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 March 31, 20182019 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 | incorporation or organization) | (I.R.S. Employer |
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7007 Pinemont, Houston, Texas | 77040 | |
(Address of principal executive offices) | (Zip Code) |
7007 Pinemont Drive
Houston, Texas 77040-6601
(Address of Principal Executive Offices) (Zip Code)
(713) 986-4444
(Registrant’s telephone number, including area code)code: (713) 986-4444
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 |
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| Accelerated filer | ☒ |
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Non-accelerated filer |
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| Smaller reporting company |
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| 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 13,577,916As of April 30, 2019, the registrant had 13,632,291 shares of the Registrant’s Common Stock outstanding ascommon stock, $.01 par value per share outstanding.
Securities registered pursuant to Section 12(b) of the close of business on April 30, 2018.Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | GEOS | The Nasdaq Global Market |
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| Page Number |
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| 3 | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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| 25 | |
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PART I - FINANCIAL INFORMATION
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
|
| March 31, 2018 |
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| September 30, 2017 |
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| March 31, 2019 |
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| September 30, 2018 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 14,179 |
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| $ | 15,092 |
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| $ | 12,765 |
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| $ | 11,934 |
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Short-term investments |
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| 26,462 |
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| 36,137 |
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| 748 |
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| 25,471 |
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Trade accounts receivable, net |
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| 12,530 |
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| 9,435 |
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| 20,634 |
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| 14,323 |
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Financing receivables |
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| 5,036 |
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| 3,055 |
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| 3,660 |
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| 4,258 |
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Income tax receivable |
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| 975 |
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| 273 |
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Inventories |
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| 21,834 |
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| 20,752 |
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| 15,525 |
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| 18,812 |
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Prepaid expenses and other current assets |
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| 1,452 |
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| 1,623 |
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| 2,275 |
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| 1,856 |
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Total current assets |
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| 82,468 |
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| 86,367 |
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| 55,607 |
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| 76,654 |
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Rental equipment, net |
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| 19,704 |
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| 16,462 |
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| 56,434 |
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| 39,545 |
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Property, plant and equipment, net |
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| 35,750 |
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| 37,399 |
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| 34,320 |
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| 33,624 |
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Non-current inventories |
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| 48,846 |
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| 55,935 |
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| 34,037 |
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| 31,655 |
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Goodwill |
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| 5,059 |
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| 4,343 |
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Other intangible assets, net |
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| 10,930 |
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| 8,006 |
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Deferred income tax assets, net |
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| 317 |
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| 259 |
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| 225 |
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| 246 |
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Non-current financing receivables, net |
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| 6,166 |
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| 8,195 |
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| 2,753 |
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| 4,740 |
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Prepaid income taxes |
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| 48 |
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| 450 |
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| 69 |
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| 54 |
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Other assets |
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| 213 |
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| 629 |
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| 216 |
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| 213 |
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Total assets |
| $ | 193,512 |
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| $ | 205,696 |
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| $ | 199,650 |
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| $ | 199,080 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable trade |
| $ | 4,922 |
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| $ | 2,599 |
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| $ | 7,117 |
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| $ | 4,106 |
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Accrued expenses and other current liabilities |
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| 5,300 |
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| 6,338 |
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| 5,059 |
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| 6,826 |
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Deferred revenue |
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| 533 |
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| 1,568 |
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| 2,393 |
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| 3,752 |
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Income tax payable |
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| 33 |
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| 51 |
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Total current liabilities |
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| 10,755 |
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| 10,505 |
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| 14,602 |
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| 14,735 |
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Contingent earn-out liabilities |
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| 12,055 |
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| 7,713 |
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Deferred income tax liabilities |
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| 46 |
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| 37 |
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| 40 |
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| 45 |
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Total liabilities |
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| 10,801 |
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| 10,542 |
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| 26,697 |
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| 22,493 |
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Commitments and contingencies (Note 11) |
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Commitments and contingencies (Note 12) |
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Stockholders’ equity: |
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Preferred stock, 1,000,000 shares authorized, no shares issued and outstanding |
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| — |
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| — |
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Common stock, $.01 par value, 20,000,000 shares authorized, 13,578,916 and 13,438,316 shares issued and outstanding |
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| 136 |
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| 134 |
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Common stock, $.01 par value, 20,000,000 shares authorized, 13,632,291 and 13,600,541 shares issued and outstanding |
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| 136 |
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| 136 |
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Additional paid-in capital |
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| 85,103 |
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| 83,733 |
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| 87,525 |
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| 86,116 |
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Retained earnings |
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| 110,957 |
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| 125,517 |
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| 100,808 |
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| 105,954 |
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Accumulated other comprehensive loss |
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| (13,485 | ) |
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| (14,230 | ) |
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| (15,516 | ) |
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| (15,619 | ) |
Total stockholders’ equity |
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| 182,711 |
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| 195,154 |
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| 172,953 |
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| 176,587 |
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Total liabilities and stockholders’ equity |
| $ | 193,512 |
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| $ | 205,696 |
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| $ | 199,650 |
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| $ | 199,080 |
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The accompanying notes are an integral part of the consolidated financial statements.
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
|
| Three Months Ended |
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| Six Months Ended |
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| Three Months Ended |
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| Six Months Ended |
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| March 31, 2018 |
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| March 31, 2017 |
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| March 31, 2018 |
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| March 31, 2017 |
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| March 31, 2019 |
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| March 31, 2018 |
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| March 31, 2019 |
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| March 31, 2018 |
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Revenue: |
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Products |
| $ | 14,044 |
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| $ | 14,775 |
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| $ | 27,469 |
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| $ | 25,072 |
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| $ | 11,845 |
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| $ | 13,910 |
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| $ | 22,304 |
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| $ | 27,184 |
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Rental equipment |
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| 5,203 |
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| 5,783 |
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| 6,422 |
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| 10,771 |
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Rental |
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| 14,278 |
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| 5,337 |
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| 21,694 |
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| 6,707 |
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Total revenue |
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| 19,247 |
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| 20,558 |
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| 33,891 |
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| 35,843 |
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| 26,123 |
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| 19,247 |
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| 43,998 |
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| 33,891 |
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Cost of revenue: |
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Products |
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| 14,205 |
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| 18,799 |
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| 27,448 |
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| 33,635 |
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| 11,246 |
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| 14,065 |
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| 22,459 |
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| 27,161 |
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Rental equipment |
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| 3,043 |
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| 4,317 |
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| 5,412 |
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| 8,093 |
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Rental |
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| 4,526 |
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| 3,183 |
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| 8,098 |
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| 5,699 |
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Total cost of revenue |
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| 17,248 |
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| 23,116 |
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| 32,860 |
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| 41,728 |
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| 15,772 |
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| 17,248 |
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| 30,557 |
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| 32,860 |
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Gross profit (loss) |
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| 1,999 |
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| (2,558 | ) |
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| 1,031 |
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| (5,885 | ) | ||||||||||||||||
Gross profit |
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| 10,351 |
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| 1,999 |
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| 13,441 |
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| 1,031 |
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Operating expenses: |
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Selling, general and administrative |
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| 4,785 |
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| 5,026 |
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| 9,914 |
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| 10,120 |
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| 5,358 |
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| 4,785 |
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| 11,443 |
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| 9,914 |
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Research and development |
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| 2,430 |
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| 3,412 |
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| 5,588 |
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| 6,784 |
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| 3,898 |
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| 2,430 |
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| 7,069 |
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| 5,588 |
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Bad debt expense (recovery) |
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| 6 |
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| 64 |
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| 356 |
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| (418 | ) |
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| 73 |
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| 6 |
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| (30 | ) |
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| 356 |
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Total operating expenses |
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| 7,221 |
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| 8,502 |
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| 15,858 |
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| 16,486 |
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| 9,329 |
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| 7,221 |
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| 18,482 |
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| 15,858 |
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Loss from operations |
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| (5,222 | ) |
|
| (11,060 | ) |
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| (14,827 | ) |
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| (22,371 | ) | ||||||||||||||||
Income (loss) from operations |
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| 1,022 |
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| (5,222 | ) |
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| (5,041 | ) |
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| (14,827 | ) | ||||||||||||||||
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Other income (expense): |
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Interest expense |
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| (127 | ) |
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| (8 | ) |
|
| (191 | ) |
|
| (16 | ) |
|
| (23 | ) |
|
| (127 | ) |
|
| (57 | ) |
|
| (191 | ) |
Interest income |
|
| 279 |
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|
| 137 |
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|
| 542 |
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|
| 268 |
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|
| 180 |
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|
| 279 |
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|
| 452 |
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|
| 542 |
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Foreign exchange losses, net |
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| (306 | ) |
|
| (215 | ) |
|
| (349 | ) |
|
| (281 | ) | ||||||||||||||||
Foreign exchange gains (losses), net |
|
| 119 |
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|
| (306 | ) |
|
| 186 |
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|
| (349 | ) | ||||||||||||||||
Other, net |
|
| (29 | ) |
|
| (16 | ) |
|
| (54 | ) |
|
| (33 | ) |
|
| (41 | ) |
|
| (29 | ) |
|
| (129 | ) |
|
| (54 | ) |
Total other expense, net |
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| (183 | ) |
|
| (102 | ) |
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| (52 | ) |
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| (62 | ) | ||||||||||||||||
Total other income (expense), net |
|
| 235 |
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|
| (183 | ) |
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| 452 |
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| (52 | ) | ||||||||||||||||
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Loss before income taxes |
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| (5,405 | ) |
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| (11,162 | ) |
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| (14,879 | ) |
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| (22,433 | ) | ||||||||||||||||
Income (loss) before income taxes |
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| 1,257 |
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| (5,405 | ) |
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| (4,589 | ) |
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| (14,879 | ) | ||||||||||||||||
Income tax expense (benefit) |
|
| (676 | ) |
|
| 341 |
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|
| (670 | ) |
|
| 775 |
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|
| 550 |
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|
| (676 | ) |
|
| 557 |
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|
| (670 | ) |
Net loss |
| $ | (4,729 | ) |
| $ | (11,503 | ) |
| $ | (14,209 | ) |
| $ | (23,208 | ) | ||||||||||||||||
Net income (loss) |
| $ | 707 |
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| $ | (4,729 | ) |
| $ | (5,146 | ) |
| $ | (14,209 | ) | ||||||||||||||||
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Loss per common share: |
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Income (loss) per common share: |
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Basic |
| $ | (0.36 | ) |
| $ | (0.88 | ) |
| $ | (1.07 | ) |
| $ | (1.77 | ) |
| $ | 0.05 |
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| $ | (0.36 | ) |
| $ | (0.38 | ) |
| $ | (1.07 | ) |
Diluted |
| $ | (0.36 | ) |
| $ | (0.88 | ) |
| $ | (1.07 | ) |
| $ | (1.77 | ) |
| $ | 0.05 |
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| $ | (0.36 | ) |
| $ | (0.38 | ) |
| $ | (1.07 | ) |
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Weighted average common shares outstanding: |
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Basic |
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| 13,264,710 |
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| 13,146,330 |
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| 13,233,205 |
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| 13,120,286 |
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| 13,401,135 |
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| 13,264,710 |
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|
| 13,369,932 |
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| 13,233,205 |
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Diluted |
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| 13,264,710 |
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| 13,146,330 |
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| 13,233,205 |
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| 13,120,286 |
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|
| 13,557,185 |
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|
| 13,264,710 |
|
|
| 13,369,932 |
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| 13,233,205 |
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The accompanying notes are an integral part of the consolidated financial statements.
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (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 |
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|
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 | ) |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||||
Net income (loss) |
| $ | 707 |
|
| $ | (4,729 | ) |
| $ | (5,146 | ) |
| $ | (14,209 | ) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on available-for-sale securities, net of tax |
|
| 19 |
|
|
| (38 | ) |
|
| 83 |
|
|
| (89 | ) |
Foreign currency translation adjustments |
|
| 238 |
|
|
| 1,039 |
|
|
| 20 |
|
|
| 834 |
|
Total other comprehensive income |
|
| 257 |
|
|
| 1,001 |
|
|
| 103 |
|
|
| 745 |
|
Total comprehensive income (loss) |
| $ | 964 |
|
| $ | (3,728 | ) |
| $ | (5,043 | ) |
| $ | (13,464 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018
(in thousands)thousands, expect share amounts)
(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 |
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 707 |
|
|
| — |
|
|
| 707 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 257 |
|
|
| 257 |
|
Forfeiture of restricted stock |
|
| (1,000 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of common stock pursuant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to the vesting of restricted stock units |
|
| 500 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 592 |
|
|
| — |
|
|
| — |
|
|
| 592 |
|
Balance at March 31, 2019 |
|
| 13,632,291 |
|
| $ | 136 |
|
| $ | 87,525 |
|
| $ | 100,808 |
|
| $ | (15,516 | ) |
| $ | 172,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2017 |
|
| 13,438,316 |
|
| $ | 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 |
|
| 13,560,291 |
|
|
| 136 |
|
|
| 84,557 |
|
|
| 115,686 |
|
|
| (14,486 | ) |
|
| 185,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,729 | ) |
|
| — |
|
|
| (4,729 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,001 |
|
|
| 1,001 |
|
Issuance of restricted stock |
|
| 16,800 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeiture of restricted stock |
|
| (1,375 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of common stock pursuant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to the exercise of stock options |
|
| 3,200 |
|
|
| — |
|
|
| 28 |
|
|
| — |
|
|
| — |
|
|
| 28 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 518 |
|
|
| — |
|
|
| — |
|
|
| 518 |
|
Balance at March 31, 2018 |
|
| 13,578,916 |
|
| $ | 136 |
|
| $ | 85,103 |
|
| $ | 110,957 |
|
| $ | (13,485 | ) |
| $ | 182,711 |
|
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)
|
| Six Months Ended |
| |||||
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (5,146 | ) |
| $ | (14,209 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Deferred income tax benefit |
|
| (14 | ) |
|
| (40 | ) |
Rental equipment depreciation |
|
| 6,121 |
|
|
| 4,519 |
|
Property, plant and equipment depreciation |
|
| 2,003 |
|
|
| 2,105 |
|
Amortization of intangible assets |
|
| 795 |
|
|
| — |
|
Accretion of discounts on short-term investments |
|
| (9 | ) |
|
| 24 |
|
Stock-based compensation expense |
|
| 1,194 |
|
|
| 1,344 |
|
Bad debt expense (recovery) |
|
| (30 | ) |
|
| 356 |
|
Inventory obsolescence expense |
|
| 2,401 |
|
|
| 3,297 |
|
Gross profit from sale of used rental equipment |
|
| (200 | ) |
|
| (4,187 | ) |
Gain on disposal of property, plant and equipment |
|
| — |
|
|
| (25 | ) |
Realized loss on short-term investments |
|
| 67 |
|
|
| 1 |
|
Effects of changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
| (5,806 | ) |
|
| (2,943 | ) |
Income tax receivable |
|
| — |
|
|
| (701 | ) |
Inventories |
|
| (3,695 | ) |
|
| (4,613 | ) |
Prepaid expenses and other current assets |
|
| (998 | ) |
|
| 179 |
|
Prepaid income taxes |
|
| (23 | ) |
|
| 49 |
|
Accounts payable trade |
|
| 3,018 |
|
|
| 2,320 |
|
Accrued expenses and other |
|
| (1,218 | ) |
|
| 89 |
|
Deferred revenue |
|
| (1,349 | ) |
|
| 60 |
|
Income tax payable |
|
| (15 | ) |
|
| — |
|
Net cash used in operating activities |
|
| (2,904 | ) |
|
| (12,375 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
| (962 | ) |
|
| (495 | ) |
Proceeds from the sale of property, plant and equipment |
|
| — |
|
|
| 200 |
|
Investment in rental equipment |
|
| (20,420 | ) |
|
| (1,643 | ) |
Proceeds from the sale of used rental equipment |
|
| 1,646 |
|
|
| 3,904 |
|
Purchases of short-term investments |
|
| — |
|
|
| (3,755 | ) |
Proceeds from the sale of short-term investments |
|
| 24,856 |
|
|
| 13,321 |
|
Business acquisition |
|
| (1,819 | ) |
|
| — |
|
Payments for damages related to insurance claim |
|
| (616 | ) |
|
| — |
|
Proceeds from insurance claim |
|
| 1,166 |
|
|
| — |
|
Net cash provided by investing activities |
|
| 3,851 |
|
|
| 11,532 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
| 215 |
|
|
| 19 |
|
Net cash provided by financing activities |
|
| 215 |
|
|
| 19 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| (331 | ) |
|
| (89 | ) |
Increase (decrease) in cash and cash equivalents |
|
| 831 |
|
|
| (913 | ) |
Cash and cash equivalents, beginning of fiscal year |
|
| 11,934 |
|
|
| 15,092 |
|
Cash and cash equivalents, end of fiscal period |
| $ | 12,765 |
|
| $ | 14,179 |
|
The accompanying notes are an integral part of the consolidated financial statements.
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, 20172018 was derived from the Company’s audited consolidated financial statements at that date. The consolidated balance sheet at March 31, 20182019 and the consolidated statements of operations, comprehensive lossincome (loss), stockholders’ equity and the consolidated statements of cash flows for the three and six months ended March 31, 20182019 and 20172018 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, 20182019 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, 2017.2018.
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. CashAt March 31, 2019, cash and cash equivalents include $8.1included $7.5 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.repatriated under rates enacted by The Tax Cuts and Jobs Act (“2017 Tax Act”).
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 OctoberNovember 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 bewas adopted by the Company no later thanin its first quarter of fiscal year 20192019. The adoption of this guidance had no effect on the Company’s consolidated financial statements since it currently 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 should be applied on a retrospective transition basis.expands disclosure requirements for revenue recognition. This new standard supersedes existing revenue recognition guidance and requires changes to the revenue recognition process, financial statement presentation and footnote disclosures. The Company has historicallyadopted this standard on October 1,
2018 using the modified retrospective method. The adoption of this standard did not held restricted cash balancesresult in a cumulative adjustment as of October 1, 2018 nor did it have any impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
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 therefore,services from nonemployees. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The Company does not expect the adoption of this guidance to have aany material effect on its consolidated financial statements. However, upon
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 beginning 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 the Company will make any necessary changes to present restricted cash balances in accordance with the guidance. on its consolidated financial statements.
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 annualfiscal years reporting periods beginning after December 15, 2019 and interim periods within those annual periods.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 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. TheEffective May 1, 2019, the Company currently is notwill be a lessee under anyan office lease agreementsagreement with a term longer than one year. The Company is routinely a lessor in its rental contracts with customers; however,customers. The minimum rental term of these rental agreements arecontracts is generally short-term in nature,less than one year, and the Company believes wouldexpects these contracts will 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.
In May 2014,2. Revenue Recognition
On October 1, 2018, the FASB issued guidance requiring entitiesCompany adopted ASC Topic 606, Revenue from Contracts with Customers. This new standard applies to recognizecontracts 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 from contracts with customers by applying a five-step model in accordance withwhen performance of contractual obligations are satisfied, generally when control of the core principle to depict the transfer of promised goods or services is transferred to its customers, in an amount that reflects the consideration to which the entityit expects to be entitled to in exchange for those goods or services. In addition, this guidance specifies
The Company primarily derives product revenue from the accountingsale of its manufactured products. Revenue from these product sales, including the sale of used rental equipment, is recognized 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. 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 some costscredit.
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 obtainminimum rental periods of up to six months or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. In August 2015,longer. The Company has determined that 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 affectdoes not apply to rental contracts, which are within the Company'sscope of other revenue recognition process and the presentations or disclosuresaccounting standards.
The cumulative effect of the Company'schanges made to the Company’s consolidated financial statements and footnotes. The Company recognizes revenue through three primary transactions types: (i) the immediate recognitionbalance sheet as 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 toOctober 1, 2018 resulting from the adoption of this standard.the new standard was not material and did not impact beginning retained earnings. The impact on the timing of sales and services for the six months ended March 31, 2019 resulting from the application of the new standard was not material.
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 March 31, 2019 and September 30, 2018 the Company had deferred contract liabilities of $0.1 million and $0.2 million, respectively, included as a component of deferred revenue. The Company had deferred contract costs of $35,000 and $27,000 at March 31, 2019 and September 30, 2018, respectively, included as a component of prepaid expenses and other current assets. During the three and six months ended March 31, 2019, the Company recognized cost of revenue of $0 and $8,000, respectively, from deferred contract costs.
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 |
|
| Six Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||||
Oil and Gas Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional exploration product revenue |
| $ | 3,261 |
|
| $ | 2,490 |
|
| $ | 5,987 |
|
| $ | 6,089 |
|
Wireless exploration product revenue |
|
| 310 |
|
|
| 1,558 |
|
|
| 454 |
|
|
| 4,181 |
|
Reservoir product revenue |
|
| 994 |
|
|
| 2,060 |
|
|
| 1,882 |
|
|
| 2,678 |
|
Total revenue |
|
| 4,565 |
|
|
| 6,108 |
|
|
| 8,323 |
|
|
| 12,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjacent Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial product revenue |
|
| 4,120 |
|
|
| 4,711 |
|
|
| 7,682 |
|
|
| 8,387 |
|
Imaging product revenue |
|
| 3,114 |
|
|
| 3,091 |
|
|
| 6,165 |
|
|
| 5,849 |
|
Total revenue |
|
| 7,234 |
|
|
| 7,802 |
|
|
| 13,847 |
|
|
| 14,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emerging Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
| 46 |
|
|
| — |
|
|
| 134 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 11,845 |
|
| $ | 13,910 |
|
| $ | 22,304 |
|
| $ | 27,184 |
|
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 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 |
|
| Six Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||||
Asia |
| $ | 1,510 |
|
| $ | 1,253 |
|
| $ | 3,068 |
|
| $ | 2,259 |
|
Canada |
|
| 342 |
|
|
| 345 |
|
|
| 630 |
|
|
| 710 |
|
Europe |
|
| 1,170 |
|
|
| 917 |
|
|
| 2,085 |
|
|
| 4,336 |
|
United States |
|
| 8,265 |
|
|
| 11,338 |
|
|
| 14,875 |
|
|
| 19,361 |
|
Other |
|
| 558 |
|
|
| 57 |
|
|
| 1,646 |
|
|
| 518 |
|
Total |
| $ | 11,845 |
|
| $ | 13,910 |
|
| $ | 22,304 |
|
| $ | 27,184 |
|
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 OptoSeis acquisition, the Company recorded goodwill of $0.7 million (deductible for tax purposes), other intangible assets of $3.7 million, fixed assets of $1.7 million and has established an initial contingent earn-out liability of $4.3 million. The contingent earn-out payments will be derived from certain eligible revenue generated during the five-and-a-half year earn-out period.
Legal costs of $0.2 million related to the OptoSeis acquisition are included in selling, general and administrative expenses. 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. During the three months ended March 31, 2019, the estimated fair value of the acquired OptoSeis assets changed, including a $1.7 million addition to machinery and equipment, which was offset by a $0.9 million decrease in goodwill and a $0.8 million decrease in other intangible assets.
2.4. Short-term Investments
|
| As of March 31, 2018 (in thousands) |
|
| As of March 31, 2019 (in thousands) |
| ||||||||||||||||||||||||||
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Estimated Fair Value |
|
| 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 |
|
| $ | 747 |
|
| $ | 1 |
|
| $ | — |
|
| $ | 748 |
|
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) |
|
| As of September 30, 2018 (in thousands) |
| |||||||||||||||||||||||||||
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Estimated Fair Value |
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Estimated Fair Value |
| ||||||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
| $ | 22,829 |
|
| $ | — |
|
| $ | (31 | ) |
| $ | 22,798 |
|
| $ | 17,851 |
|
| $ | — |
|
| $ | (60 | ) |
| $ | 17,791 |
|
Government bonds |
|
| 13,363 |
|
|
| — |
|
|
| (24 | ) |
|
| 13,339 |
|
|
| 7,702 |
|
|
| — |
|
|
| (22 | ) |
|
| 7,680 |
|
Total |
| $ | 36,192 |
|
| $ | — |
|
| $ | (55 | ) |
| $ | 36,137 |
|
| $ | 25,553 |
|
| $ | — |
|
| $ | (82 | ) |
| $ | 25,471 |
|
The Company’s short-term investments have contractual maturities ranging from April 2018 to Januaryin February 2020.
3.5. Derivative Financial Instruments
At March 31, 20182019 and September 30, 2017,2018, the Company’s Canadian subsidiary had CAN$41.114.3 million and CAD$26.120.4 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 March 28, 2018,29, 2019, the Company entered into two short-terma CAD$10.0 million 90-day hedge contracts totaling $30.0 million Canadian dollarscontract 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 havehas not been designated as hedgesa 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 |
| March 31, 2018 |
|
| September 30, 2017 |
|
| Location |
| March 31, 2019 |
|
| September 30, 2018 |
| ||||
Foreign Currency Forward Contracts |
| Accrued Expenses and Other Current Liabilities |
| $ | 55 |
|
| $ | — |
|
| Accrued Expenses and Other Current Liabilities |
| $ | 41 |
|
| $ | 270 |
|
The following table summarizes the Company’s realized gains on derivative instruments included in the consolidated statements of operations for the three and six month periodsmonths ended March 31, 20182019 and 20172018 (in thousands):
|
|
|
| Three Months Ended |
|
| Six Months Ended |
|
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
Derivative Instrument |
| Location |
| March 31, 2018 |
|
| March 31, 2017 |
|
| March 31, 2018 |
|
| March 31, 2017 |
|
| Location |
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||||||||
Foreign Currency Forward Contracts |
| Other Income (Expense) |
| $ | 733 |
|
| $ | (44 | ) |
| $ | 575 |
|
| $ | 28 |
|
| Other Income (Expense) |
| $ | 217 |
|
| $ | 733 |
|
| $ | 639 |
|
| $ | 575 |
|
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 |
|
5.6. Trade Accounts and Financing Receivables
Trade accounts receivable, net are reflected in the following table (in thousands):
|
| March 31, 2018 |
|
| September 30, 2017 |
|
| March 31, 2019 |
|
| September 30, 2018 |
| ||||
Trade accounts receivable |
| $ | 13,815 |
|
| $ | 10,830 |
|
| $ | 21,314 |
|
| $ | 15,776 |
|
Allowance for doubtful accounts |
|
| (1,285 | ) |
|
| (1,395 | ) |
|
| (680 | ) |
|
| (1,453 | ) |
|
| $ | 12,530 |
|
| $ | 9,435 |
|
| $ | 20,634 |
|
| $ | 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 March 31, 2019 includes $8.2 million due from a single customer, of which $6.2 million was collected in April 2019.
Financing receivables are reflected in the following table (in thousands):
|
| March 31, 2018 |
|
| September 30, 2017 |
|
| March 31, 2019 |
|
| September 30, 2018 |
| ||||
Promissory notes |
| $ | 6,236 |
|
| $ | 4,306 |
|
| $ | 4,730 |
|
| $ | 5,646 |
|
Sales-type lease |
|
| 6,936 |
|
|
| 8,581 |
|
|
| 4,032 |
|
|
| 5,533 |
|
Total financing receivables |
|
| 13,172 |
|
|
| 12,887 |
|
|
| 8,762 |
|
|
| 11,179 |
|
Unearned income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory notes |
|
| (95 | ) |
|
| (90 | ) |
|
| (95 | ) |
|
| (95 | ) |
Sales-type lease |
|
| (370 | ) |
|
| (527 | ) |
|
| (150 | ) |
|
| (237 | ) |
Total unearned income |
|
| (465 | ) |
|
| (617 | ) |
|
| (245 | ) |
|
| (332 | ) |
Total financing receivables, net of unearned income |
|
| 12,707 |
|
|
| 12,270 |
|
|
| 8,517 |
|
|
| 10,847 |
|
Less allowance for doubtful promissory notes |
|
| (1,505 | ) |
|
| (1,020 | ) | ||||||||
Allowance for doubtful promissory notes |
|
| (2,104 | ) |
|
| (1,849 | ) | ||||||||
Less current portion |
|
| (5,036 | ) |
|
| (3,055 | ) |
|
| (3,660 | ) |
|
| (4,258 | ) |
Non-current financing receivables |
| $ | 6,166 |
|
| $ | 8,195 |
|
| $ | 2,753 |
|
| $ | 4,740 |
|
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.
6.7. Inventories
Inventories consist of the following (in thousands):
|
| March 31, 2018 |
|
| September 30, 2017 |
|
| March 31, 2019 |
|
| September 30, 2018 |
| ||||
Finished goods |
| $ | 28,533 |
|
| $ | 33,690 |
|
| $ | 18,750 |
|
| $ | 18,802 |
|
Work in process |
|
| 5,070 |
|
|
| 2,512 |
|
|
| 3,745 |
|
|
| 7,926 |
|
Raw material |
|
| 68,975 |
|
|
| 70,099 |
|
|
| 58,570 |
|
|
| 54,290 |
|
Obsolescence reserve |
|
| (31,898 | ) |
|
| (29,614 | ) |
|
| (31,503 | ) |
|
| (30,551 | ) |
|
|
| 70,680 |
|
|
| 76,687 |
|
|
| 49,562 |
|
|
| 50,467 |
|
Less current portion |
|
| (21,834 | ) |
|
| (20,752 | ) |
|
| (15,525 | ) |
|
| (18,812 | ) |
Non-current portion |
| $ | 48,846 |
|
| $ | 55,935 |
|
| $ | 34,037 |
|
| $ | 31,655 |
|
During the six months ended March 31, 20182019 and 2017,2018, the Company made non-cash inventory transfers of $8.1$1.8 million and $1.0 million,$8.1million, respectively, to rental equipment. Raw materials include semi-finished goods and component parts which totaled approximately $43.6$28.5 million and $48.2$29.0 million at March 31, 20182019 and September 30, 2017,2018, respectively.
7. Long-Term Debt8. 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 $0.7 million and other intangible assets of $3.7 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) |
| March 31, 2019 |
|
| September 30, 2018 |
| ||
Goodwill |
|
| $ | 5,059 |
|
| $ | 4,343 |
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets: |
|
|
|
|
|
|
|
|
|
Developed technology | 17.4 |
|
| 5,919 |
|
|
| 4,200 |
|
Customer relationships | 3.4 |
|
| 3,900 |
|
|
| 2,500 |
|
Trade names | 4.5 |
|
| 1,930 |
|
|
| 1,400 |
|
Non-compete agreements | 3.5 |
|
| 170 |
|
|
| 100 |
|
Total other intangible assets | 10.5 |
|
| 11,919 |
|
|
| 8,200 |
|
Accumulated amortization |
|
|
| (989 | ) |
|
| (194 | ) |
|
|
| $ | 10,930 |
|
| $ | 8,006 |
|
Intangible assets amortization expense was $0.8 million for the six months ended March 31, 2019. The Company had no long-term debt outstanding atintangible asset amortization expense for the six months ended March 31, 2018 and September 30, 2017. 2018.
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. As2019, future estimated amortization expense 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 theother intangible 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. as follows (in thousands):
For fiscal years ending September 30, |
|
|
|
2019 | $ | 866 |
|
2020 |
| 1,732 |
|
2021 |
| 1,732 |
|
2022 |
| 1,624 |
|
2023 |
| 714 |
|
Thereafter |
| 4,262 |
|
| $ | 10,930 |
|
13
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8.9. 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 | ) |
|
| Unrealized Gain (Loss) on Available-for-Sale Securities |
|
| Foreign Currency Translation Adjustments |
|
| Totals |
| |||
Balance at October 1, 2018 |
| $ | (82 | ) |
| $ | (15,537 | ) |
| $ | (15,619 | ) |
Changes in unrealized gain on available-for-sale securities, net of tax |
|
| 83 |
|
|
| — |
|
|
| 83 |
|
Foreign currency translation adjustments |
|
| — |
|
|
| 20 |
|
|
| 20 |
|
Balance at March 31, 2019 |
| $ | 1 |
|
| $ | (15,517 | ) |
| $ | (15,516 | ) |
9.10. Stock-Based Compensation
During the six months ended March 31, 2018,2019, the Company issued 155,4508,000 shares of restricted stock awards (“RSAs”) under its 2014 Long Term Incentive Plan, as amended.amended (the “Plan”). The weighted average grant date fair value of the restricted stockeach RSA was $15.21$14.59 per share. The total grant date fair value of these awardsall RSAs issued was $2.4$0.1 million, which will be charged to expense over the next four years as the RSA vesting restrictions lapse. Compensation expense for restricted stock awardsthe RSAs 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 awardsRSAs are entitled to vote such shares and are entitled to any dividends if paid.
As of March 31, 2018,2019, the Company had unrecognized compensation expense of $4.6$3.1 million relating to restricted stock awards. This unrecognized compensation expenseRSAs that is expected to be recognized over a weighted average period of 2.92.3 years. In addition,
During the six months ended March 31, 2019, the Company issued 161,800 restricted stock units (“RSUs”) under the Plan. The RSUs issued include both time-based and performance-based vesting provisions. The weighted average grant date fair value of each RSU was $15.11 per unit. The grant date fair value of the RSUs was $2.4 million, which will be charged to expense over the next four years as the restrictions lapse. Compensation expense for the RSUs was determined based on the closing market price of the Company’s stock on the date of grant applied to the total number of units that are anticipated to fully vest. Each RSU represents a contingent right to receive one share of the Company’s common stock upon vesting. As of March 31, 2019, the Company had $0.2 million of unrecognized compensation expense relatedof $2.2 million relating to nonqualified stock option awards whichRSUs that is expected to be recognized over a weighted average period of 1.03.7 years.
As of March 31, 2018,2019, the Company had $35,000 of unrecognized compensation expense related to nonqualified stock option awards that is expected to be recognized over a totalweighted average period of 312,600 shares0.6 years.
As of restricted stockMarch 31, 2019, 226,787 RSAs, 161,300 RSUs and 194,600165,600 nonqualified stock options shares were unvested and outstanding.
14
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. Loss11. Income (Loss) Per Common Share
The Company applies the two-class method in calculating per share data. The following table summarizes the calculation of net lossincome (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 |
|
|
| 13,233,205 |
|
|
| 13,120,286 |
|
Common share equivalents outstanding related to stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total weighted average common shares and common share equivalents used in diluted loss per share |
|
| 13,264,710 |
|
|
| 13,146,330 |
|
|
| 13,233,205 |
|
|
| 13,120,286 |
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.36 | ) |
| $ | (0.88 | ) |
| $ | (1.07 | ) |
| $ | (1.77 | ) |
Diluted |
| $ | (0.36 | ) |
| $ | (0.88 | ) |
| $ | (1.07 | ) |
| $ | (1.77 | ) |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||||
Net income (loss) |
| $ | 707 |
|
| $ | (4,729 | ) |
| $ | (5,146 | ) |
| $ | (14,209 | ) |
Less: Income (loss) allocable to unvested restricted stock |
|
| (12 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Income (loss) attributable to common shareholders for diluted earnings per share |
| $ | 695 |
|
| $ | (4,729 | ) |
| $ | (5,146 | ) |
| $ | (14,209 | ) |
Weighted average number of common share equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares used in basic income (loss) per share |
|
| 13,401,135 |
|
|
| 13,264,710 |
|
|
| 13,369,932 |
|
|
| 13,233,205 |
|
Common share equivalents outstanding related to stock options and RSUs |
|
| 156,050 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total weighted average common shares and common share equivalents used in diluted income (loss) per share |
|
| 13,557,185 |
|
|
| 13,264,710 |
|
|
| 13,369,932 |
|
|
| 13,233,205 |
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.05 |
|
| $ | (0.36 | ) |
| $ | (0.38 | ) |
| $ | (1.07 | ) |
Diluted |
| $ | 0.05 |
|
| $ | (0.36 | ) |
| $ | (0.38 | ) |
| $ | (1.07 | ) |
For the calculation of diluted loss per share for the three months and six months ended March 31, 2018 and 2017, 194,600 and 206,3002019, 163,800 stock options respectively,and 161,300 non-vested RSUs were excluded in the calculation of weighted average shares outstanding as a result ofsince their impact beingon diluted loss per share was antidilutive. For the calculation of diluted loss per share for the three and six months ended March 31, 2018, 194,600 stock options and zero-non vested RSUs were excluded in the calculation of weighted average shares outstanding since their impact on diluted loss per share was antidilutive.
11.
12. Commitments and Contingencies
Contingent Earn-out Liabilities
The Company established an initial earn-out liability of $7.7 million in connection with its July 2018 acquisition of Quantum. The contingent earn-out payments, if any, which at the Company’s option may be paid in the form of cash or Company stock, will be derived from eligible revenue that may be generated by Quantum during a four-year earn-out period. The maximum amount of contingent payments is $23.5 million over the earn-out period. The fair value of the contingent earn-out liability has not significantly changed since September 30, 2018.
For the recent acquisition of the intellectual property and related assets of the OptoSeis fiber optic sensing technology in November 2018, the Company established an initial earn-out liability of $4.3 million. The contingent earn-out payments, if any, will be derived from eligible revenue generated during a five-and-half year earn-out period. The maximum amount of contingent payments is $23.2 million over the earn-out period.
The Company reviews and accesses the fair value of its contingent earn-out liabilities on a quarterly basis. The fair value of its contingent earn-out liabilities has not changed.
Legal Proceedings
The Company is involved in various pending or potential legal actions in the ordinary course of its business. Management is unable to predict the ultimate outcome of these actions, because of the inherent uncertainty such actions. However, management believes that the most probable, ultimate resolution of litigation. Management isthese pending matters will not awarehave a material adverse effect on the Company’s consolidated financial position, results of any material pendingoperations or known to be contemplated legal or government proceedings against the Company.cash flows.
12.13. Segment Information
The Company reports and evaluates financial information for twothree operating segments: SeismicOil and Non-Seismic. Seismic product lines include: landGas Markets, Adjacent Markets and marineEmerging Markets. The Oil and Gas Markets segment products include wireless seismic data acquisition systems, permanent land and seabed reservoir monitoringcharacterization products and services, geophones and geophone strings,traditional seismic exploration products such as geophones, hydrophones, leader wire, connectors, telemetry cables, marine streamer retrieval and steering devices and various other seismic products. The Non-Seismic product linesAdjacent Markets segment products include graphic imaging equipment, water meter products, offshore cables, and industrial products.seismic sensors used for vibration monitoring and geotechnical applications such as mine safety applications and earthquake detection. The Emerging Markets segment was added in conjunction with the Company’s acquisition of Quantum, which designs and markets seismic products targeted at the border and perimeter security markets.
15
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following table summarizes the Company’s segment information (in thousands):
|
| Three Months Ended |
|
| Six Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| March 31, 2018 |
|
| March 31, 2017 |
|
| March 31, 2018 |
|
| March 31, 2017 |
|
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seismic |
| $ | 11,287 |
|
| $ | 13,944 |
|
| $ | 19,326 |
|
| $ | 23,350 |
| ||||||||||||||||
Non-Seismic |
|
| 7,826 |
|
|
| 6,468 |
|
|
| 14,280 |
|
|
| 12,204 |
| ||||||||||||||||
Oil and Gas Markets |
| $ | 18,669 |
|
| $ | 11,287 |
|
| $ | 29,673 |
|
| $ | 19,326 |
| ||||||||||||||||
Adjacent Markets |
|
| 7,259 |
|
|
| 7,826 |
|
|
| 13,894 |
|
|
| 14,280 |
| ||||||||||||||||
Emerging Markets |
|
| 46 |
|
|
| — |
|
|
| 134 |
|
|
| — |
| ||||||||||||||||
Corporate |
|
| 134 |
|
|
| 146 |
|
|
| 285 |
|
|
| 289 |
|
|
| 149 |
|
|
| 134 |
|
|
| 297 |
|
|
| 285 |
|
Total |
| $ | 19,247 |
|
| $ | 20,558 |
|
| $ | 33,891 |
|
| $ | 35,843 |
|
| $ | 26,123 |
|
| $ | 19,247 |
|
| $ | 43,998 |
|
| $ | 33,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seismic |
| $ | (3,757 | ) |
| $ | (9,156 | ) |
| $ | (11,430 | ) |
| $ | (18,609 | ) | ||||||||||||||||
Non-Seismic |
|
| 1,384 |
|
|
| 1,052 |
|
|
| 2,413 |
|
|
| 2,104 |
| ||||||||||||||||
Oil and Gas Markets |
| $ | 3,332 |
|
| $ | (3,757 | ) |
| $ | 731 |
|
| $ | (11,430 | ) | ||||||||||||||||
Adjacent Markets |
|
| 1,651 |
|
|
| 1,384 |
|
|
| 2,633 |
|
|
| 2,413 |
| ||||||||||||||||
Emerging Markets |
|
| (1,180 | ) |
|
| — |
|
|
| (2,372 | ) |
|
| — |
| ||||||||||||||||
Corporate |
|
| (2,849 | ) |
|
| (2,956 | ) |
|
| (5,810 | ) |
|
| (5,866 | ) |
|
| (2,781 | ) |
|
| (2,849 | ) |
|
| (6,033 | ) |
|
| (5,810 | ) |
Total |
| $ | (5,222 | ) |
| $ | (11,060 | ) |
| $ | (14,827 | ) |
| $ | (22,371 | ) |
| $ | 1,022 |
|
| $ | (5,222 | ) |
| $ | (5,041 | ) |
| $ | (14,827 | ) |
13.14. Income Taxes
The Company’s statutory U.S. income tax rate for the six months ended March 31, 2018 was impacted by the2017 Tax Cuts and Jobs Act (the “Act”), which was enacted into law onin December 22, 2017. Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and the effects are recorded as a component of the provision for income taxes from continuing operations. As a result, the Company made changes to its provision for income tax resulting from the enactment of theThe 2017 Tax Act, for the six months ended March 31, 2018.
The Act includes significant changes to the U.S. corporate income tax system which (i)among other things, reduces the U.S. federal corporate tax rate from 35% to 21% as of, effective January 1, 2018, (ii) shifts to a modified territorial tax regime which requirescreates new taxes on certain foreign earnings and may require companies to pay a one-time transition tax on the cumulativeundistributed earnings of certain foreign subsidiaries that were previously tax deferred. The Company is not required to pay a one-time transition tax on earnings of our foreign subsidiaries since the Company had accumulated foreign losses on a consolidated basis. As a result of the 2017 Tax Act, during the six months ended March 31, 2018, the Company revalued its U.S. deferred and (iii) createstax assets based on the new taxes on certain foreign-sourced earnings. The decrease in the U.S. federal corporate tax rate from 35% to 21% results in a blended statutory tax rate of 24.5% for the Company’s fiscal year ending September 30, 2018. The new taxes for certain foreign-sourced earnings under the Act are effective for the Company beginning after the fiscal year ending September 30, 2018.
The Company is currently evaluating the impact of the Act on21%, which resulted in a reduction to its consolidated financial statements. Based on the Company’s assessments to date, it expects the one-time deemed repatriation tax on certain foreign earnings and profits to not have a cash impact since it anticipates, that it will be able to utilize existing net operating loss carryforwards to substantially offset any taxes payable on foreign earnings and profits. Additionally, the Company has adjusted its U.S. gross deferred tax assets and liabilities to the new 21% statutory tax rate; however, it also recorded a corresponding adjustment to a valuation allowance which resultedof approximately $8.1 million. The reduction in no net impact to deferred tax assets or provision forwas completely offset by a like reduction to the valuation allowance.
Consolidated income taxes. Except for, the adjustments referred to above, the Company does not expect any further adjustments relating to tax effects of the Act in its consolidated financial statements (including any provisional amounts) based on the Company’s analysis of its current and expected tax attributes.
The Company’s effective tax ratesexpense for the three months ended March 31, 2018 and 2017 were 12.5% and (3.1%), respectively. The Company’s effective2019 was $0.6 million compared to a tax ratesbenefit of $0.7 million for corresponding period of the prior fiscal year. Consolidated income tax expense for the six months ended March 31, 2018 and 2017 were 4.5% and (3.5) %, respectively.2019 was $0.6 million compared to a tax benefit of $0.7 million for corresponding period of the prior fiscal year. The United States statutory rate$0.6 million tax expense for both periods of fiscal year 2019 primarily reflects foreign withholding tax on rental income earned in Nigeria during the three and six months ended March 31, 2019. The income tax benefit for both periods of fiscal year 2018 and 2017 was 24.5% (blended) and 35%, respectively. Compared to the United States statutory rate, the lower effectivereflects a $0.7 million tax rates resulted primarilyrefund resulting from the provisionfiling of a valuation allowance againstan amended U.S. tax return in the Company’sthree months ended March 31, 2018. The Company is currently unable to record any tax benefits for its tax losses in the U.S. and Canadian deferred tax assets,Canada due to the uncertainty surrounding the Company’sits ability to utilize such deferred tax assetslosses in the future to offset taxable income. In addition, for the three months ended March 31, 2018, the Company amended its prior year U.S. tax return to claim a $0.7 million refund.
16
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
14. Exit and Disposal Activities
In December 2017, the Company initiated a program to reduce operating costs in light of expected and continuing low levels of seismic product demand. The program is expected to produce approximately $6 million of annualized cash savings. The majority of the cost reductions were realized through a reduction of over 60 employees from the Company’s Houston area workforce. In connection with the workforce reductions, the Company incurred $0.7 million of termination costs in its first quarter of fiscal year 2018. The termination costs were recorded to both cost of revenue and operating expenses in the consolidated statement of operations. No further termination costs are expected and there are no outstanding liabilities related to this program as of March 31, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of the major elements of our consolidated financial statements. You should read this discussion and analysis together with our consolidated financial statements, including the accompanying notes, and other detailed information appearing elsewhere in this Quarterly Report on Form 10-Q and our annual report on Form 10-K for the year ended September 30, 2017.2018.
Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein, if any, contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “intend”, “expect”, “plan”, “budget”, “forecast”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue”, “evaluating” or similar words. Statements that contain these words should be read carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other forward-looking information. Examples of forward-looking statements include, among others, statements that we make regarding our expected operating results, the results and success of our transactions with Quantum and the OptoSeis technology, the adoption and sale of our products in various geographic regions, potential tenders for permanent reservoir monitoring systems, future demand for OBX systems, anticipated levels of capital expenditures and the sources of funding therefore, and our strategy for growth, product development, market position, financial results and the provision of accounting reserves. These forward-looking statements reflect our best judgment about future events and trends based on the information currently available to us. However, there will likely be events in the future that we are not able to predict or control. The factors listed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017,2018, as well as other cautionary language in such Annual Report and this Quarterly Report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Such examples include, but are not limited to, the failure of the Quantum or OptoSeis technology transactions to yield positive operating results, decreases in commodity price levels, which could reduce demand for our products, the failure of our products to achieve market acceptance, despite substantial investment by us, our sensitivity to short term backlog, delayed or cancelled customer orders, product obsolescence resulting from poor industry conditions or new technologies, bad debt write-offs associated with customer accounts, lack of further orders for our OBX systems,rental equipment, failure of our non-seismicQuantum products to be adopted by the border and security perimeter market and any negative impact from our restatement of our financial statements regarding current assets.infringement or failure to protect intellectual property. The occurrence of the events described in these risk factors and elsewhere in this Quarterly Report on Form 10-Q could have a material adverse effect on our business, results of operations and financial position, and actual events and results of operations may vary materially from our current expectations. We assume no obligation to revise or update any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future developments or otherwise.
Business Overview
Geospace Technologies Corporation reincorporated as a Texas corporation on April 16, 2015. We originally incorporated as a Delaware corporation on September 27, 1994. Unless otherwise specified, the discussion in this Quarterly Report on Form 10-Q refers to Geospace Technologies Corporation and its subsidiaries. We design and manufacture instruments and equipment used in the oil and gas industry to acquire seismic data in order to locate, characterize and monitor hydrocarbon producing reservoirs. We also design and manufacture non-seismic products, including industrial products, offshore cables, imaging equipment and imaging equipment.perimeter security products. We report and categorize our customers and products into twothree different segments: SeismicOil and Non-Seismic.Gas Markets, Adjacent Markets and Emerging Markets.
We have been engaged in the design and manufacture of seismic instrumentinstruments and equipment business since 1980 and1980. We primarily market our seismic products primarily to the oil and gas industry.industry to locate, characterize and monitor hydrocarbon producing reservoirs. We also market our seismic products to other industries for vibration monitoring, border and perimeter security and various geotechnical applications. We design and manufacture other products of a non-seismic nature, including water meter products, imaging equipment and offshore cables. Demand for our seismic products targeted at the oil and gas industry has been, and will likely continue to be, vulnerable to downturns in the economy and the oil and gas industry in general. For more information, please refer to the risks discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2018.
Business Acquisition
On November 13, 2018, we 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 our 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 products and services utilizing the OptoSeis fiber optic technology.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on their public reference room. Our SEC filings are also available to the public on our website at http://www.geospace.com. From time to time, we may post investor presentations on our website under the “Investor Relations” tab. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Quarterly Report on Form 10-Q or the documents incorporated by reference in this Quarterly Report on Form 10-Q.
Products and Product Development
Seismic ProductsOil and Gas Markets
Our seismicOil and Gas Markets business segment has historically accounted for the majority of our revenue. Geoscientists use seismic data primarily in connection with the exploration, development and production of oil and gas reserves to map potential and known hydrocarbon bearing formations and the geologic structures that surround them. OurThis segment’s products include wireless seismic product lines currently consist of land and marine nodal data acquisition systems, permanent land and seabed reservoir monitoringcharacterization products and services, geophones and geophone strings,traditional seismic exploration products such as geophones, hydrophones, leader wire, connectors, telemetry cables, marine streamer retrieval and steering devices and various other products. Our seismic products are compatible with most major competitive seismic data acquisition systems currently in use.products. We believe that our seismicoil and gas products are among the most technologically advanced instruments and equipment available for seismic data acquisition.
Traditional Products
An energy source and a data recording system are combined to acquire seismic data. We provide many of the components of seismic data recording systems, including geophones, hydrophones, multi-component sensors, leader wire, geophone strings, connectors, seismic telemetry cables and other seismic related products. On land, our customers use geophones, leader wire, cables and connectors to receive and measure seismic reflections resulting from an energy source into data recording units, which store the seismic information for subsequent processing and analysis. In the marine environment, large ocean-going vessels tow long seismic cables known as “streamers” containing hydrophones whichthat are used to detect pressure changes. Hydrophones transmit electrical impulses back to the vessel’s data recording unit where the seismic data is stored for subsequent processing and analysis. Our marine seismic products also help steer streamers while being towed and help recover streamers if they become disconnected from the vessel.
Our seismic sensor, cable and connector products are compatible with most major competitive seismic data acquisition systems currently in use. Revenue from these products results primarily from seismic contractors purchasing our products as components of new seismic data acquisition systems or to repair and replace components of seismic data acquisition systems already in use.
Our products used in marine seismic data acquisition include our seismic streamer retrieval devices (“SRDs”). Occasionally, streamer cables are severed and become disconnected from the vessel as a result of obstacles, inclement weather, vessel traffic or human error. Our SRDs, which are attached to the streamer cables, contain air bags which are designed to inflate automatically at a given water depth, bringing the severed streamer cables to the surface. These SRDs save the seismic contractors significant time and money compared to the alternative of losing the streamer cable. We also produce seismic streamer steering devices, or “birds,” which are fin-like devices that attach to the streamer cable. These birds help maintain the streamer cable at a certain desired depth as it is being towed through the water.
Wireless Products
We have developed a land-based wireless (or nodal) seismic data acquisition system called the GSX. Rather than utilizing interconnecting cables as required by most traditional land data acquisition systems, each GSX station operates as an independent data collection system, allowing our GSX stations to be deployed in virtually unlimited channel configurations. As a result, our GSX system requires less maintenance, which we believe allows our customers to operate more effectively and efficiently because of its reduced environmental impact, lower weight and ease of operation. Our GSX system is designed into configurations ranging from one to four channels per station. Since its introduction in 2008 and through March 31, 2018,2019, we have sold 417,000433,000 GSX channels and we have 92,00080,000 GSX channels in our rental fleet.
We have also developed a marine-based wireless seismic data acquisition system called the OBX. Similar to our GSX land-based wireless system, the marine OBX system can be deployed in virtually unlimited channel configurations and does not require interconnecting cables between each station. Our deep water versions of the OBX system can be deployed in depths of up to 3,450 meters. ThroughAt March 31, 2018,2019, we have sold approximately 600 OBX stations and we have 6,700had 22,000 OBX stations in our rental fleet. fleet, and additional OBX stations under construction in order to meet contracted demand. We expect to make significant financial investments into our OBX rental fleet during fiscal year 2019.
Reservoir Products
Seismic surveys repeated over selected time intervals show dynamic changes within thea producing oil and gas reservoir, and operators can be useduse these surveys to monitor the effects of oil and gas development and production. In this regard, we have developed permanently installed high-definitionThis type of reservoir monitoring systems for land and ocean-bottom applications in producing oil and gas fields. We also produce a retrievable version of our ocean-bottom system for use on fields where permanently installed systems are not appropriate or economical. Utilizing these tools, producers can enhance the recovery of oil and gas deposits over the life of a reservoir.
Our high-definition reservoir monitoring products include the HDSeis™ product line and a suite of borehole and reservoir monitoring products and services. Our HDSeis™ system is a high-definition seismic data acquisition system with flexible architecture that allows it to be configured as a borehole seismic system or as a subsurface system for both land and marine reservoir-monitoring projects. The scalable architecture of the HDSeis™ system enables custom designed system configuration for applications ranging from low-channel engineering and environmental-scale surveys requiring a minimum number of recording channels to high-channel surveys required to efficiently conduct permanent reservoir monitoring (“PRM”). Modular architecture allows virtually unlimited channel expansion. In addition, multi-system synchronization features make the HDSeis™ system well suited for multi-well or multi-site acquisition, simultaneous surface and downhole acquisition and continuous reservoir monitoring projects.
Reservoir monitoring requires special purpose or custom designed systems in which portability becomes less critical and functional reliability assumes greater importance. This reliability factor helps assure successful operations in inaccessible locations over a considerable period of time. Additionally, reservoirs located in deep water or harsh environments require special instrumentation and new techniques to maximize recovery. Reservoir monitoring also requires high-bandwidth, high-resolution seismic data for engineering project planning and reservoir management. We believe our HDSeis™ System and tools, designed for cost-effective deployment and lifetime performance, will make borehole and seabed seismic acquisition a cost-effective and reliable process for the challenges of reservoir monitoring. Our multi-component seismic product developments include an omni-directional geophone for use inUtilizing these reservoir monitoring tools, producers can enhance the recovery of oil and gas deposits over the life of a compact marine three-component or four-component gimbaled sensor and special-purpose connectors, connector arrays and cases.reservoir.
We have not received ordersdeveloped permanently installed high-definition reservoir monitoring systems for anyland and ocean-bottom applications in producing oil and gas fields. Our electrical reservoir monitoring systems are currently installed on numerous offshore reservoirs in the North Sea and elsewhere. Through our recent acquisition of the OptoSeis fiber optic sensing technology, we now offer both electrical and fiber optic reservoir monitoring systems. These high-definition seismic data acquisition systems have a flexible architecture allowing them to be configured as a subsurface system for both land and marine reservoir-monitoring projects. The scalable architecture of these systems enable custom designed configuration for applications ranging from low-channel engineering and environmental-scale surveys requiring a minimum number of recording channels to high-channel surveys required to efficiently conduct permanent reservoir monitoring systems since November 2012.(“PRM”). The modular architecture of these products allows virtually unlimited channel expansion for these systems.
In addition, we produce seismic borehole acquisition systems whichthat employ a fiber optic augmented wireline capable of very high data transmission rates. These systems are used for several reservoir monitoring applications, including an application pioneered by us allowing operators and service companies to monitor and measure the results of fracturing operations.
Non-Seismic ProductsWe believe our reservoir characterization products make seismic acquisition a cost-effective and reliable process for the challenges of reservoir monitoring. Our multi-component seismic product developments also include an omni-directional geophone for use in reservoir monitoring, a compact marine three-component or four-component gimbaled sensor and special-purpose connectors, connector arrays and cases.
We have not received any orders for large-scale seabed PRM systems since November 2012 and we currently do not have any indication that such an order will be received in fiscal year 2019, although we do believe opportunities for PRM orders do exist in today’s market.
Adjacent Markets
Our non-seismicAdjacent Markets businesses leverage upon our existing manufacturing facilities and engineering capabilities.capabilities utilized by our Oil and Gas Markets businesses. We have found that many of our oil and gas seismic products, with little or no modification, have direct application to industries beyond those involved in oil and gas exploration and development. For example, our customers utilize our borehole tools to monitor subsurface carbon dioxide injections
Industrial Products
Our industrial products include water meter products, offshore cables, as well as seismic sensors used for vibration monitoring and forgeotechnical applications such as mine safety applications.applications and earthquake detection.
Imaging Products
Our non-seismicimaging products include electronic pre-press products that employ direct thermal imaging and digital inkjet printing technologies targeted at the commercial graphics, industrial graphics, textile and flexographic printing industries.
Emerging Markets
Our other non-seismicEmerging Markets business segment consists of our recent acquisition of Quantum. Quantum’s product developments include a proprietary detection system called SADAR®, which detects, locates and follows activities of interest in real-time. Using the SADAR technology, Quantum designs and sells products consist of (i) sensorsused for border and tools for vibration monitoring, mine safety, earthquake detection andperimeter security applications, (ii) cables for power and communication for the offshore oil and gas and offshore construction industries, (iii) water meter cables and connectors, and (iv) other specialty industrial cable and connector products.
surveillance, cross-border tunneling
detection and other products targeted at movement monitoring, intrusion detection and situational awareness. Quantum’s customers include various agencies of the U.S. government including the Department of Defense, Department of Energy, Department of Homeland Security and other agencies.
Consolidated Results of Operations
We report and evaluate financial information for twothree segments: SeismicOil and Non-Seismic.Gas Markets, Adjacent Markets and Emerging Markets. Summary financial data by business segment follows (in thousands):
|
| Three Months Ended |
|
| Six Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| March 31, 2018 |
|
| March 31, 2017 |
|
| March 31, 2018 |
|
| March 31, 2017 |
|
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||||||||
Seismic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Oil and Gas Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Traditional exploration product revenue |
| $ | 3,187 |
|
| $ | 3,637 |
|
| $ | 6,977 |
|
| $ | 6,207 |
|
| $ | 3,969 |
|
| $ | 3,187 |
|
| $ | 6,754 |
|
| $ | 6,977 |
|
Wireless exploration product revenue |
|
| 6,039 |
|
|
| 9,601 |
|
|
| 9,670 |
|
|
| 15,924 |
|
|
| 13,644 |
|
|
| 6,039 |
|
|
| 20,926 |
|
|
| 9,670 |
|
Reservoir product revenue |
|
| 2,061 |
|
|
| 706 |
|
|
| 2,679 |
|
|
| 1,219 |
|
|
| 1,056 |
|
|
| 2,061 |
|
|
| 1,993 |
|
|
| 2,679 |
|
Total revenue |
|
| 11,287 |
|
|
| 13,944 |
|
|
| 19,326 |
|
|
| 23,350 |
|
|
| 18,669 |
|
|
| 11,287 |
|
|
| 29,673 |
|
|
| 19,326 |
|
Operating loss |
|
| (3,757 | ) |
|
| (9,156 | ) |
|
| (11,430 | ) |
|
| (18,609 | ) | ||||||||||||||||
Non-Seismic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Operating income (loss) |
|
| 3,332 |
|
|
| (3,757 | ) |
|
| 731 |
|
|
| (11,430 | ) | ||||||||||||||||
Adjacent Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Industrial product revenue |
|
| 4,711 |
|
|
| 3,301 |
|
|
| 8,387 |
|
|
| 6,380 |
|
|
| 4,122 |
|
|
| 4,711 |
|
|
| 7,683 |
|
|
| 8,387 |
|
Imaging product revenue |
|
| 3,115 |
|
|
| 3,167 |
|
|
| 5,893 |
|
|
| 5,824 |
|
|
| 3,137 |
|
|
| 3,115 |
|
|
| 6,211 |
|
|
| 5,893 |
|
Total revenue |
|
| 7,826 |
|
|
| 6,468 |
|
|
| 14,280 |
|
|
| 12,204 |
|
|
| 7,259 |
|
|
| 7,826 |
|
|
| 13,894 |
|
|
| 14,280 |
|
Operating income |
|
| 1,384 |
|
|
| 1,052 |
|
|
| 2,413 |
|
|
| 2,104 |
|
|
| 1,651 |
|
|
| 1,384 |
|
|
| 2,633 |
|
|
| 2,413 |
|
Emerging Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Revenue |
|
| 46 |
|
|
| — |
|
|
| 134 |
|
|
| — |
| ||||||||||||||||
Operating loss |
|
| (1,180 | ) |
|
| — |
|
|
| (2,372 | ) |
|
| — |
| ||||||||||||||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
| 134 |
|
|
| 146 |
|
|
| 285 |
|
|
| 289 |
|
|
| 149 |
|
|
| 134 |
|
|
| 297 |
|
|
| 285 |
|
Operating loss |
|
| (2,849 | ) |
|
| (2,956 | ) |
|
| (5,810 | ) |
|
| (5,866 | ) |
|
| (2,781 | ) |
|
| (2,849 | ) |
|
| (6,033 | ) |
|
| (5,810 | ) |
Consolidated Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
| 19,247 |
|
|
| 20,558 |
|
|
| 33,891 |
|
|
| 35,843 |
|
|
| 26,123 |
|
|
| 19,247 |
|
|
| 43,998 |
|
|
| 33,891 |
|
Operating loss |
|
| (5,222 | ) |
|
| (11,060 | ) |
|
| (14,827 | ) |
|
| (22,371 | ) | ||||||||||||||||
Operating income (loss) |
|
| 1,022 |
|
|
| (5,222 | ) |
|
| (5,041 | ) |
|
| (14,827 | ) |
Overview
Early in calendar year 2014, we began to experienceour Oil and Gas Markets segment experienced a softening in the demand for our seismicits traditional exploration products, particularly in North America, as capital budgets for oil and gas producers were trending away from exploration-focused activities toward production and exploitation activities. During this period oil production in North America’s unconventional shale reservoirs increased, as did oil production from other non-OPEC countries, resulting in an oversupply of crude oil in the world market. Market prices for a barrel of West Texas Intermediate crude oil declined from over $100 in July 2014 to approximately $27$26 in JanuaryFebruary 2016, and have recovered somewhat to approximately $68$62 today. With this decline in oil and natural gas prices, oil and gas exploration and production companies experienced a significant reduction in cash flows, which resulted in sharp reductions in their capital spending budgets for oil and gas exploration-focused activities, including seismic data acquisition activities. WeWhile our Oil and Gas Markets segment is now seeing some signs of increased geophysical activity around the world, the need for new seismic equipment remains restrained due to capital limitations affecting many of our customers along with excess levels of underutilized equipment. While our Oil and Gas Markets segment is seeing significant demand for the rental of its marine nodal products, we expect revenue from the sale and rental of our seismicland-based products, and in particular our traditional and wireless products, to remain low until crudeexploration-focused seismic activities increase due to the ongoing depletion of existing reservoirs prompting the need to find new sources of oil prices stabilize at higher levels and exploration-focused industry conditions improve. Although we are beginning to see increased customer inquiries for new equipment in light of the recent increases in crude oil prices, wegas. We expect these challenging industry conditions towill continue to negatively impact the demand forin our seismic productsOil and Gas Markets segment throughout fiscal year 2018.
In September 2017, we were notified by Statoil that it would soon request quotes for two new PRM systems which were required to utilize fiber optic sensor technology. This contract was subsequently awarded to Alcatel in January 2018. Since our PRM designs utilize electrical sensor technology, we were not able to participate with a quotation for the design and manufacture of these PRM systems. We believe that our PRM system designs, which utilize electrical sensor technology, provide the best long-term functionality and performance of any PRM system, and we continue to aggressively market our PRM systems to major oil and gas companies. However, the occurrence of this notice from Statoil, combined with the absence of any new PRM orders of any technology type since November 2012, caused us to record $5.1 million of obsolescence reserves and $5.3 million of impairment reserves in September 2017 related to our PRM inventories and manufacturing equipment, respectively.2019.
In December 2017, we initiated a program to reduce operating costs in light of expected and continuing low levels of seismicoil and gas product demand. The program is expected to produce approximately $6 million of annualized cash savings. The majority of the future cost reductions will bewere realized through the reduction of over 60 employees from our Houston area workforce. In connection with the workforce reductions, we incurred $0.7 million of termination costs in our first quarter of fiscal year 2018. The termination costs were recorded to both cost of revenue and operating expenses in the consolidated statement of operations. No further termination costs are expected and thereThere are no outstanding liabilities related to this program as of March 31, 2018.2019.
Three and six months ended March 31, 20182019 compared to the three and six months ended March 31, 20172018
Consolidated revenue for the three months ended March 31, 2018, decreased $1.32019 increased $6.9 million, or 6.4%35.7%, from the corresponding period of the prior fiscal year. This decrease primarily resulted from a decline in sales of our wireless exploration products. Consolidated revenue for the six months ended March 31, 2018, decreased $2.02019 increased $10.1 million, or 5.4%29.8%, from the corresponding period of the prior fiscal year. The decreaseincrease in revenue for both periods was primarily due to an increase in rental revenue from our OBX marine nodal products in our Oil and Gas Markets business segment. Consolidated revenue for the quarter ended March 31, 2019 includes $1.3 million resulting from the revenue recognition of a non-refundable deposit resulting from the cancellation of a rental contract by a customer.
Consolidated gross profit for the three months ended March 31, 2019 was $10.4 million, compared to $2.0 million for the corresponding period of the prior fiscal year. Consolidated gross profit for the six months ended March 31, 20182019 was primarily due to a decrease in both wireless exploration product sales and rental revenue.
Consolidated gross profit (loss) for the three months ended March 31, 2018 was $2.0$13.4 million, compared to a loss of ($2.6)$1.0 million for the corresponding period of the prior fiscal year. The improvementincrease in gross profit (loss)for both periods primarily resulted from a decreasesignificant increase in inventory obsolescence expensewireless product rental revenue caused by the high utilization of our OBX rental fleet and a reductiondecline in fixedunutilized factory costs due to higher manufacturing costs derived from workforce reductions in the first quarter of fiscal year 2018. Consolidated gross profit (loss)productivity. While factory utilization has recently increased due to demand for the six months ended March 31, 2018 was $1.0 million, compared to a lossrental of ($5.9) million for the corresponding period of prior fiscal year. The improvement in gross profit (loss) was primarily the result of a decrease in inventory obsolescence expense, and was partially offset by a decrease in gross profits from wireless exploration rental revenue. Until seismic product demand increases to historical norms,our OBX marine nodal products, we expect our consolidated gross margins from the sale of our products to remain low.below historic norms until demand increases significantly for our land-based traditional and wireless seismic products.
In light of current market conditions, our seismicoil and gas product inventories at March 31, 2018 far2019 continue to exceed levels considered appropriate for the current level of product demand. While we are aggressively working to reduce these legacy inventory balances, we intend to addare also adding new inventories for recent oil and gas product developments and other product demand.demand in our Adjacent Markets. During periods of excessive inventory levels, our policy has been, and will continue to be, to record obsolescence expense in our consolidated income statement as we experience reduced levels of inventory turnover and as our inventories continue to age. If difficult market conditions continue for our oil and gas products, we expect to record additional inventory obsolescence expense in fiscal year 20182019 and beyond until seismic product demand andand/or resulting seismic inventory turnover returnsreturn to acceptable levels.
Consolidated operating expenses for the three months ended March 31, 20182019 were $7.2$9.3 million, a decreasean increase of $1.3$2.1 million, or 15.1%29.2%, from the corresponding period of the prior fiscal year. Consolidated operating expenses for the threesix months ended March 31, 20182019 were $15.9$18.5 million, a decreasean increase of $0.6$2.6 million, or 3.8%16.5%, from the corresponding period of the prior fiscal year. The decrease in operating expenses for both periods wasThese increases were primarily due to workforce reductionsincremental operating costs associated with our recent acquisitions of the Quantum and lower stock-based compensation expenses.OptoSeis businesses. Increased operating costs related to these acquisitions were $1.8 million and $3.3 million, respectively, for the three and six months ended March 31, 2019. Such operating costs include intangible asset amortization expenses of $0.4 million and $0.8 million, respectively, for the three and six months ended March 31, 2019. The decreaseremaining balance of acquisition-related operating costs primarily represents personnel expenses of the acquired businesses. The increase in operating expenses for the six months ended March 31, 20182019 was partially offset by a $0.8 increase$0.4 million decrease in bad debt expense.
Consolidated other expenseincome (loss) for the three months ended March 31, 20182019 was $183,000, an increaseincome of $81,000$0.2 million, compared to a loss of $(0.2) million from the corresponding period of the prior fiscal year. Consolidated other expenseincome (loss) for the six months ended March 31, 20182019 was $52,000,income of $0.5 million, compared to a decreaseloss of $10,000$(0.1) million from the corresponding period of the prior fiscal year. The changesincrease in other expenseincome for both periods werewas primarily due to an increase in net foreign exchange losses and foreign currency hedging fees offset by an increase in interest income resulting from increased financing receivables. gains.
Consolidated income tax expense (benefit) for the three months ended March 31, 20182019 was $(0.7)$0.6 million compared to $0.3a tax benefit of $0.7 million for the corresponding period of the prior fiscal year. Consolidated income tax expense (benefit) for the six months ended March 31, 20182019 was $(0.7)$0.6 million compared to $0.8a tax benefit of $0.7 million for the corresponding period of the prior fiscal year. Our effectiveThe $0.6 million tax ratesexpense for both periods in fiscal year 2019 primarily reflects foreign withholding tax on rental income earned in Nigeria during the three months ended March 31, 2019. The income tax benefit for both periods of fiscal year 2018 and 2017 were 12.5% and (3.1)%, respectively. Our effectivereflects a $0.7 million refund resulting from the filing of an amended U.S. tax rates forreturn in the sixthree months ended March 31, 2018 and 2017 were 4.5% and (3.5)%, respectively. The United States statutory tax rate for the three and six months ended March 31, 2018 and 2017 were 24.5% (blended) and 35%, respectively. Compared2018. We are currently unable to the United States statutory rate, the lower effective tax rates for the three and six months ended March 31, 2018 and 2017 primarily resulted from our inability to recognizerecord any tax benefits for theour tax losses we incurred in the U.S. and Canada due to the uncertainty surrounding our ability to utilize thesesuch losses in the future to offset taxable income. In addition, for the three months ended March 31, 2018, the Company amended its prior year U.S. tax return to claim a $0.7 million refund.
Seismic ProductsSegment Results of Operations
Oil and Gas Markets
Revenue
Revenue from our seismicoil and gas products for the three months ended March 31, 2018 decreased $2.72019 increased $7.4 million, or 19.1%65.4%, from the corresponding period of the prior fiscal year. Revenue from our seismicoil and gas products for the six months ended March 31, 2018 decreased $4.02019 increased $10.3 million, or 17.2%53.5%, from the corresponding period of the prior fiscal year. The components of these decreasesincreases include the following:
Traditional Exploration Product Revenue– For the three months ended March 31, 2019, revenue from our traditional products increased $0.8 million, or 24.5%, from the corresponding period of the prior fiscal year. The increase was primarily caused by higher demand for our marine products and an increase in repair and service revenue. The increase
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Wireless Exploration Product Revenue – For the three months ended March 31, 2018,2019, revenue from our wireless exploration products decreased by $3.6increased $7.6 million, or 37.1%, from the corresponding period of the prior fiscal year. This decrease resulted from a decline in sales and rentals of our OBX wireless products. For the six months ended March 31, 2018, revenue from our wireless exploration products decreased by $6.3 million, or 39.3%, from the corresponding period of the prior fiscal year. This revenue decline resulted from a large OBX rental contract that was active in fiscal year 2017 for which no similar large rental contract occurred during the six months ended March 31, 2018.
Reservoir Product Revenue – For the three months ended March 31, 2018, revenue from our reservoir products increased $1.4 million, or 191.9%125.9%, from the corresponding period of the prior fiscal year. For the six months ended March 31, 2018,2019, revenue from our reservoirwireless exploration products increased $1.5$11.3 million, or 119.8%116.4%, from the corresponding period of the prior fiscal year. The increase forIn both periods, reflects revenues receivedthe increase resulted from higher rental demand for our OBX systems and was partially offset by a decline in demand for sales of our GSX wireless products. Both periods of fiscal year 2019 include $1.3 million of revenue from the salerecognition of borehole toolsa non-refundable deposit resulting from ourthe cancellation of a rental fleet.contract by a customer.
Operating Loss
Despite decreased revenues, our operating loss associated with our seismic products for the three months ended March 31, 2018 decreased $5.8 million, or 59.0%, from the corresponding period of the prior year. Our operating loss associated with our seismic products for the six months ended March 31, 2018 decreased $7.2 million, or 38.6%, from the corresponding period of the prior year. The decrease in operating loss for both periods resulted from improved gross profits attributable to a decrease in inventory obsolescence expense, stock-based compensation expense and other expense declines related to a workforce reduction.
Non-Seismic Products
Revenue
Revenue from our non-seismic products for the three months ended March 31, 2018 increased $1.4 million, or 21.0%, from the corresponding period of the prior fiscal year. Revenue from our non-seismic products for the six months ended March 31, 2018 increased $2.1 million, or 17.0%, from the corresponding period of the prior fiscal year. The components of these increases included the following:
IndustrialReservoir Product Revenue – For the three months ended March 31, 2018,2019, revenue from our industrialreservoir products increased $1.4decreased $1.0 million, or 42.7%48.8%, from the corresponding period of the prior fiscal year. For the six months ended March 31, 2018,2019, revenue from our industrialreservoir products increased $2.0decreased $0.7 million, or 31.5%25.6%, from the corresponding period of the prior fiscal year. The decrease for both periods was primarily due to a decrease in sales of our borehole products and lower service revenue.
Operating Income (Loss)
Operating income associated with our oil and gas products for the three months ended March 31, 2019 was $3.3 million compared to an operating loss of $3.8 million from the corresponding period of the prior year. Operating income associated with our oil and gas products for the six months ended March 31, 2019 was $0.7 million, compared to an operating loss of $11.4 million from the corresponding period of the prior year. The improvement in operating income (loss) for both periods primarily resulted from (i) an increase in wireless rental revenue from our OBX systems, (ii) a decrease in inventory obsolescence expense and (iii) a decline in unutilized factory costs due to higher productivity. While factory utilization has recently increased due to rental demand for our OBX marine wireless products, we expect our consolidated gross margins for our oil and gas products to remain below historic norms until demand increases significantly for these products.
Adjacent Markets
Revenue
Revenue from our Adjacent Markets products for the three months ended March 31, 2019 decreased $0.6 million, or 7.2%, from the corresponding period of the prior fiscal year. Revenue from our Adjacent Markets products for the six months ended March 31, 2019 decreased $0.4 million, or 2.7%, from the corresponding period of the prior fiscal year. The components of these decreases included the following:
Industrial Product Revenue and Services – For the three months ended March 31, 2019, revenue from our industrial products decreased $0.6 million, or 12.5% from the corresponding period of the prior fiscal year. For the six months ended March 31, 2019, revenue from our industrial products decreased $0.7 million, or 8.4% from the corresponding period of the prior fiscal year. The decrease in revenue for both periods was primarily attributable to higherlower demand for our water meter products and a decrease in contract manufacturing services.service revenue. These decreases were partially offset by an increase in demand for our offshore cable products.
Imaging Product Revenue – For the three months ended March 31, 2018,2019, revenue from our imaging products decreased $0.1increased $22,000, or 0.7%, from the corresponding period of the fiscal year. For the six months ended March 31, 2019, revenue from our imaging products increased $0.3 million, or 1.6%5.4%, from the corresponding period of the fiscal year. The increase in both periods was primarily due to higher demand for our film products.
Operating Income
The operating income from our Adjacent Markets products for the three months ended March 31, 2019 increased $0.3 million or 19.3%, from the corresponding period of the prior fiscal year. For the six months ended March 31, 2018, revenueThe operating income from our imaging products increased $0.1 million, or 1.2%, from the corresponding period of the prior fiscal year. We consider these small changes in revenue to be normal and not indicative of any particular trend in product demand.
Operating Income
Our operating income associated with revenue from our non-seismic products for the three months ended March 31, 2018 increased $0.3 million, or 13.6%, from the corresponding period of the prior fiscal year. Our operating income associated with sales of our non-seismicAdjacent Markets products for the six months ended March 31, 20182019 increased $0.3$0.2 million or 14.7%9.1%, from the corresponding period of the prior fiscal year. The increase in operating income for both periods resulted from gross profits realizedmanufacturing improvements and reductions in operating personnel costs and bad debt expenses.
Emerging Markets
On July 27, 2018, we entered the border and perimeter security market through our acquisition of Quantum. In connection with the Quantum acquisition, we established the Emerging Markets business segment, which currently includes only Quantum. Revenue from increased product revenues. our Emerging Markets products for three and six months ended March 31, 2019 was $45,000 and $0.1 million, respectively. Our operating loss for the three and six months ended March 31, 2019 was $1.2 million and $2.4 million, respectively, including $0.3 million and $0.6 million of intangible asset amortization expense.
Liquidity and Capital Resources
At March 31, 2018,2019, we had approximately $14.2$12.8 million in cash and cash equivalents and $26.5$0.7 million in short-term investments. For the six months ended March 31, 2018,2019, we used $12.4$2.9 million of cash in operating activities. Our net loss of $14.2$5.1 million was offset by (i) net non-cash charges of $11.6$12.5 million from deferred income taxes, depreciation, amortization, accretion, inventory obsolescence, stock-based compensation and bad debtsdebt expense and (ii) a $2.3$3.0 million increase in accounts payable primarily dueassociated with the purchase of materials required to an increase in inventories and the timing of payments to suppliers.expand our OBX rental fleet. Other uses of cash in our operations included a (i) a $2.9$3.7 million increase in trade accounts receivable resulting from the timing of collections from customers, (ii) a $4.6 increase in inventories for the production of recently introduced land-based wireless seismic products, (iii) a $0.7(ii) $5.8 increase in income taxtrade accounts receivable resulting from an anticipated
additional U.S. tax refund,the increase in revenue and delays in collecting funds owed from a rental customer, (iii) a $1.3 million decrease in deferred revenue due to a customer deposit forfeiture on a rental contract, (iv) a $1.2 million decrease in accrued expenses and other dueexpenses primarily attributable to the payment of property taxes and (v) the removala $1.0 million increase in prepaid expenses and other current assets attributable to prepayment of a $4.2 million gross profit from the sale of used rental equipment since such gross profit is reflected in the proceeds from the sale of used rental equipment under investing activities.annual insurance premiums and advance payments made to suppliers for future inventory purchases.
For the six months ended March 31, 2018,2019, we generated cash of $11.5$3.9 million from investing activities. Sources of cash included (i) $9.6$24.9 million of net proceeds from the sale of short-term investments, and (ii) $3.9$1.6 million of proceeds from the sale of rental equipment.equipment and (iii) $0.6 million of proceeds, net of payments, from a property related insurance claim. These sources of cash were partially offset by (i) $1.6$1.8 million for the acquisition of the intellectual property and related assets of the OptoSeis fiber optic sensing technology business, (ii) $20.4 million primarily to expand our OBX rental fleet and (ii) $0.5(iii) $1.0 million for additions to our property, plant and equipment. WeAs a result of significant demand for our marine OBX rental equipment, we expect fiscal year 20182019 cash investments into our rental fleet tocould be approximately $4$30 million to replenish land-based wireless rental fleet equipment recently sold to customers and to replace/upgrade components of our wireless rental fleet.or more. We estimate total fiscal year 20182019 cash investments in property, plant and equipment willcould be approximatelyup to $3 million. Our capital expenditures are expected to be funded from our cash on hand, internal cash flowflows, cash flows from our rental contracts or, if necessary, from borrowings under our credit agreement.
For the six months ended March 31, 2018,2019, we generated cash proceeds of $19,000$0.2 million from financing activities from the exercise of stock options by our employees. We had no long-term debt outstanding throughout the fiscal year ended September 30, 20172018 or for the six months ended March 31, 2018.2019.
CrudeThroughout 2018, West Texas Intermediate crude oil prices have recently increased to their highest level in three years, although the current price level ofstrengthened into early October 2018, peaking at $76 per barrel. Since that time and continuing into late December 2018, crude oil remainsprices dropped significantly belowbottoming-out at $43 per barrel. In the peaklast few weeks we have seen crude oil price levels seenstrengthen again to around $62 per barrel. The significant price volatility that began in 2014.2014 continues today, stifling budgets targeted at the oil and gas exploration industry, including the seismic industry. OPEC and other crude oil producing/exporting nations appear united in their efforts to maintain agreed-upon supply cuts aimed at reducing the glut ofequilibrium between current worldwide crude oil supply and demand, with reported reductions in storageexcess crude oil supplies around the world. If these efforts to obtain an economic equilibrium in worldwide crude oil supplies are successful, crude oiland associated prices may stabilize, or even drift higher in the months to come. Thesethese factors and developing trends bode well for the oil and gas geophysical industry and we expect to participate in any resurgence in demand for new seismic equipment demand that may be forthcoming. WeWhile we are beginning to see the firstseeing some signs of demand developingincreased seismic activity around the world, the need for new seismic equipment and we are respondingremains restrained due to moderately increasing customer inquiries for product deliveries and pricing. However, as yet we do not have any firm orders or commitments from customers for new products andcapital limitations affecting many of our customers along with excessive quantities of under-utilized equipment. We expect product sales of our oil and gas products, and in particular our legacy land-based traditional and wireless products, to remain under-capitalized and financially constrained. While positive signs exist,low until exploration-focused seismic activities increase, which we remain cautious due to persisting low levels of product orders,believe will eventually result from the ongoing operating losses and the continued depletion of our cash balances. Until improving seismic exploration market conditions materializeexisting reservoirs prompting the need to find new sources of oil and seismic exploration product demand resumes to historical levels, wegas. We expect these depressed seismic equipment marketchallenging industry conditions to continue.facing our land-based traditional and legacy wireless products will continue throughout fiscal year 2019.
Our available cash, cash equivalents and short-term investments totaled $40.6$13.5 million at March 31, 2018,2019, including $8.1$7.5 million of cash and cash equivalents held by our foreign subsidiaries and branch offices. In light of theThe Tax Cuts and Jobs Act signed into law on December 22, 2017, whichcreates new taxes on certain foreign earnings and also requires companies to pay a one-time transition tax on undistributed earnings of their foreign subsidiaries which were previously tax deferred. We have determined that we are currently re-evaluating our prior intentnot required to permanently reinvest thesepay any transition tax on the undistributed earnings. If we were to repatriate the cash held byearnings of our foreign subsidiaries since we would be required to accrue and pay taxeshad no accumulated earnings on any amounts repatriated.a consolidated basis.
Our credit agreement allows for borrowings of up to $30.0 million with such amounts available for borrowing determined by a borrowing base. In October 2017,November 2018, we extended the maturity of the credit agreement from May 2018April 2019 to April 2019.2020. In March 2019, we entered into an amendment to the credit agreement that altered the unencumbered liquid assets covenant to (i) reduce the minimum threshold from $10 million to $5 million and (ii) include unencumbered liquid assets held outside the United States. The
amendment also added another financial covenant that requires us to maintain a tangible net worth of not less than $140 million. Additionally, pursuant to the amendment, our principal place of business and the related real estate, located at 7007 Pinemont Drive, Houston, Texas was added as collateral securing our obligations under the credit agreement. At March 31, 2018,2019, we had no outstanding borrowings under the credit agreement and after consideration of $0.3 million of outstanding letters of credit, our borrowing availability under the credit facility was $27.6$25.5 million. At March 31, 2018,2019, we were in compliance with all covenants under the credit agreement. We currently do not anticipate the need to borrow under the credit agreement; however, we can make no assurance that we will not do so.
In fiscal years 2016, 2017 and 2017,2018, we received income tax refunds of $18.3 million, $12.8 million and $12.8$0.7 million, respectively, from the U.S. Department of Treasury. These refunds were a result of the significant tax losses we experienced in fiscal yearyears 2016 and 2015, which we elected to carryback and recoup taxes previously paid. For U.S. income tax purposes, we are now in a loss carryforward position in regards to our tax losses foroccurring in fiscal year 2017 and beyond. As a result, our current tax losses will not result in any additional U.S. federal income tax refunds. The tax refunds we received in fiscal years 2016 and 2017 have beenwere significant contributors to our overall liquidity. In the absence of future profitable results of operations, we may need to rely on other sources of liquidity to fund our future operating results, including liquidating short-term investments, executed rental contracts, available borrowings under our credit agreement through its expiration in April 2019,2020 leveraging or sale of real estate assets, sales of rental assets and other liquidity sources which may be available to us. However, currently we believe that our cash, and short-term investment balances and borrowings under our credit facility will be sufficient to finance ourany future operating losses and planned capital expenditures through the next twelve months.
Off-Balance Sheet Arrangements
We do not have any obligations which meet the definition of an off-balance sheet arrangement and which have or are reasonably likely to have a current or future effect on our financial statements or the items contained therein that are material to investors.
Contractual Obligations
We established an initial earn-out liability of $4.3 million in connection with its November 2018 acquisition of all the intellectual property and related assets of the OptoSeis fiber optic sensing technology. Contingent cash payments, if any, will be derived from eligible revenue generated during a five-and-a-half year earn-out period subsequent to the closing of the acquisition from products and services utilizing the OptoSeis fiber optic technology. The maximum amount of contingent payments is $23.2 million over the earn-out period.
We established an estimated initial contingent earn-out liability of $7.7 million in connection with its July 2018 acquisition of Quantum. Contingent payments, if any, may be paid in the form of cash or company stock and will be derived from eligible revenue generated during a four-year earn-out period subsequent to the closing of the acquisition. The maximum amount of contingent payments is $23.5 million over the earn-out period.
Critical Accounting Policies
During the six months ended March 31, 2018,2019, there has been no material change to our critical accounting policies discussed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 20172018 other than the adoption of Accounting Standards Update 2016-09, “Improvements to Employee Share-Based Payment Accounting” and 2016-16, “Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory”.2014-09, Revenue from Contracts with Customers, Topic 606.
Recent Accounting Pronouncements
Please refer to Note 1 to our consolidated financial statements contained in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have market risk relative to our short-term investments, foreign currency rates and interest rates. We do not engage in commodity or commodity derivative instrument purchase or sales transactions. Because of the inherent unpredictability of foreign currency rates and interest rates, as well as other factors, actual results could differ materially from those projected in this Item.
Foreign Currency and Operations Risk
One of our wholly-owned subsidiaries, Geospace Technologies Eurasia, is located in the Russian Federation. In addition, we operate a branch office, Geospace Technologies Sucursal Sudamericana, in Colombia. Our financial results for these entities may be
affected by factors such as changes in foreign currency exchange rates, weak economic conditions or changes in the political climate. Our consolidated balance sheet at March 31, 20182019 reflected approximately USD $6.1$4.8 million and USD $0.1$0.2 million of foreign currency denominated net working capital related to our Russian and Colombian operations, respectively. Both of these entities receive a portion of their revenue and pay a majority of their expenses primarily in their local currency. To the extent that transactions of these entities are settled in their local currency, a devaluation of these currencies versus the U.S. dollar could reduce any contribution from these entities to our consolidated results of operations and total comprehensive income as reported in U.S. dollars. We do not hedge the market risk with respect to our operations in these countries; therefore, such risk is a general and unpredictable risk of future disruptions in the valuation of such currencies versus U.S. dollars to the extent such disruptions result in any reduced valuation of these foreign entities’ net working capital or future contributions to our consolidated results of operations. At March 31, 2018,2019, the foreign exchange rate for $1.00 (one U.S. dollar) was equal to approximately 57.2366 Russian Rubles and 2,7833,186 Colombian Pesos, respectively.Pesos. If the value of the U.S. dollar were to strengthen by ten percent against these foreign currencies, our working capital in the Russian Federation and in Colombia would decline by USD $0.6$0.5 million and USD $11,000,$16,000, respectively.
Foreign Currency Intercompany Accounts and Notes Receivable
We sell products to our foreign subsidiaries on trade credit terms in both U.S. dollars and in the subsidiary’s local currency. At March 31, 2018,2019, we had outstanding Canadian-dollar denominated intercompany accounts receivable of CAN $41.1CAD $14.3 million, which we consider to be of a short-term nature. The appreciation or devaluation of the Canadian dollar against the U.S. dollar will result in a gain or loss, respectively, to our consolidated statement of operations. At March 31, 2018,2019, the foreign exchange rate for USD $1.00 was equal to approximately CAN $1.29.CAD $1.33. On March 28, 201829, 2019 we entered into two short-terma CAD $10.0 million 90-day hedge contracts totaling CAN $30.0 millioncontract with a United States bank to hedge a portion of our Canadian dollar foreign exchange rate exposure, resulting in an under-hedged position of approximately CAN $11.1CAD $4.3 million. At March 31, 2018,2019, if the U.S. dollar exchange rate were to strengthen by ten percent against the Canadian dollar, we would recognize a foreign exchange loss of USD $0.9$0.3 million in our consolidated financial statements.
Floating Interest Rate Risk
Our credit agreement contains a floating interest rate which subjects us to the risk of increased interest costs associated with any upward movements in bank market interest rates. Under our credit agreement our borrowing interest rate is the Wall Street Journal prime rate, which was 4.75%5.5% at March 31, 2018.2019. As of March 31, 20182019 and September 30, 2017,2018, there were no borrowings outstanding under our credit agreement.
Item 4. Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Notwithstanding the foregoing, there can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within our company and consolidated subsidiaries to report material information otherwise required to be set forth in our reports.
In connection with the preparation of this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the CEO and CFO, as of March 31, 2018,2019, of the effectiveness of our
disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2018.2019.
Changes in Internal Control over Financial Reporting
We previously reported a material weaknessThere were no changes in our internal control over financial reporting. Asreporting (as defined in Rule 13a-15(f) and 15d-15(f) of September 30, 2017, we did not maintain effective controls concerning our classification of current assets with respect to inventories. We determined that a portion of our inventories should have been classified as noncurrent assets, as all inventories were not reasonably expected to be realized in cash, sold or consumedthe Exchange Act) during our next operating cycle.
This error was subsequently identified and corrected, and resulted in a restatement to the consolidated balance sheets as of September 30, 2016 and 2015 and as of December 31, 2016,fiscal quarter ended March 31, 2017 and June 30, 2017, which was included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. The error had no impact upon previously reported total assets, total liabilities, revenues, net loss, net loss per share,2019 that have materially affected, or cash flows.
To remediate the material weakness described above, we have designed and implemented a quarterly controlare reasonably likely to determine the value of inventories expected to be realized in cash, sold or consumed during the next operating cycle. This control, which encompasses a review by senior management, utilizes a combination of forecasts and historical trends to determine our future expected inventory utilization.
We believe that this measure remediates the material weakness identified and strengthensmaterially affect, our internal controlscontrol over financial reporting.
reporting
The following exhibits are filed with this Report on Form 10-Q or are incorporated by reference
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* This exhibit is a management contract or a compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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