GEOSPACE TECHNOLOGIES CORP 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management is responsible for establishing and maintaining a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Notwithstanding the foregoing, there can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in our reports. In connection with the preparation of this Annual Report on Form 10-K, we carried out an evaluation under the supervision and with the participation of our management, including the CEO and CFO, as of September 30, 2021 of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective as of September 30, 2021. 28 Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework (2013) . Based on this assessment, our management concluded that, as of September 30, 2021, our internal control over financial reporting is effective based on those criteria. Changes in Internal Control Over Financial Reporting There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. 29 PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item is contained in our definitive Proxy Statement to be distributed within 120 days of September 30, 2021 in connection with our 2022 Annual Meeting of Stockholders under the captions “Election of Directors,” “Executive Officers and Compensation,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics” and is incorporated herein by reference. Item 11. Executive Compensation The information required by this Item is contained in our definitive Proxy Statement to be distributed within 120 days of September 30, 2021 in connection with our 2022 Annual Meeting of Stockholders under the caption “Executive Officers and Compensation” and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is contained in our definitive Proxy Statement to be distributed within 120 days of September 30, 2021 in connection with our 2022 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference, and in Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” contained in Part II hereof. Item 13. Certain Relationships and Related Transactions and Director Independence The information required by this Item is contained in our definitive Proxy Statement to be distributed within 120 days of September 30, 2021 in connection with our 2022 Annual Meeting of Stockholders under the caption “Certain Relationships and Related Transactions” and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this Item is contained in our definitive Proxy Statement to be distributed within 120 days of September 30, 2021 in connection with our 2022 Annual Meeting of Stockholders under the caption “Independent Public Accountants” and is incorporated herein by reference. 30 PART IV Item 15. Exhibits and Financial Statement Schedules Financial Statements and Financial Statement Schedules The financial statements and financial statement schedules listed on the accompanying Index to Financial Statements (see page F-1) are filed as part of this Annual Report on Form 10-K. Exhibits Exhibit Number Description of Documents 3.1 Amended and Restated Certificate of Formation of Geospace Technologies Corporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed May 8, 2015). 3.2 Amended and Restated Bylaws of Geospace Technologies Corporation (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed August 8, 2019). 10.1 Employment Agreement dated as of August 1, 1997, between the Company and Michael J. Sheen (incorporated by reference to the Registrant’s Registration Statement on Form S-1 filed September 30, 1997 (Registration No. 333-36727)).* 10.2 Employment Agreement effective as of January 1, 2012, by and between OYO Geospace Corporation and Walter R. Wheeler (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed December 9, 2011).* 10.3 Employment Agreement effective as of January 1, 2012, by and between OYO Geospace Corporation and Robbin B. Adams (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed December 9, 2011).* 10.4 Employment Agreement effective as of January 1, 2012, by and between OYO Geospace Corporation and Thomas T. McEntire (incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed December 9, 2011).* 10.5 Geospace Technologies Corporation 2014 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A filed December 11, 2013).* 10.6 First Amendment to the Geospace Technologies Corporation 2014 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A filed December 30, 2020).* 10.7 Form of Employee Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Form S-8 filed May 21, 2014).* 10.8 Form of Employee Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 26, 2018).* 10.9 Form of Employee Incentive Stock Option Award Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Form S-8 filed May 21, 2014).* 10.10 Form of Employee Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.3 to the Registrant’s Form S-8 filed May 21, 2014).* 10.11 Form of Performance Option Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 20, 2015).* 10.12 Form of Consultant Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.4 to the Registrant’s Form S-8 filed May 21, 2014).* 10.13 Form of Consultant Stock Option Award Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s Form S-8 filed May 21, 2014).* 10.14 Form of Director Stock Option Award Agreement (incorporated by reference to Exhibit 10.6 to the Registrant’s Form S-8 filed May 21, 2014).* 10.15 Form of Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.7 to the Registrant’s Form S-8 filed May 21, 2014).* 10.16 Form of Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q filed May 3, 2019).* 31 Exhibit Number Description of Documents 10.17 Form of Employee Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 26, 2018).* 10.18 Form of Amended and Restated Indemnity Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 26, 2015).* 10.19 Geospace Technologies Corporation Annual Bonus Program (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the year ended September 30, 2017 filed December 1, 2017).* 10.20 First Amendment effective October 1, 2008 to Employment Agreement dated as of August 1, 1997, between the Company and Michael J. Sheen (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2009, filed February 5, 2010).* 10.21 Second Amendment effective November 17, 2020 to Employment Agreement dated as of August 1, 1997, between the Company and Michael J. Sheen (incorporated by reference to the Registrant’s Current Report on Form 8-K filed November 23, 2020, File No.: 001-13601).* 10.22 Loan Agreement dated September 27, 2013 among Geospace Technologies Corporation, as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed October 1, 2013). 10.23 First Amendment to Loan Agreement effective September 27, 2013 among Geospace Technologies Corporation, as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed December 18, 2013). 10.24 Second Amendment to the Loan Agreement effective May 4, 2015 by and between Geospace Technologies Corporation as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed May 8, 2015) . 10.25 Third Amendment to the Loan Agreement effective May 9, 2017 by and between Geospace Technologies Corporation as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year ended September 30, 2018 filed December 1, 2017). 10.26 Fourth Amendment to Loan Agreement dated October 25, 2017 among Geospace Technologies Corporation, as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 27, 2017). 10.27 Fifth Amendment to Loan Agreement dated November 9, 2018 among Geospace Technologies Corporation, as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed November 13, 2018). 10.28 Sixth Amendment to Loan Agreement dated March 29, 2019 among Geospace Technologies Corporation, as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed March 29, 2019). 10.29 Seventh Amendment to Loan Agreement dated November 15, 2019 among Geospace Technologies Corporation, as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed November 18, 2019, File No.: 001-13601). 10.30 Eight Amendment to Loan Agreement dated March 25, 2021 among Geospace Technologies Corporation, as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed March 29, 2021, File No.: 001-13601). 10.31 Revolving Promissory Note effective May 4, 2015 by and between Geospace Technologies Corporation as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed May 8, 2015). 10.32 Waiver and Consent Letter to Loan Agreement effective April 6, 2015 among Geospace Technologies Corporation as borrower, certain subsidiaries of Geospace Technologies Corporation, as guarantors, and Frost Bank, as lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed April 7, 2015). 32 Exhibit Number Description of Documents 10.33 Commercial Contract – Improved Property, dated June 3, 2019 by and between GTC, Inc. and Harmony Public Schools (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 3, 2019). 10.34 Consulting Agreement dated November 21, 2019 between Geospace Technologies Corporation and Thomas T. McEntire (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 22, 2019, File No.: 001-13601). 14.1 General Code of Business Conduct and Supplemental Code of Ethics for CEO and Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Registrant’s Current Report on Form 8-K filed February 6, 2019). 21.1 Subsidiaries of the Registrant.** 23.1 Consent of RSM US LLP.** 31.1 Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** 31.2 Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** 32.1 Certification of the Company’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 32.2 Certification of the Company’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101 The following financial information from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets as of September 30, 2021 and September 30, 2020, (ii) the Consolidated Statements of Operations for the years ended September 30, 2021 and 2020, (iii) the Consolidated Statements of Comprehensive Loss for the years ended September 30, 2021 and 2020, (iv) the Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2021 and 2020, (v) the Consolidated Statements of Cash Flows for the years ended September 30, 2021 and 2020 and (vi) Notes to Consolidated Financial Statements.** 104 The cover page from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021 formatted in Inline XBRL. ** * This exhibit is a management contract or a compensatory plan or arrangement. ** Filed herewith. Item 16. Form 10-K Summary None. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GEOSPACE TECHNOLOGIES CORPORATION By: /s/ WALTER R. WHEELER Walter R. Wheeler, Director, President and Chief Executive Officer November 19, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ WALTER R. WHEELER Director, President and Chief Executive Officer November 19, 2021 Walter R. Wheeler (Principal Executive Officer) /s/ ROBERT L. CURDA Vice President, Chief Financial Officer and Secretary November 19, 2021 Robert L. Curda (Principal Financial Officer and Principal Accounting Officer) /s/ GARY D. OWENS Chairman of the Board November 19, 2021 Gary D. Owens /s/ KENNETH ASBURY Director November 19, 2021 Kenneth Asbury /s/ MARGARET S. ASHWORTH Director November 19, 2021 Margaret S. Ashworth /s/ THOMAS L. DAVIS Director November 19, 2021 Thomas L. Davis /s/ EDGAR R. GIESINGER, JR. Director November 19, 2021 Edgar R. Giesinger, Jr. /s/ TINA M. LANGTRY Director November 19, 2021 Tina M. Langtry /s/ RICHARD F. MILES Director November 19, 2021 Richard F. Miles /s/ MICHAEL J. SHEEN Director November 19, 2021 Michael J. Sheen 34 GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Reports of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of September 30, 2021 and 202 0 F-6 Consolidated Statements of Operations for the Years Ended September 30, 2021 and 202 0 F-7 Consolidated Statements of Comprehensive Loss for the Years Ended September 30, 2021 and 202 0 F-8 Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2021 and 202 0 F-9 Consolidated Statements of Cash Flows for the Years Ended September 30, 2021 and 202 0 F-10 Notes to Consolidated Financial Statements F-11 Schedule II—Valuation and Qualifying Accounts F-35 F-1 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Geospace Technologies Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Geospace Technologies Corporation and its subsidiaries (the Company) as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Inventory Valuation As described in Note 1 to the consolidated financial statements, the Company’s consolidated inventories balance, which is stated at lower of cost or net realizable value, was $34.3 million as of September 30, 2021. The valuation of inventories is based on the Company’s periodic review of the composition of its inventories to determine if market demand, product modifications, technology changes, excessive quantities on-hand and other factors hinder its ability to recover its investment in such inventories. The Company’s assessment is based upon historical product demand, estimated future product demand and various other judgments and estimates. Inventory obsolescence reserves are recorded when such assessments reveal that portions or components of the Company’s investment will not be realized in its operating activities. We identified the valuation of inventories at the lower of cost or net realizable value as a critical audit matter due to the significant judgment and estimates required by management. Determining whether a decline in value has occurred requires management to make complex judgments related to (i) historical and estimated future product demand in relation to quantities on hand and (ii) obsolescence of certain products based on changes in technology and demand. Auditing these judgments is especially challenging and involved significant auditor judgment due to fluctuations in sales trends and evolving customer demands. Our audit procedures related to the Company’s valuation of inventory included the following, among others: • We tested the reasonableness of management’s projections by comparing management’s estimates to historical results and tested the completeness and accuracy of the data used in the calculation. F-2 • We tested the mathematical accuracy of the calculation of the net realizable value by reperforming the calculation based on usage reports and inventory listings. • We evaluated management’s process for subsequent adjustment to the net realizable value reserves by testing the subsequent increases in the inventory values after the net realizable value had been established. • We compared actual purchases and sales data on an individual item basis and aggregated to perform an independent assessment of the net realizable value of inventory. Valuation of Goodwill– Emerging Markets Reporting Unit As discussed in Note 11 to the consolidated financial statements, the Company assessed $4.3 million of goodwill associated with its Emerging Markets reporting unit for impairment. The fair value of the reporting unit was estimated by management using the expected present value of future cash flows and judgments, market data and using estimates, judgments and assumptions that management believe are appropriate in the circumstances. Key assumptions in the impairment analysis include revenue and cash flow projections, discount rates, long-term growth rates, and the effective tax rate. In determining the fair value of the Company’s Emerging Markets reporting unit, estimated future cash flows include the Company’s ability to obtain an additional contract with its significant customer. We identified the valuation of goodwill for the Emerging Market's reporting unit as a critical audit matter because of the significant assumptions management makes in determining the estimate, including revenue and cash flow projections and the discount rate utilized. Auditing management’s assumptions of revenue and cash flow projections and the discount rate involved a high degree of auditor judgment and increased audit effort, including the use of valuation specialists, as changes in these assumptions could have a significant impact on the fair value of the Emerging Market's reporting unit and potential impairment charges. Our audit procedures related to the Company’s valuation of goodwill for the Emerging Markets reporting unit included the following, among others: • We evaluated the reasonableness of management’s revenue and cash flow projections by comparing management’s prior forecasts to historical results for the Company. • We evaluated management’s revenue projections by comparing to historical results and inquiry of management of the reporting unit regarding additional contracts with its significant customer. • With the assistance of our valuation specialists, we evaluated the reasonableness of the Company’s valuation methodology and the discount rates utilized by comparing them to comparable companies and market data. Valuation of Contingent Consideration – OptoSeis As described in Note 18 to the consolidated financial statements, the Company recognized contingent consideration related to the acquisition of the OptoSeis fiber optic sensing technology business in November 2018. The Company recorded the initial fair value of the contingent consideration as a liability on the acquisition date. The estimated earn-out payments are subsequently remeasured to fair value at each reporting date based on the estimated future earnings associated with the acquired entity. As of September 30, 2021, the contingent consideration liability related to OptoSeis was $4.4 million. The Company utilizes the services of independent valuation consultants to assist with the estimation of the fair value of the contingent consideration, which includes estimates and projections of future revenue, including the size, length, and timing of its future contracts. We identified the valuation of contingent consideration related to OptoSeis as a critical audit matter because of the significant assumptions management makes when selecting a valuation model and determining the estimate, including the projections of future revenue, including the size, length and timing of future contracts. Auditing management’s assumptions of revenue projections and the discount rate involved a high degree of auditor judgment and increased audit effort, including the use of valuation specialists, as changes in these assumptions could have a significant impact on the fair value of the contingent consideration. Our audit procedures related to the Company’s valuation of contingent consideration related to OptoSeis included the following, among others: • We tested management’s process for estimating the fair value of the contingent consideration, which included evaluating the significant assumptions related to estimated future customer demand and associated revenue and testing the completeness and accuracy of data used in the models. • We utilized an internal valuation specialist to assist in: o Evaluating the appropriateness of the valuation models utilized by management, and o Developing independent estimates of the discount rates based on publicly available market data and comparing the resulting reporting unit fair values to management’s estimates. F-3 /s/ RSM US LLP We have served as the Company's auditor since 2018. Houston, TX November 19, 2021 F-4 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Geospace Technologies Corporation Our audits of the consolidated financial statements referred to in our report dated November 19, 2021, (included elsewhere in this Annual Report on Form 10-K) also included the financial statement schedule of Geospace Technologies Corporation and its subsidiaries, listed in Item 15(a) of this Form 10-K. This schedule is the responsibility of Geospace Technologies Corporation's management. Our responsibility is to express an opinion based on our audits of the consolidated financial statements. In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ RSM US LLP Houston, Texas November 19, 2021 F-5 Geospace Technologies Corporation and Subsidiaries Consolidated Balance Sheets (In thousands, except share amounts) AS OF SEPTEMBER 30, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 14,066 $ 32,686 Short-term investments 9,496 — Trade accounts and financing receivables, net of allowance of $ 428 and $ 496 17,159 13,778 Unbilled receivables 1,051 — Inventories, net 16,196 16,933 Property held for sale — 587 Prepaid expenses and other current assets 2,062 953 Total current assets 60,030 64,937 Non-current financing receivables 2,938 — Non-current inventories, net 18,103 16,930 Rental equipment, net 38,905 54,317 Property, plant and equipment, net 29,983 29,874 Operating right-of-use assets 1,191 — Goodwill 5,072 4,337 Other intangible assets, net 7,250 8,331 Deferred cost of revenue and other assets 457 8,119 Total assets $ 163,929 $ 186,845 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable trade $ 6,391 $ 1,593 Earn-out consideration payable 807 — Operating lease liabilities 225 — Deferred revenue and other current liabilities 7,799 8,753 Total current liabilities 15,222 10,346 Non-current contingent consideration 5,210 10,962 Non-current operating lease liabilities 1,009 — Non-current deferred revenue and other liabilities 31 4,567 Total liabilities 21,472 25,875 Commitments and contingencies (Note 18) Stockholders’ equity: Preferred stock, 1,000,000 shares authorized, no shares issued and outstanding — — Common stock, $ .01 par value, 20,000,000 shares authorized, 13,738,971 and 13,670,639 shares issued, respectively; and 12,969,542 and 13,670,639 shares outstanding, respectively 137 137 Additional paid-in capital 92,935 90,965 Retained earnings 72,510 86,566 Accumulated other comprehensive loss ( 16,320 ) ( 16,698 ) Treasury stock, at cost, 769,429 shares at September 30, 2021 ( 6,805 ) — Total stockholders’ equity 142,457 160,970 Total liabilities and stockholders’ equity $ 163,929 $ 186,845 The accompanying notes are an integral part of the consolidated financial statements. F-6 Geospace Technologies Corporation and Subsidiaries Consolidated Statements of Operations (In thousands, except share and per share amounts) YEAR ENDED SEPTEMBER 30, 2021 2020 Revenue: Products $ 75,864 $ 34,136 Rental equipment 19,000 53,699 Total revenue 94,864 87,835 Cost of revenue: Products 58,884 39,970 Rental equipment 19,686 24,433 Total cost of revenue 78,570 64,403 Gross profit 16,294 23,432 Operating expenses: Selling, general and administrative 21,926 23,068 Research and development 14,839 16,569 Goodwill impairment — 671 Change in estimated fair value of contingent consideration ( 3,524 ) 1,100 Bad debt expense (recovery) ( 76 ) 63 Total operating expenses 33,165 41,471 Loss from operations ( 16,871 ) ( 18,039 ) Other income (expense): Interest expense — ( 38 ) Interest income 1,441 1,102 Gain on investments, net 1,993 — Foreign exchange gains (losses), net ( 41 ) 491 Other, net — ( 109 ) Total other income, net 3,393 1,446 Loss before income taxes ( 13,478 ) ( 16,593 ) Income tax expense 578 2,649 Net loss $ ( 14,056 ) $ ( 19,242 ) Loss per common share: Basic $ ( 1.05 ) $ ( 1.42 ) Diluted $ ( 1.05 ) $ ( 1.42 ) Weighted average common shares outstanding: Basic 13,358,930 13,525,179 Diluted 13,358,930 13,525,179 The accompanying notes are an integral part of the consolidated financial statements. F-7 Geospace Technologies Corporation and Subsidiaries Consolidated Statements of Comprehensive Loss (In thousands) YEAR ENDED SEPTEMBER 30, 2021 2020 Net loss $ ( 14,056 ) $ ( 19,242 ) Other comprehensive loss: Change in unrealized losses on available-for-sale securities, net of tax ( 15 ) — Foreign currency translation adjustments 393 ( 941 ) Total other comprehensive income (loss) 378 ( 941 ) Total comprehensive loss $ ( 13,678 ) $ ( 20,183 ) The accompanying notes are an integral part of the consolidated financial statements. F-8 Geospace Technologies Corporation and Subsidiaries Consolidated Statements of Stockholders’ Equity For the years ended September 30, 2021 and 2020 (In thousands, except share amounts) Common Stock Accumulated Shares Amount Additional Paid-In Capital Retained Earnings Other Comprehensive Loss Treasury Stock Total Balance at October 1, 2019 13,630,666 $ 136 $ 88,660 $ 105,808 $ ( 15,757 ) $ — $ 178,847 Net loss — — — ( 19,242 ) — — ( 19,242 ) Other comprehensive loss — — — — ( 941 ) — ( 941 ) Issuance of common stock pursuant to the vesting of restricted stock units 41,723 1 — — — — 1 Forfeiture of restricted stock ( 1,750 ) — — — — — — Stock-based compensation — — 2,305 — — — 2,305 Balance at September 30, 2020 13,670,639 137 90,965 86,566 ( 16,698 ) — 160,970 Net loss — — — ( 14,056 ) — — ( 14,056 ) Other comprehensive income — — — — 378 — 378 Issuance of common stock pursuant to the vesting of restricted stock units 70,832 — — — — — — Forfeiture of restricted stock ( 2,500 ) — — — — — — Purchase of treasury stock ( 769,429 ) — — — — ( 6,805 ) ( 6,805 ) Stock-based compensation — — 1,970 — — — 1,970 Balance at September 30, 2021 12,969,542 $ 137 $ 92,935 $ 72,510 $ ( 16,320 ) $ ( 6,805 ) $ 142,457 The accompanying notes are an integral part of the consolidated financial statements. F-9 Geospace Technologies Corporation and Subsidiaries Consolidated Statements of Cash Flows (In thousands) YEAR ENDED SEPTEMBER 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 14,056 ) $ ( 19,242 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Deferred income tax expense 3 181 Rental equipment depreciation 15,075 17,945 Property, plant and equipment depreciation 3,956 4,016 Amortization of intangible assets 1,746 1,732 Goodwill impairment expense — 671 Accretion of discounts on short-term investments 96 — Stock-based compensation expense 1,970 2,305 Bad debt expense (recovery) ( 76 ) 63 Inventory obsolescence expense 3,001 4,726 Change in estimate of collectability of rental revenue — 7,993 Change in estimated fair value of contingent consideration ( 3,524 ) 1,100 Gross profit from sale of used rental equipment ( 6,678 ) ( 743 ) Gain on disposal of property, plant and equipment — ( 116 ) Realized gain on sale of investments, net ( 1,993 ) — Effects of changes in operating assets and liabilities: Trade accounts and notes receivables ( 2,973 ) 2,482 Unbilled receivables ( 1,051 ) — Inventories ( 7,674 ) 5 Deferred cost of revenue and other assets 5,368 ( 7,786 ) Accounts payable trade 4,712 ( 2,453 ) Deferred revenue and other liabilities ( 5,074 ) 5,243 Net cash provided by (used in) operating activities ( 7,172 ) 18,122 Cash flows from investing activities: Purchase of property, plant and equipment ( 3,188 ) ( 2,916 ) Investment in rental equipment ( 2,121 ) ( 5,487 ) Proceeds from the sale of property, plant and equipment 16 204 Proceeds from the sale of used rental equipment 10,626 4,149 Purchase of short-term investments ( 12,544 ) — Proceeds from the sale of short-term investments 3,170 — Business acquisition, net of acquired cash ( 1,346 ) — Proceeds from sale of investment in debt security 2,069 — Net cash used in investing activities ( 3,318 ) ( 4,050 ) Cash flows from financing activities: Payments on contingent consideration ( 1,421 ) ( 78 ) Purchase of treasury stock ( 6,805 ) — Net cash used in financing activities ( 8,226 ) ( 78 ) Effect of exchange rate changes on cash 96 ( 233 ) Increase (decrease) in cash and cash equivalents ( 18,620 ) 13,761 Cash and cash equivalents, beginning of fiscal year 32,686 18,925 Cash and cash equivalents, end of fiscal year $ 14,066 $ 32,686 The accompanying notes are an integral part of the consolidated financial statements. F-10 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies: The Company Geospace Technologies Corporation (“Geospace”) designs and manufactures instruments and equipment used by the oil and gas industry to acquire seismic data in order to locate, characterize and monitor hydrocarbon producing reservoirs. Geospace also designs and manufactures Adjacent Markets products including industrial products, imaging equipment, and provides contract manufacturing services, and Emerging Market products consisting of border and perimeter security products. Geospace and its subsidiaries are referred to collectively as the “Company”. Basis of Presentation The accompanying financial statements present the consolidated financial position, results of operations and cash flows of the Company in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated. 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 September 30, 2021 cash and cash equivalents included $ 5.2 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. Concentrations of Credit and Supplier Risk The Company maintains its cash in bank deposit accounts that, at times, exceed federally insured limits. Management of the Company believes that the financial strength of the financial institutions holding such deposits minimizes the credit risk of such deposits. The Company sells products to customers throughout the United States and various foreign countries. The Company’s normal credit terms for trade receivables are 30 days. In certain situations, credit terms may be extended to 60 days or longer. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for its trade receivables. Additionally, the Company provides long-term financing in the form of promissory notes and sales-type leases when competitive conditions require such financing. In such cases, the Company may require collateral. Allowances are recognized for potential credit losses. Three customers comprised 19.8 %, 16.4 % and 10.6 %, of the Company’s revenue during fiscal year 2021. At September 30, 2021, the Company had trade accounts, financing receivables and unbilled receivables from these customers of $ 4.9 million, $ 7.4 million (of which $ 2.1 million was long-term) and $ 1.1 million, respectively. One of the Company’s major customers in fiscal year 2021 also comprised 48.2 % of the Company’s revenue during fiscal year 2020. At September 30, 2020, the Company had trade account receivables due from this customer of $ 7.3 million. Certain models of the Company’s oil and gas marine wireless products require a timing device it purchases from a United States manufacturer. The Company currently does not possess the ability to manufacture this component and has no other reliable source for this device. If this manufacturer were to discontinue its production of this timing device, were to become unwilling to contract with the Company on competitive terms or were unable to supply the component in sufficient quantities to meet its requirements, the Company’s ability to compete in the marine wireless marketplace could be impaired, which could adversely affect its financial performance. The device is used in certain models of the Company’s rental equipment. The Company had no product sales requiring this device in fiscal year 2021. F-11 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) The Company purchases all of its thermal film from one manufacturer for its imaging products. Except for the film sold to the Company by this manufacturer, the Company knows of no other source for thermal film that performs as well in its imaging equipment. If the manufacturer were to discontinue producing thermal film, were to become unwilling to contract with the Company on competitive terms or were unable to supply thermal film in sufficient quantities to meet its requirements, the Company’s ability to compete in the direct thermal imaging marketplace could be impaired, which could adversely affect its financial performance. Thermal film sales represented approximately 7 % of the Company’s revenue in fiscal year 202 1 . Inventories The Company records a write-down of its inventories when the cost basis of any manufactured product, including any estimated future costs to complete the manufacturing process, exceeds its net realizable value. Inventories are stated at the lower of cost or net realizable value. Cost is determined on the first-in, first-out method, except that certain of the Company’s foreign subsidiaries use an average cost method to value their inventories. The Company periodically reviews the composition of its inventories to determine if market demand, product modifications, technology changes, excessive quantities on-hand and other factors hinder our ability to recover its investment in such inventories. The Company’s assessment is based upon historical product demand, estimated future product demand and various other judgments and estimates. Inventory obsolescence reserves are recorded when such assessments reveal that portions or components of the Company’s inventory investment will not be realized in its operating activities. The Company reviews it inventories for classification purposes. The value of inventories not expected to be realized in cash, sold or consumed during its next operating cycle are classified as noncurrent assets. Property, Plant and Equipment and Rental Equipment Property, plant and equipment and rental equipment are stated at cost. Depreciation expense is calculated using the straight-line method over the following estimated useful lives: Years Rental equipment 2-5 Property, plant and equipment: Machinery and equipment 3-15 Buildings and building improvements 10-50 Other 5-10 Expenditures for renewals and betterments are capitalized. Repairs and maintenance expenditures are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss thereon is reflected in the statements of operations. Impairment of Long-lived Assets The Company’s long-lived assets are reviewed for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable. The impairment review, if necessary, includes a comparison of expected future cash flows (undiscounted and without interest charges) to be generated by an asset group with the associated carrying value of the related assets. 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. Impairment charges are included as a component of cost of revenue in the Company’s consolidated statements of operations. Goodwill The Company conducts its 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, the Company determines that the fair value of a reporting unit is less that its carrying amount, a goodwill F-12 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) 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 . Other Intangible Assets Intangible assets are carried at cost, net of accumulated amortization. The estimated useful life of the Company’s other intangible assets are evaluated each reporting period to determine whether events or circumstances warrant a revision to the remaining amortization period. If the estimate of an intangible asset’s remaining useful life is changed, the amortization period should be changed prospectively. Amortization expense is calculated using the straight-line method over the following estimated useful lives: Years Developed technology 18 Trade names 5 Customer relationships 4 Non-compete agreements 4 Revenue Recognition See Note 2 to these consolidated financial statements. Contingent Consideration The Company established earn-out liabilities in connection with its business acquisitions in fiscal year 2018 and 2019. The Company engaged the services of a valuation firm to measure the initial fair value of the earn-out liabilities as of the acquisition date for each business. The valuation technique used to measure the fair value of the liability was derived from models utilizing market observable inputs, internal estimates and the use of internal projections of future revenue and/or gross profits. The Company reviews the fair value of its contingent earn-out liabilities on a quarterly basis. Adjustments to the liabilities, if any, are included as a component of earnings in the consolidated statements of operations. See Note 18 to these consolidated financial statements for additional information. Research and Development Costs The Company expenses research and development costs as incurred. Research and development costs include salaries, employee benefit costs, department supplies, direct project costs and other related costs. Product Warranties Most of the Company’s products do not require installation assistance or sophisticated instructions. The Company offers a standard product warranty obligating it to repair or replace equipment with manufacturing defects. The Company maintains a reserve for future warranty costs based on historical experience or, in the absence of historical product experience, management’s estimates. Reserves for future warranty costs are included within deferred revenue and other current liabilities on the consolidated balance sheets. Changes in the product warranty reserve are reflected in the following table (in thousands): Balance at October 1, 2019 $ 229 Accruals for warranties issued during the year 790 Settlements made (in cash or in kind) during the year ( 761 ) Balance at September 30, 2020 258 Accruals for warranties issued during the year 814 Settlements made (in cash or in kind) during the year ( 693 ) Balance at September 30, 2021 $ 379 F-13 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) Stock-Based Compensation The Company accounts for stock-based compensation, including grants of restricted awards and unqualified stock options in accordance with Accounting Standards Codification Topic 718, which requires that all share-based payments (to the extent that they are compensatory) be recognized as an expense in the Company’s consolidated statements of operations based on their fair values on the award date and the estimated number of shares it ultimately expects to vest. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award. The Company’s stock-based compensation plan and awards are more fully described in Note 15 to these consolidated financial statements. Foreign Currency Gains and Losses The assets and liabilities of the Company’s foreign subsidiaries and branch offices that have a foreign currency as their functional currency have been translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations have been translated using the average exchange rates during the year. Resulting translation adjustments have been recorded as a component of accumulated other comprehensive loss in stockholders’ equity. Foreign currency transaction gains and losses are included in the statements of operations as they occur. Transaction gains and losses on intra-entity foreign currency transactions and balances, including advances and demand notes payable on which settlement is not planned or anticipated in the foreseeable future, are recorded in “accumulated other comprehensive loss” on our consolidated balance sheets. Fair Value Fair value is the price that would be received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. U.S. generally accepted accounting principles (“GAAP”) has established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input that is significant to the fair value measurement. Level 1 represents unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 represents quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly. Level 3 represents valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Income Taxes Income taxes are presented in accordance with the Accounting Standards Codification Topic 740 (“Topic 740”) guidance for accounting for income taxes. The estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carrybacks and carryforwards are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company periodically reviews the recoverability of tax assets recorded on the balance sheet and provides valuation allowances if it is more likely than not that such assets will not be realized. The Company follows the guidance of Topic 740 to analyze all tax positions that are less than certain. Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In accordance with Topic 740, the Company recognizes in its financial statements the impact of a tax position if that position is “more likely than not” to be sustained on audit, based on the technical merits of the position. The Company’s estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company classifies interest and penalties associated with the payment of income taxes, if any, in the Other Income (Expense) section of its consolidated statements of operations. The Company incurred no interest or penalties for the fiscal years ended September 30, 2021 and 2020. 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 F-14 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) 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 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 does not expect the adoption of this guidance to have a material impact on its 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 records deferred revenue when customer funds are received prior to shipment or delivery or performance has not yet occurred. 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 and there is not a significant right of return. 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 ASC 606, 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. The Company incurred shipping and handling expenses of $ 0.4 million and $ 0.3 million, respectively, for the fiscal years ended September 30, 2021 and 2020, respectively. 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 Bureau of Customs and Border Patrol (the “CBP”) to provide a technology solution to the Department of Homeland Security. Revenue recognized under the contract for fiscal year 2020 and 2021 was $ 0.3 million and $ 10.1 million, respectively. The Company had unbilled receivables of $ 1.1 million at September 30, 2021 under this contract. Unrecognized revenue for unsatisfied performance obligations on this contract at September 30, 2021 was approximately $ 0.1 million. The Company anticipates the revenue on the remaining performance obligation on this contract will be recognized in the first quarter F-15 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) of fiscal year 2022 . Unsatisfied performance obligations on all other contracts held by the Company at September 3 0, 2021 had an original duration of one year or less. At September 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 fiscal years ended September 30, 2021 and 2020, no revenue and $ 0.2 million, respectively, was recognized from deferred contract liabilities. 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. During the fourth quarter of fiscal year 2021, the Company granted the customer a six-month principal payment forbearance. The customer is expected to recommence its monthly payments to the Company in the second quarter of fiscal year 2022. The customer has made payments totaling $ 7.2 million (exclusive of interest) as of September 30, 2021 related to the product sale. Deferred contract costs associated with this sale was recognized in fiscal year 2021. 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. YEAR ENDED SEPTEMBER 30, 2021 2020 Oil and Gas Markets Traditional exploration product revenue $ 4,518 $ 5,849 Wireless exploration product revenue 27,016 1,421 Reservoir product revenue 1,877 805 Total revenue 33,411 8,075 Adjacent Markets Industrial product revenue 21,335 15,622 Imaging product revenue 10,925 9,705 Total revenue 32,260 25,327 Emerging Markets Revenue 10,193 734 Total $ 75,864 $ 34,136 See Note 20 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: YEAR ENDED SEPTEMBER 30, 2021 2020 Asia $ 17,268 $ 3,613 Canada 1,550 2,054 Europe 7,693 4,813 United States 47,101 22,294 Other 2,252 1,362 $ 75,864 $ 34,136 F-16 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) 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. 3. Business Acquisition On July 2, 2021 , we acquired 100 percent of the outstanding membership interest in Aquana, LLC, a comprehensive wireless water monitoring and control system provider. 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 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 earn-out 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. In accordance with ASC 805, Business Combinations , 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. In connection with the Aquana acquisition, the Company recorded goodwill of $ 0.7 million, and other intangible assets of $ 0.7 million. Current assets and current liabilities acquired in the transaction were nominal. Legal and professional costs of $ 0.2 million related to the Aquana acquisition are included in selling, general and administrative expenses for the fiscal year ended September 30, 2021. The Aquana acquisition represents the Company’s strategy to expand its product revenues, as well as its engineering and manufacturing competencies, to markets outside the oil and gas industry. 4. 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 the fiscal year ended September 30, 2021, the Company realized losses of $ 4,000 from the sale of short-term investments. No gains or losses were realized during the fiscal year ended September 30, 2020 from the sale of short-term investments. The Company’s short-term investments were composed of the following (in thousands): AS OF SEPTEMBER 30, 2021 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Short-term investments: Corporate bonds $ 9,511 $ — $ ( 15 ) $ 9,496 Total $ 9,511 $ — $ ( 15 ) $ 9,496 The Company had no short-term investments at September 30, 2020. The Company’s short-term investments had contractual maturities of $ 9.0 million due within one year and $ 0.5 million due from October 2022 to March 2023. 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 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 available excess cash flows. Interest payments could 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’s scheduled maturity date was July 13, 2022 . F-17 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) 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 determined that the investment is a Level 3 financial instrument primarily due to its unknown marketability. Because of the distressed financial condition of the customer, the Company believ ed the fair value of the bond is nominal. In January 2021, the Company transferred the security pursuant to a purchase agreement (the “Agreement”) entered into with a third party (the “Buyer”). Pursuant to the Agreement, the Company received non-refundable consideration of $ 0.3 million and was entitled to receive additional cash compensation of $ 2.4 million from the Buyer if certain terms and conditions between the Buyer and the Company’s customer were met by December 31, 2021. In the event these terms and conditions were not met, the Company had 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. 5. 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 receivable, financing receivables and accounts payable, the carrying amounts approximate 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. 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 SEPTEMBER 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 $ — $ 9,496 $ — $ 9,496 Total assets $ — $ 9,496 $ — $ 9,496 Contingent consideration liabilities — — ( 5,210 ) ( 5,210 ) Total liabilities $ — $ — $ ( 5,210 ) $ ( 5,210 ) 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 Contingent consideration $ — $ — $ ( 10,962 ) $ ( 10,962 ) F-18 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) The following table summarizes changes in the fair value of the Company’s Level 3 financial instruments for the fiscal year s ended September 30, 20 20 and 20 2 1 : Balance at October 1, 2019 $ 9,940 Fair value adjustments 1,100 Payment of contingent consideration ( 78 ) Balance at September 30, 2020 10,962 Fair value adjustments ( 3,524 ) Payment of contingent consideration ( 1,421 ) 6,017 Less: Consideration payable ( 807 ) Balance at September 30, 2021 $ 5,210 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. 6. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss consisted of the following (in thousands): Unrealized Losses on Available-for-Sale Securities Foreign Currency Translation Adjustments Total Balance at October 1, 2019 $ — $ ( 15,757 ) $ ( 15,757 ) Other comprehensive loss — ( 941 ) ( 941 ) Balance at September 30, 2020 $ — ( 16,698 ) ( 16,698 ) Other comprehensive income (loss) ( 15 ) 393 378 Balance at September 30, 2021 $ ( 15 ) $ ( 16,305 ) $ ( 16,320 ) 7. Accounts and Financing Receivables Trade accounts receivable, net (excluding notes receivable) are reflected in the following table (in thousands): AS OF SEPTEMBER 30, 2021 2020 Trade accounts receivable $ 12,635 $ 14,090 Allowance for doubtful accounts ( 428 ) ( 496 ) $ 12,207 $ 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 accounts receivable balances. Accounts receivable balances are charged off against the allowance whenever it is probable that the receivable balance will not be recoverable. F-19 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) Financing receivables are reflected in the following table (in thousands): AS OF SEPTEMBER 30, 2021 2020 Promissory notes $ 5,432 $ 184 Sales-type lease 2,464 — Total financing receivables 7,896 184 Unearned income: Sales-type lease ( 6 ) — Total unearned income ( 6 ) — Total financing receivables, net of unearned income 7,890 184 Less current portion ( 4,952 ) ( 184 ) Non-current notes receivable $ 2,938 $ — 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 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 . Scheduled minimum payments due and outstanding under the lease at September 30, 2021 were $ 1.5 million. Minimum leases payments of $ 1.0 million are due in the first quarter of fiscal year 2022. Interest income of $ 37,000 was recognized during the fiscal year ended September 30, 2021. The ownership of the equipment will transfer to the customer at the end of the lease term. 8. Inventories Inventories consisted of the following (in thousands): AS OF SEPTEMBER 30, 2021 2020 Finished goods $ 19,368 $ 20,798 Work in process 8,247 984 Raw materials 43,620 47,041 Obsolescence reserve (net realizable value adjustment) ( 36,936 ) ( 34,960 ) 34,299 33,863 Less current portion 16,196 16,933 Non-current portion $ 18,103 $ 16,930 Inventory obsolescence expense totaled approximately $ 3.0 million and $ 4.7 million during fiscal years 2021 and 2020, respectively. Raw materials include semi-finished goods and component parts that totaled approximately $ 22.7 million and $ 24.3 million at September 30, 2021 and 2020, respectively. Finished goods and raw materials that totaled $ 23.3 million and $ 21.8 million were fully reserved at September 30, 2021 and 2020, respectively. F-20 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) 9. 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 liabilities and recognized in the period in which the obligation for those payments is incurred. As of September 30, 2021, the Company has two operating right-of use assets related to leased facilities in Austin, Texas and Melbourne, Florida. Maturities of the operating lease liabilities as of September 30, 2021 were as follows (in thousands): For fiscal years ending September 30, 2022 $ 262 2023 270 2024 278 2025 186 2026 130 Thereafter 225 Future minimum lease payments $ 1,351 Less interest ( 117 ) Present value of minimum lease payments $ 1,234 Less current portion ( 225 ) Long-term portion $ 1,009 Lease costs recognized in the consolidated statements of operations for the fiscal years ended September 30, 2021 and 2020 is as follows (in thousands): YEAR ENDED SEPTEMBER 30, 2021 2020 Right-of-use operating lease costs $ 246 $ 151 Short-term lease costs 239 309 Total $ 485 $ 460 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): YEAR ENDED SEPTEMBER 30, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 211 $ 165 Operating lease assets obtained in exchange for new lease liabilities 1,336 219 Weighted average remaining lease term 5.6 years 0.5 years Weighted average discount rate 3.25 % 5.00 % F-21 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) 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 minimum 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 7 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 to limit rental revenue recognized to the cash collections received. As of September 30, 2021, the Company’s trade accounts receivables included lease receivables of $ 7.5 million. Rental revenue for fiscal years 2021 and 2020 was $ 19.0 million and $ 53.7 million, respectively. At September 30, 2021, future minimum lease obligations due from the Company’s leasing customers on operating leases (all in fiscal year 2022) were $ 0.8 million. Rental equipment consisted of the following (in thousands): AS OF SEPTEMBER 30, 2021 2020 Rental equipment, primarily wireless recording equipment $ 95,827 $ 114,783 Accumulated depreciation and impairment ( 56,922 ) ( 60,466 ) $ 38,905 $ 54,317 Rental equipment depreciation expense was $ 15.1 million and $ 17.9 million in fiscal years 2021 and 2020, respectively. F-22 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) 10. Property, Plant and Equipment At September 30, 2020, the Company’s property located in Bogot á , Colombia was classified as held for sale on the accompanying consolidated balance sheet. The property was used for warehousing its rental equipment operations, product sales and service support to its customers in South America. The Company has been marketing the property since the second quarter of fiscal year 2020. The carrying value of the property was $ 0.6 million at September 30, 2020. During the fourth quarter of fiscal year 2021, the Company commenced negotiations with a prospective tenant to lease the property and anticipates that a lease will be entered into during the first quarter of fiscal year 2022. As a result of the anticipated leasing arrangement, Company has included the asset’s carrying value in property, plant and equipment on the accompanying consolidated balance sheet as of September 30, 2021. Property, plant and equipment consisted of the following (in thousands): AS OF SEPTEMBER 30, 2021 2020 Land and land improvements $ 7,932 $ 7,703 Building and building improvements 24,646 23,998 Machinery and equipment 56,828 55,359 Furniture and fixtures 1,417 1,368 Tools and molds 3,036 2,959 Construction in progress 2,288 1,431 Leasehold improvements — 88 Transportation equipment 75 75 96,222 92,981 Accumulated depreciation and impairment ( 66,239 ) ( 63,107 ) $ 29,983 $ 29,874 Property, plant and equipment depreciation expense was $ 4.0 million for each of the fiscal years ended September 30, 2021 and 2020. 11. Goodwill and Other Intangible Assets In connection with the acquisition of Aquana in July 2021, the Company recorded goodwill of $ 0.7 million (deductible for tax purposes) and other intangible assets of $ 0.7 million. The operations of Aquana are included as a component of the Company’s Adjacent Markets reporting unit. At September 30, 2021, the Company had additional goodwill of $ 4.3 million and other intangible assets, net of $ 4.5 million attributable to its Emerging Markets reporting unit and other intangible assets, net of $ 2.1 million attributable to its Oil & Gas Markets reporting unit. Goodwill represents the excess cost of a business acquired over the fair market value of identifiable net assets at the date of acquisition. At September 30, 2021, the Company assessed the goodwill associated with both its Adjacent Markets and Emerging Markets reporting units for impairment. The fair value of the reporting units were estimated using the expected present value of future cash flows, market data and using estimates, judgments and other assumptions that management believes were appropriate under the circumstances. The estimates and judgments used in the assessment included consideration of market participant rates of return and the terminal value of the reporting units. The Company determined future cash flows provided the best estimate of the fair value of its reporting units. In determining fair value for the Company’s Emerging Markets reporting unit, estimated future cash flows included obtaining a second contract with the CBP. Key assumptions in the impairment analysis include revenue and EBITDA projections, discount rates, long-term growth rates, and the effective tax rate the Company determined to be appropriate. These estimates and projections can be unpredictable, particularly for Quantum as an emerging business. T he total Company’s estimate of reporting unit fair values was reconciled to its then market capitalization (based upon the stock market price) plus an implied control premium. F-23 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) The assessment determined that the fair market value of its Adjacent Markets and Emerging Markets reporting units were more than their carrying amount. As a result, no impairment charges were recorded for the fiscal year ended September 30, 2021. For the fiscal year ended September 30, 2020, the Company recorded an impairment charge of $ 0.7 million for the entire goodwill associated with its Oil and Gas Markets reporting unit. Also see Note 1 to these consolidated financial statements. The Company’s consolidated goodwill and other intangible assets consisted of the following (in thousands): Weighted-Average Remaining Useful Lives (in years) AS OF SEPTEMBER 30, 2021 2020 Goodwill $ 5,072 $ 4,337 Other intangible assets: Developed technology 15.2 $ 6,475 $ 5,918 Customer relationships 0.9 3,900 3,900 Trade names 2.0 2,022 1,930 Non-compete agreements 1.0 186 170 Total other intangible assets 8.4 12,583 11,918 Accumulated amortization ( 5,333 ) ( 3,587 ) $ 7,250 $ 8,331 Other intangible assets amortization expense was $ 1.7 million for each of the fiscal years ended September 30, 2021 and 2020 F-24 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) As of September 30, 2021, future estimated amortization expense of other intangible assets is as follows (in thousands): For fiscal years ending September 30, 2022 $ 1,677 2023 768 2024 395 2025 381 2026 374 Thereafter 3,655 $ 7,250 12. Long-Term Debt The Company had no long-term debt outstanding at September 30, 2021 and 2020. On March 2, 2011 , the Company entered into a credit agreement with Frost Bank (the “Original Credit Agreement”). The Original Credit Agreement has been amended periodically since 2011 (as so amended, the “Credit Agreement”). 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 effective in the first quarter of fiscal year 2021, (iii) to increase the tangible net worth requirement from $ 140 million to $ 145 million in the first quarter of fiscal year 2021 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, the Company further amended the Credit Agreement to reduce the maximum amount of available 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 ended 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 the Company 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. The borrowing base is determined based upon certain of the Company’s assets which include (i) 80 % of certain accounts receivable plus (ii) 50 % of certain notes receivable (such result not to exceed $ 10 million) plus (iii) 25 % of certain inventories (such result not to exceed $ 20 million). Several of the Company’s domestic subsidiaries have guaranteed the obligations of the Company under the Credit Agreement and such subsidiaries have secured their obligations under such guarantees by the pledge of substantially all of the assets of such subsidiaries. The Company is required to make monthly interest payments on borrowed funds. The Credit Agreement limits the incurrence of additional indebtedness and contains other covenants customary in agreements of this type. The interest rate for borrowings under the Credit Agreement is based on the Wall Street Journal prime rate, which was 3.25 % at September 30, 2021. In October 2021, Frost Bank notified the Company that they will not be extending the credit agreement upon its expiration in April 2022, and in November 2021 we elected to cancel the credit 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. F-25 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) 13. Deferred Revenue and Other Liabilities Deferred revenue and other liabilities consisted of the following (in thousands): AS OF SEPTEMBER 30, 2021 2020 Deferred revenue $ 1,346 $ 6,245 Compensated absences 1,728 1,818 Payroll 1,579 1,799 Property and sales taxes 1,038 1,364 Legal and professional fees 360 451 Medical claims 574 437 Product warranty 379 258 Income taxes 60 54 Other 766 894 7,830 13,320 Less current portion 7,799 8,753 Non-current portion $ 31 $ 4,567 The Company is self-insured for certain losses related to employee medical claims. The Company has purchased stop-loss coverage for individual claims in excess of $ 175,000 per claimant per year in order to limit its exposure to any significant levels of employee medical claims. Self-insured losses are accrued based on the Company’s historical experience and on estimates of aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry. 14. Employee Benefits The Company’s U.S. employees are participants in the Geospace Technologies Corporation’s Employee’s 401(k) Retirement Plan (the “Plan”), which covers substantially all eligible employees in the United States. The Plan is a qualified salary reduction plan in which all eligible participants may elect to have a percentage of their compensation contributed to the Plan, subject to certain guidelines issued by the Internal Revenue Service. The Company’s share of discretionary matching contributions was approximately $ 0.9 million and $ 0.8 million in fiscal years 2021 and 2020, respectively. The Company’s stock incentive plans in which key employees may participate are discussed in Note 15 to these consolidated financial statements. 15. Stockholders’ Equity In February 2014, the board of directors and stockholders approved the 2014 Long Term Incentive Plan, as amended (the “2014 Plan”). In February 2021, board of directors and stockholders approved an amendment which increased the aggregate amount of shares of common stock may be issued under the 2014 Plan from 1,500,000 to 3,000,000 . The Company is authorized to issue nonqualified and incentive stock options to purchase common stock, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) to key employees, directors and consultants under the 2014 Plan. Options have a term not to exceed ten years , with the exception of incentive stock options granted to employees owning ten percent or more of the outstanding shares of common stock, which have a term not to exceed five years . The exercise price of any option may not be less than the fair market value of the common stock on the date of grant. In the case of incentive stock options granted to an employee owning ten percent or more of the outstanding shares of common stock, the exercise price of such option may not be less than 110 % of the fair market value of the common stock on the date of grant. An RSU represents a contingent right to receive one share of the common stock upon vesting. Under the 2014 Plan, the Company may issue RSAs and RSUs to employees for no payment by the employee or for a payment below the fair market value on the date of grant. The RSAs and RSUs are subject to certain restrictions described in the 2014 Plan. At September 30, 2021, an aggregate of 1,653,236 shares of common stock were available for issuance under the 2014 Plan. F-26 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) The following table summarizes the combined activity under the equity incentive plans for the indicated periods: Number of Nonqualified Options Outstanding Weighted Average Exercise Price per Share Number of RSAs Weighted Average Grant-date Fair Value per Share Number of RSUs Weighted Average Grant-date Fair Value per Unit Outstanding at October 1, 2019 165,600 $ 19.15 220,412 $ 16.50 137,290 $ 15.10 Granted — — — — 162,250 14.58 Exercised — — — — — — Forfeited ( 74,500 ) 21.34 ( 1,750 ) 17.55 ( 39,560 ) 14.78 Vested — — ( 108,288 ) 16.32 ( 41,723 ) 14.81 Outstanding at September 30, 2020 91,100 17.66 110,374 16.66 218,257 14.82 Granted — — — — 195,950 7.00 Exercised — — — — — — Forfeited ( 52,300 ) 16.47 ( 2,500 ) 14.78 ( 44,001 ) 7.14 Vested — — ( 65,777 ) 17.28 ( 70,832 ) 14.63 Outstanding at September 30, 2021 38,800 $ 21.42 42,097 $ 15.95 299,374 $ 10.87 During fiscal years 2021 and 2020, the Company issued 195,950 and 162,250 RSUs to certain of its employees, executive officers and directors under the 2014 Plan, as amended. The RSUs issued include both time-based and performance-based vesting provisions. The weighted average grant date fair value of each RSU issued for fiscal years 2021 and 2020 was $ 7.00 and $ 14.58 per unit, respectively. The total grant date fair value of all RSUs issued for fiscal years 2021 and 2020 was $ 1.4 million and $ 2.4 million, respectively, which will be charged to expense over the next one to 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. No RSAs have been issued since fiscal year 2019 All RSAs, RSUs and stock options outstanding at September 30, 2021 and 2020 were issued from the 2014 Plan. All stock options outstanding are nonqualified options. No nonqualified stock options were exercised during fiscal years 2021 and 2020. The following table summarizes information about stock options outstanding and exercisable at September 30, 2021: Options Outstanding Options Exercisable Range of Exercise Prices Shares Weighted Average Remaining Term (in years) Weighted Average Exercise Price Intrinsic Value Shares Weighted Average Remaining Term (in years) Weighted Average Exercise Price Intrinsic Value $ 21.42 38,800 5.1 21.42 — — — — — Stock-based compensation expense recognized for the fiscal years ended September 30, 2021 and 2020 was $ 2.0 million and $ 2.3 million, respectively. Company accounts for forfeitures as they occur and records compensation costs under the assumption that the holder will complete the requisite service period. As of September 30, 2021, the Company had unrecognized compensation expense of $ 0.2 million relating to RSAs which is expected to be recognized over a weighted average period of 0.5 years. As of September 30, 2021, the Company had unrecognized compensation expense of $ 2.2 million relating to RSUs which is expected to be recognized over a weighted average period of 2.3 years. The Company had no unrecognized compensation expense related to nonqualified stock option awards. 16. Income Taxes: Components of loss before income taxes were as follows (in thousands): YEAR ENDED SEPTEMBER 30, 2021 2020 United States $ ( 10,628 ) $ ( 14,109 ) Foreign ( 2,850 ) ( 2,484 ) $ ( 13,478 ) $ ( 16,593 ) F-27 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) The provision for income taxes consisted of the following (in thousands): YEAR ENDED SEPTEMBER 30, 2021 2020 Current Federal $ 14 $ ( 4 ) Foreign 561 2,467 State — 5 575 2,468 Deferred: Federal — — Foreign 3 181 3 181 $ 578 $ 2,649 Actual income tax expense (benefit) differs from income tax expense computed by applying the U.S. statutory federal tax rate of 21 % for each of the fiscal years ended September 30, 2021 and 2020 as follows (in thousands): YEAR ENDED SEPTEMBER 30, 2021 2020 Expense for U.S federal income tax at statutory rate $ ( 2,834 ) $ ( 3,484 ) Effect of foreign income taxes 1 ( 64 ) Research and experimentation tax credit ( 223 ) ( 1,201 ) State income taxes, net of federal income tax benefit 153 ( 158 ) Nondeductible expenses 44 63 Change in valuation allowance 2,893 4,882 Impact on deferred taxes due to change in tax rate 563 196 Change in fair value of contingent consideration ( 569 ) 214 Foreign income tax withholding 419 1,928 Disallowance of stock compensation adjustments in excess of book 334 255 Other items ( 203 ) 18 $ 578 $ 2,649 Effective tax rate ( 4.3 )% ( 16.0 )% The income tax expense for fiscal years 2021 and 2020 primarily reflects withholding tax on rental income earned in foreign jurisdictions. The Company is currently unable to record any tax benefits for its tax losses in the U.S., Canada and the Russian Federation due to the uncertainty surrounding its ability to utilize such losses in the future to offset taxable income. F-28 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income tax asset were as follows (in thousands): AS OF SEPTEMBER 30, 2021 AS OF SEPTEMBER 30, 2020 U.S. Non U.S. Total U.S. Non U.S. Total Deferred income tax assets: Allowance for doubtful accounts $ 80 $ 4 $ 84 $ 2,813 $ 3 $ 2,816 Inventories 8,042 — 8,042 7,809 33 7,842 Loss and tax credit carry-forwards 27,578 4,945 32,523 17,431 4,596 22,027 Stock-based compensation 398 — 398 506 — 506 Accrued product warranty 77 2 79 52 2 54 Contingent earn-out consideration 917 — 917 — — — Accrued compensated absences 320 — 320 328 — 328 Property and equipment — 487 487 — 501 501 Prepaid income taxes — 266 266 — 517 517 Other reserves 114 11 125 1,009 9 1,018 37,526 5,715 43,241 29,948 5,661 35,609 Deferred income tax liabilities: Allowance for doubtful accounts — — — — ( 11 ) ( 11 ) Inventories — ( 6 ) ( 6 ) — — — Right-of-use assets ( 131 ) — ( 131 ) — — — Intangible assets ( 642 ) — ( 642 ) ( 960 ) — ( 960 ) Property, plant and equipment and other ( 5,085 ) ( 36 ) ( 5,121 ) ( 3,271 ) ( 31 ) ( 3,302 ) Subtotal deferred income tax assets 31,668 5,673 37,341 25,717 5,619 31,336 Valuation allowance ( 31,668 ) ( 5,704 ) ( 37,372 ) ( 25,717 ) ( 5,646 ) ( 31,363 ) Net deferred income tax assets (liabilities) $ — $ ( 31 ) $ ( 31 ) $ — $ ( 27 ) $ ( 27 ) Deferred income tax assets and liabilities are reported as follows in the accompanying consolidated balance sheets (in thousands): AS OF SEPTEMBER 30, 2021 2020 Deferred income tax assets, net $ — $ — Deferred income tax liabilities, net ( 31 ) ( 27 ) $ ( 31 ) $ ( 27 ) Deferred income tax liabilities, net are included as a component of non-current deferred revenue and other liabilities in the accompanying consolidated balance sheets. The 2017 Tax Act was enacted in December 2017. The 2017 Tax Act, among other things, reduces the U.S. federal corporate tax rate from 35 % to 21 %, effective January 1, 2018, creates new taxes on certain foreign earnings and may require companies to pay a one-time transition tax on undistributed earnings of certain foreign subsidiaries that were previously tax deferred. The Company is not required to pay a one-time transition tax on earnings of our foreign subsidiaries since there were no accumulated earnings on a consolidated basis. The financial reporting basis of investments in foreign subsidiaries exceed their tax basis. A deferred tax liability is not recorded for this temporary difference because the investment is deemed to be permanent. A reversal of the Company’s plans to permanently invest in these foreign operations would cause the excess to become taxable. At September 30, 2021, the Company had $ 5.2 million of cash and cash equivalents held by its foreign subsidiaries. At September 30, 2021 and 2020, the temporary difference related to undistributed earnings for which no deferred taxes have been provided was approximately $ 6.5 million and $ 11.6 million, respectively. F-29 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) Tax return filings which are subject to review by local tax authorities by major jurisdiction are as follows: • United States—fiscal years ended September 30, 2018 through 2021 • State of Texas—fiscal years ended September 30, 2018 through 2021 • State of New York—fiscal years ended September 30, 2019 • State of California – fiscal years ended September 30, 2018 through 2021 • State of Pennsylvania – fiscal years ended September 30, 2019 • Russian Federation—calendar years 2019 through 2021 • Canada—fiscal years ended September 30, 2018 through 2021 • United Kingdom—fiscal years ended September 30, 2020 through 2021 • Colombia—calendar years 2019 through 2021 The Company had no unrecognized tax liabilities as of September 30, 2021 and 2020. As of September 30, 2021, the Company had net operating loss (“NOL”) carry-forwards of approximately $ 101.4 million in the United States, $ 20.2 million in Canada and $ 1.5 million in Russia which are available to offset future taxable income in those jurisdictions. The NOL carry-forwards for Canada and Russia begin to expire in 2033 and 2026 , respectively. The NOL carry-forward for the United States which originated prior to the 2017 Tax Act of $ 28.3 million begins to expire in 2028 . The Company’s NOLs originating after the 2017 Tax Act of $ 73.1 million do not expire. The Company has not completed a Section 382 limitation study which may prevent it from using its NOLs in the future. Management of the Company has concluded that it is more-likely-than-not that its U.S., Canadian and Russian net deferred tax assets will not be realized in accordance with U.S. GAAP. At September 30, 2021 and 2020, the Company had a valuation allowance against its U.S. net deferred tax assets of $ 31.6 million and $ 25.7 million, respectively. At September 30, 2021 and 2020, the Company had a valuation allowance against Canadian net deferred tax assets of $ 5.4 million, and $ 5.6 million, respectively. At September 30, 2021 and 2020, the Company had a valuation allowance against its Russian net deferred tax assets of $ 0.3 million and $ 0.2 million, respectively. 17. Loss Per Common Share Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares used in basic loss per share during the period. Diluted loss per share is determined on the assumption that outstanding RSUs have been exchanged for common stock and outstanding dilutive stock options have been exercised and the aggregate proceeds as defined were used to reacquire common stock using the average price of such common stock for the period. F-30 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) 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 amounts): YEAR ENDED SEPTEMBER 30, 2021 2020 Net loss $ ( 14,056 ) $ ( 19,242 ) Less: Loss allocable to unvested restricted stock — — Loss attributable to common shareholders for diluted earnings per share $ ( 14,056 ) $ ( 19,242 ) Weighted average number of common share equivalents: Common shares used in basic loss per share 13,358,930 13,525,179 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 13,358,930 13,525,179 Loss per shares: Basic $ ( 1.05 ) $ ( 1.42 ) Diluted $ ( 1.05 ) $ ( 1.42 ) For the calculation of diluted loss per share for fiscal years 2021 and 2020, stock options of 38,800 and 91,100 , respectively, and RSUs of 299,374 and 218,257 , respectively, were excluded in the calculation of weighted average shares outstanding as a result of their impact being antidilutive. 18. 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 reviews and assesses the fair value of its contingent earn-out liabilities on a quarterly basis. 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. In fiscal year 2020, the Company made a cash earn-out payment of $ 0.1 million to the former shareholders of Quantum. At September 30, 2020, the contingent earn-out liability was valued at $ 5.8 million. During fiscal year 2021, the Company recorded adjustments of $ 2.7 million to decrease the earn-out liability due to a decrease in projected future eligible revenue. In September 2021 and October 2021, the Company made cash earn-out payments of $ 1.4 million and $ 0.8 million, respectively, to the former shareholders of Quantum. The payments were primarily attributable to revenue earned on Quantum’s $ 10 million contract with the CBP to provide a technology solution to the Department of Homeland Security. At September 30, 2021, the contingent earn-out liability was valued at $ 0.8 million related to projected future eligible revenue. 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 . 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. The maximum amount of contingent payments is $ 23.2 million over the five-and-a-half year earn-out period. At September 30, 2021, the contingent earn-out liability was valued at $ 5.2 million. During fiscal year 2021, the Company recorded net adjustments of $ 0.8 million to decrease the earn-out liability to an estimated value of $ 4.4 million. No earnout-payments have been made to date on the acquisition. F-31 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) Contingent Compensation Costs In connection with the acquisition of Aquana in July 2021, the Company is 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, 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. Operating Leases The Company leases office space and certain equipment for terms of seven years or less. Rent expense was approximately $ 0.5 million for each of fiscal years 2021 and 2020. At September 30, 2021, future minimum lease payments was $ 1.4 million. See Note 9 for additional information. 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 current pending matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. 19. Supplemental Cash Flow Information Supplemental cash flow information is as follows (in thousands): YEAR ENDED SEPTEMBER 30, 2021 2020 Cash paid for interest $ — $ 38 Cash paid for income taxes 551 2,530 Non-cash investing and financing activities: Inventory transferred to rental equipment 4,038 6,343 Inventory transferred to property, plant and equipment 286 222 Financing receivables recognized in connection with sale of used rental equipment 2,665 — 20 . Segment and Geographic Information The Company reports and evaluates financial information for three operating business segments: Oil and Gas Markets, Adjacent Markets and Emerging Markets. The Oil and Gas Markets segment’s products include wireless seismic data acquisition systems, reservoir characterization products and services, and traditional seismic exploration products such as geophones, hydrophones, leader wire, connectors, cables, marine streamer retrieval and steering devices and various other seismic products. The Adjacent Markets segment’s products include imaging equipment, water meter products, remote shut-off valves and Internet of Things (IoT) platform, offshore cables, as well as seismic sensors used for vibration monitoring and geotechnical applications such as mine safety applications and earthquake detection. The Emerging Markets segment designs and markets seismic products targeted at the border and perimeter security markets. F-32 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) The following tables summarize the Company’s segment information: YEAR ENDED SEPTEMBER 30, 2021 2020 Revenue: Oil and Gas Markets $ 52,252 $ 61,661 Adjacent Markets 32,419 25,440 Emerging Markets 10,193 734 Corporate — — Total 94,864 87,835 Income (loss) from operations: Oil and Gas Markets ( 16,229 ) ( 2,139 ) Adjacent Markets 6,423 4,017 Emerging Markets 5,033 ( 6,064 ) Corporate ( 12,098 ) ( 13,853 ) Total ( 16,871 ) ( 18,039 ) Depreciation and amortization expenses: Oil and Gas Markets 18,199 21,192 Adjacent Markets 440 453 Emerging Markets 1,209 1,194 Corporate 929 854 Total 20,777 23,693 Impairment, inventory obsolescence and stock-based compensation expenses: Oil and Gas Markets 3,850 6,326 Adjacent Markets 223 232 Emerging Markets 100 203 Corporate 798 941 Total 4,971 7,702 Interest income: Oil and Gas Markets 1,409 1,029 Adjacent Markets 1 3 Emerging Markets — — Corporate 31 70 Total 1,441 1,102 Interest expense: Oil and Gas Markets — — Adjacent Markets — — Emerging Markets — — Corporate — 38 Total — 38 The Company’s manufacturing operations for its business segments are combined. Therefore, the Company does not segregate and report separate balance sheet accounts for each of its segments and, therefore, no such segment balance sheet information is presented in the table above. “Corporate” loss from operations primarily consists of the Company’s Houston headquarters general and administrative expenses. F-33 Geospace Technologies Corporation and Subsidiaries Notes to Consolidated Financial Statements—(Continued) The Company generates revenue from product sales, product rentals and services from its subsidiaries located in the United States, Canada, Colombia, the Russian Federation and the United Kingdom. Revenue generated by the Company’s subsidiaries is as follows (in thousands): YEAR ENDED SEPTEMBER 30, 2021 2020 United States $ 91,190 $ 82,166 Canada 2,417 3,709 Colombia — 5 Russian Federation 2,924 2,668 United Kingdom 3,210 2,488 Eliminations ( 4,877 ) ( 3,201 ) $ 94,864 $ 87,835 A summary of revenue by geographic area is as follows (in thousands): YEAR ENDED SEPTEMBER 30, 2021 2020 Africa $ 2,507 $ 5,814 Asia 23,299 41,128 Canada 997 3,193 Europe 13,801 12,626 United States 49,541 23,780 Other 4,719 1,294 $ 94,864 $ 87,835 Revenue is attributed to countries based on the ultimate destination of the product sold, if known. If the ultimate destination is not known, revenue is attributed to countries based on the geographic location of the initial shipment. Long-lived assets were as follows (in thousands): AS OF SEPTEMBER 30, 2021 2020 United States $ 98,985 $ 114,119 Canada 3,653 6,654 Colombia — 1 Russian Federation 689 717 United Kingdom 559 404 China 13 13 $ 103,899 $ 121,908 F-34 Schedule II Geospace Technologies Corporation and Subsidiaries Valuation and Qualifying Accounts (In thousands) Balance at Beginning of Period Charged to Costs and Expenses, net of Recoveries Charged to Other Assets (Deductions) and Additions Balance at End of Period Year ended September 30, 2021 Allowance for doubtful accounts on accounts and financing receivables $ 496 $ ( 76 ) $ — $ 8 $ 428 Year ended September 30, 2020 Allowance for doubtful accounts on accounts and financing receivables $ 951 $ 63 $ — $ ( 518 ) $ 496 Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Assets (Deductions) and Additions Balance at End of Period Year ended September 30, 2021 Inventory obsolescence reserve $ 34,960 $ 3,001 $ — $ ( 1,025 ) $ 36,936 Year ended September 30, 2020 Inventory obsolescence reserve $ 32,050 $ 4,726 $ — $ ( 1,816 ) $ 34,960 F-35