10-Q 1 geos-10q_20180331.htm 10-Q-20180331 geos-10q_20180331.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 March 31, 2018 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 13,577,916 shares of the Registrant’s Common Stock outstanding as of the close of business on April 30, 2018.

 

 

 

 


 

Table of Contents

 

2


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands except share amounts)

(unaudited)

 

 

 

March 31, 2018

 

 

September 30, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,179

 

 

$

15,092

 

Short-term investments

 

 

26,462

 

 

 

36,137

 

Trade accounts receivable, net

 

 

12,530

 

 

 

9,435

 

Financing receivables

 

 

5,036

 

 

 

3,055

 

Income tax receivable

 

 

975

 

 

 

273

 

Inventories

 

 

21,834

 

 

 

20,752

 

Prepaid expenses and other current assets

 

 

1,452

 

 

 

1,623

 

Total current assets

 

 

82,468

 

 

 

86,367

 

 

 

 

 

 

 

 

 

 

Rental equipment, net

 

 

19,704

 

 

 

16,462

 

Property, plant and equipment, net

 

 

35,750

 

 

 

37,399

 

Non-current inventories

 

 

48,846

 

 

 

55,935

 

Deferred income tax assets, net

 

 

317

 

 

 

259

 

Non-current financing receivables, net

 

 

6,166

 

 

 

8,195

 

Prepaid income taxes

 

 

48

 

 

 

450

 

Other assets

 

 

213

 

 

 

629

 

Total assets

 

$

193,512

 

 

$

205,696

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable trade

 

$

4,922

 

 

$

2,599

 

Accrued expenses and other current liabilities

 

 

5,300

 

 

 

6,338

 

Deferred revenue

 

 

533

 

 

 

1,568

 

Total current liabilities

 

 

10,755

 

 

 

10,505

 

 

 

 

 

 

 

 

 

 

Deferred income tax liabilities

 

 

46

 

 

 

37

 

Total liabilities

 

 

10,801

 

 

 

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, 13,578,916 and 13,438,316 shares issued and outstanding

 

 

136

 

 

 

134

 

Additional paid-in capital

 

 

85,103

 

 

 

83,733

 

Retained earnings

 

 

110,957

 

 

 

125,517

 

Accumulated other comprehensive loss

 

 

(13,485

)

 

 

(14,230

)

Total stockholders’ equity

 

 

182,711

 

 

 

195,154

 

Total liabilities and stockholders’ equity

 

$

193,512

 

 

$

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

 

 

Six Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

March 31, 2018

 

 

March 31, 2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

14,044

 

 

$

14,775

 

 

$

27,469

 

 

$

25,072

 

Rental equipment

 

 

5,203

 

 

 

5,783

 

 

 

6,422

 

 

 

10,771

 

Total revenue

 

 

19,247

 

 

 

20,558

 

 

 

33,891

 

 

 

35,843

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

14,205

 

 

 

18,799

 

 

 

27,448

 

 

 

33,635

 

Rental equipment

 

 

3,043

 

 

 

4,317

 

 

 

5,412

 

 

 

8,093

 

Total cost of revenue

 

 

17,248

 

 

 

23,116

 

 

 

32,860

 

 

 

41,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit (loss)

 

 

1,999

 

 

 

(2,558

)

 

 

1,031

 

 

 

(5,885

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

4,785

 

 

 

5,026

 

 

 

9,914

 

 

 

10,120

 

Research and development

 

 

2,430

 

 

 

3,412

 

 

 

5,588

 

 

 

6,784

 

Bad debt expense (recovery)

 

 

6

 

 

 

64

 

 

 

356

 

 

 

(418

)

Total operating expenses

 

 

7,221

 

 

 

8,502

 

 

 

15,858

 

 

 

16,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(5,222

)

 

 

(11,060

)

 

 

(14,827

)

 

 

(22,371

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(127

)

 

 

(8

)

 

 

(191

)

 

 

(16

)

Interest income

 

 

279

 

 

 

137

 

 

 

542

 

 

 

268

 

Foreign exchange losses, net

 

 

(306

)

 

 

(215

)

 

 

(349

)

 

 

(281

)

Other, net

 

 

(29

)

 

 

(16

)

 

 

(54

)

 

 

(33

)

Total other expense, net

 

 

(183

)

 

 

(102

)

 

 

(52

)

 

 

(62

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(5,405

)

 

 

(11,162

)

 

 

(14,879

)

 

 

(22,433

)

Income tax expense (benefit)

 

 

(676

)

 

 

341

 

 

 

(670

)

 

 

775

 

Net loss

 

$

(4,729

)

 

$

(11,503

)

 

$

(14,209

)

 

$

(23,208

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.36

)

 

$

(0.88

)

 

$

(1.07

)

 

$

(1.77

)

Diluted

 

$

(0.36

)

 

$

(0.88

)

 

$

(1.07

)

 

$

(1.77

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

13,264,710

 

 

 

13,146,330

 

 

 

13,233,205

 

 

 

13,120,286

 

Diluted

 

 

13,264,710

 

 

 

13,146,330

 

 

 

13,233,205

 

 

 

13,120,286

 

 

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

 

 

Six Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

March 31, 2018

 

 

March 31, 2017

 

Net loss

 

$

(4,729

)

 

$

(11,503

)

 

$

(14,209

)

 

$

(23,208

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains (losses) on available-for-sale securities

 

 

(38

)

 

 

11

 

 

 

(89

)

 

 

(51

)

Foreign currency translation adjustments

 

 

1,039

 

 

 

1,353

 

 

 

834

 

 

 

1,047

 

Total other comprehensive income, net of tax

 

 

1,001

 

 

 

1,364

 

 

 

745

 

 

 

996

 

Total comprehensive loss

 

$

(3,728

)

 

$

(10,139

)

 

$

(13,464

)

 

$

(22,212

)

 

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)

 

 

 

Six Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(14,209

)

 

$

(23,208

)

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

 

 

 

 

 

 

 

 

Deferred income tax benefit

 

 

(40

)

 

 

(14

)

Rental equipment depreciation

 

 

4,519

 

 

 

6,905

 

Property, plant and equipment depreciation

 

 

2,105

 

 

 

2,596

 

Accretion of discounts on short-term investments

 

 

24

 

 

 

30

 

Stock-based compensation expense

 

 

1,344

 

 

 

2,844

 

Bad debt expense (recovery)

 

 

356

 

 

 

(418

)

Inventory obsolescence expense

 

 

3,297

 

 

 

8,397

 

Gross profit from sale of used rental equipment

 

 

(4,187

)

 

 

(1,531

)

Gain on disposal of property, plant and equipment

 

 

(25

)

 

 

 

Realized loss on short-term investments

 

 

1

 

 

 

2

 

Effects of changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(2,943

)

 

 

244

 

Income tax receivable

 

 

(701

)

 

 

12,831

 

Inventories

 

 

(4,613

)

 

 

1,176

 

Prepaid expenses and other current assets

 

 

179

 

 

 

39

 

Prepaid income taxes

 

 

49

 

 

 

778

 

Accounts payable trade

 

 

2,320

 

 

 

(12

)

Accrued expenses and other

 

 

89

 

 

 

(2,251

)

Deferred revenue

 

 

60

 

 

 

(11

)

Income tax payable

 

 

 

 

 

(117

)

Net cash provided by (used in) operating activities

 

 

(12,375

)

 

 

8,280

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(495

)

 

 

(343

)

Proceeds from sale of property and equipment

 

 

200

 

 

 

 

Investment in rental equipment

 

 

(1,643

)

 

 

(140

)

Proceeds from the sale of used rental equipment

 

 

3,904

 

 

 

2,439

 

Purchases of short-term investments

 

 

(3,755

)

 

 

(5,251

)

Proceeds from the sale of short-term investments

 

 

13,321

 

 

 

3,814

 

Net cash provided by investing activities

 

 

11,532

 

 

 

519

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

19

 

 

 

50

 

Net cash provided by financing activities

 

 

19

 

 

 

50

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(89

)

 

 

196

 

Increase (decrease) in cash and cash equivalents

 

 

(913

)

 

 

9,045

 

Cash and cash equivalents, beginning of fiscal year

 

 

15,092

 

 

 

10,262

 

Cash and cash equivalents, end of fiscal period

 

$

14,179

 

 

$

19,307

 

 

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 March 31, 2018 and the consolidated statements of operations, comprehensive loss and the consolidated statements of cash flows for the three and six months ended March 31, 2018 and 2017 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 six months ended March 31, 2018 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.  Cash and cash equivalents include $8.1 million held by the Company’s foreign subsidiaries and branch offices.  If the Company were to repatriate the cash held by its foreign subsidiaries, it would be required to accrue and pay taxes on any amount repatriated.

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 net realizable 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.

7


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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.

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

 

644

 

Settlements made (in cash or in kind)

 

(383

)

Balance at March 31, 2018

$

769

 

 

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 charge 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 future intercompany 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 most of its net deferred tax assets, the adoption of this guidance had no impact upon the Company’s income tax expense for the three and six months ended March 31, 2018.

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 since the Company had no unrecorded excess tax benefits residing in its 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.  Since the Company had a valuation allowance against the value of its cumulative U.S. net operating losses, the adoption of this guidance had no impact upon the Company’s income tax expense for the three and six months ended March 31, 2018.

 

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 of this guidance had no impact 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 March 31, 2018 (in thousands)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

17,503

 

 

$

 

 

$

(109

)

 

$

17,394

 

Government bonds

 

 

9,103

 

 

 

 

 

 

(35

)

 

 

9,068

 

Total

 

$

26,606

 

 

$

 

 

$

(144

)

 

$

26,462

 

 

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 April 2018 to January 2020.

 

3.   Derivative Financial Instruments

At March 31, 2018 and September 30, 2017, the Company’s Canadian subsidiary had CAN$41.1 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 March 28, 2018, the Company entered into two short-term hedge contracts totaling $30.0 million Canadian dollars 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 have not been designated as hedges 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

 

March 31, 2018

 

 

September 30, 2017

 

Foreign Currency Forward Contracts

 

Accrued Expenses and Other Current Liabilities

 

$

55

 

 

$

 

                            

The following table summarizes the Company’s gains on derivative instruments in the consolidated statements of operations for the three and six month periods ended March 31, 2018 and 2017 (in thousands):

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

Derivative Instrument

 

Location

 

March 31, 2018

 

 

March 31, 2017

 

 

March 31, 2018

 

 

March 31, 2017

 

Foreign Currency Forward Contracts

 

Other Income (Expense)

 

$

733

 

 

$

(44

)

 

$

575

 

 

$

28

 

 

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

4.   Fair Value of Financial Instruments

At March 31, 2018, 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.

11


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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 March 31, 2018

 

 

 

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

 

$

17,394

 

 

$

 

 

$

 

 

$

17,394

 

Government bonds

 

 

9,068

 

 

 

 

 

 

 

 

 

9,068

 

Foreign currency forward contracts

 

 

 

 

 

(55

)

 

 

 

 

 

(55

)

Total

 

$

26,462

 

 

$

(55

)

 

$

 

 

$

26,407

 

 

 

 

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):

 

 

 

March 31, 2018

 

 

September 30, 2017

 

Trade accounts receivable

 

$

13,815

 

 

$

10,830

 

Allowance for doubtful accounts

 

 

(1,285

)

 

 

(1,395

)

  

 

$

12,530

 

 

$

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):

 

 

 

March 31, 2018

 

 

September 30, 2017

 

Promissory notes

 

$

6,236

 

 

$

4,306

 

Sales-type lease

 

 

6,936

 

 

 

8,581

 

Total financing receivables

 

 

13,172

 

 

 

12,887

 

Unearned income:

 

 

 

 

 

 

 

 

   Promissory notes

 

 

(95

)

 

 

(90

)

   Sales-type lease

 

 

(370

)

 

 

(527

)

      Total unearned income

 

 

(465

)

 

 

(617

)

Total financing receivables, net of unearned income

 

 

12,707

 

 

 

12,270

 

Less allowance for doubtful promissory notes

 

 

(1,505

)

 

 

(1,020

)

Less current portion

 

 

(5,036

)

 

 

(3,055

)

Non-current financing receivables

 

$

6,166

 

 

$

8,195

 

 

12


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

During the six months ended March 31, 2018, 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 six months ended March 31, 2018 of $2.4 million are included in proceeds from the sale of used rental equipment in the consolidated statements of cash flows.

  

 

6.   Inventories

Inventories consist of the following (in thousands):

 

 

 

March 31, 2018

 

 

September 30, 2017

 

Finished goods

 

$

28,533

 

 

$

33,690

 

Work in process

 

 

5,070

 

 

 

2,512

 

Raw material

 

 

68,975

 

 

 

70,099

 

Obsolescence reserve

 

 

(31,898

)

 

 

(29,614

)

 

 

 

70,680

 

 

 

76,687

 

Less current portion

 

 

(21,834

)

 

 

(20,752

)

Non-current portion

 

$

48,846

 

 

$

55,935

 

 

During the six months ended March 31, 2018 and 2017, the Company made non-cash inventory transfers of $8.1 million and $1.0 million, respectively, to rental equipment.  Raw materials include semi-finished goods and component parts which totaled approximately $43.6 million and $48.2 million at March 31, 2018 and September 30, 2017, respectively.             

7.   Long-Term Debt

The Company had no long-term debt outstanding at March 31, 2018 and September 30, 2017. 

  On May 4, 2015, the Company amended its credit agreement with Frost Bank (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”).  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.  Further, the 2017 Amendment also prevents dividends or distributions by the Company without the prior written consent of the lender.  As of March 31, 2018, the Company’s borrowing base was $27.9 million.  As of March 31, 2018, the amount available for borrowing was $27.6 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 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 4.75% at March 31, 2018.  At March 31, 2018, 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

 

 

(89

)

 

 

 

 

 

(89

)

Foreign currency translation adjustments

 

 

 

 

 

834

 

 

 

834

 

Balance at March 31, 2018

 

$

(147

)

 

$

(13,338

)

 

$

(13,485

)

 

9.   Stock-Based Compensation

During the six months ended March 31, 2018, the Company issued 155,450 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 $15.21 per share.  The grant date fair value of these awards was $2.4 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 March 31, 2018, the Company had unrecognized compensation expense of $4.6 million relating to restricted stock awards.  This unrecognized compensation expense is expected to be recognized over a weighted average period of 2.9 years.  In addition, the Company had $0.2 million of unrecognized compensation expense related to nonqualified stock option awards which is expected to be recognized over a weighted average period of 1.0 years.       

As of March 31, 2018, a total of 312,600 shares of restricted stock and 194,600 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

 

 

Six Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

March 31, 2018

 

 

March 31, 2017

 

Net loss

 

$

(4,729

)

 

$

(11,503

)

 

$

(14,209

)

 

$

(23,208

)

Less: Income allocable to unvested restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

Loss available to common shareholders

 

 

(4,729

)

 

 

(11,503

)

 

 

(14,209

)

 

 

(23,208

)

Reallocation of participating earnings

 

 

 

 

 

 

 

 

 

 

 

 

Loss attributable to common shareholders for diluted

   earnings per share

 

$

(4,729

)

 

$

(11,503

)

 

$

(14,209

)

 

$

(23,208

)

Weighted average number of common share equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares used in basic loss per share

 

 

13,264,710

 

 

 

13,146,330