MIND TECHNOLOGY, INC. Historically, we have operated in two segments,Marine Technology Products and Equipment Leasing . During the second quarter of fiscal 2021, our Board determined to exit the Leasing Business and instructed management to develop and implement a plan to dispose of those operations. Accordingly, the assets, excluding cash, and liabilities of the Leasing Business are considered held for sale and the Leasing Business operations are presented as discontinued operations. See Note 2 - "Assets Held for Sale and Discontinued Operations" to our condensed consolidated financial statements for more details. Revenue from the Marine Technology Products business includes sales ofSeamap equipment and sales of Klein equipment. This business operates from locations nearBristol, United Kingdom ;Salem, New Hampshire ;Huntsville, Texas ;Johor, Malaysia and inSingapore . DuringFebruary 2019 , the Company completed the sale of its Australian operations inBrisbane, Australia . See Note 23 - "Sale of Subsidiaries" to our condensed consolidated financial statements for additional details. The discontinued operations of theEquipment Leasing business includes all land leasing activity, sales of lease pool equipment and certain other equipment sales and services related to those operations. This business has been conducted from our locations inHuntsville, Texas ;Calgary, Canada ;Bogota, Colombia ; andBudapest, Hungary . This included the operations of our subsidiaries MCL, MEL and our branch inColombia . Management believes that the performance of our Marine Technology Products business is indicated by revenues from sales of products and by gross profit from those sales. Management monitors EBITDA and Adjusted EBITDA, both as defined and reconciled to the most directly comparable financial measures calculated and presented in accordance withUnited States generally accepted accounting principles ("GAAP"), in the following table, as key indicators of our overall performance and liquidity. 20
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Index to Financial Statements
The following table presents certain operating information of our continuing
operations:
Year Ended January 31,
2021 2020
(in thousands)
Revenues:
Sale of marine technology products $ 21,215 $ 29,919
Total revenues $ 21,215 $ 29,919
Cost of sales:
Sale of marine technology products $ 13,906 $ 16,965
Total cost of sales $ 13,906 $ 16,965
Gross profit $ 7,309 $ 12,954
Operating expenses:
Selling, general and administrative $ 12,648 $ 14,140
Research and development $ 3,003 $ 1,850
Provision for doubtful accounts $ 659 $ -
Impairment of intangible assets $ 2,531 $ 760
Depreciation and amortization $ 2,796 $ 2,494
Total operating expenses $ 21,637 $ 19,244
Operating loss $ (14,328) $ (6,290)
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Index to Financial Statements
Year Ended January 31,
2021 2020
(in thousands)
Reconciliation of Net loss from continuing operations to EBITDA and Adjusted EBITDA Net loss from continuing operations
$ (14,002) $ (6,543) Depreciation and amortization 2,796 2,823 Provision for income taxes 536 353 EBITDA from continuing operations (1) (10,670) (3,367) Non-cash foreign exchange losses 110 86 Stock-based compensation 708 854 Impairment of intangible assets 2,531 760 Adjusted EBITDA from continuing operations (1)$ (7,321) $ (1,667)
Reconciliation of
$ (6,360) $ (5,817) PPP loan forgiveness 757 - Stock-based compensation (708) (854) Provision for doubtful accounts (659) - Provision for inventory obsolescence (132) (298) Changes in accounts receivable (current and long-term) (3,077) 3,066 Interest paid 40 63 Taxes paid, net of refunds 336 498 Loss on sale of subsidiaries 357 - Changes in inventory (998) 3,306
Changes in accounts payable, accrued expenses and other current liabilities and deferred revenue
1,223 (307)
Impairment of intangible assets (2,531) (760)
Changes in prepaid expenses and other current and long-term assets
(154) 601
Foreign exchange gains, net - (313)
Other 1,236 (2,552)
EBITDA from continuing operations (1) $ (10,670) $ (3,367)
___________________________________________________________
(1)EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA is defined
as net income before (a) interest income and interest expense, (b) provision for
(or benefit from) income taxes and (c) depreciation and amortization. Adjusted
EBITDA excludes non-cash foreign exchange gains and losses, stock-based
compensation, impairment of intangible assets, other non-cash tax related items
and non-cash costs of lease pool equipment sales. We consider EBITDA and
Adjusted EBITDA to be important indicators for the performance of our business,
but not measures of performance or liquidity calculated in accordance with GAAP.
We have included these non-GAAP financial measures because management utilizes
this information for assessing our performance and liquidity, and as indicators
of our ability to make capital expenditures, service debt and finance working
capital requirements and we believe that EBITDA and Adjusted EBITDA are
measurements that are commonly used by analysts and some investors in evaluating
the performance and liquidity of companies such as us. In particular, we believe
that it is useful to our analysts and investors to understand this relationship
because it excludes transactions not related to our core cash operating
activities. We believe that excluding these transactions allows investors to
meaningfully trend and analyze the performance of our core cash operations.
EBITDA and Adjusted EBITDA are not measures of financial performance or
liquidity under GAAP and should not be considered in isolation or as
alternatives to cash flow from operating activities or as alternatives to net
income as indicators of operating performance or any other measures of
performance derived in accordance with GAAP. In evaluating our performance as
measured by EBITDA, management recognizes and considers the limitations of this
measurement. EBITDA and Adjusted EBITDA do not reflect our obligations for the
payment of income taxes, interest expense or other obligations such as capital
expenditures. Accordingly, EBITDA and Adjusted EBITDA are only two of the
measurements that management utilizes. Other companies in our industry may
calculate EBITDA or Adjusted EBITDA differently than we do and EBITDA and
Adjusted EBITDA may not be comparable with similarly titled measures reported by
other companies.
Within our Marine Technology Products business, we design, manufacture and sell
a variety of products used primarily in oceanographic, hydrographic, defense,
seismic and maritime security industries. Seamap's primary products include (i)
the GunLink seismic source acquisition and control systems; (ii) the BuoyLink
RGPS tracking system used to provide precise positioning of seismic sources and
streamers (marine recording channels that are towed behind a vessel) and (iii)
SeaLink marine sensors and solid streamer systems
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Index to Financial Statements (collectively, the "SeaLink" product line or "towed streamer products"). These towed streamer products are primarily designed for three-dimensional, high-resolution marine surveys in hydrographic industry applications. Klein designs, manufactures and sells side scan sonar and water-side security systems to commercial, governmental and military customers throughout the world. Our discontinued operations consist primarily of leasing seismic data acquisition equipment primarily to seismic data acquisition companies conducting land surveys worldwide. Historically, we provided short-term leasing, typically for a term of less than one year, of seismic equipment to meet a customer's requirements. From time to time, we sold lease pool equipment. These sales were transacted when we had equipment for which we did not have near term needs in our leasing business or which was otherwise considered excess. Additionally, when equipment that had been leased to a customer was lost or destroyed, the customer was charged for such equipment at amounts specified in the underlying lease agreement. Our results of operations can experience fluctuations in activity levels due to a number of factors outside of our control. These factors include budgetary or financial concerns, difficulties in obtaining licenses or permits, security problems, labor or political issues, inclement weather, and global pandemics. See Item 1A- "Risk Factors." Business Outlook The global pandemic created significant uncertainty in the global economy, which we believe had an adverse effect on the Company's business, financial position, results of operations and liquidity. We believe the resulting uncertainty caused many customers to delay purchasing decisions. Furthermore, travel restrictions limited our ability to interact with customers and to demonstrate our products. Similar restrictions, we believe, caused delays in certain governmental evaluation programs involving our technology. Recently we have seen indications of improving activity and the relaxation of pandemic related restrictions in some areas. However, the time frame for which disruptions related to the pandemic will continue is uncertain, as is the magnitude of any adverse impacts. We were required to temporarily shut-down our facilities inMalaysia andSingapore onMarch 17 andApril 7 , respectively. TheMalaysia facility was reopened onApril 21, 2020 with approximately 50% of its normal staff and resumed operations with 100% of its employees onMay 4, 2020 . InSingapore , we were able to continue limited shipping and receiving operations during the shutdown and were able to resume manufacturing operations onJune 1, 2020 . Our other facilities have been allowed to operate, although at reduced efficiencies in some cases as certain employees have worked remotely from time to time. Furthermore, travel restrictions resulting from the global pandemic have impacted our ability to visit customers, conduct product demonstrations and visit our various operating locations. These disruptions have had, and we expect they will continue to have, a negative effect on our business; however, the duration and magnitude of these disruptions are uncertain. Management believes that the negative impact is subsiding, but there can be no assurance of that. Additionally, oil prices declined sharply during the first quarter of fiscal 2021 in response to the economic effects of the global pandemic and the announcement ofSaudi Arabia's abandonment of output restraints. While oil prices have recovered a significant portion of the first quarter decline over the past six months, continuing uncertainty could have an adverse effect on our customers in the energy industry which could cause them to cancel or delay projects and orders with us or impair their ability to make payments to us. However, to date we have had no significant orders cancelled and continue to respond to inquiries from customers in all market segments, including energy related. Many of our marine customers have recently indicated increases in backlog, which we believe is a positive indication of a recovery in fiscal 2022 and beyond. The general economic environment concerning the energy industry could also impact our ability to realize value from our discontinued operations. In the fourth quarter of fiscal 2021 we began to experience an increase in orders and inquiries for marine exploration applications, particularly for our source controller products. Our GunLink seismic source controllers have certain capabilities that we believe are unique and that increasingly certain of these capabilities are required of operators of seismic exploration vessels. Based on this, and on discussions with current and potential customers, we believe demand for our GunLink source controllers will continue, although there can be no assurance of this. Furthermore, subsequent toJanuary 31, 2021 we entered into an indefinite quantity, indefinite delivery supply agreement with a major international marine seismic contractor. While we have not yet received firm order related to this agreement, we do expect the arrangement to result in additional sales of our source controller products. In recent months, we have continued to experience significant inquiries and bid activity for our other marine technology products and have conducted a number of demonstrations for various customers, including theU.S. Navy . However, we believe many customers have delayed purchase commitments due to the uncertainty in the global economy. Accordingly, we have not experienced the number of firm orders that we would have normally expected from the current level of inquiries and bid activity. As ofJanuary 31, 2021 , our backlog of firm orders for our Marine Technology Products business was approximately$14.2 million , as compared to approximately$8.9 million as ofJanuary 31, 2020 . We expect essentially all of these orders to be completed within fiscal 2022 and therefore expect revenues from continuing operation in fiscal 2022 to exceed those of fiscal 2021. The level of backlog at a particular point in time may not necessarily be indicative of results in subsequent periods as the size and delivery period of individual orders can vary significantly. 23
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Going forward we intend to address three primary markets in our Marine
Technology Products business -
•Marine Survey;
•Marine Exploration; and
•Maritime Defense.
Specific applications within those markets include sea-floor survey, search and
recovery, mineral and geophysical exploration, mine counter measures and
anti-submarine warfare. We have existing technology and products that meet needs
across all these markets such as -
•Side-scan sonar;
•Bathymetry systems;
•Acoustic arrays, such as SeaLink; and
•Marine seismic equipment, such as GunLink and BuoyLink.
We see a number of opportunities to add to our technology and to apply existing
technology and products to new applications.
In fiscal 2020, we introduced new sonar technology that we refer to as "MA-XTM".
We believe this to be revolutionary sonar technology that will significantly
expand the opportunities available to us. We have received and delivered orders
related to this new technology and continue to respond to orders and inquiries
related to this technology, including some for military related applications.
While the MA-XTM technology has not had a material impact on our results of
operations to date, we believe this technology will result in significant new
opportunities for us. Also, in fiscal 2020, we received an order from a
manufacturer of unmanned underwater vehicles ("UUV's") for a MA-XTM related
product to be installed on one of their UUV's. This request relates to a
potentially significant program for the U.S. Navy . While this specific order may
not have a material impact on our results of operations, we believe this, and
similar opportunities could have a material impact on our operations. During
fiscal 2021 we introduced technology based on MA-XTM specifically focused on the
rapidly growing autonomous vehicle market and entered into an agreement with a
major European defense contractor for the joint offering of synthetic aperture
sonar ("SAS"). We believe that each of these initiatives can significantly
expand our serviceable market. Also during fiscal 2021, we began development of
passive sonar arrays based on our SeaLink technology. We believe this technology
is well suited for maritime security applications such as anti-submarine
warfare, particularly in application involving unmanned vessels.
We are also pursuing a number of initiatives to further expand our product
offerings. These initiatives include new internally developed technology,
introduction of new products based on our existing technology, technology
obtained through partnering arrangements with others and a combination of all of
these. There can be no assurance that any of these initiatives will ultimately
have a material impact on our financial position or results of operations.
Certain of the business opportunities that we are pursuing are with military or
other governmental organizations. The sales cycle for these projects can be
quite long and can be impacted by a variety of factors, including the level of
competition and budget limitations. Therefore, the timing of contract awards is
often difficult to predict. However, once awarded, programs of this type can
extend for many years. To date, the majority of our revenues have been from
commercial customers; however, we expect the proportion of revenue related to
military or governmental customers will increase in the future.
We believe there are certain developments within the marine technology industry
which can have a significant impact on our business. These developments include
the following:
•The increase in the use of unmanned, or uncrewed, marine vessels, both surface
vehicles and underwater vehicles, and the need for a variety of sensor packages
designed for these applications.
•Demand for higher resolution sonar images, such as for mine countermeasure
applications.
•Demand for economical, commercially developed, technology for anti-submarine
warfare and maritime security applications.
In response to these, and other, developments we have initiated certain
strategic initiatives in order to exploit the opportunities that we perceive.
These initiatives include the following:
•Development of side-scan sonar and other sensor systems specifically for
unmanned vehicles, including integration of our MA-XTM technology;
•Development of SAS sonar systems in cooperation with a major European defense
contractor; and
•Application of our SeaLink solid streamer technology to passive sonar arrays
for use in maritime security applications, such as anti-submarine warfare.
In response to the effects of the global pandemic and the current economic
environment we took steps to reduce expenses including the layoff or furloughing
of certain employees and contractors and the deferral of other expenditures.
Should the effects of the pandemic and low commodity prices continue, we may
take further steps to reduce costs. We believe the majority of our costs are
variable in nature, such as raw materials and labor related costs. Accordingly,
we believe we can reduce such costs commensurate with any declines in our
business.
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Index to Financial Statements During fiscal 2021, the Company received aSingapore government grant pursuant to its Job Support Scheme. The primary objective of the Job Support Scheme is to assist companies in retaining local employees during the global pandemic. Similar to theSingapore government grant our operations in theUnited Kingdom were also recipients of the government backed Job Retention Scheme. Proceeds from the Job Support Scheme and the Job Retention Scheme were approximately$372,000 and$119,000 , respectively. Future benefit from these government job schemes will be dependent on availability and our ability to qualify for the assistance and we cannot be certain future benefits will be obtained. Our revenues and results of operations have not been materially impacted by inflation or changing prices in the past two fiscal years, except as described above. Results of Continuing Operations For fiscal 2021 and 2020, we recorded operating losses of approximately$14.3 million and$6.3 million , respectively. The increased operating loss in fiscal 2021 from fiscal 2020 was a result of lower revenue and gross profit from our continued operations, primarily attributable to the global pandemic, which caused many potential customers to reassess expenditures. In addition, we believe disruptions in global energy markets early in fiscal 2021, exacerbated these effects for certain of our customers. Marine Technology Products Revenues and cost of sales for our Marine Technology Products business were as follows: Year Ended January 31, 2021 2020 ($ in thousands) Revenues: Seamap$ 17,104 $ 22,393 Klein 4,387 7,472 SAP - 101 Intra-segment sales (276) (47) 21,215 29,919 Cost of sales: Seamap 10,211 11,372 Klein 3,971 5,545 SAP - 95 Intra-segment sales (276) (47) 13,906 16,965 Gross profit$ 7,309 $ 12,954 Gross profit margin 34 % 43 % A significant portion ofSeamap's sales consists of large discrete orders, the timing of which is dictated by our customers. This timing generally relates to the availability of a vessel in port so that our products can be installed. Accordingly, there can be significant variation in sales from one period to another, which does not necessarily indicate a fundamental change in demand for these products. We believe the decline inSeamap revenues is due, in large part, to temporary delays and disruptions caused by the global pandemic, including the temporary shutdown of our production facilities, and the disruptions in global energy markets early in the year. The gross profit and gross profit margins generated by sales ofSeamap products were approximately$6.9 million and 40% during fiscal 2021 and approximately$11.0 million and 49% in fiscal 2020. The decrease in gross profit margins between the periods is due primarily to reduced manufacturing activity, which resulted in lower absorption of fixed overhead costs during fiscal 2021. Revenue from the sale of Klein products was approximately$4.4 million during fiscal 2021 versus approximately$7.5 million in the prior year period. We believe the decline in revenue is primarily due to the effects of the global pandemic as discussed above. Gross profit was approximately$416,000 and$1.9 million , with gross profit margins of 9% and 26%, during fiscal 2021 and 2020, respectively. The decline in year over year gross profit margin is due mainly to lower absorption of overhead costs as a result of lower manufacturing activity, as well as higher product testing and sustaining engineering activity during fiscal 2021. Operating Expenses Selling, general and administrative expenses for fiscal 2021 amounted to approximately$12.6 million , compared to approximately$14.1 million in 2020, respectively. The decrease in operating expenses during fiscal 2021 was the result of cost control measures and the effect of reduced travel, entertainment and convention related expenses due mainly to travel and other restrictions implemented globally in response to the global pandemic. 25
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Index to Financial Statements Research and development costs increased in fiscal 2021 as compared to fiscal 2020 due to incremental product development activity, including that related to our MA-XTM, µMA-XTM and our other strategic product initiatives, including senor systems designed for uncrewed vessels, SAS and passive sonar array systems. In fiscal 2021, we recorded a provision for doubtful accounts of approximately$659,000 related to continuing operations. The provision in continuing operations was recorded in response to revaluation of bonds received during the period in exchange for an outstanding accounts receivable account. Due to the deteriorating financial position of the issuer, it was determined that the value of the bonds had been impaired. AtJanuary 31, 2021 , and 2020, we had trade accounts and note receivables over 180 days past due of approximately$1.1 million and$1.3 million , respectively. In our industry, and in our experience, it is not unusual for accounts to become delinquent from time to time and this is not necessarily indicative of an account becoming uncollectable. As ofJanuary 31, 2021 , and 2020, our allowance for doubtful accounts receivable amounted to approximately$948,000 and$2.4 million , respectively. Depreciation and amortization relates primarily to the depreciation of furniture, fixtures and office equipment and the amortization of intangible assets. The increase in depreciation and amortization expense in fiscal 2021 is due primarily to asset additions in our newMalaysia facility at the end of fiscal 2020. We periodically evaluate the recoverability of our intangible assets, including tradename. In the first quarter of fiscal 2021 due to the uncertain economic environment and declines in the trading prices of the Company's equity securities, we determined that our remaining goodwill had been impaired, resulting in a charge of approximately$2.5 million . Subsequent to that, the price of the Company's equity securities recovered substantially and no further impairments of intangible assets were deemed necessary. In fiscal 2020, our evaluation gave an indication of impairment due to recent financial results and the inherent uncertainty in projections of future results, we determined to record an impairment charge of approximately$760,000 , representing the full value of the tradename intangible asset related to Klein. Other Income and Expense Included in other expense in fiscal 2021 is approximately$757,000 related to forgiveness of the PPP Loan granted to the Company. Subsequent toJanuary 31, 2021 , the PPP Loan granted to Klein was also forgiven. Provision for Income Taxes Our provision for income taxes for continuing operations for fiscal 2021 was approximately$536,000 . This amount differed from the result expected when applying theU.S. statutory rate of 21% to our loss before income taxes due primarily to the impact of valuation allowances against the increase in our deferred tax assets, permanent differences between book income and taxable income, and the effect of foreign withholding taxes. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the global pandemic. The CARES Act did not have a material impact on the Company's fiscal 2021 provision for income taxes. In fiscal 2020, our provision for income taxes for continuing operations was approximately$353,000 . This amount differed from the expected income tax benefit at theU.S. statutory rate of 21% due primarily valuation allowances against the increase in our deferred tax assets, permanent differences between book income and taxable income, and the effect of foreign withholding taxes. Internal Controls As ofJanuary 31, 2021 , the Company's executive officers determined that the Company's internal control over financial reporting was operating effectively. As ofJanuary 31, 2020 , the Company's executive officers determined that the Company's internal control over financial reporting was not effective due to an identified material weakness. The material weakness involved the Company's review controls over significant estimates. The Company failed to detect an error related to our provision for doubtful accounts identified by the Company's auditors during the audit of our financial statements for the fiscal year endedJanuary 31, 2020 . We evaluated our controls related to accounting estimates and identified changes to our existing controls and additional controls which were implemented during fiscal 2021 in an effort to strengthen our control environment. These actions have remediated this deficiency in internal control, but we can give no assurance that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our reporting obligations. 26
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Index to Financial Statements
Results of Discontinued Operations
Revenues and cost of sales from discontinued operations were comprised of the
following:
Year Ended January 31,
2021 2020
Revenues:
Equipment leasing 3,526 10,877
Lease pool equipment sales 2,010 1,333
Other equipment sales 211 546
5,747 12,756
Cost of sales:
Direct costs-equipment leasing 2,018 3,943
Lease pool depreciation 1,698 4,630
Cost of lease pool equipment sales 684 147
Cost of other equipment sales 137 369
4,537 9,089
Gross profit (loss) 1,210 3,667
Operating expenses:
Selling, general and administrative 4,589 5,576
Provision for doubtful accounts 470 2,000
Depreciation and amortization 132 176
Total operating expenses 5,191 7,752
Operating loss (3,981) (4,085)
Other income (expenses) 201 (134)
Loss on disposal (including
(1,859) -
Loss before income taxes (5,639) (4,219)
Provision for income taxes (665) (525)
Net loss (6,304) (4,744)
Following the decision to exit the Leasing Business and present those operations
as discontinued operations, we no longer recognize depreciation expense related
to our lease pool of seismic equipment, but rather reassess, on a quarterly
basis, the recoverability of the remaining carrying value of those assets.
Similarly, we no longer recognize gain or loss from the sale of individual lease
pool assets, but treat any proceeds from such transactions as a reduction in the
carrying value of the lease pool.
Revenue from discontinued operations during fiscal 2021 decreased approximately
55% to $5.7 million compared to $12.8 million for fiscal 2020. We believe the
reduction in revenue is due to lower Equipment Leasing activity, primarily as a
result of the global pandemic, and the decision to exit the Leasing Business as
discussed above.
Direct costs related to The Leasing Business dropped to approximately $4.5
million for fiscal year 2021 from approximately $9.1 million reported in the
same period for 2020. The year over year reduction in direct costs is
commensurate with the decline in revenue. Lease pool depreciation in fiscal 2021
decreased to approximately $1.7 million from $4.6 million in fiscal 2020 as we
are no longer recording lease pool depreciation on discontinued operations.
Selling, general and administrative costs related to the Leasing Business
amounted to approximately $4.6 million , compared to $5.6 during the same period
for 2020. The decrease was due primarily to lower compensation and other
administrative expenses resulting from headcount reductions and the decline in
business activity, partially offset by accrued severance and other costs related
to the decision to exit the Leasing Business.
In fiscal 2021, we recorded a provision for doubtful accounts of approximately
$470,000 in discontinued operations. Following the decision to exit the Leasing
Business we determined that the loss of operating leverage would further impair
the collectability of certain outstanding balances. In fiscal 2020 we recorded a
provision for doubtful accounts of approximately $2.0 million related to
discontinued operations. The significant provision recorded in fiscal 2020 was
due to a revaluation of the collectability of our accounts receivable prompted
by the detrimental impact of the global pandemic and the decline in world oil
prices subsequent to January 31, 2020 . Under the circumstances, we deemed it
more likely than not that certain of our customers would encounter financial
difficulties and potentially be unable to fully satisfy their financial
obligations to us.
The loss on disposal of approximately $1.9 million reflects the amount by which
the unadjusted carrying value of the net assets of the Leasing Business exceed
the estimated proceeds of the planned sale of the business. The unadjusted
carrying value of the Leasing Business includes approximately $2.7 million of
cumulative translation adjustment which has historically been recorded in
Accumulated Other Comprehensive Loss, a component of equity.
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Index to Financial Statements Subsequent toJuly 31, 2020 , sales of lease pool equipment totaling approximately$1.5 million have been reflected as a reduction in the carrying value of assets held for sale, with no gain or loss recognized from these transactions. Our provision for income taxes from our discontinued operations for the twelve months endedJanuary 31, 2021 was approximately$665,000 on a loss before income taxes of approximately$5.6 million . Our provision varies from the expected provision based on theU.S. statutory rate due primarily to the effect of foreign withholding taxes, and because we have recorded valuation allowances against the increase in our deferred tax assets in the respective periods. Liquidity and Capital Resources As discussed above, the global pandemic and recent volatility in oil prices has created significant uncertainty in the global economy which could have an adverse effect on our business, financial position, results of operations and liquidity. The period for which disruptions related to the pandemic will continue is uncertain as is the magnitude of any adverse impacts. We believe that any negative impacts have begun to subside but there can be no assurance of that. The Company has a history of operating losses, has had negative cash from operating activities in each of the last two years and has relied on cash from the sale of preferred stock pursuant to its first at the market (the "1st ATM") offering program. ThroughJanuary 31, 2020 , we had issued 994,046 shares of our Series A Preferred Stock, representing 100% of the Series A Preferred Stock available for sale under the 1st ATM program. However, the Company's cash balance as ofJanuary 31, 2021 is approximately$1.6 million higher than the balance atJanuary 31, 2020 . Furthermore, the Company has established a second at the market (the "2nd ATM") offering program with authorization to sell up to 5.0 million shares of common stock and 500,000 shares of preferred stock. In addition to the positive factors noted above, management believes there are additional factors and actions available to the Company to address liquidity concerns, including the following: •The Company has no funded debt, excluding the PPP Loan granted to Klein which has been completely forgiven inFebruary 2021 , or other outstanding obligations, outside of normal trade obligations. •The Company has no obligations or agreements containing "maintenance type" financial covenants. •The Company has working capital of approximately$19.0 million as ofJanuary 31, 2021 , including cash of approximately$4.6 million . •Should revenues be less than projected, the Company believes it is able, and has plans, to reduce costs proportionately in order to maintain positive cash flow. •The majority of the Company's costs are variable in nature, such as raw materials and personnel related costs. The Company has terminated or furloughed certain employees and contractors. •Despite the temporary suspension of operations inMalaysia andSingapore early in fiscal 2021, operations continued uninterrupted at other locations. Certain of these operations have been deemed "essential businesses" by authorities. However, there can be no assurance that there will not be further suspensions in the future. •The Company has a backlog of orders of approximately$14.2 million as ofJanuary 31, 2021 , which is an increase of approximately 60% from the amount atJanuary 31, 2020 . Production for certain of these orders was in process and included in inventory as ofJanuary 31, 2021 , thereby reducing the liquidity needed to complete the orders. •The Company has been successful in selling certain assets held for sale and expects to generate further liquidity from such transactions in fiscal 2022. •The Company has declared and paid the quarterly dividend on its Series A Preferred Stock for each quarter in fiscal 2021, but such quarterly dividends could be suspended in the future. •Despite the challenging economic environment in the year endedJanuary 31, 2021 , the Company was successful expanding its authorized capital stock (See Note 20 - Corporate Restructuring) and raising approximately$4.6 million in new capital through the sale of common and preferred stock pursuant to the 2nd ATM offering program. Management expects to be able to raise further capital through the 2nd ATM program should the need arise. •Based on publicized transactions and preliminary discussions with potential funding sources, management believes that other sources of debt and equity financing are available should the need arise. Our principal sources of liquidity and capital over the past two fiscal years have been proceeds from issuances of preferred stock and from the sale of lease pool equipment. Under our Amended and Restated Certificate of Incorporation, we have 2,000,000 shares of preferred stock and 40,000,000 shares of Common Stock authorized which we believe provides capacity for subsequent issues of Common Stock or preferred stock. The Series A Preferred Stock has been issued in aJune 2016 public offering, as consideration to Mitsubishi Heavy Industries, Ltd ("MHI"), and in the 1st and 2nd ATM offering programs. The Series A Preferred Stock (i) allows for redemption on at our option (even in the event of a change of control), (ii) does not grant holders with voting control of our Board of Directors, and (iii) provides holders with a 28
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Index to Financial Statements conversion option (into common stock) only upon a change of control which, upon conversion, would be subject to a limit on the maximum number of shares of common stock to be issued. ThroughJanuary 31, 2021 , we have issued 1,038,232 shares of our Series A Preferred Stock. During the twelve months endedJanuary 31, 2021 , under the 2nd ATM program, the Company sold (i) 1,584,556 shares of Common Stock, resulting in net proceeds to the Company of approximately$3.6 million , after deducting underwriting discounts and offering costs and (ii) 44,186 shares of Series A Preferred Stock, resulting in net proceeds to the Company of approximately$1.0 million .
The following table sets forth selected historical information regarding cash flows from our Consolidated Statements of Cash Flows:
Year Ended January 31,
2021 2020
(in thousands)
Net cash used in operating activities $ (6,360) $ (5,817)
Net cash provided by (used in) investing activities 3,207 (2,088)
Net cash provided by financing activities 4,514 1,749
Effect of changes in foreign exchange rates on cash and cash equivalents
16 (159)
Net increase (decrease) in cash and cash equivalents $ 1,377 $ (6,315)
As of January 31, 2021 , we had working capital of approximately $19 million and
cash and cash equivalents of approximately $4.6 million , as compared to working
capital of approximately $22.2 million and cash and cash equivalents of
approximately $3.2 million at January 31, 2020 . Our working capital decreased
during fiscal 2021 compared to fiscal 2020 due primarily to a decrease in
accounts receivable and inventory.
Cash Used In Operating Activities. Cash used in operating activities amounted to
approximately $6.4 million in fiscal 2021 compared to approximately $5.8 million
in fiscal 2020. In fiscal 2021, the primary sources of cash used in operating
activities was our net loss of $20.3 million , net of non-cash charges, including
depreciation and amortization charges totaling approximately $5.2 million . The
net change in other current assets and liabilities decreased net cash used in
operating activities for fiscal 2021 by approximately $4.3 million .
Cash Flows From Investing Activities. In fiscal 2020, we acquired approximately
3.0 million, of new lease pool equipment. Cash proceeds received from the sale
of lease pool equipment were approximately $2.0 million and $1.7 million in
fiscal 2021 and 2020, respectively. Subsequent to the decision to exit the land
leasing business as of July 31, 2020 , proceeds from the sale of assets held for
sale were approximately $1.5 million .
Cash Flows From Financing Activities. We had in place the 1st ATM offering
program related to the Series A Preferred Stock which was concluded in the
fourth quarter of fiscal 2020. In September 2020 , we launched the 2nd ATM
offering program to sell up to 500,000 shares of Preferred Stock and 5,000,000
shares of $0.01 par value common stock (the "Common Stock") of the Company. We
received net proceeds from the sale of our Series A Preferred Stock during
fiscal 2021 and 2020 of approximately $1.0 million and $3.8 million ,
respectively. During fiscal 2021 we received net proceeds, after deducting
underwriting discounts and offering costs, of approximately $3.6 million from
the sale of our Common Stock, pursuant to the 2nd ATM offering program. In
fiscal 2021 and 2020 we paid cash dividends of approximately $1.7 million and
$2.1 million , respectively, related to the Series A Preferred Stock.
As of January 31, 2021 , we have no funded debt, other than the PPP Loan granted
to Klein that was forgiven in February, 2021 and no obligations containing
restrictive financial covenants.
We regularly evaluate opportunities to expand our business through the
acquisition of other companies, businesses or product lines. If we were to make
any such acquisitions, we believe they could generally be financed with a
combination of cash on hand and cash flows from operations. However, should
these sources of financing not be adequate, we may seek other sources of capital
to fund future acquisitions. These additional sources of capital include bank
credit facilities or the issuance of debt or equity securities.
We have determined that, due to the potential requirement for additional
investment and working capital to achieve our objectives, the undistributed
earnings of foreign subsidiaries is not deemed indefinitely reinvested outside
of the United States as of January 31, 2021 . Furthermore, we have concluded that
any deferred taxes with respect to the undistributed foreign earnings would be
immaterial.
As of January 31, 2021 , we had deposits in foreign banks equal to approximately
$2.8 million all of which we believe could be distributed to the United States
without adverse tax consequences. However, in certain cases the transfer of
these funds may result in withholding taxes payable to foreign taxing
authorities. These factors could limit our ability to pay cash dividends in the
future.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by Item
303(a)(4)(ii) of Regulation S-K.
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Index to Financial Statements Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires us to make estimates and assumptions in determining the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant estimates made by us in the accompanying consolidated financial statements relate to the allowances for uncollectible accounts receivable and inventory obsolescence; the useful lives of our lease pool assets and amortizable intangible assets and the impairment assessments of our lease pool and various intangible assets. Other areas where we have made significant estimates include the valuation of stock options, the assessment of the need for a valuation allowance related to deferred tax assets and the assessment of uncertain tax positions. Critical accounting policies are those that are most important to the portrayal of a company's financial position and results of operations and require management's subjective judgment. Below is a brief discussion of our critical accounting policies. Revenue Recognition •Marine Technology Product Sales - We recognize revenue and cost of goods sold from sales of marine technology products upon agreement of terms and completion of our performance obligations, which is typically when delivery has occurred, and barring any question as to collectability. •Long-term project revenue - From time to time we enter into contracts whereby they assemble and/or manufacture and sell certain marine equipment, primarily to governmental entities. Performance under these contracts generally occurs over a period of three to twelve months. Revenue and costs related to these contracts are recognized "over time", as each separately identified performance obligation is satisfied. •Service agreements - In some cases we provide ongoing support services pursuant to contracts that generally have a term of 12 months. We recognize revenue from these contracts ratably over the term of the contract. In some cases, we may provide support services on a time and material basis. Revenue from these arrangements is recognized as the services are provided. For certain new systems, we may provide support services for up to 12 months at no additional charge. We believe any amounts attributable to these support obligations are immaterial. •Leases - We recognize lease revenue ratably over the term of the lease unless there is a question as to whether it is collectible. We do not enter into leases with embedded maintenance obligations. Under our standard lease, the customer is responsible for maintenance and repairs to the equipment, excluding normal wear and tear. We provide technical advice to our customers as part of our customer service practices. In most situations, our customers pay shipping and handling costs directly to the shipping agents. EffectiveJuly 31, 2020 , the Leasing Business has been classified as held for sale on the financial results reported as discontinued operations (see Note 2 - "Assets Held for Sale and Discontinued Operations" for additional details). Allowance for Doubtful Accounts We make provisions to the allowance for doubtful accounts based on a detailed review of outstanding receivable balances. Factors considered include the age of the receivable, the payment history of the customer, the general financial condition of the customer, any financial or operational leverage we may have in a particular situation and general industry conditions. We typically do not charge fees on past due accounts, although we reserve the right to do so in most of our contractual arrangements with our customers and have done so from time to time. We recorded an allowance for doubtful accounts of approximately$0.7 million and zero related to continuing operations in fiscal 2021 and 2020, respectively, and$0.5 million and$2.0 million related to discontinued operations in fiscal 2021 and 2020, respectively.Goodwill and Other Intangible Assets As ofJanuary 31, 2021 , all intangible assets, including goodwill, relate to our Marine Technology Products business, which includes the operations ofSeamap and Klein. For purposes of evaluating impairment pursuant to FASB Accounting Standards Codification Topic (ASC) 350, we establishedSeamap and Klein as reporting units. In accordance with ASC 350 we are required to evaluate the carrying value of our goodwill at least annually for impairment, or more frequently if facts and circumstances indicate it is more likely than not impairment has occurred. In the first quarter of fiscal 2021, due to the impact of the global pandemic, significant uncertainty regarding near-term or long-term projections, and a significant drop in the value of the Company's common stock, we performed qualitative analysis that indicated full impairment of our remaining goodwill. As a result, we recorded an impairment charge against the remaining$2.5 million of goodwill recorded in ourSeamap reporting unit. Therefore, as ofJanuary 31, 2021 , we no longer have a net carrying value of goodwill recorded on our books and will no longer perform or make future disclosures with respect to testing for goodwill impairment. As ofJanuary 31, 2021 and 2020 we concluded, based on an assessment of qualitative factors, that it was more likely than not that the carrying value of theSeamap reporting unit was not more than its fair value. As a result, no further further charge for impairment was recorded in fiscal 2021 and no charge was recorded in fiscal 2020 related to theSeamap reporting unit As ofJanuary 31, 2021 , we performed an assessment of qualitative factors and concluded that a quantitative assessment was required to determine if it was more likely than not that the carrying value of the Klein reporting unit exceeded fair value. We therefore conducted a 30
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Index to Financial Statements quantitative assessment which indicated it was more likely than not that the carrying did not exceed the fair market value. As a result, no charge for impairment was recorded for fiscal 2021 related to the Klein reporting unit. As ofJanuary 31, 2020 , we concluded, based on an assessment of qualitative factors, that it was more likely than not that the carrying value of the Klein reporting unit was more than its fair value. We therefore conducted a quantitative assessment which confirmed that the carrying value exceeded the fair value. Accordingly, we recorded an impairment loss of approximately$760,000 related to other intangible assets recorded in the Klein reporting unit. Our quantitative assessment requires significant judgment and is based upon our internal forecasts and comparisons to the publicly available valuations of what we believe to be comparable companies. Our internal forecasts include assumptions about market and economic conditions. If our estimates or related projections associated with the reporting units significantly change in the future, or if we use different comparable companies, we may be required to record further impairment charges. If the operational results of our reporting units are worse than expected or if economic conditions deteriorate, the fair value of our reporting units will be adversely affected. Income Taxes Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. We assessed, using all available positive and negative evidence, the likelihood that the deferred tax assets, including deferred tax assets associated with tax loss carryovers and tax credit carryforwards, will be recovered from future taxable income. The analysis is performed on a jurisdiction by jurisdiction basis. The weight we give to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (i) the more positive evidence is necessary and (ii) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion, or all, of the deferred tax asset. Among the more significant types of evidence that we consider are: •projected taxable income in future years; •our history of taxable income within a particular jurisdiction; •any history of deferred tax assets expiring prior to without realization; •whether the carry forward period is so brief that it would limit realization of tax benefits; •other limitations on the utilization of tax benefits; •future sales and operating cost projections that will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures; •our earnings history exclusive of the loss that created the future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition; and •tax planning strategies that will create additional taxable income. In determining the valuation allowance to be recorded, we considered the following positive indicators: •our history of taxable income in certain jurisdictions; •the cyclical nature of the energy industry in general and the seismic industry in particular; •specific tax planning strategies that will produce additional taxable income; •the carryover periods for certain tax benefits. In particular, the loss carryover period inthe United States is 20 years for tax years beginning beforeDecember 31, 2017 and indefinite for losses incurred in tax years beginning afterDecember 31, 2017 . Also, pursuant to the CARES Act the utilization of losses incurred in tax years beginning afterDecember 31, 2017 and beforeJanuary 1, 2021 , is no longer limited to 80% of taxable income; •the carryover period forU.S. foreign tax credit carryforwards is 10 years; •noU.S. tax benefits are expected to expire prior to 2021; •we do not have a history of net operating losses expiring without being utilized; and •our existing customer relationships. We also considered the following negative indicators: •our recent losses within certain jurisdictions, includingthe United States ,Malaysia ,Hungary ,Canada and theUnited Kingdom , specifically cumulative losses over a three year period in these jurisdictions; •the utilization of tax benefits, specifically foreign tax credits, is limited in certain jurisdictions: 31
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Index to Financial Statements Based on our evaluation of the evidence, as ofJanuary 31, 2021 we have provided the following approximate valuation allowances against deferred tax assets of continuing operations in various jurisdictions (in thousands): Deferred Tax Valuation Net Deferred Jurisdiction Assets Allowance Tax Asset United States(1)$ 18,612 $ (18,612) $ - United Kingdom 632 (632) $ - Malaysia 553 (553) $ - (1)includes federal and state deferred tax assets The deferred tax asset inthe United States relates primarily to net operation loss carryovers. Although we do not have a history of loss carryovers expiring without being utilized and the earliest expiration of a loss carryforward is in 2033, we have a recent history of taxable losses inthe United States and future earnings in this jurisdiction are uncertain. In order to fully utilize the deferred tax assets inthe United States we would need to generate taxable income of approximately$86.3 million . We evaluate tax positions taken through a two-step process. In the first step, we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. In the second step, a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in (1) an increase in a liability for income taxes payable or (2) a reduction of an income tax refund receivable or a reduction in a deferred tax asset or an increase in a deferred tax liability or both (1) and (2). The evaluation of tax positions and the measurement of the related benefit require significant judgment on the part of management. Stock-Based Compensation Stock-based compensation expense is recorded based on the grant date fair value of share-based awards. Determining the grant date fair value requires management to make estimates regarding the variables used in the calculation of the grant date fair value. Those variables are the future volatility of our common stock price, the length of time an optionee will hold their options until exercising them (the "expected term"), and the number of options or shares that will be forfeited before they are exercised (the "forfeiture rate"). We utilize various mathematical models in calculating the variables. Stock-based compensation expense could be different if we used different models to calculate the variables. Significant Accounting and Disclosure Changes See Note 3 - "New Accounting Pronouncements" in the Notes to the Condensed Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not required under Item 305 Regulation S-K for smaller reporting companies. Item 8. Financial Statements and Supplementary Data The information required by this Item appears beginning on page F-1 and is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 32
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