Business Context and Reporting Period
Mitcham Industries, Inc. (NASDAQ: MIND and MINDP) filed this unaudited Form 10-Q for the three months ended April 30, 2020, the first quarter of fiscal 2021. The company operates through Marine Technology Products and Equipment Leasing, serving seismic, hydrographic, offshore, defense, and related markets. The filing identifies the registrant as Mitcham Industries, Inc.
Key Financial Metrics
| Metric | Three months ended April 30, 2020 | Three months ended April 30, 2019 |
|---|---|---|
| Revenue | $7.4 million | $9.9 million |
| Gross profit | $2.2 million | $3.7 million |
| Gross margin | 29.7% | 37.9% |
| Operating loss | $6.2 million | $2.5 million |
| Net loss | $6.6 million | $2.4 million |
| Net loss attributable to common shareholders | $7.2 million | $2.9 million |
| Basic and diluted loss per common share | $0.59 | $0.24 |
| Adjusted EBITDA | $(952,000) | $61,000 |
| Cash flow from operating activities | $929,000 provided | $1.9 million used |
Marine Technology Products revenue declined to $3.2 million from $6.0 million, with gross profit falling to $484,000 and segment margin to 15% from 41%. Equipment Leasing revenue increased to $4.2 million from $3.9 million, while segment gross profit increased to $1.7 million from $1.3 million, primarily because of higher lease-pool equipment sales and lower depreciation.
At April 30, 2020, cash and cash equivalents were $4.7 million, compared with $3.1 million at January 31, 2020 and $8.1 million at April 30, 2019. Working capital was approximately $20.4 million. Total assets were $51.2 million and shareholders’ equity was $40.6 million.
The company reported no funded bank debt and no outstanding bank credit facility. Lease liabilities totaled $2.0 million, including $966,000 current and $991,000 non-current. Preferred stock dividend requirements were approximately $2.2 million annually; $559,000 was paid during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 25%, primarily from lower Marine Technology Products sales, reduced leasing activity, and COVID-19-related delivery delays.
- Gross margin declined because of lower manufacturing activity and reduced overhead absorption in Marine Technology Products.
- Operating expenses increased overall despite a reduction in selling, general and administrative costs, principally because of a $2.5 million goodwill impairment charge and higher research and development expense.
- The company recorded a $2.5 million impairment of goodwill associated with the Seamap reporting unit due to COVID-19, lower oil prices, and a decline in the company’s equity market value. No additional impairment was recorded for other intangible or long-lived assets.
- Operating cash flow improved to $929,000 provided, aided by collections of accounts receivable and working-capital changes. Investing cash flow of $1.2 million was primarily supported by $1.4 million of lease-pool equipment sales.
- The Series A preferred stock ATM program was fully utilized, with 994,046 shares outstanding and no remaining shares available for issuance under that program.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that COVID-19 and the sharp decline in oil prices created substantial uncertainty and could materially adversely affect operations, liquidity, and customers’ ability to pay.
- Facilities in Malaysia and Singapore were temporarily shut down. Malaysia resumed full staffing on May 4, 2020; Singapore resumed manufacturing on June 1, 2020, but was not yet operating at full capacity at the filing date.
- Marine Technology Products backlog was approximately $10.2 million at April 30, 2020, compared with $11.0 million a year earlier and $8.9 million at January 31, 2020. Approximately 80% related to non-energy customers, and management expected completion during fiscal 2021.
- The company intends to make no new investments in land seismic lease-pool equipment and plans to maximize existing equipment through leasing or sales while reducing related costs.
- Management reduced expenses through employee and contractor layoffs or furloughs, deferred expenditures, a temporary 20% reduction in the base salaries of two senior executives, and a temporary 25% reduction in board cash compensation.
- Management disclosed substantial doubt about the company’s ability to meet obligations over the next twelve months, citing a history of losses, prior negative operating cash flow, reduced cash relative to the prior year, limited preferred-stock financing capacity, and uncertain market conditions. Management identified cost reductions, asset sales, backlog, potential financing, and government programs as mitigating factors.
- Subsequent to April 30, 2020, the company received approximately $1.6 million in two-year Paycheck Protection Program loans and smaller foreign government grants. Management believed a significant portion of the PPP loan would be forgiven, subject to program requirements.
- The company stated that its disclosure controls were not effective as of April 30, 2020 because of a previously disclosed material weakness in internal control over financial reporting. Remediation was expected before the end of fiscal 2021.
- The company had no material legal proceedings and reported no off-balance-sheet arrangements. Key risks include COVID-19, oil-price volatility, customer defaults, financing availability, foreign currency exposure, supply-chain and manufacturing disruptions, and potential further asset impairments.
Investor Verification Items
- Verify the company’s ability to remain a going concern over the next twelve months, including the availability and terms of new debt or equity financing.
- Monitor cash burn, preferred dividend obligations, lease-pool equipment sales, and the sustainability of positive operating cash flow.
- Assess the timing and collectability of customer receivables, including structured payment agreements and approximately $495,000 remaining from the sale of the former Russian subsidiary.
- Confirm the extent of COVID-19-related facility disruptions, backlog conversion, order delays, and customer cancellations.
- Evaluate whether further goodwill, intangible-asset, or long-lived-asset impairments may be required if oil prices, demand, or projected cash flows deteriorate.
- Track remediation of the material weakness in internal control over financial reporting and the effect of the PPP loan’s forgiveness requirements.