10-Q 1 geos-10q_20170630.htm GEOS-10Q-20170630 geos-10q_20170630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended June 30, 2017 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 Drive

Houston, Texas  77040-6601

(Address of Principal Executive Offices) (Zip Code)

(713) 986-4444

(Registrant’s telephone number, including area code)

 

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    X    No    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes    X    No    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

 

(Do not check if a smaller reporting company)

 

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    X

There were 13,439,566 shares of the Registrant’s Common Stock outstanding as of the close of business on July 31, 2017.

 

 

 

 


 

Table of Contents

 

2


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

 

 

June 30, 2017

 

 

September 30, 2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,077

 

 

$

10,262

 

Short-term investments

 

 

36,461

 

 

 

27,491

 

Trade accounts receivable, net

 

 

8,327

 

 

 

15,392

 

Current portion of notes receivable

 

 

2,614

 

 

 

1,533

 

Income tax receivable

 

 

473

 

 

 

13,290

 

Inventories, net

 

 

88,024

 

 

 

104,540

 

Prepaid expenses and other current assets

 

 

1,854

 

 

 

1,826

 

Total current assets

 

 

154,830

 

 

 

174,334

 

 

 

 

 

 

 

 

 

 

Rental equipment, net

 

 

20,551

 

 

 

30,973

 

Property, plant and equipment, net

 

 

43,432

 

 

 

44,732

 

Deferred income tax assets, net

 

 

267

 

 

 

216

 

Non-current notes receivable, net

 

 

588

 

 

 

1,817

 

Prepaid income taxes

 

 

1,464

 

 

 

2,620

 

Other assets

 

 

641

 

 

 

80

 

Total assets

 

$

221,773

 

 

$

254,772

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable trade

 

$

2,041

 

 

$

2,120

 

Accrued expenses and other current liabilities

 

 

5,666

 

 

 

7,849

 

Deferred revenue

 

 

1,386

 

 

 

174

 

Income tax payable

 

 

3

 

 

 

125

 

Total current liabilities

 

 

9,096

 

 

 

10,268

 

 

 

 

 

 

 

 

 

 

Deferred income tax liabilities

 

 

31

 

 

 

37

 

Total liabilities

 

 

9,127

 

 

 

10,305

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

 

134

 

 

 

133

 

Additional paid-in capital

 

 

82,291

 

 

 

77,967

 

Retained earnings

 

 

144,724

 

 

 

182,308

 

Accumulated other comprehensive loss

 

 

(14,503

)

 

 

(15,941

)

Total stockholders’ equity

 

 

212,646

 

 

 

244,467

 

Total liabilities and stockholders’ equity

 

$

221,773

 

 

$

254,772

 

 

The accompanying notes are an integral part of the consolidated financial statements.

3


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

June 30, 2017

 

 

June 30, 2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

12,888

 

 

$

12,594

 

 

$

37,960

 

 

$

34,452

 

Rental equipment

 

 

1,307

 

 

 

5,084

 

 

 

12,078

 

 

 

11,294

 

Total revenue

 

 

14,195

 

 

 

17,678

 

 

 

50,038

 

 

 

45,746

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

15,489

 

 

 

15,894

 

 

 

49,124

 

 

 

46,252

 

Rental equipment

 

 

3,818

 

 

 

4,684

 

 

 

11,911

 

 

 

13,390

 

Total cost of revenue

 

 

19,307

 

 

 

20,578

 

 

 

61,035

 

 

 

59,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit (loss)

 

 

(5,112

)

 

 

(2,900

)

 

 

(10,997

)

 

 

(13,896

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

4,972

 

 

 

5,125

 

 

 

15,092

 

 

 

16,316

 

Research and development expenses

 

 

3,674

 

 

 

3,441

 

 

 

10,458

 

 

 

10,556

 

Bad debt expense (recovery)

 

 

16

 

 

 

549

 

 

 

(402

)

 

 

(74

)

Total operating expenses

 

 

8,662

 

 

 

9,115

 

 

 

25,148

 

 

 

26,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(13,774

)

 

 

(12,015

)

 

 

(36,145

)

 

 

(40,694

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(8

)

 

 

(7

)

 

 

(24

)

 

 

(18

)

Interest income

 

 

185

 

 

 

84

 

 

 

453

 

 

 

252

 

Foreign exchange losses, net

 

 

(120

)

 

 

(678

)

 

 

(401

)

 

 

(9

)

Other, net

 

 

(11

)

 

 

(16

)

 

 

(44

)

 

 

(50

)

Total other income (expense), net

 

 

46

 

 

 

(617

)

 

 

(16

)

 

 

175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(13,728

)

 

 

(12,632

)

 

 

(36,161

)

 

 

(40,519

)

Income tax expense (benefit)

 

 

648

 

 

 

(978

)

 

 

1,423

 

 

 

(6,858

)

Net loss

 

$

(14,376

)

 

$

(11,654

)

 

$

(37,584

)

 

$

(33,661

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.09

)

 

$

(0.89

)

 

$

(2.86

)

 

$

(2.58

)

Diluted

 

$

(1.09

)

 

$

(0.89

)

 

$

(2.86

)

 

$

(2.58

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

13,147,016

 

 

 

13,051,916

 

 

 

13,129,196

 

 

 

13,042,000

 

Diluted

 

 

13,147,016

 

 

 

13,051,916

 

 

 

13,129,196

 

 

 

13,042,000

 

 

The accompanying notes are an integral part of the consolidated financial statements.

4


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

June 30, 2017

 

 

June 30, 2016

 

Net loss

 

$

(14,376

)

 

$

(11,654

)

 

$

(37,584

)

 

$

(33,661

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized (losses) gains on available-for-sale securities, net of tax

 

 

(10

)

 

 

16

 

 

 

(61

)

 

 

21

 

Foreign currency translation adjustments

 

 

452

 

 

 

115

 

 

 

1,499

 

 

 

(1,473

)

Total other comprehensive income (loss)

 

 

442

 

 

 

131

 

 

 

1,438

 

 

 

(1,452

)

Total comprehensive loss

 

$

(13,934

)

 

$

(11,523

)

 

$

(36,146

)

 

$

(35,113

)

 

The accompanying notes are an integral part of the consolidated financial statements.

5


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

June 30, 2017

 

 

June 30, 2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(37,584

)

 

$

(33,661

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Deferred income tax (benefit) expense

 

 

(25

)

 

 

4,211

 

Rental equipment depreciation

 

 

9,858

 

 

 

11,189

 

Property, plant and equipment depreciation

 

 

3,930

 

 

 

4,017

 

Impairment of rental assets

 

 

 

 

 

998

 

Accretion of discounts on short-term investments

 

 

45

 

 

 

89

 

Stock-based compensation expense

 

 

4,289

 

 

 

3,934

 

Bad debt recovery

 

 

(402

)

 

 

(74

)

Inventory obsolescence expense

 

 

12,111

 

 

 

7,031

 

Gross profit from sale of used rental equipment

 

 

(2,650

)

 

 

(229

)

Realized loss on short-term investments

 

 

2

 

 

 

4

 

Excess tax expense from stock-based compensation

 

 

 

 

 

(1,390

)

Effects of changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts and notes receivable

 

 

8,871

 

 

 

72

 

Income tax receivable

 

 

12,847

 

 

 

6,858

 

Inventories

 

 

1,208

 

 

 

3,066

 

Prepaid expenses and other current assets

 

 

459

 

 

 

(4,435

)

Prepaid income taxes

 

 

1,156

 

 

 

1,097

 

Accounts payable trade

 

 

(77

)

 

 

(1,844

)

Accrued expenses and other

 

 

(2,033

)

 

 

(2,062

)

Deferred revenue

 

 

119

 

 

 

(74

)

Income tax payable

 

 

(117

)

 

 

109

 

Net cash provided by (used in) operating activities

 

 

12,007

 

 

 

(1,094

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(588

)

 

 

(1,206

)

Investment in rental equipment

 

 

(299

)

 

 

(504

)

Proceeds from the sale of used rental equipment

 

 

4,424

 

 

 

1,280

 

Purchases of short-term investments

 

 

(16,042

)

 

 

(20,800

)

Proceeds from the sale of short-term investments

 

 

6,991

 

 

 

11,679

 

Net cash used in investing activities

 

 

(5,514

)

 

 

(9,551

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

50

 

 

 

 

Net cash provided by financing activities

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

272

 

 

 

(143

)

Increase (decrease) in cash and cash equivalents

 

 

6,815

 

 

 

(10,788

)

Cash and cash equivalents, beginning of fiscal year

 

 

10,262

 

 

 

22,314

 

Cash and cash equivalents, end of fiscal period

 

$

17,077

 

 

$

11,526

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

6


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, 2016 was derived from the Company’s audited consolidated financial statements at that date.  The consolidated balance sheet at June 30, 2017 and the consolidated statements of operations and comprehensive loss for the three and nine months ended June 30, 2017 and 2016, and the consolidated statements of cash flows for the nine months ended June 30, 2017 and 2016 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.  The results of operations for the three and nine months ended June 30, 2017 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 were omitted pursuant to the rules of the Securities and Exchange Commission.  The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2016.

Reclassifications

Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation.  Such reclassifications had no effect on net loss, stockholders’ equity or cash flows.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses 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 bad debt reserves, inventory obsolescence reserves, self-insurance reserves, product warranty reserves, impairment of long-lived assets 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, the results of which form the basis for making judgments about the carrying values of assets and liabilities which are not readily available from other sources.  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.

Short-term Investments

The Company classifies its short-term investments consisting of corporate bonds, government bonds and other such similar investments as available-for-sale securities.  Available-for-sale securities are carried at fair market value with net unrealized holding gains and losses reported each period as a component of accumulated other comprehensive loss in stockholders’ equity.  See note 2 for additional information.

Inventories

The Company records a write-down of its inventories when the cost basis of any manufactured product, including any estimated future costs to complete the manufacturing process, exceeds its net realizable value.  Inventories are stated at the lower of cost or market value.  Cost is determined on the first-in, first-out method, except that certain of the Company’s foreign subsidiaries use an average cost method to value their inventories.

7


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The Company periodically reviews the composition of its inventories to determine if market demand, product modifications, technology changes, excessive quantities on-hand and other factors hinder its ability to recover its investment in such inventories.  The Company’s assessment is based upon historical product demand, estimated future product demand and various other judgments and estimates.  Inventory obsolescence reserves are recorded when such assessments reveal that portions or components of the Company’s inventory investment will not be realized in its operating activities.

Impairment of Long-lived Assets

The Company’s long-lived assets are reviewed for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable.  The impairment review, if necessary, includes a comparison of 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, which is measured by the expected future cash flows.  

Revenue Recognition – Products and Services

The Company primarily derives revenue from the sale of its manufactured products, including revenue derived from the sale of its manufactured rental equipment.  In addition, the Company generates revenue from the short-term rental under operating leases of its manufactured products.  The Company recognizes revenue from product sales, including the sale of used rental equipment, when all of the following have occurred: (i) title passes to the customer, (ii) the customer assumes the risks and rewards of ownership, (iii) the product sales price has been determined, (iv) collectability of the sales price is reasonably assured, and (v) product delivery occurs as directed by the customer.  Although infrequent, in cases where collectability is not reasonably assured, the installment or cost recovery method is used.  Except for certain of the Company’s reservoir characterization products, the Company’s products are generally sold without any customer acceptance provisions, and the Company’s standard terms of sale do not allow customers to return products for credit.  The Company recognizes rental revenue as earned over the rental period.  Rentals of the Company’s equipment generally range from daily rentals to rental periods of up to six months or longer.  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.

Research and Development Costs

The Company expenses research and development costs as incurred.  Research and development costs include salaries, employee benefit costs, department supplies, direct project costs and other related costs.

Product Warranties

Most of the Company’s products do not require installation assistance or sophisticated instructions.  The Company offers a standard product warranty obligating it to repair or replace equipment with manufacturing defects.  The Company maintains a reserve for future warranty costs based on historical experience or, in the absence of historical product experience, management’s estimates.  Reserves for future warranty costs are included within accrued expenses and other current liabilities on the consolidated balance sheets.  Changes in the warranty reserve are reflected in the following table (in thousands):

 

Balance at October 1, 2016

$

392

 

Accruals for warranties issued during the period

 

592

 

Settlements made (in cash or in kind) during the period

 

(453

)

Balance at June 30, 2017

$

531

 

 

Recent Accounting Pronouncements

 

In May 2017, the Financial Accounting Standards Board (“FASB”) issued guidance clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award.  The new guidance must be adopted by the Company on a prospective basis no later than its

8


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

first quarter of fiscal year 2018, with early adoption permitted.  This new guidance is not expected to have an impact on the Company’s consolidated financial statements as it is not the Company’s practice to change either the terms or conditions of share-based payment awards once they are granted.

 

In November 2016, the FASB issued guidance which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  This guidance must be adopted by the Company no later than its first quarter of fiscal year 2019 and should be applied on a retrospective transition basis.  The Company has historically not held restricted cash balances and, therefore, does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.  However, upon adoption of this guidance, the Company will make any necessary changes to present restricted cash balances in accordance with the guidance.  

 

In October 2016, the FASB issued guidance which eliminates the exception of recognizing, at the time of transfer, current and deferred income taxes for intercompany profits on intra-entity asset transfers other than inventory.  This guidance must be adopted by the Company no later than its first quarter of fiscal year 2019 and applied on a modified retrospective transition basis.  Since early adoption is permitted, the Company is planning to adopt this guidance in its first quarter of its fiscal year ending September 30, 2018.  Under current guidance, the Company maintains a non-current prepaid income tax asset on its consolidated balance sheets representing income taxes paid in the U.S. on profits realized from the sale of rental equipment to its foreign subsidiaries.  As this rental equipment is depreciated, the prepaid tax is recognized as a current income tax expense in the Company’s consolidated statement of operations.  Upon adoption of the new guidance, the Company will be required to recognize a deferred tax asset related to the intercompany profits realized on the sale of assets to its subsidiaries; however, profits realized from the intercompany sale of inventories will continue to be accounted for as a prepaid income tax asset similar to the current guidance.  The deferred tax asset resulting from the sale of non-inventory assets will be recognized at the jurisdictional tax rate of the subsidiary purchasing the asset.  Any differences between the subsidiary’s jurisdictional tax rate and the seller’s tax rate pertaining to the intercompany profit will be charged to seller’s current income tax expense at the time of the sale.  Since the current U.S. income tax rate is substantially higher than the current income tax rates applicable to each of the Company’s foreign subsidiaries, adoption of the new guidance could have a significant impact on the Company’s provision for income taxes in future periods if significant amounts of rental equipment are sold by the Company’s U.S. subsidiaries to its foreign subsidiaries.  

 

In June 2016, the FASB issued guidance surrounding credit losses for financial instruments that replaces the incurred loss impairment methodology in current U.S. generally accepted accounting principles (“GAAP”).  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.  The standard is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods.  Early adoption for a fiscal year beginning after December 15, 2018 is permitted.  Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period.  The Company expects to adopt this standard during the first quarter of its fiscal year ending September 30, 2021 and is currently evaluating the impact of this new guidance on its consolidated financial statements.    

 

In March 2016, the FASB issued guidance to simplify key components of employee share-based payment accounting.  The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period.  The Company expects to adopt this guidance in the first quarter of its fiscal year ending September 30, 2018.  The new guidance simplifies several aspects of the accounting for share-based payment transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification of excess tax benefits from share-based payments on the statement of cash flows.  Under the current standard, the Company is required to track and record as a component of additional paid-in capital the tax impact of cumulative windfalls, net of any shortfalls, which result from excess tax benefits from share-based payments. As a result, the impact of net windfalls has not historically affected the Company’s provision for income taxes or its effective income tax rate.  Upon adoption of the new standard, the Company will record a cumulative-effect adjustment to retained earnings for unrecorded excess tax benefits residing in its additional paid in capital account. In addition, the Company will no longer track windfalls or shortfalls resulting from share-based payments since all future windfalls and shortfalls will be recorded as a component of the Company’s current provision for income taxes.  Depending on the magnitude of future windfalls or shortfalls, this change could significantly affect the Company’s provision for income taxes in a positive or negative direction.

In February 2016, the FASB issued guidance requiring a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months.  Consistent with current GAAP, the recognition, measurement and presentation of expense and cash flows

9


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

arising from a lease by a lessee primarily will depend on its classification of the lease as a finance or operating lease.  However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will also require operating leases of the lessee to be recognized on the balance sheet if the operating lease term is more than 12 months.  The guidance also requires disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases.  These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.  The guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2018 and is to be applied using the modified retrospective approach.  The Company expects to adopt this standard in its first quarter of its fiscal year ending September 30, 2020.  The Company currently is not a lessee under any lease agreements with a term longer than one year.  The Company is routinely a lessor in its rental contracts with customers; however, these rental agreements are short-term in nature and would be treated as operating leases under the new guidance.  As a result, the Company does not expect the adoption of this guidance to have a material effect upon its consolidated financial statements.  

 

In July 2015, the FASB issued guidance requiring management to measure inventory at the lower of cost or net realizable value.  Under the new guidance, net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period and should be applied retrospectively, with early application permitted.  The Company expects to adopt this standard in its first quarter of its fiscal year ending September 30, 2018.  Since the Company is a manufacturer and the nature of its inventory is generally unique to its designs and applications thus preventing the gathering of relevant external market data, its practice for calculating net realizable value under the current standard is consistent with the practice prescribed by the new guidance. Therefore, the Company does not expect the adoption of the new guidance to have a material effect upon its consolidated financial statements.  

 

In August 2014, the FASB issued guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern and to provide disclosures in certain circumstances.  The new guidance was issued to reduce diversity in the timing and content of footnote disclosures.  This guidance is effective for fiscal years ending after December 15, 2016 and interim reporting periods thereafter.  The Company’s management will begin evaluating any potential events and conditions which raise substantial doubt about the Company’s ability to continue as a going concern upon adoption on September 30, 2017.  The adoption of this guidance may result in additional disclosures to our consolidated financial statements.

In May 2014, the FASB issued guidance requiring entities to recognize revenue from contracts with customers by applying a five-step model in accordance with the core principle to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In addition, this guidance specifies the accounting for some costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition.  In August 2015, the FASB issued guidance deferring the effective date of this guidance to annual periods beginning after December 15, 2017, including interim reporting periods therein.  Entities have the option to adopt this guidance either retrospectively or through a modified retrospective transition method.  This new standard will supersede existing revenue guidance and affect the Company's revenue recognition process and the presentations or disclosures of the Company's consolidated financial statements and footnotes.  The Company recognizes revenue through three primary transactions types:  (i) the immediate recognition of revenue through the routine delivery of products to its customers, (ii) the rental of equipment to its customers through short-term operating leases, and (iii) the recognition of revenue utilizing the percentage of completion method for the delivery of complex products requiring long manufacturing times and substantial engineering resources.  While the Company does not expect the new guidance to impact its routine product sales or rental contracts, the new guidance could impact the manner in which it recognizes revenue using the percentage of completion method. The Company expects to adopt this standard in the first quarter of its fiscal year ending September 30, 2019 and is in the early stages of evaluating the standard including the method of adoption to determine the impact on its consolidated financial statements.  Further disclosures around policy changes or quantitative effects will be made as the Company moves closer to the adoption of this standard.

10


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

2.   Short-term Investments

 

 

 

As of June 30, 2017 (in thousands)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair

Value

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

23,756

 

 

$

 

 

$

(45

)

 

$

23,711

 

Government bonds

 

 

12,785

 

 

 

 

 

 

(35

)

 

 

12,750

 

Total

 

$

36,541

 

 

$

 

 

$

(80

)

 

$

36,461

 

 

 

 

As of September 30, 2016 (in thousands)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair

Value

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

17,342

 

 

$

 

 

$

(19

)

 

$

17,323

 

Government bonds

 

 

10,169

 

 

 

 

 

 

(1

)

 

 

10,168

 

Total

 

$

27,511

 

 

$

 

 

$

(20

)

 

$

27,491

 

 

Accumulated other comprehensive loss on the consolidated balance sheets at June 30, 2017 and September 30, 2016 included unrealized losses (net of tax) of $61,000 and $12,000, respectively.

 

The Company’s short-term investments have contractual maturities ranging from August 2017 to March 2019.

 

3.   Derivative Financial Instruments

At June 30, 2017 and September 30, 2016, the Company’s Canadian subsidiary had $24.9 million of Canadian dollar denominated intercompany accounts payable owed to one of the Company’s U.S. subsidiaries.  In order to mitigate its exposure to movements in foreign currency rates between the U.S. dollar and Canadian dollar, the Company routinely enters into foreign currency forward contracts to hedge a portion of its exposure to changes in the value of the Canadian dollar.  Approximately $0.7 million of these Canadian dollar denominated intercompany accounts payable are considered by management to be of a short-term nature whereby the appreciation or devaluation of the Canadian dollar against the U.S. dollar will result in a gain or loss, respectively, to the consolidated statement of operations.  The Company considers the remaining $24.2 million Canadian dollar denominated intercompany accounts payable to be of a long-term nature whereby settlement is not planned or anticipated in the foreseeable future; therefore, any resulting foreign exchange gains and losses are reported in the consolidated balance sheets as a component of other comprehensive income in accordance with ASC 830 “Foreign Currency Matters”.  On June 30, 2017, the Company entered into a $0.7 million Canadian dollar hedge contract with a United States bank to hedge its short-term Canadian dollar foreign exchange rate exposure.  An additional $4.3 million Canadian dollar hedge contract was entered into in July 2017.  These contracts, which expire September 30, 2017, reduce the impact on cash flows from movements in the Canadian dollar/U.S. dollar currency exchange rate, but have not been designated as a hedge for accounting purposes.

The following table summarizes the gross fair value of all derivative instruments, which are not designated as hedging instruments and their location in the consolidated balance sheets (in thousands):

 

Derivative Instrument

 

Location

 

June 30, 2017

 

 

September 30, 2016

 

Foreign Currency Forward Contracts

 

Prepaid Expenses and Other Current Assets

 

$

 

 

$

5

 

 

The following table summarizes the Company’s gains on derivative instruments in the consolidated statements of operations for the three and nine month periods ended June 30, 2017 and 2016 (in thousands):

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Derivative Instrument

 

Location

 

June 30, 2017

 

 

June 30, 2016

 

 

June 30, 2017

 

 

June 30, 2016

 

Foreign Currency Forward Contracts

 

Other Income (Expense)

 

$

(48

)

 

$

(14

)

 

$

(20

)

 

$

14

 

 

11


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Amounts in the above table include realized and unrealized derivative gains and losses.

4.   Fair Value of Financial Instruments

At June 30, 2017, the Company’s financial instruments included cash and cash equivalents, short-term investments, foreign currency forward contract, trade and notes receivables and accounts payable.  Due to the short-term maturities of cash and cash equivalents, trade and other receivables and accounts payable, the carrying amounts approximate fair value on the respective balance sheet dates.

The Company measures its short-term investments and derivative instruments at fair value on a recurring basis.  The fair value measurement of the Company’s short-term investments and derivative instruments was determined using the following inputs (in thousands):

 

 

 

As of June 30, 2017

 

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

(Level 2)

 

 

Significant

Unobservable

(Level 3)

 

 

Totals

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

23,711

 

 

$

 

 

$

 

 

$

23,711

 

Government bonds

 

 

12,750

 

 

 

 

 

 

 

 

 

12,750

 

Total

 

$

36,461

 

 

$

 

 

$

 

 

$

36,461

 

 

 

 

As of September 30, 2016

 

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

(Level 2)

 

 

Significant

Unobservable

(Level 3)

 

 

Totals

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

17,323

 

 

$

 

 

$

 

 

$

17,323

 

Government bonds

 

 

10,168

 

 

 

 

 

 

 

 

$

10,168

 

Foreign currency forward contract

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Total

 

$

27,491

 

 

$

5

 

 

$

 

 

$

27,496

 

 

5.   Accounts and Notes Receivable

Current trade accounts receivable are reflected in the following table (in thousands):

 

 

 

June 30, 2017

 

 

September 30, 2016

 

Trade accounts receivable

 

$

9,725

 

 

$

17,841

 

Allowance for doubtful accounts

 

 

(1,398

)

 

 

(2,449

)

 

 

$

8,327

 

 

$

15,392

 

 

The allowance for doubtful accounts represents the Company’s best estimate of probable credit losses.  The Company determines the allowance based upon historical experience and a current review of its balances.  Accounts receivable balances are charged off against the allowance whenever it is probable that the receivable will not be recoverable.

12


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Notes receivable, net is reflected in the following table (in thousands):

 

 

 

June 30, 2017

 

 

September 30, 2016

 

Notes receivable

 

$

4,222

 

 

$

3,850

 

Allowance for doubtful notes

 

 

(1,020

)

 

 

(500

)

 

 

 

3,202

 

 

 

3,350

 

Less current portion

 

 

2,614

 

 

 

1,533

 

Non-current notes receivable

 

$

588

 

 

$

1,817

 

 

6.   Inventories

Inventories consist of the following (in thousands):

 

 

 

June 30, 2017

 

 

September 30, 2016

 

Finished goods

 

$

36,190

 

 

$

40,260

 

Work in process

 

 

1,828

 

 

 

8,272

 

Raw material

 

 

70,438

 

 

 

65,682

 

Obsolescence reserve

 

 

(20,432

)

 

 

(9,674

)

 

 

$

88,024

 

 

$

104,540

 

 

During the nine months ended June 30, 2017 and 2016, the Company made non-cash inventory transfers of $1.6 million and $3.0 million, respectively, to rental equipment and $1.9 million and $0.1 million, respectively, to property, plant and equipment.  Raw materials include semi-finished goods and component parts totaling $43.8  million at June 30, 2017 and September 30, 2016, respectively.

7.   Long-Term Debt

The Company had no long-term debt outstanding at June 30, 2017 and September 30, 2016.

On March 2, 2011, the Company entered into a credit agreement with Frost Bank with borrowing availability of $50.0 million (the “Credit Agreement”).  On May 4, 2015, the Company amended the Credit Agreement which reduced its borrowing availability to $30.0 million with amounts available for borrowing determined by a borrowing base.  Under the amendments to the Credit Agreement, the borrowing base is determined based upon certain of the Company’s and its U.S. subsidiaries’ assets which include (i) 80% of certain accounts receivable plus (ii) 50 % of certain notes receivable (such result not to exceed $10 million) plus (iii) 25% of certain inventories (excluding work-in-process inventories).  As of June 30, 2017, the Company’s borrowing base was $26.2 million.  As of June 30, 2017, the amount available for borrowing was $25.8 million after consideration of $0.4 million of outstanding letters of credit.  The Company’s domestic subsidiaries have guaranteed the obligations of the Company under the Credit Agreement and such subsidiaries have secured their obligations under such guarantees by the pledge of substantially all of the assets of such subsidiaries, except real property assets.  The Credit Agreement expires on May 4, 2018 and all borrowed funds are due and payable at that time.  The Company is required to make monthly interest payments on borrowed funds.  The Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of a single financial ratio that compares certain of the Company’s assets to certain of its liabilities, restricts the Company and its subsidiaries’ ability to repurchase its common stock and pay cash dividends, and contains other covenants customary in agreements of this type.  The interest rate for borrowings under the Credit Agreement as amended is based on the Wall Street Journal prime rate, which was 4.25% at June 30, 2017.  At June 30, 2017, the Company was in compliance with all covenants under the Credit Agreement.

13


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

8.   Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted of the following (in thousands):

 

 

 

Unrealized Losses on

Available-for-Sale

Securities

 

 

Foreign Currency

Translation

Adjustments

 

 

Totals

 

Balance at October 1, 2016

 

$

(15

)

 

$

(15,926

)

 

$

(15,941

)

Changes in unrealized losses on available-for-sale

   securities

 

 

(61

)

 

 

 

 

 

(61

)

Foreign currency translation adjustments

 

 

 

 

 

1,499

 

 

 

1,499

 

Balance at June 30, 2017

 

$

(76

)

 

$

(14,427

)

 

$

(14,503

)

 

9.   Stock-Based Compensation

During the nine months ended June 30, 2017, the Company issued 109,500 shares of restricted stock under its 2014 Long Term Incentive Plan, as amended (the “Plan”).  The weighted average grant date fair value of the restricted stock was $21.12 per share.  The grant date fair value of these awards was $2.3 million, which will be charged to expense over the next four years as the restrictions lapse.  Compensation expense for restricted stock awards was determined based on the closing market price of the Company’s stock on the date of grant applied to the total number of shares that are anticipated to fully vest.  Recipients of restricted stock awards are entitled to vote such shares and are entitled to dividends, if paid.

During the nine months ended June 30, 2017, the Company also issued 51,300 nonqualified stock options under the Plan.  The options issued are based upon three tiers, each with separate service based vesting conditions and market conditions that affect exercisability.  Market based conditions are based on achieving a specified market return on the Company’s stock price.  Compensation expense for the nonqualified stock option awards was determined based on a Monte Carlo simulation, which incorporates the possibility that the market conditions may not be satisfied.  The weighted average grant date fair value of the options issued was determined to be $9.35 per option resulting in unrecognized compensation costs of $0.5 million, which will be charged to expense over the requisite service period of the options, ranging from 18 to 36 months.

As of June 30, 2017, the Company had unrecognized compensation expense of $5.1 million relating to restricted stock awards.  This unrecognized compensation expense is expected to be recognized over a weighted average period of 2.7 years.  In addition, the Company had $0.4 million of unrecognized compensation expense related to nonqualified stock option awards which is expected to be recognized over a weighted average period of 1.5 years.

As of June 30, 2017, a total of 292,550 shares of restricted stock and 201,800 nonqualified stock options shares were outstanding.

14


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

10.   Loss Per Common Share

The Company applies the two -class method in calculating per share data.  The following table summarizes the calculation of net loss and weighted average common shares and common equivalent shares outstanding for purposes of the computation of loss per share (in thousands, except share and per share data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

June 30, 2017

 

 

June 30, 2016

 

Net loss

 

$

(14,376

)

 

$

(11,654

)

 

$

(37,584

)

 

$

(33,661

)

Less: Income allocable to unvested restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

Loss available to common shareholders

 

 

(14,376

)

 

 

(11,654

)

 

 

(37,584

)

 

 

(33,661

)

Reallocation of participating earnings

 

 

 

 

 

 

 

 

 

 

 

 

Loss attributable to common shareholders for diluted

   earnings per share

 

$

(14,376

)

 

$

(11,654

)

 

$

(37,584

)

 

$

(33,661

)

Weighted average number of common share equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares used in basic loss per share

 

 

13,147,016

 

 

 

13,051,916

 

 

 

13,129,196

 

 

 

13,042,000

 

Common share equivalents outstanding related to

   stock options

 

 

 

 

 

 

 

 

 

 

 

 

Total weighted average common shares and common

   share equivalents used in diluted loss per share

 

 

13,147,016

 

 

 

13,051,916

 

 

 

13,129,196

 

 

 

13,042,000

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.09

)