# Dear Fellow Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-equipment-services/NASDAQ_GEOS_2020/NASDAQ_GEOS_2020.mmd` · pages 2-8_

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Dear Fellow Shareholders,

## Navigating Adversity

The events of 2020 undoubtedly surpass the wildest fiction author's imagination, uprooting virtually all sense of normalcy and convention. The novel coronavirus exacted an incalculable toll on global humanity, disrupting all forms of commerce and threatening millions of lives Geospace was not exempted from COVID-19's impact. Oil prices, already low due to oversupply, suffered unprecedented

## Rick Wheeler

volatility, even dipping negative, as demand for energy plummeted driven by a worldwide hiatus on travel and entire sectors of national economies shut down. This translated to lower demand for many of our products in the oil & gas segment as well as some of our adjacent market products. Of notable exception was an increase in rentals of our OBX ocean bottom nodal recording systems. This was driven by the desire of oil & gas companies to cut costs by finding and producing from additional reservoirs nearby existing offshore infrastructure and by enhancing the output of producing fields through better seismic imaging.

In many ways, the pandemic further galvanized Geospace's strategy to strengthen its commerce and enlarge its space of opportunities through diversification, across new markets as well as within existing markets. More than just a slogan, our concept of "Navigating Adversity Through Diversity" is foundational to leveling out the ups and downs of cyclical markets, and yes, even some variabilities induced by a pandemic. The variety of cultivated industries utilizing our products and manufacturing services include oil & gas, textile printing, packaging, municipal utility, government security, medical, and a host of others. Although each has faced unique challenges in the wake of the pandemic, an element of stability is derived from this broad base. In another hallmark of diversification, our Quantum subsidiary was awarded a $10 million contract from the U.S. Border Patrol for a border and perimeter security system utilizing our revolutionary advanced technologies. While no appreciable revenue was recognized from this contract in fiscal year 2020, it will be in fiscal year 2021.

## Financial Results

Total revenue in fiscal year 2020 was \(87.8 million, producing a gross profit of \)23.4 million. Revenue and profits would have been higher were it not for unpaid debts of one of our longstanding marine seismic rental customers. Like many other oil & gas service providers, depressed industry conditions financially overwhelmed this customer, which led to the restructuring of amounts owed us into a marketable debt security traded on the Oslo exchange. We are hopeful of recovering these amounts, but there is no certainty that we will. Last year at this time, fiscal year 2019 had achieved a 26% increase in revenue over 2018. And despite the negative economic effects of COVID-19 and a distressed customer, revenue in fiscal year 2020 came to within 8% of this figure. Although this resulted in a net loss of ($1.42) per share in fiscal year 2020, we nonetheless ended the year on firm financial footing, with no debt on our balance sheet, almost $33 million in cash and cash equivalents, and an untapped available borrowing base of nearly $18 million. During the year, we invested $5.5 million in our rental equipment and an additional $2.9 million in property, plant, and equipment, all of which was partially offset by $4.1 million of proceeds from the sale of rental equipment. For fiscal year 2021, we estimate capital spending for property, plant, and equipment to be approximately $5 million, directed primarily toward factory modernization and automation. Any investments in our rental fleet in the coming year will be highly dependent on supportive market conditions.

## Oil and Gas Markets Segment

Fiscal year 2020 started off strong for our oil & gas markets segment, with first quarter revenue increasing 77% from the prior year. But soon after, disputes between Russia and Saudi Arabia over production quotas exacerbated an oversupply of oil. Then came COVID-19, where shuttered economies and a moratorium on travel all but destroyed the demand for oil & gas. As a result, most exploration for new resources was curtailed, reducing the demand for many of our seismic products to historic lows. However, increased rental of our OBX marine systems defied this trend, generating the highest amount of revenue ever from these products. We are likely to see lower rental revenue from our OBX systems in fiscal year 2021, although customer interest in purchasing some

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of this equipment, and new inquiries for our deep-water OBX are developing. Fiscal year 2021 should also see a continuation of the discussions that began in fiscal year 2020 with oil & gas companies interested in permanent reservoir monitoring (PRM) systems. As the massive disruptions of 2020 subside and demand for energy rebounds, our products will continue to provide oil & gas customers with the utmost in efficiency and advanced technology for seismic imaging.

## Adjacent Markets Segment

Reacting to curb the spread of COVID-19, most events involving social gatherings or groups were suspended, often by mandate, including those for sports, schools, and entertainment. Customers using our graphic imaging products for printing merchandise, packaging, and promotional items for such events were severely impacted, which reduced demand for those products. Customers using our manufacturing services and industrial sensors were also negatively impacted by idled economies, thus reducing our sales of such products and services. At the end of fiscal year 2020, our adjacent markets had produced \(25.4 million, a 16% reduction from the year before. However, we expect these products to fully regain the former levels of sales and growth that existed prior to the COVID-19 pandemic.

## Emerging Markets Segment

Our emerging markets segment focuses on border and perimeter security products that provide deep awareness and real-time intelligence of any activity occurring in proximity to an area or asset of interest. These products process seismic-acoustic information using sophisticated analytics developed by our Quantum group. Even though very little revenue was generated from these products in fiscal year 2020, the year heralded major advances in our integration of Quantum software and our hardened digital systems. Based on the accolades our demonstrations of this technology have received from targeted customers, we fully expect meaningful and sustainable revenue from this segment in the foreseeable future.

## Other Events

In a culmination of governance initiatives that began in fiscal year 2020, we added two new Directors to our board in the first quarter of fiscal year 2021. With focus on our market diversification strategy and the overall benefits of board refreshment, we were exuberant when Margaret "Sid" Ashworth and Kenneth Asbury accepted our invitations to serve as Geospace Directors. They each bring overwhelming credentials and business acumen that will help Geospace provide maximum value to its shareholders. Not only will their familiarity with major government contracts and funding align with the expansion of our emerging markets segment, which we believe will be a growing component of our business, but in addition, their unique career experience and perspectives will undoubtedly translate to fresh ideas and new approaches that benefit all of our business segments. In the first fiscal quarter, our Board also implemented a stock repurchase plan, authorizing the purchase of up to $5 million of our outstanding shares. All of these actions have the clear intention of returning maximum value to our shareholders.

## Conclusion

The unforeseen nature of 2020 will pass into history. As the world begins the process of recovery, travel will resume, and the engines of nation economies will again run. Demand for energy will consequently return, and we believe the high technology products we've created for our oil & gas markets' customers will remain the optimum industry tools for managing existing reserves and exploring for new ones. Consumption of the products and services offered to our adjacent markets' customers should also return, and we expect the channels of earlier growth for these products to continue. And the inventive solutions offered through our Quantum subsidiary provide featured capabilities that never before existed, and we believe the expansion of this emerging market is just beginning. The combination of our broad technological offerings, manufacturing expertise, and solid financial strength place us in a most favorable position for bringing value to all of our stakeholders in the years to come.

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Rick Wheeler

President & Chief Executive Officer