MIND Technology, Inc. Form 10-Q Summary
Business context and reporting period
This report covers the three and six months ended July 31, 2020, the second quarter of fiscal 2021. The company designs, manufactures and sells marine seismic, hydrographic, sonar and offshore technology through its Seamap and Klein businesses. On July 27, 2020, the board approved an exit from the land seismic equipment-leasing business. That business is presented as discontinued operations and its assets and liabilities are classified as held for sale.
Effective August 3, 2020, the company reincorporated from Texas to Delaware and changed its name from Mitcham Industries, Inc. to MIND Technology, Inc. The common and preferred stock continued trading under MIND and MINDP.
Financial performance and liquidity
| Metric | Three months ended July 31, 2020 | Three months ended July 31, 2019 | Six months ended July 31, 2020 | Six months ended July 31, 2019 |
|---|---|---|---|---|
| Continuing-operations revenue | $5.1 million | $6.8 million | $8.3 million | $12.9 million |
| Gross profit | $2.0 million | $2.8 million | $2.5 million | $5.2 million |
| Gross margin | 39.7% | 41.2% | 30.2% | 40.8% |
| Operating loss | $(2.4) million | $(1.7) million | $(8.6) million | $(3.9) million |
| Net loss | $(6.6) million | $(3.1) million | $(13.2) million | $(5.6) million |
| Net loss attributable to common shareholders | $(7.2) million | $(3.6) million | $(14.4) million | $(6.5) million |
| Loss per common share | $(0.59) | $(0.30) | $(1.18) | $(0.54) |
Six-month operating results included a $2.5 million goodwill impairment charge related to Seamap. The company also recorded a $4.9 million net loss from discontinued operations for the six months, including a $1.9 million loss on disposal. Research and development expense increased to $1.2 million from $0.8 million, while selling, general and administrative expense declined to $5.9 million from $7.1 million.
Net cash used in operating activities was $2.6 million for the six months, compared with $3.5 million in the prior-year period. Investing activities provided $1.6 million, primarily from $2.0 million of proceeds from used lease-pool equipment sales. Financing activities provided $0.5 million, including $1.6 million of Paycheck Protection Program proceeds, offset by $1.1 million of preferred-stock dividends. Cash, cash equivalents and restricted cash declined to $2.6 million at July 31, 2020 from $3.2 million at January 31, 2020.
At July 31, 2020, total assets were $43.5 million, total liabilities were $9.8 million and shareholders’ equity was $33.7 million. Current assets were $28.7 million against current liabilities of $6.1 million. Notes payable were $1.6 million, representing PPP loans bearing interest at 1% and maturing May 1, 2022. Management believes a significant portion may be forgiven, but forgiveness is not assured. Operating lease liabilities totaled $1.6 million.
Material changes versus the prior comparable period
- Continuing-operations revenue declined 25% in the quarter and 36% for the six-month period, primarily due to COVID-19-related restrictions, facility shutdowns and delayed customer purchasing decisions.
- Gross margin decreased to 39.7% from 41.2% in the quarter and to 30.2% from 40.8% for the six-month period, primarily because of lower manufacturing activity and reduced overhead absorption.
- Operating losses widened, driven by lower revenue, increased research and development spending and the $2.5 million goodwill impairment recorded in the first quarter.
- Discontinued-operations revenue decreased to $1.2 million from $2.1 million in the quarter and to $5.4 million from $5.9 million for the six-month period. The company expects to sell the discontinued operations within twelve months, in one or more transactions.
- Backlog for Marine Technology Products was approximately $7.6 million at July 31, 2020, down from $10.2 million at April 30, 2020 and $8.9 million at January 31, 2020. Management expects the backlog to be completed during fiscal 2021.
- The company completed its Series A preferred-stock ATM program; all 994,046 shares available under that program were outstanding at July 31, 2020. No additional shares could be sold under the completed program.
Guidance, outlook, risks and unusual items
Management expects reduced order activity related to the pandemic and economic uncertainty to continue at least through the third quarter of fiscal 2021. A Seamap order of approximately $1.8 million had been completed but could not be shipped because of travel restrictions; management expected recognition in the third quarter.
Facilities in Malaysia and Singapore were temporarily shut down and later reopened with phased operations. Management believes the adverse pandemic effects may be temporary, but the duration and magnitude remain uncertain. Lower oil prices could cause energy customers to defer or cancel projects or have difficulty paying receivables.
The financial statements were prepared on a going-concern basis, but management identified substantial doubt about the company’s ability to continue as a going concern. Factors include recurring losses, negative operating cash flow, limited cash, the completed preferred-stock ATM program and uncertainty from COVID-19 and oil-price declines. Management cited potential cost reductions, asset-sale proceeds, the $7.6 million backlog, PPP proceeds, possible future equity or debt financing and the planned sale of the leasing business as mitigating factors. There is no assurance these actions will provide sufficient liquidity.
Management implemented employee and contractor furloughs or terminations, deferred expenditures, and temporary salary reductions of 20% for the two co-chief executive officers and chief financial officer and a 25% reduction in board cash compensation. The company received approximately $293,000 under Singapore’s Job Support Scheme and $119,000 under the U.K. Job Retention Scheme.
Disclosure controls and procedures were not effective as of July 31, 2020 because of a previously reported material weakness in internal control over financial reporting. Management expected remediation before the end of fiscal 2021, but the weakness remained unresolved at the reporting date.
The principal risks include continued pandemic disruption, customer and supplier concentration, delayed government or defense programs, foreign currency exposure, further asset impairments, uncertain demand for seismic products, difficulty obtaining financing and the uncertain value or timing of sales of assets held for sale. No material legal proceedings were reported.
Important facts for investors to verify
- Whether the company can generate positive operating cash flow and resolve the disclosed going-concern uncertainty.
- The timing and proceeds from the sale of the discontinued leasing business and remaining lease-pool equipment.
- Whether the approximately $1.6 million PPP loan is forgiven, in whole or in part.
- Whether the $7.6 million backlog converts into revenue during fiscal 2021 and whether the delayed $1.8 million Seamap order ships as expected.
- Progress in remediating the material weakness in internal control over financial reporting.
- Potential additional goodwill or long-lived-asset impairments if market conditions, customer demand or projected cash flows deteriorate.
- Future financing needs, including possible common- or preferred-stock offerings and the ability to sustain approximately $2.2 million of annual preferred-stock dividends.