Geospace Technologies Corporation

Welcome to the Geospace Technologies fourth quarter and full year 2020 earnings conference call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Kruda, the company's Chief Financial Officer, and Mark Pinker, CEO of Geospace Subsidiary Quantum Technology Sciences. Today's 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 the star and 1 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 ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press star zero. And it is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Thank you, Chris. Good morning and welcome to Geospace Technology's conference call for the fourth quarter and year end of our 2020 fiscal year. I'm Rick Wheeler, the company's President and Chief Executive Officer, and I'm joined by Robert Kurta, the company's Chief Financial Officer. We'll also have with us Dr. Mark Tinker, CEO of our Quantum Technology Sciences subsidiary. I'll first give an overview of the fourth quarter and year end, 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 cannot control or predict. Both known and unknown risks can lead to undesirable results or performance differences from what we say or imply today. 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. Our website has actually been recently revamped and refreshed, and I encourage everyone to visit it and have a look. Note that the information discussed this morning and reflected in this recording is time-sensitive and it may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released financial results for our fourth and final quarter of fiscal year 2020, ended September 30, 2020. As we noted, the COVID-19 pandemic, which continues to negatively impact economies everywhere, began relatively early in our 2020 fiscal year. In response, we implemented and still maintain heightened health and safety protocols in our operations to help protect our employees while ensuring our valued customers are served in the manner to which they've grown accustomed. Despite the negative impact COVID-19 has had on each of our business segments, we are pleased that our fiscal year 2020 total revenue of $87.8 million was within 8% of last year's total. And that's over the course of the year as we generated over $18 million in cash from operations. Note also that this reported revenue figure does not include any amounts from our sale in the second quarter of a GCL land recording system to one of our customers. This purchase, valued at $12.5 million, included $10 million of financing through a promissory note. By the end of September 2020, almost $5 million had been received toward this system, including interest charges on the note. Principal payment amounts toward this sale are listed on our balance sheet as part of non-current deferred revenue, which we intend to recognize at a later date when collection of the note is likely. As was the case throughout the fiscal year, our fourth quarter results continued to be fueled by demand for our OBX ocean bottom recording systems. In fact, rental contracts for our OBX marine systems drove revenue from our wireless exploration products above last year's mark. This helped in partially offsetting reduced demand for other products in our oil and gas segment, as well as the weaker demand we experienced for various products in our adjacent markets business. Reduced demand in all cases was largely brought about by the negative effects of COVID-19. The efforts to combat this disease have driven down the world's demand for oil and gas, which has led to the largest imbalance of supply over demand ever experienced. With the majority of seismic exploration activities currently suspended, demand for our oil and gas products remains limited. Our adjacent markets' graphic imaging products have also seen setbacks. These products are used in the printing processes, merchandising, and promotions of sports, entertainment, schools, tourism, and other social gathering events. But due to COVID-19, many of these type activities have been curtailed, thus lowering demand for these products. Recognizing this lower demand for our products and rentals, and in keeping with our conservative financial management, we took steps to lower our operating costs with a reduction in force in the third quarter of fiscal year 2020. Although a return to some form of normalcy from these circumstances seems almost certain, the timing and extent of such recovery is unclear. Late in the fourth quarter of fiscal year 2020, we received a request from a major oil and gas producer to provide a proposal for the manufacture and installation of a large-scale seabed permanent reservoir monitoring, or PRM, system. As a matter of note, we have the largest installed base of PRM systems in the world. with configurations utilizing either high-resolution electromagnetic sensors or our unique OptiSight fiber optic sensor technology. In the event of a favored response, the potential customer is expected to award a contract in the second or third quarter of our 2021 fiscal year. If we were to be awarded the contract, revenue from the contract would not likely be recognized until the latter part of fiscal year 2021 and beyond. Unrelated to this tender, we are also continuing our discussions with other major oil and gas producers for possible PRM systems. And we are also well underway in the execution of a $10 million contract awarded to us in April 2020 by the U.S. Customs and Border Protection, U.S. Border Patrol, to provide a technology-based border and perimeter security system. Revenue from this contract is expected to be recognized in our 2021 fiscal year, which began October 1, 2020, and ends September 30th, 2021. At this point, I'll now turn the call over to Robert so he can provide more financial detail.

Thanks, Rick, and good morning, everyone. Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during our call this morning. In yesterday's press release for our fourth quarter ended September 30th, 2020, We reported revenue at $21.5 million compared to last year's revenue of $28.9 million. Net loss for the quarter was $3.9 million or $0.29 per diluted share compared to the fourth quarter last year's net income of $8.7 million or $0.63 per diluted share. For the year ended September 30, 2020, we reported revenue of $87.8 million compared to revenue of $95.8 million last year. Our net loss for the year was $19.2 million, or $1.42 per diluted share, compared to last year's net loss of $146,000, or $0.01 per diluted share. Fiscal year 2020 net loss was burdened with a $1.1 million net increase in the fair value of contingent earn-out liabilities related to our acquisitions of Quantum and Optisys, and a $671,000 charge for goodwill impairment in the company's oil and gas business segment. Fiscal year 2019 benefited from a $7 million gain from the sale of nonessential real estate and a $2.1 million net reduction in the fair value of contingent earn-out liabilities related to our acquisitions of quantum and optosites. Excluding these adjustments for fiscal year 2020, the company would have reported a net loss of $17.5 million or $1.29 per diluted share, while fiscal year 2019 would have resulted in a net loss of $9.3 million or $0.70 per diluted share. A breakdown of our oil and gas product revenue is as follows. Our traditional product revenue for the fourth quarter was $1.1 million. an increase of 83% compared to revenue of $600,000 last year. Revenue for the year was $6.7 million, a decrease of 30% compared to last year's revenue of $9.5 million. The increase in revenue in the fourth quarter of 2020 is due to comparing to the historic low level of revenue from the same period last year. The revenue decline in the annual period is attributed to lower demand for our traditional products as a result of minimal seismic exploration activity due to the low demand for oil and gas caused by the COVID-19 pandemic. Our wireless product revenue for the quarter was $13 million, a decrease of 35% compared to revenue of $20 million last year. For the full year, wireless product revenue was $54.1 million, an increase of 2% compared to $52.7 million in the prior year. The fourth quarter decrease is due to lower sales and rental of our wireless products. The modest annual revenue increase for fiscal year 2020 over fiscal year 2019 is the result of demand for our OBX system rental fleet. We expect reduced revenue from the rental of OBX systems in fiscal year 2021 due to the reduced global demand for oil and gas. As a reminder, we have not recognized revenue in fiscal year 2020 for the $12.5 million GCL product sale delivered in the second quarter and secured by a $10 million promissory note. As of September 30, 2020, we have received almost $5 million in cash for principal and interest payments from our customer. Our customer continues to remain current on all payment obligations. The principal payments received and 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 revenue. We plan to recognize the revenue and cost of revenue for this transaction when we determine the collection of the promissory notice probables. Our reservoir product revenue for the fourth quarter was $110,000, a decrease of 56% compared to revenue of $252,000 last year. Revenue for the full year was $936,000, a decrease of 65% compared to the revenue of $2.7 million last year. Reductions in engineering service and lower demand for the sale, rental, and repair of our borehole tools are responsible for the decrease in both periods. 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. During our fourth quarter, we received a request to quote on a large-scale PRM system from a major oil and gas producer. Provided we reply to the request, we expect the potential customer to award the contract in the second or third quarter of fiscal year 2021. If awarded, the contract revenue would not likely be recognized until the latter part of fiscal year 2021 and beyond. Moving to adjacent markets product segment. Our industrial product revenue for the fourth quarter was $4.4 million, a decrease of 16% compared to last year's revenue of $5.3 million. Revenue for the year was $15.6 million, a decrease of 15% compared to last year's revenue of $18.3 million. We believe this decline in revenue for both periods is primarily a result of the COVID-19 pandemic's effect on the demand for our products used in non-oiling gas industrial markets and the need for our contract manufacturing services. Imaging product revenue for the fourth quarter was $2.7 million, a modest decline as compared to last year's revenue of $2.8 million. Revenue for the full year was $9.8 million, a decrease of 17% compared to $11.8 million in fiscal year 2019. We believe these decreases are primarily attributed to the COVID-19 pandemic, causing lower demand for our imaging products. Revenue from our emerging market segment totaled $177,000 and $734,000 respectively, for the three months and the year ended September 30, 2020. Prior year revenue was $14,000 for the fourth quarter and $159,000 for the fiscal year 2019. The increase in revenue is due to the sale of border and perimeter security products to a commercial customer and initial site preparation and engineering related to the U.S. Customs and Border Protection, U.S. Border Patrol, contract awarded in April 2020. Most of the revenue for the $10 million contract will be recognized in our fiscal year 2021. Our consolidated gross profit for the fourth quarter was $5 million, a decrease of 52% compared to $10.4 million last year. Gross profit for the year was $23.4 million, a decrease of 25% compared to $31.4 million last year. The decline in both in our gross profit resulted from a significant decline in product sales in the oil and gas and adjacent market business segments due to decline in demand for our products as a result of the COVID-19 pandemic and an increase in underutilized factory capacity due to lower manufacturing productivity. When analyzing our 2020 and 2019 operating expenses, Excluding the effect of non-cash adjustments to the fair value of contingent earn-out liabilities and goodwill impairment, our 2020 operating expenses for the fourth quarter was $9 million, a decrease of 11% compared to $10.2 million last year. 2020 operating expenses for the full year was $39.7 million, virtually equal to last year's operating expenses of $39.1 million. The fourth quarter operating expenses decreased due to the recovery of previously reserved aged accounts receivables, lower engineering project expenditures, and reduced sales and marketing expense. Fiscal year 2020 cash investments into our rental fleet and property plant equipment were $5.5 million and $2.9 million respectively. We expect fiscal year 2021 capital investment into our rental fleet will be minimal unless new rental contracts warrant additions to our fleet. Fiscal year 2021 capital investment in our property, plant, and equipment could be as much as $5 million. Our balance sheet at September 30, 2020 reflected $32.7 million of cash and cash equivalents. We had no long-term doubt at outstanding and the borrowings available under our credit agreement was $17.7 million. We own numerous real estate holdings in Houston and around the world that are owned free and clear and without any leverage. That concludes my discussion and I'll turn the call back to Rick.