Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 20182019

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From                   to                 

 

Commission File No. 001-32472

 


 

DAWSON GEOPHYSICAL COMPANY

(Exact name of registrant as specified in its charter)

 


 

Texas

    

74-2095844

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

508 West Wall, Suite 800, Midland, Texas 79701

(Address of Principal Executive Office) (Zip Code)

Registrant’s Telephone Number, Including Area Code: 432-684-3000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Exchange on Which Registered

Trading Symbol

Common Stock, $0.01 par value

The NASDAQ Stock Market

DWSN


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Accelerated filer ☒

Large accelerated filer ☐

Accelerated filerSmaller reporting company

 

 

 

Non-accelerated filer ☐

Smaller reporting company ☐

(Do not check if a smaller reporting company)

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Title of Each Class

    

Outstanding at May 4, 20186, 2019

Common Stock, $0.01 par value

 

21,803,75323,171,039 shares

 

 

 

 


 

Table of Contents

DAWSON GEOPHYSICAL COMPANY

 

INDEX

 

 

    

Page
Number

Part I. FINANCIAL INFORMATION 

 

3

Item 1. Financial Statements (unaudited) 

 

3

Condensed Consolidated Balance Sheets at March 31, 20182019 (unaudited) and December 31, 20120187

 

3

Condensed Consolidated Statements of Operations and Comprehensive LossIncome (Loss) for the Three Months Ended March 31, 2019 and 2018 and 2017(unaudited) 

 

4

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 and 2017(unaudited) 

 

5

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (unaudited)

6

Notes to Condensed Consolidated Financial Statements (unaudited) 

 

67

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

1215

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

 

1820

Item 4. Controls and Procedures 

 

1821

Part II. OTHER INFORMATION 

 

1921

Item 1. Legal Proceedings 

 

1921

Item 1A. Risk Factors 

 

1921

Item 6. Exhibits 

 

19

Index to Exhibits

2022

Signatures 

 

2123

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

DAWSON GEOPHYSICAL COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31,

 

    

March 31, 

 

December 31,

 

 

2018

 

2017

 

 

2019

 

2018

 

 

 

 

 

 

(as adjusted)

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,608

 

$

22,013

 

 

$

23,405

 

$

28,729

 

Short-term investments

 

17,583

 

16,583

 

 

10,583

 

10,583

 

Accounts receivable, net

 

41,215

 

33,156

 

 

35,661

 

25,338

 

Current maturities of notes receivable

 

50

 

695

 

 

64

 

64

 

Prepaid expenses and other current assets

 

 

9,396

 

 

7,340

 

 

 

9,134

 

 

12,311

 

Total current assets

 

85,852

 

79,787

 

 

 

78,847

 

 

77,025

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

82,056

 

86,573

 

 

66,696

 

71,541

 

 

 

 

 

 

Right-of-use assets

 

7,531

 

 

Notes receivable, net of current maturities

 

1,486

 

841

 

 

1,434

 

1,447

 

 

 

 

 

 

Intangibles, net

 

461

 

494

 

 

374

 

379

 

 

 

 

 

 

Long-term deferred tax assets, net

 

 

224

 

 

224

 

 

 

290

 

 

293

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

170,079

 

$

167,919

 

 

$

155,172

 

$

150,685

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,057

 

$

5,933

 

 

$

7,103

 

$

5,427

 

Accrued liabilities:

 

 

 

 

 

 

 

 

 

 

Payroll costs and other taxes

 

3,093

 

1,151

 

 

2,054

 

1,034

 

Other

 

4,175

 

4,314

 

 

3,404

 

3,643

 

Deferred revenue

 

5,833

 

6,314

 

 

5,675

 

10,501

 

Current maturities of notes payable and obligations under capital leases

 

 

3,017

 

 

2,712

 

Current maturities of notes payable and finance leases

 

6,459

 

6,683

 

Current maturities of operating lease liabilities

 

 

1,229

 

 

 

Total current liabilities

 

 

25,175

 

 

20,424

 

 

 

25,924

 

 

27,288

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

Notes payable and obligations under capital leases, net of current maturities

 

4,446

 

5,153

 

Notes payable and finance leases, net of current maturities

 

4,861

 

6,097

 

Operating lease liabilities, net of current maturities

 

6,839

 

 

Deferred tax liabilities, net

 

816

 

874

 

 

146

 

134

 

Other accrued liabilities

 

 

150

 

 

150

 

 

 

150

 

 

150

 

Total long-term liabilities

 

 

5,412

 

 

6,177

 

 

 

11,996

 

 

6,381

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

Operating commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

Preferred stock-par value $1.00 per share; 4,000,000 shares authorized, none outstanding

 

 

 

 

 

 

Common stock-par value $0.01 per share; 35,000,000 shares authorized,

 

 

 

 

 

 

 

 

 

 

22,942,386 and 22,926,026 shares issued, and 22,893,941 and 22,877,581

 

 

 

 

 

shares outstanding at March 31, 2018 and December 31, 2017, respectively

 

229

 

229

 

23,219,484 and 23,018,441 shares issued, and 23,171,039 and 22,969,996

 

 

 

 

 

shares outstanding at March 31, 2019 and December 31, 2018, respectively

 

232

 

230

 

Additional paid-in capital

 

152,093

 

151,881

 

 

153,430

 

153,268

 

Retained deficit

 

(11,678)

 

(10,012)

 

 

(34,655)

 

(34,518)

 

Treasury stock, at cost; 48,445 shares at March 31, 2018 and December 31, 2017

 

 

 

Treasury stock, at cost; 48,445 shares

 

 

 

Accumulated other comprehensive loss, net

 

 

(1,152)

 

 

(780)

 

 

 

(1,755)

 

 

(1,964)

 

Total stockholders’ equity

 

 

139,492

 

 

141,318

 

 

 

117,252

 

 

117,016

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

170,079

 

$

167,919

 

 

$

155,172

 

$

150,685

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

3


 

Table of Contents

 

DAWSON GEOPHYSICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSINCOME (LOSS)

(unaudited and amounts in thousands, except share and per share data)

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

 

 

 

 

    

2018

    

2017

 

Three Months Ended March 31, 

 

 

 

 

 

(as adjusted)

 

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

49,880

 

$

42,366

 

$

51,164

 

$

49,880

 

Operating costs:

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

38,759

 

 

39,974

 

 

40,856

 

 

38,759

 

General and administrative

 

4,083

 

 

4,355

 

 

4,544

 

 

4,083

 

Depreciation and amortization

 

 

8,678

 

 

10,176

 

 

6,081

 

 

8,678

 

 

51,520

 

 

54,505

 

 

51,481

 

 

51,520

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(1,640)

 

 

(12,139)

 

 

(317)

 

 

(1,640)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Interest income

 

37

 

 

80

 

 

142

 

 

37

 

Interest expense

 

(88)

 

 

(22)

 

 

(158)

 

 

(88)

 

Other (expense) income

 

 

(49)

 

 

106

 

Other income (expense)

 

196

 

 

(49)

 

Loss before income tax

 

 

(1,740)

 

 

(11,975)

 

 

(137)

 

 

(1,740)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

31

 

 

2,823

 

 

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(1,709)

 

 

(9,152)

 

 

(137)

 

 

(1,709)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

Net unrealized (loss) income on foreign exchange rate translation, net

 

 

(329)

 

 

97

 

Other comprehensive income (loss):

 

 

 

 

 

 

Net unrealized income (loss) on foreign exchange rate translation, net

 

209

 

 

(329)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(2,038)

 

$

(9,055)

 

Comprehensive income (loss)

$

72

 

$

(2,038)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share of common stock

 

$

(0.07)

 

$

(0.40)

 

$

(0.01)

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share of common stock

 

$

(0.07)

 

$

(0.40)

 

$

(0.01)

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average equivalent common shares outstanding

 

 

22,879,805

 

 

22,742,516

 

 

23,057,546

 

 

22,879,805

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average equivalent common shares outstanding - assuming dilution

 

 

22,879,805

 

 

22,742,516

 

 

23,057,546

 

 

22,879,805

 

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

4


 

Table of Contents

DAWSON GEOPHYSICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Three Months Ended March 31, 

 

    

2018

    

2017

    

2019

    

2018

 

 

 

 

 

 

(as adjusted)

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,709)

 

$

(9,152)

 

$

(137)

 

$

(1,709)

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,678

 

 

10,176

 

 

6,081

 

 

8,678

 

Operating lease cost

 

 

340

 

 

 

Noncash compensation

 

 

235

 

 

258

 

 

370

 

 

235

 

Deferred income tax benefit

 

 

(33)

 

 

(16)

 

 

 

 

(33)

 

Change in other accrued long-term liabilities

 

 

 

 

(1,465)

Loss (gain) on disposal of assets

 

 

10

 

 

(1,108)

Other

 

 

174

 

 

33

 

 

 

 

 

Change in current assets and liabilities:

 

 

 

 

 

 

(Gain) loss on disposal of assets

 

 

(44)

 

 

10

 

Remeasurement and other

 

 

(153)

 

 

174

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

(9,036)

 

 

(8,102)

 

 

(10,291)

 

 

(9,036)

 

Increase in prepaid expenses and other current assets

 

 

(1,755)

 

 

(47)

Decrease (increase) in prepaid expenses and other current assets

 

 

3,503

 

 

(1,755)

 

Increase in accounts payable

 

 

2,845

 

 

1,424

 

 

2,606

 

 

2,845

 

Increase in accrued liabilities

 

 

1,826

 

 

2,381

 

 

1,270

 

 

1,826

 

Decrease in operating lease liabilities

 

 

(286)

 

 

 

Decrease in deferred revenue

 

 

(481)

 

 

(1,131)

 

 

(4,826)

 

 

(481)

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

754

 

 

(6,749)

Net cash (used in) provided by operating activities

 

 

(1,567)

 

 

754

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures, net of noncash capital expenditures summarized below

 

 

(4,120)

 

 

(3,401)

 

 

(1,944)

 

 

(4,120)

 

Proceeds from maturity of short-term investments

 

 

11,000

 

 

26,250

 

 

9,000

 

 

11,000

 

Acquisition of short-term investments

 

 

(12,000)

 

 

(2,000)

 

 

(9,000)

 

 

(12,000)

 

Proceeds from disposal of assets

 

 

57

 

 

240

 

 

80

 

 

57

 

Proceeds from flood insurance claims

 

 

687

 

 

 

 

 

 

687

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

 

(4,376)

 

 

21,089

Proceeds from notes receivable

 

 

13

 

 

 

Net cash used in investing activities

 

 

(1,851)

 

 

(4,376)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Principal payments on notes payable

 

 

(27)

 

 

(949)

 

 

(1,146)

 

 

(27)

 

Principal payments on capital lease obligations

 

 

(663)

 

 

(152)

Principal payments on finance leases

 

 

(700)

 

 

(663)

 

Tax withholdings related to stock-based compensation awards

 

 

(23)

 

 

(49)

 

 

(206)

 

 

(23)

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(713)

 

 

(1,150)

 

 

(2,052)

 

 

(713)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(70)

 

 

6

 

 

146

 

 

(70)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(4,405)

 

 

13,196

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(5,324)

 

 

(4,405)

 

Cash and cash equivalents at beginning of period

 

 

22,013

 

 

14,624

 

 

28,729

 

 

22,013

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

17,608

 

$

27,820

 

$

23,405

 

$

17,608

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

74

 

$

22

 

$

144

 

$

74

 

Cash received for income taxes

 

$

 

$

1,356

 

 

 

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

Increase in accrued purchases of property and equipment

 

$

315

 

$

566

Noncash operating, investing and financing activities:

 

 

 

 

 

 

(Decrease) increase in accrued purchases of property and equipment

 

$

(938)

 

$

315

 

Finance leases incurred

 

$

40

 

$

 

Increase in right-of-use assets and operating lease liabilities

 

$

8,337

 

$

 

Decrease in right-of-use asset for accrued rent

 

$

(497)

 

$

 

Increase in right-of-use asset for prepaid rent

 

$

14

 

$

 

Financed insurance premiums

 

$

304

 

$

248

 

$

337

 

$

304

 

Equipment sales financed for buyer

 

$

 

$

(1,500)

Sales tax on equipment sales financed for buyer

 

$

 

$

(132)

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

 

 

5


Table of Contents

DAWSON GEOPHYSICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(unaudited and amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common Stock

 

Additional

 

Retained

 

Other

 

 

 

 

 

Number

 

 

 

Paid-in

 

Earnings

 

Comprehensive

 

 

 

 

 

Of Shares

    

Amount

    

Capital

    

(Deficit)

    

(Loss) Income

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2018

23,018,441

 

 $

230

 

 $

153,268

 

 $

(34,518)

 

 $

(1,964)

 

 $

117,016

 

Net loss

 

 

 

 

 

 

 

 

 

(137)

 

 

 

 

 

(137)

 

Unrealized gain on foreign exchange rate translation

 

 

 

 

 

 

 

 

 

 

 

 

209

 

 

 

 

Income tax benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

209

 

 

209

 

Issuance of common stock under stock compensation plans

229,459

 

 

2

 

 

(2)

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

297

 

 

 

 

 

 

 

 

297

 

Issuance of common stock as compensation

24,785

 

 

 

 

73

 

 

 

 

 

 

 

 

73

 

Shares exchanged for taxes on stock-based compensation

(53,201)

 

 

 

 

(206)

 

 

 

 

 

 

 

 

(206)

 

Balance March 31, 2019

23,219,484

 

 $

232

 

 $

153,430

 

 $

(34,655)

 

 $

(1,755)

 

 $

117,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common Stock

 

Additional

 

Retained

 

Other

 

 

 

 

 

Number

 

 

 

Paid-in

 

Earnings

 

Comprehensive

 

 

 

 

 

Of Shares

    

Amount

    

Capital

    

(Deficit)

    

(Loss) Income

    

Total

 

 

 

 

 

 

(as adjusted)

 

(as adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2017

22,926,805

 

 $

229

 

 $

152,022

 

 $

(10,153)

 

 $

(780)

 

 $

141,318

 

Impact of adopting ASU 2018-02

 

 

 

 

 

 

 

 

 

43

 

 

(43)

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

(1,709)

 

 

 

 

 

(1,709)

 

Unrealized loss on foreign exchange rate translation

 

 

 

 

 

 

 

 

 

 

 

 

(329)

 

 

 

 

Income tax benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

(329)

 

 

(329)

 

Issuance of common stock under stock compensation plans

8,334

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

162

 

 

 

 

 

 

 

 

162

 

Issuance of common stock as compensation

11,247

 

 

 

 

73

 

 

 

 

 

 

 

 

73

 

Shares exchanged for taxes on stock-based compensation

(4,000)

 

 

 

 

(23)

 

 

 

 

 

 

 

 

(23)

 

Balance March 31, 2018

22,942,386

 

 $

229

 

 $

152,234

 

 $

(11,819)

 

 $

(1,152)

 

 $

139,492

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

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DAWSON GEOPHYSICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. ORGANIZATION AND NATURE OF OPERATIONS

 

Dawson Geophysical Company (the “Company”) is a leading provider of North American onshore seismic data acquisition services with operations throughout the continental United States (“U.S.”) and Canada. The Company acquires and processes 2-D, 3-D and multi-component seismic data solely for its clients, ranging from major oil and gas companies to independent oil and gas operators as well as providers of multi-client data libraries.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period’s presentation.

These condensed consolidated financial statements have been prepared using accounting principles generally accepted in the U.S. for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with accounting principles generally accepted in the U.S. have been omitted.

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.

Effective January 1, 2018,The Board of Directors approved a 5% stock dividend (or 0.05 share for each share outstanding) on the outstanding shares of common stock of the Company adopted the requirementson May 1, 2018. The stock dividend was paid on May 29, 2018 to shareholders of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) as discussed below.record on May 14, 2018. All amounts and disclosures set forth in this Form 10-Qcomparative financial statement presentations have been updatedretroactively adjusted to comply withreflect the new standard,dividend, as indicated by “as adjusted”.

Significant Accounting Policies

 

Principles of Consolidation. The condensed consolidated financial statements for the three months ended March 31, 20182019 include the accounts of the Company and its wholly-owned subsidiaries, Dawson Operating LLC, Eagle Canada, Inc., Dawson Seismic Services Holdings, Inc., Eagle Canada Seismic Services ULC and Exploration Surveys, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Notes Receivable. The Company’s notes receivable consist of one note receivable from the purchaser of certain dynamite energy source drilling equipment. This note receivable is stated at the unpaid principal balance. An allowance for note losses was not deemed necessary at March 31, 2018.2019. Interest is recognized over the term of the note and is calculated using the simple-interest method. Amounts payable to the Company under the note receivable are fully collateralized by the specific dynamite energy source drilling equipment sold to the note payor.

Allowance for Doubtful Accounts. Management prepares its allowance for doubtful accounts receivable based on its review of past-due accounts, its past experience of historical write-offs and its current client base. 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 the Company’s clients. The Company’s allowance for doubtful accounts was $250,000 at March 31, 20182019 and December 31, 2017.2018.

Property and Equipment. Property and equipment is capitalized at historical cost or the fair value of assets acquired in a business combination and is depreciated over the useful life of the asset. Management’s estimation of this useful life is based on circumstances that

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exist in the seismic industry and information available at the time of the purchase of the asset. As circumstances change and new information becomes available, these estimates could change.

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Depreciation is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is reflected in the results of operations for the period.

Impairment of Long-lived Assets.  Long-lived assets are reviewed 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. Management’s forecast of future cash flows used to perform impairment analysis includes estimates of future revenues and expenses based on the Company’s anticipated future results while considering anticipated future oil and natural gas prices, which is fundamental in assessing demand for the Company’s services. If the carrying amounts of the assets exceed the estimated expected undiscounted future cash flows, the Company measures the amount of possible impairment by comparing the carrying amount of the assets to the fair value.

 

Stock-Based Compensation. The Company measures all stock-based compensation awards, which include stock options, restricted stock, restricted stock units and common stock awards, using the fair value method and recognizes compensation expense as operating or general and administrative expense, as appropriate, in the Condensed Consolidated Statements of Operations and Comprehensive Loss on a straight-line basis over the vesting period of the related awards.

Use of Estimates in the Preparation of Financial Statements. Preparation of the accompanying financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of assumptions and estimates inherent in the reporting process, actual results could differ from those estimates.

Leases. The Company leases certain vehicles, seismic recording equipment, real property and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. 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.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Subsequent ASUs were issued to provide additional guidance.

On January 1, 2019, the Company adopted Topic 842 using the optional transition method of adoption, under which the new standards were applied prospectively rather than restating the prior periods presented. The Company elected the package of practical expedients permitted, which, among other things, allowed the Company to carry forward the historical lease classification. The Company made the accounting policy elections to not recognize lease assets and lease liabilities with an initial term of 12 months or less and to not separate lease and non-lease components. The Company’s accounting for finance leases (formerly called capital lease obligations) remains substantially unchanged. Operating lease right-of-use (“ROU”) assets and liabilities were recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date was used in determining the present value. The Company will use the implicit rate when readily determinable. The operating lease ROU asset also included prepaid lease payments and was reduced by accrued lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Operating lease cost for lease payments will be recognized on a straight-line basis over the lease term. The impact of adoption on the Company’s consolidated balance sheet was the recognition of a ROU asset of $7.8 million, an operating lease liability of $8.3 million, and a reduction of accrued liabilities of $0.5 million, primarily for office and shop space leases. The Company’s adoption of Topic 842 did not materially impact its results of operations or cash flows.

Revenue Recognition. 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, the Company recognizes revenues as the services are performed. Revenue is recognized based on square miles of data recorded compared to total square miles anticipated to be recorded on the survey using the total estimated revenue for the service contract. In the case of a cancelled service contract, the client is billed and revenue is recognized for any third party charges and square miles of data recorded up to the date of cancellation.

The Company receives reimbursements for certain out-of-pocketout-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.

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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 exceeded amountexcess is considered an unbilled receivable and a contract asset. As services are performed, those deferred revenue amounts are recognized as revenue.

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 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.

Recently Issued Accounting Pronouncements

In May 2014,June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation – Stock Compensation (“Topic 606 related718”): Improvements to revenue recognition inNonemployee Share-Based Payment Accounting, which an entity should recognize revenue when promisedexpands the scope of Topic 718 to include share-based payment transactions for acquiring goods orand services are transferred to customers in an amount that reflects the consideration to which the entity expects tofrom nonemployees except for certain circumstances. Any transition impact will be entitled in exchange for those goods or services. Topic 606 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted Topic 606 effective January 1, 2018, using the full retrospective method, which required us to adjust our condensed consolidated financial statements from amounts previously reported for each prior reporting period presented. This included the recognition of additional revenue and expense deferred from 2016 into the first quarter of 2017 as we had not yet recorded data, but without a change in income tax as the Company was in a full valuation allowance. In addition, adoption of the standard resulted in an increase in accounts receivable, other current assets and deferred revenue due to the recognition in the first quarter of 2017 of deferrals from 2016. The Company recognized the cumulative effect of adopting the guidance as ancumulative-effect adjustment to our opening balance of retained earnings as of January 1, 2016. the beginning of the year of adoption. The Company elected several practical expedients including (i) to ignore the financing component when estimating the

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transaction price for service contracts completed within one year, (ii) to exclude sales tax collected from the customer when determining the transaction price, (iii) to not restate contracts that begin and end within the same annual reporting period, (iv) to use the transaction price at the completion of the contract to retrospectively apply the new guidance, and (v) to not disclose the remaining performance obligations for the reporting periods presented before the date of initial application.

Adjustments to Condensed Consolidated Financial Statements related to Topic 606 are shown in Note 4  - Supplemental Consolidated Financial Statement Information.

Recently Issued Accounting Pronouncements

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act passed by the U.S. federal government in December 2017. The Company adopted ASU 2018-02 in the first quarter of 2018 and recorded an adjustment to Stockholders’ Equity within the Condensed Consolidated Balance Sheets that did not have a material impact on the Company’s condensed consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company adopted this guidance in the first quarter of 2018,2019 and it did not have a material impact on the Company’s condensedits consolidated financial statements.

In February 2016,August 2018, the FASB issued ASU No. 2016-02, Leases2018-13, Fair Value Measurement (Topic 842),820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which will require organizations that lease assets to recognizemodifies the disclosure requirements on the balance sheet the assetsfair value measurement by removing, modifying and liabilities for the rights and obligations created by those leases. In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323), which stated additional qualitative disclosures should be considered to assess the significance of the impact upon adoption.adding certain disclosures. This ASU is effective for the annual period beginning after December 15, 2018, and for annual and2019, including interim periods thereafter. Early adoption is permitted. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easementswithin that were not previously accounted for as leases under the current lease guidance in Topic 840.annual period. The Company is currently evaluating the new guidance and practical expedients to determine the impact theyit will have on the Company’s condensed consolidated financial statements.

In August 2018, the SEC adopted amendments to simplify certain disclosure requirements, as set forth in Securities Act Release No. 33-10532, Disclosure Update and Simplification, which includes a requirement for entities to present the changes in shareholders’ equity in the interim financial statements in quarterly reports on Form 10-Q. This amendment is effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendment and proximity to the filing date for most filers’ quarterly reports, the SEC has allowed for a filer’s first presentation of the changes in shareholders’ equity to be included in its Form 10-Q for the quarter that begins after the effective date. The Company believes thatadopted the most significant change will beSEC’s amendment to interim disclosures in the Condensed Consolidated Balance Sheets asfirst quarter of 2019 and has presented the Company’s asset and liability balances will increase for operating leases that are currently off-balance sheet.

changes in shareholders’ equity on an interim basis.

 

 

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

At March 31, 20182019 and December 31, 2017,2018, the Company’s financial instruments included cash and cash equivalents, short-term investments in certificates of deposit, accounts receivable, notes receivable, other current assets, accounts payable, other current liabilities, notes payable, finance leases and notes payable.operating lease liabilities. Due to the short-term maturities of cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities, the carrying amounts approximate fair value at the respective balance sheet dates. The carrying value of the notes receivable, and notes payable, finance leases and operating lease liabilities approximate their fair value based on a comparison with the prevailing market interest rate. Due to the short-term maturities of the Company’s investments in certificates of deposit, the carrying amounts approximate fair value at the respective balance sheet dates. The fair values of the Company’s notes receivable, notes payable and investments in certificates of deposit are level 2 measurements in the fair value hierarchy.

4. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION

Except for the items mentioned below, no other balance sheet opening balances were materially impacted at January 1, 2017 for the adoption of Topic 606.

Deferred Costs

The Company’s prepaid expenses and other assets at March 31, 2018 and 2017 included deferred costs (in thousands) incurred to fulfill contracts with customers of $4,688 and $3,180, respectively. The amount of total deferred costs amortized (in thousands) during the three months ended March 31, 2018 and 2017 was $6,999 and $13,015, respectively. There were no material impairment losses incurred during these periods.

The opening balance of deferred cost (in thousands) was $2,991 and $3,668 at January 1, 2018 and 2017, respectively.

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Deferred Revenue

The Company recognized revenue (in thousands) of $3,683 and $4,655 during the three months ended March 31, 2018 and 2017, respectively, that was included in deferred revenue balances at the beginning of the respective periods.

The opening balance of deferred revenue (in thousands) was $6,314 and $5,385 at January 1, 2018 and 2017, respectively.

Adjustments to Condensed Consolidated Financial Statements

The following tables reflect the adjustments applied to our condensed consolidated financial statements related to both the adoption of Topic 606 and the 5% stock dividend discussed in Note 9.

Select line items from the Company’s Condensed Consolidated Balance Sheets which reflect the adoption of the new standard and 5% stock dividend are as follows (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

As Previously Reported

 

Topic 606 Adjustments

 

Stock Dividend Adjustments

 

As Adjusted

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

$

33,138

 

$

18

 

 

 

 

$

33,156

Prepaid expenses and other current assets

$

4,677

 

$

2,663

 

 

 

 

$

7,340

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

$

3,699

 

$

2,615

 

 

 

 

$

6,314

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

Common Stock

$

218

 

 

 

 

$

11

 

$

229

Additional paid-in capital

$

143,835

 

 

 

 

$

8,046

 

$

151,881

Retained deficit

$

(2,021)

 

$

66

 

$

(8,057)

 

$

(10,012)

Select line items from the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss which reflect the adoption of the new standard and 5% stock dividend are as follows (in thousands except share and per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

As Previously Reported

 

Topic 606 Adjustments

 

Stock Dividend Adjustments

 

As Adjusted

Operating revenues

$

41,927

 

$

439

 

 

 

 

$

42,366

Operating costs:

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

$

39,537

 

$

437

 

 

 

 

$

39,974

Loss from operations

$

(12,141)

 

$

2

 

 

 

 

$

(12,139)

Net loss

$

(9,154)

 

$

2

 

 

 

 

$

(9,152)

Basic and diluted loss per share of common stock

$

(0.42)

 

$

 

$

0.02

 

$

(0.40)

Weighted average equivalent common shares

 

 

 

 

 

 

 

 

 

 

 

outstanding and outstanding - assuming dilution

 

21,659,539

 

 

 

 

 

1,082,977

 

 

22,742,516

Select line items from the Company’s Condensed Consolidated Statements of Cash Flows which reflect the adoption of the new standard are as follows (in thousands): 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

As Previously Reported

 

Topic 606 Adjustments

 

 

As Adjusted

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

$

(9,154)

 

$

2

 

$

(9,152)

Change in current assets and liabilities:

 

 

 

 

 

 

 

 

Increase in accounts receivable

$

(8,003)

 

$

(99)

 

$

(8,102)

Increase in prepaid expenses and other current assets

$

(308)

 

$

261

 

$

(47)

Increase in accounts payable

$

1,248

 

$

176

 

$

1,424

Decrease in deferred revenue

$

(791)

 

$

(340)

 

$

(1,131)

Net cash used in operating activities

$

(6,749)

 

$

 

$

(6,749)

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4. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION

Disaggregated Revenues

The Company has one line of business, acquiring and processing seismic data in North America. Our chief operating decision maker (President, Chief Executive Officer and Chairman of the Board) makes operating decisions and assesses performance based on the Company as a whole. Accordingly, the Company is considered to be in a single reportable segment. The following table presents the Company’s operating revenues (unaudited and in thousands) disaggregated by geographic region:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2019

 

 

2018

Operating Revenues

 

 

 

 

 

 

  United States

 

 $

37,636

 

 $

37,777

  Canada

 

 

13,528

 

 

12,103

     Total

 

 $

51,164

 

 $

49,880

Deferred Costs (in thousands)

The opening balance of deferred cost was $6,994 and $2,991 at January 1, 2019 and 2018, respectively. The Company’s prepaid expenses and other current assets at March 31, 2019 and 2018 included deferred costs incurred to fulfill contracts with customers of $3,997 and $4,688, respectively.

Deferred costs at March 31, 2019 compared to January 1, 2019 decreased primarily as a result of the completion of several projects during the first quarter of 2019 that had significant deferred fulfillment costs at January 1, 2019. Deferred cost at March 31, 2018 compared to January 1, 2018 increased primarily as a result of new projects for clients with significant deferred fulfillment costs at March 31, 2018.

The amount of total deferred costs amortized for the first quarter of 2019 and 2018 was $12,905 and $6,999, respectively. There were no material impairment losses incurred during these periods.

Deferred Revenue (in thousands)

The opening balance of deferred revenue was $10,501 and $6,314 at January 1, 2019 and 2018, respectively. The Company’s deferred revenue at March 31, 2019 and 2018 was $5,675 and $5,833, respectively.

Deferred revenue at March 31, 2019 compared to January 1, 2019 decreased primarily as a result of completing projects for clients with large prepayments for third party reimbursables. Deferred revenue at March 31, 2018 compared to January 1, 2018 remained fairly consistent.

Revenue recognized for the first quarter of 2019 and 2018 that was included in the contract liability balance at the beginning of 2019 and 2018 was $6,893 and $3,683, respectively.

 

5. DEBT

 

Credit Agreement

 

The Company’s existing amended and restated credit agreement (the “Credit Agreement”) with Veritex Community Bank, a Texas state bank (“Veritex Bank”), includes term loan and revolving loan features, and also allows for the issuance of letters of credit and other promissory notes. The Company can borrow up to a maximum of $20.0 million pursuant to the Credit Agreement, subject to the terms and limitations discussed below.

 

The Credit Agreement provides for a revolving loan feature (the “Line of Credit”) that permits the Company to borrow, repay and re-borrow, from time to time until June 30, 2018,2019, up to the lesser of (i) $20.0 million or (ii) a sum equal to (a) 80% of the Company’s eligible accounts receivable (less the outstanding principal balance of term loans and letters of credit under the Credit Agreement) and (b) the lesser of (i) 50% of the value of certain of the Company’s core equipment or (ii) $12,500,000. The Company has not utilized the Line of Credit since its inception. Because the Company’s ability to borrow funds under the Line of Credit is tied to the amount of the Company’s eligible accounts receivable and value of certain of its core equipment, if the Company’s accounts receivable decrease materially for any reason, including delays, reductions or cancellations by clients, or decreased demand for the Company’s services, or the value of the Company’s pledged core equipment decreases materially, the Company’s borrowing ability to fund operations or other obligations may be reduced.

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The Credit Agreement also provides for a term loan feature. Any notes outstanding under this feature would count toward the maximum amounts the Company may borrow under the Credit Agreement.

 

The Company does not currently have any notes payable under the Credit Agreement or the term loan feature of the Credit Agreement.

The Company has one outstanding note payable under the Credit Agreement that is not under the term loan feature (and therefore does not count towards the maximum amounts that the Company may borrow) which was incurred on September 13, 2018 to purchase (and is secured by) equipment and has a remaining aggregate principal amount of $5,432,000 as of March 31, 2019. The note payable will mature upon the earlier of (i) the acceleration of the indebtedness pursuant to the terms of the Company’s existing credit facility with Veritex Bank or (ii) September 13, 2021.

The Company’s obligations under the Line of Credit are secured by a security interest in the Company’s accounts receivable and certain of the Company’s core equipment, and the term loans are also secured by certain of the Company’s core equipment. Interest on amounts outstanding under the Credit Agreement accrues at the lesser of 4.5% or the prime rate (as quoted in the Wall Street Journal), subject to an interest rate floor of 2.5%. The Credit Agreement contains customary covenants for credit facilities of this type, including limitations on disposition of assets, mergers and other fundamental changes. The Company is also obligated to meet certain financial covenants, including (i) a ratio of (x) total liabilities minus subordinated debt to (y) tangible net worth plus subordinated debt not to exceed 1.00:1.00, (ii) a ratio of current assets to current liabilities of at least 1.50:1.00 and (iii) required tangible net worth of not less than $125,000,000.$100,000,000. The Company was in compliance with all covenants under the Credit Agreement, including specified ratios, as of March 31, 2018.2019.

 

Veritex Bank has also issued threetwo letters of credit as of March 31, 2018.2019. The first letter of credit is in the amount of $1,767,000 to support payment of certain insurance obligations of the Company. The principal amount of this letter of credit is collateralized by certain of the Company’s core equipment. The second letter of credit is in the amount of $583,000 to support the company’sCompany’s workers compensation insurance and is secured by a certificate of deposit. The third letter of credit is unsecured and in the amount of $75,000 to support certain performance obligations of the Company. NoneNeither of the letters of credit counts as funds borrowed under the Company’s Line of Credit.

Other Indebtedness

 

TheAs of March 31, 2019, the Company has one outstanding note, in the remaining principal amount of $277,000 at March 31, 2018two notes payable to a finance company for insurance.

various insurance premiums totaling $1,413,000.

In addition, the Company enters into capital lease obligations forleases certain seismic recording equipment and vehicles and recording equipment.under leases classified as finance leases. The Company’s Condensed Consolidated Balance Sheets as of March 31, 20182019 include capital lease obligationsfinance leases of $7,186,000$4,475,000.

Maturities and Interest Rates of Debt

The following table sets forth the aggregate principal amount (in thousands) under the Company’s outstanding notes payable and the interest rates as of March 31, 20182019 and December 31, 2017.2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018

 

Notes payable to commercial banks

 

 

    

 

 

    

 

Aggregate principal amount outstanding

 

$

5,432

 

$

5,975

 

Interest rate

 

 

5.00%

 

 

5.00%

 

 

March 31, 2018

December 31, 2017

Notes payable to finance company for insurance

Aggregate principal amount outstanding

$

277

$

 —

Interest rates

3.80%

 —

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The aggregate maturities of the notes payable at March 31, 2018 are as follows (in thousands):

January 2018 - December 2018

$

277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2019

 

December 31, 2018

 

Notes payable to finance company for insurance

 

 

 

 

 

 

 

Aggregate principal amount outstanding

 

$

1,413

 

$

1,680

 

Interest rate

 

 

3.80% - 4.99%

 

 

3.80%

 

 

The aggregate maturities of obligations under capital leasesnotes payable at March 31, 20182019 are as follows (in thousands):

 

 

 

 

 

 

 

April 2018 - March 2019

$

2,740

April 2019 - March 2020

 

 

 

 

$

2,8703,586

April 2020 - March 2021

 

 

 

 

 

1,5602,173

April 2021 - March 2022

 

 

 

 

 

161,086

Total notes payable

$

6,845

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The aggregate maturities of finance leases at March 31, 2019 are as follows (in thousands):

April 2019 - March 2020

$

2,873

April 2020 - March 2021

1,564

April 2021 - March 2022

24

April 2022 - March 2023

14

Obligations under capitalfinance leases

 

 

 

 

$

7,1864,475

 

Interest rates on these leases range from 4.65% to 4.93%5.37%.

6. LEASES

The Company leases certain vehicles, seismic recording equipment, real property and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The majority of our operating leases are non-cancelable operating leases for office and shop space in Midland, Plano, Denison, Houston, Denver, Oklahoma City and Calgary, Alberta.

On January 1, 2019, the Company adopted Topic 842 requiring organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The Company elected to use the transition method of adoption, under which the new standards were applied prospectively rather than restating the prior periods presented. As a result of the transition method of adoption certain accounts lack a comparable value for the same period of 2018, specifically accounts and values associated with operating leases and ROU assets.

The components of lease cost for the three months ended March 31, 2019 and 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

March 31, 2018

 

 

 

 

    

 

 

    

 

Finance lease cost:

 

 

 

 

 

 

 

 Amortization of right-of-use assets

 

$

351

 

$

366

 

 Interest on lease liabilities

 

 

55

 

 

86

 

  Total finance lease cost

 

 

406

 

 

452

 

 

 

 

 

 

 

 

 

Operating lease cost

 

 

443

 

 

414

 

 

 

 

 

 

 

 

 

Short-term lease cost

 

 

10

 

 

4

 

  Total lease cost

 

$

859

 

$

870

 

Supplemental cash flow information related to leases for the three months ended March 31, 2019 and 2018 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

March 31, 2018

 

 

 

 

    

 

 

    

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 Operating cash flows from operating leases

 

$

(349)

 

$

(410)

 

 Operating cash flows from finance leases

 

$

(57)

 

$

(73)

 

 Financing cash flows from finance leases

 

$

(700)

 

$

(663)

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

 

 Operating leases

 

$

8,337

 

$

 

 Finance leases

 

$

40

 

$

 

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Supplemental balance sheet information related to leases as of March 31, 2019 and 2018 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 2019

    

March 31, 2018

 

Operating leases

 

 

 

 

 

 

 

 Operating lease right-of-use assets

 

$

7,531

 

$

 

 

 

 

 

 

 

 

 

 Operating lease liabilities - current

 

$

1,229

 

$

 

 Operating lease liabilities - long-term

 

 

6,839

 

 

 

  Total operating lease liabilities

 

$

8,068

 

$

 

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

 Property and equipment, at cost

 

$

8,582

 

$

8,542

 

 Accumulated depreciation

 

 

(2,223)

 

 

(869)

 

   Property and equipment, net

 

$

6,359

 

$

7,673

 

 

 

 

 

 

 

 

 

 Finance lease liabilities - current

 

$

2,873

 

$

2,740

 

 Finance lease liabilities - long-term

 

 

1,602

 

 

4,446

 

  Total finance lease liabilities

 

$

4,475

 

$

7,186

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term:

 

 

 

 

 

 

 

 Operating leases

 

 

6.8 years

 

 

7.9 years

 

 Finance leases

 

 

1.5 years

 

 

2.5 years

 

 

 

 

 

 

 

 

 

Weighted average discount rate:

 

 

 

 

 

 

 

 Operating leases

 

 

5.04%

 

 

 

 Finance leases

 

 

4.66%

 

 

4.65%

 

Maturities of lease liabilities at March 31, 2019 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

Finance Leases

 

 

 

 

 

 

 

 

 

April 2019 - March 2020

 

$

1,614

 

$

3,022

 

April 2020 - March 2021

 

 

1,491

 

 

1,587

 

April 2021 - March 2022

 

 

1,314

 

 

25

 

April 2022 - March 2023

 

 

1,147

 

 

15

 

April 2023 - March 2024

 

 

1,168

 

 

 

Thereafter

 

 

2,866

 

 

 

 Total payments under lease agreements

 

$

9,600

 

$

4,649

 

 

 

 

 

 

 

 

 

 Less imputed interest

 

 

(1,532)

 

 

(174)

 

 

 

 

 

 

 

 

 

  Total lease liabilities

 

$

8,068

 

$

4,475

 

 

6.7. OPERATING COMMITMENTS AND CONTINGENCIES

From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. Although the Company cannot predict the outcomes of any such legal proceedings, management believes that the resolution of pending legal actions will not have a material adverse effect on the Company’s financial condition, results of operations or liquidity, as the Company believes it is adequately indemnified and insured.

We are also party to the following legal proceeding:  On April 1, 2019, Weatherford International, LLC and Weatherford U.S., L.P. (collectively, “Weatherford”) filed a petition in state district court for Midland County, Texas, in which the Company and eighteen other parties were named as defendants, alleging the Company and/or the other named defendants contributed to or caused contamination of groundwater at and around property owned by Weatherford.  Weatherford is seeking declaratory judgment, recovery and contribution for past and future costs incurred in responding to or correcting the contamination at and around the property from each defendant.  The Company disputes Weatherford’s allegations with respect to the Company and intends to vigorously defend itself in this case.  While the outcome and impact of this legal proceeding on the Company cannot be predicted with certainty, based on currently available information

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management believes that the resolution of this proceeding will not have a material adverse effect on our financial condition, results of operations or liquidity.

 

TheAdditionally, the Company experiences contractual disputes with its clients from time to time regarding the payment of invoices or other matters. While the Company seeks to minimize these disputes and maintain good relations with its clients, the Company has experienced in the past, and may experience in the future, disputes that could affect its revenues and results of operations in any period.

The Company has non-cancelable operating leases for office and shop space in Midland, Plano, Denison, Houston, Denver, Oklahoma City and Calgary, Alberta.

7.8. NET LOSS PER SHARE

Basic net loss per share is computed by dividing the net loss by the weighted average shares outstanding. Diluted loss per share is computed by dividing the net loss by the weighted average diluted shares outstanding. 

All share and per share amounts listed on the table below have been adjusted to reflect the 5% stock dividend discussed in Note 9.

The computation of basic and diluted loss per share is as follows (in thousands, except share and per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

Three Months Ended March 31, 

 

    

2018

    

2017

 

    

2019

    

2018

    

 

 

 

 

 

(as adjusted)

 

 

 

 

 

 

 

 

Net loss

 

$

(1,709)

 

$

(9,152)

 

 

$

(137)

 

$

(1,709)

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,879,805

 

 

22,742,516

 

 

 

23,057,546

 

 

22,879,805

 

Dilutive common stock options, restricted stock unit awards and restricted stock awards

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Diluted

 

 

22,879,805

 

 

22,742,516

 

 

 

23,057,546

 

 

22,879,805

 

Basic loss per share of common stock

 

$

(0.07)

 

$

(0.40)

 

 

$

(0.01)

 

$

(0.07)

 

Diluted loss per share of common stock

 

$

(0.07)

 

$

(0.40)

 

 

$

(0.01)

 

$

(0.07)

 

 

The Company had a net loss infor the three months ended March 31, 20182019 and 2017.2018. As a result, all stock options, restricted stock unit awards and restricted stock awards were anti-dilutive and excluded from weighted average shares used in determining the diluted loss per share of common stock for the respective periods.

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The following weighted average numbers of stock options, restricted stock unit awards and restricted stock awards, in each case as adjusted for the 5% stock dividend paid to shareholders on May 29, 2018, have been excluded from the calculation of diluted loss per share of common stock, as their effect would be anti-dilutive for the three months ended March 31, 20182019 and 20172018:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

 

 

 

 

 

 

 

 

    

2019

    

2018

 

    

 

 

Three Months Ended March 31, 

 

 

 

 

 

(as adjusted)

 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

308,191

 

 

363,537

 

 

 

87,497

 

 

290,838

 

 

 

Restricted stock unit awards

 

 

393,700

 

 

253,315

 

Restricted stock units

 

 

546,747

 

 

413,385

 

 

 

Restricted stock awards

 

 

67,000

 

 

79,805

 

 

 

32,987

 

 

70,349

 

 

 

Total

 

 

768,891

 

 

696,657

 

 

 

667,231

 

 

774,572

 

 

 

 

8.

9. INCOME TAXES

For the three months ended March 31, 2019, the Company's effective tax rate was 0.0%. For the three months ended March 31, 2018, the Company's effective tax rate was 1.8%. For the three months ended March 31, 2017, the Company’s effective tax rate was 23.6%1.8%. The Company’s effective tax rate decreased compared to the corresponding period from the prior year primarily due to the reversalrecognition of uncertain tax positions associated with the processing of outstanding amended returns that were accepteda full valuation allowance in the first quarter of 2017 and the associated refunds received.all jurisdictions.

 

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over an extended amount of time. Such objective evidence limits the ability to consider other subjective evidence, such as projections for taxable earnings.

 

The income tax benefitDue to the Company’s near break-even results for the three months ended March 31, 20182019, the Company did not record an income tax benefit. The Company does not include income tax benefits for all of the losses incurred because the Companyit has recorded valuation allowances against significantly all of its federal, state and foreign deferred tax assets. The Company has recorded valuation allowances against the associated deferred tax assets for the amounts it deems are not more likely than not realizable. Based on management’s belief that not all the net operating losses are realizable, a federal valuation allowance and additional state valuation allowances were maintained during the three

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months ended March 31, 20182019 and 2017.2018. In addition, due to the Company’s recent operating losses and valuation allowances, the Company may recognize reduced or no tax benefits on future losses on the condensed consolidated financial statements. The amount of the valuation allowances considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for future growth.

9.10. SUBSEQUENT EVENTS

None.

Stock Dividend

On May 1, 2018, the Board of Directors approved a 5% stock dividend (or 0.05 share for each share outstanding) on the outstanding shares of common stock of the Company, par value $0.01 per share. The stock dividend is payable on May 29, 2018 to shareholders of record on May 14, 2018.  Shareholders will receive cash in lieu of any fractional shares that they otherwise would have been entitled to receive in connection with the stock dividend. The anticipated impact on the 2017 condensed consolidated financial statements is reflected in Note 4. The anticipated impact of all loss per common share for the quarter ended March 31, 2018 referenced within this Form 10-Q have been adjusted for the 5% stock dividend to be paid on May 29, 2018 to shareholders of record as of May 14, 2018 (excluding fractional shares that cannot be determined at this date).

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Statements other than statements of historical fact included in this Form 10-Q that relate to forecasts, estimates or other expectations regarding future events, including without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding technological advancements and our financial position, business strategy and plans and objectives of our management for future operations, may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). When used in this Form 10-Q, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors. These risks include, but are not limited to, dependence upon energy industry spending; the volatility of oil and natural gas prices; changes in economic conditions; the potential for contract delays; reductions or cancellations of service

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contracts; limited number of customers; credit risk related to our customers; reduced utilization; high fixed costs of operations and high capital requirements; operational disruptions; industry competition; external factors affecting our crews such as weather interruptions and inability to obtain land access rights of way; whether we enter into turnkey or dayrate contracts; crew productivity; the availability of capital resources; and disruptions in the global economy. A discussion of these and other factors, including risks and uncertainties, is set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20172018 that was filed with the SEC on March 9, 2018.6, 2019. These forward-looking statements reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategies and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We disclaim any intention or obligation to revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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, mainly oil and natural gas companies of all sizes. 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 a large part, on oil and natural gas prices. Significant fluctuations in domestic oil and natural gas exploration activities and commodity prices 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 beganDuring the first quarter of 2018 operating six2019, we operated a peak of five crews in the U.S. and a peak of four crews in Canada and endedwith varying utilization of the active crews during the quarter operating eightin both areas of operation, compared to a peak of nine crews in the U.S. and four in Canada. We experienced a stronger than anticipated Canadian winter season, which has now concluded, after encountering temporary weather delays early in the quarter. We are currently operating sixpeak of four crews in the U.S. and, as previously anticipated, expect to operate up to seven crewsCanada in the U.S. into the third quarter of 2018. Project visibility, while remaining constrained due to the uncertain sustainability of the recent rise in oil prices and seismic data acquisition budgets, has improved. Despite the improved environment and our recent positive EBITDA results over the last three quarters, market conditions remain challenging and we continue to maintain a conservative approach. We have continued to explore ways to reduce costs, downsized the levels of in-house services, and gained operating efficiencies through internal restructuring.

The majority of our crews have historically worked, and are currently working, in oil producing basins. It is our belief that seismic data acquisition activity will increase in producing basins outside of the Permian and Delaware basins, the primary areas of activity in the U.S., if commodity prices continue to improve and those basins become more economic. We are beginning to see a modest uptick in the bid activity and interest levels outside of those regions. Those projects are presently very competitive and the contracts on those early projects have not been awarded.

We encountered a moderate increase in demand for our services for the year 2017 and through the first quarter of 2018 as compared to 2016 demand levels. This has resulted in improved productivity and crew utilization, primarily during the second half of 2017 and through the first quarter of 2018. The winter season in Canada concluded at the end of the first quarter of 2019 with limited seismic activities anticipated until the next winter season. Based on currently available information, we anticipate operating two to four crews in the U.S. during the second quarter of 2019 and up to five crews in the third quarter. As in recent risequarters, the majority of our projects are on behalf of multi-client companies in oil prices,the U.S. In addition, we anticipate that we will conduct a total of two microseismic projects in the U.S. during the second and third quarters of 2019.

Our first quarter results were primarily a result of increased utilization of active recording channels in the U.S. and a better than anticipated late winter season in Canada. While the overall crew count in the U.S. was down from recent quarters, channel utilization peaked with a project in West Texas that included a peak of 48,000 channels. The project in West Texas, which was started and completed during the first quarter of 2019, combined with forecasted oil price increases through 2018, has resulteda 34,000 channel project in increased demand for our services. AtEastern New Mexico completed in the same time,second quarter, represents a peak of 82,000 channels and 42 vibrator energy source units over two crews. The large channel project in West Texas is the oillargest seismic project we have completed to date in the U.S. as measured by the number of single channel recording units and gas industry’s renewed focus on profitabilitynumber of energy sources in

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operation. It also represents an approximate fifteen times increase in data density and volume, as well as production growth has further driventhe average number of data source points acquired per day, as compared to our typical projects. While such data acquisition projects are currently not our typical projects in the U.S., there continues to be a growing trend toward larger more complex projects: projects that require an increase in requests for proposals, as more E&P operations seek to lower drillingchannel count, energy source units and completion costs as well as maximize production throughdata management capabilities. During the integrated use offirst quarter in Canada, we successfully completed a high density 3D multi-component project requiring 32,000 three channel multi-component seismic data into their development plans. While stillrecording units or 96,000 channels. With these high channel count projects in the U.S. and Canada, data gathering and throughput were equally as impressive as the seismic equipment requirements.

Despite a reduction in the overall crew count in the first quarter, channel count utilization was at full capacity. Market conditions however remain difficult as we navigate the second quarter. The Canadian winter season has ended and we anticipate reduced utilization of both channels and crews in the U.S. during the second quarter.

In response to the decrease in overall crew count, we have reduced our work force approximately 23% since the end of 2018 and nearly 47% from the end of 2017. The reduction in headcount is in response to an anticipated lower than the demand levels experienced in 2015, the recent increase in bid activity is encouraging.

crew count, higher channel count requirements and operational improvements.

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 includeinclude: client demand, commodity prices, whether we enter into turnkey or dayrate contracts with our clients, the number and size of crews, the number of recording channels per crew, crew downtime related to inclement weather, delays in acquiring land access permits, agricultural or hunting activity, holiday schedules, short winter days, crew repositioning and equipment failure. To the extent we experience these factors, our operating results may be affected from quarter to quarter. Consequently, our efforts to negotiate more favorable contract terms in our supplemental service agreements, mitigate permit access delays and improve overall crew productivity may contribute to growth in our revenues.

Most of our client contracts are turnkey contracts. The percentage of revenues derived from turnkey contracts represented approximately three-quarters of our revenuesAs previously discussed, in the first three months of 2018 and throughout 2017. While turnkey contracts allow us to capitalize on improved crew productivity, we also bear more risks related to weather and crew downtime. We expect the percentage of turnkey contracts to remain high as we continue our operations in the mid-continent, western and southwestern regions of the U.S. in which turnkey contracts are more common.

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Over time,recent periods, we have experienced continued increases in recording channel capacity on a per crewper-crew or project basis and high utilization of cable-less 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.

Reimbursable third-party charges related to our use of helicopter support services, permit support services, specialized survey technologies and dynamite energy sources in areas with limited access are other important factors affecting our results. Revenues associated with third-party charges as a percentage of revenues were generally below our historical range during 2017 and that trend has continued in 2018.recent years. We expect that as we continue our operations in the more open terrain of the mid-continent, western and southwestern regions of the U.S., the level of these third-party charges will continue to be generally below our historical range of 25% to 35% of revenue.

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 weaken such that our clients reduce their capital expenditures or if there is a significant drop in oil and natural gas prices, it could result in diminished demand for our seismic services, could cause downward pressure on the prices we charge and would affect our results of operations.

We adopted the new accounting standard for revenue recognition effective January 1, 2018. The new standard had a material impact on our Condensed Consolidated Balance Sheets. Our financial results reflect adoption of the standard with prior periods adjusted accordingly. Refer to Note 2 – Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements, Part I, Item 1 of this Form 10-Q, for further discussion.

Results of Operations

Operating Revenues. Operating revenues for the first quarter of 20182019 increased by 17.7%,2.6% to $51,164,000 compared to $49,880,000 compared to $42,366,000 forin the same period of 2017.2018. The revenue increase was primarily due to increased crew count and utilization during the first quarter of 2018an increase in reimbursable revenues when compared to the same period of 2017.2018.

 

Operating Expenses.  Operating expenses for the first quarter of 2018 decreased by 3.0%2019 increased 5.4% to $40,856,000 compared to $38,759,000 compared to $39,974,000 forin the same period of 2017.2018. The decreaseincrease in operating expenses was primarily due to reducedan increase in reimbursable third party charges associated with the projects recorded during the period.period when compared to the same period of 2018.

General and Administrative Expenses. General and administrative expenses forwere 8.9% of revenues in the first quarter of 2018 were 8.2% of revenues,2019, compared to 10.3%8.2% of revenues in the same period of 2017.2018. General and administrative expenses decreased $272,000increased $461,000 or 6.2%11.3% to $4,083,000$4,544,000 during the first quarter of 20182019 from $4,355,000$4,083,000 during the same period of 2017.2018. The primary factorfactors for the decreaseincrease in general and administrative expenses during the first quarter of 2019 when compared to the same period of 2018 was the results of our continued cost cutting strategies.were increases in various professional expenses and salaries.

Depreciation and Amortization Expense.  Depreciation and amortization expense for the first quarter of 20182019 totaled $8,678,000$6,081,000, compared to $10,176,000$8,678,000 for the same period of 2017.2018, respectively. Depreciation expense decreased in 20182019 compared to 20172018 as a result of multiple years of reduced capital expenditures. Our depreciation expense is expected to remain flat duringbelow that of 2018 primarilyfor the remainder of 2019, due to continuedthe anticipated continuation of maintenance levels of capital expenditures to maintain our existing asset base.

Our total operating costs for the first quarter of 20182019 were $51,520,000,$51,481,000, representing a 5.5%less than 1.0% decrease from the same period of 2017.2018. This slight decrease was primarily due to the factors described above.

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Income TaxesTaxes..  Income We did not have an income tax benefit for the first quarter of 2018 was $31,000,2019, compared to $2,823,000a benefit of $31,000 for the same period of 2017.2018. These represent effective tax rates of 1.8% for the first quarter of 2018 compared to 23.6% for the first quarter of 2017. Our first quarter0.0% and 1.8%, respectively. The Company’s effective tax rate decreased compared to the corresponding period from the prior year primarily due to the processingrecognition of outstanding amended returns that were accepteda full valuation allowance in the first quarter of 2017 and the associated refunds received.all jurisdictions

.

Our effective tax rates differ from the statutory federal rate of 21%21.0% for certain items such as state and local taxes, valuation allowances, non-deductible expenses and discrete items. For further information, see Note 89 of the Notes to the Condensed Consolidated Financial Statements.

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Use of EBITDA (a Non-GAAP measure)

We define EBITDA as net income (loss) plus interest expense, interest income, income taxes and depreciation and amortization expense. Our management uses EBITDA as a supplemental financial measure to assess:

·

the financial performance of our assets without regard to financing methods, capital structures, taxes or historical cost basis;

·

our liquidity and operating performance over time in relation to other companies that own similar assets and that we believe calculate EBITDA in a similar manner; and

·

the ability of our assets to generate cash sufficient for us to pay potential interest costs.

We also understand that such data are used by investors to assess our performance. However, the term EBITDA is not defined under GAAP, and EBITDA is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. When assessing our operating performance or liquidity, investors and others should not consider this data in isolation or as a substitute for net income (loss), cash flow from operating activities or other cash flow data calculated in accordance with GAAP. In addition, our EBITDA may not be comparable to EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner as us. Further, the results presented by EBITDA cannot be achieved without incurring the costs that the measure excludes: interest, taxes and depreciation and amortization.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

Three Months Ended March 31, 

 

 

2018

    

2017

 

 

2019

    

2018

 

 

 

 

 

 

(as adjusted)

 

 

 

 

 

 

 

 

Net loss

 

$

(1,709)

 

$

(9,152)

 

 

$

(137)

 

$

(1,709)

 

Depreciation and amortization

 

 

8,678

 

 

10,176

 

 

 

6,081

 

 

8,678

 

Interest expense (income), net

 

 

51

 

 

(58)

 

 

 

16

 

 

51

 

Income tax benefit

 

 

(31)

 

 

(2,823)

 

 

 

 

 

(31)

 

EBITDA

 

$

6,989

 

$

(1,857)

 

 

$

5,960

 

$

6,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

Three Months Ended March 31, 

 

    

2018

    

2017

 

    

2019

    

2018

 

 

 

 

 

 

(as adjusted)

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

754

 

$

(6,749)

 

Net cash (used in) provided by operating activities

 

$

(1,567)

 

$

754

 

Changes in working capital and other items

 

 

6,470

 

 

5,150

 

 

 

8,237

 

 

6,470

 

Noncash adjustments to net loss

 

 

(235)

 

 

(258)

 

 

 

(710)

 

 

(235)

 

EBITDA

 

$

6,989

 

$

(1,857)

 

 

$

5,960

 

$

6,989

 

 

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.

Cash Flows. Net cash used in operating activities was $1,567,000 for the three months ended March 31, 2019 and net cash provided by operating activities was $754,000 for the three months ended March 31, 2018 and net cash used in operating activities was $6,749,000 for the same period of 2017.2018. The change of $7,503,000$2,321,000 in cash flow from operations between periods was primarily due to a decrease ofincreased outflows related to changes in our net loss of $7,443,000current assets and liabilities for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.2019.

Net cash used in investing activities was $4,376,000 for the three months ended March 31, 2018 compared to net cash provided by investing activities of $21,089,000 for the same period of 2017. The change in cash flow from investing activities between periods was mainly due to $1,000,000 of short term investments in excess of maturities during the first three months of 2018 compared to $24,250,000 of short term investments that were not reinvested during the first three months of 2017.

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Net cash used in financinginvesting activities was $713,000$1,851,000 for the three months ended March 31, 20182019 compared to net cash used in investing activities of $4,376,000 for the same period of 2018. The change in cash flow from investing activities between periods of $2,525,000 was primarily due to $2,176,000 of additional cash capital expenditures during the three months ended March 31, 2018.

Net cash used in financing activities was $2,052,000 for the three months ended March 31, 2019 and was primarily includedcomprised of principal payments of $690,000$1,146,000 and $700,000 under our notes payable and capital leases.finance leases, respectively. Net cash used in financing activities for the three months ended March 31, 20172018 was $713,000 and was primarily comprised of principal payments of $1,101,000$27,000 and $663,000 under our notes payable and capital leases.

finance leases, respectively.

Capital Expenditures. The Board of Directors approved an initial 20182019 capital budget in the amount of $10,000,000 for capital expenditures, which was limited to necessary maintenance capital requirements and incremental recording channel replacement or increase. To date, $4,435,000For the quarter ended March 31, 2019, $1,046,000 has been spentutilized primarily for maintenance capital, additional seismic equipment, and equipment replacement and refurbishment purposes.refurbishment. In recent years, we have funded most of our capital expenditures through cash flow from operations, cash reserves, equipment term loans and capitalfinance leases. In the past, we have also funded our capital expenditures and other financing needs through public equity offerings.

We continually strive to supply our clients with technologically advanced 3-D seismic data acquisition recording services and data processing capabilities. We maintain equipment in and out of service in anticipation of increased future demand for our services.

Capital Resources.  Historically, we have primarily relied on cash generated from operations, cash reserves and borrowings from commercial banks to fund our working capital requirements and, to some extent, our capital expenditures. Recently, we have funded some of our capital expenditures through commercial bank borrowings, finance leases and equipment term loans and capital leases.loans. From time to time in the past, we have also funded our capital expenditures and other financing needs through public equity offerings.

Credit Agreement

Our Credit Agreement with Veritex Bank includes term loan and revolving loan features, and also allows for the issuance of letters of credit and other promissory notes. We can borrow up to a maximum of $20.0 million pursuant to the Credit Agreement, subject to the terms and limitations discussed below.

The Credit Agreement provides for a revolving loan feature, the Line of Credit, that permits us to borrow, repay and re-borrow, from time to time until June 30, 2018,2019, up to the lesser of (i) $20.0 million or (ii) a sum equal to (a) 80% of our eligible accounts receivable (less the outstanding principal balance of term loans and letters of credit under the Credit Agreement) and (b) the lesser of (i) 50% of the value of certain of our core equipment or (ii) $12,500,000. We have not utilized the Line of Credit since its inception. Because our ability to borrow funds under the Line of Credit is tied to the amount of our eligible accounts receivable and value of certain of our core equipment, if our accounts receivable decrease materially for any reason, including delays, reductions or cancellations by clients, or decreased demand for our services, or the value of our pledged core equipment decreases materially, our borrowing ability to fund operations or other obligations may be reduced.

 

The Credit Agreement also provides for a term loan feature. Any notes outstanding under this feature would count toward the maximum amounts we may borrow under the Credit Agreement.

 

We do not currently have any notes payable under the Credit Agreement or the term loan feature of the Credit Agreement.

We have one outstanding note payable under the Credit Agreement that is not under the term loan feature (and therefore does not count towards the maximum amounts that we may borrow) which was incurred on September 13, 2018 to purchase (and is secured by) equipment and has a remaining aggregate principal amount of $5,432,000 as of March 31, 2019. The note payable will mature upon the earlier of (i) the acceleration of the indebtedness pursuant to the terms of the Company’s existing credit facility with Veritex Bank or (ii) September 13, 2021.

Our obligations under the Line of Credit are secured by a security interest in our accounts receivable and certain of our core equipment, and the term loans are also secured by certain of our core equipment. Interest on amounts outstanding under the Credit Agreement accrues at the lesser of 4.5% or the prime rate (as quoted in the Wall Street Journal), subject to an interest rate floor of 2.5%. The Credit Agreement contains customary covenants for credit facilities of this type, including limitations on disposition of assets, mergers and other fundamental changes. We are also obligated to meet certain financial covenants, including (i) a ratio of (x) total liabilities minus subordinated debt to (y) tangible net worth plus subordinated debt not to exceed 1.00:1.00, (ii) a ratio of current assets to current liabilities of at least 1.50:1.00 and (iii) required tangible net worth of not less than $125,000,000.$100,000,000. We were in compliance with all covenants under the Credit Agreement, including specified ratios, as of March 31, 20182019.

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Veritex Bank has also issued threetwo letters of credit as of March 31, 2018.2019. The first letter of credit is in the amount of $1,767,000 to support payment of our insurance obligations. The principal amount of this letter of credit is collateralized by certain of our core equipment. The second letter of credit is in the amount of $583,000 to support our workers compensation insurance and is secured by a certificate of deposit. The third letter of credit is unsecured and in the amount of $75,000 to support certain of our performance obligations. NoneNeither of the letters of credit counts as funds borrowed under our Line of Credit.

Other Indebtedness

We had one outstanding note, in the remaining principal amountAs of $277,000 at March 31, 20182019, we have two notes payable to a finance company for insurance.

various insurance premiums totaling $1,413,000.

In addition, we enter into capital lease obligations for certain seismic recording equipment and vehicles and recording equipment.under leases classified as finance leases. Our Condensed Consolidated Balance Sheets as of March 31, 20182019 include capital lease obligationsfinance leases of $7,186,000.

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$4,475,000.

Maturities and Interest Rates of Debt

The following table set forth the aggregate principal amount (in thousands) under our outstanding notes payable and the interest rates as of March 31, 20182019 and December 31, 2017.2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018

 

Notes payable to commercial banks

 

 

    

 

 

    

 

Aggregate principal amount outstanding

 

$

5,432

 

$

5,975

 

Interest rate

 

 

5.00%

 

 

5.00%

 

 

March 31, 2018

December 31, 2017

Notes payable to finance company for insurance

Aggregate principal amount outstanding

$

277

$

 —

Interest rates

3.80%

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2019

 

December 31, 2018

 

Notes payable to finance company for insurance

 

 

 

 

 

 

 

Aggregate principal amount outstanding

 

$

1,413

 

$

1,680

 

Interest rate

 

 

3.80% - 4.99%

 

 

3.80%

 

 

The aggregate maturities of the notes payable at March 31, 20182019 are as follows (in thousands):

 

January 2018 - December 2018

$

277

The aggregate maturities of obligations under capital leases at March 31, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

April 2018 - March 2019

$

2,740

April 2019 - March 2020

 

 

 

 

$

2,8703,586

April 2020 - March 2021

 

 

 

 

 

1,5602,173

April 2021 - March 2022

 

 

 

 

 

161,086

Obligations under capitalTotal  notes payable

$

6,845

The aggregate maturities of finance leases at March 31, 2019 are as follows (in thousands):

April 2019 - March 2020

$

2,873

April 2020 - March 2021

1,564

April 2021 - March 2022

24

April 2022 - March 2023

14

Total finance leases

 

 

 

 

$

7,1864,475

 

Interest rates on these leases range from 4.65% to 4.93%5.37%.

Contractual Obligations. We believe that our capital resources, including our short-term investments, cash flow from operations, and funds available under our Credit Agreement, and cash flow from operations will be adequate to meet our current operational needs. We believe that we will be able to finance our 20182019 capital expenditures through cash flow from operations, cash reserves, equipment term loans, capital leases,borrowings from commercial lenders, and the funds available under our Credit Agreement.Line of Credit. However, our ability to satisfy working capital requirements, meet debt repayment obligations, and fund future capital requirements will depend principally upon our future operating performance, which is subject to the risks inherent in our business, and will also depend on the extent to which the current economic climate andadversely affects the ability of our clients,customers, and/or potential clients,customers, to promptly pay amounts owing to us under their service contracts with us.

Off-Balance Sheet Arrangements

As of March 31, 2018,2019, we had no off-balance sheet arrangements under current GAAP. However, we do have operating leases discussed below in the “Recently Issued Accounting Pronouncements” section.arrangements.

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Critical Accounting Policies

Except as it relates to revenue recognition,leases, information regarding our critical accounting policies and estimates is included in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. Refer to Note 2 – Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for discussion about revenue recognition.

leases.

Recently Issued Accounting Pronouncements

In FebruaryJune 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act passed by the U.S. federal government in December 2017. We adopted ASU 2018-02 in the first quarter of 2018 and recorded an adjustment to Stockholders’ Equity within the Condensed Consolidated Balance Sheets that did not have a material impact on our condensed consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09,2018-07, Compensation – Stock Compensation (Topic 718): ScopeImprovements to Nonemployee Share-Based Payment Accounting, which expands the scope of Modification Accounting, which provides guidance about which changesTopic 718 to the terms or conditions of ainclude share-based payment award require an entitytransactions for acquiring goods and services from nonemployees except for certain circumstances. Any transition impact will be a cumulative-effect adjustment to apply modification accounting.retained earnings as of the beginning of the year of adoption. We adopted this guidance in the first quarter of 2018,2019 and it did not have a material impact on our condensed consolidated financial statements.

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In February 2016,August 2018, the FASB issued ASU No. 2016-02, Leases2018-13, Fair Value Measurement (Topic 842),820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which will require organizations that lease assets to recognizemodifies the disclosure requirements on the balance sheet the assetsfair value measurement by removing, modifying, and liabilities for the rights and obligations created by those leases. In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323), which stated additional qualitative disclosures should be considered to assess the significance of the impact upon adoption.adding certain disclosures. This ASU is effective for the annual period beginning after December 15, 2018, and for annual and2019, including interim periods thereafter. Early adoption is permitted. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easementswithin that were not previously accounted for as leases under the current lease guidance in Topic 840.annual period. We are currently evaluating the new guidance and practical expedient to determine the impact theyit will have on our condensed consolidated financial statements.

In August 2018, the SEC adopted amendments to simplify certain disclosure requirements, as set forth in Securities Act Release No. 33-10532, Disclosure Update and Simplification, which includes a requirement for entities to present the changes in shareholders’ equity in the interim financial statements in quarterly reports on Form 10-Q. This amendment is effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendment and proximity to the filing date for most filers’ quarterly reports, the SEC has allowed for a filer’s first presentation of the changes in shareholders’ equity to be included in its Form 10-Q for the quarter that begins after the effective date. We believe thatadopted the most significant change will beSEC’s amendment to our Condensed Consolidated Balance Sheets as our assetinterim disclosures in the first quarter of 2019 and liability balances will increase for operating leases that are currently off-balance sheet.have presented the changes in shareholders’ equity on an interim basis.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks arising from the use of financial instruments in the ordinary course of business. These risks arise primarily as a result of potential changes to operating concentration of credit risk and changes in interest rates. We have not entered into any hedge arrangements, commodity swap agreements, commodity futures, options or other derivative financial instruments. We also conduct business in Canada, which subjects our results of operations and cash flows to foreign currency exchange rate risk.

Concentration of Credit Risk. Our principal market risks include fluctuations in commodity prices, which affect demand for and pricing of our services, and the risk related to the concentration of our clients in the oil and natural gas industry. Since all of our clients are involved in the oil and natural gas industry, there may be a positive or negative effect on our exposure to credit risk because our clients may be similarly affected by changes in economic and industry conditions. As an example, changes to existing regulations or the adoption of new regulations may unfavorably impact us, our suppliers or our clients. In the normal course of business, we provide credit terms to our clients. Accordingly, we perform ongoing credit evaluations of our clients and maintain allowances for possible losses. Our historical experience supports our allowance for doubtful accounts of $250,000 at March 31, 2018.2019. This does not necessarily indicate that it would be adequate to cover a payment default by one large or several small clients.

We generally provide services to certain key clients that account for a significant percentage of our accounts receivable at any given time. Our key clients vary over time. We extend credit to various companies in the oil and natural gas industry, including our key clients, for the acquisition of seismic data, which results in a concentration of credit risk. This concentration of credit risk may be affected by changes in the economic or other conditions of our key clients and may accordingly impact our overall credit risk. If any of these significant clients were to terminate their contracts or fail to contract for our services in the future because they are acquired, alter their exploration or development strategy, or for any other reason, our results of operations could be affected. Because of the nature of our contracts and clients’ projects, our largest clients can change from year to year, and the largest clients in any year may not be indicative of the largest clients in any subsequent year.

Interest Rate Risk. From time to time, we are exposed to the impact of interest rate changes on the outstanding indebtedness under our Credit Agreement which has variable interest rates.

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We generally have cash in the bank which exceeds federally insured limits. Historically, we have not experienced any losses in such accounts; however, volatility in financial markets may impact our credit risk on cash and short‑term investments. At March 31, 2018,2019, cash and cash equivalentsshort term investments totaled $17,608,000.$33,988,000.

ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and financial officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer, Secretary and Treasurer concluded that, as of March 31, 2018,2019, our disclosure controls and procedures were effective, in all material respects, with regard to the recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, for information required to be disclosed by us in the reports that we file or submit under the Exchange Act. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer, Secretary and Treasurer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 20182019 that have materially

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affected or are reasonably likely to materially affect our internal control over financial reporting. We implemented internal controls to ensure we properly assessed the impact of the new accounting standard related to revenue recognition on our condensed consolidated financial statements to facilitate its adoption on January 1, 2018. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From timeRefer to time, we are a party to various legal proceedings arisingNote 7 – Contingencies in the ordinary courseNotes to the Condensed Consolidated Financial Statements (Part I, Item 1 of business. Although we cannot predictthis Form 10-Q) for a discussion of the outcomes of any suchCompany’s legal proceedings, our management believes that the resolution of pending legal actions will not have a material adverse effect on our financial condition, results of operations or liquidity as the Company believes that it is adequately indemnified and insured.proceedings.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, which could materially affect our financial condition or results of operations. There have been no material changes in our risk factors from those disclosed in our 20172018 Annual Report on Form 10-K.

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ITEM 6. EXHIBITS

 

The information required by this Item 6 is set forth in the Index to Exhibits accompanying this Form 10-Q and is hereby incorporated by reference.

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Table of Contents

INDEX TO EXHIBITS

Number

    

Exhibit

 

 

 

3.1

 

Amended and Restated Certificate of Formation, as amended February 11, 2015, filed on March 16, 2015 as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K and incorporated herein by reference.

 

 

 

3.2

 

Bylaws, as amended February 11, 2015, filed on March 16, 2015 as Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K and incorporated herein by reference.

 

 

 

31.1*

 

Certification of Chief Executive Officer of Dawson Geophysical Company pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

 

 

31.2*

 

Certification of Chief Financial Officer of Dawson Geophysical Company pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

 

 

32.1*

 

Certification of Chief Executive Officer of Dawson Geophysical Company pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

 

 

 

32.2*

 

Certification of Chief Financial Officer of Dawson Geophysical Company pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

 

 

 

101*

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018,2019, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations and Comprehensive LossIncome (Loss) for the three months ended March 31, 20182019 and 2017,2018, (ii) Condensed Consolidated Balance Sheets at March 31, 20182019 and December 31, 2017,2018, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018, and 2017, and (iv)(v) Notes to Condensed Consolidated Financial Statements.


*         Filed herewith.

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report be signed on its behalf by the undersigned thereunto duly authorized.

 

DAWSON GEOPHYSICAL COMPANY

 

 

 

DATE: May 8, 20187, 2019

By:

/s/ Stephen C. Jumper

 

 

Stephen C. Jumper

 

 

Chairman of the Board of Directors, President and Chief Executive Officer

 

 

 

 

 

 

DATE: May 8, 20187, 2019

By:

/s/ James K. Brata

 

 

James K. Brata

 

 

Executive Vice President, Chief Financial Officer, Secretary and Treasurer

 

 

 

 

2123