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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------------------------------
FORM
10-Q
-------------------------------------------------------------------------------
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the Quarterly Period Ended
March 31, 2023
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the transition period from ____ to ____
Commission file number
001-13601
-------------------------------------------------------------------------------
GEOSPACE TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
-------------------------------------------------------------------------------
Texas 76-0447780
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7007 Pinemont 77040
,
Houston
,
Texas
(Address of principal executive offices) (Zip Code)
Registrant
s telephone number, including area code: (
713
)
986-4444
-------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Name of each exchange on which registered
Symbol(s)
Common Stock GEOS The
Nasdaq
Global Select Market
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.
Yes
No
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).
Yes
No
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 Accelerated filer
Non-accelerated filer Smaller reporting company
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 April 30, 2023, the registrant had
13,171,489
shares of common stock, $0.01 par value per share outstanding.
-------------------------------------------------------------------------------
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Table of Contents
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 6. Exhibits 23
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
March 31, 2023 September 30, 2022
ASSETS
Current assets:
Cash and cash equivalents $ 22,805 $ 16,109
Short-term investments 894
Trade accounts and notes receivable, net 25,908 20,886
Inventories, net 20,477 19,995
Prepaid expenses and other current assets 1,404 2,077
Total current assets 70,594 59,961
Non-current inventories, net 17,508 12,526
Rental equipment, net 20,579 28,199
Property, plant and equipment, net 22,690 26,598
Operating right-of-use assets 836 957
Goodwill 736 736
Other intangible assets, net 5,143 5,573
Other non-current assets 356 506
Total assets $ 138,442 $ 135,056
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable trade $ 5,021 $ 5,595
Contingent consideration 175
Operating lease liabilities 248 241
Other current liabilities 6,967 6,616
Total current liabilities 12,236 12,627
Non-current operating lease liabilities 654 769
Deferred tax liabilities, net 15 13
Total liabilities 12,905 13,409
Commitments and contingencies (Note 13)
Stockholders equity:
Preferred stock,
1,000,000
shares authorized,
no
shares issued and outstanding
Common Stock, $ 140 139
.01
par value,
20,000,000
shares authorized;
14,013,481
and
13,863,233
shares issued, respectively; and
13,171,489
and
13,021,241
shares outstanding, respectively
Additional paid-in capital 95,343 94,667
Retained earnings 54,194 49,654
Accumulated other comprehensive loss ( ) ( )
16,640 15,313
Treasury stock, at cost, ( ) ( )
841,992 7,500 7,500
shares
Total stockholders equity 125,537 121,647
Total liabilities and stockholders equity $ 138,442 $ 135,056
The accompanying notes are an integral part of the consolidated financial
statements.
3
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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2023 2022 2023 2022
Revenue:
Products $ 17,701 $ 21,565 $ 37,249 $ 34,597
Rental 13,669 3,135 25,230 8,094
Total 31,370 24,700 62,479 42,691
revenue
Cost of
revenue:
Products 13,196 13,500 28,561 24,850
Rental 5,225 4,390 10,435 9,329
Total cost 18,421 17,890 38,996 34,179
of revenue
Gross 12,949 6,810 23,483 8,512
profit
Operating
expenses:
Selling, general 6,387 5,991 12,822 11,735
and administrative
Research and 3,483 4,673 7,741 9,942
development
Change in estimated fair value ( ) ( )
of contingent consideration 2,218 4,658
Bad debt 17 13 137 28
expense
Total operating 9,887 8,459 20,700 17,047
expenses
Gain on disposal 1,315 1,315
of property
Income (loss) 4,377 ( ) 4,098 ( )
from operations 1,649 8,535
Other income
(expense):
Interest ( ) ( )
expense 39 78
Interest 127 126 283 320
income
Foreign exchange 185 93 292 111
gains, net
Other, 6 ( ) ( ) ( )
net 19 6 36
Total other 279 200 491 395
income, net
Income (loss) 4,656 ( ) 4,589 ( )
before income taxes 1,449 8,140
Income tax 19 25 49 102
expense
Net income $ 4,637 $ ( ) $ 4,540 $ ( )
(loss) 1,474 8,242
Income (loss) per
common share:
Basic $ 0.35 $ ( ) $ 0.35 $ ( )
0.11 0.64
Diluted $ 0.35 $ ( ) $ 0.35 $ ( )
0.11 0.64
Weighted average common
shares outstanding:
Basic 13,156,715 12,999,022 13,111,866 12,958,911
Diluted 13,156,715 12,999,022 13,111,866 12,958,911
The accompanying notes are an integral part of the consolidated financial
statements.
4
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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2023 2022 2023 2022
Net income $ 4,637 $ ( ) $ 4,540 $ ( )
(loss) 1,474 8,242
Other comprehensive
income (loss):
Change in unrealized gains on 7 2 15 ( )
available-for-sale securities, net of tax 7
Foreign currency ( ) ( ) ( ) ( )
translation adjustments 1,348 1,558 1,342 1,691
Total other ( ) ( ) ( ) ( )
comprehensive loss 1,341 1,556 1,327 1,698
Total comprehensive $ 3,296 $ ( ) $ 3,213 $ ( )
income (loss) 3,030 9,940
The accompanying notes are an integral part of the consolidated financial
statements.
5
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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
FOR THE
six months ended March 31, 2023 and 2022
(in thousands, except share amounts)
(unaudited)
Common Accumulated
Stock
Additional Other
Shares Paid-In Retained Comprehensive Treasury
Outstanding Amount Capital Earnings Loss Stock Total
Balance 13,021,241 $ 139 $ 94,667 $ 49,654 $ ( ) $ ( ) $ 121,647
at 15,313 7,500
October
1, 2022
Net ( ) ( )
loss 97 97
Other 14 14
comprehensive
income
Issuance of common 109,748 1 1
stock pursuant to
the vesting of
restricted stock units
Stock-based 370 370
compensation
Balance 13,130,989 140 95,037 49,557 ( ) ( ) 121,935
at 15,299 7,500
December
31, 2022
Net 4,637 4,637
income
Other ( ) ( )
comprehensive 1,341 1,341
loss
Issuance of common 40,500
stock pursuant to
the vesting of
restricted stock units
Stock-based 306 306
compensation
Balance 13,171,489 $ 140 $ 95,343 $ 54,194 $ ( ) $ ( ) 125,537
at 16,640 7,500
March 31,
2023
Balance 12,969,542 $ 137 $ 92,935 $ 72,510 $ ( ) $ ( ) $ 142,457
at 16,320 6,805
October
1, 2021
Net ( ) ( )
loss 6,768 6,768
Other ( ) ( )
comprehensive 142 142
loss
Issuance of common 84,762 1 1
stock pursuant to
the vesting of
restricted stock units
Purchase ( ) ( ) ( )
of 72,563 695 695
treasury
stock
Stock-based 536 536
compensation
Balance 12,981,741 138 93,471 65,742 ( ) ( ) 135,389
at 16,462 7,500
December
31, 2021
Net ( ) ( )
loss 1,474 1,474
Other ( ) ( )
comprehensive 1,556 1,556
loss
Issuance of common 37,500 1 ( )
stock pursuant to 1
the vesting of
restricted stock units
Stock-based 418 418
compensation
Balance 13,019,241 $ 139 $ 93,888 $ 64,268 $ ( ) $ ( ) $ 132,777
at 18,018 7,500
March 31,
2022
The accompanying notes are an integral part of the consolidated financial
statements.
6
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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
March 31, 2023 March 31, 2022
Cash flows from operating activities:
Net income (loss) $ 4,540 $ ( )
8,242
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Deferred income tax expense (benefit) ( )
7
Rental equipment depreciation 6,442 7,205
Property, plant and equipment depreciation 1,896 2,071
Amortization of intangible assets 430 893
Accretion of discounts on short-term investments 1 76
Stock-based compensation expense 676 954
Bad debt expense 137 28
Inventory obsolescence expense 1,836 1,106
Change in estimated fair value of contingent consideration ( )
4,658
Gross profit from sale of used rental equipment ( ) ( )
3,925 10,741
Gain on disposal of property ( )
1,315
Gain on disposal of equipment ( )
464
Realized loss on short-term investments 18
Effects of changes in operating assets and liabilities:
Trade accounts and notes receivable ( ) 4,666
8,352
Unbilled receivables 1,051
Inventories ( ) ( )
7,882 1,313
Other assets 1,702 1,027
Accounts payable trade ( ) ( )
574 1,746
Other liabilities ( ) ( )
226 2,720
Net cash used in operating activities ( ) ( )
5,078 10,332
Cash flows from investing activities:
Purchase of property, plant and equipment ( ) ( )
1,126 509
Proceeds from the sale of equipment 539
Proceeds from the sale of property 3,682
Investment in rental equipment ( ) ( )
635 2,368
Proceeds from the sale of used rental equipment 8,794 3,000
Purchases of short-term investments ( )
450
Proceeds from the sale of short-term investments 900 6,174
Net cash provided by investing activities 12,154 5,847
Cash flows from financing activities:
Payments on contingent consideration ( ) ( )
175 807
Purchase of treasury stock - ( )
695
Net cash used in financing activities ( ) ( )
175 1,502
Effect of exchange rate changes on cash ( ) 132
205
Increase (decrease) in cash and cash equivalents 6,696 ( )
5,855
Cash and cash equivalents, beginning of fiscal year 16,109 14,066
Cash and cash equivalents, end of fiscal period $ 22,805 $ 8,211
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 26 $ 81
Issuance of note receivable related to sale of used rental equipment 11,745
Inventory transferred to rental equipment 82 814
Inventory transferred to property, plant and equipment 172
The accompanying notes are an integral part of the consolidated financial
statements.
7
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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 Companys audited consolidated financial statements at
that date. The consolidated balance sheet at
March 31, 2023
and the consolidated statements of operations, comprehensive income (loss),
stockholders equity and cash flows for the
three
and
six
months ended
March 31, 2023
and
2022
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
and
six
months ended
March 31, 2023
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 Companys Annual Report on Form
10
-K for the Companys 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
March 31, 2023
and
September 30, 2022
, the Company had restricted cash of $
0.3
million and $
0.2
million, respectively. The restricted cash at
March 31, 2023
consisted of collateral on a standby letter of credit and a deposit with a
bank, which serves as collateral on employee issued credit cards. At
March 31, 2023
, cash and cash equivalents included $
4.5
million held by the Companys foreign subsidiaries and branch offices,
including $
3.2
million held by its 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 the Company
may
be unable to transfer it out of Russia without incurring substantial costs, if
at all. In addition, if the Company were to repatriate the cash held by its
Russian subsidiary, it would be required to accrue and pay taxes on any amount
repatriated. During the
second
quarter of fiscal year
2023,
in light of recent volatility in the financial markets, the Company entered
into an IntraFi Cash Service ("ISC") Deposit Placement Agreement with IntraFi
Network LLC through its primary bank, Woodforest National Bank. The ICS
program offers access to unlimited Federal Deposit Insurance Corporation
("FDIC') insurance on the Company's domestically held cash in excess of $
5.0
million, thereby mitigating its of falling outside of FDIC coverage limits.
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
March 31, 2023
,
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 standards provisions will be 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.
8
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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
Companys products are generally sold without any customer acceptance
provisions, and the Companys 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 Companys 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
March 31, 2023
, the Company had deferred contract liabilities of $
0.5
million and deferred contract costs of $
0.1
million. At
September 30, 2022
, the Company had
no
deferred liabilities or deferred contract costs. During the
three
and
six
months ended
March 31, 2023
and
2022
,
no
revenue was recognized from deferred contract liabilities and
no
cost of revenue was recognized from deferred contract costs.
At
March 31, 2023
, the Company had
no
unsatisfied performance obligations for contracts having an original duration of
one
year or less.
For each of the Companys operating segments, the following table presents
revenue (in thousands) only from the sale of products and the performance of
services under contracts with customers. Therefore, the table excludes all
revenue earned from rental contracts.
Three Months Ended Six Months Ended
March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022
Oil and Gas Markets
Traditional exploration product revenue $ 3,296 $ 1,217 $ 6,051 $ 1,797
Wireless exploration product revenue 1,411 10,500 7,170 14,258
Reservoir product revenue 132 394 287 821
Total revenue 4,839 12,111 13,508 16,876
Adjacent Markets
Industrial product revenue 9,642 5,993 17,572 11,006
Imaging product revenue 3,029 3,162 5,885 6,279
Total revenue 12,671 9,155 23,457 17,285
Emerging Markets
Revenue 191 299 284 436
Total $ 17,701 $ 21,565 $ 37,249 $ 34,597
See Note
14
for more information on the Companys operating segments.
9
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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 Six Months Ended
March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022
Asia $ 1,443 $ 1,679 $ 7,977 $ 6,357
Canada 333 659 1,094 1,057
Europe 1,792 11,432 2,926 12,743
United States 13,479 7,305 24,070 13,324
Other 654 490 1,182 1,116
Total $ 17,701 $ 21,565 $ 37,249 $ 34,597
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.
No
gains or losses were realized during the
three
and
six
months ended
March 31, 2023
from the sale of short-term investments. For the
three
and
six
months ended
March 31, 2022
, the Company realized losses of $
11,000
and $
18,000
from the sale of short-term investments.
The Companys short-term investments were composed of the following (in
thousands):
September 30, 2022 (in thousands)
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
Short-term investments:
Corporate bonds $ 909 $ $ ( ) $ 894
15
The Company had
no
short-term investments at
March 31, 2023
.
4.
Fair Value of Financial Instruments
The Companys 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 Companys short-term
investments and contingent consideration by valuation hierarchy and input (in
thousands):
As of
September 30, 2022
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets Observable Unobservable
(Level 1) (Level 2) (Level 3) Totals
Short-term investments:
Corporate bonds $ $ 894 $ $ 894
Total assets $ $ 894 $ $ 894
Contingent consideration liabilities: $ $ $ 175 $ 175
Total liabilities $ $ $ 175 $ 175
The Company had
no
short-term investments or contingent consideration payable at
March 31, 2023
.
10
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The following table summarizes changes in the fair value of the Companys Level
3
financial instruments for the
six
months ended
March 31, 2023
and
2022
(in thousands):
Contingent consideration balance at October 1, 2022 $ 175
Fair value adjustments
Payment of contingent consideration ( )
175
Contingent consideration at March 31, 2023 $
Contingent consideration balance at October 1, 2021 $ 6,017
Fair value adjustments ( )
4,658
Payment of contingent consideration ( )
807
Contingent consideration balance at March 31, 2022 $ 552
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.
5.
Trade Accounts and Notes Receivable
Trade accounts receivable, net (excluding notes receivable) are reflected in
the following table (in thousands):
March 31, 2023 September 30, 2022
Trade accounts receivable $ 21,631 $ 13,252
Allowance for doubtful accounts ( ) ( )
706 591
Total $ 20,925 $ 12,661
The allowance for doubtful accounts represents the Companys 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):
March 31, 2023 September 30, 2022
Notes receivable $ 4,983 $ 8,225
Less current portion ( ) ( )
4,983 8,225
Non-current notes receivable $ $
Promissory notes receivable are generally collateralized by the products sold,
and bear interest at rates ranging from
7.0
% to
9.5
% per year. The promissory notes receivable mature at various times through
January 2024.
The Company has, on occasion, extended or renewed notes receivable as they
mature, but there is
no
obligation to do so.
During the
second
quarter of fiscal year
2022,
the Company partially financed a $
10.0
million sale of rental equipment by entering into a $
8.0
million promissory note with a customer. The note has a
one
-year term, with principal and interest payments due quarterly until maturity.
The balance outstanding on the promissory note at
March 31, 2023
was $
2.0
million.
During the
second
quarter of fiscal year
2020,
the Company partially financed a $
12.5
million product sale by entering into a $
10.0
million promissory note with the customer. The note has a
three
-year term with monthly principal and interest payments of $
0.3
million. During the
fourth
quarter of fiscal year
2021,
the Company granted the customer a
six
-month principal payment forbearance. The customer recommenced its monthly
payments to the Company in the
second
quarter of fiscal year
2022.
In
October 2022,
the Company granted the customer an additional
six
-month principal payment forbearance. The customer has made payments totaling $
9.5
million (exclusive of interest) as of
March 31, 2023
related to the product sale, and the balance outstanding on the promissory
note at
March 31, 2023
was $
3.0
million.
6.
Inventories
Inventories consist of the following (in thousands):
March 31, 2023 September 30, 2022
Finished goods $ 17,681 $ 14,653
Work in process 7,331 6,230
Raw materials 29,046 25,609
Obsolescence reserve (net realizable value adjustment) ( ) ( )
16,073 13,971
37,985 32,521
Less current portion 20,477 19,995
Non-current portion $ 17,508 $ 12,526
Raw materials include semi-finished goods and component parts that totaled $
11.5
million and $
9.4
million at
March 31, 2023
and
September 30, 2022,
respectively.
11
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7.
Property, Plant and Equipment
In
February 2023,
the Company completed the sale of its satellite property located at
6410
Langfield Road in Houston, Texas for a cash price of $
3.7
million, net of closing costs of $
0.3
million, and realized a gain on disposal of $
1.3
million. The Company is in the process of relocating the operations of this
facility to its main campus at
7007
Pinemont Drive in Houston, Texas. The satellite property provides additional
warehousing and maintenance and repair capacity for the Companys marine rental
equipment operations. In conjunction with the sale, the Company entered into a
three
-month lease agreement with the buyer to remain in possession of the facility
during the relocation process. The sale was part of the Companys plan to
streamline operations and reduce costs.
Property, plant and equipment consisted of the following (in thousands):
March 31, 2023 September 30, 2022
Land and land improvements $ 7,290 $ 7,855
Building and building improvements 21,903 24,588
Machinery and equipment 49,657 59,393
Furniture and fixtures 1,489 1,434
Tools and molds 3,280 3,243
Construction in progress 962 341
Transportation equipment 75 74
84,656 96,928
Accumulated depreciation and impairment ( ) ( )
61,966 70,330
$ 22,690 $ 26,598
Property, plant and equipment depreciation expense for the
three
and
six
months ended
March 31, 2023
was $
0.9
million and $
1.9
million, respectively. Property, plant and equipment depreciation expense for
the
three
and
six
months ended
March 31, 2022
was $
1.0
million and $
2.1
million, respectively.
8.
Leases
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
March 31, 2023
, the Company has
two
operating right-of-use assets related to leased facilities in Austin, Texas
and Melbourne, Florida.
Maturities of the operating lease liabilities as of
March 31, 2023
were as follows: (in thousands):
For fiscal years ending September 30,
2023 (remainder) $ 147
2024 278
2025 186
2026 130
2027 134
2028 91
Future minimum lease payments 966
Less interest ( )
64
Present value of minimum lease payments 902
Less current portion ( )
248
Non-current portion $ 654
Lease costs recognized in the consolidated statements of operations for the
three
and
six
months ended
March 31, 2023
and
2022
were as follows (in thousands):
Three Months Ended Six Months Ended
March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022
Right-of-use operating lease costs $ 68 $ 68 $ 136 $ 136
Short-term lease costs 90 52 132 96
Total $ 158 $ 120 $ 268 $ 232
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):
Six Months Ended
March 31, 2023 March 31, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 123 $ 119
Weighted average remaining lease term (in years) 4.3 5.1
Weighted average discount rate 3.25 % 3.25 %
The discount rate used on the operating right-of-use assets represented the
Companys incremental borrowing rate at the lease inception date.
12
-------------------------------------------------------------------------------
As Lessor
Equipment
The Company leases equipment to customers which generally range from daily
rentals to minimum rental periods of up to
one
year. All of the Companys current leasing arrangements, which the Company acts
as lessor, are classified as operating leases. The majority of the Companys
rental revenue is generated from its marine-based wireless seismic data
acquisition systems.
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
March 31, 2023
, the Companys trade accounts receivables included lease receivables of $
9.7
million.
Rental revenue related to leased equipment for the
three
and
six
months ended
March 31, 2023
was $
13.6
million and $
25.1
million, respectively. Rental revenue related to leased equipment for the
three
and
six
months ended
March 31, 2022
was $
3.1
million and $
8.0
million, respectively.
Future minimum lease obligations due from the Companys leasing customers on
operating leases executed as of
March 31, 2023
were $
21.1
million, all of which is expected to be due within the next
12
months.
Rental equipment consisted of the following (in thousands):
March 31, 2023 September 30, 2022
Rental equipment, primarily wireless recording equipment $ 79,479 $ 83,887
Accumulated depreciation and impairment ( ) ( )
58,900 55,688
$ 20,579 $ 28,199
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 Colombia. The lease in Canada
commenced in
November 2021
and is for a
five
-year term. The lease on the warehouse in Bogot commenced in
December 2021
and is currently on a month-to-month basis.
Rental revenue related to these
two
property leases for the
three
and
six
months ended
March 31, 2023
was $
52,000
and $
98,000
, respectively. Rental revenue related to these
two
properties for the
three
and
six
months ended
March 31, 2022
was $
51,000
and $
81,000
, respectively.
Future minimum lease payments due to the Company as of
March 31, 2023
on the lease in Canada was as follows (in thousands):
For fiscal years ending September 30,
2023 (remainder) $ 62
2024 128
2025 131
2026 132
2027 11
$ 464
9.
Goodwill and Other Intangible Assets
The Companys consolidated goodwill and other intangible assets consisted of
the following (in thousands):
Weighted-
Average
Remaining Useful
Lives (in years) March 31, 2023 September 30, 2022
Goodwill:
Emerging Markets reporting unit $ 4,336 $ 4,336
Adjacent Markets reporting unit 736 736
Total goodwill 5,072 5,072
Accumulated impairment losses ( ) ( )
4,336 4,336
$ 736 $ 736
Other intangible assets:
Developed technology 13.7 $ 6,475 $ 6,475
Customer relationships -- 3,900 3,900
Trade names 0.5 2,022 2,022
Non-compete agreements 0.2 186 186
Total other intangible assets 7.1 12,583 12,583
Accumulated amortization ( ) ( )
7,440 7,010
$ 5,143 $ 5,573
At
March 31, 2023
, the Company had goodwill of $
0.7
million and other intangible assets, net of $
0.6
million attributable to its Adjacent Markets reporting unit; other intangible
assets, net of $
3.2
million attributable to its Emerging Markets reporting unit; and other
intangible assets, net of $
1.4
million attributable to its Oil and Gas Markets reporting unit. Goodwill
represents the excess cost of a business acquired over the fair market value
of identifiable net assets at the date of acquisition.
13
-------------------------------------------------------------------------------
At
March 31, 2023
, 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
and
six
months ended
March 31, 2023
and
2022
was $
0.2
million and $
0.4
million, respectively. Other intangible asset amortization expense for the
three
and
six
months ended
March 31, 2022
was $
0.4
million and $
0.9
million, respectively.
As of
March 31, 2023
, future estimated amortization expense of other intangible assets is as
follows (in thousands):
For fiscal years ending September 30,
2023 (remainder) $ 337
2024 395
2025 381
2026 374
2027 360
Thereafter 3,296
$ 5,143
10.
Long-Term Debt
The Company had
no
long-term debt outstanding at
March 31, 2023
and
September 30, 2022.
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 $
10
million. The borrowing base is determined based upon certain of the Company's
domestic assets which include (i)
70
% loan to value of the Company's 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
%. The Company is required to make monthly interest payments on borrowed
funds. Borrowings under the Agreement will be principally secured by the
Property and the Company's domestic equipment, inventory and accounts
receivables. In addition, certain domestic subsidiaries of the Company have
guaranteed the obligations of the Company under the Agreement and such
subsidiaries have secured the obligations by pledging certain assets. The
Agreement requires the Company to maintain a minimum consolidated tangible net
worth of $
100
million. At
March 31, 2023
, the Company was compliant with all covenants under the Agreement.
As discussed in Note
7,
the Property was sold in
February 2023.
The sale reduced the Company's borrowing availability under the Agreement to $
5.5
million at
March 31, 2023
. The Company is currently in discussions with
one
of the lenders on a new credit facility which would be secured by other
alternative domestic assets.
Debt issuance costs of $
0.2
million were incurred in connection with the Agreement. These costs were
capitalized in other assets on the consolidated balance sheet and are being
amortized to interest expense over the term of the Agreement.
11.
Stock-Based Compensation
During the
six
months ended
March 31, 2023
, the Company issued
211,375
restricted stock units (RSUs) under its
2014
Long Term Incentive Plan, as amended. The RSUs issued include both time-based
and performance-based vesting provisions. The weighted average grant date fair
value of each RSU was $
4.65
per unit. The grant date fair value of the RSUs was $
1.0
million, which will be charged to expense over the next
four
years as the restrictions lapse. Compensation expense for the RSUs was
determined based on the closing market price of the Companys stock on the date
of grant applied to the total number of units that are anticipated to fully
vest. Each RSU represents a contingent right to receive
one
share of the Companys common stock upon vesting.
As of
March 31, 2023
, there were
394,924
RSUs outstanding. As of
March 31, 2023
, the Company had unrecognized compensation expense of $
2.2
million relating to RSUs that is expected to be recognized over a weighted
average period of
2.7
years.
14
-------------------------------------------------------------------------------
12.
Earnings (Loss) Per Common Share
The following table summarizes the calculation of net earnings (loss) and
weighted average common shares and common equivalent shares outstanding for
purposes of the computation of earnings (loss) per share (in thousands, except
share and per share data):
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2023 2022 2023 2022
Net income $ 4,637 $ ( ) $ 4,540 $ ( )
(loss) 1,474 8,242
Less: Income allocable to
unvested restricted stock
Income (loss) attributable to common shareholders $ 4,637 $ ( ) $ 4,540 $ ( )
for diluted earnings (loss) per share 1,474 8,242
Weighted average number of
common share equivalents:
Common shares used in basic 13,156,715 12,999,022 13,111,866 12,958,911
earnings (loss) per share
Common share equivalents
outstanding related to RSUs
Total weighted average common shares and common share 13,156,715 12,999,022 13,111,866 12,958,911
equivalents used in diluted earnings (loss) per share
Earnings (loss)
per share:
Basic $ 0.35 $ ( ) $ 0.35 $ ( )
0.11 0.64
Diluted $ 0.35 $ ( ) $ 0.35 $ ( )
0.11 0.64
For the calculation of diluted earnings (loss) per share for the
three
and
six
months ended
March 31, 2023
and the
three
and
six
months ended
March 31, 2022
,
394,924
and
371,484
non-vested RSUs, respectively, were excluded in the calculation of weighted
average shares outstanding since their impact on diluted earnings (loss) per
share was antidilutive.
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
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 in order for any of Aquanas 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.
No
eligible revenue has been generated to date.
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 Companys consolidated financial
position, results of operations or cash flows.
15
-------------------------------------------------------------------------------
14.
Segment Information
The Company reports and evaluates financial information for
three
operating business segments: Oil and Gas Markets, Adjacent Markets and
Emerging Markets. The Oil and Gas Markets 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. The Adjacent Markets
segment's products include imaging equipment, water meter products, remote
shut-off valves and Internet of Things (IoT) platform, as well as and seismic
sensors used for vibration monitoring and geotechnical applications such as
mine safety applications and earthquake detection. The Emerging Markets
segment designs and markets seismic products targeted at the border and
perimeter security markets.
The following table summarizes the Companys segment information (in thousands):
Three Months Ended Six Months Ended
March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022
Revenue:
Oil and Gas Markets $ 18,419 $ 15,146 $ 38,567 $ 24,800
Adjacent Markets 12,708 9,203 23,530 17,374
Emerging Markets 191 299 284 436
Corporate 52 52 98 81
Total $ 31,370 $ 24,700 $ 62,479 $ 42,691
Income (loss) from operations:
Oil and Gas Markets $ 4,176 $ 1,656 $ 6,582 $ ( )
2,514
Adjacent Markets 3,055 1,292 4,802 2,500
Emerging Markets ( ) ( ) ( ) ( )
1,007 1,384 2,220 2,204
Corporate ( ) ( ) ( ) ( )
1,847 3,213 5,066 6,317
Total $ 4,377 $ ( ) $ 4,098 $ ( )
1,649 8,535
15.
Income Taxes
Consolidated income tax expense for the
three
and
six
months ended
March 31, 2023
was $
19,000
and $
49,000
, respectively. Consolidated income tax expense for the
three
and
six
months ended
March 31, 2022
was$
25,000
and $
102,000
, respectively. The primary difference between the Company's effective tax
rate and the statutory rate is adjustments to the valuation allowance against
deferred tax assets.
16.
Risks and Uncertainties
Concentration of Credit Risk
As of
March 31, 2023
, the Company had combined trade accounts and notes receivable from
three
customers of $
8.5
million, $
4.9
million and $
3.4
million, respectively. During the
three
months ended
March 31, 2023
, revenue recognized from these
three
customers was $
9.9
million, $
2.9
millionand $
1.2
million, respectively. During the
six
months ended
March 31, 2023
, revenue recognized from these
three
customers was $
17.9
million, $
5.6
million and $
2.9
million, respectively.
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 Companys markets.
COVID-
19
and the related mitigation measures have disrupted the Companys supply chain,
resulting in longer lead times in materials available from suppliers and
extended the shipping time for these materials to reach the Companys
facilities. If
COVID19
were again to spread or the response to contain the
COVID19
pandemic were to be 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 Companys 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
Companys 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 Companys 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 $
70
per barrel throughout
2022
and through
March 2023,
which
may
result in higher cash flows for exploration and production companies. Any
material changes in oil and gas prices or other market trends, like slowing
growth of the global economy, could adversely impact seismic exploration
activity and would likely affect the demand for the Company's products and
could materially and adversely affect its results of operations and liquidity.
Generally, imbalances in the supply and demand for oil and gas will affect oil
and gas prices and, in such circumstances, demand for the Companys oil and gas
products
may
be adversely affected when world supplies exceed demand.
16
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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. During fiscal year
2022
the Company imported $
1.9
millionof products from GTE for resale elsewhere in the world, and imported $
2.3
during the
first
six
months of fiscal year
2023.
The rapid changes in rules and implementation of new rules on imports and
exports of goods involving Russia has also led to serious delays in getting
goods to or from Russia as port authorities struggle to keep up with the
changing environment. If imports of these products from the Russian Federation
are restricted by government regulation, the Company
may
be forced to find other sources for the manufacturing of these products at
potentially higher costs. Likewise, restrictions on the Company's ability to
send products to our subsidiary in Russia,
may
force our subsidiary to have to find other sources for the manufacturing of
these products at potentially higher costs; however, the Company's exports to
GTE have historically been limited. Boycotts, protests, unfavorable
regulations, additional governmental sanctions and other actions in the region
could also adversely affect the Company's ability to operate profitably.
Delays in obtaining governmental approvals can affect the Company's ability to
timely deliver its products pursuant to contractual obligations, which could
result in the Company being liable to its customers for damages. The risk of
doing business in the Russian Federation and other economically or politically
volatile areas could adversely affect the Company's operations and earnings.
It is possible that increasing sanctions, export controls, restrictions on
access to financial institutions, supply and transportation challenges, or
other circumstances or considerations could necessitate a reduction, or even
discontinuation, of operations by GTE or other business in Russia.
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
March 31, 2023
was $
6.0
million, including cash of $
3.2
million. 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 to theproducts the Company imported from GTE, the
subsidiary generated $
1.9
million in revenue from domestic sales in fiscal year
2022
and has generated $
1.3
million from domestic sales for the
first
six
months of fiscal year
2023.
The Company has
no
way to predict the duration, progress or outcome of the military conflict in
Ukraine. The extent and duration of the military action, sanctions, and
resulting market disruptions could be significant and could potentially have
substantial impact on the global economy and the Company's business for an
unknown period of time.
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 $
2
million. In connection with the plan, the Company incurred costs of $
0.6
million in the
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. As of
March 31, 2023
,
no
liabilities were outstanding related to this plan.
17
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Item 2. Management
s Discussion and Analysis of Financial Condition and Results of Operations
The following is managements 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 SECs website at
www.sec.gov. Our SEC filings are also 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 segments 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 vessels 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.
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 March 31, 2023, 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 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-monitori
ng 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.
18
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Imaging Products
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. Quantums 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 Six Months Ended
March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022
Oil and Gas Markets
Traditional exploration product revenue $ 3,391 $ 1,245 $ 6,146 $ 1,836
Wireless exploration product revenue 14,896 13,507 32,134 22,234
Reservoir product revenue 132 394 287 730
Total revenue 18,419 15,146 38,567 24,800
Operating income (loss) 4,176 1,656 6,582 (2,514 )
Adjacent Markets
Industrial product revenue 9,642 5,993 17,572 11,006
Imaging product revenue 3,066 3,210 5,958 6,368
Total revenue 12,708 9,203 23,530 17,374
Operating income 3,055 1,292 4,802 2,500
Emerging Markets
Revenue 191 299 284 436
Operating loss (1,007 ) (1,384 ) (2,220 ) (2,204 )
Corporate
Revenue 52 52 98 81
Operating loss (1,847 ) (3,213 ) (5,066 ) (6,317 )
Consolidated Totals
Revenue 31,370 24,700 62,479 42,691
Operating income (loss) 4,377 (1,649 ) 4,098 (8,535 )
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 and through March
2023; 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. The increase in demand has led to near full
utilization of our marine wireless rental fleet, yet we continue to experience
low levels of demand for our land-based wireless products.
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 thefirst 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 March 31, 2023 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.
19
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Armed Conflict Between Russia and Ukraine
A portion of our oil and gas product manufacturing is conducted by Geospace
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 over the past twelve
months. 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 pandemics 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 and six months ended March 31, 2023 compared to the three and six months
ended March 31, 2022
Consolidated revenue for the three months endedMarch 31, 2023 was$31.4
million, an increase of $6.7 million, or27.0%, from the corresponding period
of the prior fiscal year. Consolidated revenue for the six months ended March
31, 2023 was$62.5 million, an increase of$19.8 million, or46.4%, from the
corresponding period of the prior fiscal year. The increase for both periods
was largely due to higher rental revenue from our Oil and Gas Markets segment
due to increased utilization of our OBX rental fleet, partially offset by a
decrease in sales of wireless exploration products. The increase in
consolidated revenue for both periods was also attributable to an increase in
demand for our industrial products from our Adjacent Markets segment. Wireless
exploration product revenue for thesix months ended March 31, 2023 included
$4.0 million from a rental customer as compensation for lost OBX nodes.
Consolidated gross profit for the three months ended March 31, 2023 was $$12.9
million, an increase of$6.1 million, or90.1% from the corresponding period of
the prior fiscal year. Consolidated gross profit for thesix months ended March
31, 2023 was$23.5 million, an increase of$15.0 million, or175.9% 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, partially offset by the decrease in wireless exploration product
revenue and related gross profits. The increase was also attributable to the
increase in industrial product revenue and related gross profits.
Consolidated operating expenses for the three months ended March 31, 2023 were
$9.9 million, an increase of$1.4 million, or16.9%, from the corresponding
period of the prior fiscal year. The increase was due to (i) a $2.2 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 and (ii) a $0.4 million increase in
selling, general and administrative expenses, resulting from increased
revenue. These increased operating expenses were partially offset by a $1.2
million decrease in research and development expense, primarily personnel
costs attributable to our workforce reduction in the first quarter of fiscal
year 2023. Consolidated operating expenses for thesix months ended March 31,
2023 were$20.7 million, an increase of$3.7 million, or21.4%, from the
corresponding period of the prior fiscal year. The increase was due to (i) a
$4.7 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 $1.1
million increase in selling, general and administrative expenses resulting
from increased revenue, inclusive of $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 $2.2 million decrease in
research and development expense attributable to lower project expenditures
and the decrease in personnel costs.
In February 2023, we sold our real property located at 7310 Langfield Road in
Houston, Texas for a cash sales price of $3.7 million, net of closing costs of
$0.3 million. We recognized a gain of $1.3 million from the sale of this
property in the second quarter of fiscal year 2023. The sale was part of our
plan to streamline operations and reduce costs.
Consolidated other income for the three months ended March 31, 2023 was$0.3
million, compared to$0.2 million from the corresponding period of the prior
year. Consolidated other income for thesix months ended March 31, 2023 was$0.5
million, compared to$0.4 million from the corresponding period of the prior
year. The increase for both periods was primarily due to an increase in net
foreign exchange gains.
Segment Results of Operations
Oil and Gas Markets
Revenue
Revenue from our Oil and Gas Markets products for the three months ended March
31, 2023 increased$3.3 million, or21.6%, from the corresponding period of the
prior fiscal year. Revenue from our Oil and Gas Markets products for the six
months ended March 31, 2023 increased$13.8 million, or 55.6%, from the
corresponding period of the prior fiscal year. The components of these
increases were as follows:
Traditional Exploration Product Revenue
For the three months ended March 31, 2023, revenue from our traditional products was$3.4 million, an increase
of$2.1 million from the corresponding period of the prior fiscal year. For the six months ended March 31,
2023, revenue from our traditional products was$6.1 million, an increase of$4.3 million from the corresponding
period of the prior fiscal year. The increase was primarily due to higher demand for our sensor products.
Wireless Exploration Product Revenue
For the three months ended March 31, 2023, revenue from our wireless exploration products
increased$1.4 million, or10.3%, from the corresponding period of the prior fiscal year.
For the six months ended March 31, 2023, revenue from our wireless exploration products
increased$9.9 million, or44.5%, from the corresponding period of the prior fiscal year.
Wireless product revenue for the six months ended March 31, 2023 included $4.0 million
from a rental equipment customer as compensation for lost OBX nodes. The increase for
both periods was primarily due to increased rental revenue attributable to higher utilization
of our OBX rental fleet, partially offset by a decrease in wireless product sales.
20
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Operating Income (Loss)
Operating income associated with our Oil and Gas Markets products for the
three months ended March 31, 2023 was$4.2 million, an increase of$2.5 million
from the corresponding period of the prior fiscal year. Operating income
associated with our Oil and Gas Markets products for the six months ended
March 31, 2023 was $6.6 million, compared to an operating loss of $(2.5)
million from the corresponding period of the prior fiscal year.The increase in
operating income was primarily due to (i) higher wireless rental revenue and
related gross profits due to improved utilization of our OBX rental fleet and
(ii) a decrease in research and development expense attributable to our
workforce reduction in the first quarter of fiscal year 2023 and lower project
expenditures. The increase in operating income was partially offset by (i) a
decrease in wireless product revenue and related gross profits and (ii)
favorable non-cash adjustments reported of $2.9 million and $4.0 million for
the three and six month periods of the prior year, respectively, resulting
from changes 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 March
31, 2023 increased$3.5 million, or38.1%, from the corresponding period of the
prior fiscal year. Revenue from our Adjacent Markets products for thesix
months ended March 31, 2023 increased$6.2 million, or35.4%, from the
corresponding period of the prior fiscal year. The components of these
increases were as follows:
Industrial Product Revenue and Services
For the three months ended March 31, 2023, revenue from our industrial products increased$3.6 million, or60.9%,
from the corresponding period of the prior fiscal year. For the six months ended March 31, 2023, revenue from
our industrial products increased$6.6 million, or59.7%, from the corresponding period of the prior fiscal year.
The increase in revenue for both periods was primarily due to higher demand for our water meter products.
Imaging Product Revenue
For the three months ended March 31, 2023, revenue from our imaging products decreased$0.1 million, or4.5%,
from the corresponding period of the prior fiscal year. For the six months ended March 31, 2023, revenue
from our imaging products decreased$0.4 million, or6.4%, from the corresponding period of the prior fiscal
year. The decrease for both periods was primarily due to lower demand for our consumable film products.
Operating Income
Operating income from our Adjacent Markets products for the three months ended
March 31, 2023 was$3.1 million, an increase of$1.8 million, or136.5%, from the
corresponding period of the prior fiscal year. Operating income from our
Adjacent Markets products for thesix months ended March 31, 2023 was$4.8
million, an increase of$2.3 million, or 92.1%, from the corresponding period
of the prior fiscal year. The increase in operating income for both periods
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 (i) higher selling, general and administrative
resulting from the increased revenue and (ii) an increase in research and
development project costs.
Emerging Markets
Revenue
Revenue from our Emerging Markets products was$0.2 million for the three
months endedMarch 31, 2023 compared to$0.3 million from the corresponding
period of the prior fiscal year. Revenue from our Emerging Markets products
was$0.3 million for thesix months ended March 31, 2023 compared to$0.4 million
from the corresponding period of the prior fiscal year. 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
March 31, 2023 was$1.0 million, a decrease of$0.4 million, or 27.2%, from the
corresponding period in the prior fiscal year. The decrease in operating loss
for the three months endedMarch 31, 2023 was attributable to lower personnel
costs attributable to our workforce reduction in the first quarter of fiscal
year 2023. The decrease in operating loss was partially offset by a favorable
non-cash adjustment reported for the three month period of the prior year of
$0.1 million, resulting from a change in the estimated fair value of
contingent consideration related to our Quantum acquisition. Operating loss
from our Emerging Markets products for each of thesix months ended March 31,
2023 and 2022 was $2.2 million. A decrease in personnel costs for thesix
months ended March 31, 2023 as a result of the workforce reduction were offset
by a favorable non-cash adjustment reported for the three month period of the
prior year of $0.7 million, resulting from a change in the estimated fair
value of contingent consideration related to our Quantum acquisition.
Liquidity and Capital Resources
At March 31, 2023, we had approximately $22.8 million in cash and cash
equivalents. For the six months ended March 31, 2023, we used$5.1 million of
cash from operating activities. Uses of cash in our operations primarily
included (i) a$8.4 million increase in trade accounts and notes receivable
primarily due to our increase in revenue and the timing of collections from
customers, (ii) a$7.9 million increase in inventories to meet an increase in
demand for our products, (iii) the removal of$3.9 million gross profit from
the sale of used rental equipment and $1.8 million of gain from the sale of
property and equipment since they are included in investing activities and
(iv) a$0.6 million decrease in accounts payable primarily due to the timing of
payments to our suppliers. These uses of cash were primarily offset by (i) our
net income of$4.5 million and net non-cash charges of$11.4 million resulting
from deferred income taxes, depreciation, amortization, accretion, inventory
obsolescence, stock-based compensation and bad debt expense. Other sources of
cash included a $1.7 million decrease in other assets primarily due to a
decrease in prepaid product purchases and prepaid insurance.
For the six months ended March 31, 2023, we generated cash of$12.2 million in
investing activities. Sources of cash primarily consisted of (i) proceeds
of$8.8 million from the sale of used rental equipment, (ii) proceeds of$4.2
million from the sale of property and equipment and (iii) proceeds of$0.9
million from the sale of short-term investments. Offsetting this source of
cash were (i)$1.1 million for additions to our property, plant and equipment
and (ii)$0.6 million for additions to our equipment rental fleet. We do not
expect to make any significant cash investments into our rental fleet for the
remainder of fiscal year 2023 unless changing in market conditions makes the
investment necessary. We expect our cash investments in our property, plant
and equipment will be approximately $2.0 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 six months ended March 31, 2023we used$0.2 million from financing
activities for our final contingent consideration payments to the former
shareholders of Quantum.
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Our available cash and cash equivalents was$22.8 million at March 31, 2023,
which included $4.5 million of cash and cash equivalents held by our foreign
subsidiaries and branch offices, of which $3.2 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. During the second
quarter of fiscal year 2023, in light of recent volatility in the financial
markets, we entered into an IntraFi Cash Service ("ICS") Deposit Placement
Agreement with IntraFi Network LLC through our primary bank, Woodforest
National Bank. The ICS program offers us access to unlimited Federal Deposit
Insurance Corporation ("FDIC') insurance on domestically held cash in excess
of $5.0 million, thereby mitigating our risk of falling outside of FDIC
coverage limits.
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 was sold in February 2023. The sale reduced the Company's
borrowing availability under the Agreement to $5.5 million at March 31,
2023.The Company is currently in discussions with one of the lenders on a new
credit facility which would be secured by other alternative domestic assets.
At March 31, 2023, we had no borrowings outstanding and were compliant with
all covenants under the Agreement. 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 equivalentsincreased $6.7 million during the six
months ended March 31, 2023. 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 and cash
equivalents 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
Aquanas former members to be eligible to any earn-out payments. In accordance
with ASC 805,
Business Combination
s, 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 six months ended March 31, 2023, 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.
22
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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 SECs 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 March 31, 2023, 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 March 31, 2023.
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 March 31, 2023 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 Amended and Restated Certificate
of Formation of Geospace
Technologies Corporation
(incorporated by reference to
Exhibit 3.1 to the Companys
Quarterly Report on Form 10-Q
for the quarter ended March
31, 2015, filed May 8, 2015).
3.2 Amended and Restated Bylaws of Geospace
Technologies Corporation
(incorporated by reference
to Exhibit 3.2 to the Companys Current
Report on Form 8-K filed August 8, 2019).
31.1* Certification of the Chief
Executive Officer pursuant to Rule
13a-14(a) under the Securities
and Exchange Act of 1934.
31.2* Certification of the Chief
Financial Officer pursuant Rule
13a-14(a) under the Securities
and Exchange Act of 1934.
32.1** Certification of the Chief Executive
Officer pursuant 18 U.S.C. Section 1350.
32.2** Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
101* The following financial information from the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL):
(i) the Consolidated Balance Sheets at March 31, 2023 andSeptember 30, 2022 , (ii) the Consolidated
Statements of Operations for the three and six months ended March 31, 2023 and 2022, (iii)
the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended
March 31, 2023 and 2022, (iv) the Consolidated Statements of StockholdersEquity for the three and
six months ended March 31, 2023 and 2022, (v) the Consolidated Statements of Cash Flows for
thesix months ended March 31, 2023 and 2022 and (vi) Notes to Consolidated Financial Statements.
104* The cover page from the Companys
Quarterly Report on Form 10-Q
for the quarter ended March 31,
2023 formatted in Inline XBRL.
* Filed with this Quarterly Report on Form 10-Q
** Furnished with this Quarterly Report on Form 10-Q
23
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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.
GEOSPACE TECHNOLOGIES CORPORATION
Date: May 12, 2023 By: /s/ Walter R. Wheeler
Walter R. Wheeler, President
and Chief Executive Officer
(duly authorized officer)
Date: May 12, 2023 By: /s/ Robert L. Curda
Robert L. Curda, Vice President,
Chief Financial Officer and Secretary
(principal financial officer)
24
Exhibit 31.1
CERTIFICATIONS
I, Walter R. Wheeler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Geospace Technologies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial reporting.
May 12, 2023
/s/ Walter R. Wheeler
Name: Walter R. Wheeler
Title: President and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Robert L. Curda, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Geospace Technologies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial reporting.
May 12, 2023
/s/ Robert L. Curda
Name: Robert L. Curda
Title: Vice President, Chief Financial Officer & Secretary
Exhibit 32.1
Informational Addendum to Report on Form 10-Q
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Not Filed Pursuant to the Securities Exchange Act of 1934
The undersigned President and Chief Executive Officer of Geospace Technologies
Corporation does hereby certify as follows:
Solely for the purpose of meeting the requirements of Section 906 of the
Sarbanes-Oxley Act of 2002, and solely to the extent this certification may be
applicable to this Report on Form 10-Q, the undersigned hereby certifies that
this Report on Form 10-Q fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and the information contained
in this Report on Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of Geospace Technologies
Corporation.
/s/ Walter R. Wheeler
Name: Walter R. Wheeler
Title: President and Chief Executive Officer
May 12, 2023
Exhibit 32.2
Informational Addendum to Report on Form 10-Q
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Not Filed Pursuant to the Securities Exchange Act of 1934
The undersigned Vice President, Chief Financial Officer and Secretary of
Geospace Technologies Corporation does hereby certify as follows:
Solely for the purpose of meeting the requirements of Section 906 of the
Sarbanes-Oxley Act of 2002, and solely to the extent this certification may be
applicable to this Report on Form 10-Q, the undersigned hereby certifies that
this Report on Form 10-Q fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and the information contained
in this Report on Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of Geospace Technologies
Corporation.
/s/ Robert L. Curda
Name: Robert L. Curda
Title: Vice President, Chief Financial Officer & Secretary
May 12, 2023
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