Business Context and Reporting Period
Filing: Unaudited Form 10-Q for Mitcham Industries, Inc. for the three and six months ended July 31, 2017. The request identifies MIND TECHNOLOGY, INC.; however, the provided filing is for Mitcham Industries, Inc.
The company operates two segments: Equipment Manufacturing and Sales, including Seamap, Klein and SAP products; and Equipment Leasing, which provides seismic equipment rentals and lease-pool equipment sales worldwide.
Financial Highlights
| Metric | Three months ended July 31, 2017 | Three months ended July 31, 2016 | Six months ended July 31, 2017 | Six months ended July 31, 2016 |
|---|---|---|---|---|
| Revenue | $10.8 million | $8.7 million | $29.3 million | $20.4 million |
| Gross profit (loss) | $0.6 million | $(2.2) million | $3.8 million | $(2.6) million |
| Gross margin | 5.7% | (25.9)% | 13.0% | (12.8)% |
| Operating loss | $(5.0) million | $(8.3) million | $(7.3) million | $(14.6) million |
| Net loss | $(5.4) million | $(9.5) million | $(8.0) million | $(16.0) million |
| Net loss available to common shareholders | $(5.6) million | $(9.6) million | $(8.4) million | $(16.1) million |
| Loss per common share | $(0.46) | $(0.80) | $(0.70) | $(1.33) |
| Adjusted EBITDA | $(0.3) million | $(0.6) million | $8.7 million | $1.6 million |
Manufacturing and Sales revenue increased to $9.7 million in the quarter and $16.6 million year to date, primarily due to higher Seamap sales. Equipment Leasing revenue declined to $1.3 million in the quarter from $2.9 million, but increased to $12.8 million year to date because of approximately $9.1 million of lease-pool equipment sales.
Equipment Manufacturing and Sales produced operating income of $0.9 million in the quarter and $1.2 million year to date. Equipment Leasing generated operating losses of $5.0 million and $6.6 million, respectively. Leasing results remained pressured by weak rental activity, fixed costs and lease-pool depreciation.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $6.9 million at July 31, 2017, compared with $2.9 million at January 31, 2017. Including restricted cash, total cash was $7.2 million.
- Working capital was approximately $27.3 million at July 31, 2017, compared with $21.6 million at January 31, 2017.
- Operating cash flow was $4.1 million for the first six months, versus $3.1 million in the prior-year period.
- Investing cash flow was $5.7 million, including $6.0 million of proceeds from used lease-pool equipment sales and $0.2 million of lease-pool purchases.
- Financing cash flow was negative $5.9 million, principally reflecting $3.5 million of revolving-credit repayments, $2.8 million of term-loan repayments, and $0.4 million of preferred dividends.
- The company had no outstanding debt at July 31, 2017. It repaid and terminated its Credit Agreement in March 2017 and repaid and cancelled the Seamap Credit Facility in April 2017.
- The company had no line of credit or other bank credit facility at the filing date and was discussing potential replacement facilities. Management stated that available credit, if obtained, would likely be materially lower than prior facilities.
- Series A preferred stock carries a 9.00% annual dividend. Based on shares outstanding at July 31, 2017, annual preferred dividend requirements were approximately $0.9 million. The company issued additional preferred shares through its ATM program.
Material Changes and Unusual Items
- Revenue increased 25% in the quarter and 44% for the six-month period, while net losses narrowed substantially versus the prior-year periods.
- The improvement was driven by higher manufactured equipment sales, approximately $2.9 million of year-to-date gross profit from lease-pool equipment sales, lower lease-pool depreciation and lower interest expense.
- Lease-pool assets declined to $29.8 million net from $43.8 million at January 31, 2017, reflecting asset sales, limited new purchases and depreciation.
- Manufacturing gross margin declined to 38% for the quarter and 40% year to date, from 46% and 45%, respectively, primarily due to lower Klein revenue and product mix.
- The company recorded income-tax provisions despite pretax losses, primarily because of foreign withholding taxes.
- Foreign-currency exposure remained significant: approximately 43% of net assets were affected by foreign-currency translation, and the company does not use derivatives to hedge this exposure.
Outlook, Risks and Contingencies
Management expects the seismic industry to remain challenging through fiscal 2018, with only marginal and gradual improvement. Leasing demand is constrained by weak oil and gas exploration activity, excess used equipment, pricing pressure and intense competition. Activity in Russia is expected to remain restrained by economic conditions and trade restrictions.
Management expects higher second-half revenue from Seamap, SAP and potentially Klein based on completed systems, pending orders, bookings and customer inquiries. These expectations are not formal quantitative guidance. Lease-pool additions for fiscal 2018 are expected to remain below $1.0 million, subject to changes in market conditions.
Principal risks include oil and gas price volatility, declining seismic demand, customer defaults, excess equipment supply, foreign exchange and political risks, Russia-related sanctions, seasonality and weather, competition, loss of customers or suppliers, funding constraints, and potential impairment of long-lived assets. The filing reports no material legal proceedings and no off-balance-sheet arrangements. Disclosure controls were effective as of July 31, 2017.
Investor Verification Items
- Verify the issuer identity, because the supplied filing is for Mitcham Industries, Inc., not MIND Technology, Inc.
- Assess whether operating cash flow and lease-pool asset sales can continue to fund operations without revolving credit.
- Monitor the availability and terms of any replacement bank facilities.
- Separate recurring leasing and manufacturing performance from sporadic lease-pool equipment sales.
- Evaluate the sustainability of the reported adjusted EBITDA improvement and the continuing preferred dividend obligation.
- Track recovery in oil and gas exploration, equipment utilization, Klein bookings, Seamap deliveries and international market conditions.