Q3 2020 Geospace Technologies Corp Earnings Call

Good day and welcome to the Geospace Technologies' third quarter 2020 earnings Conference call.

Hosting the call today from Geospace, There's mr., Rick Wheeler, President and Chief Executive Officer.

He is joined by Robert Cortone companies, Chief Financial Officer, Mark take or C. O Geospace subsidiary quantum technology Sciences.

This call is being recorded and will be available on the Geospace Technologies' Investor Relations website following the call.

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And it's now my pleasure to turn the floor over to Rick Wheeler. Please go ahead.

Thank you Keith.

Good morning, and welcome to Geospace Technologies Conference call for the third quarter of our 2020 fiscal year I, Rick Wheeler, the company's President and Chief Executive Officer, and I'm joined by Robert Curtis The company's Chief Financial Officer. We also have witnessed Dr. Mark Tinker CEO of our quantum technology Sciences subsidiary Alper.

To give an overview of the third quarter and Robert will follow with some in depth commentary on our financial performance. I'll, then make a few last remarks before opening the line so that Robert Mark and I can answer questions.

Some of today's statements maybe considered forward looking as defined in the private Securities Litigation Reform Act at 1995, including comments about product markets revenue recognition planned operations and capital expenditures.

These statements are based on our president awareness, well actually will outcomes are affected by uncertainties and other factors, we can't control or predict both known and unknown risks can lead to undesirable results or performance differences from what we say you're invited day and such risks and uncertainties, including those discussed in our FCC forms 10-K in 10-Q filings.

For convenience as was mentioned we will link a recording of this call on the Investor Relations page of our Geo space Dot Com website. However, since the information discussed. This morning is time sensitive it may not be accurate at the time when listens to the replay.

Yesterday after the market close we released the financial results for our third quarter fiscal year 2020 ended June Thirtyth 2020.

As reported we were very pleased that the growing bars pandemic gripping built our country in the world at large had limited impact on our third quarter performance.

Even more gratifying our employees have been middle minimally affected by cobot 19, and to date, our heightened and evolving safety protocols and health acid, maintaining a safe working environment.

Well our operations have not entirely escape the vast negative impact of this pandemic. We weren't nonetheless pleased to report that total revenues of 22.7 million and 66.3 million for the respective three and nine month periods ended June Thirtyth 2020, we're very similar to last years, three and nine month totals.

Continued strong demand for our marine Ocean bottom nodal recording systems fuel, both our third quarter and nine month results. In fact increased demand for these systems acted to counter some of the weakness we experienced in demand or other products in our oil and gas segments as well is in our adjacent markets business.

Both of which were negatively impacted by the effects of cobot 19.

As it was also mentioned reported revenue did not include additional timely payments, we received from a customer toward its promissory note to secure the purchase of the GCL land recording system comprised of 30000 channels.

These paid in amounts totaling 3.8 million through the ended the third quarter are included on the balance sheet as part of the non current deferred revenue and are intended to be recognized as revenue at a later date when the collection to the node is determined to be likely.

For the three months ended June Thirtyth 2020 revenue from our combined oil and gas market products totaled 17.5 million and for the similarly ended nine month period revenue totaled 47.5 million.

These figures reflect respective increases of 21 present, an 8% over last year's similar periods and in both periods. The increases are attributed to the greater demand for our Ob ex Ocean bottom recording systems, which were partially offset by lower demand for some of our other oil and gas segment product lines.

Our traditional seismic products generated 1.2 million and 5.6 million respectively. In the three a nine month period ended June Thirtyth 2020, both periods reflect notable declines from last year, which we attribute to lower demand for seismic sensors as a result, a fewer seismic exploration in imaging projects.

Being performed by oil and gas companies.

Moreover, due to low oil prices oversupply is of crude and the large drop in global demand for oil and gas amidst the go but 19 pandemic. We expect revenue from these products to remain challenged for the foreseeable future.

And the three a nine month periods ended June Thirtyth 2020 revenue produced from our wireless seismic products totaled 16.1 million and 41.1 million respectively.

He is reflected increases over last year's equivalent periods and are a direct result of expanded rentals of our OPX Marino recording systems, even though partially offset by lower sales of our wireless Lan products. As previously mentioned, we have not yet recorded revenue from the did <unk> delivery of the after mentioned 30000 channel GCL.

And system, which has a sales value of 12.5 million.

The growth in demand for our OPX system derives from a renewed focus by many oil and gas companies to better leverage existing offshore resources in the recovery of discovered and nearby fields Ocean bottom seismic surveys, which often utilize aerobics systems increased the likelihood of success in these endeavors by producing a superior geological.

Image of over other survey methods note that the frequency an extent of ocean bottom surveys can fluctuate with whether its seasonal changes and are subject to being negatively impacted by the declines in global demand for oil and gas brought on by Cobiz 19.

Our reservoir seismic products generated revenue of 271008 hundred 26000 into three and nine month periods ended June Thirtyth 2020.

Figures reflect reductions compared to last year similar periods as a consequence of lower sales of borehole seismic tools and lesser demand for outperform services.

We maintain the contracts for the manufacture and installation of the permanent reservoir monitoring or PRM systems, Oh, the largest opportunity for meaningful revenue from this product category.

And while it Kogas 19 pandemic did disrupt some of our discussions with oil and gas companies interested in such systems. Most have remained ongoing or have since resuming.

And based on these discussions we currently believe a tender for a PRM system is likely to be released sometime in calendar year 2020.

We further believe that our broad portfolio of PRM accomplishments and the diversity would be our of our systems, which offer both electrical and opto size fiber optic sensing technologies maximize our ability to be awarded a release PRM tinder, if such a tender occurs and a contracted <unk> 'cause subsequently awarded.

He is phase we would not expect to recognize revenue related to the contract until later in the 2021 fiscal year or beyond.

Our adjacent market segment produced revenue of 5.1 million and 18.3 million in the three and nine month periods ended June Thirtyth 2020.

These respective reductions of 38% and 17% compared to last years same three and nine month periods are the result in lower demand for industrial sensors in contract manufacturing services as well as lower sales of our graphic imaging product products.

In addition, lower demand for our water meter connectors and cables further contributed to this reduction in the recent third quarter.

In all cases, we believe the lower demand for these products is primarily affiliated with the economic impact to the covert 19 pandemic is having on our customers.

Our emerging market segment, which is essentially our quantum subsidiary generated revenue of 88550 7000 in their respective three and nine month periods ended June Thirtyth 2020.

Included in these figures is early revenue recognized from site preparation and engineering activities related to the contract awarded one by the U.S. border patrol.

Revenue in the nine month period also includes the sale of border in parameters or security products to a commercial customer.

As you May recall quantum was awarded a 10 million dollar contract in April 2020 to provided technology solution to the department of Homeland security for the U.S. customs and border protection U.S. border patrol and current execution of the contract is progressing on schedule.

However, the company does not expect significant revenue from the contract until the first quarter fiscal year 2021, which ends December 30, Onest 2020.

Well I'm remains a keystone element of our strategy to leverage our longstanding competencies in the design and manufacture a seismic acoustic technology in combination with advanced analytics to create products did expand revenue from diversified markets outside of our oil and gas segment.

At this point I'll now turn the call over to Robert So he can give you more financial detail.

Thanks, Rick and good morning, everyone I'd like to remind everyone that we will not provide any specific revenue or earnings gains during our call. This morning.

Before I discuss our financial results for the third quarter ended June Thirtyth 22020, I want to briefly express explainer correction of the of the accounting error that impacted our first and second quarter financial statements.

The error relates to the timing of the 8 million dollar receivable write off as we reported in our second quarter.

We adopted a news new leasing standard call assay topic 842 in fiscal year 2020.

And our for first quarter, we properly applied the new leasing standard bright transitioning to a cash basis revenue recognition for an international customer who was having difficulty paying its debt and we determine that collection of their future lease payments was not problem.

At that time, we also determined that 8 million dollar receivables owed to the company by the customer was fully collectible based upon a promise security interest in a significant answer to the customer.

During our second quarter as negotiations with the customer continued.

The promise security interest became diluted with other creditor claims any became unclear whether a deal would ever be concluded with the customer.

As a result, we decided to write off the receivables by recording 8 million dollar bad debt expense in our second quarter.

After filing or second quarter financial statements with the S. This FCC. We concluded our previously issued consolidated financial statements for the first quarter ended December 2019, and the second quarter ended March 30, Onest 2020 contain two accounting years with respect to the application.

The new leasing standard.

First the AMC topic 842 required the immediate write off in their first quarter of the customers accounts receivable when we determine collection of future rental billings was not a problem.

When management determines lease revenue Collectability is not problem the standard limits least revenue to the cash paid by the customer.

This limit requires a lot right also all existing receivables, even if the receivable is being fully collectible by management.

Second AMC topic 842 required the receivable write off to be recorded as a reduction of lease revenue.

Rather than as a bad debt expense.

We have revised or an audit unaudited consolidated balance sheet at December 30, Onest 2019 are UN audited statements of operations for the three months ended December 30, Onest 2018, and our UN audited statements of operations for the three and six months ended March 30, Onest 2020.

Correct identified errors.

The correction has no impact on our operating loss or net income for the six months ended March 31st 2020, nor did it have a net impact on cash flow from operating activities for the three months ended December 30, Onest 2019 and for the six months ended March 30, Onest 2020.

In yesterday's press release, our third quarter ended in June Thirtyth 2020, we reported revenue of 22.7 million compared to last year's revenue a 22 point.

The net loss for the car order was 2.3 million or 17 cents per diluted share compared to last years net loss of 3.7 million or 27 cents per diluted share.

For the nine months ended June Thirtyth 2020, we reported revenue of 66.3 million compared to revenue was 66.9 million last year, our net loss for the nine month period was 15.4 million.

Or $1.14 per diluted share compared to the last years net loss of 8.8 million or 16 66 cents per diluted share.

A break down over oil and gas product revenue.

Our traditional product revenue for the third quarter was 1.2 million a decrease of 46% compared to revenue of 2.2 million last year.

Traditional product revenue for the nine months of 2020.

Was 5.6 million a decrease of 38% compared to revenue of 8.9 million last year.

Both periods decrease is due to a lower demand for traditional sensor products.

We believe revenue for these products will be challenge in the foreseeable future due to low oil prices oversupply of crude oil in the drop in demand for oil and gas. The result of the covert 19 pandemic.

Our wireless product revenue for the quarter was 16.1 million an increase of 36% compared to revenue of 11.9 million last year.

Wireless product revenue for the nine months was 41.1 billion, an increase of 25% compared to revenue of 32.8 million for the same period of 2019. The increase in revenue for both periods is due to higher rental demand and utilization of our OPX Marine nodal system.

As a reminder, we have not recognized revenue in fiscal year 2020.

12, and a half million GCL product so delivered in the second quarter secured by $10 million promissory note.

As of June Thirtyth 2020, we have received 3.8 million in cash by way of the deposit in monthly no payments from our customer.

Im pleased to note to date the customers current all payment obligations. The cash payments received from the cost of revenue associated with the sale have been recorded on our balance sheet as part of long term deferred revenue and long term deferred cost of revenue we plan to recognize the revenue and cost revenue on this transaction when we did turn.

Women collection of the promissory note as probable.

Our resident <unk> reservoir product revenue for the seven second or third quarter was 271000, a decrease of 39% compared to revenue of 447000 last year.

Resident reservoir product revenue for nine months was 826000, it decreased to 66% compared to revenue 2.4 million last year.

The decrease for the.

For the three and nine month periods reflect reduced sales and service of our borehole borehole tools, we do not expect meaningful revenue from these products unless and until we are engaged in a contract for the delivery of a permanent reservoir monitoring system.

We believe a tender for PRM system could be released in calendar year 2020 or soon after.

Should we be awarded a tender we do not expect to recognize any PRM related revenue until later in fiscal year 2021 or beyond.

Moving onto our adjacent markets products in.

Our industrial product revenue for the third quarter fiscal year 2020 was 3.4 million a decrease at 37% over the third quarter of 2019.

Industrial products nine month revenue for fiscal year, 2020 is 11.2 million a decrease over the same period in 2019 of 14%.

The decrease in revenue in both periods is two to lower demand for industrial sensors in contract manufacturing services.

The decrease a three month period is due to lower demand for water meter cable and connector product.

We believe the lower demand for these primary products is primarily due to the economic impact of the covert 19 pandemic owner customers.

Imaging product revenue for the third quarter was 1.7 million increase of 41% compared to last year's revenue at 2.9.

This decrease is due to reduced demand for graphic imaging film products. The nine month revenue for imaging products for fiscal year 2020 is 7.1 million a 22.

Per cent decrease when compared to the same period in 2019.

In both periods, we believe the lower demand for these products is primarily due to the economic impact of the Kobin 19 pandemic all our customers.

Finally revenue from our emerging or emerging market segment totaled 88000 for the three months and 557000 for the nine month period, ending June Thirtyth 2020.

Prior year revenue was 11000 for the third quarter and 145000 for the nine month period, ending June Thirtyth 2019.

While we do not anticipate significant revenue contributions from quantum in fiscal year 2020, we do expect to record most of the revenue from our 10 million dollar contract with the U.S. border U.S. customs and border protection and our first quarter fiscal year 2021.

Our third quarter fiscal year 2020, operating expenses decreased by 297000 or 3% compared to the third quarter of 2019.

The nine month operating expenses increased by 2.9 million or 10% compared to the same period of fiscal year 2019.

The increase in operating expenses for the nine month period is mostly due to a 1.6 million and changes to the estimated fair value of contingent considered consideration and higher engineering project costs.

In July of 2020, we took actions to reduce operating costs as a result of decreased demand for our products.

The cost saving measures include workforce reductions of approximately a 100 employees from our company's workforce and a reduction in cash compensation of named executives and company directors.

We will incur 800000 or termination costs in our first fourth quarter of fiscal year 2020.

We expect we will realize annual savings of 2 million or more as a result of these cost cutting measures.

Our nine month cash investment into our rental fleet and property plant and equipment were 5.4 million in 2.6 million respectively.

We do not expect any significant additional cash investments into our rental fleet or into it or into our property plant equipment for the remaining of fiscal year 2020.

Our balance sheet at the ended the third quarter reflected 26.7 million of cash we have no long term debt outstanding in the available borrowings under our credit agreement is 17.9 million.

Million.

In addition, we own numerous real estate holdings in Houston around the world that our own free and clear without any leverage.

That concludes my discussion I'll turn the call back to it.

Alright, Thank you Robert I.

Amidst all the ramifications of cobot 19 demand for certain products in our oil and gas in adjacent market segment will undoubtedly continue to be negatively impacted.

Arch curtailments of travel and social activities combined with lower factory output will continue to hold global energy demands well below normal levels.

The us results on supply balancing acts in pricing volatility will pose ongoing challenges to oil and gas companies and energy service providers, who are our major customers. However, we believe our available products in this market standout as the preferred instruments of choice within a recovering energy market.

In addition, we believe our executed diversification strategy is already demonstrating successful and mitigation of the volatility in our oil and gas market segment as evidenced by our contract with the U.S. border patrol.

Furthermore, we believe our recent cost reduction efforts and our longstanding financial discipline keeps us optuminsight position to thrive in the post cobot 19 World ahead.

In closing we hardly thank our hard working employees, who provide the lifeblood support for our operations and our valued customers and we very much appreciate our loyal shareholders for trusting our vision and values to confidently emerge from the challenge at these uncertain times.

That concludes our prepared remarks, and I'll now turn the call back over to Keith for questions.

And at this time, if you do have a question. Please press star one on your Touchtone phone.

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[noise] once again it is stardom one on your Touchtone phone, we'll take our first question moments.

Really.

It will take a first question from Bill does that limit Titan capital. Please go ahead.

Yeah. Thanks, I have a group of questions are relative to relative to the quantum business since mark is on the line.

First of all Mark apparently there is a binational industrial research and development proposal.

Requests.

Tied to border border protection.

And I believe the executive summary is due on the 13 'cause. This month and then final proposals are due next month, which you talk a little bit about that and the degree to which Quants end user is not participating.

Sure Bill or working all your with that.

If I understand the.

<unk>.

The proposal requests to what you are referring you were talking about the same one it's a joint effort comes out of Congress its very R&D base.

Which means you submit proposals to advanced something in an R&D profile. So it's kind of a service based effort which is.

Where quantum earned its chops many years ago doing R&D its not in that direction that we're going now which is significantly pass the R&D stage and selling product and that those same border security markets.

It can have a tunnel focus, but I think it's important for you and everyone I'm on the call to understand.

At the complete tunnel challenge, it's not simply one of technological detection.

Has other asked extra which we do not participate which includes.

Investigation includes remediation, where you feel the tunnels full of cement.

How you do that there's a lot of other technologies associated with.

As members on the Hill will say solving the tunnel challenge. So we're a component of that so when you think about 30 40 million dollar Bill.

It's not all aligned to something for which we would be applicable.

Those are the two key points.

There there is routine.

Collaboration.

Between our U.S. and for example, Israel on some of these challenges and we track them very very closely we are known.

And we work with members of Congress as appropriate so.

It's a great question I'm pleased you're keeping you apprised of it.

And rest assured so are we.

Great. Thank you and that's actually a really nice segue Mark into my next question, which was I guess, just pure coincidence, but was listening to a report on the BBC or where they were in Israel on the northern border and they were referencing.

Hezbollah tunnels and built between Lebanon in Israel, and I believe that the person that was being interviewed was referencing the tunnel problem was what's considered a strategic issue for the Israeli military.

And Israeli border protection would you please talk through.

Your understanding of that northern border and <unk> <unk> and importantly, how quantum.

May or may not be able to participate in that and you are able to participate how quickly you could see oh commercial activity develop air.

That's a big question.

We we track the Israeli environment closely.

We've been in country before we've deployed our technology in the past they are well aware of what we are capable of.

I have to be mindful as to how much I enable to disclose on this call. So please understand that.

The competitive environment over there.

Is indeed truly competitive they have a lot of talent within their country as well.

We do know that they've had like the rest of the world.

Economic impact with their military due to cold it.

We understand the northern environment, and what differs between it and the southern environment on the tunnel detection standpoint.

What I can say is that we are very intimately tracking.

Where they are on that.

They are northern border strategy.

Most of our abilities.

I'm not sure what that will look like and the next six to 12 months.

The big thing to remember about Israel versus our country is that.

Our country, all sorts of bad things come through tunnels tunnel nothing good comes through a tunnel.

But in their country. They have an additional challenge, which is people come through animals with the intent to do physical harm to their citizens.

And so they do track that and take those idled threats very seriously, but they have other ways of also mitigating them.

Two other means that they try to stay in front of the.

Yeah, I'm sure you're aware in last year, how many tunnels they found due to do to Hezbollah and.

There are pictures on the Internet that everyone can go look at and those had worked very mature tunnels and then developed over a period of years.

So I.

I hope I'm kind of giving you a little bit more insight.

Sorry, I can't get too much more specific than that.

But just rest assured that we're doing everything we can remain aware of that.

No that's helpful Mark and the tunnels that I have seen do appear to be quite quite sophisticated don't look like they were a put together by a bunch of 10 year old boys.

In the afternoon. So the question given that talent that you referenced that's already in.

In Israel.

Do you do you see where there is a real probability for quantum to be able to participate and have meaningful business or.

This is that going to be a bigger challenge because of the expertise that they have a in country.

[noise], there's always a possibility.

But at this time I don't want to really deep dive deeper into it and answering that question.

I, just don't feel comfortable doing that right now.

Okay. Thank you and then I'm going ask a couple additional questions here first of all.

Your correctly in the opening remarks that you expect most of the $10 million in a U.S. customs.

In border revenue.

With that first contract to happen in the December quarter.

Yes so.

The significant amount of revenue will come in the first quarter up next fiscal year. So the October to December quarter dosed.

Yeah.

So that's going to happen a between December and April when the next renewal is potentially available or the remainder of untracked or if you're doing most of the business in <unk> in that three month period.

<unk>.

Half of it.

Understood payment doesn't correlate with effort.

I think that's a big point.

It's a product sale.

And so there's still there's still equal at the level loaded contract from an effort standpoint.

Our effort remain constant over the 12 month.

But the payment in their revenue that recognize it doesn't correlate effort because it is a product sale.

Right. Okay. Thank you and then.

What additional opportunities do you have with contractors you referenced a contractor last quarter.

Could you talk to that market or that opportunity and a bit further in terms of.

Uh huh.

That singular contractor and a and that piece of business that you were working with him on but also with other contractors and how you're viewing.

That might take a few hours [laughter], we're always on the hunt and we're maintaining our relationship with other contractors. There's a couple of has the market of course, there will be going directly to government customers through large system integrators or do we go direct ourselves as we're doing but the border patrol.

Large system integrators.

You have need of arc, rather unique talents and products on occasion in our relationships with them remain on point leaf since we've been in the business for a couple of decades now we worked very hard to to be top of mind with them for a certain types of applications.

It's a bit more of a wildcard with cobot right now on where funds are landing what's going to come out of the budget, we're in an election year.

So everybody's kind of sitting back a little bit holding their breath staying on staying true to the contracts that we have.

But my business development standpoint, seeing what's going to come out of Congress for fiscal year, 21, and when that budget might close.

We can expect probably a continuing resolution how the election this past don't know yet.

So.

Its a.

At the end of a multi variant issue right now that we're tracking but to your part of your question.

A key strategy for us is maintaining those relationships large system integrators to provide the securing surveillance component of any particular large contract they may be performing to or pursuing.

Great. Thank you and and then I'm going to shift to PRM that real quickly here are the tender that you have had referenced it may be release later this calendar year, given what you know.

That that piece of business.

How would you anticipate that revenue would be recognized over the life of the Oh the contract or upfront.

Oh, well Bill I think that that would end up.

Being a little bit further down the road so that that revenue might start be recognized a being recognized in fiscal year 2021, but the installations are.

Or not going to be until Oh after our fiscal year 2021 at least under the current to discussions as there are now.

So with the with the way the revenue revenue recognition rules run. These days so they they change [laughter] on daily basis, but I think they would likely a there wouldn't be some obviously that occur as that contract would develop.

But I think a good portion and perhaps the majority would come later.

Yes to to be specific bill, we would expect to recognize that road revenue overtime using some metric to.

Give us give us a view to how far along we are in the the production of that contract.

Now that doesn't particularly have anything to do with how cash payments may come in because there are milestone arrangements and that sort of thing as those contracts are negotiated that you know with respect to how cash flows are executed over the contract.

But the revenue recognition follows different rules.

It'll be very specifically based upon the terms of the contract.

Right. Okay. So so in the past when you had smaller PRM contracts you have recognized revenue.

Kind of in one or one shot deal at time of delivery, but with a larger contract that was done over time. So it it's would it be appropriate to infer from your comments that this PRM discussion if it comes true.

<unk> fruition would be quite large in size.

You know frankly, bill from a from a accounting guidance point of view the ways. We recognize revenue in the past related to PRM contracts. Those rules have considerably change so I'm not quite sure the size of the contract really well have anything to do too.

How we decide to recognize revenue or not.

And you certainly can't draw reference from the past to what we'll do in the future.

All right Yeah, well, let me just asked the question directly and would you Oh, what you know to date is this a oh, there's this contract appear to be larger in nature.

Yes, it does come to fruition or or smaller in nature.

The scope of work as being discussed Uh huh.

Theres more than one contracted there.

And what kind of either we're talking to but I think the one of nearest vicinity here is a large the discussions have been pointing to a large deployment.

Great. Thank you both the and actually thank you all three at the time appreciate.

Thanks, Bill Thank you Bill.

Our next questions from Strat body with more than Cabot. Please go ahead.

Good morning recovery you good news here right.

Thank you very much my question is directly related to.

Mark So so far there was the gentleman by the name of Palmer Lucky.

Credit Oculus sold to Facebook dumped fired and that was created a company called Andrew.

And he this company was there was awarded a five year contract to deploy.

Portable surveillance towers.

I believe 60 were part of a pilot program a you're gonna have to go and now it exceeds 140 towers. They also are part of.

The program of record anyways.

Some of the discussion appears to imply that this is a.

200, or 300 million dollar contract.

So money is being dispersed and I believe the contract was awarded around early July. So my question Mark to you is.

What differentiates what you guys are doing well.

Versus what Andrew is doing and and I do understand that.

The.

Power projects are going to be used in open desert as opposed to what you are doing but I'm. Just curious about if there's an overlap or are they different markets or your thoughts on that.

Sure.

There's a number of power solutions on the border today.

Palmer took a specific approach to get there.

Were two other procurement that hit the street that allowed.

Two prime again, what I call Lifesize large system integrators.

They each one notes to other procurement.

Well I'm with called integrated picks towers, and the other with a remote surveillance.

In fact all of those.

Employ a line of sight technologies.

So they have to see.

The area of regard in order to understand enough situational awareness within that area, regardless so.

So its electro optics it could be visual it could be radar anything like that.

He did feel space quantum value to market is that we are a non line of sight technology.

We are a seismic acoustic technology, we're not just limit the seismic state.

Our sensors are capable of detecting signal that propagates through the Earth <unk> air or the water.

And so non line of sight technologies are an essential element or they are they complete security posture.

Very similar to what you're doing as we speak and everybody on this call is doing is you're probably looking at your computer you're probably beating them all at the same condor listening to me.

You are employing that Israel the line of sight and the non line of sight and believe it or not art years.

Our what people are alive far more than our ice do we're just used to it.

And we don't really take acknowledge because it background processing that we're looking in all directions. All the time without years, you don't step off of the street corner.

Hi, looking first years have already told you where to look at and what you're about to see.

That isn't value.

That the seismic acoustics green.

Any security.

Challenge.

So when you think of that and you say well, where our them on line of sight challenges, while it square on the towers can't see.

So there's terrain in the southern border there's force in the northern border.

There's submarine vehicles that approach our borders and Theres aerial targets that radar can't see because they're either small there too close to the ground, but most of these things if not all of these things emit a significant amount.

The energy.

And acoustic energy goes home into the are at their water and we sit there and we see.

And then we do everything within our power and our analytics to automatically.

Determine.

What that source of energy is.

Where that source of energy is the direction up that source of energy.

And that can feed into a larger system.

Q polymer lucky's towers.

We can tell about stuff coming before he knows it in his screen.

And vice versa, now what our weaknesses.

As our we can't tell you the license plate on a car.

It's hard for us to say you know, there's three people and one of them holding the baby.

We don't know that it's hard for him to do that too by the way.

Gross.

So that's kind of a one or one on the the distinction between the value that we provide and and the value the very necessary value that those towers.

That's helpful.

It is so when I think about the addressable market.

And the fact that he received an award approaching what appears to be a couple hundred million dollars.

Are we in that same category.

No.

Yeah.

We're solving the different challenge.

And I'm, a security standpoint, and again, it's it's a non line of sight challenge.

So no we're not that same category, we're not at the same but your line.

Completely it's both a security surveillance counter for the challenge for the border.

But ours is one that's more or other different specificity.

So I don't think that's my question correctly so.

Last time when you chided you stated that the system that you were deploying would represent something like one or 2% of the addressable market.

Which which implies a fairly significant markets.

And so when I think about.

What problem is doing.

And and and the potential size addressable market then what you guys are doing.

Were from the outside trying to figure out.

What that potential addressable market is.

And so so relative to what Palmer's doing.

Are you guys.

In the same ballpark in terms of addressable market or or half of the market or more than the market.

I'm not sure you can you can answer the question.

There were the addressable market is I would say.

Roughly the same.

Whether or not it will all be addressed is a function of both.

And our ability to perform.

Now our ability to perform right now has been.

Great well established we're pretty excited about that.

But I imagine the border patrol standing back and wondering if they have a one hit wonder with us or if we if they really do habits.

And so we're excited.

We're excited to be able to.

Go forward on our efforts and and get after more of what the requirement.

And that's what we expected due in the next coming in the upcoming years, but again, we know budgets change we know pandemics occur and there's a number of things that can get in a way of that that have nothing to do with us or outperformance, but there is there's a requirement.

And.

We're right now again excited to get in the ground and do our job.

So the value of.

The value of this deployment.

And your first fiscal quarter.

It's important for people to understand what you guys can do is that fair, yes. It is important.

It's very important we've had some of that some of the challenges we are addressing have.

Not then able to be capital.

Two I think a sufficient level of performance until we've been given the opportunity to continue to demonstrate just how effective we are similar to what Palmer's doing.

He came in and instead in this particular market I think I can do it better.

And he's getting in there and stern things up which is good for him and.

I don't want to stay with thing but.

It might be an analog.

What we are doing as well.

Terrific. Thank you very much thank you guys.

Our next question from Roger here with our wealth management. Please go ahead.

Good morning.

Hi, I'm glad you're all well Oh I just I noticed on July nine said Halliburton and Tech no.

See launched a joint reservoir monitoring suite.

Given the size of those companies I was just wondering you have any initial thoughts on the collaboration or on how geospace. What geospace is competitive advantage to that collaboration might be yeah. Roger I believe that the reservoir monitoring its going on there is basically in well sort of monitoring.

And that's a quite a bit different than the overall spatial monitoring they did happens with the the seismic type equipment that is deployed in our PRM systems. So there are they're very limited opportunities in terms of what you can see from a and well monitoring.

There are useful, but they're not nearly the scope or magnitude.

From an imaging point of view that did you can get with our types of systems.

Okay, great I'm glad to hear that did here. Thanks.

[noise] [noise] once again, a star and one for questions.

We'll go next to Glenn Cookware with two quick capital.

Hey, guys already this morning good good thank you.

Oh, great job once again on prudent conservative cash management looks like cash and equivalents are trending up 10.1 million end of last year.

18.9 million first quarter. This year 26.7 million ended this quarter so great job. Thanks I appreciate.

Appreciate the the thumbnail sketch you gave in the prepared comments about where that he wants to Twoq increase came from.

But could you give us a little more color on it and do you see this trend continuing in the future quarters or is this Q to Q increase due more to like lumpier onetime events and transactions.

Well from the oil and gas point of view, a you know what has been driving our revenues a as as we mentioned is that you.

The demand for renting our Ob ex equipment.

You know that has been just an ongoing trend and it as I've mentioned in our comments, it's a highly related to the fact that the oil and gas companies are trying to conserve oh costs on their own side.

By examining a you know the fields in there in nearby areas to they're already existing infrastructure now keep in mind that.

No.

These projects as you can well.

See here have gone on despite.

The fact, the Koby 19 has just had a devastating effect over every economy over hone to htwo.

Most of these types of projects are ones that have inertia once there once their plan once they're underway a capital has been allocated and these goals.

Our held up.

Then they proceed.

I can only expect that a you know as this pandemic continues and more specifically as the demand for oil and gas remains depressed that's likely going to have an impact simply just from a capital point of view. So there is there is some probabilities.

You know that there will be a reduction in demand.

For these ocean bottom surveys, even though that is the preferential method of increasing production and managing existing production by the oil companies.

Great.

Oh after today thanks.

Okay. Thank you.

And we also have a follow up build xylem. Please go ahead.

Thank you and Mark I mean, you know that come back to you again.

Hi me or do you do you sense <unk> you mentioned that you are looking forward to getting into grounded and are proving that you're not a one hit wonder a are you sensing that the location or well where you are going in the ground here in the next few months.

Yes, and area or areas that you have a high probability of quantum success.

In a or what's your sense to.

The importance of these areas that are being chosen for first line.

Bill I always like answering your question, even though I probably should.

He.

The border patrol is very good at making sure they get.

Best value.

Out of their money.

<unk>.

Like all government customers.

Good government customers want.

The company that they invest and to succeed on their business.

So I have leveled.

Large degree of confidence and our and our collective team and the mission that we are collectively serving.

That.

We were doing our fair part and adding significant value to their mission.

Well, we look for let's say, how how long.

When would you expect.

That you would have.

The system deployed and operational I guess the question is when would you expect it the operational and therefore, a you know I'm just trying to figure out how quickly we should be watching the newspapers or [laughter] I really wish I could answer that.

For you I cannot I can't go into those details.

Alright. Thank you that's alright. So my next question I do not want this to come across this as wining <unk>.

I just get genuinely would likely I understand why is it oculist say has potentially a couple of hundred billion dollar contract and and quantum has a 10 million dollar contract I'm feeling a little bit like there it headed stepsister.

That is a good question.

That's a really good question.

They are an integrator deploying known technology.

Everybody's familiar with the camera.

There's nothing new to what they're doing.

Hi, I'm unaware how much of their press releases are somewhat promotional compared to the other integrators that are also doing the exact same thing they are.

And I do not know the procurement strategy of the government for all towers everywhere I just don't know.

Those systems leverage a tremendous amount of expenses components.

And if you want to outfit every tower with all components. They can get expenses in a hurry.

And because they are line of sight based.

You might have a lot of towers everywhere.

Again, I'm just speculating now I don't know again, the procurement strategy or where they are getting coverage.

A press releases are interesting thing when you are promoting something that everybody all it already knows about.

Well were not able to do that.

Right Okay.

Thanks, and then I do want to jump back to a couple of oil and gas set related questions.

The customer with the Ob AXT a note payable.

Are they paying as agreed.

And and secondarily what this there go forward a work schedule look like.

They are up to date on their payments.

There is a seasonal seasonal lag and some of that ocean bottom work that is going on.

As we speak just because of where in some of the areas are where all this is taking place so they as well as others.

Are likely going to experience some lags a in that activity, but it does look like that there are significant plans for ocean bottom surveys.

In fact, many in deep water for next year. So we'll have to see how that plays out.

Again, cobot 19 is going to it eventually have.

Some effect on the inertia that these sorts of products have enjoyed a hidden in times past.

Great. So kinda the implication of your comments that they're paying as agreed that it challenges. When this first came up maybe nine months or so ago.

They seem to.

They seem to have prioritized said their payments to you and and looks like we're on track.

I think at this point, we're on track, yes that is correct.

Okay, and then and are you.

Our are you still not recognizing revenue from Oh from that note.

Or where where are we at with that revenue recognition with that customer.

Yeah, we have not recognize the revenue or the cost of revenue associated with that sale.

You know were very closely.

Following the FCC filings in public.

Uh huh.

News releases from the customer to see if there's any change in in their financial outlook, but today. There's you know there's still not good news out there related to them being a code going concern going forward. So.

You know until until there that outlook changes or we've collected.

You know very significant portion of that note receivable will continue not to recognize the revenue.

And what would be incremental earnings have been this quarter had you had you recognize the revenue and as a correlated expense.

Yeah, I don't think I can tell you that bill.

Well I mean, well as it very late starts this sale was a $12.5 billion sale.

And as a pay down amounts to date, I think we revealed or 3.8 million, so it'd be somewhere between those two numbers.

Hi, Thanks, or bracketing it [laughter] <unk>, let me, let me switched into the GCL.

3.8 million dollar revenue that you will actually that was the one was just refer that we're talking about that transact yet so I thought perhaps we misunderstood. Your your earlier question because that's what we were referring to just now.

Okay. So let's hold that thought I want to stick with the O. VX or a customer.

So were that customer we're still continuing to only recognize revenue on a cash basis.

In our third quarter, we received.

Payments from the customer.

I think it was like 3.6 billion and we recognize that is rental revenue.

And then and you know going forward as they make payments to us we will recognize revenue.

As paid as pay.

Okay that is that is helpful. Thank you and then switching to 3.8 million that was not recognized as revenue in this quarter.

It's if I'm understanding this correctly since that was that a GCL not a rental better purchase there would not be any expenses associated with that.

Therefore would see that flow right to the Oh right to the bottom line is no. There are no. That's not correct Bill we're deferring or all of the revenue and all the cost of revenue associated to that that transaction until we've been collection is probable and and.

That and that determination is related to the entire to the entire sells them out not not some.

Insignificant portion of it.

Understood. So basically instead of going down the income path with this we really ought to be thinking about that from a cash flow perspective, but if we if we wanted to just rough it out we could say well if your gross margin was approximately 50% just because that say easy math, but do you.

Good to do that tax effected and ER and find that you are that you probably would have made money. A this quarter had you had you recognize that revenue.

Yeah. The thing is as you know, it's not going to go on the income statement as it is now so you've got to examine the balance sheet.

And those other lines I mean, it's sad, but the accounting has somewhat made a lot of this.

A little bit more complicated than what it would otherwise be very messy.

[laughter] messy.

And that's why you see your cash growing where yes. Your earnings are you continue to be in it in a loss position from a net income perspective that steady as part of wire cashes growing yes, absolutely.

Okay I've taken enough time today. Thank you.

Thanks, Thank bill.

Well if ever question from or Chris answered with answered advisors. Please go ahead.

Hi, guys. Good morning, good morning warning.

Along the line.

Cost cutting measures or would you. Please articulate what the Companys plan, it's around capital allocation or or more so what the plan is for assets that are either being.

Underutilized or on utilized in an environment, where exploration activity is it looks like it's gonna be depressed for the foreseeable future. Thank you.

Yeah, Chris are you know.

The majority of our assets are associated with our manufacturing operations and one of the things that we're currently doing is we're in the process of manufacturing equipment, it's going to be used in this quarter for total contract. In addition, a you know we're in discussions on some of these PRM systems, which requires significant manufacturing resource.

This is to put forward.

So it's a you know it's a constant examination.

Of.

Those assets and a those that aren't performing some some you know you know we get rid of Oh and have in recent quarters here.

You know you can well imagine that's just an ongoing or a day to day activity that we have to go through winning and making those examinations, but it's very important to predict to protect those elements that have potential for generating revenue for us and.

That is largely why we have such a conservative view in the way we manage our finances in our operations you know so that we can preserve those opportunities.

Okay. Thank you for that and could you talk about the areas, where you know you you.

Reduced.

Headcounts.

Sure largely again that had to do with the fact that or you know there there wasn't as much manufacturing operations, taking place. So that represented as you know that a significant portion of what those reductions were.

But again, we made sure that we protected our skill sets and our core competencies within the organization and we're also working too you know to.

Maximize the flexibility will say of our workforce, where there there are not silos skill sets that exist, except as necessary into where those people can move more appropriately into other areas of need within the manufacturing space.

In addition, you know the you know reductions occur with respect to we're examining our properties and other things as time goes on certainly the salaries of executives and all that Oh, you know, we're a part of that consideration as well.

Okay. Thank very much.

And we also have a follow up stopped body. Please go ahead. Your line is open.

Thank you one question one comment Mark you've been with.

Geospace now for two years I'm, how is the addressable market that you've been in for a long time changed as result of being the Geo space and my comment is that those that don't know Andrew I'll just did that financing.

With a 2 billion dollar market.

Capitalization.

Okay asked that question again, because you you my brain did a right turn when you mentioned dandruff [laughter] different different space than what we do.

So so so basically since you then with the Geo space how has your audience changed.

It's it's definitely opened up our aperture.

Before.

We had <unk>, we're very focused on what we pursued and why we pursued it.

And the risk associated with that.

Could be significant because we had to make the right choices bandwidth that we have.

But now.

Collectively what.

I will be a slight over simplification, but it's still reasonably accurate.

Geo spaces.

More than three decades.

Of hardware, but I call it data acquisition system.

Hardware superiority.

And all of the knowledge in infrastructure. It takes to make data acquisition system, it's where the austere environment.

Has been a significant add to quantify.

Their strategy and the active source oil and gas market.

Well provide the best data possible, so that their service providers and oil companies could apply whatever technique.

They chose to for that for whats called reflection seismology imaging the upper layers of the Earth's crust.

We don't.

We don't do that.

Our analytics are based more on identifying the source.

So.

We bring to the fight then very solid data acquisition once you've acquired the acquired the date of the data analysis component.

I understand how to bring in real time thousands of channels and then operate on those channels in real time and produce information.

So no operator in the loop.

And that's a very that's a very very complex thing to do.

So now together, we are able to look at.

Value adds in both the oil and gas space as well as the security and surveillance specs on what we can do with the passive seismic monitoring for and do seismicity for example, maybe associated to carbon sequestration.

We're also able to do things like our border, but cool patrol contract, where we're going to be deploying significant.

Infrastructure along the border.

Because of Geospace his expertise.

So this marriage now allows us to have a complete end to end solution.

And what's that mean is I mean worthy O E.M. for the sensor itself.

For the sensor itself.

Most of our competition can't say that.

All the way through to the analytics, so that dot on the map or that piece of information. We are now the OEM. It's one phone call now for our customers to make.

And that's exciting for us and so the last two years, we've we've been Flushing a lot of things out focused on this effort and now I'm excited to capitalize on that momentum and that work and used elsewhere for other solutions and step forward with products that are ready to roll.

Instead of 10 years ago, I always had to step forward with concepts, but now we can step forward with products. So it's it's very much opened up our aperture into the market that allowed us to consider.

Additional applications.

I think to Scott a you know I I know one of the things you're trying to get to is the of the you know them the market size. When these things and you know and in full honesty, you know we have said that.

That's not just at a quantitative number that we can oh annotate, specifically, but you know from what we see we have every anticipation that the you know the accessible market for this can easily rival what our oil and gas projects have been in the past.

Based on our discussion so although we can't Unfortunately just.

Give you a bottom line number of what that is we do conns I believe that it's a considerable element of commerce that we can get into.

Very helpful guys. Thank you.

Oh, So a question for Michael Melby with gauge Citi. Please go ahead.

Good morning, gentlemen, thanks for taking my question was actually going to ask on carbon sequestration and Mark has brought it up.

Rick Mark could you expand on.

How your products my addressed needs and the carbon sequestration market.

And the the market opportunity that might be available for geospace.

Sure Mark you can take that one.

[laughter], Thanks, Rick [laughter] carbon sequestration.

As an interesting thing there 'cause addresses a number of other.

Noted.

It's a help Uh huh.

He type of issue its environmental issue.

So we're very interested in how we might be able to participate feel safe PRM systems I mean, those things are amazing.

They can operate in the most austere environment, they've been operating income more than 10 years, and they're bringing back literally tens of thousands of channels and paid.

So our concept for that is.

When you do sequester carbon and you put it underground.

You are going to want to also invest in the insurance a policy of letting the public now.

So that it's still there.

And it isn't escaping.

Yeah, I mean, maybe a catastrophic failure of a massive burke, maybe somewhat unlikely, but there are possibilities for when you put pressure fluids underground that they migrate.

And you want to be aware of that.

And when fluid migrate they create a thing.

And if they migrate enforceable manner, they create something very similar to hydraulic fracturing and little micro seismicity event do seismicity events pop off.

That is right in the wheel house that is that is spot in the center of our sweet spot for what we're capable of doing.

So our pedigree at quantum has been associated the nuclear monitoring and might be ran at very large scale system for the government, bringing in again thousands of channel data looking for a very small events around the planet in real time, and distinguishing those events and everything else.

That's the same exact capability that we are.

Completing bringing two to the oil and gas market. If you will for carbon sequestration is taking a deal space PRM system and instead of it being an active base system for which you know you go fire off the air Gonorrhea go do whatever you do damage the upper layers, there's now a persistent component.

That which persistently 24, seven is constantly monitoring what's underneath it.

For activity and then activity can then be assessed and automatically be brought up to decision makers to understand again.

Whats occurring in the subterranean environment, it's bringing that subterranean situational awareness, it's very much a security in surveillance concept, but we want to bring that same concept into the oil and gas and energy markets.

To add to what Mark is a is saying my can mean a at the end of the day. If you have a reservoir and you're going to be you know pumping. It was C. O two or are you know otherwise engaged in those activities those pressures et cetera that are a result in of all that alter the.

A rock properties in the alter the you know the velocities and other things going on with respect to the overall seismic profile of the geology you you when you build on top of what are a very high resolution.

Hi data acquisition can accomplish and add that analytics and quantum can do there. There's just plenty of opportunity there to know what can I keep cannot keep putting out.

C O two in do I need to stop.

It is saying there you know how am I managing a you know my sequestration operations.

That's helpful and if I'm I hear you write this has the opportunity to.

Include multiple PRM type mandates at some point of the future.

It certainly could I mean, it it would be right up the reality of the you know the type of things that would need to be done to guarantee the security of though of those operations.

Got it and was hoping to a touch.

I guess mark brought up the.

The company's OEM nature.

Could you talk about.

Why it's important to manufacture a your equipment internally.

And I guess from a capital deployment standpoint.

Whether and outsourcing approach could be use that basically as to your base as a technology company without all the capital to be manufacturing company.

Yeah, that's always been an issue that or you know we've had to consider largely there aren't that many contract manufacturers or other outsourcing.

Sources.

For some of the products that are absolutely critical to those that we make a so it's a requisite aspect of our systems that we have to make or pay an arm and a lag for somebody else to build those it makes a lot more sense for us to instead.

Look for more of a vertical integration with respect to those operations, but by the same token and what what our strategy has always been is to provide other opportunities through that vertical integration of other markets and other things they can be made.

To that end is why we continue to try to grow our own contract manufacturing capabilities and expertise and that's a part of what our adjacent markets revenue represents so point in fact, as we build other components in other markets for them a in those same.

Areas.

Of our manufacturing facilities, where we build some of our very critical but not available elsewhere components.

Got it also help on a technical reason not to jump in there because I'm not a good.

It's amazing or we can sit down now with Geospace engineers, and we can get down to specifics of the frequency contents that we are interested in and sensor design that desk.

Allows us to meet the analytics that are required.

That is a rather they massive distinctive competency.

For us to be able to do that and so the innovation that we are bringing to our systems there second to none.

Well, we aren't able to do no one else in the world concurrently is able to do.

Yeah, that's extrapolate decided part about that.

Extrapolating that you know.

Discussion with engineering that takes place or a with the customer et cetera, our time to market is drastically reduced to three.

Through those capabilities going through external sources and all that just adds an enormous amount of time, sometimes you Miss the market window, if you do that <unk>.

Got it and a quick clarification the change and can tends in consideration was that related to opto site or a quantum.

Third there were just to adjustments to both of those arrangements during the quarter.

Got it and any update on the building for sale in Colombia.

I am not really it's still for sale. We've had some offers that aren't very very very realistic. So we're continuing to keep it for so for now.

Got it any range of lifting prices that but a building.

After that.

I don't really think I can share that information.

Got it thanks Farrell.

It appears we have no further questions I'll return, the Florida, Rick Wheeler for closing comments.

All right well, thank you Keith and I. Thank everyone that has joined us on our call today.

Oh, well look forward to speaking with you again at our conference call for the fourth quarter, which will be sometime in November. So thank you goodbye.

Yeah. This will conclude Geospace technologies' third quarter 2020 yards you may now disconnect have a great day.

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