Greetings, welcome to the MIND Technology 4Q 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. 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. It is now my pleasure to introduce your host, Ken Dennard. Thank you. You may begin.
Thank you, operator. Good morning, everyone, and welcome to the MIND Technology fiscal 2023 4Q 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'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, mind-technology.com, or via recorded telephonically on instant replay feature until 27 April . 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, 20 April 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 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 on its annual report Form 10-K for the year ended January 31st, 2023. As we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday. Please note that contents of our conference call this morning are covered by those statements. Now, with all that behind me, I'd like to turn the call over to Rob Capps. Rob?
Okay. Thanks, Ken. As we did last quarter, we have prepared an updated presentation covering our discussion this morning, we've posted it to our website. I invite you to refer to that at your leisure. Today, I'll begin by discussing our 4Q 2023 results as well as our current view of market conditions. Mark will provide a more detailed update on our financials. I'll wrap things up with some remarks about our outlook. We're very pleased with our 4Q results. As expected, we saw significant improvement in almost all financial metrics. Revenues were up 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 31 January , our backlog of firm orders stood at $2.7 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. Our team continues to find innovative ways to adapt our products to meet the evolving needs of our customers. This sustained customer demand and the interest 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 31 January , 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 to create dilution to our equity holders. Additionally, we've seen the benefit from the increases in revenues in the 4Q, and that has continued into the 1Q to a large degree. Cash flow from this activity has contributed to improvements in our liquidity. I'll let Mark walk you through the 4Q and full year financial results in a bit more detail. Mark?
Thanks, Rob. 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 $986,00 of other income during the quarter, most of which related to Employee Retention Credit. 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. This represents a gross profit margin of 37% for the year, an 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 4Q of 2023, which was roughly in line with the $3.6 million from the 3Q. 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 4Q was $708,000, which was down approximately 16% from our 3Q. 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 4Q this year was $445,000 as compared to a loss of $5.1 million in the 4Q of 2022.
Our 4Q Adjusted EBITDA from continuing operations was approximately $1.4 million, compared to a loss of $4.5 million in the 4Q of 2022, and a loss of $2.7 million in the 3Q 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, has 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.
Okay, thanks, Mark. We're encouraged by our 4Q and full year results. 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 have traditionally seen, there will likely be revenue variation between quarters due to a variety of challenges that are often out of our control. The favorable market trends, the robust customer interest, and growth of our backlog continues to give us confidence that sustainable higher-level revenue is achievable. 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 are all things we must deal with every day and can impact production and order 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 1Q revenues to look similar to our fiscal 2023 4Q. However, I want to reiterate that every quarter may not necessarily generate the same level of revenue. There may be certain unforeseen circumstances that cause orders or deliveries to slide to the right. That being said, we do believe that the general trend will be one of increased revenue. Earlier this month, we announced the deferral of our 4Q 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 of 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. Our growing backlog is a strong indication that our differentiated marine technology products are in 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. With that, operator, we can open the call up for some questions.
Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in a question in queue. You may press star two if you would 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. One moment while we poll for our first question. Our first question comes from Tyson Bauer with KC Capital. Please proceed.
Congratulations, gentlemen.
Thanks, Tyson.
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 taking 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 did supply constraints narrow some of those expected margins and that should improve as we go in the subsequent quarters?
Yeah, I think there are a couple of things. You know, the unusual items that Mark talked about, the inventory impairment and the vendor settlement are in cost of sales, so it impacted that gross margin. That's one factor in the 4Q. There's no doubt that, you know, the supply chain situation has had an impact. You know, having to, you know, buy components from, you know, non-traditional sources, from brokers, things like that increases the cost. As we're able to see more clearly the production plan, and that's where the backlog really helps things a lot 'cause we can see what's happening, I think we're able to be much more effective in our purchasing and therefore that's gonna drive costs down. I think we will see improvement there.
Okay. 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?
It certainly helps. Not saying, you know, that problems have gone away. It's something we continue to work. You know, it's, you know, one thing, if you can be more aggressive with your suppliers, you know, from a payment standpoint, and with your customers for that matter, then, you know, you can do some things from a margin standpoint. It's still something we're having to work every day. The situation definitely has improved.
Okay. Still in the woods, but we can see the tree line.
I guess that's a pretty good way to put it.
Okay. preferred dividend expectations are at some point in fiscal 24, I would assume, before you hit the six deferments where the board of directors change. Is that kind of the deadline that you're viewing is to make whole before that 6 deferment? If so, what criteria needs to occur? Would you use that capital accordion feature you talked about to resolve the deferred dividends?
Just to clarify, you know, the issue with it, the board is, you know, 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. Just to clarify that. Our objective is to, you know, get that current, you know, prior to that point, you know, sometime during the year. I don't think there are any specific criteria. You know, mainly we need to look at, you know, what's our overall liquidity situation to make sure we can continue to execute on the backlog.
As we're able to, you know, 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.
Okay. 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 say, 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?
Certainly not to that full amount. I think there is flexibility, and it's not specifically defined, but we think there is some flexibility there, but it's not to that magnitude.
Okay. The pipeline seems very robust, and it seems to be across renewable energy, just 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?
Oh, 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. Things of that magnitude, maybe a bit more even. I wouldn't say that there's the haymaker, as you put it. I think it's more of a, you know, steady state of business, which frankly is a better thing for us. We're able to manage that much more effectively.
Okay. On the defense side, we're starting to see improvement on the client results. Have we started to see some dividends pay off from that Europe JV? Will Sweden, if they are included in NATO, accelerate that relationship and make it more fruitful?
I don't think NATO has impact one, in one way or another, frankly. I don't think that's a factor. You know, that partnership is, you know, going well. It hasn't contributed revenue to date, so it's not in the numbers you're looking at now. That's upside for sure. We are seeing, you know, improvement, you know, across the board in, you know, both our commercial, as well as our, you know, governmental business.
Okay. During the quarter, you put out a press release regarding a patent award. What benefit do you see, and does that then somewhat protect your intellectual technology, where you can now start adding some layers around that?
You know, that relates to our, you know, angle looking sonars, our gap filler solution for side scan sonar. I think, you know, the industry's known about that for a while. That certainly protects our position there. You know, prevents someone else from coming up with a, you know, similar solution. We have a very unique solution now in the marketplace, and starting to see some real traction with that particular product. You know, that's embodied in what we call our MAXQ 600 right now, and really starting to see some traction with that product here, starting, you know, late last year and going into this year.
Okay. In 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 wanna say the word comfort, but you're a little less sleepless nights?
I don't know. I never sleep very well, Tyson. Again, we certainly are on much firmer ground now. You know, have a good book of business and knowing that it's gonna be there next month as well, that certainly helped things a lot. You know, I think we're seeing, you know, improvement in the development in, you know, new markets. You know, the release we put out this earlier this week about the wind farm installations, you know, that's really a new market or a new application, if you will, which has a lot of traction in the marketplace, both for wind farm installations as well as carbon capture installations. We see our products, you know, in demand for those sort of applications.
Again, just broader applications, I think is helping to drive some of this top line optimism.
Well, that sounds good. This has been probably one of the best conference calls we've had in a while, so congratulations.
Okay, thanks. Appreciate it, man.
Our next question comes from Ross Taylor with ARS Investment Partners. Please proceed.
Thank you, and congratulations on the rebounding numbers. I wanted to kinda get down to some other issues, though. First, you talked about the fact you haven't yet generated revenues out of the military relationship you have with Saab. Could you give us an idea of what kind of timeline you're looking at? Are you in conversations with people at this point in time? You know, what's the sticking point? Why haven't we been able to take that relationship and turn it into a revenue stream yet?
Well, I'm not gonna comment on the name of the partner, but we'll go forward from there.
There is the photo, though of the rendering.
Ross, it's a complicated development project. I mean, that's the answer.
Okay.
These things, you know, aren't easy, otherwise everyone can do it. just a matter of when we're, you know, ready to actually deploy that. You know, we are in conversations with more than one, multiple end users for these applications in a couple of different embodiments of the technology. Yeah, we thought we might be there this past year, and again, it just didn't happen for, you know, varying reasons because, again, these things are hard and things develop, and we wanna make sure it's right before we put it in the marketplace. We're very happy and our partner is very happy with what we're seeing from all the testing and sea testing we're doing. I feel good in this coming year, we'll start to see benefits of that.
Okay. Did any of that sea testing involve looking for things that might have fallen from the sky that had been made in China?
No, not for this.
No?
Not for this.
Not for this?
No.
Okay.
Not now. I'm not saying that we may not have been involved in that, those activities, but not for this particular technology.
Not for that technology, okay. I get the idea that, you know, it might have been other technology. What's the amount of arrears dividends at this point in time?
It's about $940,000 a quarter, you know, $3.8 million, roughly.
Yeah. That's a fairly substantial portion of the overall value of your equity. It seems to me that we really need to get the preferred dividend out of the way, the arrears out of the way in order to kind of start to maximize the value of the common shareholder. I would strongly encourage that be something that's expedited as quickly as possible. I mean, with the market cap around $7 million-$8 million, you know, at the open today, having that size of chunk that's owed to the preferred. It's standing in the way of us getting the value I think this company is truly worth. I would encourage you guys to get that behind you.
Understood. Understood.
Okay. Other than that, as I said, you know, looking at opportunities pushing forward, what are you seeing in areas like, you know, there had been talk in the past about, you know, mapping the oceans, the Pacific Ocean and the like. Are you seeing an increased demand for that? Are you seeing an increased interest in utilizing your technology in, you know, unmanned undersea vehicles or unmanned surface vehicles for military purposes?
Actually for military and commercial, for that matter. I think we're seeing a move in the commercial world towards unmanned vehicles in many cases, as well as manned crewed vessels. You know, Ross, I think we're seeing, you know, that interest, you know, really across the board. Certainly on the, you know, defense or maritime security side, you know, there's with world events, that certainly is then driving some activity. There's no doubt about that. You know, as I mentioned earlier, some of the things developing in the alternative energy market is driving some demand for a number of our products, frankly. They've had some different embodiments, different applications for our technology, I think is increasing markets for us. The traditional energy markets continue to be quite strong. I think all those things are driving it.
It's really not one or two things. It's fairly broad at this point.
Well, good luck pushing forward. I hope this is the year we get to finally see the breakthrough into, you know, profitability and get enough liquidity we can get that preferred dividend out of the way so that common can start to actually trade on this value.
Okay. You bet. Appreciate it, Ross.
Take care.
We have a follow-up from Tyson Bauer with KC Capital. Please proceed.
I promise to make it quick. Just going through your presentation, couple different slides mentioning your demonstrations for the U.S. Navy in various capacities. Under what nameplate is that occurring? Because I doubt if it's directly Klein with the U.S. Navy, you're using some partners or, class one contractors, those things in that regard. Is your technology being used in isolation or as an add-on to existing vehicles that are being in use by the U.S. Navy?
I think you're referring to our Sea Serpent or passive array demonstration we did with Coastal Trident last summer. That actually is. We have an entity called MIND Maritime Acoustics, which you've not heard much about, 'cause it's not been very active. We actually do that business through that entity, for some regulatory and export control reasons. It's, it's not Klein, it's not SeaMap. It's, it's something a bit different. That demonstration was done directly with the Navy with some partners in that company called Martec, supplied the vessel that we towed the streamer, the array from. BAE, British Aerospace provided a target vehicle that replicates or acts like it's a submarine. That's the target we were looking. That was the demonstration.
You know, we were forefront in that, but we did have partners in it. We're seeing what I think is a great deal of interest from a variety of parties for that technology, not just for, you know, a towed passive streamer, but also for fixed installations on the seabed. I think our technology, which is, you know, taking our SeaLink streamer technology and modifying that to work in this environment, which we call Sea Serpent, it really fits well for fixed installations on the seafloor. We've actually been running a test on the seafloor off the coast of New Hampshire for a year and a half now. We have quite a bit of data from that. That's a pretty interesting area for us.
One that you've not seen any revenue from yet, I think we'll start to see some contribution again as we go into this year.
Okay. Is that a situation where the technology, as long as it gets approved, then any kind of vehicle manufacturer, whether it be, Huntington Ingalls or somebody else, you're more or less specced in, where they then come to you to include it in their overall contracts?
Yeah. It's not quite like that, Tyson. I mean, we certainly are selling, you know, through typically some other integrator. It's not like the Navy is gonna say, "Okay, on every vehicle, you need to use Sea Serpent." It's gonna be application specific. That's potentially a big, big market for us.
Okay. it's not necessarily the U.S. Navy is buying directly from you. It is that-.
Correct.
they are, more or less
Correct.
putting in whatever they do that, okay, it has to have what you're providing.
Exactly right. It's a two-pronged sales effort. You gotta, you know, work with the integrator and the vehicle manufacturer, but you have to have. You know, the Navy is the end user eventually or wherever the commercial customer would be as well. 'Cause there are applications for, you know, commercial installations, you know, offshore platforms, you know, harbor facilities, things like that. It's not just military.
Okay. These typical contracts are ones that we've seen other defense people make announcements on, where you can have an overall fairly healthy size of the contract with kind of a base amount that they can utilize those contract terms to expand throughout a given time period. Correct?
Yes. Sometimes you'll see it in that structure.
Okay. All right. That sounds wonderful. Thank you.
Okay.
This concludes the Q&A portion of the call. I will now hand the call back to Rob Capps for final remarks.
Just wanna thank everyone for joining us today, and look forward to talking to you again at the end of our 1Q, later this year. Thanks very much.
Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.