What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-13 · 89 added, 65 removed, 138 unchanged (53% 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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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.

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.

In the fourth quarter, our Board of Directors terminated our President and Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer.

Our current management team is focused on improving margins on our seismic acquisition services, reducing general and administrative expenses, and improving our operating cash flows.

We have implemented a mark-up to our customers on reimbursable expenses and permitting costs, adjusting our bidding process to better account for our cost structure, and other cost reduction initiatives to improve our profitability.

We had two crews operating throughout the fourth quarter in the United States and resumed our seasonal operations in Canada.

High crew utilization in the fourth quarter resulted in improved margins and profitability.

In the first quarter, we continued to keep our crews highly utilized in the US and Canada.

We are working to keep our crews highly utilized throughout the remainder of the year.

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.

To the extent we experience these factors, our operating results may be affected and vary 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 December 31, 2023 and 2022.

While turnkey contracts allow us to capitalize on improved crew productivity, we also bear more risks related to weather and crew downtime.

While turnkey contracts allow us to capitalize on improved crew productivity, we also bear more risk related to weather and crew downtime.

We expect the majority of our contracts to be turnkey as we continue our operations in the mid-continent, western and southwestern regions of the U.S.

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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.

Historically, the chief operating decision maker made operating decisions and evaluated operating results of the Company on a consolidated basis.

In December 2023, we appointed a new Chief Executive Officer who is our current chief operating decision maker.

Currently, our chief operating decision maker reviews the discrete segment financial information on a geographic basis for the US operations and Canada Operations.

The revenue for both of the Company’s

segments is generated by the same services, which utilize the same type of equipment and personnel.

The performance of our segments is evaluated primarily on Adjusted EBITDA.

We define Adjusted EBITDA as our net income (loss), before (i) interest expense, net, (ii) income tax expense or benefit, (iii) depreciation, depletion and amortization and (iv) other unusual or non-recurring charges, such as severance expenses.

As a result, our business has two reportable segments, US operations and Canada Operations.

We have included management’s discussion and analysis about our two reportable segments for all periods presented herein.

Results of Operations

Year Ended December 31, 2023 versus Year Ended December 31, 2022

Operating Revenues.

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

US Fee Revenues.

Acquisition revenues for the year ended December 31, 2023, were $49.0 million compared to $31.1 million for the same period of 2022.

The increase in revenues for the year ended December 31, 2023, compared to the same period of 2022 was primarily a result of increased demand for our services.

Operating Expenses.

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.

Canadian Fee Revenues.

Acquisition revenues for the year ended December 31, 2023, were $12.4 million compared to $15.0 million for the same period of 2022.

The decrease in revenues for the year ended December 31, 2023, compared to the same period of 2022 was primarily a result of a slight decrease in demand for our services in Canada.

Total Revenues.

Revenue for the year ended December 31.

2023, were $96.8 million compared to $51.6 million for the same period of 2022.

Total revenues included an increase of $29.8 million in reimbursable revenues.

US Fee Operating Expenses.

Acquisition expenses for the year ended December 31, 2023, increased to $41.1 million compared to $29.5 million for the same period of 2022.

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

Canadian Fee Operating Expenses.

Acquisition expenses for the year ended December 31, 2023, increased slightly to $11.8 million compared to $11.4 million for the same period of 2022.

The increase in operating expenses was mainly due to an overall increase in general operating costs.

Reimbursable Revenues and Costs .

These revenues and expenses passed through to our clients and are job specific and vary significantly from year to year.

The costs are agreed to by our clients prior to contracting with outside vendors for the various tasks.

General and Administrative Expenses.

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.

General and administrative expenses decreased 26% to $11.4 million for the year ended December 31, 2023 compared to $15.5 million for the same period of 2022.

The primary factors for the decrease in general and administrative expenses are related to continued cost management and streamlining procedures.

We anticipate general and administrative charges for 2024 to be below those in 2023 due to continued focus on reducing costs and the change in our management team.

Severance Expenses.

In December 2023, we recorded severance expenses of $2.2 million in connection with the termination of the Company’s (i) President and Chief Executive Officer, (ii) Chief Financial Officer, Executive Vice President, Secretary and Treasurer and (iii) Chief Operating Officer and Executive Vice President.

Depreciation Expense.

Depreciation for the year ended December 31, 2022 was $9,795,000 compared to $12,863,000 for the same period of 2021.

Depreciation for the year ended December 31, 2023, was $8.5 million compared to $11.8 million for the same period of 2022.

The decrease in depreciation expense is a result of limiting capital expenditures to necessary maintenance capital requirements in recent years.

Our depreciation expense is expected to remain flat or decline slightly during 2024 primarily due to limited capital expenditures to maintain our existing asset base.

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.

Our total operating costs for the year ended December 31, 2023 were $110.2 million, representing a 49% increase from the corresponding period of 2022.

This change was primarily due to the factors described above.

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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.

We recognized $3.0 million 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 $3.0M as an employee retention credit receivable in the

Consolidated Balance Sheet as of December 31, 2022.

Payments were received in January 2023.

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Income Taxes.

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.

Income tax benefit was $96,000 for the year ended December 31, 2023 compared to income tax expense of $107,000 for the same period of 2022.

The effective tax benefit/expense rates for the years ended December 31, 2023 and 2022 were approximately 0.8% and -0.6%, respectively.

Our effective tax rate increased compared to the corresponding period from the prior year primarily due to a change in the valuation allowance on a portion of the NOLs 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)

We define EBITDA as net income (loss) plus interest expense, interest income, income taxes, and depreciation and amortization expense.

We define EBITDA as net income (loss) plus interest expense, interest income, income taxes, depreciation and amortization expense and severance expenses.

Our management uses EBITDA as a supplemental financial measure to assess:

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Year Ended December 31,

Depreciation and amortization

Interest (income) expense, net

Income tax expense (benefit)

Year Ended December 31,

Net cash used in operating activities

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Non-cash adjustments to net loss

Year Ended December 31,

Depreciation and amortization

Severance expense

Interest (income) expense, net

Income tax expense (benefit)

Liquidity and Capital Resources

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Year Ended December 31,

Net cash (used in) provided by

Net cash provided by (used in)

Operating activities

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Year Ended December 31, 2023 versus Year Ended December 31, 2022

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 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 provided by operating activities was $814,000 for the year ended December 31, 2023 and net cash used by operating activities was $3.3 million for the same period of 2022.

The decrease in cash used in operating activities was primarily due to a decreased net loss, due to an increase in activity.

Net cash used in investing activities was $4.5 million for the year ended December 31, 2023, and includes cash capital expenditures of $3.7 million and cash acquisition of short–term investments of $1.0 million, offset by $217,000 in proceeds from the disposal of assets.

Net cash used in investing activities was $1.1 million for the year ended December 31, 2022, and includes cash capital expenditures of $1.4 million offset by $340,000 in proceeds from the disposal of assets.

Net cash used in financing activities was $4.2 million for the year ended December 31, 2023, and includes principal payments of $896,000 on our notes and $253,000 on our finance leases and outflows of $3.1 million associated with the acquisition of Breckenridge assets.

Net cash used in financing activities was $2.2 million for the year ended December 31, 2022 and includes principal payments of $1.3 million on our notes and $47,000 on our finance leases and outflows of $301,000 for cash settlement of restricted stock units, $79,000 associated with taxes related to stock compensation awards vesting, and $583,000 associated with the acquisition of Breckenridge assets offset by $113,000 received for sale of treasury stock.

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.

Risks and Uncertainties.

Our ability to be profitable in the future will depend on many factors beyond our control, but primarily on the level of demand for land-based seismic data acquisition services by oil and natural gas exploration and development companies.

We incurred net losses of $12.1 million for the year ended December 31, 2023, and $18.6 million for the year ended December 31, 2022.

As of December 31, 2023, we had $15.8 million in cash, and a positive working capital balance of $15 million.

We believe that our cash flows from operations, and our current financial position are adequate to fund our continued operations.

Capital Resources .

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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, 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.

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

On September 30, 2023, we entered into the Fifth Loan Modification 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, (iii) that certain Third Loan Modification Agreement dated as of September 30, 2022, (iv) that certain Fourth Modification Agreement dated as of March 21, 2023, and (v) the Fifth Modification Agreement, the “Loan Agreement”) The Loan Agreement now provides for a Revolving Credit Facility in an amount up to the lesser of (I) an amount equal to the Borrowing Base or (II) $5 million.

Our obligations under the Loan Agreement are secured by a Certificate of Deposit with Dominion Bank for $5 million (the “Deposit”) in our collateral account.

As of December 31, 2023, we have not borrowed any amounts under the Revolving Credit Facility and have approximately $5.0M 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%.

We will pay a commitment fee of 0.10% per annum on the difference of (a) $10,000,000 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 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.

From and after September 30, 2023 and so long as the Deposit held by Dominion Bank remains greater than or equal to the indebtedness (the “Financial Covenant Suspension Threshold”), the testing of the financial covenants set forth in the Loan Agreement has been suspended.

The financial covenant testing shall resume if and when the Financial Covenant Suspension Threshold is no longer satisfied.

The maturity date of the Loan Agreement is September 30, 2024.

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

Our Consolidated Balance Sheet as of December 31, 2022 includes finance leases of $277,000.

Our Consolidated Balance Sheet as of December 31, 2023 includes finance leases of $1.8 million.

Contractual Obligations.

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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 $250,000 at December 31, 2022 and 2021.

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

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.

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.

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.

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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, 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 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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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.

Revenue is generally recognized based on receiver layout and pickup compared to total number of receivers 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.

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Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures (“ASU 2023-07”) .

ASU 2023-07 seeks to improve disclosures about a public entity’s reportable segments and add disclosures around a reportable segment’s expenses.

The updated guidance is effective for our annual periods beginning January 1, 2024, and interim periods within fiscal years beginning January 1, 2025.

As we have two reportable segments, we do not expect the adoption of this ASU to have a material impact on our financial statements and disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures (“ASU 2023-09”) .

ASU 2023-09 seeks to improve transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disclosures.

The updated guidance is effective for us on January 1, 2025.

We do not expect the adoption of ASU 2023-09 to have a material impact on our financial statements and disclosures.

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