GEOSPACE TECHNOLOGIES CORP 10-Q

Item 2. 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 Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended September 30, 2020. Forward-Looking Statements This Quarterly Report on Form 10-Q and the documents incorporated by reference herein 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 (the “Exchange Act”). These forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “could”, “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 transactions with Quantum and the OptoSeis ® technology, the adoption and sale of our products in various geographic regions, potential tenders for permanent reservoir monitoring systems, future demand for OBX systems, the completion of new orders for our channels of our GCL system, the fulfillment of customer payment obligations, the impact of the coronavirus (or COVID-19) pandemic, 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” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as well as other cautionary language in such Annual Report and this Quarterly Report on Form 10-Q, 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 ® technology transactions to yield positive operating results, decreases in commodity price levels, 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, inability to realize value from bonds, lack of further orders for our OBX rental equipment, failure of our Quantum products to be adopted by the border and security perimeter 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 Quarterly Report on Form 10-Q 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. Business Overview Geospace Technologies Corporation reincorporated as a Texas corporation on April 16, 2015. We originally incorporated as a Delaware corporation on September 27, 1994. Unless otherwise specified, the discussion in this Quarterly Report on Form 10-Q refers to Geospace Technologies Corporation and its subsidiaries. We principally design and manufacture seismic instruments and equipment. These seismic products are marketed to the oil and gas industry and used 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, offshore cables and provide contract manufacturing services. We report and categorize our customers and products into three different segments: Oil and Gas Markets, Adjacent Markets and Emerging Markets. Demand for our products targeted at customers in our Oil and Gas Markets segment has been, and will likely continue to be, vulnerable to downturns in the economy and the oil and gas industry in general. For more information, please refer to the risks discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. Available Information We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the internet at the SEC’s website at www.sec.gov. Our SEC filings are also available to the public on our website at www.geospace.com. From time to time, we may post investor presentations 18 on our website under the “Investor Relations” tab. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Quarterly Report on Form 10-Q or the documents incorporated by reference in this Quarterly Report on Form 10-Q. Products and Product Development Oil and Gas Markets Our Oil and Gas Markets business segment has historically accounted for the majority of our revenue. Geoscientists use seismic data primarily in connection with the exploration, development and production of oil and gas reserves to map potential and known hydrocarbon bearing formations and the geologic structures that surround them. This segment’s products include wireless seismic data acquisition systems, reservoir characterization products and services, and traditional seismic exploration products such as geophones, hydrophones, leader wire, connectors, cables, marine streamer retrieval and steering devices and various other seismic products. We believe that our Oil and Gas Markets products are among the most technologically advanced instruments and equipment available for seismic data acquisition. Traditional Products An energy source and a data recording system are combined to acquire seismic data. We provide many of the components of seismic data recording systems, including geophones, hydrophones, multi-component sensors, leader wire, geophone strings, connectors, seismic telemetry cables and other seismic related products. On land, our customers use geophones, leader wire, cables and connectors to receive and measure seismic reflections resulting from an energy source into data recording units, which store the seismic information for subsequent processing and analysis. In the marine environment, large ocean-going vessels tow long seismic cables known as “streamers” containing hydrophones that are used to detect pressure changes. Hydrophones transmit electrical impulses back to the vessel’s data recording unit where the seismic data is stored for subsequent processing and analysis. Our marine seismic products also help steer streamers while being towed and help recover streamers if they become disconnected from the vessel. Our seismic sensor, cable and connector products are compatible with most major competitive seismic data acquisition systems currently in use. Revenue from these products results primarily from seismic contractors purchasing our products as components of new seismic data acquisition systems or to repair and replace components of seismic data acquisition systems already in use. Wireless Products We have developed multiple versions of a land-based wireless (or nodal) seismic data acquisition system. Rather than utilizing interconnecting cables as required by most traditional land data acquisition systems, each of our wireless stations operate as an independent data collection system, allowing for virtually unlimited channel configurations. As a result, our wireless systems require less maintenance, which we believe allows our customers to operate more effectively and efficiently because of its reduced environmental impact, lower weight and ease of operation. Each wireless station is available in a single-channel or three-channel configuration. Since its introduction in 2008 and through December 31, 2020, we have sold 473,000 wireless channels and we currently have 84,000 wireless channels in our rental fleet. We have also developed a marine-based wireless seismic data acquisition system called the OBX. Similar to our land-based wireless systems, the marine OBX system may be deployed in virtually unlimited channel configurations and does not require interconnecting cables between each station. Our deepwater versions of the OBX system can be deployed in depths of up to 3,450 meters. Through December 31, 2020, we have sold 8,400 OBX stations and we currently have 26,000 OBX stations in our rental fleet. Reservoir Products Seismic surveys repeated over selected time intervals show dynamic changes within a producing oil and gas reservoir, and operators can use these surveys to monitor the effects of oil and gas development and production. This type of reservoir monitoring requires special purpose or custom designed systems in which portability becomes less critical and functional reliability assumes greater importance. This reliability factor helps assure successful operations in inaccessible locations over a considerable period of time. Additionally, reservoirs located in deep water or harsh environments require special instrumentation and new techniques to maximize recovery. Reservoir monitoring also requires high-bandwidth, high-resolution seismic data for engineering project planning and reservoir management. Utilizing these reservoir monitoring tools, producers can enhance the recovery of oil and gas deposits over the life of a reservoir. 19 We have developed permanently installed high-definition reservoir monitoring systems for land and ocean-bottom applications in producing oil and gas fields. Our electrical reservoir monitoring systems are currently installed on numerous offshore reservoirs in the North Sea and elsewhere. Through our acquisition of the OptoSeis ® fiber optic sensing technology, we now offer both electrical and fiber optic reservoir monitoring systems. These high-definition seismic data acquisition systems have a flexible architecture allowing them to be configured as a subsurface system for both land and marine reservoir-monitoring projects. The scalable architecture of these systems enables custom designed configuration for applications ranging from low-channel engineering and environmental-scale surveys requiring a minimum number of recording channels to high-channel surveys required to efficiently conduct permanent reservoir monitoring (“PRM”). The modular architecture of these products allows virtually unlimited channel expansion for these systems. In addition, we produce seismic borehole acquisition systems that employ a fiber optic augmented wireline capable of very high data transmission rates. These systems are used for several reservoir monitoring applications, including an application pioneered by us allowing operators and service companies to monitor and measure the results of hydraulic fracturing operations. We believe our reservoir characterization products make seismic acquisition a cost-effective and reliable process for reservoir monitoring. Our multi-component seismic product developments also include an omni-directional geophone for use in reservoir monitoring, a compact marine three-component or four-component gimbaled sensor and special-purpose connectors, connector arrays and cases. In September 2020, we received a request from a major oil and gas producer for a proposal to manufacture a large-scale seabed PRM system. Under the offered terms and conditions as initially presented, we decided not to provide a bid to the customer. However, we are in further discussions with this customer to try and resolve the issues necessary to provide a PRM system. We do not know exactly when or if these discussions will lead to a resolution or the award of a proposal. We have not received any orders for a large-scale seabed PRM system since November 2012. Adjacent Markets Our Adjacent Markets businesses leverage upon existing manufacturing facilities and engineering capabilities utilized by our Oil and Gas Markets businesses. Many of the seismic products in our Oil and Gas Markets segment, with little or no modification, have direct application to other industries. Industrial Products Our industrial products include water meter products, contract manufacturing products, offshore cables, and seismic sensors used for vibration monitoring and geotechnical applications such as mine safety applications and earthquake detection. Imaging Products Our imaging products include electronic pre-press products that employ direct thermal imaging and digital inkjet printing technologies targeted at the commercial graphics, industrial graphics, textile and flexographic printing industries. Emerging Markets Our Emerging Markets business segment consists entirely of our Quantum business. Quantum’s product line includes a proprietary detection system called SADAR ® , which detects, locates and tracks items of interest in real-time. Using the SADAR technology, Quantum designs and sells products used for border and perimeter security surveillance, cross-border tunneling detection and other products targeted at movement monitoring, intrusion detection and situational awareness. Quantum’s customers include various agencies of the U.S. government including the Department of Defense, Department of Energy, Department of Homeland Security and other agencies, in addition to its commercial base. 20 Consolidated Results of Operations 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): Three Months Ended December 31, 2020 December 31, 2019 Oil and Gas Markets Traditional exploration product revenue $ 997 $ 2,354 Wireless exploration product revenue 11,737 8,937 Reservoir product revenue 29 218 Total revenue 12,763 11,509 Operating loss (5,986 ) (3,894 ) Adjacent Markets Industrial product revenue 4,407 3,596 Imaging product revenue 2,493 2,503 Total revenue 6,900 6,099 Operating income 1,260 851 Emerging Markets Revenue 8,797 97 Operating income (loss) 6,479 (1,365 ) Corporate Operating loss (3,212 ) (3,415 ) Consolidated Totals Revenue 28,460 17,705 Operating loss (1,459 ) (7,823 ) Overview In 2014, our Oil and Gas Markets segment experienced a softening in the demand for its traditional exploration products, particularly in North America, as capital budgets for oil and gas producers were trending away from exploration-focused activities toward production and exploitation activities. During this period oil production in North America’s unconventional shale reservoirs increased, as did oil production from other non-OPEC countries, resulting in an oversupply of crude oil in the world market and a resulting drop in energy prices. In February 2020, decreased demand again caused by the oversupply of crude oil due to failed OPEC negotiations and, when combined with the impact of the COVID–19 pandemic, led to a dramatic drop in crude oil prices. 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 and will likely continue to result in reductions in their capital spending budgets for oil and gas exploration-focused activities, including seismic data acquisition activities. Our Oil and Gas Markets segment has in recent years experienced strong demand for the rental of our marine wireless nodal products; however, this demand could significantly diminish during fiscal year 2021 or beyond as a result of the significant uncertainty in the outlook for oil and gas exploration. Demand for new land-based seismic equipment in recent fiscal years has remained restrained due to capital limitations affecting many of our customers, along with their excess levels of underutilized equipment. As a result, revenue from the sale and rental of our land-based traditional and wireless products has remained low due to the reduced investment in exploration-focused seismic activities. Policies implemented by the Biden administration in the United States could also result in decreased demand for our products. President Biden has announced climate change as a core focus of his administration and that he intends to set the United States on a path to net-zero carbon emissions by 2050. In January of 2021, President Biden implemented a hold on issuing new drilling permits and new oil and gas leasing for federal lands and waters. The administration may also implement new or amended rules and regulations concerning hydraulic fracturing and emissions from oil and gas sector operations. Crude oil prices have recently rebounded to February 2020 levels; however, oil and gas pricing and the resultant economic conditions may not recover meaningfully in the long term, and we expect these challenging industry conditions will result in decreased revenue from our traditional and land-based wireless products in fiscal year 2021. 21 In light of current market conditions, the inventory balances in our Oil and Gas Markets business segment at December 31, 2020 continued to exceed levels we consider appropriate for the current level of product demand. While we are aggressively working to reduce these legacy inventory balances, 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. If difficult market conditions continue for the products in our Oil and Gas Markets segment, we expect to record additional inventory obsolescence expense in fiscal year 2021 and beyond until product demand and/or resulting inventory turnover return to acceptable levels. 22 Coronavirus (COVID-19) The ongoing COVID-19 pandemic has spread across the globe and has negatively impacted worldwide economic activity, including the global demand for oil and natural gas, and continues to create challenges in our markets. While we continue to support our customers, there remain uncertainties regarding the duration and the extent to which the COVID-19 pandemic will ultimately have a negative impact on the demand for our products and services or on our supply chain. We continue to closely monitor the situation as information becomes readily available. As of the date of this filing, our operations have, for the most part, remained open globally and the impact of the effects of COVID-19 to our personnel and operations has been limited. We have experienced lower than expected sales in our Oil and Gas Markets and Adjacent Markets segments (despite the growth in revenue this quarter compared to the same prior year quarter) and a reduction in demand for the rental of our OBX marine nodal products, which we believe is primarily the result of the pandemic. We have also experienced a reduction in demand for certain products and difficulty with field employees and salespeople traveling domestically and abroad to conduct our business. The recent increases in oil and gas prices may not be long lived and we could see a return to lower pricing which could be intensified and prolonged by the COVID-19 pandemic, increasing the risk and financial stress placed on our customers. We cannot reasonably estimate the length or severity of this pandemic, or the extent to which COVID-19 will affect our business, financial condition and results of operations in fiscal year 2021 and beyond. Cost Reduction Initiative In July 2020, we initiated a program to reduce operating and manufacturing expenses in light of decreased demand for products in our Oil and Gas Markets and Adjacent Markets segments. The program is expected to produce approximately $2.0 million of annualized cash savings. The cost reductions were primarily realized through a reduction of employees from our workforce. In connection with the workforce reductions, we incurred $0.9 million of termination costs in our fourth quarter of fiscal year 2020. The termination costs were recorded to both cost of revenue and operating expenses in the consolidated statement of operations. There are no outstanding liabilities related to this program as of December 31, 2020. Three months ended December 31, 2020 compared to the three months ended December 31, 2019 Consolidated revenue for the three months ended December 31, 2020 was $28.5 million, an increase of $10.8 million, or 60.7%, from the corresponding period of the prior fiscal year. The increase was primarily due to (i) revenue of $8.8 million recognized from our Emerging Markets segment related to our contract with the CBP, which was awarded to us in fiscal year 2020, (ii) an increase in wireless exploration product sales from our Oil and Gas Markets segment, primarily due to a large sale of OBX rental equipment to the former lessee of the equipment and (iii) an increase in demand for our industrial products in our Adjacent Markets segment. The increase in revenue was partially offset by (i) a decrease in rental revenue from our OBX marine nodal products primarily due to rental equipment sale and lower utilization of our OBX rental fleet and (ii) a decrease in demand for our traditional exploration products from our Oil and Gas Markets segment. Consolidated gross profit for the three months ended December 31, 2020 was $6.7 million, an increase of $4.3 million, or 169.3%, from the corresponding period of the prior fiscal year. The increase in gross profit was primarily due to (i) revenue recognized on our contract with the CBP and (ii) revenue from the large sale of OBX rental equipment. The increase was partially offset by the decrease in wireless product rental revenue. Consolidated operating expenses for the three months ended December 31, 2020 were $8.2 million, a decrease of $2.1 million, or 20.7%, from the corresponding period of the prior fiscal year. The decrease was primarily due to (i) a $0.6 million decrease in personnel costs related to our cost reduction program initiated in the third quarter of fiscal year 2020, (ii) a $0.7 million net non-cash decrease in the estimated fair value of contingent earn-out consideration related to our Quantum and OptoSeis ® acquisitions, (iii) a $0.4 million decrease in research and development project costs and (iv) a $0.4 million reduction in other general business expenses related to our business operations. Consolidated other income (loss) for the three months ended December 31, 2020 was $0.5 million compared to $(39,000) from the corresponding period of the prior fiscal year. The increase was primarily caused by an increase in interest income and foreign exchange gains. Consolidated income tax expense for the three months ended December 31, 2020 was $0.1 million compared to $1.4 million from the corresponding period of the prior fiscal year. This decrease in income tax expense was primarily the result of a decrease in rental revenue earned in foreign jurisdictions requiring tax withholding. We are currently unable to record any tax benefits from the tax losses we incur in the U.S., Canada and Russian Federation due to the uncertainty surrounding our ability to utilize such losses in the future to offset taxable income. 23 Segment Results of Operations Oil and Gas Markets Revenue Revenue from our Oil and Gas Markets products for the three months ended December 31, 2020 increased $1.3 million, or 10.9%, from the corresponding period of the prior fiscal year. Our product and rental revenue in this segment were significantly impacted by the COVID-19 pandemic and its impact on worldwide demand for crude oil. The components of this increase included the following: • Traditional Exploration Product Revenue – For the three months ended December 31, 2020, revenue from our traditional products decreased $1.4 million, or 57.9% from the corresponding period of the prior fiscal year. The decrease reflects lower demand for our marine products and a decrease in customer product repair and support service revenue. • Wireless Exploration Product Revenue – For the three months ended December 31, 2020, revenue from our wireless exploration products increased $2.8 million, or 31.3%, from the corresponding period of the prior fiscal year. The increase primarily resulted from a large sale of OBX rental equipment to the former lessee of the equipment. The increase was partially offset by lower rental revenue caused by the sale of the equipment and lower utilization of our OBX rental fleet. • Reservoir Product Revenue – For the three months ended December 31, 2020, revenue from our reservoir products decreased $0.2 million, or 86.7%, from the corresponding period of the prior fiscal year. The decrease was primarily due to lower service revenue. Operating Loss Operating loss associated with our Oil and Gas Markets products for the three months ended December 31, 2020 was $6.0 million, compared to $3.9 million from the corresponding period of the prior fiscal year. The increase in our operating loss was primarily due to (i) a decrease in wireless rental revenue and related gross profits from the rental of our OBX systems and (ii) an increase in unutilized factory costs resulting from lower productivity. The increase in operating loss was partially offset by (i) a large sale of OBX rental equipment to the former lessee of the equipment and (ii) lower operating expenses resulting from our fiscal year 2020 cost reduction program and a reduction in research and development project costs. Adjacent Markets Revenue Revenue from our Adjacent Markets products for the three months ended December 31, 2020 increased $0.8 million, or 13.1 %, from the corresponding period of the prior fiscal year. The components of this increase included the following: • Industrial Product Revenue and Services – For the three months ended December 31, 2020, despite the current COVID-19 pandemic, revenue from our industrial products increased $0.8 million, or 22.6% from the corresponding period of the prior fiscal year. The increase in revenue was primarily due to higher demand for water meter products and contract manufacturing services. While we experienced an increase in the demand for products during the three months ended December 31, 2020 we cannot reasonably determine if this marks the beginning of a recovery from the impact the COVID-19 for this operating segment. As a result, we are unable to determine the lasting effect the COVID-19 pandemic will have on the future demand for our industrial products and services. • Imaging Product Revenue – For the three months ended December 31, 2020 revenue from our imaging products decreased slightly by $10,000, or 0.4%, from the corresponding period of the fiscal year. The decrease was primarily due to a lower demand for our film products. While our imaging product revenue appears to be recovering from the COVID-19 pandemic, we cannot reasonably estimate the impact COVID-19 may have on the future demand for our imaging products. Operating Income The operating income from our Adjacent Markets products for the three months ended December 31, 2020 was $1.3 million, an increase of $0.4 million, or 48.1%, from the corresponding period of the prior fiscal year. The increase in operating income was primarily due to an increase in industrial product revenue. 24 Emerging Markets Revenue Revenue from our Emerging Markets products for the three months ended December 31, 2020 was $8.8 million, compared to $0.1 million from the prior fiscal year. The increase in revenue was primarily attributable to the recognition of $8.8 million in revenue related our contract with the U.S. Customs and Border Protection (“CBP”). Quantum was awarded this contract during fiscal year 2020 to provide a technology solution to the Department of Homeland Security. As of December 31, 2020, unrecognized revenue related to this contract was approximately $1.4 million, the majority of which is expected to be recognized in the second fiscal quarter of 2021. On January 20, 2021, President Biden ordered a pause on construction of the wall at the U.S. – Mexico border to assess the legality of the funding, contracting methods, as well as the consequences of stopping the construction. It remains uncertain at this time whether the executive order will result in a temporary halt or permanent cessation of the construction. The new Biden administration may implement new or different policies or take further executive action regarding border security that could change the demand for our perimeter and security products. Operating Income (Loss) Operating income from our Emerging Markets products for the three months ended December 31, 2021 was $6.5 million, compared to a loss of $(1.4) million from corresponding period in the prior fiscal year. The increase was primarily due to revenue and gross profit recognized on our contract with the CBP. The increase was also due to a non-cash adjustment of $0.8 million related to a decrease in the estimated fair value of contingent earn-out consideration related to our Quantum acquisition. Since its acquisition in July 2018, Quantum has primarily focused on product development activities, and the marketing of its technologies to government agencies and other end users. Liquidity and Capital Resources At December 31, 2020, we had approximately $33.7 million in cash and cash equivalents. For the three month ended December 31, 2020, we generated $2.3 million of cash from operating activities. Our net loss of $1.1 million was offset by net non-cash charges of $5.7 million resulting from deferred income taxes, depreciation, amortization, inventory obsolescence, stock-based compensation, bad debt expense and changes in the estimated fair value of contingent consideration. Other sources of cash included (i) a $5.1 million decrease in trade and other receivables primarily due to collections from a significant customer, (ii) a $4.1 million increase in accounts payable resulting from the timing of vendor payments and (iii) a $0.3 million increase in deferred revenue and other liabilities. Offsetting these sources of cash were (i) the removal of a $4.1 million gross profit from the sale of used rental equipment, (ii) a $4.3 million increase in unbilled receivables related to our contract with CBP, (iii) a $2.1 million increase in inventories and (iv) a $1.4 million increase in deferred cost of revenue and other assets primarily due to the prepayment of annual insurance premiums. For the three months ended December 31, 2020, we used cash of $0.5 million in investing activities. Uses of cash included $0.6 million for additions to our property, plant and equipment. Uses of cash were partially offset by $0.1 million of proceeds from the sale of rental equipment. We expect our cash investments in property, plant and equipment during fiscal year 2021 to be approximately $5 million. We anticipate that our cash investments into our rental fleet during fiscal year 2021 will primarily be dependent on demand for our OBX marine rental equipment. 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 credit agreement. For the three months ended December 31, 2020, we used $0.8 million from financing activities for the purchase of treasury stock pursuant to a stock buy-back program authorized by our board of directors. The program authorizes us to repurchase up to $5 million of our common stock in open market transactions. At December 31, 2020, $4.2 million remains available for repurchases under the program. Since 2014, the oil and gas industry has experienced a sustained downturn due to low oil and gas prices. The unprecedented sharp decline in crude oil prices since February 2020 has further impacted the overall condition of the oil and gas industry, stifling budgets targeted at the oil and gas exploration industry, including the seismic industry. Prior to this downturn we saw some signs of increased seismic activity in certain areas around the world; however, we expect the need for new seismic equipment to remain restrained due to current industry conditions, capital limitations affecting many of our customers and excessive on-hand quantities of under-utilized customer-owned seismic equipment. Further, we expect product sales of our Oil and Gas Markets products—specifically our legacy land-based traditional and wireless products—to remain low until the oil and gas industry begins to show signs of recovery and exploration-focused seismic activities increase. Crude oil prices have recently rebounded to February 2020 levels; however, oil and gas pricing and the resultant economic conditions may not recover meaningfully in the long term, and we expect these challenging industry conditions facing our land-based traditional and legacy wireless products will continue in fiscal year 2021. 25 On July 13, 2020, we received an interest in a senior secured bond from an international seismic marine customer. Our interest in the bond, which has a face value of $13.0 million, was received in exchange for $13.0 million of unpaid invoices and late fees owed by the customer. The bond is secured by a third in line lien on the assets owned by the customer and has an 8% interest rate with bi-annual interest and possible principal payments based on excess available cash flow. Interest payments can be made either in cash or in-kind payments in the form of additional debt security. In-kind interest payments require an 8.8% interest rate. The bond matures on July 13, 2022. The bond is listed on the Oslo Alternative Bond Market; however, the actual marketability is unknown at this time. Based on the distressed financial condition of the customer, we believed the fair value of the bond was nominal. In January 2021, we sold the bond for $0.3 million cash pursuant to a purchase agreement (the “Agreement”) entered into with a third party (the “Buyer”). Pursuant to the Agreement, we will also receive additional cash compensation of $2.4 million from the Buyer if certain terms and conditions between the Buyer and our customer are met by December 31, 2021. In the event these terms and conditions are not met, we have the option to repurchase the bond from the Buyer for one dollar ($1.00). During the first quarter of fiscal year 2021, we entered into a $13.2 million short-term promissory note with a customer related to the sale of rental equipment and an outstanding receivable balance. The note bears interest at 8% per annum and is due on or before March 31, 2021. Principal payments due under the note of $6.0 million were received from the customer in January 2021. Our available cash and cash equivalents totaled $33.7 million at December 31, 2020, which included $5.0 million of cash and cash equivalents held by our foreign subsidiaries and branch offices. The 2017 Tax Act creates new taxes on certain foreign earnings and also requires companies to pay a one-time transition tax on undistributed earnings of their foreign subsidiaries which were previously tax deferred. We have determined that we are not required to pay any transition tax on the undistributed earnings of our foreign subsidiaries since we had no accumulated foreign earnings on a consolidated basis. Our credit agreement allows for borrowings of up to $30.0 million with such amounts available for borrowing determined by a borrowing base. In November 2019, we amended the credit agreement to (i) extend the maturity date from April 2020 to April 2022, (ii) increase the unencumbered liquid assets covenant threshold from $5 million to $10 million commencing with the fiscal quarter ending December 31, 2020 and for each fiscal quarter thereafter, (iii) increase the tangible net worth requirement from $140 million to $145 million commencing with the fiscal quarter ending December 31, 2020 and for each fiscal quarter thereafter and (iv) remove the requirement that we obtain the consent of Frost Bank prior to paying dividends or repurchasing stock so long as we are in compliance with the covenants of the credit agreement. Our tangible net worth as defined in the credit agreement was $148 million as of December 31, 2020. Although, we have no amounts outstanding under our credit agreement, we continue to monitor our compliance with the covenants in our credit agreement in order to maintain flexibility. Should we fall below the required covenant amount, we may seek to amend our credit agreement or seek an alternative credit agreement in the future in order to maintain this flexibility. Should we need to amend the facility or seek an alternative credit facility, we may not be able to obtain as favorable terms as the current agreement. At December 31, 2020, we had no outstanding borrowings under the credit agreement and our borrowing availability under the credit facility as of December 31, 2020 was $14.7 million. At December 31, 2020, we were in compliance with all covenants under the credit agreement. We currently do not anticipate the need to borrow under the credit agreement; however, we may be required to do so if circumstances change. 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 our credit agreement through its expiration in April 2022, leveraging or sale of real estate assets, sales of rental assets and other liquidity sources which may be available to us. However, currently we believe that our cash, cash equivalents and borrowings under our credit facility will be sufficient to finance any future operating losses and planned capital expenditures through the next twelve months. Off-Balance Sheet Arrangements 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 Consideration We recorded an initial contingent earn-out liability of $7.7 million in connection with our July 2018 acquisition of Quantum. Subsequent to the acquisition, we reduced the estimated contingent earn-out liability to $5.0 million as of December 31, 2020. Contingent payments, if any, may be paid in the form of cash or Company stock and will be derived from eligible revenue generated during the four-year post-acquisition period ending in July 2022. We made cash earn-out payments of $0.1 million in fiscal year 2020. The maximum amount of contingent payments is $23.5 million. We recorded an initial contingent earn-out liability of $4.3 million in connection with our November 2018 acquisition of all the intellectual property and related assets of the OptoSeis ® fiber optic sensing technology. Subsequent to the acquisition, we increased the estimated contingent earn-out liability to $5.3 million as of December 31, 2020. Contingent cash payments, if any, will be derived from eligible revenue generated during a five-and-a-half year post-acquisition earn-out period ending in May 2024. No payments have been made to date related to the continent earn-out liability. The maximum amount of contingent payments is $23.2 million. We review and assess the fair value of our contingent earn-out liabilities on a quarterly basis. See Note 13 to our consolidated financial statements in this Quarterly Report on Form 10-Q for more information on our contractual contingencies. Critical Accounting Policies During the three months ended December 31, 2020, there has been no material change to our critical accounting policies discussed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. Recent Accounting Pronouncements Please refer to Note 1 to our consolidated financial statements contained in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item, in accordance with Item 305(e) of Regulation S-K. 27