Business Context and Reporting Period
Mitcham Industries, Inc. filed this unaudited Form 10-Q for the quarter ended July 31, 2019, the second quarter of fiscal 2020. The company operates through Marine Technology Products and Equipment Leasing, serving seismic, hydrographic, oceanographic, defense, security and offshore markets. The filing identifies the registrant as Mitcham Industries, Inc.; the request metadata refers to MIND Technology, Inc.
The company completed the sale of its Australian subsidiary, Seismic Asia Pacific Pty Ltd. (SAP), during the quarter ended April 30, 2019. It had previously sold its Russian subsidiary, Mitcham Seismic Eurasia LLC, in August 2018.
Financial Performance and Position
| Metric | Three months ended July 31, 2019 | Three months ended July 31, 2018 | Six months ended July 31, 2019 | Six months ended July 31, 2018 |
|---|---|---|---|---|
| Revenue | $8.9 million | $8.4 million | $18.8 million | $16.0 million |
| Gross profit | $2.9 million | $1.9 million | $6.6 million | $3.1 million |
| Gross margin | 32.4% | 22.3% | 35.3% | 19.5% |
| Operating loss | $(3.1) million | $(4.6) million | $(5.5) million | $(10.1) million |
| Net loss | $(3.1) million | $(4.6) million | $(5.6) million | $(10.5) million |
| Net loss attributable to common shareholders | $(3.6) million | $(5.0) million | $(6.5) million | $(11.3) million |
| Loss per common share | $(0.30) | $(0.41) | $(0.54) | $(0.93) |
| Adjusted EBITDA | $(1.0) million | $(1.1) million | $(0.9) million | $(2.6) million |
Marine Technology Products revenue increased to $6.7 million in the quarter and $12.7 million year to date, compared with $6.0 million and $9.7 million, respectively, in the prior comparable periods. Equipment Leasing revenue, including equipment sales, was $2.2 million in the quarter and $6.1 million year to date, versus $2.5 million and $6.5 million.
Cash and cash equivalents were $7.5 million at July 31, 2019, plus $0.2 million of restricted cash. Working capital was approximately $26.8 million, compared with $28.8 million at January 31, 2019. Total assets were $63.0 million and shareholders’ equity was $52.0 million.
The company had no interest-bearing bank debt at July 31, 2019. Operating lease liabilities totaled $2.7 million, including $0.7 million current and $2.0 million non-current. Preferred stock outstanding was $20.3 million, and annual preferred dividends were approximately $2.1 million based on shares outstanding at period-end.
For the six months ended July 31, 2019, operating activities used $3.5 million of cash, investing activities provided $0.6 million, and financing activities provided $1.0 million. Cash declined by $1.9 million from the beginning of the fiscal year to $7.6 million, including restricted cash.
Material Changes Versus the Prior Comparable Period
- Revenue increased 7% in the second quarter and 17% for the first six months, driven primarily by higher Marine Technology Products revenue.
- Gross margin improved substantially, reflecting higher-margin product sales and lower Equipment Leasing depreciation.
- Operating loss narrowed by $1.5 million in the quarter and $4.6 million year to date, aided by higher product contribution, improved leasing margins, cost reductions and the sale of MSE and SAP.
- Selling, general and administrative expense declined to $4.8 million from $5.5 million in the quarter and to $10.0 million from $11.1 million year to date.
- Marine Technology Products operating loss improved to $0.7 million in the quarter and $1.9 million year to date, while Equipment Leasing improved to a $1.6 million quarterly loss and a $1.9 million year-to-date loss.
- The company issued 86,938 shares of Series A Preferred Stock under its at-the-market program during the first six months, generating approximately $2.1 million of gross proceeds. Preferred stock dividends increased to $1.0 million from $0.8 million.
- The company adopted ASC 842 on February 1, 2019, recording approximately $3.0 million of operating lease right-of-use assets and corresponding liabilities. The adoption did not materially affect the income statement or cash flows.
- Inventory increased to $13.1 million from $10.8 million at January 31, 2019, while accounts receivable net of allowance declined to $10.7 million from $12.1 million.
Guidance, Outlook, Risks and Unusual Items
Management expects Marine Technology Products to provide greater growth opportunities than the historically oil-and-gas-dependent Equipment Leasing business. The Malaysia manufacturing facility was expected to operate near capacity for the balance of fiscal 2020, and management was evaluating ways to increase capacity. The company expected increasing SeaLink revenue in fiscal 2020 and beyond.
Marine Technology Products backlog was approximately $14.1 million at July 31, 2019, up from $11.0 million at April 30, 2019 and $8.7 million at January 31, 2019. Management expected substantially all backlog to be completed during fiscal 2020, but cautioned that backlog timing and order size may vary.
Management reported initial orders for new sonar technology and expected delivery in the third quarter of fiscal 2020. Government and military projects may have long and uncertain sales cycles, while certain marine seismic projects had been delayed. Equipment leasing demand remained sporadic by region, with intense competition in some markets.
Liquidity is expected to be supported by cash on hand, operating cash flows, preferred stock issuance and potential sales of lease pool equipment. The company had 76,736 preferred shares remaining available under its ATM program, no bank credit facility, and a $3.1 million lease pool equipment purchase commitment, for which a $1.6 million deposit had been paid by July 31, 2019.
- Key risks include dependence on seismic and oil and gas activity, customer defaults, loss of significant customers or suppliers, competition, manufacturing and product reliability issues, intellectual property claims, foreign currency and geopolitical exposure, and potential asset impairment.
- International customers generated approximately 81% of revenue for the first six months of fiscal 2020. The company held approximately $1.4 million of foreign-currency cash; it does not hedge foreign exchange exposure with derivatives.
- The company recorded a $4.9 million loss on the prior sale of MSE, including approximately $5.4 million of cumulative translation losses reclassified from accumulated other comprehensive loss.
- The buyer of MSE had paid approximately $0.5 million of approximately $1.2 million in contractual proceeds through July 31, 2019; management expected the remaining amount and interest to be paid.
- The company had structured payment agreements with two customers totaling $2.1 million and an allowance for doubtful accounts of $2.1 million.
- The filing reports no material legal proceedings, no off-balance-sheet arrangements, and no material change to the risk factors in the fiscal 2019 Form 10-K.
Important Facts for Investors to Verify
- Whether Marine Technology Products backlog converts to revenue and cash as expected during fiscal 2020, particularly the SeaLink and new sonar programs.
- Whether the Malaysia facility can operate near capacity without materially increasing costs or execution risk.
- The sustainability of positive gross margins and the timing of a return to positive operating income and Adjusted EBITDA.
- Future liquidity needs given continued operating cash burn, the $3.1 million equipment commitment, preferred dividends and reliance on additional preferred stock issuance or asset sales.
- Collection of remaining MSE sale proceeds and other structured customer receivables.
- Exposure to international markets, foreign currency movements, government project delays and fluctuations in seismic and oil and gas activity.