Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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.
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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 Dawson Geophysical Company and its consolidated subsidiaries.
Overview
We are a leading provider of North American onshore seismic data acquisition services with operations throughout the continental U.S. and Canada. Substantially all of our revenues are derived from the seismic data acquisition services we provide to our clients. Our clients consist of major oil and gas companies, independent oil and gas operators, and providers of multi-client data libraries. 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.
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 started the year with two crews in the US and continued to keep our crews highly utilized in Canada. We have a strong backlog of projects through the end of the second quarter of 2025.
In the fourth quarter of 2024, we began testing new single node channels from multiple vendors, which have improved our team’s efficiency and margins. We are still evaluating our options to upgrade to these single node channels based on the results of our field operations and market conditions.
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 day-rate 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 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, 2024, and 2023. While turnkey contracts allow us to capitalize on improved crew productivity, we also bear more risk related to crew downtime or other operational delays. We expect the majority of our contracts to be turnkey as we continue our operations in the midwest, western and southwestern regions of the U.S. in which turnkey contracts are more common.
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.
Our business has two reportable segments, U.S. operations and Canada operations. Tony Clark, Chief Executive Officer, is our current chief operating decision maker. Mr. Clark reviews the discrete segment financial information on a geographic basis for the U.S. operations and Canada operations. The revenue for both segments is generated by the same
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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 charges, such as severance expenses.
Results of Operations
Year Ended December 31, 2024 versus Year Ended December 31, 2023
U.S. Fee Revenues. Acquisition revenues for the year ended December 31, 2024, were $40.7 million compared to $49.0 million for the same period of 2023. The decrease in revenues for the year ended December 31, 2024, compared to the same period of 2023 was primarily a result of decreased demand for our services.
Canadian Fee Revenues. Acquisition revenues for the year ended December 31, 2024, were $12.7 million compared to $12.4 million for the same period of 2023. The increase in revenues for the year ended December 31, 2024, compared to the same period of 2023 was primarily a result of a slight increase in demand for our services in Canada, and utilization of single node channels in our operations.
Total Revenues. Revenue for the year ended December 31. 2024, were $74.2 million compared to $96.8 million for the same period of 2023. Total revenues included a decrease of $14.7 million in reimbursable revenues.
U.S. Fee Operating Expenses. Acquisition expenses for the year ended December 31, 2024, decreased to $32.8 million compared to $39.9 million for the same period of 2023. Acquisition expenses decreased from 81% of revenues in 2023 to 80% of revenues due to cost reduction initiatives throughout the year. The decrease in operating expenses was due to an overall decrease in crew production and utilization and to cost reduction initiatives.
Canadian Fee Operating Expenses. Acquisition expenses for the year ended December 31, 2024, decreased to $9.5 million compared to $11.6 million for the same period of 2023. Acquisition expenses decreased from 94% of revenues to 75% of revenues due to utilization of single node channels in our operations and higher channel count jobs in 2024. The decrease in operating expenses was mainly due to increased operational efficiencies at the crew level.
Reimbursable Revenues and Costs . These revenues and expenses are 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 decreased 25% to $9.5 million for the year ended December 31, 2024, compared to $12.6 million for the same period of 2023. The primary factors for the decrease in general and administrative expenses are related to continued cost management and streamlining procedures as well as cost savings related to changes to the executive personnel during the fourth quarter of 2023. We anticipate general and administrative expenses to continue to decrease in 2025 due to continued focus on maintaining an efficient and cost-effective administrative structure.
Severance Expenses. For the year ended December 31, 2024, we recorded severance expenses of $0.5 million in connection with the termination of a portion of our workforce. 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, 2024, was $5.7 million compared to $8.5 million for the same period of 2023. 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 2025 primarily due to limited capital expenditures to maintain our existing asset base.
Our total operating costs for the year ended December 31, 2024 were $78.7 million, representing a 28% decrease from the corresponding period of 2023. This change was primarily due to the factors described above.
Income Tax (expense) benefit. Income tax expense was $7,000 for the year ended December 31, 2024, compared to income tax benefit of $96,000 for the same period of 2023. The effective tax rates for the years ended December 31, 2024, and 2023 were approximately -0.2% and 0.8%, respectively. 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.
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Use of Adjusted EBITDA (Non-GAAP measure)
We define Adjusted EBITDA as net income (loss) plus interest expense, interest income, income taxes, depreciation and amortization expense and severance expenses. Our management uses Adjusted 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 operating performance over time in relation to other companies that own similar assets and that we believe calculate Adjusted 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 Adjusted EBITDA is not defined under generally accepted accounting principles (“GAAP”), and Adjusted EBITDA is not a measure of operating income or operating performance presented in accordance with GAAP. When assessing our operating performance, 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 Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measures utilized by other companies since other companies may not calculate Adjusted EBITDA in the same manner as us. Further, the results presented by Adjusted EBITDA cannot be achieved without incurring the costs that the measure excludes: interest, taxes, and depreciation and amortization.
The reconciliation of our Adjusted EBITDA to our net cash (used in) provided by operating activities and net (loss) income, which are the most directly comparable GAAP financial measures, are provided in the following tables (in thousands):
Year Ended December 31,
2024 US
2024 CA
2024 Consol.
2023 US
2023 CA
2023 Consol.
Net cash (used in) provided by operating activities
$
(2,821)
$
955
$
(1,866)
$
(237)
$
1,051
$
814
Changes in working capital and other items
3,928
1,023
4,951
(2,298)
(1,578)
(3,876)
Non-cash adjustments to net (loss) income
(1,401)
(209)
(1,610)
(982)
(180)
(1,162)
EBITDA
(294)
1,769
1,475
(3,517)
(707)
(4,224)
Severance expense
486
—
486
2,208
—
2,208
Adjusted EBITDA
$
192
$
1,769
$
1,961
$
(1,309)
$
(707)
$
(2,016)
Year Ended December 31,
2024 US
2024 CA
2024 Consol.
2023 US
2023 CA
2023 Consol.
Net (loss) income
$
(4,907)
$
788
$
(4,119)
$
(9,729)
$
(2,418)
$
(12,147)
Depreciation and amortization
4,752
984
5,736
6,566
1,926
8,492
Interest income, net
(146)
(3)
(149)
(258)
(215)
(473)
Income tax expense (benefit)
7
—
7
(96)
—
(96)
EBITDA
(294)
1,769
1,475
(3,517)
(707)
(4,224)
Severance expense
486
—
486
2,208
—
2,208
Adjusted EBITDA
$
192
$
1,769
$
1,961
$
(1,309)
$
(707)
$
(2,016)
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 December 31, 2024 and 2023:
Year Ended December 31,
2024
2023
Net cash (used in) provided by:
Operating activities
$
(1,866)
$
814
Investing activities
(735)
(4,504)
Financing activities
(11,563)
(4,204)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(223)
63
Net change in cash and cash equivalents and restricted cash
$
(14,387)
$
(7,831)
Year Ended December 31, 2024 versus Year Ended December 31, 2023
Net cash used in operating activities was $1.9 million for the year ended December 31, 2024, and net cash provided by operating activities was $814,000 for the same period of 2023. In 2023, cash provided by operating activities included receipt of $3 million from an employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”). The decrease in cash provided by operating activities to cash used in operating activities was primarily due to changes in operating assets and liabilities.
Net cash used in investing activities was $0.7 million for the year ended December 31, 2024, and includes cash capital expenditures of $1.9 million, offset by $533,000 in proceeds from the disposal of assets, $332,000 proceeds from insurance claims and $265,000 proceeds from maturity of short-term investments. 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 associated with the acquisition of Breckenridge Geophysical, LLC (“Breckenridge”) assets, offset by $217,000 in proceeds from the disposal of assets.
Net cash used in financing activities was $11.6 million for the year ended December 31, 2024, and includes dividend payment of approximately $9.9 million, principal payments of $947,000 on our notes and $680,000 on our finance leases. 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.
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 $4.1 million for the year ended December 31, 2024, and $12.1 million for the year ended December 31, 2023. As of December 31, 2024, we had $1.4 million in cash, and a positive working capital balance of $4.6 million. We believe that our cash flows from operations, and our current financial position are adequate to fund our continued operations for the next 12 months.
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 cash flow from operations 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, 2023, we entered into a Fifth Loan Modification Agreement (the “Fifth Modification Agreement”) 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, (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
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Agreement, the “Loan Agreement”). The Loan Agreement provided for a secured revolving credit facility (the “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 were secured by a Certificate of Deposit with Dominion Bank for $5 million (the “Deposit”) in our collateral account. On May 2, 2024, the collateral deposit of $5 million was released and the Loan Agreement was terminated.
Dominion Letters of Credit. As of December 31, 2024, we have no outstanding letters of credit. Our previously issued letter of credit in the amount of $265,000 was not renewed on August 9, 2024.
Other Indebtedness. As of December 31, 2024, we have one note payable to a finance company for various insurance premiums totaling $168,000.
In addition, we lease certain seismic recording equipment and vehicles under leases classified as finance leases. Our Consolidated Balance Sheet as of December 31, 2024 includes finance leases of $2.4 million.
Contractual Obligations. We believe that our capital resources, including our cash and cash flow from operations, will be adequate to meet our current operational needs. We believe that we will be able to finance our 2025 capital expenditures through cash flow from operations and borrowings from commercial lenders. However, our ability to 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 December 31, 2024, we had no off-balance sheet arrangements.
Critical Accounting Estimates
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.
Impairment of Long-Lived Assets. Long-lived assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value of the asset group may not be recoverable. Recognition of an impairment charge is required if future expected undiscounted net cash flows are insufficient to recover the carrying value of the asset group and the fair value of the asset group is below its carrying value. Depending upon the facts and circumstances, when indicators of asset impairment exist, management will test the asset group for impairment through developing a forecast of future undiscounted cash flows expected to be generated by the asset group or by estimating the fair value of assets within the asset group in lieu of detailed cash flow projections. If either the future undiscounted cashflows expected to be generated by the asset group or the fair of the assets within the asset group exceeds the carrying value of the asset group no impairment would be recognized. During the year ended December 31, 2024, management tested two of its asset groups for impairment through estimating the fair value of certain assets within the asset groups using a market approach or cost approach, as applicable. Because the fair value of these assets collectively exceeded the carrying value of the asset group, no impairment charges were recognized for the year ended December 31, 2024 or 2023.
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
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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.
Critical Accounting Policies
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 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.
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.
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.
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 Midland, Texas, and Plano, Texas, and Calgary, Alberta, and Wheatland County, 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. 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.
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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.
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. The Company adopted this ASU 2023-07 for the fiscal year ended December 31, 2024, as required under this standard.
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 the Company on January 1, 2025. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its financial statements and disclosures.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, ASU 2024-03 enhances the disclosures required for certain expense captions in the Company's annual and interim consolidated financial statements. This ASU is effective prospectively or retrospectively for fiscal years beginning after December 15, 2026, and for interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its disclosures