# Dear Fellow Shareholder

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-equipment-services/NASDAQ_GEOS_2018/NASDAQ_GEOS_2018.mmd` · pages 2-8_

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Dear Fellow Shareholder,

## Geospace Deepens and Extends its Product Lines

While fiscal year 2018 reflected a fourth year of depressed oil and gas exploration spending, the year was still momentous for Geospace. During the year, we acquired Quantum Technology Sciences, Inc. (Quantum) to broaden our product line and extend our technology offerings in the protection of critical infrastructure and perimeters, including domestic and international borders. We have long provided sensors to this marketplace, but with Quantum, we now add strong real-time analytics that provide our customers with highly accurate and actionable real-time intelligence.

Subsequent to year-end, we also acquired from PGS Americas, Inc. all of the intellectual property and related assets associated with OptoSeis \( ^{®} \) , a fiber optic technology which has been successfully deployed in a permanent reservoir monitoring (PRM) system located offshore Brazil. For a decade and a half, our PRM systems have provided oil and gas companies with a thorough understanding of reservoir characteristics through crystal-clear images, allowing them to reduce field risks and improve production economics throughout the lifecycle of the reservoir. The OptoSeis technology complements our existing PRM product offerings, demonstrating our commitment to serve the energy industry in the broadest way possible. We believe our expertise in PRM system products will be at the forefront of consideration as oil and gas companies seek to extract hydrocarbons more cost effectively and extend the life of their fields. The OptoSeis technology also holds promise as an improved solution for land seismic operations requiring large-channel-count cabled systems, including its potential use for border and perimeter security.

Geospace has a reputation for robust and innovative seismic solutions and, with our strategic acquisition of Quantum and OptoSeis, we are expanding into important new markets as well as deepening our commitments in existing markets.

## Financial Results

Our fiscal year 2018 results reflect the fourth year of a downturn in the oil and gas industry. For the year, we narrowed our net loss to \(19.2 million, or \)1.45 per diluted share, on revenue of \(75.7 million. This compares to a net loss of \)56.8 million, or \(4.32 per diluted share, on revenues of \)73.7 million for the prior year. Throughout this extended downturn we have remained debt free, entering fiscal year 2019 with \(37.4 of cash, cash equivalents and short-term investments, plus \)21.5 million available under our credit facility. As always, we are laser-focused on cost containment while at the same time making sensible capital improvements to increase our operating efficiencies. To that end, we have introduced new automation in areas of our production and intend to expand this effort as appropriate.

## Oil and Gas Markets Segment

In the oil and gas markets segment (formerly known as the seismic segment), our fiscal year 2018 results reflected a 5% reduction in revenues, as oil and gas companies engaged in fewer exploration programs. Despite the decline, revenue from our OBX and GSX rental fleets increased during the year. It is especially encouraging to see growth in the demand for our OBX products in an otherwise diminished market of seismic industry activity. Such growth is evidenced by the two lease contracts for our OBX products announced prior to year-end, which commence in fiscal year 2019 and are expected to generate in excess of $20 million in revenue. We are also working with customers on even more opportunities where OBX equipment could be deployed. To satisfy these growing demands, we intend to wisely deploy additional capital into our OBX products and rental fleet to take advantage of these opportunities.

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We hope fiscal year 2019 sees a loosening of the four-year stranglehold on exploration spending, especially given the dismal replacement of reserves and last year's lowest amount of new discoveries in seventy years. A refocus on such fundamentals could lead to increases in geophysical activity and expenditures. Our hope is of course predicated on a need for the industry to become sufficiently concerned about the possibility of supply shortages, after years of ignoring the decline in reserve-replacements.

As we enter year five of a downturn in seismic exploration, the challenges of forecasting industry expenditures and translating into potential sales and rentals for Geospace are even more complex. More used equipment is available in the marketplace and new manufacturers of systems are still trying to emerge, resulting in competition and pressure for lower pricing at the highest levels. Our OBX, GSX, and PRM systems are renowned for their innovation, quality, and reliability for any project - from exploration to reservoir characterization – and we believe these factors give us favor in this tight market.

## Adjacent Markets Segment

In fiscal year 2018, we recorded the largest amount of revenue in the history of our adjacent markets segment (formerly known as our non-seismic segment), largely due to greater demand for our smart water meter related products. We expect continued growth in this segment as industry demand expands for existing and new products.

## Emerging Markets Segment

For fiscal year 2019, this new market segment (attributable to our acquisition of Quantum) will focus on integrating and advancing Geospace's innovative products with Quantum's exceptional analytics, resulting in more rugged and reliable solutions uniquely suited for the border and perimeter security markets. We welcome Dr. Mark Tinker and his team to Geospace where we have already begun co-development efforts on products expected to create strong future demand.

## Conclusion

We know fiscal year 2019 will be a year in which we strengthen and extend our product lines, while improving our operating efficiencies. We also know that for now, oil and gas companies remain cautious if not hesitant about increasing capital expenditures for seismic exploration in apparent willingness to accept unsustainable depletion of reserves. Despite this environment, improved revenues are still possible. Two potential drivers for such improvement are increased demand for our OBX products, which can lead to additional long-term contracts for its use, and renewed interest by oil and gas companies in PRM systems. We believe we are optimally positioned to take advantage of any and all opportunities presented in these areas. Combining this with our strategy of market diversification through the acquisitions of Quantum and OptoSeis, we believe we can once again demonstrably increase shareholder value.

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Rick Wheeler

President & Chief Executive Officer