Earnings Call Transcript - GEOS Q2 2020

Rick Wheeler, President and CEO

Welcome to the Geospace Technologies' Second 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 Curda, the company's Chief Financial Officer; and Mark Tinker, CEO of our subsidiary, Quantum Technology Sciences. Today's call is being recorded and will be available on the Geospace Technologies' Investor Relations website following the call. For convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website. Note that the information discussed this morning is time-sensitive and may not be accurate at the time one listens to that replay. Yesterday, after the market close, we released our financial results for our second quarter of fiscal year 2020, ended March 31, 2020. As mentioned, we are very thankful that our second quarter transpired safely and with very little commercial disruption brought about by the COVID-19 pandemic, which has stressed enormous health and economic devastation upon the entire world. I'm thoroughly impressed with how our employees continue to exhibit remarkable courage and ingenuity to preserve our ongoing operations as smoothly and as efficiently as possible while maintaining strict safety protocols. Their efforts have secured our compliant role as a critical manufacturer supplying customers in multiple sectors that are designated by the U.S. government as critical infrastructure. As we reported, our second quarter revenue was primarily fueled by ongoing demand for our ocean-bottom marine nodal recording systems. Total revenue of $25.9 million matched our recent first fiscal quarter as well as last year's second quarter, differing in both cases by less than 1%. However, gross profit of $7.9 million in the second quarter reflects a decrease compared to either of the prior mentioned periods and is primarily due to nonrecurring costs for upgrades we made to our OBX rental fleet. Despite the lower gross profit in the second quarter, revenue and gross profits increased by 17% and 37%, respectively, for the first 6 months of fiscal year 2020 compared to last year's first 6 months. Note that the net losses reported for both the 3- and 6-month periods ended March 31, 2020, are largely the result of a write-down to accounts receivable of $8 million in the second quarter for a doubtful account associated with one of our OBX rental customers. Our negotiations continue with this customer on financial instruments to secure payment of the debt, and we intend to pursue full recuperation of this account. Not included in reported revenue is the sale of a $12.5 million GCL land recording system, secured with a $10 million promissory note payable in 36 monthly installments. An initial deposit plus payments on the promissory note totaling $3 million have been received from the customer and recorded on our balance sheet within our noncurrent deferred revenue. The customer is current on its note payments, but we intend to recognize this revenue at a later date when the collection of the promissory note is determined to be likely. Our combined oil and gas markets segment generated $18.4 million of revenue in the 3 months ended March 31, 2020. This slight decrease of 1% compared to the equivalent year ago period is the result of lower demand for our traditional sensors and marine products, partially offset by higher demand for our OBX marine nodal systems. For the 6 months ended March 31, 2020, this segment generated $37.9 million, an increase of 28% over last year's same 6-month period. The increase is primarily the result of growth in demand for our rental OBX systems, but is partially offset, as mentioned, by lower demand for our traditional seismic land and marine products. Traditional seismic products for this segment generated revenue of $2 million and $4 million, respectively, for the 3- and 6-month periods ended on March 31, 2020, reflecting decreases of 49% and 35% for the same respective periods a year ago. As a result of reduced levels of seismic exploration by oil and gas companies, demand for these products had already noticeably declined prior to the COVID-19 pandemic. And given the recent demand destruction for crude oil brought on by global reaction to COVID-19, combined with the oversupplies of crude oil generated in the dispute between Saudi Arabia and Russia, demand for these products will likely continue to be negatively impacted. For the 3- and 6-month periods ended March 31, 2020, our wireless seismic products generated revenue of $16.1 million and $33 million, respectively. These figures are approximate increases of 18% and 58%, respectively, when compared with the equivalent year ago periods. Interestingly, demand for our OBX equipment has experienced only a slight reduction in response to the COVID-19 pandemic and the coinciding oil price volatility. We know that one short-duration rental contract scheduled to occur in our third fiscal quarter was indefinitely postponed. Future projects intending to utilize our OBX systems might also face risks of cancellation or delays. However, to date, no other cancellations or major delays have been reported. And we continue receiving requests to provide quotes on new rental contracts. Our reservoir seismic products produced revenue of $337,000 and $555,000 for the 3- and 6-month periods ended March 31, 2020. This compares to revenue of $1.1 million and $2 million for the respective 3- and 6-month periods last year. In both periods, the decrease is due to fewer sales and services of our borehole products. We believe that the truly significant opportunities for generating meaningful revenue from this product category reside in future contracts for permanent reservoir monitoring, or PRM, systems. We also believe we have greatly increased our likelihood of receiving such PRM contracts by our acquisition of OptoSeis fiber optic sensing technology, in combination with the extensive engineering and manufacturing improvements we have made to both our optical and electrical PRM products. For the 3- and 6-month periods ended March 31, 2020, revenue from our adjacent markets segment totaled $7.1 million and $13.2 million, respectively. These figures represent slight decreases of 2% and 5% from the respective periods when compared to 1 year ago. Unexpected delays in the production of our certain imaging equipment amounted to the decreases in both periods. In addition, lower sales of film products contributed to the decrease over the 6-month period. Partially offsetting the decreases in both periods was higher sales of our water meter cable and connector products. We strongly believe our strategy of nurturing and expanding the products of our adjacent markets segment is working to provide sound and reliable means of generating stable revenue that offsets the volatility associated with our oil and gas market segment. Our emerging markets segment generated revenue of $372,000 and $469,000, respectively, for the 3- and 6-month periods ended March 31, 2020. That's compared to $46,000 and $134,000 in the equivalent periods a year ago. The increases are attributed to the sale of border and perimeter security products to a commercial customer. As a reminder, just over a month ago, we announced that our Quantum subsidiary was awarded a $10 million contract with the U.S. Customs and Border Protection for the U.S. Border Patrol to provide an advanced technology solution to the Department of Homeland Security. Even though the most significant portions of revenue from the contract may not occur until our first quarter of fiscal year 2021, we believe this first contract validates our calculated rationale to acquire Quantum. This is a first demonstration of our key strategy to leverage both of our core competencies and technologies into an expanded and diversified set of markets. We believe that this is just the beginning of the contributions this unique technology will bring in our future.

Robert Curda, CFO

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, our second quarter ended March 31, 2020, we reported revenue of $25.9 million compared to last year's revenue of $26.1 million. The net loss for the quarter was $11.8 million or $0.87 per diluted share compared to last year's net income of $700,000 or $0.05 per diluted share. For the 6 months ended March 31, 2020, we reported revenue of $51.6 million compared to revenue of $44 million last year. Our net loss for the 6-month period was $13.1 million or $0.97 per diluted share compared to last year's net loss of $5.1 million or $0.38 per diluted share. A breakdown of our oil and gas product revenue is as follows. Our traditional product revenue for the second quarter was $2 million, a decrease of 49% compared to revenue of $4 million last year. The revenue decline is attributed to lower demand for our traditional sensor products and lower demand for our marine seismic products. Traditional product revenue for the 6 months of 2020 was $4.4 million, a decrease of 35% compared to revenue of $6.8 million last year. This period's decrease is also due to lower demand for marine seismic products and traditional sensor products. Our wireless product revenue for the quarter was $16.1 million, an increase of 18% compared to revenue of $13.6 million last year. Wireless product revenue for 6 months was $33 million, an increase of 58% compared to revenue of $20.9 million for the same period last fiscal year. The increase in revenue for both periods is due to higher rental demand and utilization of our OBX marine nodal systems. Second quarter 2020 wireless product revenue does not include $12.5 million in a GCL product sale delivered in the second quarter, secured by a $10 million promissory note. As of March 31, 2020, we have received $3 million in cash for 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 cost of revenue associated with the sale have been recorded on our balance sheet as part of long-term deferred revenue and part of long-term deferred cost of revenue. We plan to recognize the revenue and cost of revenue on this transaction when we determine the collection of the promissory note is probable. Due to concerns about the collectibility of revenue from a seismic marine customer, our wireless product revenue does not include $3.6 million and $5.1 million of OBX rental revenue for the 3-month and 6-month periods of fiscal year 2020. In November 2019, we stopped recognizing revenue from this customer and will maintain this approach until the customer can meet its debt obligations to us in the normal course of business. Our reservoir product revenue for the second quarter was $337,000, a decrease of 68% compared to revenue of $1 million last year. Reservoir product revenue for the 6 months was $555,000, a decrease of 72% compared to the revenue of $2 million last year. The decrease for the 3-month and 6-month period reflects 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 continue to discuss PRM products with multiple customers, but do not expect any PRM-related revenue to be recognized in fiscal year 2020. Moving into our Adjacent Market products segment. Our industrial product revenue for the second quarter of fiscal year 2020 was $4.2 million, an increase of 2% over the second quarter of 2019. Industrial products 6-month revenue for fiscal year 2020 is $7.8 million, an increase over the same period in 2019 of 1%. Both period revenue increases are due to higher sales of our water meter cable and connector products. Imaging product revenue for the second quarter was $2.9 million, a decrease of 7% compared to last year's revenue of $3.1 million. This decrease is caused by delays in the production of certain imaging equipment. The 6-month revenue for imaging products for fiscal year 2020 is $5.4 million, a 13% decrease when compared to the same period in 2019. The decrease in revenue is due to production delays in certain imaging equipment and lower sales of film products. Finally, revenue from our emerging markets segments totaled $327,000 for the 3-month and $469,000 for the 6-month period ending March 31, 2020. Prior year revenue was $46,000 for the second quarter and $134,000 for the 6-month period ending March 31, 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 recently announced $10 million contract with U.S. Customs and Border Protection in our first quarter of fiscal year 2021. Our second quarter of fiscal year 2020 operating expenses increased by $10 million or 108% compared to the second quarter of 2019. The 6-month operating expenses increased by $11.2 million or 61% when compared to the same period of fiscal year 2019. The increase in operating expenses for the 3-month and 6-month period is mostly due to $8 million in bad debt charges related to an OBX rental customer account. We intend to pursue the collection of all amounts owed by the customer. Our 6-month cash investments into our rental equipment in property, plant and equipment were $5.2 million and $2.8 million, respectively. We do not expect any significant additional cash investments into our rental fleet in fiscal year 2020, and cash investments into our property, plant and equipment could be up to $5 million. Our balance sheet at the end of the second quarter reflected $18.9 million of cash. We have no long-term debt outstanding, and the available borrowings under our credit agreement is $14.9 million. In addition, we own numerous real estate holdings in Houston and around the world that are owned free and clear without any leverage.

Rick Wheeler, President and CEO

Thank you, Robert. And now I'd like to introduce you to Dr. Mark Tinker, CEO of our subsidiary, Quantum Technology Sciences, and let him say a few words about Quantum and our recent contract.

Mark Tinker, CEO, Quantum Technology Sciences

Thank you, Rick. Thanks for the introduction. As Rick said, I am Dr. Mark Tinker, and I am the CEO of Quantum Technology Sciences. I appreciate the opportunity to address everyone on the call. It's been nearly 2 years since Geospace acquired Quantum even though it feels like only 2 minutes. Over the past 2 years, in addition to the expected business integration efforts, we have spent significant time integrating the core competencies and technologies of both organizations. This has resulted in a unified offering that can serve markets outside of oil and gas. As previously noted, Quantum generated revenue of $372,000 in the second quarter of fiscal year 2020 and $469,000 for the 6-month period ending March 31, 2020. This revenue came from the sale of perimeter security products to a commercial customer. On April 6, 2020, we were pleased to announce a $10 million contract with U.S. Customs and Border Protection for the U.S. Border Patrol. I cannot stress enough how deeply honored we are to be able to provide a solution capable of satisfying a challenging mission for the U.S. Border Patrol agents in the field. It is very gratifying to contribute to reducing the trafficking of weapons, drugs and other illegal contraband into and out of our country. And while it took longer than desired, the first Border Patrol contract validates Geospace management's strategy to acquire Quantum. In fact, we further believe the efficacy and value of our combined unique technology will allow us to pursue not only future Border Patrol contracts, but also open up other doors for additional opportunities. Back to you, Rick.

Rick Wheeler, President and CEO

Thanks, Mark. The challenges thrust upon virtually all facets of industry by the COVID-19 pandemic, combined with initial disputes between Saudi Arabia and Russia, are really unprecedented. And each has contributed to the historic drop in worldwide oil prices seen in recent months. Despite this adversity, we are confident that all the steps we have taken, both now and in the past, to expand into new markets, diversify our revenue streams and steadfastly maintain our commitment to strong financial discipline have helped us navigate these trouble times. And the recent $10 million contract awarded to our Quantum subsidiary by the Department of U.S. Homeland Security is just one example highlighting our ability to successfully execute our strategy of diversifying our innovative technology products and the revenue we can generate from them. Lastly, I'd like to sincerely thank all of our hard-working employees, valued clients and loyal shareholders for their support through these very difficult and uncertain times. We've made good progress on a strategic course of action, and I feel confident that our decisions have and will continue to position us favorably for the future. With that, this concludes our prepared remarks, and I'll now turn the call back over to Brie for questions.

Bill Dezellem, Analyst

Mark, since you're on the line, I would like to ask a few questions about Quantum. First, you mentioned the $372,000 of revenue for the quarter. Could you provide details on what that revenue consisted of, whether it was from the U.S. or international sources, if it was for a government agency or a private entity, and any additional information would be appreciated.

Mark Tinker, CEO, Quantum Technology Sciences

Yes, it's nice to talk to you, Bill. One of the challenges in the security and surveillance market is that some of my answers may not be very satisfying because we need to maintain the anonymity of our customers and protect the fact that our technologies are used for security purposes. We don’t want to give any advantage to adversaries. However, I can share that this particular customer is a large commercial entity, a system integrator based in the United States, and they are integrating our technology into their overall security system for their client.

Bill Dezellem, Analyst

And their customer would be a government or a private business?

Mark Tinker, CEO, Quantum Technology Sciences

Their customer ranges, but in this particular example, it's for a U.S. government end user.

Bill Dezellem, Analyst

And what additional information can you share about that end user?

Mark Tinker, CEO, Quantum Technology Sciences

I can't. We're under a pretty strict nondisclosure with them.

Bill Dezellem, Analyst

Understood. And then are you anticipating any further border security, I guess, final purchase decisions, for a lack of a better phrase, this year? Mark, maybe I should qualify that in meaningful size because $370,000 of revenues is nice, but it certainly isn't a needle mover. So really something more meaningful like the Homeland Security?

Mark Tinker, CEO, Quantum Technology Sciences

Yes. Well, let me kind of hit both of those actually. While it's not meaningful, and I completely agree with you, it's somewhat analogous to what we're doing in border security. Both of these are contracts that are building towards something that we see to be of a more substantial nature. It can take a while to not only get on contracts but to get deployed and get integrated. And then the system starts to roll for larger integration efforts, larger deployment efforts. But to answer your question specifically, absolutely, it is our desire and intent to continue to support the Border Patrol with upcoming efforts in the future.

Bill Dezellem, Analyst

So you're thinking that you do have a reasonable opportunity to have an additional meaningful business announced this year?

Mark Tinker, CEO, Quantum Technology Sciences

This year is probably not expected to have an announcement. What has occurred is that the Border Patrol is establishing a significant program. This is a substantial win for everyone involved, not just for us. A program is beneficial as it becomes a line item in the United States' budget for that department. We are pleased to see this development as it reflects the commitment to move forward and work towards a shared goal.

Bill Dezellem, Analyst

So that is optimistic for us to see because it means we can keep driving and working hard to meet their needs. And so when we always see a customer who has a need and a desire, it's always nice when we're able to see that, that customer also has an ability and a program of record kind of goals towards that. So this program of record is going to extend for many years into the future.

Mark Tinker, CEO, Quantum Technology Sciences

And so we have every intention of doing everything we can to continue to serve them in the upcoming years, but that would likely not occur until starting next fiscal year.

Bill Dezellem, Analyst

So Mark, I'm going to have to expose my ignorance here. The program of record concept that you just identified is not something that I am familiar with. Would you please walk through the significance of that for those of us who are not intimately understanding how the government works?

Mark Tinker, CEO, Quantum Technology Sciences

Yes, definitely. The budgets are set from Congress all the way down to every department within the U.S. government, including the Department of Defense and others like housing and development. As these budgets are allocated, they are divided into specific lines, and a program of record can be identified by program element line numbers in the federal budget. This sets a clear definition for Congress to authorize the appropriate funding. When a program of record is established, it's reassuring for federal government contractors because it shows the U.S. government's commitment to fulfilling a particular initiative. For instance, with the Border Patrol, there is a significant push to build the wall, and they have specific budget lines for physical infrastructure like ports of entry. Additionally, they need to allocate resources to support their agents and manage extensive logistics. All of these components are accounted for within a dedicated budget for the Border Patrol, which they use to meet their specific needs and missions.

Bill Dezellem, Analyst

I’m going to use this as a transition to discuss an RFI that we understand was due on February 25, in which the Border Patrol was seeking a solution for waterway issues, particularly not open waters like the Rio Grande. Based on the criteria, it seems that much of it aligns with what you offer. Could you elaborate on that opportunity? Additionally, since you received the SBIR Phase 3, does meeting the requirements mean that the government is obligated to purchase from you because of your Phase 3 status?

Mark Tinker, CEO, Quantum Technology Sciences

Bill, that's a really good question. Let me do my best to address that in sequence. We are closely familiar with the RFI that has been issued. An RFI is a request for information, which is a completely noncommittal inquiry from the government aimed at gathering information from industry to understand what solutions might be available. This helps them formulate a procurement strategy and set requirements based on industry input. However, I want to emphasize that it is noncommittal. We are well aware of the waterways RFI and have responded to it. When it comes to SBIR status, it means the government is not obligated to purchase from us. However, if an aspect of our technology that aligns with the SBIR meets their requirements, they can award us a sole source contract. This can be advantageous for them as it allows them to bypass a full competition, saving time and money in the procurement process. Therefore, we make it a priority to ensure they are aware of our capabilities that may fit their requirements. If we don't meet their needs, we step back. We have successfully leveraged this in the past with the Air Force Research Labs and the Air Force Nuclear Weapons Center. As mentioned in the press release, we were able to do the same for our current contract with the Border Patrol. We are very excited to further engage with the Border Patrol regarding waterways and ensure they understand how we could approach addressing that specific requirement.

Bill Dezellem, Analyst

Okay. And then I'm going to take one more question, if I may, and then I'll turn it over to someone else to ask about oil and gas. But relative to the original question about the $370,000 of revenue this quarter and your description of a commercial systems integrator. Would this be an example, I'm just going to use an example in pulling this out of the air, where, say, Raytheon would be the systems integrator who is working to secure military installations. And so you'd be selling to Raytheon, who would then be selling to the military. Is that an example of what you were referring to there?

Mark Tinker, CEO, Quantum Technology Sciences

Yes. That's an exact example of what I'm referring to.

Christopher Sansone, Analyst

Okay, so I did have one question on the Quantum side. What's the revenue model for that business?

Walter Wheeler, President and CEO

It's a good $10 million.

Christopher Sansone, Analyst

Is it? Okay. So it's a onetime sale? Is there a recurring nature to any of that?

Walter Wheeler, President and CEO

Well, there are possible extensions to the contract as far as that goes. But as far as the part that's, for sure, established, it's what was mentioned in the press release.

Christopher Sansone, Analyst

Okay, right. So there's no ongoing servicing revenue stream that we could expect from those orders?

Mark Tinker, CEO, Quantum Technology Sciences

Yes, there is potential for follow-on maintenance and service in any contract, including this one, but there is no confirmation at this time.

Christopher Sansone, Analyst

Okay. And do we have any sense of what the market opportunity would be for our Quantum products? Not what the total addressable market might be?

Walter Wheeler, President and CEO

We believe that the market opportunity for our products is likely as large as our past oil and gas business. This is a promising industry that lacks innovative products like ours, which address significant challenges. While it's difficult to quantify the exact scale, we fully expect it to grow to be at least as substantial as our historical oil and gas market.

Christopher Sansone, Analyst

Okay, great. When you install the Quantum stations, how long do they last? Is there a timeframe in which you need to replace them?

Mark Tinker, CEO, Quantum Technology Sciences

Sure. One of the points I mentioned, Chris, about our collaboration with Geospace and integrating our capabilities is the expertise they have in deep, resilient geophysical data acquisition systems, which we needed as Quantum prior to the acquisition. Geospace has installed 80,700 miles of underwater systems that have been operational for 10 years. This gives me, and our customers, a strong confidence that our systems will be deployed and will operate with a very low mean time to failure. I expect our systems to be functional for 5, 10, or even 15 years. The components that may face the most challenging conditions are actually the more affordable and replaceable parts of the system, so I believe our systems will fulfill their purpose for an extended time.

Christopher Sansone, Analyst

Okay. And then switching to oil and gas. I guess I'm curious about the excluded revenue of $3.6 million. How much more potential excluded revenue should we expect to see in the coming quarters?

Robert Curda, CFO

We're working with that customer on an ongoing basis. So I'm not sure I can really answer that completely at this point because our negotiations are happening every couple of days with this customer.

Christopher Sansone, Analyst

Okay. So if we look at the $8 million that was written off versus the $14 million of total deferred revenue, is it safe to say that if we're not successful on any of it, there could potentially be another $6 million of revenue that might be excluded? Is that correct?

Robert Curda, CFO

No, that's incorrect. That's incorrect. Our exposure was $8 million. And it doesn't expand because we stopped recognizing revenue on this customer back in November. So that differential is unrecognized revenue and late fees and penalties we've charged the customer on late payment.

Christopher Sansone, Analyst

Okay. How many stations did we exit the quarter with, OBX stations?

Robert Curda, CFO

34,000 stations, I believe.

Christopher Sansone, Analyst

Okay. And as you mentioned, there won't be much more investment in stations for the rest of the year?

Walter Wheeler, President and CEO

No. In fact, what we reported for the first six months shows that most of the expenses were incurred in the first quarter. We do not expect any significant expenses moving forward. As mentioned in our press release, we upgraded some of our fleet to current technologies. Without these upgrades, the equipment would not have met the qualifications for some of the work we are currently undertaking. This equipment has been in use for some time, and technology evolves quickly. These upgrades were essentially a one-time effort to enhance their qualification levels, enabling their use in upcoming projects. At this time, we do not plan on making new investments or increasing the rental fleet. However, if unexpected opportunities arise, we will certainly consider them.

Christopher Sansone, Analyst

Right. Okay. And then you mentioned utilization. What visibility do you have into utilization or utilization rates for the balance of the year?

Robert Curda, CFO

Well, I would say that due to the disruption we've experienced in commerce from the pandemic and the fluctuations in oil and gas prices, we currently do not have a live forecast. However, we have only had one small contract canceled so far, and we are actively providing quotes for new contracts as we speak.

Walter Wheeler, President and CEO

Yes, that's a very good question, Chris, but it's challenging for us to provide an accurate answer due to many factors beyond our control. What we can tell you at this moment is that we expected more disruption, but that hasn't materialized. The reason for this might be that the OBX use relates to longer-term strategies of the oil companies. Therefore, their focus on long-term aspects of their future seems to alleviate some of the immediate challenges we have faced, even if they are significant.

Christopher Sansone, Analyst

Right. Right. Before I switch over to CapEx, just one comment on the issues that we're having with some of the bad debt or the uncollected receivables. You would think that with the end user or the end customer being a major offshore exploration production company, I'm sure they're paying the bills. So I'm just curious if you have a blue chip customer who's paying their bills, why is it that our customer isn't paying us?

Walter Wheeler, President and CEO

Well, in some cases, those blue chip customers aren't paying their bills. And that has a downhill flow to some extent with respect to particularly those companies that are more cash flow restricted than others. So you're right, you would believe in that circumstance that, that would be more the case. But there has been a considerable squeeze that has occurred from parties that you wouldn't necessarily think that would be the case.

Christopher Sansone, Analyst

Right. And what control do we have to prevent that from happening again?

Walter Wheeler, President and CEO

Near 0. I mean part of the problem is that there is a certain amount of disarray within the industry and the way it's organized and the independence of all the contractors. So there's really no consistency that exists necessarily. And the way these contracts come about, the different oil companies have their own issues, the library houses have yet another set of issues. It would be great if there was just more consistency that one could point their finger at and then get better assurances, but it just has not been the case over the years for that to be true.

Christopher Sansone, Analyst

Okay. And then my last question is the $5 million of non-sensor CapEx. Can you talk about what that's geared towards?

Robert Curda, CFO

I think you're speaking about improvements to plant, property and equipment in non-sensor CapEx, right?

Christopher Sansone, Analyst

Yes.

Robert Curda, CFO

Yes. We're just updating, adding additional equipment to our manufacturing facilities and research and development and things of the like, things that we've decided to do this year as part of our initiatives to improve our efficiency.

Walter Wheeler, President and CEO

But it wasn't $5 million, I don't believe.

Robert Curda, CFO

Yes. We spent $2.8 million, but we expect we could spend up to $5 million this year.

Walter Wheeler, President and CEO

Yes, that is right. Our current spend is $2.8 million.

Bill Dezellem, Analyst

I'll actually take the bait on that last question. So given how the oil and gas business is under pressure. What is it that you would need to upgrade your plant for that's leading to that difference between $2.8 million and $5 million as opposed to just shutting CapEx down to 0?

Walter Wheeler, President and CEO

Well, in many cases, Bill, it has to do with bringing the machinery up-to-date in certain cases for the manufacturing. We certainly have the products with Quantum that we need to get out and put together. We're consistently trying to improve our processes through various means of automation to bring our costs even further down than what they have been as far as that goes. That certainly helps with margins on products, even in lower volumes. So it's not that we will necessarily spend that, but those are elements that as we examine the future under reasonably cautious and examined circumstances that we could spend up to that much towards those purposes.

Robert Curda, CFO

Yes. Bill, we'll certainly watch our cash flow going forward. We've always watched cash flow, and we certainly won't expend any money on improvements that won't have any incoming cash to support that.

Bill Dezellem, Analyst

That's part of why I was asking the question is it seems that you have done a good job managing your cash historically, and it seems a bit out of character that you would be spending cash now. So I read between the lines that there is some interesting business that may be associated with this CapEx and hoping you could shed some light on that.

Walter Wheeler, President and CEO

Well, I mean, there's always interesting business in this stuff. But we look very seriously at the return on that investment, the time frames based on commitments with our customers that those improvements would span over and examining the pertinence of those expenditures. I mean, quite honestly, that's how we've operated forever and a day, and so we're not really changing any of that. The one outcome would be that we don't spend another dime. The other outcome would depend on some of these discussions we're having with various customers. And even in our adjacent markets, this is not just oil and gas. But certainly, there are other potentials within our emerging markets, our Quantum segment, within our adjacent markets, those lists of customers. So those are just things that we want to make sure you're aware of.

Bill Dezellem, Analyst

And then how much of this is potentially tied to Quantum and some of the business that Mark spoke of earlier in the call?

Walter Wheeler, President and CEO

Well, I think probably not the majority of it, maybe even just a smaller portion of it. We're pretty well set up. As Mark indicated, we're already well versed in producing extremely reliable bulletproof seismic acquisition, hardware and sensors and that sort of thing, and those are crucial and critical to what Quantum needs in its product. Other aspects aren't going to necessarily require that much capital expenditure. But certainly, there will be some machinery with respect to making these sensors and cables and all that, that if it became necessary, we could upgrade. But I think for the most part, it would be other areas.

Bill Dezellem, Analyst

That is helpful. The previous questioner inquired about the potential size of the Border Patrol, and I would like to rephrase that question. The $10 million funding would cover how much distance? There are a few thousand miles of border, but not all of it has a high population density where tunnels might be significant. So, how much distance are we discussing for the $10 million?

Walter Wheeler, President and CEO

Mark, is that something you're at liberty to discuss?

Mark Tinker, CEO, Quantum Technology Sciences

I'm at liberty to completely not answer Bill's question. But I do want to do my best, Bill. Yes, there's thousand miles of border. And yes, our contract is for supplying our technology for a particular application for which we have not disclosed. And so because of that, it's frustrating for me not to be able to go into some more specifics. So I cannot tell you exactly by decree the distance for which we are going to go secure. And because I can't get into the specifics of the application, I can't then talk to you about the total addressable market there for that particular threat.

Bill Dezellem, Analyst

What I will tell you is that we have every intention of taking this technology and its initial deployment further for the Border Patrol. This is, I'm hoping, the tip of the iceberg with them, and I'm looking forward to continuing to go into the upcoming fiscal years. So, if the Border Patrol were to have their wish, how many years would it take to fulfill this application?

Mark Tinker, CEO, Quantum Technology Sciences

If I had that crystal ball, I would be very happy. As I mentioned earlier, the program that has been established represents a significant advancement in their capability to achieve their goals. However, I cannot predict the extent to which they will accomplish this. Nonetheless, launching a program of record indicates a strong intention to make significant progress in fulfilling this mission.

Bill Dezellem, Analyst

That is helpful. And then I'd like to actually switch to one more question circling back to the systems integrator for an end customer application. The implication of your comments was that this is a test that is being done. And then if the test goes well, then there would be some bigger piece of business. How long would you anticipate this test? And how large could that business be?

Mark Tinker, CEO, Quantum Technology Sciences

I'm going to approach the notion of a test from a different angle. Test doesn't solely refer to a pass or fail scenario. Instead, it signifies our collaborative engineering efforts. They lead the overall integration project, while we serve as a part of a larger security system they are building. Even if we were to experience setbacks, we have progressed far enough that such a possibility was not expected. It's more about the shared engineering process to fulfill the needs of their customer and the entire system. The timeline for this project is lengthy, extending well beyond five years for us, with a gradual increase in revenue as we work towards that goal.

Bill Dezellem, Analyst

If you would ask me this question a year ago, I would have said don't even worry about it for 5 years. But unexpectedly and unusually, this slid significantly to the left. So it's still slow. I mean I don't want anybody to go nuts about what I'm saying right now. But the fact that we're integrating with them and we're positioning with them and they are doing what they need to do now and not 3 or 4 years from now is very positive progress. Does this imply that the integrator has a contract that they have won? Or are they preparing for a hoped-for future win?

Mark Tinker, CEO, Quantum Technology Sciences

It's a highly likely win for them.

Bill Dezellem, Analyst

And so once this becomes an actual win, assuming that it does, does that lead to a burst of business for Quantum? Or how will that end up unfolding?

Mark Tinker, CEO, Quantum Technology Sciences

It won't change what we're predicting today because we're all operating under the mindset of win.

Operator, Operator

We will take a follow-up from Bill Dezellem with Tieton Capital.

Bill Dezellem, Analyst

I'll actually take the bait on that last question. So given how the oil and gas business is under pressure. What is it that you would need to upgrade your plant for that's leading to that difference between $2.8 million and $5 million as opposed to just shutting CapEx down to 0?

Walter Wheeler, President and CEO

Well, in many cases, Bill, it has to do with bringing the machinery up-to-date in certain cases for the manufacturing. We certainly have the products with Quantum that we need to get out and put together. We're consistently trying to improve our processes through various means of automation to bring our costs even further down than what they have been as far as that goes. That certainly helps with margins on products, even in lower volumes. So it's not that we will necessarily spend that, but those are elements that as we examine the future under reasonably cautious and examined circumstances that we could spend up to that much towards those purposes.

Robert Curda, CFO

Yes. Bill, we'll certainly watch our cash flow going forward. We've always watched cash flow, and we certainly won't expend any money on improvements that won't have any incoming cash to support that.

Walter Wheeler, President and CEO

Thank you, Brie, and thanks to everyone that joined our call today. We look forward to speaking with you again on our conference call for the third quarter of fiscal year 2020, which will be in August. So thank you again, and goodbye.

Operator, Operator

This does conclude today's Geospace Technologies' Second Quarter 2020 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.