What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-07 · 115 added, 107 removed, 208 unchanged (52% of the section changed)

7 unchanged sentences

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 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 transaction with Aquana, LLC, future demand for our Quantum security solutions, 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 and the recovery from 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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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.

Such examples include, but are not limited to, the failure of the Quantum and 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, 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.

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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

on our website under the “Investor Relations” tab.

filings are also available to the public on our website at www.geospace.com.

From time to time, we may post investor presentations 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.

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Each wireless station is available in a single-channel or three-channel configuration.

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.

Since its introduction in 2008 and through June 30, 2021, we have sold 484,000 wireless channels and we currently have 74,000 wireless channels in our rental fleet.

We have also developed a marine-based wireless seismic data acquisition system called the OBX.

1 unchanged sentence

Our deepwater versions of the OBX system can be deployed in depths of up to 3,450 meters.

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

Through June 30, 2021, we have sold 8,400 OBX stations and we currently have 27,000 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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Three Months Ended

Six Months Ended

March 31, 2021

March 31, 2020

March 31, 2021

March 31, 2020

Nine Months Ended

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Oil and Gas Markets

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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.

In February 2020, demand decreased 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.

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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.

In light of current market conditions, the inventory balances in our Oil and Gas Markets business segment at June 30, 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 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 experienced 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.

We believe we may be entering a period of recovery from the initial effects of the COVID-19 pandemic on our Adjacent Markets business segment, but we continue to be cautious about the pandemic’s effect on our other business segments and our supply chain.

As a result, we continually communicate with our suppliers and customers as information is available to best manage this difficult situation.

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 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.

There are no outstanding liabilities related to this program as of June 30, 2021.

Three and nine months ended June 30, 2021 compared to the three and nine months ended June 30, 2020

Consolidated revenue for the three months ended June 30, 2021 was $23.1 million, an increase of $0.4 million, or 1.7%, from the corresponding period of the prior fiscal year.

The increase in revenue for the three months ended June 30, 2021 was primarily due to (i) a $4.3 million increase in revenue from our Adjacent Markets business segment due to an increase in both industrial and imaging product sales and (ii) a $3.8 million increase in wireless exploration product sales from our Oil and Gas Markets business segment, including a $2.9 million sale of used land-based wireless rental equipment.

The increase was largely offset by a $10.3 million decrease in rental revenue, primarily from our OBX marine nodal products caused by the COVID-19 pandemic, as discussed in more detail below.

Consolidated revenue for the nine months ended June 30, 2021 was $75.4 million, an increase of $9.1 million, or 13.8%, from the corresponding period of the prior fiscal year.

The increase in revenue for the nine months ended June 30, 2021 was primarily due to (i) the recognition of $12.5 million of wireless product revenue attributable to a 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, (iii) $9.9 million of revenue recognized on our contract with the U.S.

Customs and Border Protection (the “CBP”) from our Emerging Markets business segment, which was awarded to us in fiscal year 2020, and (iv) a $5.6 million increase in both industrial and imaging product revenue from our Adjacent Markets business segment.

These increases in revenue for the nine months ended June 30, 2021 were largely offset by a $31.3 million decrease in rental revenue, primarily from our OBX marine nodal products caused by sales of rental equipment and lower utilization of our OBX rental fleet caused by the COVID-19 pandemic.

Consolidated gross profit for the three months ended June 30, 2021 was $5.6 million, compared to $8.1 million for the corresponding period of the prior fiscal year.

Consolidated gross profit for the nine months ended June 30, 2021 was $13.2 million, compared to $18.5 million for the corresponding period of the prior fiscal year.

The decrease in gross profit for the three and nine months ended June 30, 2021 was caused by the reduction of rental revenue discussed above, and was partially offset by increased gross profits attributable to the higher revenue from other product categories discussed above.

Consolidated operating expenses for the three months ended June 30, 2021 were $8.1 million, a decrease of $2.6 million, or 24.0%, from the corresponding period of the prior fiscal year.

The decrease was due to (i) a $1.5 million net non-cash decrease in the estimated fair value of contingent earn-out consideration related to our Quantum and OptoSeis ® acquisitions, (ii) a $0.3 million reduction in research and development project costs, (iii) a $0.3 million reduction in bad debt expense and (iv) a $0.5 million reduction in other general business expenses related to our business operations.

Consolidated operating expenses for the nine months ended June 30, 2021 were $25.3 million, a decrease of $7.1 million, or 21.9%, from the corresponding period of the prior fiscal year.

The decrease was due to (i) a $3.3 million net non-cash decrease in the estimated fair value of contingent earn-out consideration related to our Quantum and OptoSeis ® acquisitions, (ii) a $1.3 million decrease in personnel costs primarily related to our cost reduction program initiated in the third quarter of fiscal year 2020, (iii) a $0.6 million reduction in research and development project costs (iv) a $0.4 million reduction in bad debt expense and (iv) a $1.5 million reduction in other general business expenses related to our business operations.

Consolidated other income for the three months ended June 30 , 2021 was $1.

8 million compared to $0.

9 million from the corresponding period of the prior fiscal year.

Consolidated other income for the nine months ended June 30 , 2021 was $ 3.

3 million compared to $ 1.1 million from the corresponding period of the prior fiscal year.

The increase in other income for both periods was primarily caused by a gain recognized on the sale of our investment in a debt security .

Consolidated income tax expense for the three months ended June 30, 2021 was $0.2 million compared to $0.6 million from the corresponding period of the prior fiscal year.

Consolidated income tax expense for the nine months ended June 30, 2021 was $0.3 million compared to $2.6 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.

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Oil and Gas Markets

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.

Revenue from our Oil and Gas Markets products for the three months ended June 30, 2021 decreased $4.9 million, or 27.8%, from the corresponding period of the prior fiscal year.

Revenue from our Oil and Gas Markets products for the nine months ended June 30, 2021 decreased $5.9 million, or 12.5%, 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.

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.

Traditional Exploration Product Revenue – For the three months ended June 30, 2021, revenue from our traditional products increased $0.8 million, or 66.8% from the corresponding period of the prior fiscal year.

The increase for the three months ended June 30, 2021 was primarily due to an increase in demand for our sensor products.

For the nine months ended June 30, 2021, revenue from our traditional products decreased $1.8 million, or 32.7% from the corresponding period of the prior fiscal year.

The decrease for the nine months ended June 30, 2021 primarily reflects lower demand for our marine products, partially offset by an increase in demand for our sensor products.

Wireless Exploration Product Revenue – For the three months ended June 30, 2021, revenue from our wireless exploration products decreased $6.4 million, or 40.1%, from the corresponding period of the prior fiscal year.

The decrease for the three months ended June 30, 2021 was primarily due to a decrease in rental revenue from our OBX marine nodal products due to lower utilization of our OBX rental fleet caused by the COVID-19 pandemic.

The decrease was largely offset by a $2.9 million sale of land-based wireless seismic products.

For the nine months ended June 30, 2021, revenue from our wireless exploration products decreased $4.9 million, or 12.0%, from the corresponding period of the prior fiscal year.

The decrease for the nine months ended June 30, 2021 was primarily due to the decrease in OBX rental revenue.

This decrease was partially offset by (i) the recognition of $12.5 million of revenue related to land-based wireless seismic products delivered to a customer in the prior year, (ii) a $9.9 million sale of used OBX rental equipment to the former lessee of the equipment and (iii) a $2.9 million third quarter sale of land-based wireless seismic products.

Reservoir Product Revenue – For the three months ended June 30, 2021, revenue from our reservoir products was $1.1 million, an increase of $0.8 million from the corresponding period of the prior fiscal year.

For the nine months ended June 30, 2021, revenue from our reservoir products was $1.7 million, an increase of $0.8 million from the corresponding period of the prior fiscal year.

The increase for both periods was primarily due to higher reservoir monitoring 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.

Operating income (loss) associated with our Oil and Gas Markets products for the three months ended June 30, 2021 was $(1.8) million, compared to operating income of $1.5 million from the corresponding period of the prior fiscal year.

The decrease in operating income for the three months ended June 30, 2021 was primarily due to lower wireless rental revenue and related gross profits from the rental of our OBX systems.

The decrease for the three months ended June 30, 2021 was partially offset by a reduction in operating expense attributable to (i) $0.7 million in net non-cash adjustments to the estimated fair value of contingent earn-out consideration related to our OptoSeis ® acquisition and (ii) lower research and development project costs.

Operating loss associated with our Oil and Gas Markets products for the nine months ended June 30, 2021 was $(13.3) million, compared to $(1.1) million from the corresponding period of the prior fiscal year.

The increase in operating loss for the nine months ended June 30, 2021 was primarily due to lower wireless rental revenue and related gross profits from the rental of our OBX systems.

The decrease in

operating income for the nine months ended June 30, 2021 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 ( i ii) 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 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.

Revenue from our Adjacent Markets products for the three months ended June 30, 2021 increased $4.3 million, or 83.6%, from the corresponding period of the prior fiscal year.

Revenue from our Adjacent Markets products for the nine months ended June 30, 2021 increased $5.6 million, or 30.4%, from the corresponding period of the prior fiscal year.

While we experienced an increase in the demand for our Adjacent Markets products and services during the three and nine months ended June 30, 2021 despite the current COVID-19 pandemic, we cannot reasonably determine if this marks the beginning of a lasting 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 Adjacent Markets products and services.

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.

Industrial Product Revenue and Services – For the three months ended June 30, 2021 revenue from our industrial products increased $3.0 million, or 89.6% from the corresponding period of the prior fiscal year.

For the nine months ended June 30, 2021 revenue from our industrial products increased $4.7 million, or 41.6% 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 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.

Imaging Product Revenue – For the three months ended June 30, 2021, revenue from our imaging products increased $1.2 million, or 71.6%, from the corresponding period of the prior fiscal year.

For the nine months ended June 30, 2021 revenue from our imaging products increased $0.9 million, or 12.8%, from the corresponding period of the prior fiscal year.

The increase for both periods was primarily due to higher demand for our equipment products and consumable film products.

Operating Income

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.

The operating income from our Adjacent Markets products for the three months ended June 30, 2021 was $2.0 million, an increase of $1.4 million from the corresponding period of the prior fiscal year.

The operating income from our Adjacent Markets products for the nine months ended June 30, 2021 was $4.8 million, an increase of $2.2 million from the corresponding period of the prior fiscal year.

The increase in operating income for both periods was primarily due to an increase in both industrial and imaging product revenue and related gross profits.

Emerging Markets

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 .

Revenue from our Emerging Markets products for the three months ended June 30, 2021 was $1.1 million, compared to $0.1 million from the corresponding period in the prior fiscal year.

Revenue from our Emerging Markets products for the nine months ended June 30, 2021 was $10.0 million, compared to $0.6 million from the prior fiscal year.

The increase in revenue for both periods was primarily attributable to the recognition of revenue related to 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 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.

As of June 30, 2021, unrecognized revenue related to this contract was approximately $0.3 million, which is expected to be recognized during the fourth quarter 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 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.

Operating income (loss) from our Emerging Markets products for the three months ended June 30, 2021 was $(4,000), compared to $(1.2) million from the corresponding period in the prior fiscal year.

The decrease in operating income (loss) for the three months ended June 30, 2021 was primarily due to net non-cash adjustments of $1.0 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 nine months ended June 30 , 2021 was $5.3 million, compared a loss of $( 5.0 ) million from corresponding period in the prior fiscal year.

The in crease in operating income for the nine months ended June 30 , 2021 was primarily due to revenue and gross profits recognized on our contract with the CBP .

The in crease for the nine months ended June 30, 2021 was also due to net non-cash adjustments of $2.

2 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 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.

At June 30, 2021, we had approximately $30.0 million in cash and cash equivalents and short-term investments.

For the nine months ended June 30, 2021, we used $7.5 million of cash from operating activities.

Our net loss of $9.0 million was offset by net non-cash charges of $17.1 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.

Other uses of cash in our operations included (i) the removal of $6.5 million gross profit from the sale of used rental equipment as it is included in investing activities, (ii) a $2.0 million gain from the sale of our investment in debt security, (iii) a $4.9 million increase in inventories for the production of OBX products, (iv) a $4.6 million increase in trade accounts and notes receivable primarily due to a trade note receivable recognized on a land-based wireless product sale that was delivered in the prior fiscal year, (v) a $1.6 million increase in unbilled receivables related to our contract with CBP and (vi) a $4.1 million decrease in deferred revenue and other liabilities primarily due to revenue recognized on a land-based wireless product.

Offsetting these uses of cash were (i) a $1.4 million increase in accounts payable due to the increase in inventories and the timing of payments to suppliers and (ii) a $6.8 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 insurance premiums.

For the nine months ended June 30, 2021, we used cash of $1.7 million in investing activities.

Uses of cash included (i) net disbursements of $9.7 million for purchases of short-term investments, (ii) $2.5 million for additions to our property, plant and equipment and (iii) $1.5 million for additions to our equipment rental fleet.

Sources of cash included (i) $10.0 million of proceeds from the sale of used rental equipment and (ii) $2.1 million of proceeds from the sale of our investment in a debt security.

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

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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 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.

For the nine months ended June 30, 2021, we used $3.6 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 March 31, 2021, approximately $2.7 million remains available for repurchases under the program.

At June 30, 2021, approximately $1.4 million of our common stock 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, 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.

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 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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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, 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.

During the third quarter of fiscal year 2021, we agreed to a reduction to

the additional cash compensation required from the Buyer to obtain full rights to the bond from $2.4 million to $1.8 million.

In June 2021, we received the $1.8 million from the Buyer and relinquished all rights to the bond.

Our available cash and cash equivalents and short-term investments totaled $30.0 million at June 30, 2021, which included $5.6 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 $20.0 million with such amounts available for borrowing determined by a borrowing base.

Our credit agreement with Frost Bank allows for borrowings of up to $20.0 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.

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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 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.

At June 30, 2021, we had no outstanding borrowings under the credit agreement and our borrowing availability under the credit facility as of June 30, 2021 was $17.7 million.

At June 30, 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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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

Frost Bank may not extend our credit agreement or may do so on terms and conditions that are unacceptable to us upon its expiration.

In the absence of such extension, we intend to pursue a new credit facility arrangement with alternative lenders prior to the expiration of our current credit facility;

however, we may not be successful in obtaining a credit facility on terms that are favorable to us.

Although we do not currently anticipate the need to borrow under our current agreement, the lack of a credit facility could negatively impact our liquidity.

This could have a material adverse impact on our future operations, financial condition, growth, and other aspects of our business.

However, currently we believe that our cash and cash equivalents, and any borrowings under our credit facility 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.

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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 March 31, 2021.

Subsequent to the acquisition, we reduced the estimated contingent earn-out liability to $4.1 million as of June 30, 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.

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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 $5.1 million as of March 31, 2021.

Subsequent to the acquisition, we increased the estimated contingent earn-out liability to $5.2 million as of June 30, 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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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 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.

Critical Accounting Estimates

During the nine months ended June 30, 2021, there has been no material change to our critical accounting estimates 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