DAWSON GEOPHYSICAL COMPANY The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Form 10-K. Portions of this document that are not statements of historical or
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current fact are forward-looking statements that involve risk and uncertainties, such as statements of our plans, business strategy, objectives, expectations and intentions. This discussion contains forward-looking statements that involve risks and uncertainties. Please see "Business," "Disclosure Regarding Forward-Looking Statements" and "Risk Factors" elsewhere in this Form 10-K.
You should read this discussion in conjunction with the financial statements and
notes thereto included elsewhere in this Form 10-K. Unless the context requires
otherwise, all references in this Item 7 to the "Company," "we," "us" or "our"
refer to
Overview
We are a leading provider of North American onshore seismic data acquisition
services with operations throughout the continental
We began the fourth quarter with three small to mid-sized channel count crews
operating in the lower 48 in October and dropped to one mid-size crew
intermittently in November and a large channel count crew in late December.
Project timing was, and continues to be, impacted by delays in securing
necessary land access agreements on behalf of our clients. Activity in
For the full year, we experienced low utilization rates, particularly during the
second and third quarters of 2022 as demand for seismic services remained at
historically low levels in
First quarter 2023 activity in the lower 48 began with a large channel count
crew operating on a project that began late in the fourth quarter of 2022. After
completion of that project in January, the operation of a mid-size channel count
crew began in February. We are currently operating two mid-sized crews, one of
which began operations in early March. Based on currently available information
and discussion with our clients, we believe we will continue operation of two
mid-sized crews into the third quarter of 2023. Client discussions continued to
increase early in 2023 and we believe demand for our services is sufficient to
maintain one to two mid-sized crews well into the second half of 2023. In
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.
The majority of our revenues were derived from turnkey contracts for the years
ending
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Over time, we have experienced continued increases in recording channel capacity on a per-crew or project basis and high utilization of cableless 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.
While the markets for oil and natural gas have been very volatile and are likely to continue to be so in the future, and we can make no assurances as to future levels of domestic exploration or commodity prices, we believe opportunities exist for us to enhance our market position by responding to our clients' continuing desire for higher resolution subsurface images.
Results of Operations
Year Ended
Operating Revenues. Operating revenues for the year ended
Operating Expenses. Operating expenses for the year ended
General and Administrative Expenses. General and administrative expenses were
36.8% of revenues in the year ended
Depreciation Expense. Depreciation for the year ended
Our total operating costs for the year ended
Other Income (Expense). Under the provisions of the Coronavirus Aid, Relief, and
Economic Security Act ("the CARES Act") and its subsequent amendments, we were
eligible and, in
Income Taxes. Income tax expense was
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Use of EBITDA (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 generally accepted accounting principles ("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 our net loss and net cash used in operating activities, which are the most directly comparable GAAP financial measures, are provided in the following tables (in thousands):
Year Ended December 31,
2022 2021
Net loss $ (20,451) $ (29,091)
Depreciation and amortization 9,795 12,863
Interest (income) expense, net (285) (199)
Income tax expense (benefit) 107 (26)
EBITDA $ (10,834) $ (16,453)
Year Ended December 31,
2022 2021
Net cash used in operating activities
(462) 1,142
Non-cash adjustments to net loss (1,411) (1,545)
EBITDA $ (10,834) $ (16,453) Liquidity and Capital Resources
Introduction. 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.
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Cash Flows. The following table shows our sources and uses of cash (in
thousands) for the years ended
Year Ended December 31,
2022 2021
Net cash (used in) provided by
Operating activities $ (8,961) $ (16,050)
Investing activities (669) 264
Financing activities (1,567) 95
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(265) 112
Net change in cash and cash equivalents and restricted cash
$ (11,462) $ (15,579)
Year Ended
Net cash used in operating activities was
Net cash used in investing activities was
Net cash used in financing activities was
We continually strive to supply our clients with technologically advanced 3-D 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 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. We believe that our capital resources, including our cash and short-term investments, cash flow from operations, and funds available under our Revolving Credit Facility are sufficient to meet our operational needs.
Dominion Credit Facility. On
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approximately
Under the Revolving Credit Facility, interest will accrue at an annual rate
equal to the lesser of (i) 7.75% and (ii) the greater of (a) the prime rate as
published from time to time in
We do not currently have any notes payable under the Revolving Credit Facility.
Dominion Letters of Credit. As of
Other Indebtedness. As of
In addition, we lease certain seismic recording equipment and vehicles under
leases classified as finance leases. Our Consolidated Balance Sheet as of
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 2023 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
Critical Accounting Policies
The preparation of our financial statements in conformity with GAAP requires that certain assumptions and estimates be made that affect the reported amounts of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting periods. Because of the use of assumptions and estimates inherent in the reporting process, actual results could differ from those estimates.
Allowance for Doubtful Accounts. Our allowance for doubtful accounts reflects
our current estimate of credit losses expected to be incurred over the life of
the financial instrument and is determined based on a number of factors. We
prepare our allowance for doubtful accounts receivable based on our review of
past-due accounts, our past experience of historical write-offs, our current
client base, when customer accounts exceed 90 days past due and specific
customer account reviews. While the collectability of outstanding client
invoices is continually assessed, the inherent volatility of the energy
industry's business cycle can cause swift and unpredictable changes in the
financial stability of our clients. With the adoption of ASU 2016-13 in 2020, we
made an accounting policy election to write off accrued interest amounts by
reversing interest income. Our allowance for doubtful accounts was
Impairment of Long-Lived Assets. We review long-lived assets for impairment when triggering events occur suggesting deterioration in the assets' recoverability or fair value. Recognition of an impairment charge is required if future
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expected undiscounted net cash flows are insufficient to recover the carrying
value of the assets, and the fair value of the assets is below the carrying
value of the assets. Our forecast of future cash flows used to perform
impairment analysis includes estimates of future revenues and expenses based on
our anticipated future results while considering anticipated future oil and gas
prices, which is fundamental in assessing demand for our services. If the
carrying amounts of the assets exceed the estimated expected undiscounted future
cash flows, we measure the amount of possible impairment by comparing the
carrying amount of the asset to its fair value. No impairment charges were
recognized for the years ended
Leases. We lease certain vehicles, seismic recording equipment, real property
and office equipment under lease agreements. We evaluate each lease to determine
its appropriate classification as an operating lease or a finance lease for
financial reporting purposes. We are the lessee in a lease contract when we
obtain the right to control the asset. The majority of our operating leases are
non-cancelable operating leases for office, shop and warehouse space in
The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair market value of the related assets. Assets under finance leases are amortized using the straight-line method over the initial lease term. Amortization of assets under finance leases is included in depreciation expense.
For operating leases, where readily determinable, we use the implicit interest rate in determining the present value of future minimum lease payments. In the absence of an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date. We give consideration to our outstanding debt, as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. The ROU assets are amortized to operating lease cost over the lease terms on a straight-line basis. We do not recognize leases with an initial term of 12 months or less and we do not separate lease and non-lease components.
Several of our leases include options to renew, with renewal terms that can extend from one to 10 years or more. The exercise of lease renewal options is primarily at our discretion. To measure operating lease recognition, we evaluate our lease agreements to determine if they have economic incentives for renewal or options to purchase. We deem leasehold improvements as one of the few economic incentives that would entice us to renew a lease and all of our leasehold improvements are currently fully amortized.
Revenue Recognition. Our services are provided under cancelable service contracts which usually have an original expected duration of one year or less. These contracts are either turnkey or term agreements. Under both types of agreements, we recognize revenue as the services are performed. Revenue is generally recognized based on square miles of data recorded compared to total square miles anticipated to be recorded on the survey using the total estimated revenue for the service contract. In the case of a cancelled service contract, the client is billed and revenue is recognized for any third party charges and square miles of data recorded up to the date of cancellation.
We also receive reimbursements for certain out-of-pocket expenses under the terms of the service contracts. The amounts billed to clients are included at their gross amount in the total estimated revenue for the service contract.
Clients are billed as permitted by the service contract. Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. If billing occurs prior to the revenue recognition or billing exceeds the revenue recognized, the amount is considered deferred revenue and a contract liability. Conversely, if the revenue recognition exceeds the billing, the excess is considered an unbilled receivable and a contract asset. As services are performed, those contract liabilities and contract assets are recognized as revenue and expense, respectively.
In some instances, third-party permitting, surveying, drilling, helicopter, equipment rental and mobilization costs that directly relate to the contract are utilized to fulfill the contract obligations. These fulfillment costs are capitalized in other current assets and amortized based on the total square miles of data recorded compared to total square miles anticipated to be recorded on the survey using the total estimated fulfillment costs for the service contract.
Estimates for total revenue and total fulfillment cost on any service contract are based on certain qualitative and quantitative judgments supported by underlying facts. Management considers a variety of factors such as whether various components of the performance obligation will be performed internally or externally, cost of third party services, and facts and circumstances unique to the performance obligation in making these estimates.
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Additionally, our policy includes (i) ignoring the financing component when estimating the transaction price for service contracts completed within one year, (ii) excluding sales tax collected from the customer when determining the transaction price, and (iii) expensing incremental costs to obtain a customer contract if the amortization period for those costs would otherwise be one year or less.
Income Taxes. We account for income taxes by recognizing amounts of taxes payable or refundable for the current year, and by using an asset and liability approach in recognizing the amount of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. We determine deferred taxes by identifying the types and amounts of existing temporary differences, measuring the total deferred tax asset or liability using the applicable tax rate in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates of deferred tax assets and liabilities is recognized in income in the year of an enacted rate change. The deferred tax asset is reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Our methodology for recording income taxes requires judgment regarding assumptions and the use of estimates, including determining our annual effective tax rate and the valuation of deferred tax assets, which can create a variance between actual results and estimates and could have a material impact on our provision or benefit for income taxes. Due to recent operating losses and valuation allowances, we may recognize reduced or no tax benefits on future losses on the Consolidated Statements of Operations and Comprehensive Loss. Our effective tax rates differ from the statutory federal rate of 21% for certain items such as state and local taxes, valuation allowances, and non-deductible expenses.
Recently Issued Accounting Pronouncements
None.
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