MIND Technology, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended October 31, 2020, the third quarter of fiscal 2021. The company designs, manufactures and sells marine technology products through Seamap and Klein for seismic, hydrographic, offshore, defense and maritime-security markets.
In July 2020, the company decided to exit its Equipment Leasing business. That business is classified as discontinued operations and its assets and liabilities are held for sale. The company also reincorporated from Texas to Delaware and changed its name from Mitcham Industries, Inc. to MIND Technology, Inc., effective August 3, 2020.
Key financial metrics
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Marine technology revenue | $6.5 million in 2020 vs. $8.2 million in 2019 | $14.8 million vs. $21.0 million |
| Gross profit | $2.3 million vs. $3.3 million | $4.8 million vs. $8.6 million |
| Gross margin | 35% vs. 41% | 32% vs. 41% |
| Operating loss from continuing operations | $2.3 million vs. $1.3 million | $10.8 million vs. $5.2 million |
| Net loss | $3.6 million vs. $2.0 million | $16.8 million vs. $7.6 million |
| Net loss attributable to common shareholders | $4.1 million, or $0.34 per share | $18.5 million, or $1.51 per share |
| Net cash used in operating activities | Not separately presented | $4.8 million vs. $4.2 million |
At October 31, 2020, cash and cash equivalents were $2.7 million, compared with $3.1 million at January 31, 2020. Working capital was approximately $20.7 million, compared with $31.0 million at January 31, 2020. Total assets were $40.8 million and shareholders’ equity was $31.0 million.
The company recorded $1.6 million of PPP loans as notes payable. The loans mature in May 2022 and bear interest at 1%. Management expects a significant portion to be forgiven, but forgiveness is not assured. The company stated that it had no funded bank debt or maintenance-type financial covenants and no credit facility.
Material changes versus the prior comparable period
- Marine technology revenue declined due largely to COVID-19-related restrictions, facility shutdowns, customer delivery delays and weaker activity in the energy market.
- Gross margin decreased to 35% in the quarter and 32% year to date, primarily because of lower manufacturing activity and reduced overhead absorption. Klein’s quarterly gross margin was particularly weak, with gross profit of approximately $53,000 compared with $805,000 in the prior-year quarter.
- Research and development expense increased to $912,000 for the quarter and $2.1 million year to date, reflecting investment in strategic initiatives, including sonar, passive-array and autonomous-vehicle technologies.
- Selling, general and administrative expense decreased to $3.0 million for the quarter and $8.9 million year to date, helped by reduced travel, cost reductions, salary and rent savings, and government subsidies.
- The company recorded a $2.5 million goodwill impairment charge in the first quarter of fiscal 2021 related to the Seamap reporting unit. No additional impairment was recorded after April 30, 2020.
- Discontinued operations generated a net loss of $1.2 million in the quarter and $6.1 million year to date, compared with losses of $0.7 million and $2.6 million, respectively, in the prior-year periods. The year-to-date result included a $1.9 million loss on disposal.
- The company raised approximately $1.3 million net through the sale of 676,283 common shares under a new at-the-market program during the quarter. Preferred stock dividends were $559,000 for the quarter and $1.7 million year to date.
Guidance, outlook, risks and unusual items
Backlog for the Marine Technology Products segment was approximately $8.2 million at October 31, 2020, compared with $7.6 million at July 31, 2020 and $8.9 million at January 31, 2020. Management expects a significant portion to be completed in fiscal 2021 and expects fourth-quarter continuing-operations revenue to exceed third-quarter revenue. The filing does not provide formal full-year revenue or earnings guidance.
Management reported increased customer inquiries, bid activity and marine backlog, but noted that many customers delayed firm purchase commitments. Management expects demand for GunLink source controllers to increase, while emphasizing that order timing remains uncertain. Strategic initiatives include MA-X sonar, unmanned-vehicle systems, synthetic aperture sonar and passive sonar arrays for defense and maritime-security applications.
The company states that substantial doubt exists regarding its ability to continue as a going concern because of recurring losses, negative operating cash flow, reduced cash, COVID-19 disruption, low oil prices and uncertain access to capital. Management cited cost reductions, backlog, potential asset-sale proceeds, equity-market access, PPP funding and possible debt or equity financing as mitigating factors.
The company submitted applications for PPP loan forgiveness, but the amount forgiven, if any, is uncertain. Proceeds from further sales of lease-pool equipment are also unpredictable. Preferred stock carries an annual dividend requirement of approximately $2.2 million, although future dividends could be suspended.
COVID-19 caused temporary shutdowns in Malaysia and Singapore, reduced operating efficiency and restricted travel and customer demonstrations. Additional risks include customer concentration or losses, supplier and manufacturing issues, foreign currency exposure, competition, intellectual-property claims, further asset impairments, long sales cycles for defense programs and possible deterioration in demand for seismic services.
Disclosure controls and procedures were not effective as of October 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.
Most important facts for investors to verify
- Whether the company can address the stated going-concern uncertainty and fund operations with only approximately $2.7 million of cash.
- The amount and timing of PPP loan forgiveness and any remaining repayment obligation.
- Whether the $8.2 million backlog converts to revenue and cash flow as expected.
- The timing and proceeds of the planned disposition of the Equipment Leasing business and remaining lease-pool assets.
- Whether revenue, gross margins and operating cash flow recover after COVID-19-related disruptions.
- The completion and effectiveness of remediation for the material weakness in internal controls.
- Whether strategic technology initiatives generate material orders and returns, particularly in defense, unmanned-vehicle and marine-seismic markets.
- The company’s ability to continue paying preferred dividends while operating losses and cash use persist.