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Item 1A. Risk Factors

2021-04-16 compared with 2020-04-28 · 154 added, 155 removed, 270 unchanged (53% of the section changed)

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Our business, financial condition and results of operations may also be affected by additional factors that are not currently known to us, that we currently consider immaterial or that are not specific to us, such as general economic conditions.

Furthermore, the COVID-19 pandemic (the “global pandemic”) may amplify many of the risks discussed below to which we are subject and, given the unpredictable, unprecedented and fluid nature of the pandemic, it may materially and adversely affect us in ways that are not anticipated by or known to us or that we do not currently consider to present significant risk.

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You should refer to the explanation of the qualifications and limitations on forward-looking statements included under “Cautionary Statements About Forward-Looking Statements” of this Form 10-K.

All forward-looking statements made by us are qualified by the risk factors described below.

Risk Related to Our Financial Condition

The Company’s ability to continue as a going concern could impact our ability to obtain capital financing and adversely affect the price of our common stock.

The Company has a history of losses, has had negative cash from operating activities in the last two years and may not have access to sources of capital that were available in prior periods.

In addition, the COVID-19 pandemic and the decline in oil prices subsequent to January 31, 2020 have created significant additional uncertainty and could have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

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The Company has a history of operating losses and has had negative cash from operating activities in the last two years.

In addition, the global pandemic has created significant additional uncertainty and could have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

After considering various factors, Management believes that the Company will continue to meet its obligations as the arise over the next 12 months.

(See Note 4 of Notes to Consolidated Financial Statements.

Risk Related to the Operation of Our Business

A limited number of customers account for a significant portion of our revenues and the loss of one of these customers could harm our results of operations.

We typically sell and lease equipment to a relatively small number of customers, the composition of which changes from year to year as leases are initiated and concluded and as customers’ equipment needs vary.

We typically sell equipment to a relatively small number of customers, the composition of which changes from year to year as customers’ equipment needs vary.

Therefore, at any one time, a large portion of our revenues may be derived from a limited number of customers.

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This consolidation could result in the loss of one or more of our customers and could result in a decrease in the demand for our equipment.

The demand for our government-related services is generally driven by the level of government program funding.

The state of the economy, competing political priorities, public funds and the timing of payment of these funds may influence the amount and timing of spending by our customers who are government agencies.

The loss of any one of our largest customers or a sustained decrease in demand by any of such customers could result in a substantial loss of revenues and could have a material adverse effect on our results of operations.

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If our customers experience financial difficulties or their own customers delay payment to them, they may not be able to pay, or may delay payment of, accounts receivable owed to us.

Disruptions in the financial markets or other macro-economic issues, such as volatility in price of oil or other hydrocarbons or worldwide pandemic, such as COVID-19, could exacerbate financial difficulties for our customers.

Any inability of customers to pay us for services could adversely affect our financial condition and results of operations.

Disruptions in the financial markets or other macro-economic issues, such as volatility in price of oil or other hydrocarbons or a worldwide pandemic, such as COVID-19, could exacerbate financial difficulties for our customers.

Any inability of customers to pay us for product and services could adversely affect our financial condition and results of operations.

As of January 31, 2021, we had approximately $5.7 million of gross customer accounts receivable, of which approximately $1.1 million was over 180 days past due.

Our allowance for doubtful accounts of $4.1 million is substantially related to accounts that are over 180 days past due.

For fiscal 2020, 2019 and 2018, we had net charges of approximately $2.0 million, $200,000 and $1.0 million, respectively, to our provision for doubtful accounts.

Significant payment defaults by our customers in excess of the allowance would have a material adverse effect on our financial position and results of operations.

Our allowance for doubtful accounts of $948,000 is substantially related to accounts that are over 180 days past due.

For fiscal 2021, we had net charges to our provision for doubtful accounts of approximately $659,000 and $470,000 related to continuing operations and discontinued operations, respectively.

For fiscal 2020 we had net charges to our provision for doubtful accounts of approximately zero and $2.0 million related to continuing and discontinued operations, respectively.

Significant payment defaults by our customers in excess of our allowance for doubtful accounts would have a material adverse effect on our financial position and results of operations.

We derive a substantial amount of our revenues from foreign operations and sales, which pose additional risks including economic, political and other uncertainties.

We conduct operations on a global scale.

Our international operations include locations in Canada, Columbia, Hungary, Malaysia, the United Kingdom and Singapore.

For fiscal 2020, 2019 and 2018, approximately 84%, 85%, and 76%, respectively, of our revenues were attributable to operations in foreign countries.

We conduct continuing operations on a global scale.

Our international continuing operations include locations in Malaysia, the United Kingdom and Singapore.

For fiscal 2021 and 2020, approximately 83% and 87%, respectively, of our revenues were attributable to customers in foreign countries.

Our international operations are subject to a number of risks inherent to any business operating in foreign countries, and especially those with emerging markets.

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• difficulty in repatriating foreign currency received in excess of local currency requirements;

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• fluctuations in foreign currency;

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• environmental conditions and regulatory controls or initiatives in some countries that may impose additional or more stringent requirements than found in the United States and which may not be consistently applied or enforced;

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• regulations, laws or emergency measures taken or imposed by the United States or foreign state and local governments and municipalities in response to emergency or crisis situations, including natural disasters or pandemics, such as COVID-19, which could have an adverse effect on our business, our customers or our operations.

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Our global operations expose us to risks associated with conducting business internationally, including failure to comply with United States laws that apply to international operations.

Some of our products are subject to export control regulations, including the International Traffic in Arms Regulations administered by the U.S.

Some of our products are subject to export control regulations, including the International Traffic in Arms Regulations (“ITAR”) administered by the U.S.

Department of State’s Directorate of Defense Trade Controls (“DDTC”) and the Export Administration Regulations administered by the U.S.

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We operate on a global scale and while the majority of our foreign revenues are contracted in U.S.

dollars, locally sourced items and expenditures are predominately conducted in local currency.

These costs are subject to the risk of taxation policies, expropriation, political turmoil, civil disturbances, armed hostilities, and other geopolitical hazards as well as foreign currency exchange controls (in which payment could not be made in U.S.

dollars, locally sourced items and expenditures are predominately transacted in local currency.

dollars) and fluctuations.

For accounting purposes, balance sheet accounts of our operating subsidiaries are translated at the current exchange rate as of the end of the accounting period.

Statement of operations items are translated at average currency exchange rates.

The resulting translation adjustment is recorded as a separate component of comprehensive income within shareholders’ equity.

This translation adjustment has in the past been, and may in the future be, material because of the significant amount of assets held by our international subsidiaries and the fluctuations in the foreign exchange rates.

However, the sale of our Russian and Australian entities in fiscal 2019 and 2020, respectively, has reduced our exposure to currency fluctuations.

The majority of our operating subsidiaries utilize the U.S.

dollar as their functional currency for accounting purposes.

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United Kingdom’s withdrawal from the European Union (“Brexit”), including the subsequent exchange rate fluctuations and political and economic uncertainties, may have a negative effect on global economic conditions, financial markets and our business .

On January 31, 2020, the United Kingdom withdrew from the European Union.

Under the terms of the withdrawal agreement, a post-Brexit transition period started on January 31, 2020 and will end on December 31, 2020 unless extended (the “transition period”).

The transition period, however, can be extended for up to one or two years in a one-off decision made by the joint United Kingdom and European Union committee before June 30, 2020.

Significant change is expected at the end of the transition period, even if a comprehensive future United Kingdom and European Union relationship is concluded within the transition period.

Further, negotiations on the United Kingdom and European Union relationship are likely to continue after the end of the transition period.

The consequences of Brexit and the negotiations that the United Kingdom is currently undertaking with other countries with a view to replicating (where possible) the effects of the European Union’s international trade agreements, which the United Kingdom will no longer benefit from, together with the protracted negotiations around the terms of Brexit, could introduce significant uncertainties into global financial markets and adversely impact the regions in which we and our clients operate.

The United Kingdom entered into a new trade agreement with the European Union on December 24, 2020.

Despite the December 2020 trade agreement, many potential effects of Brexit remain unclear and pose significant uncertainties in global financial markets and adversely impact the regions in which we and our clients operate.

For example, our Seamap facility in the United Kingdom could be subject to higher costs and delays, which could cause disruptions in our delivery schedules to our customers.

In the long term, Brexit could also create uncertainty with respect to the legal and regulatory requirements to which we and our customers are subject and lead to divergent national laws and regulations as the United

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Kingdom government determines which European Union laws to modify or replace.

There remains substantial uncertainty surrounding the ultimate effect of Brexit and outcomes could disrupt the markets we serve and the tax jurisdictions in which we operate.

Continued adverse consequences, such as deterioration in economic conditions and volatility in currency exchange rates, and the uncertainty surrounding Brexit could have a negative impact on our financial position and results of operations.

We are subject to risks associated with the intellectual property of our Marine Technology Products segment.

We are subject to risks associated with intellectual property.

We rely on a combination of patent, copyright, trademark and trade secret laws, and confidentiality procedures, contractual provisions and restrictions on disclosure to protect our intellectual property and proprietary information.

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• declining interest from potential customers.

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Although we maintain accruals for product warranties as we deem necessary, actual costs could exceed these amounts.

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New and enhanced products and services introduced by a competitor may gain market acceptance and, if not available to us, may adversely affect us.

If we choose the wrong technology, or if our

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competitors select a superior technology, we could lose our existing customers and be unable to attract new customers, which would harm our business and operations.

If we choose the wrong technology, or if our competitors select a superior technology, we could lose our existing customers and be unable to attract new customers, which would harm our business and operations.

The markets for our products and services are characterized by changing technology and new product introductions.

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Delayed deliveries from these sources could adversely affect our business.

A global shortage of key components, such as semiconductors, can disrupt production.

If there is a shortage of a key component and the component cannot be easily sourced from a different supplier, the shortage could disrupt our production activities.

Wafers are a key component in the production of semiconductors.

Wafers have a long production lead time, sometimes up to 30 weeks, which further elevates the shortage.

Various factors, including increased demand for consumer electronics, shutdowns due to COVID-19 and long lead times for wafer production, are contributing to the shortage of semiconductors.

A shortage of key components such as semiconductors may cause a significant disruption to our production activities, which could have a substantial adverse effect on its financial condition or results of operations.

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We rely on a small number of suppliers and disruption in vendor supplies could adversely affect our results of operations.

We purchase many of the components used in our manufacturing from a small number of suppliers.

Should our relationships with our suppliers deteriorate, we may have difficulty in obtaining new technology required by our customers and maintaining our existing equipment in accordance with manufacturers’ specifications.

In addition, we may, from time to time, experience supply or quality control problems with suppliers, and these problems could significantly affect our ability to meet delivery schedules or other contractual commitments.

Also, our suppliers could experience significant cash flow issues or otherwise be negatively impacted by current or future global economic conditions.

Please read risk factor “ We face risks related to health epidemics and other outbreaks, including the recent spread of COVID-19 or novel coronavirus, or fear of such an event ” below for a discussion of recent disruptions relating to the recent global pandemic.

Reliance on certain suppliers, as well as industry supply conditions, generally involve several risks, including the possibility of a shortage or a lack of availability of key products and increases in product costs and reduced control over delivery schedules;

any of these events could adversely affect our future results of operations.

We rely on contractors and subcontractors for certain projects, which could affect our results of operations and reputation.

We may rely on contractors and subcontractors to complete certain projects.

The quality and timing of production and services by our contractors and subcontractors is not totally under our control.

Reliance on contractors and subcontractors gives us less control over a project and exposes us to significant risks, including late delivery, substandard quality and high costs.

In addition, we may be jointly and severally liable for a contractor or subcontractor’s actions or contract performance.

The failure of our contractors or subcontractors to deliver quality products or services in a timely manner could adversely affect our profitability and reputation.

Increases in tariffs, trade restrictions, or taxes on our supplies and products could have an adverse impact on our business.

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However, any of the factors above may adversely affect our operating results.

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Our quarterly operating results may be subject to significant fluctuations.

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These periodic fluctuations in our operating results could adversely affect our stock price.

We face competition for our products and services.

We face significant competition for our products and services.

We have several competitors who provide similar products and services, many of which have substantially greater financial resources than our own.

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Competitive pressures or other factors may also result in significant price competition that could have a material adverse effect on our results of operations.

The advancement of seismic technology having a significant competitive advantage over the equipment in our rental fleet could have an adverse effect on our ability to profitably lease and/or sell this equipment.

We rely on a small number of suppliers and disruption in vendor supplies could adversely affect our results of operations.

We purchase many of the components used in our manufacturing operations and the majority of our seismic equipment for our lease pool from a small number of suppliers.

In addition, we may, from time to time, experience supply or quality control problems with suppliers, and these problems could significantly affect our ability to meet our lease commitments.

Also, our suppliers could experience significant cash flow issues or otherwise be negatively impacted by current or future global economic conditions.

any of these events could adversely affect our future results of operations.

We rely on contractors and subcontractors for certain projects, which could affect our results of operations and reputation.

We may rely on contractors and subcontractors to complete certain projects.

The quality and timing of production and services by our contractors and subcontractors is not totally under our control.

Reliance on contractors and subcontractors gives us less control over a project and exposes us to significant risks, including late delivery, substandard quality and high costs.

The failure of our contractors or subcontractors to deliver quality products or services in a timely manner could adversely affect our profitability and reputation.

Demand for seismic data is not assured.

Demand for certain of our products and services depends on the level of spending by oil and gas companies for exploration, production and development activities, as well as on the number of crews conducting land, transition zone and marine seismic data acquisition worldwide.

The levels of such spending are influenced by:

the level of consumer demand;

supplies of oil and natural gas;

the effect of worldwide energy conservation measures;

the ability of OPEC to set and maintain production levels;

oil and gas prices and industry expectations of future price levels;

the cost of exploring for, producing and delivering oil and gas;

the availability of current geophysical data;

the ability of oil and gas companies to generate funds or otherwise obtain capital for exploration operations;

the granting of leases or exploration concessions and the expiration of such rights;

changes to existing laws and regulations, including legal requirements relating to the environment;

pandemics, such as the worldwide COVID-19 or coronavirus outbreak beginning in early 2020, which could impact economic conditions;

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shareholder activism or activities by non-governmental organizations to limit certain sources of funding for the energy sector or restrict the exploration, development and production of oil and gas and related infrastructure;

domestic and foreign tax policies;

merger and divestiture activity among oil and gas producers;

expected rates of declining current production;

technical advances affecting energy exploration, production, transportation and consumption;

weather conditions, including hurricanes and monsoons that can affect oil and gas operations over a wide area as well as less severe inclement weather that can preclude or delay seismic acquisition surveys;

the discovery rate of new oil and gas reserves;

prices and availability of alternative fuels;

local and international political and economic conditions.

The cyclical nature of the oil and gas industry can have a significant effect on our revenues and profitability.

Historically, oil and natural gas prices, as well as the level of exploration and developmental activity, have fluctuated significantly.

During periods of improved energy commodity prices, the capital spending budgets of oil and natural gas operators tend to expand, which results in increased demand for our products.

Conversely, in periods when these energy commodity prices deteriorate, capital spending budgets of oil and natural gas operators tend to contract and the demand for our products generally weakens.

These fluctuations have in the past, and may in the future, adversely affect our business.

Slowdowns in economic activity would likely reduce worldwide demand for energy and result in an extended period of lower crude oil and natural gas prices.

We are unable to predict future oil and natural gas prices or the level of oil and gas industry activity.

A prolonged low level of activity in the oil and gas industry will likely depress exploration and development activity, adversely affecting the demand for our products and services and our financial condition and results of operations.

Equipment that we lease to our customers is sometimes located in foreign countries where retrieval of the equipment after the termination of the rental agreement is difficult or impossible if the customer does not return the equipment or comply with contractual obligations to reimburse us for lost equipment.

The costs associated with retrieving this equipment or the loss of equipment that is not retrieved could be significant and could adversely affect our operations and earnings.

Fuel conservation measures could reduce demand for oil and natural gas, which would in turn reduce the demand for our products and services.

Fuel conservation measures, alternative fuel requirements, technological advances in fuel economy and energy generation, and increasing consumer demand for alternatives to oil and natural gas could reduce demand for oil and natural gas.

The impact of the changing demand for oil and natural gas may have a material adverse effect on our business, financial condition, prospects, results of operations, and cash flows.

Additionally, the increased competitiveness of alternative energy sources (such as wind, solar geothermal, tidal and biofuels) could reduce demand for our products and services, which would lead to a reduction in our revenues.

Our revenues are subject to fluctuations that are beyond our control, which could materially adversely affect our results of operations in a given financial period.

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These factors include the following:

inclement weather conditions, natural disasters or pandemics, including the recent COVID-19 outbreak;

• inclement weather conditions, natural disasters or pandemics, including the recent global pandemic;

• difficulties in obtaining permits and licenses;

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• budgetary or financial issues;

• macroeconomic and industry conditions;

• delays in payments to our customers from their clients.

We face risks related to health epidemics and other outbreaks, including the recent spread of COVID-19 or novel coronavirus, or fear of such an event.

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Our business could be adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a COVID-19.

The spread of COVID-19 is currently impacting countries and communities where we have facilities and employees, as well as those where our suppliers and customers have operations.

We are monitoring the outbreak of COVID-19 and taking certain steps deemed necessary to mitigate risks to us, our employees, business associates and communities.

To date, the spread of COVID-19 has not had a material impact on Mitcham.

However, on March 18, 2020, our facility in Malaysia was closed for a period mandated by the Malaysian government through at least April 30, 2020.

On April 6, 2020 the Singaporean government imposed a similar closure of our facility in Singapore through at least April 30, 2020.

We cannot predict whether there will be additional closures at any of our facilities, including an extension of the closures mandated by the Malaysian and Singaporean governments, or other interruptions or impact to our business activities from the spread of COVID-19.

Furthermore, our reliance on third-party suppliers, contract manufacturers, and service providers exposes us to possibility of further delay or interruption of our operations.

We are unable to accurately predict the impact that COVID-19 will have on our business due to various uncertainties, including the ultimate geographic spread of COVID-19, the severity of the disease, the duration of the outbreak, and actions that may be taken by governmental authorities in the countries and communities where we, our suppliers, or our customers have operations.

If there are extended or additional facility closures, or other interruptions to our business, including as a result of impact on third-party suppliers, contract manufacturers and service providers, related to the spread of COVID-19, such disruptions could have a material adverse impact on our liquidity, financial condition, and results of operations.

Capital requirements for our business strategy can be large.

If we are unable to finance these requirements, we may not be able to maintain our competitive advantage or execute our strategy.

We have historically funded our capital requirements with cash generated from operations, cash reserves, issuance of preferred and common stock and short-term borrowings from commercial banks.

We have historically funded our capital requirements with cash generated from operations, cash reserves, issuance of preferred and common stock and proceeds from the sale of assets.

Our capital requirements may continue to increase.

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Furthermore, due to the historically cyclical nature of the energy business in general, and the seismic industry in particular, capital for businesses in this industry can be even more difficult and expensive to obtain.

On May 5, 2020, the Company, and its wholly owned subsidiary, Klein (collectively, the “Borrowers”), were granted loans (the “Loans” or “PPP Loans”) from Bank of America, N.A.

in the aggregate amount of approximately $1.6 million, pursuant to the Small Business Association's Paycheck Protection Program (the “PPP”), a component of the Coronavirus Aid, Relief, and Economic Security Act which was enacted on March 27, 2020.

Under the terms of the PPP, funds from the Loans may only be used for payroll costs, rent, utilities and interest on other debt obligations incurred prior to February 15, 2020.

In addition, certain amounts of the Loan may be forgiven if the funds are used to pay qualifying expenses.

In January 2021, we received confirmation that 100% of the PPP Loan granted to the Company had been forgiven and in February 2021 we received confirmation that 100% of the PPP Loan granted to Klein had been forgiven.

See Note 13 - “Notes Payable” to our condensed consolidated financial statements for additional details.

Through January 31, 2021, we have issued 1,038,232 shares of 9.00% Series A Cumulative Preferred Stock, par value $1.00 per share, with a liquidation preference of $25.00 per share (the “Series A Preferred Stock”).

The 994,046 shares represent 100% of the Series A Preferred Stock available for sale through our at-the-market program.

In addition, we have limited authorized capital of preferred stock remaining available for issuance.

As of January 31, 2021, under our Amended and Restated Articles of Incorporation, we had 2,000,000 shares of preferred stock authorized.

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From time to time, we may require access to working capital to meet overhead costs and operational expenditures, finance inventory purchases, to provide letters of credit or bankers’ guarantees to certain customers.

Historically, we have met this need by utilizing a revolving credit facility.

In March 2017, we terminated our revolving Credit Agreement (as defined below) and have not replaced that facility.

There is no assurance that we will be able to negotiate a replacement facility or facilities.

Many commercial banks in the United States have undertaken to reduce their exposure to companies engaged in oil and gas related activities, which further limits our ability to obtain working capital financing.

For the past several years we have not had a credit facility in place, and have used cash generated from our operations, sale of lease pool equipment and sale of our Series A preferred stock to meet our working capital needs.

There is no assurance that we will be able to negotiate a credit facility or continue to meet working capital needs with cash generated from our operations, sale of lease pool equipment or sale of our Series A preferred stock or common stock.

Many commercial banks in the United States have undertaken to reduce their exposure to companies engaged in oil and gas related activities, which f limits our ability to obtain working capital financing.

Should we not have access to adequate working capital financing, we may not be able to pursue or complete some business opportunities or maintain and appropriate level of working capital to meet our overhead costs and operational expenditures.

Further, our failure to meet our projected financial results or achieve projected revenues and cash flows could lead to cash flow and working capital constraints that could limit our ability to meet day-to-day needs of our business.

If our cash flows and capital resources are insufficient to fund our operations, we may be forced to reduce or delay capital expenditures, sell assets, or seek additional capital, which may not be available on terms acceptable to us, or at all.

Our inability to generate or access working capital could have a material adverse effect on our operations and financial condition.

Our failure to attract and retain key personnel could adversely affect our operations.

Our success is dependent on, among other things, our ability to hire, develop, motivate and retain the services of certain key personnel.

In September of 2015, Robert P.

Capps, Executive Vice President-Finance and Chief Financial Officer, and Guy Malden, Executive Vice President-Marine Systems, assumed the additional roles of Co-Chief Executive Officers.

In these roles, Mr.

Capps and Mr.

Malden are responsible for all day-to-day operations in close coordination with the Board of Directors.

The loss of the services of Mr.

If our cash flows and capital

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Malden for an extended period of time or the inability to recruit, train and retain other key personnel could have a material adverse effect on our operations.

The high fixed costs of our equipment leasing operations could adversely affect our results of operations.

Our equipment leasing business has high fixed costs.

In periods of significant downtime these fixed costs do not decline as rapidly as our revenues.

As a result, any significant downtime or low activity caused by reduced demand could adversely affect our results of operations.

resources are insufficient to fund our operations, we may be forced to reduce or delay capital expenditures, sell assets, or seek additional capital, which may not be available on terms acceptable to us, or at all.

Our inability to generate or access working capital could have a material adverse effect on our operations and financial condition.

Our long-lived assets may be subject to impairment.

We periodically assess our long-lived assets, including goodwill, other intangible assets and our lease pool of equipment, for impairment.

If we expect significant sustained decreases in oil and natural gas prices in the future, we may be required to write down the value of our long-lived assets if the future cash flows anticipated to be generated from these assets falls below net book value.

Declines in oil and natural gas prices, if sustained, could result in future impairments.

We periodically assess our long-lived assets and other intangible assets for impairment.

If the future cash flows anticipated to be generated from these assets falls below net book value, we may be required to write down the value of our long-lived assets.

If we are forced to write down the value of our long-lived assets, these noncash asset impairments could negatively affect our results of operations in the period in which they are recorded.

In fiscal 2020 and fiscal 2018 we recognized charges for impairment of approximately $760,000 and $1.5 million, respectively, related to certain intangible assets.

In fiscal 2021 and 2020 we recognized impairment charges of approximately $2.5 million and $760,000, respectively, related to certain intangible assets.

See the discussion included in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Long-Lived Assets.”

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We could also face fines, sanctions and other penalties from authorities in the relevant jurisdictions, including prohibition of our participating in or curtailment of business operations in those jurisdictions or the seizure of assets.

We could face other third party claims by agents, shareholders, debt holders, or other interest holders or constituents of our company.

We could face other third party claims by agents, stockholders, debt holders, or other interest holders or constituents of our company.

Further, disclosure of the subject matter of any investigation could adversely affect our reputation and our ability to obtain new business from potential customers or retain existing business from our current customers, to attract and retain employees and to access the capital markets.

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We are subject to stringent governmental laws and regulations both in the United States and in foreign countries relating to worker safety and health, protection of the environment and natural resources, and the handling of chemicals and materials used in our manufacturing processes as well as the recycling and disposal of wastes generated by those processes.

For additional information regarding costs and liabilities associated with environmental or worker safety and health matters, see Item 1 - “Regulation - Environmental Regulation.” Compliance with or continuing to be subject to these applicable laws and regulations could have a material adverse effect on our business,

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financial condition or results of operations.

For additional information regarding costs and liabilities associated with environmental or worker safety and health matters, see Item 1 - “Regulation - Governmental and Environmental Regulation.” Compliance with or continuing to be subject to these applicable laws and regulations could have a material adverse effect on our business, financial condition or results of operations.

In addition, increased environmental regulation of oil and gas exploration and production activities, whether in the United States or in any of the other countries in which our customers operate could cause them to incur increased costs or restrict, delay or cancel drilling, exploration or production programs or associated hydraulic fracturing activities, which in turn could result in reduced demand for our products and services and have a material adverse effect on our business, financial condition, results of operations, or cash flows.

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Use of our equipment in marine environments may be regulated or require a permit or other authorization from United States or foreign governmental agencies.

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Environmental Protection Agency (“EPA”), in addition to some state and regional authorities, have in recent years considered legislation or regulations to reduce emissions of carbon dioxide, methane and other greenhouse gases (“GHGs”).

These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs, and regulations that directly limit GHG emissions from certain sources.

These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting, permitting, and tracking programs, and regulations that directly limit GHG emissions from certain sources.

In the absence of federal GHG-limiting legislation, the EPA has determined that GHG emissions present a danger to public health and the environment and has adopted regulations that, among other things, restrict emissions of GHGs under existing provisions of the U.S.

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In addition, the EPA has adopted regulations requiring monitoring and annual reporting of GHG emissions from certain sources, including, among others, certain onshore and offshore oil and natural gas production facilities.

In 2016, the EPA finalized new regulations that set methane emission standards for new and modified oil and natural gas production and natural gas processing and transmission facilities, known as New Source Performance Standards Subpart OOOOa.

In 2016, the EPA finalized new regulations that set emission standards for methane and other volatile organic compounds for new and modified oil and natural gas production and natural gas processing and transmission facilities, known as New Source Performance Standards (“NSPS”) Subpart OOOOa.

Although EPA subsequently withdrew these requirements for certain sectors of the oil and gas industry, and the ultimate scope of these rules is uncertain due to ongoing court challenges of the rules and any potential changes to the rules by U.S.

President Biden’s Administration, the bulk of NSPS Subpart OOOOa is currently in effect.

Also, many of the other countries where we and our customers operate, including Canada and various countries in Europe, have adopted or are considering GHG reduction measures similar to those described above.

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Although it is not possible at this time to predict how legislation or new regulations or other initiatives that may be adopted to address GHG emissions would impact our business, any such future laws, regulations or other legal requirements imposing reporting or permitting obligations on, or limiting emissions of GHGs from oil and gas exploration and production activities could have an adverse effect on the demand for our products and services.

Finally, increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, hurricanes, floods and other climatic events.

In addition, spurred by increasing concerns regarding climate change, the oil and gas industry faces growing demand for corporate transparency and a demonstrated commitment to sustainability goals.

Environmental, social, and governance (“ESG”) goals and programs, which typically include extralegal targets related to environmental stewardship, social responsibility, and corporate governance, have become an increasing focus of investors and shareholders across the industry.

While reporting on ESG metrics remains voluntary, access to capital and investors is likely to favor companies with robust ESG programs in place.

Ultimately, these initiatives could increase operational costs and make it more difficult for companies, including our current and potential customers, to secure funding for exploration and production activities and, thus, reduce demand for our products and services.

If any such climatic events were to occur, they could have an adverse effect on our financial condition and results of operations and the financial condition and operations of our customers.

Notwithstanding potential risks related to climate change, the International Energy Agency estimates that oil and gas will continue to represent a major share of global energy use through 2040, and other private sector studies project continued growth in demand for the next two decades.

Notwithstanding potential risks related to climate change, the International Energy Agency estimates that oil and gas will continue to represent a substantial major share of global energy use through 2030, and other private sector studies project continued growth in demand for the next two decades.

However, recent activism directed at shifting funding away from companies with energy-related assets could result in limitations or restrictions on certain sources of funding for the energy sector.

The results of the 2020 U.S.

presidential and congressional elections may create regulatory uncertainty for our industry.

Changes in environmental laws could increase costs and harm our business, financial condition and results of operations .

Joe Biden's victory in the U.S.

presidential election, as well as a closely divided Congress, may create regulatory uncertainty in our industry.

During his first weeks in office, President Biden has issued several executive orders promoting various programs and initiatives designed to, among other things, curtail climate change and control the release of methane.

It remains unclear what additional actions President Biden will take and what support he will have for any potential legislative changes from Congress.

Further, it is uncertain to what extent any new environmental laws or regulations, or any repeal of existing environmental laws or regulations, may affect the operations of our customers and the demand for our products.

While management believes our international footprint helps minimize the impact of any regional or country-specific impact, such actions could increase our operating costs, which could materially harm our business, financial condition and results of operations .

Our business could be negatively affected by security threats, including cybersecurity threats, and other disruptions.

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The potential for such security threats subjects our operations to increased risks that could have a material adverse effect on our business.

In particular, our implementation of various procedures and controls to monitor and mitigate security threats and to increase security for our information, facilities and infrastructure may result in increased capital and operating costs.

In particular, our implementation of various procedures and controls to monitor and mitigate security

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threats and to increase security for our information, facilities and infrastructure may result in increased capital and operating costs.

Moreover, there can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring.

If any of these security breaches were to occur, they could lead to losses of sensitive information, critical infrastructure or capabilities essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations or cash flows.

Since the outbreak of the global pandemic and continuing through the beginning of fiscal 2022, we have allowed our employees to work from home according to shelter in place rules put forth by their local governments.

As a result, we may have increased cybersecurity and data security risks, due to increased use of home Wi-Fi networks and virtual private networks.

The United States Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency has warned that cybercriminals will take advantage of the disruption and uncertainty created by the global pandemic in their cyberattacks.

While we continue to implement information technology controls to reduce the risk of a cybersecurity or data security breach, there is no guarantee that these measures will be adequate to safeguard all systems with an increased number of employees working remotely.

Cybersecurity attacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, disruption of our customers’ operations, loss or damage to our data delivery systems, unauthorized release of confidential or otherwise protected information, corruption of data, and increased costs to prevent, respond to or mitigate cybersecurity events.

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These events could damage our reputation and lead to financial losses from remedial actions, loss of business, increased protection costs, regulatory action or potential liability.

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Our business could be negatively affected by data protection and privacy laws that carry fines and may expose us to criminal sanctions and civil suits.

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• incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;

• unknown liabilities or other unforeseen obligations of any company we may acquire, which may not be identified in the course of or due diligence;

• failure to integrate the operations or management of any acquired operations or assets successfully and timely;

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• increased competition for acquisition opportunities, in turn increasing our cost of making further acquisitions or causing us to refrain from making additional acquisitions;

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• our inability to secure sufficient financing, on terms we find acceptable, that may be required for any such acquisition or investment.

In addition, we may not be able to identify suitable acquisition or strategic investment opportunities.

We may incur expenses associated with sourcing, evaluating and negotiating acquisitions (including those that we do not complete), and we may also pay fees and expenses associated with financing acquisitions to investment banks and other advisors.

Any of these amounts may be substantial, and together with the size, timing and number of acquisitions we pursue, may negatively affect and cause significant volatility in our financial results.

Encountering any of these or any unforeseen problems in completing acquisitions could have a material adverse effect on our ability to compete, financial condition and results of operations, and could prevent us from achieving the increases in revenues and profitability that we hope to realize through acquisitions.

Our failure to properly develop and manage strategic initiatives may adversely affect our financial position and results of operations.

We have initiated, and may in the future initiate, strategic initiatives in order to focus and expand our product offerings.

The initiatives we have initiated include (i) the development of side-scan sonar systems specifically for unmanned vehicles, including integration of our MA-X TM technology;

(ii) the development of SAS sonar systems in cooperation with a major European defense contractor;

(iii) the application of our SeaLink solid streamer technology to passive sonar arrays for use in maritime security applications, such as anti-submarine warfare;

and (iv) disposition of our Leasing Business.

There can be no assurance that we will realize the anticipated benefits of such initiatives or that any of the strategic initiatives will ultimately have a material impact on our financial position or results of operations.

The pursuit of the strategic initiatives presents a number of risks, including but not limited to, the length of development, increased competition, the diversion of management’s attention from existing operations or other priorities, the unavailability of equipment, budget limitations and the ability to sell our lease pool equipment on favorable terms, if at all, all of which could adversely affect our financial condition and results of operations.

Risks Related to the Global Pandemic

We face risks related to health epidemics and other outbreaks, including the recent spread of COVID-19 or novel coronavirus, or fear of such an event.

Our business could be adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by the global pandemic.

The global pandemic has impacted countries and communities where we have facilities and employees, as well as those where our suppliers and customers have operations.

We are continuing to monitor the situation and take the steps deemed necessary to mitigate risks to us, our employees, business associates and communities.

We were required to temporarily shut-down our facilities in Malaysia and Singapore on March 17, 2020 and April 7, 2020, respectively.

The Malaysia facility was reopened on April 21, 2020 with approximately 50% of its normal staff and resumed operations with 100% of its employees on May 4, 2020.

In Singapore, we were able to continue limited shipping and receiving operations during the shutdown and were able to resume manufacturing operations on June 1, 2020.

Both facilities continue to operate at essentially full capacity.

However, the ability of management to travel between Singapore and Malaysia continues to be restricted.

Our other facilities have been allowed to operate, although at reduced efficiencies as certain employees have worked remotely.

Furthermore, travel restrictions resulting from the global pandemic have impacted our ability to visit customers, conduct product demonstrations and visit our various operating locations.

These disruptions have had, and we expect they will continue to have, a negative effect on our business;

however, the duration and magnitude of these disruptions are uncertain.

We cannot predict whether there will be additional closures at any of our facilities, or other interruptions or impact to our business activities from the spread of global pandemic.

Furthermore, our reliance on third-party suppliers, contract manufacturers, and service providers exposes us to possibility of further delay or interruption of our operations.

We are unable to accurately predict the continuing impact that the global pandemic will have on our business due to various uncertainties, including the severity and transmission rate of the virus and any new variants of the virus, the extent and effectiveness of containment actions, the long-term efficacy of COVID-19 vaccines and actions that may be taken by governmental authorities in the countries and communities where we, our suppliers, or our customers have operations the impact of these and other factors on our employees, suppliers and customers.

Furthermore, the global pandemic also raises the possibility of an extended global economic downturn and has caused volatility in financial markets, which could affect demand for our products and impact our financial condition and results of operations even after the pandemic is fully contained.

For example, if a customer’s financial difficulties become severe, the customer may be unwilling or unable to pay our invoices in the ordinary course of business, which could adversely affect collections of both our accounts receivable and unbilled services.

We continue to monitor the impact of the COVID-19 pandemic on our cash flows and on the credit and financial markets.

If there are extended or additional facility closures, or other interruptions to our business, including as a result of impact on third-party suppliers, contract manufacturers and service providers, related to the global pandemic, such disruptions could have a material adverse impact on our liquidity, financial condition, and results of operations.

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Risk Related to Our Common Stock

Our stock price is subject to volatility.

Energy and energy service company stock prices, including our stock price, have been volatile from time to time.

Stock prices, including our stock price, have been volatile from time to time.

Stock price volatility could adversely affect our business operations by, among other things, impeding our ability to attract and retain qualified personnel and to obtain additional financing.

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• operating results that vary from the expectations of securities analysts and investors;

factors influencing the levels of global oil and natural gas exploration and exploitation activities, such as depressed prices for natural gas in North America or disasters such as the Deepwater Horizon incident in the Gulf of Mexico in 2010;

• the operating and securities price performance of companies that investors or analysts consider comparable to us;

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• changes in global financial markets and global economies and general market conditions, such as interest rates, commodity and equity prices and the value of financial assets.

In March 2020, as a result of multiple significant factors impacting supply and demand in the global oil and natural gas markets, including the announced price reductions and production increases by members of OPEC and other oil exporting nations, the price for oil declined sharply and may continue to decline.

Oil and natural gas commodity prices are expected to continue to be volatile.

In addition, a slowing or changing economy as a result of the recent COVID-19 outbreak may further depress financial markets and have a negative impact

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on the price of our common stock.

We cannot predict the duration or effects of these recent developments, but if the prices of oil and natural gas continue to decline or remain low for a lengthy period, or if general macroeconomic conditions worsen or remain depressed for an extended period, the price of our common stock could be negatively affected.

To the extent that the price of our common stock remains at lower levels or it declines further, our ability to raise funds through the issuance of equity or otherwise use our common stock as consideration will be reduced.

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These factors may limit our ability to implement our operating and growth plans

We may not be able to maintain our listing on the NASDAQ Global Select Market (“NASDAQ”), which could have a material adverse effect on us and our shareholders.

We may not be able to maintain our listing on the NASDAQ Global Select Market (“NASDAQ”), which could have a material adverse effect on us and our stockholders.

The standards for continued listing on NASDAQ include, among other things, that the minimum bid price for the listed securities not fall below $1.00 for a period in excess of thirty consecutive business days.

Our common stock has recently traded at levels below $1.00 per share.

If the closing bid price of our common stock were to fail to meet NASDAQ’s minimum closing bid price requirement, or if we otherwise fail to meet any other applicable requirements of NASDAQ and we are unable to regain compliance, NASDAQ may make a determination to delist our common stock.

During the months of March, April, and May of 2020 our common stock periodically traded at levels below $1.00 per share, but never for thirty consecutive days.

Subsequently, the price recovered from those levels.

However, if the closing bid price of our common stock were to fail to meet NASDAQ’s minimum closing bid price requirement, or if we otherwise fail to meet any other applicable requirements of NASDAQ and we are unable to regain compliance, NASDAQ may make a determination to delist our common stock.

The delisting of our common stock from NASDAQ could negatively impact us by (i) reducing the liquidity and market price of our common stock;

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We may issue debt or equity securities with rights senior to that of our common stock in liquidation which could dilute or negatively affect the value of our common stock.

Through January 31, 2020, we have issued 994,046 shares of our Series A Preferred Stock, with a liquidation preference of $25.00 per share.

The 994,046 shares represent 100% of the Series A Preferred Stock available for sale through our at-the-market program.

As of January 31, 2021, 1,038,232 shares of the Series A Preferred Stock were outstanding, with a liquidation preference of $25.00 per share.

The Company has 2,000,000 shares of preferred stock authorized.

The preferred stock may be issued in multiple series with various terms, as authorized by the Company’s Board of Directors.

The Series A Preferred Stock has a liquidation preference senior to that of our common stock.

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The issuance of these securities could dilute or negatively affect the value of our common stock.

Provisions in our Amended and Restated Articles of Incorporation and Texas law could discourage a takeover attempt, which may reduce or eliminate the likelihood of a change of control transaction and, therefore, the ability of our shareholders to sell their shares for a premium.

Provisions of our Amended and Restated Articles of Incorporation and the Texas Business Organizations Code may tend to delay, defer or prevent a potential unsolicited offer or takeover attempt that is not approved by our Board of Directors but that our shareholders might consider to be in their best interest, including an attempt that might result in shareholders receiving a premium over the market price for their shares.

To the extent that there are authorized, unissued shares, our Board of Directors is authorized to issue preferred stock with preferences and rights as it determines, which may afford the holders of any series of preferred stock preferences, rights or voting powers superior to those of the holders of common stock.

Provisions in our Amended and Restated Certificate of Incorporation and Delaware law could discourage a takeover attempt, which may reduce or eliminate the likelihood of a change of control transaction and, therefore, the ability of our stockholders to sell their shares for a premium.

Provisions of our certificate of incorporation and the Delaware General Corporation Law may tend to delay, defer or prevent a potential unsolicited offer or takeover attempt that is not approved by our board of directors but that our stockholders might consider to be in

Index to Financial Statements

their best interest, including an attempt that might result in stockholders receiving a premium over the market price for their shares.

Because our board of directors is authorized to issue preferred stock with preferences and rights as it determines, it may afford the holders of any series of preferred stock preferences, rights or voting powers superior to those of the holders of common stock.

In addition, we are governed by Section 203 of the Delaware General Corporation Law which, subject to some specified exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock, for a three-year period following the date that the stockholder became an interested stockholder.

Section 203 could have the effect of delaying, deferring, or preventing a change in control that our stockholders might consider to be in their best interests.

Failure to establish and maintain effective internal control over financial reporting could adversely affect our financial results.

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The Company failed to detect an error related to our provision for doubtful accounts identified by the Company’s auditors during the audit of our financial statements for the fiscal year ended January 31, 2020.

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During fiscal 2021 management implemented certain remediation procedures and as of January 31, 2021, management has determined that such controls are effective.

A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors