MIND Technology, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended April 30, 2021, representing the first quarter of fiscal 2022. MIND Technology designs, manufactures and sells marine technology products through its Seamap and Klein businesses, serving seismic, hydrographic, offshore, defense and maritime-security markets. The former Equipment Leasing segment is classified as discontinued operations and held for sale.
The company operated as a single continuing segment, Marine Technology Products. The filing reflects the company’s August 2020 reincorporation from Texas to Delaware and name change from Mitcham Industries, Inc. to MIND Technology, Inc.
Financial Performance and Position
| Metric | Three months ended April 30, 2021 | Three months ended April 30, 2020 |
|---|---|---|
| Continuing-operations revenue | $4.194 million | $3.187 million |
| Gross profit | $543,000 | $484,000 |
| Gross margin | 13% | 15% |
| Operating loss | $4.793 million | $6.141 million |
| Loss from continuing operations | $3.701 million | $6.427 million |
| Net loss | $3.984 million | $6.642 million |
| Net loss attributable to common stockholders | $4.568 million | $7.201 million |
| Loss per common share | $0.33 | $0.59 |
| Adjusted EBITDA from continuing operations | $(3.001) million | $(2.548) million |
| Net cash from operating activities | $(2.807) million | $929,000 |
- Revenue increased 32% year over year, led by Seamap revenue of $3.044 million versus $2.212 million. Klein revenue was approximately $1.156 million versus $1.241 million.
- Gross profit increased modestly, but gross margin declined to 13% from 15%, primarily reflecting product mix and lower Klein margins.
- Operating expenses were $5.336 million versus $6.625 million. The prior-year period included a $2.531 million intangible-asset impairment charge; current-period expenses included higher general and administrative and research and development costs.
- Other income was $947,000, substantially reflecting forgiveness of the remaining approximately $850,000 PPP loan held by Klein.
- At April 30, 2021, cash and cash equivalents were $2.001 million, compared with $4.611 million at January 31, 2021. Working capital was approximately $15.2 million, compared with approximately $19.0 million at January 31, 2021.
- Total assets were $35.521 million and stockholders’ equity was $26.568 million at April 30, 2021.
- The company had no funded debt at quarter-end and no obligations containing maintenance-type financial covenants. Operating lease liabilities totaled $1.138 million.
- Inventory increased to $12.169 million from $11.453 million, while net accounts receivable declined to $3.649 million from $4.747 million.
- Cash used in operating activities was $2.807 million, compared with cash provided of $929,000 in the prior-year quarter. Investing activities provided $179,000, and financing activities used $33,000.
- Financing included net proceeds of approximately $503,000 from Series A preferred stock and $42,000 from common stock under the second at-the-market offering program, offset by approximately $576,000 of preferred dividends.
Material Changes Versus the Prior Comparable Period
- Continuing-operations revenue rose by approximately $1.0 million, but the gross margin declined by two percentage points.
- Operating loss improved by approximately $1.35 million primarily because the $2.5 million prior-year impairment charge did not recur. This improvement was partly offset by increased general and administrative expenses and research and development spending.
- General and administrative expense increased to $3.817 million from $2.954 million, reflecting higher travel, compensation and costs allocated to continuing operations after the leasing-business exit.
- Research and development expense increased to $853,000 from $410,000, driven by development of synthetic aperture sonar, passive sonar arrays and unmanned-system sensor packages.
- Discontinued-operation revenue fell to $30,000 from $4.188 million as the company curtailed leasing activity and pursued the sale of the leasing business.
- Net cash decreased by $2.610 million during the quarter, compared with a $1.471 million increase in the prior-year period.
- Firm-order backlog declined to approximately $11.0 million from $14.1 million at January 31, 2021, but exceeded the $10.2 million backlog at April 30, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management expects essentially all of the approximately $11.0 million backlog to be completed in fiscal 2022 and expects fiscal 2022 continuing-operations revenue to exceed fiscal 2021 revenue.
- The company entered into an indefinite-quantity, indefinite-delivery supply agreement with a major international marine seismic contractor, but had not received a firm order under the agreement as of the filing.
- Management reported two additional orders totaling more than $5.0 million during the second quarter of fiscal 2022. These orders are subsequent to the reporting period.
- A customer cancelled an approximately $2.1 million order during the first quarter of fiscal 2022 because of changing requirements; management expects additional orders from that customer as requirements become clearer.
- The company expects to complete the sale of the discontinued Equipment Leasing operations within the next six months. Assets held for sale totaled $4.086 million and related liabilities totaled $972,000 at April 30, 2021.
- Management expects to meet obligations over the next twelve months, relying on its cash and working capital, cost-reduction plans, backlog, potential proceeds from asset sales and additional equity capacity. The company acknowledges a history of operating losses and negative operating cash flow.
- COVID-19 effects were viewed as moderating, but continuing restrictions, including renewed workplace restrictions in Singapore, remained possible. Supply-chain disruptions increased component lead times, shipping times and costs.
- Key risks include dependence on oil-and-gas and marine exploration spending, customer delays or defaults, supply-chain constraints, loss of significant customers or suppliers, foreign-currency and geopolitical exposure, competition, long government and defense sales cycles, and possible impairment of long-lived assets.
- The company reported no material legal proceedings, no off-balance-sheet arrangements and no material change in risk factors from its fiscal 2021 Form 10-K.
- Disclosure controls and procedures were deemed effective as of April 30, 2021, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the company can convert its $11.0 million backlog into revenue and positive operating cash flow during fiscal 2022.
- The timing and proceeds of the planned sale of remaining leasing-business assets, including the recoverability of the $4.086 million held-for-sale asset balance.
- Whether supply-chain delays, freight costs and component inflation pressure margins beyond the reported 13% gross margin.
- The sustainability of liquidity given $2.001 million of cash, quarterly preferred dividends and continued operating cash burn.
- The terms, potential dilution and remaining capacity of the second at-the-market common and preferred stock programs.
- Whether strategic investments in unmanned systems, synthetic aperture sonar, passive sonar arrays and defense programs generate material orders.
- The impact of discontinued operations, PPP-loan forgiveness and other unusual items when assessing recurring earnings and cash generation.