MITCHAM INDUSTRIES INC

Transcription

1 MITCHAM INDUSTRIES INC FORM 10-Q (Quarterly Report) Filed 12/08/16 for the Period Ending 10/31/16 Address 8141 SH 75 SOUTH PO BOX 1175 HUNTSVILLE, TX Telephone CIK Symbol MIND SIC Code Equipment Rental and Leasing, Not Elsewhere Classified Industry Oil Related Services and Equipment Sector Energy Fiscal Year 01/31 Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2016 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: MITCHAM INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Texas (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8141 SH 75 South P.O. Box 1175 Huntsville, Texas (Address of principal executive offices, including Zip Code) (936) (Registrant s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

3 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Indicate the number of shares outstanding of each of the issuer s classes of common stock, as of the latest practicable date: 12,089,758 shares of common stock, $0.01 par value, were outstanding as of December 7, 2016.

4 MITCHAM INDUSTRIES, INC. Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of October 31, 2016 and January 31, Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2016 and Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended October 31, 2016 and Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2016 and Notes to Condensed Consolidated Financial Statements 5 Cautionary Statement about Forward-Looking Statements 14 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 Item 4. Controls and Procedures 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings 30 Item 1A. Risk Factors 30 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30 Item 3. Defaults Upon Senior Securities 30 Item 4. Mine Safety Disclosures 30 Item 5. Other Information 30 Item 6. Exhibits 30 Signatures 31 ii

5 Item 1. Financial Statements PART I. FINANCIAL INFORMATION MITCHAM INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (unaudited) October 31, 2016 January 31, 2016 ASSETS Current assets: Cash and cash equivalents $ 3,232 $ 3,769 Accounts and contracts receivable, net of allowance for doubtful accounts of $5,192 and $5,821 at October 31, 2016 and January 31, 2016, respectively 11,292 19,775 Inventories, net 12,521 12,944 Prepaid income taxes 1,656 2,523 Prepaid expenses and other current assets 1,808 1,685 Total current assets 30,509 40,696 Seismic equipment lease pool and property and equipment, net 54,192 73,516 Intangible assets, net 9,442 10,466 Goodwill 3,997 4,155 Deferred tax asset 1, Long-term receivables 4,968 4,972 Other assets Total assets $ 104,342 $ 134,759 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable $ 2,716 $ 3,543 Current maturities long-term debt 8,676 3,218 Deferred revenue Accrued expenses and other current liabilities 2,094 5,369 Total current liabilities 13,664 12,456 Long-term debt, net of current maturities 17,266 Total liabilities 13,664 29,722 Shareholders equity: Preferred stock, $1.00 par value; 1,000 shares authorized; 328 issued and outstanding 6,975 Common stock, $0.01 par value; 20,000 shares authorized; 14,019 shares issued at October 31, 2016 and January 31, Additional paid-in capital 121, ,664 Treasury stock, at cost (1,929 and 1,928 shares at October 31, 2016 and January 31, 2016, respectively) (16,858) (16,854) Retained earnings (accumulated deficit) (10,405) 13,188 Accumulated other comprehensive loss (10,425) (12,101) Total shareholders equity 90, ,037 Total liabilities and shareholders equity $ 104,342 $ 134,759 The accompanying notes are an integral part of these condensed consolidated financial statements. 1

6 MITCHAM INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) For the Three Months Ended October 31, For the Nine Months Ended October 31, Revenues: Equipment leasing $ 2,577 $ 4,271 $ 7,819 $ 19,966 Lease pool and other equipment sales 229 1,440 2,439 2,092 Equipment manufacturing and sales 5,251 9,970 18,193 18,319 Total revenues 8,057 15,681 28,451 40,377 Cost of sales: Direct costs - equipment leasing 739 1,175 2,276 3,593 Direct costs - lease pool depreciation 6,428 7,241 19,976 22,460 Cost of lease pool and other equipment sales Cost of equipment manufacturing and sales 2,944 5,072 10,062 9,803 Total cost of sales 10,194 13,958 33,196 36,687 Gross (loss) profit (2,137) 1,723 (4,745) 3,690 Operating expenses: General and administrative 5,039 4,359 15,778 14,219 Provision for doubtful accounts 600 1,200 Contract settlement 2,142 2,142 Depreciation and amortization ,857 1,868 Total operating expenses 5,597 7,701 17,635 19,429 Operating loss (7,734) (5,978) (22,380) (15,739) Other income (expense): Interest, net (111) (136) (539) (523) Other, net 287 (445) Total other income (expense) 176 (581) (413) 143 Loss before income taxes (7,558) (6,559) (22,793) (15,596) Benefit (provision) for income taxes (506) 3,698 Net loss $ (7,330) $ (5,813) $(23,299) $(11,898) Preferred stock dividends (180) (294) Net loss available to common shareholders $ (7,510) $ (5,813) $(23,593) $(11,898) Net loss per common share: Basic $ (0.62) $ (0.48) $ (1.96) $ (0.99) Diluted $ (0.62) $ (0.48) $ (1.96) $ (0.99) Shares used in computing net loss per common share: Basic 12,075 12,051 12,068 12,035 Diluted 12,075 12,051 12,068 12,035 The accompanying notes are an integral part of these condensed consolidated financial statements. 2

7 MITCHAM INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) (unaudited) For the Three Months Ended October 31, For the Nine Months Ended October 31, Net loss available to common shareholders $ (7,510) $ (5,813) $(23,593) $(11,898) Change in cumulative translation adjustment (748) (361) 1,676 (2,007) Comprehensive loss attributable to common shareholders $ (8,258) $ (6,174) $(21,917) $(13,905) The accompanying notes are an integral part of these condensed consolidated financial statements. 3

8 MITCHAM INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) For the Nine Months Ended October 31, Cash flows from operating activities: Net loss $(23,299) $(11,898) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 21,927 24,432 Stock-based compensation Provision for inventory obsolescence Provision for doubtful accounts, net of charge offs 1,200 Gross profit from sale of lease pool equipment (1,420) (1,027) Excess tax benefit from exercise of non-qualified stock options and restricted shares (125) Deferred tax benefit (582) (5,285) Changes in working capital items: Trade accounts and contracts receivable 10, Inventories 471 (982) Prepaid expenses and other current assets (893) 3,925 Income taxes payable Accounts payable, accrued expenses, other current liabilities and deferred revenue (4,242) 2,547 Foreign exchange gains net of losses 381 (532) Net cash provided by operating activities 3,687 13,899 Cash flows from investing activities: Purchases of seismic equipment held for lease (604) (2,128) Purchases of property and equipment (117) (227) Sale of used lease pool equipment 2,256 1,566 Net cash provided by (used in) investing activities 1,535 (789) Cash flows from financing activities: Net payments on revolving line of credit (9,400) (11,500) Payments on term loan and other borrowings (2,414) (2,413) Net proceeds from short-term investments 182 Net proceeds from preferred stock offering 6,975 Preferred stock dividends (294) Purchase of treasury stock (2) (3) Excess tax benefit from exercise of non-qualified stock options and restricted shares 125 Net cash used in financing activities (5,135) (13,609) Effect of changes in foreign exchange rates on cash and cash equivalents (624) (110) Net change in cash and cash equivalents (537) (609) Cash and cash equivalents, beginning of period 3,769 5,175 Cash and cash equivalents, end of period $ 3,232 $ 4,566 Supplemental cash flow information: Interest paid $ 610 $ 538 Income taxes paid $ 705 $ 1,405 Purchases of seismic equipment held for lease in accounts payable at end of period $ 160 $ 8 The accompanying notes are an integral part of these condensed consolidated financial statements. 4

9 1. Organization MITCHAM INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Mitcham Industries, Inc. (for purposes of these notes, the Company ) was incorporated in Texas in The Company, through its wholly owned Canadian subsidiary, Mitcham Canada, ULC ( MCL ), its wholly owned Russian subsidiary, Mitcham Seismic Eurasia LLC ( MSE ), its wholly owned Hungarian subsidiary, Mitcham Europe Ltd. ( MEL ), its wholly owned Singaporean subsidiary, Mitcham Marine Leasing Pte. Ltd. ( MML ), and its branch operations in Colombia, provides full-service equipment leasing, sales and service to the seismic industry worldwide. The Company, through its wholly owned Australian subsidiary, Seismic Asia Pacific Pty Ltd. ( SAP ), provides seismic, oceanographic and hydrographic leasing and sales worldwide, primarily in Southeast Asia and Australia. The Company, through its wholly owned subsidiaries, Seamap International Holdings Pte, Ltd. ( Seamap ) and Klein Marine Systems, Inc. ( Klein ), designs, manufactures and sells a broad range of proprietary products for the seismic, hydrographic and offshore industries with product sales and support facilities based in New Hampshire, Singapore and the United Kingdom. All intercompany transactions and balances have been eliminated in consolidation. 2. Basis of Presentation The condensed consolidated balance sheet as of January 31, 2016 for the Company has been derived from audited consolidated financial statements. The unaudited interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ( SEC ). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company s Annual Report on Form 10-K for the year ended January 31, In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position as of October 31, 2016, the results of operations for the three and nine months ended October 31, 2016 and 2015, and the cash flows for the nine months ended October 31, 2016 and 2015, have been included in these financial statements. The foregoing interim results are not necessarily indicative of the results of operations to be expected for the full fiscal year ending January 31, New Accounting Pronouncements In November 2016, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , StatementofCash Flows(Topic230):RestrictedCash,to require that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No will be effective during the fiscal year ended January 31, The Company does not believe the adoption will have a material effect on its financial statements. In August 2016, the FASB issued ASU No , StatementofCashFlows(Topic230) :ClassificationofCertainCashReceiptsandCashPayments, to address how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU No will be effective during the fiscal year ended January 31, The Company is evaluating the impact of ASU No on its financial statements. In March 2016, the FASB issued ASU No , Compensation-StockCompensation(Topic718):ImprovementstoEmployeeShare-BasedPayment Accounting, to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU No will be effective during the fiscal year ended January 31, The Company is evaluating the impact of ASU No on its financial statements. In February 2016, the FASB issued ASU No , Leases(Topic842), to provide guidance on recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. ASU No will be effective during the fiscal year ended January 31, The Company is evaluating the impact of ASU No on its financial statements. 5

10 In September 2015, the FASB issued ASU No , BusinessCombinations:(Topic805), to provide guidance on the simplification of the accounting for adjustments made to provisional amounts recognized in a business combination, eliminating the requirement to retrospectively account for those adjustments. ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendment requires that the acquirer record, in the same period s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendment further requires presentation separately on the face of the income statement or disclosure in the notes to the financial statements of the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU was effective during the nine months ended October 31, The adoption of this standard did not have a material effect on the Company s financial statements. In August 2015, the FASB issued ASU No , Interest-ImputationofInterest:(Subtopic835-30), to provide guidance on measurement of debt issuance costs associated with line-of-credit arrangements. ASU allows debt issuance costs associated with line-of-credit arrangements to be deferred and presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement. ASU was effective during the nine months ended October 31, The adoption of this standard did not have a material effect on the Company s financial statements. In July 2015, the FASB issued ASU No , Inventory:(Topic330), to provide guidance on measurement of inventory. ASU requires that inventories utilizing the first-in, first-out (FIFO) method be measured at lower of cost or net realizable value. ASU will be effective during the fiscal year ended January 31, The Company does not believe the adoption will have a material effect on its financial statements. In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers: (Topic 606), to provide guidance on revenue recognition on contracts with customers to transfer goods or services or on contracts for the transfer of nonfinancial assets. ASU requires that revenue recognition on contracts with customers depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In April 2016, the FASB also issued ASU No , Revenue from Contracts with Customers: (Topic 606) IdentifyingPerformanceObligationsandLicensing,to give guidance on identifying performance obligations and licensing implementation related to revenue contracts with customers. In May 2016, the FASB further issued ASU No , Revenue from Contracts with Customers: (Topic 606) Narrow-Scope ImprovementsandPracticalExpedients,to give guidance on assessing collectability, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications at transition. ASU , ASU and ASU will be effective during the fiscal year ended January 31, The Company does not believe the adoption will have a material effect on its financial statements. 4. Acquisition In December 2015, the Company purchased Klein, a designer, manufacturer and worldwide distributor of sonar and waterside security systems to military and commercial customers, for approximately $10 million in cash. Klein s product lines consist of single and multi-beam side scan sonar systems. The Company made this acquisition to expand the product offerings available to customers, gain access to additional technology, expand the markets in which it operates and to reduce the Company s dependence on the cyclical energy industry. The Company estimated fair values for assets acquired utilizing management estimates with the assistance of an independent appraisal firm. The value of tangible property was estimated using a combination of cost and sales comparison approaches. The value of identifiable intangible assets was estimated generally using an income approach. This approach utilized inputs that are not observable in the market and thus represents a Level 3 fair value measurement. Key assumptions include management s estimates of revenue and costs associated with various intangible assets and the discount rate applied to those revenues and costs. The following is a summary of the amounts recognized for assets acquired and liabilities assumed at the date of acquisition (in thousands): Working capital $2,572 Property, plant and equipment 3,416 Intangible assets 2,350 Goodwill 1,504 6

11 Intangible assets include trade names of approximately $760,000, which have an indefinite useful life and are not amortizable. The weighted average useful life of other acquired intangibles was 9.5 years. The goodwill associated with this acquisition is deductible for tax purposes. Pro Forma Results of Operations The following consolidated pro forma results of operations for the three and nine months ended October 31, 2015 assumes the acquisition of Klein occurred as of the beginning of the period and reflects the full results of operations for the period presented. The consolidated pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations that would actually have occurred had the combinations been in effect on the dates indicated, or that may occur in the future. (In thousands, except per share amounts) Three Months Ended October 31, 2015 Nine Months Ended October 31, 2015 (unaudited) Revenues $ 17,000 $ 45,061 Net loss $ (6,540) $ (14,111) Loss per share: Basic $ (0.54) $ (1.17) Diluted $ (0.54) $ (1.17) 5. Balance Sheet October 31, 2016 January 31, 2016 (in thousands) Accounts receivable $ 18,700 $ 27,691 Contracts receivable 2,752 2,877 21,452 30,568 Less long-term portion (4,968) (4,972) Current accounts and contracts receivable 16,484 25,596 Less allowance for doubtful accounts (5,192) (5,821) Current portion of accounts and contracts receivable, net of allowance for doubtful accounts $ 11,292 $ 19,775 Contracts receivable consisted of $2.8 million and $2.9 million due from three customers as of October 31, 2016 and January 31, 2016, respectively. These contracts receivable at October 31, 2016 and January 31, 2016 consisted of contracts bearing interest at an average rate of approximately 2.2% and 2.4%, respectively, and with remaining repayment terms from one to 40 months. These contracts are collateralized by the equipment sold. The Company has entered into structured payment arrangements with four customers, which extend the payment of their accounts and contracts receivable balances resulting in long-term accounts receivable with two customers totaling $3.7 million and long-term contracts receivable with two customers totaling $1.3 million. Payments terms for longterm receivables are structured to be completed by the end of fiscal

12 October 31, 2016 January 31, 2016 (in thousands) Inventories: Raw materials $ 5,880 $ 7,314 Finished goods 6,126 4,967 Work in progress 1,426 1,563 13,432 13,844 Less allowance for obsolescence (911) (900) Total inventories, net $ 12,521 $ 12,944 In December of 2015, the Company acquired $3.3 million of inventory in connection with the purchase of Klein. See Note 4 to our consolidated financial statements. October 31, 2016 January 31, 2016 (in thousands) Seismic equipment lease pool and property and equipment: Seismic equipment lease pool $ 230,763 $ 230,923 Land and buildings 3,379 3,375 Furniture and fixtures 9,412 9,405 Autos and trucks , ,397 Accumulated depreciation and amortization (190,037) (170,881) Total seismic equipment lease pool and property and equipment, net $ 54,192 $ 73,516 As of January 31, 2016, the Company completed an annual review of long-lived assets noting that the undiscounted future cash flows exceeded their carrying value and no impairment has been recorded. 6. Goodwill and Other Intangible Assets Weighted October 31, 2016 January 31, 2016 Average Life at 10/31/16 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization (in thousands) (in thousands) Goodwill $ 3,997 $ 4,155 Net Carrying Amount Proprietary rights 6.2 $ 5,803 $ (2,865) 2,938 $ 5,959 $ (2,645) 3,314 Customer relationships 5.1 4,738 (1,516) 3,222 4,633 (1,006) 3,627 Patents 6.1 1,629 (523) 1,106 1,592 (369) 1,223 Trade name (24) (17) 866 Customer backlog (17) 3 20 (2) 18 Developed technology 9.2 1,430 (119) 1,311 1,430 (12) 1,418 Amortizable intangible assets $ 14,506 $ (5,064) $ 9,442 $ 14,517 $ (4,051) $ 10,466 In December of 2015, the Company acquired $1.5 million in goodwill and $2.4 million in other intangible assets in connection with the purchase of Klein. See note 4 to our consolidated financial statements. The remaining $2.5 million of goodwill is allocated to Seamap. On January 31, 2016 the Company completed the annual review of goodwill and other intangible assets. Based on a review of qualitative factors, the Company recorded an impairment of the goodwill associated with its Seamap reporting unit in the amount of $3.0 million. Also at January 31, 2016, the Company recorded impairment of approximately $600,000 related to certain identifiable intangible assets related to its leasing reporting unit. 8

13 Amortizable intangible assets are amortized over their estimated useful lives of three to 15 years using the straight-line method (for customer relationships, the straight-line method is not materially different from other methods that estimate run off of the underlying customer base). Aggregate amortization expense was $369,000 and $413,000 for the three months ended October 31, 2016 and 2015, respectively, and $1.1 million and $1.3 million for the nine months ended October 31, 2016 and 2015, respectively. As of October 31, 2016, future estimated amortization expense related to amortizable intangible assets was estimated to be: For fiscal years ending January 31 (in thousands): 2017 $ , , , , and thereafter 3,493 Total $9, Long-Term Debt and Notes Payable Long-term debt and notes payable consisted of the following (in thousands): October 31, 2016 January 31, 2016 Revolving line of credit $ 5,000 $ 14,400 Term credit facility 3,600 6,000 Other equipment notes ,676 20,484 Less current portion (8,676) (3,218) Long-term debt $ $ 17,266 The Company has a secured, revolving credit facility, as described below (the Credit Agreement ). The Credit Agreement is a secured revolving facility in the maximum principal amount of $20.0 million and a maturity of August 31, 2017, among the Company, as borrower, HSBC Bank USA, N.A., as administrative agent and several banks and other financial institutions from time to time as lenders thereunder (initially consisting of HSBC Bank USA, N.A. and First Victoria National Bank). In November 2016, the Company reduced the commitment to $10.0 million from $20.0 million. Amounts available for borrowing under the Credit Agreement are determined by a borrowing base. The borrowing base is determined primarily based upon the appraised value of the Company s domestic lease pool equipment and certain accounts receivable. The Credit Agreement is collateralized by essentially all of the Company s domestic assets (other than real estate) and 65% of the capital stock of Mitcham Holdings, Ltd., a foreign holding company and wholly owned subsidiary of the Company that holds the capital stock of the Company s foreign subsidiaries. The Credit Agreement provides interest at a base rate, or for Eurodollar borrowings, in both cases plus an applicable margin. As of October 31, 2016, the base rate margin was 250 basis points and the Eurodollar margin was 350 basis points. The Company has agreed to pay a commitment fee on the unused portion of the Credit Agreement of 0.375% to 0.5%. Up to $10.0 million of available borrowings under the Credit Agreement may be utilized to secure letters of credit. The Credit Agreement contains certain financial covenants that require, among other things, that the Company maintain a leverage ratio, which is calculated at the end of each quarter, of no greater than 2.00 to 1.00 on a trailing four quarter basis and a fixed charge coverage ratio, which also is calculated at the end of each quarter, of no less than 1.25 to 1.00 on a trailing four quarter basis. In addition, should Adjusted EBITDA, as defined in the Credit Agreement, for any trailing four quarter period be less than $22.0 million, the ratio of capital expenditures to Adjusted EBITDA for that four quarter period may not be greater than 1.0 to 1.0. The Credit Agreement also includes restrictions on additional indebtedness in excess of $5.0 million. As of October 31, 2016, the Company was in compliance with each of these provisions, except for the leverage ratio and fixed charge coverage ratio. However, the banks granted a one-time waiver with respect to the leverage ratio and fixed charge coverage ratio. This waiver applies only as of and for the fiscal quarter ended October 31,

14 The Credit Agreement contains customary representations, warranties, conditions precedent to credit extensions, affirmative and negative covenants and events of default. The negative covenants include restrictions on liens, additional indebtedness in excess of $5.0 million, acquisitions, fundamental changes, dispositions of property, restricted payments, and transactions with affiliates and lines of business. The events of default include a change in control provision. On August 22, 2014, Seamap Singapore, entered into a $15.0 million credit facility (the Seamap Credit Facility ) with The Hongkong and Shanghai Banking Corporation Limited ( HSBC-Singapore ). The facility consists of a $10.0 million term loan, a $3.0 million revolving credit facility, and a $2.0 million banker s guarantee facility. The term loan portion of the Seamap Credit Facility provides for eleven quarterly principal payments of $800,000 and a final payment of the remaining $1.2 million on or before August 22, Interest on the term facility is payable quarterly at LIBOR plus 2.75%. Under the Seamap Credit Facility, Seamap Singapore may borrow up to $3.0 million for a period of one to three months to be utilized for working capital and other general corporate purposes. Borrowings under the revolving credit facility bear interest at LIBOR plus 3.00%. Borrowings under this arrangement are secured by essentially all of the assets of Seamap Singapore and the Company s guarantee. The Seamap Credit Facility contains financial covenants that require Seamap Singapore to maintain a minimum shareholder s equity of S$15 million and a minimum ratio of debt to EBITDA of not less than 125% for each fiscal year. The Company was in compliance with each of these provisions as of and for the year ended January 31, The Seamap Credit Facility contains customary representations and warranties, conditions precedent to credit extensions, affirmative and negative covenants and events of default. The negative covenants include restrictions on liens, additional indebtedness, acquisitions, fundamental changes, dispositions of property, restricted payments, and transactions with affiliates. The Seamap Credit Facility also requires the Company, as guarantor, to comply with financial covenants contained in the Credit Agreement. The Company s average borrowings under the Credit Agreement and the Seamap Credit Facility for the nine months ended October 31, 2016 and 2015 were approximately $13.9 million and $18.3 million, respectively. From time to time, certain subsidiaries have entered into notes payable to finance the purchase of certain equipment, which is pledged as security for the notes payable. 8. Income Taxes Effective January 31, 2016 the Company has adopted the provisions of ASU on a prospective basis. Accordingly, all net deferred tax assets are classified as long-term assets as of October 31, 2016 and January 31, 2016 in the accompanying Consolidated Balance Sheets. Amounts for prior periods have not been restated. The provisions of this pronouncement have been adopted in order to simplify the presentation of deferred income taxes. Prepaid taxes of approximately $1.7 million at October 31, 2016 consisted of approximately $1.5 million of foreign taxes and approximately $195,000 of domestic federal and state taxes. Prepaid income taxes of approximately $2.5 million at January 31, 2016 consisted of approximately $2.3 million of foreign taxes and approximately $182,000 of domestic federal and state taxes. The Company and its subsidiaries file consolidated and separate income tax returns in the United States federal jurisdiction and in foreign jurisdictions. The Company is subject to United States federal income tax examinations for all tax years beginning with its fiscal year ended January 31, The Company is subject to examination by taxing authorities throughout the world, including foreign jurisdictions such as Australia, Canada, Colombia, Hungary, Peru, Russia, Singapore and the United Kingdom. The Company and its subsidiaries are no longer subject to foreign income tax examinations for tax years before the fiscal year ended Jan 31, The provision for income taxes for the nine months ended October 31, 2016 includes certain foreign withholding taxes. These taxes can distort the relationship between income or loss before income taxes and the provision for income taxes. Also, a valuation against the deferred tax assets of the Company for approximately $22.0 million and $16.7 million has been recorded as of October 31, 2016 and January 31, 2016, respectively. These deferred tax assets relate primarily to net operating loss carryforwards in the United States and other jurisdictions. The valuation allowances were determined based on management s judgment as to the likelihood that these deferred tax assets would be realized. The judgment was based on an evaluation of available evidence, both positive and negative. Accordingly, the effective tax rates for these periods differ significantly from the federal statutory rate of 34%. The Company has determined that certain earnings from foreign jurisdictions have been permanently reinvested outside of the United States through the nine months ended October 31,

15 For the nine months ended October 31, 2016, the Company did not recognize any tax expense or benefit related to uncertain tax positions. For the fiscal year ended January 31, 2016, the Company recognized tax benefits of approximately $92,000 related to the resolution of uncertain tax positions and reversed approximately $144,000 of penalties and interest related to these matters. 9. Earnings per Share Earnings per basic common share is computed using the weighted average number of common shares outstanding during the period, excluding unvested restricted stock. Earnings per diluted common share is computed using the weighted average number of common shares and dilutive potential common shares outstanding during the period using the treasury stock method. Potential common shares result from the assumed exercise of outstanding common stock options having a dilutive effect and from the assumed vesting of unvested shares of restricted stock. The following table presents the calculation of basic and diluted weighted average common shares used in the earnings per share calculation: Three Months Ended October 31, Nine Months Ended October 31, (in thousands) (in thousands) Basic weighted average common shares outstanding 12,075 12,051 12,068 12,035 Stock options Unvested restricted stock Total weighted average common share equivalents Diluted weighted average common shares outstanding 12,120 12,105 12,120 12,094 For the three months ended October 31, 2016 and 2015 and the nine months ended October 31, 2016 and 2015, potentially dilutive common shares underlying stock options and unvested restricted stock were anti-dilutive and were therefore not considered in calculating diluted loss per share for that period. 10. Related Party Transaction On June 8, 2016, the Company issued 320,000 shares of 9.00% Series A Cumulative Preferred Stock (the Preferred Stock ), par value $1.00 per share, pursuant to an underwriting agreement, dated June 2, 2016, by and between the Company and Ladenburg Thalmann & Co. Inc. The Co-Chief Executive Officer and Co-President of Ladenburg Thalmann & Co. Inc is the Non-Executive Chairman of the Company s board of directors. The underwriter received underwriting discounts and commissions totaling $440,000 in connection with this offering. In addition, the underwriter received a structuring fee equal to 0.50% of the gross proceeds from this offering, or $40,000. The Non-Executive Chairman of the Company received no portion of these commissions, discounts and fees. On October 7, 2016 the Company entered into an equity distribution agreement (the Equity Distribution Agreement ) with Ladenburg Thalmann & Co. Inc. (the Agent ), pursuant to which the Company may sell up to 500,000 shares of the Preferred Stocked through the Agent through an at the market ( ATM ) offering program. Under the Equity Distribution Agreement, the Agent will be entitled to compensation of up to 2.0% of the gross proceeds from the sale of Preferred Stock under the ATM program. For the three months ended October 31, 2016, the Company issued 7,990 shares of Preferred Stock under the ATM offering program. Gross proceeds from these sales were approximately $190,000 and the Agent received compensation of approximately $3,800. The Non- Executive Chairman of the Company received no portion of this compensation. 11. Treasury Stock In April 2013, the Company s Board of Directors authorized the repurchase of up to 1.0 million shares of the Company s common stock through December 31, The Company purchased a total of 1.0 million shares under this program, representing the total amount of shares authorized for repurchase. These shares are reflected as treasury stock in the accompanying financial statements. 11

16 In the fourth quarter of our fiscal year ended January 31, 2015 ( fiscal 2015 ), the Company s Board of Directors authorized the repurchase of up to an additional 1.0 million shares of the Company s common stock through December 31, The Company did not purchase any shares pursuant to this additional authorization. 12. Stock-Based Compensation Total compensation expense recognized for stock-based awards granted under the Company s equity incentive plan during the three and nine months ended October 31, 2016 was approximately $154,000 and $587,000, respectively, and, during the three and nine months ended October 31, 2015 was approximately $565,000 and $1.1 million ($360,000 of these amounts is included in contract settlement expense for each of the three and nine months ended October 31, 2015), respectively. 13. Segment Reporting The Equipment Leasing segment offers new and experienced seismic equipment for lease or sale to the oil and gas industry, seismic contractors, environmental agencies, government agencies and universities. The Equipment Leasing segment is headquartered in Huntsville, Texas, with sales and services offices in Calgary, Canada; Brisbane, Australia; Ufa, Bashkortostan, Russia; Budapest, Hungary; Singapore; and Bogota, Colombia. The Equipment Manufacturing and Sales segment is engaged in the design, manufacture and sale of state-of-the-art seismic and offshore telemetry systems. Manufacturing, support and sales facilities are maintained in New Hampshire, the United Kingdom and Singapore. Financial information by business segment is set forth below (net of any allocations): As of October 31, 2016 As of January 31, 2016 Total Assets Total Assets (in thousands) Equipment Leasing $ 67,368 $ 95,932 Equipment Manufacturing and Sales 37,239 39,059 Eliminations (265) (232) Consolidated $ 104,342 $ 134,759 Results for the three months ended October 31, 2016 and 2015 were as follows (in thousands): Revenues Operating (loss) income (Loss) income before taxes Equipment Leasing $2,806 $ 5,711 $ (6,341) $ (7,582) $ (6,292) $ (8,033) Equipment Manufacturing and Sales 5,251 10,127 (647) 2,470 (513) 2,340 Corporate expenses (688) (792) (688) (792) Eliminations (157) (58) (74) (65) (74) Consolidated $8,057 $15,681 $ (7,734) $ (5,978) $ (7,558) $ (6,559) 12

17 Results for the nine months ended October 31, 2016 and 2015 were as follows (in thousands): Revenues Operating loss (Loss) income before taxes Equipment Leasing $10,258 $22,058 $(19,087) $(14,815) $ (18,627) $ (14,517) Equipment Manufacturing and Sales 18,229 18,589 (867) 1,772 (1,699) 1,617 Corporate expenses (2,390) (2,668) (2,390) (2,668) Eliminations (36) (270) (36) (28) (77) (28) Consolidated $28,451 $40,377 $(22,380) $(15,739) $ (22,793) $ (15,596) Sales from the Equipment Manufacturing and Sales segment to the Equipment Leasing Segment are eliminated in consolidated revenues. Consolidated income before taxes reflects the elimination of profit from intercompany sales and depreciation expense on the difference between the sales price and the cost to manufacture the equipment. Fixed assets are reduced by the difference between the sales price and the cost to manufacture the equipment, less the accumulated depreciation related to the difference. 13

18 CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q (this Form 10-Q ) may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of The words anticipate, believe, expect, plan, intend, foresee, should, would, could, or other similar expressions are intended to identify forward-looking statements, which generally are not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below : decline in the demand for seismic data and our services; the effect of changing economic conditions and fluctuations in oil and natural gas prices on exploration activities; the effect of uncertainty in financial markets on our customers and our ability to obtain financing; loss of significant customers; increased competition; loss of key suppliers; uncertainties regarding our foreign operations, including political, economic and currency risks; seasonal fluctuations that can adversely affect our business; fluctuations due to circumstances beyond our control or that of our customers; defaults by customers on amounts due us; possible further impairment of our long-lived assets due to technological obsolescence or changes in anticipated cash flow generated from those assets; inability to obtain funding or to obtain funding under acceptable terms; intellectual property claims by third parties; risks associated with our manufacturing operations; the impact of economic and trade sanctions imposed on Russia by the United States and the European Union in response to the political unrest in Ukraine; and other risks associated with our foreign operations, including foreign currency exchange risk. Foradditionalinformationregardingknownmaterialfactorsthatcouldcauseouractualresultstodiffermateriallyfromourprojectedresults,pleasesee(1)Part II, Item1A.RiskFactors ofthisform10-q,and(2)parti, Item1A.RiskFactors inourannualreportonform10-kforthefiscalyearendedjanuary31, Readersarecautionednottoplaceunduerelianceonforward-lookingstatements,whichspeakonlyasofthedatehereof.Weundertakenoobligationto publicallyupdateorreviseanyforward-lookingstatementafterthedatetheyaremade,whetherastheresultofnewinformation,futureeventsorotherwise. 14

19 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations Overview We operate in two segments, equipment leasing ( Equipment Leasing ) and equipment manufacturing and sales ( Equipment Manufacturing and Sales ). Through our Equipment Leasing Segment, we believe we are the largest independent provider of exploration equipment to the seismic industry. Our worldwide Equipment Manufacturing and Sales Segment includes the Seamap business, which designs, manufactures and sells specialized seismic marine equipment and Klein Marine Systems, Inc. ( Klein ), which designs, manufactures and sells high performance side scan sonar systems. Our Equipment Leasing segment is primarily engaged in the leasing of seismic equipment to companies in the oil and gas industry throughout the world. We conduct our leasing business through the Company, our wholly-owned subsidiaries and our branch in Colombia. We also sell new and used seismic equipment from time to time. The subsidiaries that conduct our leasing business are Mitcham Canada ULC ( MCL ), Seismic Asia Pacific Pty Ltd. ( SAP ), Mitcham Seismic Eurasia LLC ( MSE ), Mitcham Europe Ltd. ( MEL ) and Mitcham Marine Leasing Pte. Ltd. ( MML ). Our Equipment Manufacturing and Sales segment is engaged in the design, production and sale of marine seismic equipment and oceanographic and hydrographic equipment. The operations of this segment are conducted through our wholly-owned subsidiaries, Seamap (UK) Ltd. ( Seamap UK ), Seamap Pte. Ltd. ( Seamap Singapore and, together with Seamap UK, Seamap ), Klein and SAP. The following table presents certain operating information by operating segment. For the Three Months Ended October 31, For the Nine Months Ended October 31, (in thousands) (in thousands) Revenues: Equipment Leasing $ 2,806 $ 5,711 $ 10,258 $ 22,058 Equipment Manufacturing and Sales 5,251 10,127 18,229 18,589 Inter-segment sales (157) (36) (270) Total revenues 8,057 15,681 28,451 40,377 Cost of sales: Equipment Leasing 7,249 8,918 23,134 26,981 Equipment Manufacturing and Sales 2,887 5,123 10,062 9,948 Inter-segment costs 58 (83) (242) Total cost of sales 10,194 13,958 33,196 36,687 Gross (loss) profit (2,137) 1,723 (4,745) 3,690 Operating expenses: General and administrative 5,039 4,359 15,778 14,219 Contract settlement 2,142 2,142 Provision for doubtful accounts 600 1,200 Depreciation and amortization ,857 1,868 Total operating expenses 5,597 7,701 17,635 19,429 Operating loss $ (7,734) $ (5,978) $ (22,380) $ (15,739) 15

20 EBITDA (1) $ (430) $ 1,454 $ (327) $ 9,359 Adjusted EBITDA (1) $ (513) $ 4,588 $ 1,055 $ 13,107 Reconciliation of Net loss to EBITDA and Adjusted EBITDA Net loss $(7,330) $(5,813) $(23,299) $(11,898) Interest expense, net Depreciation and amortization 7,017 7,877 21,927 24,432 (Benefit) provision for income taxes (228) (746) 506 (3,698) EBITDA (1) (430) 1,454 (327) 9,359 Non-cash foreign exchange losses and (gains) (288) Stock-based compensation (2) ,085 Contract settlement (2) 1,781 1,781 Cost of lease pool sales Adjusted EBITDA (1) $ (513) $ 4,588 $ 1,055 $ 13,107 Reconciliation of Net cash provided by operating activities to EBITDA Net cash provided by operating activities $ 602 $ 2,249 $ 3,687 $ 13,899 Stock-based compensation (2) (154) (566) (587) (1,085) Provision for doubtful accounts (600) (1,200) Provision for inventory obsolescence (22) (44) (65) (134) Changes in trade accounts, contracts and notes receivable (1,539) 5,070 (10,308) (268) Interest paid Taxes paid, net of refunds ,405 Gross profit from sale of lease pool equipment (36) 811 1,420 1,027 Changes in inventory (290) (2,367) (471) 982 Changes in accounts payable, accrued expenses and other current liabilities and deferred revenue 228 (3,208) 4,242 (2,547) Changes in prepaid expenses and other current assets 220 (33) 893 (3,925) Foreign exchange gains net of losses 196 (488) (381) 532 Other (72) 135 EBITDA (1) $ (430) $ 1,454 $ (327) $ 9,359 (1) EBITDA is defined as net income before (a) interest income and interest expense, (b) provision for (or benefit from) income taxes and (c) depreciation and amortization. Adjusted EBITDA excludes non-cash foreign exchange gains and losses, non-cash costs of lease pool equipment sales, certain non-recurring contract settlement costs, impairment of intangible assets and stock-based compensation. This definition of Adjusted EBITDA is consistent with the definition in the Credit Agreement. We consider EBITDA and Adjusted EBITDA to be important indicators for the performance of our business, but not measures of performance or liquidity calculated in accordance with accounting principles generally accepted in the United States of America ( GAAP ). We have included these non-gaap financial measures because management utilizes this information for assessing our performance and liquidity, and as indicators of our ability to make capital expenditures, service debt and finance working capital requirements. The Credit Agreement contains financial covenants based on EBITDA or Adjusted EBITDA. Management believes that EBITDA and Adjusted EBITDA are measurements that are commonly used by analysts and some investors in evaluating the performance and liquidity of companies such as us. In particular, we believe that it is useful to our analysts and investors to understand this relationship because it excludes transactions not related to our core cash operating activities. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash operations. EBITDA and Adjusted EBITDA are not measures of financial performance or liquidity under GAAP and should not be considered in isolation or as alternatives to cash flow from operating activities or as alternatives to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP. In evaluating our performance as measured by EBITDA, management recognizes and considers the limitations of this measurement. EBITDA and Adjusted EBITDA do not reflect our obligations for the payment of income taxes, interest expense or other obligations such as capital expenditures. Accordingly, EBITDA and Adjusted EBITDA are only two of the measurements that management utilizes. Other companies in our industry may calculate EBITDA or Adjusted EBITDA differently than we do and EBITDA and Adjusted EBITDA may not be comparable with similarly titled measures reported by other companies. 16