Business Context and Reporting Period
Mitcham Industries, Inc. (the filing identifies the registrant as Mitcham Industries, Inc.) filed this unaudited Form 10-Q for the three months ended April 30, 2018, the first quarter of fiscal 2019. The company operates through Marine Technology Products and Equipment Leasing segments, serving seismic, hydrographic, oceanographic, offshore, defense and maritime-security markets.
The company adopted ASC Topic 606 using the modified retrospective method effective February 1, 2018. Management stated that adoption had no material effect on the financial statements.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Total revenue | $7.6 million | $18.4 million |
| Gross profit | $1.2 million | $3.2 million |
| Gross margin | 16.4% | 17.3% |
| Operating loss | $5.6 million | $2.3 million |
| Net loss | $5.9 million | $2.7 million |
| Net loss available to common shareholders | $6.3 million | $2.9 million |
| Loss per common share | $0.52 | $0.24 |
| Adjusted EBITDA | $(1.5) million | $9.0 million |
| Net cash from operating activities | $(3.4) million | $1.1 million |
Marine Technology Products revenue was $3.7 million versus $6.9 million, with gross profit of $1.5 million and a 40% margin versus $2.9 million and 42%. Equipment Leasing revenue was $4.0 million versus $11.5 million, and the segment generated a gross loss of $0.2 million versus gross profit of $0.3 million.
At April 30, 2018, cash and cash equivalents were $8.6 million, restricted cash was $0.2 million, working capital was approximately $25.3 million and total assets were $72.7 million. The company reported no interest-bearing debt and no bank credit facilities. Preferred stock outstanding was $15.3 million, with annual dividend requirements of approximately $1.6 million.
Cash, cash equivalents and restricted cash decreased by $1.3 million during the quarter to $8.8 million. Investing cash outflows included $3.0 million for the Hydroscience asset acquisition, partially offset by $1.6 million from sales of lease-pool equipment. Financing cash inflows included $3.8 million of net preferred-stock proceeds.
Material Changes Versus the Prior Comparable Period
- Revenue declined 59%, primarily because the prior-year quarter included an unusually large lease-pool equipment sale and because Marine Technology Products revenue was lower.
- Equipment leasing revenue was essentially flat, but lease-pool equipment sales fell to $1.2 million from $8.8 million.
- Lease-pool depreciation declined 37% to $2.7 million because of asset sales, lower purchases and fully depreciated equipment.
- SG&A increased to $5.6 million from $4.8 million, reflecting approximately $0.4 million of costs related to new products and facilities and approximately $0.3 million of overhead no longer absorbed into cost of sales.
- Research and development expense increased to $0.4 million from $0.1 million, and the company recorded a $0.2 million provision for doubtful accounts.
- Operating loss widened to $5.6 million from $2.3 million, while Adjusted EBITDA declined to a loss of $1.5 million from income of $9.0 million.
- The company acquired Hydroscience intellectual property and other assets for total consideration of $4.5 million, including $3.0 million in cash, $1.1 million in released claims and $0.3 million in transaction costs. The allocation included $3.9 million of intangible assets.
- Preferred stock increased through a $3.5 million private placement to Mitsubishi Heavy Industries and additional ATM sales. Preferred dividends were $0.4 million for the quarter.
Guidance, Outlook, Risks and Unusual Items
Management expects Equipment Leasing results to remain below historical levels because of lower oil and gas exploration activity, excess seismic equipment capacity, technological changes and competition. Land leasing activity is expected to remain well below historical levels in fiscal 2019, although management anticipates continuing demand in Europe and improving demand in South America. Marine leasing demand is also expected to remain pressured by excess used equipment.
Management is emphasizing Marine Technology Products, reducing capital deployed in the lease pool and adjusting its geographic footprint. Seamap had received approximately $6.1 million of orders through May 31, 2018, plus approximately $1.0 million of orders for the new SeaLink streamer product line. Klein had booked approximately $6.0 million of new orders through May 31, 2018, which management expected to complete in fiscal 2019.
The company did not expect a material contribution from the new towed-streamer products until the second half of fiscal 2019. It had incurred approximately $0.4 million of incremental expenses for technology transfer and facility setup and expected to begin repair and support services for Mitsubishi Heavy Industries in the second quarter of fiscal 2019.
Management stated that cash on hand, operating cash flow and preferred-stock proceeds should meet liquidity needs for the next 12 months, but the company had no revolving credit or other bank facility. It was discussing possible facilities with banks, with no assurance that financing would be available on acceptable terms.
- Key risks include reduced seismic demand, oil and gas price fluctuations, customer defaults, loss of significant customers, competition, foreign operations and currency exposure, sanctions affecting Russia, supplier risks, seasonal volatility and potential impairment of long-lived assets.
- International customers generated approximately 89% of quarterly revenue, increasing exposure to foreign markets and geopolitical and currency risks.
- A 10% increase in the U.S. dollar against relevant foreign currencies would reduce the U.S.-dollar value of foreign-currency cash deposits by approximately $0.1 million.
- The company had approximately $0.2 million of cash collateral supporting import and performance bonds.
- The company reported no material legal proceedings, no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Facts Investors Should Verify
- Whether the approximately $6.1 million of Seamap orders and $6.0 million of Klein orders convert to revenue and cash collection as anticipated.
- The timing and commercial success of the SeaLink streamer product line and the related facility-expansion costs.
- Whether Equipment Leasing demand and lease-pool utilization stabilize, and whether additional asset sales generate sufficient liquidity.
- The company’s ability to maintain liquidity without bank credit facilities while funding operating losses and approximately $1.6 million of annual preferred dividends.
- Accounts and contracts receivable collection risk, including $4.4 million of contracts receivable due from four customers at April 30, 2018.
- Potential impairment of lease-pool equipment, goodwill or other intangible assets if market demand or projected cash flows deteriorate.
- Foreign-exchange, sanctions and other geopolitical exposure arising from the company’s substantial international revenue and operations.