MIND Technology, Inc. (NASDAQ:MIND) Q1 2024 Earnings Call Transcript

MIND Technology, Inc. (NASDAQ:MIND) Q1 2024 Earnings Call Transcript June 14, 2023

Operator: Greetings. Welcome to the MIND Technology First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ken Dennard. Mr. Dennard, you may begin.

Ken Dennard: Thank you, operator. Good morning, and welcome to the MIND Technology fiscal 2024 first quarter earnings conference call. We appreciate all of you joining us today. With me are Rob Capps, President and Chief Executive Officer; and Mark Cox, Vice President and Chief Financial Officer. Before I turn the call over to Rob, I have a few items to cover. If you’d like to listen to a replay of today’s call, it’ll be available for 90 days via webcast by going to the Investor Relations section of the company’s website at mind-technology.com, or you can listen via a recorded instant replay by phone until June 21. Information on how to access the replay features was provided in yesterday’s earnings release. Also, information reported on this call speaks only as of today, Wednesday, June 14, 2023, and therefore, you’re advised the time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

Before we begin, let me remind you that certain statements made by management during this call making to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company’s actual future results or performance to materially differ from any future results or performance expressed or implied by these statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including in its annual report on Form 10-K for the year ended January 31 2023.

Furthermore, as we start this call, please refer to the statement regarding forward-looking statements incorporated in the press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements. So now, without further ado, I’d like to turn the call over to Rob Capps. Rob?

Rob Capps: Okay. Thanks, Ken. As we did last quarter, we’ve prepared an updated presentation covering our discussion this morning, and we posted it to our website. I invite you to refer to that at your leisure. Today, I’ll begin by discussing our first quarter 2024 results as well as our current view of market conditions. Mark will then provide a more detailed update on the financials. I’ll then wrap things up with some remarks about our outlook. We are very pleased with the first quarter results and the start of our fiscal 2024, which we believe demonstrate our ability to capitalize on MIND’s favorable market position to continue delivering sustainable top-line improvement. Our financial and operational performance remained strong in the quarter, as expected, resulting in much improved financial metrics across the board when compared to the year ago period.

Photo by christina wocintechchat on Unsplash

Revenues were up 39% year-over-year, and despite a robust fourth quarter results, we also grew our revenue sequentially. Additionally, we achieved a much improved gross profit margin of 43% during the quarter. Most importantly though, we produced positive operating income. Once again, we also produced positive adjusted EBITDA. The fourth quarter was the first time since we transformed the company that we achieved this, and we’re proud to continue that trend in the first quarter. As anticipated, we executed on our backlog, which resulted in significant top-line revenue of $12.6 million. Although we generated substantial revenue in the quarter, we maintained and even grew our backlog. As of April 30, our backlog of firm orders stood at $22.6 million compared to $13.4 million at the same time a year ago and $20.7 million at the end of last quarter.

We believe this trend is indicative of the favorable market conditions and the differentiation of our product lines, and we’re confident this momentum will carry throughout the remainder of fiscal 2024. We’re pursuing a number of other orders and are poised to be successful on many. We hope to be in a position to announce some of these in coming weeks. We remain encouraged by the favorable macroeconomic trends coupled with strong customer engagement and order activity. We believe that the current market environment is advantageous for MIND. We continue to see substantial tailwinds in each of our three key markets: exploration, defense, and survey. And our team continues to find innovative ways to adapt our products to meet the evolving needs of our customers.

Currently, we’re seeing the biggest order growth in our Seamap segment, which is benefiting from the favorable fundamentals within the exploration and alternative energy markets. This growth is supported by the 19% sequential increase in Seamap revenue that we generated during the first quarter, and we expect to build on this momentum going forward. We intend to leverage and sustain customer demand and interest that we’re seeing in all of our key markets, drive further growth in our book of business in the coming quarters. As announced in early April, we elected to defer the payment of our preferred stock dividend for the first quarter of fiscal 2024. I know that our liquidity position has been a concern for many of you. Although we’ve seen improved liquidity has resulted to higher revenue levels throughout the last couple of quarters, we believe it was prudent to retain the cash flow from these activities at this time to complete upcoming and other expected orders.

While there are more stringent working capital demands that come with increases in business, I believe we’ve made progress with respect to liquidity. It remains an area of focus for us. We also are aware of the continued listing standard notice that was sent to us by NASDAQ. We’re working through and analyzing options to regain our compliance. With that, now I’ll let Mark walk you through our first quarter financial results in a bit more detail.

Mark Cox: Thanks, Rob, and good morning, everyone. As Rob mentioned earlier, revenues from continuing operations totaled approximately $12.6 million in the quarter, a 39% increase when compared to the $9.1 million in the same period a year ago. Our Seamap segment delivered substantial revenue of approximately $10.6 million during the quarter, which demonstrates the growth that we’re seeing in the exploration and alternative energy markets. Gross profit during the first quarter was approximately $5.4 million, which was up approximately 65% when compared to the prior-year period. As Rob also mentioned, this represents a gross profit margin of 43% for the quarter, a 700 basis point increase from the 36% we achieved during the same quarter a year ago.

The higher revenue achieved in our first quarter resulted in greater overhead absorption, generating a much more favorable gross profit margin. Our general and administrative expenses were approximately $3.9 million for the first quarter, which were up slightly when compared to the $3.7 million from the fourth quarter. However, as we’ve mentioned in the past, our G&A expenses tend to be front-end loaded as we incur higher payroll taxes, professional fees and travel-related expenses in the first few months of the year. This recurring trend, although minimal, was evident in our first quarter results. Our research and development expense for the first quarter was $773,000, which was up approximately 9% sequentially, but down 24% from the same quarter a year ago.

Consistent with prior periods, these costs are largely directed toward our strategic initiatives, including synthetic aperture sonar and passive sonar arrays. Operating income for the first quarter was $289,000 as compared to a loss of approximately $2.5 million in the first quarter of fiscal 2023. Our first quarter adjusted EBITDA was $913,000 compared to a loss of approximately $1.9 million in the first quarter of last year. As of April 30, 2023, we had working capital of approximately $14 million and cash of $815,000. As noted in Rob’s opening comments, we continue to see improvement in our liquidity. I’ll now pass it back over to Rob for some concluding comments.

Rob Capps: Thanks, Mark. We remain encouraged by our results for the first quarter and by the favorable outlook in each of our key markets. We are generating sustainably higher revenue while maintaining and growing our backlog of business. And customer demand and engagement remains strong, resulting in better-than-ever quarter flow. We’re optimistic that MIND is in a position to build on this momentum in the coming quarters. And we look forward to sharing the fruits of our labor with you. As we look forward to our second quarter and the remainder of fiscal 2024, we’re excited about the opportunities that lie ahead. Many of our technologies continue to gain traction with customers globally for a variety of end uses. And as I noted earlier, our Seamap products are playing a significant role in paving the way for MIND’s continued growth.

We’ve traditionally seen there will likely be revenue variation between quarters due to a variety of challenges that are often out of our control, such as supply chain issues, tighter vendor credit requirements, evolving delivery requirements, government contracting processes, and technical and production challenges that can impact production and deliveries. However, the favorable market trends, robust customer interest and growth of our backlog continues to give us confidence that sustainable higher-level revenue is achievable. We feel good about where the company sits today. We believe that our development programs will continue to positively contribute. There may be certain unforeseen circumstances that cause orders or deliveries to slide to the right, but we do believe that the general trend will be on of increased revenue.

As I mentioned earlier, there are challenges that come with our improving business. We’re doing our best to manage these challenges and demands. In closing, we’re excited about the future of MIND Technology. Our stable and growing backlog, robust order flow and increased revenue levels are indicative of our technology being in greater demand. We intend to continue capitalizing on the favorable market conditions and macroeconomic environment and robust customer interest and engagement to achieve improved results going forward. We’ve worked hard to position MIND as a leading producer of differentiated marine technology products. We intend to build on this momentum to generate significant revenue, which we believe will drive meaningful shareholder value throughout the remainder of fiscal 2024 and beyond.

And with that, that’s our prepared remarks. Operator, we can now open the call up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Tyson Bauer with KC Capital. Please proceed.

Tyson Bauer: Gentlemen.

Rob Capps: Hey, Tyson.

Tyson Bauer: You want to start with some operational questions or the elephant in the room on trying to climb out of the preferred dividend hole and what some of remedy possibilities are…

Rob Capps: Up to you.

Tyson Bauer: All right. Let’s start backwards, and then we’ll figure out if the operations will get us the resolution. On the preferred dividend, obviously, you can defer one more before we get to the six deferred later this fall. Are remedies possible where you can roll those dividends where you’re paying maybe ones that are in arrears in essence, you do not have to make one cumulative payment to become whole, there are other options, correct?

Rob Capps: That is correct. You’re exactly right. So, we could we could pay one or two or three or — so you’re right. We could pick and choose, if you will. They continue to accumulate, of course, it’s either way. But yes, you’re right, we don’t have to do it all at once.

Tyson Bauer: Okay. Which then also pushes to the right that holds six deferred. As long as you’re not six or more deferred, we don’t trigger some of those provisions that are within the preferred dividend. So, we could actually roll forward to buy you some time, but also you’re then returning capital to those holders which then should benefit the common guys that there will be some residual value left for them also, correct?

Rob Capps: Yes, but let me correct. It’s actually, if I’m not mistaken, the provision is once we’ve deferred six dividends, not that we have six in arrears, I think that then triggers the rights of preferred to name two directors, and that’s the only remedy that the preferreds have. I think there’s two more before we trigger that. So it’s not a catastrophic thing by any means, just to clarify. But that does give us ability to catch up over time, if you will, and return from capital to the preferreds.

Tyson Bauer: And according to your proxy statement, the largest preferred holder still is Mitsubishi.

Rob Capps: That’s correct.

Tyson Bauer: Okay. And as your intent, we got two more that buys you some time. You’re looking at a, now we’ll get into some operational questions, that operations could be there or to satisfy, give you more options as we go through the next six months or really the next four months?

Rob Capps: Yes, I think so. I mean, obviously, as you see, last two quarters, we produced essentially enough EBITDA to make that dividend. So, if we can address, the working capital needs and feel comfortable about where we stand there, then we, operationally, are approaching a point where we could address that.

Tyson Bauer: Okay. Margins, you’re seeing some nice improvement. Typically, you have some decent margins on the Seamap with those large whole system sales that you get. Are we looking at the backlog bid margins even showing greater improvements and greater trend improvements as we get some more economies of scale as that backlog grows, as that throughput grows and covering those fixed expenses?