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Item 7. Management’s Discussion and Analysis

2021-04-16 compared with 2020-04-28 · 292 added, 362 removed, 182 unchanged (78% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We operate in two segments, Marine Technology Products and Equipment Leasing.

The Marine Technology Products segment was previously referred to as our Equipment Manufacturing and Sales segment.

Revenue from the Marine Technology Products segment includes sales of Seamap equipment, sales of Klein equipment and through the first quarter of fiscal 2020, sales of oceanographic and hydrographic equipment by SAP.

This segment operates from locations near Bristol, United Kingdom, Salem, New Hampshire and in Singapore.

During fiscal 2019, we established a new facility in Malaysia for the manufacture and repair of the newly introduced SeaLink product line discussed in more detail below.

This facility is in close proximity to our Singapore facility.

Historically, we have operated in two segments, Marine Technology Products and Equipment Leasing.

During the second quarter of fiscal 2021, our Board determined to exit the Leasing Business and instructed management to develop and implement a plan to dispose of those operations.

Accordingly, the assets, excluding cash, and liabilities of the Leasing Business are considered held for sale and the Leasing Business operations are presented as discontinued operations.

See Note 2 - “ Assets Held for Sale and Discontinued Operations” to our condensed consolidated financial statements for more details.

Revenue from the Marine Technology Products business includes sales of Seamap equipment and sales of Klein equipment.

This business operates from locations near Bristol, United Kingdom;

Salem, New Hampshire;

Huntsville, Texas;

Johor, Malaysia and in Singapore.

During February 2019, the Company completed the sale of its Australian operations in Brisbane, Australia.

See Note 22 - “Sale of Subsidiaries” of our consolidated financial statements for additional details.

The operations of our Equipment Leasing segment include all leasing activity, sales of lease pool equipment and certain other equipment sales and services related to those operations.

This business is conducted from our locations in Huntsville, Texas;

See Note 23 - “Sale of Subsidiaries” to our condensed consolidated financial statements for additional details.

The discontinued operations of the Equipment Leasing business includes all land leasing activity, sales of lease pool equipment and certain other equipment sales and services related to those operations.

This business has been conducted from our locations in Huntsville, Texas;

Calgary, Canada;

Bogota, Colombia;

Budapest, Hungary and Singapore.

This includes the operations of our subsidiaries MCL, MEL, MML and our branch in Colombia.

We conducted leasing operations through SAP, our subsidiary located in Brisbane, Australia and MSE, our subsidiary located in Ufa, Russia, prior to the sale of these entities in February 2019 and August 2018, respectively.

Management believes that the performance of our Marine Technology Products segment is indicated by revenues from equipment sales and by gross profit from those sales.

Management further believes that the performance of our Equipment Leasing segment is indicated by revenues from equipment leasing and by the level of our investment in lease pool equipment.

and Budapest, Hungary.

This included the operations of our subsidiaries MCL, MEL and our branch in Colombia.

Management believes that the performance of our Marine Technology Products business is indicated by revenues from sales of products and by gross profit from those sales.

Management monitors EBITDA and Adjusted EBITDA, both as defined and reconciled to the most directly comparable financial measures calculated and presented in accordance with United States generally accepted accounting principles (“GAAP”), in the following table, as key indicators of our overall performance and liquidity.

The following table presents certain operating information by operating segment:

Years Ended January 31,

Index to Financial Statements

The following table presents certain operating information of our continuing operations:

Year Ended January 31,

(in thousands)

Marine technology products

Equipment leasing

Less inter-segment sales

Sale of marine technology products $ 21,215 $ 29,919

Total revenues $ 21,215 $ 29,919

Cost of sales:

Marine Technology products

Equipment leasing

Less inter-segment costs

Total costs of sales

Marine technology products

Equipment leasing

Inter-segment amounts

Total gross profit

Sale of marine technology products $ 13,906 $ 16,965

Total cost of sales $ 13,906 $ 16,965

Gross profit $ 7,309 $ 12,954

Operating expenses:

1 unchanged sentence

Research and development $ 3,003 $ 1,850

Impairment of intangible assets

Provision for doubtful accounts $ 659 $ —

Impairment of intangible assets $ 2,531 $ 760

Depreciation and amortization $ 2,796 $ 2,494

2 unchanged sentences

Index to Financial Statements

Years Ended January 31,

Year Ended January 31,

(in thousands)

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA

Interest expense (income), net

Reconciliation of Net loss from continuing operations to EBITDA and Adjusted EBITDA

Net loss from continuing operations $ (14,002) $ (6,543)

Depreciation and amortization 2,796 2,823

Provision for income taxes 536 353

EBITDA from continuing operations (1) (10,670) (3,367)

Non-cash foreign exchange losses 110 86

1 unchanged sentence

Impairment of intangible assets 2,531 760

Reserve against non-current prepaid income taxes

Cost of lease pool sales

Adjusted EBITDA (1)

Reconciliation of Net Cash Provided by Operating Activities to EBITDA

Net cash (used in) provided by operating activities

Adjusted EBITDA from continuing operations (1) $ (7,321) $ (1,667)

Reconciliation of Net Cash Used In Operating Activities to EBITDA

Net cash used in operating activities $ (6,360) $ (5,817)

PPP loan forgiveness 757 —

Stock-based compensation (708) (854)

4 unchanged sentences

Taxes paid, net of refunds 336 498

Gross profit from sale of lease pool equipment

Loss on sale of subsidiaries 357 —

3 unchanged sentences

Impairment of intangible assets (2,531) (760)

Changes in prepaid expenses and other current assets

Foreign exchange losses, net

Reserve against non-current prepaid income taxes

Net assets held for sale

Changes in prepaid expenses and other current and long-term assets (154) 601

Foreign exchange gains, net — (313)

Other 1,236 (2,552)

EBITDA from continuing operations (1) $ (10,670) $ (3,367)

___________________________________________________________

E BITDA is defined as net income before (a) interest income and interest expense, (b) provision for (or benefit from) income taxes and (c) depreciation and amortization.

Adjusted EBITDA excludes non-cash foreign exchange gains and losses, non-cash costs of lease pool equipment sales, impairment of intangible assets, stock-based compensation and other non-cash tax related items.

(1) EBITDA and Adjusted EBITDA are non-GAAP financial measures.

EBITDA is defined as net income before (a) interest income and interest expense, (b) provision for (or benefit from) income taxes and (c) depreciation and amortization.

Adjusted EBITDA excludes non-cash foreign exchange gains and losses, stock-based compensation, impairment of intangible assets, other non-cash tax related items and non-cash costs of lease pool equipment sales.

We consider EBITDA and Adjusted EBITDA to be important indicators for the performance of our business, but not measures of performance or liquidity calculated in accordance with GAAP.

6 unchanged sentences

Accordingly, EBITDA and Adjusted EBITDA are only two of the measurements that management utilizes.

Other companies in our industry may calculate

Other companies in our industry may calculate EBITDA or Adjusted EBITDA differently than we do and EBITDA and Adjusted EBITDA may not be comparable with similarly titled measures reported by other companies.

Within our Marine Technology Products business, we design, manufacture and sell a variety of products used primarily in oceanographic, hydrographic, defense, seismic and maritime security industries.

Seamap’s primary products include (i) the GunLink seismic source acquisition and control systems;

Index to Financial Statements

EBITDA or Adjusted EBITDA differently than we do and EBITDA and Adjusted EBITDA may not be comparable with similarly titled measures reported by other companies.

Within our Marine Technology Products segment, we design, manufacture and sell a variety of products used primarily in oceanographic, hydrographic, defense, seismic and maritime security industries.

Seamap’s primary products include (i) the GunLink and Digishot seismic source acquisition and control systems, which provide marine operators more precise control of exploration tools;

(ii) the BuoyLink RGPS tracking system used to provide precise positioning of seismic sources and streamers (marine recording channels that are towed behind a vessel) and (iii) beginning in fiscal 2019 SeaLink marine sensors and solid streamer systems (collectively the “SeaLink” product line or “towed streamer products”).

(collectively, the “SeaLink” product line or “towed streamer products”).

These towed streamer products are primarily designed for three-dimensional, high-resolution marine surveys in hydrographic industry applications.

Klein designs, manufactures and sells side scan sonar and water-side security systems to commercial, governmental and military customers throughout the world.

SAP sells equipment, consumable supplies, systems integration, engineering hardware and software maintenance support services to the seismic, hydrographic, oceanographic, environmental and defense industries throughout Southeast Asia and Australia.

We completed the sale of SAP in the first quarter of fiscal 2020.

In our Equipment Leasing segment, we lease seismic data acquisition equipment primarily to seismic data acquisition companies conducting land, transition zone and marine seismic surveys worldwide.

We provide short-term leasing of seismic equipment to meet a customer’s requirements.

All active leases at January 31, 2020 were for a term of less than one year.

Seismic equipment held for lease is carried at cost, net of accumulated depreciation.

We acquire some marine lease pool equipment from our Marine Technology Products segment.

These assets are carried in our lease pool at the cost to our Marine Technology Products segment, less accumulated depreciation.

From time to time, we sell lease pool equipment.

These sales are transacted when we have equipment for which we do not have near term needs in our leasing business or which is otherwise considered excess.

Additionally, when equipment that has been leased to a customer is lost or destroyed, the customer is charged for such equipment at amounts specified in the underlying lease agreement.

Our discontinued operations consist primarily of leasing seismic data acquisition equipment primarily to seismic data acquisition companies conducting land surveys worldwide.

Historically, we provided short-term leasing, typically for a term of less than one year, of seismic equipment to meet a customer’s requirements.

From time to time, we sold lease pool equipment.

These sales were transacted when we had equipment for which we did not have near term needs in our leasing business or which was otherwise considered excess.

Additionally, when equipment that had been leased to a customer was lost or destroyed, the customer was charged for such equipment at amounts specified in the underlying lease agreement.

Our results of operations can experience fluctuations in activity levels due to a number of factors outside of our control.

2 unchanged sentences

Business Outlook

The COVID-19 pandemic has created significant uncertainty in the global economy which could have an adverse effect on the Company’s business, financial position, results of operations and liquidity.

The time frame for which disruptions related to the pandemic will continue is uncertain as is the magnitude of any adverse impacts.

The global pandemic created significant uncertainty in the global economy, which we believe had an adverse effect on the Company’s business, financial position, results of operations and liquidity.

We believe the resulting uncertainty caused many customers to delay purchasing decisions.

Furthermore, travel restrictions limited our ability to interact with customers and to demonstrate our products.

Similar restrictions, we believe, caused delays in certain governmental evaluation programs involving our technology.

Recently we have seen indications of improving activity and the relaxation of pandemic related restrictions in some areas.

However, the time frame for which disruptions related to the pandemic will continue is uncertain, as is the magnitude of any adverse impacts.

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

Although both locations have now reopened for limited operations, they are not yet operating at full capacity.

The Malaysia facility was reopened at April 21 with approximately 50% of its normal staff.

We are allowed to operate in Singapore to receive and make shipments, but no production operations are currently allowed.

The shut-down in Singapore is currently projected to continue through the month of May.

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

We expect a negative effect on our business due to these disruptions;

however, the magnitude of such effect is uncertain.

Management believes that any negative impacts will be temporary, but there can be no assurance of that.

Additionally, oil prices have declined sharply during the first quarter of 2020 and continuing in the second quarter in response to the economic effects of the COVID-19 pandemic and the recent announcement of Saudi Arabia’s abandonment of output restraints.

This decline could have an adverse effect on our customers in the energy industry, which could in turn cause them to cancel or delay projects and orders with us and could impair their ability to make payments to us.

We are continuing to transform the Company from its historical equipment leasing business that was heavily dependent upon oil and gas exploration activity.

While our Equipment Leasing segment remains a part of our business, increasingly we see greater opportunities for growth in our Marine Technology Products segment and expect that segment to represent an increasing part of our business going forward.

Historically, a significant portion of the Marine Technology Products segment was dependent upon activity related to marine oil and gas exploration.

In recent periods we have attempted to emphasize products and applications in other industries.

Target markets for these products and services include commercial governmental organizations, both domestically and abroad, in the hydrographic, oceanographic, security, defense and seismic industries.

We believe there are a number of opportunities to expand our offerings of technology and solutions to our customers by applying our existing technology to new markets and by adding new technology to our portfolio.

We expect to add new technology through internal development, acquisition and by partnering with others.

During fiscal 2020, our Marine Technologies Products segment experienced an increase in both inquiries and order activity and an increase in revenues, particularly in the last half of fiscal 2020.

As of January 31, 2020, our backlog of firm orders for this segment was approximately $8.9 million, as compared to approximately $8.7 million as of January 31, 2019.

We estimate that approximately 80% of the backlog at January 31, 2020, relates to orders from non-energy related customers.

We expect all of these orders to be completed within fiscal 2021.

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.

Our other facilities have been allowed to operate, although at reduced efficiencies in some cases as certain employees have worked remotely from time to time.

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.

Management believes that the negative impact is subsiding, but there can be no assurance of that.

Additionally, oil prices declined sharply during the first quarter of fiscal 2021 in response to the economic effects of the global pandemic and the announcement of Saudi Arabia’s abandonment of output restraints.

While oil prices have recovered a significant portion of the first quarter decline over the past six months, continuing uncertainty could have an adverse effect on our customers in the energy industry which could cause them to cancel or delay projects and orders with us or impair their ability to make payments to us.

However, to date we have had no significant orders cancelled and continue to respond to inquiries from customers in all market segments, including energy related.

Many of our marine customers have recently indicated increases in backlog, which we believe is a positive indication of a recovery in fiscal 2022 and beyond.

The general economic environment concerning the energy industry could also impact our ability to realize value from our discontinued operations.

In the fourth quarter of fiscal 2021 we began to experience an increase in orders and inquiries for marine exploration applications, particularly for our source controller products.

Our GunLink seismic source controllers have certain capabilities that we believe are unique and that increasingly certain of these capabilities are required of operators of seismic exploration vessels.

Based on this, and on discussions with current and potential customers, we believe demand for our GunLink source controllers will continue, although there can be no assurance of this.

Furthermore, subsequent to January 31, 2021 we entered into an indefinite quantity, indefinite delivery supply agreement with a major international marine seismic contractor.

While we have not yet received firm order related to this agreement, we do expect the arrangement to result in additional sales of our source controller products.

In recent months, we have continued to experience significant inquiries and bid activity for our other marine technology products and have conducted a number of demonstrations for various customers, including the U.S.

However, we believe many customers have delayed purchase commitments due to the uncertainty in the global economy.

Accordingly, we have not experienced the number of firm orders that we would have normally expected from the current level of inquiries and bid activity.

As of January 31, 2021, our backlog of firm orders for our Marine Technology Products business was approximately $14.2 million, as compared to approximately $8.9 million as of January 31, 2020.

We expect essentially all of these orders to be completed within fiscal 2022 and therefore expect revenues from continuing operation in fiscal 2022 to exceed those of fiscal 2021.

The level of backlog at a particular point in time may not necessarily be indicative of results in subsequent periods as the size and delivery period of individual orders can vary significantly.

In fiscal 2020, we introduced new sonar technology that we refer to as “MA-X”.

We believe this to be revolutionary sonar technology that will significantly expand the opportunities available to us.

We have received and delivered orders related to this new technology and continue to respond to orders and inquires related to this technology, including some for military related applications.

While the MA-X technology has not had a material impact on our results of operations to date, we believe this technology will result in significant new opportunities for us.

Also, in fiscal 2020, we received an order from a manufacturer of unmanned

Index to Financial Statements

underwater vehicles (“UUV’s”) for a MA-X related product to be installed on one of their UUV’s.

Going forward we intend to address three primary markets in our Marine Technology Products business -

• Marine Survey;

• Marine Exploration;

• Maritime Defense.

Specific applications within those markets include sea-floor survey, search and recovery, mineral and geophysical exploration, mine counter measures and anti-submarine warfare.

We have existing technology and products that meet needs across all these markets such as -

• Side-scan sonar;

• Bathymetry systems;

• Acoustic arrays, such as SeaLink;

• Marine seismic equipment, such as GunLink and BuoyLink.

We see a number of opportunities to add to our technology and to apply existing technology and products to new applications.

In fiscal 2020, we introduced new sonar technology that we refer to as “MA-X TM ”.

We believe this to be revolutionary sonar technology that will significantly expand the opportunities available to us.

We have received and delivered orders related to this new technology and continue to respond to orders and inquiries related to this technology, including some for military related applications.

While the MA-X TM technology has not had a material impact on our results of operations to date, we believe this technology will result in significant new opportunities for us.

Also, in fiscal 2020, we received an order from a manufacturer of unmanned underwater vehicles (“UUV’s”) for a MA-X TM related product to be installed on one of their UUV’s.

This request relates to a potentially significant program for the U.S.

While this specific order may not have a material impact on our results of operations, we believe this, and similar opportunities could have a material impact on our operations.

We also are pursuing a number of initiatives to further expand our product offerings.

During fiscal 2021 we introduced technology based on MA-X TM specifically focused on the rapidly growing autonomous vehicle market and entered into an agreement with a major European defense contractor for the joint offering of synthetic aperture sonar (“SAS”).

We believe that each of these initiatives can significantly expand our serviceable market.

Also during fiscal 2021, we began development of passive sonar arrays based on our SeaLink technology.

We believe this technology is well suited for maritime security applications such as anti-submarine warfare, particularly in application involving unmanned vessels.

We are also pursuing a number of initiatives to further expand our product offerings.

These initiatives include new internally developed technology, introduction of new products based on our existing technology, technology obtained through partnering arrangements with others and a combination of all of these.

1 unchanged sentence

Certain of the business opportunities that we are pursuing are with military or other governmental organizations.

The sales cycle for these projects can be quite long and can be impacted by a number of factors, including the level of competition and budget limitations.

The sales cycle for these projects can be quite long and can be impacted by a variety of factors, including the level of competition and budget limitations.

Therefore, the timing of contract awards is often difficult to predict.

However, once awarded, programs of this type can extend for a number of years.

In addition, we are pursuing a number of opportunities related to activity within the marine seismic industry.

Certain projects, for which we anticipate providing equipment, including source controllers, have not progressed as rapidly as we had anticipated and had been indicated by our customers.

Based on information from our customers, we believe these projects remain viable and will proceed.

However, the timing of orders and delivery of products is uncertain.

Demand for the rental of land seismic exploration equipment varies by geographic region and has been very sporadic in recent periods.

We expect continuing demand in Europe and South America through fiscal 2021;

however, the decline in oil prices and the effect of the COVID-19 pandemic could materially impact such demand.

Although we anticipate opportunities for projects in other parts of the world, competition is generally intense and there is no assurance that we will have the opportunity to provide equipment for such projects.

We believe that specific situations may arise to reallocate capital from existing assets to other, newer technology thereby creating additional rental opportunities.

In the third quarter of fiscal 2020, we redeployed capital from previous sales of lease pool equipment and invested approximately $2.0 million in certain new land nodal equipment.

This equipment was purchased from Inova pursuant to our ongoing partnership and equipment lease agreement.

Although we are making efforts to move away from land-based seismic operations, the decision to invest in this particular equipment was made in response to demand from customers.

This new equipment was immediately deployed on a project in Europe.

Notwithstanding the recent uncertainty in global energy markets, we believe there are opportunities to sell lease pool equipment and redeploy that capital.

In response to a decline in activity in some regions, we have taken steps to reduce costs, such as by reducing personnel, down-sizing facilities and relocating certain inventory and lease pool assets to more active locations.

Specifically, in fiscal 2019 we significantly reduced our presence in Colombia and Canada and sold our operations in Russia.

In addition, we sold our operations in Australia in the first quarter of fiscal 2020.

Based on business activity and prospects, we may make further adjustments to our cost structure.

Subsequent to January 31, 2020 and in response to the effects of the COVID-19 pandemic and the decline in oil prices, we have taken steps to reduce expenses including the layoff or furloughing of certain employees and contractors and the deferral of other expenditures.

Should the effects of these factors continue, we may take further similar steps.

However, once awarded, programs of this type can extend for many years.

To date, the majority of our revenues have been from commercial customers;

however, we expect the proportion of revenue related to military or governmental customers will increase in the future.

We believe there are certain developments within the marine technology industry which can have a significant impact on our business.

These developments include the following:

• The increase in the use of unmanned, or uncrewed, marine vessels, both surface vehicles and underwater vehicles, and the need for a variety of sensor packages designed for these applications.

• Demand for higher resolution sonar images, such as for mine countermeasure applications.

• Demand for economical, commercially developed, technology for anti-submarine warfare and maritime security applications.

In response to these, and other, developments we have initiated certain strategic initiatives in order to exploit the opportunities that we perceive.

These initiatives include the following:

• Development of side-scan sonar and other sensor systems specifically for unmanned vehicles, including integration of our MA-X TM technology;

• Development of SAS sonar systems in cooperation with a major European defense contractor;

• Application of our SeaLink solid streamer technology to passive sonar arrays for use in maritime security applications, such as anti-submarine warfare.

In response to the effects of the global pandemic and the current economic environment we took steps to reduce expenses including the layoff or furloughing of certain employees and contractors and the deferral of other expenditures.

Should the effects of the pandemic and low commodity prices continue, we may take further steps to reduce costs.

We believe the majority of our costs are variable in nature, such as raw materials and labor related costs.

Accordingly, we believe we can reduce such costs commensurate with any declines in our business.

Our revenues and results of operations have not been materially impacted by inflation or changing prices in the past three fiscal years, except as described above.

Results of Operations

For fiscal 2020, 2019 and 2018, we recorded operating losses of approximately $10.4 million, $13.0 million and $19.7 million, respectively.

The improvement in fiscal 2020 from fiscal 2019 was due primarily to increased revenue and gross profit in the Marine Technology Products segment, and despite an increase in the provision for doubtful accounts year over year.

The lower operating loss in fiscal 2019 as compared to fiscal 2018 was due primarily to reduced lease pool depreciation expense, non-recurring impairment charges in fiscal 2018, and lower provision for doubtful accounts year over year.

Index to Financial Statements

Revenues and Cost of Sales

During fiscal 2021, the Company received a Singapore government grant pursuant to its Job Support Scheme.

The primary objective of the Job Support Scheme is to assist companies in retaining local employees during the global pandemic.

Similar to the Singapore government grant our operations in the United Kingdom were also recipients of the government backed Job Retention Scheme.

Proceeds from the Job Support Scheme and the Job Retention Scheme were approximately $372,000 and $119,000, respectively.

Future benefit from these government job schemes will be dependent on availability and our ability to qualify for the assistance and we cannot be certain future benefits will be obtained.

Our revenues and results of operations have not been materially impacted by inflation or changing prices in the past two fiscal years, except as described above.

Results of Continuing Operations

For fiscal 2021 and 2020, we recorded operating losses of approximately $14.3 million and $6.3 million, respectively.

The increased operating loss in fiscal 2021 from fiscal 2020 was a result of lower revenue and gross profit from our continued operations, primarily attributable to the global pandemic, which caused many potential customers to reassess expenditures.

In addition, we believe disruptions in global energy markets early in fiscal 2021, exacerbated these effects for certain of our customers.

Marine Technology Products

Revenues and cost of sales for our Marine Technology Products segment were as follows:

Years Ended January 31,

Revenues and cost of sales for our Marine Technology Products business were as follows:

Year Ended January 31,

($ in thousands)

Seamap $ 17,104 $ 22,393

Klein 4,387 7,472

Intra-segment sales (276) (47)

21,215 29,919

Cost of sales:

Seamap 10,211 11,372

Klein 3,971 5,545

Intra-segment sales (276) (47)

13,906 16,965

Gross profit $ 7,309 $ 12,954

Gross profit margin 34 % 43 %

A significant portion of Seamap’s sales consist of large discrete orders, the timing of which is dictated by our customers.

A significant portion of Seamap’s sales consists of large discrete orders, the timing of which is dictated by our customers.

This timing generally relates to the availability of a vessel in port so that our products can be installed.

Accordingly, there can be significant variation in sales from one period to another, which does not necessarily indicate a fundamental change in demand for these products.

The increase in Seamap product sales in fiscal 2020 as compared to fiscal 2019 relates primarily to the sale of SeaLink streamer products and increased demand for BuoyLink RGPS positioning systems.

The decline in revenue from Seamap product sales in fiscal 2019 as compared to fiscal 2018 was the result of from a general softening in demand within the marine seismic industry during that period.

The gross profit generated by sales of Seamap products for fiscal 2020 and 2019 was approximately $11.1 million and $7.4 million, respectively.

The gross profit margin from the sales of Seamap products in fiscal 2020 and 2019 increased to 50% from 46%, respectively.

We had expected an additional order for approximately $2.0 million to a customer in Asia would be completed by January 31, 2020.

However, due to customer requested modifications we were unable to make delivery by that time.

We now expect this order to be completed in second quarter of fiscal 2021.

The Seamap gross profit margin for fiscal 2019 was negatively impacted by manufacturing expansion costs related to the start-up of our SeaLink product line.

We began providing repair and support services to Mitsubishi Heavy Industries, Ltd (“MHI”).

during the second quarter of fiscal 2019, pursuant to the support agreement we entered into in February 2019, and generated revenue from these and other services related to newly acquired technology of approximately $1.5 million in fiscal 2019, which resulted in a gross profit of approximately $200,000.

This level of gross profit is lower than normally expected due to start-up costs for these operations.

The time required to ramp up repair and production activity for these new products was longer than projected.

Gross profit during fiscal 2019 and fiscal 2018 was $7.4 million and $8.5 million, respectively.

Our gross profit margin was 46% for fiscal 2019 and 2018.

In fiscal 2018, we notified customers that certain legacy products would no longer be supported beyond a specified date.

Due to this “end of life” determination we adjusted the carrying value of certain inventory related to these products resulting in a charge to cost of sales in fiscal 2018 of approximately $550,000.

The fluctuations in gross profit margin among the periods were due primarily to the effect of these special charges and changes in product mix.

Revenue from the sale of Klein products remained essentially flat in fiscal 2020 as compared to fiscal 2019 and improved from fiscal 2018.

This level of revenue remains below our expectations.

We believe this shortfall was due in part to the following factors:

delays in project awards by domestic and foreign governmental agencies due to budget constraints and processes;

an industry-wide decline in the purchase of sonar products;

competitive pressures;

delays in the introduction of new products.

The gross profit from sale of Klein products was approximately $1.9 million, with a gross profit margin of 26%, in fiscal 2020 and approximately $2.7 million, with a gross profit margin of 36%, in fiscal 2019.

Gross margin decreased in fiscal 2020 due to product mix and a non-recurring adjustment related to a change in Klein’s standard cost model.

Equipment Leasing

Index to Financial Statements

Revenues and cost of sales from our Equipment Leasing segment were comprised of the following:

Years Ended January 31,

($ in thousands)

Equipment leasing

Lease pool equipment sales

Other equipment sales

Cost of sales:

Direct costs – equipment leasing

Lease pool depreciation

Cost of lease pool equipment sales

Cost of other equipment sales

Gross profit (loss)

Gross loss margin

Equipment leasing revenues remained relatively flat year over year with a decrease of approximately 1% in fiscal 2020 compared to fiscal 2019.

The decrease to revenue was primarily driven by reduced land leasing activity, primarily in Europe and Latin America.

We had expected additional lease pool sales of approximately $1.0 million in fiscal 2020;

however, an anticipated transaction with a customer in Asia could not be completed due to issues surrounding the COVID-19 outbreak in China.

Subsequent to January 31, 2020, a lease pool sale transaction of a similar amount was completed with another customer.

Equipment leasing revenue in fiscal 2019 increased 46% to $11.4 million compared to $7.8 million in fiscal 2018.

Sales of lease pool assets decreased to $3.5 million in fiscal 2019 compared to $12.5 million in fiscal 2018 due primarily to significant sales during the first quarter of 2018.

The geographic regions with the largest contributions to our land leasing revenues in fiscal 2019 were Latin America, and Europe.

In fiscal 2018 the regions making the largest contributions to leasing revenues were Asia, Latin America, Europe, and the United States.

From time to time, we sell equipment from our lease pool based on specific customer demand or in order to redeploy capital in other lease pool assets or other business opportunities.

These transactions tend to occur as opportunities arise and, accordingly, are difficult to predict.

Also included in sales of lease pool equipment are charges to leasing customers for lost or destroyed equipment.

Due to the recent changes in the seismic equipment market we have implemented a strategy to dispose of certain lease pool equipment.

Sales of lease pool equipment in prior periods has resulted in reduced inventory and therefore reduced availability for sales in the current or future periods.

As a result of reduced inventories sales of lease pool equipment decreased in fiscal 2020 as compared to fiscal 2019, and in fiscal 2019 as compared to fiscal 2018.

We will continue to evaluate opportunities for additional lease pool equipment sales in fiscal 2021.

The sale of lease pool equipment resulted in a gross profit of approximately $1.2 million, $2.4 million and $4.9 million in fiscal 2020 and 2019, and 2018, respectively.

The amount of the gross profit or loss on a particular transaction varies greatly based primarily upon the age of the equipment.

Lease pool depreciation expense for fiscal 2020 amounted to approximately $5.0 million, as compared to approximately $9.2 million in fiscal 2019 and approximately $14.4 million in fiscal 2018.

Due to increased demand, opportunities and contractual obligations approximately $4.6 million in equipment was acquired in fiscal 2020.

The decreases reflect reduced purchases and the sale of lease pool equipment in recent periods.

We reduced our lease pool additions in fiscal 2016 through fiscal 2019 in response to industry conditions.

At January 31, 2020, lease pool assets with an acquisition cost of approximately $114.5 million were fully depreciated yet remained in service.

This compares to approximately $105.4 million at January 31, 2019.

These assets, though fully depreciated, are expected to continue to generate revenues through leasing activity.

We recorded direct costs related to seismic leasing for fiscal 2020 in the amount of approximately $4.0 million as compared to approximately $4.4 million in fiscal 2019 and approximately $3.5 million in fiscal 2018.

These costs as a percentage of leasing revenues for fiscal 2020, 2019 and 2018 are 36%, 38% and 44%, respectively.

Direct costs typically fluctuate with leasing revenues, as the three main components of direct costs are freight, repairs and sublease expense.

However, a portion of these costs are fixed, such as warehouse and employee related expenses.

Costs related to subleased equipment increased in fiscal 2020 due to arrangements with certain OEM’s which provide us access to equipment for rental at no, or a reduced, initial investment.

We believe the decline in Seamap revenues is due, in large part, to temporary delays and disruptions caused by the global pandemic, including the temporary shutdown of our production facilities, and the disruptions in global energy markets early in the year.

The gross profit and gross profit margins generated by sales of Seamap products were approximately $6.9 million and 40% during fiscal 2021 and approximately $11.0 million and 49% in fiscal 2020.

The decrease in gross profit margins between the periods is due primarily to reduced manufacturing activity, which resulted in lower absorption of fixed overhead costs during fiscal 2021.

Revenue from the sale of Klein products was approximately $4.4 million during fiscal 2021 versus approximately $7.5 million in the prior year period.

We believe the decline in revenue is primarily due to the effects of the global pandemic as discussed above.

Gross profit was approximately $416,000 and $1.9 million, with gross profit margins of 9% and 26%, during fiscal 2021 and 2020, respectively.

The decline in year over year gross profit margin is due mainly to lower absorption of overhead costs as a result of lower manufacturing activity, as well as higher product testing and sustaining engineering activity during fiscal 2021.

Operating Expenses

Selling, general and administrative expenses for fiscal 2020 amounted to approximately $19.7 million, compared to approximately $20.9 million and $19.7 million in fiscal 2019 and 2018, respectively.

The decrease in operating expenses during fiscal 2020 was due to cost

Selling, general and administrative expenses for fiscal 2021 amounted to approximately $12.6 million, compared to approximately $14.1 million in 2020, respectively.

The decrease in operating expenses during fiscal 2021 was the result of cost control measures and the effect of reduced travel, entertainment and convention related expenses due mainly to travel and other restrictions implemented globally in response to the global pandemic.

Index to Financial Statements

control measures and the effect of the sale of our Australian subsidiary, SAP.

General and administrative expenses increased in fiscal 2019 compared to fiscal 2018 due to approximately $1.5 million of incremental costs attributable to the HTI Acquisition and start-up of the Sealink product line, offset by the non-recurrence of restructuring costs of approximately $400,000 in the fourth quarter of 2018.

Research and development costs increased in fiscal 2020 as compared to prior periods due to increased product development activity, including that related to our MA-X and µMA-X technology.

As a result of the COVID-19 pandemic and the decline in world oil prices subsequent to January 31, 2020, we have reevaluated the collectability of our accounts receivables.

We think it now more likely that certain of our customers will encounter financial difficulties and may be unable to fully satisfy their financial obligations to us.

Therefore, we have recorded a provision for doubtful accounts of approximately $2.0 million in fiscal 2020.

In fiscal 2019 and 2018, we provided approximately $200,000 and $1.0 million, respectively, for doubtful accounts.

Research and development costs increased in fiscal 2021 as compared to fiscal 2020 due to incremental product development activity, including that related to our MA-X TM , µMA-X TM and our other strategic product initiatives, including senor systems designed for uncrewed vessels, SAS and passive sonar array systems.

In fiscal 2021, we recorded a provision for doubtful accounts of approximately $659,000 related to continuing operations.

The provision in continuing operations was recorded in response to revaluation of bonds received during the period in exchange for an outstanding accounts receivable account.

Due to the deteriorating financial position of the issuer, it was determined that the value of the bonds had been impaired.

At January 31, 2021, and 2020, we had trade accounts and note receivables over 180 days past due of approximately $1.1 million and $1.3 million, respectively.

In our industry, and in our experience, it is not unusual for accounts to become delinquent from time to time and this is not necessarily indicative of an account becoming uncollectable.

As of January 31, 2020 and 2019, our allowance for doubtful accounts receivable amounted to approximately $4.1 million and $2.1 million, respectively.

Depreciation and amortization, other than lease pool depreciation, relates primarily to the depreciation of furniture, fixtures and office equipment and the amortization of intangible assets.

The increase in depreciation and amortization expense in fiscal 2020 is due primarily to asset additions in our new Malaysia facility.

As of January 31, 2021, and 2020, our allowance for doubtful accounts receivable amounted to approximately $948,000 and $2.4 million, respectively.

Depreciation and amortization relates primarily to the depreciation of furniture, fixtures and office equipment and the amortization of intangible assets.

The increase in depreciation and amortization expense in fiscal 2021 is due primarily to asset additions in our new Malaysia facility at the end of fiscal 2020.

We periodically evaluate the recoverability of our intangible assets, including tradename.

Due to recent financial results and the inherent uncertainty in projections of future results, we determined to record an impairment charge of approximately $760,000, representing the full value of the tradename intangible asset related to Klein.

For 2019, our evaluation did not give an indication of impairment.

In fiscal 2018, our evaluation did give an indication of impairment, resulting in a goodwill impairment charge of approximately $1.5 million in fiscal 2018.

In the first quarter of fiscal 2021 due to the uncertain economic environment and declines in the trading prices of the Company’s equity securities, we determined that our remaining goodwill had been impaired, resulting in a charge of approximately $2.5 million.

Subsequent to that, the price of the Company’s equity securities recovered substantially and no further impairments of intangible assets were deemed necessary.

In fiscal 2020, our evaluation gave an indication of impairment due to recent financial results and the inherent uncertainty in projections of future results, we determined to record an impairment charge of approximately $760,000, representing the full value of the tradename intangible asset related to Klein.

Other Income and Expense

Included in other expense in fiscal 2019 is approximately $5.4 million related to a loss on the sale of our Russian and Australian subsidiaries and a $1.2 million reserve against foreign non-current prepaid income taxes.

The loss on the sale was primarily due to the cumulative translation loss related to our Russian operations.

Included in other expense in fiscal 2021 is approximately $757,000 related to forgiveness of the PPP Loan granted to the Company.

Subsequent to January 31, 2021, the PPP Loan granted to Klein was also forgiven.

Provision for Income Taxes

Our provision for income taxes for fiscal 2020 was approximately $878,000.

Our provision for income taxes for continuing operations for fiscal 2021 was approximately $536,000.

This amount differed from the result expected when applying the U.S.

statutory rate of 21% to our loss before income taxes due primarily to the effect of foreign branch and withholding taxes.

Recent changes to United States tax laws, including a reduction in the corporate tax rate and the manner in which earnings from foreign operations are taxed, did not have a material effect on our provision for income taxes in fiscal 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic.

The CARES Act, among other things, permits NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

The Company is currently evaluating the impact of the CARES Act.

However, based on the preliminary analysis the provisions of the CARES Act are not expected to have a material impact on the Company’s fiscal 2021 provision for income taxes.

In fiscal 2019, our provision for income taxes was approximately $252,000.

This amount differed from the expected income tax benefit at the U.S.

statutory rate of 21% due primarily to recording a valuation allowance against all of the fiscal 2019 increase in deferred tax assets and the effect of foreign branch and withholding taxes.

In fiscal 2018, our provision for income taxes was approximately $910,000.

statutory rate of 21% to our loss before income taxes due primarily to the impact of valuation allowances against the increase in our deferred tax assets, permanent differences between book income and taxable income, and the effect of foreign withholding taxes.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the global pandemic.

The CARES Act did not have a material impact on the Company’s fiscal 2021 provision for income taxes.

In fiscal 2020, our provision for income taxes for continuing operations was approximately $353,000.

This amount differed from the expected income tax benefit at the U.S.

statutory rate of 32% due primarily to recording a valuation allowance against all of the fiscal 2018 increase in deferred tax assets and the effect of foreign withholding taxes.

statutory rate of 21% due primarily valuation allowances against the increase in our deferred tax assets, permanent differences between book income and taxable income, and the effect of foreign withholding taxes.

Internal Controls

As of January 31, 2021, the Company’s executive officers determined that the Company’s internal control over financial reporting was operating effectively.

As of January 31, 2020, the Company’s executive officers determined that the Company’s internal control over financial reporting was not effective due to an identified material weakness.

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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.

We are evaluating our controls related to accounting estimates and have identified changes to our existing controls and additional controls we intend to implement in an effort to strengthen our control environment.

We can give no assurance that these actions will remediate this deficiency in internal control or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future.

We evaluated our controls related to accounting estimates and identified changes to our existing controls and additional controls which were implemented during fiscal 2021 in an effort to strengthen our control environment.

These actions have remediated this deficiency in internal control, but we can give no assurance that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future.

Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our reporting obligations.

Index to Financial Statements

Results of Discontinued Operations

Revenues and cost of sales from discontinued operations were comprised of the following:

Year Ended January 31,

Equipment leasing 3,526 10,877

Lease pool equipment sales 2,010 1,333

Other equipment sales 211 546

Cost of sales:

Direct costs-equipment leasing 2,018 3,943

Lease pool depreciation 1,698 4,630

Cost of lease pool equipment sales 684 147

Cost of other equipment sales 137 369

Gross profit (loss) 1,210 3,667

Operating expenses:

Selling, general and administrative 4,589 5,576

Provision for doubtful accounts 470 2,000

Depreciation and amortization 132 176

Total operating expenses 5,191 7,752

Operating loss (3,981) (4,085)

Other income (expenses) 201 (134)

Loss on disposal (including $2,745 of cumulative translation loss) (1,859) —

Loss before income taxes (5,639) (4,219)

Provision for income taxes (665) (525)

Net loss (6,304) (4,744)

Following the decision to exit the Leasing Business and present those operations as discontinued operations, we no longer recognize depreciation expense related to our lease pool of seismic equipment, but rather reassess, on a quarterly basis, the recoverability of the remaining carrying value of those assets.

Similarly, we no longer recognize gain or loss from the sale of individual lease pool assets, but treat any proceeds from such transactions as a reduction in the carrying value of the lease pool.

Revenue from discontinued operations during fiscal 2021 decreased approximately 55% to $5.7 million compared to $12.8 million for fiscal 2020.

We believe the reduction in revenue is due to lower Equipment Leasing activity, primarily as a result of the global pandemic, and the decision to exit the Leasing Business as discussed above.

Direct costs related to The Leasing Business dropped to approximately $4.5 million for fiscal year 2021 from approximately $9.1 million reported in the same period for 2020.

The year over year reduction in direct costs is commensurate with the decline in revenue.

Lease pool depreciation in fiscal 2021 decreased to approximately $1.7 million from $4.6 million in fiscal 2020 as we are no longer recording lease pool depreciation on discontinued operations.

Selling, general and administrative costs related to the Leasing Business amounted to approximately $4.6 million, compared to $5.6 during the same period for 2020.

The decrease was due primarily to lower compensation and other administrative expenses resulting from headcount reductions and the decline in business activity, partially offset by accrued severance and other costs related to the decision to exit the Leasing Business.

In fiscal 2021, we recorded a provision for doubtful accounts of approximately $470,000 in discontinued operations.

Following the decision to exit the Leasing Business we determined that the loss of operating leverage would further impair the collectability of certain outstanding balances.

In fiscal 2020 we recorded a provision for doubtful accounts of approximately $2.0 million related to discontinued operations.

The significant provision recorded in fiscal 2020 was due to a revaluation of the collectability of our accounts receivable prompted by the detrimental impact of the global pandemic and the decline in world oil prices subsequent to January 31, 2020.

Under the circumstances, we deemed it more likely than not that certain of our customers would encounter financial difficulties and potentially be unable to fully satisfy their financial obligations to us.

The loss on disposal of approximately $1.9 million reflects the amount by which the unadjusted carrying value of the net assets of the Leasing Business exceed the estimated proceeds of the planned sale of the business.

The unadjusted carrying value of the Leasing Business includes approximately $2.7 million of cumulative translation adjustment which has historically been recorded in Accumulated Other Comprehensive Loss, a component of equity.

Index to Financial Statements

Subsequent to July 31, 2020, sales of lease pool equipment totaling approximately $1.5 million have been reflected as a reduction in the carrying value of assets held for sale, with no gain or loss recognized from these transactions.

Our provision for income taxes from our discontinued operations for the twelve months ended January 31, 2021 was approximately $665,000 on a loss before income taxes of approximately $5.6 million.

Our provision varies from the expected provision based on the U.S.

statutory rate due primarily to the effect of foreign withholding taxes, and because we have recorded valuation allowances against the increase in our deferred tax assets in the respective periods.

Liquidity and Capital Resources

As discussed above, the COVID-19 pandemic and the decline in oil prices has created significant uncertainty in the global economy which could have an adverse effect on our business, financial position, results of operations and liquidity.

As discussed above, the global pandemic and recent volatility in oil prices has created significant uncertainty in the global economy which could have an adverse effect on our business, financial position, results of operations and liquidity.

The period for which disruptions related to the pandemic will continue is uncertain as is the magnitude of any adverse impacts.

We believe that any negative impacts will be temporary, but there can be no assurance of that.

The Company has a history of losses, has had negative cash from operating activities in each of the last two years and its cash balance as of January 31, 2020 is significantly lower than at January 31, 2019.

For the past three years, the Company has generated significant cash from the sale of preferred stock pursuant to an “at the market” program.

That program has been completed and no further preferred shares can be sold pursuant to it.

Furthermore, the amount of authorized preferred stock available for other financing transactions is limited.

While the Company has plans to increase the authorized shares, such increase requires shareholder approval and there can be no assurance such approval will be obtained.

Due to the above factors, there is substantial doubt about the Company’s ability to meet its obligations as they arise over the next twelve months.

However, management believes there are compensating factors and actions that can be taken to address these uncertainties, including the following:

The Company has no funded debt or other outstanding obligations, outside of normal trade obligations.

We believe that any negative impacts have begun to subside but there can be no assurance of that.

The Company has a history of operating losses, has had negative cash from operating activities in each of the last two years and has relied on cash from the sale of preferred stock pursuant to its first at the market (the “1 st ATM”) offering program.

Through January 31, 2020, we had issued 994,046 shares of our Series A Preferred Stock, representing 100% of the Series A Preferred Stock available for sale under the 1 st ATM program.

However, the Company’s cash balance as of January 31, 2021 is approximately $1.6 million higher than the balance at January 31, 2020.

Furthermore, the Company has established a second at the market (the “2 nd ATM”) offering program with authorization to sell up to 5.0 million shares of common stock and 500,000 shares of preferred stock.

In addition to the positive factors noted above, management believes there are additional factors and actions available to the Company to address liquidity concerns, including the following:

• The Company has no funded debt, excluding the PPP Loan granted to Klein which has been completely forgiven in February 2021, or other outstanding obligations, outside of normal trade obligations.

• The Company has no obligations or agreements containing “maintenance type” financial covenants.

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The Company has terminated or furloughed certain employees and contractors.

Despite the temporary suspension of operations in Malaysia and Singapore, operations have continued uninterrupted at other locations.

• Despite the temporary suspension of operations in Malaysia and Singapore early in fiscal 2021, operations continued uninterrupted at other locations.

Certain of these operations have been deemed “essential businesses” by authorities.

There can be no assurance that there will not be further suspensions in the future.

The Company has a backlog of orders of approximately $8.9 million as of January 31, 2020 that is primarily related to customers not engaged in the energy industry.

However, there can be no assurance that there will not be further suspensions in the future.

• The Company has a backlog of orders of approximately $14.2 million as of January 31, 2021, which is an increase of approximately 60% from the amount at January 31, 2020.

Production for certain of these orders was in process and included in inventory as of January 31, 2021, thereby reducing the liquidity needed to complete the orders.

There are various government sponsored grant or loan programs, both in the United States and in certain foreign locations which are available to the Company and for which the Company has applied.

Although the initial funding for one such program has been depleted, the Company has pending applications for approximately $1.6 million in government sponsored loans.

Management believes additional funding will become available for these programs.

Despite the present difficulties in world energy markets, Management believes there are opportunities sell assets such as lease pool equipment and have completed such transactions recently.

The Company has declared the quarterly dividend on the its Series A Preferred Stock for the quarter ending April 30, 2020, but such quarterly dividends could be suspended in the future.

• The Company has been successful in selling certain assets held for sale and expects to generate further liquidity from such transactions in fiscal 2022.

• The Company has declared and paid the quarterly dividend on its Series A Preferred Stock for each quarter in fiscal 2021, but such quarterly dividends could be suspended in the future.

• Despite the challenging economic environment in the year ended January 31, 2021, the Company was successful expanding its authorized capital stock (See Note 20 - Corporate Restructuring) and raising approximately $4.6 million in new capital through the sale of common and preferred stock pursuant to the 2 nd ATM offering program.

Management expects to be able to raise further capital through the 2 nd ATM program should the need arise.

• Based on publicized transactions and preliminary discussions with potential funding sources, management believes that other sources of debt and equity financing are available should the need arise.

Our principal sources of liquidity and capital over the past three fiscal years have been proceeds from issuances of preferred stock and from the sale of lease pool equipment.

The Series A Preferred Stock has been issued in the June 2016 offering, as consideration to MHI and in an “at the market” or “ATM” program.

The Series A Preferred Stock (i) allows for redemption on at our option (even in the event of a change of control), (ii) does not grant holders with voting control of our Board of Directors, and (iii) provides holders with a conversion option (into common stock) only upon a change of control which, upon conversion, would be subject to a limit on the maximum number of shares of common stock to be issued.

Through January 31, 2020, we have issued 994,046 shares of our 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, 2020, under our Amended and Restated Articles of Incorporation, we had 1,000,000 shares of preferred stock authorized.

Our principal sources of liquidity and capital over the past two fiscal years have been proceeds from issuances of preferred stock and from the sale of lease pool equipment.

Under our Amended and Restated Certificate of Incorporation, we have 2,000,000 shares of preferred stock and 40,000,000 shares of Common Stock authorized which we believe provides capacity for subsequent issues of Common Stock or preferred stock.

The Series A Preferred Stock has been issued in a June 2016 public offering, as consideration to Mitsubishi Heavy Industries, Ltd (“MHI”), and in the 1 st and 2 nd ATM offering programs.

Index to Financial Statements

conversion option (into common stock) only upon a change of control which, upon conversion, would be subject to a limit on the maximum number of shares of common stock to be issued.

Through January 31, 2021, we have issued 1,038,232 shares of our Series A Preferred Stock.

During the twelve months ended January 31, 2021, under the 2 nd ATM program, the Company sold (i) 1,584,556 shares of Common Stock, resulting in net proceeds to the Company of approximately $3.6 million, after deducting underwriting discounts and offering costs and (ii) 44,186 shares of Series A Preferred Stock, resulting in net proceeds to the Company of approximately $1.0 million.

The following table sets forth selected historical information regarding cash flows from our Consolidated Statements of Cash Flows:

Years Ended January 31,

Year Ended January 31,

(in thousands)

Net cash (used in) provided by operating activities

Net cash (used in) provided by investing activities

Net cash provided by (used) in financing activities

Net cash used in operating activities $ (6,360) $ (5,817)

Net cash provided by (used in) investing activities 3,207 (2,088)

Net cash provided by financing activities 4,514 1,749

Effect of changes in foreign exchange rates on cash and cash equivalents 16 (159)

Net (decrease) increase in cash and cash equivalents

As of January 31, 2020, we had working capital of approximately $22.2 and cash and cash equivalents of approximately $3.2 million, as compared to working capital of approximately $28.8 million and cash and cash equivalents of approximately $9.5 million at January 31, 2019.

Our working capital decreased during fiscal 2020 compared to fiscal 2019 due primarily to a decrease in cash and cash equivalents and an increase in accounts payable.

Cash Flows From Operating Activities.

Cash flows used in operating activities in fiscal 2020 amounted to approximately $5.8 million in fiscal 2020 compared to cash flows used in operating activities of approximately $5.5 million in fiscal 2019 and cash flows provided by operating activities of approximately $719,000 in fiscal 2018.

Net increase (decrease) in cash and cash equivalents $ 1,377 $ (6,315)

As of January 31, 2021, we had working capital of approximately $19 million and cash and cash equivalents of approximately $4.6 million, as compared to working capital of approximately $22.2 million and cash and cash equivalents of approximately $3.2 million at January 31, 2020.

Our working capital decreased during fiscal 2021 compared to fiscal 2020 due primarily to a decrease in accounts receivable and inventory.

Cash Used In Operating Activities.

Cash used in operating activities amounted to approximately $6.4 million in fiscal 2021 compared to approximately $5.8 million in fiscal 2020.

In fiscal 2021, the primary sources of cash used in operating activities was our net loss of $20.3 million, net of non-cash charges, including depreciation and amortization charges totaling approximately $5.2 million.

The net change in other current assets and liabilities increased net cash used in operating activities for fiscal 2020 by approximately $5.6 million.

The net change in other current assets and liabilities decreased net cash used in operating activities for fiscal 2021 by approximately $4.3 million.

Cash Flows From Investing Activities .

In fiscal 2020, 2019 and 2018, we acquired approximately $3.0 million, $1.7 million and $909,000, respectively, of new lease pool equipment.

During fiscal 2019 we acquired certain assets in the Hydroscience Acquisition.

The cash portion of the consideration given was $3.0 million.

Cash proceeds received from the sale of lease pool equipment were approximately $1.7 million, $5.7 million and $10.3 million in fiscal 2020, 2019 and 2018, respectively.

In fiscal 2020, we acquired approximately 3.0 million, of new lease pool equipment.

Cash proceeds received from the sale of lease pool equipment were approximately $2.0 million and $1.7 million in fiscal 2021 and 2020, respectively.

Subsequent to the decision to exit the land leasing business as of July 31, 2020, proceeds from the sale of assets held for sale were approximately $1.5 million.

Cash Flows From Financing Activities .

We had in place an “at the market” or “ATM” program related to the Series A Preferred Stock which was concluded in the fourth quarter of fiscal 2020.

We received net proceeds from the sale of our Series A Preferred Stock during fiscal 2020, 2019 and 2018 of $3.8 million, $6.9 million and $4.2 million, respectively.

Included in the sales during fiscal 2019 were 174,046 shares issued to MHI in a privately negotiated transaction in connection with the Hydroscience Acquisition (see Note 5 - “Acquisition of Assets”).

Proceeds from this transaction were $4.0 million.

In fiscal 2020, 2019 and 2018, we paid cash dividends of approximately $2.1 million, $1.7 million and $905,000, respectively, related to the Series A Preferred Stock.

During fiscal 2020 we had no outstanding bank funded debt.

On August 2, 2013, we entered into a syndicated $50 million, secured, three-year revolving credit agreement (the “Credit Agreement”) with HSBC Bank USA, N.A as administrative agent, and on August 22, 2014, Seamap Singapore entered into a $15.0 million credit facility (the “Seamap Credit Facility”) with The Hongkong and Shanghai Banking Corporation Limited.

In March 2017, we repaid all outstanding obligations under the Credit Agreement and terminated that agreement.

Also, on April 5, 2017, we repaid all outstanding obligations under the Seamap Credit Facility and cancelled that facility.

During fiscal 2018, our average borrowing levels under the Credit Agreement and the Seamap Credit Facility was approximately $801,000 and we made net repayments of borrowings under the Credit Agreement of approximately $3.5 million.

In connection with the temporary importation of our lease pool equipment into some countries we are required to post import bonds with the customs authorities of that country.

In addition, from time to time we must post bonds in connection with bid, delivery or warranty obligations.

These bonds are normally provided by local insurance, surety companies or local banks.

In some cases, the party issuing the bond requires that we post collateral to secure our obligations under the bonds.

As of January 31, 2020, we have deposited approximately $144,000 of cash under these conditions and classified this deposit as restricted cash.

The following table sets forth estimates of future payments of our consolidated contractual obligations as of January 31, 2020 (in thousands):

Payments Due by Period

Contractual Obligations

Operating leases

Other obligations

Purchase obligations

Index to Financial Statements

We had in place the 1 st ATM offering program related to the Series A Preferred Stock which was concluded in the fourth quarter of fiscal 2020.

In September 2020, we launched the 2 nd ATM offering program to sell up to 500,000 shares of Preferred Stock and 5,000,000 shares of $0.01 par value common stock (the “Common Stock”) of the Company.

We received net proceeds from the sale of our Series A Preferred Stock during fiscal 2021 and 2020 of approximately $1.0 million and $3.8 million, respectively.

During fiscal 2021 we received net proceeds, after deducting underwriting discounts and offering costs, of approximately $3.6 million from the sale of our Common Stock, pursuant to the 2 nd ATM offering program.

In fiscal 2021 and 2020 we paid cash dividends of approximately $1.7 million and $2.1 million, respectively, related to the Series A Preferred Stock.

As of January 31, 2021, we have no funded debt, other than the PPP Loan granted to Klein that was forgiven in February, 2021 and no obligations containing restrictive financial covenants.

We regularly evaluate opportunities to expand our business through the acquisition of other companies, businesses or product lines.

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These additional sources of capital include bank credit facilities or the issuance of debt or equity securities.

We have determined that, due to fundamental shifts in our business strategy to emphasize our Marine Technology Products business and the potential requirement for additional investment and working capital to achieve our objectives, the undistributed earnings of foreign subsidiaries as of January 31, 2020, can no longer be deemed indefinitely reinvested outside of the United States.

Furthermore, we have concluded that any deferred taxes with respect to the undistributed foreign earnings would be immaterial, particularly in light of the one-time repatriation of foreign earnings imposed by recently enacted tax legislation in the United States (see Note 15 - “Income Taxes” to our consolidated financial statements).

We have determined that, due to the potential requirement for additional investment and working capital to achieve our objectives, the undistributed earnings of foreign subsidiaries is not deemed indefinitely reinvested outside of the United States as of January 31, 2021.

Furthermore, we have concluded that any deferred taxes with respect to the undistributed foreign earnings would be immaterial.

As of January 31, 2021, we had deposits in foreign banks equal to approximately $2.8 million all of which we believe could be distributed to the United States without adverse tax consequences.

However, in certain cases the transfer of these funds may result in withholding taxes payable to foreign taxing authorities.

These factors could limit our ability to pay cash dividends in the future.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of Regulation S-K.

Index to Financial Statements

Critical Accounting Policies

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Revenue Recognition

• Marine Technology Product Sales – We recognize revenue and cost of goods sold from sales of marine technology products upon agreement of terms and completion of our performance obligations, which is typically when delivery has occurred, and barring any question as to collectability.

• Long-term project revenue – From time to time we enter into contracts whereby they assemble and/or manufacture and sell certain marine equipment, primarily to governmental entities.

Performance under these contracts generally occurs over a period of three to twelve months.

Revenue and costs related to these contracts are recognized “over time”, as each separately identified performance obligation is satisfied.

• Service agreements – In some cases we provide ongoing support services pursuant to contracts that generally have a term of 12 months.

We recognize revenue from these contracts ratably over the term of the contract.

In some cases, we may provide support services on a time and material basis.

Revenue from these arrangements is recognized as the services are provided.

For certain new systems, we may provide support services for up to 12 months at no additional charge.

We believe any amounts attributable to these support obligations are immaterial.

• Leases – We recognize lease revenue ratably over the term of the lease unless there is a question as to whether it is collectible.

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In most situations, our customers pay shipping and handling costs directly to the shipping agents.

Equipment Sales – We recognize revenue and cost of goods sold from equipment sales upon agreement of terms and when delivery has occurred, unless there is a question as to its collectability.

We occasionally offer extended payment terms on equipment sales transactions.

These terms are generally one to two years in duration.

Long-term project revenue – From time to time, Klein enters into contracts whereby they assemble and/or manufacture and sell certain marine equipment, primarily to governmental entities.

Performance under these contracts generally occurs over a period of three to twelve months.

Revenue and costs related to these contracts are recognized “over time”, as each separately identified performance obligation is satisfied, pursuant to new guidance on Revenue from Contracts with Customers adopted in the first quarter of fiscal 2019.

Service agreements – Seamap provides on-going support services pursuant to contracts that generally have a term of 12 months.

We recognize revenue from these contracts ratably over the term of the contract.

In some cases, we will provide support services on a time and material basis.

Revenue from these arrangements is recognized as the services are provided.

For certain new systems that Seamap sells, we provide support services for up to 12 months at no additional charge.

Any amounts attributable to these support obligations are immaterial.

Effective July 31, 2020, the Leasing Business has been classified as held for sale on the financial results reported as discontinued operations (see Note 2 – “Assets Held for Sale and Discontinued Operations” for additional details).

Allowance for Doubtful Accounts

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We typically do not charge fees on past due accounts, although we reserve the right to do so in most of our contractual arrangements with our customers and have done so from time to time.

Based on our view of general industry conditions and the specific customer factors discussed above, it was determined that an allowance of approximately $2.0 million was required for fiscal 2020.

We recorded an allowance for doubtful accounts of approximately $200,000, and $1.0 million in fiscal 2019, and 2018, respectively.

Index to Financial Statements

Long-Lived Assets

We carry our lease pool of equipment and other property and equipment at cost, net of accumulated depreciation, and compute depreciation on the straight-line method over the estimated useful lives of the property and equipment, which range from two to ten years.

Geophones and batteries are depreciated over three years and recording channels over five to seven years.

Buildings are depreciated over thirty years;

property improvements are amortized over ten years and leasehold improvements are amortized over the shorter of the useful life and the life of the lease.

Intangible assets are amortized over estimated useful lives of three to fifteen years.

The estimated useful lives for rental equipment are based on our experience as to the economic useful life of our products.

We review and consider industry trends in determining the appropriate useful life for our lease pool equipment, including technological obsolescence, market demand and actual historical useful service life of our lease pool equipment.

Additionally, to the extent information is available publicly, we compare our depreciation policies to those of other companies in our industry for reasonableness.

Our policy regarding the removal of assets that are fully depreciated from our books is the following:

if an asset is fully depreciated and is still expected to generate revenue, then the asset will remain on our books.

However, if a fully depreciated asset is not expected to have any revenue generating capacity, then it is removed from our books.

We carry our amortizable intangible assets at cost, net of accumulated amortization.

Amortization is computed on a straight-line method (for customer relationships, the straight-line method is not materially different from other methods that estimate run off of the underlying customer base) over the estimated life of the asset.

Currently, patents are amortized over an eight-to ten-year period, proprietary rights are amortized over a ten-to fifteen-year period, customer relationships are amortized over an eight-year period, and covenants-not-to-compete are amortized over a three-year period.

The basis for the proprietary rights and customer relationships lives are generally based upon the results of valuation reports commissioned from third parties.

Patents are amortized over their remaining term.

Covenants-not-to-compete are amortized over the term of the contract.

We annually assess our lease pool equipment for potential impairment.

The assessment determines if, in our opinion, events or changes in circumstances have occurred that would indicate the carrying value of the asset may not be recoverable.

Such events or changes in circumstances might include the following:

a significant decrease in the market price of the asset;

a significant adverse change in the extent or manner in which the assets are being used or in their physical condition;

a significant adverse change in legal factors or in the business climate that could affect the value of the assets;

a current period operating or cash flow loss, a history of operating or cash flow losses or a projection of continuing losses associated with the use of the assets;

a current expectation that it is more likely than not that the assets will be sold or otherwise disposed of significantly before the end of their previously estimated useful life.

If there is an indication of possible impairment, we test the assets for recoverability.

Recoverability is determined by comparing the estimated future undiscounted cash flows expected to be generated by our lease pool assets to their total carrying value.

Considering the general industry downturn and the factors noted above, we performed a test for recoverability as of January 31, 2020.

We determined that despite recent declines in the overall business environment, there was no impairment of our lease pool assets.

See Item 1A - “Risk Factors” and Note - 9 “Seismic Equipment Lease Pool and Property and Equipment” to our consolidated financial statements.

We recorded an allowance for doubtful accounts of approximately $0.7 million and zero related to continuing operations in fiscal 2021 and 2020, respectively, and $0.5 million and $2.0 million related to discontinued operations in fiscal 2021 and 2020, respectively.

Goodwill and Other Intangible Assets

As of January 31, 2020, all intangible assets, including goodwill, relate to our Marine Technology Products segment, which includes the operations of Seamap and Klein.

As of January 31, 2021, all intangible assets, including goodwill, relate to our Marine Technology Products business, which includes the operations of Seamap and Klein.

For purposes of evaluating impairment pursuant to FASB Accounting Standards Codification Topic (ASC) 350, we established Seamap and Klein as reporting units.

In accordance with ASC 350 we are required to evaluate the carrying value of our goodwill at least annually for impairment, or more frequently if facts and circumstances indicate it is more likely than not impairment has occurred.

We formally evaluate the carrying value of our goodwill for impairment annually, as of January 31 for each of our reporting units.

We first perform a qualitative assessment by evaluating relevant events or circumstances to determine if it is more likely than not that a reporting unit’s fair value exceeds its carrying value.

If we are unable to conclude qualitatively that is more likely than not that a reporting unit’s fair value exceeds its carrying value, then we perform a quantitative assessment of fair value of a reporting unit.

If the carrying value of a reporting unit that includes goodwill is determined to be more than the fair value of the reporting unit, there exists a possibility of impairment of goodwill.

Prior to fiscal 2018, any impairment related to goodwill was measured in a two-step process.

Step 1 consisted of the process of allocating the fair value of the reporting unit to net assets and liabilities to determine the implied carrying value of goodwill and Step 2 consisted of comparing the implied carrying value of goodwill to the carrying value of the goodwill.

Any excess of carrying value over implied carrying value was recorded as an impairment loss.

Effective for fiscal 2018 the Company adopted Accounting Standards Update (“ASU”) No.

2017-04, Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment.

ASU 2017-14 simplifies the process for assessing goodwill impairment by

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eliminating Step 2 for the goodwill impairment test.

As amended, the goodwill impairment test consists of one step comparing the fair value of a reporting unit with its carrying amount.

A goodwill impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

Any loss recognized should not exceed the total amount of goodwill allocated to the reporting unit.

In the first quarter of fiscal 2021, due to the impact of the global pandemic, significant uncertainty regarding near-term or long-term projections, and a significant drop in the value of the Company’s common stock, we performed qualitative analysis that indicated full impairment of our remaining goodwill.

As a result, we recorded an impairment charge against the remaining $2.5 million of goodwill recorded in our Seamap reporting unit.

Therefore, as of January 31, 2021, we no longer have a net carrying value of goodwill recorded on our books and will no longer perform or make future disclosures with respect to testing for goodwill impairment.

As of January 31, 2021 and 2020 we concluded, based on an assessment of qualitative factors, that it was more likely than not that the carrying value of the Seamap reporting unit was not more than its fair value.

As a result, no further further charge for impairment was recorded in fiscal 2021 and no charge was recorded in fiscal 2020 related to the Seamap reporting unit

As of January 31, 2021, we performed an assessment of qualitative factors and concluded that a quantitative assessment was required to determine if it was more likely than not that the carrying value of the Klein reporting unit exceeded fair value.

We therefore conducted a

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quantitative assessment which indicated it was more likely than not that the carrying did not exceed the fair market value.

As a result, no charge for impairment was recorded for fiscal 2021 related to the Klein reporting unit.

As of January 31, 2020, we concluded, based on an assessment of qualitative factors, that it was more likely than not that the carrying value of the Klein reporting unit was more than its fair value.

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Accordingly, we recorded an impairment loss of approximately $760,000 related to other intangible assets recorded in the Klein reporting unit.

As of January 31, 2019, we concluded, based on an assessment of qualitative factors, that it was more likely than not that the carrying value of the Klein reporting unit was not more than its fair value.

As of January 31, 2018, we concluded, based on an assessment of qualitative factors, that it was more likely than not that the carrying value of the Klein reporting unit was more than its fair value.

We therefore conducted a quantitative assessment which confirmed that the carrying value exceeded the fair value.

Accordingly, we recorded an impairment loss of approximately $1.5 million related to goodwill recorded in the Klein reporting unit.

Our quantitative assessment requires significant judgment and is based upon our internal forecasts and comparisons to the publicly available valuations of what we believe to be comparable companies.

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• tax planning strategies that will create additional taxable income.

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In determining the valuation allowance to be recorded, we considered the following positive indicators:

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In particular, the loss carryover period in the United States is 20 years for tax years beginning before December 31, 2017 and indefinite for losses incurred in tax years beginning after December 31, 2017.

Also, pursuant to the CARES Act the utilization of losses incurred in tax years beginning after December 31, 2017 is no longer limited to 80% of taxable income;

Also, pursuant to the CARES Act the utilization of losses incurred in tax years beginning after December 31, 2017 and before January 1, 2021, is no longer limited to 80% of taxable income;

• the carryover period for U.S.

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tax benefits are expected to expire prior to 2021;

we do not have a history of tax benefits expiring without being utilized;

• we do not have a history of net operating losses expiring without being utilized;

• our existing customer relationships.

We also considered the following negative indicators:

our recent losses within certain jurisdictions, including the United States, Hungary, Canada and the United Kingdom;

the recent decline in worldwide oil prices;

• our recent losses within certain jurisdictions, including the United States, Malaysia, Hungary, Canada and the United Kingdom, specifically cumulative losses over a three year period in these jurisdictions;

• the utilization of tax benefits, specifically foreign tax credits, is limited in certain jurisdictions:

the risk of decreased global demand for oil;

the potential for increased competition in the seismic equipment leasing and sales business.

Based on our evaluation of the evidence, as of January 31, 2020 we have provided the following approximate valuation allowances against deferred tax assets in various jurisdictions (in thousands):

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Based on our evaluation of the evidence, as of January 31, 2021 we have provided the following approximate valuation allowances against deferred tax assets of continuing operations in various jurisdictions (in thousands):

Jurisdiction Deferred Tax

Assets Valuation

Allowance Net Deferred

United States (1)

$ 18,612 $ (18,612) $ —

United Kingdom 632 (632) $ —

Malaysia 553 (553) $ —

(1) includes federal and state deferred tax assets

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The evaluation of tax positions and the measurement of the related benefit require significant judgment on the part of management.

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Stock-Based Compensation

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Significant Accounting and Disclosure Changes

See Note 2 - “New Accounting Pronouncements” in the Notes to the Condensed Consolidated Financial Statements in Part II, Item 8 of this form 10-K.

See Note 3 - “New Accounting Pronouncements” in the Notes to the Condensed Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Quantitative and Qualitative Disclosures about Market Risk

Not required under Item 305 Regulation S-K for smaller reporting companies.

Financial Statements and Supplementary Data

The information required by this Item appears beginning on page F-1 and is incorporated herein by reference.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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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 7. Management’s Discussion and Analysis