10-Q 1 geos-10q_20171231.htm 10-Q geos-10q_20171231.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 December 31, 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 13,563,491 shares of the Registrant’s Common Stock outstanding as of the close of business on January 31, 2018.

 

 

 

 


 

Table of Contents

 

2


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

 

 

December 31, 2017

 

 

September 30, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,923

 

 

$

15,092

 

Short-term investments

 

 

32,085

 

 

 

36,137

 

Trade accounts receivable, net

 

 

7,011

 

 

 

9,435

 

Financing receivables

 

 

5,793

 

 

 

3,055

 

Income tax receivable

 

 

263

 

 

 

273

 

Inventories

 

 

19,994

 

 

 

20,752

 

Prepaid expenses and other current assets

 

 

1,939

 

 

 

1,623

 

Total current assets

 

 

81,008

 

 

 

86,367

 

 

 

 

 

 

 

 

 

 

Rental equipment, net

 

 

15,542

 

 

 

16,462

 

Property, plant and equipment, net

 

 

36,475

 

 

 

37,399

 

Non-current inventories

 

 

56,184

 

 

 

55,935

 

Deferred income tax assets, net

 

 

305

 

 

 

259

 

Non-current financing receivables, net

 

 

7,032

 

 

 

8,195

 

Prepaid income taxes

 

 

56

 

 

 

450

 

Other assets

 

 

619

 

 

 

629

 

Total assets

 

$

197,221

 

 

$

205,696

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable trade

 

$

3,322

 

 

$

2,599

 

Accrued expenses and other current liabilities

 

 

6,516

 

 

 

6,338

 

Deferred revenue

 

 

1,461

 

 

 

1,568

 

Total current liabilities

 

 

11,299

 

 

 

10,505

 

 

 

 

 

 

 

 

 

 

Deferred income tax liabilities

 

 

29

 

 

 

37

 

Total liabilities

 

 

11,328

 

 

 

10,542

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, 1,000,000 shares authorized, no shares issued and outstanding

 

 

 

 

 

 

Common stock, $.01 par value, 20,000,000 shares authorized, 13,560,291 and 13,438,316 shares issued and outstanding

 

 

136

 

 

 

134

 

Additional paid-in capital

 

 

84,557

 

 

 

83,733

 

Retained earnings

 

 

115,686

 

 

 

125,517

 

Accumulated other comprehensive loss

 

 

(14,486

)

 

 

(14,230

)

Total stockholders’ equity

 

 

185,893

 

 

 

195,154

 

Total liabilities and stockholders’ equity

 

$

197,221

 

 

$

205,696

 

 

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

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Revenue:

 

 

 

 

 

 

 

 

Products

 

$

13,425

 

 

$

10,297

 

Rental equipment

 

 

1,219

 

 

 

4,988

 

Total revenue

 

 

14,644

 

 

 

15,285

 

Cost of revenue:

 

 

 

 

 

 

 

 

Products

 

 

13,243

 

 

 

14,836

 

Rental equipment

 

 

2,369

 

 

 

3,776

 

Total cost of revenue

 

 

15,612

 

 

 

18,612

 

 

 

 

 

 

 

 

 

 

Gross profit (loss)

 

 

(968

)

 

 

(3,327

)

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,129

 

 

 

5,094

 

Research and development

 

 

3,158

 

 

 

3,372

 

Bad debt expense (recovery)

 

 

350

 

 

 

(482

)

Total operating expenses

 

 

8,637

 

 

 

7,984

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(9,605

)

 

 

(11,311

)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(64

)

 

 

(8

)

Interest income

 

 

263

 

 

 

130

 

Foreign exchange losses, net

 

 

(43

)

 

 

(65

)

Other, net

 

 

(25

)

 

 

(17

)

Total other income, net

 

 

131

 

 

 

40

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(9,474

)

 

 

(11,271

)

Income tax expense

 

 

6

 

 

 

434

 

Net loss

 

$

(9,480

)

 

$

(11,705

)

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.72

)

 

$

(0.89

)

Diluted

 

$

(0.72

)

 

$

(0.89

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

13,202,384

 

 

 

13,094,809

 

Diluted

 

 

13,202,384

 

 

 

13,094,809

 

 

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

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Net loss

 

$

(9,480

)

 

$

(11,705

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

Change in unrealized losses on available-for-sale securities

 

 

(51

)

 

 

(62

)

Foreign currency translation adjustments

 

 

(205

)

 

 

(306

)

Total other comprehensive loss, net of tax

 

 

(256

)

 

 

(368

)

Total comprehensive loss

 

$

(9,736

)

 

$

(12,073

)

 

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)

 

 

 

Three Months Ended

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,480

)

 

$

(11,705

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Deferred income tax expense (benefit)

 

 

(55

)

 

 

34

 

Rental equipment depreciation

 

 

2,247

 

 

 

3,308

 

Property, plant and equipment depreciation

 

 

1,095

 

 

 

1,313

 

Accretion of discounts on short-term investments

 

 

13

 

 

 

16

 

Stock-based compensation expense

 

 

826

 

 

 

1,375

 

Bad debt expense (recovery)

 

 

350

 

 

 

(482

)

Inventory obsolescence expense

 

 

1,434

 

 

 

4,147

 

Gross profit from sale of used rental equipment

 

 

(2,566

)

 

 

(1,201

)

Realized loss on short-term investments

 

 

 

 

 

1

 

Effects of changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

2,562

 

 

 

2,312

 

Income tax receivable

 

 

10

 

 

 

 

Inventories

 

 

(2,865

)

 

 

(1,507

)

Prepaid expenses and other current assets

 

 

(329

)

 

 

(39

)

Prepaid income taxes

 

 

41

 

 

 

393

 

Accounts payable trade

 

 

723

 

 

 

(348

)

Accrued expenses and other

 

 

267

 

 

 

(257

)

Deferred revenue

 

 

(65

)

 

 

771

 

Income tax payable

 

 

 

 

 

(31

)

Net cash used in operating activities

 

 

(5,792

)

 

 

(1,900

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(218

)

 

 

(106

)

Proceeds from the sale of used rental equipment

 

 

997

 

 

 

1,915

 

Purchases of short-term investments

 

 

(1,905

)

 

 

 

Proceeds from the sale of short-term investments

 

 

5,898

 

 

 

2,674

 

Net cash provided by investing activities

 

 

4,772

 

 

 

4,483

 

 

 

 

 

 

 

 

 

 

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

 

 

(149

)

 

 

(101

)

Increase (decrease) in cash and cash equivalents

 

 

(1,169

)

 

 

2,532

 

Cash and cash equivalents, beginning of fiscal year

 

 

15,092

 

 

 

10,262

 

Cash and cash equivalents, end of fiscal period

 

$

13,923

 

 

$

12,794

 

 

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, 2017 was derived from the Company’s audited consolidated financial statements at that date.  The consolidated balance sheet at December 31, 2017 and the consolidated statements of operations, comprehensive loss and the consolidated statements of cash flows for the three months ended December 31, 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 months ended December 31, 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, 2017.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated 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.  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.

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.

The Company reviews its inventories for classification purposes.  The value of inventories not expected to be realized in cash, sold or consumed during its next operating cycle are classified as noncurrent assets.

7


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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.  

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, 2017

$

508

 

Accruals for warranties issued during the period

 

197

 

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

 

(150

)

Balance at December 31, 2017

$

555

 

 

8


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Recently Adopted Accounting Pronouncements

In October 2016, the Financial Accounting Standards Board (“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.  The Company adopted this guidance in its first quarter of its fiscal year ending September 30, 2018 using the modified retrospective approach.  The adoption resulted in a cumulative-effect adjustment to opening retained earnings of $0.4 million.  Under prior guidance, the Company maintained 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 was depreciated, the prepaid tax was recognized as a current income tax expense in the Company’s consolidated statement of operations.  Under the new guidance, the Company is required to recognize a deferred tax asset related to the intercompany profits realized on the sale of non-inventory 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 in accordance with the prior guidance.  Under the new guidance, the deferred tax asset resulting from the sale of non-inventory assets is recognized at the jurisdictional tax rate of the subsidiary which purchased the asset.  Any differences between the subsidiary’s jurisdictional tax rate and the seller’s tax rate pertaining to the intercompany profit are charged to seller’s current income tax expense at the time of the sale.  With the recent reduction in the U.S. income tax rate to 21%, and assuming that a majority of the Company’s equipment sales will continue to be made to its Canadian subsidiary having a higher statutory tax rate, the new guidance is expected to have a favorable impact on the Company’s provision for income taxes in future periods.  Due to the fact the Company has a valuation allowance against its net deferred tax assets, the adoption of this guidance had no impact upon the Company’s income tax expense for the three months ended December 31, 2017.

In March 2016, the FASB issued guidance to simplify key components of employee share-based payment accounting.  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.  The Company adopted this guidance in the first quarter of its fiscal year ending September 30, 2018.  No cumulative effect adjustment to retained earnings was needed upon adoption as the Company has no unrecorded excess tax benefits residing in additional paid-in-capital account.  Under the prior standard, the Company was required to track and record as a component of additional paid-in capital the tax impact of cumulative windfalls, net of any shortfalls, which resulted 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.  Under the new guidance, 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.  Due to the fact the Company has a valuation allowance against its net deferred tax assets, the adoption of this guidance had no impact upon the Company’s income tax expense for the three months ended December 31, 2017.

 

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.    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 existing practice for calculating net realizable value under the current standard is consistent with the practice prescribed by the new guidance.  The Company adopted this standard in its first quarter of its fiscal year ending September 30, 2018. The adoption did not have a material effect upon the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

 

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.  

    

9


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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 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 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 generally short-term in nature, and the Company believes would be treated as operating leases under the new guidance; however, the Company has not completed a detailed review of its lease arrangements, and these conclusions are subject to change.    

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.  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.

    

2.   Short-term Investments

 

 

 

As of December 31, 2017 (in thousands)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair

Value

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

21,739

 

 

$

 

 

$

(67

)

 

$

21,672

 

Government bonds

 

 

10,452

 

 

 

 

 

 

(39

)

 

 

10,413

 

Total

 

$

32,191

 

 

$

 

 

$

(106

)

 

$

32,085

 

 

10


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

 

As of September 30, 2017 (in thousands)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair

Value

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

22,829

 

 

$

 

 

$

(31

)

 

$

22,798

 

Government bonds

 

 

13,363

 

 

 

 

 

 

(24

)

 

 

13,339

 

Total

 

$

36,192

 

 

$

 

 

$

(55

)

 

$

36,137

 

 

  The Company’s short-term investments have contractual maturities ranging from January 2018 to January 2020.

 

3.   Derivative Financial Instruments

At December 31, 2017 and September 30, 2017, the Company’s Canadian subsidiary had CAN$32.7 million and CAD$26.1 million, respectively, 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.  On December 29, 2017, the Company entered into a CAN$32.0 million 90-day hedge contract effective January 2, 2018 with a United States bank to reduce the impact on cash flows from movements in the Canadian dollar/U.S. dollar currency exchange rate, but has not been designated as a hedge for accounting purposes.  The Company’s derivative instruments had no fair value as of December 31, 2017 and September 30, 2017.        

                            

The following table summarizes the Company’s gains on derivative instruments in the consolidated statements of operations for the three months ended December 31, 2017 and 2016 (in thousands):

 

 

 

 

 

Three Months Ended

 

Derivative Instrument

 

Location

 

December 31, 2017

 

 

December 31, 2016

 

Foreign Currency Forward Contracts

 

Other Income (Expense)

 

$

158

 

 

$

72

 

 

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

4.   Fair Value of Financial Instruments

At December 31, 2017, the Company’s financial instruments included cash and cash equivalents, short-term investments, derivative instruments, trade accounts and financing 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 December 31, 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

 

 

11


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

 

As of September 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

 

$

22,798

 

 

$

 

 

$

 

 

$

22,798

 

Government bonds

 

 

13,339

 

 

 

 

 

 

 

 

$

13,339

 

Total

 

$

36,137

 

 

$

 

 

$

 

 

$

36,137

 

 

5.   Trade Accounts and Financing Receivables

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

 

 

 

December 31, 2017

 

 

September 30, 2017

 

Trade accounts receivable

 

$

8,265

 

 

$

10,830

 

Allowance for doubtful accounts

 

 

(1,254

)

 

 

(1,395

)

  

 

$

7,011

 

 

$

9,435

 

 

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.

Financing receivables are reflected in the following table (in thousands):

 

 

 

December 31, 2017

 

 

September 30, 2017

 

Promissory notes

 

$

7,062

 

 

$

4,306

 

Sales-type lease

 

 

7,807

 

 

 

8,581

 

Total financing receivables

 

 

14,869

 

 

 

12,887

 

Unearned income:

 

 

 

 

 

 

 

 

   Promissory notes

 

 

(95

)

 

 

(90

)

   Sales-type lease

 

 

(444

)

 

 

(527

)

      Total unearned income

 

 

(539

)

 

 

(617

)

Total financing receivables, net of unearned income

 

 

14,330

 

 

 

12,270

 

Allowance for doubtful promissory notes

 

 

(1,505

)

 

 

(1,020

)

Less current portion

 

 

(5,793

)

 

 

(3,055

)

Non-current financing receivables

 

$

7,032

 

 

$

8,195

 

 

During the three months ended December 31, 2017, the Company issued a $2.8 million promissory note receivable to a customer in connection with the sale of rental equipment.  Cash flows from financing receivables related to the sale of rental equipment for the three months ended December 31, 2017 of $0.9 million are presented in proceeds from the sale of used rental equipment in the consolidated statements of cash flows.

  

 

12


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

6.   Inventories

Inventories consist of the following (in thousands):

 

 

 

December 31, 2017

 

 

September 30, 2017

 

Finished goods

 

$

32,768

 

 

$

33,690

 

Work in process

 

 

5,837

 

 

 

2,512

 

Raw material

 

 

68,078

 

 

 

70,099

 

Obsolescence reserve

 

 

(30,505

)

 

 

(29,614

)

 

 

 

76,178

 

 

 

76,687

 

 

 

 

 

 

 

 

 

 

Less current portion

 

 

(19,994

)

 

 

(20,752

)

Non-current portion

 

$

56,184

 

 

$

55,935

 

 

During the three months ended December 31, 2017 and 2016, the Company made non-cash inventory transfers of $2.0 million and $0.3 million, respectively, to rental equipment.  Raw materials include semi-finished goods and component parts which totaled approximately $44.1 million and $43.2 million at December 31, 2017 and September 30, 2017, respectively.             

7.   Long-Term Debt

The Company had no long-term debt outstanding at December 31, 2017 and September 30, 2017.

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.  On October 25, 2017, the Company entered into another amendment to the Credit Agreement which extended its maturity to April 30, 2019.  The 2017 amendment also modified the borrowing base to be determined based upon certain of the Company’s 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 (such result not to exceed $20 million) and requires the Company to maintain unencumbered liquid assets of $10 million.  The 2017 amendment also removed a requirement that the Company maintain a financial ratio that compares certain of the Company’s assets to certain of its liabilities and imposed a new financial covenant that the Company maintain a minimum amount of certain liquid assets.  As of December 31, 2017, the Company’s borrowing base was $26.6 million.  As of December 31, 2017, the amount available for borrowing was $26.3 million after consideration of $0.3 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 Company is required to make monthly interest payments on borrowed funds.  The Credit Agreement limits the incurrence of additional indebtedness, restricts the Company and its subsidiaries’ ability to pay cash dividends and contains other covenants customary in agreements of this type.  The interest rate for borrowings under the Credit Agreement is based on the Wall Street Journal prime rate, which was 4.50% at December 31, 2017.  At December 31, 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, 2017

 

$

(58

)

 

$

(14,172

)

 

$

(14,230

)

Changes in unrealized losses on available-for-sale

   securities

 

 

(51

)

 

 

 

 

 

(51

)

Foreign currency translation adjustments

 

 

 

 

 

(205

)

 

 

(205

)

Balance at December 31, 2017

 

$

(109

)

 

$

(14,377

)

 

$

(14,486

)

 

9.   Stock-Based Compensation

During the three months ended December 31, 2017, the Company issued 138,650 shares of restricted stock under its 2014 Long Term Incentive Plan, as amended.  The weighted average grant date fair value of the restricted stock was $15.54 per share.  The grant date fair value of these awards was $2.2 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.    

As of December 31, 2017, the Company had unrecognized compensation expense of $4.8 million relating to restricted stock awards.  This unrecognized compensation expense is expected to be recognized over a weighted average period of 3.1 years.  In addition, the Company had $0.3 million of unrecognized compensation expense related to nonqualified stock option awards which is expected to be recognized over a weighted average period of 1.2 years.       

As of December 31, 2017, a total of 300,675 shares of restricted stock and 201,800 nonqualified stock options shares were outstanding.

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

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Net loss

 

$

(9,480

)

 

$

(11,705

)

Less: Income allocable to unvested restricted stock

 

 

 

 

 

 

Loss available to common shareholders

 

 

(9,480

)

 

 

(11,705

)

Reallocation of participating earnings

 

 

 

 

 

 

Loss attributable to common shareholders for diluted

   earnings per share

 

$

(9,480

)

 

$

(11,705

)

Weighted average number of common share equivalents:

 

 

 

 

 

 

 

 

Common shares used in basic loss per share

 

 

13,202,384

 

 

 

13,094,809

 

Common share equivalents outstanding related to

   stock options

 

 

 

 

 

 

Total weighted average common shares and common

   share equivalents used in diluted loss per share

 

 

13,202,384

 

 

 

13,094,809

 

Loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.72

)

 

$

(0.89

)

Diluted

 

$

(0.72

)

 

$

(0.89

)

 

14


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

For the calculation of diluted loss per share for the three months ended December 31, 2017 and 2016, 201,800 and 206,300 stock options, respectively, were excluded in the calculation of weighted average shares outstanding as a result of their impact being antidilutive.   

11.   Commitments and Contingencies

The Company is involved in various pending or potential 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 litigation.  Management is not aware of any material pending or known to be contemplated legal or government proceedings against the Company.

12.   Segment Information

The Company reports and evaluates financial information for two segments:  Seismic and Non-Seismic. Seismic product lines include: land and marine wireless data acquisition systems, permanent land and seabed reservoir monitoring products and services, geophones and geophone strings, hydrophones, leader wire, connectors, telemetry cables, marine streamer retrieval and steering devices and various other products.  The Non-Seismic product lines include imaging products and industrial products.

The following table summarizes the Company’s segment information (in thousands):

 

 

 

Three Months Ended

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Revenue:

 

 

 

 

 

 

 

 

Seismic

 

$

8,039

 

 

$

9,406

 

Non-Seismic

 

 

6,454

 

 

 

5,736

 

Corporate

 

 

151

 

 

 

143

 

Total

 

$

14,644

 

 

$

15,285

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

Seismic

 

$

(7,673

)

 

$

(9,453

)

Non-Seismic

 

 

1,029

 

 

 

1,052

 

Corporate

 

 

(2,961

)

 

 

(2,910

)

Total

 

$

(9,605

)

 

$

(11,311

)

 

13.   Income Taxes

The Company’s effective tax rate for the three months ended December 31, 2017 was impacted by the Tax Cuts and Jobs Act (“the Act”), which was enacted into law on December 22, 2017.  Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations. As a result, the Company made changes to its provision for income tax resulting from the enactment of the Act for the three months ended December 31, 2017.

 

The Act includes significant changes to the U.S. corporate income tax system which reduces the U.S. federal corporate tax rate from 35.0% to 21.0% as of January 1, 2018; shifts to a modified territorial tax regime which requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred; and creates new taxes on certain foreign-sourced earnings.  The decrease in the U.S. federal corporate tax rate from 35.0% to 21.0% results in a blended statutory tax rate of 24.5% for the Company’s fiscal year ending September 30, 2018. The new taxes for certain foreign-sourced earnings under the Act are effective for the Company after the fiscal year ending September 30, 2018.

The Company is currently in the early stages of evaluating the impact of the Act on its consolidated financial statements.  Based on the Company’s initial assessments to date, it expects the one-time transition tax on certain foreign earnings and profits to have a minimal cash impact since it anticipates that it will be able to utilize existing net operating loss carryforwards to substantially offset any taxes payable on foreign earnings and profits.  Additionally, the Company has adjusted its U.S. gross deferred tax assets and

15


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

liabilities to the new 21% statutory tax rate; however, it also recorded a corresponding adjustment to a valuation allowance which resulted in no net impact to deferred tax assets or provision for income taxes.  Except for the adjustments referred to above,  the Company has not recorded any income tax effects of the Act in its consolidated financial statements (including any provisional amounts) because it does not yet have the necessary information available, prepared or analyzed in reasonable detail to complete the applicable accounting.

The Company’s effective tax rates for the three months ended December 31, 2017 and 2016 were (0.1)% and (9.6)% , respectively.  The United States statutory rate for the three months ended December 31, 2017 and 2016 was 24.5% (blended) and 35%, respectively.  Compared to the United States statutory rate, the lower effective tax rates resulted primarily from the provision of a valuation allowance against the Company’s U.S. and Canadian deferred tax assets due to the uncertainty surrounding the Company’s ability to utilize such deferred tax assets in the future to offset taxable income.       

                   

14.   Exit and Disposal Activities

In December 2017, the Company initiated a program to reduce operating costs in light of expected and continuing low levels of seismic product demand.  The program is expected to produce approximately $6 million of annualized cash savings.  The majority of the cost reductions were realized through a reduction of over 60 employees from the Company’s Houston area workforce.   In connection with the workforce reductions, the Company incurred $0.7 million of termination costs in its first quarter of fiscal year 2018.  The termination costs were recorded to both cost of revenue and operating expenses in the consolidated statement of operations.  No further termination costs are expected and there are no outstanding liabilities related to this program as of December 31, 2017.    

 

 

16


 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the major elements of our consolidated financial statements.  You should read this discussion and analysis together with our consolidated financial statements, including the accompanying notes, and other detailed information appearing elsewhere in this Quarterly Report on Form 10-Q and our annual report on Form 10-K for the year ended September 30, 2017.

Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein, if any, 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”, “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 adoption and sale of our products in various geographic regions, anticipated levels of capital expenditures and the sources of funding therefore, and our strategy for growth, product development, market position, financial results and the provision of accounting reserves.  These forward-looking statements reflect our best 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, 2017, as well as other cautionary language in such Annual Report and this Quarterly Report, 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, decreases in commodity price levels, 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, and any negative impact from our restatement of our financial statements regarding current assets.  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

Geospace Technologies Corporation reincorporated as a Texas corporation on April 16, 2015.  We originally incorporated as a Delaware corporation on September 27, 1994.  Unless otherwise specified, the discussion in this Quarterly Report on Form 10-Q refers to Geospace Technologies Corporation and its subsidiaries.  We design and manufacture instruments and equipment used in the oil and gas industry to acquire seismic data in order to locate, characterize and monitor hydrocarbon producing reservoirs.  We also design and manufacture non-seismic products, including industrial products, offshore cables and imaging equipment.  We report and categorize our customers and products into two different segments: Seismic and Non-Seismic.

We have engaged in the seismic instrument and equipment business since 1980 and market our products primarily to the oil and gas industry.  Demand for our products 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, 2017.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”).  Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov.  You may also read and copy any document we file at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549.  Please call the SEC at 1-800-SEC-0330 for further information on their public reference room.  Our SEC filings are also available to the public on our website at http://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.

 

17


 

Products and Product Development

Seismic Products

Our seismic 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.  Our seismic product lines currently consist of land and marine nodal data acquisition systems, permanent land and seabed reservoir monitoring products and services, geophones and geophone strings, hydrophones, leader wire, connectors, telemetry cables, marine streamer retrieval and steering devices and various other products.  Our seismic products are compatible with most major competitive seismic data acquisition systems currently in use.  We believe that our seismic 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 which are used to detect pressure changes.  Hydrophones transmit electrical impulses back to the vessel’s data recording unit where the seismic data is stored for subsequent processing and analysis.  Our marine seismic products also help steer streamers while being towed and help recover streamers if they become disconnected from the vessel.

Our seismic sensor, cable and connector products are compatible with most major competitive seismic data acquisition systems currently in use.  Revenue from these products results primarily from seismic contractors purchasing our products as components of new seismic data acquisition systems or to repair and replace components of seismic data acquisition systems already in use.

Our products used in marine seismic data acquisition include our seismic streamer retrieval devices (“SRDs”).  Occasionally, streamer cables are severed and become disconnected from the vessel as a result of obstacles, inclement weather, vessel traffic or human error.  Our SRDs, which are attached to the streamer cables, contain air bags which are designed to inflate automatically at a given water depth, bringing the severed streamer cables to the surface.  These SRDs save the seismic contractors significant time and money compared to the alternative of losing the streamer cable.  We also produce seismic streamer steering devices, or “birds,” which are fin-like devices that attach to the streamer cable.  These birds help maintain the streamer cable at a certain desired depth as it is being towed through the water.

Wireless Products

We have developed a land-based wireless (or nodal) seismic data acquisition system called the GSX.  Rather than utilizing interconnecting cables as required by most traditional land data acquisition systems, each GSX station operates as an independent data collection system, allowing our GSX stations to be deployed in virtually unlimited channel configurations.  As a result, our GSX system requires 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.  Our GSX system is designed into configurations ranging from one to four channels per station.  Since its introduction in 2008 and through December 31, 2017, we have sold 417,000 GSX channels and we have 64,000 GSX channels in our rental fleet.  We expect to make additional investments in our GSX rental fleet in fiscal year 2018 to replenish a sale of used GSX rental equipment in the fourth quarter of fiscal year 2017.

We have also developed a marine-based wireless seismic data acquisition system called the OBX.  Similar to our GSX land-based wireless system, the marine OBX system can be deployed in virtually unlimited channel configurations and does not require interconnecting cables between each station.  Our deep water versions of the OBX system can be deployed in depths of up to 3,450 meters.  Through December 31, 2017, we have sold approximately 600 OBX stations and we have 6,700 OBX stations in our rental fleet.  

Reservoir Products

Seismic surveys repeated over selected time intervals show dynamic changes within the reservoir and can be used to monitor the effects of oil and gas development and production.  In this regard, we have developed permanently installed high-definition reservoir monitoring systems for land and ocean-bottom applications in producing oil and gas fields.  We also produce a retrievable version of our ocean-bottom system for use on fields where permanently installed systems are not appropriate or economical.  Utilizing these tools, producers can enhance the recovery of oil and gas deposits over the life of a reservoir.

18


 

Our high-definition reservoir monitoring products include the HDSeis™ product line and a suite of borehole and reservoir monitoring products and services.  Our HDSeis™ system is a high-definition seismic data acquisition system with flexible architecture that allows it to be configured as a borehole seismic system or as a subsurface system for both land and marine reservoir-monitoring projects.  The scalable architecture of the HDSeis™ system enables custom designed system 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”).  Modular architecture allows virtually unlimited channel expansion.  In addition, multi-system synchronization features make the HDSeis™ system well suited for multi-well or multi-site acquisition, simultaneous surface and downhole acquisition and continuous reservoir monitoring projects.

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.  We believe our HDSeis™ System and tools, designed for cost-effective deployment and lifetime performance, will make borehole and seabed seismic acquisition a cost-effective and reliable process for the challenges of reservoir monitoring.  Our multi-component seismic product developments 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.

We have not delivered nor did we receive orders for any permanent reservoir monitoring systems during fiscal year 2017 or during the first three months of fiscal year 2018.

In addition, we produce seismic borehole acquisition systems which 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 fracturing operations.

Non-Seismic Products

Our non-seismic businesses leverage upon our existing manufacturing facilities and engineering capabilities.  We have found that many of our seismic products, with little or no modification, have direct application to industries beyond those involved in oil and gas exploration and development.  For example, our customers utilize our borehole tools to monitor subsurface carbon dioxide injections and for mine safety applications.

Our non-seismic products include electronic pre-press products that employ direct thermal imaging and digital inkjet printing technologies targeted at the commercial graphics, industrial graphics, textile and flexographic printing industries.  Our other non-seismic products consist of (i) sensors and tools for vibration monitoring, mine safety application and earthquake detection, (ii) cables for power and communication for the offshore oil and gas and offshore construction industries, (iii) water meter cables and connectors, and (iv) other specialty industrial cable and connector products.

 

19


 

Consolidated Results of Operations

We report and evaluate financial information for two segments: Seismic and Non-Seismic.  Summary financial data by business segment follows (in thousands):

 

 

 

Three Months Ended

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Seismic

 

 

 

 

 

 

 

 

Traditional exploration product revenue

 

$

3,790

 

 

$

2,570

 

Wireless exploration product revenue

 

 

3,631

 

 

 

6,323

 

Reservoir product revenue

 

 

618

 

 

 

513

 

Total revenue

 

 

8,039

 

 

 

9,406

 

Operating loss

 

 

(7,673

)

 

 

(9,453

)

Non-Seismic

 

 

 

 

 

 

 

 

Industrial product revenue

 

 

3,676

 

 

 

3,079

 

Imaging product revenue

 

 

2,778

 

 

 

2,657

 

Total revenue

 

 

6,454

 

 

 

5,736

 

Operating income

 

 

1,029

 

 

 

1,052

 

Corporate

 

 

 

 

 

 

 

 

Revenue

 

 

151

 

 

 

143

 

Operating loss

 

 

(2,961

)

 

 

(2,910

)

Consolidated Totals

 

 

 

 

 

 

 

 

Revenue

 

 

14,644

 

 

 

15,285

 

Operating loss

 

 

(9,605

)

 

 

(11,311

)

 

Overview

Early in calendar year 2014, we began to experience a softening in the demand for our seismic exploration products, particularly in North America, as capital budgets for oil and gas producers were trending away from exploration-focused activities toward production and exploitation activities.  During this period oil production in North America’s unconventional shale reservoirs increased, as did oil production from other non-OPEC countries, resulting in an oversupply of crude oil in the world market.  Market prices for a barrel of crude oil declined from over $100 in July 2014 to approximately $27 in January 2016, and have recovered somewhat to approximately $64 today.  With this decline in oil and natural gas prices, oil and gas exploration and production companies experienced a significant reduction in cash flows, which resulted in sharp reductions in their capital spending budgets for oil and gas exploration-focused activities, including seismic activities.  We expect revenue from our seismic products, and in particular our traditional and wireless products, to remain low until crude oil prices stabilize at higher levels and exploration-focused industry conditions improve.  We expect these challenging industry conditions to continue to negatively impact the demand for our seismic products throughout fiscal year 2018.  

In September 2017, we were notified by a previous PRM system customer that it was in the process of requesting quotes for two new PRM systems which must utilize fiber optic sensor technology.  Since our PRM designs utilize electrical sensor technology, we did not participate with a quotation for the design and manufacture of these PRM systems.  We believe that our PRM system designs, which utilize electrical sensor technology, provide the best long-term functionality and performance of any PRM system, and we continue to aggressively market our PRM systems to major oil and gas companies.  However, the occurrence of this notice, combined with the absence of any new PRM orders of any technology type since November 2012, have caused us to provide additional obsolescence reserves for a substantial portion of our PRM inventories, and we concluded a triggering event occurred and performed an impairment assessment on certain heavy equipment used for the manufacturing of PRM systems, which resulted in an impairment.  Specific to our PRM inventories and manufacturing equipment, we recorded obsolescence reserves of $5.1 million and impairment expense of $5.3 million, respectively, in the fourth quarter of our fiscal year ended September 30, 2017.  

In December 2017, we initiated a program to reduce operating costs in light of expected and continuing low levels of seismic product demand.  The program is expected to produce approximately $6 million of annualized cash savings.  The majority of the cost reductions were realized through a reduction of over 60 employees from our Houston area workforce.  In connection with the workforce reductions, we incurred $0.7 million of termination costs in our first quarter of fiscal year 2018.  The termination costs were recorded to both cost of revenue and operating expenses in the consolidated statement of operations.  No further termination costs are expected and there are no outstanding liabilities related to this program as of December 31, 2017.      

20


 

Three months ended December 31, 2017 compared to the three months ended December 31, 2016

Consolidated revenue for the three months ended December 31, 2017, decreased $0.6 million, or 4.2%, from the corresponding period of the prior fiscal year.  The decrease in revenue for the three months ended December 31, 2017 was primarily due to a decrease in wireless exploration rental revenue in our seismic business segment.    

Consolidated gross profit (loss) for the three months ended December 31, 2017 was a loss of ($1.0) million, compared to a loss of ($3.3) million for the corresponding period of prior fiscal year.  The improvement in gross profit (loss) for the three months ended December 31, 2017 was primarily the result of a decrease in inventory obsolescence and rental equipment depreciation expenses.  These improvements were partially offset by a decrease in wireless exploration rental revenue.  Until seismic product demand increases to historical norms, we expect our consolidated gross margins to remain low.

In light of current market conditions, our seismic product inventories at December 31, 2017 far exceed levels considered appropriate for the current level of product demand.  While we are aggressively working to reduce these legacy inventory balances, we have also added new inventories for recent product developments and other product demand.  During periods of excessive inventory levels, our policy has been, and will continue to be, to record obsolescence expense in our consolidated income statement as we experience reduced levels of inventory turnover and as our inventories continue to age.  If current market conditions continue, we expect to record additional inventory obsolescence expense in fiscal year 2018 and beyond until seismic product demand and resulting seismic inventory turnover returns to acceptable levels.

Consolidated operating expenses for the three months ended December 31, 2017 were $8.6 million, an increase of $0.7 million, or 8.2%, from the corresponding period of the prior fiscal year.  This increase was primarily due to a $0.8 million increase in bad debt expense.  Excluding the change in bad debt, consolidated operating expense declined by $0.1 million due to a reduction is stock-based compensation expenses and partially offset by termination costs.

Consolidated other income for the three months ended December 31, 2017 was $131,000, an increase of $91,000 from the corresponding period of the prior fiscal year.  The increase for the three months ended December 31, 2017 was primarily due to an increase in interest income resulting from increased financing receivables.  

Consolidated income tax expense for the three months ended December 31, 2017 was $6,000 compared to $0.4 million for the corresponding period of the prior fiscal year.  Our effective tax rates for the three months ended December 31, 2017 and 2016 were (0.1)% and (9.6)%, respectively.  The United States statutory tax rate for the three months ended December 31, 2017 and 2016 were 24.5% (blended) and 35%, respectively.  Compared to the United States statutory rate, the lower effective tax rates for the three months ended December 31, 2017 and 2016 primarily resulted from our inability to recognize any tax benefits for the tax losses we incurred in the U.S. and Canada due to the uncertainty surrounding our ability to utilize these losses in the future to offset taxable income.    

Seismic Products

Revenue

Revenue from our seismic products for the three months ended December 31, 2017 decreased $1.4 million, or 14.5%, from the corresponding period of the prior fiscal year.  The components of this decrease include the following:

 

Traditional Exploration Product Revenue – For the three months ended December 31, 2017, revenue from our traditional products increased $1.2 million, or 47.5% from the corresponding period of the prior fiscal year.  The increase was due to an increase in certain specialty sensor product sales and the sale of sensors from our rental fleet.  

 

Wireless Exploration Product Revenue – For the three months ended December 31, 2017, revenue from our wireless exploration products decreased by $2.7 million, or 42.6%, from the corresponding period of the prior fiscal year.  The decrease was primarily due to a large OBX rental contract that was active during the three months ended December 31, 2016. This decrease was partially offset by increased sales of our GSX wireless products from our rental fleet.

 

Reservoir Product Revenue – For the three months ended December 31, 2017, revenue from our reservoir products increased $0.1 million, or 20.5%, from the corresponding period of the prior fiscal year.  The increase was primarily due to higher demand for our borehole and other products, and increased service revenues.  

Operating Loss

Despite decreased revenues, our operating loss associated with our seismic products for the three months ended December 31, 2017 decreased $1.8 million, or 18.9%, from the corresponding period of the prior year.  The decrease in operating loss was

21


 

primarily due to a decrease in inventory obsolescence and rental equipment depreciation expenses.  These decreases were partially offset by lower wireless exploration rental revenue.

Non-Seismic Products

Revenue

Revenue from our non-seismic products for the three months ended December 31, 2017 increased $0.7 million, or 12.5%, from the corresponding period of the prior fiscal year.  The components of this increase included the following:

 

Industrial Product Revenue – For the three months ended December 31, 2017, revenue from our industrial products increased $0.6 million, or 19.4% from the corresponding period of the prior fiscal year.  The increase was primarily attributable to higher demand for our water meter products.  

 

Imaging Product Revenue – For the three months ended December 31, 2017, revenue from our imaging products increased $0.1 million, or 4.6%, from the corresponding period of the prior fiscal year.  The increase was primarily due to higher demand for our equipment and film products.

Operating Income

Our operating income associated with sales of our non-seismic products for the three months ended December 31, 2017 declined $23,000 from the corresponding period of the prior fiscal year.  The decline resulted from reduced gross profit margins due to higher manufacturing costs, and increased operating expenses resulting from increased sales and marketing expenses.  

Liquidity and Capital Resources

At December 31, 2017, we had approximately $13.9 million in cash and cash equivalents and $32.1 million in short-term investments.  For the three months ended December 31, 2017, we used $5.8 million of cash in operating activities.  Our net loss of $9.1 million was offset by (i) net non-cash charges of $5.9 million from deferred income taxes, depreciation, accretion, inventory obsolescence, stock-based compensation and bad debts, (ii) a $2.6 million decrease in trade accounts receivable resulting from the timing of collections from customers, and (iii) a $0.7 million increase in accounts payable primarily due to an increase in inventories and the timing of payments to suppliers. Other uses of cash in our operations included (i) a $2.9 increase in inventories for the replenishment of rental equipment sold to customers and the purchase of raw materials for new product production and (ii) the removal of a $2.6 million gross profit from the sale of used rental equipment since such gross profit is reflected in the proceeds from the sale of used rental equipment under investing activities.  

For the three months ended December 31, 2017, we generated cash of $4.8 million from investing activities.  Sources of cash included (i) $4.0 million of net proceeds from the sale of short-term investments and (ii) $1.0 million of proceeds from the sale of rental equipment.  These sources of cash were partially offset by an investment of $0.2 million in property, plant and equipment.   We estimate total fiscal year 2018 cash investments in property, plant and equipment will be approximately $3 million.  We expect fiscal year 2018 cash investments into our rental fleet to be approximately $2 million in order to replenish land-based wireless rental fleet equipment recently sold to customers.  Our capital expenditures are expected to be funded from our cash on hand, internal cash flow or, if necessary, from borrowings under our credit agreement.

For the three months ended December 31, 2017, we had no cash flows from financing activities.  We had no long-term debt outstanding throughout the fiscal year ended September 30, 2017 or for the three months ended December 31, 2017.

While crude oil prices have recently increased to their highest level in three years, the current level of crude oil prices remain significantly below the peak price levels seen in 2014.  These lower crude oil prices combined with an ample supply of crude oil in the world market do not support the investment required by many exploration and production companies to explore and develop new frontier areas for oil and gas development and production.  In addition, many smaller exploration and production companies are under-capitalized and their capital spending budgets for exploration-focused activities, including seismic activities, are financial restrained.  As a result, our seismic business segment continues to experience lower levels of product orders and associated revenue, resulting in substantial operating losses and the continued depletion of our cash balances.  Due to the uncertainty concerning a recovery of crude oil prices to levels capable of sustaining increased seismic exploration activities, we expect these depressed seismic market conditions to continue through fiscal year 2018.

Our available cash, cash equivalents and short-term investments totaled $46.0 million at December 31, 2017, including $8.4 million of cash and cash equivalents held by our foreign subsidiaries and branch offices.  In light of the Tax Cuts and Jobs Act signed into law on December 22, 2017 which requires companies to pay a one-time transition tax on undistributed earnings of foreign

22


 

subsidiaries, we are currently re-evaluating our prior intent to permanently reinvest these undistributed earnings.  If we were to repatriate the cash held by our foreign subsidiaries, we would be required to accrue and pay taxes on any amounts repatriated.

Our credit agreement allows for borrowings of up to $30.0 million with such amounts available for borrowing determined by a borrowing base.  In October 2017, we extended the maturity of the credit agreement from May 2018 to April 2019.  At December 31, 2017, we had no outstanding borrowings under the credit agreement and, after consideration of $0.3 million of outstanding letters of credit, our borrowing availability under the credit facility was $26.3 million.  At December 31, 2017, we were in compliance with all covenants under the credit agreement.  We currently do not anticipate the need to borrow under the credit agreement; however, we can make no assurance that we will not do so.  

In fiscal years 2016 and 2017, we received income tax refunds of $18.3 million and $12.8 million, respectively, from the U.S. Department of Treasury.  These refunds were a result of the significant tax losses we experienced in fiscal year 2016 and 2015, which we elected to carryback and recoup taxes previously paid.  For U.S. income tax purposes, we are now in a loss carryforward position in regards to our tax losses for fiscal year 2017 and beyond.  As a result, we will not receive any additional U.S. federal income tax refunds as a result of our current tax losses.  The tax refunds we received in fiscal years 2016 and 2017 have been significant contributors to our overall liquidity.  In the absence of future profitable results of operations, we may need to rely on other sources of liquidity to fund our future operating results, including liquidating short-term investments, executed rental contracts, available borrowings under our credit agreement through its expiration in April 2019, leveraging or sale of real estate assets, sales of rental assets and other liquidity sources which may be available to us.  However, currently we believe that our cash and short-term investment balances will be sufficient to finance our operating losses and planned capital expenditures through December 2018.

Critical Accounting Policies

During the three months ended December 31, 2017, there has been no material change to our critical accounting policies discussed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 other than th