Greetings, and welcome to the MIND Technology third quarter fiscal 2024 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'll now turn the call over to your host, Ken Dennard. Please go ahead, sir.
Thank you, operator. Good morning, everyone, and welcome to the MIND Technology Fiscal 2024 third 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 housekeeping items to run through. If you'd like to listen to a replay of today's call, it'll be available via webcast by going to the investor relations section of the company's website at mind-technology.com, or you can listen to a recorded instant replay until December 21. Information on how to access these replay features was provided in yesterday's earnings release.
Information reported on this call speaks only as of today, Thursday, December 14th, 2023, and therefore, you are advised that 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 may 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 those 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 also refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements. With that now behind me, I'd like to turn the call over to Rob Capps. Rob?
Hey, thanks, Ken, and thank you all for joining us today. I'll start by addressing some key achievements during the quarter and highlights of our results. Mark will then provide a more detailed update on our financials, and I'll return to wrap things up with some remarks about our outlook. First, I want to address two very significant achievements for MIND. During the quarter, we took a meaningful step towards streamlining and focusing our operations with the previously announced sale of Klein to General Oceans for cash consideration of $11.5 million. We utilized a portion of those proceeds to repay our term loan and eliminate our outstanding debt. This transaction, which resulted in a financial gain of almost $2.4 million, has provided us with important liquidity and financial stability with which to exploit the remarkable growth we're seeing within our Seamap business.
Now, this brings me to our second achievement. We ended the third quarter with a record backlog of $37.4 million, over double where it was just three months ago. I'll touch on this in greater detail shortly, but I believe this unprecedented backlog is indicative of our specialized capabilities and product lines. Additionally, subsequent to the end of the quarter, we entered into a supply agreement with a major international seismic contractor. We expect to receive initial orders under this agreement shortly. This means that we start the fourth quarter of this fiscal year, move into next fiscal year with a record backlog and confidence in our continued order flow. Our marine technology products revenue during the third quarter was approximately $5 million. Now, this was significantly lower than we had anticipated.
We experienced delays in the delivery of certain components, which prevented us from getting these orders completed, out the door, and recognized as revenue before quarter end. These orders, which total $5 million-$6 million, are expected to be delivered in our fiscal fourth quarter. This situation clearly demonstrates that supply chain issues, while much improved from a couple of years ago, are still with us and can impact results in particular periods. The good news here is that the orders are not lost, merely delayed. The magnitude of our backlog does give us better visibility and therefore better ability to manage our procurement process. However, increased level of activity also means increased capital requirements. Based on the orders that we were delayed and the schedule of other orders in our backlog, we expect a significant increase in revenues in our fourth quarter.
We continue to believe that MIND is exceptionally well positioned to capitalize on the favorable market dynamics to achieve sustainable top-line improvement. We think our record backlog is indicative of the growing demand for our differentiated Seamap product lines, such as GunLink source controllers, BlueLink positioning systems, and SeaLink streamer systems. We believe this continued positive backlog trend and the early benefits from our framework agreement reflect the strength in the underlying market and demonstrate that we are the partner of choice for companies looking to acquire high quality and versatile marine technology products. We continue to believe that the current market environment is advantageous for MIND. Each of our three key markets, exploration, defense, and survey, remain loaded with opportunity.
Having completed the sale of Klein in August, we now operate a more streamlined and focused suite of products, and we are better positioned than ever to deploy our product lines into a variety of end markets. Additionally, our team continues to develop new and innovative ways to adapt and implement our technologies to meet the evolving needs of our customers.... In addition to traditional energy-related opportunities, we are seeing new applications for our Seamap technologies. As an example, our backlog includes over $5 million related to one of our SeaLink ultra-high-resolution 3D seismic streamer systems. This system is intended for use in surveys required for offshore wind farms and other green energy projects. There's also a growing opportunity for MIND to provide seismic streamer repair services, not only for SeaLink streamers, but also for products manufactured by others.
Within the maritime defense and security market, we continue to believe that our SeaSerpent passive array system, which is derived from the commercially developed SeaLink system, is a significant and economical solution for various demanding applications within this space. We are also optimistic that through our collaboration agreement with General Oceans, we will see increasing interest in our Spectral AI software suite and find further applications for this technology. Now, with that, let Mark walk you through our third quarter financial results in a bit more detail.
Thanks, Rob, and good morning, everyone. At the outset, I would like to point out that with the sale of Klein, those operations have been treated as discontinued operations, and prior period results have been restated to reflect that. Accordingly, the results from continuing operations that we reported yesterday and are discussing here today, including prior period comparative data, do not include amounts related to Klein. They include only our ongoing business. As Rob mentioned earlier, revenues from continuing marine technology product sales totaled approximately $5 million in the quarter, which was up about 64% from approximately $3 million in the same period a year ago.
While we experienced several delays during the third quarter that resulted in some revenue getting pushed into the fourth quarter, we believe the strength we are seeing in all our key markets and the growth in our backlog of orders positions us well for sustained higher-level revenue in the coming quarters. Gross profit during the third quarter was approximately $2.3 million, which was up meaningfully when compared to gross profit of approximately $862,000 in the prior year period. This represents a gross profit margin of 45% for the quarter. We're pleased that we were able to deliver some higher-margin orders during the quarter, despite the overall lower sequential revenue levels. Revenue, revenue in the quarter was largely driven by sales of spare parts as opposed to sales of full systems. These transactions, while smaller in size, tend to generate higher gross margins.
Our general and administrative expenses were approximately $2.9 million for the third quarter, which was down slightly when compared to approximately $3.5 million from the second quarter and $3 million for the same period a year ago. The sale of Klein is allowing us to streamline our operations and thereby reduce some costs. We've recently taken some actions in this regard, including selected headcount reductions, reducing the size of our board of directors, and reducing the compensation for the remaining members of the board. We also believe that the more streamlined operations will result in lower professional fees and travel costs. We will begin to see the impact of these changes in the fourth quarter of this year, but will not recognize the full benefit until next fiscal year.
In the third quarter, the impact of cost reduction measures taken earlier this year was partially offset by severance costs and higher professional fees. Our research and development expense for the third quarter, which relates only to our continuing operations, was approximately $508,000, up slightly from the comparable period a year ago. These costs are largely directed toward the development of our next-generation streamer system and continued development of our Spectral AI software Suite. Operating loss for the third quarter was approximately $1.5 million, which was nearly a 50% improvement from the loss of $2.9 million in the third quarter of fiscal 2023. Our third quarter adjusted EBITDA from continuing operations was a loss of $1.1 million, compared to a loss of $2.4 million in the third quarter last year.
Overall, we reported net income of approximately $568,000 for the third quarter of this year, driven by a gain of approximately $2.4 million on the sale of Klein. As of October 31, 2023, we had working capital of approximately $16.5 million and approximately $5.6 million of cash on hand. After factoring in net proceeds from the Klein sale completed in August, our liquidity position is significantly improved. Additionally, as a reminder, upon the closing of the sale of Klein, we repaid and eliminated our high-cost debt, leaving MIND debt-free today. I'll now pass it back over to Rob for some concluding comments.
Okay, thanks, Mark. Our conviction about the future of MIND Technology has only been strengthened by our recent achievements. We've taken the necessary steps to streamline our operations and focus on profitability. We believe that this company is better positioned now than ever. Our marine technology products continue to penetrate a variety of industries and markets, which I believe is a direct correlation to the work that our team has done to develop and continually adapt our technology to meet the evolving needs of our customers.... We believe that the record backlog that we have achieved is just the beginning, as there are still significant opportunities for our Seamap unit and our other initiatives. Market conditions remain favorable, and we generally feel that the robust customer interest and engagement that we've seen to date signifies that the market adoption of our product lines is gaining traction.
We're confident MIND is headed in the right direction, and we look forward to building on the strong foundation that we've constructed. As I mentioned earlier, the increase in business comes at a price, that being the capital needed to execute the growing business. As you probably know, we did declare and pay a dividend on preferred stock for the quarter ended October 31, 2023. However, there remains about $4.7 million as accumulated dividends from prior periods, and the ongoing dividends accrue at a rate of about $3.8 million per year. While our liquidity and financial position are much improved, we do not believe that our current operations can generate the capital needed to exploit and grow our business and, at the same time, pay ongoing or accumulated dividends on the preferred stock.
Therefore, while no decisions have been made and circumstances can change, we currently believe it unlikely that we will declare further dividends on our preferred stock for the foreseeable future. As we experienced this quarter, and have traditionally seen, there will likely be revenue variation between quarters due to a variety of challenges and unforeseen circumstances, as well as simple customer delivery requirements. With that said, we do believe the general trend will be one of increased revenue. The favorable market trends, robust customer interest, and substantial growth of our backlog continues to give us confidence that sustainable, higher level revenue is achievable. Looking forward, we anticipate meaningful financial improvements in the fourth quarter and in fiscal 2025 as we convert our record backlog to revenue.
We're encouraged by the current macro environment and believe that our streamlined, differentiated, and market-leading suite of maritime technology products is uniquely positioned to capitalize on favorable customer demand. We expect to continue adding new orders in the coming months and tend to utilize this momentum to drive meaningful shareholder value. With that, operator, we can now open the call up for some questions.
Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.
Good morning, gentlemen.
Tyson.
Trying to get a where we are today, kind of look at the company, and all this is going to lead up to, you know, the eventual question of where we need to get to. But you ended the quarter at $37.4 million of backlog. $5-$6 million of that is because we had deferred revenue that will fall into this quarter. So you have approximately $32 million of backlog that is a significant increase from $17 million at the end of July. Where are you kind of today and where your backlog stands relative to also your recognized revenue in the quarter? Has that $5-$6 million been realized already, along with your other expected revenue you thought you were going to have?
Or is this a situation where the components delay really has pushed everything to the right of the calendar, so we don't necessarily have that catch up where all of a sudden we have a $12-$15 million quarter?
Yeah. So Tyson, we, those delayed orders have partially been shipped. They're not all completed. They've been partially done. We do expect them all done by the end of the quarter, much by the end of the calendar year. So I think we will see a bit of a catch-up, to use your term, in this quarter. So it's not, it's not a delay that's getting pushed out all the way. Just there's a certain component that was two months late coming to us from a supplier, so just didn't give us enough time to get everything, you know, built and out the door when we had originally scheduled to.
Are these components that are just drop-in for, you know, like we see at the automakers, they need a chip, they build the vehicle, and then they can put the chip in and then ship it. Is that the situation here, where it's a drop-in component that you can make the product, and you're just waiting on that last component to complete it? Or is this something at the beginning of the process that just kind of halts the whole system and build?
Well, it's kind of halfway in between, that's the way I'd describe it. It's certainly it is a drop-in, and we can complete much of the system. But we have to drop in this component before we can then, you know, complete everything else. So it's a little bit of both. So we certainly have been able to continue with production and have things ready. You know, we have components sitting on the bench right now that we're, you know, again, dropping in, to use your term, to finish this. And then, of course, then there's software to be burned in, things of that nature, you know, part of the process that has to happen at the end. So we have been able to continue with the process, Ty, to the nub of your question.
Okay. And, and just for the sake of clarity, because I think you mentioned this on the last call. If the expectation you did $5 million, you thought you had $5-$6 million, that was deferred, that implies that you thought you were going to be able to do $10-$11 million in the quarter. I think in the last call, you thought that the quarters would be somewhat similar, obviously, depending on some timing issues.... Does that mean you're walking into this quarter with the expectation that you thought you were gonna do, say, roughly $10 million, and the $5-$6 million is an add-on? Or give us a little better clarity on that.
Yeah. No, I understand where you're going, and, and the answer is yes. Although understand just the caveat, things can happen, and we could have something drop in unexpected. We do better, or we get something pushed to the left or, or to the right, rather, for whatever reason. But fundamentally, your analysis is correct.
Okay. When we look at where your accounts receivable were or was at the end of July compared to where it was, obviously, you have the benefit of client drops out of that, obviously. Also, you didn't have the sales that were realized in the quarter. Does that anticipate, if we go back to that July level and that level of business that you're expecting to do, since you haven't made all the deliveries as of yet, a $3 million working capital requirement just on that alone, not looking at additional inventories and that, which would leave you at the end of the fiscal year, roughly $2.5 million of cash left?
Oh, well, there's a lot of calculus that goes into that, Tyson. So I'm not sure I'd draw that exact conclusion. I certainly. Delayed shipments mean delayed cash flow coming in, but there'll be some catch up there as well. We have had to use working capital to buy components, so there's some benefit there. There are some contracts that we have advanced payments on, prepayments from customers, so there's lots of things that go into that calculus. But I think the message is, you know, with increasing business, that means there is an increase in working capital requirement, be it receivables, be it inventory. And so that's the reason we're trying to take the position we are.
Okay. Well, that's why we're ultimately, all these questions are gonna come down to: What operational level do you think or believe you need to be at to reinitiate that dividend, also meet your working capital needs, given the growth outlook? And we've already seen, say, on your rev or inventory, an inventory $2 million increase that was offset by the reduction in accounts receivable. So at $5.5 million, where you ended the quarter, are you anticipating being able to maintain that level, or is that level going to be further stressed at the end of the year? And what level is comfortable for you to reexamine whether you have the operational results to reinitiate the dividend and meet your requirements for growth?
So, Tyson, the answer there is we don't know for sure because we need to understand how the business is going to, how the cash flow and how the working capital requirements are gonna flow as this business, you know, flows through the production cycle. So that's the reason we want to be conservative here and, you know, keep our powder dry, if you will. So that's the whole reason where this is a huge backlog improvement. I mean, this is, you know, unbelievably larger than anything we've seen in the past, so we think it only prudent to make sure that we first serve the business and can execute on the business before we make any decisions on the preferred stock. So we just haven't decided yet.
Foreseeable future. If we get through and we play a little catch up, as you just mentioned, and we start kind of getting a more stabilized flow as long as component supply is there, does that imply by the end of Q1 of the next fiscal year, you should be in a more comfortable position on where you're at to make that decision? I mean, is foreseeable future one, two quarters, or is it, don't expect anything for the next fiscal year?
I said I don't know at this point. That's what we're trying to understand. So I, I can't give you more guidance than we have here.
Okay. The pending contract structure, obviously, you're not gonna name who, and it probably doesn't make that big of a difference. Are those more for components, whole systems that you are going to be supplying, which obviously is gonna be far more lumpy? And does that imply that they're operating as kind of a middleman as opposed to the end user, which is typically your customer?
They refer full systems. They are the end user, and there is a production schedule that we're working out with them over the next, you know, several quarters.
Okay. So when we see orders from them, these are gonna be for whole systems. So we're looking at the, you know, $1.5 million-$4 million type systems that they would be purchasing at a time.
Correct. And maybe even some smaller systems as well. But yes, the answer is yes.
Okay. Is this a multi-year agreement?
It is.
Is there an accordion-type feature to this, where you've set the price, and it's just a function of that price will be good for what they need going forward?
No, no, no. No, but I don't want to get into specifics for some competitive reasons, as you might imagine.
Okay. But we should see, before the end of the year, some more details and color come from this contract that will make it clear and obvious to the rest of us, the scope of it?
Yeah. You should, well, I think, very confident about them.
Okay. All right. I mean, for right now, I'm sure Ross is in queue. We'll let him take over. It looks like at least operationally, you're where you wanna be. It's just what are we gonna do on the decision on that accumulated deficit on the preferred, and what is it gonna take to actually catch up? Business-wise to basically create that residual value for the common once we satisfy the preferred side. So, hopefully we'll know that in a quarter or two.
Okay.
Thank you. Our next question comes in line of Ross Taylor with ARS Investment Partners. Please proceed with your question.
Well, Tyson was right. Well, you and I-
Don't, don't, don't tell him that.
Yeah, well, he knows it now. You and I have had a number of conversations about the imperative nature of paying this dividend because there is no way you can—I mean, the equity is a residual here. And for those of us who own equity, for we want and need you to get this preferred out of the way so we can start to accumulate the value that is gonna grow in this company. And it strikes me as a couple questions. First, what was the inventory working cap, you know, working capital impact or drag last quarter from the deferred sales? Obviously, you were building stuff. You had costs that you incurred that didn't go out the door as far as sales to generate revenues. So what kind of impact was that?
Our inventories over the last six months are up about $3 million, roughly.
Okay. As you sell that out, we should start to see that cash flow should come in.
Yes, but understand, we're gonna continue building this.
Yes, I understand.
Yeah. Yeah.
But as you build, and as you build backlogs and accounts receivable, you and I talked about the fact that-
Yeah
... you can actually do other steps, factor, accounts receivable, things of that nature, that the cheapest debt you're really gonna get is the preferred, but it also absorbs. Right now, that preferred probably has about $46 million worth of value. Your equity has about $8 million worth of value. You know, it strikes me, as I said before, that if I want my equity to grow, you got to solve the problem with the preferred, and it's got to be imperative. And one of the things that you guys do is you keep promising us it's gonna work as a company, and then just when you get back on the road, it's like, if you didn't think you could pay the fourth quarter dividend, why would you pay the third?
Save the money and pay it in the fourth, so you can start a string of winning. I'm starting to think you guys are managed by the same people who manage the Seattle Mariners, which is, being from Seattle, not a compliment. But I think that... I mean, I'm wrestling with what your thinking is because I'm hearing you say, we worry about this, but in fact, you have a lot of other alternatives to finance. You, quite honestly, if I were sitting on your board, I would say if I vote against the dividend, the only other question is, you know, I hire a banker for, A, to sell, you know, shop the company, or B, to give it to Tyson to do an ATM and raise $5 million.
Because by my calculations for if you could buy back, you know, 5, let's say 500,000 shares for $5 million, you actually create $3.33 a share in extra value for the common stock, stock, which is, you know, basically a better than 50% increase over what, what it went out at. It just strikes me as we really need to get focused on being a public company and developing the confidence of the street. You know, as I said, every time it seems like you're about to, to turn that corner, you go into another dark place. How do we keep from being there? You know, answering Tyson's question of, you don't know. I understand you don't know, but you got to have a plan, and that plan's got to be, you know, using these...
You and I talked about other ways of raising capital and using these other ways because I think that you want to actually be able to eventually use that preferred dividend or preferred as a way to raise capital. It's a better way than going into the general financing market, I would think.
Yeah.
Am I wrong?
Ross, I understand all your comments, believe me, and so that's nothing's news to me on this. I understand completely.
Well, it's not news, but it's... I mean, to be honest, and the idea that you dropped the comment, you haven't made a decision, and you drop it with two weeks left in the year. It's just, you know, Rob, I've-- we've talked, and I've known you for a long time, and I've, you know, been a real loyal shareholder, but you know how frustrating it is to watch, you know, you basically come in and do something like this with two weeks left in the year because it just sets, it, it sets you back so much more than, you know, potential loss of one quarter's dividend. It sets you back to where you, all the street cred you're building is gonna have to restart.
I think your board needs to recognize that's a, you know, you got cash, and you got stuff coming on and, and your credibility as a public company. I mean, it's one thing if you're private, but you're public, so you have a duty to, you know, your shareholders.
I said-
And I think that duty, I'd rather see you issue equity, dilute me a little bit on equ-- you know, dilute me on equity even heavily, because getting rid of that preferred, particularly if you can get rid of it at $10 or $12 a share, if you can buy back, that's a huge win for us shareholders. So we've got to be thinking about the game plan, okay? I know it's-- I know this isn't a happy conversation, but I'm, you know, I'm not happy with the way this is falling together. So I feel like we're right back where we were a year or two ago, except for we thought we were so much better.
Okay.
Thank you.
All right. I appreciate the comments, Ross.
Give Tyson a call about the ATM if you don't pay the dividend. I think he'd love the business.
Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to management for any final comments.
All right. Thanks, everyone, for joining us today, and I look forward to talking to you at the end of our fourth quarter. Thanks very much.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.