The following is management's discussion and analysis of the major elements of
our consolidated financial statements. You should read this discussion and
analysis together with our consolidated financial statements, including the
accompanying notes, and other detailed information appearing elsewhere in this
Annual Report on Form 10-K, including under the heading "Risk Factors." The
discussion of our financial condition and results of operations includes various
forward-looking statements about our markets, the demand for our products and
services and our future plans and results. These statements are based on
assumptions that we consider to be reasonable, but that could prove to be
incorrect. For more information regarding our assumptions, you should refer to
the section entitled "Cautionary Note Regarding Forward-Looking Statements and
Assumptions" below.
Cautionary Note Regarding Forward-Looking Statements and Assumptions
This Annual Report on Form 10-K and the documents incorporated by reference
herein, if any, contain "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
can be identified by terminology such as "may", "will", "should", "intend",
"expect", "plan", "budget", "forecast", "anticipate", "believe", "estimate",
"predict", "potential", "continue", "evaluating" or similar words. Statements
that contain these words should be read carefully because they discuss our
future expectations, contain projections of our future results of operations or
of our financial position or state other forward-looking information. Examples
of forward-looking statements include, among others, statements that we make
regarding our expected operating results, the adoption, results and success of
our rollout of our Aquana smart water valves and cloud-based control platform,
future demand for our Quantum security solutions, the adoption and sale of our
products in various geographic regions, potential tenders for PRM systems,
future demand for OBX systems, the completion of new orders for our channels of
our GCL system, the fulfillment of customer payment obligations, the impact of
and the recovery from the impact of the coronavirus (or COVID-19) pandemic, the
impact of the current armed conflict between Russia and Ukraine, our ability to
manage changes and the continued health or availability of management personnel,
volatility and direction of oil prices, anticipated levels of capital
expenditures and the sources of funding therefor, and our strategy for growth,
product development, market position, financial results and the provision of
accounting reserves. These forward-looking statements reflect our current
judgment about future events and trends based on the information currently
available to us. However, there will likely be events in the future that we are
not able to predict or control. The factors listed under the caption "Risk
Factors", as well as cautionary language in this Annual Report on Form 10-K,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our
forward-looking statements. Such examples include, but are not limited to, the
failure of the Quantum or OptoSeis® or Aquana technology transactions to yield
positive operating results, decreases in commodity price levels and continued
adverse impact of COVID-19 which could reduce demand for our products, the
failure of our products to achieve market acceptance (despite substantial
investment by us) our sensitivity to short term backlog, delayed or cancelled
customer orders, product obsolescence resulting from poor industry conditions or
new technologies, bad debt write-offs associated with customer accounts,
inability to collect on promissory notes, lack of further orders for our OBX
systems, failure of our Quantum products to be adopted by the border and
perimeter security market, or a decrease in such market due to governmental
changes, and infringement or failure to protect intellectual property. The
occurrence of the events described in these risk factors and elsewhere in this
Annual Report on Form 10-K could have a material adverse effect on our business,
results of operations and financial position, and actual events and results of
operations may vary materially from our current expectations. We assume no
obligation to revise or update any forward-looking statement, whether written or
oral, that we may make from time to time, whether as a result of new
information, future developments or otherwise, except as required by applicable
securities laws and regulations.
Background
We design and manufacture seismic instruments and equipment and primarily market
these products to the oil and gas industry to locate, characterize and monitor
hydrocarbon producing reservoirs. We also market our seismic products to other
industries for vibration monitoring, border and perimeter security and various
geotechnical applications. We design and manufacture other products of a
non-seismic nature, including water meter products, imaging equipment and
provide contract manufacturing services. For further informtion on the nature of
our operations, see the information under the heading "Business" in this Annual
Report on Form 10-K.
Consolidated Results of Operations
As we have reported in the past, our revenue and operating profits have varied
significantly from quarter-to-quarter, and even year-to-year, and are expected
to continue that trend in the future, especially when our quarterly or annual
financial results are impacted by the presence or absence of relatively large,
but somewhat erratic, sales of our oil and gas PRM systems and/or wireless
seismic data acquisition systems for land and marine applications.
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We report and evaluate financial information for three segments: Oil and Gas
Markets, Adjacent Markets and Emerging Markets. Summary financial data by
business segment follows (in thousands):
YEAR ENDED SEPTEMBER 30,
2022 2021
Oil and Gas Markets
Traditional exploration product revenue $ 6,597 $ 4,518
Wireless exploration product revenue
40,667 45,751
Reservoir product revenue 1,877 1,983
Total revenue 49,141 52,252
Operating loss (7,539 ) (16,229 )
Adjacent Markets
Industrial product revenue 25,640 21,335
Imaging product revenue 13,531 11,084
Total revenue 39,171 32,419
Operating income 6,021 6,423
Emerging Markets
Revenue 711 10,193
Operating income (loss) (9,128 ) 5,033
Corporate
Revenue 230 -
Operating loss (12,490 ) (12,098 )
Consolidated Totals
Revenue 89,253 94,864
Operating loss (23,136 ) (16,871 )
Overview
Although in an already depressed oil and gas industry, demand further decreased
in February 2020 because of the oversupply of crude oil due to failed OPEC
negotiations that led to a dramatic drop in crude oil prices when combined with
the impact of the COVID-19 pandemic. These declines in the demand for oil and
gas have caused oil and gas exploration and production companies to experience a
significant reduction in cash flows, which have resulted in reductions in their
capital spending budgets for oil and gas exploration-focused activities,
including seismic data acquisition activities. Recently, crude oil prices have
rebounded and held above February 2020 levels; however, a lag in time typically
occurs between higher oil prices and greater demand for our Oil and Gas Markets
segment products. We believe this lag is the result of exploration and
production ("E&P") companies allocating their cash flow towards shareholder
reward initiatives, such as stock buy-back programs and dividend payments, or in
debt reduction. We believe this lag is a short-term trend that will continue
until E&P companies decide to reinvest capital into exploration activities. As
this lag persists, we expect the reduced levels of demand for our Oil and Gas
Markets segment products and our rental marine wireless nodal products to
continue. We also expect our land-based traditional and wireless products will
continue to experience low levels of product demand until our customers consume
their excess levels of underutilized equipment. During the third quarter of
fiscal year 2022, we experienced increased rental demand for our marine nodal
products in the form of additional rental contracts and requests for quotes from
existing and new customers.
In light of current market conditions, the inventory balances in our Oil and Gas
Markets business segment at September 30, 2022 continued to exceed levels we
consider appropriate for the current level of product demand. We are continuing
to work aggressively to reduce these legacy inventory balances; however, we are
also adding new inventories for new wireless product developments and for other
product demand in our Adjacent Markets segment. During periods of excessive
inventory levels, our policy has been, and will continue to be, to record
obsolescence expense as we experience reduced product demand and as our
inventories continue to age. As difficult market conditions continue for the
products in our Oil and Gas Markets segment, we are recording additional
expenses for inventory obsolescence and will continue to do so in the future
until product demand and/or resulting inventory turnover return to acceptable
levels.
Armed Conflict Between Russia and Ukraine
A portion of our oil and gas product manufacturing is conducted through our
wholly-owned subsidiary, Geospace Technologies Eurasia LLC, which is based in
the Russian Federation. Consequently, our oil and gas business could be directly
affected by the current war between Russia and Ukraine. Please see "Part I-Item
1A.-Risk Factors" for more information.
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Coronavirus (COVID-19)
The ongoing COVID-19 pandemic has negatively impacted worldwide economic
activity and continues to create challenges in our markets, such as
uncertainties regarding the duration and extent to which the COVID-19 pandemic
will ultimately have a negative impact on the demand for our products and
services or on our supply chain. We continue to closely monitor the situation as
information becomes readily available.
During the fiscal year ended September 30, 2022, our operations have, for the
most part, remained open globally and the impact of the effects of COVID-19 to
our personnel and operations has been limited. Our supply chain has become
increasingly strained due to increased pricing for raw material and supplies
coupled with longer than expected lead times. We initially experienced a
reduction in demand for the rental of our OBX marine nodal products, which we
believed was primarily the result of the pandemic; however, demand has increased
in fiscal year 2022. We also believe our Adjacent Markets business segment has
entered into a period of recovery from the initial effects of the COVID-19
pandemic, but we continue to be cautious about the pandemic's effect on our
other business segments and our supply chain. As a result, we continually
communicate with our suppliers and customers as information is available to best
manage this difficult situation.
Fiscal Year 2022 Compared to Fiscal Year 2021
Consolidated revenue for fiscal year 2022 was $89.3 million, a decrease of $5.6
million, or 5.9%, from fiscal year 2021. The decrease in revenue was primarily
due to a reduction in revenue from our Emerging Markets segment related to our
contract with the CBP and a decrease in revenue from sales of our wireless
seismic products. The decrease in revenue was partially offset by increased
rental revenue from our OBX rental fleet and higher sales of our industrial and
imaging products.
Consolidated gross profit for fiscal year 2022 was $18.0 million, an increase of
$1.7 million, or 10.7%, from fiscal year 2021. The increase in gross profit
primarily resulted from (i) higher gross profit attributable to the increased
utilization of our OBX rental fleet and (ii) the higher profit margins generated
on wireless exploration product sales. The increase was partially offset by the
reduction in revenue and related gross profit from our contract with the CBP
discussed above.
Consolidated operating expenses for fiscal year 2022 were $41.2 million, an
increase of $8.0 million, or 24.2%, from fiscal year 2021. The increase was due
to (i) a $4.3 million goodwill impairment charge related to our Quantum
acquisition, (ii) a $1.8 million increase in research and development project
costs, (iii) a $1.4 million increase in personnel costs, (iv) $1.1 million in
incremental operating costs associated with our acquisition of Aquana and (v) a
$0.9 million increase in sales, marketing and other general business expenses.
The increase was partially offset by a $1.5 million increase in a favorable
non-cash adjustment to the estimated fair value of contingent consideration
related to our Quantum and OptoSeis® acquisitions when compared to the prior
fiscal year.
Consolidated other income for fiscal year 2022 was $0.5 million compared to $3.4
million from fiscal year 2021. The decrease in other income was primarily due to
(i) a gain recognized on the sale of our investment in a debt security in fiscal
year 2021, (ii) an increase in foreign exchanges losses and (iii) a decrease in
interest income.
Consolidated income tax expense for fiscal year 2022 was $0.2 million compared
to $0.6 million from fiscal year 2021. This decrease in income tax expense was
primarily the result of a decrease in rental revenue earned in foreign
jurisdictions requiring tax withholding. We are currently unable to record any
tax benefits from the tax losses we incur in the U.S., Canada and Russian
Federation due to the uncertainty surrounding our ability to utilize such losses
in the future to offset taxable income.
Segment Results of Operations
Fiscal Year 2022 Compared to Fiscal Year 2021
Oil and Gas Markets
Revenue
Revenue from our Oil and Gas Markets products for fiscal year 2022 decreased
$3.1 million, or 6.0%, from fiscal year 2021. Our product and rental revenue in
this segment continues to be negatively impacted by a lack of spending by oil
and gas exploration companies despite higher crude oil prices. The components of
this decrease were as follows:
•
Traditional Exploration Product Revenue - Revenue from our traditional products
increased $2.1 million, or 46.0% from the prior fiscal year. The increase
primarily reflects higher demand for our sensor and marine products.
•
Wireless Exploration Product Revenue - Revenue from our wireless exploration
products decreased $5.1 million, or 11.1%, from the prior fiscal year. The
decrease was primarily due to the recognition of $12.5 million of revenue
related to a land-based wireless system in the second quarter of fiscal year
2021 and a $9.9 million sale of used OBX rental
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equipment in the first quarter of fiscal year 2021. The decrease was partially
offset by a $10.0 million sale of used OBX rental equipment in the second
quarter of fiscal year 2022 and increased OBX rental revenue during fiscal year
2022.
•
Reservoir Product Revenue - Revenue from our reservoir products decreased $0.1
million, or 5.3%, from the prior fiscal year. The decrease in revenue was
primarily due to lower reservoir monitoring service revenue. The decrease was
largely offset by higher demand for our borehole products.
Operating Loss
Operating loss from our Oil and Gas Markets products for fiscal year 2022 was
$(7.5) million, a decrease of $(8.7) million, or 53.5%, from the prior fiscal
year. The decrease in operating loss was primarily due to (i) higher wireless
rental revenue and related gross profits due to improved utilization of our OBX
rental fleet and (ii) a $3.6 million increase to a favorable non-cash adjustment
to the estimated fair value of contingent consideration related to our OptoSeis®
acquisition when compared to the same period of the prior fiscal year. The
decrease in operating loss was partially offset by an increase in research and
development costs.
Adjacent Markets
Revenue
Revenue from our Adjacent Markets products for fiscal year 2022 increased $6.8
million, or 20.8%, from the prior fiscal year. While we experienced an increase
in the demand for our Adjacent Markets products and services during fiscal year
2022 despite the global supply chain shortages, we cannot reasonably determine
the lasting effects of the supply chain shortage on this operating segment. The
components of this increases were as follows:
•
Industrial Product Revenue and Services - Revenue from our industrial products
increased $4.3 million, or 20.2%, from the prior fiscal year. The increase was
primarily due to higher demand for water meter products and contract
manufacturing services.
•
Imaging Product Revenue - Revenue from our imaging products increased $2.4
million, or 22.1%, from the prior fiscal year. The increase was primarily due to
higher demand for our imaging equipment.
Operating Income
Operating income from our Adjacent Markets products for fiscal year 2022 was
$6.0 million, a decrease of $0.4 million, or 6.3% from the prior fiscal year.
The decrease in operating income was primarily due (i) a $1.3 million increase
in research and development expense, (ii) $1.0 million in incremental operating
costs attributable to our acquisition of Aquana and (iii) a $0.4 million
impairment charge on our manufacturing equipment. The decrease was largely
offset by an increase in revenue and related gross profits for fiscal year 2022.
Emerging Markets
Revenue
Revenue from our Emerging Markets products for fiscal year 2022 was $0.7
million, compared to $10.2 million from the prior fiscal year. The decrease was
due to $10.1 million of revenue recognized on our contract with the CBP during
the prior fiscal year. We were awarded this contract during fiscal year 2020 to
provide a technology solution to the Department of Homeland Security. The
majority of the revenue related to this contract was recognized in fiscal year
2021. The contract was completed in the second quarter of fiscal year 2022.
Operating Income (Loss)
Operating income (loss) from our Emerging Markets products for fiscal year 2022
was $(9.1) million, compared to $5.0 million from the prior fiscal year. The
decrease for fiscal year 2022 was primarily due to the revenue and related gross
profit recognized on our contract with the CBP in the prior fiscal year. The
decrease in operating income (loss) was also due (i) a non-cash goodwill
impairment charge of $4.3 million and (ii) a $2.0 million decrease to a
favorable non-cash adjustment to the estimated fair value of contingent
consideration related to our Quantum acquisition when compared to the same
period of the prior fiscal year.
Liquidity and Capital Resources
Fiscal Year 2022
At September 30, 2022, we had approximately $17.0 million in cash and cash
equivalents and short-term investments. For the fiscal year ended September 30,
2022, we used $10.0 million of cash from operating activities. Our net loss of
$22.9 million was offset by
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net non-cash charges of $24.6 million resulting from deferred income taxes,
depreciation, amortization, asset impairments, accretion, inventory
obsolescence, stock-based compensation, bad debt expense and changes in the
estimated fair value of contingent consideration. Other uses of cash in our
operations primarily included (i) the removal of $11.1 million gross profit from
the sale of used rental equipment as it is included in investing activities,
(ii) a $0.8 million decrease in accounts payable due to the timing of payments
to suppliers, (iii) a $2.4 million increase in inventories to meet an increase
in demand for our Adjacent Markets products and (iv) a $0.7 million decrease in
other liabilities primarily due to a decrease in customer deposits on rental
equipment and a decrease in accrued compensation costs. Offsetting these uses of
cash primarily included (i) a $1.8 million decrease in trade accounts and notes
receivable primarily due to the timing of collections from customers and (ii) a
$1.1 million decrease in unbilled receivables resulting from the collection of
billings to the CBP.
For the fiscal year ended September 30, 2022, we generated cash of $14.1 million
in investing activities. Sources of cash included (i) net proceeds of $8.5
million from the sale of short-term investments and (ii) proceeds of $11.6
million from the sale of used rental equipment. Offsetting these sources were
(i) $1.1 million for additions to our property, plant and equipment and (ii)
$4.8 million for additions to our equipment rental fleet. We expect our cash
investments in our rental fleet to be approximately $6 million in fiscal year
2023. We expect fiscal year 2023 cash investments in property, plant and
equipment will be approximately $1 million during fiscal year 2023. Our capital
expenditures are expected to be funded from our cash on hand, internal cash
flows, cash flows from our rental contracts or, if necessary, borrowings under
our new credit agreement.
For the fiscal year ended September 30, 2022, we used $1.7 million from
financing activities. Uses of cash included (i) $0.8 million for contingent
consideration payments to the former shareholders of Quantum, (ii) debt issuance
costs of $0.2 million incurred in connection with our new credit agreement and
(iii) $0.7 million for the purchase of treasury stock pursuant to a stock
buy-back program authorized by our board of directors in November 2020. The
stock buy-back program authorized us to repurchase up to $7.5 million of our
common stock in open market transactions. The program was completed in November
2021.
Our available cash and cash equivalents and short-term investments totaled $17.0
million at September 30, 2022, which included $2.6 million of cash and cash
equivalents held by our foreign subsidiaries and branch offices, of which $1.8
million was held by our subsidiary in the Russian Federation. . In response to
sanctions imposed by the U.S. and others on Russia, the Russian government has
imposed restrictions on companies' abilities to repatriate or otherwise remit
cash from their Russian-based operations to locations outside of Russia. As a
result, this cash can be used in our Russian operations, but we may be unable to
transfer it out of Russia without incurring substantial costs, if at all. In
addition, if we were to repatriate the cash held by our Russian subsidiary, we
would be required to accrue and pay taxes on any amount repatriated.
In May 2022, we entered into a credit agreement (the "Agreement") with
Amerisource Funding, Inc., as administrative agent and as a lender, and
Woodforest National Bank, as a lender. Available borrowings under the Agreement
are determined by a borrowing base with a maximum availability of $10 million.
The borrowing base is determined based upon certain of our domestic assets which
include (i) 70% loan to value of our property located at 6410 Langfield Road in
Houston, Texas (the "Property"), (ii) 50% of forced liquidation value of
equipment, (iii) 80% of certain accounts receivable and (iv) 50% of forced
liquidation value of certain inventory (inventory borrowing base limited to 100%
of borrowing base credit given toward accounts receivable). The Agreement is for
a two-year term with all funds borrowed due at the expiration of the term. The
interest rate on borrowed funds is the Wall Street prime rate (with a minimum of
3.25%) plus 4.00%. We are required to make monthly interest payments on borrowed
funds. Borrowings under the Agreement will be principally secured by the
Property and our domestic equipment, inventory and accounts receivables. In
addition, certain of our domestic subsidiaries have guaranteed our obligations
under the Agreement and such subsidiaries have secured the obligations by
pledging certain assets. The Agreement requires us to maintain a minimum
consolidated tangible net worth of $100 million. We expect to remain in
compliance with this requirement in fiscal year 2023.
At September 30, 2022, we had no borrowings outstanding and were compliant with
all covenants under the Agreement. Our borrowing availability at September 30,
2022 was $8.5 million. We do not currently anticipate the need to borrow under
the Agreement, however, we may decide to do so in the future, if needed.
Our available cash and cash equivalent and short-term investments decreased $6.6
million during fiscal year 2022. In the absence of future profitable results of
operations, we may need to rely on other sources of liquidity to fund our future
operations, including executed rental contracts, available borrowings under our
Agreement through its expiration in May 2024, leveraging or sales of real estate
assets, sales of rental assets and other liquidity sources which may be
available to us. We currently believe that our cash, cash equivalents and
short-term investments will be sufficient to finance any future operating losses
and planned capital expenditures through the next twelve months.
We do not have any obligations which meet the definition of an off-balance sheet
arrangement and which have or are reasonably likely to have a current or future
effect on our financial statements or the items contained therein that are
material to investors.
Contractual Obligations
Contingent Consideration
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We recorded an initial contingent consideration liability of $7.7 million in
connection with our July 2018 acquisition of Quantum. Subsequent to the
acquisition, we reduced the liability to $0.2 million as of September 30, 2022
as a result of $2.3 million of earn-out payments made through June 2022 and $5.2
million in adjustments to reduce the value of expected future payments.
Contingent payments derived from eligible revenue generated during the four-year
post-acquisition period ended July 2022 can be paid in the form of cash or
Company stock. In November 2022, the Company paid in cash the remaining $0.2
million liability to the former shareholders of Quantum. Subsequent to this
payment, there are no further contingent payment obligations related to this
acquisition.
We recorded an initial contingent consideration liability of $4.3 million in
connection with our November 2018 acquisition of all the intellectual property
and related assets of the OptoSeis® fiber optic sensing technology. We decreased
the estimated liability to zero as of September 30, 2022 as a result of the
unlikelihood any eligible revenue will be generated during the earn-out period.
Contingent cash payments were to be derived from eligible revenue generated
during a five-and-a-half year post-acquisition 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, which ended
November 13, 2022. No sales contracts were entered into during this period and
we have no contingent payment obligations related to this acquisition.
Contingent Compensation Costs
In connection with the acquisition of Aquana in July 2021, we are subject to
additional contingent cash payments to the former members of Aquana 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 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 receive 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.
See Note 18 to our consolidated financial statements in this Annual Report on
Form 10-K for more information on our contractual contingencies.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the use of estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. We consider many factors in selecting appropriate
operational and financial accounting policies and controls, and in developing
the estimates and assumptions that are used in the preparation of these
financial statements. We continually evaluate our estimates, including those
related to revenue recognition, bad debt reserves, inventory obsolescence
reserves, goodwill and long-lived asset impairment. We base our estimates on
historical experience and various other factors, including the impact from the
current economic conditions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates under different
conditions or assumptions.
Our normal credit terms for trade receivables are 30 days. In certain
situations, credit terms for trade receivables may be extended to 60 days or
longer and such receivables generally do not require collateral. Additionally,
we provide long-term financing in the form of promissory notes and sales-type
leases when competitive conditions require such financing and, in such cases, we
may require collateral. We perform ongoing credit evaluations of our accounts
and financing receivables, and allowances are recognized for potential credit
losses.
Our 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.
We conduct our evaluation of goodwill at the reporting unit level on an annual
basis as of September 30 and more frequently if events or circumstances indicate
that the carrying value of a reporting unit exceeds its fair value. The guidance
on the testing of goodwill for impairment provides the option to first assess
qualitative factors to determine if the fair value of a reporting unit exceeds
its carrying amount. If, based on the qualitative assessment of events or
circumstances, an entity determines it is more likely than not that the fair
value of a reporting unit is more than its carrying amount then it is not
necessary to perform a quantitative assessment. However, if an entity concludes
otherwise, then a quantitative assessment must be performed. If, based on the
quantitative assessment, we determine that the fair value of a reporting unit is
less that its carrying amount, a goodwill impairment is recognized equal to the
difference between the carrying amount of the reporting unit and its fair value,
not to exceed the carrying amount of the goodwill.
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We record a write-down of our inventories when the cost basis of any
manufactured product, including any estimated future costs to complete the
manufacturing process, exceeds its net realizable value. Inventories are stated
at the lower of cost or net realizable value. Cost is determined on a first-in,
first-out method, except that our subsidiaries in the Russian Federation and the
United Kingdom use an average cost method to value their inventories.
We periodically review the composition of our inventories to determine if market
demand, product modifications, technology changes, excessive quantities on-hand
and other factors hinder our ability to recover our investment in such
inventories. Management'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 our inventory investment will not be realized in our
operating activities.
The value of our inventories not expected to be realized in cash, sold or
consumed during our next operating cycle are classified as non-current assets in
our consolidated balance sheets.
We recognize revenue from product sales and services in accordance with ASC
Topic 606, Revenue from Contracts with Customers. This standard applies to
contracts for the sale of products and services and does not apply to contracts
for the rental or lease of products. Under this standard, we recognize revenue
when performance of contractual obligations are satisfied, generally when
control of the promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled in exchange for
those goods or services. Revenue from product sales is recognized when
obligations under the terms of a contract are satisfied, control is transferred
and collectability of the sales price is reasonably assured. Transfer of control
generally occurs with shipment or delivery, depending on the terms of the
underlying contract. Our products are generally sold without any customer
acceptance provisions, and our standard terms of sale do not allow customers to
return products for credit. Most of our products do not require installation
assistance or sophisticated instruction. We offer a standard product warranty,
which obligates us to repair or replace our products having manufacturing
defects. We maintain a reserve for future warranty costs based on historical
experience or, in the absence of historical experience, management estimates.
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. We recognize rental revenue as earned over the rental period.
Rentals of our equipment generally range from daily rentals to rental periods of
up to six months or longer.
We recognize rental revenue in accordance with ASC Topic 842, Leases. In the
event collectability of lease payments is not probable at the lease commencement
date, we recognize revenue when payments are received. We regularly evaluate the
collectability of our 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. We suspend the recognition of rental
revenue when the collectability of amounts due are no longer probable and record
a direct write-off of the lease receivable to rental revenue.
Recent Accounting Pronouncements
Please refer to Note 1 to our consolidated financial statements contained in
this Annual Report for a discussion of recent accounting pronouncements.
Management's Current Outlook and Assumptions
As further discussed above, there remains uncertainties regarding the duration
and to what extent the COVID-19 pandemic will ultimately impact the demand for
our products and services or with our supply chain.
Regarding our Oil and Gas Markets business segment, demand for our products are
subject to volatile fluctuations in crude oil prices. As a result of substantial
declines in crude oil prices in recent years combined with the recent reduced
global demand for oil and gas as a result of the COVID-19 pandemic, oil and gas
exploration and production companies experienced a significant reduction in cash
flows resulting in sharp reductions in their capital spending budgets for oil
and gas exploration-focused activities including seismic data acquisition
activities. While we have experienced stronger marine nodal rental activity in
fiscal year 2022, the need for new seismic equipment, particularly land-based
equipment, remains restrained due to our customers' (i) limited capital
resources, (ii) lack of visibility into future demand for their seismic services
and (iii) in some cases, under-utilized legacy equipment. Crude oil prices have
recently rebounded; however, lasting higher levels of oil and gas commodity
pricing may not stabilize in the long term, thus continuing the challenging
industry conditions we have experienced in previous fiscal years.
Many of our land-based traditional seismic products can be damaged, destroyed or
otherwise consumed during our customer's field operations. We expect fiscal year
2023 demand for our land-based traditional seismic products may increase
slightly over fiscal year 2022 levels.
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It is uncertain what revenue impact our land-based wireless data recorder will
have during fiscal year 2023 in light of the tepid market demand for oil and gas
seismic services and equipment, but we are optimistic demand during fiscal year
2023 will exceed fiscal year 2022 levels.
The vast majority of our oil and gas rental revenue in fiscal year 2022 was
derived from short-term rentals of our OBX ocean-bottom recorder. We believe our
OBX rental revenue will increase substantially in fiscal year 2023 as a result
of rental contracts executed during fiscal year 2022 and anticipated new rental
contracts, but we can make no assurance in this regard.
We expect that fiscal year 2023 revenue from our oil and gas reservoir products,
and principally our borehole tools and services, will increase slightly over
fiscal year 2022 levels. We have not received any orders for a large-scale
seabed PRM system since November 2012, although we do believe opportunities for
PRM orders do exist in today's market. If a large scale PRM order were received
in fiscal year 2023, it could significantly impact our fiscal year 2023 or
fiscal year 2024 revenue and profits.
We expect fiscal year 2023 revenue from our Adjacent Markets products to
increase over fiscal year 2022 levels due to our acquisition of Aquana and
intergration of Aquana's products into our business and optimisim that demand
for our industrial, imaging products and contract manufacturing services will
continue to increase in fiscal year 2023.
We expect fiscal year 2023 revenue from our Emerging Markets products to
increase over 2022 levels largely due to optimism of obtaining new
security-related contracts and opportunities with oil and gas industry
customers.
© Edgar Online, source Glimpses
GEOSPACE TECHNOLOGIES CORPORATION 
