What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-18 compared with 2021-03-16 · 41 added, 89 removed, 158 unchanged (45% of the section changed)

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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.

Demand for our services depends upon the level of spending by these companies for exploration, production, development and field management activities, which depends, in 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 fourth quarter of 2020, we operated one data acquisition crew with periods of low utilization in the U.S.

The one crew was inactive for the latter part of the third quarter and well into the fourth quarter.

Based on currently available information, we anticipate operating one crew in the U.S.

through the first quarter with likely sustained periods

of downtime and one crew in Canada for the winter season ending at the end of the first quarter of 2021.

While visibility remains limited beyond the first quarter, we maintain the ability to deploy additional crews on short notice when market conditions improve.

Reflected in both the fourth quarter and year end results is a non-cash impairment of approximately $1.6 million related to a note receivable and bad debt expense.

Fiscal 2020 was a year of unprecedented adversity.

We started out the first half of the year with our best financial and operational results in many years.

We operated three large channel count crews in the U.S.

and up to three crews in the Canada during the first quarter of 2020.

We continued profitability in the second quarter with the operation of two large channel count crews.

As reported in our second quarter earnings release, we began to experience the dramatic impact of the COVID-19 related economic lockdowns in late spring and early summer.

As oil prices began to trade at significantly low levels, Exploration and Production (“E&P”) companies reduced their capital budgets and spending, which in turn, negatively impacted demand for our services.

As a result, crew deployment lessened and utilization of our existing channels dropped.

Utilization levels went from strong and promising in the first half of the year to weak for periods of time in the second half of the year.

Even though we have seen some gradual uptick in oil prices, current requests for proposals for our services in both the U.S.

and Canada remain challenged.

We are beginning to see signs of modest recovery in the oilfield service space as the oil and gas industry has experienced slight economic improvements in the number of active drilling rigs and hydraulic fracturing crews deployed in the U.S.

On a different note, the decrease in overall activity and financial difficulties led to an increase in merger and acquisition (“M&A”) activity as some E&P companies have chosen to consolidate with others.

At this time, we are unable to forecast the impact that this activity will have on the demand for our services as E&P companies re-evaluate their capital spending projects.

However, this recent M&A activity indicates E&P companies will continue their focus on shareholder returns and disciplined capital spending as they seek to develop and produce oil and natural gas with increased efficiency by prioritizing their most economic drilling locations.

This need for increased efficiencies promotes demand for seismic data acquisition and the services we provide.

As in the most recent down cycles, we anticipate recovery in seismic data acquisition to somewhat lag behind increases in drilling and completion activities.

The overall effect of the current administration’s order to pause oil and gas leasing and issuance of new drilling permits on federal lands will have on us is yet to be determined, however, we anticipate activity among E&P companies to be cautious in many of the Western States such as New Mexico, Utah and Wyoming.

In response to these difficult conditions, we are maintaining our focus on cost saving measures while balancing the ability to respond rapidly when market conditions improve.

In addition, we remain fully committed to our longstanding focus on the health and safety of our employees, vendors and clients, the environment (both public and private), compliance with corporate governance policies, transparency in SEC reporting and requirements of the Sarbanes-Oxley Act.

As previously reported in our third quarter 2020 earnings press release, we have taken steps to outsource several ancillary services.

These steps, including permitting and surveying, have resulted in reduced salary costs and lower general and administrative expenses.

Moreover, as previously reported in our second quarter 2020 earnings press release, we anticipate approximately $4.3 million in annual cost savings as a result of previously enacted cost saving measures.

Despite the setbacks thrust upon us by the worldwide COVID-19 pandemic, we are determined to press forward and deliver the highest quality services for our clients.

Our state-of-the-art equipment inventory, our strong and unleveraged balance sheet and our dedicated work force positions us for a healthy recovery when market conditions improve.

As mentioned above, conditions are difficult and will remain so for the near-term pending continued improvement and stabilization in oil prices, but we are confident in the future and that we are properly focused on upcoming opportunities.

During the fourth quarter of 2021, we operated one large channel count data acquisition crew with periods of low utilization in the U.S.

and one crew in Canada during the back half of the quarter.

crew was inactive until later in the fourth quarter and continued operation through the early part of the first quarter of 2022.

Based on currently

available information, we anticipate operating two small channel count crews in the U.S.

periodically through the latter part of the first quarter of 2022 and up to three midsize crews in Canada for the winter season which concludes at the end of the first quarter of 2022.

Visibility beyond the first quarter of 2022 is limited as demand for seismic data acquisition services in North America remains historically weak.

Bid activity continues to be slow despite recent surges in oil and natural gas prices as U.S.

Exploration and Production companies publicly reiterate their focus on return of capital strategies, capital spending restraint and limited production growth.

We anticipate limited crew activity in the second and third quarters and, while engaging in active discussions for projects in the second half of 2022, including potential projects for exploration and production and multi-client data companies, we currently do not have any projects scheduled to begin during such time period.

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.

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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.

If economic conditions continue to weaken such that our clients continue to reduce their capital expenditures or if the sustained drop in oil and natural gas prices worsens, it could continue to result in diminished demand for our seismic services, could cause downward pressure on the prices we charge and would affect our results of operations.

Results of Operations

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Operating revenues for the year ended December 31, 2021 were $24,695,000 compared to $86,100,000 for the same period of 2020.

The decrease in revenues for the year ended December 31, 2020 compared to the same period of 2019 was primarily a result of decreased equipment and crew utilization.

The decrease in revenues for the year ended December 31, 2021 compared to the same period of 2020 was primarily a result of decreased demand for our services.

Operating Expenses.

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General and Administrative Expenses.

General and administrative expenses were 16.2% of revenues in the year ended December 31, 2020 compared to 11.8% of revenues in the same period of 2019 primarily due to a decrease in operating revenues discussed above.

General and administrative expenses were 48.8% of revenues in the year ended December 31, 2021 compared to 16.2% of revenues in the same period of 2020 primarily due to the decrease in operating revenues discussed above.

General and administrative expenses decreased to $12,046,000 during the year ended December 31, 2021 from $13,920,000 during the same period of 2020.

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Income Taxes.

Income tax expense was $24,000 for the year ended December 31, 2020 compared to income tax benefit of $239,000 for the same period of 2019.

The effective tax expense/benefit rates for the years ended December 31, 2020 and 2019 were approximately -0.2% and 1.5%, respectively.

Our effective tax rate decreased compared to the corresponding period from the prior year primarily due to state income taxes.

Income tax benefit was $26,000 for the year ended December 31, 2021 compared to income tax expense of $24,000 for the same period of 2020.

The effective tax benefit/expense rates for the years ended December 31, 2021 and 2020 were approximately 0.1% and -0.2%, respectively.

Our effective tax rate increased compared to the corresponding period from the prior year primarily due to state income taxes.

Our effective tax rates differ from the statutory federal rate of 21% for certain items such as state and local taxes, valuation allowances, non-deductible expenses and discrete items.

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interest, taxes, and depreciation and amortization.

The reconciliation of our EBITDA to our net loss and net cash provided by operating activities, which are the most directly comparable GAAP financial measures, are provided in the following tables (in thousands):

The reconciliation of our EBITDA to our net loss and net cash (used in) provided by operating activities, which are the most directly comparable GAAP financial measures, are provided in the following tables (in thousands):

Year Ended December 31,

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Interest (income) expense, net

Income tax expense (benefit)

Income tax (benefit) expense

Year Ended December 31,

Net cash provided by operating activities

Net cash (used in) provided by operating activities

Changes in working capital and other items

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Year Ended December 31,

Net cash provided by (used in)

Net cash (used in) provided by

Operating activities

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Financing activities

Effect of exchange rate changes on cash and cash equivalents and restricted cash

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net change in cash and cash equivalents and restricted cash

Year Ended December 31, 2021 versus Year Ended December 31, 2020

Net cash provided by operating activities was $19,641,000 and $9,480,000 for the years ended December 31, 2020 and 2019, respectively.

The increase in cash provided by operating activities was primarily due to a decrease in our operating level of accounts receivable as of December 31, 2020.

Net cash used in investing activities was $512,000 for the year ended December 31, 2020 and includes $1,767,000 of proceeds from maturities of short-term investments that were not reinvested offset by cash capital expenditures of $2,847,000.

Net cash provided by investing activities was $4,185,000 for the year ended December 31, 2019 and includes $8,233,000 of proceeds from maturities of short-term investments that were not reinvested offset by cash capital expenditures of $4,396,000.

Net cash used in operating activities was $16,050,000 for the year ended December 31, 2021, and net cash provided by operating activities was $19,641,000 for the same period of 2020.

The decrease in cash provided by operating activities was primarily due to an increased net loss combined with an increase in our operating level of accounts receivable as of December 31, 2021.

Net cash provided by investing activities was $264,000 for the year ended December 31, 2021 and includes $318,000 of proceeds from maturities of short-term investments that were not reinvested and $451,000 in proceeds from the disposal of assets offset by cash capital expenditures of $505,000.

Net cash used in investing activities was $512,000 for the year ended December 31, 2020 and primarily includes $1,767,000 of proceeds from maturities of short-term investments that were not reinvested and $542,000 in proceeds from the disposal of assets offset by cash capital expenditures of $2,847,000.

Net cash provided by financing activities was $95,000 for the year ended December 31, 2021 and includes $787,000 of proceeds from notes payable offset by principal payments of $562,000 on our notes and $55,000 on our finance leases and outflows of $75,000 associated with taxes related to stock compensation awards vesting.

Net cash used in financing activities was $4,534,000 for the year ended December 31, 2020 and includes principal payments of $2,138,000 on our notes and $2,326,000 on our finance leases and outflows of $70,000 associated with taxes related to stock vesting.

Additionally, during the second quarter of 2020, we received proceeds from a promissory note with Dominion Bank of $6,374,000 related to an unsecured loan under the Paycheck Protection Program and repaid such loan in its entirety shortly after we received the proceeds.

Net cash used in financing activities was $11,256,000 for the year ended December 31, 2019 and includes principal payments of $8,165,000 on our notes and $2,855,000 on our finance leases and outflows of $236,000 associated with taxes related to stock vesting.

We continually strive to supply our clients with technologically advanced 3-D data acquisition recording services and data processing capabilities.

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From time to time in the past, we have also funded our capital expenditures and other financing needs through public equity offerings.

Dominion Loan Agreement.

On September 30, 2019, we entered into a Loan and Security Agreement with Dominion Bank.

On September 30, 2020, we entered into a Loan Modification Agreement to the Loan and Security Agreement (as amended by the Loan Modification Agreement, the “Loan Agreement”) for the purpose of amending and extending the maturity of our line of credit with Dominion Bank by one year.

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 (the “Deposit”).

As of December 31, 2020, we have not borrowed any amounts under the Revolving Credit Facility.

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 September 30, 2019, we entered into a Loan and Security Agreement with Dominion Bank, a Texas state bank (“Dominion Bank”).

On September 30, 2021, we entered into a Second Loan Modification Agreement (the “Second Modification”) to the Loan and Security Agreement (as amended by the Loan Modification Agreement, the “Loan Agreement”) for the purpose of (a) amending and extending the maturity of our line of credit with Dominion Bank by one year and (b) amending our obligation to maintain a certain tangible net worth.

The Loan Agreement provides for a revolving credit facility (the “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 IntraFi Network Deposit account of $5,000,000 (the “Deposit”).

As of December 31, 2021, we have not borrowed any amounts under the Revolving Credit Facility and have approximately $10,300,000 available for withdrawal.

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%.

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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.

We are also obligated to meet certain financial covenants under the Loan Agreement, including maintaining a tangible net worth of not less than $55,000,000 and specified ratios with respect to current assets and liabilities and debt to tangible net worth.

We received a limited waiver from Dominion Bank with respect to any non-compliance with the tangible net worth covenant for the period ended June 30, 2021.

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.

The maturity date of the Loan Agreement is September 30, 2022.

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Other Indebtedness.

As of December 31, 2020, we have one note payable to a finance company for various insurance premiums totaling $40,000.

As of December 31, 2021, we have two notes payable to a finance company for various insurance premiums totaling $265,000.

In addition, we lease certain seismic recording equipment and vehicles under leases classified as finance leases.

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Allowance for Doubtful Accounts.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments – Credit Losses (“Topic 326”):

Measurement of Credit Losses on Financial Instruments, requiring entities to measure expected credit losses for certain financial assets using a new, forward-looking current expected credit loss model (“CECL”) which will result in the earlier recognition of allowances for losses.

CECL is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts.

This ASU requires a modified retrospective approach with a cumulative-effect adjustment to retained earnings for additional loss allowances, if any, as of the beginning of the first reporting period of adoption.

Additional ASU’s were issued subsequently that provided additional guidance.

On January 1, 2020, we adopted Topic 326 and had no cumulative-effect adjustment needed to our retained earnings as our loss allowance was deemed sufficient.

Our financial instruments within the scope of this guidance primarily includes trade receivables and a note receivable.

We have made an accounting policy election to write off accrued interest amounts by reversing interest income.

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.

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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 $250,000 at December 31, 2021 and 2020.

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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 Midland, Plano, Houston, Denver, Oklahoma City and Calgary, Alberta.

The majority of our operating leases are non-cancelable operating leases for office, shop and warehouse space in Midland, Plano, Houston, Oklahoma City and Calgary, Alberta.

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.

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Estimates for total revenue and total fulfillment cost on any service contract are based on significant qualitative and quantitative judgments.

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.

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.

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.

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2020-10, Codification Improvements, which clarifies the Codification or corrects unintended application of guidance by improving the consistency of the Codification for disclosure on multiple topics.

They are not expected to change current practice.

This ASU is effective for the annual period beginning after December 15, 2020, including interim periods within that annual period and should be applied on a retrospective basis for all periods presented.

Early adoption is permitted.

We are currently implementing the new guidance and it will not have a material impact on our 2021 consolidated financial statements.

We adopted this guidance in the first quarter of 2021 and it did not have a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU No.

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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.

We adopted this guidance in the first quarter of 2021 prospectively as it relates to currency translation adjustments in other comprehensive income and it did not have a material impact on our consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis