What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-11-19 compared with 2020-11-20 · 157 added, 155 removed, 134 unchanged (70% of the section changed)

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Statements that contain these words should be read carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other forward-looking information.

Examples of forward-looking statements include, among others, statements that we make regarding our expected operating results, the 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 PRM systems, future demand for OBX systems, the completion of new orders for our channels of our GCL system, the fulfillment of customer payment obligations, the impact of the coronavirus (COVID-19) pandemic, the Company’s ability to manage changes and the continued health or availability of management personnel, volatility and 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 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 PRM systems, future demand for OBX systems, the completion of new orders for our channels of our GCL system, the fulfillment of customer payment obligations, the impact of and the recovery from the impact of the coronavirus (or COVID-19) pandemic, the Company’s 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”, as well as cautionary language in this Annual Report on Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

Such examples include, but are not limited to, the failure of the Quantum or OptoSeis ® 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, lack of further orders for our OBX systems, failure of our Quantum products to be adopted by the border and perimeter security market, infringement or failure to protect intellectual property.

The occurrence of the events described in these risk factors and elsewhere in this Annual Report on Form 10-K could have a material adverse effect on our business, results of operations and financial position, and actual events and results of operations may vary

materially from our current expectations.

We assume no obligation to revise or update any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future developments or otherwise.

Such examples include, but are not limited to, the failure of the Quantum or OptoSeis ® or Aquana technology transactions to yield positive operating results, decreases in commodity price levels and continued adverse impact of COVID-19 which could reduce demand for our products, the failure of our products to achieve market acceptance (despite substantial investment by us) our sensitivity to short term backlog, delayed or cancelled customer orders, product obsolescence resulting from poor industry conditions or new technologies, bad debt write-offs associated with customer accounts, inability to collect on promissory notes, lack of further orders for our OBX systems, failure of our Quantum products to be adopted by the border and perimeter security market, or a decrease in such market due to governmental changes, and infringement or failure to protect intellectual property.

We design and manufacture seismic instruments and equipment and primarily market these products to the oil and gas industry to locate, characterize and monitor hydrocarbon producing reservoirs.

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As we have reported in the past, our revenue and operating profits have varied significantly from quarter-to-quarter, and even year-to-year, and are expected to continue that trend in the future, especially when our quarterly or annual financial results are impacted by the presence or absence of relatively large, but somewhat erratic, sales of our oil and gas PRM systems and/or wireless seismic data acquisition systems for land and marine applications.

Our revenue and results of operations have not been materially impacted by inflation or changing prices in the past two fiscal years.

We report and evaluate financial information for three segments:

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Total revenue

Operating income (loss)

Operating loss

Adjacent Markets

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Emerging Markets

Operating loss

Operating income (loss)

Operating loss

Consolidated Totals

Operating income (loss)

In 2014, our Oil and Gas Markets segment experienced a softening in the demand for its traditional exploration products, particularly in North America, as capital budgets for oil and gas producers were trending away from exploration-focused activities toward production and exploitation activities.

During this period oil production in North America’s unconventional shale reservoirs increased, as did oil production from other non-OPEC countries, resulting in an oversupply of crude oil in the world market and a resulting drop in energy prices.

Early in 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 which have subsequently recovered to some extent.

To date the effect of the COVID-19 pandemic has resulted in a global drop in demand for oil and gas.

Operating loss

Although in an already depressed oil and gas industry, demand further decreased in February 2020 because of the oversupply of crude oil due to failed OPEC negotiations that led to a dramatic drop in crude oil prices when combined with the impact of the COVID-19 pandemic.

These declines in the demand for oil and gas have caused oil and gas exploration and production companies to experience a significant reduction in cash flows, which have resulted in and will likely continue to result in reductions in their capital spending budgets for oil and gas exploration-focused activities, including seismic data acquisition activities.

Our Oil and Gas Markets segment has in recent years experienced strong demand for the rental of our marine wireless nodal products;

however, this demand could

significantly diminish during fiscal year 2021 or beyond as a result of the significant uncertainty in the outlook for oil and gas exploration.

however, this demand has significantly declined during the first half of fiscal year 2021 and could continue to decline in future years as a result of the significant uncertainty in the outlook for oil and gas exploration.

Demand for new land-based seismic equipment in recent fiscal years has remained restrained due to capital limitations affecting many of our customers, along with their excess levels of underutilized equipment.

As a result, revenue from the sale and rental of our land-based traditional and wireless products has remained low due to the reduced investment in exploration-focused seismic activities.

We expect these challenging industry conditions will result in revenue from our traditional and land-based wireless products to remain below historical norms.

Policies implemented by the Biden administration in the United States could also result in decreased demand for our products.

President Biden has announced climate change as a core focus of his administration and that he intends to set the United States on a path to net-zero carbon emissions by 2050.

In January of 2021, President Biden implemented a hold on issuing new drilling permits and new oil and gas leasing for federal lands and waters.

The administration may also implement new or amended rules and regulations concerning hydraulic fracturing and emissions from oil and gas sector operations.

Crude oil prices have recently rebounded above February 2020 levels;

however, a lag in time typically occurs between higher oil prices and greater demand for our Oil and Gas Markets segment products.

Lasting higher levels of oil and gas commodity pricing may not stabilize in the long term, thus continuing the challenging industry conditions we have experienced in previous fiscal years.

We only expect improved market conditions when we see lasting stabilization of higher crude oil commodity prices, which should result in higher revenue from our Oil and Gas Markets segment products.

In light of current market conditions, the inventory balances in our Oil and Gas Markets business segment at September 30, 2021 continued to exceed levels we consider appropriate for the current level of product demand.

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Coronavirus (COVID-19)

In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide.

The spread of COVID-19 has resulted in most governments issuing restrictive orders, including “shelter in place” orders around the globe to assist in mitigating the spread of the virus.

The ongoing COVID-19 pandemic has spread across the globe and has negatively impacted worldwide economic activity, including the global demand for oil and natural gas, and continues to create challenges in our markets.

While we continue to support our customers, there remain uncertainties regarding the duration and the extent to which the COVID-19 pandemic will ultimately have a negative impact on the demand for our products and services or on our supply chain.

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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 Adjacent Markets segment which we believe are primarily the result of the pandemic.

We have also experienced a reduction in demand for certain products, cancellation of rental contracts and difficulty with field employees and salespeople traveling domestically and abroad to conduct our business.

The current low oil and gas price environment may be intensified and prolonged by the COVID-19 pandemic and is increasing the risk and financial stress placed on our customers.

We cannot reasonably estimate the length or severity of this pandemic, or the extent to which COVID-19 will affect our business, financial condition and results of operations in fiscal year 2021 and beyond.

Cost Reduction Initiative

In July 2020, we initiated a program to reduce operating and manufacturing expenses in light of decreased demand for products in our Oil and Gas Markets and Adjacent Markets segments.

The program is expected to produce approximately $2.0 million of annualized cash savings.

The cost reductions were primarily realized through a reduction of employees from our workforce.

In connection with the workforce reductions, we incurred $0.9 million of termination costs in our fourth quarter of fiscal year 2020.

The termination costs were recorded to both cost of revenue and operating expenses in the consolidated statement of operations.

There are no outstanding liabilities related to this program as of September 30, 2020.

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

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

Fiscal Year 2021 Compared to Fiscal Year 2020

Consolidated revenue for fiscal year 2020 was $87.8 million, a decrease of $8.0 million, or 8.3%, from fiscal year 2019.

While we experienced reduced demand for most of our product categories due to the factors cited above, the decrease was primarily caused by an $8.0 million charge to (or reduction of) revenue related to the impairment of an operating lease receivable resulting from the rental of our marine seismic equipment.

Consolidated revenue for fiscal year 2021 was $94.9 million, an increase of $7.0 million, or 8.0%, from fiscal year 2020.

The increase in revenue 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) $10.1 million of revenue recognized on our contract with the CBP from our Emerging Markets business segment, which was awarded to us in fiscal year 2020, and (iv) a $7.0 million increase in both industrial and imaging product revenue from our Adjacent Markets business segment.

These increases in revenue were largely offset by a $34.7 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 fiscal year 2021 was $16.3 million, a decrease of $7.1 million, or 30.5%, from fiscal year 2020.

The decrease in gross profit was also primarily caused by the $8.0 million charge to (or reduction of) revenue related to the impairment of an operating lease receivable resulting from the rental of our marine seismic equipment.

Consolidated operating expenses for fiscal year 2020 were $41.5 million, an increase of $4.0 million, or 10.8%, from fiscal year 2019.

The increase in operating costs were primarily due to (i) a $3.2 million net non-cash increase in the estimated fair value of contingent earn-out consideration related to our Quantum and OptoSeis ® acquisitions, (ii) $0.9 in personnel related termination costs associated with our workforce reduction, (iii) $0.4 million of incremental research and development costs associated with our acquisition of the OptoSeis ® business in November 2018 and (iv) a $0.7 million goodwill impairment charge.

These increases in operating expenses were partially offset by a $0.4 million decrease in bad debt expense.

In August 2019, we sold our real property located at 7334 N.

Gessner in Houston, Texas which generated a $7.0 million gain on disposal of property in the fourth quarter of fiscal year 2019.

The buyer occupied the property as a tenant under a long-term lease.

The property was not strategic to our ongoing operations.

The decrease in gross profit 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 fiscal year 2021 were $33.2 million, a decrease of $8.3 million, or 20.0%, from fiscal year 2020.

The decrease was due to (i) a $4.6 million net non-cash decrease in the estimated fair value of contingent earn-out consideration related to our Quantum and OptoSeis ® acquisitions, (ii) a $1.5 million decrease in personnel costs primarily related to our cost reduction program initiated in the third quarter of fiscal year 2020, (iii) a $0.7 million reduction in research and development project costs, (iv) a $0.8 million reduction in other general business expenses and (v) a $0.7 million reduction in goodwill impairment charges.

Consolidated other income for fiscal year 2021 was $3.4 million compared to $1.4 million from fiscal year 2020.

The increase was primarily caused by an increase in foreign exchange gains, and was partially offset by a decrease in interest income.

Consolidated income tax expense for fiscal year 2020 and 2019 was $2.6 million and $2.4 million, respectively.

This increase in income tax expense was primarily the result of an increase in rental revenue earned in foreign jurisdictions requiring tax withholding.

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

Consolidated income tax expense for fiscal year 2021 was $0.6 million compared to $2.6 million from fiscal year 2020.

This decrease in income tax expense was primarily the result of a decrease in rental revenue earned in foreign jurisdictions requiring tax withholding.

We are currently unable to record any tax benefits from the tax losses we incur in the U.S., Canada and Russian Federation due to the uncertainty surrounding our ability to utilize such losses in the future to offset taxable income.

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Revenue from our Oil and Gas Markets products for fiscal year 2021 decreased $9.4 million, or 15.3%, from fiscal year 2020.

The components of these decreases included the following:

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 this decrease included the following:

Traditional Exploration Product Revenue – Revenue from our traditional products decreased $2.1 million, or 32.1% from the prior fiscal year.

The decrease reflects lower demand for our sensor products and a decrease in customer product repair and support service revenue.

Wireless Exploration Product Revenue – Revenue from our wireless exploration products increased $1.3 million, or 2.5%, from the prior fiscal year.

Excluding an $8.0 million charge to (or reduction of) revenue related to the impairment of an operating lease receivable, our wireless exploration product revenue increased by $9.3 million, or 17.6%.

The revenue increase primarily resulted from higher rental demand for our OBX systems.

The increase was partially offset by a decrease in the recognition of revenue from an international seismic marine customer and lower GSX product revenue.

Reservoir Product Revenue – Revenue from our reservoir products decreased $1.8 million, or 65.2%, from the prior fiscal year.

The decrease for both periods was primarily due to a decrease in sales of our borehole products and lower service revenue.

During the second quarter of fiscal year 2020, we partially financed a $12.5 million product sale by entering into a $10.0 million promissory note with a customer.

The promissory note is for a three-year term with monthly principal and interest payments of $0.3 million.

Due to the financial condition of the customer, we have concerns over the probable collectability of the promissory note.

As a result, we did not recognize any revenue or cost of revenue on the product sale.

Through September 30, 2020 we have received payments from the customer totaling $4.6 million (exclusive of interest) related to the sale, which are reflected on our accompanying consolidated balance sheet as non-current deferred revenue.

Management does not intend to recognize the revenue and cost of revenue from the sale until it becomes probable that the customer will satisfy its financial obligation under the promissory note.

Operating Income ( L oss)

Operating income (loss) from our Oil and Gas Markets products for fiscal year 2020 was $(2.1) million, compared to $3.1 million from the prior fiscal year.

The decrease in our operating income was primarily the result of an $8.0 million charge related to the impairment of an operating lease receivable.

The decrease was also attributable to $0.7 million in termination costs related to the Company’s fourth quarter fiscal year 2020 workforce reduction and a $0.7 million goodwill impairment charge.

The decrease in operating income was partially offset by an increase in gross profit attributable higher rental revenue and a $0.7 million decrease in non-cash charges related to changes in the estimated fair value of contingent earn-out consideration related to our OptoSeis acquisition.

The decrease primarily reflects lower demand for our marine products and lower rental utilization of our traditional products.

The decrease was partially offset by an increase in demand for our sensor products.

Wireless Exploration Product Revenue – Revenue from our wireless exploration products decreased $8.3 million, or 15.4%, from the prior fiscal year.

The decrease was primarily due to a $35.5 million 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.

decrease was partially offset by (i) the recognition of $12.5 million of revenue related to the sale of 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 q uarter sale of land-based wireless seismic products .

Operating Loss

Operating loss from our Oil and Gas Markets products for fiscal year 2021 was $(16.2) million, an increase of $(14.1) million from the prior fiscal year.

The increase in operating loss was primarily due to lower wireless rental revenue and related gross profits from the rental of our OBX systems driven by the continued depreciation of our rental fleet.

The increase in operating loss 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.

The decrease was also attributable to net non-cash adjustments of $0.9 million related to the decrease in the estimated fair value of contingent earn-out consideration related to our OptoSeis ® acquisition and a $0.7 million reduction in goodwill impairment expense related to an impairment charge recorded in fiscal year 2020.

Adjacent Markets

Fiscal Year 2021 Compared to Fiscal Year 2020

Revenue from our Adjacent Markets products for fiscal year 2020 decreased $4.7 million, or 15.6%, from the prior fiscal year.

The components of this decrease included the following:

Industrial Product Revenue and Services – Revenue from our industrial products decreased $2.7 million, or 14.7%, from the prior fiscal year.

The decrease was due to lower demand for our industrial sensor and water meter products and contract manufacturing services as a result of the COVID-19 pandemic.

We cannot reasonably estimate the impact the COVID-19 will have on the future demand for our industrial products and services.

Imaging Product Revenue – Revenue from our imaging products decreased $2.0 million, or 17.0%, from the prior fiscal year.

The decrease was primarily due to a decline in sales of our film products as a result of the COVID-19 pandemic.

The decrease was also attributable to unforeseen delays in the production of certain imaging equipment.

We cannot reasonably estimate the impact COVID-19 will have on the future demand for our imaging products.

Revenue from our Adjacent Markets products for fiscal year 2021 increased $7.0 million, or 27.4%, from the prior fiscal year.

While we experienced an increase in the demand for our Adjacent Markets products and services during fiscal year 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 and the supply chain for our Adjacent Markets products and services.

The components of this increase included the following:

Industrial Product Revenue and Services – Revenue from our industrial products increased $5.7 million, or 36.6%, from the prior fiscal year.

The increase was primarily due to higher demand for water meter products and contract manufacturing services.

Imaging Product Revenue – Revenue from our imaging products increased $1.3 million, or 12.9%, from the prior fiscal year.

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

Operating Income

Operating income from our Adjacent Markets products for fiscal year 2020 was $4.0 million, a decrease of $2.2 million, or 35.6%, from the prior fiscal year.

The decrease was primarily due a decrease in gross profit caused by the decline in industrial and imaging product revenue.

Operating income from our Adjacent Markets products for fiscal year 2021 was $6.4 million, an increase of $2.4 million, or 59.9%, from the prior fiscal year.

The increase was primarily due an increase in both industrial and imaging product revenue and related gross profits.

Emerging Markets

Fiscal Year 2021 Compared to Fiscal Year 2020

On July 27, 2018, we entered the border and perimeter security market through our acquisition of Quantum.

In connection with our Quantum acquisition, we established the Emerging Markets business segment, which currently includes only Quantum.

Revenue from our Emerging Markets products for fiscal year 2021 was $10.2 million, compared to $0.7 million from the prior fiscal year.

The increase in revenue was primarily attributable to (i) the sale of border and perimeter security products to a commercial customer and (ii) site preparation and engineering related to a U.S.

Customs and Border Protection U.S.

Border Patrol contract.

In April 2020, Quantum was awarded a $10 million contract with the U.S.

Customs and Border Protection U.S.

Border Patrol to provide a technology solution to the Department of Homeland Security.

The Company expects most of the revenue from this contract will be recognized during the first six months of fiscal year 2021.

Operating Loss

Operating loss from our Emerging Markets products for fiscal year 2020 was $6.1 million, an increase of $3.8 million from the prior fiscal year.

The increase was primarily due to non-cash charges of $1.0 million in fiscal year 2020 for changes in the estimated fair value of contingent earn-out consideration related to our Quantum acquisition, compared to $(2.9) million of non-cash credits in the prior year.

During fiscal year 2020, Quantum also experienced an increase in product development costs which were offset by an increase in gross profits attributable to its higher revenue.

Quantum’s operating expenses for each of fiscal years 2020 and 2019 included intangible asset amortization expenses of $1.2 million.

The increase 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 September 30, 2021, unrecognized revenue related to this contract was approximately $0.1 million, which is expected to be recognized during the first quarter of 2022.

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

– Mexico border to assess the legality of the funding, contracting methods, as well as the consequences of stopping the construction.

It remains uncertain at this time whether the executive order will result in a temporary halt or permanent cessation of the construction.

The new Biden administration may implement new or different policies or take further executive action regarding border security that could change the demand for our perimeter and security products.

Operating Income (Loss)

Operating income (loss) from our Emerging Markets products for fiscal year 2021 was $5.0 million, an increase of $11.1 million from the prior fiscal year.

The increase in operating income for fiscal year 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 of $3.7 million related to the

decrease in the estimated fair value of contingent earn-out consideration related to the Quantum acquisition .

Since its acquisition in July 2018, Quantum has primarily focused on product development activities, and the marketing of its technologies to government agencies and other end users.

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Fiscal Year 2021

At September 30, 2021, we had approximately $23.6 million in cash and cash equivalents and short-term investments.

For fiscal year 2021, we used $7.2 million of cash from operating activities.

Our net loss of $14.1 million was offset by net non-cash charges of $22.2 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 $6.7 million gross profit from the sale of used rental equipment and the removal of a $2.0 million gain resulting from the sale of our investment in a debt security since the proceeds related to both of these transactions are included in investing activities, (ii) a $7.7 million increase in inventories primarily for the maintenance and upgrade of OBX rental products and components, (iii) a $4.0 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, (iv) a $1.1 million increase in unbilled receivables related to our contract with the CBP and (v) a $5.1 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 $4.7 million increase in accounts payable due to the increase in inventories and the timing of payments to suppliers and (ii) a $5.4 million increase in deferred cost of revenue and other assets primarily due to recognition of cost of revenue on the land-based wireless product sale and the prepayment of insurance premiums.

For fiscal year 2021, we used cash of $3.3 million in investing activities.

Uses of cash included (i) net disbursements of $9.4 million for purchases of short-term investments, (ii) $3.2 million for additions to our property, plant and equipment and (iii) $2.1 million for additions to our equipment rental fleet.

Sources of cash included (i) $10.6 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 2022 to be approximately $4 million.

Depending on demand for our OBX marine rental equipment, we expect fiscal year 2021 cash investments into our rental fleet to be approximately $3 million.

Our capital expenditures are expected to be funded from our cash on hand, internal cash flows, cash flows from our rental contracts or, if necessary, borrowings under a potential new credit facility arrangement, if any.

For fiscal year 2021, we used $6.8 million from financing activities for the purchase of treasury stock pursuant to a stock buy-back program authorized by our board of directors.

The program authorizes us to repurchase up to $7.5 million of our common stock in open market transactions.

At September 30, 2021, approximately $0.7 million of our common stock remains available for repurchases under the program.

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

Our interest in the bond, which had 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 was secured by a third in line lien on the assets owned by the customer and had an 8% interest rate with bi-annual interest and possible principal payments based on excess available cash flow.

Interest payments could be made either in cash or in-kind payments in the form of additional debt security.

In-kind interest payments required an 8.8% interest rate.

The bond’s scheduled maturity date was July 13, 2022.

The bond was listed on the Oslo Alternative Bond Market;

however, the actual marketability was unknown.

Based on the distressed financial condition of the customer, we believed the fair value of the bond was nominal.

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

Pursuant to the Agreement, we transferred the bond to the Buyer in exchange for non-refundable consideration of $0.3 million and were entitled to receive additional cash compensation of $2.4 million from the Buyer if certain terms and conditions between the Buyer and our customer were met by December 31, 2021.

In the event these terms and conditions were not met, we had the option to reacquire the bond from the Buyer for one US dollar ($1.00).

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, cash equivalents and short-term investments totaled $23.6 million at September 30, 2021, which included $5.2 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 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, the credit agreement was amended 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.

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

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

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

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

At September 30, 2021, we had no outstanding borrowings under our credit agreement.

In October 2021, Frost Bank notified us that they will not be extending our credit agreement upon its expiration in April 2022, and in November 2021 we elected to cancel the agreement.

We are currently in negotiations with multiple lenders for a new credit facility arrangement;

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

The lack of a credit facility could negatively impact our liquidity and 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, cash equivalents and short-term investments will be sufficient to finance any future operating losses and planned capital expenditures through the next twelve months.

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, borrowings under a potential new credit facility arrangement, if any, leveraging or sales of real estate assets, sales of rental assets and other liquidity sources which may be available to us.

Fiscal Year 2020

At September 30, 2020, we had approximately $32.7 million in cash and cash equivalents.

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These uses of cash were partially offset by (i) $4.1 million of proceeds from the sale of rental equipment and (ii) $0.2 million of proceeds from the sale of equipment.

Fiscal year 2021 cash investments in property, plant and equipment could be approximately $5 million.

Fiscal year 2021 cash investments into our rental fleet will primarily be dependent on demand for our OBX marine rental equipment.

Our capital expenditures are expected to be funded from our cash on hand, internal cash flows, cash flows from our rental contracts or, if necessary, from borrowings under our credit agreement.

For fiscal year 2020 we used $0.1 million from financing activities for the payment of contingent consideration related to our acquisition of Quantum in 2018.

Since 2014, the oil and gas industry has experienced a sustained downturn due to low oil and gas prices.

Recently, the unprecedented sharp decline in crude oil prices since February 2020 has further impacted the overall condition of the oil and gas industry, stifling budgets targeted at the oil and gas exploration industry, including the seismic industry.

Prior to recent downturn we saw some signs of increased seismic activity in certain areas around the world;

however, we expect the need for new seismic equipment to remain restrained due to current industry conditions, capital limitations affecting many of our customers and excessive on-hand quantities of under-utilized customer-owned seismic equipment.

Further, we expect product sales of our Oil and Gas Markets products—specifically our legacy land-based traditional and wireless products—to remain low until the oil and gas industry begins to show signs of recovery and exploration-focused seismic activities increase.

However, oil and gas pricing and the resultant economic conditions may not recover meaningfully in the near term, and we expect these challenging industry conditions facing our land-based traditional and legacy wireless 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.

Our interest in the bond, which has a face value of $13.0 million, was received in exchange for $13.0 million of unpaid invoices and late fees owed by the customer.

The bond is secured by a third in line lien on the assets owned by the customer and has an 8% interest rate with bi-annual interest and possible principal payments based on excess available cash flow.

Interest payments can be made either in cash or in-kind payments in the form of additional debt security.

In-kind interest payments require an 8.8% interest rate.

The bond matures July 13, 2022.

The bond is listed on the Oslo Alternative Bond Market;

however, the actual marketability is unknown at this time.

Based on the distressed financial condition of the customer, we believe the fair value of the bond is nominal and we have not recorded a carrying amount for this bond at September 30, 2020.

Our available cash and cash equivalents totaled $32.7 million at September 30, 2020, which included $5.8 million of cash and cash equivalents held by our foreign subsidiaries and branch offices.

We have determined that we are not required to pay any transition tax on the undistributed earnings of our foreign subsidiaries since we had no accumulated foreign earnings on a consolidated basis.

Our credit agreement allows for borrowings of up to $30.0 million with such amounts available for borrowing determined by a borrowing base.

In November 2019, we amended the credit agreement to (i) extend the maturity date from April 2020 to April 2022, (ii) increase the unencumbered liquid assets covenant threshold from $5 million to $10 million commencing with the fiscal quarter ending December 31, 2020 and for each fiscal quarter thereafter, (iii) increase the tangible net worth requirement from $140 million to $145 million commencing with the fiscal quarter ending December 31, 2020 and for each fiscal quarter thereafter and (iv) remove the requirement that we obtain the consent of Frost Bank prior to paying dividends or repurchasing stock so long as we are in compliance with the covenants of the credit agreement.

At September 30, 2020, we had no outstanding borrowings under the credit agreement and our borrowing availability under the credit facility pursuant to the credit agreement, based on the borrowing base calculation as of September 30, 2020, was $ 17.7 million.

At September 30, 2020, we were in compliance with all covenants under the credit agreement.

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

however, we can make no assurance that we will not do so.

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.

Fiscal Year 2019

At September 30, 2019, we had approximately $18.9 million in cash and cash equivalents and short-term investments.

For fiscal year 2019, we generated $5.6 million of cash from operating activities.

Our net loss of $0.1 million included net non-cash charges of $24.6 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.

These net non-cash charges were partially offset by (i) a $9.2 million increase in trade accounts and financing receivables resulting from the increase in revenue and delays in collecting funds owed from a rental customer, (ii) a $1.9 million increase in inventories for the production of recently introduced land-based wireless seismic products, (iii) the removal of a $7.1 million gain from the sale of real property and equipment since such gains are reflected in the proceeds from the sale of property and equipment under investing activities and (iv) a $1.0 decrease in deferred revenue due to the revenue recognition of customer deposits on rental contracts.

For fiscal year 2019, we generated cash of $1.6 million from investing activities.

Sources of cash included (i) $25.6 million of proceeds from the sale of short-term investments, (ii) $8.3 million of proceeds from the sale of a real property (iii) $4.9 million of proceeds from the sale of rental equipment and (iv) $0.5 million of proceeds, net of payments, from a property-related insurance claim.

These sources of cash were partially offset by (i) $34.1 million investment in our rental equipment primarily to expand our OBX rental fleet, (ii) $1.9 million for additions to our property, plant and equipment and (iii) $1.8 million for the acquisition of the intellectual property and related assets of the OptoSeis ® fiber optic sensing technology business.

For fiscal year 2019, we generated cash proceeds of $0.2 million from financing activities from the exercise of stock options by our employees.

We had no long-term debt outstanding throughout the fiscal year ended September 30, 2019.

Off-Balance Sheet Arrangements

We do not have any obligations which meet the definition of an off-balance sheet arrangement and which have or are reasonably likely to have a current or future effect on our financial statements or the items contained therein that are material to investors.

Contractual Obligations

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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 $5.8 million as of September 30, 2020.

Subsequent to the acquisition, we have reduced the estimated contingent earn-out liability to $0.8 million as of September 30, 2021 as a result of $1.5 million of earn-out payments made through September 2021 (with an additional $0.8 million payable) and $4.6 million of reductions in the value of expected future earn-out payments.

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.

The Company made cash earn-out payments of $0.1 million in fiscal year 2020.

We made cash earn-out payments of $1.4 million and $0.1 million in fiscal year 2021 and 2020, respectively, to the former shareholders of Quantum.

The Company made an additional earn-out payment of $0.8 million in October 2021.

The maximum amount of contingent payments is $23.5 million.

We recorded an initial contingent earn-out liability of $4.3 million in connection with our November 2018 acquisition of all the intellectual property and related assets of the OptoSeis ® fiber optic sensing technology.

Subsequent to the acquisition, we increased the estimated contingent earn-out liability to $5.2 million as of September 30, 2020.

Subsequent to the acquisition, we have increased the estimated contingent earn-out liability to $4.4 million at September 30, 2021 as a result of a $0.1 million net increase in the value of the expected future earn-out payments.

Contingent cash payments, if any, will be derived from eligible revenue generated during a five-and-a-half year post-acquisition earn-out period ending in May 2024.

No payments have been made to date related to the earn-out.

In order for revenue to be considered eligible, sales contracts must be entered into during the first four years of the earn-out period ending in November 2022.

No payments have been made to date related to the continent earn-out liability.

The maximum amount of contingent payments is $23.2 million.

We will reassess the earn-out calculations related to this contingent consideration in future periods.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Contingent Compensation Costs

In connection with the acquisition of Aquana in July 2021, we are subject to additional contingent cash payments to the former members of Aquana, LLC.

over a six-year earn-out period.

The contingent payments, if any, will be derived from certain eligible revenue generated during the earn-out period from products and services sold by Aquana.

There is no maximum limit to the contingent cash payments that could be made.

The merger agreement with Aquana requires the continued employment of a certain key employee and former member of Aquana, LLC for the first four years of the six year earn-out period in order for any of Aquana’s former members to be eligible to any earn-out payments.

As discussed in Note 3 of the accompanying consolidated financial statements, due to the continued employment requirement, no liability has been recorded for the estimated fair value of contingent earn-out payments for this transaction.

Earn-outs achieved, if any, will be recorded as compensation expense when incurred.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

We consider many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements.

We continually evaluate our estimates, including those related to revenue recognition, bad debt reserves, inventory obsolescence reserves, self-insurance reserves for medical

expenses, product warranty reserves, contingent consideration, stock-based compensation and deferred income tax assets.

We continually evaluate our estimates, including those related to revenue recognition, bad debt reserves, inventory obsolescence reserves, goodwill and long-lived asset impairment and contingent consideration.

We base our estimates on historical experience and various other factors, including the impact from the current economic conditions that we believe to be reasonable under the circumstances.

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If the carrying value of the asset group exceeds the expected future cash flows, an impairment loss is recognized to the extent that the carrying value of the asset group exceeds its fair value.

Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability.

In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions as well as by the Internal Revenue Service.

In management’s opinion, adequate provisions for income taxes have been made for all open tax years.

The potential outcomes of examinations are regularly assessed in determining the adequacy of the provision for income taxes and income tax liabilities.

Management believes that adequate provisions have been made for reasonable and foreseeable outcomes related to uncertain tax matters.

We conduct our evaluation of goodwill at the reporting unit level on an annual basis as of September 30 and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value.

The guidance on the testing of goodwill for impairment provides the option to first assess qualitative factors to determine if the fair value of a reporting unit exceeds its carrying amount.

If, based on the qualitative assessment of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is more than its carrying amount then it is not necessary to perform a quantitative assessment.

However, if an entity concludes otherwise, then a quantitative assessment must be performed.

If, based on the quantitative

assessment, we determine that the fair value of a reporting unit is less that its carrying amount, a goodwill impairment is recognized equal to the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying amount of the goodwill.

We record a write-down of our inventories when the cost basis of any manufactured product, including any estimated future costs to complete the manufacturing process, exceeds its net realizable value.

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The value of our inventories not expected to be realized in cash, sold or consumed during our next operating cycle are classified as non-current assets in our consolidated balance sheets.

We established contingent earn-out liabilities in connection with its acquisition of Quantum in fiscal year 2018 and the OptoSeis ® fiber optic sensing technology business fiscal year 2019.

The estimated earn-outs payments are remeasured to fair value on a quarterly basis.

We utilize the services of an independent valuation consultant to assist with the remeasurement of our contingent consideration, which includes estimates and projections of future revenue, including the size, length, and timing of future contracts.

Adjustments to the liabilities are included as a component of earnings.

We recognize revenue from product sales and services in accordance with ASC Topic 606, Revenue from Contracts with Customers .

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As further discussed above, there remains uncertainties regarding the duration and to what extent the COVID-19 pandemic will ultimately impact the demand for our products and services or with our supply chain.

Regarding our Oil and Gas Markets business segment, prices for a barrel of WTI crude oil declined from over $100 in July 2014 to approximately $26 in February 2016, and have recovered to approximately $40 today.

With this substantial net decline in crude oil prices and the recent reduced global demand for oil and gas as a result of the COVID-19 pandemic, oil and gas exploration and production companies experienced a significant reduction in cash flows resulting in sharp reductions in their capital spending budgets for oil and gas exploration-focused activities including seismic data acquisition activities.

While we have experienced strong marine nodal rental activity in recent years including fiscal year 2020, the need for new seismic equipment, particularly land-based equipment, remains restrained due to our customers’ (i) limited capital resources, (ii) lack of visibility into future demand for their seismic services and (iii) in some cases, under-utilized legacy equipment.

Regarding our Oil and Gas Markets business segment, demand for our products are subject to volatile fluctuations in crude oil prices.

As a result of substantial declines in crude oil prices in recent years combined with the recent reduced global demand for oil and gas as a result of the COVID-19 pandemic, oil and gas exploration and production companies experienced a significant reduction in cash flows resulting in sharp reductions in their capital spending budgets for oil and gas exploration-focused activities including seismic data acquisition activities.

legacy equipment.

Crude oil prices have recently rebounded;

however, lasting higher levels of oil and gas commodity pricing may not stabilize in the long term, thus continuing the challenging industry conditions we have experienced in previous fiscal years.

Many of our land-based traditional seismic products can be damaged, destroyed or otherwise consumed during our customer’s field operations.

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We believe our “GCL”, which is a new version of our land-based wireless data recorder, will be a market leader similar to our GSX wireless unit.

While it is uncertain what revenue impact the GCL will have during fiscal year 2021 in light of the tepid market demand for oil and gas seismic services and equipment, we expect our fiscal year 2021 land-based wireless product revenue to moderately exceed the levels we achieved in fiscal year 2020.

It is uncertain what revenue impact the GCL will have during fiscal year 2022 in light of the tepid market demand for oil and gas seismic services and equipment.

We do not expect our land-based wireless product revenue to exceed the levels achieved in fiscal year 2021.

The vast majority of our oil and gas rental revenue in fiscal year 2021 was derived from short-term rentals of our OBX ocean-bottom recorder.

We believe our OBX rental revenue may decrease substantially in fiscal year 2021 primarily due to the expiration of several rental contracts in fiscal year 2020 and indications from a customer considering the purchase of a substantial quantity of OBX units currently being rented, in addition to the consequences of the COVID-19 pandemic.

Although we anticipate more rental contracts for our OBX equipment will be entered into in fiscal year 2021, we can make no assurance in this regard.

We believe our OBX rental revenue will increase substantially in fiscal year 2022 as a result of rental contracts executed during fiscal year 2021 and anticipated new rental contracts, but we can make no assurance in this regard.

We believe that fiscal year 2022 revenue from our oil and gas reservoir products, and principally our borehole tools and services, to increase slightly over fiscal year 2021 levels.

In the fourth quarter of fiscal year 2020, we received a request from a major oil and gas producer to propose on the manufacture of a large-scale seabed PRM system.

We are in the process of responding to this request and we believe the potential customer will grant the award in the second or third quarter of fiscal year 2021.

If we are awarded the contract, revenue from this contract will most likely not be recognized until latter part of fiscal year 2021, if any;

fiscal year 2022 and beyond.

We expect fiscal year 2021 revenue from our Adjacent Markets products to increase over fiscal year 2020 levels.

Demand for our adjacent markets products in fiscal year 2020 were negatively impacted by the COVID-19 pandemic.

Although we cannot accurately determine the impact the COVID-19 pandemic will have on our fiscal year 2021 revenue, we are optimistic that demand for both our industrial, imaging products and contract manufacturing services will increase in fiscal year 2021.

We expect fiscal year 2021 revenue from our Emerging Markets products to increase over fiscal year 2020 primarily as a result of the contract awarded to Quantum from the U.S.

In September 2020, we received a request from a major oil and gas producer for a proposal to manufacture a large-scale seabed PRM system.

Under the offered terms and conditions as initially presented, we decided not to provide a bid.

In August 2021, we received a revised request from the producer and are in the process of responding to this request.

We believe the potential customer may grant the award in the second quarter of fiscal year 2022.

If we are awarded the contract, revenue from this contract will most likely not be recognized until the latter part of fiscal year 2022, if any;

fiscal year 2023 and 2024.

We expect fiscal year 2022 revenue from our Adjacent Markets products to increase over fiscal year 2021 levels largely due to our acquisition of Aquana.

We are optimistic that demand for our industrial, imaging products and contract manufacturing services will increase in fiscal year 2022.

We expect fiscal year 2022 revenue from our Emerging Markets products to match fiscal year 2021 levels.

We are optimistic that Quantum we will be awarded a second contract from the U.S.

Customs and Border Protection U.S.

Border Patrol to provide a technology solution to the Department of Homeland Security.

The Company expects most of the revenue from this contract will be recognized during the first six months of fiscal year 2021.

Quantitative and Qualitative Disclosures about Market Risk

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What changed 10-K

Item 7. Management’s Discussion and Analysis