MIND TECHNOLOGY, INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview MIND Technology, Inc., a Delaware corporation, formerly Mitcham Industries, Inc., a Texas corporation, was incorporated in 1987. Effective August 3, 2020 we effectuated a 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 15 - “Corporate Restructuring” to our condensed consolidated financial statements for additional details. 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 3 - “ 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. The discontinued operations of the Leasing business includes all leasing activity, sales of lease pool equipment and certain other equipment sales and services related to those operations. This business had been conducted from our locations in Huntsville, Texas; Calgary, Canada; Bogota, Colombia; and Budapest, Hungary. 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 business is indicated by revenues from product 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 July 31, For the Six Months Ended July 31, 2021 2020 2021 2020 Reconciliation of Net loss from Continuing Operations to EBITDA and Adjusted EBITDA Net loss from continuing operations $ (2,739) $ (1,896) $ (6,440) $ (8,323) Interest income, net (9) — — — Depreciation and amortization 557 714 1,223 1,479 (Benefit) provision for income taxes 197 (530) 52 (188) EBITDA from continuing operations (1) (1,994) (1,712) (5,165) (7,032) Non-cash foreign exchange losses 33 33 82 44 Stock-based compensation 115 219 236 449 Impairment of intangible assets — — — 2,531 Adjusted EBITDA from continuing operations (1) $ (1,846) $ (1,460) $ (4,847) $ (4,008) Reconciliation of Net Cash Used in Operating Activities to EBITDA Net cash used in operating activities $ (4,384) $ (3,495) $ (7,191) $ (2,566) PPP loan forgiveness — — 850 — Stock-based compensation (115) (219) (236) (449) Provision for inventory obsolescence (23) (23) (45) (45) Changes in accounts receivable (current and long-term) 1,570 (46) 466 (3,181) Interest paid — 12 — 23 Taxes paid, net of refunds 116 97 147 246 Gross profit from sale of other equipment 75 — 155 — Changes in inventory (218) 143 523 699 Changes in accounts payable, accrued expenses and other current liabilities and deferred revenue 588 1,100 (332) 756 Impairment of intangible assets — — — (2,531) Changes in prepaid expenses and other current and long-term assets 333 (310) 500 (469) Other 64 1,029 (2) 485 EBITDA from continuing operations (1) $ (1,994) $ (1,712) $ (5,165) $ (7,032) (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 16 Table of Contents 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. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash operations. EBITDA and Adjusted EBITDA are not measures of financial performance or liquidity under GAAP and should not be considered in isolation or as alternatives to cash flow from operating activities or as alternatives to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP. In evaluating our performance as measured by EBITDA, management recognizes and considers the limitations of this measurement. EBITDA and Adjusted EBITDA do not reflect our obligations for the payment of income taxes, interest expense or other obligations such as capital expenditures. Accordingly, EBITDA and Adjusted EBITDA are only two of the measurements that management utilizes. 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, 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) SeaLink marine sensors and solid streamer systems (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. 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 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 other unforeseen circumstances such as the Pandemic. See Part II, Item 1A-- “Risk Factors.” Business Outlook The Pandemic has 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. However, travel between our Singapore and Malaysia facilities is limited, which has made management and coordination more difficult. In addition, Singapore reimposed certain workplace restrictions in May 2021. 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 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, some components and materials are not readily available and 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. 17 Table of Contents 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, during the first quarter of fiscal 2022, we entered into an indefinite quantity, indefinite delivery supply agreement with a major international marine seismic contractor. We 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. We continue to pursue a number of other opportunities and believe there is a general uptick in activity in this market. 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. Navy. 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 July 31, 2021, our backlog of firm orders for our Marine Technology Products business was approximately $11.7 million, as compared to approximately $14.1 million as of January 31, 2021 and $7.6 million at July 31, 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 backlog 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. 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. Earlier this year, we introduced a product line of sonar systems, referred to as AUV-Mako TM specifically focused on the rapidly growing autonomous vehicle market. In addition, in fiscal 2021 we 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 applications involving unmanned vessels. Recently, we have noted an increase in inquiries and bids for our single-beam and multi-beam sonar systems. As a result, we expect improvement in this portion of our business in the second half of fiscal 2022 and beyond. However, there can be no assurance of any such improvement or the magnitude of such. 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. There can be no assurance that any of these initiatives will ultimately have a material impact on our financial position or results of operations. 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 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 many years. To date, the most of our revenues have been from commercial customers; however, we believe 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: • 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 . 18 Table of Contents 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 technology ; • Development of SAS sonar systems in cooperation with a major European defense contractor ; and • Application of our SeaLink solid streamer technology to passive sonar arrays for use in maritime security applications, such as anti-submarine warfare. 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 through the second half of fiscal 2022 or beyond, 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 two fiscal years, except as described above. Results of Continuing Operations Revenues for the three months ended July 31, 2021 were approximately $6.8 million compared to approximately $5.1 million for the three months ended July 31, 2020. For the six months ended July 31, 2021, revenues were approximately $11.0 million, compared to approximately $8.3 million for the six months ended July 31, 2020. We believe the increase in fiscal 2022 periods 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 July 31, 2021, we generated an operating loss of approximately $2.6 million, compared to an operating loss of approximately $2.4 million for the three months ended July 31, 2020. For the six months ended July 31, 2021, we generated an operating loss of approximately $7.4 million, compared to an operating loss of approximately $8.6 million for the six months ended July 31, 2020. The operating loss during the three-month periods ended July 31, 2021 and July 31, 2020 were relatively flat. The decrease in operating loss during the six-month period ended July 31, 2021 is primarily attributable to a non-recurring goodwill impairment charge related to our Seamap reporting unit in the prior year period. 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. 19 Table of Contents Revenues and Cost of Sales Revenues and cost of sales for our Marine Technology Products business were as follows: Three Months Ended July 31, Six Months Ended July 31, 2021 2020 2021 2020 (in thousands) (in thousands) Revenues: Seamap $ 5,402 $ 4,080 $ 8,446 $ 6,293 Klein 1,408 1,003 2,564 2,244 Intra-business sales (3) — (9) (242) 6,807 5,083 11,001 8,295 Cost of sales: Seamap 3,293 2,281 5,890 4,175 Klein 1,293 785 2,353 1,861 Intra-business sales (3) — (9) (242) 4,583 3,066 8,234 5,794 Gross profit $ 2,224 $ 2,017 $ 2,767 $ 2,501 Gross profit margin 33 % 40 % 25 % 30 % 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. 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 second quarter of fiscal 2022 increased when compared to second quarter of fiscal 2021. 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. Nonetheless, we did experience an increase in deliveries and associated revenues in this area as we executed certain orders previously received. Based on our remaining backlog and on-going order activity, we expect further improvement in the second half of fiscal 2022. The gross profit and gross profit margins generated by sales of Seamap products were approximately $2.1 million and 39% in the second quarter of fiscal 2022 and approximately $1.8 million and 44% in the second quarter of fiscal 2021. The decrease 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 was approximately $1.4 million for the second quarter of fiscal 2022 versus approximately $1.0 million in the prior year period. Gross profit was approximately $115,000 and $218,000 for the second quarter of fiscal 2022 and 2021, respectively. The decline in gross profit in the second 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 July 31, 2021, increased to approximately $3.3 million from approximately $3.0 million for the three months ended July 31, 2020. General and administrative expenses for the six months ended July 31, 2021 increased approximately $1.3 million to $7.2 million compared to $5.9 million for the six months ended July 31, 2020. The increase in is primarily due to certain recurring general and administrative operating expenses, including but not limited to, property and casualty insurance premiums, facility maintenance expenses, communications costs, etc., reported in discontinued operations in the prior year comparative periods, but are being reported in continuing operations in the current fiscal year as we wind-down and dispose of our discontinued operations. Current period costs also reflect increases in compensation and benefits costs, travel and entertainment expense and professional fees. In addition, the prior year comparative periods included the benefit of governmental rent and payroll subsidies in several international locations that have been significantly reduced or eliminated in the current fiscal year. Research and development costs remained relatively flat at approximately $888,000 in the three-month period ended July 31, 2021, as compared to approximately $755,000 in the three-month period ended July 31, 2020. Research and development costs increased to approximately $1.7 million in the six-month period ended July 31, 2021, as compared to approximately $1.2 million in the prior year period ended. 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 $557,000 and $1.2 million in the three- and six-month periods ended July 31, 2021, respectively, as compared to approximately $700,000 and $1.4 million in the three- and six-month periods ended July 31, 2020, respectively. The lower depreciation and amortization expense in the three- and six-month periods of fiscal 2022 is due primarily to assets becoming fully depreciated over time. 20 Table of Contents During the six months ended July 31, 2021, it was determined that there were no substantive indicators of impairment. During the first quarter of fiscal 2021, 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 associated with our Seamap business was impaired and recorded an impairment charge of approximately $2.5 million. Provision for Income Taxes For the six months ended July 31, 2021, we reported tax expense of approximately $52,000 on pre-tax net loss of approximately $6.4 million from continuing operations, and for the six months ended July 31, 2020, we reported tax benefit of approximately $188,000 on pre-tax net loss of approximately $8.5 million from continuing operations. Our recorded tax expense and benefit in the six-month periods ended July 31, 2021, and 2020, respectively, are less than the benefit that would be derived by applying the applicable statutory rate to the net 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 business were comprised of the following: For the Three Months Ended July 31, For the For the Six Months Ended July 31, 2021 2020 2021 2020 Revenues: Equipment leasing 757 622 787 3,197 Lease pool equipment sales — 573 — 2,010 Other equipment sales — 35 — 211 757 1,230 787 5,418 Cost of sales: Direct costs-equipment leasing 332 762 705 1,607 Lease pool depreciation — 772 — 1,698 Cost of lease pool equipment sales — 98 — 684 Cost of other equipment sales — 10 — 137 332 1,642 705 4,126 Gross profit (loss) 425 (412) 82 1,292 Operating expenses: Selling, general and administrative 378 1,476 720 3,176 Provision for doubtful accounts (2) 470 (445) 470 Depreciation and amortization 2 41 3 85 Total operating expenses 378 1,987 278 3,731 Operating loss 47 (2,399) (196) (2,439) Other income (expenses) 35 72 (4) 75 Loss on disposal (including $2,745 of cumulative translation loss) — (1,859) — (1,859) Income (loss) before income taxes 82 (4,186) (200) (4,223) Provision for income taxes (3) (522) (4) (700) Net income (loss) 79 (4,708) (204) (4,923) 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 the second quarter of fiscal 2022 decreased to $757,000, compared to $1.2 million for the second 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 $332,000 for the second quarter of fiscal year 2022 from approximately $762,000 reported in the same period of fiscal 2021. For the three- and six-month periods ended July 31, 2021, lease pool depreciation decreased approximately $772,000 and $1.7 million from the three- and six month periods ended July 31, 2020, because we are no longer recording lease pool depreciation on discontinued operations. Selling, general and administrative costs related to the Leasing Business decreased to approximately $720,000 in the six months ended July 31, 2021, from approximately $3.2 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 21 Table of Contents 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 six months ended July 31, 2021. Our tax expense from discontinued operations for the three- and six-month periods ended July 31, 2021, was approximately $3,000 and $4,000, respectively, on pre-tax net income of approximately $82,000 for the three-month period and a pre-tax net loss of approximately $200,000 for the six-month period. For the three and six months ended July 31, 2020, we reported tax expense of approximately $522,000 and $700,000, respectively, on pre-tax net loss from discontinued operations of approximately $4.2 million for both periods. We recorded tax expense in the six-month periods ended July 31, 2021 and 2020, despite generating a pre-tax net loss from discontinued operations, due mainly to the effect of foreign withholding taxes and recording valuation allowances against increases in our deferred tax assets. Subsequent to July 31,2021, we completed an agreement for the sale of lease pool equipment reported as Assets Held for Sale (see Note 3 – “Assets Held for Sale and Discontinued Operations” for additional details) in our condensed consolidated financial statements. Under the terms of the agreement the Company will receive total proceeds of approximately $4.5 million, with approximately $2.5 million paid at closing and the balance of approximately $2.0 million paid before the end of fiscal 2022. Liquidity and Capital Resources 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 $16.1 million as of July 31, 2021, including cash of approximately $2.1 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. • 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 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 there will not be further suspensions in the future. • The Company has a backlog of orders of approximately $11.7 million as of July 31, 2021, which is a decrease from the record amount at January 31, 2021, but an increase of approximately 54% from July 31, 2020. • The Company has been successful in selling certain assets held for sale Subsequent to July 31, 2021, the Company completed an asset sale for total proceeds of approximately $4.5 million, all of which we expect to receive in fiscal 2022. • The Company has declared and paid the quarterly dividend on its Preferred Stock for the first and second 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 $4.5 million in new capital through the sale of Common Stock and Preferred Stock pursuant to the 2nd 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. 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 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 Preferred Stock (i) allows for redemption on at our option (even in the event of a change of 22 Table of Contents 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 July 31, 2021, we have issued 1,222,972 shares of our Preferred Stock. During the six months ended July 3, 2021, under the 2 nd ATM Offering Program, the Company sold (i) 18,415 shares of Common Stock, resulting in net proceeds to the Company of approximately $43,000, after deducting offering costs and (ii) 184,740 shares of Series A Preferred Stock, resulting in net proceeds to the Company of approximately $4.5 million. The following table sets forth selected historical information regarding cash flows from our Consolidated Statements of Cash Flows: For the Six Months Ended July 31, 2021 2020 (in thousands) Net cash (used in) provided by operating activities $ (7,191) $ (2,566) Net cash provided by investing activities 1,231 1,598 Net cash provided by financing activities 3,383 489 Effect of changes in foreign exchange rates on cash and cash equivalents 22 (117) Net decrease in cash and cash equivalents $ (2,555) $ (596) As of July 31, 2021, we had working capital of approximately $16.1 million, including cash and cash equivalents and restricted cash of approximately $2.1 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 six months of fiscal 2022 as compared to January 31, 2021 due primarily to reductions in cash, assets held for sale and an increase in accounts payable. Cash Flows from Operating Activities . Net cash used in operating activities was approximately $7.2 million in the first six months of fiscal 2022 as compared to approximately $2.6 million of cash used in operating activities in the first six months of fiscal 2021. [In the quarter ended July 31, 2021, the primary sources of cash used in operating activities was our net loss of $6.6 million, net of non-cash charges, including depreciation, amortization and provision for inventory obsolescence totaling approximately $1.5 million. In addition, the net change in working capital items, such as accounts receivable and accounts payable, increased net cash used in operating activities by approximately $4.6 million. Cash Flows from Investing Activities . Cash provided from investing activities decreased during the first six months of fiscal 2022 compared to the same period in the prior year. The decrease is primarily due to lower proceeds from the sale of Assets Held for Sale in fiscal 2022 as compared to proceeds from the sale of lease pool equipment in fiscal 2021. We had $1.2 million of proceeds from sale of assets held for sale during the first six months of fiscal 2022 compared to approximately $2.0 million of proceeds from the sale of lease pool equipment in the first six 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, which is currently classified as Assets Held for Sale. However, there is no guarantee additional sales of Assets Held for Sale will occur. Accordingly, cash flow from the sale of Assets Held for Sale is unpredictable. Proceeds from any additional sales of Assets Held for Sale will be deployed in other areas of our business or used for general corporate purposes. Cash Flows from Financing Activities . Net cash provided by financing activities in the first six months of fiscal 2021 consisted of approximately $43,000 of proceeds from sales of Common Stock, approximately $4.5 million of proceeds from sales of Preferred Stock, offset by approximately $1.2 million of Preferred Stock dividend payments. Our 1 st ATM Offering Program related to the Preferred Stock was concluded in fiscal 2020. In the third quarter of fiscal 2021, we launched the 2 nd ATM Offering Program to sell up to 500,000 shares of Preferred Stock and 5,000,000 shares of Common Stock. As of July 31, 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 July 31, 2021. Furthermore, we have concluded that any deferred taxes with respect to the undistributed foreign earnings would be immaterial. As of July 31, 2021, we had deposits in foreign banks equal to approximately $669,000 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. 23 Table of Contents 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- and six-month periods ended July 31, 2021. 24 Table of Contents