MIND Technology, Inc. (NASDAQ:MIND) Q4 2023 Earnings Call Transcript April 20, 2023
Operator Greetings, and welcome to the MIND Technology Fourth Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Ken Dennard. Thank you. You may begin.Ken Dennard Thank you, operator and good morning everyone. And welcome to the MIND Technology fiscal 2023 fourth 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 cover.
If you like to listen to a replay of today’s call, it 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 recorded telephonically, an instant replay feature until April 27. Information on how to access the replay feature was provided in yesterday’s earnings release. Information reported on this call speaks only as of today, Thursday, April 20, 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 included in the risk factors disclosed by the company from time-to-time in its filings with the SEC, including on its annual report 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 contents of our conference call this morning are covered by those statements.And now with all that behind me, I’d like to turn the call over to Rob Capps.
Rob?Rob Capps Okay, thanks Ken. As we did last quarter, we have prepared an updated presentation covering our discussion this morning and we’ve posted it to our website. I invite you to refer to that at your leisure. Now today I’ll begin by discussing our fourth quarter 2023 results as well as our current view of market conditions. Mark will then provide a more detailed update on our financials. I’ll then wrap things up with some remarks about our outlook.We’re very pleased with our fourth quarter results. As expected, we saw significant improvement on almost all financial metrics. Revenues were at 230% year-over-year and 154% sequentially. More importantly, we produced positive net income and adjusted EBITDA. Something we’ve not done since we transformed the company.
As anticipated, we executed on our backlog, which resulted in significant top line revenue of $12.4 million.Despite the significant increase in revenues, we maintained and even increased our backlog. As of January 31, our backlog of firm orders stood at $20.7 million compared to $13.1 million at the end of fiscal 2022 and $19.9 million at the end of last quarter. We think this bodes well for fiscal 2024 and indicates favorable trends.In fact, since year-end, we’ve booked significant new business including more than $7 million in new orders we announced earlier this week. We’re also pursuing a number of other orders and are confident we’ll be successful on many if not most. We are encouraged by the favorable macroeconomic trends coupled with the 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.This sustained customer demand and interest that we’ve seen across all of our end markets continues to underpin the growth of our book of business, which is evident by our current backlog. Now, I know that our liquidity position has been a concern for many of you, especially in light of the working capital demands that come with increases in business. Since January 31, I think we’ve made some significant progress in that regard.As previously reported, we entered into a $3.75 million secured financing arrangement back in February to assist with the execution of our growing backlog of business.
We were adamant about securing a form of financing that didn’t contain extensive restrictions such as financial covenants or limitations on the use of proceeds, and we didn’t want the financing degree dilution to our equity holders. Additionally, we’ve seen the benefit from the increases in revenues in the fourth quarter and that has contributed to the first quarter to a large degree. Cash flow from this activity has contributed to improvements in our liquidity.Now I’ll let Mark walk you through the fourth quarter and full year financial results in a bit more detail. Mark?Mark Cox Thanks, Rob, and good morning everyone. As Rob mentioned earlier, revenues from continuing operations totaled $12.4 million in the quarter, a 230% increase when compared to the $3.8 million in the same period a year ago.
We saw improvement from both the Seamap, and Klein product lines. In fact, revenues from our Klein products were greater this year than any year since we acquired Klein.Full year revenue amounted to $35.1 million, which was up approximately 51% over the previous year and represents the highest annual revenue ever for the marine technology products segment. We did have a couple of unusual or non-recurring income and expense items in the quarter, which netted a small gain. We recognized $986,000 of other income during the quarter, most of which related to employee retention credits. In cost of sales, we recorded about $610,000 of non-recurring expenses comprised of a $250,000 inventory impairment charge and a $360,000 settlement related to a vendor dispute.Full year gross profit from continuing operations was $13 million, which was up approximately 115% when compared to the prior year period.
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This represents a gross profit margin of 37% for the year, and 11% increase from the 26% we achieved during 2022. The incremental year-over-year revenue resulted in greater overhead absorption and a much improved gross profit margin.Our general and administrative expenses were approximately $3.7 million for the fourth quarter of 2023, which was roughly in line with the $3.6 million from the third quarter. 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. We expect this trend to continue in 2024.Subsequent to year-end, we eliminated certain positions and took other actions to control cost. We estimate that these actions will result in a reduction of expenses of up to $1 million annually.
Our research and development expense for the fourth quarter was $708,000, which was down approximately 16% from our third quarter.Consistent with prior periods, these costs are largely directed toward our strategic initiatives including synthetic aperture sonar, and passive sonar arrays. Our income from continuing operations for the fourth quarter of this year was $445,000 as compared to a loss of $5.1 million in the fourth quarter of 2022.Our fourth quarter adjusted EBITDA from continuing operations was approximately $1.4 million compared to a loss of $4.5 million in the fourth quarter of 2022 and a loss of $2.7 million in the third quarter of this year.As of January 31, 2023, we had a working capital of approximately $13.6 million and cash of approximately $778,000.
As noted in Rob’s opening comments, we have seen an improvement in our liquidity since year-end. Rob also mentioned we recently entered into a $3.75 million secured financing arrangement. This agreement, which is secured by certain real estate assets as a one-year term with extensions available under certain conditions. We intend to utilize these funds to support the timely execution of our backlog of business.I’ll now pass it back over to Rob for some concluding comments.Rob Capps Okay. Thanks, Mark. We’re encouraged of our fourth quarter employee results and given the current state of our backlog and the strong customer engagement that we’re experiencing. We’re optimistic that we’ll be in a position to maintain and improve our elevated revenue momentum in the coming quarters.As we look forward to fiscal 2024, we’re excited about the opportunities that lie ahead.
As 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. But the favorable market trends, robust customer interest and growth of our backlog continues to give us confidence that sustainable higher level revenue is achievable.Now, of course, this is not without inherent risk. Supply chain issues, tighter vendor credit requirements, evolving delivery requirements, government contracting processes, technical and production challenges, all things we must deal with every day and can impact production in order to deliveries.Nonetheless, we feel good about where the company sits today and we believe that our development programs will continue to positively contribute.
We currently expect our first quarter revenues to look similar to our fiscal 2023 fourth quarter. However, I want to reiterate that every quarter may not necessarily generate the same level of revenue. There may be certain unforeseen circumstances because orders or deliveries to slide to the right. That being said, we do believe that the general trend be one of increased revenue.Now, earlier this month, we announced the deferral of our fourth quarter preferred stock dividend. We took this action in addition to the financing we secured in February to address the liquidity demands required to complete our near-term backlog as well as other expected orders.As we’ve noted in the past, there’s a level of uncertainty surrounding the timing of cash flows.
So it was important that we address our liquidity in a non-dilutive way and preserve our financial flexibility as we work to fulfill orders, the varying sizes and timelines. We expect to resume payment of dividends, including any previously deferred at some point, but have not yet made a decision as to the timing of that.In closing, we maintain our belief that MIND Technology is exceptionally well positioned to continue capitalizing on the favorable market conditions and macroeconomic environment in fiscal 2024. The growing backlog is a strong indication that our differentiated Marine Technology Products are an increasing customer demand and we intend to build upon that momentum to generate sustained high level revenue in the coming quarters, which we believe will drive meaningful shareholder value.And with that operator, we can open the call up for some questions.Question-and-Answer Session Operator Thank you.
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We will now conduct a question-and-answer session. [Operator Instructions]
Our first question comes from Tyson Bauer with KC Capital. Please proceed.Tyson Bauer Congratulations gentlemen.Rob Capps Thanks, Tyson.Tyson Bauer It’s been a while and a nice way to start the morning. It seems like you’re fairly confident on the top line that you’ve got that situation taken care of or at least in a much better position as we move forward and especially backlog is backing up your statements.On the margin side, we’ve always talked about how well your contribution margins are for incremental revenue didn’t quite see that in the quarter. Is that primarily due to bidding for business to get those revenues in place or to supply constraints narrow some of those expected margins and that should improve as we go in the subsequent quarters?Rob Capps Yes.
I think there are a couple of things. The unusual items that Mark talked about the inventory impairment and the vendor settlement are in cost of sales, so that impacted that gross margin. So that’s one factor in the fourth quarter. There’s no doubt that the supply chain situation has had an impact, having to buy components from non-traditional sources from brokers things like that increases the cost.And as we’re able to see more clearly the production plan, and that’s where the backlog really helps things a lot because we can see what’s happening. I think we’re able to be much more effective in our purchasing and therefore they’re going to drive costs down. So I think we will see improvement there.Tyson Bauer Okay. And does that also then entail a much better cash conversion now that we’re at a more steady state and expectations for top line and the backlog supporting it?Rob Capps It certainly helps.
Not saying that that problems have gone away. It’s something we continue to work, it’s – one thing, if you can be more aggressive with your suppliers from a payment standpoint and with your customers for that matter then you can do some things from a margin standpoint. So it’s still something we’re having to work every day, but the situation definitely is improved.Tyson Bauer Okay. So still in the woods, but we can see the tree line.Rob Capps Yes, I guess that’s a pretty good way to put it.Tyson Bauer Okay. Preferred dividend expectations are at some point in fiscal 2024 I would assume before you hit the six deferments where then the Board of Directors change. Is that kind of the deadline that you’re viewing is to make whole before that six deferment?
And if so, what criteria needs to occur and would you use that capital accordion feature you talked about to resolve the deferred dividends?Rob Capps Yes. So just to clarify, the issue with it the board is – if we miss or defer six quarterly payments, then the preferred holders have the right to appoint two directors. Doesn’t mean they necessarily will, but they do have the right to do so, so just to clarify that. Our objective is to get that current, prior to that point, sometime during the year, I don’t think there are any specific criteria, mainly we need to look at what’s our overall liquidity situation to make sure we can continue to execute on the backlog. So as we’re able to handle cash flows or cash flow needs for that execution in a more traditional way then I think that’ll give us the flexibility to do some things with the preferred.Tyson Bauer Okay.
And on the financing, given what was in the public arena as far as appraisal values for those real estate assets that was online. You drew 3.7, it’s not necessarily a line of credit per se, but there are features there that can allow you to draw more against those real estate assets. Do you have the full availability to go up to that $10 million or somewhere where you have plenty of flexibility?Rob Capps Certainly not to that full amount. I think there is flexibility and it’s not specifically defined and that we think there is some flexibility there, but it’s not for that magnitude.Tyson Bauer Okay. The pipeline seems very robust and it seems to be across renewable energy just the old, I guess you call it the old world energy still, and defense obviously.
Are there any haymakers that are involved in that pipeline that are kind of game changers along with the steady flow of just consistent business?Rob Capps I’m not sure I’d put it that way. I think there are some potentially significant orders. I think we’ve announced a couple of those. And so things of that magnitude maybe a bit more even. But I wouldn’t say that there’s a haymaker as you put it, but I think it’s more of a steady state of business, which frankly is a better thing for us. We’re able to manage that much more effectively.Tyson Bauer Okay. On the defense side, we’re starting to see improvement on decline results. Have we started to see some dividends pay off from that Europe JV and will Sweden, if they are included in NATO accelerate that relationship and make it more fruitful?Rob Capps I don’t think NATO has impact one way or another, frankly.
So I don’t think that’s a factor. We – that partnership is going well, it hasn’t contributed revenue to date, so it’s not in the numbers you’re looking at now, so that’s upside for sure. And we are seeing improvement across the board in both our commercial as well as our governmental business.Tyson Bauer Okay. During the quarter you put out a press release regarding a patent award, what benefits do you see? And does that then somewhat protect your intellectual technology where you can now start adding some layers around that?Rob Capps Yeah, that relates to our angle looking sonars are gap filler solution for sidescan sonar. So I think the industry’s known about that for a while. I think we’re – that certainly protects our position there.
Prevents someone else coming up with a similar solution. So we have a very unique solution now in the marketplace and starting to see some real traction with that particular product. That’s embodied in what we call our MA-X VIEW 600 right now and really starting to see some traction with that product here starting late last year and going into this year.Tyson Bauer Okay. So on synopsis, the revenue seems to be – we’ve gotten that hurdle. The backlog is supporting, margins, we expect improvement as we go forward. Are you now in a position liquidity wise and self-sustaining where I don’t want to say the word comfort, but you’re a little less sleepless nights?Rob Capps I never sleep very well, Tyson. But again, we certainly are on much firmer ground now, having the good book of business and knowing that it’s going to be there next month as well.
