Geospace Technologies Corporation

Good day and welcome to the Geospace Technologies Third Quarter 2020 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Curdo, Company's Chief Financial Officer, and Mark Tinker, CEO of Geospace Subsidiary Quantum Technology Sciences. This call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star and one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, press star zero. And it's now my pleasure to turn the floor over to Rick Wheeler. Please go ahead.

Thank you, Keith. Good morning, and welcome to Geospace Technology's conference call for the third quarter of our 2020 fiscal year. I'm Rick Wheeler, the company's president and chief executive officer, and I'm joined by Robert Curta, the company's chief financial officer. We also have with us Dr. Mark Tinker, CEO of our Quantum Technology Sciences subsidiary. I'll first give an overview of the third quarter and Robert will follow with some in-depth commentary on our financial performance. I'll then make a few last remarks before opening the line so that Robert, Mark, and I can answer questions. Some of today's statements may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995, including comments about product markets, revenue recognition, planned operations, and capital expenditures. These statements are based on our present awareness, while actual outcomes are affected by uncertainties and other factors we can't control or predict. Both known and unknown risks can lead to undesirable results or performance differences from what we say or imply today, and such risks and uncertainties include those discussed in our SEC Forms 10-K and 10-Q filings. For convenience, as was mentioned, we will link a recording of this call on the investor relations page of our geospace.com website. However, since the information discussed this morning is time sensitive, it may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released the financial results for our third quarter of fiscal year 2020, ended June 30, 2020. As reported, we were very pleased that the coronavirus pandemic, gripping both our country and the world at large, had limited impact on our third quarter performance. Even more gratifying, our employees have been minimally affected by COVID-19, and to date, our heightened and evolving safety protocols have helped us in maintaining a safe working environment. While our operations have not entirely escaped the vast negative impact of this pandemic, we were nonetheless pleased to report that total revenue of $22.7 million and $66.3 million for the respective three- and nine-month periods into June 30, 2020, were very similar to last year's three- and nine-month totals. Continued strong demand for our marine ocean bottom nodal recording systems fueled both our third quarter and nine-month results. In fact, increased demand for these systems acted to counter some of the weakness we experienced in demand for other products in our oil and gas segments as well as in our adjacent markets business, both of which were negatively impacted by the effects of COVID-19. As was also mentioned, reported revenue did not include additional timely payments we received from a customer toward its promissory note to secure the purchase of a GCL land recording system comprised of 30,000 channels. These paid-in amounts, totaling $3.8 million through the end of the third quarter, are included on the balance sheet as part of the non-current deferred revenue and are intended to be recognized as revenue at a later date when the collection of the note is determined to be likely. For the three months ended June 30, 2020, revenue from our combined oil and gas market products totaled $17.5 million, and for the similarly ended nine-month period, revenue totaled $47.5 million. These figures reflect respective increases of 21% and 8% over last year's similar periods. And in both periods, the increases are attributed to the greater demand for our OBX ocean bottom recording systems, which were partially offset by lower demand for some of our other oil and gas segment product lines. Our traditional seismic products generated $1.2 million and $5.6 million, respectively, in the three- and nine-month periods dated June 30, 2020. Both periods reflect notable declines from last year, which we attribute to lower demand for seismic sensors as a result of fewer seismic exploration and imaging projects being performed by oil and gas companies. Moreover, due to low oil prices, oversupplies of crude, and the large drop in global demand for oil and gas amidst the COVID-19 pandemic, we expect revenue from these products to remain challenged for the foreseeable future. In the three- and nine-month periods into June 30, 2020, revenue produced from our wireless seismic products totaled $16.1 million and $41.1 million, respectively. These reflected increases over last year's equivalent periods and are a direct result of expanded rentals of our OBX marine noble recording systems, even though partially offset by lower sales of our wireless land products. As previously mentioned, we have not yet recorded revenue from the delivery of the aforementioned 30,000-channel GCL land system, which has a sales value of $12.5 million. The growth in demand for our OBX system derives from a renewed focus by many oil and gas companies to better leverage existing offshore resources in the recovery of discovered and nearby fields. Ocean bottom seismic surveys, which often utilize our OBX systems, increase the likelihood of success in these endeavors by producing a superior geological image over other survey methods. Note that the frequency and extent of ocean bottom surveys can fluctuate with weather and seasonal changes and are subject to being negatively impacted by the declines in global demand for oil and gas brought on by COVID-19. Our reservoir seismic products generated revenue of $271,000 and $826,000 in the three- and nine-month periods that ended June 30, 2020. Both figures reflect reductions compared to last year's similar periods as a consequence of lower sales of borehole seismic tools and lesser demand for our performed services. We maintain that contracts for the manufacture and installation of permanent reservoir monitoring, or PRM, systems hold the largest opportunity for meaningful revenue from this product category. And while the COVID-19 pandemic did disrupt some of our discussions with oil and gas companies interested in such systems, most have remained ongoing or have since resumed. And based on these discussions, we currently believe a tender for a PRM system is likely to be released sometime in calendar year 2020. We further believe that our broad portfolio of PRM accomplishments and the diversity of our systems which offer both electrical and opto-sized fiber optic sensing technologies, maximize our ability to be awarded a released PRM tender. If such a tender occurs and a contract is subsequently awarded to Geospace, we would not expect to recognize revenue related to the contract until later in the 2021 fiscal year or beyond. Our adjacent market segment produced revenue of $5.1 million and $18.3 million in the three and nine-month periods into June 30, 2020. These respective reductions of 38% and 17% compared to last year's same three and nine-month periods are the result of lower demand for industrial sensors and contract manufacturing services, as well as lower sales of our graphic imaging products. In addition, lower demand for our water meter connectors and cables further contributed to this reduction in the recent third quarter. In all cases, we believe the lower demand for these products is primarily affiliated with the economic impact the COVID-19 pandemic is having on our customers. Our emerging market segment, which is essentially our quantum subsidiary, generated revenue of $88,000 and $557,000 in the respective three and nine-month periods into June 30, 2020. Included in these figures is early revenue recognized from site preparation and engineering activities related to the contract awarded to Quantum by the U.S. Border Patrol. Revenue in the nine-month period also includes the sale of border and perimeter security products to a commercial customer. As you may recall, Quantum was awarded a $10 million contract in April 2020 to provide a technology solution to the Department of Homeland Security for the U.S. Customs and Border Protection U.S. Border Patrol. and current execution of the contract is progressing on schedule. However, the company does not expect significant revenue from the contract until the first quarter of fiscal year 2021, which ends December 31, 2020. Quantum remains a keystone element of our strategy to leverage our longstanding competencies in the design and manufacture of seismic acoustic technology in combination with advanced analytics to create products that that expand revenue from diversified markets outside of our oil and gas segment. At this point, I'll now turn the call over to Robert so he can give you more financial detail.

Thanks, Rick, and good morning everyone. I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during our call this morning. Before I discuss our financial results for the third quarter ended June 30th, 2020, I want to briefly explain our correction of the accounting error that impacted our first and second quarter financial statements. The error relates to the timing of an $8 million receivable write-off as we reported in our second quarter. We adopted a new leasing standard called ASC Topic 842 in fiscal year 2020. In our first quarter, we properly applied the new leasing standard by transitioning to a cash basis revenue recognition for an international customer who was having difficulty paying its debts. And we determined that collection of their future lease payments was not probable. At that time, we also determined that an $8 million receivable owed to the company by the customer was fully collectible based upon a promised security interest in a significant asset of the customer. During our second quarter, as negotiations with the customer continued, the promised security interest became diluted with other creditor claims and it became unclear whether a deal would ever be concluded with the customer. As a result, we decided to write off the receivable by recording an $8 million bad debt expense in our second quarter. After filing our second quarter financial statements with the SEC, we concluded our previously issued consolidated financial statements for the first quarter ended December 2019, and the second quarter ended March 31, 2020, contained two accounting errors with respect to the application of the new leasing standard. First, ASE Topic 842 required the immediate write-off in our first quarter of the customer's accounts receivable when we determined collection of future rental billings was not probable. When management determines leased revenue collectability is not probable, the standard limits leased revenue to the cash paid by the customer. This limit requires the write-off of all existing receivables, even if the receivable is deemed fully collectible by management. Second, ASC Topic 842 required the receivable write-off to be recorded as a reduction of lease revenue, rather than as a bad debt expense. We have revised our unaudited consolidated balance sheet at December 31, 2019, our unaudited statements of operation for the three months ended December 31st, 2019, and our unaudited statements of operation for the three and six months ended March 31st, 2020 to correct identified errors. The correction has no impact on our operating loss or net income for the six months ended March 31st, 2020, nor did it have a net impact on cash flows from operating activities For the three months ended December 31st, 2019, and for the six months ended March 31st, 2020. In yesterday's press release, our third quarter ended June 30th, 2020. We reported revenue of $22.7 million compared to last year's revenue of $22.9. The net loss for the quarter was $2.3 million or 17 cents per diluted share. compared to last year's net loss of 3.7 million or 27 cents per diluted share. For the nine months ended June 30th, 2020, we reported revenue of 66.3 million compared to revenue of 66.9 million last year. Our net loss for the nine-month period was 15.4 million or $1.14 per diluted share compared to the last year's net loss of 8.8 million or 66 cents per diluted share. A breakdown of our oil and gas product revenue. Our traditional product revenue for the third quarter was $1.2 million, a decrease of 46% compared to revenue of $2.2 million last year. Traditional product revenue for the nine months of 2020 was $5.6 million, a decrease of 38% compared to revenue of $8.9 million last year. Both periods' decrease is due to a lower demand for traditional sensor products. We believe revenue for these products will be challenged in the foreseeable future due to low oil prices, oversupply of crude oil, and the drop in demand for oil and gas as a result of the COVID-19 pandemic. Our wireless product revenue for the quarter was $16.1 million, an increase of 36% compared to revenue of $11.9 million last year. Wireless product revenue for the nine months was $41.1 million, an increase of 25% compared to revenue of $32.8 million for the same period of 2019. The increase in revenue for both periods is due to higher rental demand and utilization of our OBX marine nodal system. As a reminder, we have not recognized revenue in fiscal year 2020, a $12.5 million GCL product sale delivered in the second quarter, secured by a $10 million promissory note. As of June 30, 2020, we have received $3.8 million in cash by way of a deposit and monthly note payments from our customer. I am pleased to note to date the customer is current on all payment obligations. The cash payments received and the cost of revenue associated with the sale have been recorded on our balance sheet as part of long-term deferred revenue and long-term deferred cost of revenues. We plan to recognize the revenue and cost of revenue on this transaction when we determine collection of the promissory note is probable. Our reservoir product revenue for the third quarter was $271,000, a decrease of 39% compared to revenue of $447,000 last year. Reservoir product revenue for nine months was $826,000. It decreased to 66% compared to revenue of $2.4 million last year. The decrease for the three and nine-month periods reflect reduced sales and service of our borehole tools. We do not expect meaningful revenue from these products unless and until we are engaged in a contract for the delivery of a permanent reservoir monitoring system. We believe a tender for a PRM system could be released in calendar year 2020 or soon after. Should we be awarded a tender, we do not expect to recognize any PRM-related revenue until later in fiscal year 2021 or beyond. Moving on to our adjacent markets product segment, our industrial product revenue for the third quarter of fiscal year 2020 was 3.3%. $4 million, a decrease of 37% over the third quarter of 2019. Industrial products nine-month revenue for fiscal year 2020 is $11.2 million, a decrease over the same period in 2019 of 14%. The decrease in revenue in both periods is due to lower demand for industrial sensors and contract manufacturing services. The decrease in the three-month period is due to lower demand for our water meter cable and connector products. We believe the lower demand for these products is primarily due to the economic impact of the COVID-19 pandemic on our customers. Imaging product revenue for the third quarter was $1.7 million, a decrease of 41% compared to last year's revenue of $2.9 million. This decrease is due to reduced demand for graphic imaging film products. The nine-month revenue for imaging products for fiscal year 2020 is $7.1 million. a 22% decrease when compared to the same period in 2019. In both periods, we believe the lower demand for these products is primarily due to the economic impact of the COVID-19 pandemic on our customers. Finally, revenue from our emerging market segments totaled $88,000 for the three months and $557,000 for the nine-month period ending June 30, 2021. Prior year revenue was $11,000 for the third quarter and $145,000 for the nine-month period ending June 30, 2019. While we do not anticipate significant revenue contributions from Quantum in fiscal year 2020, we do expect to record most of the revenue from our $10 million contract with the U.S. Customs and Border Protection in our first quarter of fiscal year 2021. Our third quarter of fiscal year 2020 operating expenses decreased by 297,000 or 3% compared to the third quarter of 2019. The nine month operating expenses increased by 2.9 million or 10% when compared to the same period of fiscal year 2019. The increase in operating expenses for the nine month period is mostly due to $1.6 million in changes to the estimated fair value of contingent consideration and higher engineering project costs. In July of 2020, we took actions to reduce operating costs as a result of decreased demand for our products. The cost-saving measures include workforce reductions of approximately 100 employees from our company's workforce and a reduction in cash compensation of named executives and company directors. We will incur 800,000 of termination costs in our fourth quarter of fiscal year 2020. We expect we will realize annual savings of 2 million or more as a result of these cost-cutting measures. Our nine-month cash investment into our rental fleet and property plant equipment were 5.4 million and 2.6 million, respectively. We do not expect any significant additional cash investments into our rental fleet or into our property plan equipment for the remaining fiscal year 2020. Our balance sheet at the end of the third quarter reflected $26.7 million of cash. We have no long-term debt outstanding, and the available borrowings under our credit agreement is $17.9 million. In addition, we own numerous real estate holdings in Houston and around the world that are owned free and clear without any leverage. That concludes my discussion, and I'll turn the call back to Rick.