# Mind Technology, Inc: Form 10-Q for the period ended Oct 31, 2022

- Company: [Mind Technology, Inc](/companies/mind.md) (CIK 926423)
- Form: 10-Q
- Filed: 2022-12-14
- Accepted by EDGAR: Dec 14, 2022, 16:19 ET
- Period: 2022-10-31
- Accession: 0001437749-22-029082
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/926423/000143774922029082/mind20221031_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/926423/000143774922029082/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-10-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-08-01 to 2022-10-31 | $4.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-02-01 to 2022-10-31 | $22.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2022-08-01 to 2022-10-31 | $1.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-02-01 to 2022-10-31 | $8.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-08-01 to 2022-10-31 | $843.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-02-01 to 2022-10-31 | $2.7m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2022-08-01 to 2022-10-31 | $3.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-02-01 to 2022-10-31 | $11.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-08-01 to 2022-10-31 | −$3.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-02-01 to 2022-10-31 | −$7.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-08-01 to 2022-10-31 | $37.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-02-01 to 2022-10-31 | $379.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-08-01 to 2022-10-31 | −$5.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-02-01 to 2022-10-31 | −$9.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-08-01 to 2022-10-31 | −$0.44 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-02-01 to 2022-10-31 | −$0.90 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-08-01 to 2022-10-31 | −$0.44 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-02-01 to 2022-10-31 | −$0.90 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-08-01 to 2022-10-31 | 13,788,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-02-01 to 2022-10-31 | 13,782,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-02-01 to 2022-10-31 | −$2.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-02-01 to 2022-10-31 | $531.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2022-02-01 to 2022-10-31 | $1.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-10-31 | $812.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-10-31 | $23.2m | us-gaap:AssetsCurrent |
| Total assets | at 2022-10-31 | $34.3m | us-gaap:Assets |
| Current liabilities | at 2022-10-31 | $10.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-10-31 | $12.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-10-31 | $22.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 40,068 characters.

### Overview

Historically, we have operated in two segments, Marine Technology Products and Equipment Leasing. During the second quarter of fiscal 2021, our Board decided 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 3 - “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 of Seamap equipment and sales of Klein equipment. This business operates from locations near Bristol, United Kingdom; Salem, New Hampshire; Huntsville, Texas; Johor, Malaysia and in Singapore.

The discontinued operations of the Leasing Business include 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 in Huntsville, Texas; Calgary, Canada; Bogota, Colombia; and Budapest, Hungary. This included the operations of our subsidiaries MCL, MEL and our branch in Colombia.

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 with United States generally accepted accounting principles (“GAAP”), in the following table, as key indicators of our overall performance and liquidity.

*(in thousands)*

| Reconciliation of Net loss from Continuing Operations to EBITDA and Adjusted EBITDA | For the Three Months Ended October 31, 2022 | 2021 | For the Nine Months Ended October 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net loss from continuing operations | $(3,313) | $(2,079) | $(7,876) | $(8,519) |
| Interest expense, net | — | — | 4 | — |
| Depreciation and amortization | 469 | 494 | 1,415 | 1,717 |
| Provision for income taxes | 37 | 59 | 379 | 111 |
| EBITDA loss from continuing operations (1) | (2,807) | (1,526) | (6,078) | (6,691) |
| Non-cash foreign exchange losses | — | 42 | — | 124 |
| Stock-based compensation | 136 | 183 | 524 | 419 |
| Adjusted EBITDA loss from continuing operations (1) | $(2,671) | $(1,301) | $(5,554) | $(6,148) |
| **Reconciliation of Net Cash Used in Operating Activities to EBITDA** |  |  |  |  |
| Net cash provided by (used in) operating activities | $247 | $(4,038) | $(2,251) | $(11,228) |
| PPP loan forgiveness | — | — | — | 850 |
| Stock-based compensation | (136) | (183) | (524) | (419) |
| Provision for inventory obsolescence | (23) | (38) | (68) | (83) |
| Changes in accounts receivable (current and long-term) | (2,932) | 4,417 | (4,792) | 4,883 |
| Interest paid | — | — | 4 | — |
| Taxes paid, net of refunds | 94 | 2 | 371 | 149 |
| Gross (loss) profit from sale of other equipment | — | — | (113) | 155 |
| Changes in inventory | 2,438 | (393) | 2,899 | 130 |
| Changes in accounts payable, accrued expenses and other current liabilities and deferred revenue | (2,325) | (1,468) | (1,595) | (1,800) |
| Changes in prepaid expenses and other current and long-term assets | (153) | 42 | (24) | 543 |
| Other | (17) | 133 | 15 | 129 |
| EBITDA loss from continuing operations (1) | $(2,807) | $(1,526) | $(6,078) | $(6,691) |

(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 (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 systems to commercial, governmental and military customers throughout the world.

Our discontinued operations consisted primarily of leasing seismic data acquisition equipment mainly 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 Part II, Item 1A-- “Risk Factors.”

### Business Outlook

Our financial results during the first nine months of fiscal year 2023 have improved when compared to the first nine months of fiscal 2022. We believe the fiscal 2022 results were, and to a lesser extent our year-to-date fiscal 2023 results have been, detrimentally impacted by the following factors:

- The ongoing effects of the global pandemic, such as delayed customer activity, inability to interact directly with many customers and restrictions on the activities of our employees.
- Disruptions in the global supply chain which have resulted in delays in development and production activities.
- Uncertainty in the global economic and geopolitical situation, resulting in delayed expenditures or changes in project priorities.
- Delays and uncertainties in the timing of orders due to governmental budget issues.

However, we believe general economic and geopolitical trends are now more favorable for much of our business. Global energy prices have increased significantly during fiscal 2023. We believe this is a positive development for our marine seismic customers and many of our customers in this space have recently reported improving financial metrics and outlooks. Higher energy prices and the global movement towards renewable energy is, we believe, positive for our customers in the marine survey industry. Additionally, the current geopolitical unrest, especially in Europe and Asia, is driving demand for defense and maritime security solutions.

In recent months, we have experienced and continue to experience increased inquiries and bid activity for our marine technology products. As of October 31, 2022, our backlog of firm orders for our Marine Technology Products business was approximately $19.9 million, as compared to approximately $13.1 million as of January 31, 2022, and $10.0 million as of October 31, 2021. In addition, we continue to pursue a number of other significant opportunities and expect to secure additional orders, primarily for delivery in fiscal 2024. 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.

Based on our current backlog of orders, continued product inquiries, and current production and delivery schedules, we anticipate revenue from continuing operations in the fourth quarter of fiscal 2023 to range between $12.0 million and $14.0 million. We expect revenue in fiscal 2023 to exceed that of fiscal 2022. However, due to normal fluctuations quarterly revenues will not necessarily equal those in the fourth quarter. If revenues in the fourth quarter are as expected, we believe the Company will report net income from continuing operations for the fourth quarter of fiscal 2023. However, no assurances of such results can be made, and there are a number of risks which could cause results to be less than anticipated. Those risks include the following:

- Inability of our customers to accept delivery of orders as scheduled;
- Cancellation of orders;
- Production difficulties, including supply chain disruptions, which could delay the completion of orders as scheduled;
- Anticipated orders not being received as expected; and
- Higher than anticipated costs.

We continue to address three primary markets in our Marine Technology Products business:

- Marine Survey
- Marine Exploration
- 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, including multi-beam systems for more demanding missions such as mine counter measure operations
- Acoustic arrays, such as SeaLink
- 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.

We also continue to pursue 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 that 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 and other marine security applications.
- Demand for economical, commercially developed, technology for anti-submarine warfare and maritime security applications.

In response to these, and other, developments we have prioritized certain strategic initiatives to exploit the opportunities that we perceive. These initiatives include the following:

- Application of our Automatic Target Recognition (“ATR”) technology to our sonar systems;
- Development of Synthetic Aperture Sonar (“SAS”) 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.

We believe that the above applications expand our addressable markets and provide opportunities for further growth in our revenues.

Subsequent to January 31, 2022, we eliminated two executive management positions in order to further control general and administrative costs. Should future financial results fall below our expectation, we may take further steps to reduce costs. We believe many 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.

General inflation levels have increased recently due in part to supply chain issues, increased energy costs and geopolitical uncertainty. In addition, shortages of certain components, such as electronic components, have caused prices for available components to increase in some cases. These factors can be expected to have a negative impact on our costs; however, the magnitude of such impact cannot be accurately determined. In response to these cost increases, in the first quarter of fiscal 2023, we increased the pricing for most of our products. The amount of the increase varies by product and ranged from approximately 5% to 20%.

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

Revenues for the three months ended October 31, 2022 were approximately $4.9 million compared to approximately $8.3 million for the three months ended October 31, 2021. For the nine months ended October 31, 2022, revenues were approximately $22.7 million, compared to approximately $19.3 million for the nine months ended October 31, 2021. We believe the decrease in the three-month period is due in large part to customer delivery requirements shifting to the latter part of the current fiscal year. The increase in the fiscal 2023 nine-month period compared to the prior year was primarily due to positive trends within our primary markets, as discussed above. For the three months ended October 31, 2022, we generated an operating loss of approximately $3.4 million, compared to an operating loss of approximately $2.1 million for the three months ended October 31, 2021. For the nine months ended October 31, 2022, we generated an operating loss of approximately $7.4 million, compared to an operating loss of approximately $9.4 million for the nine months ended October 31, 2021. The increased operating loss in comparable three-month periods and the decrease in operating loss during the comparable nine-month periods ended October 31, 2022, were primarily attributable to the fluctuation in revenues during the respective periods. A more detailed explanation of these variations follows.

### Revenues and Cost of Sales

Revenues and cost of sales for our Marine Technology Products business were as follows:

*(in thousands)*

*(in thousands)*

| Revenues: | Three Months Ended October 31, 2022 | 2021 | Nine Months Ended October 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Seamap | $3,037 | $7,034 | 16,141 | $15,480 |
| Klein | 1,937 | 1,330 | 6,748 | 3,894 |
| Intra-business sales | (90) | (17) | (205) | (26) |
|  | 4,884 | 8,347 | 22,684 | 19,348 |
| Cost of sales: |  |  |  |  |
| Seamap | 2,176 | 3,935 | 10,446 | 9,825 |
| Klein | 1,296 | 1,259 | 4,114 | 3,612 |
| Intra-business sales | (90) | (17) | (205) | (26) |
|  | 3,382 | 5,177 | 14,355 | 13,411 |
| Gross profit | $1,502 | $3,170 | $8,329 | $5,937 |
| **Gross profit margin** | 31% | 38% | 37% | 31% |

19

A significant portion of Seamap’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. Revenue from the sale of Seamap products was approximately $3.0 million and $16.1 million for the three- and nine-month periods ended October 31, 2022, respectively. Seamap revenue for three- and nine-month periods of fiscal 2022 was approximately $7.0 and $15.5 million, respectively. The gross profit and gross profit margins for Seamap were approximately $861,000 and 28% and approximately $3.1 million and 44% in the third quarters of fiscal 2023 and 2022, respectively. The gross profit and gross profit margins for the nine-month periods ended October 31, 2022 and 2021, were approximately $5.7 million and 35% and approximately $5.7 million and 37%, respectively. The decrease in gross profit margins between the comparative periods is due primarily to the mix of revenue from sales of systems and spare parts and service and repairs in the most recent period.

Revenue from the sale of Klein products was approximately $1.9 million for the third quarter of fiscal 2023 versus approximately $1.3 million in the prior year period. Klein’s revenue for the nine-month periods ended October 31, 2022 and 2021 was approximately $6.7 million and $3.9 million, respectively. Gross profit was approximately $641,000 and $71,000 for the third quarter of fiscal 2023 and 2022, respectively, and approximately $2.6 million and $0.3 million for the nine-month periods ended October 31, 2022 and 2021, respectively. The increase in gross profits in the respective fiscal 2023 periods is due primarily to the delivery of multi-beam sonar systems.

### Operating Expenses

General and administrative expenses for the three months ended October 31, 2022, were approximately $3.6 million compared to approximately $3.8 million for the three-months ended July 31, 2022 and approximately $3.9 million for the three-months ended October 31, 2021. The decrease from the three-months ended July 31, 2022 period is primarily due to reduction of non-essential business expenses. General and administrative expenses for the nine months ended October 31, 2022 increased to $11.6 million from approximately $11.1 million for the nine months ended October 31, 2021. The approximately $519,000 increase is primarily due to accrued severance expense for the Company’s former Chief Operating Officer, plus higher convention, travel and entertainment expenses incurred as the Company reengaged with customers following easing of global pandemic related restrictions. In addition, the increase reflects certain recurring general and administrative operating expenses, including but not limited to, property and casualty insurance premiums, facility maintenance expenses, and communications costs, etc., which were directly attributable to our discontinued operations and reported as such in the prior year comparative period, but are reported in continuing operations in the current period as management has concluded that these costs will be retained going forward.

Research and development costs were approximately $843,000 in the three-month period ended October 31, 2022, compared to approximately $826,000 in the three-months ended October 31, 2021. For the nine-month period ended October 31, 2022, research and development costs increased to approximately $2.7 million from approximately $2.6 million in the prior year period ended. The marginal increase in year-over-year costs reflects incremental product development activity, including SAS, ATR, and passive array systems.

Depreciation and amortization expense include depreciation of equipment, furniture and fixtures and the amortization of intangible assets. These costs were approximately $469,000 and $1.4 million in the three- and nine-month periods ended October 31, 2022, respectively, as compared to approximately $494,000 and $1.7 million in the three- and nine-month periods ended October 31, 2021, respectively. The lower depreciation and amortization expense in fiscal 2023 is due primarily to assets becoming fully depreciated over time.

### Provision for Income Taxes

For the nine months ended October 31, 2022, we reported tax expense of approximately $379,000 on pre-tax loss of approximately $7.5 million from continuing operations, and for the nine months ended October 31, 2021, we reported tax expense of approximately $111,000 on pre-tax loss of approximately $8.4 million from continuing operations. We recorded tax expense for the nine-month period ended October 31, 2022, and 2021, despite generating pre-tax losses from continuing operations, due mainly to the effect of permanent differences between book and taxable income and recording valuation allowances against increases in our deferred tax assets.

### Results of Discontinued Operations

Revenues and cost of sales from our Equipment Leasing business were comprised of the following:

*(in thousands)*

*(in thousands)*

| Revenues: | For the Three Months Ended October 31, 2022 | 2021 | For the Nine Months Ended October 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Equipment leasing | — | 53 | — | 840 |
|  | — | 53 | — | 840 |
| Cost of sales: |  |  |  |  |
| Direct costs-equipment leasing | 24 | 86 | 72 | 791 |
|  | 24 | 86 | 72 | 791 |
| Gross (loss) profit | (24) | (33) | (72) | 49 |
| Operating expenses: |  |  |  |  |
| Selling, general and administrative | 145 | 502 | 359 | 1,222 |
| Recovery of doubtful accounts | — | (5) | — | (450) |
| Depreciation and amortization | — | 1 | — | 4 |
| Total operating expenses | 145 | 498 | 359 | 776 |
| Operating loss | (169) | (531) | (431) | (727) |
| Other (expenses) income (including $1,626 of cumulative translation loss) | (1,677) | 41 | (1,191) | 37 |
| Loss before income taxes | (1,846) | (490) | (1,622) | (690) |
| Provision for income taxes | — | (9) | — | (13) |
| Net Loss | (1,846) | (499) | (1,622) | (703) |

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 lease pool assets, but record proceeds from such transactions as a reduction in the carrying value of our lease pool assets. During the nine-month period ended October 31, 2022, the carrying value of our lease pool assets have been fully written down. As a result, approximately $382,000 of proceeds from the sale of lease pool assets was recognized as gain and reported in other income during the nine months ended October 31, 2022.

We recorded no revenue from discontinued operations for the three-and-nine-month periods ended October 31, 2022, compared to approximately $53,000 and $840,000 of revenue recognized for the three-and-nine-month periods ended October 31, 2021, respectively. Direct costs related to Equipment Leasing dropped to approximately $24,000 for the three months ended October 31, 2022, from approximately $86,000 reported in the three months ended October 31, 2021. Direct costs related to Equipment Leasing dropped to approximately $72,000 for the nine months ended October 31, 2022, from approximately $791,000 reported in the nine months ended October 31, 2021.Our revenue and direct costs from discontinued operations decreased compared to the prior year periods because we ceased all equipment leasing activity in fiscal 2022.

Selling, general and administrative costs related to the Leasing Business decreased to approximately $145,000 in the three months ended October 31, 2022, from approximately $502,000 in the same period one year ago. Selling, general and administrative costs related to the Leasing Business decreased to approximately $359,000 in the nine months ended October 31, 2022, from approximately $1.2 million in the same period one year ago. The decrease in the fiscal 2023 periods is due primarily to lower compensation and other administrative expenses resulting from lower headcount and reduced activity. In addition, certain recurring operating expenses, including but not limited to, property and casualty insurance premiums, facility maintenance expenses, communications costs, etc., which were directly attributable to our discontinued operations and reported as such in fiscal 2022, are reported in continuing operations in the current period as management has concluded these costs will be retained going forward. See Note 3 - “Assets Held for Sale and Discontinued Operations” to our consolidated financial statements for more details.

Included in other expense for the three months ended October 31, 2022, is a charge of approximately $1.6 million. This represents a non-cash charge related to cumulative translation losses associated with our Canadian subsidiary.

For the nine months ended October 31, 2022, we recorded no tax expense on approximately $1.6 million of pre-tax loss from discontinued operations. For the nine months ended October 31, 2021, we reported tax expense of approximately $13,000 on pre-tax loss of approximately $690,000 from discontinued operations. For the nine-month period ended October 31, 2022, despite recording a pre-tax loss from discontinued operations, we did not recognize a tax benefit because we have recorded tax valuation allowances against all of our deferred tax assets. For the nine-month period ended October 31, 2021, we recorded tax expense, despite generating a pre-tax net loss from discontinued operations, due mainly to the effect of foreign withholding taxes and recording valuation allowances against increases in our deferred tax assets.

### Liquidity and Capital Resources

As discussed above, the lingering impacts of the global pandemic, emerging supply chain disruptions and volatility in oil prices have created significant uncertainty in the global economy, which has had, and may continue to have, an adverse effect on our business, financial position, results of operations and liquidity. The period for which the disruptions and volatility 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 generating operating losses and negative cash from operating activities and has relied on cash from the sale of lease pool equipment and the sale of Preferred Stock and Common Stock for the past several years. As of October 31, 2022, the Company has some remaining lease pool equipment available for sale and has approximately 317,000 shares of Preferred Stock and approximately 22.1 million shares of Common Stock available for issuance. However, there can be no assurance the remaining lease pool equipment will be sold or that the Preferred Stock or Common Stock can be sold at prices acceptable to the Company.

Due to the above factors, there is substantial doubt about the Company’s ability to meet its obligations as they arise over the next twelve months. However, management believes there are compensating factors and actions available to the Company to address liquidity concerns, including the following:

- The Company has no funded debt 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 $12.8 million as of October 31, 2022, including cash of approximately $812,000.
- 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 recently eliminated two executive level positions, and additional reductions in operations, sales, and general and administrative headcount could be made, if deemed necessary by management.
- The Company has a backlog of orders of approximately $19.9 million as of October 31, 2022, which is an increase of approximately 52% from the $13.1 million reported at January 31, 2022, and an increase of approximately 99% from the amount reported at October 31, 2021. Production activities for certain of these orders was in process and included in inventory as of October 31, 2022, thereby reducing the liquidity needed to complete the orders.
- Since designating the Leasing Business as held for sale in the second quarter of fiscal 2021, the Company has been able to generate cash from the sale of lease pool equipment related to its discontinued operations. Management expects to generate additional liquidity from the sale of lease pool equipment during the fourth quarter of fiscal 2023.
- The Company declared and paid the quarterly dividend on its Preferred Stock for the first quarter of fiscal 2023, and each quarter in fiscal 2022, but deferred payment of the quarterly dividend for the second and third quarters of fiscal 2023. The Company also has the option to defer future quarterly dividend payments if deemed necessary. The dividends are a cumulative dividend that accrue for payment in the future. During a deferral period, the Company is prohibited from paying dividends or distributions on its common stock, or redeeming any of those shares. Further, if the Company does not pay dividends on its Series A Preferred Stock for six or more quarters, the holders of Series A Preferred Stock will have the right to appoint two directors to the Company's board.
- In recent years, the Company has raised capital through the sale of Common Stock and Preferred Stock pursuant to the ATM Offering Program (as defined herein) and underwritten offerings on Form S-1. Currently, the Company is not eligible to issue securities pursuant to Form S-3 and accordingly cannot sell securities pursuant to the ATM Offering Program. However, the Company may sell securities pursuant to Form S-1 or in private transactions. Management expects to be able to raise further capital through these available means 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.

As of this date, under our Amended and Restated Certificate of Incorporation, we have 2,000,000 shares of preferred stock authorized, of which 1,682,985 are currently outstanding, leaving 317,015 available for future issuance. In addition, 40,000,000 shares of Common Stock are authorized, of which 13,788,738 are currently outstanding and 4,110,167 are reserved for issue under outstanding stock options, leaving 22,101,095 available for future issuance. We believe these factors provide capacity for subsequent issues of common stock or preferred stock.

The Preferred Stock has been issued in public offerings in June 2016 and November 2021, and in two ATM offering programs. The Preferred Stock issued in the June 2016 public offering was consideration to Mitsubishi Heavy Industries, Ltd. Pursuant to the November 2021 underwritten public offering, the Company issued 432,000 shares of Preferred Stock. The Company received net proceeds of approximately $9.5 million after underwriting discounts and other costs. The Preferred Stock (i) allows for redemption 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 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. Through October 31, 2022, we have issued 1,682,985 shares of our Preferred Stock.

During the nine months ended October 31, 2022, the Company did not sell any shares of Common Stock or Series A Preferred Stock under the ATM Offering Program.

Due to the rising level of sales and production activities there are increasing requirements for purchases of inventory and other production costs. Additionally, due to component shortages and long-lead times for certain items there are requirements in some cases to purchase items well in advance. Furthermore, some suppliers require prepayments in order to secure some items. All of these factors combine to increase the Company’s working capital requirements. Furthermore, Management believes there are opportunities to increase production capacity and efficiencies. However, some of these opportunities may require investments such as production equipment or other fixed assets. If we are unable to meet suppliers demands, we may not be able to produce products and fulfill orders from our customers.

We do expect additional collections from customers in the fourth quarter and beyond due to the expected increase in revenue. However, Management believes it prudent for the Company to explore sources of additional capital. Such sources include private or public issues of equity or debt securities, or a combination of such securities. Other sources could include secured debt financing, sale-leaseback transactions on owned real estate or investment from strategic industry participants. The Company is currently exploring a number of such opportunities. There can be no assurance that any of these sources will be available to the Company, available in adequate amounts, or available under acceptable terms.

The following table sets forth selected historical information regarding cash flows from our Consolidated Statements of Cash Flows:

*(in thousands)*

|  | For the Nine Months Ended October 31, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(2,251) | $(11,228) |
| Net cash (used in) provided by investing activities | (149) | 3,809 |
| Net cash (used in) provided by financing activities | (1,895) | 3,344 |
| Effect of changes in foreign exchange rates on cash and cash equivalents | (7) | 86 |
| Net decrease in cash and cash equivalents | $(4,302) | $(3,989) |

As of October 31, 2022, we had working capital of approximately $12.8 million, including cash and cash equivalents of approximately $812,000, as compared to working capital of approximately $18.5 million, including cash and cash equivalents of approximately $5.1 million, at January 31, 2022. Our working capital decreased during the first nine months of fiscal 2023 as compared to January 31, 2022 due primarily to reductions in cash and accounts receivable, partially offset by an increase in inventory.

*Cash Flows from Operating Activities*. Net cash used in operating activities was approximately $2.3 million in the first nine months of fiscal 2023 as compared to approximately $11.2 million in the first nine months of fiscal 2022. The decrease in net cash used in operating activities in nine months of fiscal 2023 compared to the prior year period was due mainly to cash provided by reductions in accounts receivable, increases in accounts payable, and non-cash expenses, such as recognition of cumulative translation losses included in our net loss from discontinued operations in the nine months ended October 31, 2022. The primary sources of cash used in operating activities was our net loss of approximately $9.5 million, partially offset by net change in working capital items, including accounts receivable, inventories and accounts payable, non-cash expenses, such as depreciation and stock-based compensation, and recognition of cumulative translation losses included in our net loss from discontinued operations.

*Cash Flows from Investing Activities*. Cash provided by investing activities during the first nine months of fiscal 2023 decreased approximately $4.0 million over the same period in fiscal 2022. The decrease relates primarily to a reduction in sales of assets held-for-sale, together with an increase in purchase of property plant and equipment in fiscal 2023.

*Cash Flows from Financing Activities*. Net cash used in financing activities during the first nine months of fiscal 2023 consisted of approximately $1.9 million of Preferred Stock dividend payments compared to approximately $1.8 million in the prior year period. In addition, proceeds from the sale of Preferred Stock and Common Stock totaled approximately $5.1 million in the first nine months of fiscal 2022.

As of October 31, 2022, we have no funded debt and no obligations containing restrictive financial covenants.

We have determined that the undistributed earnings of foreign subsidiaries are not deemed indefinitely reinvested outside of the United States as of October 31, 2022. Furthermore, we have concluded that any deferred taxes with respect to the undistributed foreign earnings would be immaterial.

As of October 31, 2022, we had deposits in foreign banks equal to approximately $606,000, 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. If withholding taxes should become payable, we believe the amount of tax withheld would be immaterial.

### Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

### Critical Accounting Policies

Information regarding our critical accounting policies and estimates is included in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended January 31, 2022. There have been no material changes to our critical accounting policies and estimates during the three- and nine-month periods ended October 31, 2022.

## Market risk

As filed, 1,575 characters.

We are exposed to market risk, which is the potential loss arising from adverse changes in market prices and rates. We have not entered, and do not intend to enter, into derivative financial instruments for hedging or speculative purposes.

### Foreign Currency Risk

We operate in several foreign locations, which gives rise to risk from changes in foreign currency exchange rates. To the extent possible, we attempt to denominate our transactions in foreign locations in U.S. dollars. For those cases in which transactions are not denominated in U.S. dollars, we are exposed to risk from changes in exchange rates to the extent that non-U.S. dollar revenues exceed non-U.S. dollar expenses related to those transactions. Our non-U.S. dollar transactions are denominated primarily in British pounds, Singapore dollars and European Union euros. As a result of these transactions, we generally hold cash balances that are denominated in these foreign currencies. At October 31, 2022, our consolidated cash and cash equivalents included foreign currency denominated amounts equivalent to approximately $78,000 in U.S. dollars. A 10% increase in the U.S. dollar as compared to each of these currencies would result in a loss of approximately $8,000 in the U.S. dollar value of these deposits, while a 10% decrease would result in an equal amount of gain. We do not currently hold or issue foreign exchange contracts or other derivative instruments to hedge these exposures.

### Interest Rate Risk

As of October 31, 2022, we have no interest-bearing bank debt on our balance sheet.

## Controls and procedures

As filed, 2,239 characters.

### Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officers and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officers and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our principal executive officer and principal financial officer have concluded that our current disclosure controls and procedures were not effective as of October 31, 2022, due to a material weakness in our internal control over financial reporting that was disclosed on our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.

### Remediation

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended January 30, 2022, we are implementing a remediation plan to address the material weakness in our internal controls over financial reporting. The weakness will remain unresolved, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

### Changes in Internal Control over Financial Reporting

Other than changes in connection with the remediation plan discussed above, there was no change in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended October 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,277 characters.

*In addition to the risk factors set forth below and the other information set forth elsewhere in this Form 10-Q, you should carefully consider the risks discussed in our Annual Report on Form 10-K for the year ended January 31, 2022, and in our Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2022, which risks could materially affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in our Annual Report on Form 10-K for the year ended January 31, 2022, and our Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2022, other than the updating risk factors below. The risks described in our Annual Report on Form 10-K for the year ended January 31, 2022, our Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2022, and below are not the only risks the Company faces. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.*

**The Company has deferred payment of dividends on its Series A Preferred Stock, which restricts our ability to undertake certain actions.**

The Company deferred payment of the quarterly dividend on its Series A Preferred Stock for the second and third quarters of fiscal 2023. Prior to the declaration and payment of dividends our board of directors must determine, among other things, that funds are available out of the surplus of the Company and that the payment would not render us insolvent or compromise our ability to pay our obligations as they come due in the ordinary course of business. As a result, although the Series A Preferred Stock will continue to earn a right to receive dividends, the Company’s ability to pay dividends will depend, among other things, upon our ability to generate excess cash. During a deferral period, the Company is prohibited from paying dividends or distributions on its common stock, or redeeming any of those shares. Further, if the Company does not pay dividends on its Series A Preferred Stock for six or more quarters, the holders of Series A Preferred Stock will have the right to appoint two directors to the Company's board.

Filed Dec 14, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-029082. Last ingested by Listed: Oct 24, 2026, 15:01 ET. No prices; not investment advice.