Geospace Technologies Corporation

Welcome to the Geospace Technologies first quarter 2021 earnings conference call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Kurta, the company's Chief Financial Officer, and Mark Tinker, CEO of 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 open for your questions following the presentation. If you would like to ask a question at that time, please press star then 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 ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Thank you, Aaron. Good morning, and welcome to Geospace Technology's conference call for the first quarter of fiscal year 2021. As mentioned, 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. Also with us is Dr. Mark Tinker, CEO of our Quantum Technology Sciences subsidiary. I'll first give an overview of the first quarter, and Robert will follow with some in-depth commentary on our financial performance. After a few last remarks, we'll open the line for questions that Robert, Mark, and I can answer. 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 factors and uncertainties we cannot predict or control. Both known and unknown risks can lead to undesirable results or differing performance 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, we will link a recording of this call on the Investor Relations page of our geospace.com website, which I encourage everyone to visit and browse. Note that the information discussed and recorded this morning 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 first quarter of fiscal year 2021 into December 31, 2020. As we noted, despite the negative impacts that the COVID-19 pandemic had and continues to have on our business segments, we were pleased to report that total revenue generated in the first three months of fiscal year 2021 reached $28.5 million. This figure exceeded each of the four quarters reported in the previous fiscal year and, moreover, achieved our highest recorded first quarter revenue in seven years. There were also several notable first-time events that occurred in the quarter. The first of these was our first sale of a large OBX marine nodal recording system. The system, which included 7,500 OBX ocean bottom marine nodes from our rental fleet, along with related central electronics, was purchased by a large international seismic contractor for $9.9 million. The quarter also marked the first occurrence of meaningful revenue from our quantum technology sciences subsidiary, which makes up our emerging markets segment. The revenue was in relation to fulfillment of a $10.5 million contract secured in April of 2020 with the U.S. Customs and Border Protection U.S. Border Patrol for a high-technology border security solution. Products from our emerging market segment utilize proprietary seismic acoustics and data analytics, which provide customers in a variety of markets with actionable real-time information. In another company first, revenue from our emerging markets and adjacent market segments combined to reach the highest figure ever, and for the first time, exceeded revenue generated in our oil and gas market segments. This accomplishment tangibly demonstrates real and true value derived entirely from our disciplined diversification strategy. We believe this strategy will continue to create new value with its clear focus on deepening our technologies and advancing our core engineering and manufacturing competencies into broader markets. In noting yet one more first, the company made its first purchases during the quarter of common shares under the stock repurchase program that we announced in November of 2020. As of December 31, 2020, the company had purchased a total of 117,637 shares on the open market for an aggregate amount of $828,000. Our implementation and execution of this program is just one more way that we are returning value to our shareholders. At this point, I'll now turn the call over to Robert so he can provide some more financial detail.

Thanks, Rick, and good morning. 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, our first quarter ended December 31, 2020. We reported revenue of $28.5 million compared to last year's revenue of $17.79. Net loss for the quarter was $1.1 million or $0.08 per diluted share compared to the first quarter of last year's net loss. of $9.3 million, or 69 cents per diluted share. The first quarter of fiscal year 2021 benefited from a $700,000 net reduction in the fair value of contingent earn-out liabilities related to our acquisitions of Quantum and Optisys, whereas the same period of the prior year did not contain a similar adjustment. A breakdown of our oil and gas product revenue is as follows. Our traditional product revenue for the three-month period ended December 31, 2020, was $1 million, a decrease of 58% compared to revenue of $2.4 million last year. The decrease in revenue is due to lower demand for marine seismic products, repairs of customer traditional seismic equipment, and support services provided to our customers. We expect continued low levels of demand for these products and services until seismic exploration activity increases from the historic lows we are seeing today. Our wireless product revenue for the quarter was $11.7 million, an increase of 31% compared to revenue of $8.9 million last year. The increase in revenue is due to a $9.9 million sale of 7,500 OBX rental nodes and the related central electronic equipment to an international seismic contractor. The sale was partially offset by a reduction in rental revenue due to lower utilization of our rental fleet and the conversion of the rental contract into a sale of the OBX rental notes. We expect lower demand for our wireless products and lower utilization of our rental fleet during fiscal year 2021 due to reduced global demand for oil and gas. As a reminder, we have not recognized revenue in fiscal year 2021 for a $12.5 million GCO product sale delivered in the second quarter of fiscal year 2020, secured by a $10 million promissory note. As of December 31st, 2020, we received $5.9 million in cash for principal and interest payments from our customer. Our customer continues to remain current on all payment obligations The cash payment 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 note is probable. Our reservoir product revenue for the first quarter was $29,000, a decrease of 87% compared to revenue of $218,000 last year. Reduced demand for engineering services and the sale, rental, and repair of the company's borehole tools are responsible for the decrease in revenue. 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. In September of 2020, we received a request to bid on a large-scale PRM system from a major oil and gas producer. We declined to provide a bid on the project due to terms and conditions presented by the customer. We have continued discussions with the customer to resolve these issues, barring us from providing a PRM system. We do not know when or if these issues will be resolved and whether it will lead to the award of the contract. We continue to have discussions with other major oil and gas producers about PRM systems. Moving to adjacent markets product segment, our industrial product revenue for the first quarter was $4.4 million, an increase of 23% compared to last year's revenue of $3.6 million. The increase in revenue is due to higher demand for our water meter connector and cables and contract manufacturing service. We do not believe this increase in revenue marks a recovery from the effects of the COVID-19 virus on the demand for these products and services. Imaging product revenue for the first quarter was $2.5 million equal to the revenue for the same period of the prior fiscal year. We believe these products will continue to counter reduced demand until we see a recovery from the effects of the COVID-19 pandemic. Recovery for these products will not occur until there is a return of large social gathering like conferences, sporting events, and concerts. These gatherings consume or sell products that are manufactured using our imaging products. Revenue from our emerging market segments for the first quarter of fiscal year 2021 is $8.8 million compared to $100,000 for the same period of the prior fiscal year. The increase in revenue is a result of completing most of the obligations related to the contract with the U.S. Border Patrol that we signed in April of 2020. We expect to complete the remaining obligations of the contract during fiscal year 2021, although we currently do not have any additional significant contracts. We believe our advanced seismic acoustic technologies and the innovative data analytics developed by our quantum subsidiary provides customers with capabilities that will lead to future contracts. Our consolidated gross profit for the first quarter was $6.7 million compared to $2.5 million last year. The increase in gross profit was due to the large sale of our OBX rental equipment to the farmer lessee and the partial completion of the U.S. Border Patrol contract. These transactions were partially offset by low utilization of our GSX and OBX rental equipment and lower manufacturing productivity, increasing our unutilized factory costs. The first quarter of fiscal year 2021 operating expenses are $8 $8.2 million. This is a 21% decrease when compared to the $10.3 million for the first three months of fiscal year 2020. The decrease is a result of reduced personnel costs related to our cost reduction program that began in fiscal year 2020, a non-cash decrease in the fair value of contingent earn-out liabilities for our quantum and opti-size acquisitions, a decrease in research and development project costs, and a reduction in general business expenses related to business operations. Fiscal year 2021 cash investments into property, plant, and equipment is $600,000. We expect fiscal year 2021 capital investments into our rental fleet will be minimal unless new rental contract warrants additions to the fleet. Investments in property, plant, and equipment could be as much as $5 million further fiscal year 2021. Our balance sheet at December 31st, 2020 reflected $33.7 million of cash and cash equivalents. We had no long-term debt outstanding, and the borrowings available under our credit agreement was $14.7 million. 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. I'll turn the call back to Rick.