Quick Pitch: MIND Technology (MINDP)

Preferred Stock Conversion – 29% Upside

Over the last few weeks, I have received several questions from SSI members regarding MIND Technology preferred stock conversion. The 29% spread is pretty tempting, but I do not think the company will gather sufficient votes from the preferred holders to implement the transaction. So I am staying on the sidelines for now, and sharing my research notes below.

MIND Technology is a designer and manufacturer of specialized marine seismic equipment. Despite its tiny $6m market cap, the company is saddled with $49m (including $7m of unpaid dividends) of 9% Series A preferred stock. The common stock’s ticker is MIND and the pref. stock’s – MINDP. The preferred stock creates a massive overhang, which limits company’s access to capital and growth opportunities.

Management is proposing to convert all preferreds into common stock at an exchange ratio of 3.9x. The spread currently stands at 29%. The conversion requires an amendment to the terms of MINDP, which has to be approved by two-thirds of the outstanding preferred stock. The vote is now scheduled for June 27 (but could get extended again). The borrow to hedge exposure to the common shares is available at 17% annual rate (on Interactive Brokers) – hedging costs would only have a minor impact on this arbitrage if the transaction gets approved in a short timeframe. Borrow fees could easily spike upwards, if the conversion becomes more certain.

The proposal seems undoubtedly beneficial for the preferred stockholders. It comes at a massive premium – the offer is now worth around $16.5 per MINDP versus $7-$8 trading levels earlier this year before the announcement. The conversion would also substantially improve company’s capital structure and could even open the gates for a potential buyout (probably just a wishful thinking):

Despite all of these benefits for preferred holders, management is struggling to gather the required votes. The special meeting has already been postponed twice. MINDP is an obscure nanocap security, predominantly held by passive retail investors, who may not even be aware of or interested in the vote. The two largest pref. stockholders are Mitsubishi Heavy Industries (owns 10.3%) and MIND’s chairman Peter Blum (1.3%). The remaining ~90% of preferreds are held “by beneficial owners in street name”. With non-votes counted as “no”, the company might still be very far from reaching the required two-thirds approval threshold. Management has not disclosed the acceptance level so far, and this lack of transparency is quite concerning, especially since the disclosure of acceptance threshold is a rather common practice in similar situations.

Here’s a brief timeline of the recent events:

• March 25 – the conversion was proposed. The initial exchange rate was set at 2.7x, which would give pref. stock holders 76% ownership of the whole company post-conversion. At the time of the announcement, the offer was worth $16.52 per MINDP. The meeting date was set for April 25.
• April 24 – the company postponed the meeting with the revised date to be set later on. No explanation was offered to shareholders.
• May 8 – the new meeting date was set for June 13, while the exchange ratio was improved to 3.9x. Pref. holders would own 82% of the company post-conversion. The record date was also revised from February 27 to April 26. Management finally explained that there were several reasons why the meeting date had to be adjourned. Some  pref. stock holders indicated the conversion rate was too low, but would consider supporting a revised rate. Certain pref. stock holders also wanted to see Q4 results before casting a vote. Besides that, management was also having trouble of collecting the required amount of votes: “Due to the diverse holdings of the preferred stock, additional time was necessary to solicit proxies.” At the time of the announcement, the updated offer was worth $19.66 per MINDP.
• May 29 – the company issued a reminder of the special meeting. Management’s tone seemingly changed and the CEO noted that: “We are very pleased with the feedback we have received so far on the proposal”.
• June 13 – the special meeting was adjourned again to provide additional time to solicit more votes. The CEO stated: “We are pleased with the response we have received to date to the Preferred Stock Proposal. However, given the diverse holdings of the preferred stock and the requirement to obtain the affirmative vote of two-thirds of the outstanding shares, we think it appropriate to adjourn the virtual special meeting and provide additional time to solicit proxies.” The new date was set for June 27.

Management seems to have been working pretty actively to push through this conversion. They’ve already improved the terms and have sent out reminders. Additionally, advisors have been reaching out to each stockholder individually (e.g. letter 1, letter 2).

What else could management do here? Theoretically, the company could go for a more creative workaround. For example, RHE (covered on SSI here) was trying to exchange old Series A pref. shares into new Series B pref. shares, but also stumbled into a similar issue with a passive retail stockholder base not turning up for voting. RHE solved this problem by setting up the following scheme. The company issued new supervoting shares to all stockholders, but then redeemed these new supervoting shares from those shareholders who were absent before opening of the voting polls. This allowed the active and supporting shareholders to overwhelm the passive non-voters and approve the conversion. Tilray Brands (TLRY) also did a similar scheme for their common stock conversion last year. I am not sure if something similar could be implemented by MIND, maybe something in company’s or preferreds’ bylaws restricts these workarounds.

The proxy notes that the amendment to the pref. stock terms need to be filed with the Delaware Secretary of State by July 31. Otherwise, the proposal would be “abandoned”. I am not sure why there would a strict deadline for this transaction, but the same date is also highlighted in the press releases and presentations. It might be just a way to entice preferred stockholders to vote more actively.

If the offer fails the downside on this arb could be severe, potentially 30%-50%.