Forward Looking Statements
Statements other than statements of historical fact included in this Form 10-Q
that relate to forecasts, estimates or other expectations regarding future
events, including without limitation, statements under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding
technological advancements, our financial position, business strategy and plans,
objectives of our management for future operations, including statements related
to the expected or potential impact of the novel coronavirus ("COVID-19")
pandemic on our business, financial condition and results of operations, may be
deemed to be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
(the "Exchange Act"). When used in this Form 10-Q, words such as "anticipate,"
"believe," "estimate," "expect," "intend," and similar expressions, as they
relate to us or our management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of management as well as
assumptions made by and information currently available to management. Actual
results could differ materially from those contemplated by the forward-looking
statements as a result of certain factors. These risks include, but are not
limited to, dependence upon energy industry spending; changes in exploration and
production spending by our customers and changes in the level of oil and natural
gas exploration and development; the results of operations and financial
condition of our customers, particularly during extended periods of low prices
for crude oil and natural gas; the volatility of oil and natural gas prices;
changes in economic conditions; the severity and duration of the COVID-19
pandemic, related economic repercussions and the resulting negative impact on
demand for oil and gas; the current significant surplus in the supply of oil and
the ability of the Organization of the Petroleum Exporting Countries (OPEC) to
agree on and comply with supply limitations; the duration and magnitude of the
unprecedented disruption in the oil and gas industry currently resulting from
the impact of the foregoing factors, which is negatively impacting our business;
the potential for contract delays; reductions or cancellations of service
contracts; limited number of customers; credit risk related to our customers;
reduced utilization; high fixed costs of operations and high capital
requirements; operational disruptions; operational challenges relating to the
COVID-19 pandemic and efforts to mitigate the spread of the virus, including
logistical challenges, protecting the health and well-being of our employees and
remote work arrangements; industry competition; external factors affecting our
crews such as weather interruptions and inability to obtain land access rights
of way; whether we enter into turnkey or dayrate contracts; crew productivity;
the availability of capital resources; and disruptions in the global economy. A
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discussion of these and other factors, including risks and uncertainties, is set
forth under "Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2019 that was filed with the SEC on March 6, 2020 and in this Form
10-Q. These forward-looking statements reflect our current views with respect to
future events and are subject to these and other risks, uncertainties and
assumptions relating to our operations, results of operations, growth strategies
and liquidity. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by this paragraph. We disclaim any intention or obligation to
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Overview
We are a leading provider of North American onshore seismic data acquisition
services with operations throughout the continental U.S. and Canada.
Substantially all of our revenues are derived from the seismic data acquisition
services we provide to our clients. Our clients consist of major oil and gas
companies, independent oil and gas operators, and providers of multi-client data
libraries. In recent years, our primary customer base has consisted of providers
of multi-client data libraries. Demand for our services depends upon the level
of spending by these companies for exploration, production, development and
field management activities, which depends, in a large part, on oil and natural
gas prices. Significant fluctuations in domestic oil and natural gas exploration
and development activities related to commodity prices, as we have recently
experienced, have affected, and will continue to affect, demand for our services
and our results of operations, and such fluctuations continue to be the single
most important factor affecting our business and results of operations.
During the first quarter of 2020, we operated three large channel count crews in
the U.S., primarily in the Permian Basin, and a peak of three crews in Canada
with varying utilization rates of the active crews during the quarter compared
to a peak of five total crews, two of which were larger channel count, in the
U.S. and a peak of four crews in Canada in the first quarter of 2019. The winter
season in Canada concluded at the end of the first quarter of 2020 with limited
seismic activities anticipated until the next winter season. Equipment stationed
in Canada will be redeployed to the U.S. to service our clients, as needed. As
in recent quarters, the majority of our projects are on behalf of multi-client
companies in the U.S.
Our first quarter results were favorably impacted by the continued operation of
three large channel count crews in the U.S. and a better than anticipated
Canadian season. While we are pleased with our first quarter results, there have
been numerous changes to the oil and gas industry and the overall market since
we reported December 31, 2019 results in late February. Oil demand has
significantly deteriorated as a result of the COVID-19 pandemic and
corresponding preventative measures taken around the world to contain its spread
and mitigate its public health effects. At the same time, increases in
production of oil by Saudi Arabia and Russia created a significant surplus in
the supply of oil. The combination of the dissolution of OPEC oil production
quotas, primarily by Saudi Arabia and Russia in early March, and the economic
impact and resulting reductions in demand for oil caused by the COVID-19
pandemic, resulted in an oversupply of oil worldwide which caused oil prices to
plummet from approximately $52 per barrel on February 1, 2020 to below $15 per
barrel in March. Oil futures even went negative for a brief period in April.
Despite the subsequent agreement between Saudi Arabia and Russia to withhold
approximately 9.7 million barrels of oil from the world markets, downward
pressure on commodity prices has continued and could continue for the
foreseeable future. The drop in oil prices has forced exploration and production
companies to cut capital budgets 30% to 50%, resulting in rapid reductions in
the number of new wells being drilled and completed. As in prior periods of
capital expenditure reductions by our clients, demand for our services has
declined accordingly. Since the onset of these unforeseen circumstances, we have
experienced a reduction in requests for proposals and several large projects
have been postponed. We continue to maintain close communication with our client
base who are experiencing the same level of uncertainty.
Based on current, but rapidly changing information, we anticipate continued
operation of two large channel count crews through the second quarter and into
the third quarter of 2020. The second quarter will be somewhat negatively
impacted as we redeploy a third smaller channel crew on a previously completed
project, which experienced limited data drops from an undetected operational
issue. In the current market environment, our visibility beyond the early part
of the third quarter is limited. In response to this uncertainty, we reduced our
non-field level support staff in April, which, after severance costs of $1.4
million in the second quarter, ultimately should result in annual savings of
approximately $4.3 million. In addition, we reduced the base salaries of each of
our senior executives by approximately 20% effective March 30, 2020 until
February 11, 2023, unless otherwise determined by the Board, and many other
employees have taken temporary salary reductions of varying levels, which we
currently expect should result in an annual saving of approximately $0.9
million.
In response to the COVID-19 pandemic and its impact on our people, we instituted
recommended CDC guidelines in early March including, but not limited to, social
distancing, hygiene recommendations, small group limits, enhanced work-from-home
guidelines, minimized office hours and weekly town hall telephone conferences to
update employees and their families on the Company's practices and protocols. We
continue to observe applicable shelter-in-place directives and now that we are
seeing certain areas in Texas and other locations begin to open up, we are
reopening business locations provided that proper CDC guidelines are rigorously
followed.
We continue to provide additional flexibility to work from home for those with
pre-existing health concerns, child care issues, elderly in-home residents or
other general concerns. At the crew level, we have implemented policies to
eliminate large group gatherings, provided additional vehicles to reduce the
number of people in a single vehicle traveling to and from project locations,
increased utilization of radio
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communication, secured ample safe daily water supply, offered increased housing
flexibility and relaxed field schedules to allow for individual needs. Most of
our day to day operations consist of small, often times individual, isolated
work groups.
We received loan proceeds of approximately $6.4 million on April 15, 2020 under
the Paycheck Protection Program (the "PPP") established under the Coronavirus
Aid, Relief, and Economic Security Act ("CARES Act") administered by the U.S.
Small Business Administration ("SBA"). Since the issuance of the loan to the
Company, additional guidance has been issued by the SBA and the Treasury
Department that creates uncertainty regarding the qualification requirements for
a PPP loan. Out of an abundance of caution and in light of the new guidance, the
Company has determined to repay the PPP loan and intends to do so on or before
May 14, 2020.
While our revenues are mainly affected by the level of client demand for our
services, our revenues are also affected by the pricing for our services that we
negotiate with our clients and the productivity and utilization level of our
data acquisition crews. Factors impacting productivity and utilization levels
include: client demand, commodity prices, whether we enter into turnkey or
dayrate contracts with our clients, the number and size of crews, the number of
recording channels per crew, crew downtime related to inclement weather, delays
in acquiring land access permits, agricultural or hunting activity, holiday
schedules, short winter days, crew repositioning and equipment failure. To the
extent we experience these factors, our operating results may be affected from
quarter to quarter. Consequently, our efforts to negotiate more favorable
contract terms in our supplemental service agreements, mitigate permit access
delays and improve overall crew productivity may contribute to growth in our
revenues. Further, the ongoing COVID-19 pandemic may compound one or more of the
foregoing factors and could directly affect our productivity.
As previously discussed, in recent periods, we have experienced continued
increases in recording channel capacity on a per-crew or project basis and high
utilization of cable-less and multicomponent equipment. This increase in channel
count demand is driven by client needs and is necessary in order to produce
higher resolution images, increase crew efficiencies and undertake larger scale
projects. In response to project-based channel requirements, we routinely deploy
a variable number of channels on a variable number of crews in an effort to
maximize asset utilization and meet client needs.
Results of Operations
Operating Revenues. Operating revenues for the first quarter of 2020 decreased
23.8% to $38,979,000 compared to $51,164,000 in the same period of 2019. The
decrease during the first quarter of 2020 when compared to the first quarter of
2019 is primarily due to lower crew and equipment utilization.
Operating Expenses. Operating expenses for the first quarter of 2020 decreased
29.0% to $29,016,000 compared to $40,856,000 in the same period of 2019. The
decrease was primarily due to decreased crew activity, lower reimbursable
expenses and increased operational efficiencies.
General and Administrative Expenses. General and administrative expenses were
9.4% and 8.9% of revenues in the first quarter of 2020 and 2019, respectively.
General and administrative expenses decreased $870,000 or 19.1% to $3,674,000
during the first quarter of 2020 from $4,544,000 during the same period of 2019.
The primary factor for the decrease in general and administrative expenses
during the first quarter was the continued cost reduction efforts made by
management.
Depreciation and Amortization Expense. Depreciation and amortization expense
for the first quarter of 2020 totaled $4,904,000, compared to $6,081,000 for the
same period of 2019, respectively. Depreciation expense decreased in 2020
compared to 2019 as a result of multiple years of reduced capital expenditures.
Our depreciation expense is expected to remain below that of 2019 for the
remainder of 2020, due to the anticipated continuation of maintenance levels of
capital expenditures to maintain our existing asset base.
Total operating costs for the first quarter of 2020 were $37,594,000,
representing a 27.0% decrease from the same period of 2019. This decrease was
primarily due to the factors described above.
Income Taxes. Income tax benefit for the first quarter 2020 was $1,000, compared
to no benefit for the same period of 2019. These amounts represent effective tax
rates of -0.2% and 0.3%, respectively. The Company's effective tax rate
decreased compared to the corresponding period from the prior year primarily due
to profitability in the quarter compared to a projected loss for the year.
Our effective tax rates differ from the statutory federal rate of 21.0% for
certain items such as state and local taxes, valuation allowances,
non-deductible expenses and discrete items. For further information, see Note 9
of the Notes to the Condensed Consolidated Financial Statements.
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Use of EBITDA (a Non-GAAP measure)
We define EBITDA as net income (loss) plus interest expense, interest income,
income taxes, and depreciation and amortization expense. Our management uses
EBITDA as a supplemental financial measure to assess:
· the financial performance of our assets without regard to financing methods,
capital structures, taxes or historical cost basis;
· our liquidity and operating performance over time in relation to other
companies that own similar assets and that we believe calculate EBITDA in a
similar manner; and
· the ability of our assets to generate cash sufficient for us to pay potential
interest costs.
We also understand that such data are used by investors to assess our
performance. However, the term EBITDA is not defined under GAAP, and EBITDA is
not a measure of operating income, operating performance or liquidity presented
in accordance with GAAP. When assessing our operating performance or liquidity,
investors and others should not consider this data in isolation or as a
substitute for net income (loss), cash flow from operating activities or other
cash flow data calculated in accordance with GAAP. In addition, our EBITDA may
not be comparable to EBITDA or similarly titled measures utilized by other
companies since such other companies may not calculate EBITDA in the same manner
as us. Further, the results presented by EBITDA cannot be achieved without
incurring the costs that the measure excludes: interest, taxes, and depreciation
and amortization.
The reconciliation of our EBITDA to net income (loss) and to net cash used in
operating activities, which are the most directly comparable GAAP financial
measures, are provided in the following tables (in thousands):
Three Months Ended March 31,
2020 2019
Net income (loss) $ 993 $ (137)
Depreciation and amortization 4,904 6,081
Interest (income) expense, net (65) 16
Income tax benefit (1) -
EBITDA $ 5,831 $ 5,960
Three Months Ended March 31,
2020 2019
Net cash used in operating activities $ (173) $ (1,567)
Changes in working capital and other items
6,508 8,237
Noncash adjustments to net loss (504) (710)
EBITDA $ 5,831 $ 5,960
Liquidity and Capital Resources
Our principal sources of cash are amounts earned from the seismic data
acquisition services we provide to our clients. Our principal uses of cash are
the amounts used to provide these services, including expenses related to our
operations and acquiring new equipment. Accordingly, our cash position depends
(as do our revenues) on the level of demand for our services. Historically, cash
generated from our operations along with cash reserves and borrowings from
commercial banks have been sufficient to fund our working capital requirements
and, to some extent, our capital expenditures.
Cash Flows. Net cash used in operating activities was $173,000 for the three
months ended March 31, 2020 and net cash used in operating activities was
$1,567,000 for the same period of 2019. This results in a decrease of $1,394,000
in cash flow used in operations when comparing the three months ended March 31,
2020 to the three months ended March 31, 2019. This is primarily due to net
income of $993,000 for the first quarter of 2020 compared to a net loss of
$137,000 for the same period of 2019.
Net cash used in investing activities was $1,679,000 for the three months ended
March 31, 2020 compared to net cash used in investing activities of $1,851,000
for the same period of 2019. The decrease in cash used in investing activities
between periods of $172,000 was primarily due to $167,000 of additional cash
capital expenditures during the three months ended March 31, 2019.
Net cash used in financing activities was $1,432,000 for the three months ended
March 31, 2020 and was primarily comprised of principal payments of $707,000 and
$725,000 under our notes payable and finance leases, respectively. Net cash used
in financing activities
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for the three months ended March 31, 2019 was $2,052,000 and was primarily
comprised of principal payments of $1,146,000 and $700,000 under our notes
payable and finance leases, respectively.
Capital Expenditures. The Board of Directors approved an initial 2020 capital
budget in the amount of $5,000,000 for capital expenditures, which was limited
to necessary maintenance capital requirements and incremental recording channel
replacement or increase. For the three months ended March 31, 2020, $2,344,000
has been utilized primarily for maintenance capital, additional seismic
equipment, and equipment replacement and refurbishment. In recent years, we have
funded most of our capital expenditures through cash flow from operations, cash
reserves, equipment term loans and finance leases. In the past, we have also
funded our capital expenditures and other financing needs through public equity
offerings.
We continually strive to supply our clients with technologically advanced 3-D
seismic data acquisition recording services and data processing capabilities. We
maintain equipment in and out of service in anticipation of increased future
demand for our services.
Capital Resources. Historically, we have primarily relied on cash generated
from operations, cash reserves and borrowings from commercial banks to fund our
working capital requirements and, to some extent, our capital expenditures.
Recently, we have funded some of our capital expenditures through commercial
bank borrowings, finance leases and equipment term loans. From time to time in
the past, we have also funded our capital expenditures and other financing needs
through public equity offerings.
Loan Agreement
Dominion Credit Facility. On September 30, 2019, we entered into a Loan
Agreement with Dominion Bank. The Loan Agreement provides for a Revolving Credit
Facility in an amount up to the lesser of (i) $15,000,000 or (ii) a sum equal to
(a) 80% of our eligible accounts receivable plus 100% of the amount on deposit
with Dominion Bank in our collateral account, consisting of a restricted CDARS
account of $5,000,000.
Under the Revolving Credit Facility, interest will accrue at an annual rate
equal to the lesser of (i) 6.00% and (ii) the greater of (a) the prime rate as
published from time to time in The Wall Street Journal or (b) 3.50%. We will pay
a commitment fee of 0.10% per annum on the difference of (a) $15,000,000 minus
the Deposit minus (b) the daily average usage of the Revolving Credit Facility.
The Loan Agreement contains customary covenants for credit facilities of this
type, including limitations on disposition of assets. We are also obligated to
meet certain financial covenants under the Loan Agreement, including maintaining
a tangible net worth of $75,000,000 and specified ratios with respect to current
assets and liabilities and debt to tangible net worth. Our obligations under the
Loan Agreement are secured by a security interest in the collateral account
(including the Deposit) with Dominion Bank and future accounts receivable and
related collateral. As of March 31, 2020, we have not borrowed any amounts under
the Revolving Credit Facility. The maturity date of the Loan Agreement is
September 30, 2020.
We do not currently have any notes payable under the Revolving Credit Facility.
Veritex Letters of Credit. As of March 31, 2020, Veritex has issued us two
letters of credit, each of which are secured by a certificate of deposit with
Veritex. The first letter of credit is in the amount of $1,767,000 to support
payment of our insurance obligations. The second letter of credit is in the
amount of $583,000 to support our workers compensation insurance.
Other Indebtedness
As of March 31, 2020, we have two notes payable to a finance company for various
insurance premiums totaling $1,472,000.
In addition, we lease certain seismic recording equipment and vehicles under
leases classified as finance leases. Our Condensed Consolidated Balance Sheets
as of March 31, 2020 include finance leases of $1,654,000.
Maturities and Interest Rates of Debt
The following tables set forth the aggregate principal amount (in thousands)
under our outstanding notes payable and the interest rates as of March 31, 2020
and December 31, 2019:
March 31, 2020 December 31, 2019
Notes payable to finance company for insurance
Aggregate principal amount outstanding $ 1,472 $ 1,746
Interest rate 4.05% - 4.99% 4.05% - 4.99%
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The aggregate maturities of the notes payable as of March 31, 2020 are as
follows (in thousands):
April 2020 - March 2021 $ 1,472
Total notes payable $ 1,472
The aggregate maturities of finance leases as of March 31, 2020 are as follows
(in thousands):
April 2020 - March 2021 $ 1,577
April 2021 - March 2022 45
April 2022 - March 2023 32
Obligations under finance leases $ 1,654
Interest rates on these leases range from 4.65% to 5.37%.
Contractual Obligations. We believe that our capital resources, including our
short-term investments, cash flow from operations, and funds available under our
Revolving Credit Facility, will be adequate to meet our current operational
needs. We believe that we will be able to finance our 2020 capital expenditures
through cash flow from operations, borrowings from commercial lenders, and the
funds available under our Revolving Credit Facility. However, our ability to
satisfy working capital requirements, meet debt repayment obligations, and fund
future capital requirements will depend principally upon our future operating
performance, which is subject to the risks inherent in our business, and will
also depend on the extent to which the current economic climate adversely
affects the ability of our customers, and/or potential customers, to promptly
pay amounts owing to us under their service contracts with us.
Off-Balance Sheet Arrangements
As of March 31, 2020, we had no off-balance sheet arrangements.
Critical Accounting Policies
Information regarding our critical accounting policies and estimates is included
in Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report on Form 10-K for the year ended
December 31, 2019.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes ("Topic 740"):
Simplifying the Accounting for Income Taxes, which simplifies the accounting for
income taxes by eliminating certain exceptions to the general principles in
Topic 740 and by clarifying and amending existing guidance to improve consistent
application. This ASU is effective for the annual period beginning after
December 15, 2020, including interim periods within that annual period. Certain
amendments within this ASU are required to be applied on a retrospective basis
for all periods presented; others are to be applied using a modified
retrospective approach with a cumulative-effect adjustment to retained earnings,
if any, as of the beginning of the first reporting period in which the guidance
is adopted; and yet others are to be applied using either basis. All other
amendments not specified in the ASU should be applied on a prospective basis.
Early adoption is permitted. An entity that elects to early adopt in an interim
period should reflect any adjustments as of the beginning of the annual period
that includes that interim period. Additionally, an entity that elects early
adoption must adopt all the amendments in the same period. We are currently
evaluating the new guidance to determine the impact it will have on our
consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic
820): Disclosure Framework - Changes to the Disclosure Requirements for Fair
Value Measurement, which modifies the disclosure requirements on fair value
measurement by removing, modifying and adding certain disclosures. This ASU is
effective for the annual period beginning after December 15, 2019, including
interim periods within that annual period. We adopted this guidance in the first
quarter of 2020 and it did not have a material impact on our consolidated
financial statements.
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