GEOS 10-Q
Geospace Technologies Corp (GEOS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
for the Quarterly Period Ended
for the transition period from ____ to ____
Commission file number
(Exact Name of Registrant as Specified in Its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of January 31, 2023, the registrant had
Table of Contents
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Page Number |
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3 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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20 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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27 |
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28 |
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PART II. OTHER INFORMATION |
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28 |
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
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December 31, 2022 |
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September 30, 2022 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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Trade accounts and notes receivable, net |
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Property held for sale |
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— |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Non-current notes receivable |
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— |
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Non-current inventories, net |
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Rental equipment, net |
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Property, plant and equipment, net |
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Operating right-of-use assets |
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Goodwill |
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Other intangible assets, net |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable trade |
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$ |
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$ |
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Contingent consideration |
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— |
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Operating lease liabilities |
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Other current liabilities |
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Total current liabilities |
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Non-current operating lease liabilities |
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Deferred tax liabilities, net |
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Total liabilities |
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(Note 13) |
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Stockholders’ equity: |
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Preferred stock, |
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Common Stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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Treasury stock, at cost, |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of the consolidated financial statements.
3
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
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Three Months Ended |
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December 31, 2022 |
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December 31, 2021 |
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Revenue: |
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$ |
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$ |
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Rental |
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Total revenue |
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Cost of revenue: |
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Rental |
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Total cost of revenue |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development |
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Change in estimated fair value of contingent consideration |
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— |
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Bad debt expense |
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Total operating expenses |
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Loss from operations |
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Other income (expense): |
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Interest expense |
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— |
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Interest income |
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Foreign exchange gains, net |
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Other, net |
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Total other income, net |
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Loss before income taxes |
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Income tax expense |
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Net loss |
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$ |
( |
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$ |
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Loss per common share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted average common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of the consolidated financial statements.
4
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
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Three Months Ended |
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December 31, 2022 |
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December 31, 2021 |
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Net loss |
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$ |
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$ |
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Other comprehensive income (loss): |
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Change in unrealized gains (losses) on available-for-sale securities, net of tax |
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Foreign currency translation adjustments |
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Total other comprehensive income (loss) |
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( |
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Total comprehensive loss |
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$ |
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$ |
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The accompanying notes are an integral part of the consolidated financial statements.
5
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2022 AND 2021
(in thousands, except share amounts)
(unaudited)
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Common Stock |
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Accumulated |
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Additional |
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Other |
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Shares |
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Paid-In |
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Retained |
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Comprehensive |
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Treasury |
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Outstanding |
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Amount |
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Capital |
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Earnings |
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Loss |
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Stock |
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Total |
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Balance at October 1, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock pursuant to the vesting of restricted stock units |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Balance at October 1, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
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— |
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Issuance of common stock pursuant to the vesting of restricted stock units |
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— |
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— |
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— |
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— |
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Purchase of treasury stock |
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( |
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— |
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— |
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— |
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— |
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( |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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The accompanying notes are an integral part of the consolidated financial statements.
6
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended |
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December 31, 2022 |
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December 31, 2021 |
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Cash flows from operating activities: |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Deferred income tax benefit |
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Rental equipment depreciation |
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Property, plant and equipment depreciation |
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Amortization of intangible assets |
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Accretion of discounts on short-term investments |
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Stock-based compensation expense |
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Bad debt expense |
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Inventory obsolescence expense |
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Change in estimated fair value of contingent consideration |
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— |
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( |
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Gross profit from sale of used rental equipment |
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( |
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( |
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Gain on disposal of property, plant and equipment |
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( |
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— |
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Realized loss on short-term investments |
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— |
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Effects of changes in operating assets and liabilities: |
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Trade accounts and notes receivable |
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Inventories |
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Other assets |
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Accounts payable trade |
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( |
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Other liabilities |
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( |
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Net cash used in operating activities |
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( |
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( |
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Cash flows from investing activities: |
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Purchase of property, plant and equipment |
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( |
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( |
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Proceeds from the sale of property, plant and equipment |
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— |
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Investment in rental equipment |
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( |
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( |
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Proceeds from the sale of used rental equipment |
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Purchases of short-term investments |
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— |
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Proceeds from the sale of short-term investments |
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— |
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Net cash provided by investing activities |
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Cash flows from financing activities: |
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Payments on contingent consideration |
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( |
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( |
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Purchase of treasury stock |
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— |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of exchange rate changes on cash |
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Decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents, beginning of fiscal year |
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Cash and cash equivalents, end of fiscal period |
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$ |
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$ |
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SUPPLEMENTAL CASH FLOW INFORMATION: |
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Cash paid for income taxes |
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$ |
— |
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$ |
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Accounts receivable related to sale of used rental equipment |
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— |
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Issuance of note receivable related to sale of used rental equipment |
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— |
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Inventory transferred to rental equipment |
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Inventory transferred to property, plant and equipment |
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— |
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The accompanying notes are an integral part of the consolidated financial statements.
7
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Significant Accounting Policies
Basis of Presentation
The consolidated balance sheet of Geospace Technologies Corporation and its subsidiaries (the “Company”) at September 30, 2022 was derived from the Company’s audited consolidated financial statements at that date. The consolidated balance sheet at December 31, 2022 and the consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the three months ended December 31, 2022 and 2021 were prepared by the Company without audit. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows were made. All intercompany balances and transactions have been eliminated. The results of operations for the three months ended December 31, 2022 are not necessarily indicative of the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America ("U.S.") were omitted pursuant to the rules of the Securities and Exchange Commission. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2022.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. The Company continually evaluates its estimates, including those related to revenue recognition, bad debt reserves, collectability of rental revenue, inventory obsolescence reserves, self-insurance reserves, product warranty reserves, useful lives of long-lived assets, impairment of long-lived assets, impairment of goodwill and other intangible assets, contingent consideration and deferred income tax assets. The Company bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. While management believes current estimates are reasonable and appropriate, actual results may differ from these estimates under different conditions or assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original or remaining maturity at the time of purchase of three months or less to be cash equivalents. At December 31, 2022 and September 30, 2022, the Company had restricted cash of $
Impairment of Long-lived Assets
The Company's long-lived assets are reviewed for impairment whenever an event or circumstance indicates that the carrying amount of an asset or group of assets may not be recoverable. The impairment review, if necessary, includes a comparison of the expected future cash flows (undiscounted and without interest charges) to be generated by an asset group with the associated carrying value of the related assets. If the carrying value of the asset group exceeds the expected future cash flows, an impairment loss is recognized to the extent that the carrying value of the asset group exceeds its fair value. During the quarter ended December 31, 2022, no events or changes in circumstances were identified indicating the carrying value of any of the Company's asset groups may not be recoverable.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued guidance surrounding credit losses for financial instruments that replaces the incurred loss impairment methodology in generally accepted accounting principles. The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other financial instruments. For available-for-sale debt securities with unrealized losses, credit losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a smaller reporting company, the Company must adopt this standard no later than the first quarter of its fiscal year ending September 30, 2024, although early adoption is permitted. The standard’s provisions will be
8
applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company intends to adopt this standard during the first quarter of its fiscal year ending September 30, 2024 and is continuing to evaluate the impact of this new guidance on its consolidated financial statements.
2. Revenue Recognition
In accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when performance of contractual obligations are satisfied, generally when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services.
The Company primarily derives product revenue from the sale of its manufactured products. Revenue from these product sales, including the sale of used rental equipment, is recognized when obligations under the terms of a contract are satisfied, control is transferred and collectability of the sales price is probable. The Company records deferred revenue when customer funds are received prior to shipment or delivery or performance has not yet occurred. The Company assesses collectability during the contract assessment phase. In situations where collectability of the sales price is not probable, the Company recognizes revenue when it determines that collectability is probable or when non-refundable cash is received from its customers and there is not a significant right of return. Transfer of control generally occurs with shipment or delivery, depending on the terms of the underlying contract. The Company’s products are generally sold without any customer acceptance provisions, and the Company’s standard terms of sale do not allow customers to return products for credit.
Revenue from engineering services is recognized as services are rendered over the duration of a project, or as billed on a per hour basis. Field service revenue is recognized when services are rendered and is generally priced on a per day rate.
The Company also generates revenue from short-term rentals under operating leases of its manufactured products. Rental revenue is recognized as earned over the rental period if collectability of the rent is reasonably assured. Rentals of the Company’s equipment generally range from daily rentals to minimum rental periods of up to one year. The Company has determined that ASC 606 does not apply to rental contracts, which are within the scope of ASC Topic 842, Leases.
As permissible under ASC 606, sales taxes and transaction-based taxes are excluded from revenue. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Additionally, the Company expenses costs incurred to obtain contracts when incurred because the amortization period would have been one year or less. These costs are recorded in selling, general and administrative expenses.
The Company has elected to treat shipping and handling activities in a sales transaction after the customer obtains control of the goods as a fulfillment cost and not as a promised service. Accordingly, fulfillment costs related to the shipping and handling of goods are accrued at the time of shipment. Amounts billed to a customer in a sales transaction related to reimbursable shipping and handling costs are included in revenue and the associated costs incurred by the Company for reimbursable shipping and handling expenses are reported in cost of revenue.
At December 31, 2022 and September 30, 2022, the Company had
At December 31, 2022, the Company had no unsatisfied performance obligations with an original duration of one year or less.
For each of the Company’s operating segments, the following table presents revenue only from the sale of products and the performance of services under contracts with customers (in thousands). Therefore, the table excludes all revenue earned from rental contracts.
9
|
|
Three Months Ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Oil and Gas Markets |
|
|
|
|
|
|
||
Traditional exploration product revenue |
|
$ |
|
|
$ |
|
||
Wireless exploration product revenue |
|
|
|
|
|
|
||
Reservoir product revenue |
|
|
|
|
|
|
||
Total revenue |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Adjacent Markets |
|
|
|
|
|
|
||
Industrial product revenue |
|
|
|
|
|
|
||
Imaging product revenue |
|
|
|
|
|
|
||
Total revenue |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Emerging Markets |
|
|
|
|
|
|
||
Revenue |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
See Note 14 for more information on the Company’s operating segments.
For each of the geographic areas where the Company operates, the following table presents revenue (in thousands) from the sale of products and services under contracts with customers. The table excludes all revenue earned from rental contracts:
|
|
Three Months Ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Asia |
|
$ |
|
|
$ |
|
||
Canada |
|
|
|
|
|
|
||
Europe |
|
|
|
|
|
|
||
United States |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Revenue is attributable to countries based on the ultimate destination of the product sold, if known. If the ultimate destination is not known, revenue is attributable to countries based on the geographic location of the initial shipment.
3. Short-term Investments
The Company classifies its short-term investments as available-for-sale securities. Available-for-sale securities are carried at fair market value with net unrealized gains and losses reported as a component of accumulated other comprehensive loss in stockholders’ equity.
The Company’s short-term investments were composed of the following (in thousands):
|
|
As of December 31, 2022 (in thousands) |
|
|||||||||||||
|
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Estimated Fair |
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate bonds |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
As of September 30, 2022 (in thousands) |
|
|||||||||||||
|
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Estimated Fair |
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate bonds |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
10
The Company’s short-term investments at December 31, 2022 had contractual maturities ranging from February 2023 to March 2023.
4.
The Company’s financial instruments generally include cash and cash equivalents, short-term investments, trade accounts and notes receivable and accounts payable. Due to the short-term maturities of cash and cash equivalents, trade accounts and notes receivable and accounts payable, the carrying amounts of these financial instruments are deemed to approximate their fair value on the respective balance sheet dates. The valuation technique used to measure the fair value of the contingent consideration was based on internal estimates and the use of internal projections of future revenue.
The Company measures its short-term investments and contingent consideration at fair value on a recurring basis.
The following tables present the fair value of the Company’s short-term investments and contingent consideration by valuation hierarchy and input (in thousands):
|
|
As of December 31, 2022 |
|
|||||||||||||
|
|
Quoted Prices in |
|
|
Significant |
|
|
Significant |
|
|
Totals |
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate bonds |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Total assets |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
As of September 30, 2022 |
|
|||||||||||||
|
|
Quoted Prices in |
|
|
Significant |
|
|
Significant |
|
|
Totals |
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate bonds |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Total assets |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration liabilities: |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
Total liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
The following table summarizes changes in the fair value of the Company’s Level 3 financial instruments for the three months ended December 31, 2022 and 2021 (in thousands):
Contingent consideration balance at October 1, 2022 |
$ |
|
|
Fair value adjustments |
|
— |
|
Payment of contingent consideration |
|
( |
) |
Contingent consideration at December 31, 2022 |
$ |
— |
|
|
|
|
|
Contingent consideration balance at October 1, 2021 |
$ |
|
|
Fair value adjustments |
|
( |
) |
Payment of contingent consideration |
|
( |
) |
Contingent consideration balance at December 31, 2021 |
$ |
|
|
Adjustments to the fair value of the contingent consideration were based on internal estimates and management assessments regarding potential future scenarios which involved significant judgment. As of December 31, 2022, the Company had
11
5. Trade Accounts and Notes Receivable
Trade accounts receivable, net (excluding notes receivable) are reflected in the following table (in thousands):
|
|
December 31, 2022 |
|
|
September 30, 2022 |
|
||
Trade accounts receivable |
|
$ |
|
|
$ |
|
||
Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
The allowance for doubtful accounts represents the Company’s best estimate of probable credit losses. The Company determines the allowance based upon historical experience and a current review of its trade accounts receivable balances. Trade accounts receivable balances are charged off against the allowance whenever it is probable that the receivable balance will not be recoverable.
Notes receivable are reflected in the following table (in thousands):
|
|
December 31, 2022 |
|
|
September 30, 2022 |
|
||
Notes receivable |
|
$ |
|
|
$ |
|
||
Less current portion |
|
|
( |
) |
|
|
( |
) |
Non-current notes receivable |
|
$ |
|
|
$ |
— |
|
|
Promissory notes receivable are generally collateralized by the products sold, and bear interest at rates ranging from
During the second quarter of fiscal year 2022, the Company partially financed a $
During the first quarter of fiscal year 2022, the Company financed a sale of rental equipment by entering into a $
During the second quarter of fiscal year 2020, the Company partially financed a $
6.
Inventories consist of the following (in thousands):
|
|
December 31, 2022 |
|
|
September 30, 2022 |
|
||
Finished goods |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Raw materials |
|
|
|
|
|
|
||
Obsolescence reserve (net realizable value adjustment) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Less current portion |
|
|
|
|
|
|
||
Non-current portion |
|
$ |
|
|
$ |
|
||
Raw materials include semi-finished goods and component parts that totaled $
7. Asset Held for Sale
12
During the first quarter of fiscal year 2023, the Company entered into a contract to sell its property located at 6410 Langfield Road in Houston, Texas. The facility provides additional warehousing and maintenance and repair capacity for the Company's marine rental equipment operations. The Company plans on relocating the operations of this facility to its 7700 Pinemont Drive facility in Houston, Texas as part of its cost reductions efforts. The property's carrying value at December 31, 2022 was $
8
As Lessee
The Company has elected not to record operating right-of-use assets or operating lease liabilities on its consolidated balance sheet for leases having a minimum term of 12 months or less. Such leases are expensed on a straight-line basis over the lease term. Variable lease payments are excluded from the measurement of operating right-of-use assets and operating lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As of December 31, 2022, the Company has
Maturities of the operating lease liabilities as of December 31, 2022 were as follows: (in thousands):
For fiscal years ending September 30, |
|
|
|
|
2023 (remainder) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Future minimum lease payments |
|
|
|
|
Less interest |
|
|
( |
) |
Present value of minimum lease payments |
|
|
|
|
Less current portion |
|
|
( |
) |
Long-term portion |
|
$ |
|
|
Lease costs recognized in the consolidated statements of operations for the three months ended December 31, 2022 and 2021 were as follows (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Right-of-use operating lease costs |
|
$ |
|
|
$ |
|
||
Short-term lease costs |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Right-of use operating lease costs and short-term lease costs are included as a component of total operating expenses.
Other information related to operating leases is as follows (in thousands):
|
Three Months Ended |
|
|||||
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
||
Operating cash flows from operating leases |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Weighted average remaining lease term |
|
|
|
||||
Weighted average discount rate |
|
% |
|
|
% |
||
The discount rate used on the operating right-of-use assets represented the Company’s incremental borrowing rate at lease inception.
As Lessor
Equipment
The Company leases equipment to customers which generally range from daily rentals to minimum rental periods of up to
13
The Company regularly evaluates the collectability of its lease receivables on a lease-by-lease basis. The evaluation primarily consists of reviewing past due account balances and other factors such as the credit quality of the customer, historical trends of the customer and current economic conditions. The Company suspends revenue recognition when the collectability of amounts due are no longer probable and concurrently records a direct write-off of the lease receivable to rental revenue and limits future rental revenue recognition to cash received. As of December 31, 2022, the Company’s trade accounts receivables included lease receivables of $
Rental revenue related to leased equipment for the three months ended December 31, 2022 and 2021 was $
Future minimum lease obligations due from the Company’s leasing customers on operating leases executed as of December 30, 2022 were $
Rental equipment consisted of the following (in thousands):
|
|
December 31, 2022 |
|
|
September 30, 2022 |
|
||
Rental equipment, primarily wireless recording equipment |
|
$ |
|
|
$ |
|
||
Accumulated depreciation and impairment |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Property
During the first quarter of fiscal year 2022, the Company leased a portion of its property located in Calgary, Alberta, Canada and fully leased its warehouse in Bogotá, Colombia. The lease in Canada commenced in
Rental revenue related to these
Future minimum lease payments due to the Company as of December 31, 2022 on these two leases were as follows (in thousands):
For fiscal years ending September 30, |
|
|
|
|
2023 (remainder) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
|
|
$ |
|
|
14
9.
The Company’s consolidated goodwill and other intangible assets consisted of the following (in thousands):
|
Weighted- |
|
|
|
|
|
|
||
|
Average |
|
|
|
|
|
|
||
|
Remaining Useful |
|
|
|
|
|
|
||
|
Lives (in years) |
|
December 31, 2022 |
|
|
September 30, 2022 |
|
||
Goodwill: |
|
|
|
|
|
|
|
||
Emerging Markets reporting unit |
|
|
$ |
|
|
$ |
|
||
Adjacent Markets reporting unit |
|
|
|
|
|
|
|
||
Total goodwill |
|
|
|
|
|
|
|
||
Accumulated impairment losses |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
||
Other intangible assets: |
|
|
|
|
|
|
|
||
Developed technology |
|
$ |
|
|
$ |
|
|||
Customer relationships |
-- |
|
|
|
|
|
|
||
Trade names |
|
|
|
|
|
|
|||
Non-compete agreements |
|
|
|
|
|
|
|||
Total other intangible assets |
|
|
|
|
|
|
|||
Accumulated amortization |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
$ |
|
||
At December 31, 2022, the Company had goodwill of $
At December 31, 2022, the Company determined there were no triggering events requiring an impairment assessment of its goodwill and other intangible assets. The Company performs its annual goodwill impairment test in the fourth quarter. If the Company determines that the future cash flows anticipated to be generated from its reporting units will not be sufficient to recover the carrying amount of the respective reporting unit, it will need to recognize an impairment charge equal to the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying amount of the goodwill.
Other intangible asset amortization expense for the three months ended December 31, 2022 and 2021 was $
As of December 31, 2022, future estimated amortization expense of other intangible assets is as follows (in thousands):
For fiscal years ending September 30, |
|
|
|
2023 (remainder) |
$ |
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
Thereafter |
|
|
|
|
$ |
|
|
10
The Company had
In May 2022, the Company entered into a credit agreement (the “Agreement”) with Amerisource Funding, Inc, as administrative agent and as a lender, and Woodforest National Bank, as a lender. Available borrowings under the Agreement are determined by a borrowing base with a maximum availability of $
15
value of certain inventory (inventory borrowing base limited to
As discussed in Note 7, the Property is under contract to sell at December 31, 2022. The Company is currently in discussions with its lenders to collateralize the Agreement with alternative domestic assets.
Debt issuance costs of $
11. Stock-Based Compensation
During the three months ended December 31, 2022, the Company issued
As of December 31, 2022, there were
12. Loss Per Common Share
The following table summarizes the calculation of net loss and weighted average common shares and common equivalent shares outstanding for purposes of the computation of loss per share (in thousands, except share and per share data):
|
|
Three Months Ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Less: Loss allocable to unvested restricted stock |
|
|
— |
|
|
|
— |
|
Loss attributable to common shareholders for |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted average number of common share equivalents: |
|
|
|
|
|
|
||
Common shares used in basic loss per share |
|
|
|
|
|
|
||
Common share equivalents outstanding related to RSUs |
|
|
— |
|
|
|
— |
|
Total weighted average common shares and common |
|
|
|
|
|
|
||
Loss per share: |
|
|
|
|
|
|
||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
For the calculation of diluted loss per share for the three months ended December 31, 2022,
13. Commitments and Contingencies
Contingent Compensation Costs
In connection with the acquisition of Aquana, LLC (“Aquana”) in July 2021, the Company is subject to additional contingent cash payments to the former members of Aquana over a
16
key employee and former member of Aquana for the first four years of the six year earn-out period in order for any of Aquana’s former members to be eligible for any earn-out payments. Due to the continued employment requirement, no liability has been recorded for the estimated fair value of earn-out payments for this transaction. Earn-outs achieved, if any, will be recorded as compensation expense when incurred.
Legal Proceedings
The Company is involved in various pending legal actions in the ordinary course of its business. Management is unable to predict the ultimate outcome of these actions, because of the inherent uncertainty of such actions. However, management believes that the most probable, ultimate resolution of current pending matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
14. Segment Information
The Company reports and evaluates financial information for
The following table summarizes the Company’s segment information (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Revenue: |
|
|
|
|
|
|
||
Oil and Gas Markets |
|
$ |
|
|
$ |
|
||
Adjacent Markets |
|
|
|
|
|
|
||
Emerging Markets |
|
|
|
|
|
|
||
Corporate |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Income (loss) from operations: |
|
|
|
|
|
|
||
Oil and Gas Markets |
|
$ |
|
|
$ |
( |
) |
|
Adjacent Markets |
|
|
|
|
|
|
||
Emerging Markets |
|
|
( |
) |
|
|
( |
) |
Corporate |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
( |
) |
15. Income Taxes
16. Risks and Uncertainties
Concentration of Credit Risk
As of December 31, 2022, the Company had combined trade accounts and notes receivable from
COVID-19 Pandemic
The ongoing COVID-19 pandemic has spread across the globe and has negatively impacted worldwide economic activity and continues to create challenges in the Company’s markets. COVID-19 and the related mitigation measures have disrupted the Company’s supply chain, resulting in longer lead times in materials available from suppliers and extended the shipping time for these materials to
17
reach the Company’s facilities. If COVID–19 continues to spread or the response to contain the COVID–19 pandemic is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and liquidity.
Oil Commodity Price Levels
Demand for many of the Company’s products and the profitability of its operations depend primarily on the level of worldwide oil and gas exploration activity. Prevailing oil and gas prices, with an emphasis on crude oil prices, and market expectations regarding potential changes in such prices significantly affect the level of worldwide oil and gas exploration activity. During periods of improved energy commodity prices, the capital spending budgets of oil and natural gas operators tend to expand, which results in increased demand for our customers services leading to increased demand in the Company’s products. Conversely, in periods when these energy commodity prices deteriorate, capital spending budgets of oil and natural gas operators tend to contract causing demand for the Company’s products to weaken. Historically, the markets for oil and gas have been volatile and are subject to wide fluctuations in response to changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond its control. These factors include the level of consumer demand, regional and international economic conditions, weather conditions, domestic and foreign governmental regulations (including those related to climate change), price and availability of alternative fuels, political conditions, the war between Russian and Ukraine, instability and hostilities in the Middle East and other significant oil-producing regions, increases and decreases in the supply of oil and gas, the effect of worldwide energy conservation measures and the ability of the Organization of Petroleum Exporting Countries ("OPEC') to set and maintain production levels and prices of foreign imports.
Crude oil prices held above $
Generally, imbalances in the supply and demand for oil and gas will affect oil and gas prices and, in such circumstances, demand for the Company’s oil and gas products may be adversely affected when world supplies exceed demand.
Armed Conflict Between Russia and Ukraine
A portion of the Company's oil and gas product manufacturing is conducted through its wholly-owned subsidiary Geospace Technologies Eurasia LLC ("GTE"), which is based in the Russian Federation. In February 2022, the Russian Federation launched a full-scale military invasion of Ukraine, and Russia and Ukraine continue to engage in active and armed conflict. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions in addition to any direct impact on the Company's operations in Russia. As a result of the invasion, the governments of several western nations, including the U.S., Canada, the United Kingdom and the European Union, implemented new and/or expanded economic sanctions and export restrictions against Russia, Russian-backed separatist regions in Ukraine, certain banks, companies, government officials, and other individuals in Russia and Belarus. The implementation of these sanctions and exports restrictions, in combination with the withdrawal of numerous private companies from the Russian market, has had, and is likely to continue to have, a negative impact on the Company's business in the region. In fiscal year 2022, the Company imported $
The Company is actively monitoring the situation in Ukraine and Russia and assessing its impact on its business, including GTE. The net carrying value of this subsidiary on the Company's consolidated balance sheet at December 31, 2022 was $
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$
17. Exit and Disposal Activities
During the first quarter of fiscal year 2023, the Company implemented a plan to discontinue the manufacture of certain low margin, low revenue products and reconfigure our production facilities to lower our costs and raise efficiencies. As part of the plan, reductions were made to the Company's workforce which are expected to yield an annual savings of more than $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of the major elements of our consolidated financial statements. You should read this discussion and analysis together with our consolidated financial statements, including the accompanying notes, and other detailed information appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended September 30, 2022.
Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “could”, “intend”, “expect”, “plan”, “budget”, “forecast”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue”, “evaluating” or similar words. Statements that contain these words should be read carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other forward-looking information. Examples of forward-looking statements include, among others, statements that we make regarding our expected operating results, the timing, adoption, results and success of our rollout of our Aquana smart water valves and cloud-based control platform, future demand for our Quantum security solutions, the adoption and sale of our products in various geographic regions, potential tenders for permanent reservoir monitoring systems, future demand for OBX rental equipment, the adoption of Quantum's SADAR® product monitoring of subsurface reservoirs, the completion of new orders for channels of our GCL system, the fulfillment of customer payment obligations, the impact of and the recovery from the impact of the coronavirus (or COVID-19) pandemic, the impact of the current armed conflict between Russia and Ukraine, our ability to manage changes and the continued health or availability of management personnel, volatility and direction of oil prices, anticipated levels of capital expenditures and the sources of funding therefor, and our strategy for growth, product development, market position, financial results and the provision of accounting reserves. These forward-looking statements reflect our current judgment about future events and trends based on the information currently available to us. However, there will likely be events in the future that we are not able to predict or control. The factors listed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as well as other cautionary language in such Annual Report and this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Such examples include, but are not limited to, the failure of the Quantum and OptoSeis® or Aquana technology transactions to yield positive operating results, decreases in commodity price levels, the continued adverse impact of COVID-19 which could reduce demand for our products, the failure of our products to achieve market acceptance (despite substantial investment by us), our sensitivity to short term backlog, delayed or cancelled customer orders, product obsolescence resulting from poor industry conditions or new technologies, bad debt write-offs associated with customer accounts, inability to collect on promissory notes, lack of further orders for our OBX rental equipment, failure of our Quantum products to be adopted by the border and security perimeter market or a decrease in such market due to governmental changes, and infringement or failure to protect intellectual property. The occurrence of the events described in these risk factors and elsewhere in this Quarterly Report on Form 10-Q could have a material adverse effect on our business, results of operations and financial position, and actual events and results of operations may vary materially from our current expectations. We assume no obligation to revise or update any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future developments or otherwise.
Business Overview
Unless otherwise specified, the discussion in this Quarterly Report on Form 10-Q refers to Geospace Technologies Corporation and its subsidiaries. We principally design and manufacture seismic instruments and equipment. These seismic products are marketed to the oil and gas industry and used to locate, characterize and monitor hydrocarbon producing reservoirs. We also market our seismic products to other industries for vibration monitoring, border and perimeter security and various geotechnical applications. We design and manufacture other products of a non-seismic nature, including water meter products, imaging equipment, remote shutoff water valves and Internet of Things ("IoT") platform and provide contract manufacturing services. We report and categorize our customers and products into three different segments: Oil and Gas Markets, Adjacent Markets and Emerging Markets. In recent years, the revenue contribution from our Adjacent Markets segment has grown to represent nearly half of our total revenue. This revenue growth is reflective of both our diversification strategy as well as the continued downturn in the Oil and Gas Markets segment.
Demand for our seismic products targeted at customers in our Oil and Gas Markets segment has been, and will likely continue to be, vulnerable to downturns in the economy and the oil and gas industry in general. For more information, please refer to the risks discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the internet at the SEC’s website at www.sec.gov. Our SEC filings are also
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available to the public on our website at www.geospace.com. From time to time, we may post investor presentations on our website under the “Investor Relations” tab. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Quarterly Report on Form 10-Q or the documents incorporated by reference in this Quarterly Report on Form 10-Q.
Products and Product Development
Oil and Gas Markets
Our Oil and Gas Markets business segment has historically accounted for the majority of our revenue. Geoscientists use seismic data primarily in connection with the exploration, development and production of oil and gas reserves to map potential and known hydrocarbon bearing formations and the geologic structures that surround them. This segment’s products include wireless seismic data acquisition systems, reservoir characterization products and services, and traditional seismic exploration products such as geophones, hydrophones, leader wire, connectors, cables, marine streamer retrieval and steering devices and various other seismic products. We believe that our Oil and Gas Markets products are among the most technologically advanced instruments and equipment available for seismic data acquisition.
Traditional Products
An energy source and a data recording system are combined to acquire seismic data. We provide many of the components of seismic data recording systems, including geophones, hydrophones, multi-component sensors, leader wire, geophone strings, connectors, seismic telemetry cables and other seismic related products. On land, our customers use geophones, leader wire, cables and connectors to receive and measure seismic reflections resulting from an energy source into data recording units, which store the seismic information for subsequent processing and analysis. In the marine environment, large ocean-going vessels tow long seismic cables known as “streamers” containing hydrophones that are used to detect pressure changes. Hydrophones transmit electrical impulses back to the vessel’s data recording unit where the seismic data is stored for subsequent processing and analysis. Our marine seismic products also help steer streamers while being towed and help recover streamers if they become disconnected from the vessel.
Our seismic sensor, cable and connector products are compatible with most major competitive seismic data acquisition systems currently in use. Revenue from these products results primarily from seismic contractors purchasing our products as components of new seismic data acquisition systems or to repair and replace components of seismic data acquisition systems already in use.
Wireless Products
We have developed multiple versions of a land-based wireless (or nodal) seismic data acquisition system. Rather than utilizing interconnecting cables as required by most traditional land data acquisition systems, each of our wireless stations operate as an independent data collection system, allowing for virtually unlimited channel configurations. As a result, our wireless systems require less maintenance, which we believe allows our customers to operate more effectively and efficiently because of its reduced environmental impact, lower weight and ease of operation. Each wireless station is available in a single-channel or three-channel configuration. Since its introduction in 2008 and through December 31, 2022, we have sold 500,000 wireless channels and we currently have 63,000 wireless channels in our rental fleet.
We have also developed a marine-based wireless seismic data acquisition system called the OBX. Similar to our land-based wireless systems, the marine OBX system may be deployed in virtually unlimited channel configurations and does not require interconnecting cables between each station. We have two versions of OBX nodal stations. A shallow water version that can be used in depths up to 750 meters and a deepwater version that can be deployed in depths of up to 3,450 meters. Through December 31, 2022, we have sold 13,000 OBX stations and we currently have 24,000 OBX stations in our rental fleet.
In August 2022, we announced the release of a new seismic acquisition product known as Mariner™, a continuous, cable-free, four channel autonomous, shallow water ocean bottom recorder. Mariner is the next generation node designed for extended duration seabed ocean bottom seismic data acquisition. The slim profile nodes, which are part of our shallow water stations, are ideally deployed as deep as 750 meters. The device continuously records for up to 70 days and offers more rapid recharging times. Its slim profile creates space savings on seismic survey vessels, allowing contractors to fit up to 25% more nodes into a download/charge container.
Reservoir Products
Seismic surveys repeated over selected time intervals show dynamic changes within a producing oil and gas reservoir, and operators can use these surveys to monitor the effects of oil and gas development and production. This type of reservoir monitoring requires special purpose or custom designed systems in which portability becomes less critical and functional reliability assumes greater importance. This reliability factor helps assure successful operations in inaccessible locations over a considerable period of time. Additionally, reservoirs located in deep water or harsh environments require special instrumentation and new techniques to maximize recovery. Reservoir monitoring also requires high-bandwidth, high-resolution seismic data for engineering project planning and
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reservoir management. Utilizing these reservoir monitoring tools, producers can enhance the recovery of oil and gas deposits over the life of a reservoir.
We have developed permanently installed high-definition reservoir monitoring systems for land and ocean-bottom applications in producing oil and gas fields. Our electrical reservoir monitoring systems are currently installed on numerous offshore reservoirs in the North Sea and elsewhere. Through our acquisition of the OptoSeis® fiber optic sensing technology, we now offer both electrical and fiber optic reservoir monitoring systems. These high-definition seismic data acquisition systems have a flexible architecture allowing them to be configured as a subsurface system for both land and marine reservoir-monitoring projects. The scalable architecture of these systems enables custom designed configuration for applications ranging from low-channel engineering and environmental-scale surveys requiring a minimum number of recording channels to high-channel surveys required to efficiently conduct permanent reservoir monitoring (“PRM”). The modular architecture of these products allows virtually unlimited channel expansion for these systems.
In addition, we produce seismic borehole acquisition systems that employ a fiber optic augmented wireline capable of very high data transmission rates. These systems are used for several reservoir monitoring applications, including an application pioneered by us allowing operators and service companies to monitor and measure the results of hydraulic fracturing operations.
We believe our reservoir characterization products make seismic acquisition a cost-effective and reliable process for reservoir monitoring. Our multi-component seismic product developments also include an omni-directional geophone for use in reservoir monitoring, a compact marine three-component or four-component gimbaled sensor and special-purpose connectors, connector arrays and cases.
During 2022, we have maintained active discussions with potential clients for future PRM systems. In coordination with a potential client, we concluded a successful demonstration of our OptoSeis® fiber optic PRM technology in real-world field conditions. This demonstration was a pre-requisite step toward future contract consideration. If we are awarded a PRM contract in fiscal year 2023, revenue will most likely not be recognized until fiscal year 2024. We have also held discussions and received requests for information from other major oil and gas producers regarding PRM systems. We have not received any orders for a large-scale seabed PRM system since November 2012.
Adjacent Markets
Our Adjacent Markets businesses leverage upon existing manufacturing facilities and engineering capabilities utilized by our Oil and Gas Markets businesses. Many of the seismic products in our Oil and Gas Markets segment, with little or no modification, have direct application to other industries.
Our business diversification strategy has centered largely on translating expertise in ruggedized engineering and manufacturing into expanded customer markets. To bolster the solid market share we have established in the water utility market for water meter cables, in fiscal year 2021, we acquired the smart water IoT company, Aquana, LLC ("Aquana").
Industrial Products
Our industrial products include water meter products, remote shut-off water valves and IoT Platform, contract manufacturing services and seismic sensors used for vibration monitoring.
Our water meter products support the global smart meter connectivity water utility market. Our products provide our customers with highly reliable automated meter-reading and automated meter infrastructure with our robust water-proof connectors. Our field splice kits allow for accelerated repairs once identified.
Our water IoT platform and remote-shut off valve allows customers that manage multi-family and commercial properties to monitor their properties for leak and burst events, with real-time notifications, complimented with our remote-shut off to stop water damage. These products also allow water utilities to control and monitor water use remotely, discontinue or limit service without placing its employees in potential harm or danger.
Our robust manufacturing capabilities have allowed us to provide specialized contract manufacturing services for printed circuit board manufacturing, cabling and harnesses, machining, injection molding and electronic system assembly.
Our seismic sensors provide unique high definition, low frequency sensing that allows for vibration monitoring in industrial machinery, mine safety and earthquake detection.
Imaging Products
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Our imaging products include electronic pre-press products that employ direct thermal imaging, direct-to-screen printing systems, and digital inkjet printing technologies targeted at the commercial graphics, industrial graphics, textile and flexographic printing industries.
Emerging Markets
Our Emerging Markets business segment consists entirely of our Quantum business. Quantum’s product line includes a proprietary detection system called SADAR®, which detects, locates and tracks items of interest in real-time. Using the SADAR® technology, Quantum designs and sells products used for border and perimeter security surveillance, cross-border tunneling detection and other products targeted at movement monitoring, intrusion detection and situational awareness. SADAR's technology also provides passive seismic real-time monitoring in emerging energy applications such as Carbon Capture and Storage (CCS) and geothermal energy. Quantum's customers include various agencies of the U.S. government including the Department of Defense, Department of Energy, Department of Homeland Security and other agencies as well as energy companies needing real-time monitoring of seismic data..
Consolidated Results of Operations
We report and evaluate financial information for three segments: Oil and Gas Markets, Adjacent Markets and Emerging Markets. Summary financial data by business segment follows (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Oil and Gas Markets |
|
|
|
|
|
|
||
Traditional exploration product revenue |
|
$ |
2,755 |
|
|
$ |
591 |
|
Wireless exploration product revenue |
|
|
17,238 |
|
|
|
8,727 |
|
Reservoir product revenue |
|
|
155 |
|
|
|
336 |
|
Total revenue |
|
|
20,148 |
|
|
|
9,654 |
|
Operating income (loss) |
|
|
2,406 |
|
|
|
(4,170 |
) |
Adjacent Markets |
|
|
|
|
|
|
||
Industrial product revenue |
|
|
7,930 |
|
|
|
5,013 |
|
Imaging product revenue |
|
|
2,892 |
|
|
|
3,158 |
|
Total revenue |
|
|
10,822 |
|
|
|
8,171 |
|
Operating income |
|
|
1,747 |
|
|
|
1,208 |
|
Emerging Markets |
|
|
|
|
|
|
||
Revenue |
|
|
93 |
|
|
|
137 |
|
Operating loss |
|
|
(1,213 |
) |
|
|
(820 |
) |
Corporate |
|
|
|
|
|
|
||
Revenue |
|
46 |
|
|
|
29 |
|
|
Operating loss |
|
|
(3,219 |
) |
|
|
(3,104 |
) |
Consolidated Totals |
|
|
|
|
|
|
||
Revenue |
|
|
31,109 |
|
|
|
17,991 |
|
Operating loss |
|
|
(279 |
) |
|
|
(6,886 |
) |
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Overview
Although in an already depressed oil and gas industry, demand further decreased in February 2020 because of the oversupply of crude oil due to failed OPEC negotiations that led to a dramatic drop in crude oil prices when combined with the impact of the COVID-19 pandemic. These declines in the demand for oil and gas have caused oil and gas exploration and production companies to experience a significant reduction in cash flows, which have resulted in reductions in their capital spending budgets for oil and gas exploration-focused activities, including seismic data acquisition activities. Crude oil prices held above $70 per barrel throughout 2022; however, a lag in time typically occurs between higher oil prices and greater demand for our Oil and Gas Markets segment products. We believe this lag is the result of exploration and production (“E&P”) companies allocating their cash flow towards shareholder reward initiatives, such as stock buy-back programs and dividend payments, or in debt reduction. We believe this lag is a short-term trend that will continue until E&P companies decide to reinvest capital into exploration activities. As this lag persists, we expect the reduced levels of demand for our Oil and Gas Markets segment products and our rental marine wireless nodal products to continue. We also expect our land-based traditional and wireless products will continue to experience low levels of product demand until our customers consume their excess levels of underutilized equipment. During the third quarter of fiscal year 2022, we began to experience an increase in rental demand for our marine nodal products in the form of additional rental contracts and requests for quotes from existing and new customers.
During the first quarter of fiscal year 2023, we implemented a plan to discontinue the manufacture of certain low margin, low revenue products and reconfigure our production facilities to lower our costs and raise efficiencies. As part of the plan, reductions were made to our workforce which are expected to yield an annual savings of more than $2 million. In connection with the plan, we incurred costs of $0.6 million in ther first quarter of fiscal year 2023, primarily termination costs related to the workforce reduction. The costs were recorded both to cost of revenue and operating expenses in the consolidated statement of operations. No significant future costs are expected.
In light of current market conditions, the inventory balances in our Oil and Gas Markets business segment at December 31, 2022 continued to exceed levels we consider appropriate for the current level of product demand. We are continuing to work aggressively to reduce these legacy inventory balances; however, we are also adding new inventories for new wireless product developments and for other product demand in our Adjacent Markets segment. During periods of excessive inventory levels, our policy has been, and will continue to be, to record obsolescence expense as we experience reduced product demand and as our inventories continue to age. As difficult market conditions continue for the products in our Oil and Gas Markets segment, we are recording additional expenses for inventory obsolescence and will continue to do so in the future until product demand and/or resulting inventory turnover return to acceptable levels.
Armed Conflict Between Russia and Ukraine
A portion of our oil and gas product manufacturing is conducted by Geopace Technologies Eurasia LLC, our wholly-owned subsidiary based in the Russian Federation. Consequently, our oil and gas business could be directly affected by the current war between Russia and Ukraine. See Note 16 in this Quarterly Report on Form 10-Q for more information.
Coronavirus (COVID-19)
The ongoing COVID-19 pandemic has negatively impacted worldwide economic activity and continues to create challenges in our markets, such as uncertainties regarding the duration and extent to which the COVID-19 pandemic will ultimately have a negative impact on the demand for our products and services or on our supply chain. We continue to closely monitor the situation as information becomes readily available.
During the fiscal year 2022, our operations have, for the most part, remained open globally and the impact of the effects of COVID-19 to our personnel and operations has been limited. Our supply chain has become increasingly strained due to increased pricing for raw material and supplies coupled with longer than expected lead times. We initially experienced a reduction in demand for the rental of our OBX marine nodal products, which we believed was primarily the result of the pandemic; however, demand has increased in fiscal year 2022. We also believe our Adjacent Markets business segment has entered into a period of recovery from the initial effects of the COVID-19 pandemic, but we continue to be cautious about the pandemic’s effect on our other business segments and our supply chain. As a result, we continually communicate with our suppliers and customers as information is available to best manage this difficult situation
Three months ended December 31, 2022 compared to the three months ended December 31, 2021
Consolidated revenue for the three months ended December 31, 2022 was $31.1 million, an increase of $13.1 million, or 72.9%, from the corresponding period of the prior fiscal year. The increase was largely attributable to higher revenue from our Oil and Gas Markets segment, primarily due to increased utilization of our OBX rental fleet and higher wireless exploration product revenue. Wireless exploration product revenue included $4.0 million from a rental customer as compensation for lost OBX nodes. The increase in consolidated revenue was also caused by an increase in sales of industrial products from our Adjacent Markets segment.
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Consolidated gross profit for the three months ended December 31, 2022 was $10.5 million, an increase of $8.8 million from the corresponding period of the prior fiscal year. The increase was primarily due to higher gross profits from the increased utilization of our OBX rental fleet and from higher wireless exploration product sales. The increase was also attributable to the increase from industrial product revenue and related gross profits.
Consolidated operating expenses for the three months ended December 31, 2022 were $10.8 million, an increase of $2.2 million, or 25.9%, from the corresponding period of the prior fiscal year. The increase was due to (i) a $2.4 million favorable non-cash adjustment reported in the prior year period resulting from a change in the estimated fair value of contingent consideration related to our Quantum and OptoSeis®acquisitions, (ii) a $0.7 million increase in selling, general and administrative expenses, resulting from increased revenue and $0.3 million in employee termination costs and (iii) a $0.1 million increase in bad debt expense. These increased operating expenses were partially offset by a $1.0 million decrease in research and development project costs.
Consolidated other income for the three months ended December 31, 2022 did not change materially from the prior year period.
Segment Results of Operations
Oil and Gas Markets
Revenue
Revenue from our Oil and Gas Markets products for the three months ended December 31, 2022 increased $10.5 million, or 108.7%, from the corresponding period of the prior fiscal year. The components of these increases were as follows:
Operating Income (Loss)
Operating income associated with our Oil and Gas Markets products for the three months ended December 31, 2022 was $2.4 million, compared to an operating loss of $(4.2) million from the corresponding period of the prior fiscal year. The increase in operating income was primarily due to (i) higher wireless rental and product revenue and related gross profits due to improved utilization of our OBX rental fleet, (ii) compensation for OBX nodes lost by our customer. These improvements in operating income were partially offset by a $2.4 million favorable non-cash adjustment reported in the prior year period resulting from a change in the estimated fair value of contingent consideration related to our OptoSeis® acquisition.
Adjacent Markets
Revenue
Revenue from our Adjacent Markets products for the three months ended December 31, 2022 increased $2.7 million, or 32.4%, from the corresponding period of the prior fiscal year. The components of these increases were as follows:
Operating Income
The operating income from our Adjacent Markets products for the three months ended December 31, 2022 was $1.7 million, an increase of $0.5 million, or 44.6%, from the corresponding period of the prior fiscal year. The increase in operating income was primarily due to the increase in revenue and related gross profits. The increase in operating income was partially offset by an increase in operating expenses, mostly caused by higher research and development expense.
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Emerging Markets
Revenue
Revenue from our Emerging Markets products was $0.1 million for each of the three months ended December 31, 2022 and 2021. The revenue for each period primarily consisted of on-going service and maintenance related to our completed contract with the U.S. Customs and Border Protection.
Operating Loss
Operating loss from our Emerging Markets products for the three months ended December 31, 2022 was $(1.2) million, an increase of 0.4 million, or 47.9%, from the corresponding period in the prior fiscal year. The increase in operating loss was primarily due to a $0.6 million favorable non-cash adjustment reported in the prior year period resulting from a change in the estimated fair value of contingent consideration related to our Quantum acquisition. The increase in operating loss was partially offset by lower operating expenses.
Liquidity and Capital Resources
At December 31, 2022, we had approximately $12.3 million in cash and cash equivalents and short-term investments. For the three months ended December 31, 2022, we used $4.9 million of cash from operating activities. Our net loss of $0.1 million was offset by net non-cash charges of $6.4 million resulting from deferred income taxes, depreciation, amortization, accretion, inventory obsolescence, stock-based compensation and bad debt expense. Other uses of cash in our operations primarily included (i) a $6.9 million increase in trade accounts and notes receivable primarily due to our increase in revenue and the timing of collections from customers, (ii) a $5.2 million increase in inventories to meet an increase in demand for our products and (iii) the removal of $3.1 million gross profit from the sale of used rental equipment as it is included in investing activities. Offsetting these uses of cash were (i) a $1.9 million increase in accounts payable primarily due to the timing of payments to our suppliers, (ii) a $1.2 million increase in other liabilities due an increase in customer deposits we require for our rental equipment from and an increase in accrued property taxes and (iii) a $0.9 million decrease in other assets primarily due to a decrease in prepaid product purchases and prepaid insurance.
For the three months ended December 31, 2022, we generated cash of $0.2 million in investing activities. Sources of cash primarily consisted of proceeds of $0.6 million from the sale of used rental equipment. Offsetting this source of cash were (i) $0.3 million for additions to our property, plant and equipment and (ii) $0.2 million for additions to our equipment rental fleet. We expect our cash investments in our rental fleet to be approximately $6.0 million in fiscal year 2023. We expect our cash investments in property, plant and equipment will be approximately $1.0 million in fiscal year 2023. Our capital expenditures are expected to be funded from our cash on hand, internal cash flows, cash flows from our rental contracts or, if necessary, borrowings under our new credit agreement.
For the three months ended December 30, 2022, we used $0.2 million from financing activities for contingent consideration payments to the former shareholders of Quantum.
Our available cash and cash equivalents and short-term investments totaled $12.3 million at December 31, 2022, which included $2.9 million of cash and cash equivalents held by our foreign subsidiaries and branch offices, of which $2.2 million was held by our subsidiary in the Russian Federation. In response to sanctions imposed by the U.S. and others on Russia, the Russian government has imposed restrictions on companies' abilities to repatriate or otherwise remit cash from their Russian-based operations to locations outside of Russia. As a result, this cash can be used in our Russian operations, but we may be unable to transfer it out of Russia without incurring substantial costs, if at all. In addition, if we were to repatriate the cash held by our Russian subsidiary, we would be required to accrue and pay taxes on any amount repatriated.
In May 2022, we entered into a credit agreement (the “Agreement”) with Amerisource Funding, Inc., as administrative agent and as a lender, and Woodforest National Bank, as a lender. Available borrowings under the Agreement are determined by a borrowing base with a maximum availability of $10 million. The borrowing base is determined based upon certain of our domestic assets which include (i) 70% loan to value of our property located at 6410 Langfield Road in Houston, Texas (the “Property”), (ii) 50% of forced liquidation value of equipment, (iii) 80% of certain accounts receivable and (iv) 50% of forced liquidation value of certain inventory (inventory borrowing base limited to 100% of borrowing base credit given toward accounts receivable). The Agreement is for a two-year term with all funds borrowed due at the expiration of the term. The interest rate on borrowed funds is the Wall Street prime rate (with a minimum of 3.25%) plus 4.00%. We are required to make monthly interest payments on borrowed funds. Borrowings under the Agreement will be principally secured by the Property and our domestic equipment, inventory and accounts receivables. In addition, certain of our domestic subsidiaries have guaranteed our obligations under the Agreement and such subsidiaries have secured the obligations by pledging certain assets. The Agreement requires us to maintain a minimum consolidated tangible net worth of $100 million. We expect to remain in compliance with this requirement in fiscal year 2023.
The Property is under contract to sell at December 31, 2022. The Company is currently in discussions with its lenders to collateralize the Agreement with alternative domestic assets.
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At December 31, 2022, we had no borrowings outstanding and were compliant with all covenants under the Agreement. Our borrowing availability at December 31, 2022 was $8.5 million. We do not currently anticipate the need to borrow under the Agreement, however, we may decide to do so in the future, if needed.
Our available cash and cash equivalent and short-term investments decreased $4.8 million during the three months ended December 31, 2022. In the absence of future profitable results of operations, we may need to rely on other sources of liquidity to fund our future operations, including executed rental contracts, available borrowings under our Agreement through its expiration in May 2024, leveraging or sales of real estate assets, sales of rental assets and other liquidity sources which may be available to us. We currently believe that our cash, cash equivalents and short-term investments will be sufficient to finance any future operating losses and planned capital expenditures through the next twelve months.
We do not have any obligations which meet the definition of an off-balance sheet arrangement and which have or are reasonably likely to have a current or future effect on our financial statements or the items contained therein that are material to investors.
Contractual Obligations
Contingent Compensation Costs
In connection with the acquisition of Aquana in July 2021, we are subject to additional contingent cash payments to the former members of Aquana over a six-year earn-out period. The contingent payments, if any, will be derived from certain eligible revenue generated during the earn-out period from products and services sold by Aquana. There is no maximum limit to the contingent cash payments that could be made. The merger agreement with Aquana requires the continued employment of a certain key employee and former member of Aquana for the first four years of the six year earn-out period for any of Aquana’s former members to be eligible to any earn-out payments. In accordance with ASC 805, Business Combinations, due to the continued employment requirement, no liability has been recorded for the estimated fair value of contingent earn-out payments for this transaction. Earn-outs achieved, if any, will be recorded as compensation expense when incurred.
See Note 13 to our consolidated financial statements in this Quarterly Report on Form 10-Q for more information on our contractual contingencies.
Critical Accounting Estimates
During the three months ended December 31, 2022, there has been no material change to our critical accounting estimates discussed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Recent Accounting Pronouncements
Please refer to Note 1 to our consolidated financial statements contained in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item, in accordance with Item 305(e) of Regulation S-K.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Notwithstanding the foregoing, there can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within our Company and consolidated subsidiaries to report material information otherwise required to be set forth in our reports.
In connection with the preparation of this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the CEO and CFO, as of December 31, 2022, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits
The following exhibits are filed with this Report on Form 10-Q or are incorporated by reference
3.1 |
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3.2 |
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31.1* |
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31.2* |
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32.1** |
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Certification of the Chief Executive Officer pursuant 18 U.S.C. Section 1350. |
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32.2** |
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
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101* |
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The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets at December 31, 2022 and September 30, 2022, (ii) the Consolidated Statements of Operations for the three months ended December 31, 2022 and 2021, (iii) the Consolidated Statements of Comprehensive Loss for the three months ended December 31, 2022 and 2021, (iv) the Consolidated Statements of Stockholders’ Equity for the three months ended December 31, 2022 and 2021, (v) the Consolidated Statements of Cash Flows for the three months ended December 31, 2022 and 2021 and (vi) Notes to Consolidated Financial Statements. |
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104* |
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The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2022 formatted in Inline XBRL. |
* Filed with this Quarterly Report on Form 10-Q
** Furnished with this Quarterly Report on Form 10-Q
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GEOSPACE TECHNOLOGIES CORPORATION |
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Date: |
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February 9, 2023 |
By: |
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/s/ Walter R. Wheeler |
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Walter R. Wheeler, President |
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and Chief Executive Officer |
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(duly authorized officer) |
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Date: |
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February 9, 2023 |
By: |
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/s/ Robert L. Curda |
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Robert L. Curda, Vice President, |
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Vice President, Chief Financial Officer and Secretary |
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(principal financial officer) |
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