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 Curda, the company's Chief Financial Officer; and Mark Tinker, CEO of Geospace's 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.

Thank you, Chris. Good morning and welcome to Geospace Technologies 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 Curda, 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 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, the information discussed this morning and reflected in this reporting is time-sensitive and 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 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.

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 30, 2020, we reported revenue of $21.5 million compared to last year's revenue of $28.9 million. The 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 OptoSeis 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 non-essential 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 OptoSeis. 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.

Thank you, Robert. COVID-19 continues to tightly grip the economies of countries around the world, and until there is a successful vaccine and infection rates consistently decline, there's really no way to forecast what a recovery will look like. Although the impact of the pandemic on some of our business segments was initially delayed, the negative effects have largely caught up. Seismic exploration activity will likely remain minimal as long as oil and gas supplies outstrip demand, and the destruction of demand brought about by COVID-19 reinforces this condition. As certain businesses of some of our customers suffer from the pandemic's effects, many of our adjacent market products will continue to see weaker demand. However, a large element of our current efforts is focused on longer-term strategic goals and projects of major customers that are looking much further into the future. This includes oil and gas companies eager to find new reserves, using our OBX systems, as well as those intending to maximize recoveries from existing fields using our PRM systems. Also certainly transcending this pandemic is a critical mission of the US Customs and Border Protection and US Border Patrol as we fulfill our contract to provide the Department of Homeland Security with a technology solution to protect our borders and society at large. We believe our strong balance sheet with ample liquidity and no debt gives us the fundamental strength to weather this pandemic and emerge on good footing. As such, we believe we're well positioned to leverage our comprehensive engineering and significant manufacturing operation in pursuit of new specialized industrial manufacturing customers and in support of national and homeland security missions. By maintaining our own manufacturing operation, we de-risk our supply chain and enable rapid time to market for our new products, all of which makes us highly attractive for partnerships and fulfillment of commercial and government contracts. In other matters, I take special pleasure in welcoming the recent additions to our Board of Directors, Margaret Sid Ashworth, former Vice President of Government Relations for Northrop Grumman, and Kenneth Asbury, former president and CEO of CACI International. The experience each of them bring from their remarkable careers and accomplishments will bring fresh and diverse perspectives to our board and future strategies, creating new value for our shareholders. I'd also like to make note of the stock repurchase program just announced and authorized by our Board of Directors. In accordance with this program, discretionary purchases through open market transactions of up to $5 million in aggregate have been authorized. Actual purchases under the program will depend on various factors including stock price, trading volume, and our general business and market conditions. In closing, as we enter this Thanksgiving season, let me give thanks to our hardworking employees who give their all in supporting our operations and valued customers. And my additional hearty thanks go out to our loyal shareholders who continue to confidently recognize our value and our ability to withstand and emerge from these uncertain times. This concludes our prepared remarks. And I'll turn the call back over to Chris for questions.

The floor is now open for questions. And our first question comes from Bill Dezellem from Tieton Capital. Please go ahead.

Great, thank you. You've given us a lot to chew on here. Let's start if we could with the PRM tender. Is this an existing customer or a new customer that has let this tender out?

Well, we certainly have experience with this customer, so they're an existing customer. I mean, as you might well know, in all of these endeavors, there are typically many partners involved, as it were, but certainly this customer is one that we've dealt with in the past.

And so, Rick, may we interpret that as the partner would maybe not be the one who made the final decision or was a name that was announced to the public previously, but they were on one of the fields. So they would know the capabilities of your system?

Well, I think in almost all these circumstances, the partners pretty much make all their names known. So I would say even in earlier work that we've done, that their name was certainly mentioned.

Understood. Great, thank you. And so the reason I'm asking the question is with oil prices at an uninspiring level, they're making a decision to go ahead with a tender. That implies that they have some real – they have a favorable view of the ROI, even at the current oil prices. And so that's just my theory. I guess would you talk to how the customer is viewing this? And how they are - what ROI they've had in the past and why they would be letting a tender out now?

Sure. They don't really reveal their explicit ROIs as it were. But I think you're fundamentally absolutely right in the sense that they recognize the return on these investments. The good news, and it's really along the lines of what I've mentioned before, there are certain aspects of looking forward well beyond what COVID-19 is doing. And even prior to the pandemic, there were certainly supply imbalances. But nonetheless, if you're looking longer-term and maximizing the recovery of existing assets you already have, it makes sense. These systems for more than two decades now have been acknowledged to yield a significant return on investment in the manner that it allows the reserves to be managed and mitigates circumstances where production is being reduced and gets them back up again. So I think this is just a normal course of action for those that are looking longer-term besides the existing very temporal circumstances that we're going through right now.

And Rick, do we remember correctly when British Petroleum did their first or made their first acquisition of the equipment, oil prices at that time were in the $20 to $30 range. And they came out with a white paper that indicated that they had quite a high return on investment if I'm remembering correctly.

Yeah, that goes back quite a while. But you're exactly right. That was 2003 when we created that first system and had it installed. But yes, the answer is yes to that.

And so let me just pick the number of $25 a barrel with $40 a barrel, oil today. What's the difference in how that ROI calculation would be? I guess, what costs have changed over that time period or could we surmise that even at $25 there would still be a good ROI? So at $40, it would be even better?

My recollection may be wrong, but I thought the price of oil at that point in time actually dipped well below that number you mentioned when that first PRM system was put in. In terms of establishing what ROI would be in today's world, I'm sure that would just be a matter of examining the inflationary aspects across the various market segments that it involves, but I certainly don't have those numbers right in front of me.

Great, thank you. And then what additional insights would you like to share about the other companies that are evaluating the PRM that you referenced in the press release?

I think, again, they are looking at the future with the eyes of optimizing their ability to make money on the existing assets that they have. That's what PRM does. I mean, in fact, in more recent times, these PRM systems have been evaluated for being put in service very early on in the life of the reserve. So in some cases, in earlier times, these type systems were placed in service after they have been producing from the reservoir for quite some time. These days, because of their understanding of how that optimizes their recoveries, they're considering that in much earlier circumstances.

Rick, does that increase the size of the market for you?

That's hard to say. I mean, the market has always been one that's very specific and sparse to a large extent. I mean, there's not a lot of PRM systems out there. We have almost all of them; I think there are two or so that are not ours or not ones that our technology is in place in. As far as whether the market is burgeoning? That's not for me to say; I mean, we're out there just trying to service the needs that they raise, and we have a technology that allows them to do so.

Great, thank you. I'm going to switch gears entirely. If I may, the two new Directors that you have brought on, what are they thinking that they can bring to the table for you?

A whole lot, I mean, besides their additional experience in dealing with the government contracts and other services related to the government, they just bring overall great credentials with respect to business as a general rule. So I'm really looking forward to their input in pretty much everything that we do. So I don't see any limited area of their contribution at all.

No, it looks very qualified. It was certainly not a questioning why you would choose them. I was just wondering if they had something—each of them in particular—that they're feeling like they can really bring to the fold for you. And in particular, Sid, with the experience in the appropriations process, from a much larger company perspective, is there anything in particular that may be specifically useful there?

Well, I believe there is. I mean, fundamentally, that experience helps us develop our strategies. And there's a lot to that. In many cases, we have gone down the path of as best we understand, and the guidance that she's going to be able to help provide us in those same endeavors is just going to be remarkable.

Great, thank you. I can either step back in or I do have some additional questions; which would you prefer?

That's up to you and the moderator?

Well, unless the moderator cuts me off, I will continue. The Democratic Congresswoman, Elissa Slotkin, I believe it is in Michigan, did put a bill out in September, kind of requesting a comprehensive Border Patrol plan. I think it was to identify, deploy and integrate the emerging and advanced technologies. I think there have been also some other bills that kind of end under this same vein. What is the implication of such a thing? And has this bill made any progress in Congress?

The implication is certainly that the technology that she's referencing there intersects 100% with our technology and capabilities. What we provide is a high technology solution. It's one that reaches across the aisle in all regards of those that are concerned with the border and perimeter security. I don't know the status of that particular bill; Mark's on the line. He may know a little bit of information on that.

Hi, Bill. Yeah, I'm not sure of the status either. But it does show that there is—with the new incoming administration—that we might see a bit of a shift from more of a balancing, I would say, between a physical security solution to a balance of both physical security and a technological approach to securing our borders.

So Mark, kind of taking that one step further, are you anticipating that the new administration will net-net be favorable to Quantum's ability to generate more border security revenue?

The good thing is we've not experienced that yet so far, so we'll see how this shakes out. But in our experience on this bill, the value that we add is very bipartisan. We've not seen any issues Republican or Democrat concerning their support of the value that we provide. But what may be beneficial is, like I said, more of a balancing and funding. So while we have that support from a bipartisan standpoint, it is important to get that to reflect back into budgets that would potentially allow the physical versus the technological solutions to be better balanced from a budgetary standpoint.

Great, thank you. And then I need some help understanding the implications of some things here, relative to the border security. So you have the contract, which was a one-year contract beginning in early April of last year, or probably this year, going through early April of '21. You were fortunate enough to be listed as a program of record, and also have the SBIR Phase III status. I don't think I understand the implications of each of those two aspects, the program of record and the SBIR Phase III status, and what that may or may not mean for the next border security contract on the US-Mexican border.

Good points in your questions. Having a program of record means that the government agency is recognizing that they have a capability or a need that they are now attending to address. So to do so, they establish a program of record that can then be appropriately funded. And of course, you have to have all the elements lined up to fund it. But the first element you have to have is that bucket, if you will, with its defined scope to receive those funds. And so that was a significant milestone for our customer. It's not unique to— it doesn't uniquely serve what we provide; it provides funding across the breadth of capabilities that they need, and we are one of those. The SBIR Phase III is something that says that we have the exclusive data rights for our technology to the United States government. So they are not able to feel or use our capabilities if provided by somebody else; it's kind of like intellectual property protection. So it doesn't mean they can't use somebody else's solution. But if they want to use our solution if our solution proves to be the best they've ever seen, then that is uniquely addressed by our company.

So I don't want to jump ahead too far here, but is the implication then because you are a program of record, is there—nothing is guaranteed, but a high probability is that starting in April of this coming year, there will be an additional contract, simply because that's part of the solution for the problem that they have identified.

I wouldn't go that far. I want to be very clear that the program of record isn't for Quantum or for Geospace. It is a government program of record that allows them to address certain classes of threats using a wide variety of technologies and techniques. And again, we're a component of that, but it's a key milestone; you got to have it to go forward. It's a very dynamic time in our United States government. We're living in the middle of something that's—and first in history as we're looking at a transition of power between an outgoing administration and a new administration. And so there's a lot in this dynamic that would be challenging to predict as early as April. So I think that we can look to some of these alignments that are might be looking somewhat favorable, but I don't think it's fair to put a time on that would be so aggressive.

Great, thank you. And then one additional question, I think I'll hop back into the queue. You have referenced on one of the recent conference calls is that the Border Patrol has selected you for an application, which they are now keeping quiet in terms of what that application is. Are there other applications beyond this first one that are being considered, and if so where are we at in the process with those?

There are applications, but we're in the early phases. The combined value of Quantum and Geospace that keeps me excited every day is being able to deliver information from acoustic data. And that has a number of applications. And we are engaged with the government, as we speak, on the exploration of one of the applications. It's completely early stage. And by early stage, I mean, we're beginning to explore the possibility of there being a solution. So a few years out before that closes, but they are aware of how our capability can be valuable elsewhere.

Okay, I misspoke. I am actually going to squeak one more question in. So back on the March quarter call, you had talked about the commercial systems integrator that you were working with. And so even prior to the press release, we were interested in an update since that was several months ago. But there was a sale that was referenced in the release to the commercial integrator. Is it the same one? And right now the numbers are quite small. So how do we go from numbers in the thousands in order or business in the thousands of dollars to millions of dollars with the commercial system?

It's another good observation, Bill. It requires patience. For some of our applications, they go into very sensitive areas. And those sensitive areas require very, very thorough testing. Just use the analogy of any flight system that we've brought into operations; whether it's the F-22 or something, it could be decades in development for that to be completely tested before certified as operational. We are part of that team. And we are part of that overall capability. And so we are now in the stages of selling kind of single unit systems in, and the point then for this tiered evaluation process, because it has to be thoroughly understood, evaluated, and then accepted. And so that's how you go from something low order with high potential.

And given the timeline that you see today, what would be the fiscal year that you would expect meaningful orders in that arena?

With many years out, it's many years out. I like it because it gives a sense of that strategic revenue that we're positioning ourselves for, but it is many years out.

Great, thank you both for the time.

And our next question comes from Josh Cooley, who is a Private Investor. Please go ahead.

Hey, Rick. I appreciate your time. I think the gentleman before me probably asked a little bit more thorough questioning than I had for you guys regarding the seismic technology. And maybe you can speak on any potential opportunities that you guys have abroad internationally, with border security.

Well, there certainly are other opportunities out there internationally. In some of those circumstances, they're not in the mood for purchase at this point in time or development. They are either busy with what they already have. But certainly there is interest there. And we do have continued discussions on those topics. Again, if Mark wants to make some additional commentary there, he's welcome to.

Yeah, the international arena is a very important one to us. And our strategy has been to stage ourselves into that. And to do that and to garner the attention of the international community in the international markets, it's very beneficial to be able to demonstrate that you have past performance or proven systems and operations. And that's what we're coming to closure on now with the Border Patrol. The system we're deploying on the border is very complex. And it's taken a great deal of effort from our combined teams as we've merged them together to provide this complete end-to-end system. I'm very excited about that. But it's just been an effort, and we wanted to make sure we delivered that first. And then we can look at bringing that past performance into the international market space.

Thank you.

And our next question comes from Brent Miley from Rutabaga Capital. Please go ahead.

Good morning, I got a few questions for you. One, on the CapEx comments, you mentioned it could be up to $5 million. Secondly, to be contingent upon sort of the PRM proposal awarding that kind of a contract or is there more other investments there that you're considering?

Yeah, I think some of it may be related to PRM, but most of it is related to other opportunities we're looking towards. And we're certainly not going to pull the trigger on any investment unless we think there's opportunities and revenue that comes along with that.

Right, I mean to further what Robert just said, you're referring to the property, plant, and equipment type CapEx, and a large part of that is just a normal course of business that we're going through. We have certain projects associated with our automation and other things that do drive revenue, and as growth in those areas continues to manifest, it makes sense. But again, to Robert's point, there's certainly always a review of those prior to the actual expenditure that everything's still aligned for them to happen.

I guess, in that main, what are the areas that have potential growth into next year? I mean, obviously, the OBX has really been the main revenue driver. So maybe you could provide—help me understand what kind of visibility you've got into that? I know some of that rentals, some small portion of that is sales. But if you actually are considering some investments in automation, and the revenue driven, what are the areas that might kind of be hopefully going to rebound in the coming year or two?

But it's really hard to say what's going to rebound and continue the previous exhibited growth as a function of COVID-19. Certainly, our adjacent markets have taken the biggest advantage of any automation efforts that we have put in place to date. And we certainly continue to see those with every potential of continuing to grow. There has, without any doubt whatsoever, been an impact as a result of COVID-19 because in many cases, some of those products are used in the Smart City endeavors that are constantly going on. But those have seen some reductions because they can't pursue some of those projects of smart metering and other things that take place in this environment of COVID. So we have no doubt that that industry is going to recover and continue progressing and growing just simply because of what it represents overall to society and to these utility companies. But the timing on that is just very, very difficult to give you any insight on.

Okay, fair enough. But on the OBX side of things, again, I know the fleet's not growing currently. But what is—what kind of visibility you're having to the coming year in terms of utilization and so forth, if any?

I think that we're seeing a slowdown in that. As I mentioned in our earlier statement and early on, some of the segments had a very much delayed impact with respect to how COVID-19 was having an effect. But we have seen a catch-up on that. So largely, I think that we have every expectation that the OBX rentals are going to subside to some extent. I mean, the number of quotes that are coming in are certainly reduced. We also have a different character to some of the quotes. Many of them are calling for deepwater activity, which is highly interesting. And that's a much different product in terms of its capabilities because of the depths that it can reach. But in general, we see the OBX continuing, but we certainly believe there's going to be a lessening of demand there as time goes on.

Okay, fair enough. On the sort of border patrol side of things, if you were to frame up for next, and I understand it's a very complex process, and you're dealing with governments and administration changes that testing, I understand all that. When you look at the timeframe, you've characterized the potential market as being every bit as big as your current core business. Is that sort of over a five-year time horizon? I'm just trying to frame it up for sort of—we're long-term investors, but I do kind of want to understand when in terms of inserting the P&L, that might become sort of more material, to your kind of to the external financials as or?

No, I understand. And I still think that's going to take some time. The uncertainty of what's going on now is certainly not helping matters as it were. Appropriations are going to be delayed and go through probably a whole another round of deliberation as far as that goes. I think the important thing for us is that the technology we provide is unique. It's technology that has not existed in the past. It notably performs well in what it does in providing a listening and ears capability; most security aspects are wrapped in terms of line of sight type of approach to things. What we provide is something that doesn't need that, and it can certainly detect and determine events and provide intelligent information that's actionable without that need. So given the uniqueness of the product, it's going to take a little while for that to introduce itself at the level that we expect, but we do have every confidence that the technology represents itself in a way that can grow to the size of our oil and gas business.

And is the—the current $10 million contract, I'm assuming that that will be—the vast majority of that will be recognized, I guess, either in the first or second quarter, given the end date on that contract. Is that correct?

Certainly, yeah, that's right.

That's absolutely correct.

Okay, and then is the best way to sort of think about that, again, beyond some of the budgeting complexities—is the best way to think about it as if this project works? And actually, I know that you had to do a lot of testing, so I think it does work. Otherwise, you wouldn't be even in the sort of—you would have gotten that contract. But if that works, is sort of the biggest near-term opportunity basically to get the incremental additions to that kind of a rollout? In other words, if you did a mile of fencing in a certain area of traffic, and whatever there is—is it fair to assume that there are many X times similar layouts and opportunities in terms of where you are on the border and so forth. And sorry, if that's really big, but basically, I think it's if you've got 1% penetrated, and this thing really works, do you have a chance to get to 100% or 50% penetrated over the next two, three years?

There is absolutely more opportunity along the lines of what we're putting in now. It's not at all even near the saturable point of what that market demands. So the answer is yes, so there's plenty of opportunity in that regard.

Okay, great. Appreciate it. Thank you, guys.

And our next question comes from Scott Bundy from Moors & Cabot. Please go ahead.

Hi, Rick. Good morning.

Hi, Scott.

Just a quick question. OptoSeis versus prior technology, I think there's only one system out there. What's the value of fiber to your customer versus prior technology?

There's significant interest in the fiber at this point in time. So I would say that the highest points of interest in these permanent reservoir monitoring systems, as we speak, are looking towards the fiber. The conversation does vacillate a bit back and forth. But certainly, just to be honest, their interest seems to lie in that technology.

And it does appear that there are no further questions over the phone at this time. I'd like to go ahead and turn it back to you, Rick, for any closing comments.

All right, well, thank you, Chris. And thanks to everyone who joined our call today. And let me encourage everyone to have a very safe and happy Thanksgiving coming up. With that we will get back with you on our first quarter of fiscal year 2021 in February. So have a good Thanksgiving. Thanks and bye, bye.

Thank you. This does conclude today's Geospace Technologies fourth quarter and full year 2020 earnings conference call. Please disconnect your line at this time and have a wonderful day.