Geospace Technologies Corporation (GEOS) Q4 2022 Earnings Report, Transcript and Summary

Welcome to the Geospace Technologies Fourth Quarter 2022 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; and Mark Tinker, CEO of Geospace subsidiary, Quantum Technology Sciences. 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.

All right. Thank you. Good morning, and welcome to Geospace Technologies conference call for the fourth quarter and year end of fiscal year 2022. I'm Rick Wheeler, the company's President and Chief Executive Officer, and as mentioned I'm joined by Robert Curda, the company's Chief Financial Officer. And also in the call this morning is Dr. Mark Tinker, CEO of our subsidiary, Quantum Technology Sciences. I'll first provide an overview of the fourth quarter and year end, and Robert will follow up with in-depth commentary on our financial performance. Afterwards, we'll open the line for questions, and we'll try to answer. Some of today's statements may be forward-looking as defined in the Private Securities Litigation Reform Act of 1995. And this includes comments about markets, revenue recognition, planned operations and capital expenditures. Such statements are based on our present awareness, while actual outcomes are affected by factors and uncertainties, we cannot predict or control. Both known and unknown risks can lead to performance and results that differ from what we say or imply today, these risks and uncertainties include those discussed in our SEC Form 10-K and 10-Q filings. For convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website. And please take the opportunity to browse the website to learn more about Geospace and our products. Note that the information we record this morning is time sensitive and may not be accurate at the time one listens to the replay. So yesterday, after the market closed, we released our financial results for the fourth quarter and year end of fiscal year 2022, which ended September 30, 2022. Our fourth quarter revenue grew more than 33% over last year's same period, excluding the first three quarters of fiscal year 2022. This is largely attributable to the steady increase in demand for our OBX ocean bottom nodes as the year progressed. And we expect this demand will continue to grow in fiscal year 2023. Fourth quarter oil and gas segment revenue saw an additional boost as we began scheduled deliveries of specialty geophone sensors and partial fulfillment of a previously announced order that extends into fiscal year 2023. However, despite the improved Q4 performance, revenue for the full fiscal year missed last year's total by 6% leading to a net loss for the year of $22.9 million. In response, we have begun the implementation of a Board approved dynamic plan intended to lead us to consistent profitability. The plan includes leveraging the successes of our diversification strategy that have created new products and revenue growth in the adjacent market segment. It also includes shedding the manufacturer of some low margin, low revenue products and reconfiguring our production facilities to lower our costs and raise efficiencies. As part of the plan adjustments have already been made in our workforce since the fiscal year end and are expected to yield an annual savings of more than $2 million. And as our plan continues to unfold, regular evaluations of each business segment will focus on revenue opportunities, as well as additional areas where costs can be reduced. Note that the fourth quarter and full year losses reported for fiscal year 2022 include a non-cash charge of $4.3 million for the impairment of goodwill related to our 2018 acquisition of Quantum. The technology we gained through this acquisition remains highly valuable and is in fact being targeted in a variety of new applications with promising revenue potential. However, past performance of our Quantum acquisition has not met the necessary expectations required to support its goodwill. Our reported losses also include a non-cash charge of approximately $400,000 for the write-off of certain heavy machinery in our cable shop. Over time, revenue from goods produced with this equipment has greatly diminished and the space will recover from its removal will allow us to move our OBX rental operations from a nearby satellite facility to our main campus. This consolidation should provide much better efficiency and utilization of the factory and in turn reduce costs and increase our profitability. Recent conversations with our permanent reservoir monitoring or PRM system customers have led us to expect additional delays in the timing of a potential tender, although they've indicated that their overall interest and intentions have in no way diminished. This means the most opportune time for the transformation of our cable shop is now when it should not interfere with ongoing main campus manufacturing activities nor disrupt any ongoing OBX rental operations with the move. Note also that the ability of our cable shop to build both electrical and optical PRM system cables will remain intact after the transition. While we are certainly encouraged by favorable trends in our Oil and Gas segment, we are especially pleased with the revenue growth and product expansion of our Adjacent Markets segment. Fourth quarter revenue from our adjacent market's products became the second highest in its history almost matching the all-time record set in the fiscal year's third quarter. For the full 2022 fiscal year, our adjacent market revenue reached $39.2 million. This outperforms last year's result by 21% and sets yet another full year record for that segment. Within the segment, our Exile graphic imaging products, water meter cables and connectors and contract manufacturing services each set new full year records of their own. In another first, the fourth quarter included the very first shipment of our Aquana smart water valves and subscription-based cloud control software. The dollar amount was not significant, but it nonetheless marks the beginning of what we believe will be another path of profitable expansion in the years to come. Overall, the ramping performance of our Adjacent Markets segment provides strong validation that our strategy of selective diversifications outside of the oil and gas industry is working by broadening our revenue base and moving us forward on a path toward profitability. Now I'll turn the call over to Robert to provide more financial detail on the fourth quarter and full year.

Thanks, Rick, and good morning. 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 for our fourth quarter ended September 30, 2022, we reported revenue of $25.9 million compared to last year's revenue of $19.4 million. The net loss for the quarter was $8 million or $0.62 per diluted share compared to last year's net loss of $5 million or $0.39 per diluted share. For the 12 months ended September 30, 2022, we reported revenue of $89.3 million compared to revenue of $94.9 million last year. Our net loss for the 12-month period was $22.9 million or $1.76 per diluted share compared to last year's net loss of $14.1 million or $1.05 per diluted share. Here is our Oil and Gas market segment revenue. The Oil and Gas market segment produced revenue of $14.8 million for the three months ended September 30, 2022. This compares with revenue of $10.7 million for the same period of the prior fiscal year, an increase of 38%. The 12-month period ended September 30, 2022, the segment contributed revenue of $49.1 million versus $52.3 million dollars for the same prior year period. The increase for the three-month period is due to higher demand for seismic sensors and a higher level of repair parts and services needed for the repairs of customer-owned marine wireless products. The 12-month decrease in revenue is due to lower demand for the purchase of our land and marine wireless products partially offset by higher utilization of our marine wireless rental fleet and a higher demand for our seismic sensors. Our Adjacent Markets segment revenue is as follows. Our industrial product revenue for the fourth quarter of fiscal year 2022 was $7.2 million an increase of 30% over the fourth quarter of 2021. The industrial products 12-month revenue for the fiscal year 2022 is $25.6 million an increase over the same period in 2021 of 20%. Both periods' revenue increases are due to higher sales of our water meter cable and connector products, industrial sensor products and contract manufacturing services. Imaging product revenue for the fourth quarter was $3.7 million an increase of 21% compared to last year's revenue of $3.1 million. The 12-month revenue for the imaging products for fiscal 2022 is $13.5 million a 22% increase when compared to the same period in 2021. The increase in revenue for both periods is due to a higher demand for our thermal imaging equipment and consumable film products. Finally, revenue from our emerging market segment for the fourth quarter was $140,000 compared to $170,000 for the same period in 2021. The 12 month revenue for the segment for fiscal year 2022 was $711,000 compared to $10.2 million for the same prior year period. The decrease in revenue for both periods is due to meeting contractual obligations in fiscal year 2021 for a contract with the Customs and Border Protection U.S. Border Patrol that was awarded in April of 2020. Our fourth quarter fiscal year 2022 operating expenses increased by $6.1 million compared to the fourth quarter of 2021. The increased operating expenses for the three months ended April 30, 2022 was due to a one time non-cash charge for the goodwill impairment in the company's emerging market segments, a decrease in favorable non-cash adjustment for contingent consideration related to Quantum and OptoSeis acquisitions and higher engineering project expenses. The 12-months operating expenses decreased by $8 million or 24% when compared to the same prior year period. The increase in operating expenses is due to the goodwill impairment in the fourth quarter already mentioned, higher engineering project at cost, increased personnel costs, incremental operating costs associated with our recent acquisition of Quantum and increased sales, marketing and other general business expenses. This increase was partially offset by an increase in favorable non-cash adjustment or contingent consideration related to the Quantum and OptoSeis acquisitions. Our 12-months cash investment into our rental fleet was $4.8 million and cash investments into property plant and equipment was $1.1 million. Our balance sheet at the end of the fourth quarter reflected $17 million of cash in short terms and investments. And we have $8.5 million of additional liquidity from our credit facilities. In addition, we own numerous real estate holdings in Houston and around the world that are owned free and clear without any leverage. That concludes my discussion, I'll return the call back to Rick.

Thank you, Robert. The aftermath of the pandemic and the war in Ukraine have created a broad level of disarray throughout the world. Global inflation and threatened energy supplies are the prime examples. Solving the latter of these is critical and evading the former and provides the only means for us all to move forward. We believe the oil and gas industry is fully engaged and trying to responsibly solve the issue. And we believe this offers rationale for an increase in demand for our OBX and other oil and gas segment products. Coupled with a successful expansion of our adjacent markets products and our structured moves to achieve greater efficiencies, our confidence is bolstered for increasing revenue, maintaining a strong balance sheet and providing profitable returns for our shareholders in the future. This concludes our prepared commentary. So now I'll turn the call back over to Ashley for questions from our listeners.

[Operator Instructions] Thank you. And our first question comes from Scott Bundy with Moors & Cabot. Please go ahead.

Good morning, gentlemen.

Hi, Scott.

I'm very pleased to hear you guys talking about getting to profitability. Just a couple of bookkeeping things that I'm trying to understand regarding the contingent consideration for Quantum and OptoSeis. According to your third quarter 10-Q the contingent consideration was a couple 100,000 bucks for Quantum and 0 for OptoSeis. Also according to the 10-Q the earn-out for Quantum expired in July of 2022, and for OptoSeis earn-out any money required contract signings as of I think November of 2022. So first of all, do I have that correct?

Yes, you have that, correct? But we have very little contingent consideration for Quantum on the books to make a final payment to the former shareholders and then we have no contingent consideration on the books for OptoSeis.

So the comment related to $5 million non-cash benefit for changes in contingent consideration related to Quantum and OptoSeis in your release, what is that referencing?

That's referencing that we were reducing the liability we had on the balance sheet because we didn't need that large of a liability. So it's a favorable adjustment to the P&L.

So it is -- am I -- is that in fact an indication then -- is the $5 million an indication from nothing before an indication of revenues that you anticipate or do I have that wrong?

Well, it was on the books, on the balance sheet as a potential obligation that needed to be recorded there. And now that all those earn-out periods are expired, that is being relinquished off there, that's no longer a liability. I think that's the way I would interpret it.

Okay, I missed -- okay, I just -- thank you very much. So, Rick, the Schlumberger CEO recently indicated that the pipeline for final investment decisions for deepwater and shallow water was the highest in over 10 years, which is pretty extraordinary. And the number provided was something in the vicinity of $170 billion. So where are you guys in terms of your discussions with people regarding these markets, let's even include PRM because that's a lot of money and the trend seems to be quite favorable?

No, I agree 100% and in fact that's what we're seeing and largely that's driven the demand for our OBX ocean bottom nodes as high as it has and we continue to see that demand growing. And it's because that marine exploration side, which is a preface before all of these final decisions,, investment decisions you're talking about, has to occur. Even the towed streamer operations are seeing some improvement to that extent that's why you see this order that we announced earlier to provide these sensors for PGS's GeoStreamer capabilities is in place. As it relates to PRM, no difference there. I mean, the fact is the interest is still highly expressed with us in conversations going on about these PRM projects. But issues have come into play where they need to kind of get their own ducks in a row is the way I would kind of explain it before they can make some of those final decisions. And that includes even some initial front end surveys that they want to do. So they have a better idea than what they did before as how they want to go forward with a PRM. So all of those things are in play and to your point, I think we see the same thing as it intersects our business. That part of the marine industry for oil and gas is definitely where the activity is.

You used plural the word multiple people that you are talking to at PRM. Is that correct?

Yes, that's right.

And two other questions if I may. Has the stock valuation had any impact on contract talks?

Not to this point, not at all. I think the technology and the fact that we've got a strong balance sheet, no debt and all of that plays into our ability to be well represented in the commercial space.

And lastly, if I may for Mark, lots of discussion in the marketplace regarding CO2 sequestration, real money being moved in this area. Mark, can you just give us an update on the level of interest for what you guys are doing in that space?

Yes, I'd be delighted to. Part of our long term plan when we started to exit COVID was to establish a reference system using our SEDAR technology. And so we just celebrated our one year anniversary being deployed at a small carbon storage facility in Canada. associated with carbon management in Canada. And based on our results there, which have vastly exceeded even my own expectations, we presented a number of papers throughout the last year and are putting that brand on the rise. And thanks to that, and thanks to that validation. We see a very strong indicator in how SEDAR can come in and actually fill a gap associated to the measurement modeling and verification function for carbon storage. So when companies go apply for the full permitting process that this is the reservoir, this is what we're going to do. There's a component of that that says once carbon is injected, how are we going to know that it's going to stay there? And they have to have ways of validating that in near real time. And so, we are enjoying a significant number of conversations across all the majors and some of the service providers for how SEDAR can meet those requirements.

And Mark when you're - just to help us from the outside looking in. When we look at this, is it a cost issue? Is it - your technology versus someone else's technology, meaning it's competition can you give us a little flavor of the dynamics of these negotiations?

Sure, it's some of - it's first and foremost a disruptive conversation. Classic ways when you're trying to understand what's going on in an environment in which you cannot see. So we can't see the subsurface, so we have to listen to it. And there's two fundamental ways that we listen to it. We put sensors on the surface of the earth, in large channel counts or we put sensors deep into the earth into boreholes that are either existing or that we have to drill. Both of those techniques have their benefits and they have their challenges. Our state or our approach actually splits the difference. It's neither a surface system nor is it a deep borehole system. It's shallowly deployed in the upper meters of the earth. The other thing is, is its permanent. So that's what I mean by a disruptive conversation. That's why we're giving technical papers is to show its performance capabilities relative to something that this industry is very familiar with. Recall, we are also a passive, monitoring technology. So I want to be very clear on that. Traditional techniques have been used to image the layers of the earth, to image reservoirs. So to image something we have to send energy into the earth, listen to its reflections and then understand what it looks like geometrically, right? A passive technology simply listens and what's it listening for? It's listing for these little micro earthquakes. And those micro earthquakes are indicative of what's going on with the reservoir. When we interact with reservoirs in any capacity, whether we're extracting some form of hydrocarbon or injecting hydrocarbons or injecting carbon or injecting groundwater whatever it might be, that reservoir is going to have an expression and an expression is going to be seismicly based. When we interact with it, it's going to have little creasing cracks that pop off and those are micro earthquakes. And if we can accurately detect and locate those, it gives us a very good understanding of what might be happening in the subsurface. And so our value propositions are to passively listen for those and give a real time response. So what we're doing is we are selling information, we're not selling hardware systems, we're not selling algorithms. That's part of our full system solution that ends up the result is selling that information. Why do I want that information? Because I'm going to take action, it's going to compel me to take an action that allows me to stay compliant with my regulations for carbon storage or anything else I might be, needing to monitor for that micro-seismic expression of my reservoir.

So is this - are there tenth in terms of being compliant here from a law perspective?

Yes, so these regulations are forming, and you can go Google them and research them that when you inject carbon and you have your reservoir, there's going to be regulations that say you must by law monitor that reservoir - upwards of 99 years in some cases. And so it is part of the carbon capture process. It is part of that complete, what I call a kill chain. So, we must understand the reservoir first upfront, where are we going to put our wells, all these other things that we don't apply to. But once it goes into that ground, and that that pressure plume as it's called starts to push through and fill that reservoir with carbon. We want to know what is that plume doing, is it staying below the cap rock? Is it escaping by breaking the cap rock? Is it escaping due to existing wells? And when you think of what it takes, to store enough carbon to make an impact towards global climate change. We're looking at carbon storage reservoirs of the gigaton level as it says. A gigaton reservoir has a very significant expanse in terms of its lateral extent. It's much bigger than the city of Houston, for example. How do you monitor something that size economically? How do you give a persistent look at what you're doing to that reservoir or something that's many, many, many square miles that's that value proposition that we're coming in at. We can't do it using traditional seismic techniques. So that's why we created this technology to give us that understanding of that pressure plume as it pushes out that is going forward as we expected to do as required to do. So there is going to go to be effort to put the carbon there, we have to go to the effort to make sure that it stays there.

Last question with the recent elections are you more or less optimistic about activity regarding the border?

It's a very good question. What's been driving that frustratingly long process for our border security technologies is somewhat driven by Congress, but more driven by a border patrol process that they had been following. And now, we're coming towards the end of that process in the next year or so. So we maintain a strong presence on the hill. They understand what our technology is capable of doing, and they are very supportive in a bipartisan way of ensuring the upcoming funds that we're working towards will be in place to follow the border patrol plan.

If you were to guess would you - guess that having gone through this process that you would be more successful than you were the first time in terms of size of these contracts and I understand it's a guess?

Yes, so our first contract was part of this three-year process. It was as designed so I'm - I will guess with you that the follow-on work is going to be a very - we're looking forward to this strategic revenue that we've been positioned for in the upcoming years.

Terrific, thank you very much guys.

Thank you.

Thank you, Scott.

And we'll take our next question from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. I had a couple of questions. First one relative to OBX, Rick, you had referenced the increase in demand that you have seen. Did we understand correctly that you believe that that demand growth will continue from here. And I mean given what it appears as though the underlying dynamics for the industry, are you anticipating kind of a longer term rate of level of growth for that OBX business?

Hi, Bill. It certainly looks that way when we examine the amount of jobs that various oil and gas companies are proffering to be performed. And we see this through the eyes of the, contractors who are - that's our customers. We're not dealing directly with the oil companies as it relates to the OBX. Some of that may change because the demand for these - for this type of equipment and for some of these projects is getting tied enough to where I think that in many cases some of the oil companies and others out there that want these surveys to go forward are looking past the contractors to try to secure these assets. But nonetheless, the demand is growing and the number of projects is growing and it's certainly something that we see this coming year. Many of these are actually extrapolated out into subsequent years, but you don't just jump on your hopes with those out there because things can turn on a dime in this industry and we're quite familiar with that as you're well aware. But we nonetheless have those in our sides with respect to what would be prudent ways to try to accommodate those. Quite honestly, there is not enough equipment in the world to supply these projects all sold.

Not only are the number of jobs increasing the sizes - and number of nodes that are required or growing and the length of the jobs are getting longer. And if we think about the comment in the press release that you anticipate a large portion of your CapEx this coming fiscal year to be tied to the rental fleet. Is that just another indication to us on the outside of the strength that you see in that business since historically, you've said you'd be very cautious about expanding the rental fleet until you saw real strong demand?

No, that's absolutely right. And that caution has not gone away. We still have that caution for sure. These sorts of things do require commitment on the part of the end users, to be it the contractors and or their clients in financial commitments towards those sorts of movements. But certainly the demand is leading them to make those commitments in many cases and that's exactly what we're talking about. The capital investment is certainly there and available to be made, but it will be a cautionary way forward.

That's helpful, thank you. And then Mark, relative to your system are you anticipating that the border patrol will be the next will be the next order or would you anticipate that some of the other entities that you've been in conversation with and referenced in prior calls that that they would likely place an order first or later?

Our federal strategy is doing - is in effect and working. So I anticipate that we will see other federal contracts before the next margin on the border of control.

And Mark, if I'm remembering correctly from the last call or maybe the prior one, there was a reference to military. Is that the area of the federal that you would anticipate the first, I guess the first next order or is there another agency or segment of the government that you think could be before the military?

We focus on DHS and DoD and so, yes DoD - is a key area for our future revenue.

And I'll ask one more question relative to the DoD sizing. What would be your expectation of size if they were to place an order relative to the first border patrol order?

It's a tough question to answer. I'll say it will be a phased approach. And while DoD is easy to say. It's large and complex as an organization when you think across not only the branches of the military, but the office secretary of Defense as well. And I think that you'll see - what you'll see in the upcoming year where we're headed, Scott. You'll see what's going to happen. Oh sorry, Bill.

No worries, thank you. So kind of tying in to the prior questioner's comments or questions in your comment that - the Department of Homeland Security border patrol likely has a year or so process that it would be sometime within the next 12 months that you may see something from the DoD then followed by Homeland Security. Just kind of the cadence that you're thinking right now from what you know how it would unfold. Is that the proper interpretation?

That's what we're looking at. That's what we're preparing for, so we've been performing for. So that's the best way I can interpret it right now.

Great, thank you all for taking the questions.

Welcome Bill.

Thank you.

[Operator Instructions] We'll go next to Brent Miley with Rutabaga Capital. Please go ahead.

Hi, good morning. A couple of questions for you if I could, the cash flow was good in the fourth quarter wondered if you might comment on that. Glad to see it and maybe talk a little bit about pacing of your expectations for cash flow and CapEx in the 2023? And then secondarily, I was curious on the Quanta business the adoption? I wondered if the first adoption was a utility or actually a real estate customer.

But for cash flow point of view, yes, we're pleased to see the cash flow improve over the quarter. I mean that's something we've been looking at for quite a while and we monitor very closely. Going forward, we expect there to be growth throughout the next 12 months. I think it will dip down early in the year and return in Q3 and Q4. As far as the Quantum sales of lead builds were in the utility area.

Okay, great. And then just one last one if I could. On the PRM front, obviously the big companies, big projects process has been ongoing. It's been sort of - I don't know from the outside looking in sort of incredibly complicated and complex. And is there any sense on timing here? I mean, prices are up, efficient desire for using our most efficient assets is incredibly reasonable. Is there any sense of when these things might actually get let?

Brett, that's an excellent question and the timing would be implied as near term based on all of those underlying conditions that you were talking about in the price of oil, et cetera. It's just been -- there's been a complication of complicated issues that have jumped into here that represent instability, I guess, and the confidence of that market. Capital spending in general in some of the oil and gas space but as was mentioned earlier by another caller, there are movements where we see that changing and that's the case here too. Giving you -- we've had these discussions and we've had promises of one time and then another time that just makes it really difficult to give any sort of real timing issue that you can sink your teeth into. That being the case, that's not -- we're not going to sit on our heels and just not do anything. We've got work to do and that includes making sure that technology for the PRM work is firmly established and tied up in ribbons. So -- and there's other applications for it too that we'll be putting forth that also make it better usable in the PRM case. So I really wish I could give you some better aspects about what timing looks like. But it seems to me that just moving those dates back and forth as it were makes that hard to do.

Fair enough. And it sounds like - had there been any more active tests, I guess, I think you mentioned in last call you guys had a pretty comprehensive test…

No, there may be -- right, no, there may be some minor tests coming up in the future, but there have been none in the field tests similar to what we had done before, which went well by the way. I think fundamentally in many cases it seems like in some of these conversations we're having with the oil companies, they're recognizing as we've moved further down the path towards what needs to be done that there's some loose ends on their side. and they need to get those tied up so that they make the very best investment decision and where these things are going to go, what the configurations of the field need to look like, those are important matters in getting this done and they've identified that maybe they've got some deficits there that they need to clear up first. And so that timing is not in my hands and therefore not something I can really comment on.

Okay. And forgive me just to be clear on that. Are those technical issues and sort of scope of project issues? Or is this more of a deal where again they want -- is it more contractual where they're trying to get for example, the folks who are going to lay the cable and so is it more of a construction and contract structure issue or is it more technical and kind of design of the scope of the actual project issue?

No, right, good question. And for clarity, the ones that I'm referring to are more of a technical nature, broad scope technical wise, so not dealing with our specific technology or any of that. But just the overall aspects of the science that goes into the permanent reservoir monitoring and the 4D processes that they need to make sure they have properly put in place and have determined what the real areas that they want to be monitoring are. So it's really a technical matter, not really a contractual matter.

Fair enough. Appreciate it. Thank you.

And we'll take our next question from Glenn Kukla with Kukla Capital Partners. Please go ahead.

Hi, guys. Good morning.

Good morning.

Hi, Glenn.

My question will be about the cash on hand and short term investments. Good job on increasing that. I can appreciate the write-down a little bit from OptoSeis, a lot from Quantum that reduces the liability on the balance sheet. Obviously, that's a -- it's a paper write-down. It's not actual physical cash going out, I assume but it looks like we have physical cash coming in, last quarter $9.1 million cash on hand plus short term investments this quarter, $17 million again, good job, pat on the back. Could you walk us through how you got from $9.1 million to $17 million of physical cash and physical short term assets that impact the moving parts?

Yes, most of that is related to this increase in our OBX rental activity going on and the increase in sales we're having from our adjacent markets grew. We also sold some equipment earlier than in the year and we received payments from that customer - very timely. Last day of the quarter in fact, that helped with our cash balance at the end of the year. But I would say, by and large, most of that increase in cash is because of the increase in OBX rental activity.

Great. I know you don't want to give forward-looking advice or information, but based on the plan that you will implement to change cost structure, what impact do you think that will have on physical cash short-term investment liquidity, not line of credit liquidity?

I mean, there will be - I guess, it's going to depend on what type of changes we make. We're really just kind of whiteboarding those discussions at this point. We have made some specific changes like we discussed in the press release, I think we're going to have costs associated with combining our facilities, but I don't expect that to be significant in nature.

Great. I know you don't want to give forward-looking advice or information, but based on the plan that you will implement to change cost structure. What impact do you think that will have on physical cash short-term investment liquidity, not line of credit or liquidity?

I mean there will be -- I guess, it's going to depend on what type of changes we make. We're really just kind of whiteboarding those discussions at this point. We have made some specific changes like we discussed in the press release. I don't -- I think we're going to have costs associated with combining our facilities, but I don't expect that to be significant in nature.

Okay great. And then you mentioned you're predicting, I think it was a $7 million CapEx for fiscal '23. Is that correct?

Yes, sir.

Do you - so...

I'm sorry, go ahead.

No, you go ahead.

I was going to say most of that is related to potential increases or additions to our rental fleet. And as we've said earlier, we're not going to make those kind of additions unless we get some financial commitments from our customers to help fund those additions.

So we just say that $7 million CapEx is not scheduled to be spent just yet, it's earmarked if and when orders come in?

That's exactly right.

Okay great. But you're setting it aside. If orders come in and you have the $7 million CapEx, remind us, how does that compare to last year's '22 fiscal year total CapEx expense?

Last year, we spent about $4.8 million on rental fleet additions and a little over $1 million on property, plant and equipment.

Okay. So if we find ourselves at the end of fiscal year '23, and we've spent all $7 million, that's likely because we've seen an increase in orders and you have to spend money to make money. So would it be fair to assume that having spent $7 million at the end of '23 is likely to result in an increase in revenue versus '22?

Yes. I absolutely expect that.

Okay. That coupled with cost reduction that looks like a path to profitability?

We believe so.

Okay, great. Well that's only question guys have a wonderful day.

Thank you very much.

Thanks Glenn.

Thank you.

We will go next to Michael Melby with Gate City Capital Management. Please go ahead.

Hi, good morning and thanks for taking my questions. With the movement of the OBX rental operations from the satellite facility, is that being moved from an owned facility?

Yes, yes we own that facility, and we would be moving it from that own facility into our Pinemont owned facility.

Makes sense. And I guess is that current facility then redundant and something that could be a source of capital going forward?

Yes, sir.

Exactly.

Got it. And just for the call, any sense of what that facility might be worth?

We're in the process of evaluating that right now.

Got it. And on the Quantum side, you said revenues weren't significant in Q4. Do you expect them to be significant in fiscal 2023?

It's going to end up being a ramp up, Mike, how those kind, of things go as a new introduction. But it was the first one. So it's one of those things where you like for that to happen. One of the things that we've had to overcome and we've made it very clear and well-known is the supply chain problems that often have plagued everyone. Many of them still continuing, but we've worked around a lot of those. And put some things in place to try to provide some elasticity going forward for being able to make some of these orders despite some of the supply chain problems. So this is going to be a ramping issue with respect to how much revenue you see coming across. I can't give you a predictive amount of what that's going to be, but we are encouraged by the fact that we've taken that first step there symbolic if nothing else. And certainly, we're prepared and are building towards orders for those products. There's even some other products as part of our development plan going forward that we know there's demand for with conversations with those potential customers and some partnered companies. So that looks good for us. We're definitely progressing on that well and putting some resources behind it.

And do you care to frame it anymore for, investors in terms of what the opportunity set is with the Quantum?

Well, the utility companies are one of the initial targets there, but we are, in fact, going after the property markets, too, where there's, significant gains that can be made in asset protection. That's one of the main aspects there. The utility companies are more for convenience, reducing their costs with respect to meter shutoffs and turn ons, where they don't have to roll trucks out there to perform those activities. There's certainly a conservation issue that's important when leaks are detected, that's a major tieback to where these valves are used so that even some automation could be introduced for shutting off water. So conservation issues there, also within municipalities for maintaining their regulatory components as they see fit. It's kind of a broad landscape, but clearly related to the municipalities, there's issues also with payment where they just have to shut off water and when people move out of houses before new owners move in, all of those sorts of things where, they just save the cost and being able to do that from an office.

Makes sense on the use cases. Could you frame it did you buy this because he thought it could be a $5 million business, a $10 million business, I mean in terms of how you evaluate the opportunity set here?

Well, the opportunities are - I'm not going to put a ceiling on what that is capable of doing. I mean there's, a software as a service component that's also there. These will be new aspects of revenue for us that have not been historic part of our revenue stream. But in addition, it's a technology buy. I mean we feel that the smart city movement overall is a big movement and extends much more beyond these valves. So there's a platform that from an engineering standpoint, our guys are putting together that's fundamental to how these systems work. And that IoT platform is going to have some other development capabilities in other product areas.

Got it. And could you talk about your expectations for the land seismic business either in the U.S. or internationally for 2023?

We don't have great ambitions of what we - what participation will have in that market. It just seems to be rather inactive as that goes, a little pieces here and there coming about, but we don't see any kind of resurgence to levels that there were in the past, maybe it's too early for that with some of the other improvements we see, which are mostly in the marine world. But overall, as the oil and gas industry is plotting in the future, of course, the land hasn't really from our perspective, the land side of the instrumentation market hasn't really manifested.

Got it. And just to clarify from other participants, you were free cash flow positive in Q4. Do you expect to be free cash flow positive in fiscal 2023?

Yes, absolutely.

Thank you.

Thanks Mike.

Thank you.

And we'll take a follow-up from Scott Bundy with Moors & Cabot. Please go ahead.

My question was just answered. Thanks guys.

Thank you, Scott.

Thanks.

And we'll take another follow-up from Brent Miley with Rutabaga Capital. Please go ahead.

Hi, I had one more, if I could. The adjacent markets business, obviously, has been very strong. Pre-COVID, those were as memory serves incredibly kind of consistent and good markets for you all. Would you say they've kind of recovered from kind of - or from COVID, I guess? And do you expect those to be kind of against steady eddies or a little bit of growth there, if you could kind of give us some commentary on that, I'd appreciate it.

No, I think you're reading it correctly, Brent. The COVID aspect did definitely hit that - some of those businesses, and particularly, the EXILE thermal imaging products, which we used a lot for screen printing and things for major events and things that just got shutdown. So clearly, those things have rebounded much more towards normalcy, if not at normal levels, and it's expanding. It appears that through the pandemic and working through that, it's sort of jostled things in such a way that, that industry has found better ways of doing things with less labor. And that involves oftentimes the benefits that our machinery, the EXILE machines can provide for those types of businesses. So that has had an impact. The other aspect of the water meter cable and connector business, we believe that's just going to be a growth area in general as more and more smart city movements take place in the utility companies almost all of them are migrating over the course of time towards these automatically measured meters and billing processes. So I think COVID is behind us from that market as it stands right now.

Great, thank you.

And there are no further questions at this time. I'll turn the floor back over to Rick Wheeler for any additional or closing remarks.

All right, well thank you, Ashley, and thanks to all of you that were listening to our call and ask these great questions. So we look forward to speaking with you again on our conference call for the first quarter of fiscal year 2023 it will be in February. So thanks again, and goodbye.

Thank you. And this does conclude today's Geospace Technologies fourth quarter 2022 earnings conference call. Please disconnect your lines at this time, and have a wonderful day.