D3 Family Funds Request Governance and Other Changes at GEOS

CAMAS, Wash., March 2, 2020 /PRNewswire/ -- D3 Family Funds, owner of 4% of Geospace Technologies Corporation (NASDAQ: GEOS), announced today that they support Chris Sansone's February 18, 2020 Form 13D, which advocates board refreshment and other changes at GEOS for two reasons:  1) we know several Sansone investors and consider them shrewd, well-connected, and constructive; and 2) we share Sansone's concerns that GEOS should improve capital allocation, profitability, and credit risk management, and refresh its board composition.

In fairness to GEOS, we appreciate that it entered the energy industry's deep downturn with a strong balance sheet and market share and that it had solid wireless seismic products.  GEOS deepened its technology moat while most of its competitors faltered or failed.  Moreover, GEOS' non-seismic businesses generated profits through the downturn.  Combined with non-core asset monetization, this sustained the company as it awaited industry recovery.  These attributes and actions benefitted all stakeholders.

We own 4% of GEOS.  We know other large shareholders, including Sansone, who, along with us, collectively own 16% of the company.  Through our relationships in the corporate governance community, we have access to most other large shareholders.  We should note that the GEOS shareholders we know are not, and are not acting as, a "group" in the legal sense of that word.  Nevertheless, we can state that the concerns Sansone and we have expressed about GEOS are shared by other shareholders we know----asset allocation, continuing losses, dwindling cash, and reservations about GEOS' ability to manage its vendor leasing business prudently and about board oversight.

These issues lead us to agree with Sansone that board refreshment could bring fresh perspectives, independence, objectivity, and appropriate directorial skepticism.  Our one disagreement with Sansone is our strong belief that a director's age has nothing to do with their ability to exercise sound business judgment.

To articulate our concerns, we'll begin with asset allocation:  first, we are concerned about what we call "diworsification," and, second, we wonder about possibly excess inventory of seismic equipment.  GEOS' purchase of perimeter monitoring firm Quantum has not produced material revenue yet, while generating losses which delay GEOS' return to the black.  GEOS is not a venture capital incubator; funding and nurturing an early stage venture are different from running an established, public $100M company.  Before Quantum, GEOS already was something of a mini-conglomerate, operating seismic and several other "adjacent market" businesses in different industries.  Quantum makes GEOS even more complex and harder to manage.  We do not like our companies to divert focus and resources from their core.  Moreover, shareholders don't need GEOS to be a diversification vehicle; they can diversify for themselves.  We do not want GEOS to remain a mini-conglomerate.  Tighter focus brings better execution; less focus, the opposite.

This concern about focus is not hypothetical.  For example, in justifying the increased risk of large credit losses in its seismic equipment rental business, GEOS management characterized some rental business as opportunistic decisions to rent out underutilized equipment----albeit at the risk of an $8.7M bad debt write-off.  This begs the question of whether GEOS may have allocated more capital to building equipment than it could prudently sell or lease to acceptable customers, and whether GEOS' pricing adequately compensates it for accepting such risk.  In the past six quarters, GEOS invested over $30M in rental equipment.

While GEOS, and its regulatory filings, may not describe itself exactly this way, the company is deeply involved in vendor leasing.  Success in vendor leasing requires skills different from designing and manufacturing seismic sensor systems:  careful analysis of customers' ability to pay, execution of appropriate contractual documentation, accurate GAAP accounting treatment of revenue recognition and loss reserves, and the toughness to claw back equipment from excessively risky or deadbeat customers.  We wonder whether GEOS' management has these skills and whether the board has the skill and experience to provide effective oversight of vendor leasing and related capital allocation.

When we originally invested in GEOS net cash was about $49M.  But, by year-end 2019, domestic cash had dwindled to $3M.  We fear that buying Quantum, funding its operating losses and capital needs, investing in excess seismic equipment, and questionable management of rental customer credit risk has eroded GEOS' financial strength.

For these reasons, Sansone's concern about the composition and effectiveness of GEOS' board resonates with us.  Our only board exposure has been to its chair.  He is impressive.  But the board has three current and former GEOS executives and two accountants.  We do not know the cultural norms in GEOS' boardroom---whether active questioning, dissent and disagreement are encouraged or discouraged.  Human nature being immutable, we might not be surprised if a board with such long tenure and little change possibly may have grown too comfortable with each other and with management, and/or insufficiently critical, independent, and objective.

Changing one or two directors in this situation probably would be insufficient; instead, we believe that four directors should be succeeded by new ones in an orderly transition.  Large and long-standing shareholders should participate in this process.  New directors should bring skills needed in corporate strategy review and asset allocation, vendor leasing, relevant wireless technology, and mergers and divestitures.  Moreover, the new board should determine whether the sum of the various parts of GEOS (including real estate) --if sold separately?might be worth substantially more than GEOS's current enterprise value.  The new board also should determine whether shareholders benefit from GEOS' remaining an independent public company with such a small market cap, no analytical coverage, and little trading liquidity, while bearing the substantial costs of being public.

Depending how GEOS responds to Sansone's 13D and to this appeal, it is possible that we may contact other stakeholders, including active stock pickers, passive indexers, and leading proxy advisors.  The network of relationships we have built in the governance community should enable us to identify and listen to the owners of the majority of GEOS shares.  We anticipate that the concerns expressed here may be widely shared.

FORWARD-LOOKING STATEMENTS

Any statements contained herein that do not describe historical facts, including future operations, are neither promises nor guarantees and may constitute "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may include words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue," the negative of these terms and other comparable terminology.  Any such forward-looking statements contained herein are based on current assumptions, estimates and expectations, but are subject to a number of known and unknown risks and significant business, economic and competitive uncertainties that may cause actual results to differ materially from expectations.  Numerous factors could cause actual future results to differ materially from current expectations expressed or implied by such forward-looking statements, including the risks and other risk factors detailed in various publicly available documents filed by the Company from time to time with the Securities and Exchange Commission (SEC), which are available at www.sec.gov, including but not limited to, such information appearing under the caption "Risk Factors" in the Company's Annual Report on Form 10-K filed with the SEC on November 22, 2019.  Any forward-looking statements should be considered in light of those risk factors. We caution readers not to rely on any such forward-looking statements, which speak only as of the date they are made.  We disclaim any intent or obligation to publicly update or revise any such forward-looking statements to reflect any change in the Company expectations or future events, conditions or circumstances on which any such forward-looking statements may be based, or that may affect the likelihood that actual results may differ from those set forth in such forward-looking statements.

SOURCE D3 Family Funds