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Operator
Welcome to the Geospace Technologies 4th 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 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 any time, please press star 1 on your telephone keypad. 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 0. It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.
Rick Wheeler
Thank you, Brittany. Good morning and welcome to Geospace Technology's conference call for the fourth quarter of our 2021 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, and also with us this morning is Dr. Mark Tinker, CEO of Quantum Technology Sciences, our subsidiary. I'll first give an overview of the year end, and Robert will follow with in-depth commentary on our financial performance. And after a few last remarks, we'll open the line for questions for Robert, Mark, and I to try and answer. Some of today's statements may be forward-looking, as defined in the Private Securities Litigation Reform Act of 1995. This includes comments about markets, revenue recognition, planned operations, and capital expenditures. Such 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 performance and results that differ from what we say or imply today. Such risks and uncertainties include those discussed in our SEC Form 10-K and 10-Q filings. For convenience, we'll link a recording of this call on the investor relations page of our geospace.com website, and I encourage everyone to browse the site to learn more about GeoSpace and our products. Note that the information we record this morning is time sensitive and may not be accurate at the time one listens to a replay. After the markets closed yesterday, we released our financial results for the fourth and final quarter of fiscal year 2021. which ended September 30th, 2021. While the year was challenged by the ongoing havoc and instabilities related to COVID-19, we were pleased that revenue for the full fiscal year increased by 8% over last year. This is a near match to the revenue we achieved just before the pandemic in fiscal year 2019. However, performance over the year for each of our market segments was mixed. The oil and gas market segment experienced a reduction in revenue of 15%. Lower demand for our traditional marine products was a factor. However, the largest reduction stemmed from fewer rentals of our OBX ocean bottom recording systems. Despite this overall reduction, the last two quarters of the year experienced consecutive increases in rental revenue from our OBX equipment. This suggests that OBX demand is improving as both new and earlier stalled projects move forward. As the world emerges from the pandemic, fueling global economic recovery has increased energy demands, resulting in higher oil prices. This bolsters the likelihood of improved demand for our seismic products. However, a lag in time typically occurs between higher oil prices and greater demand for our products. This lag in part is the result of decisions by exploration and production or E&P companies to allocate major portions of their cash flow toward shareholder reward initiatives such as stock buybacks, and dividends, as well as debt reduction. While this may be a short-term trend, until E&P operators begin to reinvest capital in exploration and production, challenges will remain for our oil and gas market segment. In more upbeat news, we received a new request for a proposal from a major oil company for a permanent reservoir monitoring, or PRM, system. If, after due consideration, we provide a proposal, there is no assurance that a contract will be awarded, nor, if so, that it would be awarded to us. However, the presenting of this formal request, in conjunction with the level of interest and quality discussions underway with other E&P companies, gives us great encouragement that the potential for future PRM contracts is high. In contrast to the oil and gas market segment, our adjacent market segment reported an increase in full-year revenue of 27% over last year. Industrial products made up the largest increase due to greater demand for our water and radio cables and connectors, as well as for our contract manufacturing services. Higher sales of our graphic imaging products also boosted revenue in this segment. These products, as used in merchandise and textile printing, have seen demand grow with the reopening of sporting, entertainment, and other social events and gatherings. There was no revenue from our IoT smart water valves and cloud platforms secured through our recent Aquana acquisition. However, we are actively rolling out these products in close cooperation with potential customers to incorporate their requirements. We expect revenue from our Aquana products to begin in fiscal year 2022, this coming fiscal year. As our emerging market segment, fiscal year 2021 marked a major milestone in the achievement of meaningful revenue from our quantum technology sciences subsidiary. For the full year, this segment generated over $10 million, primarily associated with our contract to provide the U.S. Border Patrol with an advanced high-tech border security solution. We firmly believe the value of actionable information provided by our quantum solutions will lead to future contracts across multiple U.S. government entities. Now, just ahead of turning the call over to Robert, I'm pleased to announce that as of this week, we have succeeded in fully executing the $7.5 million stock repurchase plan that our Board of Directors approved in November of 2020. Under this program, we return meaningful value to our shareholders through the repurchase of nearly 842,000 shares of our common stock. And with that, I'll now turn the call over to Robert for financial details.
Brittany
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 for our fourth quarter ended September 30th, 2021, we reported revenue of $19.4 million compared to last year's revenue at $21.5 million. The net loss for the quarter was $5 million or $0.39 per diluted share compared to last year's net loss of $3.9 million or $0.29 per diluted share. For the 12 months ended September 30th, 2021, we reported revenue of $94.9 million compared to revenue of $87.8 million last year. Our net loss for the 12-month period was $14.1 million, or $1.05 per diluted share, compared to last year's net loss of $19.2 million, or $1.42 per diluted share. Our oil and gas markets revenue is as follows. Our traditional seismic product revenue for the fourth quarter was $800,000, a decrease of 29% compared to revenue of $1.1 million last year. The decrease in revenue for the comparative three-month period is due to lower demand for the rental and sale of our traditional seismic products. Revenue for the 12 months of 2021 was $4.5 million, a decrease of 32% compared to revenue of $6.7 million for the same prior year period. The reduction of revenue is due to lower sales of our marine seismic products, lower utilization of our traditional rental seismic products, offset by higher sales of our seismic sensors. Our wireless product revenue for the quarter was 9.6 million, a decrease of 26% compared to revenue of 13 million last year. Wireless product revenue for 12 months was 45.8 million, a decrease of 15%. compared to revenue of $54.1 million for the same period last year. The reduction in revenue for both the three-month and 12-month period is due to lower utilization of our OBX rental fleet caused by the effects from the COVID-19 pandemic. The reduction in revenue for the 12-month period is offset by the recognition of a $12.5 million sale related to a land-based seismic wireless system delivered to a customer in the prior year, a $9.9 million sale of a used OBX rental equipment to the former lessee, and a $2.9 million sale of land-based wireless products. Our reservoir product revenue for the three and 12 months periods ended September 30, 2021, was $300,002 million, respectively. These reflect increases of $200,000 and $1 million when compared to the three and 12 months periods last year. The increase in both periods is due to a higher level of performed engineer services. We believe the best opportunity for meaningful revenue from this segment will be from the future contracts for the design, manufacturing, deployment of PRM systems. We continue to discuss PRM products with multiple customers. Moving on to our adjacent market segments, our industrial product revenue for the fourth quarter of fiscal year 2021 was $5 million, an increase of 24% over the fourth quarter of 2020. Industrial products 12-month revenue for fiscal year 2021 is $21.5 million, an increase over the same period in 2020 of 37%. Both periods revenue increases are due to higher sales of our water meter cable and connector products and higher demand for our contract manufacturing services. Imaging product revenue for the fourth quarter was 3.1 million, an increase of 13% compared to last year's revenue of 2.7 million. The 12-month revenue for imaging products for fiscal year 2021 is 11.1 million, a 13% increase when compared to the same period in 2020. The increase in revenue for both periods is due to increased demand for our thermal imaging products. Finally, revenue from our emerging market segment totaled $170,000 for the three-month and $10.2 million for the 12-month period ending September 30, 2021. Prior year revenue was $177,000 for the fourth quarter and $734,000 for the 12-month period ending September 30, 2020. The increase in revenue for the 12-month period over the prior year is due to the contract awarded in April 2020 with the US Border Patrol. We expect to complete this contract during the second quarter of fiscal year 2022. Our fourth quarter of the fiscal year 2021 operating expenses decreased by $1.2 million 14% compared to the fourth quarter of 2020. The 12-month operating expenses decreased by 8.3 million or 20% when compared to the same prior year period. The decrease in operating expenses for the three-month and 12-month periods is due to reduced personnel costs related to our cost reduction program that began in fiscal year 2020. a non-cash decrease to the fair value of contingent earn-out liabilities for our quantum and opto-size acquisition, a decrease in research and development project costs, and a reduction in general business expenses related to our business operation. The decrease in operating expenses for the three-month period was partially offset by higher selling and marketing costs related to travel, Related to an increase in travel, conferences and trade shows previously restricted by the COVID-19 pandemic. Our 12-month cash investments into property, plant, and equipment were $3.2 million. Our cash investment into our rental fleet was $2.1 million as of September 30, 2021. We expect fiscal year 2022 cash investments into our rental fleet to be approximately $3 million. and cash investments into our property, plant, and equipment to be $4 million. Our balance sheet at the end of the fourth quarter reflected $23.6 million of cash and short-term investments. We currently have no debt and 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.
Rick Wheeler
Thank you, Robert. Despite the many negative impacts of COVID-19 throughout the year, our 2021 fiscal year held some remarkable accomplishments. Full-year revenue from our adjacent market segment reached its highest figure ever in the company's long history. The year also marked the beginning of meaningful revenue from our quantum subsidiary and the emerging market segment. Moreover, combined revenue from products and services outside of our oil and gas market segment made up 45% of the year's total revenue. This serves as a testament to the power of our diversification strategy and the afforded benefit of transitioning our technologies into other markets. This path forward is further evidenced in our recent addition of Aquana and its smart water management products. Likewise, our announced partnership with Carbon Management Canada to develop a cost-effective solution for monitoring carbon storage with sophisticated quantum analytics is another example. Both endeavors seek to improve the environment through better management of water resources in one case and helping industry reduce atmospheric CO2 in the other. In conjunction with our strong debt-free balance sheet, these pursuits give us optimism that the opportunities for our growth are outstanding. This concludes our prepared remarks, and I'll now turn the call back over to Brittany for questions.
Operator
The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality. Thank you. Our first question comes from Matt Dane with Titan Capital.
Matt Dane
Thank you. I wanted to touch on your commentary around the border control contract being completed here in the second quarter of fiscal 22. I was surprised to hear that. I thought it was more or less completed. Is there significant revenues that still remain to be realized from that contract? And what are you still doing on that contract, if you could, too?
Brittany
There are not any significant revenues associated with that. We're really just wrapping up that contract. We have some very minor things to complete with them, some training to do, things of that nature. We're just getting towards the end of it.
Matt Dane
Great. Would it be safe to assume that conversations continue actively with the Border Patrol and and how would you characterize those conversations and what's been their reaction to what they've experienced and seen so far with the system that is actively laid right now?
Mark
Hi, Matt. This is Mark. Hey, Mark. The relationship remains very positive, of course. The performance has gone very well. We're very proud of that, and the – the team that we have developed to do something so complex. They, of course, are subject to what's happening on the Hill with continuing resolutions, and so it's going to be a little bit of a wait and see for what's next as we work through this budgeting period and see what will ultimately happen with the Homeland Security budget. It's hard to predict, of course, but we hope to see and have go into law sometime in the spring
Matt Dane
Great. And from my understanding, I believe expectations, there was already an expectation that the system would perform well. Has it exceeded even what you believe the individuals at the Border Patrol expected it to do? Has it surpassed our expectations, I guess?
Mark
Well, I can't answer for them, of course. I can tell you as a seismologist and one of the innovators of it that I'm very happy. I'm very pleased with how it has gone, both in our manufacturing of it. It's a very complex system, so geospace and quantum, bringing our mutual capabilities into a single solution, that's a big milestone for us that we're now going to leverage going forward into many different applications in the future. I'm pleased with getting it in the ground. These are seismic acoustic systems, and how we get them there is important in an efficient and cost-effective and environmentally friendly way. And then how it performs. These are challenging environments that we go into. We prepared for them. We did the good science. And, yes, I could not be happier with how well the system is doing, but I'm only speaking on my behalf. I can't speak on behalf of the Border Patrol.
Matt Dane
Well, I appreciate the commentary, Mark.
Operator
And once again, that is star and one if you have a question. And we do have an additional question from Mark Bundy with Morrison Cabot. Your line is open.
Mark Bundy
Good morning, gentlemen. Hi. So, Rick, the credit facility, is it the intent to increase the size of that credit facility with someone else?
Rick Wheeler
Well, in actuality, we haven't used that credit facility in quite some time, and in review of that, we thought we could do better than that. I mean, let me let Robert speak to that because he can give you some more details on it.
Brittany
Yeah, our plans right now are not necessarily to increase the credit facility. It's just to look for what other options are out there and what better fits our needs today.
Rick Wheeler
I think the last time we even... utilized any kind of a credit facility was back in, was it 2013? Yes, September of 2013. So, you know, it's just, it's not been something that's really benefited us or has been needed to benefit us in time since then.
Mark Bundy
So where I'm going with that is obviously in 2013 was the last significant PRM contract and I guess the interesting question for me is if this PRM contract comes to fruition, would you need additional resources?
Rick Wheeler
We're actually not sure that we would or would not, but I don't think we feel that we're under any stress with respect to coming out with the financial wherewithal to proceed with any of these discussions that we're having with the oil and gas companies.
Mark Bundy
So, Rick, the Gulf of Mexico just had a fairly significant new leases. Is there any historical perspective that you can provide for us related to activity in the Gulf, new leases, etc., and what that may mean for your seismic equipment?
Rick Wheeler
Well, certainly our OBX ocean bottom equipment has been very popular in the marine environment over the last several years, and you're well aware of that. It certainly has opportunity to be used in the Gulf. There are discussions about various projects out there where it would apply. There's also possibilities for permanent reservoir monitoring systems in Gulf waters as well. So there's plenty of opportunities there, but as you well know, things change. As political environments change, that also impacts the future of those areas, so we'll just have to see.
Mark Bundy
Rick, am I correct? Is the only other competition for this PRM contract from Alcatel? or are there others?
Rick Wheeler
I would say that in our estimation, the primary competition would be from Alcatel. If there are others, they're not ones that have made themselves known to me. It does not mean there don't exist some out there.
Mark Bundy
And so I'm assuming, going back a year ago when you guys declined to provide a bid, that Alcatel or the others also declined to bid? And so what's different right now versus a year ago when these discussions were taking place?
Rick Wheeler
Well, I mean, terms and conditions were tweaked a bit, I guess, from last time, and that requires, you know, new evaluations, which is what we're in the middle of at this point in time.
Mark Bundy
And obviously when you use the word great encouragement Is this environment the best environment in terms of discussions that you guys have ever had at Geospace?
Rick Wheeler
That's a very fair statement. We have more ongoing conversations going on, none of which imply there will be any revenue in fiscal year 2022. But the level of these discussions, the depth that we're getting into on these discussions is certainly is the greatest it's ever been, to be quite frank. And that being the case, it's very much an indication of just how well this science is understood, how much value there is in 4D monitoring, they call it, on these reservoirs. They all do 4D monitoring or time-lapse monitoring. They don't always use permanent systems, But there's quite a bit of return on the investment in a sooner amount of time using permanent reservoir monitoring systems. They're also much more environmentally friendly because once you deploy the systems, then subsequent surveys are generally a single vessel towing an air gun around. So it's a very lightweight ongoing process there. So there's a lot of things that point to the effectiveness of PRM. That may well be why we have as many conversations going on as we do, but we'll just have to see how it all plays out.
Mark Bundy
If I could just ask Mark a couple of questions. Sure. Mark, the Secretary of Homeland Security is supposed to submit an annual report to the Congressional Committee set forth in this This would include cross-border tunnels, et cetera. I'm sure you're quite aware of this. What I've not been able to find is this report, but this report's supposed to be pretty exhaustive, as best I can tell. Can you give us any additional information on what this means and how this affects geospace?
Mark
Well, everybody pull up to your whiteboards It's a very good question, but it requires more of an in-depth answer than I think I can go into here. Our capabilities provide a solution for being able to deliver to the Border Patrol actionable information. So border security is a key element, nonpartisan, for ensuring that we remain aware of anything coming across our borders, whether it's legally through ports of entry or illegally. Threats come every day, so I'm not exactly sure what will be in his report, but we do know surface crossings, aerial crossings, and subterranean crossings are mechanisms for bringing guns, weapons, drugs, and other contraband in. It's been no secret, we talked about it quite a bit, that the requirements for monitoring we are very attuned to and that this next level system that we've delivered is going to be evaluated and looked at for meeting those additional requirements. So his report, The plus-up that came in the Senate appropriations last draft language of taking border security technologies and adding another $70 million to it, it's all indications that security technologies are a key element in addition to a physical barrier such as a wall to providing a complete security domain awareness along the southern border and the northern border to be included.
Mark Bundy
So have those funds been exhausted, and so therefore we do have to wait for this next bill? Is that what you're referring to in terms of next spring?
Mark
I can't speak if all the funds have been exhausted. We're not privy to what remains in the funding coffers of the Border Patrol. But funds come in different colors. Multi-year funds can sometimes be the case. but we're pretty sure that our next contract will be tied to the future funding cycles, and that's why we're trying to stay so attuned to the FY22 budget.
Mark Bundy
Got it. And just lastly, can you give us a little bit of insight as to what this JV means for carbon management? Exxon recently put out a pretty big number of relative to the amount of money that they'd like to appropriate to this area. How far out is this? Where are we in terms of products and availability? Can you give us some sense of what's going on with regards to this JV?
Mark
I'd be delighted to. So passive seismic monitoring is an additional component endeavor that we're taking here at Geospace. As you know, we offer best-in-class products for the active seismic world that Rick was just talking about. So we deliver acquisition systems that record intentional energy injected into the ground to image the upper layers of the Earth. But in this new movement and the expansion of energy and how we're going to deliver energy, and it can be whether we're doing it cleanly to secure carbon, whether we're going to use geothermal, or other techniques. When we're interacting with reservoirs in the upper layers of the earth by injecting fluids, these fluids can be liquids or these fluids can be gases, these reservoirs have a seismic expression. They're going to release micro-earthquakes. So now we have the opportunity for passive monitoring, and that's standing back and listening for that seismic expression. So you're right, Exxon's putting a big investment out. I was pleased to attend, about a month ago, a conference in which I was able to hear the CEO of Oxy speak. And she says, this part of this new market that's coming at us is fascinating. She said between $3 and $5 trillion is her prediction. So of that very sizable market, a component of that will be the monitoring of those reservoirs. You can go look in Canada. You can look in California. You can Google for what these potential requirements will be to ensure that when we do store carbon underground, how are we going to make sure that it stays there? And how long do we have to ensure that? So that aspect of the full carbon capture utilization and storage market, that aspect is the MMV component, the verification component, and that's where we come in.
Mark Bundy
So would this be like laying sensors on the border for the Border Patrol?
Mark
So our state, our technology that we're applying throughout, that we have applied throughout the government to include the Border Patrol... is an exact map over. So the JV is very critical because it allows us to have energy, the entire energy market, see how well this works. So that relationship that we have with Carbon Management Canada, and they have a number of joint industry subscribers, if they call it, from a number of major oil companies such as Shell or Chevron or Synovus or BP. It's an active carbon storage site. So our SADAR technology that we've developed has now been deployed there, and we're going to be analyzing the data and sharing those results with potentially future customers.
Mark Bundy
And what do you think the cycle time is for other players, for people to evaluate this? What sort of the evaluation is it? A quarter, two quarters, four quarters? What's your guess?
Mark
I would say four to eight quarters.
Mark Bundy
Okay. Thank you, guys. As always, appreciate it.
Rick Wheeler
You bet, Scott. Thank you.
Operator
There are no further questions on the line at this time. I'll turn the floor back over to Rick Wheeler for any additional or closing remarks.
Rick Wheeler
All right. Well, thank you, Brittany. And thanks to everyone who joined our call today. And we'll look forward to speaking to you again on our conference call tomorrow. for the first quarter of fiscal year 2022 in February. Thank you very much and goodbye.
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