Geospace Technologies Corporation (GEOS) Q4 2015 Earnings Report, Transcript and Summary

Please standby, your program is about to begin. Welcome to the Geospace Technologies Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. Hosting this call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Tom McEntire, the company's Vice President and Chief Financial Officer. Today's call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Good morning. And welcome to Geospace Technologies conference call for the fourth quarter and year end of fiscal year 2015 and thank you for listening today. I am Rick Wheeler, the company's President and Chief Executive Officer; and I'm here with Tom McEntire, the company's Vice President and Chief Financial Officer. I will start the prepared portion of the call with an overview of the quarter and fiscal year. Following that, Tom will provide an in-depth review and commentary of our financial performance. I'll then close out the prepared portion of the call with some final remarks and we will open the line for questions. As mentioned, also as a matter of convenience we will make a replay of this conference call available in the Investor Relations section of our website at www.geospace.com. Let me caution that the information we will discuss this morning is time-sensitive and therefore, may not be accurate on the date one listens to the replay. Secondly, many of the statements that we will make today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. By example, this includes statements about the market for our products, revenue recognition, planned operations and capital expenditures. These statements are based on our current perceptions, expectations and knowledge, but actual outcomes are influenced by uncertainties and other factors that we are unable to control or predict. These and other risks, both known and unknown, can lead to undesirable results or cause our performance to materially differ from what we may express or imply. These risks and uncertainties include those discussed in our SEC Form 10-K and Form 10-Q filings. Yesterday, after the market closed, the company released its financial results for the fourth quarter and year end of fiscal year 2015. As reported, the 2015 fiscal year represented an unrelenting commercial challenge as the depressed seismic exploration market that first began in 2014 continually worsened throughout the year. Weak demand for our seismic equipment led to fourth quarter revenue of $16 million, a drop of 39% from last year's fourth quarter. For the full fiscal year revenue was $84.9 million, a decline from last year’s total of 64%. Net losses sustained in all four quarters was substantially driven firstly by our high fixed manufacturing overhead costs which were left unabsorbed by lower factory activity, and secondly, by depreciation expenses on our underutilized GSX rental equipment. Also contributing to the fiscal year loss was a $1.8 million write-off of goodwill in our fourth quarter, which was determined to be impaired in light of current market conditions in our seismic business segment. Note that with this write-off no outstanding goodwill remains on our balance sheet. Further contributing to the loss was a $1.3 million increase in our bad debt expense. However, excluding both of these charges cost control efforts throughout the year were able to reduce operating expenses for the fiscal year of 2015 by 11% from fiscal year 2014 levels. In line with lower demand, revenue generated from our traditional seismic exploration products in the fourth quarter was down 26% from the same period a year ago and for the full fiscal year revenue from these products decreased 42% compared to fiscal year 2014. It’s notable that the majority of our traditional seismic products constitute consumable items that become used up and worn out as a function of our customer's seismic operations. As such, the comparative revenue reductions in these time periods are a testament to the slow seismic exploration activity currently taking place in the wake of lower oil prices and the subsequent reduced exploration spending by oil companies. This is further exacerbated by the fact that our customers can draw from their own existing stocks of unutilized equipment which reduces their need for new equipment. Demand for our wireless seismic equipment also has been impacted by these same market conditions. Revenue from wireless products in our fourth quarter was $1.3 million, compared to $8.3 million in last year’s fourth quarter. For the complete 2015 fiscal year wireless product revenues of $25.1 million representing a reduction of 68% compared to fiscal year 2014. Sales of our GSX wireless land system totaled just under 7,000 channels for the year, most of which were sold from our rental fleet. However, as the year unfolded, we saw continued demand for rental of our OBX ocean bottom nodal marine systems increase. As previously announced, we executed recently an agreement to rent a system comprised of 5,000 OBX stations, which is scheduled for delivery in our second fiscal quarter ending March 31, 2016. This is a very positive note in an otherwise retracting seismic exploration market. The technical merits of our OBX system have seen increasing recognition and acceptance worldwide, and its operational benefits are continually being proven. Revenue from our reservoir seismic products totaled $0.9 million in the fourth quarter and compares to revenue of $3.6 million in the fourth quarter of last year. For the full 2015 fiscal year, our reservoir seismic products generated revenue of only $5.4 million, compared with last year’s amount of $84.3 million. This represents a year-over-year decline of 94% and is largely the result of having no contracts in fiscal year 2015 for permanent reservoir monitoring or PRM systems. In contrast, fiscal year 2014 saw performing PRM contracts with Statoil, BP and Makamin Petroleum Services, which contributed revenue of $71.5 million. While discussions and real opportunities exist for PRM system contracts in fiscal year 2016, we are very cautious in today’s market that they will materialize without delays or postponements. However, because PRM systems facilitate enhance recovery and increased production thus maximizing the value of existing assets and infrastructure, we believe they represent sensible investments even in today’s market at lower oil prices. Although, our seismic business segment has struggled throughout fiscal year 2015, our non-seismic businesses posted fourth quarter revenue of $7.2 million, compared with $5.5 million for the same period last year, an increase of 31%. For the full fiscal year, non-seismic revenue grew to $23.8 million in 2015, representing a year-over-year revenue increase for this segment of 11%. For the first time, our industrial product components combined to represent a majority of generated revenue in this segment and we’re very pleased to see that these products gain acceptance and penetration in their respective markets. At this time, I will turn the call over to Tom McEntire to provide you with more detailed commentary and insight on the company’s fourth quarter and year end financial performance.

Thanks, Rick, and good morning everyone. Before I begin, I would like to remind everyone that we will not provide any specific revenue or earnings guidance during this call. In yesterday's press release for our fourth quarter ended September 30, 2015, we reported revenue of $16 million compared to revenue of $26 million last year. Our net loss for the quarter was $13.5 million or loss of $1.03 per diluted share compared to last year's net loss of $1.8 million or $0.14 per diluted share. For the year ended September 30, 2015, we reported revenue of $85 million compared to revenue of $237 million last year. Our net loss for fiscal year 2015 was $33 million or loss of $2.51 per diluted share compared to last year's net income of $37 million, or earnings of $2.81 per diluted share. A breakdown of revenue for each of our product segments is as follows: Our traditional seismic product revenues for the fourth quarter was $6.5 million, a decrease of 26% compared to revenue of $8.7 million last year. Revenue for the fiscal year was $30 million a decrease of 42% compared to last year's revenue of $52 million. The decrease for both periods reflect lower demand for geophones and marine products due to soft industry conditions. Last year's first quarter included large orders for geophones which accompanied the sale of GSX wireless system. Fourth quarter revenue from our GSX and OBX wireless seismic products was $1.3 million, a decrease of 85% compared to revenue of $8.3 million last year. Wireless revenue for the fiscal year was $25 million, a decrease of 68% compared to last year's revenue of $79 million. These results reflect declines of both product and rental revenue and are direct result of reduced demand caused by soft industry conditions. Reservoir seismic product revenue for the fourth quarter was $900,000, a decrease of 75% compared to revenues of $3.6 million last year. Reservoir product revenues for the fiscal year was $5.4 million, a decrease of 94% compared to last year's revenue of $84 million. The decrease in revenue was primarily due to the delivery in fiscal year 2014 of $71.5 million of PRM systems, including $62.1 million related to the Statoil order. No orders for PRM systems were received or delivered in fiscal year 2015 although we do believe opportunities for PRM orders do exist in today’s market. For the fourth quarter, our non-seismic product revenue was $7.2 million, an increase of 31% compared to revenue of $5.5 million last year. Revenue for fiscal year 2015 was $23.8 million, an increase of 11% compared to last year's revenue of $21.4 million. The revenue increases for each period resulted from increased demand for our industrial and offshore cable products. Our seismic segment gross profit margins continue to be unfavorably impacted by a number of factors including significantly lower product and rental revenue, unabsorbed fixed manufacturing cost due to low factory utilization, fixed depreciation expenses from our unutilized rental fleet, a sales mix containing a concentration of significantly lower margin products caused by a substantial reduction in revenues from our wireless and reservoir products, increased warranty costs due to product defects and increased inventory obsolescence expenses due to higher levels of slow-moving inventories. Should current industry conditions persist, we expect our seismic product gross profit margins to be under significant stress throughout fiscal year 2016 and beyond. Due to the steep drop in crude oil prices and the corresponding decline in product orders in our fourth quarter, we conducted an impairment assessment of our seismic segment goodwill. Our assessment concluded that the goodwill was impaired and we recorded a non-cash goodwill impairment expense of $1.8 million in our fourth quarter. As Rick mentioned there is no longer any goodwill carried on our balance sheet. Excluding the goodwill impairment charge, our fourth quarter operating expenses were $10.5 million, an increase of 12% compared to operating expenses of $9.4 million last year. The increase in operating expenses resulted from an increase in our bad debt expense and engineering project expenses. For fiscal year 2015, again excluding the goodwill impairment charge, our operating expenses were $39.5 million, a decrease of 7% compared to last year's operating expenses of $43 million. The decrease primarily resulted from the elimination of incentive compensation expenses and was partially offset by increased bad debt expense. Total capital investments in our rental fleet and property, plant and equipment for fiscal year 2015 were $6.2 million. We continued to remain cautious with respect to funding future capital projects, as we seek to preserve cash and reduce our asset values. In this regard, we expect our total fiscal year 2016 capital investments to be approximately $5 million. This amount excludes any non-cash transfers from our inventories to our rental fleet that may result from potential customer demand for additional rental equipment. Our inventory balance now stands at $125 million, representing a decline of $21 million since the beginning of the fiscal year. Although demand is weak, we expect further inventory reductions throughout fiscal year 2016, as we seek to work off excess stocking levels. Purchase orders for raw materials continued to remain at extremely low levels and our production activities are focused only on essential tests. At September 30, 2015, our balance sheet reflected $40 million of cash and short-term investments. We have no long-term debt outstanding and our borrowing availability under our credit agreement was $30 million. While cash flows are expected to be lumpy throughout fiscal year 2016, we believe our total cash flows in fiscal 2016 will be positive, primarily due to a $17.3 million income tax refund we expect to receive during the second quarter of fiscal year 2016. We are committed to cash preservations and cost reductions while we endure this market downturn. In this regard, we have taken a number of cost reduction steps, which include a reduction of our workforce by 32% since April 2014, an elimination of cash incentive compensation, consolidation of warehouse locations in 2015 and we plan to do so again in 2016, and a reduction in discretionary spending. That concludes my prepared remarks and I'll turn the call back over to Rick.

Thanks, Tom. As we look back over fiscal year 2015, we saw crude oil prices continue to fall to six-year lows. This price drop had a significant impact on the seismic exploration delivery, as oil companies have minimized or eliminated spending on exploration projects. We believe that this reduced level of spending on seismic exploration will likely continue through 2016 and we do not anticipate any real improvement in demand for our seismic exploration products in the near foreseeable future. However, we also believe that low crude oil prices and, more particularly, continued curtailment of seismic exploration activities cannot be sustained for an indefinite period of time. Furthermore, we believe that seismic technologies will continue to be an important tool used by the oil and gas industry to find and exploit oil and gas reservoirs long into the future. In the meantime, we intend to continue our focus on conservative financial management and minimal capital expenditure, while continuing the research and development that will both maintain and extend our leadership position in the science and technology required for the seismic industry. We believe this strategy combined with our strong balance sheet provides us the means to weather the current market conditions and prepare for the market’s recovery. This concludes our prepared remarks. I will now turn the call back over to the moderator for questions.

Thank you. [Operator Instructions] And we will go first to Joe Maxa with Dougherty & Company. Please go ahead.

Thank you. Good morning.

Hi, Joe.

So, first question is on the 5,000 OBX station rental contract to deliver in March, is there concern of a potential delay or even cancellation given that the industry has weakened since you got that contract or at least appears to have?

Well, we don’t have any anticipation of that happening right now, Joe. I mean it’s certainly a possibility but as it stands right now, that looks like it’s going to move forward.

Okay. And wanted to ask on the traditional seismic, is that running at what you would consider more of a base level or do you expect to see that continue to weaken?

Well, I mean so long as exploration is as curtailed as it is, it really is a representative of consumed item. So if there is not seismic exploration activity that picks up then the traditional products are not going to pick up.

Right, right. And just I know you don’t give -- provide guidance but as it looks today, does the next quarter appear to be a lot quite similar to the quarter you just finished?

I think from a commercial point of view, yes.

Yeah. I guess you never know timing of particular contracts that could come in. Well, I understand that.

Right.

And then on the R&D, I mean, you are investing but just curious on what those investments entail given that industry concern are so weak that you’re spending more than you had maybe in the last couple of quarters, and what we should think about in 2016.

Well, I mean products in the seismic industry are always going to need to be improved and technology increased in them. And to that extent, the seismic industry to be healthy needs to have good instrumentation and we’re going to continue the development of that with new products and enhancement of existing products, such that when seismic exploration activities do pick up, we’re going to be well poised to deliver those products into the market.

So does that mean you'll continue near current levels, should we look for a decline, what should we think about?

Well, I mean there will be near current levels. We’ll be very prudent about how we approach our R&D efforts. I mean naturally that will be the case but we’re not going to curtail those activities. I mean that would be sort of counterproductive.

Okay. That’s it for me. Thank you.

And our next question is coming from Georg Venturatos with Johnson Rice. Please go ahead.

Hey, good morning, guys.

Hi, Georg.

Wanted to touch on the previously announced OBX rental as well, I’ll ask couple of different questions. One, it sounds like at least at the moment you anticipate that to go through. Is the nine-month kind of timeframes still intact there in terms of your expectations, would kind of be my first question? And then secondarily, the implied revenue you talked about there in terms of that potential over the nine-month period, is that pricing based on shallow water application?

Well, this is a shallow water utilization as far as the rental fleet goes. But yes, as far as the anticipation of the contract running to its full extent, at this point, we believe that's the case; we have no indication otherwise.

Okay. Great. Just further detail on the wireless side, this quarter obviously saw that decline sequentially. But just break down in terms of what we saw from OBX versus GSX in the quarter? And then obviously, we’ve got some positive commentary on OBX, interest remaining. Is GSX, I mean, are you having any conversations there? Obviously, our kind of channel checks on the contractor side point to very modest CapEx on that side and feels like they’re pretty well-stocked. But just wanted to get a sense of if those conversations are even ongoing at this point?

Conversations with respect to purchasing GSXs or …

GSX purchase or rental really?

Well, most of the rental interest is in the OBX product line. I mean the GSX is certainly something that was very much underutilized this year and certainly you saw the sales numbers were very small. So the OBX is really what is the predominant component with respect to demand in the rental fleet and the wireless segment.

Georg, if there is a choice between GSX sales and rentals, there's more activity on the rental side then there is in the sale side but it’s not much.

Right. Understood. And last one for me and then maybe I will re-queue. But hit on this on the financial side, obviously, you guys are well-positioned with the net cash position. Tom, maybe remind us on the revolver and credit facility that you have, the covenants there that maybe -- might be most onerous and your expectations over the next 12 months to remain…?

Yeah. There is essentially one covenant, Georg, and it is a quick ratio type covenant, and at the end of this calendar year or fiscal year and going forward we believe that we will continue to have that borrowing availability.

Okay. Perfect. I appreciate. Thank you, guys.

It’s also a borrowing base, Georg, that it gets funded all off of receivables and inventories and we have plenty of those assets.

Perfect. Thanks, Tom.

And our next question is coming from Ken Sill with Seaport Global. Please go ahead.

Yeah. I was just wondering if you could kind of walk us through the cost side of things from Q3 to Q4; at a high level your sales were down $3.8 million, cost of goods sold was up $2.1 million, and I am thinking that’s actually excluding the goodwill write-off and the bad debt. But I was wondering if you kind of walk us through how they went from with revenues down, costs were up and where you expect that to go in Q1?

Yeah. Ken, this is Tom. We had some warranty expenses that were again unexpected in the fourth quarter that were fairly substantial, much higher than normal run rate, inventory obsolescence continues to take a toll on our gross profit margins and as our inventory gets older we are taking more reserves because certain items are not moving. Doesn't mean that it’s bad to broken, throw it away, but we do take reserves based upon the age of the inventory and the turnover of the inventory. So those type of costs which are unfortunate, but they are reflected in the fourth quarter and they are driving down the gross profit margin.

Yeah. And then -- and so my follow-up is, in other words your expenses are obviously are hard to predict? But given what happened in Q4, should we expect those expenses to remain relatively high and on the obsolescence is it just something that’s going to continue overtime, are you -- you took a good swipe that adhere year end?

We do not expect the warranty expenses to continue and we would fully expect that they would ramp back down to kind of a normal run rate, which is usually maybe a couple hundred thousand dollars of quarter at the most. With respect to inventory obsolescence, I would expect similar charges and if this year turns out to be less than last year in terms of demand for products it could be even more. So, yeah, it’s going to be more the same and if we see a pick up in activity, you will see a reduction in that type of expense.

Yeah. No that makes sense. So that’s a non-cash expense.

Right.

So, I guess, there is silver lining on that one. Right, I will stop here and let somebody else get back in. Thanks.

And our next question is coming from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. I have a group of questions. First of all, in opening remarks there was a reference to further margin stress? Do -- are you expecting margins to go down further if conditions remain the same or what were you trying to highlight there?

Well, I mean, I am sure exactly, what -- which aspect of the statements you're referring to. But, I mean, margins are hit significantly by the fact that we have a lot of manufacturing fixed overhead costs because we are not really building much out on the floor. They don’t get absorb. So those costs are ones that are going to be something that we experienced whether we build anything or not.

So the correct way to think about it is that margins will remain under the current level of pressure if conditions remain the same, they won’t get worse for some reason and I wasn't able to figure out my own life.

No, I mean, in essence, I think you're exactly right. I mean, so long as on the top side, if revenues aren’t coming in then those fixed costs are going to represent quite a hit.

Yes, okay. Thank you. And then relative to the OBX rental, if we recall correctly that is a rental that's anticipated last for nine months. And if that's the case, what sort of a discount does that equate to for a customer that was then interested in considering purchasing the equipment at the end of that nine months period?

Well, certainly, the option to purchase the equipment exist. I mean, the discounts are ones that are governed by the length of the rental term, the number of units that are rented. So there is some complexity to how that works.

And it’s also proprietary to the customer bill. So we can’t publish that in a conference call.

Okay. Is there a general guideline that you could give us here on the call or if someone were to rent an OBX for nine months or is that not something that you're comfortable doing?

Well, our standard terms on most rentals is that 70% of the rent can be applied towards purchases up to 70% of the purchase price.

Okay. And since I'm not fast enough to do the math in my head, if one were to rent for nine months, how far down the path if one were applying that formula would a customer -- just a generic customer get to relative to the purchase?

Well, it depends on what the rental rate is relative to the purchase price. So it varies. A nine month rental will have a lower daily rental rate than a 30-day rental.

Okay. All right.

But again, every rental contract is negotiated with each customer independently. And so there's not a standard formula that we really stick to.

Okay. I’ll say kudos to you. You stopped me out on that question. I’ll have to think about that one further before I go further. Let’s shift if we could to PRM. You referenced that there may be opportunities there. I am hoping that you can talk in a little bit more detail and dive into that if you would please in terms of what you are seeing as a perspective opportunity landscape?

Well we’re not really able to get into detail on that. I mean, as far as specifics on who we’re talking to and that sort of thing but if we -- as we disclosed before, there were no opportunities that we saw that would manifest in 2015 but that's not the case this year. So the discussions do center around some possibilities of contracts actually being executed and performed this year. But as we’ve said the market is volatile enough to where that we see many of the oil companies’ decisions on capital spending shifts from one day to the next. And while this does represent in our estimation, a reasonable financial investment and in return particularly with the enhanced recovery that it will provide for these offshore reserves, we still see these opportunities as ones that can manifest but we're cautious about that.

Great. Thank you. And then one more question, please, I want o circle back to OBX and what is the landscape what like for additional rentals and/or additional purchases of that product line?

Well, there are some other opportunities out there but we don't have contracts on them. And as such they're not announced to you as far as that goes like this other contract that was executed. But fundamentally, the OBX is representing itself mostly as a as a rental market. We come to understand that, that's the primary operating circumstances that we’re under.

Thank you. I appreciate.

And our next question is coming from Sheldon Grodsky with Grodsky Associates. Please go ahead.

Yeah. So, first of all, let me just make a comment. I bet you are happy that you have no debt.

Definitely, we are.

This is deadly environment I believe for some of your competitors in the overall industry and not specifically into your physical. But one of the biggest challenges I see for you and I hope you are up to it is that you have, basically most of your networks tied up in inventories and rental equipment. And the good news is that those assets were shrinking in the last year, but do you think you could bring them both -- I assume is your plan to bring both the rental equipment and the inventories down in the next year but how far do you think you can go? You think you could get it done by $30 million to $50 million or is that too high?

Well, there is really no way to predict that. I mean, if you look at what happened this year, it’s been a very challenging year from a sales point of view. The fact is the rental assets could go up because if the demand is such that rental opportunities for this equipment come to pass, we want to take advantage of those. But as far as how much we could predict that we would bring down those inventories, really it would just be throwing a wild dart and it wouldn’t hit the bull’s eye at all.

Yeah. I would echo what Rick is saying but I think the numbers you threw out are a little, well very much for the market that we are in right now. We would love to bring them down that much if there was a buyer out there. But unfortunately, our customers are sitting on excess levels of equipment and working these inventories down is a challenge, as well as working the rental equipment down. But our plan is to do that as best we can.

Okay. How much risk is there? Inventory can be stolen. Inventory can become obsolescence. Inventory can -- different thing. Are you putting a lot of effort to making sure that you preserve as much as value as possible in that inventory figure?

Absolutely. But as Tom mentioned earlier, I mean, we do take reserves for an inventory obsolescence just as a best practice. But this equipment, a lot of it is finished goods. It doesn’t go bad. It doesn’t spoil or anything of that nature. So it remains buyable in a good healthy market.

Thank you.

[Operator Instructions] We will go next to Charles Murphy with Liberty Park. Please go ahead.

Good morning, guys.

Good morning.

So, I’m guessing it’s been a very long time since you’ve been at $85 million in annual revenue and probably an even longer time since you have been at $85 million and been profitable. But I would imagine that at some point in your history that has been the case. And so I was just sort of wondering is there a way to sort of get back there and how do you balance the need to stay kind of, at least minimize the losses with the need to stay in preparation for the inventory recovery?

Well. I mean, yeah, we’ve been a growth oriented company. So there is clearly a point in our history where revenues were at these levels. We’ve grown since then. We had more in a way of assets and property and equipment. Right now, it’s not appropriate to try to move back to prior days. We see this industry cycle as one that can’t be persistent indefinitely. It wouldn’t make any sense to -- it wouldn’t be a sustainable energy market if that were to be the case. So it’s really an aspect of endurance as we see it at this point in time.

Okay. And I mean, given that viewpoint that this too shall pass and given that you have a pretty substantial cushion. I realized things are very nasty out there today. But what is sort of your interest level given that -- if I’m not mistaken, the stock is now pretty close to half of your tangible book value, your level of interest in starting to buy back some stock?

Well, I think at this point, we are trying to preserve cash. I mean that’s the most important thing for us to be able to endure this downturn. So, I think that will be our primary focus.

Okay. Yeah. Got it. That’s all I had. Thank you.

And we will go next to a follow-up from Ken Sill with Seaport Global. Please go ahead.

Yeah. I just got a follow-up on the concept of people buying the rental stuff. Do you guys have a track record, or any kind of proportion of on or offshore, GSX or OBX rental sensors that actually end up getting purchased by the client or was it just returned to you at the end of the rental period?

Yeah. Ken, that’s a good question. Typically, our short-term rental, what we call short-term are these 30-day, 45-day rentals. They generally get turn back in. When we have rentals that go out beyond 90 days or 180 days or more, the customer generally earns enough equity in the product that they think twice before turning it back in. Doesn’t mean that they always buy it in that case, but early on and in the introduction of the technology to the marketplace for GSX, we did see a lot of those rentals, those kind of longer term rentals turn into purchases.

And I guess a follow-up to that. So, we’re in a down market where your customers are trying to preserve their capital too. Has there been enough activity? It seems there’s been a shift or decline and the willingness to buy or not with oil prices here.

Oh! Yeah. Absolutely. And I want to keep in mind that, not only are our product sales depressed right now, our rental revenue is significantly depressed. So there is not a lot of equipment being rented either.

Yeah. And I guess so. We just really don’t know when it comes to these 5,000 stations or the odds of that company want to buy it at the end, if that’s what we’re all trying to get out.

They have that option, but they haven’t told us which way they will go with that. That’s their option to choose at the end of the rental term.

I bet it depends on oil prices at the end of the term. All right. Thank you.

And we’ll go next to Jon Burke of Amica Insurance. Please go ahead.

Hey, Tom. Last quarter, you mentioned that you expect cash burn in 2016 to be or hope to be a $1 million a month. I know you spoke to the income tax refund but if you just exclude that out, is that a million a month, is that still a good kind of baseline for what you would expect to be a cash burn in this environment?

The level of revenue that we had in the fourth quarter was substantially lower than what we had in first three quarters. So, if you take into account what's happening now, and if this is the baseline level of revenues, which we’re not sure if it is or not we would expect to burn more cash.

Okay. Do you have a rate on that?

No. We don’t. Our cash flow, especially customer payments in this market is hard to predict. We have some big ones out there and where they’re going to fall and when they’re going to fall. But we have said in our prepared remarks that we think we will be cash positive this year, including the refund and other business related to the GS or OBX contract that we have.

Okay. Yeah. And at the end of the day that’s important thing. So, all right, that’s helpful. The bad debt expense, is that several customers or is that just one customer, do you have an outlook for that going forward?

It’s several customers and it’s a sign of the times. We have a lot of light payments out there that we’re chasing right now. This is a reserve against the probabilities of whether we will collect and whether they will have the ability to pay. There is still a chance that we could get some of that money, but it's just a reflection of the aging of our receivables in this market.

Okay. My last one, you just spoke to kind of the fourth quarter falling off on a kind of base business level. Is your -- you already spoke earlier, your R&D, you are not going to cut back on that and I completely understand that. The SG&A, is there still room there if we’re kind of in this lower base level of revenue for the next couple of quarters? Or is this the five, four that you’re doing every quarter, is that a good number?

There is always room if we need to cut more, always room.

Okay. And just you take one caller at a time, is that kind of your expectations?

Yeah. We are kind of, yeah, it’s -- we don't have much backlog, it's hard tell what the future is and we are managing as we go.

Okay.

The thing is, as we -- we don’t want to hamstring ourselves with respect to being able to emerge out of this cyclical condition and be able to jump in very strongly. So there is room to cut and there is thing that can be done, but we want to be careful that we do not harm ourselves in what we do.

Yeah. No. I appreciate that. I mean, I can imagine most people are involved in the company for near-term profitability and you have a balance sheet position where you are going to survive? So I appreciate that. All right. Thanks, guys.

You bet.

Yeah.

[Operator Instructions] We will go next to Ken Sill with Seaport Global. Please go ahead.

Yeah. One last housekeeping question, in the text on the press release you guys said that, you had the $1.3 million increase in bad debt expense, which contributed loss, but when you look at the income statement the bad debt expense was a $1,017,000, I was just trying to reconcile the $1.3 in the text versus the $1 million on that?

I think in Rick’s prepared remarks, he was talking about the change in the bad debt expense last year versus this year, that’s it.

Okay. So that was year-over-year change.

Right.

Right.

Okay. And so last year you had credit I guess.

Last year for the full year we had $833,000 and this year it was $2,147,000.

Okay. That’s the full year impact, okay. Thank you. Sorry, be confused. Bye.

And there is no further questions at this time, I’d like to hand it back over to Mr. Rick Wheeler for any closing remarks.

All right. Well, thanks, Zack. We would like to thank everyone that joined our call today and for that matter we look forward to speaking with you during our fiscal year 2016 first quarter conference call, which will be in February. So, thanks again, everyone. Good-bye.

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.