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, 2019 OR

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

for the transition period from ____ to ____

Commission file number 001-13601

 

GEOSPACE TECHNOLOGIES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Texas

76-0447780

( State or other jurisdiction of

incorporation or organization)

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

7007 Pinemont,

Houston, Texas

77040

(Address of principal executive offices)

(Zip Code)

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

 

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

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

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

 

Large accelerated filer

 

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

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

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

As of April 30, 2019, the registrant had 13,632,291 shares of common stock, $.01 par value per share outstanding.

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

GEOS

 

The Nasdaq Global Market

  

 

 

 

 


 

Table of Contents

 

 

 

Page

Number

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

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

 

17

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

24

 

 

 

Item 4. Controls and Procedures

 

25

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 6. Exhibits

 

26

2


 

PART I - FINANCI AL INFORMATION

Item 1. Financial Statements

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands except share amounts)

(unaudited)

 

 

 

March 31, 2019

 

 

September 30, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,765

 

 

$

11,934

 

Short-term investments

 

 

748

 

 

 

25,471

 

Trade accounts receivable, net

 

 

20,634

 

 

 

14,323

 

Financing receivables

 

 

3,660

 

 

 

4,258

 

Inventories

 

 

15,525

 

 

 

18,812

 

Prepaid expenses and other current assets

 

 

2,275

 

 

 

1,856

 

Total current assets

 

 

55,607

 

 

 

76,654

 

 

 

 

 

 

 

 

 

 

Rental equipment, net

 

 

56,434

 

 

 

39,545

 

Property, plant and equipment, net

 

 

34,320

 

 

 

33,624

 

Non-current inventories

 

 

34,037

 

 

 

31,655

 

Goodwill

 

 

5,059

 

 

 

4,343

 

Other intangible assets, net

 

 

10,930

 

 

 

8,006

 

Deferred income tax assets, net

 

 

225

 

 

 

246

 

Non-current financing receivables, net

 

 

2,753

 

 

 

4,740

 

Prepaid income taxes

 

 

69

 

 

 

54

 

Other assets

 

 

216

 

 

 

213

 

Total assets

 

$

199,650

 

 

$

199,080

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable trade

 

$

7,117

 

 

$

4,106

 

Accrued expenses and other current liabilities

 

 

5,059

 

 

 

6,826

 

Deferred revenue

 

 

2,393

 

 

 

3,752

 

Income tax payable

 

 

33

 

 

 

51

 

Total current liabilities

 

 

14,602

 

 

 

14,735

 

 

 

 

 

 

 

 

 

 

Contingent earn-out liabilities

 

 

12,055

 

 

 

7,713

 

Deferred income tax liabilities

 

 

40

 

 

 

45

 

Total liabilities

 

 

26,697

 

 

 

22,493

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, $.01 par value, 20,000,000 shares authorized, 13,632,291 and 13,600,541 shares issued and outstanding

 

 

136

 

 

 

136

 

Additional paid-in capital

 

 

87,525

 

 

 

86,116

 

Retained earnings

 

 

100,808

 

 

 

105,954

 

Accumulated other comprehensive loss

 

 

(15,516

)

 

 

(15,619

)

Total stockholders’ equity

 

 

172,953

 

 

 

176,587

 

Total liabilities and stockholders’ equity

 

$

199,650

 

 

$

199,080

 

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

3


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

March 31, 2019

 

 

March 31, 2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

11,845

 

 

$

13,910

 

 

$

22,304

 

 

$

27,184

 

Rental

 

 

14,278

 

 

 

5,337

 

 

 

21,694

 

 

 

6,707

 

Total revenue

 

 

26,123

 

 

 

19,247

 

 

 

43,998

 

 

 

33,891

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

11,246

 

 

 

14,065

 

 

 

22,459

 

 

 

27,161

 

Rental

 

 

4,526

 

 

 

3,183

 

 

 

8,098

 

 

 

5,699

 

Total cost of revenue

 

 

15,772

 

 

 

17,248

 

 

 

30,557

 

 

 

32,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

10,351

 

 

 

1,999

 

 

 

13,441

 

 

 

1,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,358

 

 

 

4,785

 

 

 

11,443

 

 

 

9,914

 

Research and development

 

 

3,898

 

 

 

2,430

 

 

 

7,069

 

 

 

5,588

 

Bad debt expense (recovery)

 

 

73

 

 

 

6

 

 

 

(30

)

 

 

356

 

Total operating expenses

 

 

9,329

 

 

 

7,221

 

 

 

18,482

 

 

 

15,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

1,022

 

 

 

(5,222

)

 

 

(5,041

)

 

 

(14,827

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(23

)

 

 

(127

)

 

 

(57

)

 

 

(191

)

Interest income

 

 

180

 

 

 

279

 

 

 

452

 

 

 

542

 

Foreign exchange gains (losses), net

 

 

119

 

 

 

(306

)

 

 

186

 

 

 

(349

)

Other, net

 

 

(41

)

 

 

(29

)

 

 

(129

)

 

 

(54

)

Total other income (expense), net

 

 

235

 

 

 

(183

)

 

 

452

 

 

 

(52

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

1,257

 

 

 

(5,405

)

 

 

(4,589

)

 

 

(14,879

)

Income tax expense (benefit)

 

 

550

 

 

 

(676

)

 

 

557

 

 

 

(670

)

Net income (loss)

 

$

707

 

 

$

(4,729

)

 

$

(5,146

)

 

$

(14,209

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

(0.36

)

 

$

(0.38

)

 

$

(1.07

)

Diluted

 

$

0.05

 

 

$

(0.36

)

 

$

(0.38

)

 

$

(1.07

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

13,401,135

 

 

 

13,264,710

 

 

 

13,369,932

 

 

 

13,233,205

 

Diluted

 

 

13,557,185

 

 

 

13,264,710

 

 

 

13,369,932

 

 

 

13,233,205

 

 

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

4


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

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.

 

5


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018

(in thousands, expect share amounts)

(unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Total

 

Balance at October 1, 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.

 

7


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1.   Significant Accounting Policies

Basis of Presentation

The consolidated balance sheet of Geospace Technologies Corporation and its subsidiaries (the “Company”) at September 30, 2018 was derived from the Company’s audited consolidated financial statements at that date.  The consolidated balance sheet at March 31, 2019 and the consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the three and six months ended March 31, 2019 and 2018 were prepared by the Company without audit.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows were made.  The results of operations for the three and six months ended March 31, 2019 are not necessarily indicative of the operating results for a full year or of future operations.

Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America were omitted pursuant to the rules of the Securities and Exchange Commission.  The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2018.

Reclassifications

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  The Company considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these consolidated financial statements.  The Company continually evaluates its estimates, including those related to bad debt reserves, inventory obsolescence reserves, self-insurance reserves, product warranty reserves, impairment of long-lived assets and deferred income tax assets.  The Company bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different conditions or assumptions.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original or remaining maturity at the time of purchase of three months or less to be cash equivalents.  At March 31, 2019, cash and cash equivalents included $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 under rates enacted by The Tax Cuts and Jobs Act (“2017 Tax Act”).

Recently Adopted Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  This guidance was adopted by the Company in its first quarter of fiscal year 2019.  The adoption 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 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 adopted this standard on October 1,

8


 

2018 using the modified retrospective method.  The adoption of this standard did not result in a cumulative adjustment as of October 1, 2018 nor did it have any impact on the Company’s consolidated finan cial 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 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 any material on its consolidated financial statements.

In August 2018, the FASB issued guidance requiring certain existing disclosure requirements in ASC Topic 820, Fair Value Measurements and Disclosures , to be modified or removed, and certain new disclosure requirements to be added to this standard.  In addition, the guidance allows entities to exercise more discretion when considering fair value measurement disclosures.  The 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 on its consolidated financial statements.

In June 2016, the FASB issued guidance surrounding credit losses for financial instruments that replaces the incurred loss impairment methodology in generally accepted accounting principles (“GAAP”).  The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other financial instruments.  For available-for-sale debt securities with unrealized losses, credit losses will be recognized as allowances rather than reductions in the amortized cost of the securities.  The standard is effective for fiscal years reporting periods beginning after December 15, 2019 and interim periods within those fiscal years.  Early adoption for a fiscal year beginning after December 15, 2018 is permitted.  Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period.  The Company 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.  Effective May 1, 2019, the Company will be a lessee under an office lease agreement with a term longer than one year.  The Company is routinely a lessor in its rental contracts with customers.  The minimum rental term of these contracts is generally less than one year, and the Company expects 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.

2.   Revenue Recognition

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

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

9


 

The Company primarily derives product revenue f rom the sale 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 rewa rds 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 a cceptance provisions, and the Company’s standard terms of sale do not allow customers to return products for credit.  

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

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

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

10


 

For each of the geographic areas where the Company operates, t he 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.  

  

4.   Short-term Investments

 

 

 

As of March 31, 2019 (in thousands)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government bonds

 

$

747

 

 

$

1

 

 

$

 

 

$

748

 

 

 

 

As of September 30, 2018 (in thousands)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

17,851

 

 

$

 

 

$

(60

)

 

$

17,791

 

Government bonds

 

 

7,702

 

 

 

 

 

 

(22

)

 

 

7,680

 

Total

 

$

25,553

 

 

$

 

 

$

(82

)

 

$

25,471

 

 

The Company’s short-term investments have contractual maturities in February 2020.   

11


 

5.   Derivative Financial Instruments

At March 31, 2019 and September 30, 2018, the Company’s Canadian subsidiary had CAN$14.3 million and CAD$20.4 million, respectively, of Canadian dollar denominated intercompany accounts payable owed to one of the Company’s U.S subsidiaries.  In order to mitigate its exposure to movements in foreign currency rates between the U.S. dollar and Canadian dollar, the Company routinely enters into foreign currency forward contracts to hedge a portion of its exposure to changes in the value of the Canadian dollar.  On March 29, 2019, the Company entered into a CAD$10.0 million 90-day hedge contract with a United States bank to reduce the impact on cash flows from movements in the Canadian dollar/U.S. dollar currency exchange rate, but has not been designated as a hedge for accounting purposes.     

The following table summarizes the gross fair value of all derivative instruments, which are not designated as hedging instruments and their location in the consolidated balance sheets (in thousands).

  

Derivative Instrument

 

Location

 

March 31, 2019

 

 

September 30, 2018

 

Foreign Currency Forward Contracts

 

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 months ended March 31, 2019 and 2018 (in thousands):

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

Derivative Instrument

 

Location

 

March 31, 2019

 

 

March 31, 2018

 

 

March 31, 2019

 

 

March 31, 2018

 

Foreign Currency Forward Contracts

 

Other Income (Expense)

 

$

217

 

 

$

733

 

 

$

639

 

 

$

575

 

 

 

6.   Trade Accounts and Financing Receivables

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

 

 

 

March 31, 2019

 

 

September 30, 2018

 

Trade accounts receivable

 

$

21,314

 

 

$

15,776

 

Allowance for doubtful accounts

 

 

(680

)

 

 

(1,453

)

 

 

$

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, 2019

 

 

September 30, 2018

 

Promissory notes

 

$

4,730

 

 

$

5,646

 

Sales-type lease

 

 

4,032

 

 

 

5,533

 

Total financing receivables

 

 

8,762

 

 

 

11,179

 

Unearned income:

 

 

 

 

 

 

 

 

Promissory notes

 

 

(95

)

 

 

(95

)

Sales-type lease

 

 

(150

)

 

 

(237

)

Total unearned income

 

 

(245

)

 

 

(332

)

Total financing receivables, net of unearned income

 

 

8,517

 

 

 

10,847

 

Allowance for doubtful promissory notes

 

 

(2,104

)

 

 

(1,849

)

Less current portion

 

 

(3,660

)

 

 

(4,258

)

Non-current financing receivables

 

$

2,753

 

 

$

4,740

 

   

12


 

7.   Inventories

Inventories consist of the following (in thousands):

 

 

 

March 31, 2019

 

 

September 30, 2018

 

Finished goods

 

$

18,750

 

 

$

18,802

 

Work in process

 

 

3,745

 

 

 

7,926

 

Raw material

 

 

58,570

 

 

 

54,290

 

Obsolescence reserve

 

 

(31,503

)

 

 

(30,551

)

 

 

 

49,562

 

 

 

50,467

 

Less current portion

 

 

(15,525

)

 

 

(18,812

)

Non-current portion

 

$

34,037

 

 

$

31,655

 

 

During the six months ended March 31, 2019 and 2018, the Company made non-cash inventory transfers of $1.8 million and $8.1million, respectively, to rental equipment.  Raw materials include semi-finished goods and component parts totaled approximately $28.5 million and $29.0 million at March 31, 2019 and September 30, 2018, respectively.  

8.   Goodwill and Other Intangible Assets

In connection with the acquisition of all of the intellectual property and related assets of the OptoSeis fiber optic sensing technology business from PGS Americas, Inc. in November 2018, the Company recorded goodwill of $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 intangible asset amortization expense for the six months ended March 31, 2018.

As of March 31, 2019, future estimated amortization expense of other intangible assets is 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


 

9.   Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted of the following (in thousands):

 

 

 

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

)

 

10.   Stock-Based Compensation

During the six months ended March 31, 2019, the Company issued 8,000 shares of restricted stock awards (“RSAs”) under its 2014 Long Term Incentive Plan, as amended (the “Plan”).   The weighted average grant date fair value of each RSA was $14.59 per share.  The total grant date fair value of all RSAs issued was $0.1 million, which will be charged to expense over the next four years as the RSA vesting restrictions lapse.  Compensation expense for the 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 RSAs are entitled to vote such shares and are entitled to any dividends paid.  As of March 31, 2019, the Company had unrecognized compensation expense of $3.1 million relating to RSAs that is expected to be recognized over a weighted average period of 2.3 years.

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 unrecognized compensation expense of $2.2 million relating to RSUs that is expected to be recognized over a weighted average period of 3.7 years.

As of March 31, 2019, the Company had $35,000 of unrecognized compensation expense related to nonqualified stock option awards that is expected to be recognized over a weighted average period of 0.6 years.

As of March 31, 2019, 226,787 RSAs, 161,300 RSUs and 165,600 nonqualified stock options were unvested and outstanding.

11.   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 income (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, 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

)

14


 

 

For the calculation of diluted loss per share for the six months ended March 31, 2019, 163,800 stock options and 161,300 non-vested RSUs were excluded in the calculation of weighted average shares outstanding since their impact on 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.    

 

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 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 these pending matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

13.   Segment Information

The Company reports and evaluates financial information for three operating segments:  Oil and Gas Markets, Adjacent Markets and Emerging Markets.  The Oil and Gas Markets segment products include wireless seismic data acquisition systems, reservoir characterization products and services, and traditional seismic exploration products such as geophones, hydrophones, leader wire, connectors, cables, marine streamer retrieval and steering devices and various other seismic products.  The Adjacent Markets segment products include graphic imaging equipment, water meter products, offshore cables, and 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


 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

March 31, 2019

 

 

March 31, 2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

149

 

 

 

134

 

 

 

297

 

 

 

285

 

Total

 

$

26,123

 

 

$

19,247

 

 

$

43,998

 

 

$

33,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(2,781

)

 

 

(2,849

)

 

 

(6,033

)

 

 

(5,810

)

Total

 

$

1,022

 

 

$

(5,222

)

 

$

(5,041

)

 

$

(14,827

)

 

14.   Income Taxes

The 2017 Tax Act was enacted in December 2017. The 2017 Tax Act, among other things, reduces the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018, creates new taxes on certain foreign earnings and may require companies to pay a one-time transition tax on undistributed 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 tax assets based on the new U.S. federal tax rate of 21%, which resulted in a reduction to its deferred tax assets of approximately $8.1 million.  The reduction in deferred tax assets was completely offset by a like reduction to the valuation allowance.

Consolidated income tax expense for the three months ended March 31, 2019 was $0.6 million compared to a tax benefit of $0.7 million for corresponding period of the prior fiscal year.   Consolidated income tax expense for the six months ended March 31, 2019 was $0.6 million compared to a tax benefit of $0.7 million for corresponding period of the prior fiscal year.  The $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 months ended March 31, 2019.  The income tax benefit for both periods of fiscal year 2018 reflects a $0.7 million tax refund resulting from the filing of an amended U.S. tax return in the three months ended March 31, 2018.  The Company is currently unable to record any tax benefits for its tax losses in the U.S. and Canada due to the uncertainty surrounding its ability to utilize such losses in the future to offset taxable income.

    

16


 

Item 2.   Management’s Discussion and Analysis o f 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, 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, 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 rental equipment, failure of our Quantum products to be adopted by the border and security perimeter market and 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 industrial products, offshore cables, imaging equipment and perimeter security products.  We report and categorize our customers and products into three different segments:  Oil and Gas Markets, Adjacent Markets and Emerging Markets.

We have been engaged in the design and manufacture of seismic instruments and equipment since 1980.  We primarily market our seismic products to the oil and gas 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, 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.  

17


 

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.  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

Oil and Gas Markets

Our Oil 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.  This segment’s products include wireless seismic data acquisition systems, reservoir characterization products and services, and traditional seismic exploration products such as geophones, hydrophones, leader wire, connectors, cables, marine streamer retrieval and steering devices and various other seismic products.  We believe that our oil 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 that 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, 2019, we have sold 433,000 GSX channels and we have 80,000 GSX channels in our rental fleet.  

18


 

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 ch annel 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.  At March 31, 2019, we had 22,000 OBX stations in our rental fleet, and addit ional 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 a producing oil and gas reservoir, and operators can use these surveys to monitor the effects of oil and gas development and production.  This type of 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.  Utilizing these reservoir monitoring tools, producers can enhance the recovery of oil and gas deposits over the life of a reservoir.

We have developed permanently installed high-definition reservoir monitoring systems for land 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 (“PRM”).  The modular architecture of these products allows virtually unlimited channel expansion for these systems.  

In addition, we produce seismic borehole acquisition systems that 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.

We 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 Adjacent Markets businesses leverage upon our existing manufacturing facilities and engineering 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.  

Industrial Products

Our industrial products include water meter products, offshore cables, as well as seismic sensors used for vibration monitoring and geotechnical applications such as mine safety applications and earthquake detection.

Imaging Products

Our imaging 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 Emerging 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 used for border and perimeter security surveillance, cross-border tunneling

19


 

detection and other products targeted at movement monitoring, intrusion detectio n 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 three segments: Oil and Gas Markets, Adjacent Markets and Emerging Markets.  Summary financial data by business segment follows (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

 

$

3,969

 

 

$

3,187

 

 

$

6,754

 

 

$

6,977

 

Wireless exploration product revenue

 

 

13,644

 

 

 

6,039

 

 

 

20,926

 

 

 

9,670

 

Reservoir product revenue

 

 

1,056

 

 

 

2,061

 

 

 

1,993

 

 

 

2,679

 

Total revenue

 

 

18,669

 

 

 

11,287

 

 

 

29,673

 

 

 

19,326

 

Operating income (loss)

 

 

3,332

 

 

 

(3,757

)

 

 

731

 

 

 

(11,430

)

Adjacent Markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial product revenue

 

 

4,122

 

 

 

4,711

 

 

 

7,683

 

 

 

8,387

 

Imaging product revenue

 

 

3,137

 

 

 

3,115

 

 

 

6,211

 

 

 

5,893

 

Total revenue

 

 

7,259

 

 

 

7,826

 

 

 

13,894

 

 

 

14,280

 

Operating income

 

 

1,651

 

 

 

1,384

 

 

 

2,633

 

 

 

2,413

 

Emerging Markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

46

 

 

 

 

 

 

134

 

 

 

 

Operating loss

 

 

(1,180

)

 

 

 

 

 

(2,372

)

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

149

 

 

 

134

 

 

 

297

 

 

 

285

 

Operating loss

 

 

(2,781

)

 

 

(2,849

)

 

 

(6,033

)

 

 

(5,810

)

Consolidated Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

26,123

 

 

 

19,247

 

 

 

43,998

 

 

 

33,891

 

Operating income (loss)

 

 

1,022

 

 

 

(5,222

)

 

 

(5,041

)

 

 

(14,827

)

Overview

Early in calendar year 2014, our Oil and Gas Markets segment experienced a softening in the demand for its 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 $26 in February 2016, and have recovered to approximately $62 today.  With this decline in oil 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.  While 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 land-based products, and in particular our traditional and wireless products, to remain low until exploration-focused seismic activities increase due to the ongoing depletion of existing reservoirs prompting the need to find new sources of oil and gas.  We expect these challenging industry conditions will continue in our Oil and Gas Markets segment throughout fiscal year 2019.  

In December 2017, we initiated a program to reduce operating costs in light of expected and continuing low levels of oil and gas product demand.  The program is expected to produce approximately $6 million of annualized cash savings.  The majority of the future cost reductions were 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.  There are no outstanding liabilities related to this program as of March 31, 2019.      

20


 

Three months ended March 31, 2019 compared to the three months ended March 31, 2018

Consolidated revenue for the three months ended March 31, 2019 increased $6.9 million, or 35.7%, from the corresponding period of the prior fiscal year.  Consolidated revenue for the six months ended March 31, 2019 increased $10.1 million, or 29.8%, from the corresponding period of the prior fiscal year.  The increase 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, 2019 was $13.4 million, compared to $1.0 million for the corresponding period of the prior fiscal year.  The increase in gross profit for both periods primarily resulted from a significant increase in wireless product rental revenue caused by the high utilization of our OBX rental fleet and a decline in unutilized factory costs due to higher manufacturing productivity.  While factory utilization has recently increased due to demand for the rental of our OBX marine nodal products, we expect our consolidated gross margins from the sale of our products to remain below historic norms until demand increases significantly for our land-based traditional and wireless seismic products.

In light of current market conditions, our oil and gas product inventories at March 31, 2019 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 are also adding new inventories for recent oil and gas product developments and other product demand in our Adjacent Markets.  During periods of excessive inventory levels, our policy has been, and will continue to be, to record obsolescence expense 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 2019 and beyond until product demand and/or resulting inventory turnover return to acceptable levels.

Consolidated operating expenses for the three months ended March 31, 2019 were $9.3 million, an increase of $2.1 million, or 29.2%, from the corresponding period of the prior fiscal year.  Consolidated operating expenses for the six months ended March 31, 2019 were $18.5 million, an increase of $2.6 million, or 16.5%, from the corresponding period of the prior fiscal year.  These increases were primarily due to incremental operating costs associated with our recent acquisitions of the Quantum and 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 remaining 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, 2019 was partially offset by a $0.4 million decrease in bad debt expense.  

Consolidated other income (loss) for the three months ended March 31, 2019 was income of $0.2 million, compared to a loss of $(0.2) million from the corresponding period of the prior fiscal year.  Consolidated other income (loss) for the six months ended March 31, 2019 was income of $0.5 million, compared to a loss of $(0.1) million from the corresponding period of the prior fiscal year.  The increase in other income for both periods was primarily due to an increase in net foreign exchange gains.

Consolidated income tax expense for the three months ended March 31, 2019 was $0.6 million compared to a tax benefit of $0.7 million for corresponding period of the prior fiscal year.   Consolidated income tax expense for the six months ended March 31, 2019 was $0.6 million compared to a tax benefit of $0.7 million for corresponding period of the prior fiscal year.  The $0.6 million tax expense 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 reflects a $0.7 million refund resulting from the filing of an amended U.S. tax return in the three months ended March 31, 2018.  We are currently unable to record any tax benefits for our tax losses in the U.S. and Canada due to the uncertainty surrounding our ability to utilize such losses in the future to offset taxable income.

Segment Results of Operations

Oil and Gas Markets

Revenue

Revenue from our oil and gas products for the three months ended March 31, 2019 increased $7.4 million, or 65.4%, from the corresponding period of the prior fiscal year.  Revenue from our oil and gas products for the six months ended March 31, 2019 increased $10.3 million, or 53.5%, from the corresponding period of the prior fiscal year.   The components of these increases 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

21


 

 

was partially offset by lower demand for our specialty sensor products.  For the six months ended March 31, 2019, revenue from our traditional products decreased $0.2 million, or 3.2% from the corresponding period of the prior fiscal year.  The decrease primarily reflects lower demand for ou r specialty sensor products.  

 

 

Wireless Exploration Product Revenue – For the three months ended March 31, 2019, revenue from our wireless exploration products increased $7.6 million, or 125.9%, from the corresponding period of the prior fiscal year.  For the six months ended March 31, 2019, revenue from our wireless exploration products increased $11.3 million, or 116.4%, from the corresponding period of the prior fiscal year.  In both periods, the 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 recognition of a non-refundable deposit resulting from the cancellation of a rental contract by a customer.  

 

 

Reservoir Product Revenue – For the three months ended March 31, 2019, revenue from our reservoir products decreased $1.0 million, or 48.8%, from the corresponding period of the prior fiscal year.    For the six months ended March 31, 2019, revenue from our reservoir products decreased $0.7 million, or 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 lower demand for our water meter products and a decrease in contract manufacturing 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, 2019, revenue from our imaging products increased $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 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.  The operating income from our Adjacent Markets products for the six months ended March 31, 2019 increased $0.2 million or 9.1%, from the corresponding period of the prior fiscal year.   The increase in operating income for both periods resulted from manufacturing improvements and reductions in operating personnel costs and bad debt expenses.

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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 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, 2019, we had approximately $12.8 million in cash and cash equivalents and $0.7 million in short-term investments.  For the six months ended March 31, 2019, we used $2.9 million of cash in operating activities.  Our net loss of $5.1 million was offset by (i) net non-cash charges of $12.5 million from deferred income taxes, depreciation, amortization, accretion, inventory obsolescence, stock-based compensation and bad debt expense and (ii) a $3.0 million increase in accounts payable primarily associated with the purchase of materials required to expand our OBX rental fleet.  Other uses of cash in our operations included a (i) a $3.7 million increase in inventories for the production of recently introduced land-based wireless seismic products, (ii) $5.8 increase in trade accounts receivable resulting from 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 and other expenses primarily attributable to the payment of property taxes and (v) a $1.0 million increase in prepaid expenses and other current assets attributable to prepayment of annual insurance premiums and advance payments made to suppliers for future inventory purchases.  

For the six months ended March 31, 2019, we generated cash of $3.9 million from investing activities.  Sources of cash included (i) $24.9 million of proceeds from the sale of short-term investments, (ii) $1.6 million of proceeds from the sale of rental 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) $1.8 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 (iii) $1.0 million for additions to our property, plant and equipment.  As a result of significant demand for our marine OBX rental equipment, we expect fiscal year 2019 cash investments into our rental fleet could be $30 million or more.  We estimate total fiscal year 2019 cash investments in property, plant and equipment could be up to $3 million.  Our capital expenditures are expected to be funded from our cash on hand, internal cash flows, cash flows from our rental contracts or, if necessary, from borrowings under our credit agreement.

For the six months ended March 31, 2019, we generated cash proceeds of $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, 2018 or for the six months ended March 31, 2019.

Throughout 2018, West Texas Intermediate crude oil prices strengthened into early October 2018, peaking at $76 per barrel.  Since that time and continuing into late December 2018, crude oil prices dropped significantly bottoming-out at $43 per barrel.  In the last few weeks we have seen crude oil price strengthen again to around $62 per barrel.  The significant price volatility that began in 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 equilibrium between current worldwide crude oil supply and demand, with reported reductions in excess crude oil supplies around the world.  If worldwide crude oil supplies and associated prices stabilize, these factors and developing trends bode well for the oil and gas industry and we expect to participate in any resurgence in demand for new seismic equipment that may be forthcoming.  While we are seeing some signs of increased seismic activity around the world, the need for new seismic equipment remains restrained due to capital 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 low until exploration-focused seismic activities increase, which we believe will eventually result from the ongoing depletion of existing reservoirs prompting the need to find new sources of oil and gas.  We expect these challenging industry conditions 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 $13.5 million at March 31, 2019, including $7.5 million of cash and cash equivalents held by our foreign subsidiaries and branch offices.  The Tax Cuts and Jobs Act signed into law on December 22, 2017, creates 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 not required to pay any transition tax on the undistributed earnings of our foreign subsidiaries since we had no accumulated earnings on 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 November 2018, we extended the maturity of the credit agreement from April 2019 to April 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

23


 

amendment also added another financial covenant that r equires 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 securin g our obligations under the credit agreement. At March 31, 2019, we had no outstanding borrowings under the credit agreement and our borrowing availability under the credit facility was $25.5 million.  At March 31, 2019, we were in compliance with all cove nants 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 2018, we received income tax refunds of $18.3 million, $12.8 million and $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 years 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 occurring 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 were 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 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, short-term investment balances and borrowings under our credit facility will be sufficient to finance any 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, 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, 2018 other than the adoption of Accounting Standards Update 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

24


 

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, 2019 reflected approximately USD $4.8 million and USD $0.2 million of foreign currency denominated net working capital related to our Russian and Colombian operations, respectively.  Both of these entities rece ive 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 re duce 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 ge neral 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 consolid ated results of operations.  At March 31, 2019, the foreign exchange rate for $1.00 (one U.S. dollar) was equal to approximately 66 Russian Rubles and 3,186 Colombian Pesos.  If the value of the U.S. dollar were to strengthen by ten percent against these f oreign currencies, our working capital in the Russian Federation and in Colombia would decline by USD $0.5 million and USD $16,000, respectively.

Foreign Currency Intercompany Accounts 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, 2019, we had outstanding Canadian-dollar denominated intercompany accounts receivable of CAD $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, 2019, the foreign exchange rate for USD $1.00 was equal to approximately CAD $1.33.  On March 29, 2019 we entered into a CAD $10.0 million 90-day hedge contract 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 CAD $4.3 million.  At March 31, 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 $0.3 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 5.5% at March 31, 2019.  As of March 31, 2019 and September 30, 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, 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, 2019.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

25


 

PART II - OTHE R INFORMATION

Item 6.   Exhibits

The following exhibits are filed with this Report on Form 10-Q or are incorporated by reference

 

3.1

 

Amended and Restated Certificate of Formation of Geospace Technologies Corporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed May 8, 2015).

 

 

 

3.2

 

Amended and Restated Bylaws of Geospace Technologies Corporation (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed September 22, 2017).

 

 

 

10.1

 

Form of Director Restricted Stock Unit Award Agreement.*

 

 

 

10.2

 

Sixth Amendment to Loan Agreement dated March 29, 2019 among Geospace Technologies Corporation, as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed April 1, 2019).

 

 

 

14.1

 

General Code of Business Conduct and Supplemental Code of Ethics for CEO and Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Registrant’s Current Report on Form 8-K filed February 8, 2019).

 

 

 

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

Interactive data file.

 

* This exhibit is a management contract or a compensatory plan or arrangement.

 

26


 

SIGNATURES

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.

 

 

 

 

GEOSPACE TECHNOLOGIES CORPORATION

 

 

 

 

 

 

 

 

 

 

Date:

 

May 3, 2019

By:

 

/s/ Walter R. Wheeler

 

 

 

 

 

Walter R. Wheeler, President

 

 

 

 

 

and Chief Executive Officer

 

 

 

 

 

(duly authorized officer)

 

Date:

 

May 3, 2019

By:

 

/s/ Thomas T. McEntire

 

 

 

 

 

Thomas T. McEntire, Vice President,

 

 

 

 

 

Chief Financial Officer and Secretary

 

 

 

 

 

(principal financial officer)

 

27

Exhibit 10.1

 

 

DIRECTOR RESTRICTED STOCK unit A WARD AGREEMENT

Geospace Technologies Corporation (the Company ”), pursuant to the Geospace Technologies Corporation 2014 Long Term Incentive Plan (the “ Plan ”), hereby awards to you, ___________________, effective as of ______________ (the Grant Date ”), _______ Restricted Stock Units under the Plan on the following terms and conditions (individually, a “ Restricted Stock Unit ”, and collectively, the “ Restricted Stock Units ”).  In accepting the Restricted Stock Units granted in this Award Agreement, including, without limitation, the T erms and Conditions of Director Restricted Stock Unit Award Agreement (the Terms and Conditions ”) attached hereto (collectively, this “ Agreement ”), you accept and agree to be bound by all the terms and conditions of the Plan and this Agreement.  

The Restricted Stock Units are represented by bookkeeping entries on the ledger maintained by the Company under the Plan.  

The Restricted Stock Units granted hereby may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of in any manner.  Any such attempted sale, assignment, pledge, exchange, hypothecation, transfer, encumbrance or disposition in violation of this Agreement shall be void and the Company shall not be bound thereby.  Further, any shares of the Stock issued under this Agreement may not be sold or otherwise disposed of in any manner that would constitute a violation of any applicable securities laws.  The recipient of any shares of the Stock issued under this Agreement agrees that the Company may (a) refuse to cause the transfer of any such shares of the Stock to be registered on the applicable stock transfer records of the Company if such proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of any applicable securities law and (b) give related instructions to the transfer agent, if any, to stop registration of the transfer of such shares of the Stock.  The shares of Stock that may be issued under the Plan are registered with the Securities and Exchange Commission under a Registration Statement on Form S-8.  A Prospectus describing the Plan and the shares of Stock is available from the Company.

The Restricted Stock Units that are granted hereby shall be subject to the prohibitions and restrictions set forth herein with respect to the sale or other disposition of the Restricted Stock Units granted hereunder and the obligation to forfeit and surrender such Restricted Stock Units to the Company (the “ Forfeiture Restrictions ”).  The Forfeiture Restrictions shall lapse as to the Restricted Stock Units in accordance with the following schedule provided that your service on the Board as a Director has not terminated prior to the applicable lapse date:

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(1)

on the first anniversary of the Grant Date, the Forfeiture Restrictions shall lapse as to one-quarter of the Restricted Stock Units subject to this Agreement; and

(2)

on each succeeding anniversary of the Grant Date, the Forfeiture Restrictions shall lapse as to an additional one-quarter of the Restricted Stock Units subject to this Agreement, so that on the fourth anniversary of the Grant Date the Forfeiture Restrictions shall lapse as to all of the Restricted Stock Units subject to this Agreement.

If a Change of Control of the Company occurs or your service on the Board as a Director terminates before the fourth anniversary of the Grant Date, your rights to the Restricted Stock Units under this Agreement will be determined as provided in the attached Terms and Conditions.

You have no vested interest in the Restricted Stock Units credited to your bookkeeping ledger account under the Plan except as set forth in this Agreement.

Upon the lapse of the Forfeiture Restrictions applicable to a Restricted Stock Unit, the Company shall issue to you one share of the Stock in exchange for such Restricted Stock Unit and thereafter you shall have no further rights with respect to such Restricted Stock Unit.  The Company shall cause to be delivered to the holder of this Agreement, in electronic or certificated form, any shares of the Stock that are to be issued under the terms of this Agreement in exchange for the Restricted Stock Units, and such shares of the Stock shall be transferable by the recipient (except to the extent that any proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of applicable securities law).

Capitalized terms that are not defined herein shall have the meaning ascribed to such terms in the Plan.

In accepting the award of Restricted Stock Units set forth in this Agreement (the “ Award ”) you accept and agree to be bound by all the terms and conditions of the Plan and this Agreement, including the Terms and Conditions.

GEOSPACE TECHNOLOGIES CORPORATION

By:
Its:

 

 

ACCEPTED this ___ day of _______________

 

_________________________________________
Director Name:  __________________________

 

 

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GEOSPACE TECHNOLOGIES CORPORATION

TERMS AND CONDITIONS OF
DIRECTOR RESTRICTED STOCK unit A WARD AGREEMENT

These Terms and Conditions are applicable to the R estricted S tock Unit award granted pursuant to the Geospace Technologies Corporation 2014 Long Term Incentive Plan (the Plan ”) and are incorporated as part of the Director Restricted Stock Unit Award Agreement setting forth the terms of such R estricted S tock Unit award.

1.

TERMINATION OF SERVICE . The following provisions will apply in the event your service on the Board as a Director terminates before the fourth anniversary of the Grant Date (the Fourth Anniversary Date ”) under the Agreement:

 

1.1

Termination Generally . If your service on the Board as a Director terminates on or before the Fourth Anniversary Date for any reason other than the reasons described in Sections 1.2 and 1.3 below, the Forfeiture Restrictions then applicable to the Restricted Stock Units shall not lapse and all of the Restricted Stock Units then subject to the Forfeiture Restrictions shall be forfeited to the Company on the date your service on the Board as a Director terminates.

 

1.2

Disability . Notwithstanding any other provision of the Agreement or these Terms and Conditions to the contrary, if you become permanently disabled before the Fourth Anniversary Date and before your service on the Board as a Director terminates, all remaining Forfeiture Restrictions then applicable to the Restricted Stock Units shall immediately lapse on the date of your becoming permanently disabled.    For purposes of this Section 1.2 , you will be “permanently disabled” if you are unable to perform any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.

 

1.3

Death . Notwithstanding any other provision of the Agreement or these Terms and Conditions to the contrary, if you die before the Fourth Anniversary Date and before your service on the Board as a Director terminates for some other reason, all remaining Forfeiture Restrictions applicable to the Restricted Stock Units shall immediately lapse on the date of death.

2.

CHANGE OF CONTROL . Notwithstanding any other provision of the Agreement or these Terms and Conditions to the contrary, if a Change of Control occurs before the Fourth Anniversary Date and before your service on the Board as a Director terminates, then all remaining Forfeiture Restrictions applicable to the Restricted Stock Units shall immediately lapse immediately prior to the effective time of the Change of Control.

3.

NON-TRANSFERABILITY . The Agreement is not transferable by you otherwise than by will or by the laws of descent and distribution.

- 3 -


4.

NO FRACTIONAL SHARES .  All provisions of this Agreement concern whole shares of the Stock.  If the application of any provision hereunder would yield a fractional share, such fractional share shall be rounded down to the next whole share if it is less than 0.5 and rounded up to the next whole share if it is 0.5 or more.

5.

CAPITAL ADJUSTMENTS AND REORGANIZATIONS . The existence of the Restricted Stock Units shall not affect in any way the right or power of the Company or any company the stock of which is awarded pursuant to the Agreement to make or authorize any adjustment, recapitalization, reorganization or other change in its capital structure or its business, engage in any merger or consolidation, issue any debt or equity securities, dissolve or liquidate, or sell, lease, exchange or otherwise dispose of all or any part of its assets or business, or engage in any other corporate act or proceeding.

6.

NO RIGHTS OF SHAREHOLDER .  You shall not have the voting rights or any of the other rights, powers or privileges of a holder of the Company’s Stock with respect to the Restricted Stock Units that are awarded hereby.  Only after a share of the Stock is issued in exchange for a Restricted Stock Unit will you have all of the rights of a shareholder with respect to such share of Stock issued in exchange for a Restricted Stock Unit.

7.

SECURITIES ACT LEGEND . You consent to the placing on any certificate or electronic book entry for any s hares of Stock issued under this Agreement of an appropriate legend restricting resale or other transfer of the s hares except in accordance with the Securities Act of 1933 and all applicable rules thereunder.

8.

LIMIT OF LIABILITY . Under no circumstances will the Company or any Affiliate be liable for any indirect, incidental, consequential or special damages (including lost profits) of any form incurred by any person, whether or not foreseeable and regardless of the form of the act in which such a claim may be brought, with respect to the Plan or the award of Restricted Stock Units.

9.

DATA PRIVACY . The Company’s Human Resources Department in Houston, Texas (U.S.A.) administers and maintains the data regarding the Plan, the grantees and the R estricted S tock Unit awards granted to all employees, consultants and directors in the Company and its Affiliates worldwide.  The data administered and maintained by the Company includes information that may be considered personal data, including the name of the awardee, the award granted and the number of shares of stock subject to any award (“ Personal Data ”). From time to time the Company may transfer certain of your Personal Data to Affiliates as necessary for the purpose of implementation, administration and management of your participation in the Plan (the “ Purposes ”), and the Company and its Affiliates may each further transfer your Personal Data to any third parties assisting the Company in the implementation, administration and management of the Plan (collectively, “ Data Recipients ”). The countries to which your Personal Data may be transferred may have data protection standards that are different than those in your home country and that offer a level of data protection that is less than that in your home country.  In accepting the award of the Award, you hereby expressly acknowledge that you understand that from time to time the Company and its Affiliates may transfer your Personal Data to Data Recipients for the Purposes. You further acknowledge that

- 4 -


you understand that the countries to which your Personal Data may be transferred may have data protection standards that are different than those in your home country and that offer a level of data protection that is less than that in your home country. Further, in accepting the award of the Award, you hereby expressly affirm that you do not object, and you hereby expressly consent, to the transfer of your Personal Data by the Company and its Affiliates to Data Recipients for the Purposes from time to time.

10.

GOVERNING LAW AND VENUE . The Plan, the Agreement including these Terms and Conditions and the Award shall be governed by the laws of the State of Texas, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation to the substantive law of another jurisdiction. In accepting the award of the Award you agree to submit solely and exclusively to the jurisdiction and venue of the federal or state courts of Harris County, Houston, Texas, to resolve any and all issues that may arise out of or relate to the Plan, the Agreement and the grant of the Award.

11.

AMENDMENT AND WAIVER .  Except as otherwise provided herein or in the Plan or as necessary to implement the provisions of the Plan, the Agreement may be amended, modified or superseded only by written instrument executed by the Company and the then valid holder of the Agreement.  Only a written instrument executed and delivered by the party waiving compliance hereof shall make any waiver of the terms or conditions.  Any waiver granted by the Company shall be effective only if executed and delivered by a duly authorized executive officer of the Company other than the Award recipient.  The failure of any party at any time or times to require performance of any provisions hereof shall in no manner effect the right to enforce the same.  No waiver by any party of any term or condition, or the breach of any term or condition contained in this Agreement, in one or more instances, shall be construed as a continuing waiver of any such condition or breach, a waiver of any other condition, or the breach of any other term or condition.

12.

SECTION 409A .  It is intended that the provisions of the Agreement be exempt from the requirements of Section 409A of the Code, and the accompanying U.S. Treasury Regulations and pronouncements thereunder, under the “short-term deferral” exception described in U.S. Treasury Regulation § 1.409A-1(b)(4) and that the Agreement be interpreted and operated in a manner consistent with such intent.

13.

MISCELLANEOUS . The Agreement is awarded pursuant to and is subject to all of the provisions of the Plan, including amendments to the Plan, if any. In the event of a conflict between these Terms and Conditions and the Plan provisions, the Plan provisions will control. The terms “you” and “your” refer to the Participant named in the Agreement. Capitalized terms that are not defined herein shall have the meanings ascribed to such terms in the Plan or the Agreement.

 

- 5 -

 

Exhibit 31.1

CERTIFICATIONS

I, Walter R. Wheeler, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Geospace Technologies Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

May 3, 2019

 

 

 

 

 

/s/ Walter R. Wheeler

 

 

Name:

Walter R. Wheeler

 

Title:

President and Chief Executive Officer

 

 

Exhibit 31.2

CERTIFICATIONS

I, Thomas T. McEntire, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Geospace Technologies Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

May 3, 2019

 

 

 

 

 

/s/ Thomas T. McEntire

 

 

Name:

Thomas T. McEntire

 

Title:

Vice President, Chief Financial Officer & Secretary

 

Exhibit 32.1

Informational Addendum to Report on Form 10-Q

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Not Filed Pursuant to the Securities Exchange Act of 1934

The undersigned President and Chief Executive Officer of Geospace Technologies Corporation does hereby certify as follows:

Solely for the purpose of meeting the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and solely to the extent this certification may be applicable to this Report on Form 10-Q, the undersigned hereby certifies that this Report on Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in this Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Geospace Technologies Corporation.

 

/s/ Walter R. Wheeler

Name:

 

Walter R. Wheeler

Title:

 

President and Chief Executive Officer

May 3, 2019

 

Exhibit 32.2

Informational Addendum to Report on Form 10-Q

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Not Filed Pursuant to the Securities Exchange Act of 1934

The undersigned Vice President, Chief Financial Officer and Secretary of Geospace Technologies Corporation does hereby certify as follows:

Solely for the purpose of meeting the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and solely to the extent this certification may be applicable to this Report on Form 10-Q, the undersigned hereby certifies that this Report on Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in this Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Geospace Technologies Corporation.

 

/s/ Thomas T. McEntire

Name:

 

Thomas T. McEntire

Title:

 

Vice President, Chief Financial Officer & Secretary

May 3, 2019