Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Geospace Technologies Corp (NASDAQ:GEOS)
Q2 2020 Earnings Call
May 9, 2020, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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, is joined by Robert Curda, Company's Chief Financial Officer; and Mark Tinker, CEO of our subsidiary Quantum Technology Sciences. [Operator Instructions] And will be available on the Geospace Technologies Investor Relations website following the call. [Operator Instructions]

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

Walter R. (Rick) Wheeler -- Chief Executive Officer

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're 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 and our recent award contract with the U.S. Border Control. 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 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 that 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 stressed enormous health and economic devastation upon the entire world. I'm 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 of 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 recording systems.

Total revenue of $25.9 million matched our recent first fiscal quarter as well as last year's second quarter, differing 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 nonrecurring costs for upgrades we made to our 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 three- and six-month periods ended March 31, 2020, are largely the result of a writedown 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 recording system, secured with a $10 million promissory note payable in 36 monthly installments. And 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 noncurrent deferred revenue. The customer is current on its note 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 markets segment generated $18.4 million of revenue in the three months ended March 31, 2020. The slight decrease of 1% compared to the equivalent year ago period as 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 six-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 3- 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 oversupplies of crude oil generated in the dispute between Saudi Arabia and Russia, demand for these products will likely continue to be negatively impacted. For the 3- 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 stem from greater rentals of our OBX systems. Interestingly, demand for our 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 risks of cancellation or delays. However, to date, no other cancellations or major delays have been reported. And we continue receiving requests 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 products.

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 dialogues unaffected. For the three- and six-month period ended March 31, 2020, revenue from our adjacent markets 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 markets 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 attendant 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 markets segment generated revenue of $372,000 and $469,000, respectively, for the 3- 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 U.S. Customs and Border Protection for the U.S. Border Control to provide an advanced technology solution to the Department of Homeland Security. Even though the most significant portions of revenue from the contract may not occur until our first quarter of 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 take over and give some more financial detail.

Robert L. Curda -- Chief Financial Officer

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 decrease is also due to lower demand for marine seismic products and 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 and 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 collectibility of revenue from a seismic marine customer, our wireless product revenue does not 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 we'll continue this practice until the customer can service its debt owed to us in the 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 30-month and six -month period reflect reduced sales in 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 products 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 products six-month revenue for fiscal year 2020 is $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. And the decrease in revenue is due to production delays in certain imaging equipment and lower sales of 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. border 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 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 own 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.

Walter R. (Rick) Wheeler -- Chief Executive Officer

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.

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

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's 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 has 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, 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 contrabands into and out of our country. And while it took longer than desired, the first border patrol contract validates Geospace management's 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.

Walter R. (Rick) Wheeler -- Chief Executive Officer

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 trouble 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've 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.

Questions and Answers:

Operator

[Operator Instructions] and we'll go first to Bill Dezellem with Tieton Capital.

Bill Dezellem -- Tieton Capital -- Analyst

Thank you, Mark, 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 a government type agency or private? And any additional detail would be helpful.

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

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 don't feel very gratifying because we have to preserve some of the not only the anonymity of our customers 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 is 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. And their customer would be a government or a private business. Their customer ranges, but in this particular example, it's for a U.S. government end user.

Bill Dezellem -- Tieton Capital -- Analyst

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

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

I can't. We're under a pretty strict nondisclosure with them.

Bill Dezellem -- Tieton Capital -- Analyst

Understood. And then are you anticipating any further border security, I guess, final purchase decisions for a lack of a better phrase this year? 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 A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

Yes. But let me kind of hit both of those actually. While it's not meaningful, 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 toward 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 you specifically, absolutely. It is our desire and intent to continue to support the Border Patrol with upcoming efforts in the future.

Bill Dezellem -- Tieton Capital -- Analyst

So you're thinking that you do have it announced this year?

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

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. The program of record is the 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 toward 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 an ability and a program of record kind of goes toward 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 -- Tieton Capital -- Analyst

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 just or understanding how the government works?

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

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 I'd call program element line numbers within the United States budget. And so it's a specific place with a specific definition for Congress to both authorize an appropriate funding to be used. When you see that there's 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're 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's a big push to put the wall into the ground. There's they have mine 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 and 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. And so to see that happen. That was part of the reason it took us a little longer to get off contract to is because it was their intent to do that. The program of record, I want to be crystal clear. It's not all about fun. It's about a mission that they're going to go satisfy, and we're going to go compete for those funds along others for that portion of that mission that may apply to us.

Bill Dezellem -- Tieton Capital -- Analyst

And so I'm actually going to use that as a great segue, and I apologize for taking up lots of time here, but I'm going to use that as a segue to an RFI that we understand was due, at least this is what we read, was due February 25. And where the border Patrol was looking for a solution to address waterways in particular. Didn't appear that it was open water or 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 talk to that opportunity, number one? And then number two, because you were granted the SBIR Phase three, if you do fit the requirements, does are we understanding correctly that this obligates the government to buy from you because you do have that Phase three status?

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

Bill, that's a really good question. Let me do my best to address that in sequence. We are intimately familiar with the RFI coming out. An RFI for everybody else in the call is request for information. It's a completely noncommittal 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 it's noncommittal. The waterways RFI we are intimately familiar with and did respond to. When you get into SBIR status, what that means is the government's 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 conduct. That can make them very happy because it means they get to avoid a complete competition, which both costs 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. We are leveraging this in our distant path with both Air Force Research Labs and the Air Force Nuclear Weapons Center. And as you guys read in the press release, we were able to do it for this current contract with the Border Patrol. Waterways is something that we are very excited to further engage the Border Patrol on and make sure they're aware of how we would approach solving that particular requirement.

Bill Dezellem -- Tieton Capital -- Analyst

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 of a commercial systems integrator. Would this be an example, I'm just going to use an example in pulling this out of the air, where, say, Raytheon would be the systems integrator who is working to secure military installations. And so you'd be selling to Raytheon, it then be selling to the military. Is that an example of what you were referring to there?

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

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

Bill Dezellem -- Tieton Capital -- Analyst

Okay, great, thank you for the time

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

Thank you, Bill.

Operator

[Operator Instructions] We'll go next to Chris Sansone of Sansone Advisors. Your line is open.

Chris Sansone -- Sansone Advisors -- Analyst

Hi, everyone. Good morning.

Walter R. (Rick) Wheeler -- Chief Executive Officer

Hi, Chris.

Chris Sansone -- Sansone Advisors -- Analyst

Okay. So I did have one question on the Quantum side. What's the revenue model for that business?

Walter R. (Rick) Wheeler -- Chief Executive Officer

It's good $10 million.

Chris Sansone -- Sansone Advisors -- Analyst

Is it? Okay. So it's a onetime sale. Is there a recurring nature to any of that?

Walter R. (Rick) Wheeler -- Chief Executive Officer

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 -- Sansone Advisors -- Analyst

Okay. Right. So there's no ongoing servicing revenue stream that we could expect from those orders?

Walter R. (Rick) Wheeler -- Chief Executive Officer

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

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

Yes. There's the potential for follow-on maintenance and service and any contract, of course, and there's the potential for that one. But nothing inked at this moment.

Chris Sansone -- Sansone Advisors -- Analyst

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?

Walter R. (Rick) Wheeler -- Chief Executive Officer

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 doesn't have products like that we have innovated and come out with and it solves some very serious problems. So we expect it 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 -- Sansone Advisors -- Analyst

Okay, great. And then so when you put the Quantum stations in place, how long do they last for? Was there some period of time where you have to go back and replace that?

Walter R. (Rick) Wheeler -- Chief Executive Officer

Mark, do you want to answer that?

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

Sure. But 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, they have put literally 80,700 miles of PRM systems on the ocean bottom that have been in place and 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 mean time to failure, that's very impressive. So I fully anticipate that our systems will be in place and be operational for 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 -- Sansone Advisors -- Analyst

Okay. 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 L. Curda -- Chief Financial Officer

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 -- Sansone Advisors -- Analyst

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

Walter R. (Rick) Wheeler -- Chief Executive Officer

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 -- Sansone Advisors -- Analyst

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

Walter R. (Rick) Wheeler -- Chief Executive Officer

34,000 stations, I believe.

Chris Sansone -- Sansone Advisors -- Analyst

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

Walter R. (Rick) Wheeler -- Chief Executive Officer

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 and mentioned that in our press release that we did upgrade some of that fleet to current technologies. Have we not done that, it would not have qualified for some of the work that we're getting with that equipment right now. As you know, some of this equipment has been around for a while, and technology changes pretty rapidly. So these upgrades were sort of a onetime 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 -- Sansone Advisors -- Analyst

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

Robert L. Curda -- Chief Financial Officer

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 live. But as we've said, we've only had, thus far, one contract small contract that's been canceled, and we're putting out quotes for new contracts as we speed.

Walter R. (Rick) Wheeler -- Chief Executive Officer

Yes, that's a very good question, Chris, but it's not one that we can give you a really accurate answer on it because of so many balls that are being juggled in the air right now with 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 toward their longer-term aspects of their future I think that mitigates some of even though it's huge, some of the elements that and our immediacy have occurred.

Chris Sansone -- Sansone Advisors -- Analyst

Right. Right. Before I switch over to capex, just one comment on the issues that we're having with some of the bad debt 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 how if you have a blue-chip customer who's paying their bills, why is it that our customer isn't paying us?

Walter R. (Rick) Wheeler -- Chief Executive Officer

Well, in some cases, those blue-chip customers aren't paying their bills. And that has a 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 -- Sansone Advisors -- Analyst

Right. And what control do we have to prevent that from happening again.

Walter R. (Rick) Wheeler -- Chief Executive Officer

Near zero. I mean, part of the problem is that there's a certain amount of disarray within the industry and the way it's organized and the independence of all the 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 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 -- Sansone Advisors -- Analyst

Yes. And then my last question is the $5 million of nonsensor capex. Can you talk about what that's geared toward?

Robert L. Curda -- Chief Financial Officer

I think you're speaking about improvements to plant property and equipment and nonsensor capex, right? 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.

Walter R. (Rick) Wheeler -- Chief Executive Officer

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

Robert L. Curda -- Chief Financial Officer

Yes, we spent $2.8 million, but we expect we could spend up to $5 million this year.

Walter R. (Rick) Wheeler -- Chief Executive Officer

Right. Our current spend is $2.8 million.

Chris Sansone -- Sansone Advisors -- Analyst

Okay, understood. All right, thank you guys.

Walter R. (Rick) Wheeler -- Chief Executive Officer

Thanks, Chris.

Operator

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

Bill Dezellem -- Tieton Capital -- Analyst

Thank you. I'll actually take the bait on that last question. Given how the oil and gas business is under pressure. What is it that you would need to upgrade your plant for that that's leading to that difference between $2.8 million and $5 million as opposed to just shutting capex down to 0?

Walter R. (Rick) Wheeler -- Chief Executive Officer

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 to 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 examined circumstances that we could spend that match toward those purposes.

Robert L. Curda -- Chief Financial Officer

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

Bill Dezellem -- Tieton Capital -- Analyst

That's 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 may be associated with this capex and hoping you could shed some light on that?

Walter R. (Rick) Wheeler -- Chief Executive Officer

Well, I mean, there's always interesting business in this stuff. But we look very seriously at earn-on that investment, the time frames based on commitments with our customers. That those improvements would 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, this is not just oil and gas. But certainly, there are other potentials within our emerging markets, our 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 -- Tieton Capital -- Analyst

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

Walter R. (Rick) Wheeler -- Chief Executive Officer

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 bulletproof seismic acquisition, hardware and sensors and that sort of thing. And those are crucial and critical to what Quantum needs in 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, that if it became necessary we could upgrade. But I think for the most part, it would be other areas.

Bill Dezellem -- Tieton Capital -- Analyst

That is helpful. And then the prior questioner was asking a bit 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's a couple of thousand miles of border, but not all of that is densely populated bordre where maybe tunnels might be important. So how much distance are we talking about for $10 million?

Walter R. (Rick) Wheeler -- Chief Executive Officer

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

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

I'm at liberty to completely not answer Bill's question. But I do want to do my best deal. Yes, there's 1,000 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 by 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 I'm hoping the tip of the iceberg with them and looking forward to continuing to go into the upcoming fiscal years.

Bill Dezellem -- Tieton Capital -- Analyst

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

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

Okay.

Bill Dezellem -- Tieton Capital -- Analyst

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

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

I understand, and I'm going to give you an exact answer, but I'm having to think first to 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 and our share of that market is currently unknown, and we're going to compete for.

Bill Dezellem -- Tieton Capital -- Analyst

And is that the 2% of the available market? Does the available market is this application this unclosed application? Or is that for the total U.S., Mexican border.

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

This application.

Bill Dezellem -- Tieton Capital -- Analyst

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

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

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

Bill Dezellem -- Tieton Capital -- Analyst

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

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

Yes, sir.

Bill Dezellem -- Tieton Capital -- Analyst

That is that's extraordinarily exciting. So and 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 A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

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 with a giant leap forward in facilitating their ability to meet it. To the degree that they will go and need it is what I don't have the crystal ball for. But you don't stand up a program of record if you don't have the intention to go significantly forward in meeting this particular mission.

Bill Dezellem -- Tieton Capital -- Analyst

That is that is helpful. 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 comments was that this is a test that is being done and then if the test goes well, then there would be a bigger piece of business. How long would you anticipate this test? And how large could that that business be?

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

I'm going to take a little bit of a twist on the definition of tested mean test failure in or out, per se. Test mean we're 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, 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, long. 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 with slowly increasing revenue toward that end goal. If you would ask me this question a year ago, I would have said, I don't even worry about it for five years, but unexpectedly and unusually, this slid significantly to the left on this. So it's still slow. I don't want anybody to go nuts about 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 is very positive progress.

Bill Dezellem -- Tieton Capital -- Analyst

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

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

It's a highly likely win for them.

Bill Dezellem -- Tieton Capital -- Analyst

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 A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

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

Bill Dezellem -- Tieton Capital -- Analyst

Thank you for the time

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

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.

Walter R. (Rick) Wheeler -- Chief Executive Officer

All right. Well, thank you, Brie, and thanks to everyone that 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 in August. So thank you again, and goodbye.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Walter R. (Rick) Wheeler -- Chief Executive Officer

Robert L. Curda -- Chief Financial Officer

Mark A. Tinker -- Chief Executive Officer of Quantum Technology Sciences

Bill Dezellem -- Tieton Capital -- Analyst

Chris Sansone -- Sansone Advisors -- Analyst

More GEOS analysis

All earnings call transcripts

AlphaStreet Logo