The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Significant Accounting Policies
Basis of Presentation
The consolidated balance sheet of Geospace Technologies Corporation and its subsidiaries (the “Company”) at September 30, 2022 was derived from the Company’s audited consolidated financial statements at that date. The consolidated balance sheet at March 31, 2023 and the consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the three and six months ended March 31, 2023 and 2022 were prepared by the Company without audit. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows were made. All intercompany balances and transactions have been eliminated. The results of operations for the three and six months ended March 31, 2023 are not necessarily indicative of the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America ("U.S.") were omitted pursuant to the rules of the Securities and Exchange Commission. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2022.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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 revenue recognition, 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, impairment of goodwill and other 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 March 31, 2023 and September 30, 2022, the Company had restricted cash of $0.3 million and $0.2 million, respectively. The restricted cash at March 31, 2023 consisted of collateral on a standby letter of credit and a deposit with a bank, which serves as collateral on employee issued credit cards. At March 31, 2023, cash and cash equivalents included $4.5 million held by the Company’s foreign subsidiaries and branch offices, including $3.2 million held by its 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 the Company may be unable to transfer it out of Russia without incurring substantial costs, if at all. In addition, if the Company were to repatriate the cash held by its Russian subsidiary, it would be required to accrue and pay taxes on any amount repatriated. During the second quarter of fiscal year 2023, in light of recent volatility in the financial markets, the Company entered into an IntraFi Cash Service ("ISC") Deposit Placement Agreement with IntraFi Network LLC through its primary bank, Woodforest National Bank. The ICS program offers access to unlimited Federal Deposit Insurance Corporation ("FDIC') insurance on the Company's domestically held cash in excess of $5.0 million, thereby mitigating its of falling outside of FDIC coverage limits.
Impairment of Long-lived Assets
The Company's long-lived assets are reviewed for impairment whenever an event or circumstance indicates that the carrying amount of an asset or group of assets may not be recoverable. The impairment review, if necessary, includes a comparison of the 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. During the quarter ended March 31, 2023, no events or changes in circumstances were identified indicating the carrying value of any of the Company's asset groups may not be recoverable.
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 smaller reporting company, the Company must adopt this standard no later than the first quarter of its fiscal year ending September 30, 2024, although 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 evaluate the impact of this new guidance 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 one year. 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.
At March 31, 2023, the Company had deferred contract liabilities of $0.5 million and deferred contract costs of $0.1 million. At September 30, 2022, the Company had no deferred liabilities or deferred contract costs. During the three and six months ended March 31, 2023 and 2022, no revenue was recognized from deferred contract liabilities and no cost of revenue was recognized from deferred contract costs.
At March 31, 2023, the Company had no unsatisfied performance obligations for contracts having an original duration of one year or less.
For each of the Company’s operating segments, the following table presents revenue (in thousands) only from the sale of products and the performance of services under contracts with customers. Therefore, the table excludes all revenue earned from rental contracts.
| | | Three Months Ended | | | Six Months Ended | |
| | | March 31, 2023 | | | March 31, 2022 | | | March 31, 2023 | | | March 31, 2022 | |
| Oil and Gas Markets | | | | | | | | | | | | | | | | |
| Traditional exploration product revenue | | $ | 3,296 | | | $ | 1,217 | | | $ | 6,051 | | | $ | 1,797 | |
| Wireless exploration product revenue | | | 1,411 | | | | 10,500 | | | | 7,170 | | | | 14,258 | |
| Reservoir product revenue | | | 132 | | | | 394 | | | | 287 | | | | 821 | |
| Total revenue | | | 4,839 | | | | 12,111 | | | | 13,508 | | | | 16,876 | |
| | | | | | | | | | | | | | | | | |
| Adjacent Markets | | | | | | | | | | | | | | | | |
| Industrial product revenue | | | 9,642 | | | | 5,993 | | | | 17,572 | | | | 11,006 | |
| Imaging product revenue | | | 3,029 | | | | 3,162 | | | | 5,885 | | | | 6,279 | |
| Total revenue | | | 12,671 | | | | 9,155 | | | | 23,457 | | | | 17,285 | |
| | | | | | | | | | | | | | | | | |
| Emerging Markets | | | | | | | | | | | | | | | | |
| Revenue | | | 191 | | | | 299 | | | | 284 | | | | 436 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 17,701 | | | $ | 21,565 | | | $ | 37,249 | | | $ | 34,597 | |
See Note 14 for more information on the Company’s operating segments.
For each of the geographic areas where the Company operates, the following table presents revenue (in thousands) from the sale of products and services under contracts with customers. The table excludes all revenue earned from rental contracts:
| | | Three Months Ended | | | Six Months Ended | |
| | | March 31, 2023 | | | March 31, 2022 | | | March 31, 2023 | | | March 31, 2022 | |
| Asia | | $ | 1,443 | | | $ | 1,679 | | | $ | 7,977 | | | $ | 6,357 | |
| Canada | | | 333 | | | | 659 | | | | 1,094 | | | | 1,057 | |
| Europe | | | 1,792 | | | | 11,432 | | | | 2,926 | | | | 12,743 | |
| United States | | | 13,479 | | | | 7,305 | | | | 24,070 | | | | 13,324 | |
| Other | | | 654 | | | | 490 | | | | 1,182 | | | | 1,116 | |
| Total | | $ | 17,701 | | | $ | 21,565 | | | $ | 37,249 | | | $ | 34,597 | |
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. 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. No gains or losses were realized during the three and six months ended March 31, 2023 from the sale of short-term investments. For the three and six months ended March 31, 2022, the Company realized losses of $11,000 and $18,000 from the sale of short-term investments.
The Company’s short-term investments were composed of the following (in thousands):
| | | September 30, 2022 (in thousands) | |
| | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
| Short-term investments: | | | | | | | | | | | | | | | | |
| Corporate bonds | | $ | 909 | | | $ | — | | | $ | (15 | ) | | $ | 894 | |
The Company had no short-term investments at March 31, 2023.
4. Fair Value of Financial Instruments
The Company’s financial instruments generally include cash and cash equivalents, short-term investments, trade accounts and notes receivable and accounts payable. Due to the short-term maturities of cash and cash equivalents, trade accounts and notes receivable and accounts payable, the carrying amounts of these financial instruments are deemed to approximate their fair value on the respective balance sheet dates. The valuation technique used to measure the fair value of the contingent consideration was based on internal estimates and the use of internal projections of future revenue.
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, 2022 | |
| | | Quoted Prices in | | | Significant | | | | | | | | | |
| | | Active Markets for | | | Other | | | Significant | | | | | |
| | | Identical Assets | | | Observable | | | Unobservable | | | | | |
| | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Totals | |
| Short-term investments: | | | | | | | | | | | | | | | | |
| Corporate bonds | | $ | — | | | $ | 894 | | | $ | — | | | $ | 894 | |
| Total assets | | $ | — | | | $ | 894 | | | $ | — | | | $ | 894 | |
| | | | | | | | | | | | | | | | | |
| Contingent consideration liabilities: | | $ | — | | | $ | — | | | $ | 175 | | | $ | 175 | |
| Total liabilities | | $ | — | | | $ | — | | | $ | 175 | | | $ | 175 | |
The Company had no short-term investments or contingent consideration payable at March 31, 2023.
The following table summarizes changes in the fair value of the Company’s Level 3 financial instruments for the six months ended March 31, 2023 and 2022 (in thousands):
| Contingent consideration balance at October 1, 2022 | | $ | 175 | |
| Fair value adjustments | | | — | |
| Payment of contingent consideration | | | (175 | ) |
| Contingent consideration at March 31, 2023 | | $ | — | |
| | | | | |
| Contingent consideration balance at October 1, 2021 | | $ | 6,017 | |
| Fair value adjustments | | | (4,658 | ) |
| Payment of contingent consideration | | | (807 | ) |
| Contingent consideration balance at March 31, 2022 | | $ | 552 | |
Adjustments to the fair value of the contingent consideration were based on internal estimates and management assessments regarding potential future scenarios which involved significant judgment.
5. Trade Accounts and Notes Receivable
Trade accounts receivable, net (excluding notes receivable) are reflected in the following table (in thousands):
| | | March 31, 2023 | | | September 30, 2022 | |
| Trade accounts receivable | | $ | 21,631 | | | $ | 13,252 | |
| Allowance for doubtful accounts | | | (706 | ) | | | (591 | ) |
| Total | | $ | 20,925 | | | $ | 12,661 | |
The allowance for doubtful accounts represents the Company’s best estimate of probable credit losses. The Company determines the allowance based upon historical experience and a current review of its trade accounts receivable balances. Trade accounts receivable balances are charged off against the allowance whenever it is probable that the receivable balance will not be recoverable.
Notes receivable are reflected in the following table (in thousands):
| | | March 31, 2023 | | | September 30, 2022 | |
| Notes receivable | | $ | 4,983 | | | $ | 8,225 | |
| Less current portion | | | (4,983 | ) | | | (8,225 | ) |
| Non-current notes receivable | | $ | — | | | $ | — | |
Promissory notes receivable are generally collateralized by the products sold, and bear interest at rates ranging from 7.0% to 9.5% per year. The promissory notes receivable mature at various times through January 2024. 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 2022, the Company partially financed a $10.0 million sale of rental equipment by entering into a $8.0 million promissory note with a customer. The note has a one-year term, with principal and interest payments due quarterly until maturity. The balance outstanding on the promissory note at March 31, 2023 was $2.0 million.
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. During the fourth quarter of fiscal year 2021, the Company granted the customer a six-month principal payment forbearance. The customer recommenced its monthly payments to the Company in the second quarter of fiscal year 2022. In October 2022, the Company granted the customer an additional six-month principal payment forbearance. The customer has made payments totaling $9.5 million (exclusive of interest) as of March 31, 2023 related to the product sale, and the balance outstanding on the promissory note at March 31, 2023 was $3.0 million.
6. Inventories
Inventories consist of the following (in thousands):
| | | March 31, 2023 | | | September 30, 2022 | |
| Finished goods | | $ | 17,681 | | | $ | 14,653 | |
| Work in process | | | 7,331 | | | | 6,230 | |
| Raw materials | | | 29,046 | | | | 25,609 | |
| Obsolescence reserve (net realizable value adjustment) | | | (16,073 | ) | | | (13,971 | ) |
| | | | 37,985 | | | | 32,521 | |
| Less current portion | | | 20,477 | | | | 19,995 | |
| Non-current portion | | $ | 17,508 | | | $ | 12,526 | |
Raw materials include semi-finished goods and component parts that totaled $11.5 million and $9.4 million at March 31, 2023 and September 30, 2022, respectively.
7. Property, Plant and Equipment
In February 2023, the Company completed the sale of its satellite property located at 6410 Langfield Road in Houston, Texas for a cash price of $3.7 million, net of closing costs of $0.3 million, and realized a gain on disposal of $1.3 million. The Company is in the process of relocating the operations of this facility to its main campus at 7007 Pinemont Drive in Houston, Texas. The satellite property provides additional warehousing and maintenance and repair capacity for the Company’s marine rental equipment operations. In conjunction with the sale, the Company entered into a three-month lease agreement with the buyer to remain in possession of the facility during the relocation process. The sale was part of the Company’s plan to streamline operations and reduce costs.
Property, plant and equipment consisted of the following (in thousands):
| | | March 31, 2023 | | | September 30, 2022 | |
| Land and land improvements | | $ | 7,290 | | | $ | 7,855 | |
| Building and building improvements | | | 21,903 | | | | 24,588 | |
| Machinery and equipment | | | 49,657 | | | | 59,393 | |
| Furniture and fixtures | | | 1,489 | | | | 1,434 | |
| Tools and molds | | | 3,280 | | | | 3,243 | |
| Construction in progress | | | 962 | | | | 341 | |
| Transportation equipment | | | 75 | | | | 74 | |
| | | | 84,656 | | | | 96,928 | |
| Accumulated depreciation and impairment | | | (61,966 | ) | | | (70,330 | ) |
| | | $ | 22,690 | | | $ | 26,598 | |
Property, plant and equipment depreciation expense for the three and six months ended March 31, 2023 was $0.9 million and $1.9 million, respectively. Property, plant and equipment depreciation expense for the three and six months ended March 31, 2022 was $1.0 million and $2.1 million, respectively.
8. Leases
As Lessee
The Company has elected not to record operating right-of-use assets or operating lease liabilities on its consolidated balance sheet for leases having a minimum term of 12 months or less. Such leases are expensed on a straight-line basis over the lease term. Variable lease payments are excluded from the measurement of operating right-of-use assets and operating lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As of March 31, 2023, 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 March 31, 2023 were as follows: (in thousands):
| For fiscal years ending September 30, | | | | |
| 2023 (remainder) | | $ | 147 | |
| 2024 | | | 278 | |
| 2025 | | | 186 | |
| 2026 | | | 130 | |
| 2027 | | | 134 | |
| 2028 | | | 91 | |
| Future minimum lease payments | | | 966 | |
| Less interest | | | (64 | ) |
| Present value of minimum lease payments | | | 902 | |
| Less current portion | | | (248 | ) |
| Non-current portion | | $ | 654 | |
Lease costs recognized in the consolidated statements of operations for the three and six months ended March 31, 2023 and 2022 were as follows (in thousands):
| | | Three Months Ended | | | Six Months Ended | |
| | | March 31, 2023 | | | March 31, 2022 | | | March 31, 2023 | | | March 31, 2022 | |
| Right-of-use operating lease costs | | $ | 68 | | | $ | 68 | | | $ | 136 | | | $ | 136 | |
| Short-term lease costs | | | 90 | | | | 52 | | | | 132 | | | | 96 | |
| Total | | $ | 158 | | | $ | 120 | | | $ | 268 | | | $ | 232 | |
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):
| | | Six Months Ended | |
| | | March 31, 2023 | | | March 31, 2022 | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows from operating leases | | $ | 123 | | | $ | 119 | |
| | | | | | | | | |
| Weighted average remaining lease term (in years) | | | 4.3 | | | | 5.1 | |
| Weighted average discount rate | | | 3.25 | % | | | 3.25 | % |
The discount rate used on the operating right-of-use assets represented the Company’s incremental borrowing rate at the lease inception date.
As Lessor
Equipment
The Company leases equipment to customers which generally range from daily rentals to minimum rental periods of up to one year. All of the Company’s current leasing arrangements, which the Company acts as lessor, are classified as operating leases. The majority of the Company’s rental revenue is generated from its marine-based wireless seismic data acquisition systems.
The Company regularly evaluates the collectability of its lease receivables on a lease-by-lease basis. The evaluation primarily consists of reviewing past due account balances and other factors such as the credit quality of the customer, historical trends of the customer and current economic conditions. The Company suspends revenue recognition when the collectability of amounts due are no longer probable and concurrently records a direct write-off of the lease receivable to rental revenue and limits future rental revenue recognition to cash received. As of March 31, 2023, the Company’s trade accounts receivables included lease receivables of $9.7 million.
Rental revenue related to leased equipment for the three and six months ended March 31, 2023 was $13.6 million and $25.1 million, respectively. Rental revenue related to leased equipment for the three and six months ended March 31, 2022 was $3.1 million and $8.0 million, respectively.
Future minimum lease obligations due from the Company’s leasing customers on operating leases executed as of March 31, 2023 were $21.1 million, all of which is expected to be due within the next 12 months.
Rental equipment consisted of the following (in thousands):
| | | March 31, 2023 | | | September 30, 2022 | |
| Rental equipment, primarily wireless recording equipment | | $ | 79,479 | | | $ | 83,887 | |
| Accumulated depreciation and impairment | | | (58,900 | ) | | | (55,688 | ) |
| | | $ | 20,579 | | | $ | 28,199 | |
Property
During the first quarter of fiscal year 2022, the Company leased a portion of its property located in Calgary, Alberta, Canada and fully leased its warehouse in Colombia. The lease in Canada commenced in November 2021 and is for a five-year term. The lease on the warehouse in Bogotá commenced in December 2021 and is currently on a month-to-month basis.
Rental revenue related to these two property leases for the three and six months ended March 31, 2023 was $52,000 and $98,000, respectively. Rental revenue related to these two properties for the three and six months ended March 31, 2022 was $51,000 and $81,000, respectively.
Future minimum lease payments due to the Company as of March 31, 2023 on the lease in Canada was as follows (in thousands):
| For fiscal years ending September 30, | | | | |
| 2023 (remainder) | | $ | 62 | |
| 2024 | | | 128 | |
| 2025 | | | 131 | |
| 2026 | | | 132 | |
| 2027 | | | 11 | |
| | | $ | 464 | |
9. Goodwill and Other Intangible Assets
The Company’s consolidated goodwill and other intangible assets consisted of the following (in thousands):
| | | Weighted- | | | | | | | | | |
| | | Average | | | | | | | | | |
| | | Remaining Useful | | | | | | | | | |
| | | Lives (in years) | | | March 31, 2023 | | | September 30, 2022 | |
| Goodwill: | | | | | | | | | | | |
| Emerging Markets reporting unit | | | | | $ | 4,336 | | | $ | 4,336 | |
| Adjacent Markets reporting unit | | | | | | 736 | | | | 736 | |
| Total goodwill | | | | | | 5,072 | | | | 5,072 | |
| Accumulated impairment losses | | | | | | (4,336 | ) | | | (4,336 | ) |
| | | | | | $ | 736 | | | $ | 736 | |
| | | | | | | | | | | | |
| Other intangible assets: | | | | | | | | | | | |
| Developed technology | | 13.7 | | | $ | 6,475 | | | $ | 6,475 | |
| Customer relationships | | -- | | | | 3,900 | | | | 3,900 | |
| Trade names | | 0.5 | | | | 2,022 | | | | 2,022 | |
| Non-compete agreements | | 0.2 | | | | 186 | | | | 186 | |
| Total other intangible assets | | 7.1 | | | | 12,583 | | | | 12,583 | |
| Accumulated amortization | | | | | | (7,440 | ) | | | (7,010 | ) |
| | | | | | $ | 5,143 | | | $ | 5,573 | |
At March 31, 2023, the Company had goodwill of $0.7 million and other intangible assets, net of $0.6 million attributable to its Adjacent Markets reporting unit; other intangible assets, net of $3.2 million attributable to its Emerging Markets reporting unit; and other intangible assets, net of $1.4 million attributable to its Oil and 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 March 31, 2023, the Company determined there were no triggering events requiring an impairment assessment of its goodwill and other intangible assets. The Company performs its annual goodwill impairment test in the fourth quarter. If the Company determines that the future cash flows anticipated to be generated from its reporting units will not be sufficient to recover the carrying amount of the respective reporting unit, it will need to recognize an impairment charge equal to the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying amount of the goodwill.
Other intangible asset amortization expense for the three and six months ended March 31, 2023 and 2022 was $0.2 million and $0.4 million, respectively. Other intangible asset amortization expense for the three and six months ended March 31, 2022 was $0.4 million and $0.9 million, respectively.
As of March 31, 2023, future estimated amortization expense of other intangible assets is as follows (in thousands):
| For fiscal years ending September 30, | | | | |
| 2023 (remainder) | | $ | 337 | |
| 2024 | | | 395 | |
| 2025 | | | 381 | |
| 2026 | | | 374 | |
| 2027 | | | 360 | |
| Thereafter | | | 3,296 | |
| | | $ | 5,143 | |
10. Long-Term Debt
The Company had no long-term debt outstanding at March 31, 2023 and September 30, 2022.
In May 2022, the Company 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 the Company's domestic assets which include (i) 70% loan to value of the Company's 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%. The Company is required to make monthly interest payments on borrowed funds. Borrowings under the Agreement will be principally secured by the Property and the Company's domestic equipment, inventory and accounts receivables. In addition, certain domestic subsidiaries of the Company have guaranteed the obligations of the Company under the Agreement and such subsidiaries have secured the obligations by pledging certain assets. The Agreement requires the Company to maintain a minimum consolidated tangible net worth of $100 million. At March 31, 2023, the Company was compliant with all covenants under the Agreement.
As discussed in Note 7, the Property was sold in February 2023. The sale reduced the Company's borrowing availability under the Agreement to $5.5 million at March 31, 2023. The Company is currently in discussions with one of the lenders on a new credit facility which would be secured by other alternative domestic assets.
Debt issuance costs of $0.2 million were incurred in connection with the Agreement. These costs were capitalized in other assets on the consolidated balance sheet and are being amortized to interest expense over the term of the Agreement.
11. Stock-Based Compensation
During the six months ended March 31, 2023, the Company issued 211,375 restricted stock units (“RSUs”) under its 2014 Long Term Incentive 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 was $4.65 per unit. The grant date fair value of the RSUs was $1.0 million, which will be charged to expense over the next four years as the restrictions lapse. Compensation expense for the RSUs was determined based on the closing market price of the Company’s stock on the date of grant applied to the total number of units that are anticipated to fully vest. Each RSU represents a contingent right to receive one share of the Company’s common stock upon vesting.
As of March 31, 2023, there were 394,924 RSUs outstanding. As of March 31, 2023, the Company had unrecognized compensation expense of $2.2 million relating to RSUs that is expected to be recognized over a weighted average period of 2.7 years.
12. Earnings (Loss) Per Common Share
The following table summarizes the calculation of net earnings (loss) and weighted average common shares and common equivalent shares outstanding for purposes of the computation of earnings (loss) per share (in thousands, except share and per share data):
| | | Three Months Ended | | | Six Months Ended | |
| | | March 31, 2023 | | | March 31, 2022 | | | March 31, 2023 | | | March 31, 2022 | |
| Net income (loss) | | $ | 4,637 | | | $ | (1,474 | ) | | $ | 4,540 | | | $ | (8,242 | ) |
| Less: Income allocable to unvested restricted stock | | | — | | | | — | | | | — | | | | — | |
| Income (loss) attributable to common shareholders for diluted earnings (loss) per share | | $ | 4,637 | | | $ | (1,474 | ) | | $ | 4,540 | | | $ | (8,242 | ) |
| Weighted average number of common share equivalents: | | | | | | | | | | | | | | | | |
| Common shares used in basic earnings (loss) per share | | | 13,156,715 | | | | 12,999,022 | | | | 13,111,866 | | | | 12,958,911 | |
| Common share equivalents outstanding related to RSUs | | | — | | | | — | | | | — | | | | — | |
| Total weighted average common shares and common share equivalents used in diluted earnings (loss) per share | | | 13,156,715 | | | | 12,999,022 | | | | 13,111,866 | | | | 12,958,911 | |
| Earnings (loss) per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.35 | | | $ | (0.11 | ) | | $ | 0.35 | | | $ | (0.64 | ) |
| Diluted | | $ | 0.35 | | | $ | (0.11 | ) | | $ | 0.35 | | | $ | (0.64 | ) |
For the calculation of diluted earnings (loss) per share for the three and six months ended March 31, 2023 and the three and six months ended March 31, 2022, 394,924 and 371,484 non-vested RSUs, respectively, were excluded in the calculation of weighted average shares outstanding since their impact on diluted earnings (loss) per share was antidilutive.
13. Commitments and Contingencies
Contingent Compensation Costs
In connection with the acquisition of Aquana, LLC (“Aquana”) in July 2021, the Company is 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 for any earn-out payments. Due to the continued employment requirement, no liability has been recorded for the estimated fair value of earn-out payments for this transaction. Earn-outs achieved, if any, will be recorded as compensation expense when incurred. No eligible revenue has been generated to date.
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.
14. Segment 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, as well as and 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.
The following table summarizes the Company’s segment information (in thousands):
| | | Three Months Ended | | | Six Months Ended | |
| | | March 31, 2023 | | | March 31, 2022 | | | March 31, 2023 | | | March 31, 2022 | |
| Revenue: | | | | | | | | | | | | | | | | |
| Oil and Gas Markets | | $ | 18,419 | | | $ | 15,146 | | | $ | 38,567 | | | $ | 24,800 | |
| Adjacent Markets | | | 12,708 | | | | 9,203 | | | | 23,530 | | | | 17,374 | |
| Emerging Markets | | | 191 | | | | 299 | | | | 284 | | | | 436 | |
| Corporate | | | 52 | | | | 52 | | | | 98 | | | | 81 | |
| Total | | $ | 31,370 | | | $ | 24,700 | | | $ | 62,479 | | | $ | 42,691 | |
| | | | | | | | | | | | | | | | | |
| Income (loss) from operations: | | | | | | | | | | | | | | | | |
| Oil and Gas Markets | | $ | 4,176 | | | $ | 1,656 | | | $ | 6,582 | | | $ | (2,514 | ) |
| Adjacent Markets | | | 3,055 | | | | 1,292 | | | | 4,802 | | | | 2,500 | |
| Emerging Markets | | | (1,007 | ) | | | (1,384 | ) | | | (2,220 | ) | | | (2,204 | ) |
| Corporate | | | (1,847 | ) | | | (3,213 | ) | | | (5,066 | ) | | | (6,317 | ) |
| Total | | $ | 4,377 | | | $ | (1,649 | ) | | $ | 4,098 | | | $ | (8,535 | ) |
15. Income Taxes
Consolidated income tax expense for the three and six months ended March 31, 2023 was $19,000 and $49,000, respectively. Consolidated income tax expense for the three and six months ended March 31, 2022 was $25,000 and $102,000, respectively. The primary difference between the Company's effective tax rate and the statutory rate is adjustments to the valuation allowance against deferred tax assets.
16. Risks and Uncertainties
Concentration of Credit Risk
As of March 31, 2023, the Company had combined trade accounts and notes receivable from three customers of $8.5 million, $4.9 million and $3.4 million, respectively. During the three months ended March 31, 2023, revenue recognized from these three customers was $9.9 million, $2.9 million and $1.2 million, respectively. During the six months ended March 31, 2023, revenue recognized from these three customers was $17.9 million, $5.6 million and $2.9 million, respectively.
COVID-19 Pandemic
The ongoing COVID-19 pandemic has spread across the globe and has negatively impacted worldwide economic activity and continues to create challenges in the Company’s markets. COVID-19 and the related mitigation measures have disrupted the Company’s supply chain, resulting in longer lead times in materials available from suppliers and extended the shipping time for these materials to reach the Company’s facilities. If COVID–19 were again to spread or the response to contain the COVID–19 pandemic were to be unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and liquidity.
Oil Commodity Price Levels
Demand for many of the Company’s products and the profitability of its operations depend primarily on the level of worldwide oil and gas exploration activity. Prevailing oil and gas prices, with an emphasis on crude oil prices, and market expectations regarding potential changes in such prices significantly affect the level of worldwide oil and gas exploration activity. During periods of improved energy commodity prices, the capital spending budgets of oil and natural gas operators tend to expand, which results in increased demand for our customers services leading to increased demand in the Company’s products. Conversely, in periods when these energy commodity prices deteriorate, capital spending budgets of oil and natural gas operators tend to contract causing demand for the Company’s products to weaken. Historically, the markets for oil and gas have been volatile and are subject to wide fluctuations in response to changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond its control. These factors include the level of consumer demand, regional and international economic conditions, weather conditions, domestic and foreign governmental regulations (including those related to climate change), price and availability of alternative fuels, political conditions, the war between Russian and Ukraine, instability and hostilities in the Middle East and other significant oil-producing regions, increases and decreases in the supply of oil and gas, the effect of worldwide energy conservation measures and the ability of the Organization of Petroleum Exporting Countries ("OPEC') to set and maintain production levels and prices of foreign imports.
Crude oil prices held above $70 per barrel throughout 2022 and through March 2023, which may result in higher cash flows for exploration and production companies. Any material changes in oil and gas prices or other market trends, like slowing growth of the global economy, could adversely impact seismic exploration activity and would likely affect the demand for the Company's products and could materially and adversely affect its results of operations and liquidity.
Generally, imbalances in the supply and demand for oil and gas will affect oil and gas prices and, in such circumstances, demand for the Company’s oil and gas products may be adversely affected when world supplies exceed demand.
Armed Conflict Between Russia and Ukraine
A portion of the Company's oil and gas product manufacturing is conducted through its wholly-owned subsidiary Geospace Technologies Eurasia LLC ("GTE"), which is based in the Russian Federation. In February 2022, the Russian Federation launched a full-scale military invasion of Ukraine, and Russia and Ukraine continue to engage in active and armed conflict. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions in addition to any direct impact on the Company's operations in Russia. As a result of the invasion, the governments of several western nations, including the U.S., Canada, the United Kingdom and the European Union, implemented new and/or expanded economic sanctions and export restrictions against Russia, Russian-backed separatist regions in Ukraine, certain banks, companies, government officials, and other individuals in Russia and Belarus. The implementation of these sanctions and exports restrictions, in combination with the withdrawal of numerous private companies from the Russian market, has had, and is likely to continue to have, a negative impact on the Company's business in the region. During fiscal year 2022 the Company imported $1.9 million of products from GTE for resale elsewhere in the world, and imported $2.3 during the first six months of fiscal year 2023. The rapid changes in rules and implementation of new rules on imports and exports of goods involving Russia has also led to serious delays in getting goods to or from Russia as port authorities struggle to keep up with the changing environment. If imports of these products from the Russian Federation are restricted by government regulation, the Company may be forced to find other sources for the manufacturing of these products at potentially higher costs. Likewise, restrictions on the Company's ability to send products to our subsidiary in Russia, may force our subsidiary to have to find other sources for the manufacturing of these products at potentially higher costs; however, the Company's exports to GTE have historically been limited. Boycotts, protests, unfavorable regulations, additional governmental sanctions and other actions in the region could also adversely affect the Company's ability to operate profitably. Delays in obtaining governmental approvals can affect the Company's ability to timely deliver its products pursuant to contractual obligations, which could result in the Company being liable to its customers for damages. The risk of doing business in the Russian Federation and other economically or politically volatile areas could adversely affect the Company's operations and earnings. It is possible that increasing sanctions, export controls, restrictions on access to financial institutions, supply and transportation challenges, or other circumstances or considerations could necessitate a reduction, or even discontinuation, of operations by GTE or other business in Russia.
The Company is actively monitoring the situation in Ukraine and Russia and assessing its impact on its business, including GTE. The net carrying value of this subsidiary on the Company's consolidated balance sheet at March 31, 2023 was $6.0 million, including cash of $3.2 million. 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 to the products the Company imported from GTE, the subsidiary generated $1.9 million in revenue from domestic sales in fiscal year 2022 and has generated $1.3 million from domestic sales for the first six months of fiscal year 2023. The Company has no way to predict the duration, progress or outcome of the military conflict in Ukraine. The extent and duration of the military action, sanctions, and resulting market disruptions could be significant and could potentially have substantial impact on the global economy and the Company's business for an unknown period of time.
17. Exit and Disposal Activities
During the first quarter of fiscal year 2023, the Company implemented a plan to discontinue the manufacture of certain low margin, low revenue products and reconfigure our production facilities to lower our costs and raise efficiencies. As part of the plan, reductions were made to the Company's workforce which are expected to yield an annual savings of more than $2 million. In connection with the plan, the Company incurred costs of $0.6 million in the first quarter of fiscal year 2023, primarily termination costs related to the workforce reduction. The costs were recorded both to cost of revenue and operating expenses in the consolidated statement of operations. No significant future costs are expected. As of March 31, 2023, no liabilities were outstanding related to this plan.