Geospace Technologies Corporation
Q1 2020 Earnings Call Transcript

Published: 8 May 2020

[Operator:]

Welcome to the Geospace Technologies' Second 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; and Mark Tinker, CEO of our 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 opened for your questions following the presentation. [Operator Instructions]It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

[Rick Wheeler:]

Thank you, [Brie].Good morning and welcome to Geospace Technologies conference call for the second 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. In addition as mentioned, we are pleased to have Mark Tinker, CEO of our Quantum Technology Sciences subsidiary with us on the call today. I'll first give an overview of the second quarter and Robert will then give some in-depth commentary on our financial performance. Following that, I'll give Mark an opportunity to discuss Quantum in our recently awarded contract with the U.S. Border Patrol. Finally, I’ll make a few last remarks and then we’ll 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, including comments about the 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 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. Note that the information discussed this morning is time-sensitive and may not be accurate at the time one listens to the replay.Yesterday, after the market closed, we released our financial results for our second quarter of fiscal year 2020 ended March 31, 2020. As mentioned, we are very thankful that our second quarter transpired safely and with very little commercial disruption brought about by the COVID-19 pandemic which has thrust enormous health and economic devastation upon the entire world.I am thoroughly impressed with how our employees continue to exhibit remarkable courage and ingenuity to preserve our ongoing operations as smoothly and as efficiently as possible, while maintaining strict safety protocols. Their efforts have secured our compliant role as a critical manufacturer supplying customers in multiple sectors that are designated by the U.S. government as critical infrastructure.As we reported our second quarter revenue was primarily fueled by ongoing demand for our ocean-bottom marine nodal reporting systems. Total revenue of $25.9 million matched our recent first fiscal quarter, as well as last year's second quarter delivering in both cases by less than 1%. However, gross profit of $7.9 million in the second quarter reflects a decrease compared to either of the prior mentioned periods and is primarily due to non-recurring cost for upgrades we made throughout OBX rental fleet.Despite the lower gross profit in the second quarter, revenue and gross profits increased by 17% and 37% respectively for the first six months of fiscal year 2020 compared to last year's first six months. Note that the net losses reported for both the 3 and 6-month periods ended March 31, 2020 are largely the result of a write-down to accounts receivable of $8 million in the second quarter for a doubtful account associated with one of our OBX rental customers.Our negotiations continue with this customer on financial instruments to secure payment of the debt, and we intend to pursue full recuperation of this account. Not included in reported revenue is the sale of a $12.5 million GCL land reporting system secured with a $10 million promissory note payable in 36 monthly installments. An initial deposit plus payments on the promissory note totaling $3 million have been received from the customer and recorded on our balance sheet within our non-current deferred revenue.The customers current on its no payments, but we intend to recognize this revenue at a later date, when the collection of the promissory note is determined to be likely. Our combined oil and gas market segment generated $18.4 million of revenue in the three months ended March 31, 2020. This slight decrease of 1% compared to the equivalent year-ago period is the result of lower demand for our traditional sensors and marine products, partially offset by higher demand for our OBX marine nodal systems.For the six months ended March 31, 2020, this segment generated $37.9 million, an increase of 28% over last year's same 6-month period. The increase is primarily the result of growth in demand for our rental OBX systems but is partially offset as mentioned by lower demand for our traditional seismic land and marine products.Traditional seismic products for this segment generated revenue of $2 million and $4 million respectively for the three and six month periods ended on March 31, 2020 reflecting decreases of 49% and 35% for the same respective periods a year ago.As a result of reduced levels of seismic exploration by oil and gas companies, demand for these products had already noticeably declined prior to the COVID-19 pandemic and given the recent demand destruction for crude oil brought on by global reaction to COVID-19 combined with the oversupply as approved oil generated in the dispute between Saudi Arabia and Russia, demand for these products will likely continue to be negatively impacted.For the three and six month periods ended March 31, 2020 our wireless seismic products generated revenue of $16.1 million and $33 million respectively. These figures are approximate increases of 18% and 58% respectively, when compared with the equivalent year-ago periods. The increases stemmed from greater rentals of our OBX systems. Interestingly, demand for OBX equipment has experienced only a slight reduction in response to the COVID-19 pandemic and the coinciding oil price volatility.We know that one short duration rental contract scheduled to occur in our third fiscal quarter was indefinitely postponed. Future projects intending to utilize our OBX systems might also face risk of cancellation or delays, however to date, no other cancellations or major delays have been reported. And we continue receiving request to provide quotes on new rental contracts.Our reservoir seismic products produced revenue of 337,000 and 555,000 for the three and six month periods ended March 31, 2020. This compares to revenue of 1.1 million and 2 million for the respective three and six month periods last year. In both periods the decrease is due to fewer sales and services of our borehole products.We believe that the truly significant opportunities for generating meaningful revenue from this product category reside in future contracts for permanent reservoir monitoring or PRM systems. We also believe we have greatly increased our likelihood of receiving such PRM contracts by our acquisition of OptoSeis fiber optic sensing technology in combination with the extensive engineering and manufacturing improvements we have made to both our optical and electrical PRM product.We are in open discussions with multiple clients interested in deploying PRM systems in the coming years. Because of COVID-19, some of these clients have called for temporary interruptions in these discussions while others have carried on dialogs unaffected.For the three and six month periods ended March 31, 2020 revenue from our adjacent market segment totaled $7.1 million and $13.2 million respectively. These figures represent slight decreases of 2% and 5% from the respective periods when compared to one year ago. Unexpected delays in the production of our certain imaging equipment amounted for the decreases in both periods. In addition, lower sales of film products contributed to the decrease over the six month period.Partially offsetting the decreases in both periods was higher sales of our water meter cable and connector products. We strongly believe our strategy of nurturing and expanding the products of our adjacent market segment is working to provide sound and reliable means of generating stable revenue that offsets the volatility associated with our oil and gas market segment.Note that certain customers of our graphic imaging products depend on attended events, gatherings and other such functions for commerce. Many of these activities have been largely curtailed in an effort to combat the spread of COVID-19 and this will likely result in lower demand for those related products, so long as these restrictions on such things are in effect.Our emerging market segment generated revenue of 372,000 and 469,000 respectively for the three and six month periods ended March 31, 2020. That's compared to 46,000 and 134,000 in the equivalent periods a year ago.The increases are attributed to the sale of border and perimeter security products to a commercial customer. As a reminder, just over a month ago, we announced that our Quantum subsidiary was awarded a $10 million contract with the U.S. Customs and Border Protection for the U.S. Border Patrol to provide an advanced technology solution to the Department of Homeland Security. Even though the most significant portion of revenue from the contract may not occur until our first quarter and fiscal year 2021.We believe this first contract validates our calculated rationale to acquire Quantum. This is a first demonstration of our key strategy to leverage both of our core competencies and technologies into an expanded and diversified set of markets. We believe that this is just the beginning of the contributions this unique technology will bring in our future.At this point, I'll let Robert takeover and give some more financial detail.

[Robert Curda:]

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 second quarter ended March 31, 2020, we reported revenue of $25.9 million compared to last year's revenue of $26.1 million. The net loss for the quarter was $11.8 million or $0.87 per diluted share compared to last year's net income of $700,000 or $0.05 per diluted share.For the six months ended March 31, 2020, we reported revenue of $51.6 million compared to revenue of $44 million last year. Our net loss for the six-month period was $13.1 million or $0.97 per diluted share compared to last year's net loss of $5.1 million or $0.38 per diluted share.A breakdown of our oil and gas product revenue is as follows. Our traditional product revenue for the second quarter was $2 million, a decrease of 49% compared to revenue of $4 million last year. The revenue decline is attributed to lower demand for our traditional sensor products and lower demand for our marine seismic products.Traditional product revenue for the six months of 2020 was $4.4 million, a decrease of 35% compared to revenue of $6.8 million last year. This period's decrease is also due to lower demand for marine seismic products in traditional sensor products. Our wireless product revenue for the quarter was $16.1 million, an increase of 18% compared to revenue of $13.6 million last year.Wireless product revenue for six months was $33 million, an increase of 58% compared to revenue of $20.9 million for the same period last fiscal year. The increase in revenue for both periods is due to higher rental demand and utilization of our OBX marine nodal systems. Second quarter 2020 wireless product revenue does not include $12.5 million in a GCL product sale delivered in the second quarter secured by a $10 million promissory note.As of March 31, 2020, we have received $3 million in cash for deposit in monthly note payments from our customer. I am pleased to note to-date the customer is current on all payment obligations. The cash payments received and cost of revenue associated with the sale have been recorded on our balance sheet as part of long-term deferred revenue and part of long-term deferred cost of revenue.We plan to recognize the revenue and cost of revenue on this transaction when we determine collection of the promissory note is probable. Due to concerns of collectability of revenue from our seismic marine customer, our wireless product revenue – also does not include $3.6 million and $5.1 million of OBX rental revenue for the three-month and six-month periods of fiscal year 2020.In November, 2019, we ceased recognizing revenue from this customer and will continue this practice until the customer can service its debt owed to us in a normal course of business. Our reservoir product revenue for the second quarter was $337,000, a decrease of 68% compared to revenue of $1 million last year. Reservoir product revenue for the six months was $555,000, a decrease of 72% compared to the revenue of $2 million last year.The decrease for the three-month and six-month period reflect reduced sales and service 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 permanent reservoir monitoring system. We continue to discuss PRM products with multiple customers, but do not expect any PRM related revenue to be recognized in fiscal year 2020.Moving into our adjacent market product segment, our industrial product revenue for the second quarter of fiscal year 2020 was $4.2 million, an increase of 2% over the second quarter of 2019. Industrial product six-month revenue for fiscal year 2020 at $7.8 million, an increase over the same period in 2019 of 1% both period revenue increases are due to higher sales of our water meter cable and connector products.Imaging product revenue for the second quarter was $2.9 million, a decrease of 7% compared to last year's revenue of $3.1 million. This decrease is caused by delays in production of certain imaging equipment. The six-month revenue for imaging products for fiscal year 2020 is $5.4 million, a 13% decrease when compared to the same period in 2019. The decrease in revenue is due to production delays in certain imaging equipment and lower product sales or film products.Finally, revenue from our emerging market segments, totaled $327,000 for the three-month and 469,000 for the six-month period ending March 31, 2020. Prior year revenue was $46,000 for the second quarter and $134,000 for the six-month period ending March 31, 2019. While we do not anticipate significant revenue contributions from Quantum in fiscal year 2020, we do expect to record most of the revenue from our recently announced $10 million contract with U.S. Customs and Border Protection in our first quarter of fiscal year 2021.Our second quarter of fiscal year 2020 operating expenses increased by $10 million or 108% compared to the second quarter of 2019. The six-month operating expenses increased by $11.2 million or 61% when compared to the same period of fiscal year 2019. The increase in operating expenses for the three-month and six-month period is mostly due to $8 million and bad debt charges related to an OBX rental customer account. We intend to pursue the collection of all amounts owed by the customer.Our six-month cash investments into our rental equipment and property, plant and equipment were $5.2 million and $2.8 million respectively. We do not expect any significant additional cash investments into our rental fleet in fiscal year 2020 and cash investments into our property, plant and equipment could be up to $5 million.Our balance sheet at the end of the second quarter reflected $18.9 million of cash. We have no long-term debt outstanding and the available borrowings under our credit agreement is $14.9 million. In addition, we owned numerous real estate holdings in Houston and around the world that are owned free and clear without any leverage.That concludes my discussion, and I’ll turn the call back to Rick.

[Rick Wheeler:]

Thank you, Robert.And now I'd like to introduce you to Dr. Mark Tinker, CEO of our subsidiary Quantum Technology Sciences and let him say a few words about Quantum and our recent contract. Go ahead Mark.

[Mark Tinker:]

Thank you, Rick. Thanks for the introduction.As Rick said, I am Dr. Mark Tinker and I am the CEO of Quantum Technology Sciences. I appreciate the opportunity to address everyone on the call. It has been nearly two years since Geospace acquired Quantum even though it feels like only two minutes. Over the past two years in addition to the expected business integration efforts.We have spent significant time integrating the core competencies and technologies of both organizations. This is resulted in a unified offering that can serve markets outside of oil and gas. As previously noted Quantum generated revenue of $372,000 in the second quarter of fiscal year 2020 and $469,000 for the six-month period ending March 31 of 2020. This revenue came from the sale of perimeter security products to a commercial customer.On April 6, 2020, we were pleased to announce a $10 million contract with U.S. Customs and Border Protection for the U.S. Border Patrol. I cannot stress enough how deeply honored we are to be able to provide a solution capable of satisfying a challenging mission for the U.S. Border Patrol agents in the field. It is very gratifying to contribute to reducing the trafficking of weapons, drugs and other illegal contraband into and out of our country.And while it took longer than desired, the first Border Patrol contract validates Geospace management strategy to acquire Quantum. In fact, we further believe the efficacy and value of our combined unique technology will allow us to pursue not only future border patrol contracts, but also open up other doors for additional opportunities.Back to you, Rick.

[Rick Wheeler:]

Thanks Mark.The challenges thrust upon virtually all facets of industry by the COVID-19 pandemic combined with initial disputes between Saudi Arabia and Russia are really unprecedented and each has contributed to the historic drop in worldwide oil prices seen in recent months. Despite this adversity, we are confident that all the steps we have taken, both now and in the past to expand into new markets, diversify our revenue streams and steadfastly maintain our commitment to strong financial discipline have helped us navigate these troubled times.And the recent $10 million contract awarded to our Quantum subsidiary by the Department of U.S. Homeland Security is just one example, highlighting our ability to successfully execute our strategy of diversifying our innovative technology products and the revenue we can generate from them.Lastly, I'd like to sincerely thank all of our hard working employees, valued clients and loyal shareholders for their support through these very difficult and uncertain times. We made good progress on a strategic course of action and I feel confident that our decisions have and will continue to position us favorably for the future.With that, this concludes our prepared remarks and I'll now turn the call back over to Brie for questions.

[Operator:]

[Operator Instructions] We will go first to Bill Dezellem with Tieton Capital.

[Bill Dezellem:]

Since you're on the line I'm going to take advantage of this, and ask a few Quantum questions. First of all, you referenced the $372,000 of revenue in the quarter. Would you talk to what that revenue was whether it was U.S. or outside of the country, whether it was to government type agency or private, any additional detail would be helpful?

[Mark Tinker:]

Yes, sir and nice to talk to you, Bill. Part of the challenges of being in the security and surveillance market is, as you might expect some of my answers – feel very gratifying, because we have to preserve some of the – not only the anonymity of our customers. But also the fact that, our technologies are being used for their security purposes, and we don't want to give any adversary and undue advantage.But still to that end, this particular customer was a commercial entity, a large system integrator within the United States, who – has their own purposes and own mission for which we are becoming an integrated component of an overall security system that they are providing to their customer.

[Bill Dezellem:]

And their customer would be a government or a private business?

[Mark Tinker:]

Their customer ranges, but in this particular example, it's for a U.S. government end user.

[Bill Dezellem:]

And what additional information can you share about that end user?

[Mark Tinker:]

I can't we’re under a pretty strict non-disclosure with them.

[Bill Dezellem:]

Understood. And then are you anticipating any further border security of, I guess final purchase decisions for lack of a better phrase this year? And Mark, maybe I should qualify that in meaningful size because $370,000 of revenues is nice, but it certainly isn't a needle mover. So really something more meaningful like the Homeland Security?

[Mark Tinker:]

Yes well, but let me kind of hit both of those actually. No it's not meaningful and I completely agree with you, it's somewhat analogous to what we're doing in border security. Both of these are contracts that are building towards something that we see to be of a more substantial nature, it can take a while to not only get on contract, but to get deployed and get integrated and then the system starts to roll for larger integration efforts, larger deployment efforts.But to answer your question specifically, absolutely it is our desire and intent to continue to support the Border Patrol with upcoming efforts in the future.

[Bill Dezellem:]

So, you're thinking that you do have a reasonable opportunity to have additional meaningful business announced this year?

[Mark Tinker:]

This year is likely I don't want to go that far I'll say probably not announced. What’s happened is, and I can't say the name, but there is a – the Border Patrol is able to stand up a nice program of record. This is a big win for everybody involved, not just us. A program of record is a nice thing to have, because it is a line item within the United States budget for that particular department.And we are happy to see that stood up because it shows everybody's intent and purpose to march forward and continue to work towards that common goal. So that is optimistic for us to see, because it means we can keep driving and working hard to meet their needs. And so, when we always see a customer, who has a need and a desire it's always nice when we're able to see that that customer also has and ability in a program of record kind of goes towards that.So this program of record is going to extend for many years into the future. And so, we have every intention of doing everything we can to continue to serve them in the upcoming years. But that would likely not occur until starting next fiscal year.

[Bill Dezellem:]

So Mark, I'm going to have to expose my ignorance here the program of record concept that you just identified is not something that I am familiar with. Would you please walk through the significance of that for those of us who are not intimately?

[Mark Tinker:]

Yes sir.

[Bill Dezellem:]

Understanding how the government works?

[Mark Tinker:]

Absolutely, so from Congress all the way down into every department within the United States government whether it's DoD to you name it housing and development. The budgets are established and as those trickle down, they fall into specific lines. And a program of record can have what are called program element line numbers within the United States budget. And so, it's a specific place with a specific definition for Congress to both authorized and appropriate funding to be used.When you see that there is a program of record as a federal government contractor, it's encouraging because you can see a commitment from the United States to be behind something that they are intending to go complete and go satisfied. So that was encouraging for us to see that Border Patrol says hey, as you might imagine, there is a big push to put the wall into the ground. They have line elements for physical things such as ports of entry. They have to support their agents.They have a massive amount of logistics, they have to deal with. All these things fall into a specific budget within the Border Patrol for which they move, assign their funds to then go meet those specific needs and missions. And so, the one that we're satisfying to provide our technology into has now been established, that was a big win for us and it occurred within the last 12 months.So to see that happen that was part of the reason, it took us a little longer to get on contractive because their intent to do that. The program of record I want to be crystal clear, it's not all about funds, it's about a mission that they're going to go satisfying and we're going to go compete for those funds along others for that portion of that mission that they apply to us.

[Bill Dezellem:]

Thank you. And so I'm actually going to use that as a great segue and I apologize for taking up a lots of time here I mean use that as a segue to an RFI we understand was due at least this is what we read was due February 25 where the Border Patrol was looking for a solution to address waterways in particular didn't appear it was open water more like the Rio Grande for example?And when looking at the criteria, it looked as though much of that criteria fit you all, would you please talk to that opportunity, number one? And then number two, because you were granted the SBIR Phase III. If you do fit the requirements – are we understanding correctly that this obligates the government to buy from you, because you do have that Phase III status?

[Mark Tinker:]

Bill, that's a really good question. And – let me do my best to address that in sequence. We were intimately familiar with the RFI coming out an RFI for everybody else in the call is Request for Information. It's a completely non-committal request from the government to gather information from industry for them to ascertain what solutions might be available, and for them to then formulate a procurement strategy and set requirements according to what they learned from industry.But again, I stress its non-committal. The waterways RFI we are intimately familiar with and did respond to. When you get into SBIR status, what that means is the government is not obligated to buy from us. But what it does mean is if a particular aspect of our technology, which aligns with that SBIR serves the requirement. They are then able to award us a sole source contract. That can make them very happy, because it means they get to avoid a complete competition, which both cost them money and can delay a procurement.So, we do everything in our power to make sure that they are aware that we might fit that particular requirement with our capability. And if we don't, we get out of the way, but we've had a good deal of success with this in the past with leveraging this in our distant past with both Air Force research labs and the Air Force nuclear weapons center. As you guys read in the press release, we were able to do it for this current contract with the Border Patrol.On waterways is something that we are very excited to further engage the Border Patrol on and make sure they are aware of how we would approach solving that particular requirement.

[Bill Dezellem:]

Okay. And then I'm going to take one more question if I may, and then I'll turn it over to someone else to ask about oil and gas. But relative to the original question about the 370,000 of revenue this quarter and your description the commercial systems integrator. Would this be an example I'm just going to use an example and pulling us out of the year - where say Raytheon would be the systems integrator, who is working to secure military installations?And so, you'd be selling to Raytheon who then be selling to the military. Is that an example of what you are referring to here?

[Mark Tinker:]

Yes, that's an exact example of what I'm referring to.

[Operator:]

[Operator Instructions] We'll go next to Chris Sansone with Sansone Advisors. Chris, your line is open.

[Chris Sansone:]

So I did have one question on the Quantum side, what's the revenue model for that business?

[Robert Curda:]

It's to get $10 million.

[Chris Sansone:]

Okay. So it's a one-time sale is there is a recurring nature to any of that?

[Robert Curda:]

Well, there are possible extensions to the contract as far as that goes. But as far as the part that's for sure established, it's what was mentioned in the press release.

[Chris Sansone:]

Okay, right. So there is no ongoing service servicing revenue stream that we could expect from those from those orders?

[Robert Curda:]

Well there might be some Mark can address that if you'd like, but it's not going to be a huge amount.

[Mark Tinker:]

Yes, there is the potential for follow-on maintenance and service in any contract of course and there is the potential for that one, but nothing in case of this moment.

[Chris Sansone:]

Okay. And do we have any sense for what the market opportunity would be for Quantum's products - what the total addressable market might be?

[Rick Wheeler:]

Well, I think we think it's easily as large as what our oil and gas business has been in the past. This is a very fertile industry that it doesn't have products like that we have innovated and come out with, and it solves some very serious problems. So we expected - I mean it's hard to measure something that of this size, but we have every anticipation that it can grow into - at least as big as our oil and gas market has been in our past.

[Chris Sansone:]

Okay, great. And then, so when you put the Quantum stations in place how long did they last for - it was some period of time, we have to go back and replace them?

[Rick Wheeler:]

Mark, do you want to answer that.

[Mark Tinker:]

Sure, one of the things I mentioned Chris about what we've been working on now intimately with Geospace and bringing our capabilities together. Is what they were able to do and what we desperately needed as Quantum prior to being acquired was that really deep maturity of hardened geophysical data acquisition systems. So when you consider Geospace’s depth here, that they have put literally 80,700 miles of PRM systems on the ocean bottom that have been in place in operational for 10 years.That gives me such a degree of confidence now as it does our customers that we can deploy systems that - will get deployed and operate with a meantime to failure that's very impressive. So I fully anticipate that our systems will be in place and be operational four or five, 10-15 years and the parts that might - that are in the most hazardous conditions are actually the more disposable less expensive part of the system. So I anticipate our systems are going to serve a mission for extremely long time.

[Chris Sansone:]

Okay, thank you very much. And then switching to oil and gas I guess I'm curious about the excluded revenue of $3.6 million. How much more potential excluded revenue should we expect to see in the coming quarters?

[Robert Curda:]

We're working with that customer on an ongoing basis. I'm not sure I can really answer that completely at this point, because our negotiations are happening every couple of days with this customer.

[Chris Sansone:]

Okay. So if we look at - those two numbers there was $8 million that was written off versus $14 million of - was it total deferred revenue? So is it safe to say if we're not successful on any of this - it’s potentially another $6 million of revenue that could be excluded, is that?

[Robert Curda:]

No, that's incorrect, that's incorrect. Our exposure was $8 million and it doesn't expand because we stopped recognizing revenue on this customer back in November. So that differential is unrecognized revenue and late fees and penalties, we've charged the customer on late payment.

[Chris Sansone:]

Okay. How many stations did we exit the quarter with OBX stations?

[Robert Curda:]

34,000 stations I believe.

[Chris Sansone:]

Okay. And like you guys said, the investment in stations for the balance of the year, is not going to be much more of that?

[Rick Wheeler:]

No and in fact, what we reported Chris, even within this first six months, most of that was spent in the first quarter of the year. But we don't anticipate, any significant expenses going forward. We did as you know upgrade I mentioned that in our press release that we did upgrade some of that fleet to current technologies. Had we not done that it would not have qualified for some of the work that that we're getting with that equipment right now.As some of this equipment has been around for a while and technology changes pretty rapidly so, these upgrades were sort of a one-time event to bring them up to higher qualification levels, allowing them to be utilized in some of these upcoming jobs. But short of that, we're not planning on any new investments and increasing the rental fleet at this time. I mean, if some magic happens and all this blows open of course we’ll take that into consideration.

[Chris Sansone:]

Right okay. And then you mentioned utilization. What visibility do you have into utilization - for utilization rates for the balance of the year?

[Robert Curda:]

Well, I would say given the disruption we've had in commerce, based on the pandemic and the instability in the oil and gas prices. We don't have a lot, but as we said, we've only had thus far one contract or small contract that's been cancelled. And we're putting out quotes for new contracts, even as we speak.

[Rick Wheeler:]

Yes, that's a very good question, Chris. But it's not one that we can give you a really accurate answer on because of so many balls that are being juggled in the air right now - out of our control. But I mean, all we can tell you is that, at least from what we can see at this point in time, we might have anticipated there would be more disruption, but there has been. And I think the reason being is that the OBX use is for much longer term elements within the oil companies, plans as far as that goes.So to that extent, to what extent they're looking towards their longer term aspects of their future. I think that mitigates some of even though it's huge, some of the elements that in our immediacy have occurred.

[Chris Sansone:]

Right, right, before I switch over to CapEx just one comment on the issues that we're having with some of the bad debts or the uncollected receivables. You would think that with the end user or the end customer being a major, offshore exploration production company. I'm sure they're paying the bills, so I'm just curious if you have a blue chip customer is paying their bills. Why is it that our customer isn't paying us?

[Robert Curda:]

Well in some cases, those blue chip customers aren't paying their bills. And that has a downhill flow to some extent with respect to particularly those companies that are more cash flow restricted than others. So you're right, you would believe in that circumstance, that that would be more the case, but there has been a considerable squeeze that has occurred from parties that you wouldn't necessarily think that would be the case.

[Chris Sansone:]

Right and what control do we have to prevent that from happening again?

[Robert Curda:]

Near zero, I mean, part of the problem is that, there is a certain amount of disarray within the industry and the way it's organized and the independence of contractors. So there's really no consistency that exists necessarily and the way these contracts come about. The different oil companies have their own issues. The library houses have yet another set of issues. It would be great if there was just more consistency that one could, point their finger at and then get better assurances, but it just has not been the case over the years for that to be true.

[Chris Sansone:]

Thank you. And then my last question is the $5 million of non-sensor CapEx. Can you talk about what that's geared towards?

[Robert Curda:]

I think you're speaking about improvements to plant, property and equipment and not non-sensor CapEx right?

[Chris Sansone:]

Yes.

[Robert Curda:]

Yes, we're just updating adding additional equipment to our manufacturing facilities and research and development and things of the like, things that we've decided to do this year as part of our initiatives to improve our efficiency.

[Rick Wheeler:]

So it wasn't five. I don't believe.

[Robert Curda:]

We spent $2.8 million but FX we could spend up to $5 million this year.

[Rick Wheeler:]

Right, our current spend is 2.8.

[Chris Sansone:]

Okay, understood. All right, thank you guys.

[Rick Wheeler:]

Thanks, Chris.

[Operator:]

We will take a follow-up from Bill Dezellem with Tieton Capital.

[Bill Dezellem:]

Yes, thank you. I'll actually take the bait on that last question. So given how the oil and gas business is under pressure. What is it that you would need to upgrade your plant for that it’s leading to that difference between 2.8 million and 5 million as opposed to just shedding, CapEx down to zero?

[Rick Wheeler:]

Well, in many cases Bill, it has to do with bringing the machinery up to-date. In certain cases for the manufacturing, we certainly have the products with Quantum that we need to get out and put together, we're consistently trying to improve our processes through various means of automation to bring our costs even further down than what they have been. As far as that goes that certainly helps with margins on products even in lower volumes.So it's not that we will necessarily spend that but those are elements that as we examine the future, under reasonably cautious and examine circumstances that we could spend up to that match towards those purposes.

[Robert Curda:]

Yes we'll certainly watch our cash flow going forward, we've always watched cash flow and we certainly won't expend any money on improvements that won't have any income and cash to support that.

[Rick Wheeler:]

Right.

[Bill Dezellem:]

That's the part of why I was asking the question, is it seems that you have done a good job managing your cash historically. And it seems a bit out of character that you would be spending cash now. So I read between the lines that there is some interesting business that maybe associated with this CapEx, and hoping you could shed some light on that?

[Rick Wheeler:]

Well I mean, there's always interesting business in this stuff, but we look very seriously at the return on that investment. The timeframes based on commitments with our customers, that those improvements, which span over and examining the pertinence of those expenditures. I mean, quite honestly, that's how we've operated forever in a day. And so, we're not really changing any of that, the one outcome would be that we don't spend another dime.The other outcome would depend on some of these discussions we're having with various customers and even in our adjacent markets, it's just not just oil and gas. But certainly there are other potentials within our emerging markets, or Quantum segment within our adjacent markets those lists of customers. So those are just things that we want to make sure you're aware of.

[Bill Dezellem:]

And then how much of this is potentially tied to Quantum and some of the business that Mark spoke of earlier in the call?

[Rick Wheeler:]

Well, I think probably not the majority of it, maybe even just a smaller portion of it. We're pretty well set up as Mark indicated. We're already well versed in producing extremely reliable bullet proof seismic acquisition hardware and sensors and that sort of thing. And those are crucial and critical to what Quantum needs and its product.Other aspects aren't going to necessarily require that much capital expenditure, but certainly there will be some machinery with respect to making these sensors and cables and all that if it became necessary, we could upgrade. But I think for the most part, it would be other areas.

[Bill Dezellem:]

That is helpful. And then the prior questioner I was asking that about how big the Border Patrol could be and if I understood part of where he was going. So I'm going to ask that question slightly different. The $10 million would be for how much distance. There is a couple thousand miles of border, but not all of that is densely populated border where maybe tunnels might be important. So how much distance are we talking about for $10 million?

[Rick Wheeler:]

Mark, is that something you're at liberty to discuss?

[Mark Tinker:]

I am at liberty to completely not answer Bill's question, but I do want to do my best Bill. Yes, there is thousand miles of border. And yes, our contract is for supplying our technology for a particular application for which we have not disclosed. And so because of that, it's frustrating for me not to be able to go into some more specifics. So, I cannot tell you exactly, but by my decree, the distance for which we are going to go secure and, because I can't get into the specifics of the application I can't then talk to you about the total addressable market there for that particular threat.What I will tell you is that we have every intention of taking this technology and this initial deployment further for the Border Patrol. This is what I'm hoping, the tip of the iceberg with them, and looking forward to continuing to go into the upcoming fiscal years.

[Bill Dezellem:]

So Mark, I'm going to have a little fun with you.

[Mark Tinker:]

Okay.

[Bill Dezellem:]

So for this undisclosed application, are you addressing a, a small amount of the total distance that this application will be addressing with a $10 million or a really large portion of it. And so, we shouldn't expect a lot more follow-on for this application, but future applications?

[Mark Tinker:]

I understand, and I'm going to give you an exact answer but I'm having to think first so, I make sure I do this properly. We are addressing 2% of the total available market. What we are actually going to be able to serve for Border Patrol and become our share of that market is currently unknown and we're going to compete for.

[Bill Dezellem:]

And is that 2% of the available market. Is the available market of this – closed application or is that for the total U.S. Mexican border?

[Mark Tinker:]

This application.

[Bill Dezellem:]

Okay. So if you were to add an additional application for other miles of the border that would be a whole another 100% pie that we would then get to discuss?

[Mark Tinker:]

That's exactly correct. And the example that you already mentioned earlier was waterways.

[Bill Dezellem:]

And that would be a different application, a different buyer.

[Mark Tinker:]

Yes sir.

[Bill Dezellem:]

That's extraordinarily exciting. So how long for this current application, if the Border Patrol were to have their wish, how many years would it take for them to fulfill this application?

[Mark Tinker:]

Oh boy, if I had that crystal ball, I'd be really, really happy. As I mentioned before, they are – this program of record that's been stood up was a giant leap forward. And facilitating their ability to meet it to the degree that they will go and meet it is what I don't have the crystal ball for it. But you don't stand up a program of record if you don't have the intension to go significantly forward in meeting this particular mission.

[Bill Dezellem:]

That is helpful thank you. And then I'd like to actually switch to one more question circling back to the systems integrator for an end customer application. The implication of your comment was that this is a test that is being done. And then if the test goes well, then there would be some bigger piece of business. How long would you anticipate this test, and how large could that business be?

[Mark Tinker:]

I'm going to take a little bit of a twist on the definition of test. Test doesn't mean tasks failure in or out per se. Test means for mutually engineering together. They are the prime. They have the overall integration effort. We are a component of an overall security system that they are establishing. And we could get in there and completely fail, but we would not have made it this far if anybody had the expectation that was the case.So it's more of the test and engineering of completing this on behalf of their customer, the overall system. And where that can go, it's going to be a long haul I kind of have a reasonable understanding of the future for them. So it's going to stretch out well beyond into and beyond the five year horizon for us here, but we’re slowly increasing revenue towards that end goal. If you would ask me this question a year ago, I would have said, don't even worry about it for five years, but unexpectedly and unusually this was significantly to left domes [ph].So it's still slow. I don't want anybody to go nuts in what I'm saying right now, but the fact that we're integrating with them and we're positioning with them and they are doing what they need to do now and not three or four years from now. It's very positive progress.

[Bill Dezellem:]

Does this imply that the integrator has a contract that they have won or are they preparing for a hoped for future win?

[Mark Tinker:]

It's a highly likely win for them.

[Bill Dezellem:]

And so once this becomes an actual win, assuming that it does, does that lead to a burst of business for Quantum or how will that end up unfolding?

[Mark Tinker:]

It won't change what we're predicting today. Because we're all operating under the mindset of wins.

[Bill Dezellem:]

Thank you for the time.

[Mark Tinker:]

You bet.

[Operator:]

And there are no further questions in queue at this time. I'll turn it back to the speakers for any closing remarks.

[Rick Wheeler:]

All right well, thank you Brie and thanks to everyone who joined our call today. We look forward to speaking with you again on our conference call for the third quarter of fiscal year 2020, which will be August. So thank you again, and good bye.

[Operator:]

This does conclude today’s Geospace Technologies second quarter 2020 earnings conference call. Please disconnect your lines at this time and have a wonderful day.