Geospace Technologies : Annual Report for Fiscal Year Ending 09-30, 2025 (Form 10-K)

About this update from Geospace Technologies Corporation

Management ' s Discussion and Analysis of Financial Condition and Results of Operations 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, sales or rentals for ocean bottom nodes, the adoption of Quantum's SADAR® product monitoring of subsurface reservoirs, the completion of new orders for channels of our Pioneer™ system, the fulfillment of customer payment obligations, 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 our acquisitions to yield positive operating results and decreases in commodity price levels which could reduce demand for our products, the failure of our products to achieve market acceptance (despite substantial investment by us), our sensitivity to short term backlog, delayed or cancelled customer orders, product obsolescence resulting from poor industry conditions or new technologies, bad debt write-offs associated with customer accounts, inability to collect on promissory notes, lack of further orders for our ocean bottom rental equipment, 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. 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 Hydroconn® water meter connector products, IoT water values, imaging equipment and provide contract manufacturing services. For further information 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 unpredictable, sales of our oil and gas PRM systems and/or wireless seismic data acquisition systems for land and marine applications. We report and evaluate financial information for three segments: Smart Water, Energy Solutions and Intelligent Industrial. Summary financial data by business segment follows (in thousands): YEAR ENDED SEPTEMBER 30, 2025 2024 Smart Water Product revenue $ 35,816 $ 32,434 Income from operations 5,663 9,215 Energy Solutions Product revenue 44,600 58,878 Rental revenue 6,106 19,099 Total revenue 50,706 77,977 Income from operations 388 18,570 Intelligent Industrial Product revenue 23,788 24,724 Rental revenue 172 167 Total revenue 23,960 24,891 Loss from operations (4,329 ) (6,691 ) Corporate Revenue 321 296 Loss from operations (13,006 ) (13,977 ) Consolidated Totals Revenue 110,803 135,598 Income (loss) from operations (11,284 ) 7,117 Overview Growing industry acceptance of our water meter cables and connectors provides a strong enabler for additional revenue from our Smart Water segment. Automatic meter reading efficiencies in operations and improved customer service has begun to be understood by the municipalities of the United States. We expect this portion of our business to continue to grow for the foreseeable future. Additionally, we anticipate this segment to see revenue contributions from our Aquana smart water valve and IoT technology products as market traction and increased sales backlog continues to gather. Given the well-known and often extreme volatility experienced in our Energy Solutions segment, careful expansion of products and market diversity in our Smart Water and Intelligent Industrial segments has been a longstanding part of our strategic vision and reflects our on-going diversification efforts. Our Energy Solution segment saw a shift from rentals of our ocean bottom nodes to purchases of the equipment in fiscal years 2024 and 2025. This shift signifies our customer's recognition of future backlog to justify ownership versus renting the nodes. We do not expect significant expansion of the ocean bottom nodal market, because we expect the market is saturable and future rental fleet use will come from our customers' need to temporarily expand their nodal fleet. We expect our Energy Solutions segment to provide a significant portion of our revenue for years to come, but in diminishing portion to our other segments. During the third quarter of fiscal year 2025, we entered into a PRM contract. The duration of the contract is expected to be approximately 18 months. Revenue will be recognized in our Energy Solutions segment over the duration of the contract. We continue to maintain a strong balance sheet with no debt. Our current liquidity enables our ability to seek out business acquisitions and allows us to continue investments in capital assets and product research and development, which have historically driven revenue growth. Fiscal Year 2025 Compared to Fiscal Year 2024 Consolidated revenue for fiscal year 2025 was $110.8 million, a decrease of $24.8 million, or 18.3%, from fiscal year 2024. The decrease in revenue was primarily due to lower product revenue from our Energy Solutions segment. Revenue for fiscal year 2025 included a $17 million sale of ocean bottom nodes structured as a sales-type lease. However, in comparison, revenue for fiscal year 2024 included a $30 million sale of our Mariner® shallow water ocean bottom nodes. The decrease was also attributable to a decrease in our wireless marine rental revenue. The decrease in consolidated revenue for fiscal year 2025 was partially offset by an increase in demand for our Hydroconn® cable and connector products from our Smart Water segment. Consolidated gross profit for fiscal year 2025 was $32.9 million, a decrease of $19.7 million, or 37.4%, from fiscal year 2024. The decrease in gross profit was primarily due to a decrease in ocean bottom nodes product revenue and a lower utilization of our rental fleet, and the operating costs of our rental fleet are primarily depreciation expense, which is not variable with revenue. The decrease in gross profit was also attributable to low gross margins on sales of our land-based wireless products due to very strong price competition on these products and due to an increase in tariffs on the raw materials we purchase. Consolidated operating expenses for fiscal year 2025 were $48.8 million, an increase of $3.3 million, or 7.3%, from fiscal year 2024. The increase was primarily due to (i) higher personnel costs, including severance costs and acceleration of stock-based compensation expense and (ii) an increase in sales and marketing costs. The increase was partially offset by a $2.8 million impairment charge on intangible assets in the prior year. In June 2025, we sold our real property located at 4318 Northfield Lane Houston, Texas. The 17.3-acre property served as additional property for our main campus and contained legacy structures used to support our manufacturing and warehousing operations We recognized a gain on disposal of property of $4.6 million during the third quarter of fiscal year 2025. The gain is included as a component of income (loss) from operations in the accompanying statements of operations. Segment Results of Operations Fiscal Year 2025 Compared to Fiscal Year 2024 Smart Water Revenue Revenue from our Smart Water products for fiscal year 2025 increased $3.4 million, or 10.4%, from the prior fiscal year. The increase was primarily due to an increase in demand for our Hydroconn® cable and connector products. Operating Income Operating income from our Smart Water products for fiscal year 2025 decreased $3.6 million, or 38.5%, from the prior fiscal year. The decrease was primarily due to an increase in sales and marketing and research and development costs associated with our increase in revenue. The decrease was also attributable to lower gross margins due to changes in the mix of products sold proportionally affecting the allocation of manufacturing overhead and other costs of revenue to our business segments. Energy Solutions Revenue Revenue from our Energy Solutions products for fiscal year 2025 decreased $27.3 million, or 35.0%, from fiscal year 2024. The components of this decrease were as follows: ● Product Revenue - Product revenue decreased $14.3 million, or 24.3%, from the prior fiscal year. The decrease was primarily due to lower demand for our ocean bottom nodes. Revenue for fiscal year 2025 included a $17 million sale of ocean bottom nodes and $11 million in sales of our wireless land-based Pioneer™. However, in comparison, revenue for fiscal year 2024 included a $30 million sale of our Mariner® shallow water ocean bottom nodes and an $11 million sale of our shallow water OBX 750E nodes. ● Rental Revenue - Rental revenue decreased $13.0 million, or 68.0%, from the prior fiscal year. The decrease was due to lower utilization of our ocean bottom nodes rental fleet. The decrease for fiscal year 2025 was also attributable to the reversal of a $2.2 million receivable from a rental customer against rental revenue during the second quarter of fiscal year 2025. We determined the collectability of this receivable was less than probable. Any future cash received from this customer will be recognized as rental revenue. Operating Income Operating income associated with our Energy Solutions products for fiscal year 2025 decreased $18.2 million, or 97.9%, from the prior fiscal year. The decrease was primarily due to (i) the decrease in revenues and related gross profits and (ii) higher research and development expenses, primarily personnel costs. Intelligent Industrial Revenue Revenue from our Intelligent Industrial products for fiscal year 2025 decreased $0.9 million, or 3.7%, from the prior fiscal year. The decrease was primarily due to (i) revenue recognized for fiscal year 2024 on a government contract completed in the fourth quarter of fiscal year 2024 and (ii) lower demand for our imaging products. The decrease was partially offset by an increase in demand for our sensor products and contract manufacturing services. Operating Loss Operating loss from our Intelligent Industrial products for fiscal year 2025 decreased $2.4 million, or 35.3%, from the prior fiscal year. The decrease in operating loss was primarily due to a $2.8 million non-cash impairment of intangible assets recorded in the prior fiscal year. The decrease in operating loss for fiscal year 2025 was partially offset by (i) the decrease in revenue and (ii) lower gross margins due to changes in the mix of products sold proportionally affecting the allocation of manufacturing overhead and other costs of revenue to our business segments. Liquidity and Capital Resources At September 30, 2025, we had $26.3 in cash and cash equivalents. For fiscal year 2025, we used $22.2 million of cash from operating activities. Uses of cash included (i) our net loss of $9.7 million, offset by non-cash charges of $14.6 million resulting from deferred income taxes, depreciation, amortization, accretion, inventory obsolescence, stock-based compensation and provision for credit losses, (ii) a $7.6 million increase in inventories for the strategic purchase of long lead-time components needed for use in wireless products, valves and contract manufacturing, ( iii) $4.2 million increase in trade accounts and notes receivable due to timing of collections from customers and (iv) $1.3 million increase in other assets, primarily due to prepaid product purchases. These uses of cash were partially offset b y a i) $4.8 increase in other liabilities primarily related to customer deposits and (ii) $2.4 million increase in trade accounts payable due to timing of payments to our suppliers. For fiscal year 2025, we generated cash of $42.7 million in investing activities. Sources of cash consisted of (i) $30.4 million from the sale of short-term investments, (ii) $8.7 million of proceeds from the sale of property, plant and equipment and (iii) $14.2 million in proceeds from the sale of rental equipment. These sources of cash were partially offset by (i) $8.0 million for additions to our property, plant and equipment, (ii) $1.1 million for additions to our equipment rental fleet and (iii) $1.8 million paid for our Geovox acquisition. We expect fiscal year 2026 cash investments in property, plant and equipment will be approximately $7 million. Our capital expenditures are expected to be funded from our cash on hand and internal cash flows or, if necessary, borrowings under our new credit agreement. For fiscal year 2025, we used $1.0 million from financing activities which consisted of (i) $0.4 million in debt issuance costs related the renewal of our credit agreement and (ii) $0.6 million for the purchase of treasury stock pursuant to a stock buy-back program authorized by our board of directors. The program authorized us to repurchase up to $7 million of our common stock in open market transactions. The program was completed in the second quarter of fiscal year 2025. On August 29, 2025, we amended our credit agreement ("the Agreement") with Woodforest National Bank. The Agreement extended our revolving loan agreement, dated as of July 26, 2023, with Woodforest. The Agreement is for a three-year term and provides a revolving credit facility with a maximum availability of $25 million. Interest shall accrue on outstanding borrowings at 30 Day Term SOFR plus a margin equal to 2.75% per annum. We are required to make monthly interest payments on borrowed funds. The Agreement is secured by substantially all of our assets, except for certain excluded property. The Agreement requires us to maintain (i) a minimum consolidated tangible net worth of $85 million, (ii) minimum liquidity of $10 million, and (iii) a minimum asset coverage ratio of 2.00 to 1.00. The Agreement also requires us to maintain a springing minimum interest coverage ratio of at least 1.50 to 1.00, tested quarterly whenever (a) there is an outstanding balance on the revolving credit facility or (b) have letter of credit exposure greater than $1 million. At September 30, 2025, we were in compliance with all covenants under the Agreement. At September 30, 2025, we could borrow approximately $8 million without violating any debt covenants. At September 30, 2025, we had no outstanding borrowings under the Agreement. 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 equivalents was $26.3 million at September 30, 2025, which included $0.8 million of cash and cash equivalents held by our foreign subsidiaries and branch offices. 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 the Agreement through its expiration in July 2028, sales or leveraging real estate assets, sales of rental assets and other liquidity sources which may be available to us. We currently believe that our cash 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 In August 2025, we acquired Geovox. In connection with the acquisition, we recorded an initial contingent earn-out liability of $2.5 million. Contingent payments, if any, will be based on eligible revenue generated during a four-year earn-out period. The maximum amount of contingent payments is $3.3 million. In July 2021, we acquired Aquana. Pursuant to the merger agreement with Aquana, as amended ("the Merger Agreement"), the Company is subject to additional contingent cash payments to the former members of Aquana over a seven-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 requires the continued employment of a certain key employee and former member of Aquana for the first five years of the seven-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 are recorded as compensation expense when incurred. See Note 19 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 rental revenue recognition, bad debt reserves, inventory obsolescence reserves, business acquisitions and contingent earn-out liabilities. 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. 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 subsidiary in the United Kingdom uses an average cost method to value its 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 accounted for our Geovox acquisition under the acquisition method of accounting. The total value of the consideration paid was allocated to the underlying net assets acquired, based on their respective estimated fair values. We utilized the excess earnings method to determine the fair value of assets and liabilities acquired, including discounted cash flows, external market values, valuations on recent transactions or a combination thereof, and believe that we used the most appropriate measure to value each asset or liability. The Company recognizes measurement-period adjustments in the reporting period in which the adjustment amounts, if any, are determined. We established an earn-out liability in connection with our acquisition of Geovox in the fourth quarter of fiscal year 2025. We engaged the services of a valuation firm to measure the fair value of the liability. The valuation technique used to measure the fair value of the liability was a Monte Carlo simulation. The primary inputs included revenue forecast, risk free rate, revenue volatility, revenue discount rate and payment discount rate. We will review and assess the value of the liability on a quarterly basis. Adjustments, if any, will be included as a component of earnings in the consolidated statements of operations. 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 of our consolidated financial statements contained in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements. Management ' s Current Outlook and Assumptions Regarding our Energy Solutions business segment, demand for our products is subject to volatile fluctuations in crude oil prices. As a result of substantial declines in crude oil prices in recent years, 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 experienced stronger wireless land product sales in fiscal year 2025, the need for new seismic equipment, particularly traditional 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. The vast majority of our Energy Solutions business segment revenue in fiscal year 2025 was derived from wireless product sales. We believe our wireless product sales will moderately increase in fiscal year 2026 over 2025 levels, primarily driven by our recent introduction of our Pioneer™ land-based wireless system and our Mariner® wireless system, but we can make no assurance in this regard. We expect that fiscal year 2026 revenue from our Energy Solutions reservoir products will increase significantly over fiscal year 2025 levels due to the PRM contract we entered into in the third quarter of 2025. The duration of the contract is expected to be approximately 18 months. Revenue will be recognized over the duration of the contract. We expect fiscal year 2026 revenue from our Smart Water business segment products to increase slightly over fiscal year 2025 levels due in part to the continued increase in demand for our Hydroconn® products and growth in market acceptance in our Aquana products. We expect fiscal year 2026 revenue from our Intelligent Industrial business segment products to increase over fiscal year 2025 levels due to our recent acquisition of Geovox's Heartbeat Detector® as well as optimism that demand for our surveillance and defense products and our contract manufacturing services will increase. We are aggressively marketing our SADAR® technologies to both our security and oil and gas industry customers. While marked acceptance of SADAR® as an effective analytical tool for categorizing seismic data, we continue to believe acceptance will occur.

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