Mind Technology, Inc: Form 10-Q for the period ended Oct 31, 2023

Overview

On August 21, 2023, the Company completed the Sale of Klein (see Note 2-"Sale of Subsidiary" in the accompanying financial statements for additional details). Effective with the Sale of Klein, we operate in one segment, Seamap. Seamap designs, produces and sells seismic exploration and survey equipment. Its customers include foreign and domestic commercial marine survey companies and various governmental institutions.

Management believes that the performance of our Seamap 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)

(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 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.

We design, manufacture and sell a variety of products used primarily in seismic and marine survey 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 marine survey applications.

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 performance has improved significantly in recent periods. Although we have a history of operating losses, we generated positive operating income from continuing operations in the fourth quarter of fiscal 2023 and the first quarter of fiscal 2024. We believe this is due to increased demand within our primary markets and efforts to reduce costs and improve product margins.

On August 21, 2023, we completed the Sale of Klein for cash consideration of $11.5 million. In addition, in connection with the Sale of Klein, the Company granted the Buyer a license in its Spectral Ai software suite, exclusive to the Buyer as it relates to side scan sonar. The Company and the Buyer also entered into a collaboration agreement for the further development of Spectral Ai and potentially other software projects. The license and collaboration agreements provide opportunities for recurring licensing revenue and recovery of certain ongoing operating costs. We believe the Sale of Klein serves to streamline the Company’s operations and provides needed working capital to address the financial requirements associated with the continuing growth of our Seamap business.

We have experienced increased inquiries and bid activity for our marine technology products. As of October 31, 2023, our backlog of firm orders for our Seamap segment was approximately $37.4 million, as compared to approximately $15.7 million as of January 31, 2023, and $14.0 million as of October 31, 2022. Additionally, subsequent to the end of the quarter we entered into a supply agreement with a major international seismic contractor and expect to receive initial orders under the agreement in the fourth quarter of fiscal 2024. We believe that essentially all of our current backlog and the initial orders expected under the new supply agreement will be completed and shipped by the end of fiscal 2025. We believe that these firm orders provide good visibility for the balance of this fiscal year and into the next year. However, 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.

Our revenues tend to fluctuate from quarter to quarter due to delivery schedules and other factors. We expect higher revenue in the fourth quarter of fiscal 2024 as compared to each of the prior quarters in fiscal 2024. We further expect revenue in the fiscal year ending January 31, 2025 to exceed that of fiscal 2024. 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
• Other unanticipated delays beyond our control.

In our Seamap business we address the following primary markets:

• Marine Survey
• Marine Exploration

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.

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:

• Demand for economical, commercially developed, technology for anti-submarine warfare and maritime security applications; and
• Increased activity within the marine exploration space, including applications for energy exploration, alternative energy projects such as offshore windfarms and carbon capture projects.

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 Spectral Ai software suite technology to side scan sonar systems and potentially other applications;
• Adaptation of our SeaLink solid streamer technology to alternative applications, such as windfarm and carbon capture projects; 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, 2023, we eliminated two executive management positions and certain other administrative positions in order to further control general and administrative costs. We believe that the Sale of Klein will allow us to further streamline our operations and may provide opportunities to further reduce overhead 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.

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 Operations

Revenues for the three and nine months ended October 31, 2023 were approximately $5.0 million and $23.1 million, respectively, compared to approximately $3.0 million and $16.1 million for the three and nine months ended October 31, 2022, respectively. The increase in the first nine months of fiscal 2024 compared to the prior year period was primarily due to positive trends within our primary markets, as discussed above. However, those increases were not as great as we anticipated, as discussed below. For the three and nine months ended October 31, 2023, we generated operating losses of approximately $1.5 million and $1.8 million, respectively, compared to operating losses of approximately $2.9 million and $6.2 million for the three and nine months ended October 31, 2022, respectively. The decrease in operating losses in the current three and nine month periods was primarily attributable to incremental revenues and higher profit margins during the three and nine months ended October 31, 2023. 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)

A significant portion of Seamap’s sales consist 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 $5.0 million and $23.1 million for the three- and nine-month periods ended October 31, 2023, respectively, compared to revenue of approximately $3.0 million and $16.1 million for three and nine-month periods ended October 31, 2022, respectively. We had expected revenues in the third quarter of fiscal 2024 to be higher. However, due to delays in receiving certain components we were unable to complete and ship some orders as originally scheduled. We estimate the impact of these delays on revenue in the quarter to be between $5.0 and $6.0 million. We expect these orders to be completed in the fourth quarter of fiscal 2024. Based upon this, and other orders in our backlog, we expect a significant increase in revenue in the fourth quarter of fiscal 2024 as compared to each of the prior three quarters. The gross profit and gross profit margins for Seamap were approximately $2.3 million and 45% and approximately $862,000 and 28% in the three-month periods ended October 31, 2023 and 2022, respectively. For the nine-months ended October 31, 2023 and 2022, the gross profit and gross profit margins were $9.7 million and 42% and $5.7 million and 35%, respectively. The increase in gross profit margin between the comparative periods is due primarily to a favorable mix of revenue from sales of higher margin products and services. In particular, in the third quarter of fiscal 2024 there was a higher proportion of spare parts sales, as opposed to system sales, which generally attract higher gross margins. Increased manufacturing activity levels resulting in greater absorption of manufacturing overhead also contributed to the improved gross margins.

Operating Expenses

General and administrative expenses for the three and nine months ended October 31, 2023, were approximately $2.9 million and $9.2 million, respectively, compared to approximately $3.0 million and $9.9 million for the three and nine months ended October 31, 2022, respectively. The decrease from the prior periods is primarily the result of lower compensation expense due to headcount reductions, and the impact of broader cost control measures. However, the decrease between the three month periods was lower due mainly to accrued severance cost and higher professional fees incurred in the current period.

Research and development costs were approximately $508,000 and $1.5 million in the three and nine-month periods ended October 31, 2023, respectively, compared to approximately $412,000 and $1.1 million in the three- and nine-month periods ended October 31, 2022, respectively. Costs in each of the periods are related primarily to our next generation towed streamer system and ongoing development of our Spectral Ai software suite.

Depreciation and amortization expense, which includes depreciation of equipment, furniture and fixtures and the amortization of intangible assets remained relatively consistent year-over year. These costs were approximately $257,000 and $892,000 in the three and nine-month period ended October 31, 2023, as compared to approximately $331,000 and $1.0 million in the three and nine-month period ended October 31, 2022.

Interest Expense

Interest expense in the three and nine months ended October 31, 2023, was primarily due to interest on the Loan of approximately $169,000 and $536,000, respectively. Interest expense in the three months ended October 31, 2023, relates to the write-off of remaining debt acquisition costs due to the early repayment of the Loan.

Other Expense

Other expense primarily relates to gains on the sale of certain ancillary equipment, scrap sales and other income.

Provision for Income Taxes

For the three- and nine-months ended October 31, 2023, we reported tax expense of approximately $112,000 and $590,000 on pre-tax loss from continuing operations of approximately $1.6 million and $2.0 million, respectively. For the three- and nine-month periods ended October 31, 2022, our income tax expense was approximately $38,000 and $380,000 on a pre-tax loss from continuing operations of $2.8 million and $6.4 million, respectively. We recorded tax expense on pre-tax losses for fiscal 2024 and 2023 due mainly to the effect of recording valuation allowances against increases in our deferred tax assets.

Liquidity and Capital Resources

On August 21, 2023, we completed the Sale of Klein. The aggregate consideration to the Company consisted of a cash payment of $11.5 million. On August 22, 2023, following the closing of the Sale of Klein, all outstanding amounts due and owed, including principal, interest, and other charges, under the Loan were repaid in full, the Loan was terminated, and all liens and security interests granted thereunder were released and terminated (see note 10 - "Notes Payable" for additional details). After transaction costs and repayment of the Loan, the Company received net proceeds from the Sale of Klein totaling approximately $7.3 million. We believe the Sale of Klein serves to streamline the Company’s operations and provides needed working capital to address the financial requirements associated with the continuing growth of our Seamap business.

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 and recently, a short-term loan.

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 obligations or agreements containing “maintenance type” financial covenants.
• The Company had working capital of approximately $16.5 million as of October 31, 2023, including cash of approximately $5.6 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 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 had a backlog of orders related to the Seamap segment of approximately $37.4 million as of October 31, 2023, production for certain of these orders was in process and included in inventory as of October 31, 2023, thereby reducing the liquidity needed to complete the orders.
• Although the Company declared and paid the quarterly dividend on its Preferred Stock for the third quarter of fiscal 2024, there were no dividends declared or paid on the Company’s Preferred stock for the first or second quarter of fiscal 2024. The Company declared and paid the quarterly dividend on its Preferred Stock for the first quarter of fiscal 2023 but deferred all dividend payments for the subsequent quarters of fiscal 2023. The Company has the option to defer future quarterly dividend payments if deemed necessary. The dividends are cumulative and deferred dividends 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 Preferred Stock for six or more quarters, the holders of 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.
• The Company’s financial results have improved in recent quarters, producing positive operating income from continuing operations in the fourth quarter of fiscal 2023 and the first quarter of fiscal 2024.
• On August 21, 2023, we completed the Sale of Klein for aggregate consideration to the Company of $11.5 million in cash. Following the closing of the Sale of Klein, all outstanding amounts due and owed, including principal, interest, and other charges, under the Loan were repaid in full (see Note 10 -"Notes Payable" for additional details"). After transaction costs and repayment of the Loan, the Company received net proceeds from the Sale of Klein totaling approximately $7.3 million.

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 additional investments such as in 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.

In order to fund future growth, we may 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, the sale of assets or investment from strategic industry participants.

We declared and paid the dividend on the Preferred Stock for the quarter ended October 31, 2023 which amounted to approximately $947,000. However, accumulated and undeclared dividends amount to approximately $4.7 million as of October 31, 2023. Management does not believe that current operations can simultaneously fund the capital requirements of the ongoing business, as discussed above, as well as ongoing or accumulated dividends related to the Preferred Stock. Accordingly, although no firm decisions have been made, management currently believes it is unlikely that the Company will declare dividends on the Preferred Stock for the foreseeable future.

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

(in thousands)

As of October 31, 2023, we had working capital of approximately $16.5 million, including cash and cash equivalents of approximately $5.6 million, as compared to working capital of approximately $13.3 million, including cash and cash equivalents of approximately $778,000, at January 31, 2023.

Cash Flows from Operating Activities. Net cash used in operating activities was approximately $5.6 million in the first nine months of fiscal 2024 as compared to approximately $2.3 million in the first nine months of fiscal 2023. The increase in net cash used in operating activities in the first nine months of fiscal 2024 compared to the prior year period was due mainly to an increase in inventories and reduction in accounts payable.

Cash Flows from Investing Activities. Cash provided by investing activities during the first nine months of fiscal 2024 increased approximately $11.0 million over the same period in fiscal 2023. The increase relates primarily to the proceeds for the Sale of Klein.

Cash Flows from Financing Activities. Net cash used in financing activities during the first nine months of fiscal 2024 consisted of approximately $589,000 of payments net of proceeds related to short-term loans compared to cash used of approximately $1.9 million in the prior year period related to Preferred Stock dividends.

On August 21, 2023, the Company completed the Sale of Klein (see Note 2 – “Sale of Subsidiary” for additional details). In connection with the Sale of Klein, the Loan was subsequently paid in full (see Note 10 - "Notes Payable" for additional details).

We have determined that the undistributed earnings of foreign subsidiaries are not deemed indefinitely reinvested outside of the United States as of October 31, 2023. Furthermore, we have concluded that any deferred taxes with respect to the undistributed foreign earnings would be immaterial.

As of October 31, 2023, 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. 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 Estimates

Information regarding our critical accounting estimates is included in Part II, 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, 2023. There have been no material changes to our critical accounting estimates during the three- and nine-month periods ended October 31, 2023.

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, 2023, our consolidated cash and cash equivalents included foreign currency denominated amounts equivalent to approximately $224,000 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 $22,000 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, 2023, we had no debt.

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, 2023, due to a material weakness in our internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023.

Remediation

As previously described in Part II, Item 9A, "Controls and Procedures" of our Annual Report on Form 10-K for the fiscal year ended January 31, 2023, 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, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In addition to 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, 2023, 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, 2023. The risks described in our Annual Report on Form 10-K for the year ended January 31, 2023, 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 may also materially adversely affect our business, financial condition, or future results.