Business Context and Reporting Period
MIND Technology, Inc. is identified in the filing as Mitcham Industries, Inc. The unaudited Form 10-Q covers the three months ended April 30, 2019, the first quarter of fiscal 2020, with comparison to the three months ended April 30, 2018.
The company operates through Marine Technology Products, which designs and sells seismic, hydrographic, sonar and offshore products, and Equipment Leasing, which leases and sells seismic equipment. During the quarter, the company sold its Australian subsidiary, Seismic Asia Pacific Pty Ltd. It had previously sold its Russian subsidiary in August 2018.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $9.857 million | $7.613 million | 29.5% increase |
| Gross profit | $3.741 million | $1.245 million | 100.5% increase |
| Gross margin | 37.9% | 16.4% | Up approximately 21.5 percentage points |
| Operating loss | $2.456 million | $5.572 million | Improved by $3.116 million |
| Operating margin | (24.9%) | (73.2%) | Improved |
| Net loss | $2.415 million | $5.905 million | Improved by $3.490 million |
| Net loss attributable to common shareholders | $2.886 million | $6.290 million | Improved by $3.404 million |
| Loss per common share | $0.24 | $0.52 | Improved |
| Adjusted EBITDA | $61,000 | $(1.479) million | Improved by $1.540 million |
| Net cash used in operating activities | $1.851 million | $3.366 million | Use reduced by $1.515 million |
Marine Technology Products revenue was $5.982 million, compared with $3.708 million in the prior-year quarter, and generated gross profit of $2.467 million, compared with $1.480 million. Equipment Leasing revenue was $3.935 million, compared with $4.047 million, but gross profit improved to $1.274 million from a $235,000 gross loss.
At April 30, 2019, cash and cash equivalents were $7.986 million and restricted cash was $153,000. Working capital was approximately $27.0 million, compared with $28.8 million at January 31, 2019. Total assets were $64.333 million and shareholders’ equity was $53.923 million.
The company reported no interest-bearing bank debt and no line of credit or other bank credit facility. Operating lease liabilities totaled $3.014 million following adoption of ASC 842. Annual preferred-stock dividend requirements were approximately $1.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because Marine Technology Products revenue rose by $2.274 million, led by Seamap, while Equipment Leasing revenue increased for leasing activities but declined for lease-pool equipment sales.
- Gross profit improved substantially because of higher-margin Marine Technology Products sales, improved Equipment Leasing margins and a $1.2 million reduction in lease-pool depreciation.
- Selling, general and administrative expense declined to $5.232 million from $5.630 million following restructuring, cost reductions and the sales of the Russian and Australian subsidiaries.
- Cash used in operations declined, although operations still consumed cash. Investing activities provided $603,000, including $730,000 from lease-pool equipment sales and approximately $239,000 of net proceeds from the Australian subsidiary sale.
- Financing activities used $62,000, reflecting approximately $409,000 of preferred-stock proceeds offset by $471,000 of preferred dividends.
- The company adopted the new lease standard on February 1, 2019, recording approximately $3.0 million of operating lease right-of-use assets and corresponding liabilities without a material effect on earnings or cash flow.
- Preferred stock outstanding increased to 847,000 shares from 830,000 shares, primarily through the at-the-market offering program.
Guidance, Outlook, Risks and Unusual Items
Management is transitioning the company toward Marine Technology Products while retaining Equipment Leasing as an important business. Management expects increasing revenue from the SeaLink product line and stated that the Malaysian manufacturing facility was expected to operate near capacity for the balance of fiscal 2020. The filing does not provide formal revenue or earnings guidance.
Marine Technology Products backlog was approximately $11.0 million at April 30, 2019, compared with $2.7 million a year earlier and $8.7 million at January 31, 2019. The company also reported approximately $5.1 million of additional orders received after quarter-end and expected substantially all reported orders to be completed in fiscal 2020. Management cautioned that backlog timing and size may not predict subsequent-period results.
Management believes liquidity for the next 12 months will be provided by cash on hand, operating cash flow and additional preferred-stock proceeds, with possible proceeds from lease-pool equipment sales. Liquidity could be pressured by continued operating cash use, preferred dividends, customer defaults, seasonal demand and the unpredictability of equipment-sale proceeds.
- Demand remains dependent on seismic, hydrographic, oceanographic, defense and oil-and-gas exploration activity, which can be volatile and outside the company’s control.
- Foreign operations expose the company to political, economic, regulatory, currency and export-compliance risks. Approximately 78% of first-quarter revenue came from international customers.
- The company has significant receivables, including structured payment agreements with customers. Customer defaults could adversely affect liquidity.
- Goodwill and intangible assets totaled approximately $12.7 million at April 30, 2019. The filing reported no new impairment indicators, but technological obsolescence or weaker cash flows could require future impairment.
- The company had $153,000 of cash collateral securing import and performance bonds and no derivative instruments to hedge foreign currency exposure.
- The Australian subsidiary sale included approximately $420,000 of unsecured, non-interest-bearing note receivable and an expected working-capital adjustment of approximately $114,000.
- The prior Russian subsidiary sale resulted in an approximately $4.9 million loss, including recognition of approximately $5.4 million of cumulative translation losses; related installment receivables remained outstanding.
- The company recorded income-tax provisions despite pretax losses, primarily because of foreign withholding taxes and valuation allowances on deferred tax assets.
- No material legal proceedings were reported, and management stated that previously disclosed risk factors had not materially changed.
Most Important Facts for Investors to Verify
- Whether the $11.0 million backlog and $5.1 million of post-quarter orders convert to revenue and cash within fiscal 2020.
- The sustainability of improved Equipment Leasing margins after lower lease-pool depreciation and equipment sales.
- Whether the Malaysian facility can meet expected demand without materially increasing capital expenditures or operating costs.
- The company’s ability to generate positive operating cash flow while funding approximately $1.9 million of annual preferred dividends.
- Collection timing and credit quality for structured customer receivables, the Russian subsidiary installment balance and the Australian sale-related receivables.
- Future demand for Marine Technology Products and exposure to fluctuations in seismic and oil-and-gas exploration activity.
- Potential impairment risk relating to the lease pool, goodwill and intangible assets.