GEOSPACE TECHNOLOGIES CORP

Previous wording

Unless otherwise specified, the discussion in this Quarterly Report on Form 10-Q refers to Geospace Technologies Corporation and its subsidiaries. We principally design and manufacture seismic instruments and equipment. These seismic products are marketed to the oil and gas industry and used 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, remote shutoff water valves and Internet of Things ("IoT") platform and provide contract manufacturing services. We report and categorize our customers and products into three different segments: Oil and Gas Markets, Adjacent Markets and Emerging Markets. In recent years, the revenue contribution from our Adjacent Markets segment has grown to represent nearly half of our total revenue. This revenue growth is reflective of both our diversification strategy as well a downturn in the Oil and Gas Markets segment at the time.

Current wording

Unless otherwise specified, the discussion in this Quarterly Report on Form 10-Q refers to Geospace Technologies Corporation and its subsidiaries. We principally design and manufacture seismic instruments and equipment. These seismic products are marketed to the oil and gas industry and used 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, remote shutoff water valves and Internet of Things ("IoT") platform and provide contract manufacturing services. We report and categorize our customers and products into three different segments: Oil and Gas Markets, Adjacent Markets and Emerging Markets. In recent years, the revenue contribution from our Adjacent Markets segment has grown to represent nearly half of our total revenue, which is reflective of our diversification strategy.

Previous wording

In 2022, we announced the release of a new seismic acquisition product known as Mariner™, a continuous, cable-free, four channel autonomous, shallow water ocean bottom recorder. Mariner is the next generation node designed for extended duration seabed ocean bottom seismic data acquisition. The slim profile nodes, which are part of our shallow water stations, are ideally deployed as deep as 750 meters. The device continuously records for up to 70 days and offers more rapid recharging times. Its slim profile creates space savings on seismic survey vessels, allowing contractors to fit up to 25% more nodes into a download/charge container. Through December 31, 2023, we have sold 7600 Mariner™ nodes.

Current wording

We have also developed a marine-based wireless seismic data acquisition system called the OBX, and recently released Mariner™. Similar to our land-based wireless systems, these marine wireless systems may be deployed in virtually unlimited channel configurations and do not require interconnecting cables between each station. We have two versions of OBX nodal stations: a shallow water version that can be used in depths up to 750 meters and a deepwater version that can be deployed in depths of up to 3,450 meters. Through March 31, 2024, we have sold 14,000 OBX stations and we currently have 24,000 OBX stations in our rental fleet. The Mariner™ is a continuous, cable-free, four channel autonomous, shallow water ocean bottom recorder. Mariner™ is the next generation node designed for extended duration seabed ocean bottom seismic data acquisition. The slim profile nodes, which are part of our shallow water stations, are ideally deployed as deep as 750 meters. The device continuously records for up to 70 days and offers more rapid recharging times. Its slim profile creates space savings on seismic survey vessels, allowing contractors to fit up to 25% more nodes into a download/charge container. Through March 31, 2024, we have sold 7,600 Mariner™ nodes.

Previous wording

Although in an already depressed oil and gas industry, demand further decreased in February 2020 because of the oversupply of crude oil due to failed OPEC negotiations that led to a dramatic drop in crude oil prices when combined with the impact of the COVID-19 pandemic. These declines in the demand for oil and gas have caused oil and gas exploration and production companies to experience a significant reduction in cash flows, which have resulted in reductions in their capital spending budgets for oil and gas exploration-focused activities, including seismic data acquisition activities. Crude oil prices held above $70 per barrel throughout 2023; however, a lag in time typically occurs between higher oil prices and greater demand for our Oil and Gas Markets segment products. We believe this lag is the result of exploration and production (“E&P”) companies allocating their cash flow towards shareholder reward initiatives, such as stock buy-back programs and dividend payments, or in debt reduction. We believe this lag is a short-term trend that will continue until E&P companies decide to reinvest capital into exploration activities. As this lag persists, we expect the reduced levels of demand for our Oil and Gas Markets segment products. We also expect our land-based traditional and wireless products will continue to experience low levels of product demand until our customers consume their excess levels of underutilized equipment. As discussed below, we had a $30.0 million wireless product sale to a customer in the first quarter of fiscal year 2024. However, we do not currently anticipate another product sale this large for the remainder of fiscal year 2024.

Current wording

Although in an already depressed oil and gas industry, demand further decreased in February 2020 because of the oversupply of crude oil due to failed OPEC negotiations that led to a dramatic drop in crude oil prices when combined with the impact of the COVID-19 pandemic. These declines in the demand for oil and gas have caused oil and gas exploration and production companies to experience a significant reduction in cash flows, which have resulted in reductions in their capital spending budgets for oil and gas exploration-focused activities, including seismic data acquisition activities. Crude oil prices have stabilized over the past 18 months; however, a lag in time typically occurs between higher oil prices and greater demand for our Oil and Gas Markets segment products. We believe this lag is the result of exploration and production (“E&P”) companies allocating their cash flow towards shareholder reward initiatives, such as stock buy-back programs and dividend payments, or in debt reduction. We believe this lag is a short-term trend that will continue until E&P companies decide to reinvest capital into exploration activities. As this lag persists, we expect the reduced levels of demand for our Oil and Gas Markets segment products. We also expect our land-based traditional and wireless products will continue to experience low levels of product demand until our customers consume their excess levels of underutilized equipment. As discussed below, we had a $30 million wireless product sale to a customer in the first quarter of fiscal year 2024. However, we do not currently anticipate another product sale this large for the remainder of fiscal year 2024.

Previous wording

Three months ended December 31, 2023 compared to the three months ended December 31, 2022

Current wording

Three and six months ended March 31, 2024 compared to the three and six months ended March 31, 2023

Previous wording

Consolidated revenue for the three months ended December 31, 2023 was $50.0 million, an increase of $18.9 million, or 60.8%, from the corresponding period of the prior fiscal year. The increase was largely due to a $30.0 million sale of our Mariner™ shallow water ocean bottom nodes, which replaced a rental contract with the customer. The increase was partially offset by (i) a decrease in rental revenue due to lower utilization of our OBX rental fleet and (ii) a decrease in demand for our industrial products from our Adjacent Markets segment. We do not expect this increase in revenue to continue for the remaining three quarters of of fiscal year 2024.

Current wording

Consolidated revenue for the three months ended March 31, 2024 was $24.3 million, a decrease of $7.1 million, or 22.6%, from the corresponding period of the prior fiscal year. The decrease was primarily due to a decrease in rental revenue due to lower utilization of our OBX rental fleet. Consolidated revenue for the six months ended March 31, 2024 was $74.3 million, an increase of $11.8 million, or 18.9%, from the corresponding period of the prior fiscal year. The increase was largely due to a $30.0 million sale of our Mariner™ shallow water ocean bottom nodes in the first quarter of fiscal year 2024, which replaced a rental contract with the customer. We do not expect another product sale this large for the remainder of fiscal year 2024. The increase was partially offset by (i) a decrease in rental revenue due to lower utilization of our OBX rental fleet and (ii) a decrease in demand for our industrial products from our Adjacent Markets segment.

Previous wording

Consolidated gross profit for the three months ended December 31, 2023 was $22.2 million, an increase of $11.7 million, or 111.1%, from the corresponding period of the prior fiscal year. The increase was primarily due to gross profit on its Mariner™ sale. The increase in gross profit was partially offset by (i) the decrease in utilization of our OBX rental fleet and (ii) a higher warranty accrual, primarily related to the Mariner™ sale.

Current wording

Consolidated gross profit for the three months ended March 31, 2024 was $5.9 million, a decrease of $7.1 million, or 54.6%, from the corresponding period of the prior fiscal year. The decrease in gross profit was primarily due to decrease in utilization of our OBX rental fleet. Consolidated gross profit for the six months ended March 31, 2024 was $28.1 million, an increase of $4.6 million, or 19.7%, from the corresponding period of the prior fiscal year. The increase was largely due to gross profit on our Mariner™ sale in the first quarter of fiscal year 2024. The increase in gross profit was partially offset by (i) the decrease in utilization of our OBX rental fleet and (ii) a higher warranty accrual, primarily related to the Mariner™ sale.

Previous wording

Consolidated operating expenses for the three months ended December 31, 2023 were $9.4 million, a decrease of $1.4 million, or 13.1%, from the corresponding period of the prior fiscal year. The decrease was primarily due to lower personnel costs attributable to our workforce reduction in first quarter of fiscal year 2023, which included $0.4 million in employee termination costs. The decrease was also due to lower research and development project expenditures.

Current wording

Consolidated operating expenses for the three months ended March 31, 2024 were $10.4 million, an increase of $0.5 million, or 5.1%, from the corresponding period of the prior fiscal year. The increase was primarily due to higher research and development expense, primarily project expenditures. Consolidated operating expenses for the six months ended March 31, 2024 were $19.8 million, a decrease of $0.9 million, or 4.4%, from the corresponding period of the prior fiscal year. The decrease was primarily due to lower personnel costs attributable to our workforce reduction in first quarter of fiscal year 2023, which included $0.4 million in employee termination costs.

Previous wording

Consolidated other expense for the three months ended December 31, 2023 was $(0.1) million, compared to other income of $0.2 million from the corresponding period of the prior year. The decrease in other income was primarily due to net foreign currency transaction losses. The decrease was partially offset by an increase in interest income attributable to short-term investments.

Current wording

Consolidated other income for the three months ended March 31, 2024 was $0.2 million, compared to $0.3 million from the corresponding period of the prior year. Consolidated other income for the six months ended March 31, 2024 was $0.1 million, compared to $0.5 million from the corresponding period of the prior year. The decrease for both periods was principally due to net foreign currency transaction losses, partially offset by an increase in interest income attributable to short-term investments.

Previous wording

Revenue from our Oil and Gas Markets products for the three months ended December 31, 2023 increased $19.8 million, or 98.1%, from the corresponding period of the prior fiscal year. The components of this increase were as follows:

Current wording

Revenue from our Oil and Gas Markets products for the three months ended March 31, 2024 decreased $7.6 million, or 41.1%, from the corresponding period of the prior fiscal year. Revenue from our Oil and Gas Markets products for the six months ended March 31, 2024 increased $12.2 million, or 31.6%, from the corresponding period of the prior fiscal year. The components of these changes were as follows:

Previous wording

Operating income associated with our Oil and Gas Markets products for the three months ended December 31, 2023 was $14.6 million, an increase of $12.2 million from the corresponding period of the prior fiscal year. The increase in operating income was related to gross profits related to the Mariner™ sale. The income was partially offset by lower wireless rental revenue and related gross profits due to a decrease in the utilization of our OBX rental fleet.

Current wording

Operating income (loss) associated with our Oil and Gas Markets products for the three months ended March 31, 2024 was $(3.0) million, a decrease of $7.3 million from the corresponding period of the prior fiscal year. The decrease was primarily due to lower wireless rental revenue and related gross profits due to a decrease in the utilization of our OBX rental fleet. Operating income associated with our Oil and Gas Markets products for the six months ended March 31, 2024 was $11.4 million, an increase of $4.8 million from the corresponding period of the prior fiscal year. The increase in operating income was related to gross profits related to the Mariner™ sale. The income was partially offset by lower wireless rental revenue and related gross profits due to a decrease in the utilization of our OBX rental fleet.

Previous wording

Revenue from our Adjacent Markets products for the three months ended December 31, 2023 decreased $1.0 million, or 9.3%, from the corresponding period of the prior fiscal year. The components of this change was as follows:

Current wording

Revenue from our Adjacent Markets products for the three months ended March 31, 2024 decreased $0.5 million, or 3.7%, from the corresponding period of the prior fiscal year. Revenue from our Adjacent Markets products for the six months ended March 31, 2024 decreased $1.5 million, or 6.3%, from the corresponding period of the prior fiscal year. The components of this decrease was as follows:

Previous wording

Operating income from our Adjacent Markets products for the three months ended December 31, 2023 was $2.0 million, a increase of $0.3 million, or 16.4%, from the corresponding period of the prior fiscal year. The increase in operating income was primarily due to margin improvements on both our industrial and imaging products.

Current wording

Operating income from our Adjacent Markets products for the three months ended March 31, 2024 was $2.8 million, a decrease of $0.3 million, or 8.5%, from the corresponding period of the prior fiscal year. The decrease was primarily due to a decrease in revenue and related gross profits. Operating income from our Adjacent Markets products for the six months ended March 31, 2024 was $4.8 million, an increase $28,000, or 0.6%, from the corresponding period of the prior fiscal year. The increase in operating income was primarily due to higher research and development costs, largely offset by gross margin improvements.

Previous wording

Operating loss from our Emerging Markets products for the three months ended December 31, 2023 was $0.6 million, a decrease of $0.6 million, or 48.5%, from the corresponding period in the prior fiscal year. The decrease was primarily attributable to lower personnel costs attributable to our workforce reduction in the first quarter of fiscal year 2023.

Current wording

Operating loss from our Emerging Markets products for the three months ended March 31, 2024 was $0.7 million, a decrease of $0.4 million, or 35.4%, from the corresponding period in the prior fiscal year. Operating loss for the six months ended March 31, 2024 was $1.3 million, a decrease of $0.9 million, or 42.5%, from the corresponding period of the prior fiscal year. The decrease in operating loss for both periods was primarily due to an increase in revenue and related gross profits. The decrease for the six months ended March 31, 2024 was also attributable to lower personnel costs attributable to our workforce reduction in the first quarter of fiscal year 2023.

Previous wording

At December 31, 2023, we had $34.0 million in cash and cash equivalents and short-term investments. For the three months ended December 31, 2023, we generated $2.7 million of cash from operating activities. Sources of cash included our net income of $12.7 million and net non-cash charges of $4.5 million resulting from deferred income taxes, depreciation, amortization, accretion, inventory obsolescence, stock-based compensation and provision for credit losses. Other sources of cash included a (i) $8.0 million decrease in trade accounts and notes receivable payable primarily due to the timing of collections from customers and (ii) $1.2 million increase in other liabilities due to increases in customer deposits and our product warranty accrual, partially offset by lower accrued employee compensation costs. These sources of cash were partially offset by (i) the removal of $19.4 million gross profit from the sale of rental equipment is included in investing activities, (ii) a $0.5 million decrease in accounts payable due to timing of payments to our suppliers and (iii) $4.1 million increase in inventories to meet an increase in demand for our products.

Current wording

At March 31, 2024, we had $51.2 million in cash and cash equivalents and short-term investments. For the six months ended March 31, 2024, we used $6.3 million of cash from operating activities. These uses of cash included (i) the removal of $20.6 million gross profit from the sale of rental equipment is included in investing activities, a (ii) $5.6 million increase in inventories for the strategic purchase of long lead components needed for use in wireless products, valves and contract manufacturing and (iii) $3.2 million decrease in other liabilities due to the return of customer deposits and lower accrued employee compensation costs, partially offset by an increase in our product warranty accrual and (iv) $0.7 million decrease in accounts payable due to timing of payments to our suppliers. These uses of cash were partially offset by (i) our net income of $8.4 million and net non-cash charges of $8.5 million resulting from deferred income taxes, depreciation, amortization, accretion, inventory obsolescence, stock-based compensation and provision for credit losses. Other sources of cash included a (i) $6.0 million decrease in trade accounts and notes receivable primarily due to the timing of collections from customers and (ii) $0.9 million decrease in other assets.

Previous wording

For the three months ended December 31, 2023, we used cash of $2.7 million in investing activities. Uses of cash included (i) $2.6 million for additions to our equipment rental fleet and (ii) $0.8 million for additions to our property, plant and equipment. Offsetting these uses of cash was $0.6 million of proceeds from the sale of rental equipment. We expect cash investments into our rental fleet will be approximately $5 million in fiscal year 2024. We expect our cash investments in our property, plant and equipment will be approximately $2 million in fiscal year 2024. 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, borrowings under our new credit agreement.

Current wording

For the six months ended March 31, 2024, we generated cash of $8.1 million in investing activities. Sources of cash primarily consisted of $30.5 million of proceeds from the sale of rental equipment. Offsetting sources of cash included (i) $15.3 million in purchases of short-term investments, net, (ii) $3.9 million for additions to our equipment rental fleet and (iii) $3.2 million for additions to our property, plant and equipment. We expect cash investments into our rental fleet will be approximately $7 million in fiscal year 2024. We expect our cash investments in our property, plant and equipment will be approximately $5 million in fiscal year 2024. Our capital expenditures are expected to be funded from our cash on hand, cash flows, including cash flows from rental contracts or, if necessary, borrowings under our new credit agreement.

Previous wording

For the three months ended December 31, 2023 we had no cash flows from financing activities.

Current wording

For the six months ended March 31, 2024 we had no cash flows from financing activities.

Previous wording

Our available cash, cash equivalents and short-term investments was $34.0 million at December 31, 2023, which included $3.3 million of cash and cash equivalents held by our foreign subsidiaries and branch offices, of which $1.8 million was held by our subsidiary in the Russian Federation. In response to sanctions imposed by the U.S. and other countries on the Russian Federation, the Russian government has imposed restrictions on companies' abilities to repatriate or otherwise remit cash from their Russian-based operations to locations outside of Russia. As a result, this cash can be used in our Russian operations, but we may be unable to transfer it out of Russia without incurring substantial costs, if at all. In addition, if we were to repatriate the cash held by our Russian subsidiary, we would be required to accrue and pay taxes on any amount repatriated. During fiscal year 2023, in light of recent volatility in the financial markets, we entered into an IntraFi Cash Service ("ICS") Deposit Placement Agreement with IntraFi Network LLC through our primary bank, Woodforest National Bank. The ICS program offers us access to unlimited Federal Deposit Insurance Corporation ("FDIC") insurance on domestically held cash in excess of $5.0 million, thereby mitigating our risk of falling outside of FDIC coverage limits.

Current wording

Our available cash, cash equivalents and short-term investments was $51.2 million at March 31, 2024, which included $3.3 million of cash and cash equivalents held by our foreign subsidiaries and branch offices, of which $2.0 million was held by our subsidiary in the Russian Federation. In response to sanctions imposed by the U.S. and other countries on the Russian Federation, the Russian government has imposed restrictions on companies' abilities to repatriate or otherwise remit cash from their Russian-based operations to locations outside of Russia. As a result, this cash can be used in our Russian operations, but we may be unable to transfer it out of Russia without incurring substantial costs, if at all. In addition, if we were to repatriate the cash held by our Russian subsidiary, we would be required to accrue and pay taxes on any amount repatriated.

Previous wording

At December 31, 2023 we had no outstanding borrowings under the Agreement and our borrowing base availability under the Agreement was $14.9 million after consideration of a $0.1 million outstanding letter of credit. We were in compliance with all covenants under the Agreement. We do not currently anticipate the need to borrow under the Agreement, however, we may decide to do so in the future, if needed.

Current wording

At March 31, 2024 we had no outstanding borrowings under the Agreement and our borrowing base availability under the Agreement was $11.3 million after consideration of a $0.1 million outstanding letter of credit. We were in compliance with all covenants under the Agreement. We do not currently anticipate the need to borrow under the Agreement, however, we may decide to do so in the future, if needed.

Previous wording

Our total available cash, cash equivalents and short-term investments did not significantly change during the three months ended December 31, 2023. Our current accounts receivable includes $28.7 related to our first quarter 2024 Mariner™ sale. We expect to receive these funds in the second quarter of fiscal year 2024. In the absence of future profitable results of operations, we may need to rely on other sources of liquidity to fund our future operations, including executed rental contracts, available borrowings under the Agreement through its expiration in July 2025, leveraging or sales of real estate assets, sales of rental assets and other liquidity sources which may be available to us. We currently believe that our cash, cash equivalents and short-term investments will be sufficient to finance any future operating losses and planned capital expenditures through the next twelve months.

Current wording

Our total available cash, cash equivalents and short-term investments increased $17.5 million during the six months ended March 31, 2024, largely due to the collection of an account receivable related to our first quarter 2024 Mariner™ sale. In the absence of future profitable results of operations, we may need to rely on other sources of liquidity to fund our future operations, including executed rental contracts, available borrowings under the Agreement through its expiration in July 2025, leveraging or sales of real estate assets, sales of rental assets and other liquidity sources which may be available to us. We currently believe that our cash, cash equivalents and short-term investments will be sufficient to finance any future operating losses and planned capital expenditures through the next twelve months.

Previous wording

During the three months ended December 31, 2023, there has been no material change to our critical accounting estimates discussed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

Current wording

During the six months ended March 31, 2024, there has been no material change to our critical accounting estimates discussed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.