Welcome to the Geospace Technologies First Quarter 2020 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Curda, the company's Chief Financial Officer. Today's call is being recorded, and will be available on the Geospace Technologies Investor Relations website following the call. [Operator Instructions] It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Thank you, Tony. Good morning, and welcome to Geospace Technologies Conference Call for the First Quarter of our 2020 Fiscal Year. I'm Rick Wheeler, the company's President and Chief Executive Officer; and I'm joined by Robert Curda, the company's Chief Financial Officer. I'll start with an overview of the first quarter, and Robert will then offer an in-depth commentary on our financial performance. Afterwards, I'll make a few final remarks and open the line for questions. Some of today's statements may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995, and that includes comments about product markets, revenue recognition, planned operations and capital expenditures. These statements are based on our present awareness, while actual 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 or imply. Such risks and uncertainties include those discussed in our SEC forms 10-K and 10-Q filings. And as mentioned, for convenience, we'll link a recording of this call on the Investor Relations page of our geospace.com website. Note that information discussed this morning is time-sensitive and may not be accurate at the time one listens to the replay. So yesterday, after the market close, we released our financial results for our first quarter of fiscal year 2020, ended December 31, 2019. As reported, increased demand for our OBX marine nodal recording systems fueled first quarter results. First quarter revenue of $25.7 million outperformed the last year's first quarter by 44%. In fact, first quarter revenue was the highest first quarter figure since our all-time record-breaking high in the first quarter of fiscal year 2014. In addition, gross profits generated on this higher revenue more than tripled compared to last year,…

Thanks, Rick, and good morning, everyone. Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during our call this morning. In yesterday's press release, our first quarter ended December 31, 2019, we reported revenue of $25.7 million compared to last year's revenue of $17.9 million. The net loss for the quarter was $1.3 million or $0.10 per diluted share compared to last year's net loss of $5.9 million or $0.44 per diluted share. A breakdown of our oil and gas product revenue is as follows: our traditional product revenue for the first quarter was $2.4 million, a decrease of 15% compared to revenue of $2.8 million last year. The revenue decline is attributed to lower demand for our traditional sensor products, partially offset by an increase in demand for our marine seismic products. Our wireless product revenue for the quarter was $16.9 million, an increase of 132% compared to revenue of $7.3 million last year. The increase in revenue is due to growth in the rental demand and utilization of our OBX marine nodal systems. Revenue for the first quarter excludes $1.5 million of rental revenue not recognized due to the uncertainty of a customer's ability to service its debts. Our reservoir product revenue for the first quarter was $218,000, a decrease of 77% compared to a revenue of $937,000 last year. This revenue decrease reflects reduced sales of our 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 PRM system. Currently, there are no open tenders for a PRM system, but we believe the tender offering is likely to be released in fiscal year 2020. However, provided Geospace is awarded a PRM contract,…

Thank you, Robert. Within our oil and gas market segment, our traditional exploration and reservoir seismic products remain extremely challenged by very low demand. This directly affirms that historic low levels to which seismic exploration activity in the oil and gas industry has fallen, and we see no real indications of improvement for these products on the horizon. These conditions have similarly impacted our wireless seismic products for onshore use, although we believe recent sales of our advanced GCL nodal recording system helped demonstrate the value that our technology offers to our customers while navigating these down conditions. On the other hand, our OBX marine nodal recording systems continue to represent a bright spot in an otherwise dim seismic equipment market. We believe the continued revenue growth and seemingly uninterrupted increase in demand for these products is driven by the renewed focus on offshore reserves by many of today's E&P operators. At the same time, we believe that this increased focus on offshore reserves is creating renewed interest in our PRM systems, which could lead to one or more tenders and opportunities for PRM contracts in fiscal year 2020. That said, we continue to move forward with our diversification strategies for the adjacent and emerging markets in order to help mitigate the volatility we face in our oil and gas market segment. Based on our technological accomplishments, we believe, the onset of meaningful Quantum product revenue could start this year from our border and perimeter security customers. This concludes our prepared remarks. And now I'll turn the call back over to Tony for questions.

[Operator Instructions] We'll take our first question from Bill Dezellem with Tieton Capital.

Here in the last couple of weeks, we saw an article from the BBC that said that the U.S. border patrol had found the longest tunnel that they had ever found along the U.S.-Mexican border. I believe it went from Tijuana to the San Diego side. And it was found back in the August time frame. What do you all know about that tunnel? And how that was found?

Well, Bill, I guess, what I do know about it is, it really represents what really faces the border patrol every day. That tunnel has -- that was found, we're quite aware of it. There's -- who knows how much illicit commerce has gone through that tunnel across the border, and it's a dangerous situation. It's something the border patrol faces every day. I certainly -- it's not even appropriate for me to comment on whether we had any involvement in that find or not. I think it's more important just to realize that this is an important situation that the border patrol needs to address. And I believe they fully intend to try to address those issues. I can say that the equipment that we have developed with Quantum is exactly suited for detecting these sorts of tunnels. So we look forward to the border patrol's fight and their effort in trying to combat that sort of illicit activity.

And Rick, I'm going to keep going down this path, if I may. I guess, I'll ask -- you said you won't comment directly what role your equipment did or did not play. But I'm curious, it seemed like there were 2 aspects. Number one, there was the identification of the tunnel. And then secondarily, there was the mapping of the tunnel. Does the Quantum equipment lend itself to both mapping and the finding? Or is it better for one or the other? And why? Can you help us understand the equipment a little better from that perspective?

I think so. I mean, the detection aspects certainly are something that the Quantum technology can do. Utilization of the tunnel causes seismic activity that is monitored. And through that surveillance is what provides the ability with all of the artificial intelligence and machine learning and other aspects that go into the deep analytics that are performed with the quantum algorithms to make those detections and mappings to that extent as well. So as long as there is seismicity, the Quantum system is going to do well.

So would it be a correct understanding or interpretation that once you have detected a tunnel that you could send some people to walk through the tunnel, the good guys, that is, and you could simply map where that tunnel went and what buildings it was under, et cetera?

I'm sure physically that would make perfect sense. I mean we're not involved in the interdiction of any sort of tunnel activity. What our equipment is designed to do is to detect and identify those sorts of things.

Right. Okay. That is helpful. And then I would like to have some clarification on a couple of things that I thought I heard that may have been in contrast here on the call. And Rick, you were reading your script and said that you do believe that a meaningful Quantum revenue could happen this year from the border security. Robert, I thought that we heard you say that you did not expect meaningful revenue from Quantum in the near term. Are those 2 statements in contrast or not? And would you help clarify for us?

I do think it's possible that we could see some revenue from Quantum this fiscal year. I think I'm just being just a little bit more careful about those statements. But we do think that, that could occur in this fiscal year.

[Operator Instructions] Meanwhile, we'll move to Chris Sansone, Sansone Advisors.

Rick, one for you. The demand you're seeing on the offshore side with the ocean bottom systems. Is that coming at the expense? Or is that gaining market share relative to the streamer technologies? Or is that incremental analysis that they're using the ocean bottom stations for?

I think it's circumstantial in a sense. I think we do believe that certain streamer operations are improving though they're not near what they used to be in times past as far as that goes. But I think it's the manner in which the oil companies have sort of renewed their interest in offshore. In many cases, quite successfully, they're looking for discoveries nearby their existing infrastructure. And in that sense, where there are existing platforms, they're not so keen on those streamers getting too close to those platforms. And moreover, in some cases, they need the better imaging that you can get through ocean bottom data where you can shoot under and you can achieve azimuths in your imaging that you cannot do even with wide azimuth streamers. So I think that the type of refocusing that is going on at this point offshore is sort of driving this additional demand for that broader and more resolute imaging that the ocean bottom nodes are providing.

Got it. Got it. And then, Robert, as more of the business shifts to a rental-based business, are you guys considering including EBITDA or adjusted EBITDA during quarterly earnings releases?

We have not considered that. That could be something we could add in the future, but Rick and I have not discussed that at this point.

Yes. I mean, I think it would help tell the story because that's really where the growth is really going to be seen. As you know, in a rental business, the cash was out the door, day 1, and then it comes back to you over the life of the contract. So I think it would be helpful for investors to kind of see how you guys are driving that growth.

Next, we'll move to David Nierenberg with Nierenberg Investment.

As you and others on the call know, we have long been supportive shareholders of this company. We're impressed by your survival instincts and your preservation of cash at a time when competitors were going out of business. We're delighted to see your continuing investment in innovation, gaining market share offshore and starting to get orders onshore in your core business. And we share your hopefulness about the prospects for continued strength in offshore exploration and for new orders for the PRM business. We do have two concerns, neither of which are new to you or to those on the call. One is we would sure like to see Quantum generate orders and revenue. It's been a long time while that has not happened, and we've been incurring operating losses and investments, but our single greatest concerned today is about accepting credit risk to risky customers on land and offshore, domestic and foreign, and the risk to the strength of the balance sheet, which results from that. We do not want to see this company becoming that borrower, and I imagine you don't either. But during the time we've been shareholders, the cash balance has sunk from close to $50 million to now about $10 million. We really don't like to see you being a lender because our perception is that both management and Board of this company lack relevant banking experience, lack asset-based lending experience, lack vendor leasing experience and you're dealing with risky customers in a risky business, and there have been and are likely to continue to be large losses from time to time. And now with this new $12.5 million contract, most of which, if and when it's paid for, is going to be extended out to January 2023 that really concerns us. So our concerns are, is this a prudent business strategy? Is this a prudent financial strategy? Is your accounting and auditing doing the right things in terms of revenue recognition, establishment of loss reserves and realization of those reserves? Why is it a good business if we have to accept this kind of risk from shaky customers? And so I think it's a good time for shareholders to be asking you and the Board to do a thorough review of this company's strategy and ask whether it is right for this company to continue to remain an independent public company or whether or not you should partner? Or consider sum-of-the parts transactions because the pieces may be worth more than the whole? That's how uncomfortable and troubled I am about the credit risk that you're accepting.

Well, we can certainly appreciate that, David. I think that in general -- that we do feel that we're on sound footing with respect to the -- for example, the $12.5 million contract that you're referring to there. I mean that's -- the note that we're discussing is certainly a secured note. That also represents an order that we received upfront cash payments. And we basically operate our business in that sort of manner even on our rental equipments to ensure that our base costs have representation in terms of the cash that begins those contracts. So I think we're doing our best at putting in due diligence in ensuring that our financial footing on these sorts of contracts start out very solid. To that extent, as a security, if that equipment were to come back to us, I mean it would be certainly something that could generate revenue through its rental opportunities. We do examine our cash outlook at the Board level every quarter, and we do -- try to forward look on all of that. And we examine how it matches up to what has happened. There are risks involved in this particular business, any oil and gas related, particularly in the services side, there are risks. And you see those represented absolutely in this offshore case of the OBX rentals. Clearly, we own all of that equipment. So that asset is ours. It's not in jeopardy in any respect. And we have every indication that -- so far that we believe that, that debt will be able to be paid and that the opportunities for that work exists. But we are having to work through some difficult issues with that particular company to get this on proper footing. There is risk there. I can't deny that. And that's exactly why we have made it so well-known and try to give a complete and utter disclosure of what the issues are there that we're facing. But for right now, we believe that our ability to ring that in and bring it into a better circumstance certainly has a high probability. But that could change. And that's exactly what we've tried to make clear.

I remain concerned about granting credit risk in a company where I question whether or not the management and the Board have relevant credit granting and oversight expertise. I guess I'm going to follow up on this call by having conversations with the shareholders I know to see whether or not our concerns are shared by others. And then we'll come back to you with our findings. But I'm sorry to have to register this today, but the numbers are so big that it's a serious concern for us at least.

Next, we'll move to [ Michael Cox with EPG ].

I just wanted to talk a little bit about the current -- the credit that you're concerned about? This operator, they still have -- they've not made payments, obviously, in some time because you've registered this now on 2 calls in a row. But are they still operating the rental equipment that they secured from you?

That is correct. They are still using our equipment on jobs today.

Has there been any thought to, since it's your equipment, and they're not making payments, and your commentary is incredibly negative around it. I'm going to follow up in the second discussion to not have a bad debt expense around this, but you're basically -- it sounds like what you're saying is that you don't expect to get a new money at this. Why are you letting them continue to use your equipment now for going on almost 6 months of no payment?

Well, actually, it's part of the equipment. Some of the equipment is returned in our hands. But to your point, and that's certainly an option, there would be a complete cessation of any cash flows if the equipment was not continued to be used. And honestly, if any of the new demand comes about and that equipment is better placed in other circumstances, we would certainly do that. But at this point in time, we -- in the private discussions with the company, we see the forecasted opportunities that can bring this back into line. And so we believe it's in our best interest to let this ride at the present time.

Okay. You said it sounds like you made an agreement with them in November, and they immediately didn't follow through on the agreement, so -- which -- fool me once, shame on you, fool me twice, shame on me. You sound a little bit more optimistic this time around, but really what -- how -- what gives you the confidence to suggest that round 2 of negotiations with them will end up any better than round one?

That is a very fair observation. And I can tell you that the agreement that was made in November, there were circumstances that occurred very nearly immediately thereafter that caused some delays in those forward opportunities beginning that we're going to correct those measures. Those have subsequently begun, but because of those delays, the initial payments on that plan were not able to be made. We recognize that. We know what the circumstances are that caused that, and certainly not anything that it was our fault or in our control, but were circumstantial. And now that those are more on the original plan of execution, we believe that this new plan, which will also involve some asset securities, will put us in a better position.

Okay. And one way or another, your expectation is that by the time we're talking again at the end of the next quarter, this will be substantially decided, whether it's -- you'll either have collected some cash and be able to feel more confident about this or you'll be -- you'll likely be recording a big bad debt expense, correct?

I think we completely agree with that. Yes.

Okay. And then turning to the balance sheet for a second. Obviously, a substantial increase in accounts receivable and other receivables this quarter. Is this related to SAExploration? Or what is driving that? Because we had -- normally, your balance sheet, I'd say, is pretty a client-toward positive free cash flow. And this, obviously, was a bad quarter from that perspective. So could you just kind of walk through the pieces there?

So it's a -- the increase in accounts receivable does not have to do with SAExploration. I mean we were notified by one of our other OBX nodal customers that they were going to be delaying some payments subsequent to that. They started paying right when they indicated that they would have cash flow coming towards us. And the cash flow has been received and we're -- our receivables reflect that as of today.

Okay. So no incremental concerns there, just happened to be right around the end of the quarter?

Right. That was a timing issue, yes.

Okay. And then finally, and then I'll shut up and turn it back to everybody else. On the PRM side, I know that this isn't -- they almost punished you for being willing to [indiscernible] at all. But I was going back reading through quarter after quarter of your commentary surrounding your hopefulness for things moving. It sounded like there was a tweak in the wording that made it a little bit more. You feel like 2020 is a year where there will be some -- a tender as opposed to the near term, et cetera. Could you just maybe talk a little bit more in-depth around the nature of those conversations? And you're either growing confidence or not growing confidence about something happening in the next 10 months?

Sure. We're very bullish on the efficiency and efficacy of PRM. The science is well known. It's just been the capital investments by the oil companies have been very much withheld and, particularly, withheld from offshore work until very recently here. The reason we're more hopeful is because the discussions we're having, which are under nondisclosure, so I can't really give you lots of information on any of that detail. But in those discussions, it is being referenced to us and has been for even some time of when a tender might come out. And even though there have been delays that have occurred there, we feel more confident based on what we're told and based on the discussions and the way that we're being fed information in these discussions from the oil companies that there is the likelihood this year of such a tender coming out. Now even having said that, and I want to make clear that the execution of that award, when it takes place, based on our confidential understandings of when deployments would occur and all that, don't necessarily mean that the revenue would be recognized in this fiscal year, even though a tender, possibly even an award might come out in the fiscal year. Beyond that, there's other opportunities that are brand-new that are coming up. The new discussions that we have not had that are -- that have been onset, new requests for information towards that thing. So the good news about that is it sort of confirms, I think what many in the industry that analyze what's going on in the industry. I'm not the only one that has seen this sort of new interest as it were in the offshore world. We know that the shale aspects are changing, the investment strategies are changing there, and we see many of oil companies going back and examining what they can achieve offshore. Sometimes using some of the new techniques they've now developed, having been very cost-conscious as they were. So we believe all of that is driving things in the right direction.

And next, we'll move to a follow up from Bill Dezellem.

I'd actually like to continue down the PRM path, if I may. The reference in the press release, was that the same prospective customer that you have been or same perspective tender that you have been talking about? Or is it different than the one that you expected in the past? And I do know that you did say that you had some new requests from new prospective customers. But it sounds like that's a little bit different and more ancillary than the one that you referenced in the release?

Well, there certainly are some new ones. And the press release is trying to reference those too. But I can say that longer-standing ones that we've been in discussion with are also included in that commentary.

And have you previously been under NDA? Or is that a forward step in that process?

That's always a forward step in that process and a consideration that we're always meant to follow.

And when did you go under NDA?

Probably the day we started talking.

Understood. Okay. And then I do want to come back, if I may, to the border security business that -- last quarter, I think the press release made reference to the fact that you don't expect significant revenues from border security in the near term. This quarter, the press release in the same paragraph said that near-term opportunities exist. Would you please talk about what changed for that more positive tone in the press release?

Yes. Just to be clear, the near-term opportunities are for contracts, but that does not necessarily mean revenue would be recognized at the onset of that contract. But within those opportunities that we think do exist in the near term, from a contractual point of view, I think it's quite possible that they would lead to revenue recognition before the end of the fiscal year, and there's going to be a timing issue there.

And did something change in the last 3 months or since the last call, I should say, that you're receiving more positive indications from prospective customer?

I think so. It's just timing has passed and some of the steps and necessary actions that needed to be taken by those involved have progressed. And so that just puts it further down the timeline towards reaching an endpoint.

Right. And I'm going to relate the same question back to PRM. With the border security products, are you anticipating revenue recognition on a percentage of completion or on shipment? Or does all that change with ASC 606?

Yes, it has changed, and it would be more likely over a period of time. We would have to examine the contract and determine what those measurable points of time would be to recognize revenue, but it is not exactly the same as percentage completion any longer.

And yet, you do think that the border security probably would be recognized over time rather than in a 1 step?

Yes, that would be my expectation.

And how about with the PRM that you are -- a tender that you are referencing, would you expect that if you were awarded that, that, that would be recognized over time or more upon delivery?

Again, it would be -- it would depend upon the particulars within the contract. But I do expect that we would recognize the revenue over time.

And so our experience historically with PRM is that the smaller contracts or tenders you recognized upon shipments and then larger were over time. So would it be fair to infer that the tender that you're talking about would be of a more meaningful size and that's why recognized over time?

I think so. But there are some other opportunities. Certainly, within our discussions, it might fall into a shorter time frame in that regard. But we'll just have to wait and see how those might manifest.

Okay. So said another way, you have both small opportunities and big opportunities in the PRM arena?

I think that's a fair statement.

Okay, that's helpful. And then one additional question before I step back. The incremental revenue or incremental margin on your incremental revenue was somewhere in the neighborhood of 95% this quarter. Is that the sort of incremental profitability that we should anticipate as the rental business grows? And granted, coming back to the earlier point about getting paid. That's an important piece of all this, too. But assuming that you are paid, that, that's the right way to be thinking about margin? Or is there something special this quarter where that incremental margin was higher than normal?

No. There's not -- nothing unique or special about this quarter in relation to our rental revenue and the margins we expect to see from that. Those -- the rental equipment has primarily a fixed cost in nature. And as you have more of that equipment out being utilized and generating revenue, we see a higher level of profit from that.

And essentially, you're depreciating that product, whether it is -- whether you're recognizing revenue, whether the product is being used or not. And so any rental revenue really becomes margin.

That's correct. In addition to depreciation, we had maintenance costs for equipment that's unutilized also. So those costs don't go away.

And next, we'll move to a follow up from David Nierenberg.

This question is probably for Robert. I noticed that this past quarter, there was a $1.42 million income tax charge, which was way beyond the operating profit that was reported, which I think was only about $170,000. Could you please explain to us what was going on with taxes in this quarter that made that number pop up so large?

Yes. Those taxes are associated with withholding tax in foreign countries where our rental equipment is used, our OBX nodes are used. Our rental revenue contemplates that tax, and that tax is remitted on our behalf by our customers.

And do we wind up having to pay that tax regardless of whether or not we get paid for the rental of the equipment?

Well, our -- in the situations where we have withholding tax, the tax is actually remitted to the taxing authority by the customer.

And I'm unclear about why it appears on our P&L.

Well, it appears on our P&L because we have increased our rental revenue to include that tax and they are paying us a lesser amount. They are paying us net of the tax.

And next, we'll move to Michael Melby with Gate City Capital.

My question was answered.

And next, we'll move to Damon Benedict with D3. Damon Benedict;D3 Family Funds;Analyst: I thought I heard you mention in response to David's question about the GCL order that you'd received some cash upfront. How much was that? And how much of your cost to produce those GCL units, how much of your cost to produce was offset by that cash you've already received?

Actually, Dan, it's a great question, but we don't reveal the costs on those units. I mean our competitors would love us to do that, but we're not willing to do that. Damon Benedict;D3 Family Funds;Analyst: Without giving a dollar number, could you just let us know roughly what percent of your cost is already recovered and derisked.

No. I'm afraid I couldn't, but I believe the down payment on that was something like 10% or something along those lines, if I'm not mistaken. Damon Benedict;D3 Family Funds;Analyst: Okay. And was the cost, sorry, I missed those in the prepared remarks, but with the...

I'm sorry, Robert just corrected me and said it was 20%. Damon Benedict;D3 Family Funds;Analyst: Okay. And was the cost already reflected in your P&L in this past quarter? Or is that going to be reflected in the upcoming quarter, the cost to produce that? Sorry, if I missed it.

Yes. Delivery didn't occur into -- until our second quarter. So we would not reflect any cost until we recognize the revenue. Damon Benedict;D3 Family Funds;Analyst: Okay. And on the promissory note, is there any payment in the meantime? Or is it all just one bullet in '23?

No. They'll make scheduled payments, monthly payments throughout the life of the note. Damon Benedict;D3 Family Funds;Analyst: Okay. And then last one, on the $8 million of projected CapEx related to the rental fleet for this year, how much was already in this fiscal first quarter versus how much for the next 3 quarters?

I mean that $8 million includes $5 million we incurred in this quarter. And I'm not really sure I know the timing on a quarter basis through the rest of this year for the rest of those. Damon Benedict;D3 Family Funds;Analyst: Okay. So only $3 million more over the next 3 quarters?

Yes.

And at this time, we have no further questions. I will turn the floor back over to Mr. Rick Wheeler for any additional or closing remarks.

All right. Well, thank you, Tony. And thank you, everyone, who joined our call, and we definitely appreciate the very valuable and good questions you've asked. And hopefully, we've been able to give you some good answers. So we look forward to speaking to you again in our conference call for the second quarter of fiscal year 2020 in May. So thanks again, and goodbye.

Thank you. This does conclude today's Geospace Technologies First Quarter 2020 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.