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Geospace Technologies Corp (NASDAQ:GEOS)
Q1 2020 Earnings Call
Feb 6, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Geospace Technologies First Quarter 2020 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Curda, the company's Chief Financial Officer. [Operator Instructions]

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

Walter R. Wheeler -- President and Chief Executive Officer

Thank you, Tony. Good morning and welcome to Geospace Technologies conference call for the first quarter of our 2020 fiscal year. I'm Rick Wheeler, the company's President and Chief Executive Officer; and I'm joined by Robert Curda, the company's Chief Financial Officer. I'll start with an overview of the first quarter and Robert will then offer an in-depth commentary on our financial performance. Afterwards, I'll make a few final remarks and open the line for questions.

Some of today's statements may considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995 and that includes comments about product markets, revenue recognition, planned operations and capital expenditures. These statements are based on our present awareness while actual outcomes are affected by uncertainties and other factors we can't control or predict. Both known and unknown risks can lead to undesirable results or performance differences from what we say or imply. Such risks and uncertainties include those discussed in our SEC forms 10-K and 10-Q filings. And as mentioned for convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website.

Note that information discussed this morning is time-sensitive and may not be accurate at the time one listens to the replay. So yesterday, after the market closed, we released our financial results for our first quarter of fiscal year 2020 ended December 31st 2019. As reported, increased demand for our OBX marine nodal recording systems fueled first quarter results. First quarter revenue of $25.7 million outperformed last year's first quarter by 44%. In fact, first quarter revenue was the highest first quarter figure, since our all-time record breaking high in the first quarter of fiscal year 2014. In addition, gross profits generated on this higher revenue more than tripled, compared to last year reaching $10.5 million.

Operating expenses in the first quarter increased 13% over last year, primarily as a result of our acquisition of the OptoSeis fiber optic sensing technology, along with an increase in other R&D project expenditures. Despite the higher operating expenses, Geospace narrowed its net loss for the first quarter, compared to last year by 78% to $0.10 per share.

Revenue from our oil and gas market segment totaled $19.5 million in the first quarter, a 77% increase, compared to the first quarter a year ago. The increase is attributed to higher rental deployment of our OBX marine nodal recording systems. As of December 31st 2019, we had approximately 33,000 OBX stations in our rental fleet, most of which were actively utilized on performing rental contracts across the globe with multiple seismic contractors.

We're also in conversation with new and existing customers to potentially extend current rental contracts, as well as -- execute future rental contracts for our OBX stations. We carefully consider these activities in order to gauge the need for potential expansion of our OBX rental fleet. And based on current levels of demand, we expect cash investments into our wireless product rental fleet to be $8 million or more in fiscal year 2020.

Our traditional seismic products generated $2.4 million of revenue in the first fiscal quarter, a decrease of approximately 15%, compared to last year. The lower revenue is a culmination of decreasing demand for our traditional sensor products, partially offset by an increase in demand for our marine seismic products. Revenue from our wireless seismic product lines, totaled $16.9 million, a 132% increase, compared to last year, driven by higher rental demand and utilization of our fleet of OBX marine seismic recorders.

In November of the first quarter, we also announced the sale of a land system to SA Exploration, comprised a 30,000 channels of our advanced GCL nodal recorder. This $12.5 million sale was primarily financed with the promissory note due in January of 2023 and delivery of the system occurred in our second fiscal quarter.

First quarter revenue from our reservoir seismic products totaled $218,000, this was a decrease of about 77%, compared to last year and is attributed to lower demand for our borehole seismic sensing and recording products. We expect revenue from this product category to remain low, unless and until we're engaged in a contract for the delivery of a Permanent Reservoir Monitoring or PRM system. We believe that our broad portfolio of PRM accomplishments and engineered products, which now includes OptoSeis fiber optic sensing technology, greatly enhances our opportunity to win future PRM contracts. While there are currently no open tenders in the industry for a PRM system, we believe a tender offering is likely to come out in fiscal year 2020. Note that revenue from such a contract, if awarded to Geospace would not be expected to occur within fiscal year 2020.

In the first fiscal quarter, revenue from our adjacent market segment totaled $6.1 million, a decrease of approximately 8%, compared to the first quarter last year. The decrease was primarily caused by unforeseen delays in the production of certain graphic imaging equipment and lower demand for our film and industrial sensor products, but this was partially offset by greater demand for our water meter cable and connector products.

Despite lower first quarter revenues than last year, we believe opportunity to grow revenue in our adjacent market segment remains promising. And we believe that revenue generated from our adjacent market segment continues to act as a strategic hedge, helping to provide stability that offset some of the volatility occurring in the demand for our oil and gas market segment products.

Revenue from our emerging market segment, totaled $97,000 in the first quarter, this was an increase of about 10%, compared to last year, but is not considered as important or a reflection of any underlying trend. As a reminder, the emerging market segment is comprised solely of products and services offered through our subsidiary Quantum Technology Sciences. These specialty products, uniquely combine the technologies of seismic acoustics and highly sophisticated analytics to provide actionable information of potential threats around physical borders and perimeters by way of persistence, surveillance and detection. These products have applications in both domestic and international markets and in both commercial and governmental settings. We believe this unique technology achievement, accomplished through our acquisition and integration of Quantum, can generate meaningful revenue going forward. We believe contract opportunities for the deployment and utilization of these products are likely to occur in the near future and could lead to ensuing revenue in the current fiscal year.

At this point, I'll turn the call over to Robert for more financial detail.

Robert L. Curda -- Vice President and Chief Financial Officer

Thanks Rick. Good morning, everyone. Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during our call this morning.

In yesterday's press release, our first quarter ended December 31st 2019, we reported revenue of $25.7 million, compared to last year's revenue of $17.9 million. The net loss for the quarter was $1.3 million or $0.10 per diluted share, compared to last year's net loss of $5.9 million or $0.44 per diluted share.

A breakdown of our oil and gas revenue is as follows: our traditional product revenue for the first quarter was $2.4 million, a decrease of 15%, compared to revenue of $2.8 million last year. The revenue decline is attributed to lower demand for our traditional sensor products, partially offset by an increase in demand for our marine seismic products.

Our wireless product revenue for the quarter was $16.9 million, an increase of 132%, compared to revenue of $7.3 million last year. The increase in revenue is due to growth in the rental demand and utilization of our OBX marine nodal systems. Revenue for the first quarter excludes $1.5 million of rental revenue, not recognized due to the uncertainty of a customer's ability to service its debts.

Our reservoir product revenue for the first quarter was $218,000, a decrease of 77%, compared to revenue of $937,000 last year. This revenue decrease reflects reduced sales of our borehole tools. We do not expect meaningful revenue from these products unless and until we are engaged in a contract for the delivery of a PRM system. Currently, there are no open tenders for a PRM system, but we believe a tender offering is likely to be released in fiscal year 2020. However, provided Geospaces, awarded to PRM contract, we do not expect to recognize any revenue within fiscal year 2020.

Moving onto our adjacent markets product segment. Our industrial product revenue for the first quarter of fiscal year 2020 was $3.6 million, essentially unchanged for the same period of the prior fiscal year. Imaging product revenue for the first quarter was $2.5 million, a decrease of 19%, compared to last year's revenue of $3.1 million. This decrease is caused by unforeseen delays in the production of certain imaging equipment and a decline in sales in our film products. While this revenue decline is larger than we anticipated, we do not expect a continued trend of lower revenues in the future.

Finally, revenue from our emerging market segment totaled $97,000 for the three months ended December 31st 2019. Prior year revenue was $88,000 for the first quarter ending December 31st 2018, while we do not anticipate significant revenue contributions from Quantum in the near-term, we do believe our ongoing development efforts are creating future meaningful revenue opportunities.

Our first quarter fiscal year 2020 operating expenses increased by $1.2 million or 13%, compared to last year's first quarter. The increase in operating expenses was due to incremental research and development costs associated with our recent acquisition of the OptoSeis business in November 2018, an additional research and development project related expenditures in our oil and gas market segment.

Our first quarter cash investments into our rental equipment and -- property, plant and equipment were $5.2 million and $1.7 million respectively, we continue to experience strong demand for our marine OBX rental equipment. As a result, we believe our fiscal year 2020 -- in fiscal year 2020 our cash investments into our rental fleet could be $8 million or more.

We estimate total fiscal year 2020 cash investments into our property, plant and equipment could be up to $5 million. At December 31st 2019, we had $8.7 million of accounts receivable due from an international customer, who is currently leasing a significant portion of our OBX nodal equipment. We have experienced ongoing cash collection difficulties with this customer throughout fiscal year 2019 and the first quarter of fiscal year 2020. In late November 2019, we ceased recognizing revenue from this customer and expect to continue to do so until the customer exhibits an ability to service its debts owed to the company.

The unrecognized revenue invoiced to the customer in the first fiscal quarter of 2020 was $1.5 million. We have also commenced negotiations with this customer to enter into an agreement requiring the customer to pay a portion of the trade accounts receivables in the near-term, to pay all rental payments going forward on a current basis and to convert the remaining amounts owed into a debt instrument. Secured by certain of the customer's assets. We expect to finalize the agreement within the second quarter ending March 31st 2020.

We have significant concerns about the collection of these accounts receivable, but we have not and do not intend to provide any additional bad debt reserve toward this customer's outstanding accounts receivable, unless and until we believe that it is probable the customer will not be able to pay its debts to us. Also our current negotiations may not lead to an agreement or the fair market -- fair value of the customers collateral may not exceed -- equal or exceed the balance of accounts receivable owed by the customer or the customer may not need its payment obligations. If any of these situations occur, we could record a significant bad debt reserve as soon as the second quarter of 2020.

Our balance sheet at the end of the first quarter reflected $10.1 million of cash in short-term investments. We had no long-term debt outstanding and available borrowings under our credit agreement were $24.7 million. In addition, we own numerous real estate holdings in Houston 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.

Walter R. Wheeler -- President and Chief Executive Officer

Thank you, Robert. Within our oil and gas market segment, our traditional exploration and reservoir seismic products remain extremely challenged by very low demand. This directly affirms the historical low levels to which seismic exploration activity in the oil and gas industry has fallen. And we see no real indications of improvement for these products on the horizon. These conditions have similarly impacted our wireless seismic products for onshore use. Although we believe recent sales of our advanced GCL nodal recording system help demonstrate the value that our technology offers to our customers, while navigating these down conditions.

On the other hand, our OBX marine nodal recording systems continue to represent a bright spot in an otherwise dim seismic equipment market. We believe the continued revenue growth and seemingly uninterrupted increase in demand for these products, is driven by the renewed focus on offshore reserves by many of today's E&P operators. At the same time, we believe that this increased focus on offshore reserves is creating renewed interest in our PRM systems, which could lead to one or more tenders and opportunities for PRM contracts in fiscal year 2020.

That said, we continue to move forward with our diversification strategies for the adjacent and emerging markets in order to help mitigate the volatility we face in our oil and gas market segment. Based on our technological accomplishments, we believe the onset of meaningful Quantum product revenue could start this year from our border and perimeter security customers.

This concludes our prepared remarks, and now I'll turn the call back over to Tony for questions.

Questions and Answers:

Operator

Great, thank you. The floor is now opened for questions. [Operator Instructions] We'll take our first question from Bill Dezellem with Tieton Capital. Please go ahead, your line is open.

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

Well, Bill. I guess, what I do know about it is, it really represents what really faces the border patrol everyday. That tunnel has -- that was found, you know, we are quite aware of it, there is -- who knows how much illicit commerce has gone through that tunnel across the border. And it's a dangerous situation and it is something the border patrol faces everyday. I certainly, it's not even appropriate for me to comment on whether we had any involvement in that find or not. I think it's more important just to realize that, this is an important situation that the border patrol needs to address, and I believe they're fully intend to try to address those issues.

I can say that the equipment that we have developed with Quantum, is exactly suited for detecting these sorts of tunnels. So we look forward to the border patrol's fight and their effort and trying to combat that sort of illicit activity.

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

Great, thank you. I'll let others ask questions.

Operator

Thank you. [Operator Instructions] Meanwhile, we'll move to Chris Sansone with Sansone Advisors. Please go ahead, your line is open.

Christopher Sansone -- Sansone Advisors -- Analyst

Hi guys, good morning. Thank you for taking my call.

Walter R. Wheeler -- President and Chief Executive Officer

Hi, Chris.

Robert L. Curda -- Vice President and Chief Financial Officer

Good morning.

Christopher Sansone -- Sansone Advisors -- Analyst

Rick, one for you, the demand you're seeing on the offshore side with the Ocean-bottom systems. Is that coming at the expense or is it -- or is that gaining market share relative to the Streamer Technologies or is that incremental analysis that they are using the Ocean-bottom stations for?

Walter R. Wheeler -- President and Chief Executive Officer

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

Christopher Sansone -- Sansone Advisors -- Analyst

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

Robert L. Curda -- Vice President and Chief Financial Officer

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

Christopher Sansone -- Sansone Advisors -- Analyst

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

Operator

Right, thank you. Next we'll move to David Nierenberg with Nierenberg Investment. Please go ahead, your line is open.

David Nierenberg -- Nierenberg Investment -- Analyst

Good morning, guys.

Robert L. Curda -- Vice President and Chief Financial Officer

Hi, David.

Walter R. Wheeler -- President and Chief Executive Officer

Good morning.

David Nierenberg -- Nierenberg Investment -- Analyst

As you and others on the call know, we have long been supportive shareholders of this company. We're impressed by your survival instincts and your preservation of cash at a time when competitors were going out of business. We're delighted to see your continuing investment in innovation; gaining market share offshore and starting to get orders onshore in your core business. And we share your hopefulness about the prospects for continued strength in offshore exploration and for new orders for the PRM business.

We do have two concerns, neither of which are new to you or to those on the call. One is, we would sure like to see Quantum generate orders and revenue. It's been a long time, why that has not happened and we've been incurring operating losses in investments. But our single greatest concern today is about accepting credit risk to risky customers on land and offshore, domestic and foreign. And the risk to the strength of the balance sheet, which results from that. We do not wanted to see this company become a net borrower, and I imagine you don't either.

But during the time we've been shareholders, the cash balance is so from close to $50 million to now about $10 million. We really don't like to see you being a lender, because our perception is that both management and Board of this company lack relevant banking experience; lack asset based lending experience; lack vendor leasing experience and you're dealing with risky customers and a risky business and there have been and are likely to continue to be large losses from time-to-time.

And now with this new $12.5 million contract, most of which if and when it's paid for, is going to be extended out to January 2023, that really concerns us. So our concerns are; is this a prudent business strategy? Is this a prudent financial strategy? Is your accounting and auditing doing the right things in terms of revenue recognition, establishment of loss reserves and realization of those reserves. Why is it a good business, if we have to accept this kind of risk from shaky customers?

And so I think it's a good time for shareholders to be asking you and the Board to do a thorough review of this company's strategy. And ask whether it is right for this company to continue to remain an independent public company or whether or not you should partner or consider some of the parts transactions, because the pieces may be worth more than the whole. That's how uncomfortable and troubled I am about the credit risk that you're accepting?

Walter R. Wheeler -- President and Chief Executive Officer

Well, we can certainly appreciate that, David. I think, that in general that we do feel relative -- that we're on sound footing with respect to the -- for example, the $12.5 million contract that you're referring to there. I mean, that's the note that we're discussing is certainly a secured note that also represents an order that we received upfront cash payments and we basically operate our business in that sort of manner, even on our rental equipment to ensure that our base costs have representation in terms of the cash that begins those contracts.

So I think we're doing our best at putting in due diligence in ensuring that our financial footing on these sorts of contracts start out very solid. To that extent, as a security, if that equipment were to come back to us. I mean, it would be certainly something that could generate revenue through its rental opportunities. We do examine our cash outlook at the Board level every quarter. And we do quite a forward look on all of that. And we examine how it matches up to what has happened? There are risks involved in this particular business any oil and gas related, particularly in the services side, there are risks and you see those represent it absolutely in this offshore case of the OBX rentals.

Clearly, we own all of that equipment. So that asset is ours, it's not in jeopardy, in any respect. And we have every indication that so far that we believe that, that debt will be able to be paid and that the opportunities for that work exist. But we are having to work through some difficult issues with that particular company to get this on proper footing. There is risk there, I can't deny that. And that's exactly why we have made it so well-known and try to give a complete and other disclosure of what the issues are there that we're facing. But for right now, we believe that, you know, our ability to ring that in and bring it into a better circumstance, certainly has high probability. But that could change, and that's exactly what we've tried to make clear.

David Nierenberg -- Nierenberg Investment -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

All right. That sounds great.

Operator

Thank you. Next, excuse me. Thank you. Next we'll move to Michael Cox with EPG. Please go ahead, your line is open.

Michael Cox -- EPG -- Analyst

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

Robert L. Curda -- Vice President and Chief Financial Officer

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

Michael Cox -- EPG -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Michael Cox -- EPG -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Michael Cox -- EPG -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

I think we completely agree with that.

Robert L. Curda -- Vice President and Chief Financial Officer

Yes.

Michael Cox -- EPG -- Analyst

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

Robert L. Curda -- Vice President and Chief Financial Officer

The increase in accounts receivable does not have to do with SA Exploration. We were notified by one of our other OBX nodal customers that they were going to be delaying some payments subsequent to that. They started paying right when they indicated that they would have cash flow coming toward us and the cash flow has been received and where our receivables reflect that as of today.

Michael Cox -- EPG -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

Right, that was a timing issue, yes.

Michael Cox -- EPG -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

Sure. We're very bullish on the efficiency and efficacy of PRM. The science is well-known. It's just been the capital investments by the oil companies have been very much with held, in particularly withheld from offshore work until very recently here. The reason we're more hopeful is, because the discussions we're having, which we are under non-disclosure. So I can't really give you lots of information on any of that detail. But in those discussions, it is being referenced to us and has been for even some time of when a tender might come out. And even though there have been delays that have occurred there. We feel more confident based on what we're told and based on the discussions and the way that we're being fed information in these discussions from the oil companies that there is the likelihood this year of such a tender coming out.

Now even having said that, and I want to make clear. That the execution of that award, when it takes place, based on our confidential understandings of when deployments would occur and all that, don't necessarily mean that the revenue would be recognized in this fiscal year, even though a tender possibly even an award might come out in the fiscal year. Beyond that...

Michael Cox -- EPG -- Analyst

I think. Yes...

Walter R. Wheeler -- President and Chief Executive Officer

Beyond that, there is other opportunities that are brand new, that are coming up. New discussions that we have not have that are -- that have been onset new request for information toward that thing. So the good news about that is it sort of confirms, I think what many in the industry that analyze what's going on in the industry, I'm not the only one that has seen this sort of new interest as it were in the offshore world. We know that the shale aspects are changing, the investment strategies are changing there, and we see many of oil companies going back and examining what they can achieve offshore. Sometimes using some of the new techniques they've now developed having been very cost conscious as it were. So we believe all of that is driving things in the right direction.

Michael Cox -- EPG -- Analyst

Thank you very much.

Operator

Hey, thank you. And next we'll move to a follow-up from Bill Dezellem. Please go ahead, your line is open.

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

And had you previously been under NDA or is that a forward step in that process?

Walter R. Wheeler -- President and Chief Executive Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

And when did you go under NDA?

Walter R. Wheeler -- President and Chief Executive Officer

Probably the day we started talking.

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

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

Robert L. Curda -- Vice President and Chief Financial Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

Yes, that would be my expectation.

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

I think so, but there are some other opportunity certainly within our discussions that might fall into a shorter timeframe in that regard. But we'll just have to wait and see how those might manifest.

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

I think that's a fair statement.

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

No, there is nothing unique or special about this quarter in relation to our rental revenue in the margins we expect to see from that. Those rental equipment has primarily a fixed cost in nature and as you have more of that equipment out being utilized and generating revenue, we see a higher level of profit from that.

Bill Dezellem -- Tieton Capital -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

That's correct. In addition to depreciation, we have maintenance cost for equipment that's unutilized also, so those cost don't go away.

Bill Dezellem -- Tieton Capital -- Analyst

Right. Great, thank you both.

Operator

Thank you. And next we'll move to a follow-up from David Nierenberg. Please go ahead, your line is open.

David Nierenberg -- Nierenberg Investment -- Analyst

Hello?

Walter R. Wheeler -- President and Chief Executive Officer

Hey, David.

David Nierenberg -- Nierenberg Investment -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

David Nierenberg -- Nierenberg Investment -- Analyst

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

Walter R. Wheeler -- President and Chief Executive Officer

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

David Nierenberg -- Nierenberg Investment -- Analyst

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

Robert L. Curda -- Vice President and Chief Financial Officer

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

David Nierenberg -- Nierenberg Investment -- Analyst

I see. Great, thank you.

Robert L. Curda -- Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. And next we'll move to Michael Melby with Gate City Capital. Please go ahead and your line is open.

Michael Melby -- Gate City Capital -- Analyst

Good morning. My question was answered. Thank you.

Operator

Thank you. And next we'll move to Damon Benedict with D3. Please go ahead, your line is open.

Damon Benedict -- D3 -- Analyst

Hi, I thought, I heard you mention in response to David's question about the GCL order that you had received some cash upfront. How much was that? And how much of your cost to produce those GCL units? How much of your cost to produce with offset by that cash, you've already received?

Walter R. Wheeler -- President and Chief Executive Officer

Actually, it's a great question, but we don't reveal the costs on those units. I mean, our competitors would love us to do that, but we're not willing to do that.

Damon Benedict -- D3 -- Analyst

Without giving dollar number, could you just let us know roughly what percent of your cost is already recovered and de-risked?

Walter R. Wheeler -- President and Chief Executive Officer

No, I'm afraid. I couldn't, but I believe the down payment on that was something like 10% or something along those lines, if I'm not mistaken.

Damon Benedict -- D3 -- Analyst

Okay. And with the cost -- sorry, if I missed this in the prepared remarks, but was the...

Walter R. Wheeler -- President and Chief Executive Officer

Well, I'm sorry, Robert just corrected me and said it was 20%.

Damon Benedict -- D3 -- Analyst

Okay. And was the cost already reflected in your P&L in this past quarter? Or is that going to be reflected in the upcoming quarter and the cost to produce that, sorry if I missed it.

Robert L. Curda -- Vice President and Chief Financial Officer

Yes, delivery did occur until our second quarter. So we would not reflect any cost until we recognize the revenue.

Damon Benedict -- D3 -- Analyst

Okay. And on the promissory note. Is there any payment in the meantime or is it all just one bullet in '23?

Robert L. Curda -- Vice President and Chief Financial Officer

No, they'll make schedule payments, monthly payments throughout the life of the note.

Damon Benedict -- D3 -- Analyst

Okay. And then last one on the $8 million of projected capex related to the rental fleet for this year. How much was already in this fiscal first quarter versus how much for the next three quarters?

Walter R. Wheeler -- President and Chief Executive Officer

I mean, that $8 million includes $5 million we incurred in this quarter. And I'm not real sure, I know the timing on a quarter basis through the rest of this year for the rest of those.

Damon Benedict -- D3 -- Analyst

Okay. So only $3 million more over the next three quarters.

Walter R. Wheeler -- President and Chief Executive Officer

Yes.

Damon Benedict -- D3 -- Analyst

Okay, thank you.

Operator

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

Walter R. Wheeler -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Walter R. Wheeler -- President and Chief Executive Officer

Robert L. Curda -- Vice President and Chief Financial Officer

Bill Dezellem -- Tieton Capital -- Analyst

Christopher Sansone -- Sansone Advisors -- Analyst

David Nierenberg -- Nierenberg Investment -- Analyst

Michael Cox -- EPG -- Analyst

Michael Melby -- Gate City Capital -- Analyst

Damon Benedict -- D3 -- Analyst

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