GEOSPACE TECHNOLOGIES CORP 10-K

Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     Holders of Record   Our common stock is traded on The NASDAQ Global Select Market under the symbol “GEOS”. On October 31, 2023, there were approximately 143 holders of record of our common stock, and the closing price per share on such date was $11.99 as quoted by The NASDAQ Global Select Market.   Market Information for Common Stock   The following table shows the high and low per share sales prices for our common stock reported on The NASDAQ Global Select Market.   Year Ended September 30, 2023:   Low     High   Fourth Quarter   $ 7.22     $ 14.59   Third Quarter     6.60       9.16   Second Quarter     3.96       7.55   First Quarter     3.76       4.88                     Year Ended September 30, 2022:                 Fourth Quarter   $ 4.10     $ 5.45   Third Quarter     4.64       6.72   Second Quarter     4.97       8.88   First Quarter     6.41       10.27       Dividends   Since our initial public offering in 1997, we have not paid dividends, and we do not intend to pay cash dividends on our common stock in the foreseeable future. We presently intend to retain our earnings for use in our business, with any future decision to pay cash dividends dependent upon our growth, profitability, financial condition and other factors our Board of Directors may deem relevant.   Securities Authorized for Issuance under Equity Compensation Plans   The following equity plan information is provided as of September 30, 2023:   Equity Compensation Plan Information   Plan Category   Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)     Weighted-average Exercise Price of Outstanding Options, Warrants and Rights (b)     Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)       (In shares)     (In dollars per share)     (In shares)   Equity Compensation Plans Approved by Security Holders (1)     377,549       N/A       1,137,509   Equity Compensation Plans Not Approved by Security Holders     —       —       —   Total     377,549       N/A       1,137,509       (1) The number of securities shown in column (c) represents number of securities remaining available for issuance under the Company’s 2014 Long Term Incentive Plan, as amended (the “2014 Plan”). The 2014 Plan allows for the issuance of restricted stock awards, performance stock awards, performance stock unit awards, restricted stock unit awards (the foregoing, “Full Value Awards”), stock options and stock appreciation rights. For purposes of calculating the number of securities remaining under the 2014 Plan in column (c), Full Value Awards are counted as 1.5 shares for each share awarded. The number of securities shown in column (a) of the table above represents restricted stock unit awards outstanding under the 2014 Plan. Column (b) excludes restricted stock unit awards.   19     Recent Sales of Unregistered Securities and Use of Proceeds   None.     Purchases of Equity Securities by the Issuer and Affiliated Purchasers   None.   20     Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations   The following is management’s discussion and analysis of the major elements of our consolidated financial statements. You should read this discussion and analysis together with our consolidated financial statements, including the accompanying notes, and other detailed information appearing elsewhere in this Annual Report on Form 10-K, including under the heading “Risk Factors.” The discussion of our financial condition and results of operations includes various forward-looking statements about our markets, the demand for our products and services and our future plans and results. These statements are based on assumptions that we consider to be reasonable, but that could prove to be incorrect. For more information regarding our assumptions, you should refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements and Assumptions” below.     Cautionary Note Regarding Forward-Looking Statements and Assumptions   This Annual Report on Form 10-K and the documents incorporated by reference herein, if any, contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “intend”, “expect”, “plan”, “budget”, “forecast”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue”, “evaluating” or similar words. Statements that contain these words should be read carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other forward-looking information. Examples of forward-looking statements include, among others, statements that we make regarding our expected operating results, the adoption, results and success of our rollout of our Aquana smart water valves and cloud-based control platform, future demand for our Quantum security solutions, the adoption and sale of our products in various geographic regions, potential tenders for PRM systems, future demand for OBX rental equipment, the adoption of Quantum's SADAR® product monitoring of subsurface reservoirs, the completion of new orders for our channels of our GCL system, the fulfillment of customer payment obligations, the impact of and the recovery from the impact of the coronavirus (or COVID-19) pandemic, the impact of the current armed conflict between Russia and Ukraine, our ability to manage changes and the continued health or availability of management personnel, volatility and direction of oil prices, anticipated levels of capital expenditures and the sources of funding therefor, and our strategy for growth, product development, market position, financial results and the provision of accounting reserves. These forward-looking statements reflect our current judgment about future events and trends based on the information currently available to us. However, there will likely be events in the future that we are not able to predict or control. The factors listed under the caption “Risk Factors”, as well as cautionary language in this Annual Report on Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Such examples include, but are not limited to, the failure of the Quantum or OptoSeis® or Aquana technology transactions to yield positive operating results, decreases in commodity price levels and continued adverse impact of COVID-19 which could reduce demand for our products, the failure of our products to achieve market acceptance (despite substantial investment by us) our sensitivity to short term backlog, delayed or cancelled customer orders, product obsolescence resulting from poor industry conditions or new technologies, bad debt write-offs associated with customer accounts, inability to collect on promissory notes, lack of further orders for our OBX rental equipment, failure of our Quantum products to be adopted by the border and perimeter security market, or a decrease in such market due to governmental changes, and infringement or failure to protect intellectual property. The occurrence of the events described in these risk factors and elsewhere in this Annual Report on Form 10-K could have a material adverse effect on our business, results of operations and financial position, and actual events and results of operations may vary materially from our current expectations. We assume no obligation to revise or update any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future developments or otherwise.     Background   We design and manufacture seismic instruments and equipment and primarily market these products to the oil and gas industry to locate, characterize and monitor hydrocarbon producing reservoirs. We also market our seismic products to other industries for vibration monitoring, border and perimeter security and various geotechnical applications. We design and manufacture other products of a non-seismic nature, including water meter products, imaging equipment and provide contract manufacturing services. For further information on the nature of our operations, see the information under the heading “Business” in this Annual Report on Form 10-K.     Consolidated Results of Operations   As we have reported in the past, our revenue and operating profits have varied significantly from quarter-to-quarter, and even year-to-year, and are expected to continue that trend in the future, especially when our quarterly or annual financial results are impacted by the presence or absence of relatively large, but somewhat erratic, sales of our oil and gas PRM systems and/or wireless seismic data acquisition systems for land and marine applications.   21     We report and evaluate financial information for three segments: Oil and Gas Markets, Adjacent Markets and Emerging Markets. Summary financial data by business segment follows (in thousands):       YEAR ENDED SEPTEMBER 30,       2023     2022   Oil and Gas Markets                 Traditional exploration product revenue   $ 12,183     $ 6,597   Wireless exploration product revenue     60,848       40,667   Reservoir product revenue     962       1,877   Total revenue     73,993       49,141   Operating income (loss)     15,759       (7,539 ) Adjacent Markets                 Industrial product revenue     36,859       25,640   Imaging product revenue     12,180       13,531   Total revenue     49,039       39,171   Operating income     11,490       6,021   Emerging Markets                 Revenue     1,234       711   Operating loss     (4,003 )     (9,128 ) Corporate                 Revenue     243       230   Operating loss     (11,918 )     (12,490 ) Consolidated Totals                 Revenue     124,509       89,253   Operating income (loss)     11,328       (23,136 )     Overview   Although in an already depressed oil and gas industry, demand further decreased in February 2020 because of the oversupply of crude oil due to failed OPEC negotiations that led to a dramatic drop in crude oil prices when combined with the impact of the COVID-19 pandemic. These declines in the demand for oil and gas have caused oil and gas exploration and production companies to experience a significant reduction in cash flows, which have resulted in reductions in their capital spending budgets for oil and gas exploration-focused activities, including seismic data acquisition activities. Crude oil prices held above $65 per barrel throughout 2022 and through September 2023; however, a lag in time typically occurs between higher oil prices and greater demand for our Oil and Gas Markets segment products. We believe this lag is the result of exploration and production (“E&P”) companies allocating their cash flow towards shareholder reward initiatives, such as stock buy-back programs and dividend payments, or in debt reduction. We believe this lag is a short-term trend that will continue until E&P companies decide to reinvest capital into exploration activities. As this lag persists, we expect the reduced levels of demand for our Oil and Gas Markets segment products. We also expect our land-based traditional and wireless products will continue to experience low levels of product demand until our customers consume their excess levels of underutilized equipment. During the third quarter of fiscal year 2022, we began to experience an increase in rental demand for our marine nodal products in the form of additional rental contracts and requests for quotes from existing and new customers.  The increase in demand has led to near full utilization of our marine wireless rental fleet, yet we continue to experience low levels of demand for our land-based wireless products.         During the first quarter of fiscal year 2023, we implemented a plan to discontinue the manufacture of certain low margin, low revenue products and reconfigure our production facilities to lower our costs and raise efficiencies. As part of the plan, reductions were made to our workforce which are expected to yield an annual savings of more than $2 million. In connection with the plan, we incurred costs of $0.6 million in the first quarter of fiscal year 2023, primarily termination costs related to the workforce reduction. The costs were recorded both to cost of revenue and operating expenses in the consolidated statement of operations. No significant future costs are expected.   In light of current market conditions, the inventory balances in our Oil and Gas Markets business segment at September 30, 2023 continued to exceed levels we consider appropriate for the current level of product demand. We are continuing to work aggressively to reduce these legacy inventory balances; however, we are also adding new inventories for new wireless product developments and for other product demand in our Adjacent Markets segment. During periods of excessive inventory levels, our policy has been, and will continue to be, to record obsolescence expense as we experience reduced product demand and as our inventories continue to age. Although the Oil and Gas Markets segment is seeing a recovery after experiencing difficult market conditions, we have been recording additional expenses for inventory obsolescence and will continue to do so in the future until product demand and/or resulting inventory turnover return to acceptable levels.   Armed Conflict Between Russia and Ukraine   A portion of our oil and gas product manufacturing is conducted through GTE, which is based in the Russian Federation. Consequently, our oil and gas business could be directly affected by the current war between Russia and Ukraine. Please see “Part I—Item 1A.—Risk Factors” for more information.   22     Coronavirus (COVID-19)   The ongoing COVID-19 pandemic has negatively impacted worldwide economic activity and continues to create challenges in our markets.  The COVID-19 pandemic and the related mitigation measures have disrupted our supply chain, resulting in longer lead times in materials available from suppliers and extended shipping time for these materials to reach our facilities.  The occurrence or resurgence of global or regional health events such as the COVID-19 pandemic, and the related government responses, could result in a material adverse effect on our business, financial condition, results of operations and liquidity.  As such, we will continue to closely monitor COVID-19 and will continue to reassess our strategy and operational structure on a regular, ongoing basis.   Fiscal Year 2023 Compared to Fiscal Year 2022   Consolidated revenue for fiscal year 2023 was $124.5 million, an increase of $35.3 million, or 39.5%, from fiscal year 2022. The increase in revenue was largely due to higher rental revenue from our Oil and Gas Markets segment due to increased utilization of our OBX rental fleet and an increase in demand for our industrial products from our Adjacent Markets segment.  The increase was partially offset by a decrease in sales of wireless exploration products.  Wireless exploration product revenue for fiscal year 2023 also included $4.0 million from a rental customer as compensation for lost OBX nodes.   Consolidated gross profit for fiscal year 2023 was $51.7 million, an increase of $33.6 million, or 186.5%, from fiscal year 2022. The increase in gross profit was primarily due to higher gross profits from the increased utilization of our OBX rental fleet and the increase in industrial product revenue and related gross profits.  The increase was partially offset by the decrease in wireless exploration product revenue and related gross profits.   Consolidated operating expenses for fiscal year 2023 were $41.7 million, an increase of $0.5 million, or 1.2%, from fiscal year 2022.  The increase was primarily due to a (i) $5.0 million favorable non-cash adjustment reported in the prior year period resulting from a change in the estimated fair value of contingent consideration related to our Quantum and OptoSeis® acquisitions and (ii) an increase in incentive compensation attributable to the increase in revenue.  The increase in operating expenses were partially offset by a (i) $4.3 million non-cash goodwill impairment charge reported in the prior fiscal year related to our Quantum acquisition, (ii) reduction in personnel costs attributable to our workforce reduction, (iii) lower research and development project expenditures and (iv) decrease in bad debt expense resulting from collections of previously reserved past due receivables.   In February 2023, we sold our real property located at 7310 Langfield Road in Houston, Texas for a cash sales price of $3.7 million, net of closing costs of $0.3 million.  We recognized a gain of $1.3 million from the sale of this property in the second quarter of fiscal year 2023. The sale was part of our plan to streamline operations and reduce costs.    Consolidated other income for fiscal year 2023 was $1.2 million compared to $0.5 million from fiscal year 2022. The increase in other income was primarily due to a increase in net foreign currency transaction gains.  The increase was partially offset by a decrease in interest income attributable to lower note receivable balances between periods.   Segment Results of Operations   Fiscal Year 2023 Compared to Fiscal Year 2022   Oil and Gas Markets   Revenue   Revenue from our Oil and Gas Markets products for fiscal year 2023 increased $24.9 million, or 50.6%, from fiscal year 2022.  The components of this increase were as follows:     ● Traditional Exploration Product Revenue   – Revenue from our traditional products increased $5.6 million, or 84.7% from the prior fiscal year. The increase primarily reflects higher demand for our sensor and marine products.     ● Wireless Exploration Product Revenue  – Revenue from our wireless exploration products increased $20.2 million, or 49.6%, from the prior fiscal year. The increase was primarily due to increased rental revenue attributable to higher utilization of our OBX rental fleet.  The increase was partially offset by a decrease in wireless product sales.  Wireless product revenue for fiscal year 2023 also included the $4.0 million from a rental equipment customer as compensation for lost OBX nodes.   23     Operating Income (Loss)           Operating income associated with our Oil and Gas Markets products for fiscal year 2023 was $15.8 million, compared to an operating loss of $(7.5) million from the prior fiscal year. The increase in operating income was primarily due to higher wireless rental revenue and related gross profits due to improved utilization of our OBX rental fleet.  The improvement in operating income was partially offset by a (i) decrease in wireless product revenue and related gross profits and (ii) $4.4 million favorable non-cash adjustment reported in the prior fiscal year related to the estimated fair value of contingent consideration related to our OptoSeis® acquisition.   Adjacent Markets   Revenue   Revenue from our Adjacent Markets products for fiscal year 2023 increased $9.9 million, or 25.2%, from the prior fiscal year.  The components of this increase were as follows:     ● Industrial Product Revenue and Services  – Revenue from our industrial products increased $11.2 million, or 43.8%, from the prior fiscal year. The increase was primarily due to higher demand for our water meter products.     ● Imaging Product Revenue  – Revenue from our imaging products decreased $1.4 million, or 10.0%, from the prior fiscal year. The decrease was primarily due to lower demand for our imaging equipment.   Operating Income   Operating income from our Adjacent Markets products for fiscal year 2023 was $11.5 million, an increase of $5.5 million, or 90.8% from the prior fiscal year. The increase in operating income was primarily due to the increase in revenue and related gross profits.  The increase was partially offset by (i) an increase in operating expenses resulting from the increased revenue and (ii) higher research and development expense.  Operating income for the prior fiscal year included a $0.4 million impairment charge on our manufacturing equipment.   Emerging Markets   Revenue   Revenue from our Emerging Markets products for fiscal year 2023 was $1.2 million, compared to $0.7 million from the prior fiscal year.  The increase in revenue was primarily due to revenue of $0.7 million recognized on a security related contract completed with a commercial customer.    Operating Loss   Operating loss from our Emerging Markets products for fiscal year 2023 was $4.0 million, compared to $9.1 million from the prior fiscal year.  The decrease in operating loss for fiscal year 2023 was primarily due a (i) non-cash goodwill impairment charge of $4.3 million reported in the prior fiscal year and (ii) lower personnel costs attributable to our workforce reduction.  The decrease in operating loss was partially offset by a $0.7 million decrease to a favorable non-cash adjustment to the estimated fair value of contingent consideration related to our Quantum acquisition when compared to the same period of the prior fiscal year.   24     Liquidity and Capital Resources   Fiscal Year 2023   At September 30, 2023, we had approximately $33.7 million in cash, cash equivalents and short-term investments.  For the fiscal year ended September 30, 2023, we generated $15.6 million of cash from operating activities.  Sources of cash included our net income of $12.2 million and net non-cash charges of $19.6 million resulting from deferred income taxes, depreciation, amortization, accretion, inventory obsolescence, stock-based compensation and bad debt recovery.  Other sources of cash included a (i) $5.4 million increase in other liabilities due to an increase in customer deposits on rental contracts and accrued employee compensation costs and (ii) $1.3 million decrease in other assets.  These sources of cash were partially offset by (i) a $5.6 million increase in trade accounts and notes receivable primarily due to our increase in revenue and the timing of collections from customers, (ii) a $11.0 million increase in inventories to meet an increase in demand for our products, (iii) the removal of $4.4 million gross profit from the sale of used rental equipment and (iv) a $1.1 million of gain from the sale of property and equipment since they are included in investing activities.    For the fiscal year ended September 30, 2023, we used cash of $11.9 million in investing activities. Uses of cash included (i) $4.0 million for additions to our property, plant and equipment, (ii) $9.9 million for additions to our equipment rental fleet and (iii) net disbursements of $13.9 million for purchases of short-term investments.  These uses of cash were partially offset by proceeds of (i) $11.5 million from the sale of used rental equipment and (ii) $4.4 million from the sale of property and equipment.  We expect fiscal year 2024 cash investments into our rental fleet will be approximately $9 million.  We expect fiscal year 2024 cash investments in our property, plant and equipment will be approximately $4 million.  Our capital expenditures are expected to be funded from our cash on hand, internal cash flows, cash flows from our rental contracts or, if necessary, borrowings under our new credit agreement.   For the fiscal year ended September 30, 2023, we used cash of  $0.5 million from financing activities consisting of (i) $0.4 million for debt issuance costs related to our new credit agreement and (ii) $0.2 million for final contingent consideration payments to the former shareholders of Quantum.   25     Our available cash, cash equivalents and short-term investments was $33.7 million at September 30, 2023, which included $3.8 million of cash and cash equivalents held by our foreign subsidiaries and branch offices, of which $2.5 million was held by our subsidiary in the Russian Federation. In response to sanctions imposed by the U.S. and other countries on the Russian Federation, the Russian government has imposed restrictions on companies' abilities to repatriate or otherwise remit cash from their Russian-based operations to locations outside of Russia. As a result, this cash can be used in our Russian operations, but we may be unable to transfer it out of Russia without incurring substantial costs, if at all.  In addition, if we were to repatriate the cash held by our Russian subsidiary, we would be required to accrue and pay taxes on any amount repatriated.  During fiscal year 2023, in light of recent volatility in the financial markets, we entered into an IntraFi Cash Service ("ICS") Deposit Placement Agreement with IntraFi Network LLC through our primary bank, Woodforest National Bank.  The ICS program offers us access to unlimited Federal Deposit Insurance Corporation ("FDIC") insurance on domestically held cash in excess of $5.0 million, thereby mitigating our risk of falling outside of FDIC coverage limits.   In July 2023, we entered into a credit agreement (“the Agreement”) with Woodforest National Bank, as sole lender.  The Agreement refinanced our credit agreement dated May 6, 2022, with Amerisource Funding, Inc., as administrative agent and as a lender, and Woodforest National Bank, as a lender.  The Agreement provides a revolving credit facility with a maximum availability of $15 million.  Availability under the Agreement is determined based upon a borrowing base comprised of certain of our domestic assets which include (i) 80% of eligible accounts receivable, plus (ii) 90% of eligible foreign insured accounts, plus (iii) 25% of eligible inventory plus (iv) 50% of the orderly liquidation value of eligible equipment, in each case subject to certain limitations and adjustments.  Interest shall accrue on outstanding borrowings at a rate equal to Term SOFR (Secured Overnight Financing Rate) plus a margin equal to 3.25% per annum.  We are required to make monthly interest payments on borrowed funds. The Agreement is secured by substantially all of our assets, except for certain excluded property.  The Agreement requires us to maintain a minimum (i) consolidated tangible net worth of $100 million, (ii) liquidity of $5 million, and (iii) current ratio no less than 2.00 to 1.00, in each case tested quarterly. The Agreement also requires us to maintain a springing minimum interest coverage ratio of 1.50 to 1.00, tested quarterly whenever there is an outstanding balance.  The Agreement expires in July 2025.   At September 30, 2023, we had no outstanding borrowings under the Agreement and our borrowing base availability under the Agreement was $13.1 million after consideration of a $0.1 million outstanding letter of credit.  We were in compliance with all covenants under the Agreement.  We do not currently anticipate the need to borrow under the Agreement; however, we may decide to do so in the future, if needed.   Our available cash, cash equivalents and short-term investments increased $17.0 million during fiscal year 2023.  In the absence of future profitable results of operations, we may need to rely on other sources of liquidity to fund our future operations, including executed rental contracts, available borrowings under the Agreement through its expiration in July 2025, leveraging or sales of real estate assets, sales of rental assets and other liquidity sources which may be available to us. We currently believe that our cash and cash equivalents will be sufficient to finance any future operating losses and planned capital expenditures through the next twelve months.   We do not have any obligations which meet the definition of an off-balance sheet arrangement and which have or are reasonably likely to have a current or future effect on our financial statements or the items contained therein that are material to investors.   26     Contractual Obligations   Contingent Compensation Costs   In connection with the acquisition of Aquana in July 2021, we are subject to additional contingent cash payments to the former members of Aquana over a six-year earn-out period. The contingent payments, if any, will be derived from certain eligible revenue generated during the earn-out period from products and services sold by Aquana. There is no maximum limit to the contingent cash payments that could be made. The merger agreement with Aquana requires the continued employment of a certain key employee and former member of Aquana for the first four years of the six year earn-out period in order for any of Aquana’s former members to be eligible to receive any earn-out payments. In accordance with ASC 805, Business Combination s, due to the continued employment requirement, no liability has been recorded for the estimated fair value of contingent earn-out payments for this transaction. Earn-outs achieved, if any, will be recorded as compensation expense when incurred.   See Note 17 to our consolidated financial statements in this Annual Report on Form 10-K for more information on our contractual contingencies.   Critical Accounting Estimates   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider many factors in selecting appropriate operational and financial accounting policies and controls and in developing the estimates and assumptions that are used in the preparation of these financial statements. We continually evaluate our estimates, including those related to revenue recognition, bad debt reserves, inventory obsolescence reserves, goodwill and long-lived asset impairment. We base our estimates on historical experience and various other factors, including the impact from the current economic conditions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.   Our normal credit terms for trade receivables are 30 days. In certain situations, credit terms for trade receivables may be extended to 60 days or longer and such receivables generally do not require collateral. Additionally, we provide long-term financing in the form of promissory notes and sales-type leases when competitive conditions require such financing and, in such cases, we may require collateral. We perform ongoing credit evaluations of our accounts and financing receivables, and allowances are recognized for potential credit losses.   Our long-lived assets are reviewed for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable. The impairment review, if necessary, includes a comparison of expected future cash flows (undiscounted and without interest charges) to be generated by an asset group with the associated carrying value of the related assets. If the carrying value of the asset group exceeds the expected future cash flows, an impairment loss is recognized to the extent that the carrying value of the asset group exceeds its fair value.   We conduct our evaluation of goodwill at the reporting unit level on an annual basis as of September 30 and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. The guidance on the testing of goodwill for impairment provides the option to first assess qualitative factors to determine if the fair value of a reporting unit exceeds its carrying amount. If, based on the qualitative assessment of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is more than its carrying amount, then it is not necessary to perform a quantitative assessment. However, if an entity concludes otherwise, then a quantitative assessment must be performed. If, based on the quantitative assessment, we determine that the fair value of a reporting unit is less that its carrying amount, a goodwill impairment is recognized equal to the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying amount of the goodwill.   27     We record a write-down of our inventories when the cost basis of any manufactured product, including any estimated future costs to complete the manufacturing process, exceeds its net realizable value. Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out method, except that our subsidiaries in the Russian Federation and the United Kingdom use an average cost method to value their inventories.   We periodically review the composition of our inventories to determine if market demand, product modifications, technology changes, excessive quantities on-hand and other factors hinder our ability to recover our investment in such inventories. Management’s assessment is based upon historical product demand, estimated future product demand and various other judgments and estimates. Inventory obsolescence reserves are recorded when such assessments reveal that portions or components of our inventory investment will not be realized in our operating activities.   The value of our inventories not expected to be realized in cash, sold or consumed during our next operating cycle are classified as non-current assets in our consolidated balance sheets.   We recognize revenue from product sales and services in accordance with ASC Topic 606, Revenue from Contracts with Customers . This standard applies to contracts for the sale of products and services and does not apply to contracts for the rental or lease of products. Under this standard, we recognize revenue when performance of contractual obligations are satisfied, generally when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. Revenue from product sales is recognized when obligations under the terms of a contract are satisfied, control is transferred and collectability of the sales price is reasonably assured. Transfer of control generally occurs with shipment or delivery, depending on the terms of the underlying contract. Our products are generally sold without any customer acceptance provisions, and our standard terms of sale do not allow customers to return products for credit. Most of our products do not require installation assistance or sophisticated instruction. We offer a standard product warranty, which obligates us to repair or replace our products having manufacturing defects. We maintain a reserve for future warranty costs based on historical experience or, in the absence of historical experience, management estimates. Revenue from engineering services is recognized as services are rendered over the duration of a project or as billed on a per hour basis. Field service revenue is recognized when services are rendered and is generally priced on a per day rate. We recognize rental revenue as earned over the rental period. Rentals of our equipment generally range from daily rentals to rental periods of up to six months or longer.   We recognize rental revenue in accordance with ASC Topic 842, Leases . In the event collectability of lease payments is not probable at the lease commencement date, we recognize revenue when payments are received. We regularly evaluate the collectability of our lease receivables on a lease-by-lease basis. The evaluation primarily consists of reviewing past due account balances and other factors such as the credit quality of the customer, historical trends of the customer and current economic conditions. We suspend the recognition of rental revenue when the collectability of amounts due are no longer probable and record a direct write-off of the lease receivable to rental revenue.   Recent Accounting Pronouncements   Please refer to Note 1 to our consolidated financial statements contained in this Annual Report for a discussion of recent accounting pronouncements.   Management ’ s Current Outlook and Assumptions   As further discussed above, there remains uncertainties regarding the duration and to what extent the COVID-19 pandemic will ultimately impact the demand for our products and services or with our supply chain.   Regarding our Oil and Gas Markets business segment, demand for our products are subject to volatile fluctuations in crude oil prices. As a result of substantial declines in crude oil prices in recent years combined with the recent reduced global demand for oil and gas as a result of the COVID-19 pandemic, oil and gas exploration and production companies experienced a significant reduction in cash flows resulting in sharp reductions in their capital spending budgets for oil and gas exploration-focused activities including seismic data acquisition activities. While we have experienced stronger marine nodal rental activity in fiscal year 2023, the need for new seismic equipment, particularly land-based equipment, remains restrained due to our customers’ (i) limited capital resources, (ii) lack of visibility into future demand for their seismic services and (iii) in some cases, under-utilized legacy equipment. Crude oil prices have rebounded; however, lasting higher levels of oil and gas commodity pricing may not stabilize in the long term, thus continuing the challenging industry conditions we have experienced in previous fiscal years.   Many of our land-based traditional seismic products can be damaged, destroyed or otherwise consumed during our customer’s field operations. We expect fiscal year 2024 demand for our land-based traditional seismic products may increase slightly over fiscal year 2023 levels.   28     The vast majority of our oil and gas rental revenue in fiscal year 2023 was derived from short-term rentals of our OBX ocean-bottom recorder. We believe our OBX rental revenue will increase in fiscal year 2024 as a result of rental contracts executed during fiscal year 2023 and anticipated new rental contracts, but we can make no assurance in this regard.   We expect that fiscal year 2024 revenue from our oil and gas reservoir products, and principally our borehole tools and services, will increase slightly over fiscal year 2023 levels. We have not received any orders for a large-scale seabed PRM system since November 2012, although we do believe opportunities for PRM orders do exist in today's market. If a large scale PRM order were received in fiscal year 2024, revenue would likely not be recognized until fiscal year 2025 and 2026.   We expect fiscal year 2024 revenue from our Adjacent Markets products to increase over fiscal year 2023 levels due to our acquisition of Aquana and intergration of Aquana's products into our business and optimism that demand for our industrial, imaging products and contract manufacturing services will continue to increase in fiscal year 2024.   We expect fiscal year 2024 revenue from our Emerging Markets products to increase over 2023 levels largely due to optimism of obtaining new security-related contracts and opportunities with oil and gas industry customers.   Item 7A. Quantitative and Qualitative Disclosures about Market Risk   Not required.