What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-13 compared with 2022-03-18 · 52 added, 48 removed, 151 unchanged (40% of the section changed)

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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 current fact are forward-looking statements that involve risk and uncertainties, such as statements of our plans, business strategy, objectives, expectations and intentions.

Portions of this document that are not statements of historical or

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.

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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 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 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.

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 Canada began earlier than in recent seasons with up to three small channel count crews operating in the back half of the fourth quarter and continuing to operate today.

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 North America.

Bid activity and client discussions improved in the third and fourth quarter and activity levels improved in the fourth quarter.

Visibility continues to improve into 2023 as does project timing related to land access agreements and project readiness.

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 Canada, we are currently operating four crews of increased capacity from the fourth quarter of 2022 and anticipate operating all four crews through the remainder of the Canadian season which typically ends in late March or early April.

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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Operating revenues for the year ended December 31, 2022 were $37,480,000 compared to $24,695,000 for the same period of 2021.

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.

The increase in revenues for the year ended December 31, 2022 compared to the same period of 2021 was primarily a result of increased demand for our services.

Operating Expenses.

Operating expenses for the year ended December 31, 2021 decreased to $29,016,000 compared to $68,998,000 for the same period of 2020.

The decrease in operating expenses was mainly due to an overall decrease in crew production and utilization.

Operating expenses for the year ended December 31, 2022 increased to $37,910,000 compared to $29,016,000 for the same period of 2021.

The increase in operating expenses was mainly due to an overall increase in crew production and utilization.

General and Administrative Expenses.

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.

The primary factors for the decrease in general and administrative expenses are related to continued cost cutting strategies implemented by the Company.

General and administrative expenses were 36.8% of revenues in the year ended December 31, 2022 compared to 48.8% of revenues in the same period of 2021 primarily due to the increase in operating revenues discussed above.

General and administrative expenses increased to $13,785,000 during the year ended December 31, 2022 from $12,046,000 during the same period of 2021.

The primary factors for the increase in general and administrative expenses are related to increases in professional fees and accounting charges in 2022.

We anticipate general and administrative charges for 2023 to be similar to those in 2022.

Depreciation Expense.

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Our depreciation expense is expected to remain flat or decline slightly during 2023 primarily due to limited capital expenditures to maintain our existing asset base.

Our total operating costs for the year ended December 31, 2021 were $53,925,000, representing a 46.1% decrease from the corresponding period of 2020.

Our total operating costs for the year ended December 31, 2022 were $61,490,000, representing a 14.0% increase from the corresponding period of 2021.

This change was primarily due to the factors described above.

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 April 2022, we applied for a refundable employee retention credit subject to program conditions and requirements.

We recognize these credits as a gain when all uncertainties have been met and the amounts are realizable in accordance with similar gain contingencies.

We recognized $2,966,000 as a gain in other income and $69,000 as interest income on the Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2022 and recognized $3,035,000 as an employee retention credit receivable in the Consolidated Balance Sheet as of December 31, 2022.

Payments were received in January 2023.

No additional credits are expected to be received.

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.

Income tax expense was $107,000 for the year ended December 31, 2022 compared to income tax benefit of $26,000 for the same period of 2021.

The effective tax expense/benefit rates for the years ended December 31, 2022 and 2021 were approximately -0.5% and 0.1%, respectively.

Our effective tax rate decreased compared to the corresponding period from the prior year primarily due to a change in the valuation allowance on a portion of the NOL’s due to an Internal Revenue Code section 382 limitation.

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.

Use of EBITDA (Non-GAAP measure)

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interest, taxes, and depreciation and amortization.

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):

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,

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Interest (income) expense, net

Income tax (benefit) expense

Income tax expense (benefit)

Year Ended December 31,

Net cash (used in) provided by operating activities

Net cash used in operating activities

Changes in working capital and other items

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Year Ended December 31, 2022 versus Year Ended December 31, 2021

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 used in operating activities was $8,961,000 for the year ended December 31, 2022 and $16,050,000 for the same period of 2021.

The decrease in cash used in operating activities was primarily due to a decreased net loss combined with an increase in our operating level of deferred revenue offset by increases in contract assets and other prepaid expenses as of December 31, 2022.

The gain from employee retention credit is offset by the increase in employee retention credit receivable.

Net cash used in investing activities was $669,000 for the year ended December 31, 2022 and includes cash capital expenditures of $894,000 offset by $225,000 in proceeds from the disposal of assets.

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 used in financing activities was $1,567,000 for the year ended December 31, 2022 and includes principal payments of $1,253,000 on our notes and $47,000 on our finance leases and outflows of $301,000 associated with cash settlement of restricted stock units and $79,000 associated with taxes related to stock compensation awards vesting offset by $113,000 received for sale of treasury stock.

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.

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

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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.

On September 30, 2022, we entered into a Third Loan Modification Agreement (the “Third Modification”) to the Loan and Security Agreement (as amended by (i) that certain Loan Modification Agreement dated as of September 30, 2020, (ii) that certain Second Loan Modification Agreement dated as of September 30, 2021, and (iii) the Third Modification, 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 the principal amount under the Loan Agreement, (c) amending the interest rate under the Loan Agreement, (d) amending our obligation to maintain a certain tangible net worth and (e) adding our obligation to maintain a minimum liquidity amount.

The Loan Agreement provides for a secured revolving credit facility (the “Revolving Credit Facility”) in an amount up to the lesser of (i) $10,000,000 or (ii) a sum equal to (a) 80% of our eligible accounts receivable plus (b) 100% of the amount on deposit with Dominion Bank in our collateral account, including a restricted IntraFi Network Deposit account of $5,000,000 (the “Deposit”).

As of December 31, 2022, we have not borrowed any amounts under the Revolving Credit Facility and have

approximately $9,017,000 available for withdrawal.

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 The Wall Street Journal or (b) 4.75%.

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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 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.

We are also obligated to meet certain financial covenants under the Loan Agreement, including maintaining a tangible net worth of not less than $38,000,000 and, to be tested as of the end of each calendar quarter, unencumbered liquid assets of not less than $5,000,000, 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 December 31, 2022.

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.

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Other Indebtedness.

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

As of December 31, 2022, we have one note payable to a finance company for various insurance premiums totaling $205,000.

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

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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 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.

Recognition of an impairment charge is required if future

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.

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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 finance lease for financial reporting purposes.

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.

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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 significant qualitative and quantitative judgments.

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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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, non-deductible expenses and discrete items.

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

In October 2020, the FASB issued ASU No.

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.

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.

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.

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