Business Context and Reporting Period
Mitcham Industries, Inc. filed this unaudited Form 10-Q for the quarter and six months ended July 31, 2018, corresponding to the second quarter of fiscal 2019. The filing identifies two operating segments: Marine Technology Products and Equipment Leasing. The company designs, manufactures, sells, leases and services seismic, hydrographic, oceanographic and offshore equipment worldwide.
The filing states that the Marine Technology Products segment was renamed from Equipment Manufacturing and Sales; the segment’s composition and operations were unchanged. The company remained a smaller reporting company, with 12.1 million common shares outstanding as of September 5, 2018.
Financial Performance and Position
| Metric | Three Months Ended July 31, 2018 | Three Months Ended July 31, 2017 | Six Months Ended July 31, 2018 | Six Months Ended July 31, 2017 |
|---|---|---|---|---|
| Total revenue | $8.4 million | $10.8 million | $16.0 million | $29.3 million |
| Gross profit | $1.9 million | $0.6 million | $3.1 million | $3.8 million |
| Gross margin | 22.3% | 5.7% | 19.4% | 13.0% |
| Operating loss | $(4.6) million | $(5.0) million | $(10.1) million | $(7.3) million |
| Net loss | $(4.6) million | $(5.4) million | $(10.5) million | $(8.0) million |
| Net loss attributable to common shareholders | $(5.0) million | $(5.6) million | $(11.3) million | $(8.4) million |
| Loss per common share | $(0.41) | $(0.46) | $(0.93) | $(0.70) |
| Adjusted EBITDA | $(1.1) million | $(0.3) million | $(2.6) million | $8.7 million |
Quarterly revenue declined approximately 23% year over year, while six-month revenue declined approximately 45%. The six-month comparison was materially affected by a large lease-pool equipment sale in the first quarter of fiscal 2018 that did not recur. Quarterly operating loss improved modestly, primarily because of higher Marine Technology Products margins and lower lease-pool depreciation; the six-month operating loss worsened because of the prior-year equipment sale and increased operating expenses.
- Marine Technology Products revenue was $6.0 million in the quarter and $9.7 million for six months, compared with $9.7 million and $16.6 million, respectively, in the prior-year periods. Segment gross margin improved to 44% for the quarter and 43% for six months, from 38% and 40%.
- Equipment Leasing revenue was $2.5 million in the quarter and $6.5 million for six months, compared with $1.3 million and $12.8 million, respectively. The segment produced gross losses of $0.8 million and $1.0 million.
- General and administrative expense increased to $5.5 million for the quarter and $11.1 million for six months, primarily because of SeaLink start-up costs, restructuring expenses and a software upgrade project.
- SeaLink-related incremental expenses were approximately $0.6 million in the quarter and $0.8 million for six months. The company did not expect material SeaLink revenue until the second half of fiscal 2019.
Cash Flow, Liquidity and Capital Structure
| Balance or Cash Flow | July 31, 2018 | January 31, 2018 |
|---|---|---|
| Cash, cash equivalents and restricted cash | $7.1 million | $10.1 million |
| Working capital | $24.0 million | $25.5 million |
| Total assets | $68.1 million | $73.7 million |
| Total liabilities | $8.2 million | $7.8 million |
| Shareholders’ equity | $60.0 million | $65.8 million |
- Operating cash flow was $(5.8) million in the first six months of fiscal 2019, compared with $4.1 million provided in the prior-year period.
- Investing cash flow was $(2.1) million, including the $3.0 million cash purchase of Hydroscience assets, $1.4 million of lease-pool purchases and $2.8 million of proceeds from lease-pool equipment sales.
- Financing cash flow was $4.7 million, primarily from preferred-stock issuances, net of $0.8 million of preferred dividends.
- The company had no outstanding borrowings or bank credit facilities at July 31, 2018. It was discussing potential facilities but stated that availability, if established, could be significantly below prior facilities.
- Preferred stock outstanding generated annual dividend requirements of approximately $1.7 million. The company had 225,656 shares remaining available under its preferred-stock ATM program.
- Restricted cash of approximately $0.2 million secured import and performance bonds. The company reported no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue fell sharply for the six-month period because the prior year included approximately $9.1 million of lease-pool equipment sales versus approximately $2.2 million in the current period.
- Equipment leasing revenue increased 67% in the quarter and 17% for six months, mainly from greater land-leasing activity in Canada and Europe, but remains well below historical levels.
- Klein product revenue increased approximately 60% in the first half of fiscal 2019, with improved gross margins, although revenue remained below management expectations.
- Seamap revenue declined year over year, but gross margins improved because of product mix. Revenue from Seamap support services was not expected to become significant until the third quarter.
- The company acquired Hydroscience intellectual property and other assets for total consideration of $4.5 million, including $3.0 million in cash and $3.9 million of acquired intangible assets.
- Preferred stock issuances provided approximately $5.5 million of gross financing proceeds during the six months, including shares issued to Mitsubishi Heavy Industries in connection with the Hydroscience transaction and a subsequent milestone.
- Cash, total assets and equity declined from January 31, 2018, principally reflecting operating cash usage and ongoing investment in the SeaLink product line.
Guidance, Outlook, Risks and Unusual Items
- Management expected improved operating results and cash flow in the second half of fiscal 2019 and believed liquidity needs for the next 12 months would be met through cash on hand, operating cash flow and preferred-stock proceeds. This outlook is not a formal revenue or earnings forecast.
- Marine Technology Products backlog was approximately $12.6 million at July 31, 2018, and management expected substantially all of it to be completed in the second half of fiscal 2019.
- Management expected incremental Klein revenue in the second half of fiscal 2019 and anticipated improved demand for sonar products.
- Management expected total fiscal 2019 additions to the lease pool to be less than $2.0 million and stated that leasing results were unlikely to return to historical levels because of excess industry capacity, technological changes, competition and weak oil and gas exploration activity.
- Cost reductions from reduced operations in Colombia and Canada and the elimination of Russian operations were expected to produce annual savings of approximately $2.0 million, although significant savings had not yet been realized and restructuring costs had been incurred.
- In August 2018, the company sold its Russian subsidiary for approximately $1.0 million, near the book value of its net assets. Management did not expect a material effect on results.
- Key risks include oil and gas activity and commodity prices, customer defaults, loss of significant customers, foreign currency and political risks, Russia-related sanctions, competition, supplier or intellectual-property issues, seasonal fluctuations, financing availability and potential impairment of long-lived assets.
- The company adopted the new revenue standard effective February 1, 2018 using the modified retrospective method; management reported no material impact. The filing also states that the company had identified no additional impairment indicators as of July 31, 2018.
- Disclosure controls and procedures were deemed effective at July 31, 2018, and no material change in internal control over financial reporting was reported.
Investor Verification Checklist
- Verify whether the $12.6 million Marine Technology Products backlog converted to revenue and cash in the second half of fiscal 2019.
- Assess whether the expected $2.0 million of annual cost savings were realized and whether restructuring and SeaLink start-up costs continued.
- Monitor cash burn, preferred-stock issuance capacity, recurring preferred dividends and the absence of committed bank credit facilities.
- Separate recurring leasing and product revenue from the unusually large prior-year lease-pool equipment sale when evaluating trends.
- Evaluate customer concentration, receivable collectibility and the $3.8 million of contracts receivable due from four customers.
- Review the effect of the Hydroscience acquisition and SeaLink expansion on future revenue, margins, capital requirements and intangible-asset amortization.
- Confirm the financial and operational effects of the August 2018 Russian subsidiary sale and the company’s continuing foreign-exchange and geopolitical exposure.