Welcome to the Geospace Technologies First Quarter 2021 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 subsidiary, Quantum Technology Sciences.

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. It's now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin..

Thank you, Aaron. Good morning and welcome to Geospace Technologies conference call for the first quarter and fiscal year 2021. As mentioned, 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. Also with us is Dr.

Mark Tinker, CEO of our Quantum Technology Sciences subsidiary. I'll first give an overview of the first quarter and Robert will follow with some in-depth commentary on our financial performance. After a few last remarks we'll open the line for questions that Robert, Mark and I can answer.

Some of today's statements may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995, including 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 cannot predict or control. Both known and unknown risks can lead to undesirable results or differing performance from what we say or imply today.

Such risks and uncertainties include those discussed in our SEC Forms 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, which I encourage everyone to visit and browse.

Note, that the information discussed and recorded this morning in time-sensitive and it may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released the financial results for our first quarter and fiscal year 2021 ended December 31, 2020.

As we noted, despite the negative impact that the COVID-19 pandemic had and continues to have on our business segments, we were pleased to report the total revenue generated in the first three months of fiscal year 2021 reached $28.5 million.

This figure exceeded each of the four quarters reported in the previous fiscal year, and moreover achieved our highest recorded first quarter revenue in seven years. There were also several notable first-time events that occurred in the quarter. The first of these was our first sale of a large OBX marine nodal recording system.

The system which included 7,500 OBX ocean-bottom marine notes from our rental fleet, along with related central electronics was purchased by a large international seismic contractor for $9.9 million.

The quarter also marked the first occurrence of meaningful revenue from our Quantum Technology Sciences subsidiary, which makes up our emerging market segment. The revenue was in relation to fulfillment of a $10.5 million contract secured in April of 2020, with the U.S. Customs and Border Protection U.S.

Border Patrol for a High Technology Border Security Solution. Products from our emerging market segment utilize proprietary seismic acoustics and data analytics, which provide customers in a variety of markets with actionable real time information..

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 our first quarter ended December 31, 2020, we reported revenue of $28.5 million compared to last year's revenue of $17.7 million.

Net loss for the quarter was $1.1 million or $0.08 per diluted share, compared to the first quarter of last year's net loss of $9.3 million or $0.69 per diluted share.

The first quarter of fiscal year 2021 benefited from a 700,000 net reduction in the fair value of contingent earn-out liabilities related to our acquisitions of Quantum and OptoSeis, whereas the same period of the prior year did not contain a similar adjustment.

A breakdown of our oil and gas product revenue is as follows; our traditional product revenue for the three-month period ended December 31, 2020 was $1 million, a decrease of 58% compared to revenue of $2.4 million last year.

The decrease in revenue is due to lower demand for our marine seismic products, repairs of customer, traditional seismic equipment and support services provided to our customers. We expect continued low levels of demand for these products and services, until seismic exploration activity increases from the historic lows we are seeing today.

Our wireless product revenue for the quarter was $11.7 million an increase of 31% compared to revenue of $8.9 million last year. The increase in revenue is due to a $9.9 million sale of 7500 OBX rental notes in the related central electronic equipment to an international seismic contractor.

This sale was partially offset by a reduction in rental revenue due to lower utilization of our rental fleet, and the conversion of the rental contract into a sell of the OBX rental nodes. We expect lower demand for our wireless products and lower utilization of our rental fleet during fiscal year 2021, due to reduced global demand for oil and gas..

All right, thank you, Robert. A year is now gone by since COVID-19 began to wreak havoc on the earth to jeopardizing the health of mankind and disrupting whole national economies in the attempts to prevent its spread. The world is anxious yet hopeful that the vaccines emerging today will provide a path to normalcy.

A successful recovery will take some time though, and a true rendering of society's new normal after COVID-19 is still undefined..

Thank you. Our first question comes from Bill Dezellem with Tieton Capital..

Thank you. I have a group of questions. But I'd like to start with OBX, if we could, please.

Would you discuss the circumstances that led to your customer purchasing the rental equipment?.

Sure, Bill. This customer had been under our rental contract for some length of time for some significant work and projects using the OBX. Throughout the duration, our contracts offer the accrual of equity towards that purchase, and in fact that's an incentive that we embed in our rental contracts to facilitate those sorts of sales.

Just to take your customer had rented in for a length of time and had expectations of extended rental times that it made sense for them to go ahead and exercise that option within their contract and purchase these units..

And how does the 7500 notes that they purchased, how does that compared to what this contractor has been using on many of their projects?.

They are using more than that, overall. I think they have more than one crew. It's also utilizing OBXs. So this is just one of those contracts and one crew that is still renting some other units as well..

Great. Thank you. Let me shift, if I may to PRM. Relative to the bid that you noted in the press release that you did not I guess I said bid - RFP, that you did not bid on.

Did anyone else bid on that piece of business?.

I am really not at liberty to really discuss that, just based on our NDA with that particular oil company. But certainly, we entered into our decision based on its own merits and our own position..

Let me ask a question in a way that might be answerable for you.

Do you feel as though there is still an opportunity with that customer and that's why your conversations are continuing with them?.

Yes, we certainly believe that there's still opportunity there and is exactly why we are having these conversations..

Great. Thank you. And relative to your comment in the release about other PRM contracts or fields that you are under discussions with.

Would you talk to us about the level of those conversations? And how they compare relative to when an oil company really is genuinely close to year end RFP or making a decision?.

Well, I think that as we see it, the fields that are being examined here would not expect to see these sorts of systems deployed, until probably 2022, at the earliest.

So these are looking forward, but these discussions as you well know, take quite some time to come to terms with, and to get the systems designed and suited for the fields that they're point to be deployed in. The discussions are of high interest.

We're not just randomly having these discussions, we're being solicitude to have these discussions and so that's always an encouragement. But we don't anticipate any contracts to happen imminently here based on these discussions..

Great. Thank you. And then let me jump to Quantum, if I may. The press release specifically states and I believe Robert's opening remarks made reference to the fact that this will lead to additional contracts.

Will is a pretty definitive statement, so I am hoping for a little more commentary around that please?.

Alright. Well, actually let me let Mark speak to that. I am sure he is jumping at the bid to get some words since he is very excited about what we're doing for the border patrol..

Good morning, Bill..

Good morning, Mark..

Yes, we're tracking this closely, so we're excited about what we've deployed so far. And we're right on cost right on schedule for that effort. We're looking at how FY '21 appropriation to shaking out in this time of new administration and in light of a global pandemic.

But I think what we're able to do and the value that we're adding from a security standpoint is going to be extremely well received, and I'm pretty confident that downstream from this, as we work through these budgeting cycles, we'll see follow on work..

And so I believe yesterday, the new Head of Homeland Security was confirmed.

Is that relevant to I guess, those of us on the outside our hope that you would have another contract that would be awarded when this one is completed? Or is that not a disruptive factor that having now a permanent Head of Homeland Security removes that distraction and disruption and, in fact, be favorable? I'm trying to understand the significance of that..

Yes, it's a good question. I'll try to give you a thoughtful answer. It has two perspectives. The first is we can have a stable leadership within the department.

I don't mean the individuals themselves, I mean, of them coming and going, working with acting secretaries, and what's underneath them can be challenging for Customs and Border Protection, and the Border Patrol, because it's such a fluid environment, and that ultimately can trickle down to us. So having something stable, I think be of a benefit.

The second one is with the Democrats coming in into office. They favor more heavily a border security technologies. And the type of security that we provide, we have found to be perfectly bipartisan. We've never met with anybody who doesn't favor the security value that we offer.

So what that means is FY '21 has about $188 million so far that we're tracking on for appropriations. There might be and this is kind of the key point, when I say might, there might be additional reallocation from border wall, as the administration is looking to stand that down.

That's going to be a lengthy process, there's legalities involved, but we're tracking that as well. So those are the two perspectives when you get stability into the department, and then the department wants to make sure that there is the appropriate balance of how you provide border security, between physical and between technological..

I know, I've already taken up more than my allotted time. But Mark, you just said $188 million of allocations that you are tracking. When I compare that to a $10 million order you had last year that was a pretty big difference.

Would you talk to us about what that actually means the $188 million?.

Yes, that's a good one. I'm glad you brought that up. It's overall for border security technologies. So the Department and Border Patrol will decide how they allocate that. And so we are a technology, we are not the only technology. As you might imagine, that can go to facilitate things like further cameras being deployed or radars being deployed.

It's a step in the right direction for how we make the environment along the border, being something that's complimentary to the physical security that's currently there..

So when I think about the billions, that generally we talked about, when we when we think about federal budget, $188 million, actually seems pretty small in that scope.

Are there other pieces where that are relevant to the Quantum business?.

That's the place that we will start, and your assessment of that proportion I agree with. It does seem rather small and that's why when we start to look at what aspects of the law are now going to be stood down and reprogrammed. It's a significant amount of money.

And so we want to make sure we're there advocating for where some of those funds can go and make sure they're aligned more along that technology standpoint. And also keep in mind as our current contract is coming to a close part of that is it's full, if you will, and so I have got lot of confidence, complete confidence.

But we're in a planned understanding that the border patrol uses for introducing any new technology as a security in which you step through this process of testament valuation. So, I have confidence that we'll come out the other side, doing rather well and then we can see if and when those security funds start elevating..

Are you under or in conversations already for that next order once you've completed this installation?.

I can't say that at this time..

And then lastly, is your equipment installed in such a location that it would give you an ability to identify elicit votes? Meaning that, if you were installed in Arizona that doesn't give just to pick up anything in the Pacific Ocean, but if you were still on land in Southern California right on the edge of the ocean you would be able to do that.

Are you in a position to do that?.

Bill, that's a fabulous question, but I'm not allowed to say where we currently have been installed..

Great, thank you..

And we do have a follow-up from Bill Dezellem with Tieton Capital..

Mark, I actually want to continue down that same path that I was just on. The reason for the question is that we did see where there was a boat that was picked up, and I think the guy had a criminal record in the U.S. even though he was a Mexican citizen. And so, theoretically if you had your equipment on land there in the U.S.

but right next to the ocean, would you be able - is the system capable of identifying boat traffic offshore in the ocean to the coast guard and border patrol that way?.

Bill you're a real problem for me, you know that..

Thank you, Mark..

What I'll say is, before we acquired by Geospace, Quantum had a deep relationship with the number of R&D organizations within U.S. government. One of those functions that we performed was doing exactly that, having land-based sensors tracking boat traffic. So, this is a prudent capability. Our government knows about it.

We of course, are in constant conversations about where the next application might be for which we could add that value.

Having Geospace now, being a part of the Geospace family and their ability to make submarine data acquisition systems really gives me a lot of kind of street cred now when I go ahead and have these conversations that what we're able to do next, and where that might apply.

I want to be clear, I'm not specifically referring to any location that such as the one you're mentioning, it may not even being with the border patrol. But it is a capability, it's one we've booked on, it's one we've refined, and it's one we look forward to try and to add value to for the government..

Thank you, I appreciate the theoretical answer.

Relative to the equipments you have installed, I'm guessing by now that there is a level of operational capability, and if that is the case, have you had any success, I guess, I'll say generically nabbing bad guys?.

You will hear about any - you won't hear about any success we don't have obviously, it's hard to report them on event. But when successes do occur, you will hear about it through proper channels coming out of the board..

Okay. Marks, thanks for taking all my questions..

You're welcome..

And our next question comes from Glenn Kukla with Kukla Capital Partners. Your line is open..

Gentlemen, good morning.

How are you?.

Good.

How are you?.

Let me start by saying that I felt like a broken record but great job again on cash management and conservative stewardship of the balance sheet. I see the cash and cash equivalent has trended slightly up from $32 million last quarter to $33.7 million this quarter.

I wanted to ask is any of that trend up or change include that customers partial pay down of the $10 million note? I know you've classified it as noncurrent deferred revenue, but is that listed elsewhere on the balance sheet? Or is that listed as part of the cash and cash equivalents?.

Yes, the cash we received for them for their payments is included in their increase in cash. The offset is to the deferred portions on the balance sheet..

Got you. Okay. Very helpful.

Do you have any prediction where you see cash and cash equivalents trending in the next 12 months, even with the stock buyback?.

Yes, we don't normally provide that kind of information, or we don't provide that information going forward..

Fair enough. Next question. I noticed that the bank credit agreement dropped a little bit from $17 million to $14 million.

Any reason for that?.

Just the normal changes within our balance sheet that are subject to adjustments in our borrowing base. We collect cash, receivables go down, and as a result, the amount we can borrow changes along with that..

Got you. Okay.

So they review that once a quarter?.

We make that assessment once a quarter, yes..

Okay, great. I wanted to jump over to headcount. Six months ago, headcount was reduced, again plays well into your good stewardship, and knowing how to manage expense as well.

Has headcount trended back up? Or do you feel that it's plateau?.

I'd say our headcount is - it continues to be down at a similar level as it was when we did our cost reductions..

Great. Last question about the imaging sub-segment. Any thoughts or any color on if that sub-segments is profitable? Or if not, do you think it'll be profitable? And let me add that I miss going to concerts, I miss buying T-shirts.

And I know that's one of the things you guys do looking forward to spending a lot of money on concert T-shirts and hopefully some of that goes back to Geospace.

But is that sub-segment would you say is it profitable or not or you don't have that level of detail available?.

Well, I mean, we do show costs of goods in the various segments there, which you can look at in our financials that we've published. But certainly, we enjoy that business. It is good for the company and it's part of our overall strategy of making sure that our footprint extends into more than just the oil and gas sector.

To your point, it certainly has been impacted by the restriction of all the social events, a very vast number of them, including schools, school events, and things of that nature are also part of all of that. So, our customers of those products are the ones that provide the merchandising and other things for those sorts of events.

And we're looking forward to the recovery that will occur after COVID-19, because we think that will go back to a more normal demand..

Great.

Even if demand returns, any thoughts of ever spending that sub-segment off?.

I guess we're always open to all things, but we're going to - anything of that nature, we would have to examine what the return would be to our shareholders, and how it would impact our business..

Great. So I've got for today, guys. Again, great job and stay safe..

Thank you. You do the same..

And there are no additional questions at this time. I'd like to turn the program back over to Rick Wheeler for any closing remarks..

All right. Well, thank you, Aaron. And I certainly thank everyone that's joined our call today. We look forward to speaking with you again on our conference call for the second quarter of fiscal year 2021 in May. So for now, goodbye..

Thank you. This does conclude today's Geospace Technologies first 2021 earnings conference call. Please disconnect your line at this time. And have a wonderful day..