What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2021-02-04 · 119 added, 87 removed, 196 unchanged (51% of the section changed)

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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.

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 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.

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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.

Since its introduction in 2008 and through March 31, 2021, 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.

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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.

Through March 31, 2021, we have sold 8,400 OBX stations and we currently have 25,000 OBX stations in our rental fleet.

Reservoir Products

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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.

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.

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We do not know exactly when or if these discussions will lead to a resolution or the award of a proposal.

We have also held discussions and received requests for information from other major oil and gas producers regarding PRM systems.

We have not received any orders for a large-scale seabed PRM system since November 2012.

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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.

In addition to its commercial base of customers, Quantum’s customers primarily include various agencies of the U.S.

government including the Department of Defense, Department of Energy, Department of Homeland Security and other agencies.

Consolidated Results of Operations

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Three Months Ended

December 31, 2020

December 31, 2019

Six Months Ended

March 31, 2021

March 31, 2020

March 31, 2021

March 31, 2020

Oil and Gas Markets

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Total revenue

Operating loss

Operating income (loss)

Adjacent Markets

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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.

however, this demand has significantly declined during fiscal year 2021 and could continue to decline in future years 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.

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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.

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.

Crude oil prices have recently rebounded above 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 Oil and Gas Markets segment products in fiscal year 2021.

In light of current market conditions, the inventory balances in our Oil and Gas Markets business segment at March 31, 2021 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.

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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.

We have experienced lower than expected sales in our Oil and Gas Markets and Adjacent Markets segments and a reduction in demand for the rental of our OBX marine nodal products, which we believe is primarily the result of the pandemic.

Our supply chain has become increasingly strained due to increased pricing for raw material and supplies coupled with longer than expected lead times.

We continually communicate with our suppliers and customers as information is available to best manage this difficult situation.

We have also experienced difficulties with field employees and salespeople traveling domestically and abroad to conduct our business.

Cost Reduction Initiative

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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.

There are no outstanding liabilities related to this program as of March 31, 2021.

Three and six months ended March 31, 2021 compared to the three and six months ended March 31, 2020

Consolidated revenue for the three months ended March 31, 2021 was $23.9 million, a decrease of $2.0 million, or 7.8%, from the corresponding period of the prior fiscal year.

The decrease in revenue for the three months ended March 31, 2021 was primarily due to a decrease in rental revenue from our OBX marine nodal products primarily due to the sale of rental equipment in our first quarter and lower utilization of our OBX rental fleet caused by the COVID-19 pandemic.

The decrease was largely offset by an increase in land-based wireless seismic product revenue attributable to the recognition of revenue on a large product delivery which occurred in the prior fiscal year.

Consolidated revenue for the six months ended March 31, 2021 was $52.4 million, an increase of $8.7 million, or 20.0%, from the corresponding period of the prior fiscal year.

The increase in revenue for the six months ended March 31, 2021 was primarily due to (i) a $12.5 million of wireless product revenue attributable to the recognition of revenue on the large land-based wireless seismic product delivered in fiscal year 2020, (ii) a $9.9 million sale of used OBX rental equipment to the former lessee of the equipment and (iii) revenue of $9.0 million recognized from our Emerging Markets segment related to our contract with the CBP, which was awarded to us in fiscal year 2020.

The increase in revenue for the six months ended March 31, 2021 was partially offset by a decrease in rental revenue from our OBX marine nodal products primarily due to the sale of rental equipment in our first quarter and lower utilization of our OBX rental fleet caused by the COVID-19 pandemic.

Consolidated gross profit for the three months ended March 31, 2021 was $0.8 million, compared to $7.9 million for the corresponding period of the prior fiscal year.

The decrease in gross profit for the three months ended March 31, 2021 was caused by the by the reduction of rental revenue discussed above, and was partially offset by an increase in gross profits from our land-based wireless seismic products attributed to the recognition of revenue from a product delivery in the prior fiscal year.

Consolidated gross profit for the six months ended March 31, 2021 was $7.6 million, compared to $10.4 million for the corresponding period of the prior fiscal year.

The decrease in gross profit for the six months ended March 31, 2021 was primarily due to a decrease in wireless product rental revenue, and was partially offset by (i) an increase wireless product gross profit attributable to the revenue recognized on the large land-based wireless seismic product delivery in the prior year, (ii) gross profit from the sale of OBX rental equipment to the former lessee of the equipment and (iii) gross profit realized on our contract with the CBP.

Consolidated operating expenses for the three months ended March 31, 2021 were $9.0 million, a decrease of $2.4 million, or 20.9%, from the corresponding period of the prior fiscal year.

The decrease was due to (i) a $0.6 million decrease in personnel costs primarily related to our cost reduction program initiated in the third quarter of fiscal year 2020, (ii) a $1.2 million net non-cash decrease in the estimated fair value of contingent earn-out consideration related to our Quantum and OptoSeis ® acquisitions and (iii) a $0.6 million reduction in other general business expenses related to our business operations.

Consolidated operating expenses for the six months ended March 31, 2021 were $17.2 million, a decrease of $4.5 million, or 20.8%, from the corresponding period of the prior fiscal year.

The decrease was due to (i) a $1.9 million net non-cash decrease in the estimated fair value of contingent earn-out consideration related to our Quantum and OptoSeis ® acquisitions, (ii) $1.2 million decrease in personnel costs primarily related to our cost reduction program initiated in the third quarter of fiscal year 2020, (iii) a $0.4 million reduction in research and development project costs and (iv) a $1.0 million reduction in other general business expenses related to our business operations.

Consolidated other income for the three months ended March 31, 2021 was $1.1 million compared to $0.3 million from the corresponding period of the prior fiscal year.

Consolidated other income (loss) for the six months ended March 31, 2021 was $1.5 million compared to $0.2 million from the corresponding period of the prior fiscal year.

The increase in other income for both periods was primarily caused by an increase in interest and investment income.

Consolidated income tax expense for the three months ended March 31, 2021 was $0.1 million compared to $0.6 million from the corresponding period of the prior fiscal year.

Consolidated income tax expense for the six months ended March 31, 2021 was $0.1 million compared to $2.0 million from the corresponding period of the prior fiscal year.

This decrease in income tax expense for both periods 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.

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Oil and Gas Markets

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.

Revenue from our Oil and Gas Markets products for the three months ended March 31, 2021 decreased $2.3 million, or 12.5%, from the corresponding period of the prior fiscal year.

Revenue from our Oil and Gas Markets products for the six months ended March 31, 2021 decreased $1.0 million, or 3.5%, from the corresponding period of the prior fiscal year.

Our product and rental revenue in this segment was negatively impacted by the COVID-19 pandemic and its impact on worldwide demand for crude oil, and positively impacted by the sale of used OBX rental equipment to the former lessee of the equipment in the first quarter of fiscal year 2021.

The components of these decreases included the following:

Traditional Exploration Product Revenue – For the three months ended March 31, 2021, revenue from our traditional products decreased $1.2 million, or 61.1% from the corresponding period of the prior fiscal year.

For the six months ended March 31, 2021, revenue from our traditional products decreased $2.6 million, or 59.3% from the corresponding period of the prior fiscal year.

The decrease for both periods 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 March 31, 2021, revenue from our wireless exploration products decreased $1.3 million, or 8.1%, from the corresponding period of the prior fiscal year.

The decrease for the three months ended March 31, 2021 was primarily due to a decrease in rental revenue from our OBX marine nodal products caused by a large sale of OBX rental equipment to the former lessee of the equipment in the first quarter of fiscal year 2021 and due to lower utilization of our OBX rental fleet caused by the COVID-19 pandemic.

The decrease was largely offset by the recognition of $12.5 million of revenue related to land-based wireless seismic products delivered to a customer in the prior fiscal year.

For the six months ended March 31, 2021, revenue from our wireless exploration products increased $1.5 million, or 6.0%, from the corresponding period of the prior fiscal year.

The increase for the six months ended March 31, 2021 was primarily due to the recognition of $12.5 million of revenue on the land-based wireless system and from the $9.9 million sale of used OBX rental equipment to the former lessee of the equipment.

These increases were largely offset by the significant decrease in OBX rental revenue.

Reservoir Product Revenue – For the three months ended March 31, 2021, revenue from our reservoir products increased $0.2 million, or 69.4%, from the corresponding period of the prior fiscal year.

For the six months ended March 31, 2021, revenue from our reservoir products increased $45,000, or 8.1%, from the corresponding period of the prior fiscal year.

The increase for both periods was primarily due to higher reservoir-related service revenue.

Operating Income (Loss)

Operating income (loss) associated with our Oil and Gas Markets products for the three months ended March 31, 2021 was $(5.5) million, compared to operating income of $1.3 million from the corresponding period of the prior fiscal year.

Operating loss associated with our Oil and Gas Markets products for the six months ended March 31, 2021 was $(11.5) million, compared to $(2.6) million from the corresponding period of the prior fiscal year.

The decrease in operating income for both periods was primarily due to (i) lower 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 decrease in operating income for both periods was partially offset by (i) the sale of the OBX rental equipment to the former lessee of the equipment, (ii) the recognition of revenue on the land-based wireless system delivered in the prior year, and (iii) lower operating expenses resulting from our fiscal year 2020 cost reduction program and other related cost reductions.

Adjacent Markets

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.

Revenue from our Adjacent Markets products for the three months ended March 31, 2021 increased $0.5 million, or 7.0%, from the corresponding period of the prior fiscal year.

Revenue from our Adjacent Markets products for the six months ended March 31, 2021 increased $1.3 million, or 9.8%, from the corresponding period of the prior fiscal year.

The components of these increases included the following:

Industrial Product Revenue and Services – For the three months ended March 31, 2021 revenue from our industrial products increased $0.8 million, or 18.9% from the corresponding period of the prior fiscal year.

For the six months ended March 31, 2021 revenue from our industrial products increased $1.6 million, or 20.6% from the corresponding period of the prior fiscal year.

The increase in revenue for both periods 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 and six months ended March 31, 2021 despite the current COVID-19 pandemic, we cannot reasonably determine if this marks the beginning of a recovery from the impact of the COVID-19 pandemic 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.

Imaging Product Revenue – For the three months ended March 31, 2021, revenue from our imaging products decreased $0.3 million, or 10.2%, from the corresponding period of the fiscal year.

For the six months ended March 31, 2021 revenue from our imaging products decreased $0.3 million, or 5.7%, from the corresponding period of the prior fiscal year.

The decrease for both periods was primarily due to lower demand for our consumable film products partially offset by increased demand for our equipment products.

Demand for our consumable film products continues to be impacted by the current COVID-19 pandemic.

We expect this lower demand for our film products to continue until large scale social gatherings resume where our customers use these 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.

The operating income from our Adjacent Markets products for the three months ended March 31, 2021 was $1.6 million, an increase of $0.3 million, or 28.7%, from the corresponding period of the prior fiscal year.

The operating income from our Adjacent Markets products for the six months ended March 31, 2021 was $2.8 million, an increase of $0.8 million, or 36.7%, from the corresponding period of the prior fiscal year.

The increase in operating income for both periods was primarily due to an increase in industrial product revenue and related gross profits, and operating expense reductions resulting from our fiscal year 2020 cost reduction program.

Emerging Markets

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”).

Revenue from our Emerging Markets products for the three months ended March 31, 2021 was $0.2 million, compared to $0.4 million from the comparable period in prior fiscal year.

The decrease for the three months ended March 31, 2021 was primarily due to lower demand of border and perimeter security products from commercial customers.

Revenue from our Emerging Markets

products for the six months ended March 31, 2021 was $ 9.0 million, compared to $0.5 million from the prior fiscal year.

The increase in revenue for the six months ended March 31, 2021 was primarily attributable to the recognition of revenue related our contract with the 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.

As of March 31 , 202 1 , unrecognized revenue related to this contract was approximately $ 1.3 million, the majority of which is expected to be recognized in during the last half of fiscal year 2021.

On January 20, 2021, President Biden ordered a pause on construction of the wall at the U.S.

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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.

Operating loss from our Emerging Markets products for the three months ended March 31, 2021 was $(1.2) million, compared to $(2.5) million from corresponding period in the prior fiscal year.

The decrease in operating loss for the three months ended March 31, 2021 was primarily due to net non-cash adjustments of $1.5 million related to a decrease in the estimated fair value of contingent earn-out consideration related to the Quantum acquisition.

Operating income (loss) from our Emerging Markets products for the six months ended March 31, 2021 was $5.3 million, compared to a loss of $(3.9) million from corresponding period in the prior fiscal year.

The increase in operating income for the six months ended March 31, 2021 was primarily due to revenue and gross profits recognized on our contract with the CBP.

The increase was also due to net non-cash adjustments for the six months ended March 31, 2021 of $2.3 million related to a decrease in the estimated fair value of our contingent earn-out consideration.

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.

At March 31, 2021, we had approximately $35.1 million in cash and cash equivalents and short-term investments.

For the six months ended March 31, 2021, we used $3.9 million of cash from operating activities.

Our net loss of $8.2 million was offset by net non-cash charges of $11.8 million resulting from deferred income taxes, depreciation, amortization, accretion, inventory obsolescence, stock-based compensation, bad debt expense and changes in the estimated fair value of contingent consideration.

Other uses of cash in our operations included (i) the removal of $4.2 million gross profit from the sale of used rental equipment as it is included in investing activities, (ii) a $6.7 million increase in inventories for the production of OBX products as well as the upgrade and repair of our OBX rental fleet, (iii) a $2.7 million increase in unbilled receivables related to our contract with CBP and (iv) a $4.2 million decrease in deferred revenue and other liabilities primarily due to the revenue recognized on the land-based wireless product that was delivered in the prior fiscal year.

Offsetting these uses of cash were (i) a $3.6 million increase in accounts payable due to the increase in inventories and the timing of payments to suppliers and (ii) a $6.5 million increase in deferred cost of revenue and other assets primarily due to recognition of cost of revenue on the land-based wireless product and the prepayment of annual insurance premiums.

For the six months ended March 31, 2021, we generated cash of $4.7 million in investing activities.

Sources of cash included (i) $10.0 million of proceeds from the sale of used rental equipment and (ii) $0.3 million of proceeds from the transfer of our investment in a debt security.

Uses of cash included (i) disbursements of $3.8 million for purchases of short-term investment, $1.7 million for additions to our property, plant and equipment and (iii) $0.1 million for additions to our equipment rental fleet.

We expect our cash investments in property, plant and equipment during fiscal year 2021 to be approximately $3 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.

Depending on demand for our OBX marine rental equipment, we expect fiscal year 2021 cash investments into our rental fleet to be approximately $2 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 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.

For the six months ended March 31, 2021, we used $2.3 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.

At March 31, 2021, approximately $2.7 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.

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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.

however, o il 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 Oil and Gas Markets products will continue in fiscal year 2021.

On July 13, 2020, we received an interest in a senior secured bond from an international seismic marine customer.

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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).

In January 2021, we transferred the bond pursuant to a purchase agreement (the “Agreement”) entered into with a third party (the “Buyer”).

Pursuant to the Agreement, we transferred the bond to the Buyer in exchange for non-refundable consideration of $0.3 million and will 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 reacquire the bond from the Buyer for one US 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 note, which bore interest at 8% per annum, was paid during the three months ended March 31, 2021.

Our available cash and cash equivalents and short-term investments totaled $35.1 million at March 31, 2021, which included $5.3 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.

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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.

In March 2021, we amended the credit agreement to reduce the maximum amount available for borrowing from $30 million to $20 million.

The March 2021 amendment also altered the tangible net worth requirement to decrease the minimum threshold from $145 million to $132 million commencing with the fiscal quarter ending March 31, 2021 and for each fiscal quarter thereafter.

Additionally, the March 2021 amendment added a funded debt to EBITDA ratio financial covenant which requires us to maintain, for a twelve-month period ending on the last day of each fiscal quarter commencing with the fiscal quarter ended March 31, 2021, and for each fiscal quarter thereafter, a ratio of funded debt to EBITDA not exceeding 1.50 to 1.00.

The March 2021 amendment also amended the definition of “Eligible Accounts” to include certain unbilled receivables, and reduced the limit on the amount of “Eligible Inventory” that may be included in the borrowing base from $20 million to $15 million.

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.

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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.

At March 31, 2021, we had no outstanding borrowings under the credit agreement and our borrowing availability under the credit facility as of March 31, 2021 was $18.5 million.

At March 31, 2021, we were in compliance with all covenants under the credit agreement.

We currently do not anticipate the need to borrow under the credit agreement;

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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.

Subsequent to the acquisition, we reduced the estimated contingent earn-out liability to $5.0 million as of March 31, 2021.

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.

We made cash earn-out payments of $0.1 million in fiscal year 2020 to the former shareholders of Quantum.

The Company plans to make an additional earn-out payment of approximately $2.3 million in the fourth quarter of fiscal year 2021.

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.

Subsequent to the acquisition, we increased the estimated contingent earn-out liability to $5.1 million as of March 31, 2021.

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.

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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.

During the six months ended March 31, 2021, 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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis