MIND - NASDAQ

Greetings, and welcome to the MIND Technology's Fiscal 2026 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host,

Thank you, operator. Good morning, and welcome to the MIND Technology's Fiscal 2026 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 items to cover. If you would like to listen to a replay of today's call, will be available for 90 days via webcast by going to the Investor Relations section of the company's website at mind-technology.com or via a recorded instant replay until December 17. Information on how to access the replay was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Wednesday, December 10, 2025, and therefore, you are advised that 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 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, 2025. 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. Now I'd like to turn the call over to Rob Capps.

Okay. Thanks,

Thanks, Rob, and good morning, everyone. Revenues from Marine Technology product sales totaled $9.7 million for the quarter. Our existing backlog, contributions from our aftermarket business, and current visibility give us confidence that we will achieve improved results in the fourth quarter. Although customer decision-making has slowed, as Rob mentioned earlier, overall interest and engagement remains positive. Third quarter gross profit was $4.5 million. This represents a gross profit margin of 47% for the quarter compared to 45% for the same quarter a year ago. The year-over-year margin improvement was primarily attributable to product mix, which included a greater portion of spare parts and other aftermarket activity. We also continue to benefit from our cost structure optimization, which includes greater production efficiencies, and we expect these efforts to help maintain favorable gross profit and margins in future quarters. Our general and administrative expenses were approximately $3 million for the third quarter of fiscal 2026. This was down sequentially but up slightly compared to the same quarter a year ago, with the year-over-year increase primarily due to higher stock-based compensation. Our research and development expense for the third quarter was $506,000, which was down slightly compared to the same quarter a year ago. Consistent with prior periods, these costs were largely directed toward the development enhancement of our streamer systems and source controller offerings. Operating income for the third quarter was approximately $774,000 when compared to operating income of $1.9 million in the same quarter a year ago. Third quarter adjusted EBITDA was approximately $1.3 million compared to adjusted EBITDA of $2 million in the third quarter of fiscal 2025. Net income for the third quarter was $62,000 compared to net income of $1.3 million in the same quarter a year ago. Our effective tax rate for the third quarter increased significantly both sequentially and year-over-year due to a combination of discrete tax expense items, primarily return to provision adjustments recorded by our Singapore entity and the mix of net income generated in jurisdictions in which we record tax expense, mainly Singapore, the net losses incurred in jurisdictions in which we do not recognize a tax benefit due to valuation allowances on our deferred tax assets, mainly the U.S. and the United Kingdom. The impact of discrete tax items and unbenefited net losses on our effective tax rate is greater when our pretax income is lower. As of October 31, 2025, we had significant working capital of approximately $35.8 million, including $19.4 million of cash on hand. Approximately $11 million of our cash at quarter end was provided by share issuances through our ATM program during the quarter. The company continues to maintain a clean, debt-free balance sheet with a simplified capital structure. We continue to believe our solid footing and flexibility will help us enhance stockholder value in future periods. I'll now pass it back over to Rob for some concluding comments.

Thanks, Mark. MIND remains very well positioned for future success. Our prospects are plentiful. As we look at today, the long-term pipeline of opportunities continues to be very positive. That being said, our near-term visibility is a bit more limited than it has been in recent periods. As we've discussed, there are some current uncertainties in the market that has caused customers to delay purchase decisions and capital commitments. However, we view these as temporary positive. Commentary from numerous companies for marine exploration exposure have echoed this sentiment. For the most part, the effect on our business to date have been minimal and impacts to our backlog have been delayed relative to others. I personally believe that geopolitical risk is a major contributor to the prevalent uncertainty today. The global economic environment continues to evolve. Tariffs and complex are creating unease. There's still plenty of positive tailwinds for our business, and we expect this pause in order activity to be temporary and resolve in the coming months. I expect to have a clear picture of how fiscal 2027 will look on our next call. It's times of uncertainty like this that serve as a great reminder of just how well positioned we are relative to previous cycles. We have a streamlined footprint, strong balance sheet and simplified capital structure. We're operating lean and efficiently, and it really doesn't take much to move our needle in a positive direction. As 1 or 2 large orders materialize, we have a very different outlook. Our marine technology products continue to penetrate a variety of industries and end markets, and our pipeline of future opportunities remains robust. Additionally, our technological innovation allows us to expand our capabilities and address new opportunities. We are consistently evaluating unique ways to repurchase our existing technology for new applications. We're also looking at ways to expand our product offerings. Given our visibility, we expected to conclude fiscal 2026 on a positive note. We have line of sight to orders that we anticipate delivering before year-end, barring unforeseen circumstances. We expect improved financial results, which will continue our trend of profitability. There's always a chance that timing issues or customer delivery delays could impact future results. However, I continue to believe that our results for 2026 will look similar to fiscal 2025, and we expect to be profitable for fiscal 2026 as a whole. Going forward, as a part of our capital allocation strategy, we have several levers we can pull to add accretive scale, expand our offerings and enhance value for our stockholders. These including mergers and acquisitions and investments in organic growth opportunities such as expansion of our existing product lines and strategic alliances with industry partners. We intend to be very disciplined in our approach to capital allocation, weighing the expected return with the cost of capital. Now let me take a moment to address the recent sales of stock to our ATM program that Mark mentioned. As a result of our pricing approach and strategic planning, we have a framework in place to quickly and efficiently strengthen our balance sheet and enhance liquidity during the third quarter. Our stock price experienced a positive fluctuation, and we were given the opportunity to raise capital at levels that we deemed appropriate without negatively impacting our existing stockholders. In total, we raised approximately $11 million prior to quarter end. This additional liquidity gives us immense flexibility and opportunity. As a result, we have broadened our opportunity set as it pertains to acquisitions of businesses or product lines to help grow our existing business. We will continue to evaluate the potential impacts of any ATM activities in the future with the primary focus of preserving stockholder value for years to come. We remain committed to positioning MIND for success and strengthening it for the future. We continue to evaluate all suitable opportunities with the goal of maintaining financial flexibility, preserving our balance sheet, adding scale, expanding our offerings and growing existing product lines. All of these address our overall objective of increasing stockholder value. To conclude today's call, I'd like to reiterate our long-term optimism for the future. Despite our limited near-term visibility, our long-term trajectory is still intact. The underlying fundamentals associated with various macro demand trends such as power generation, energy transition, defense and offshore energy exploration are positive for the marine survey exploration and security entries and more specifically, MIND's technology. I'm proud of the platform we've built. And our differentiated and market-leading suite of products continue to position us favorably. We are pursuing several new opportunities within our current and future markets, which I expect to bear fruit. I look forward to sharing updates on our outlook and other strategic actions in the coming periods as we strive to enhance stockholder value. And with that, operator, I think we can open the call up for some questions.

[Operator Instructions] Our first question comes from the line of Tyson Bauer with KC Capital.

Before we get to the ATM questions, your confidence in your fiscal Q4, does that in part we got that recurring base around $6 million per quarter. And even though we just heard the announcement on the orders, these are orders we've talked about for a couple of quarters. Does that imply that they were already in process? So the turnaround for delivery is going to be much quicker than maybe a typical order that you might get that would require 2, 3 quarters before you actually deliver those?

That's exactly the case, Tyson. We've expected these orders for some time. As we said, we were working with the customer very closely to finalize configuration of the system itself. But we have been building these systems. Actually, I'm in Singapore right now, as a matter of fact. And I've actually seen the systems on the bench being worked on. So we very much have been working on these. And yes, the aftermarket business, kind of the base level does have an impact on our visibility and our outlook for the quarter. What the exact amount is each quarter will vary from time to time, but it is a growing piece of our business, but that certainly does help give us confidence for what we see in the fourth quarter.

If we look at past quarters, such as Q1 of fiscal '25, similar revenue, similar product mix. This go around, you had a 300 basis point improvement in your gross margin. So you've done well in that part of the business, obviously offset a little bit by a 10% increase on the SG&A due to stock-based comp. When we see the system sales included in those numbers where it makes up a bigger part of that mix, it appears the contribution margin of those large systems is 60% roughly or if not greater. Is that what you're able to bid those projects at? Or is that because we're seeing some of that fixed cost absorption that allows that contribution margin to be so robust?

I think it's more than 4% fixed overhead more than anything. A large system, as you might imagine, we will be a bit more aggressive on pricing sometimes. So therefore, you might see a larger discount than you do on aftermarket business. But certainly, as we have greater volume, we're absorbing more fixed costs. So that's a big contributor. That's the biggest contributor, I should say.

Okay. And you talked about a lull period, orders slowed. Give us little -- you talked about geopolitical risk, given the leadership in the globe right now, it doesn't seem like that's going to abate anytime soon. What gives you that confidence that lull period ends? And two, of the pipeline of orders that you do have, is it more from existing past customers? Or are you seeing an influx of new customers showing interest in your product lines?

Let me answer the last first. It's both, Tyson. We certainly have a number of new prospects we're looking at, people that we haven't sold to in the past necessarily or haven't sold to on a regular basis, I should say. But at the same time, we are seeing recurring revenues from existing customers as well. So it's really a mix. But I will say, I am kind of -- I'm encouraged by we're seeing some new customers, some new opportunities that we haven't seen in the past. So that's very encouraging to me.

Okay. Now let's get to the ATM. Backing into the numbers, it looks like you sold about 1 million shares at $11 less brokerage fees at the end of the quarter. The 2 weeks subsequent to the quarter, the stock price runs up to 14%. I would assume if you participated, you would have let us know that and probably by ending the ATM, allow the stock to get up to 14 on that side of it. Where -- did you see something that you are targeting as a potential event? Or is this more of a case of just getting a buffer to your net working capital?

I think it's more of the latter. Certainly, there are things that we are looking at right now, but I can't say there's a specific event that we were looking to finance. We just saw the value proposition looks positive. The stock was moving in the right direction and took the opportunity to put a little working capital on the balance sheet and give us the opportunity to move quickly should we be able to bring a couple of these opportunities to fruition.

Does that imply that if the share price got back in that range, you would use that as an opportunity again? Or are you pretty well set with where you are now?

Not necessarily. I think I don't want to make a comment one or another as to what we might or might not do. I think I'll just leave it at if we see the value at what we think given the current circumstances are appropriate, we might go back in the market, but not necessarily.

Okay. And you talked about the Horizon long term still looks good. What creates that step-up function for the company where we're not in that $8 million to $14 million a quarter type outlook depending on the schedules and deliveries, where we get that to that $12 million to $20 million a quarter going forward. What's it going to take to step it up? Is it going to be a potential M&A type situation or affiliation? Or is there something a new product or something that allows us to step up to show that growth for the company?

Yes. Tyson I think that's really -- you go back to what we said earlier this year as to our approach to try to increase our scale. So that's all we need to do to get to that position. And it could be any of those things. I think most likely, it's -- we can look at adding new offerings to our quiver, if you will, new products maybe addressing some new markets. So it doesn't necessarily have to be an M&A where we go and acquire a product line or another company or something like that. There are some organic things within our current technology that we think we can add to, which will give us that opportunity. But it's adding scale is the bottom line. And there are different ways to get there.

[Operator Instructions] Our next question comes from the line of [ Mike Mitcham ] with NCR Corporation.

Could you expand a little bit on the GWL collaboration is that meant to be an aftermarket servicing? Or is that more of a product line expansion or whatever you can share would be great.

Sure. That's really more of a product line expansion. I don't want to get too detailed as to that offering just yet. We're early days in it, and there's some competitive reasons not to get too detailed about it, but it is an expansion of our product line and partnering with someone else in the industry. So that's a great example of what I was alluding to earlier with Tyson's question, as something we can add to our quiver and therefore, help increase our scale.

Our next question comes from the line of Ross Taylor with ARS Investment Partners.

First, I just want to confirm, so you had done no ATM action in the current quarter, correct?

That's correct. We've been in a blackout. The only -- let me clarify that. There was the trades on the last day of the quarter, the past quarter, there were, I don't know, 60,000, 65,000 shares that traded that didn't settle until the current quarter. And so that will be reported in the current quarter just because that's the way the accounting rules work. But no, we have been in blackout since the end of the quarter and have not been active in the market.

But when you're talking about your 1 million shares and $11 million raise, you're including what you did on the last day, correct?

We are not. No, we are not. So there's no -- about 60,000, 65,000. No, just the accounting rules don't let you do that. This says you have to look at the settlement date, which I don't agree with, but I don't make the rules.

Okay. So we got the math from that now. Okay. A couple of things. One, you talked about the ability to do a quick turnaround on the recent orders that you got after the end of the prior quarter. Are the costs for building those systems. It sounds like you've already started building some of them. You might even have some of them already built. Are those costs when we get the Q, will those costs actually be in the Q anywhere?

They will be an inventory. Anything we spent to date on those orders will be in inventory.

Okay. And what kind of cost are we looking at? So how much of inventory should we assume is tied into orders that will be going out this quarter?

Oh gosh. Ross, I'm not sure I can answer that very accurately. There's $10 millions of orders. Just to make the math easy, the cost is half of that. And so we've spent some amount of that. But I wouldn't get too worried about trying to figure those numbers out. We always are carrying some inventory. We always are carrying some for current future orders. So I think if you try to chase that down the road hole too much, it's not going to tell you very much, frankly.

Okay. I'm trying to get the idea of what cash -- what we should be looking at for free cash flow. And it would seem that you should have a pretty strong free cash flow quarter given that you've already put some of the costs in the inventory?

Okay. I understood where you're heading on that now. So yes, you're right about that. Just the issue is when do we actually deliver that and therefore, when do we actually get paid for it. So I could deliver it on January 20 and not get paid until February. So it doesn't show up in the free cash flow in that quarter. So it kind of works both ways on it, but I understand your question. So yes, we have spent a great deal of the cost already and therefore, would not be a cash outlay in the quarter.

Okay, cool. Now it looks like you've talked about your opportunities. You obviously appear to be trying to find a way to ship or create income in the U.S. where you have tax loss carryforwards. Can you give an idea of kind of what type of magnitude, what type of expense? How do you value something if you're going to -- if you want to build that, how much of it can you effectively greenfield, you have your new expanded facility? How should we see run through that on an annual basis? Because it does sound like what you're trying to do is become -- you've got that tax asset and you're trying to find a way to turn that into value.

Yes, you're right about that. And expanding the wholesale facility is certainly part of that strategy. The majority of our revenues have been out of Singapore historically. That's going to continue to be the case. So we're not going to start creating half of revenue in the U.S., all of a sudden. But if we can increase that to $3 million, $4 million, $5 million, $10 million a year out of the U.S. that can have a big impact on that tax rate. So that's what we're trying to do. So just to give you a sense of magnitude, again, it's not going to be half our revenue, but it could be a significant portion going forward. And as we look at opportunities beyond what we've done in Huntsville and expanding that facility, we'll continue to evaluate that, and that's just part of our economics and looking at new opportunities.

Okay. And touching on something Tyson asked on the 661 and kind of maintenance-type work that you guys -- recurring work you guys are doing. Is that -- is that a safe run rate on a quarterly basis effectively going forward, should we assume that how does it grow as your systems in the market grow?

Yes. I mean, I'm hesitant to put a dollar value on that because it does fluctuate from time to time, but it certainly is a growing percentage of our business as we've demonstrated. It just grows as we have more stuff out there. Everything we have out in the field needs to be serviced. Does activity within the industry have some impact? Sure. If people aren't using their equipment, it doesn't work out as much. If they're using it more, it wears out more quickly. So that does have an impact. But the important thing in my mind is it's not a capital expenditure decision. Our customers are bought the stuff to use it. So they're out trying to generate revenue. So by and large, if they bought it, they're using it. And so that it becomes more and more recurring for us. So just as we sell more stuff, that's going to layer on over time. So I don't see that going down over time. I see it continue to increase incrementally.

Okay. And lastly, should we be looking at expecting your operating profit margin to push back up towards levels you were at some of your prior quarters? This quarter sets up -- it sounds like it sets up to be a strong quarter. You've got a lot of business that you got some systems business that should, I would think, allow you to push pretty well into the fixed cost structure. The last quarter, I have to say a little with the net profit margin. So I'm wondering if we're going to see it recover strongly in the current quarter.

Well, the gross profit were 47% in the quarter. So I mean, gross profit is going in the right direction. Operating profit, top line impacts that. So we have some fixed G&A type costs that don't get absorbed as much. So certainly, as we have a better top line, we're going to see improvement there. But as Mark said, I think, in his comments, the -- a big part of the increase in the G&A line was stock-based compensation, which is a noncash item, obviously. And so that's really otherwise, it's pretty flat from an excellent standpoint.

Well I'm excited to see what you can do this quarter. I'm hopeful that you will stay off the ATM for a bit until you find a way to spend it to make back that money. I understand you want U.S. liquidity, but at the same time, I think shareholders would love to see you actually -- would love to see that capital deployed in the way that's going to be adding to value for the company. So other than that, that's what I...

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Capps for any final comments.

Thanks, everyone, for joining us this morning. I appreciate your time and look forward to visiting with you again as we report our fourth quarter in the new year. Thank you very much.