Mitcham Industries, Inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2020. The request references 2019 Q4; the filing is the annual report for FY2020, including the quarter ended January 31, 2020. Mitcham provides marine technology products and seismic equipment leasing services through its Marine Technology Products and Equipment Leasing segments.
Business Context and Strategy
- Marine Technology Products includes Seamap marine seismic equipment and Klein side-scan sonar and waterside security systems.
- Equipment Leasing provides short-term seismic equipment rentals and sales of used lease-pool equipment, primarily to oil and gas industry customers.
- Management is shifting emphasis toward marine technology and non-energy applications, including hydrographic, oceanographic, defense, security and governmental markets.
- The company completed the sale of its Australian subsidiary, SAP, in February 2019 and had previously exited Russia through the sale of MSE in August 2018.
Financial Performance and Position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $42.675 million | $42.942 million |
| Gross profit | $16.621 million | $11.740 million |
| Gross margin | 38.9% | 27.3% |
| Operating loss | $10.375 million | $13.020 million |
| Net loss | $11.287 million | $19.840 million |
| Net loss attributable to common shareholders | $13.337 million | $21.548 million |
| Loss per diluted common share | $1.10 | $1.78 |
| Adjusted EBITDA | $(568,000) | $928,000 |
| Cash flow from operations | $(5.817) million | $(5.457) million |
| Cash, cash equivalents and restricted cash | $3.234 million | $9.549 million |
| Working capital | $22.2 million | $28.8 million |
| Long-term debt | None | None |
- Marine Technology Products revenue increased 15% to $29.572 million, with gross profit of $12.981 million and a 44% gross margin.
- Equipment Leasing revenue declined 24% to $13.213 million, while segment gross profit improved to $3.640 million from $999,000, mainly because lease-pool depreciation fell to $4.960 million from $9.186 million.
- Seamap revenue increased to $22.003 million from $15.989 million, driven primarily by SeaLink streamer products and BuoyLink RGPS systems. Klein revenue was essentially flat at $7.472 million.
- Operating expenses included a $2.0 million doubtful-account provision, a $760,000 intangible-asset impairment charge, $1.850 million of research and development expense and $19.716 million of selling, general and administrative expense.
- Accounts receivable totaled $16.378 million before a $4.054 million allowance. Approximately $4.8 million was more than 180 days past due, according to the risk disclosures.
- Net property and equipment and seismic lease-pool assets were $13.777 million, compared with $14.155 million in the prior year. Approximately $114.5 million of fully depreciated lease-pool equipment remained in service.
- Preferred stock outstanding increased to 994,046 shares. The 9% Series A Preferred Stock generated approximately $2.050 million of dividends in FY2020, or about $559,000 quarterly.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly flat, declining 0.6%, but gross profit increased 41.6% and the operating loss narrowed by 20.3%.
- Marine Technology Products became a larger contributor to revenue and gross profit, while Equipment Leasing continued to contract operationally.
- Operating cash use increased modestly from $5.457 million to $5.817 million, and year-end cash declined by approximately $6.3 million.
- The provision for doubtful accounts increased from $200,000 to $2.0 million, and the allowance for doubtful accounts rose from $2.113 million to $4.054 million.
- The company recorded a $760,000 Klein intangible-asset impairment in FY2020. FY2019 included a $5.405 million loss on the sale of subsidiaries and a $1.211 million reserve against foreign prepaid income taxes; these items did not recur in FY2020.
- Capital expenditures and lease-pool purchases totaled approximately $3.991 million, including approximately $2.0 million invested in new land nodal equipment during the third quarter.
- The company adopted ASC 842 lease accounting, recognizing approximately $2.3 million of operating lease assets and liabilities at January 31, 2020.
Guidance, Outlook, Risks and Unusual Items
- Marine Technology Products backlog was approximately $8.9 million at January 31, 2020, compared with $8.7 million the prior year. Management expected it to be fulfilled during FY2021, with approximately 80% related to non-energy customers.
- Management highlighted opportunities for MA-X and Micro Max sonar technology, including potential military and unmanned underwater vehicle applications, but stated that these products had not yet materially affected results.
- COVID-19 caused temporary shutdowns or restrictions at facilities in Malaysia and Singapore, reduced operating efficiency elsewhere, and created uncertainty regarding orders, shipments, collections and liquidity.
- The sharp decline in oil prices could reduce seismic activity, delay or cancel customer projects, and impair customers’ ability to pay.
- The company disclosed substantial doubt about its ability to continue as a going concern over the next twelve months. Mitigating factors cited include no funded debt, $22.2 million of working capital, cost-reduction plans, backlog, potential asset sales, government financing applications and possible debt or equity financing.
- The Series A preferred-stock ATM program was completed, and additional preferred-stock capacity is limited. Management stated that future preferred dividends could be suspended if liquidity demands require it.
- As of January 31, 2020, the company had no funded bank debt, no maintenance-type financial covenants and approximately $6.753 million of contractual obligations, primarily operating leases, purchase obligations and other obligations.
- Management identified a material weakness in internal control over financial reporting involving review controls over significant estimates, after auditors identified an error in the doubtful-account provision. Remediation had not yet been fully tested or completed.
- The filing reports no material pending legal proceedings and no off-balance-sheet arrangements.
Most Important Facts to Verify
- Whether COVID-19, lower oil prices and customer credit deterioration materially reduced FY2021 revenue, collections and liquidity after the filing date.
- Progress toward resolving the going-concern uncertainty and replacing the funding capacity previously provided by preferred-stock issuances.
- Actual collections on the approximately $4.8 million of receivables more than 180 days past due and whether the $4.054 million allowance is adequate.
- Whether the $8.9 million marine-technology backlog converted to revenue on schedule and whether MA-X, Micro Max and potential defense programs generated material orders.
- Whether further impairment charges, lease-pool disposals or restructuring costs were required as seismic and energy-market conditions deteriorated.
- Whether management remediated the material weakness related to significant-estimate review controls.