What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-06-03 compared with 2020-12-04 · 157 added, 188 removed, 150 unchanged (70% of the section changed)

10 unchanged sentences

This segment 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 14 - “Sale of Subsidiaries” to our condensed consolidated financial statements for additional details.

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

3 unchanged sentences

and Budapest, Hungary.

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

This included the operations of our subsidiaries Mitcham Canada, ULC, Mitcham Europe Ltd.

and our branch in Colombia.

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 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.

For the Three Months Ended October 31, For the Nine Months Ended October 31,

2020 2019 2020 2019

For the Three Months Ended April 30,

Reconciliation of Net loss from Continuing Operations to EBITDA and Adjusted EBITDA

Net loss from continuing operations $ (3,701) $ (6,427)

Interest expense (income), net 9 —

Depreciation and amortization 666 765

Provision (benefit) for income taxes 109 (31) (79) (75)

(Benefit) provision for income taxes (145) 342

EBITDA from continuing operations (1) (3,171) (5,320)

4 unchanged sentences

Reconciliation of Net Cash Used in Operating Activities to EBITDA

Net cash used in operating activities $ (2,237) $ (745) $ (4,803) $ (4,247)

Net cash (used in) provided by operating activities $ (2,807) $ 929

PPP loan forgiveness 850 —

Stock-based compensation (121) (230)

8 unchanged sentences

Changes in prepaid expenses and other current and long-term assets 168 (159)

Foreign exchange (gains) losses, net — (241) — (230)

Reserve against non-current prepaid income taxes — 137 — —

Other (67) (544)

EBITDA from continuing operations (1) $ (3,171) $ (5,320)

(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, non-cash costs of lease pool equipment sales, impairment of intangible assets, stock-based compensation and other non-cash tax related items.

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.

These non-GAAP financial measures are not intended to replace the presentation of financial results in accordance with GAAP.

Rather, we have included these non-GAAP financial measures because management utilizes this information for assessing our performance and liquidity, and as indicators of our ability to make capital expenditures and finance working capital requirements.

We believe that EBITDA and Adjusted EBITDA are measurements that are commonly used by analysts and some investors in evaluating the performance and liquidity of companies such as us.

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.

We have included these non-GAAP financial measures because management utilizes this information for assessing our performance and liquidity, and as indicators of our ability to make capital expenditures, service debt and finance working capital requirements and we believe that EBITDA and Adjusted EBITDA are measurements that are commonly used by analysts and some investors in evaluating the performance and liquidity of companies such as us.

In particular, we believe that it is useful to our analysts and investors to understand this relationship because it excludes transactions not related to our core cash operating activities.

10 unchanged sentences

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

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

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

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 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.

From time to time, we sold lease pool equipment.

Those 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 has 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.

These factors include budgetary or financial concerns, difficulties in obtaining licenses or permits, security problems, labor or political issues, inclement weather, and global pandemics.

See Item 1A-- “Risk Factors.”

These factors include budgetary or financial concerns, difficulties in obtaining licenses or permits, security problems, labor or political issues, inclement weather, and other unforeseen circumstances such as the recent COVID-19 pandemic (the “Pandemic”).

See Part II, Item 1A-- “Risk Factors.”

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.

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

The Pandemic created significant uncertainty in the global economy, which we believe has 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.

In fiscal 2021, we were required to temporarily shutdown our facilities in Malaysia and Singapore on March 17, 2020, and April 7, 2020, respectively.

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

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

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

Furthermore, travel restrictions resulting from the COVID-19 pandemic have impacted our ability to visit customers, conduct product demonstrations and visit our various operating locations.

However, travel between our Singapore and Malaysia facilities is limited, which has made management and coordination more difficult.

In addition, in May 2021, Singapore reimposed certain workplace restrictions.

While we are able to maintain full operation, we are required to rotate personnel and allow some personnel to work remotely.

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 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 will be temporary, 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 COVID-19 pandemic and the announcement of Saudi Arabia’s abandonment of output restraints.

Oil prices have partially recovered recently, but the 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.

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 later in fiscal 2021 and beyond.

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

In recent months, we have continued to experience significant inquiries and bid activity 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.

Recently we have received orders for new seismic source controllers or upgrades of systems that we previously sold.

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

Recently, we have begun to experience difficulties in our global supply chain.

Lead times for some components and materials have increased as have prices for some items.

Additionally, shipping times and costs have increased, particularly for ocean freight.

We believe these issues will be temporary but there can be no assurance of that and these conditions could have an adverse effect on our operations and financial results.

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

While oil prices have recovered significantly, 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.

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 increase in coming months, although there can be no assurance of this.

As of October 31, 2020, our backlog of firm orders for our Marine Technology Products segment was approximately $8.2 million, as compared to approximately $7.6 million as of July 31, 2020 and $8.9 million as of January 31, 2020.

We expect a significant number of these orders to be completed within fiscal 2021 and therefore expect revenues from continuing operation in the fourth quarter of fiscal 2021 to exceed those of the third quarter of this year.

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, during the first quarter of fiscal 2022, we entered into an indefinite quantity, indefinite delivery supply agreement with a major international marine seismic contractor.

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

Based on discussion with a particular customer, we expect to receive an order for a source controller and other related equipment related to a new build vessel.

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 April 30, 2021, our backlog of firm orders for our Marine Technology Products business was approximately $11.0 million, as compared to approximately $14.1 million as of January 31, 2021 and $10.2 million at April 30, 2020.

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

During the first quarter of fiscal 2022, a customer cancelled an order for approximately $2.1 million due to changes in their requirements.

We expect other orders from this customer in coming months as those requirements are more clearly defined.

Additionally, we received two specific orders totaling more than $5.0 million during the second quarter of fiscal 2022.

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.

10 unchanged sentences

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”.

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 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 related product to be installed on one of their UUV’s.

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

During the current fiscal year we also introduced technology based on MA-X 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”).

During fiscal 2021 we introduced technology based on MA-XT M 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.

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

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 un manned 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 remain uncertain.

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

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

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

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

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

These developments include the following:

4 unchanged sentences

These initiatives include the following:

• Development of side-scan sonar systems specifically for unmanned vehicles, including integration of our MA-X technology.

• 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 COVID-19 pandemic and the current economic environment 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 the pandemic and low commodity prices continue, we may take further steps to reduce costs.

In fiscal 2021 we took steps to reduce expenses including the layoff or furloughing of certain employees and contractors and the deferral of other expenditures, in response to the effects of the Pandemic on the economic environment.

Should the effects of the Pandemic continue in fiscal 2022, 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.

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 COVID-19 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 approximately $119,000, respectively.

Continued use of these government job schemes will be dependent on availability and our ability to qualify for the assistance.

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.

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

Results of Continuing Operations

Revenues for the three months ended October 31, 2020 were approximately $6.6 million compared to approximately $8.1 million for the three months ended October 31, 2019.

For the nine months ended October 31, 2020, revenues were approximately $14.8 million, compared to approximately $21.0 million for the nine months ended October 31, 2019.

We believe the decrease in fiscal 2021 periods is due in large part to restrictions on commerce as a result of the global pandemic.

For the three months ended October 31, 2020, we generated an operating loss of approximately $2.3 million, compared to an operating loss of approximately $1.3 million for the three months ended October 31, 2019.

For the nine months ended October 31, 2020, we generated an operating loss of approximately $10.8 million, compared to an operating loss of approximately $5.2 million for the nine months ended October 31, 2019.

The increase in operating loss during the three and nine month periods ended October 31, 2020 is primarily attributable to lower revenue contribution and an increase in research and development costs and in the nine-month period, goodwill impairment related to our Seamap reporting unit.

Revenues for the three months ended April 30, 2021 were approximately $4.2 million compared to approximately $3.2 million for the three months ended April 30, 2020.

We believe the increase in the first quarter of fiscal 2022 is due in large part to lifting of restrictions on commerce that were present in the prior period as a result of the Pandemic.

For the three months ended April 30, 2021, we generated an operating loss of approximately $4.8 million, compared to an operating loss of approximately $6.1 million for the three months ended April 30, 2020.

The decrease in operating loss during the three-month period ended April 30, 2021 is primarily attributable to a goodwill impairment charge related to our Seamap reporting unit in the prior year period that did not recur in the current quarter.

In addition, the current quarter operating loss was impacted by higher research and development and general and administrative costs.

A more detailed explanation of these variations follows.

2 unchanged sentences

Three Months Ended

October 31, Nine Months Ended

2020 2019 2020 2019

(in thousands) (in thousands)

(in thousands)

Seamap $ 3,044 $ 2,212

Klein 1,156 1,241

SAP — — — 101

Intra-segment sales (6) (266)

6,550 8,143 14,845 21,039

Cost of sales:

2 unchanged sentences

Intra-segment sales (6) (266)

4,276 4,828 10,070 12,478

Gross profit $ 543 $ 484

3 unchanged sentences

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.

We believe the decline in Seamap revenues is due in large part to temporary delays caused by the COVID-19 pandemic, including the temporary shutdown of our production facilities.

As discussed in previous periods, a particular order of approximately $1.8 million was delayed from the first quarter of fiscal 2021 as due to travel restrictions, the customer was unable to arrange shipment and take delivery of the equipment.

This order was shipped and recognized in the third quarter of fiscal 2021.

The gross profit and gross profit margins generated by sales of Seamap products were approximately $2.2 million and 41% in the third quarter of fiscal 2021 and approximately $2.5 million and 43% in the third quarter of fiscal 2020.

The decrease in gross profit margins between the periods is due primarily to lower manufacturing activity, which resulted in lower overhead absorption during the period.

Revenue from the sale of Klein products was approximately $1.2 million for the third quarter of fiscal 2021 versus approximately $2.4 million in the prior year period.

We believe the decline in revenue is partially due to the effects of the COVID-19 pandemic.

Gross profit was approximately $53,000 and $805,000 for the third quarter of fiscal 2021 and 2020, respectively.

The decline in gross profit margin in the third quarter of fiscal 2021 was due mainly to lower absorption of overhead costs and higher product testing and sustaining engineering activity during the period.

We believe the increase in Seamap revenues is due in large part to lifting of commerce restrictions, previously caused by the Pandemic, including the temporary shutdown of our production facilities in the prior period.

Revenues in the first quarter of fiscal 2022 were less than in the fourth quarter of fiscal 2021 and less than we expected.

We believe lingering effects of the Pandemic and the resulting impact on the global supply chain has impacted certain of our customers.

In some cases, customers have delayed placing or accepting orders.

We believe that delays in these customers receiving related products and materials from other supplier have contributed to these delays.

The gross profit and gross profit margins generated by sales of Seamap products were approximately $447,000 and 15% in the first quarter of fiscal 2022 and approximately $319,000 and 14% in the first quarter of fiscal 2021.

The increase in gross profit margins between the periods is due primarily to the mix of products and services sold in the respective periods.

Revenue from the sale of Klein products remained relatively flat year over year, at approximately $1.2 million for the first quarter of fiscal 2022 and fiscal 2021.

Gross profit was approximately $96,000 and $165,000 for the first quarter of fiscal 2022 and 2021, respectively.

The decline in gross profit margin in the first quarter of fiscal 2022 was due mainly to lower absorption of overhead costs and higher product testing and sustaining engineering activity during the period.

Operating Expenses

General and administrative expenses for the three months ended October 31, 2020 decreased to approximately $3.0 million from approximately $3.4 million for the three months ended October 31, 2019.

General and administrative expenses for the nine months ended October 31, 2020 decreased approximately $1.6 million to $8.9 million, compared to $10.5 million for the nine months ended October 31, 2019.

The decrease in general and administrative expenses is primarily due to reduced travel and entertainment expense as a result of restrictions due

to the global pandemic, reductions in salary and rent costs due to the offset of government subsidies received in several international locations and the impact of various strategic restructuring activities implemented in fiscal 2020.

In recognition of the need to control costs in the current environment, effective May 1, 2020, Robert P.

Capps, Co-Chief Executive Officer, Executive Vice President of Finance and Chief Financial Officer, and Guy Malden, Co-Chief Executive Officer and Executive Vice President of Marine Systems, both agreed to a temporary 20% reduction in base salary.

In addition, our Board has agreed to a temporary 25% reduction in cash compensation.

Research and development costs in the third quarter and first nine months of fiscal 2021 increased to approximately $912,000 and $2.1 million, respectively, compared to approximately $629,000 and $1.4 million in the three and nine months ended October 31, 2019, respectively.

The increase in these costs reflects activity in the strategic initiatives noted above, including the deployment of a passive array test system during the third quarter of fiscal 2021.

Depreciation and amortization expenses include depreciation of equipment, furniture and fixtures and the amortization of intangible assets.

These costs were approximately $662,000 and $2.1 million in the three and nine month periods ended October 31, 2020, respectively, as compared to approximately $604,000 and $1.8 million in the three and nine month periods ended October 31, 2019, respectively.

The higher depreciation and amortization expense in the three and nine month periods of fiscal 2021 is due primarily to asset additions associated with the start-up of our Malaysian manufacturing facility and the amortization of intangible assets related to a recent software upgrade.

Due to deterioration in macroeconomic factors and a decline in the market value of our equity securities subsequent to January 31, 2020, we concluded that goodwill was impaired and recorded an impairment charge of approximately $2.5 million in the first quarter of fiscal 2021.

The goodwill impairment indicated that there was potential impairment of our other intangible and long-lived assets.

Accordingly, we performed an analysis of the undiscounted future cash flow from those assets and concluded that there was no impairment.

Subsequent to April 30, 2020 there have been no substantive indicators of additional impairment.

General and administrative expenses for the three months ended April 30, 2021 increased to approximately $3.8 million from approximately $3.0 million for the three months ended April 30, 2020.

The increase in general and administrative expenses includes higher travel and entertainment expenses, due mainly to reduced pandemic related travel restrictions in the current period, and higher compensation costs resulting from the recent addition of several strategic corporate level positions.

In addition, the current period general and administrative costs from continuing operations includes certain personnel, facility and overhead costs which were included in discontinued operations in the prior year period.

Research and development costs were approximately $853,000 in the three-month period ended April 30, 2021, as compared to approximately $410,000 in the three-month period ended April 30, 2020.

The increase in these costs reflects activity in the strategic initiatives noted above, including our SAS system, passive sonar arrays and sensor packages specifically for unmanned systems.

Depreciation and amortization expense include depreciation of equipment, furniture and fixtures and the amortization of intangible assets.

These costs were approximately $666,000 in the three-month period ended April 30, 2021, as compared to approximately $730,000 in the three-month period ended April 30, 2020.

The lower depreciation and amortization expense in the three-month period of fiscal 2022 is due primarily to assets becoming fully depreciated over time.

During the three months ended April 30, 2021, it was determined that there were no substantive indicators of impairment.

During the quarter ended April 30, 2020, due to deterioration in macroeconomic factors and a decline in the market value of our equity securities subsequent to January 31, 2020, we concluded that goodwill was impaired and recorded an impairment charge of approximately $2.5 million in the first quarter of fiscal 2021.

Provision for Income Taxes

For the three months ended October 31, 2020, we reported tax expense of approximately $109,000, and for the three months ended October 31, 2019 we reported a tax benefit of approximately $31,000.

For the nine month periods ended October 31, 2020 and October 31, 2019 we reported a tax benefit of approximately $79,000 and $75,000, respectively.

Our recorded tax expense and benefit in the three and nine-month periods ended October 31, 2020 and 2019, are less than the expense or benefit that would be derived by applying the applicable statutory rate to loss before tax from continuing operations in each of these periods, due mainly to the effect of permanent differences between book and taxable income, including impairment expense, and recording valuation allowances against increases in our deferred tax assets.

For the three months ended April 30, 2021, we reported tax benefit of approximately $145,000 on pre-tax net loss from continuing operations, and for the three months ended April 30, 2020, we reported a tax expense of approximately $342,000 on pre-tax net loss from continuing operations.

Our recorded tax benefit and expense in the three and nine-month periods ended April 30, 2021 and 2020, are less than the benefit or expense that would be derived by applying the applicable statutory rate to loss before tax from continuing operations in each of these periods, due mainly to the effect of permanent differences between book and taxable income, foreign withholding taxes and recording valuation allowances against increases in our deferred tax assets.

Results of Discontinued Operations

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

For the Three Months Ended October 31, For the Nine Months Ended October 31,

2020 2019 2020 2019

For the Three Months Ended April 30,

Equipment leasing 30 2,575

1 unchanged sentence

Other equipment sales — 176

313 2,488 5,731 8,379

Cost of sales:

3 unchanged sentences

Cost of other equipment sales — 127

263 1,752 4,389 6,266

Gross profit (loss) (343) 1,704

1 unchanged sentence

Selling, general and administrative 342 1,700

Provision for doubtful accounts — — 470 —

Recovery of doubtful accounts (443) —

Depreciation and amortization 1 44

2 unchanged sentences

Other income (expenses) (39) 3

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

Loss before income taxes (282) (37)

3 unchanged sentences

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 the third quarter of fiscal 2021 decreased approximately 87% to $313,000 compared to $2.5 million for the third quarter of fiscal 2020 and decreased approximately $2.6 million, or 32% in the first nine months of fiscal 2021 as compared to the first nine months of fiscal 2020.

The reduction in revenue is due to lower Equipment Leasing activity, primarily we believe as a result of the global pandemic, the decision to exit the Leasing Business and the change in treatment of lease pool sales as discussed above.

Direct costs related to Equipment Leasing dropped to approximately $263,000 for the third quarter of fiscal year 2021 from approximately $568,000 reported in the same period for 2019.

Revenue from discontinued operations during the first quarter of fiscal 2022 decreased to $30,000, compared to $4.2 million for the first quarter of fiscal 2021.

The reduction in revenue is due to the curtailment of Equipment Leasing activity as a result of the decision to exit the Leasing Business and the change in treatment of lease pool sales as discussed above.

Direct costs related to Equipment Leasing dropped to approximately $373,000 for the first quarter of fiscal year 2022 from approximately $845,000 reported in the same period for 2020.

A significant portion of direct costs are generally fixed and therefore do not fluctuate with the level of leasing revenue.

However, these costs also include sub-lease payments to certain OEM’s under revenue sharing arrangements which do fluctuate with the level of leasing revenue.

For the three month period ended October 31, 2020 lease pool depreciation decreased approximately $1.1 million from the three months ended October 31, 2021 due to the fact that we are no longer recording lease pool depreciation on discontinued operations.

Selling, general and administrative costs related to the Leasing Business decreased in the three months ended October 31, 2020 as compared to the same period one year ago due to cost reduction efforts and a decline in activity.

These costs increased during the nine months ended October 31, 2020 as compared to the prior year period.

The increase in the nine-month period was due primarily to accrued severance and other costs related to the decision to exit the Leasing Business

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.

Our provision for income taxes for the three and nine months ended October 31, 2020 are approximately $6,000 and $706,000, respectively, on loss before income tax of approximately $1.2 million and $5.4 million for the three and nine month periods, respectively.

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.

For the three-month period ended April 30, 2021, lease pool depreciation decreased approximately $926,000 from the three months ended April 30, 2020, due to the fact that we are no longer recording lease pool depreciation on discontinued operations.

Selling, general and administrative costs related to the Leasing Business decreased to approximately $342,000 in the three months ended April 30, 2021, from approximately $1.7 million in the same period one year ago.

The reduction in selling, general and administrative expense is due to permanent headcount reductions, closing and downsizing facilities, and lower overall operating costs due to the significant decline in activity.

In addition, the current period general and administrative costs from discontinued operations excludes certain personnel, facility and overhead costs which are included in continuing operations for the three months ended April 30, 2021.

Our tax expense for the three months ended April 30, 2021, was approximately $1,000 on pre-tax net loss from discontinued operations.

For the three months ended April 30, 2020, we reported tax expense of approximately $178,000 on pre-tax net loss from discontinued operations.

We recorded tax provisions in the three-month periods ended April 30, 2021, and 2020, despite generating a loss before income taxes from discontinued operations in each of these periods, due mainly to the effect of foreign withholding taxes and recording valuation allowances against increases in our deferred tax assets.

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.

The period of time for which pandemic related disruptions will continue remains uncertain, as does 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 fiscal years and its cash balance as of October 31, 2020 is lower than at January 31, 2020.

For the past three years, the Company has generated significant cash from the sale of preferred stock pursuant to the 1 st ATM program.

The 1 st ATM program has been completed and no further preferred shares can be sold pursuant to it.

However, the Company has established a 2 nd ATM program under which we may sell up to 500,000 shares of Preferred Stock and 5,000,000 shares of Common Stock.

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:

As discussed above, the Pandemic and 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 have begun to subside but there can be no assurance of that.

The Company has a history of operating losses, has generated negative cash from operating activities in each of the last four quarters and has relied on cash from the sale of lease pool equipment and preferred stock pursuant to the 2 nd ATM Offering Program established in the third quarter of fiscal 2021.

Notwithstanding the negative impacts of the Pandemic and history of operating losses noted above, management believes there are factors and actions available to the Company to address liquidity concerns, including the following:

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

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

• The Company has working capital of approximately $20.7 million as of October 31, 2020, including cash of approximately $2.7 million, which is a decrease from approximately $3.1 million of cash at January 31, 2020.

• The Company has working capital of approximately $15.2 million as of April 30, 2021, including cash of approximately $2.0 million.

• Should revenues be less than projected, the Company believes it is able, and has plans, to reduce costs proportionately in order to maintain positive cash flow.

Certain cost reduction measures have been implemented, the effects of which are expected to be reflected in future periods.

• The majority of the Company’s costs are variable in nature, such as raw materials and personnel related costs.

The Company has terminated or furloughed certain employees and contractors.

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

The Company has terminated or furloughed certain employees and contractors in response to market conditions.

• 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.

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

• The Company has a backlog of orders of approximately $8.2 million as of October 31, 2020.

• The Company received approximately $1.6 million in U.S.

government sponsored loans pursuant to the PPP and has received lesser amounts of government grants in several foreign jurisdictions.

The PPP loans are in the form of two-year promissory notes.

The Company has submitted an application for the forgiveness of the loans and management believes a significant portion of the $1.6 million PPP loan will be forgiven under the terms of the PPP.

• Management expects to generate cash from the sale of the Leasing Business or the related underlying assets and has done so in recent periods.

• The Company has declared and paid the quarterly dividend on its Preferred Stock for the quarter ending October 31, 2020, but such quarterly dividends could be suspended in the future.

• In July 2020, the Company received shareholder approval and effective August 2020 increased the authorized number shares of common and preferred shares available for issuance.

During the third quarter of fiscal 2021 we initiated the 2 nd ATM program providing for the sale of up to 500,000 shares of Preferred Stock and 5,000,000 shares of Common Stock.

During the third quarter of fiscal 2021, we sold and received net proceeds of approximately $1.3 million from the sale of Common Stock pursuant to the 2 nd ATM program.

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 $11.0 million as of April 30, 2021, which is a decrease from the record amount at January 31, 2021, but an increase of approximately 9% from April 30, 2020.

• 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 the first quarter of fiscal 2022, and each quarter in fiscal 2021, but such quarterly dividends could be suspended in the future.

• Despite the challenging economic environment in fiscal 2021, the Company successfully expanded its authorized capital stock (See Note 15 - Corporate Restructuring) and raised 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 Offering 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.

Our Preferred Stock has been issued in the June 2016 offering, as consideration to MHI and in the 1 st ATM program.

The 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 Preferred Stock.

The 994,046 shares represent 100% of the Preferred Stock available for sale under the 1 st ATM program.

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 or preferred stock.

During the three months ended October 31, 2020 the Company sold 676,283 shares of Common Stock under the 2 nd ATM program, resulting in net proceeds to the Company of approximately $1.3 million.

Based on the factors and actions available to the Company as discussed above, Management expects the Company to continue to meet its obligations as they arise over the next twelve months.

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.

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 April 30, 2021, we have issued 1,059,192 shares of our Series A Preferred Stock.

During the three months ended April 30, 2021, under the 2 nd ATM Offering Program, the Company sold (i) 18,053 shares of Common Stock, resulting in net proceeds to the Company of approximately $42,000, after deducting offering costs and (ii) 20,960 shares of Series A Preferred Stock, resulting in net proceeds to the Company of approximately $503,000.

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

For the Nine Months Ended

For the Three Months Ended

(in thousands)

Net cash used in operating activities $ (4,803) $ (4,247)

Net cash provided by (used in) investing activities 2,570 (1,178)

Net cash provided by financing activities 1,780 744

Net cash (used in) provided by operating activities $ (2,807) $ 929

Net cash provided by investing activities 179 1,239

Net cash used in financing activities (33) (559)

Effect of changes in foreign exchange rates on cash and cash equivalents 51 (138)

Net decrease in cash and cash equivalents $ (2,610) $ 1,471

As of October 31, 2020, we had working capital of approximately $20.7 million, including cash and cash equivalents and restricted cash of approximately $2.7 million, as compared to working capital of approximately $31.0 million, including cash and cash equivalents and restricted cash of approximately $3.2 million, at January 31, 2020.

Our working capital decreased during the first nine months of fiscal 2021 as compared to January 31, 2020 due primarily to a decrease in cash and cash equivalents, reductions in accounts receivable and an increase in accounts payable.

As of April 30, 2021, we had working capital of approximately $15.2 million, including cash and cash equivalents and restricted cash of approximately $2.0 million, as compared to working capital of approximately $19.0 million, including cash and cash equivalents and restricted cash of approximately $4.6 million, at January 31, 2021.

Our working capital decreased during the first three months of fiscal 2022 as compared to the same period in fiscal 2021 due primarily to reductions in accounts receivable and an increase in accounts payable and accrued liabilities.

Cash Flows from Operating Activities .

Net cash used in operating activities was approximately $4.8 million in the first nine months of fiscal 2021 as compared to approximately $4.2 million in the first nine months of fiscal 2020.

The decrease between the two periods resulted primarily from changes in working capital items such as cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities.

Net cash used in operating activities was approximately $2.8 million in the first three months of fiscal 2022 as compared to approximately $929,000 of cash provided by operating activities in the first three months of fiscal 2021.

In the quarter ended April 30, 2021, the primary sources of cash used in operating activities was our net loss of $4.0 million, net of non-cash charges, including depreciation and amortization and provision for inventory obsolescence totaling approximately $1.0 million.

In addition, the net change in working capital items, such as accounts receivable and accounts payable, decreased net cash used in operating activities by approximately $1.0 million.

Cash Flows from Investing Activities .

Cash provided from investing activities increased during the first nine months of fiscal 2021 compared to the same period in the prior year.

The increase is primarily due to proceeds from sale the of lease pool equipment and the sale of assets held for sale.

In the first nine months of fiscal 2021 proceeds from the sale of lease pool equipment and assets held for sale totaled approximately $2.7 million compared to approximately $1.4 million in the first nine months of fiscal 2020.

Due to the decision to exit the Leasing Business we are currently seeking to sell all of the remaining equipment from our lease pool.

Cash provided from investing activities decreased during the first three months of fiscal 2022 compared to the same period in the prior year.

The decrease is primarily due to reduced proceeds from the sale of lease pool equipment and the sale of assets held for sale.

We had no proceeds from sale of lease pool equipment and assets held for sale during the first three months of fiscal 2022 compared to approximately $1.4 million in the first three months of fiscal 2021.

Due to the decision to exit the Leasing Business we are currently seeking to sell the remaining equipment from our lease pool.

However, there is no guarantee additional sales of lease pool equipment will occur.

2 unchanged sentences

Cash Flows from Financing Activities .

Net cash provided by financing activities in the first nine months of fiscal 2021 consisted of approximately $1.6 million of proceeds from the PPP Loans, approximately $1.3 million of proceeds from sales of Common Stock, offset by approximately $1.1 million of preferred stock dividend payments, as compared to approximately $2.2 million of proceeds from sales of Preferred Stock, offset by approximately $1.4 million of preferred stock dividend payments in the prior year period.

We believe that a significant portion of the PPP Loans may be forgiven, and we have submitted applications for the forgiveness of the Loans.

However, there can be no assurance as to the amount of the Loans that will be forgiven, if any.

As of October 31, 2020, there were 994,046 shares of Preferred Stock outstanding, which represents 100% of the Preferred Stock available for sale through our 1st ATM program.

Based on the Preferred Stock outstanding at October 31, 2020, annual dividend requirements are approximately $2.2 million.

In August 2020 the Company effectuated a shareholder approved reincorporation to the state of Delaware, name change to MIND Technology, Inc.

and increase in the number of shares of common stock and preferred stock authorized for issuance.

See Note 16 - “Corporate Restructuring” to our condensed consolidated financial statements for additional details.

The Company may issue up to 40,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock.

Management believes this provides significant additional financing flexibility, including the capacity for subsequent issues of Common Stock or Preferred Stock.

In September 2020 we entered the 2nd Equity Distribution Agreement with the Agent with economic terms essentially identical to the initial agreement.

Pursuant to the 2nd Equity Distribution Agreement, the Company may sell up to 500,000 shares of Preferred Stock and 5,000,000 shares of Common Stock through the 2nd ATM program.

During the three months ended October 31, 2020 the Company sold 676,283 shares of Commons Stock under the 2nd ATM program, resulting in net proceeds to the Company of approximately $1.3 million.

Compensation to the Agent during this period was approximately $30,500, none of which was received by the Non-Executive Chairman of the Board.

We currently do not have a line of credit or other bank credit facilities.

From time to time, we may engage in discussions with one or more commercial banks regarding establishing a credit facility or facilities.

However, there can be no assurance that we will be able to establish any such facilities if and when needed and to the extent required, on acceptable terms or at all.

We would intend to use such facilities for short-term working capital needs and to support letter of credit requirements.

From time to time we are required to provide performance bonds related to the sale and delivery of new equipment.

These bonds are normally provided by insurance companies, 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 October 31, 2020, we had deposits in foreign banks consisting of both U.S.

dollar and foreign currency deposits equal to approximately $1.9 million.

We believe all $1.9 million of these deposits could be distributed to the United States without any adverse tax consequences.

Net cash provided by financing activities in the first three months of fiscal 2021 consisted of approximately $42,000 of proceeds from sales of Common Stock, approximately $503,000 of proceeds from sales of Preferred Stock, offset by approximately $576,000 of preferred stock dividend payments, as compared to approximately $559,000 of preferred stock dividend payments in the prior year period.

Our 1 st ATM Offering Program related to the Series A Preferred Stock 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 of the Company.

As of April 30, 2021, we have no funded debt 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.

If we were to make any such acquisitions, we believe they could generally be financed with a combination of cash on hand and cash flows from operations.

However, should these sources of financing not be adequate, we may seek other sources of capital to fund future acquisitions.

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

We have determined that the undistributed earnings of foreign subsidiaries are not deemed indefinitely reinvested outside of the United States as of April 30, 2021.

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

As of April 30, 2021, we had deposits in foreign banks equal to approximately $1.4 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.

Critical Accounting Policies

Information regarding our critical accounting policies and estimates is included in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended January 31, 2021.

There have been no material changes to our critical accounting policies and estimates during the three-month period ended April 30, 2021.

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-Q

Item 2. Management’s Discussion and Analysis