GEOSPACE TECHNOLOGIES CORP 10-Q

Item 1. Financial Statements GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except share amounts) (unaudited) June 30, 2021 September 30, 2020 ASSETS Current assets: Cash and cash equivalents $ 20,070 $ 32,686 Short-term investments 9,900 — Trade accounts and financing receivables, net 18,981 13,778 Unbilled receivables 1,561 — Inventories, net 15,170 16,933 Asset held for sale 606 587 Prepaid expenses and other current assets 1,951 953 Total current assets 68,239 64,937 Non-current financing receivables 2,154 — Non-current inventories, net 18,151 16,930 Rental equipment, net 41,862 54,317 Property, plant and equipment, net 29,449 29,874 Operating right-of-use assets 1,249 — Goodwill 4,337 4,337 Other intangible assets, net 7,032 8,331 Deferred cost of revenue and other assets 238 8,119 Total assets $ 172,711 $ 186,845 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable trade $ 2,973 $ 1,593 Contingent consideration 2,317 — Operating lease liabilities 221 — Deferred revenue and other current liabilities 8,766 8,753 Total current liabilities 14,277 10,346 Non-current contingent consideration 6,932 10,962 Non-current operating lease liabilities 1,073 — Non-current deferred revenue and other liabilities 26 4,567 Total liabilities 22,308 25,875 Commitments and contingencies (Note 12) Stockholders’ equity: Preferred stock, 1,000,000 shares authorized, no shares issued and outstanding — — Common Stock, $ .01 par value, 20,000,000 shares authorized; 13,739,096 and 13,670,639 shares issued, respectively; and 13,315,097 and 13,670,639 shares outstanding, respectively 137 137 Additional paid-in capital 92,475 90,965 Retained earnings 77,545 86,566 Accumulated other comprehensive loss ( 16,166 ) ( 16,698 ) Treasury stock, at cost, 423,999 shares at June 30, 2021 ( 3,588 ) — Total stockholders’ equity 150,403 160,970 Total liabilities and stockholders’ equity $ 172,711 $ 186,845 The accompanying notes are an integral part of the consolidated financial statements. 3 GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (unaudited) Three Months Ended Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Revenue: Products $ 17,679 $ 6,975 $ 66,005 $ 25,575 Rental 5,404 15,728 9,430 40,740 Total revenue 23,083 22,703 75,435 66,315 Cost of revenue: Products 12,907 8,660 47,492 28,285 Rental 4,549 5,979 14,744 19,564 Total cost of revenue 17,456 14,639 62,236 47,849 Gross profit 5,627 8,064 13,199 18,466 Operating expenses: Selling, general and administrative 5,243 5,704 16,075 17,767 Research and development 3,658 4,014 10,943 12,535 Change in estimated fair value of contingent consideration ( 795 ) 662 ( 1,713 ) 1,634 Bad debt expense (recovery) ( 40 ) 248 ( 32 ) 406 Total operating expenses 8,066 10,628 25,273 32,342 Loss from operations ( 2,439 ) ( 2,564 ) ( 12,074 ) ( 13,876 ) Other income (expense): Interest expense — ( 8 ) — ( 31 ) Interest income 151 574 1,284 924 Gain on investments, net 1,727 — 1,996 — Foreign exchange gains (losses), net ( 49 ) 307 64 283 Other, net ( 8 ) ( 21 ) ( 3 ) ( 78 ) Total other income, net 1,821 852 3,341 1,098 Loss before income taxes ( 618 ) ( 1,712 ) ( 8,733 ) ( 12,778 ) Income tax expense 169 573 288 2,600 Net loss $ ( 787 ) $ ( 2,285 ) $ ( 9,021 ) $ ( 15,378 ) Loss per common share: Basic $ ( 0.06 ) $ ( 0.17 ) $ ( 0.67 ) $ ( 1.14 ) Diluted $ ( 0.06 ) $ ( 0.17 ) $ ( 0.67 ) $ ( 1.14 ) Weighted average common shares outstanding: Basic 13,353,254 13,545,340 13,464,177 13,517,387 Diluted 13,353,254 13,545,340 13,464,177 13,517,387 The accompanying notes are an integral part of the consolidated financial statements. 4 GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) (unaudited) Three Months Ended Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net loss $ ( 787 ) $ ( 2,285 ) $ ( 9,021 ) $ ( 15,378 ) Other comprehensive income (loss): Change in unrealized losses on available-for-sale securities, net of tax ( 6 ) — ( 9 ) — Foreign currency translation adjustments 278 ( 235 ) 541 ( 686 ) Total other comprehensive income (loss) 272 ( 235 ) 532 ( 686 ) Total comprehensive loss $ ( 515 ) $ ( 2,520 ) $ ( 8,489 ) $ ( 16,064 ) The accompanying notes are an integral part of the consolidated financial statements. 5 GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED JUNE 30, 2021 AND 2020 (in thousands, except share amounts) (unaudited) Common Stock Accumulated Additional Other Shares Paid-In Retained Comprehensive Treasury Outstanding Amount Capital Earnings Loss Stock Total Balance at October 1, 2020 13,670,639 $ 137 $ 90,965 $ 86,566 $ ( 16,698 ) $ — $ 160,970 Net loss — — — ( 1,050 ) — — ( 1,050 ) Other comprehensive income — — — — 197 — 197 Issuance of common stock pursuant to the vesting of restricted stock units 57,332 — — — — — — Purchase of treasury stock ( 117,637 ) — — — — ( 828 ) ( 828 ) Stock-based compensation — — 548 — — — 548 Balance at December 31, 2020 13,610,334 137 91,513 85,516 ( 16,501 ) ( 828 ) 159,837 Net loss — — — ( 7,184 ) — — ( 7,184 ) Other comprehensive income — — — — 63 — 63 Issuance of common stock pursuant to the vesting of restricted stock units 13,500 — — — — — — Forfeiture of restricted stock ( 375 ) — — — — — — Purchase of treasury stock ( 157,551 ) — — — — ( 1,500 ) ( 1,500 ) Stock-based compensation — — 479 — — — 479 Balance at March 31, 2021 13,465,908 137 91,992 78,332 ( 16,438 ) ( 2,328 ) 151,695 Net loss — — — ( 787 ) — — ( 787 ) Other comprehensive income — — — — 272 — 272 Forfeiture of restricted stock ( 2,000 ) — — — — — — Purchase of treasury stock ( 148,811 ) — — — — ( 1,260 ) ( 1,260 ) Stock-based compensation — — 483 — — — 483 Balance at June 30, 2021 13,315,097 $ 137 $ 92,475 $ 77,545 $ ( 16,166 ) $ ( 3,588 ) $ 150,403 Balance at October 1, 2019 13,630,666 $ 136 $ 88,660 $ 105,808 $ ( 15,757 ) $ — $ 178,847 Net loss — — — ( 9,282 ) — — ( 9,282 ) Other comprehensive income — — — — 566 — 566 Issuance of common stock pursuant to the vesting of restricted stock units 30,823 1 — — — — 1 Stock-based compensation — — 590 — — — 590 Balance at December 31, 2019 13,661,489 137 89,250 96,526 ( 15,191 ) — 170,722 Net loss — — — ( 3,811 ) — — ( 3,811 ) Other comprehensive loss — — — — ( 1,017 ) — ( 1,017 ) Forfeiture of restricted stock — — — — — — — Issuance of common stock pursuant to the vesting of restricted stock units 3,500 — — — — — — Stock-based compensation — — 533 — — — 533 Balance at March 31, 2020 13,664,989 137 89,783 92,715 ( 16,208 ) — 166,427 Net loss — — — ( 2,285 ) — — ( 2,285 ) Other comprehensive income — — — — ( 235 ) — ( 235 ) Forfeiture of restricted stock ( 375 ) — — — — — — Stock-based compensation — — 559 — — — 559 Balance at June 30, 2020 13,664,614 $ 137 $ 90,342 $ 90,430 $ ( 16,443 ) $ - $ 164,466 The accompanying notes are an integral part of the consolidated financial statements. 6 GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine Months Ended June 30, 2021 June 30, 2020 Cash flows from operating activities: Net loss $ ( 9,021 ) $ ( 15,378 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Deferred income tax expense (benefit) ( 3 ) 195 Rental equipment depreciation 11,332 13,643 Property, plant and equipment depreciation 2,956 3,029 Amortization of intangible assets 1,299 1,299 Accretion of discounts on short-term investments 45 — Stock-based compensation expense 1,510 1,682 Bad debt expense (recovery) ( 32 ) 406 Inventory obsolescence expense 1,702 2,853 Change in estimate of collectability of rental revenue — 7,993 Change in estimated fair value of contingent consideration ( 1,713 ) 1,634 Gross profit from sale of used rental equipment ( 6,546 ) ( 698 ) Loss (gain) on disposal of property, plant and equipment 6 ( 151 ) Realized gain on sale of investments, net ( 1,996 ) — Effects of changes in operating assets and liabilities: Trade accounts and notes receivables ( 4,621 ) 2,059 Unbilled receivables ( 1,561 ) — Inventories ( 4,920 ) 898 Deferred cost of revenue and other assets 6,756 ( 8,178 ) Accounts payable trade 1,372 ( 1,654 ) Deferred revenue and other liabilities ( 4,080 ) 2,811 Net cash provided by (used in) operating activities ( 7,515 ) 12,443 Cash flows from investing activities: Purchase of property, plant and equipment ( 2,451 ) ( 2,559 ) Proceeds from the sale of property, plant and equipment 3 204 Investment in rental equipment ( 1,528 ) ( 5,448 ) Proceeds from the sale of used rental equipment 9,994 3,258 Purchases of short-term investments ( 10,844 ) — Proceeds from the sale of short-term investments 1,100 — Proceeds from sale of investment in debt security 2,069 — Net cash used in investing activities ( 1,657 ) ( 4,545 ) Cash flows from financing activities: Purchase of treasury stock ( 3,588 ) — Net cash used in financing activities ( 3,588 ) — Effect of exchange rate changes on cash 144 ( 154 ) Increase (decrease) in cash and cash equivalents ( 12,616 ) 7,744 Cash and cash equivalents, beginning of fiscal year 32,686 18,925 Cash and cash equivalents, end of fiscal period $ 20,070 $ 26,669 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ — $ 31 Cash paid for income taxes 284 2,454 Inventory transferred to rental equipment 3,777 6,220 The accompanying notes are an integral part of the consolidated financial statements. 7 GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Significant Accounting Policies Basis of Presentation The consolidated balance sheet of Geospace Technologies Corporation and its subsidiaries (the “Company”) at September 30, 2020 was derived from the Company’s audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 2021 and the consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the three and nine months ended June 30, 2021 and 2020 were prepared by the Company without audit. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows were made. All intercompany balances and transactions have been eliminated. The results of operations for the three and nine months ended June 30, 2021 are not necessarily indicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America were omitted pursuant to the rules of the Securities and Exchange Commission. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2020. Reclassifications Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation. Such reclassifications had no effect on previously reported net loss, stockholders’ equity or cash flows. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. The Company continually evaluates its estimates, including those related to bad debt reserves, collectability of rental revenue, inventory obsolescence reserves, self-insurance reserves, product warranty reserves, useful lives of long-lived assets, impairment of long-lived assets and intangible assets, contingent consideration and deferred income tax assets. The Company bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. While management believes current estimates are reasonable and appropriate, actual results may differ from these estimates under different conditions or assumptions. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original or remaining maturity at the time of purchase of three months or less to be cash equivalents. At June 30, 2021, cash and cash equivalents included $ 5.6 million held by the Company’s foreign subsidiaries and branch offices. If the Company were to repatriate the cash held by its foreign subsidiaries, it could be required to accrue and pay taxes on any amount repatriated. The Tax Cut and Jobs Act (“2017 Tax Act”) creates new taxes on certain foreign earnings and also requires entities to pay a one-time transition tax on undistributed earnings of their foreign subsidiaries which were previously tax deferred. The Company has determined it is no t required to pay transition tax on the undistributed earnings of its foreign subsidiaries since it had no accumulated foreign earnings on a consolidated basis. Recently Issued Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (the “FASB”) issued guidance surrounding credit losses for financial instruments that replaces the incurred loss impairment methodology in generally accepted accounting principles. The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other financial instruments. For available-for-sale debt securities with unrealized losses, credit losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a small reporting company, the Company must adopt this standard no later than the first quarter of its fiscal year ending September 30, 2024. Early adoption is permitted. The standard’s provisions will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting 8 period. The Company intends to adopt this standard during the first quarter of its fiscal year ending September 30, 2024 and is continuing to evaluat e the impact of this new guidance on its consolidated financial statements. In December 2019, the FASB issued guidance on simplifying the accounting for income taxes. The guidance eliminates certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. Certain amendments within the guidance are required to be applied on a retrospective basis for all periods presented; others are to be applied using a modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, as of the beginning of the first reporting period in which the guidance is adopted; and yet others are to be applied using either basis. All other amendments not specified in the guidance should be applied on a prospective basis. Early adoption is permitted. An entity that elects to early adopt in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company intends to adopt this standard during the first quarter of its fiscal year ending September 30, 2022 and is continuing to evaluate the new guidance to determine the impact it will have on its condensed consolidated financial statements. 2. Revenue Recognition In accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when performance of contractual obligations are satisfied, generally when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The Company primarily derives product revenue from the sale of its manufactured products. Revenue from these product sales, including the sale of used rental equipment, is recognized when obligations under the terms of a contract are satisfied, control is transferred and collectability of the sales price is probable. The Company assesses collectability during the contract assessment phase. In situations where collectability of the sales price is not probable, the Company recognizes revenue when it determines that collectability is probable or when non-refundable cash is received from its customers. Transfer of control generally occurs with shipment or delivery, depending on the terms of the underlying contract. The Company’s products are generally sold without any customer acceptance provisions, and the Company’s standard terms of sale do not allow customers to return products for credit. Revenue from engineering services is recognized as services are rendered over the duration of a project, or as billed on a per hour basis. Field service revenue is recognized when services are rendered and is generally priced on a per day rate. The Company also generates revenue from short-term rentals under operating leases of its manufactured products. Rental revenue is recognized as earned over the rental period if collectability of the rent is reasonably assured. Rentals of the Company’s equipment generally range from daily rentals to minimum rental periods of up to six months or longer. The Company has determined that ASC 606 does not apply to rental contracts, which are within the scope of ASC Topic 842, Leases . As permissible under the new standard, sales taxes and transaction-based taxes are excluded from revenue. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Additionally, the Company expenses costs incurred to obtain contracts when incurred because the amortization period would have been one year or less. These costs are recorded in selling, general and administrative expenses. The Company has elected to treat shipping and handling activities in a sales transaction after the customer obtains control of the goods as a fulfillment cost and not as a promised service. Accordingly, fulfillment costs related to the shipping and handling of goods are accrued at the time of shipment. Amounts billed to a customer in a sales transaction related to reimbursable shipping and handling costs are included in revenue and the associated costs incurred by the Company for reimbursable shipping and handling expenses are reported in cost of revenue. During the third quarter of fiscal year 2020, the Company was awarded a $ 10.5 million contract (inclusive of a subsequent contract amendment of $ 0.3 million) with the U.S. Customs and Border Protection (the “CBP”) to provide a technology solution to the Department of Homeland Security. Revenue recognized under the contract for fiscal year 2020 and for the nine months ended June 30, 2021 was $ 0.3 million and $ 9.9 million, respectively. The Company had unbilled receivables of $ 1.5 million at June 30, 2021 under this contract. Unrecognized revenue for unsatisfied performance obligations on this contract at June 30, 2021 was approximately $ 0.3 million. The Company anticipates the revenue on the remaining performance obligation on this contract will be recognized in fiscal year 2021. Unsatisfied performance obligations on all other contracts held by the Company at June 30, 2021 had an original duration of one year or less. At June 30, 2021, the Company had no deferred contract costs or deferred contract liabilities. At September 30, 2020, the Company had no deferred contract costs and $ 0.2 million deferred contract liabilities, which are included in current liabilities on the Company’s consolidated balance sheet as a component of deferred revenue and other liabilities. During the three and nine months ended June 30, 2021, no revenue and $ 0.2 million, respectively, was recognized from deferred contract liabilities. During the three and nine months ended June 30, 2020, no revenue was recognized from deferred contract liabilities. No cost of revenue was recognized from deferred contract costs for the three and nine months ended June 30, 2021 and 2020. 9 During the second quarter of fiscal year 2020, the Company partially financed a $ 12.5 million product sale by entering into a $ 10.0 million promissory note with the customer. The note has a three-year term with monthly principal and interest payments of $ 0.3 million. Due to the financial condition of the customer, the Company had concerns over the probable collectability of the promissory note. As a result, the Company did no t recognize any revenue or cost of revenue on the product sale through its first quarter of fiscal year 2021. During the second quarter of fiscal year 2021, as a result of new information received from the customer, management determined that it is probable that the customer will satisfy its remaining payment obligations on the promissory note with the Company and recognized revenue of $ 12.5 million on the product sale. The customer is current on its payment obligations and has made payments totaling $ 7.0 million (exclusive of interest) as of June 30, 2021 related to the product sale. For each of the Company’s operating segments, the following table presents revenue only from the sale of products and the performance of services under contracts with customers (in thousands). Therefore, the table excludes all revenue earned from rental contracts. Three Months Ended Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Oil and Gas Markets Traditional exploration product revenue $ 1,949 $ 1,162 $ 3,736 $ 4,749 Wireless exploration product revenue 4,264 453 26,923 1,336 Reservoir product revenue 1,071 187 1,565 704 Total revenue 7,284 1,802 32,224 6,789 Adjacent Markets Industrial product revenue 6,451 3,403 15,835 11,185 Imaging product revenue 2,883 1,682 7,923 7,044 Total revenue 9,334 5,085 23,758 18,229 Emerging Markets Revenue 1,061 88 10,023 557 Total $ 17,679 $ 6,975 $ 66,005 $ 25,575 See Note 13 for more information on the Company’s operating segments. For each of the geographic areas where the Company operates, the following table presents revenue (in thousands) from the sale of products and services under contracts with customers. The table excludes all revenue earned from rental contracts: Three Months Ended Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Asia $ 4,088 $ 925 $ 16,554 $ 2,200 Canada 279 509 1,167 1,776 Europe 3,223 1,193 6,102 3,865 United States 9,401 4,087 40,820 16,868 Other 688 261 1,362 866 Total $ 17,679 $ 6,975 $ 66,005 $ 25,575 Revenue is attributable to countries based on the ultimate destination of the product sold, if known. If the ultimate destination is not known, revenue is attributable to countries based on the geographic location of the initial shipment. 10 3. Investments Short-term Investments The Company classifies its short-term investments as available-for-sale securities. Available-for-sale securities are carried at fair market value with net unrealized gains and losses reported as a component of accumulated other comprehensive loss in stockholders’ equity. For each of the three and nine months ended June 30, 2021, the Company realized losses of $ 1,000 from the sale of short-term investments. No gains or losses were realized during the three and nine months ended June 2020 from the sale of short-term investments. The Company’s short-term investments were composed of the following (in thousands): As of June 30, 2021 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Short-term investments: Corporate bonds $ 9,909 $ — $ ( 9 ) $ 9,900 The Company had no short-term investments at September 30, 2020. The Company’s short-term investments had contractual maturities ranging from September 2021 to September 2022 . Investment in Debt Security On July 13, 2020, the Company received an interest in a senior secured bond issued from an international seismic marine customer. The Company’s interest in the bond, which has a face value of $ 13.0 million, was received in exchange for $ 13.0 million of unpaid invoices and late fees owed by the customer. The bond is secured by a third in line lien on the assets owned by the customer and has an 8 % interest rate with bi-annual interest and possible principal payments based on available excess cash flows. Interest payments can be made either in cash or in-kind payments in the form of additional debt security. In-kind interest payments require an 8.8 % interest rate. The bond matures on July 13, 2022 . Upon receipt of the senior secured bond, the Company performed a fair value assessment of the investment to determine the bond’s initial carrying amount. In accordance with ASC 825, “Fair Value Instruments”, the Company has determined that the investment is a Level 3 financial instrument primarily due to its current unknown marketability. Because of the distressed financial condition of the customer, the Company believes the fair value of the bond is nominal. In January 2021, the Company transferred the security pursuant to a purchase agreement (the “Agreement”) entered with a third party (the “Buyer”). Pursuant to the Agreement, the Company received 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 the Company’s customer are met by December 31, 2021. In the event these terms and conditions are not met, the Company has the option to reacquire the bond from the Buyer for one dollar US ($ 1.00 ). The Company recognized a gain on investment of $ 0.3 million during the three months ended March 31, 2021 in connection with the transfer of the bond. During the third quarter of fiscal year 2021, the Company 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, the Company received the $ 1.8 million from the Buyer and relinquished all rights to the bond. The Company recognized a $ 1.7 million gain on the sale of the bond during the third quarter of fiscal year 2021. 4. Fair Value of Financial Instruments The Company’s financial instruments generally include cash and cash equivalents, short-term investments, trade accounts, financing receivables and accounts payable. Due to the short-term maturities of cash and cash equivalents, trade accounts, financing receivables and accounts payable, the carrying amounts of these financial instruments are deemed to approximate their fair value on the respective balance sheet dates. The valuation technique used to measure the fair value of the contingent consideration was derived from models utilizing market observable inputs. The Company measures its short-term investments and contingent consideration at fair value on a recurring basis. 11 The following tables present the fair value of the Company’s short-term investments and contingent consideration by valuation hierarchy and input (in thousands): As of June 30, 2021 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable (Level 2) Significant Unobservable (Level 3) Totals Short-term investments: Corporate bonds $ 9,900 $ — $ — $ 9,900 Total assets $ 9,900 $ — $ — $ 9,900 Contingent consideration liabilities: Current portion — — ( 2,317 ) ( 2,317 ) Non-current portion — — ( 6,932 ) ( 6,932 ) Total liabilities $ — $ — $ ( 9,249 ) $ ( 9,249 ) As of September 30, 2020 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable (Level 2) Significant Unobservable (Level 3) Totals Non-current contingent consideration $ — $ — $ ( 10,962 ) $ ( 10,962 ) The following table summarizes changes in the fair value of the Company’s Level 3 financial instruments for the nine months ended June 30, 2021: Balance at October 1, 2020 $ 10,962 Fair value adjustments ( 697 ) Balance at December 31, 2020 10,265 Fair value adjustments ( 221 ) Balance at March 31, 2021 10,044 Fair value adjustments ( 795 ) Balance at June 30, 2021 $ 9,249 Adjustments to the fair value of the contingent consideration are based on Monte Carlo simulations or the probability-weighted expected return method utilizing inputs which include market comparable information and management assessments regarding potential future scenarios. The Company believes its estimates and assumptions are reasonable, however, there is significant judgment involved. 5. Trade Accounts and Financing Receivables Trade accounts receivable, net (excluding notes receivable) are reflected in the following table (in thousands): June 30, 2021 September 30, 2020 Trade accounts receivable $ 12,966 $ 14,090 Allowance for doubtful accounts ( 482 ) ( 496 ) Total $ 12,484 $ 13,594 The allowance for doubtful accounts represents the Company’s best estimate of probable credit losses. The Company determines the allowance based upon historical experience and a current review of its trade accounts receivable balances. Trade accounts receivable balances are charged off against the allowance whenever it is probable that the receivable balance will not be recoverable. Financing receivables are reflected in the following table (in thousands): 12 June 30, 2021 September 30, 2020 Promissory notes $ 5,708 $ 184 Sales-type lease 2,974 — Total financing receivables $ 8,682 184 Unearned income: Sales-type lease $ ( 31 ) — Total unearned income $ ( 31 ) — Total financing receivables, net of unearned income 8,651 184 Less current portion ( 6,497 ) ( 184 ) Non-current notes receivable $ 2,154 $ — Promissory notes receivable are generally collateralized by the products sold, and bear interest at rates ranging up to 8 % per year. The promissory notes receivable mature at various times through January 2023 . The Company has, on occasion, extended or renewed notes receivable as they mature, but there is no obligation to do so. During the second quarter of fiscal year 2020, the Company partially financed a $ 12.5 million product sale by entering into a $ 10.0 million promissory note with the customer. The note has a three-year term with monthly principal and interest payments of $ 0.3 million. Due to the financial condition of the customer, the Company had concerns over the probable collectability of the promissory note. As a result, the promissory note was not reflected on the Company’s consolidated balance sheet through its first quarter of fiscal year 2021. During the second quarter of fiscal year 2021, as a result of a new information received from the customer, management determined that it is probable that the customer will satisfy its remaining payment obligations to the Company and recognized the promissory note on its consolidated balance sheet as of March 31, 2021. See Note 2 for more information on this matter. During the first quarter of fiscal year 2021, the Company 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 5 % per annum, was paid during the three months ended March 31, 2021 . During the third quarter of fiscal year 2021, the Company entered into a sales-type lease with a customer on land-based wireless seismic equipment from its rental fleet. The lease has a term of six months . Future minimum payments required under the lease at June 30, 2021 were $ 3.0 million, including $ 31,000 of unearned income. The future minimum leases payments of $ 2.0 million and $ 1.0 million are due in fiscal year 2021 and 2022, respectively. Interest income related to the lease of $ 12,000 was recognized for the three and nine months ended June 30, 2021. The ownership of the equipment will transfer to the customer at the end of the lease term. 6. Inventories Inventories consist of the following (in thousands): June 30, 2021 September 30, 2020 Finished goods $ 19,481 $ 20,798 Work in process 4,428 984 Raw materials 44,530 47,041 Obsolescence reserve ( 35,118 ) ( 34,960 ) 33,321 33,863 Less current portion ( 15,170 ) ( 16,933 ) Non-current portion $ 18,151 $ 16,930 Raw materials include semi-finished goods and component parts that totaled approximately $ 22.7 million and $ 24.3 million at June 30, 2021 and September 30, 2020, respectively. 7. Leases As Lessee The Company has elected not to record operating right-of-use assets or operating lease liabilities on its consolidated balance sheet for leases having a minimum term of 12 months or less. Such leases are expensed on a straight-line basis over the lease term. Variable lease payments are excluded from the measurement of operating right-of-use assets and operating lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As of June 30, 2021, the Company has two operating right-of-use assets related to leased facilities in Austin, Texas and Cocoa Beach, Florida. 13 Maturities of the operating lease liabilities as of June 30, 2021 were as follows: (in thousands): For fiscal years ending September 30, 2021 (remainder) $ 69 2022 262 2023 270 2024 278 2025 186 Thereafter 356 Future minimum lease payments 1,421 Less interest 127 Present value of minimum lease payments 1,294 Less current portion ( 221 ) Long-term portion $ 1,073 Lease costs recognized in the consolidated statements of operations for the three and nine months ended June 30, 2021 and 2020 is as follows (in thousands): Three Months Ended Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Right-of-use operating lease costs $ 67 $ 38 $ 178 $ 113 Short-term lease costs 52 78 192 229 Total $ 119 $ 116 $ 370 $ 342 Right-of-use operating lease costs and short-term lease costs are included as a component of total operating expenses. Other information related to operating leases is as follows (in thousands): Nine Months Ended June 30, 2021 June 30, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 142 $ 123 Operating lease assets obtained in exchange for new lease liabilities 1,336 219 Weighted average remaining lease term 5.8 years 0.8 year Weighted average discount rate 3.25 % 5.00 % The discount rate used on the operating right-of-use assets represented the Company’s incremental borrowing rate at lease inception. As Lessor The Company leases equipment to customers primarily for terms of six months or less. The majority of the Company’s rental revenue is generated from its marine-based wireless seismic data acquisition system. All of the Company’s leasing arrangements as lessor are classified as operating leases, except for one sales-type lease. See Note 5 for more information on the Company’s sales-type lease. The Company regularly evaluates the collectability of its lease receivables on a lease by lease basis. The evaluation primarily consists of reviewing past due account balances and other factors such as the credit quality of the customer, historical trends of the customer and current economic conditions. The Company suspends revenue recognition when the collectability of amounts due are no longer probable and concurrently records a direct write-off of the lease receivable to rental revenue and limits future rental revenue recognition to cash received. As of June 30, 2021, the Company’s trade accounts receivables included lease receivables of $ 4.8 million. 14 Rental revenue for the three and nine months ended June 30, 2021 was $ 5.4 million and $ 9.4 million, respectively. Rental revenue for the three and nine months ended June 30, 2020 was $ 15.7 million and $ 40.7 million, respectively. At June 30, 2021, future minimum lease obligations due from the Company’s leasing customers on operating leases (all in fiscal year 2021) were $ 6.4 million. Rental equipment consisted of the following (in thousands): June 30, 2021 September 30, 2020 Rental equipment, primarily wireless recording equipment $ 95,665 $ 114,783 Accumulated depreciation and impairment ( 53,803 ) ( 60,466 ) $ 41,862 $ 54,317 8. Asset Held for Sale The Company owns a property located in Bogot á , Colombia that it is marketing for sale. The property was used for warehousing its rental equipment operations, product sales and service support to its customers in South America. The property’s carrying value at June 30, 2021 and September 30, 2020 of $ 0.6 million is classified as an asset held for sale in the accompanying consolidated balance sheets as of June 30, 2021 and September 30, 2020. The Company has been marketing the property since the second quarter of fiscal year 2020. The Company believes the fair market value of the property exceeds its carrying value and that the property will be sold within the next 12-months. 9. Goodwill and Other Intangible Assets The Company’s consolidated goodwill and other intangible assets consisted of the following (in thousands): Weighted- Average Remaining Useful Lives (in years) June 30, 2021 September 30, 2020 Goodwill $ 4,337 $ 4,337 Other intangible assets: Developed technology 15.2 $ 5,918 $ 5,918 Customer relationships 1.2 3,900 3,900 Trade names 2.2 1,930 1,930 Non-compete agreements 1.2 170 170 Total other intangible assets 8.3 11,918 11,918 Accumulated amortization ( 4,886 ) ( 3,587 ) $ 7,032 $ 8,331 The Company’s goodwill is entirely associated with its Emerging Markets reporting unit. At June 30, 2021, the Company determined there were no triggering events requiring an impairment assessment of its goodwill and other intangible assets. The Company performs its annual goodwill impairment test in the fourth quarter. If the Company determines that the future cash flows anticipated to be generated from its Emerging Markets reporting unit will not be sufficient to recover the carrying amount of the reporting unit, it will need to recognize an impairment charge equal to the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying amount of the goodwill. Other intangible assets amortization expense was $ 0.4 million for each of the three months ended June 30, 2021 and 2020 and $ 1.3 million for each of the nine months ended June 30, 2021 and 2020. 15 As of June 30, 2021, future estimated amortization expense of other intangible assets is as follows (in thousands): For fiscal years ending September 30, 2021 (remainder) $ 433 2022 1,624 2023 714 2024 342 2025 329 Thereafter 3,590 $ 7,032 10. Stock-Based Compensation During the nine months ended June 30, 2021, the Company issued 189,950 restricted stock units (“RSUs”) under its 2014 Long Term Incentive Plan, as amended (the “Plan”). The RSUs issued include both time-based and performance-based vesting provisions. The weighted average grant date fair value of each RSU was $ 6.96 per unit. The grant date fair value of the RSUs was $ 1.3 million, which will be charged to expense over the next four years as the restrictions lapse. Compensation expense for RSUs was determined based on the closing market price of the Company’s stock on the date of grant applied to the total number of units that are anticipated to fully vest. Each RSU represents a contingent right to receive one share of the Company’s common stock upon vesting. As of June 30, 2021, the Company had unrecognized compensation expense of $ 2.7 million relating to RSUs that is expected to be recognized over a weighted average period of 2.6 years. As of June 30, 2021, the Company had $ 0.3 million of unrecognized compensation expense related to restricted stock awards (“RSAs”) that is expected to be recognized over a weighted average period of 0.6 years. As of June 30, 2021, there were 331,999 RSUs, 46,847 RSAs and 38,800 nonqualified stock options outstanding. 11. Loss Per Common Share The following table summarizes the calculation of net loss and weighted average common shares and common equivalent shares outstanding for purposes of the computation of loss per share (in thousands, except share and per share data): Three Months Ended Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net loss $ ( 787 ) $ ( 2,285 ) $ ( 9,021 ) $ ( 15,378 ) Less: Loss allocable to unvested restricted stock — — — — Loss attributable to common shareholders for diluted earnings per share $ ( 787 ) $ ( 2,285 ) $ ( 9,021 ) $ ( 15,378 ) Weighted average number of common share equivalents: Common shares used in basic loss per share 13,353,254 13,545,340 13,464,177 13,517,387 Common share equivalents outstanding related to stock options and RSUs — — — — Total weighted average common shares and common share equivalents used in diluted loss per share 13,353,254 13,545,340 13,464,177 13,517,387 Loss per share: Basic $ ( 0.06 ) $ ( 0.17 ) $ ( 0.67 ) $ ( 1.14 ) Diluted $ ( 0.06 ) $ ( 0.17 ) $ ( 0.67 ) $ ( 1.14 ) For the calculation of diluted loss per share for the three and nine months ended June 30, 2021, 38,800 stock options and 331,999 non-vested RSUs were excluded in the calculation of weighted average shares outstanding since their impact on diluted loss per share was antidilutive. For the calculation of diluted loss per share for the three and nine months ended June 30, 2020, 103,100 stock options and 264,375 non-vested RSUs, respectively, were excluded in the calculation of weighted average shares outstanding since their impact on diluted loss per share was antidilutive. 16 12. Commitments and Contingencies Contingent Consideration In connection with its acquisitions of Quantum Technology Sciences, Inc. (“Quantum”) and the OptoSeis ® fi ber optic sensing technology business, the Company recorded contingent purchase price payments, or contingent consideration, that may be owed in the future. For both acquisitions, the contingent payments are based on future receipt of contract awards and the resulting revenue derived from such contracts. The Company utilizes the services of independent valuation consultants to assist with the estimation of the fair value of this contingent consideration. The determination of fair value is inherently unpredictable since it requires estimates and projections of future revenue, including the size, length, timing and, in the case of Quantum, the extent of gross profits earned under its future contracts. As a result, the Company anticipates fair value adjustments to these liabilities over the respective earn-out periods, and these adjustments will result in either charges or credits to the Company’s operating expenses when the fair value of the contingent consideration increases or decreases, respectively. The Company recorded an initial contingent earn-out liability of $ 7.7 million in connection with its July 2018 acquisition of Quantum. Contingent payments, if any, may be paid in the form of cash or Company stock and will be derived from eligible revenue generated during a four-year earn-out period ending July 2022 . The maximum amount of contingent payments is $ 23.5 million over the four-year earn-out period. At September 30, 2020, the contingent earn-out liability was valued at $ 5.8 million. During the three and nine months ended June 30, 2021, the Company recorded adjustments of $ 0.9 million and $ 1.7 million, respectively, to decrease the liability to an estimated fair value of $ 4.1 million. The decrease in the earn-out liability was due to a decrease in projected eligible revenue. The Company made a cash earn-out payment 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 Company recorded an initial contingent earn-out liability of $ 4.3 million in connection with its November 2018 acquisition of all the intellectual property and related assets of the OptoSeis ® fiber optic sensing technology. Contingent cash payments, if any, will be derived from eligible revenue generated during a five-and-a-half year earn-out period ending in May 2024 . The maximum amount of contingent payments is $ 23.2 million over the five-and-a-half year earn-out period. At September 30, 2020, the contingent earn-out liability was valued at $ 5.2 million. During the nine months ended June 30, 2021, the Company recorded a net decrease of $ 17,000 to the liability, maintaining the liability’s estimated value of $ 5.2 million at June 30, 2021. The Company reviews and assesses the fair value of its contingent earn-out liabilities on a quarterly basis. Operating Leases The Company leases office space and certain equipment for terms of seven years or less. As of June 30, 2021, future minimum lease payment obligations were $ 1.4 million. Legal Proceedings The Company is involved in various pending legal actions in the ordinary course of its business. Management is unable to predict the ultimate outcome of these actions, because of the inherent uncertainty of such actions. However, management believes that the most probable, ultimate resolution of these pending matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. 13. Segment Information The Company reports and evaluates financial information for three operating segments: Oil and Gas Markets, Adjacent Markets and Emerging Markets. The Oil and Gas Markets segment products include wireless seismic data acquisition systems, reservoir characterization products and services, and traditional seismic exploration products such as geophones, hydrophones, leader wire, connectors, cables, marine streamer retrieval and steering devices and various other seismic products. The Adjacent Markets segment products include imaging equipment, water meter products, offshore cables, and seismic sensors used for vibration monitoring and geotechnical applications such as mine safety applications and earthquake detection. The Emerging Markets segment provides seismic products targeted at the border and perimeter security markets. 17 The following table summarizes the Company’s segment information (in thousands): Three Months Ended Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Revenue: Oil and Gas Markets $ 12,649 $ 17,509 $ 41,544 $ 47,452 Adjacent Markets 9,373 5,106 23,868 18,306 Emerging Markets 1,061 88 10,023 557 Total $ 23,083 $ 22,703 $ 75,435 $ 66,315 Income (loss) from operations: Oil and Gas Markets $ ( 1,807 ) $ 1,496 $ ( 13,258 ) $ ( 1,088 ) Adjacent Markets 1,997 605 4,819 2,670 Emerging Markets ( 4 ) ( 1,170 ) 5,286 ( 5,035 ) Corporate ( 2,625 ) ( 3,495 ) ( 8,921 ) ( 10,423 ) Total $ ( 2,439 ) $ ( 2,564 ) $ ( 12,074 ) $ ( 13,876 ) 14. Income Taxes Consolidated income tax expense for the three and nine months ended June 30, 2021 was $ 0.2 million and $ 0.3 million, respectively. Consolidated income tax expense for the three and nine months ended June 30, 2020 was $ 0.6 million and $ 2.6 million, respectively. This decrease in fiscal year 2021 income tax expense was primarily the result of a decrease in rental revenue earned in foreign jurisdictions requiring tax withholding. The Company is currently unable to record any tax benefits from the tax losses it incurs in the U.S., Canada and Russian Federation due to the uncertainty surrounding its ability to utilize such losses in the future to offset taxable income. 15. Risks and Uncertainties Concentration of Credit Risk As of June 30, 2021, the Company had combined trade accounts, financing receivables and unbilled receivables from three customers of $ 5.5 million, $ 6.1 million and $ 1.6 million, respectively. During the three months ended June 30, 2021, the revenue recognized from these three customers was $ 4.5 million, $ 0.4 million and $ 1.0 million, respectively. During the nine months ended June 30, 2021, revenue recognized from these three customers was $ 17.3 million, $ 13.2 million and $ 9.9 million, respectively. COVID-19 Pandemic The ongoing COVID-19 pandemic has spread across the globe and has negatively impacted worldwide economic activity, including the global demand for oil and natural gas, and continues to create challenges in the Company’s markets. In addition to measures the Company has taken voluntarily, the government authorities in the Company’s markets have taken actions to mitigate the spread of COVID-19, including travel restrictions, border closings, restrictions on public gatherings, stay-at-home orders and other quarantine and isolation measures. Following the initial outbreak of the virus, the Company experienced disruptions in its supply chain, a reduction in demand for certain products, cancellation of rental contracts and difficulty with field employees and salespeople traveling domestically and abroad to conduct the Company’s business. COVID-19 continues to pose the risk that the Company or its employees, contractors, suppliers and customers may be prevented from conducting business activities for an indefinite period of time. The effort to vaccinate the global population appears to be reducing the effects of COVID-19, but new mutations of the virus and the global unvaccinated population has allowed the continued spread of COVID–19. COVID-19 and the related mitigation measures have disrupted the Company’s supply chain, resulting in longer lead times in materials available from suppliers and extended the shipping time for these materials to reach the Company’s facilities. If COVID–19 continues to spread or the response to contain the COVID–19 pandemic is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and liquidity. Decrease in Oil Commodity Price Levels Demand for many of the Company’s products and the profitability of its operations depend primarily on the level of worldwide oil and gas exploration activity. Prevailing oil and gas prices, with an emphasis on crude oil prices, and market expectations regarding potential changes in such prices significantly affect the level of worldwide oil and gas exploration activity. During periods of improved energy commodity prices, the capital spending budgets of oil and natural gas operators tend to expand, which results in increased demand for our customers services leading to increased demand in the Company’s products. Conversely, in 18 periods when these energy commodity prices deteriorate, capital spending budgets of oil and natural gas operators tend to contract causing demand for the Company’s products to weaken. Historically, the markets for oil and gas have been volatile and are subject to wide fluctuations in response to changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond its control. These factors include the level of consumer demand, regional and international economic conditions, weather conditions, domestic and foreign governmental regulations (including those related to climate change), price and availability of alternative fuels, political conditions, instability and hostilities in the Middle East and other significant oil-producing regions, increases and decreases in the supply of oil and gas, the effect of worldwide energy conservation measures and the ability of OPEC to set and maintain production levels and prices of foreign imports. Sustained low oil prices or the failure of oil prices to rise in the future and the resulting downturns or lack of growth in the energy industry and energy‑related business, could have a negative impact on the Company’s results of operations and financial condition. In light of the decline in oil prices caused by the COVID-19 pandemic in 2020, oil and gas exploration and production companies experienced a significant reduction in cash flows, which resulted in reductions in their capital spending budgets for oil and gas exploration-focused activities, including seismic data acquisition activities. Demand for the sale of the Company’s seismic products targeted at customers in its Oil and Gas Markets segment, which has historically accounted for the majority of its revenue, significantly declined during fiscal year 2020, and both product sales and rental revenue could significantly diminish during the remainder of fiscal year 2021 or beyond as a result of significant uncertainty in the outlook for oil and gas exploration. Specifically, the Company expects these challenging industry conditions to result in decreased demand for its marine wireless nodal products and its land-based seismic products, as the demand for such products has been, and will likely continue to be, vulnerable to downturns in the economy and the oil and gas industry in general. In addition to the negative effects of slowdowns in the United States economy, slowing economic growth in growing economies like those in China and India could lead to a decline in demand for crude oil and natural gas. Slowdowns in economic activity would likely reduce worldwide demand for energy and result in an extended period of lower crude oil and natural gas prices. Any material changes in oil and gas prices or other market trends that adversely impact seismic exploration activity would likely affect the demand for the Company’s products and could materially and adversely affect its results of operations and liquidity. Generally, imbalances in the supply and demand for oil and gas will affect oil and gas prices and, in such circumstances, demand for the Company’s oil and gas products may be adversely affected when world supplies exceed demand. 16. Subsequent Event On July 2, 2021 , the Company acquired 100 percent of the outstanding membership interest of Aquana, LLC, a comprehensive wireless water monitoring and control system provider (“Aquana”). Aquana will operate as a wholly-owned subsidiary of the Company and reside in the Company’s Adjacent Markets business segment. The acquisition purchase price for Aquana consisted of an initial cash down payment at closing of approximately $ 1.4 million, subject to adjustment, and additional contingent cash payments over a six year earn-out period. The contingent cash payments will be derived from revenue generated during the earn-out period from products and services sold by Aquana. The fair value of the contingent consideration has not yet been determined. 19