10-Q 1 geos-10q_20191231.htm GEOS-10Q-1Q2020 geos-10q_20191231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

for the Quarterly Period Ended December 31, 2019 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

incorporation or organization)

(I.R.S. Employer
Identification No.)

7007 Pinemont,

Houston, Texas

77040

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (713) 986-4444

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

GEOS

 

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No 

As of January 31, 2020, the registrant had 13,661,489 shares of common stock, $.01 par value per share outstanding.

 

  

 

 

 

 


 

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, 2019

 

 

September 30, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,141

 

 

$

18,925

 

Trade accounts receivable, net

 

 

32,681

 

 

 

24,193

 

Financing receivables

 

 

2,517

 

 

 

3,233

 

Inventories

 

 

23,907

 

 

 

23,855

 

Property held for sale

 

 

691

 

 

 

 

Income tax receivable

 

 

11

 

 

 

7

 

Prepaid expenses and other current assets

 

 

1,960

 

 

 

1,001

 

Total current assets

 

 

71,908

 

 

 

71,214

 

 

 

 

 

 

 

 

 

 

Non-current financing receivables

 

 

116

 

 

 

184

 

Non-current inventories

 

 

19,223

 

 

 

21,524

 

Rental equipment, net

 

 

66,985

 

 

 

62,062

 

Property, plant and equipment, net

 

 

31,615

 

 

 

31,474

 

Operating right-of-use asset

 

 

184

 

 

 

 

Goodwill

 

 

5,008

 

 

 

5,008

 

Other intangible assets, net

 

 

9,630

 

 

 

10,063

 

Deferred income tax assets, net

 

 

262

 

 

 

236

 

Prepaid income taxes

 

 

65

 

 

 

64

 

Other assets

 

 

180

 

 

 

179

 

Total assets

 

$

205,176

 

 

$

202,008

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable trade

 

$

6,339

 

 

$

4,051

 

Accrued expenses and other current liabilities

 

 

6,241

 

 

 

6,370

 

Deferred revenue and customer deposits

 

 

3,658

 

 

 

2,724

 

Operating lease liability

 

 

160

 

 

 

 

Income tax payable

 

 

35

 

 

 

25

 

Total current liabilities

 

 

16,433

 

 

 

13,170

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

 

9,940

 

 

 

9,940

 

Non-current operating lease liability

 

 

42

 

 

 

 

Deferred income tax liabilities

 

 

46

 

 

 

51

 

Total liabilities

 

 

26,461

 

 

 

23,161

 

 

 

 

 

 

 

 

 

 

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, 13,661,489 and

 

 

 

 

 

 

 

 

13,630,666 shares issued and outstanding

 

 

137

 

 

 

136

 

Additional paid-in capital

 

 

89,250

 

 

 

88,660

 

Retained earnings

 

 

104,519

 

 

 

105,808

 

Accumulated other comprehensive loss

 

 

(15,191

)

 

 

(15,757

)

Total stockholders’ equity

 

 

178,715

 

 

 

178,847

 

Total liabilities and stockholders’ equity

 

$

205,176

 

 

$

202,008

 

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, 2019

 

 

December 31, 2018

 

Revenue:

 

 

 

 

 

 

 

 

Products

 

$

9,083

 

 

$

10,459

 

Rental

 

 

16,615

 

 

 

7,416

 

Total revenue

 

 

25,698

 

 

 

17,875

 

Cost of revenue:

 

 

 

 

 

 

 

 

Products

 

 

9,903

 

 

 

11,220

 

Rental

 

 

5,305

 

 

 

3,565

 

Total cost of revenue

 

 

15,208

 

 

 

14,785

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

10,490

 

 

 

3,090

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,997

 

 

 

6,085

 

Research and development

 

 

4,296

 

 

 

3,171

 

Bad debt expense (recovery)

 

 

27

 

 

 

(103

)

Total operating expenses

 

 

10,320

 

 

 

9,153

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

170

 

 

 

(6,063

)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(12

)

 

 

(34

)

Interest income

 

 

134

 

 

 

272

 

Foreign exchange gains (losses), net

 

 

(132

)

 

 

67

 

Other, net

 

 

(29

)

 

 

(88

)

Total other income (loss), net

 

 

(39

)

 

 

217

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

131

 

 

 

(5,846

)

Income tax expense

 

 

1,420

 

 

 

7

 

Net loss

 

$

(1,289

)

 

$

(5,853

)

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

(0.44

)

Diluted

 

$

(0.10

)

 

$

(0.44

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

13,454,254

 

 

 

13,339,408

 

Diluted

 

 

13,454,254

 

 

 

13,339,408

 

 

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

4


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Net loss

 

$

(1,289

)

 

$

(5,853

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

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

 

 

 

 

 

64

 

Foreign currency translation adjustments

 

 

566

 

 

 

(218

)

Total other comprehensive income (loss)

 

 

566

 

 

 

(154

)

Total comprehensive loss

 

$

(723

)

 

$

(6,007

)

 

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

 

5


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED DECEMBER 31, 2019 AND 2018

(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, 2019

 

 

13,630,666

 

 

$

136

 

 

$

88,660

 

 

$

105,808

 

 

$

(15,757

)

 

$

178,847

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,289

)

 

 

 

 

 

(1,289

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

566

 

 

 

566

 

Issuance of common stock pursuant to the vesting of restricted stock units

 

 

30,823

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

 

 

 

 

 

 

590

 

 

 

 

 

 

 

 

 

590

 

Balance at December 31, 2019

 

 

13,661,489

 

 

 

137

 

 

 

89,250

 

 

 

104,519

 

 

 

(15,191

)

 

 

178,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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, 2019

 

 

December 31, 2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,289

)

 

$

(5,853

)

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

 

 

 

 

 

 

 

 

Deferred income tax benefit

 

 

(25

)

 

 

(61

)

Rental equipment depreciation

 

 

4,443

 

 

 

2,711

 

Property, plant and equipment depreciation

 

 

930

 

 

 

919

 

Amortization of intangible assets

 

 

433

 

 

 

362

 

Amortization of premiums on short-term investments

 

 

 

 

 

(7

)

Stock-based compensation expense

 

 

590

 

 

 

602

 

Bad debt expense (recovery)

 

 

27

 

 

 

(103

)

Inventory obsolescence expense

 

 

1,436

 

 

 

1,428

 

Gross profit from sale of used rental equipment

 

 

(284

)

 

 

 

Gain on disposal of property, plant and equipment

 

 

(14

)

 

 

 

Realized loss on short-term investments

 

 

 

 

 

59

 

Effects of changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts and other receivables

 

 

(8,460

)

 

 

1,824

 

Income tax receivable

 

 

(4

)

 

 

 

Inventories

 

 

(3,126

)

 

 

(6,302

)

Prepaid expenses and other current assets

 

 

(949

)

 

 

(1,472

)

Prepaid income taxes

 

 

(1

)

 

 

(12

)

Accounts payable trade

 

 

2,284

 

 

 

4,240

 

Accrued expenses and other

 

 

(283

)

 

 

2,008

 

Deferred revenue and customer deposits

 

 

925

 

 

 

879

 

Income tax payable

 

 

9

 

 

 

50

 

Net cash provided by (used in) operating activities

 

 

(3,358

)

 

 

1,272

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(1,670

)

 

 

(717

)

Proceeds from the sale of property, plant and equipment

 

 

40

 

 

 

 

Investment in rental equipment

 

 

(5,152

)

 

 

(10,164

)

Proceeds from the sale of used rental equipment

 

 

1,146

 

 

 

728

 

Proceeds from the sale of short-term investments

 

 

 

 

 

16,081

 

Business acquisition

 

 

 

 

 

(1,819

)

Payments for damages related to insurance claim

 

 

 

 

 

(118

)

Proceeds from insurance claim

 

 

 

 

 

78

 

Net cash provided by (used in) investing activities

 

 

(5,636

)

 

 

4,069

 

 

 

 

 

 

 

 

 

 

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

 

 

210

 

 

 

(379

)

Increase (decrease) in cash and cash equivalents

 

 

(8,784

)

 

 

5,177

 

Cash and cash equivalents, beginning of fiscal year

 

 

18,925

 

 

 

11,934

 

Cash and cash equivalents, end of fiscal period

 

$

10,141

 

 

$

17,111

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

12

 

 

$

34

 

Cash paid for income taxes

 

 

1,440

 

 

 

7

 

Inventory transferred to rental equipment

 

 

4,070

 

 

 

7,353

 

 

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, 2019 was derived from the Company’s audited consolidated financial statements at that date.  The consolidated balance sheet at December 31, 2019 and the consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the three months ended December 31, 2019 and 2018 were prepared by the Company without audit.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows were made.  All intercompany balances and transactions have been eliminated.  The results of operations for the three months ended December 31, 2019 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, 2019.

 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 (“GAAP”) 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.  While management believes current estimates are reasonable and appropriate, actual results may differ from these estimates under different conditions or assumptions.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original or remaining maturity at the time of purchase of three months or less to be cash equivalents.  At December 31, 2019, cash and cash equivalents included $6.9 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 February 2016, the Financial Accounting Standards Board (“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 Company adopted this guidance on October 1, 2019 using the optional transition method, which allows it to initially apply the new guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings.  The adoption of this

8


 

guidance had an immaterial impact on the Company’s consolidated financial statements, and there was no adjustment made to the opening balance of retained earnings.  

In June 2018, the FASB issued guidance expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees.  The Company adopted this guidance on October 1, 2019.  The adoption of this guidance did not have any material impact on its consolidated financial statements.

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 Company adopted this guidance on October 1, 2019.  The adoption of this guidance did not have any impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

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 will 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 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.  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 fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.  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 will 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. 

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 October 1, 2018 are presented under the new standard and prior period amounts were 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.  Revenue from these product sales, including the sale of used rental equipment, is recognized when obligations under the terms of a contract are satisfied, control is transferred and collectability of the sales price is reasonably assured.  In situations where collectability of the sales price is not reasonably assured, the Company recognizes the sales price on a cash basis.  Transfer of control generally occurs with shipment or delivery, depending on the terms of the underlying contract.  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 and collectability of the rent is reasonably assured.  Rentals of the Company’s equipment generally range from daily rentals to minimum 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 beginning retained earnings.  The impact on the timing of sales and services for the fiscal year ended September 30, 2019 resulting from the application of the new standard was not material.  

9


 

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

At December 31, 2019 and September 30, 2019, the Company had no deferred contract liabilities or deferred contract costs.   During the three months ended December 31, 2019 and 2018, the Company recognized revenue of zero and $0.1 million, respectively, from deferred contract liabilities and cost of revenue of zero and $8,000, respectively, from deferred contract costs.  

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

 

 

 

Three Months Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Oil and Gas Markets

 

 

 

 

 

 

 

 

Traditional exploration product revenue

 

$

2,330

 

 

$

2,726

 

Wireless exploration product revenue

 

 

404

 

 

 

144

 

Reservoir product revenue

 

 

180

 

 

 

888

 

Total revenue

 

 

2,914

 

 

 

3,758

 

 

 

 

 

 

 

 

 

 

Adjacent Markets

 

 

 

 

 

 

 

 

Industrial product revenue

 

 

3,596

 

 

 

3,562

 

Imaging product revenue

 

 

2,476

 

 

 

3,051

 

Total revenue

 

 

6,072

 

 

 

6,613

 

 

 

 

 

 

 

 

 

 

Emerging Markets

 

 

 

 

 

 

 

 

Revenue

 

 

97

 

 

 

88

 

 

 

 

 

 

 

 

 

 

Total

 

$

9,083

 

 

$

10,459

 

 

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

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

 

 

 

Three Months Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Asia

 

$

445

 

 

$

1,558

 

Canada

 

 

473

 

 

 

288

 

Europe

 

 

1,413

 

 

 

915

 

United States

 

 

6,597

 

 

 

6,610

 

Other

 

 

155

 

 

 

1,088

 

Total

 

$

9,083

 

 

$

10,459

 

 

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.   Derivative Financial Instruments

At December 31, 2019 and September 30, 2019, the Company’s Canadian subsidiary had CAD $8.3 million and CAD $9.3 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.  At December 31, 2019 and September 30, 2019, the Company had short-term hedge contracts of CAD $6.0 million and CAD $7.0 million, respectively, 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 the contract has not been designated as a hedge for accounting purposes.     

10


 

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, 2019

 

 

September 30, 2019

 

Foreign Currency Forward Contracts

 

Accrued Expenses and Other Current Liabilities

 

$

26

 

 

$

4

 

 

The following table summarizes the Company’s realized gains (losses) on derivative instruments included in the consolidated statements of operations for the three months ended December 31, 2019 and 2018 (in thousands):

 

 

 

 

 

Three Months Ended

 

Derivative Instrument

 

Location

 

December 31, 2019

 

 

December 31, 2018

 

Foreign Currency Forward Contracts

 

Other Income (Expense)

 

$

(98

)

 

$

552

 

 

4.   Trade Accounts Receivable and Financing Receivables

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

 

 

 

December 31, 2019

 

 

September 30, 2019

 

Trade accounts receivable

 

$

33,641

 

 

$

25,144

 

Allowance for doubtful accounts

 

 

(960

)

 

 

(951

)

Total

 

$

32,681

 

 

$

24,193

 

 

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, 2019 and September 30, 2019 includes $8.7 million and $8.5 million, respectively, due from an international seismic marine customer that, as of December 31, 2019 rented a significant amount of marine nodal equipment from the Company.  The Company has experienced cash collection difficulties with this customer throughout fiscal year 2019 and into the first quarter of fiscal year 2020 due to the customer’s inability to generate sufficient cash flows to pay its obligations in a timely manner.  In November 2019, the Company accepted from the customer a plan to bring its unpaid invoices to a satisfactory status.  The most recent payment made by the customer prior to the plan was $1.4 million in November 2019.  The customer did not make any of the scheduled payments as detailed in that plan.  In late November 2019, the Company ceased recognizing revenue from this customer and expects to continue to do so until the customer demonstrates its ability to routinely service its debts owed to the Company in the ordinary course of business.  At December 31, 2019, the total debt contractually owed by the customer to the Company is $10.2 million; however, the trade accounts receivable of $8.7 million on the Company’s balance sheet at December 31, 2019 excludes $1.5 million of unrecognized revenue invoiced by the Company during the quarter ended December 31, 2019.  Prior to the customer missing the first scheduled payment in late November, the Company recognized $2.5 million of revenue from this customer for the quarter ended December 31, 2019.

 

  Subsequent to December 31, 2019, the Company has commenced negotiations with the customer to enter into an agreement requiring the customer to pay a portion of the trade accounts receivable in the near term, to pay all rental payments going forward on a current basis and convert the remaining amount owed into a debt instrument secured by certain of the customer’s assets.  The Company expects to finalize the agreement with the customer in its second quarter ending March 31, 2020.

 

While the Company has significant concerns about the ultimate collection of its accounts receivable from this customer, the Company has not provided any additional bad debt reserves toward its outstanding accounts receivable balance from this customer due to the on-going negotiations.  If it becomes probable (in the Company’s judgment) that the customer is unable to generate cash flows sufficient to satisfy the customer’s obligations from the variety of options available to it, the Company will record additional bad debt reserves.  The current negotiations may not lead to a definitive agreement being entered into; or the fair market value of the collateral securing the debt under the agreement may not equal or exceed the balance of accounts receivable owed by the customer; or the customer may not meet it’s payment obligations.  If any of these situations occur, the Company could record a significant bad debt reserve as soon as the second quarter of fiscal year 2020.

 

11


 

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

 

 

 

December 31, 2019

 

 

September 30, 2019

 

Promissory notes

 

$

607

 

 

$

780

 

Sales-type lease

 

 

2,054

 

 

 

2,692

 

Total financing receivables

 

 

2,661

 

 

 

3,472

 

Unearned income:

 

 

 

 

 

 

 

 

Sales-type lease

 

 

(28

)

 

 

(55

)

Total unearned income

 

 

(28

)

 

 

(55

)

Total financing receivables, net of unearned income

 

 

2,633

 

 

 

3,417

 

Less current portion

 

 

(2,517

)

 

 

(3,233

)

Non-current financing receivables

 

$

116

 

 

$

184

 

   

Promissory notes receivable are generally collateralized by the products sold, and bear interest at rates ranging up to 5% per year.  The promissory notes receivable mature at various times through May 2021.  The Company has, on occasion, extended or renewed notes receivable as they mature, but there is no obligation to do so.

The Company entered into a sales-type lease in September 2017 resulting from the sale of rental equipment.  The sales-type lease has a term of three years. Future minimum lease payments required under the lease at December 31, 2019 were $2.1 million, including $0.1 million of unearned income.  The future minimum lease payments are due in fiscal year 2020.  Interest income earned on the lease for the three months ended December 31, 2019 and 2018 was $32,000 and $0.1 million, respectively.  The ownership of the equipment will transfer to the lessee at the end of the lease term.

5.   Inventories

Inventories consist of the following (in thousands):

 

 

 

December 31, 2019

 

 

September 30, 2019

 

Finished goods

 

$

24,286

 

 

$

17,967

 

Work in process

 

 

6,745

 

 

 

3,681

 

Raw materials

 

 

44,446

 

 

 

55,781

 

Obsolescence reserve

 

 

(32,347

)

 

 

(32,050

)

 

 

 

43,130

 

 

 

45,379

 

Less current portion

 

 

(23,907

)

 

 

(23,855

)

Non-current portion

 

$

19,223

 

 

$

21,524

 

 

Raw materials included semi-finished goods and component parts that totaled approximately $19.2 million and $25.2 million at December 31, 2019 and September 30, 2019, respectively.

6.  Leases

As Lessee

The Company has elected not to record operating right-of-use assets or operating lease liabilities with a term of 12 months or less on its consolidated balance sheet.  Such leases are expensed on a straight-line basis over the lease term.  The Company has one operating right-of use asset on its consolidated balance sheet related to a leased facility in Austin, Texas.  The lease commenced in May 2019 and is for a two-year term.  Future minimum lease payments related to the operating lease is as follows (in thousands):  

 

For fiscal year ending September 30,

 

 

 

 

2020 (remainder)

 

$

124

 

2021

 

 

84

 

Future minimum lease payments

 

 

208

 

Less interest

 

 

(6

)

Present value of future minimum lease payments

 

 

202

 

Less current portion

 

 

(160

)

Non-current portion

 

$

42

 

12


 

 

The discount rate used on the lease was 5%, which represents the Company’s incremental borrowing rate.

Operating lease costs are recorded in a single expense in the consolidated statements of operations and allocated to the right-of-use asset and the related lease liability as amortization expense and interest expense, respectively.  Right-of-use asset operating lease costs of $38,000 and short-term lease costs of $76,000, both included as a component of total operating expenses, were recognized for the three months ended December 31, 2019.

Supplemental cash flow information related to the operating lease is a follows (in thousands):

 

 

 

Three Months Ended

 

 

 

December 31, 2019

 

Cash paid for amounts included in the measurement of lease liability

 

$

40

 

Operating lease asset obtained in exchange for new lease liability

 

 

219

 

 

As Lessor

The Company leases equipment to customers primarily for terms of six months or less.  The majority of the Company’s rental revenue is generated from its marine-based wireless seismic data acquisition system.        

All of the Company’s leasing arrangements as lessor are classified as operating leases except for one sales-type lease.  See note 4 for more information on this lease.

Rental revenue for the three months ended December 31, 2019 and 2018 was $16.6 million and $7.4 million, respectively.

At December 31, 2019, future minimum leases payments due from the Company’s leasing customers (all in fiscal year 2020) were $3.2 million (not inclusive of lease deposits of $0.7 million).  At December 31, 2019, the minimum lease term for the majority of the equipment on lease to customers was expired and was leased on a day-to-day basis.

Rental equipment consisted of the following (in thousands):

 

 

December 31, 2019

 

 

September 30, 2019

 

Rental equipment, primarily wireless recording equipment

 

$

117,210

 

 

$

107,645

 

Accumulated depreciation and impairment

 

 

(50,225

)

 

 

(45,583

)

 

 

$

66,985

 

 

$

62,062

 

 

7.   Property Held for Sale

The Company owns a property located in Bogotá, Colombia that it is marketing for sale.  The property was used for product sales and service support to its customers in South America as well as warehousing for its rental equipment operations.  The property’s carrying value at December 31, 2019 was $0.7  million has been reclassified from property, plant and equipment to property held for sale in the accompanying consolidated balance sheet as of December 31, 2019.  The Company believes the property will be sold within the next 12-months.  The Company continues to operate on a reduced scale in Colombia.  The Company’s rental equipment in Colombia was either sold to customers or transferred back to its headquarters in Houston, Texas.                 

13


 

8.   Goodwill and Other Intangible Assets

    The Company’s consolidated goodwill and other intangible assets consisted of the following (in thousands):        

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Remaining Useful

 

 

 

 

 

 

 

 

 

Lives (in years)

 

December 31, 2019

 

 

September 30, 2019

 

Goodwill

 

 

$

5,008

 

 

$

5,008

 

 

 

 

 

 

 

 

 

 

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

Developed technology

16.7

 

 

5,919

 

 

 

5,918

 

Customer relationships

2.7