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EX-32.1 - EXHIBIT 32.1 - MITCHAM INDUSTRIES INCcopyofex-321.htm
EX-31.2 - EXHIBIT 31.2 - MITCHAM INDUSTRIES INCcopyofex-312.htm
EX-31.1 - EXHIBIT 31.1 - MITCHAM INDUSTRIES INCcopyofex-311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2017
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: 001-13490 
 
MITCHAM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
Texas
 
76-0210849
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
8141 SH 75 South
P.O. Box 1175
Huntsville, Texas 77342
(Address of principal executive offices, including Zip Code)
(936) 291-2277
(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 (§232.405 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  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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
 
 
 
 
 
 
 
 
Emerging growth company
 
  
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
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: 12,089,339 shares of common stock, $0.01 par value, were outstanding as of December 6, 2017.
 



MITCHAM INDUSTRIES, INC.
Table of Contents
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 


ii


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MITCHAM INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
October 31, 2017
 
January 31, 2017
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
6,541

 
$
2,902

Restricted cash
229

 
609

Accounts and contracts receivable, net of allowance for doubtful accounts of $2,965 and $3,716 at October 31, 2017 and January 31, 2017, respectively
12,165

 
15,830

 
 
 
 
Inventories, net
11,940

 
11,960

Prepaid income taxes

 
1,565

Prepaid expenses and other current assets
2,135

 
2,193

Total current assets
33,010

 
35,059

Seismic equipment lease pool and property and equipment, net
26,372

 
43,838

Intangible assets, net
8,151

 
9,012

Goodwill
3,997

 
3,997

Non-current prepaid income taxes
1,167

 

Long-term receivables, net of allowance for doubtful accounts of $2,188 at October 31, 2017 and January 31, 2017
4,071

 
2,780

Other assets
29

 
28

Total assets
$
76,797

 
$
94,714

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
2,118

 
$
1,929

Current maturities – long-term debt

 
6,371

Deferred revenue
236

 
651

Income taxes payable
329

 

Accrued expenses and other current liabilities
3,669

 
4,514

Total current liabilities
6,352

 
13,465

Deferred tax liability
296

 
317

Total liabilities
6,648

 
13,782

Shareholders’ equity:
 
 
 
Preferred stock, $1.00 par value; 1,000 shares authorized; 425 and 343 shares issued and outstanding at October 31, 2017 and January 31, 2017, respectively
9,144

 
7,294

Common stock, $0.01 par value; 20,000 shares authorized; 14,019 shares issued at October 31, 2017 and January 31, 2017
140

 
140

Additional paid-in capital
122,087

 
121,401

Treasury stock, at cost (1,929 shares at October 31, 2017 and January 31, 2017)
(16,858
)
 
(16,858
)
Accumulated deficit
(34,391
)
 
(20,451
)
Accumulated other comprehensive loss
(9,973
)
 
(10,594
)
Total shareholders’ equity
70,149

 
80,932

Total liabilities and shareholders’ equity
$
76,797

 
$
94,714

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


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,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
 
Equipment manufacturing and sales
 
$
5,955

 
$
5,251

 
$
22,429

 
$
18,193

Equipment leasing
 
2,071

 
2,577

 
5,765

 
7,819

Lease pool and other equipment sales
 
618

 
229

 
9,719

 
2,439

Total revenues
 
8,644

 
8,057

 
37,913

 
28,451

Cost of sales:
 
 
 
 
 
 
 
 
Cost of equipment manufacturing and sales
 
3,132

 
2,944

 
12,975

 
10,062

Direct costs—equipment leasing
 
822

 
739

 
2,306

 
2,276

Direct costs—lease pool depreciation
 
3,578

 
6,428

 
11,509

 
19,976

Cost of lease pool and other equipment sales
 
211

 
83

 
6,410

 
882

Total cost of sales
 
7,743

 
10,194

 
33,200

 
33,196

Gross profit (loss)
 
901

 
(2,137
)
 
4,713

 
(4,745
)
Operating expenses:
 
 
 
 
 
 
 
 
General and administrative
 
5,178

 
5,039

 
15,145

 
15,778

Depreciation and amortization
 
516

 
558

 
1,622

 
1,857

Total operating expenses
 
5,694

 
5,597

 
16,767

 
17,635

Operating loss
 
(4,793
)
 
(7,734
)
 
(12,054
)
 
(22,380
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest, net
 
52

 
(111
)
 
23

 
(539
)
Other, net
 
46

 
287

 
(107
)
 
126

Total other income (expense)
 
98

 
176

 
(84
)
 
(413
)
Loss before income taxes
 
(4,695
)
 
(7,558
)
 
(12,138
)
 
(22,793
)
(Provision) benefit for income taxes
 
(586
)
 
228

 
(1,172
)
 
(506
)
Net loss
 
$
(5,281
)
 
$
(7,330
)
 
$
(13,310
)
 
$
(23,299
)
Preferred stock dividends
 
(229
)
 
(180
)
 
(630
)
 
(294
)
Net loss available to common shareholders
 
$
(5,510
)
 
$
(7,510
)
 
$
(13,940
)
 
$
(23,593
)
Net loss per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.46
)
 
$
(0.62
)
 
$
(1.15
)
 
$
(1.96
)
Diluted
 
$
(0.46
)
 
$
(0.62
)
 
$
(1.15
)
 
$
(1.96
)
Shares used in computing net loss per common share:
 
 
 
 
 
 
Basic
 
12,087

 
12,075

 
12,082

 
12,068

Diluted
 
12,087

 
12,075

 
12,082

 
12,068

The accompanying notes are an integral part of these condensed consolidated financial statements.


2


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,
 
 
2017
 
2016
 
2017
 
2016
Net loss available to common shareholders
 
$
(5,510
)
 
$
(7,510
)
 
$
(13,940
)
 
$
(23,593
)
Change in cumulative translation adjustment
 
(254
)
 
(748
)
 
621

 
1,676

Comprehensive loss attributable to common shareholders
 
$
(5,764
)
 
$
(8,258
)
 
$
(13,319
)
 
$
(21,917
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


3


MITCHAM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
For the Nine Months Ended October 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(13,310
)
 
$
(23,299
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
13,219

 
21,927

Stock-based compensation
 
685

 
587

Provision for inventory obsolescence
 
58

 
65

Gross profit from sale of lease pool equipment
 
(3,080
)
 
(1,420
)
Deferred tax benefit
 
(31
)
 
(582
)
Changes in working capital items:
 
 
 
 
Trade accounts and contracts receivable
 
5,129

 
10,308

Inventories
 
79

 
471

Prepaid expenses and other current assets
 
207

 
(893
)
Income taxes payable
 
714

 
384

Accounts payable, accrued expenses, other current liabilities and deferred revenue
 
(1,244
)
 
(4,242
)
Foreign exchange gains net of losses
 
(252
)
 
381

Net cash provided by operating activities
 
2,174

 
3,687

Cash flows from investing activities:
 
 
 
 
Purchases of seismic equipment held for lease
 
(321
)
 
(604
)
Purchases of property and equipment
 
(276
)
 
(117
)
Sale of used lease pool equipment
 
6,690

 
2,256

Net cash provided by investing activities
 
6,093

 
1,535

Cash flows from financing activities:
 
 
 
 
Net payments on revolving line of credit
 
(3,500
)
 
(9,400
)
Payments on term loan and other borrowings
 
(2,807
)
 
(2,414
)
Net proceeds from preferred stock offering
 
1,847

 
6,975

Preferred stock dividends
 
(630
)
 
(294
)
Purchase of treasury stock
 

 
(2
)
Net cash used in financing activities
 
(5,090
)
 
(5,135
)
Effect of changes in foreign exchange rates on cash, cash equivalents and restricted cash
 
82

 
(624
)
Net change in cash, cash equivalents and restricted cash
 
3,259

 
(537
)
Cash, cash equivalents and restricted cash, beginning of period
 
3,511

 
3,769

Cash, cash equivalents and restricted cash, end of period
 
$
6,770

 
$
3,232

Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
84

 
$
610

Income taxes paid
 
$
436

 
$
705

Purchases of seismic equipment held for lease in accounts payable at end of period
 
$
65

 
$
160

The accompanying notes are an integral part of these condensed consolidated financial statements.


4


MITCHAM INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization
Mitcham Industries, Inc. (for purposes of these notes, the “Company”) was incorporated in Texas in 1987. 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. 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 corporate headquarters in the United States, 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. All intercompany transactions and balances have been eliminated in consolidation.
2. Basis of Presentation
The condensed consolidated balance sheet as of January 31, 2017 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, 2017. In the opinion of the Company’s management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position as of October 31, 2017, the results of operations for the three and nine months ended October 31, 2017 and 2016, and the cash flows for the nine months ended October 31, 2017 and 2016, have been included in these condensed consolidated 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, 2018.
3. New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify impairment testing of goodwill and other intangible assets by eliminating step two of the impairment test. ASU No. 2017-04 will be effective during the fiscal year ended January 31, 2021. The Company does not believe the adoption will have a material effect on its financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, 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. The Company has adopted the provisions of ASU No. 2016-18 as of February 1, 2017. The adoption of ASU No. 2016-18 did not have a material effect on the Company’s condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, 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. 2016-15 will be effective during the fiscal year ended January 31, 2019. The Company is evaluating the impact of ASU No. 2016-15 on its financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation -Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment 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. The Company adopted this new standard as of February 1, 2017, utilizing the prospective transition method. As a result, the Company now recognizes all excess tax charges or benefits as income tax expense or benefit in the accompanying Consolidated Statements of Operations and in the accompanying Consolidated Statements of Cash Flows as operating activities.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), 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. 2016-02 will be effective during the fiscal year ended January 31, 2020. The Company is evaluating the impact of ASU No. 2016-02 on its financial statements.

5


In July 2015, the FASB issued ASU No. 2015-11, Inventory: (Topic 330), to provide guidance on measurement of inventory. ASU 2015-11 requires that inventories utilizing the first-in, first-out (FIFO) method be measured at lower of cost or net realizable value. The Company has adopted the provisions of ASU 2015-11 as of February 1, 2017. The adoption of ASU 2015-11 did not have an impact on the Company’s consolidated financial statements as the Company’s inventory is determined using the average cost method.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 was later amended by ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients . ASU 2014-09, as amended, (the “Revenue Standard”) supersedes most industry specific guidance and intends to enhance comparability of revenue recognition practices across entities and industries by providing a principle-based, comprehensive framework for addressing revenue recognition issues. The Revenue Standard will be effective during the fiscal year ended January 31, 2019.     
The Company will adopt the Revenue Standard in the first quarter of fiscal 2018. The Company is currently analyzing its most significant revenue streams including those most likely to be impacted by the Revenue Standard. The Company anticipates that the adoption of the Revenue Standard will primarily affect the Equipment Manufacturing and Sales segment. Under the new standard, the Company expects that recognition of equipment sales revenues for certain contracts may be accelerated, but not materially different. Revenues for these contracts will be estimated and allocated over the life of the contract rather than recognized when equipment is delivered. The Company is continuing to evaluate the effect that the adoption will have on its financial statements, disclosures, and related internal controls. The Company plans to use the modified retrospective method to adopt the Revenue Standard.
4. Balance Sheet
 
 
October 31, 2017
 
January 31, 2017
 
 
(in thousands)
Accounts receivable
 
$
16,015

 
$
21,762

Contracts receivable
 
5,374

 
2,752

 
 
21,389

 
24,514

Less long-term portion
 
(6,259
)
 
(4,968
)
Current accounts and contracts receivable
 
15,130

 
19,546

Less current portion of allowance for doubtful accounts
 
(2,965
)
 
(3,716
)
Current portion of accounts and contracts receivable, net of allowance for doubtful accounts
 
$
12,165

 
$
15,830

Contracts receivable consisted of $5.4 million due from four customers at October 31, 2017 and $2.8 million due from three customers as of January 31, 2017. The balance of contracts receivable at October 31, 2017 and January 31, 2017 consisted of contracts bearing interest at an average rate of approximately 2.8% and 2.2% respectively and with remaining repayment terms from 1 to 40 months. These contracts are related to lease pool equipment sales and are collateralized by the equipment sold. During the quarter ended April 30, 2017, the Company entered into a long-term contract receivable totaling approximately $3.8 million for the sale of lease pool equipment with the balance due in 24 equal monthly installments through March of 2019.
 
 
October 31, 2017
 
January 31, 2017
 
 
(in thousands)
Inventories:
 
 
 
 
Raw materials
 
$
5,157

 
$
5,781

Finished goods
 
5,642

 
5,985

Work in progress
 
2,003

 
1,146

 
 
12,802

 
12,912

Less allowance for obsolescence
 
(862
)
 
(952
)
Total inventories, net
 
$
11,940

 
$
11,960

 

6


 
 
October 31, 2017
 
January 31, 2017
 
 
(in thousands)
Seismic equipment lease pool and property and equipment:
 
 
 
 
Seismic equipment lease pool
 
$
185,304

 
$
219,001

Land and buildings
 
3,380

 
3,379

Furniture and fixtures
 
9,904

 
9,462

Autos and trucks
 
701

 
675

 
 
199,289

 
232,517

Accumulated depreciation and amortization
 
(172,917
)
 
(188,679
)
Total seismic equipment lease pool and property and equipment, net
 
$
26,372

 
$
43,838

As of January 31, 2017, 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. Since January 31, 2017 there have been no significant changes to the market, economic or legal environment in which the Company operates that would indicate additional impairment analysis is necessary as of October 31, 2017.
5. Goodwill and Other Intangible Assets
 
 
Weighted Average Life at 10/31/2017
 
October 31, 2017
 
January 31, 2017
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
Goodwill
 
 
 
$
3,997

 
 
 
 
 
$
3,997

 
 
 
 
Proprietary rights
 
5.1
 
$
5,973

 
$
(3,430
)
 
2,543

 
$
5,810

 
$
(3,003
)
 
2,807

Customer relationships
 
4.1
 
4,835

 
(2,206
)
 
2,629

 
4,679

 
(1,656
)
 
3,023

Patents
 
5.2
 
1,663

 
(705
)
 
958

 
1,608

 
(558
)
 
1,050

Trade name
 
8.6
 
889

 
(36
)
 
853

 
884

 
(27
)
 
857

Developed technology
 
8.2
 
1,430

 
(262
)
 
1,168

 
1,430

 
(155
)
 
1,275

Amortizable intangible assets
 
$
14,790

 
$
(6,639
)
 
$
8,151

 
$
14,411

 
$
(5,399
)
 
$
9,012

On January 31, 2016, 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. The Seamap reporting unit is included in the Equipment Manufacturing and Sales segment. Also at January 31, 2016, the Company recorded impairment of approximately $600,000 related to certain identifiable intangible assets related to its Equipment Leasing segment.
As of January 31, 2017, the Company completed the annual review of goodwill and other intangible assets. Based on a review of qualitative and quantitative factors it was determined it was more likely than not that the fair value of our reporting units was greater than their carrying value. During the nine months ended October 31, 2017 there have been no substantive indicators of additional impairment.
Amortizable intangible assets are amortized over their estimated useful lives of five to 15 years using the straight-line method. Aggregate amortization expense was $1.1 million for the nine months ended October 31, 2017 and 2016.

As of October 31, 2017, future estimated amortization expense related to amortizable intangible assets was estimated to be:
For fiscal years ending January 31 (in thousands):
 
2018
$
364

2019
1,458

2020
1,458

2021
1,310

2022
838

2023 and thereafter
2,723

 
 
Total
$
8,151

 
 

7


6. Long-Term Debt and Notes Payable
Long-term debt and notes payable consisted of the following (in thousands):
 
 
October 31, 2017
 
January 31, 2017
Revolving line of credit
 
$

 
$
3,500

Term credit facility
 

 
2,800

Other equipment notes
 

 
71

 
 

 
6,371

Less current portion
 

 
(6,371
)
Long-term debt
 
$

 
$

As of January 31, 2017, the Company had a secured, revolving credit facility, as described below (the “Credit Agreement”). The Credit Agreement was 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. In March 2017, the Company repaid all outstanding obligations under the Credit Agreement and terminated that agreement.
The Credit Agreement provided for Eurodollar loans, which bore interest at the Eurodollar base rate, plus a margin of from 2.50% to 3.50% based on the Company’s leverage ratio and for ABR loans which bore interest at the applicable base rate plus a margin of from 1.50% to 2.50% based on the Company’s leverage ratio. As of January 31, 2017, the margin for ABR loans was 250 basis points and the margin for Eurodollar loans was 350 basis points. The Company 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 have been utilized to secure letters of credit.
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 consisted of a $10.0 million term loan, a $3.0 million revolving credit facility, and a $2.0 million banker’s guarantee facility. In April 2017, the Company prepaid all amounts outstanding under the Seamap Credit Facility and cancelled that facility.
The term loan portion of the Seamap Credit Facility provided for eleven quarterly principal payments of $800,000 and a final payment of the remaining $1.2 million on or before August 22, 2017. Interest on the term facility was payable quarterly at LIBOR plus 2.75%. Under the Seamap Credit Facility, Seamap Singapore may have borrowed 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 were subject to interest at LIBOR plus 3.00%.
The Company’s average borrowings under the Credit Agreement and the Seamap Credit Facility for the nine months ended October 31, 2017 and 2016 were approximately $1.1 million and $13.9 million, respectively.
7. Income Taxes
For the nine months ended October 31, 2017 the provision for income taxes was approximately $1.2 million on a pre-tax net loss of $12.1 million, or an effective tax rate of -9.7%. For the nine months ended October 31, 2016 the provision for income taxes was approximately $506,000 on a pre-tax net loss of $22.8 million, or an effective tax rate of -2.2%. The variance between our effective rate and the U.S. statutory rate is due to the mix of pre-tax profit between the U.S. and international taxing jurisdictions with varying statutory rates, the impact of permanent differences, state income and foreign withholding taxes, other tax adjustments, such as valuation allowances against deferred tax assets, and discrete items.
Non-current prepaid income taxes of approximately $1.2 million at October 31, 2017 and prepaid taxes of $1.6 million at January 31, 2017, consist primarily of foreign taxes.
The Company and its subsidiaries file consolidated and separate income tax returns in the United States federal and several state jurisdictions. The Company is subject to United States federal income tax examinations for all tax years beginning with its fiscal year ended January 31, 2013. In addition, the Company and its subsidiaries file income tax returns and are subject to examination by taxing authorities throughout the world, including foreign jurisdictions such as Australia, Canada, Colombia, Hungary, Russia, Singapore and the United Kingdom. The Company and its subsidiaries are generally no longer subject to foreign income tax examinations for tax years before the fiscal year ended January 31, 2011.
The Company has determined that the undistributed earnings of foreign subsidiaries, other than branch operations in Colombia, have been indefinitely reinvested outside of the United States as of October 31, 2017.
For the nine months ended October 31, 2017 and October 31, 2016, the Company did not recognize any tax expense or benefit related to uncertain tax positions.

8


The Company adopted the provisions of ASU 2015-17 in fiscal 2017. Accordingly, all net deferred tax assets and liabilities are classified as long-term assets as of October 31, 2017 and January 31, 2017 in the accompanying Condensed Consolidated Balance Sheets. The Company also prospectively adopted the provisions of ASU 2016-09 beginning February 1, 2017. Accordingly, all excess tax benefits or deficiencies related to employee share-based payments are recognized as income tax benefits or expense in the accompanying Consolidated Statement of Operations and as operating activities in the accompanying Consolidated Statements of Cash Flows.
8. Earnings per Share
Net income per basic common share is computed using the weighted average number of common shares outstanding during the period, excluding unvested restricted stock. Net income 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,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
 
(in thousands)
Basic weighted average common shares outstanding
 
12,087

 
12,075

 
12,082

 
12,068

Stock options
 
35

 
8

 
81

 
6

Unvested restricted stock
 
28

 
37

 
34

 
46

Total weighted average common share equivalents
 
63

 
45

 
115

 
52

Diluted weighted average common shares outstanding
 
12,150

 
12,120

 
12,197

 
12,120


For the three months ended October 31, 2017 and 2016 and the nine months ended October 31, 2017 and 2016, 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 those period.
9. 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 direct compensation for 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 Stock 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 and nine months ended October 31, 2017, the Company issued 44,932 and 81,904 shares of Preferred Stock under the ATM offering program, respectively. Gross proceeds from these sales for the three and nine months ended October 31, 2017 were approximately $1.0 million and $1.9 million respectively and the Agent received compensation of approximately $20,000 and $37,000, respectively. The Non-Executive Chairman of the Company received no portion of this compensation.
10. 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, 2014. 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. Equity and Stock-Based Compensation
During the three months ended October 31, 2017, the Company’s Board of Directors declared quarterly dividends of $0.5625 per share for our Preferred Stock. See note 9 to our condensed consolidated financial statements.

9


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, 2017 was approximately $224,000 and $685,000, respectively, and, during the three and nine months ended October 31, 2016 was approximately $154,000 and $587,000, respectively.
12. Segment Reporting
The Equipment Manufacturing and Sales segment is engaged in the design, manufacture and sale of state-of-the-art sonar, seismic and offshore telemetry systems. Manufacturing, support and sales facilities are maintained in New Hampshire, the United Kingdom and Singapore.
The Equipment Leasing segment offers new and used 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.
Financial information by business segment is set forth below (net of any allocations):
 
 
 
As of October 31, 2017
 
As of January 31, 2017
 
 
Total Assets
 
Total Assets
 
 
(in thousands)
Equipment Manufacturing and Sales
 
$
39,258

 
$
37,294

Equipment Leasing
 
37,602

 
57,544

Eliminations
 
(63
)
 
(124
)
Consolidated
 
$
76,797

 
$
94,714

Results for the three months ended October 31, 2017 and 2016 were as follows (in thousands):
 
 
Revenues
 
Operating loss
 
Income (loss) before taxes
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Equipment Manufacturing and Sales
 
$
5,992

 
$
5,251

 
$
(74
)
 
$
(647
)
 
$
4

 
$
(513
)
Equipment Leasing
 
2,730

 
2,806

 
(3,927
)
 
(6,341
)
 
(3,933
)
 
(6,292
)
Corporate expenses
 

 

 
(792
)
 
(688
)
 
(792
)
 
(688
)
Eliminations
 
(78
)
 

 

 
(58
)
 
26

 
(65
)
Consolidated
 
$
8,644

 
$
8,057

 
$
(4,793
)
 
$
(7,734
)
 
$
(4,695
)
 
$
(7,558
)
Results for the nine months ended October 31, 2017 and 2016 were as follows (in thousands):
 
 
 
Revenues
 
Operating income (loss)
 
Income (loss) before taxes
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Equipment Manufacturing and Sales
 
$
22,565

 
$
18,229

 
$
1,160

 
$
(867
)
 
$
999

 
$
(1,699
)
Equipment Leasing
 
15,546

 
10,258

 
(10,571
)
 
(19,087
)
 
(10,494
)
 
(18,627
)
Corporate expenses
 

 

 
(2,643
)
 
(2,390
)
 
(2,643
)
 
(2,390
)
Eliminations
 
(198
)
 
(36
)
 

 
(36
)
 

 
(77
)
Consolidated
 
$
37,913

 
$
28,451

 
$
(12,054
)
 
$
(22,380
)
 
$
(12,138
)
 
$
(22,793
)
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.

10


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 1995. 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.
For additional information regarding known material factors that could cause our actual results to differ materially from our projected results, please see (1) Part II, “Item 1A. Risk Factors” of this Form 10-Q, and (2) Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publically update or revise any forward-looking statement after the date they are made, whether as the result of new information, future events or otherwise.


11


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview
We operate in two segments, Equipment Manufacturing and Sales and Equipment Leasing. Equipment Manufacturing and Sales includes sales of Seamap equipment, sales of Klein equipment and sales of oceanographic and hydrographic equipment by SAP. This segment operates from locations near Bristol, United Kingdom; Brisbane, Australia; Salem, New Hampshire and in Singapore.
Our Equipment Leasing operations include all leasing activity, sales of lease pool equipment and certain other equipment sales and services related to those operations. This business is conducted from our Huntsville, Texas headquarters and from our locations in Calgary, Canada; Brisbane, Australia; Bogota, Colombia; Budapest, Hungary; Singapore and Ufa, Russia. This includes the operations of our subsidiaries MCL, MEL, MML and MSE, our branch in Colombia and the leasing operations conducted by SAP.
Management believes that the performance of our Equipment Manufacturing and Sales segment is indicated by revenues from equipment sales and by gross profit from those sales. Management further believes that the performance of our Equipment Leasing segment is indicated by revenues from equipment leasing and by the level of our investment in lease pool equipment. Management monitors EBITDA and Adjusted EBITDA, both as defined in the following table, as key indicators of our overall performance and liquidity.
The following table presents certain operating information by operating segment.
 
 
 
For the Three Months Ended October 31,
 
For the Nine Months Ended October 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
Equipment Manufacturing and Sales
 
$
5,992

 
$
5,251

 
$
22,565

 
$
18,229

Equipment Leasing
 
2,730

 
2,806

 
15,546

 
10,258

Inter-segment sales
 
(78
)
 

 
(198
)
 
(36
)
Total revenues
 
8,644


8,057


37,913


28,451

Cost of sales:
 
 
 
 
 
 
 
 
Equipment Manufacturing and Sales
 
3,174

 
2,887

 
13,116

 
10,062

Equipment Leasing
 
4,647

 
7,249

 
20,282

 
23,134

Inter-segment costs
 
(78
)
 
58

 
(198
)
 

Total cost of sales
 
7,743


10,194


33,200


33,196

Gross profit (loss)
 
901


(2,137
)

4,713


(4,745
)
Operating expenses:
 
 
 
 
 
 
 
 
General and administrative
 
5,178

 
5,039

 
15,145

 
15,778

Depreciation and amortization
 
516

 
558

 
1,622

 
1,857

Total operating expenses
 
5,694

 
5,597


16,767


17,635

Operating loss
 
$
(4,793
)

$
(7,734
)

$
(12,054
)

$
(22,380
)
EBITDA (1)
 
$
(623
)
 
$
(430
)
 
$
1,058

 
$
(327
)
Adjusted EBITDA (1)
 
$
(406
)
 
$
(513
)
 
$
8,291

 
$
1,055

Reconciliation of Net loss to EBITDA and Adjusted EBITDA
 
 
 
 
 
 
 
 
Net loss
 
$
(5,281
)
 
$
(7,330
)
 
$
(13,310
)
 
$
(23,299
)
Interest (income) expense, net
 
(52
)
 
111

 
(23
)
 
539

Depreciation and amortization
 
4,124

 
7,017

 
13,219

 
21,927

Provision (benefit) for income taxes
 
586

 
(228
)
 
1,172

 
506

EBITDA (1)
 
(623
)

(430
)

1,058


(327
)
Non-cash foreign exchange (gains) losses
 
(41
)
 
(288
)
 
320

 
31

Stock-based compensation
 
224

 
154

 
685

 
587

Cost of lease pool sales
 
34

 
51

 
6,228

 
764

Adjusted EBITDA (1)
 
$
(406
)

$
(513
)

$
8,291


$
1,055


12


Reconciliation of Net cash provided by operating activities to EBITDA
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
(1,912
)
 
$
602

 
$
2,174

 
$
3,687

Stock-based compensation
 
(224
)
 
(154
)
 
(685
)
 
(587
)
Provision for inventory obsolescence
 
9

 
(22
)
 
(58
)
 
(65
)
Changes in trade accounts, contracts and notes receivable
 
748

 
(1,539
)
 
(5,129
)
 
(10,308
)
Interest (received) paid
 
(36
)
 
106

 
84

 
610

Taxes paid, net of refunds
 
277

 
176

 
436

 
705

Gross profit (loss) from sale of lease pool equipment
 
228

 
(36
)
 
3,080

 
1,420

Changes in inventory
 
(186
)
 
(290
)
 
(79
)
 
(471
)
Changes in accounts payable, accrued expenses and other current liabilities and deferred revenue
 
315

 
228

 
1,244

 
4,242

Changes in prepaid expenses and other current assets
 
(6
)
 
220

 
(207
)
 
893

Foreign exchange gains net of losses
 
181

 
196

 
252

 
(381
)
Other
 
(17
)
 
83

 
(54
)
 
(72
)
EBITDA (1)
 
$
(623
)

$
(430
)

$
1,058


$
(327
)
 
(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 and stock-based compensation. 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 and we believe 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.
Within our Equipment Manufacturing and Sales segment, we design, manufacture and sell a variety of products used primarily in marine seismic, hydrographic, oceanographic and defense applications. Seamap’s primary products include the (i) GunLink and Digishot seismic source acquisition and control systems, which provide marine operators more precise control of exploration tools; and (ii) the BuoyLink RGPS tracking system used to provide precise positioning of seismic sources and streamers (marine recording channels that are towed behind a vessel). Klein designs, manufactures and sells side scan sonar and water-side security systems to commercial, governmental and military customers throughout the world. SAP sells equipment (including equipment manufactured by Klein and Seamap), consumable supplies, systems integration, engineering hardware and software maintenance support services to the seismic, hydrographic, oceanographic, environmental and defense industries throughout Southeast Asia and Australia.

In our Equipment Leasing segment, we lease seismic data acquisition equipment primarily to seismic data acquisition companies conducting land, transition zone and marine seismic surveys worldwide. We provide short-term leasing of seismic equipment to meet a customer’s requirements. Seismic equipment held for lease is carried at cost, net of accumulated depreciation. We acquire some marine lease pool equipment from our Equipment Manufacturing and Sales segment. These amounts are carried in our lease pool at the cost to our Equipment Manufacturing and Sales segment, less accumulated depreciation. From time to time, we sell lease pool equipment to our customers. These sales are usually transacted when we have equipment for which we do not have near term needs in our leasing business. Additionally, when equipment that has been leased to a customer is lost or destroyed, the customer is charged for such equipment at amounts specified in the underlying lease agreement. These charges are included in “Lease pool equipment sales” in the accompanying financial statements. In response to changes in demand for seismic equipment in recent periods we have sought to sell certain lease pool equipment and redeploy that capital into other areas. We occasionally sell new seismic equipment that we acquire from other manufacturers and provide repair and support services to our rental customers.


13


Seismic equipment leasing is susceptible to weather patterns in certain geographic regions. In Canada and Russia, a significant percentage of the seismic survey activity normally occurs in the winter months, from December through March or April. During the months in which the weather is warmer, certain areas are not accessible to trucks, earth vibrators and other heavy equipment because of the unstable terrain. Accordingly, our first and fourth quarters have historically produced higher leasing revenues than the second and third quarters. However, in recent periods the effect of this historical seasonality has been less pronounced due to the significant decline in seismic exploration activity in Canada and Russia. In other areas of the world, periods of heavy rain can impair seismic operations. These periods of inclement weather can impact our results of operations; however, there is no historical trend as to the timing of such impact. When these weather events do occur, in many cases we are able to transfer our equipment from one region to another in order to deal with seasonal demand and to increase our equipment utilization. Our results of operations, particularly those of our Equipment Leasing segment, can also experience fluctuations in activity levels due to matters unrelated to seasonal or weather factors. These factors include the periodic shift of seismic exploration activity from one geographic region to another and difficulties encountered by our customers due to permitting and other logistical challenges. For further information, refer to Item 1A- “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017.
Business Outlook
The markets for the products in our Equipment Manufacturing and Sales segment include the hydrographic, oceanographic, defense and oil and gas industries. While the results of this segment have been negatively impacted over the past several years by the downturn in the energy industry, the extent of the impact has not been as great as that experienced by our Equipment Leasing segment. One of our strategies is to reduce our dependence on oil and gas exploration activity by expanding our manufacturing operations with products and services that are not solely dependent on this segment of the industry. We believe there are a number of opportunities to expand the product offerings of our Equipment Manufacturing and Sales segment. These opportunities include new internally developed products, the acquisition of technology that will produce new products, the acquisition of product lines from others and the acquisition of third parties businesses. We are actively pursuing a number of such opportunities.
Products sold by Seamap are primarily dependent upon activity within the offshore, or marine, seismic industry, including the re-fitting of existing seismic vessels and the equipping of new vessels. However, these products are also utilized by hydrographic and geotechnical survey vessels whose activities are not limited to oil and gas related operations. Our Seamap business has benefited from equipping new-build vessels and from re-equipping older vessels with newer, more efficient technology. In addition, as Seamap has expanded its installed base of products our business for replacements, spare parts, repair and support services has expanded. The overall decline in seismic exploration activity has had, and we expect it will continue to have, an impact on the demand for Seamap’s products and services. However, we believe the expansion of our product offerings and the desire of our customers to upgrade to newer, more efficient technology will mitigate this impact to some extent. We also believe that Seamap has had recent success penetrating new markets, as evidenced by recent deliveries to new customers in China and Japan. We continue to have discussions with existing and potential customers regarding new products and enhancement to existing products in order to better meet the needs of the marine seismic, hydrographic and oceanographic industries.
Demand for Klein’s products is generally not dependent upon activity within the oil and gas industry. Customers for these products primarily consist of domestic and foreign governmental and military organizations and commercial entities involved in the hydrographic and oceanographic industries. Although revenue from the sale of Klein products has trailed expectations to date for fiscal 2018, we are seeing increased order bookings and inquiries which we believe is indicative of improvement in this part of our business. Certain of these potential orders involve multi-year programs.

The revenues of our Equipment Leasing segment correlate to the level of worldwide oil and gas exploration activities and the profitability and cash flows of oil and gas companies and seismic contractors which are, in turn, affected by energy prices, expectations regarding supply and demand for oil and natural gas, and exploration and development costs. The decline in oil and gas exploration activity in recent years resulted in a significant decline in the demand for seismic exploration equipment and our equipment rental services. Lower demand resulted in a material decline in prices for such equipment and services, as much as 50% or more in some cases. While oil prices have recovered somewhat from their historical lows and there have been indications of improving conditions, we expect incremental activity to be marginal and for conditions in the seismic industry to remain challenging for the foreseeable future.
Demand for the rental of land seismic exploration equipment varies by geographic region. During the first nine months of fiscal 2018 we experienced some increased demand in North America, but incremental activity is sporadic and competition is very high in the region. For the remainder of fiscal 2018 we expect demand for our equipment to be primarily in Europe, South America and North America. Activity in Russia has been, and is expected to remain, restrained due to economic issues and trade restrictions impacting that region. We do anticipate opportunities for projects in other parts of the world, including North Africa and the Middle East region, some of which could be significant. However, competition for such projects is generally intense and there is no assurance that we will have the opportunity to provide equipment for such projects.
Marine leasing activity has declined significantly over the past several years due in large part, we believe, to an excess of equipment in the marine seismic market. As marine contractors have sought to reduce costs by retiring older vessels, an excess of used equipment has become available, thereby reducing the demand for rental equipment. While we have experienced an increase in inquiries for marine equipment in recent months, we believe this excess of available equipment will continue to impact leasing activity and pricing.
Demand for downhole seismic equipment has been very sporadic during fiscal 2018 and is expected to remain so. This equipment is most often used in applications related to the development of oil and gas properties, such as hydraulic fracturing monitoring or reservoir monitoring

14


programs. Accordingly, the degree to which current oil prices and exploration activity influence demand for these products can be different from that for our other equipment.
The oil and gas industry, in general, and the seismic industry, in particular, have historically been cyclical businesses. If worldwide oil and gas prices should decline from current levels, we could see a material change in the level of our business and our income from operations.
Accordingly, we believe a number of factors have negatively affected, and will continue to affect, our business, particularly our Equipment Leasing segment. These factors include reduced demand for seismic services and related equipment, an excess of supply of seismic exploration equipment, increased competition among suppliers of seismic exploration equipment and a reduction in pricing for the sale or rental of both new and used seismic exploration equipment. In the nine months ended October 31, 2017 we have experienced increased activity in our seismic business in the form of inquiries, bids and proposals. Although there are early indications that this market is improving, we believe any meaningful recovery will be gradual and expect only marginal improvement in the last quarter of fiscal 2018. Furthermore, we believe it is unlikely that the financial results of our Equipment Leasing segment will return to levels seen in fiscal 2015 in the foreseeable future.
In order to address the changes in circumstances discussed above we have implemented a strategy which includes the following:
 
Increased emphasis on our Equipment Manufacturing and Sales segment. We intend to expand our product offerings with an emphasis on products and services that are not exclusively dependent upon oil and gas exploration activity. We expect new products and services to come from a combination of internally developed products and those acquired from third parties, such as the acquisition of Klein in fiscal 2016

Redeploy capital from lease pool. We expect our Equipment Leasing segment to remain an important component of our business. However, we believe there are opportunities to selectively sell certain lease pool assets and redeploy that capital in order to invest in other opportunities.

Selectively invest in new lease pool assets. Due to the increased competition and challenging economic conditions in the seismic equipment industry, we intend to limit future acquisitions of lease pool assets to situations that enhance the value of our existing assets or in which we enjoy a competitive advantage due to pricing, operational considerations or exclusivity arrangements. As a part of this strategy, we are attempting to develop arrangements with various manufacturers of land seismic equipment in order to reduce the capital requirements for this segment of our business, while continuing to provide important services to our customers.

Continually monitor and assess overhead and administrative cost structures.    We will continue to monitor and proactively manage our overhead and administrative cost structures to ensure we are providing the necessary support to our operations and customers in a cost efficient and economical manner as the strategy is implemented.

Maintain a capital structure with limited leverage. Historically, we have utilized short-term commercial banking facilities to temporarily finance capital expenditures and business acquisitions. Due to conditions within the oil and gas industry, including our own recent financial results, and associated regulatory pressures, access to such capital has become more limited and may not be available to us in amounts historically available. Accordingly, we have reduced our exposure to short-term credit facilities. During the first quarter of fiscal 2018 we repaid all outstanding obligations under our Credit Agreement and terminated that agreement, and repaid all outstanding obligations under our Seamap Credit Facility and cancelled that facility. In the future, we intend to rely on other sources of expansion capital, including cash flow provided by operations, proceeds from the sale of lease pool assets, the issuance of debt securities and the issuance of equity securities.
Consistent with the strategy discussed above, we continually monitor the composition of our lease pool in relation to general industry conditions and customer requirements. As a result, from time to time we may seek to reduce the amount of certain types of equipment in our lease pool or to completely divest ourselves of certain types of equipment. During the first three quarters of fiscal 2018 we completed several lease pool equipment sale transactions with approximately $6.3 million net book value of lease pool equipment sold. Sales of lease pool equipment are reflected in our consolidated results of operations as “Lease pool equipment sales”. We also analyze the demand for the types and amount of equipment within various geographic regions and will move equipment among our various locations as warranted.
In response to the decline in demand for our equipment and what we believe to be an excess of equipment in the market, we have significantly reduced our purchases of lease pool equipment from historical levels. For the nine months ended October 31, 2017 we added approximately $252,000 to our lease pool. We expect lease pool additions for the balance of fiscal 2018 to generally remain at this level. By comparison, we added approximately $441,000, $2.4 million and $11.8 million to our lease pool during the fiscal years ended 2017, 2016 and 2015, respectively. We expect any additions for the remainder of fiscal 2018 will be limited to maintenance of our existing equipment or additional ancillary items that will enhance our ability to lease existing equipment. However, should industry conditions change, or unusual opportunities present themselves, we could revise our planned leased pool additions.
A significant portion of our revenues are generated from foreign sources. For fiscal 2017, revenue from international customers totaled approximately $34.7 million, or about 85% of consolidated revenue. For the nine months ended October 31, 2017 revenue from international customers totaled approximately $27.4 million, or roughly 72% of consolidated revenue; however, this period included sales of lease pool equipment in the United States, and accordingly, we do not think this is indicative of future periods. The majority of our transactions with foreign customers are denominated in United States, Australian, Canadian and Singapore dollars. We have not entered, nor do we intend to enter, into derivative financial instruments for hedging or speculative purposes.

15


Our revenues and results of operations have not been materially impacted by inflation or changing prices in the past several years, except as described above.
Results of Operations
Revenues for the three months ended October 31, 2017 were approximately $8.6 million compared to approximately $8.1 million for the three months ended October 31, 2016. For the nine months ended October 31, 2017 revenues were approximately $37.9 million, compared to approximately $28.5 million for the nine months ended October 31, 2016. The increase in the three-month period is due to incremental manufactured equipment sales, partially offset by lower equipment leasing revenue between the periods. The increase in the fiscal 2018 nine-month period compared to the prior year is primarily due to a large lease pool equipment sale in the first quarter of fiscal 2018 and higher manufactured equipment sales. For the three months ended October 31, 2017, we generated an operating loss of approximately $4.8 million, compared to an operating loss of approximately $7.7 million for the three months ended October 31, 2016. For the nine months ended October 31, 2017 our operating loss was approximately $12.1 million, compared to approximately $22.4 million for the nine months ended October 31, 2016. The decrease in operating loss in the fiscal 2018 periods as compared to the same periods a year ago is due primarily to contribution from incremental manufactured equipment and lease pool equipment sales, plus lower lease pool depreciation. A more detailed explanation of these variations follows.
Revenues and Cost of Sales
Equipment Manufacturing and Sales
Revenues and cost of sales from our Equipment Manufacturing and Sales segment were as follows:
 
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
Seamap
 
$
3,676

 
$
2,536

 
$
16,053

 
$
9,662

Klein
 
1,517

 
1,999

 
3,456

 
6,462

SAP
 
1,087

 
1,440

 
3,998

 
3,253

Intra-segment sales
 
(288
)
 
(724
)
 
(942
)
 
(1,148
)
 
 
5,992


5,251


22,565


18,229

Cost of sales:
 
 
 
 
 
 
 
 
Seamap
 
1,671

 
1,061

 
8,438

 
4,501

Klein
 
894

 
1,468

 
2,571

 
4,330

SAP
 
896

 
1,140

 
3,158

 
2,436

Intra-segment sales
 
(287
)
 
(782
)
 
(1,051
)
 
(1,205
)
 
 
3,174


2,887


13,116


10,062

Gross profit
 
$
2,818


$
2,364


$
9,449


$
8,167

Gross profit margin
 
47
%

45
%

42
%

45
%
The sale of Seamap products, while not generally impacted by seasonal factors, can vary significantly from quarter to quarter due to customer delivery requirements. Seamap revenues for the third quarter of fiscal 2018 increased 45% from the third quarter of fiscal 2017 and Seamap revenues for the nine months ended October 31, 2017 increased 66% from the nine months ended October 31, 2016, due to sales of completed systems in the first nine months of fiscal 2018.
Demand for Klein’s products relates primarily to activity within the hydrographic and oceanographic industries. Such demand is not subject to significant seasonal factors, but sales can vary significantly from quarter to quarter based on the requirements of specific projects. Klein’s revenues declined in the three and nine month periods ended October 31, 2017 compared to the three and nine month periods ended October 31, 2016. Although revenue at Klein was lower than expected in the first nine months of fiscal 2018, we have begun to see an increase in order bookings and inquiries which we believe is indicative of an improved outlook over the next several quarters in that part of our business.
SAP’s revenues are also attributable to activity within the hydrographic and oceanographic industry and can vary significantly from quarter to quarter based on the requirements of specific programs. Sales of products by SAP were approximately $353,000 lower in the three months ended October 31, 2017 and approximately $745,000 higher in the nine month period ended October 31, 2017 compared to the prior year periods. The revenue variances across comparative periods are more reflective of the timing of deliveries than changes in SAP’s revenue stream. However, SAP did complete two large system sales to defense industry customers in the first half of 2018 and, based on pending orders, is expected to produce higher revenues in fiscal 2018 than in fiscal 2017.

16


The gross profit margin from the Equipment Manufacturing and Sales segment increased during the three month period ended October 31, 2017 compared to the three month period ended October 31, 2016. The increase is due primarily to incremental high margin revenue from Seamap. For the nine months ended October 31, 2017, gross profit margin from the Equipment Manufacturing and Sales segment decreased compared to the prior year period, due mainly to lower revenue from Klein, and more specifically due to the mix of products sold. Although Klein and Seamap products generally have similar gross profit margins, both manufacturing operations have certain fixed costs which can negatively impact gross profit margins in periods of relatively lower revenues.

Equipment Leasing
Revenue and cost of sales from our Equipment Leasing segment were as follows:
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
 
(in thousands)
Revenue:
 
 
Equipment leasing
 
$
2,071

 
$
2,577

 
$
5,765

 
$
7,819

Lease pool equipment sales
 
247

 
87

 
9,309

 
2,256

Other equipment sales
 
412

 
142

 
472

 
183

 
 
2,730

 
2,806


15,546


10,258

Cost of sales:
 
 
Direct costs-equipment leasing
 
858

 
739

 
2,363

 
2,276

Lease pool depreciation
 
3,578

 
6,428

 
11,509

 
19,976

Cost of lease pool equipment sales
 
34

 
51

 
6,228

 
764

Cost of other equipment sales
 
177

 
31

 
182

 
118

 
 
4,647


7,249


20,282


23,134

Gross loss
 
$
(1,917
)

$
(4,443
)

$
(4,736
)

$
(12,876
)
Equipment leasing revenues decreased approximately 20% and 26%, respectively, for the three and nine month periods ending October 31, 2017 as compared to the same periods of fiscal 2017 due to lower land leasing revenues. The geographical region with the largest revenue decline from the prior year periods was Latin America. As discussed above, current seismic exploration activity is generally very depressed and our land leasing operations in the Western Hemisphere have been most affected by the reduction in activity.
From time to time, based on specific customer demand and as opportunities present themselves, we sell equipment from our lease pool in order to redeploy our capital. As a result, these transactions tend to occur sporadically and are difficult to predict. Often, the equipment that is sold from our lease pool has been in service, and therefore depreciated, for some period of time. Accordingly, the equipment sold may have a relatively low net book value at the time of the sale, resulting in a relatively high gross margin from the transaction. The amount of the margin on a particular transaction varies greatly, based primarily upon the age of the equipment. The gross profit from sales of lease pool equipment for the three month periods ended October 31, 2017 and 2016 was approximately $213,000 and $36,000, respectively. For the nine month periods ended October 31, 2017 and 2016 the gross profit from the sale of lease pool equipment was approximately $3.1 million and $1.5 million, respectively. Although demand for used lease pool equipment is depressed by the same factors affecting leasing services, we expect to continue to sell lease pool equipment from time to time as opportunities arise.
Direct costs related to equipment leasing were approximately 41% of leasing revenues in the three and nine month periods ended October 31, 2017. This compares with approximately 29% for the three and nine month periods ended October 31, 2016. The increase in direct costs as a percentage of revenue is mainly because a significant portion of direct costs are generally fixed and therefore do not fluctuate with the level of leasing revenues. For the three and nine month periods ended October 31, 2017, lease pool depreciation decreased approximately 44% and 42%, respectively, from the same periods in the prior fiscal year. The decrease reflects the significant sales of lease pool equipment, lower level of lease pool purchases and the effect of certain equipment becoming fully depreciated.

Operating Expenses
General and administrative expenses for the three months ended October 31, 2017 were approximately $5.2 million compared to approximately $5.0 million for the three months ended October 31, 2016. The increase in the fiscal 2018 period reflects higher business development costs. General and administrative expenses for the nine months ended October 31, 2017 and 2016 were approximately $15.1 million and $15.8 million, respectively, reflecting our ongoing efforts to actively manage these costs.
Depreciation and amortization includes depreciation of equipment, furniture and fixtures and the amortization of intangible assets. These costs were approximately $516,000 and $1.6 million in the three and nine month periods ended October 31, 2017, respectively, as compared to approximately $558,000 and $1.9 million in the three and nine month periods ended October 31, 2016, respectively.

17


Other Income (Expense)
Net interest income for the three months ended October 31, 2017 was approximately $52,000 compared to net interest expense of $111,000 for the three months ended October 31, 2016. Net interest income for the nine months ended October 31, 2017 was $23,000 as compared to net interest expense of approximately $539,000 for the nine months ended October 31, 2016. The decrease in net interest expense reflects the impact of lower average borrowings.
Other income and other expense relate primarily to foreign exchange gains and losses incurred by our foreign subsidiaries and branches. Certain of these entities have functional currencies other than the U.S. dollar, but in many cases hold U.S. dollar cash balances and have accounts receivable and accounts payable, including inter-company obligations, denominated in U.S. dollars. As the U.S. dollar fluctuates in value against each subsidiary’s functional currency, the subsidiary can incur a foreign exchange gain or loss, although the value of these amounts in our consolidated financial statements may not have changed materially. Items of this nature are considered non-cash in our calculation of Adjusted EBITDA and resulted in a net gain of approximately $41,000 and $288,000 in the three months ended October 31, 2017 and 2016, respectively. For the nine months ended October 31, 2017 and 2016 we recognized non-cash foreign exchange losses of approximately $320,000 and $31,000, respectively. The net gains realized in the comparative three month periods resulted from strengthening of the U.S. dollar versus a number of foreign currencies, including the Canadian, Singapore and Australian dollar, whereas the net losses incurred in the comparative nine month periods resulted primarily from the strengthening of the Canadian and Singapore dollar versus the U.S. dollar.
Provision for Income Taxes
Our tax provision for the three and nine month periods ended October 31, 2017 was approximately $586,000 and approximately $1.2 million, respectively. For the three and nine month periods ended October 31, 2016 we recorded a tax benefit of approximately $228,00 and tax provision of approximately $506,000, respectively. We recorded tax provision in the three and nine month periods ended October 31, 2017 despite generating a loss before income taxes in each of these periods, due mainly to the effect of foreign withholding taxes and recording valuation allowances against deferred tax assets.
Liquidity and Capital Resources
Our principal sources of liquidity and capital in recent periods have been cash flows provided by operating activities, proceeds from the sale of lease pool equipment and net proceeds from the issuance of preferred stock. As discussed in footnote 6 - Long-term Debt and Notes Payable of the accompanying Condensed Consolidated Financial Statements, in the first quarter of fiscal 2018 we paid all the outstanding obligations under our Credit Agreement and terminated that agreement, and we repaid all outstanding obligations under our Seamap Credit Facility and cancelled that facility. The principal factor that has affected our cash flow from operating activities is the level of oil and gas exploration and development activities as discussed above and a decrease in accounts and contracts receivable.
We believe that our liquidity needs for the next 12 months will be met from cash on hand, cash provided by operating activities and net proceeds from the issuance of preferred stock. We may also generate cash from the sale of additional lease pool equipment from time to time. However, should our needs for liquidity increase, such as to make an acquisition, we may seek to issue debt or other equity securities.
The following table sets forth selected historical information regarding cash flows from our Consolidated Statements of Cash Flows:
 
 
 
For the Nine Months Ended
October 31,
 
 
2017
 
2016
 
 
(in thousands)
Net cash provided by operating activities
 
$
2,174

 
$
3,687

Net cash provided by investing activities
 
6,093

 
1,535

Net cash used in financing activities
 
(5,090
)
 
(5,135
)
Effect of changes in foreign exchange rates on cash and cash equivalents
 
82

 
(624
)
Net increase (decrease) in cash and cash equivalents
 
$
3,259

 
$
(537
)

As of October 31, 2017, we had working capital of approximately $26.7 million, including cash and cash equivalents and restricted cash of approximately $6.8 million, as compared to working capital of approximately $21.6 million, including cash and cash equivalents and restricted cash of approximately $3.5 million, at January 31, 2017. The increase in working capital resulted primarily from cash provided by operating activities and proceeds from the sale of preferred stock during the first nine months of fiscal 2018.
Cash Flows from Operating Activities. Net cash provided by operating activities was approximately $2.2 million in the first nine months of fiscal 2018 as compared to approximately $3.7 million of net cash provided by operating activities in the first nine months in fiscal 2017.
Cash Flows from Investing Activities. Net cash flows used in investing activities for the nine months ended October 31, 2017 included purchases of seismic equipment held for lease totaling approximately $321,000, as compared to approximately $604,000 in the nine months ended October 31, 2016. Due to the decline in demand for our rental equipment, we have significantly curtailed our purchases of lease pool

18


equipment in recent periods. We expect additions to our lease pool for all of fiscal 2018 to total less than $0.5 million. We expect to fund these purchases with a combination of cash on hand and cash flow generated from operating activities.
In the first nine months of fiscal 2018, proceeds from the sale of lease pool equipment totaled approximately $6.7 million compared to approximately $2.3 million in the first nine months of fiscal 2017. From time to time we may seek to sell certain equipment from our lease pool. In particular, we may sell lease pool equipment in response to specific demand from customers if the selling price exceeds the estimated present value of projected future leasing revenue from that equipment. Accordingly, cash flow from the sale of lease pool equipment is unpredictable.
Cash Flows from Financing Activities. Net cash used in financing activities in the first nine months of fiscal 2018 consists primarily of approximately $3.5 million of net payments under the Credit Agreement and $2.8 million of payments pursuant to the Seamap Credit Facility.
During the three and nine months ended October 31, 2017, we issued 44,932 and 81,904 shares of Series A Preferred Stock under our ATM offering program, respectively (see footnote 9-Related Party Transaction). Net proceeds to us from these sales during the three and nine months ended October 31, 2017 were approximately $1.0 million and $1.9 million, respectively. The Series A Preferred Stock has a liquidation preference of $25.00 per share, an annual dividend rate of 9.00%, has no maturity date, but may be redeemed at the option of the Company at any time after June 8, 2021 or upon a change of control of the Company. The Series A Preferred Stock is not convertible into shares of our common stock, except in limited situations arising from a change in control of the Company in which event the conversion would be subject to a limit on the maximum number of shares of common stock to be issued, and is not anticipated to grant holders with voting control of our Board of Directors. Based on the Series A Preferred Stock outstanding at October 31, 2017, annual dividend requirements are approximately $956,000.
In connection with the temporary importation of our lease pool equipment into some countries, we are required to post import bonds with the customs authorities of that country. In addition, from time to time we are required to provide performance bonds related to the sale and delivery of new equipment, primarily by Seamap. These bonds are normally provided by insurance companies, surety companies or local banks. In some cases, the party issuing the bond requires that we post collateral to secure our obligations under the bonds. As of October 31, 2017, we had provided approximately $229,000 of cash collateral to secure these obligations.
In March 2017, we paid all the outstanding obligations under our Credit Agreement and terminated that agreement and in April 2017, we repaid all outstanding obligations under our Seamap Credit Facility and cancelled that facility. We currently do not have any line of credit or other bank credit facilities. We are engaged in discussions with a number of commercial banks regarding establishing one or more credit facilities. There can be no assurance that we will be able to establish any such facilities. Should we successfully conclude these discussions we anticipate the amount of credit available under the facilities will be significantly less than that available under the Credit Agreement and the Seamap Credit Facility. We would intend to use such facilities for short-term working capital needs and to support letter of credit requirements from time to time.
We have determined that the undistributed earnings of our foreign subsidiaries, other than branch operations in Colombia, have been indefinitely reinvested outside of the United States. The undistributed earnings have been reinvested through the purchase of lease pool equipment and other assets, strategic acquisitions, and additional working capital to support ongoing operations and expansion of these businesses. As of October 31, 2017, we estimate that the unrecognized deferred tax liability related to these items is immaterial.

As of October 31, 2017, we had deposits in foreign banks consisting of both United States dollar and foreign currency deposits equal to approximately $6.1 million. We believe all $6.1 million of these deposits could be distributed to the United States without any adverse tax consequences.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.

19


Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk, which is the potential loss arising from adverse changes in market prices and rates. We have not entered, and do not intend to enter, into derivative financial instruments for hedging or speculative purposes.
Foreign Currency Risk
We operate in a number of foreign locations, which gives rise to risk from changes in foreign exchange rates. To the extent possible, we attempt to denominate our transactions in foreign locations in United States dollars. For those cases in which transactions are not denominated in United States dollars, we are exposed to risk from changes in exchange rates to the extent that non-United States dollar revenues exceed non-United States dollar expenses related to those operations. Our non-United States dollar transactions are denominated primarily in Canadian dollars, Australian dollars, Singapore dollars and Russian rubles. As a result of these transactions, we generally hold cash balances that are denominated in these foreign currencies. At October 31, 2017, our consolidated cash and cash equivalents included foreign currency denominated amounts equivalent to approximately $1.4 million in United States dollars. A 10% increase in the value of the United States dollar as compared to the value of each of these currencies would result in a loss of approximately $140,000 in the United States dollar value of these deposits, while a 10% decrease would result in an equal amount of gain. We do not currently hold or issue foreign exchange contracts or other derivative instruments as we do not believe it is cost efficient to attempt to hedge these exposures.
Some of our foreign operations are conducted through wholly-owned foreign subsidiaries or branches that have functional currencies other than the United States dollar. We currently have subsidiaries whose functional currencies are the Canadian dollar, British pound sterling, Australian dollar, Russian ruble and the Singapore dollar. Assets and liabilities from these subsidiaries are translated into United States dollars at the exchange rate in effect at each balance sheet date. The resulting translation gains or losses are reflected as accumulated other comprehensive loss in the shareholders’ equity section of our consolidated balance sheets. Approximately 44% of our net assets as of October 31, 2017 were impacted by changes in foreign currencies in relation to the United States dollar.
Interest Rate Risk
As of October 31, 2017, the Company had no outstanding borrowings subject to fluctuations in interest rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of October 31, 2017 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting
There was no change in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended October 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

20


PART II
Item 1. Legal Proceedings
From time to time, we are a party to legal proceedings arising in the ordinary course of business. We are not currently a party to any legal proceedings, individually or collectively, that we believe could have a material adverse effect on our results of operations or financial condition or is otherwise material.
Item 1A. Risk Factors
The risk factors included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017 have not materially changed. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
(a)
Not applicable.
(b)
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item  5. Other Information
Not applicable.
Item 6. Exhibits
Exhibits
The exhibits required to be filed pursuant to the requirements of Item 601 of Regulation S-K are set forth in the Exhibit Index accompanying this Form 10-Q and are incorporated herein by reference.


21


EXHIBIT INDEX
Each exhibit identified below is part of this Form 10-Q. Exhibits filed with this Form 10-Q are designated by the cross symbol (†) and exhibits furnished with this Form 10-Q are designated by the asterisk symbol (*). All exhibits not so designated are incorporated herein by reference to a prior filing as indicated.
 
 
 
 
 
 
Exhibit
Number
Document Description
Report or Registration Statement
SEC File or
Registration
Number
Exhibit
Reference
 
 
 
 
 
3.1
Incorporated by reference to Mitcham Industries, Inc.’s Registration Statement on Form S-8, filed with the SEC on August 9, 2001.
333-67208
3.1
 
 
 
 
 
3.2
Incorporated by reference to Mitcham Industries, Inc.’s Current Report on Form 8-K, filed with the SEC on August 2, 2010.
000-25142
3.1(i)
 
 
 
 
 
3.3
Incorporated by reference to Mitcham Industries, Inc.’s Form 8-K filed with SEC on June 10, 2016.
001-13490
3.1
 
 
 
 
 
3.4
Incorporated by reference to Mitcham Industries, Inc.’s form 8-K filed with the SEC on October 7, 2016.
001-13490
3.1
 
 
 
 
 
31.1†
 
 
 
 
 
 
 
 
31.2†
 
 
 
 
 
 
 
 
32.1*
 
 
 
 
 
 
 
 
101.INS†
XBRL Instance Document
 
 
 
 
 
 
 
 
101.SCH†
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
101.CAL†
XBRL Taxonomy Extension Calculation of Linkbase Document
 
 
 
 
 
 
 
 
101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
101.LAB†
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
101.PRE†
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 

22


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MITCHAM INDUSTRIES, INC.
 
 
 
 
Date: December 7, 2017
 
 
 
 
 
/s/ Robert P. Capps
 
 
 
 
 
 
Robert P. Capps
 
 
 
 
 
 
Co-Chief Executive Officer,
 
 
 
 
 
 
Executive Vice President of Finance and Chief Financial Officer
 
 
 
 
 
 
(Duly Authorized Officer)



23