MIND Technology, Inc. 10-Q Summary
Business context and reporting period
Filed for the quarter ended July 31, 2022, representing the second quarter and first six months of fiscal 2023. The company operates primarily through Seamap and Klein in the Marine Technology Products segment, serving seismic, hydrographic, offshore, defense and maritime security markets. The former Equipment Leasing segment is classified as discontinued operations and is being wound down.
Financial performance and position
| Metric | Three months ended July 31, 2022 | Three months ended July 31, 2021 | Six months ended July 31, 2022 | Six months ended July 31, 2021 |
|---|---|---|---|---|
| Revenue | $8.7 million | $6.8 million | $17.8 million | $11.0 million |
| Gross profit | $3.5 million | $2.2 million | $6.8 million | $2.8 million |
| Gross margin | 41% | 33% | 38% | 25% |
| Operating loss | $1.6 million | $2.6 million | $4.0 million | $7.4 million |
| Net loss from continuing operations | $1.8 million | $2.7 million | $4.6 million | $6.4 million |
| Net loss attributable to common stockholders | $2.9 million | $3.3 million | $6.2 million | $7.9 million |
| Adjusted EBITDA loss | $1.0 million | $1.8 million | $2.9 million | $4.8 million |
For the six months, net cash used in operating activities was $2.5 million, compared with $7.2 million in the prior-year period. Investing activities provided $111,000, while financing activities used $1.9 million, primarily for preferred stock dividends. Cash declined to $833,000 from $5.1 million at January 31, 2022.
At July 31, 2022, total assets were $35.6 million, total liabilities were $9.9 million, working capital was approximately $15.6 million, and stockholders’ equity was $25.7 million. The company reported no funded debt and no debt-related financial covenants. Operating lease liabilities totaled $2.0 million. Inventory was $14.4 million and net accounts receivable was $6.7 million.
Material changes versus the prior comparable period
- Six-month revenue increased 62% to $17.8 million, driven by higher Seamap and Klein product deliveries. Klein revenue increased substantially due primarily to delivery of multi-beam sonar systems in Europe.
- Gross margin improved to 38% from 25% for the six-month period. Second-quarter Seamap margin declined to 36% from 39% because of lower fixed-cost absorption, while Klein generated approximately $1.7 million of second-quarter gross profit versus $115,000 in the prior-year quarter.
- Operating losses narrowed materially because of higher revenue, although selling, general and administrative expense increased to $8.1 million for the six months from $7.2 million. The increase included severance, higher travel and convention expenses, and costs retained from discontinued operations.
- The company generated no revenue from discontinued leasing operations in the current-year quarter or six-month period, compared with $757,000 and $787,000, respectively, in the prior-year periods.
- Backlog increased to approximately $19.3 million from $13.1 million at January 31, 2022 and $11.7 million at July 31, 2021.
- The company did not sell common or Series A preferred shares under its ATM program during the six months, compared with approximately $4.5 million of preferred-stock proceeds and $43,000 of common-stock proceeds in the prior-year period.
Guidance, outlook, risks and unusual items
Management expects fiscal 2023 continuing-operations revenue to exceed fiscal 2022 and expects the second half of fiscal 2023 to improve over the first half. Revenue is expected to decline in the third quarter from the second quarter, followed by significant improvement in the fourth quarter. If fourth-quarter revenue meets expectations, management believes the company could report positive net income from continuing operations in that quarter; this is not assured.
Management cites improving energy prices, marine survey activity, defense and maritime security demand, and increased inquiries and bid activity. Most of the current backlog is expected to be completed in fiscal 2023, while many additional opportunities would not be completed until fiscal 2024.
The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern and to meet obligations over the next twelve months. Mitigating factors include the absence of funded debt, variable costs, potential cost reductions, backlog, possible proceeds from remaining lease-pool equipment, and potential equity or other financing. However, the company is not currently eligible to use its Form S-3 ATM program and financing may not be available on acceptable terms.
The company deferred the second-quarter fiscal 2023 preferred dividend, resulting in approximately $947,000 of undeclared dividends in arrears. The 9% cumulative preferred dividend continues to accrue; during the deferral period, common dividends and redemptions are restricted. Six or more missed quarters would give preferred holders the right to appoint two directors.
Other significant risks include pandemic-related disruption, supply-chain shortages and inflation, component cost increases, customer delivery or cancellation risk, foreign-currency and geopolitical exposure, dependence on government and energy-sector demand, potential asset impairment, and cybersecurity threats. The company received a Nasdaq notice regarding its failure to maintain a $1 minimum bid price; the initial compliance period expires January 23, 2023, subject to a possible second period.
Disclosure controls were not effective as of July 31, 2022 because of an unresolved material weakness in internal control over financial reporting. Management is implementing a remediation plan. The filing also corrects an immaterial prior presentation error involving preferred dividends in comprehensive loss.
Most important facts for investors to verify
- Whether backlog converts into revenue and cash on the expected fiscal 2023 schedule, particularly given the anticipated third-quarter decline.
- Whether cash of only $833,000, operating cash usage, preferred dividend arrears and increased working-capital requirements create a near-term funding shortfall.
- Whether management can obtain equity or debt financing despite Form S-3 ineligibility and the company’s going-concern uncertainty.
- Whether the company regains Nasdaq’s $1 minimum bid-price requirement before the applicable deadline.
- Whether supply-chain costs, production delays, customer cancellations and delivery acceptance affect margins and fourth-quarter profitability.
- Progress in disposing of discontinued leasing assets and completing the exit process, which management expects by January 31, 2023.
- Remediation of the material weakness in internal control over financial reporting.