10-Q 1 geos-10q_20181231.htm GEOS-10Q-2018-12-31 geos-10q_20181231.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, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes    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

 

 

 

 

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 13,632,791 shares of the Registrant’s Common Stock outstanding as of the close of business on January 31, 2019.

 

 

 

 


 

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)

 

 

 

December 31, 2018

 

 

September 30, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,111

 

 

$

11,934

 

Short-term investments

 

 

9,495

 

 

 

25,471

 

Trade accounts receivable, net

 

 

12,399

 

 

 

14,323

 

Financing receivables

 

 

3,843

 

 

 

4,258

 

Inventories

 

 

17,565

 

 

 

18,812

 

Prepaid expenses and other current assets

 

 

3,336

 

 

 

1,856

 

Total current assets

 

 

63,749

 

 

 

76,654

 

 

 

 

 

 

 

 

 

 

Rental equipment, net

 

 

52,394

 

 

 

39,545

 

Property, plant and equipment, net

 

 

33,302

 

 

 

33,624

 

Non-current inventories

 

 

31,003

 

 

 

31,655

 

Goodwill

 

 

5,980

 

 

 

4,343

 

Other intangible assets, net

 

 

12,163

 

 

 

8,006

 

Deferred income tax assets, net

 

 

264

 

 

 

246

 

Non-current financing receivables, net

 

 

3,793

 

 

 

4,740

 

Prepaid income taxes

 

 

57

 

 

 

54

 

Other assets

 

 

225

 

 

 

213

 

Total assets

 

$

202,930

 

 

$

199,080

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable trade

 

$

8,338

 

 

$

4,106

 

Accrued expenses and other current liabilities

 

 

6,391

 

 

 

6,826

 

Deferred revenue

 

 

4,620

 

 

 

3,752

 

Income tax payable

 

 

96

 

 

 

51

 

Total current liabilities

 

 

19,445

 

 

 

14,735

 

 

 

 

 

 

 

 

 

 

Contingent earn-out liabilities

 

 

12,055

 

 

 

7,713

 

Deferred income tax liabilities

 

 

33

 

 

 

45

 

Total liabilities

 

 

31,533

 

 

 

22,493

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, $.01 par value, 20,000,000 shares authorized, 13,632,791 and 13,600,541 shares issued and outstanding

 

 

136

 

 

 

136

 

Additional paid-in capital

 

 

86,933

 

 

 

86,116

 

Retained earnings

 

 

100,101

 

 

 

105,954

 

Accumulated other comprehensive loss

 

 

(15,773

)

 

 

(15,619

)

Total stockholders’ equity

 

 

171,397

 

 

 

176,587

 

Total liabilities and stockholders’ equity

 

$

202,930

 

 

$

199,080

 

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, 2018

 

 

December 31, 2017

 

Revenue:

 

 

 

 

 

 

 

 

Products

 

$

10,459

 

 

$

13,274

 

Rental

 

 

7,416

 

 

 

1,370

 

Total revenue

 

 

17,875

 

 

 

14,644

 

Cost of revenue:

 

 

 

 

 

 

 

 

Products

 

 

11,220

 

 

 

13,096

 

Rental

 

 

3,565

 

 

 

2,516

 

Total cost of revenue

 

 

14,785

 

 

 

15,612

 

 

 

 

 

 

 

 

 

 

Gross profit (loss)

 

 

3,090

 

 

 

(968

)

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

6,085

 

 

 

5,129

 

Research and development

 

 

3,171

 

 

 

3,158

 

Bad debt expense (recovery)

 

 

(103

)

 

 

350

 

Total operating expenses

 

 

9,153

 

 

 

8,637

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(6,063

)

 

 

(9,605

)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(34

)

 

 

(64

)

Interest income

 

 

272

 

 

 

263

 

Foreign exchange gains (losses), net

 

 

67

 

 

 

(43

)

Other, net

 

 

(88

)

 

 

(25

)

Total other income, net

 

 

217

 

 

 

131

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(5,846

)

 

 

(9,474

)

Income tax expense

 

 

7

 

 

 

6

 

Net loss

 

$

(5,853

)

 

$

(9,480

)

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.44

)

 

$

(0.72

)

Diluted

 

$

(0.44

)

 

$

(0.72

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

13,339,408

 

 

 

13,202,384

 

Diluted

 

 

13,339,408

 

 

 

13,202,384

 

 

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, 2018

 

 

December 31, 2017

 

Net loss

 

$

(5,853

)

 

$

(9,480

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

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

 

 

64

 

 

 

(51

)

Foreign currency translation adjustments

 

 

(218

)

 

 

(205

)

Total other comprehensive loss

 

 

(154

)

 

 

(256

)

Total comprehensive loss

 

$

(6,007

)

 

$

(9,736

)

 

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

 

5


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, expect share amounts)

(unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Total

 

Balance at October 1, 2018

 

 

13,600,541

 

 

$

136

 

 

$

86,116

 

 

$

105,954

 

 

$

(15,619

)

 

$

176,587

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,853

)

 

 

 

 

 

(5,853

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(154

)

 

 

(154

)

Issuance of restricted stock

 

 

8,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(250

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock pursuant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   to the exercise of stock options

 

 

24,500

 

 

 

 

 

 

215

 

 

 

 

 

 

 

 

 

215

 

Stock-based compensation

 

 

 

 

 

 

 

 

602

 

 

 

 

 

 

 

 

 

602

 

Balance at December 31, 2018

 

 

13,632,791

 

 

$

136

 

 

$

86,933

 

 

$

100,101

 

 

$

(15,773

)

 

$

171,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 1, 2017

 

 

13,438,616

 

 

$

134

 

 

$

83,733

 

 

$

125,166

 

 

$

(14,230

)

 

$

194,803

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(9,480

)

 

 

 

 

 

(9,480

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(256

)

 

 

(256

)

Issuance of restricted stock

 

 

138,650

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(16,675

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

826

 

 

 

 

 

 

 

 

 

826

 

Balance at December 31, 2017

 

 

13,560,591

 

 

$

136

 

 

$

84,557

 

 

$

115,686

 

 

$

(14,486

)

 

$

185,893

 

 

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

 


6


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

December 31, 2018

 

 

December 31, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,853

)

 

$

(9,480

)

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

 

 

 

 

 

 

 

 

Deferred income tax benefit

 

 

(61

)

 

 

(55

)

Rental equipment depreciation

 

 

2,711

 

 

 

2,247

 

Property, plant and equipment depreciation

 

 

919

 

 

 

1,095

 

Amortization of intangible assets

 

 

362

 

 

 

 

Accretion of discounts on short-term investments

 

 

(7

)

 

 

13

 

Stock-based compensation expense

 

 

602

 

 

 

826

 

Bad debt expense (recovery)

 

 

(103

)

 

 

350

 

Inventory obsolescence expense

 

 

1,428

 

 

 

1,434

 

Gross profit from sale of used rental equipment

 

 

 

 

 

(2,566

)

Realized loss on short-term investments

 

 

59

 

 

 

 

Effects of changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

1,824

 

 

 

2,562

 

Income tax receivable

 

 

 

 

 

10

 

Inventories

 

 

(6,302

)

 

 

(2,865

)

Prepaid expenses and other current assets

 

 

(1,472

)

 

 

(329

)

Prepaid income taxes

 

 

(12

)

 

 

41

 

Accounts payable trade

 

 

4,240

 

 

 

723

 

Accrued expenses and other

 

 

2,008

 

 

 

267

 

Deferred revenue

 

 

879

 

 

 

(65

)

Income tax payable

 

 

50

 

 

 

 

Net cash provided by (used in) operating activities

 

 

1,272

 

 

 

(5,792

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(717

)

 

 

(218

)

Investment in rental equipment

 

 

(10,164

)

 

 

 

Proceeds from the sale of used rental equipment

 

 

728

 

 

 

997

 

Purchases of short-term investments

 

 

 

 

 

(1,905

)

Proceeds from the sale of short-term investments

 

 

16,081

 

 

 

5,898

 

Business acquisition

 

 

(1,819

)

 

 

 

Payments for damages related to insurance claim

 

 

(118

)

 

 

 

Proceeds from insurance claim

 

 

78

 

 

 

 

Net cash provided by investing activities

 

 

4,069

 

 

 

4,772

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

215

 

 

 

 

Net cash provided by financing activities

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(379

)

 

 

(149

)

Increase (decrease) in cash and cash equivalents

 

 

5,177

 

 

 

(1,169

)

Cash and cash equivalents, beginning of fiscal year

 

 

11,934

 

 

 

15,092

 

Cash and cash equivalents, end of fiscal period

 

$

17,111

 

 

$

13,923

 

 

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

 

 

7


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1.   Significant Accounting Policies

Basis of Presentation

The consolidated balance sheet of Geospace Technologies Corporation and its subsidiaries (the “Company”) at September 30, 2018 was derived from the Company’s audited consolidated financial statements at that date.  The consolidated balance sheet at December 31, 2018 and the consolidated statements of operations, comprehensive loss, stockholders’ equity and the consolidated statements of cash flows for the three months ended December 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 months ended December 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, 2018.

Reclassifications

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires 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.  At December 31, 2018, cash and cash equivalents included $7.6 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 under rates enacted by The Tax Cuts and Jobs Act (“2017 Tax Act”).

Recently Adopted Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“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 was adopted by the Company in its first quarter of fiscal year 2019.  The adoption had no effect on the Company’s consolidated financial statements as it holds no restricted cash balances.

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

8


 

beginning after December 15, 2017, including interim reporting periods therein.  This new standard supersedes existing revenue guidance and affected the Company's revenue recognition process and the presentations or disclosures of the Company's consolidated financial statements and footnotes.  The Company adopted this standard on October 1, 2018 using the modified retrospective method.  The adoption of this standard did not (i) result in a cumulative adjustment as of October 1, 2018 or (ii) have any impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued guidance requiring certain existing disclosure requirements in ASC Topic 820, Fair Value Measurements and Disclosures, to be modified or removed, and certain new disclosure requirements to be added to this standard.  In addition, the guidance allows entities to exercise more discretion when considering fair value measurement disclosures.  The guidance is effective for fiscal years beginnings after December 15, 2019 with early adoption permitted. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements.

In January 2017, the FASB issued guidance simplifying the current two-step goodwill impairment test by eliminating Step 2 of the test.  The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any.  This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis.  Early adoption is permitted for the interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In June 2016, the FASB issued guidance surrounding credit losses for financial instruments that replaces the incurred loss impairment methodology in 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.  The term of these rental contracts is generally short-term in nature, and the Company believes these rentals would be treated as operating leases under the new guidance; however, the Company has not completed a detailed review of its various lease and rental arrangements, and these conclusions are subject to change.

2.   Revenue Recognition

On October 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers. This new standard applies to contracts for the sale of products and services, and does not apply to contracts for the rental or lease of products.  The Company adopted the new standard using the modified retrospective method applied to those contracts that were not completed as of September 30, 2018.  Results for reporting periods beginning after September 30, 2018 are presented under the new standard, while prior period amounts are not restated.

Under the new standard, the Company recognizes revenue when performance of contractual obligations are satisfied, generally when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services.  

The Company primarily derives product revenue from the sale of its manufactured products and from the sale of its manufactured rental equipment.  Revenue from these product sales, including the sale of used rental equipment, is recognized when all

9


 

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. The Company’s products are generally sold without any customer acceptance provisions, and the Company’s standard terms of sale do not allow customers to return products for credit.  

Revenue from engineering services is recognized as services are rendered over the duration of a project, or as billed on a per hour basis.  Field service revenue is recognized when services are rendered and is generally priced on a per day rate.

The Company also generates revenue from short-term rentals under operating leases of its manufactured products.  Rental revenue is recognized as earned over the rental period.  Rentals of the Company’s equipment generally range from daily rentals to rental periods of up to six months or longer.  The Company has determined that the new standard does not apply to rental contracts, which are within the scope of other revenue recognition accounting standards.  

The cumulative effect of the changes made to the Company’s consolidated balance sheet as of October 1, 2018 resulting from the adoption of the new standard was not material and did not impact opening retained earnings.  The impact on the timing of sales and services for the three months ended December 31, 2018 resulting from the application of the new standard was not material.  

As permissible under the new standard, sales and transaction-based taxes are excluded from revenue.  Also, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.  Additionally, the Company expenses costs incurred to obtain contracts when incurred because the amortization period would have been one year or less.  These costs are recorded in selling, general and administrative expenses.

As of December 31, 2018 and September 30, 2018 the Company had deferred contract liabilities of $0.1 million and $0.2 million included in deferred revenue and deferred contract assets of $36,000 and $27,000 included in prepaid expenses and other current assets on its consolidated balance sheets.   During the three months ended December 31, 2018, the Company recognized revenue of $0.1 million included in its deferred contract liability balance and $8,000 included in its prepaid expenses and other current asset balance at the beginning of the period.

For each of the Company’s operating segments, the following table presents revenue from the sale of products and services under contracts with customers.  The table excludes all revenue earned from rental contracts (in thousands):

 

 

 

Three Months Ended

 

 

 

December 31, 2018

 

 

December 31, 2017

 

Oil and Gas Markets

 

 

 

 

 

 

 

 

Traditional exploration product revenue

 

$

2,726

 

 

$

3,599

 

Wireless exploration product revenue

 

 

144

 

 

 

2,623

 

Reservoir product revenue

 

 

888

 

 

 

618

 

Total revenue

 

 

3,758

 

 

 

6,840

 

 

 

 

 

 

 

 

 

 

Adjacent Markets

 

 

 

 

 

 

 

 

Industrial product revenue

 

 

3,562

 

 

 

3,676

 

Imaging product revenue

 

 

3,051

 

 

 

2,758

 

Total revenue

 

 

6,613

 

 

 

6,434

 

 

 

 

 

 

 

 

 

 

Emerging Markets

 

 

 

 

 

 

 

 

Revenue

 

 

88

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

10,459

 

 

$

13,274

 

 

See note 13 for more information on the Company’s operating segments.

10


 

For each of the geographic areas where the Company operates, the following table presents revenue from the sale of products and services under contracts with customers.  The table excludes all revenue earned from rental contracts (in thousands):

 

 

 

Three Months Ended

 

 

 

December 31, 2018

 

 

December 31, 2017

 

Asia

 

$

1,558

 

 

$

1,006

 

Canada

 

 

288

 

 

 

365

 

Europe

 

 

915

 

 

 

3,419

 

United States

 

 

6,610

 

 

 

8,023

 

Other

 

 

1,088

 

 

 

461

 

Total

 

$

10,459

 

 

$

13,274

 

 

Revenue is attributable to countries based on the ultimate destination of the product sold, if known.  If the ultimate destination is not known, revenue is attributable to countries based on the geographic location of the initial shipment.

3.   Business Acquisition

On November 13, 2018, the Company acquired all of the intellectual property and related assets of the OptoSeis® fiber optic sensing technology business.  The assets of the OptoSeis business are included in the Company’s Oil and Gas Markets business segment.  The acquisition purchase price consisted of cash at closing of approximately $1.8 million and contingent earn-out payments of up to $23.2 million over a five-and-a-half year period.  The contingent cash payments will be derived from eligible revenue generated during the earn-out period from product and services.   

In connection with the acquisition the Company recorded goodwill and other intangible assets of $6.1 million and established an initial contingent earn-out liability of $4.3 million.  No current assets and liabilities were acquired in the transaction.  The contingent earn-out payments will be derived from certain eligible revenue generated during the five-and-a-half year earn-out period.

Acquisition related legal costs of $0.2 million are included in selling, general and administrative expenses in the Company’s consolidated financial statements.  Due to the limited amount of time since the acquisition transaction, the valuation of the OptoSeis assets and liabilities and the determination of the fair value of the contingent consideration are considered by the Company as preliminary and subject to change.

 

4.   Short-term Investments

 

 

 

As of December 31, 2018 (in thousands)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

6,289

 

 

$

 

 

$

(25

)

 

$

6,264

 

Government bonds

 

 

3,224

 

 

 

7

 

 

 

 

 

 

3,231

 

Total

 

$

9,513

 

 

$

7

 

 

$

(25

)

 

$

9,495

 

 

 

 

As of September 30, 2018 (in thousands)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

17,851

 

 

$

 

 

$

(60

)

 

$

17,791

 

Government bonds

 

 

7,702

 

 

 

 

 

 

(22

)

 

 

7,680

 

Total

 

$

25,553

 

 

$

 

 

$

(82

)

 

$

25,471

 

 

The Company’s short-term investments have contractual maturities ranging from February 2019 to November 2020. 

11


 

5.   Derivative Financial Instruments

At December 31, 2018 and September 30, 2018, the Company’s Canadian subsidiary had CAN$19.6 million and CAD$20.4 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 28, 2018, the Company entered into a CAD$15.0 million 90-day hedge contract 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 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

 

December 31, 2018

 

 

September 30, 2018

 

Foreign Currency Forward Contracts

 

Prepaid Expenses and Other Assets

 

$

2

 

 

$

 

Foreign Currency Forward Contracts

 

Accrued Expenses and Other Current Liabilities

 

 

 

 

 

270

 

 

The following table summarizes the Company’s realized gains on derivative instruments included in the consolidated statements of operations for the three months ended December 31, 2018 and 2017 (in thousands):

 

 

 

 

 

Three Months Ended

 

Derivative Instrument

 

Location

 

December 31, 2018

 

 

December 31, 2017

 

Foreign Currency Forward Contracts

 

Other Income (Expense)

 

$

856

 

 

$

158

 

 

 

6.   Trade Accounts and Financing Receivables

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

 

 

 

December 31, 2018

 

 

September 30, 2018

 

Trade accounts receivable

 

$

13,385

 

 

$

15,776

 

Allowance for doubtful accounts

 

 

(986

)

 

 

(1,453

)

 

 

$

12,399

 

 

$

14,323

 

 

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 accounts receivable balances.  Accounts receivable balances are charged off against the allowance whenever it is probable that the receivable balance will not be recoverable. Trade accounts receivable at December 31, 2018 includes $6.8 million due from a single customer.        

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

 

 

 

December 31, 2018

 

 

September 30, 2018

 

Promissory notes

 

$

5,170

 

 

$

5,646

 

Sales-type lease

 

 

4,590

 

 

 

5,533

 

Total financing receivables

 

 

9,760

 

 

 

11,179

 

Unearned income:

 

 

 

 

 

 

 

 

Promissory notes

 

 

(95

)

 

 

(95

)

Sales-type lease

 

 

(180

)

 

 

(237

)

Total unearned income

 

 

(275

)

 

 

(332

)

Total financing receivables, net of unearned income

 

 

9,485

 

 

 

10,847

 

Allowance for doubtful promissory notes

 

 

(1,849

)

 

 

(1,849

)

Less current portion

 

 

(3,843

)

 

 

(4,258

)

Non-current financing receivables

 

$

3,793

 

 

$

4,740

 

   

12


 

7.   Inventories

Inventories consist of the following (in thousands):

 

 

 

December 31, 2018

 

 

September 30, 2018

 

Finished goods

 

$

14,712

 

 

$

18,802

 

Work in process

 

 

7,405

 

 

 

7,926

 

Raw material

 

 

57,099

 

 

 

54,290

 

Obsolescence reserve

 

 

(30,648

)

 

 

(30,551

)

 

 

 

48,568

 

 

 

50,467

 

Less current portion

 

 

17,565

 

 

 

18,812

 

Non-current portion

 

$

31,003

 

 

$

31,655

 

 

During the three months ended December 31, 2018 and 2017, the Company made non-cash inventory transfers of $7.4 million and $2.0 million, respectively, to rental equipment.  Raw materials include semi-finished goods and component parts totaled approximately $26.7 million and $29.0 million at December 31, 2018 and September 30, 2018, respectively.  

8.   Goodwill and Other Intangible Assets

In connection with the acquisition of all of the intellectual property and related assets of the OptoSeis fiber optic sensing technology business from PGS Americas, Inc. in November 2018, the Company recorded goodwill of $1.6 million and other intangible assets of $4.5 million.  As a result of this acquisition and the acquisition of Quantum Technology Sciences (“Quantum”) in July 2018, the Company’s consolidated intangible assets consisted of the following (in thousands):  

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Remaining Useful

 

 

 

 

 

 

 

 

 

Lives (in years)

 

December 31, 2018

 

 

September 30, 2018

 

Goodwill

 

 

$

5,980

 

 

$

4,343