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DWSN Dawson Geophysical

Filed: 4 Nov 21, 4:47pm

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 September 30, 2021

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 every Interactive Data File required to be submitted 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 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

Smaller reporting company

Non-accelerated filer

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 November 2, 2021

Common Stock, $0.01 par value

23,643,934 shares

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

DAWSON GEOPHYSICAL COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

    

September 30, 

December 31,

 

2021

2020

Assets

Current assets:

Cash and cash equivalents

$

36,018

$

40,955

Restricted cash

5,000

5,000

Short-term investments

 

583

 

583

Accounts receivable, net

325

 

7,343

Prepaid expenses and other current assets

2,516

4,709

Total current assets

 

44,442

 

58,590

Property and equipment, net

28,941

38,900

Right-of-use assets

4,703

5,494

Intangibles, net

394

393

Total assets

$

78,480

$

103,377

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

1,557

$

1,603

Accrued liabilities:

 

 

Payroll costs and other taxes

 

672

 

1,045

Other

 

1,491

 

1,811

Deferred revenue

 

96

 

1,779

Current maturities of notes payable and finance leases

 

246

 

94

Current maturities of operating lease liabilities

1,006

1,109

Total current liabilities

 

5,068

 

7,441

Long-term liabilities:

 

 

Notes payable and finance leases, net of current maturities

 

10

 

44

Operating lease liabilities, net of current maturities

4,177

4,899

Deferred tax liabilities, net

19

19

Total long-term liabilities

 

4,206

 

4,962

Operating commitments and contingencies

Stockholders’ equity:

Preferred stock-par value $1.00 per share; 4,000,000 shares authorized, NaN outstanding

 

 

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

23,692,379 and 23,526,517 shares issued, and 23,643,934 and 23,478,072 shares

outstanding at September 30, 2021 and December 31, 2020, respectively

 

237

 

235

Additional paid-in capital

 

155,101

 

154,866

Retained deficit

 

(85,037)

 

(62,927)

Treasury stock, at cost; 48,445 shares

Accumulated other comprehensive loss, net

 

(1,095)

 

(1,200)

Total stockholders’ equity

 

69,206

 

90,974

Total liabilities and stockholders’ equity

$

78,480

$

103,377

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

3

DAWSON GEOPHYSICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

2021

    

2020

    

2021

    

2020

 

Operating revenues

$

1,914

$

8,738

$

13,855

$

77,216

Operating costs:

Operating expenses

 

3,975

 

9,441

 

18,247

 

58,189

General and administrative

 

2,443

 

3,270

 

7,996

 

11,205

Depreciation and amortization

 

3,249

 

4,125

 

10,083

 

13,412

 

9,667

 

16,836

 

36,326

 

82,806

Loss from operations

 

(7,753)

 

(8,098)

 

(22,471)

 

(5,590)

Other income (expense):

Interest income

50

106

176

326

Interest expense

 

(4)

 

(10)

 

(16)

 

(80)

Other (expense) income, net

(158)

177

201

12

Loss before income tax

 

(7,865)

 

(7,825)

 

(22,110)

 

(5,332)

 

Income tax expense

(15)

 

(15)

Net loss

(7,865)

(7,840)

(22,110)

(5,347)

Other comprehensive (loss) income:

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

(307)

374

105

(221)

Comprehensive loss

$

(8,172)

$

(7,466)

$

(22,005)

$

(5,568)

Basic loss per share of common stock

$

(0.33)

$

(0.33)

$

(0.94)

$

(0.23)

Diluted loss per share of common stock

$

(0.33)

$

(0.33)

$

(0.94)

$

(0.23)

Weighted average equivalent common shares outstanding

 

23,632,112

 

23,423,437

 

23,545,693

 

23,350,204

Weighted average equivalent common shares outstanding - assuming dilution

 

23,632,112

 

23,423,437

 

23,545,693

 

23,350,204

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

4

DAWSON GEOPHYSICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and amounts in thousands)

Nine Months Ended September 30, 

    

2021

    

2020

 

Cash flows from operating activities:

Net loss

$

(22,110)

$

(5,347)

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

Depreciation and amortization

 

10,083

 

13,412

Operating lease cost

796

916

Non-cash compensation

 

312

 

600

Deferred income tax expense

 

 

79

Change in other long-term liabilities

(150)

Gain on disposal of assets

(131)

(3)

Remeasurement and other

 

20

 

68

Change in operating assets and liabilities:

 

 

Decrease in accounts receivable

 

7,037

 

19,373

Decrease in prepaid expenses and other assets

 

2,194

 

4,505

Decrease in accounts payable

 

(365)

 

(2,957)

Decrease in accrued liabilities

 

(696)

(2,011)

Decrease in operating lease liabilities

(830)

(930)

Decrease in deferred revenue

 

(1,683)

(3,107)

Net cash (used in) provided by operating activities

 

(5,373)

 

24,448

Cash flows from investing activities:

Capital expenditures, net of non-cash capital expenditures summarized below

 

(11)

(2,822)

Proceeds from maturity of short-term investments

1,767

Proceeds from disposal of assets

384

225

Proceeds from notes receivable

 

26

Net cash provided by (used in) investing activities

373

(804)

Cash flows from financing activities:

Proceeds from notes payable

550

6,374

Principal payments on notes payable

(387)

(8,393)

Principal payments on finance leases

 

(46)

 

(2,291)

Tax withholdings related to stock-based compensation awards

(75)

(70)

Net cash provided by (used in) financing activities

 

42

 

(4,380)

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

21

(113)

Net (decrease) increase in cash and cash equivalents and restricted cash

 

(4,937)

 

19,151

Cash and cash equivalents and restricted cash at beginning of period

 

45,955

 

31,271

Cash and cash equivalents and restricted cash at end of period

$

41,018

$

50,422

Supplemental cash flow information:

Cash paid for interest

$

16

$

89

Cash paid for income taxes

$

81

$

83

Cash received for income taxes

$

$

206

Non-cash operating, investing and financing activities:

Increase (decrease) in accrued purchases of property and equipment

$

318

$

(61)

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

$

1

$

63

Increase in right-of-use assets for prepaid rent

$

$

3

Financed insurance premiums

$

$

433

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

5

DAWSON GEOPHYSICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited and amounts in thousands, except share data)

Accumulated

Common Stock

Additional

Other

Number

Paid-in

Retained

Comprehensive

Of Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Total

 

Balance December 31, 2020

23,526,517

$

235

$

154,866

$

(62,927)

$

(1,200)

$

90,974

Net loss

(5,228)

(5,228)

Unrealized income on foreign exchange rate translation

201

201

Stock-based compensation expense

101

101

Balance March 31, 2021

23,526,517

235

154,967

(68,155)

(999)

86,048

Net loss

(9,017)

(9,017)

Unrealized income on foreign exchange rate translation

211

211

Issuance of common stock under stock compensation plans

174,000

2

(2)

Stock-based compensation expense

67

67

Issuance of common stock as compensation

11,320

30

30

Shares exchanged for taxes on stock-based compensation

(31,410)

(75)

(75)

Balance June 30, 2021

23,680,427

237

154,987

(77,172)

(788)

77,264

Net loss

(7,865)

(7,865)

Unrealized loss on foreign exchange rate translation

(307)

(307)

Stock-based compensation expense

84

84

Issuance of common stock as compensation

11,952

30

30

Balance September 30, 2021

23,692,379

$

237

$

155,101

$

(85,037)

$

(1,095)

$

69,206

Accumulated

Common Stock

Additional

Other

Number

Paid-in

Retained

Comprehensive

Of Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Total

 

Balance December 31, 2019

23,335,855

$

233

$

154,235

$

(49,731)

$

(1,572)

$

103,165

Net income

993

993

Unrealized loss on foreign exchange rate translation

(1,199)

(1,199)

Stock-based compensation expense

203

203

Balance March 31, 2020

23,335,855

233

154,438

(48,738)

(2,771)

103,162

Net income

1,500

1,500

Unrealized income on foreign exchange rate translation

604

604

Issuance of common stock under stock compensation plans

78,600

1

(1)

Stock-based compensation expense

271

271

Shares exchanged for taxes on stock-based compensation

(15,420)

(17)

(17)

Balance June 30, 2020

23,399,035

234

154,691

(47,238)

(2,167)

105,520

Net loss

(7,840)

(7,840)

Unrealized income on foreign exchange rate translation

374

374

Issuance of common stock under stock compensation plans

157,500

2

(2)

Stock-based compensation expense

126

126

Shares exchanged for taxes on stock-based compensation

(30,018)

(1)

(52)

(53)

Balance September 30, 2020

23,526,517

$

235

$

154,763

$

(55,078)

$

(1,793)

$

98,127

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

6

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 multicomponent 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 may 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, 2020.

Significant Accounting Policies

Principles of Consolidation. The condensed consolidated financial statements for the three and nine months ended September 30, 2021 include the accounts of the Company and its wholly-owned subsidiaries, Dawson Operating LLC, Dawson Seismic Services Holdings, Inc., Eagle Canada, Inc., Eagle Canada Seismic Services ULC and Exploration Surveys, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Allowance for Doubtful Accounts. The Company’s allowance for doubtful accounts reflects its current estimate of credit losses expected to be incurred over the life of the financial instrument and is determined based on a number of factors. Management determines the need for any allowance for doubtful accounts receivable based on its review of past-due accounts, its past experience of historical write-offs, its current client base, when customer accounts exceed 90 days past due and specific customer account reviews. While the collectability of outstanding client invoices is continually assessed, the inherent volatility of the energy industry’s business cycle can cause swift and unpredictable changes in the financial stability of the Company’s clients. The Company's allowance for doubtful accounts was $250,000 at September 30, 2021 and December 31, 2020.

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 a finance lease or an operating 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. For operating leases, where readily determinable, the Company uses the implicit interest rate in determining the present value of future minimum lease payments. In the absence of an implicit rate, the Company uses its incremental borrowing rate. The right-of-use assets are amortized to operating lease cost over the lease terms on a straight-line basis and is included in operating expense. Several of the Company’s leases include options to renew and the exercise of lease renewal options is primarily at the Company’s discretion.

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

7

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. 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, net of actual forfeitures, 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.

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 generally recognized based on square miles of data recorded compared to total square miles anticipated to be recorded on the survey using the total estimated revenue for the service contract. 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-pocket expenses under the terms of the service contracts. The amounts billed to clients are included at their gross amount in the total estimated revenue for the service contract.

Clients are billed as permitted by the service contract. Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. If billing occurs prior to the revenue recognition or billing exceeds the revenue recognized, the amount is considered deferred revenue and a contract liability. Conversely, if the revenue recognition exceeds the billing, the excess is considered an unbilled receivable and a contract asset. As services are performed, those 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 generally 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 October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-10, Codification Improvements, which clarifies the Codification or corrects unintended application of guidance by improving the consistency of the Codification for disclosure on multiple topics. They are not expected to change current practice. This ASU is effective for the annual period beginning after December 15, 2020, including interim periods within that annual period and should be applied on a retrospective basis for all periods presented. The Company adopted this guidance in the first quarter of 2021 and it did not have a material impact on its consolidated financial statements.

8

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by eliminating certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance to improve consistent application. This ASU is effective for the annual period beginning after December 15, 2020, including interim periods within that annual period. Certain amendments within this ASU are required to be applied on a retrospective basis for all periods presented; others are to be applied using a modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, as of the beginning of the first reporting period in which the guidance is adopted; and yet others are to be applied using either basis. All other amendments not specified in the ASU should be applied on a prospective basis. The Company adopted this guidance in the first quarter of 2021 prospectively as it relates to currency translation adjustments in other comprehensive income and it did not have a material impact on its consolidated financial statements.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

At September 30, 2021 and December 31, 2020, the Company’s financial instruments included cash and cash equivalents, restricted cash, short-term investments in certificates of deposit, accounts receivable, other current assets, accounts payable, other current liabilities, notes payable, finance leases and operating lease liabilities. Due to the short-term maturities of cash and cash equivalents, restricted cash, 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 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 payable and investments in certificates of deposit are level 2 measurements in the fair value hierarchy.

4. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION

Disaggregated Revenues

The Company has 1 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 September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

2021

2020

Operating Revenues

United States

$

1,914

$

8,738

 

$

10,891

 

$

65,408

Canada

 

 

 

2,964

 

11,808

Total

$

1,914

$

8,738

$

13,855

$

77,216

Deferred Costs (in thousands)

Deferred costs were $1,847 and $2,525 at January 1, 2021 and 2020, respectively. The Company’s prepaid expenses and other current assets at September 30, 2021 and 2020 included deferred costs incurred to fulfill contracts with customers of $210 and $417, respectively.

Deferred costs at September 30, 2021 compared to January 1, 2021 and at September 30, 2020 compared to January 1, 2020 decreased primarily as a result of the completion of several projects during those nine month periods that had significant deferred fulfillment costs at January 1, 2021 and 2020, respectively.

The amount of total deferred costs amortized for the three and nine months ended September 30, 2021 was $453 and $4,360, respectively. The amount of total deferred costs amortized for the three and nine months ended September 30, 2020 was $1,128 and $12,023, respectively. There were no material impairment losses incurred during these periods.

Deferred Revenue (in thousands)

Deferred revenue was $1,779 and $3,481 at January 1, 2021 and 2020, respectively. The Company’s deferred revenue at September 30, 2021 and 2020 was $96 and $374, respectively.

Deferred revenue at September 30, 2021 compared to January 1, 2021 and at September 30, 2020 compared to January 1, 2020 decreased primarily as a result of completing projects for clients with large prepayments for third party reimbursables.

9

Revenue recognized for the three and nine months ended September 30, 2021 that was included in the contract liability balance at the beginning of 2021 was $0 and $1,779, respectively. Revenue recognized for the three and nine months ended September 30, 2020 that was included in the contract liability balance at the beginning of 2020 was $129 and $3,476, respectively.

5. DEBT

Dominion Loan Agreement

On September 30, 2019, the Company entered into a Loan and Security Agreement with Dominion Bank, a Texas state bank (“Dominion Bank”). On September 30, 2021, the Company entered into a Second Loan Modification Agreement (the “Second Modification”) to the Loan and Security Agreement (as amended by the Loan Modification Agreement, the “Loan Agreement”) for the purpose of (a) amending and extending the maturity of its line of credit with Dominion Bank by one year and (b) amending the Company's obligation to maintain a certain tangible net worth. The Loan Agreement provides for a revolving credit facility (the “Revolving Credit Facility”) in an amount up to the lesser of (i) $15,000,000 or (ii) a sum equal to (a) 80% of the Company’s eligible accounts receivable plus 100% of the amount on deposit with Dominion Bank in the Company’s collateral account, consisting of a restricted CDARS account of $5,000,000 (the “Deposit”). As of September 30, 2021, the Company has not borrowed any amounts under the Revolving Credit Facility.

Under the Revolving Credit Facility, interest will accrue at an annual rate equal to the lesser of (i) 6.00% and (ii) the greater of (a) the prime rate as published from time to time in The Wall Street Journal or (b) 3.50%. The Company will pay a commitment fee of 0.10% per annum on the difference of (a) $15,000,000 minus the Deposit minus (b) the daily average usage of the Revolving Credit Facility. The Loan Agreement contains customary covenants for credit facilities of this type, including limitations on disposition of assets. The Company is also obligated to meet certain financial covenants under the Loan Agreement, including maintaining a tangible net worth of not less than $55,000,000 and specified ratios with respect to current assets and liabilities and debt to tangible net worth. The Company’s obligations under the Loan Agreement are secured by a security interest in the collateral account (including the Deposit) with Dominion Bank and future accounts receivable and related collateral. The maturity date of the Loan Agreement is September 30, 2022.

The Company does not currently have any notes payable under the Revolving Credit Facility.

Dominion Letters of Credit

As of September 30, 2021, Dominion Bank has issued 1 letter of credit in the amount of $265,000 to support the Company’s workers compensation insurance. The letter of credit is secured by a certificate of deposit with Dominion Bank.

Other Indebtedness

As of September 30, 2021, the Company has 1 short-term note payable to a finance company for various insurance premiums totaling $203,000.

In addition, the Company leases certain seismic recording equipment and vehicles under leases classified as finance leases. The Company’s Condensed Consolidated Balance Sheet as of September 30, 2021 includes finance leases of $53,000.

Maturities and Interest Rates of Debt

The following tables set forth the aggregate principal amount (in thousands) under the Company’s outstanding notes payable and the interest rates as of September 30, 2021 and December 31, 2020:

    

September 30, 2021

December 31, 2020

Notes payable to finance company for insurance

Aggregate principal amount outstanding

$

203

$

40

Interest rate

4.99%

4.99%

The aggregate maturities of finance leases as of September 30, 2021 are as follows (in thousands):

October 2021 - September 2022

$

43

October 2022 - September 2023

10

Obligations under finance leases

$

53

Interest rates on these leases range from 4.83% to 5.37%.

10

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, Houston, Denver, Oklahoma City and Calgary, Alberta. There have been no material changes to our leases since the Company’s most recent Annual Report on Form 10-K that was filed with the SEC on March 16, 2021.

Maturities of lease liabilities as of September 30, 2021 are as follows (in thousands):

Operating Leases

Finance Leases

October 2021 - September 2022

$

1,243

$

45

October 2022 - September 2023

1,166

10

October 2023 - September 2024

1,188

October 2024 - September 2025

943

October 2025 - September 2026

892

Thereafter

451

Total payments under lease agreements

5,883

55

Less imputed interest

(700)

(2)

Total lease liabilities

$

5,183

$

53

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 18 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. On October 28, 2020, the trial court granted a plea to jurisdiction in favor the City of Midland, a co-defendant in the case. Weatherford is appealing that decision and the case is stayed, pending the appellate ruling. While the outcome and impact of this legal proceeding on the Company cannot be predicted with certainty, based on currently available information, management believes that the resolution of this proceeding will not have a material adverse effect on our financial condition, results of operations or liquidity.

Additionally, 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.

8. NET LOSS PER SHARE

Basic 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.

11

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

 

Net loss

$

(7,865)

$

(7,840)

$

(22,110)

$

(5,347)

Weighted average common shares outstanding

 

 

Basic

23,632,112

23,423,437

 

23,545,693

 

23,350,204

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

Diluted

23,632,112

23,423,437

23,545,693

23,350,204

Basic loss per share of common stock

$

(0.33)

$

(0.33)

$

(0.94)

$

(0.23)

Diluted loss per share of common stock

$

(0.33)

$

(0.33)

$

(0.94)

$

(0.23)

The Company had a net loss for the three and nine months ended September 30, 2021 and 2020. 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 those periods.

The following weighted average numbers of stock options, restricted stock unit awards and restricted stock awards have been excluded from the calculation of diluted loss per share of common stock, as their effect would be anti-dilutive for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Stock options

Restricted stock units

167,500

242,478

151,413

332,868

Restricted stock awards

Total

167,500

242,478

151,413

332,868

9. INCOME TAXES

For each of the three and nine months ended September 30, 2021, the Company's effective tax rate was 0.0%. For the three and nine months ended September 30, 2020, the Company’s effective tax rate was -0.2% and -0.3%, respectively. The Company’s nominal or no effective tax rate for the periods above was due to the presence of net operating loss carryovers and adjustments to the valuation allowance on deferred tax assets.

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.

If the Company had any income tax benefit for the three and nine months ended September 30, 2021, it would not include income tax benefits for all of the losses incurred because the Company 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 nine months ended September 30, 2021 and 2020. 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.

On December 27, 2020, Congress passed the Consolidated Appropriations Act, 2021 which included changes to federal income tax law which did not have a material impact on the Company’s consolidated financial statements.

10. SUBSEQUENT EVENTS

On October 25, 2021, the Company announced that it entered into a definitive merger agreement Wilks Brothers, LLC (“Wilks”). Pursuant to the merger agreement, a subsidiary of Wilks commenced a tender offer to acquire all of the Company’s outstanding common

12

stock for $2.34 per share in cash (the “Offer”) on November 1, 2021. Subject to the closing of the Offer, the merger agreement also contemplates that Wilks will acquire any shares of the Company’s common stock that are not tendered into the Offer at the same price per share through a second-step merger, which will be completed as soon as practicable following the closing of the Offer, subject to the approval of at least 80% of the outstanding shares of the Company’s common stock.

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, our financial position, business strategy and plans, objectives of our management for future operations, including statements related to the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic on our business, financial condition and results of 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, the satisfaction of closing conditions for the acquisition by Wilks (such as the tender of at least 80% of the outstanding shares of capital stock of the Company in order to close the tender offer, and approval of at least 80% of the outstanding shares of the capital stock of the Company in order to consummate the second step merger); the possibility that the merger will not be completed; dependence upon energy industry spending; changes in exploration and production spending by our customers and changes in the level of oil and natural gas exploration and development; the results of operations and financial condition of our customers, particularly during extended periods of low prices for crude oil and natural gas; the volatility of oil and natural gas prices; changes in economic conditions; the severity and duration of the COVID-19 pandemic-related economic repercussions and the resulting negative impact on demand for oil and gas; surpluses in the supply of oil and the ability of the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, to agree on and comply with supply limitations; the duration and magnitude of the unprecedented disruption in the oil and gas industry currently resulting from the impact of the foregoing factors, which is negatively impacting our business; the potential for contract delays; reductions or cancellations of service contracts; limited number of customers; credit risk related to our customers; reduced utilization; high fixed costs of operations and high capital requirements; operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees and remote work arrangements; 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 in our Annual Report on Form 10-K that was filed with the SEC on March 16, 2021 and any subsequent Quarterly Reports on Form 10-Q filed with the SEC. 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. Our clients consist of major oil and gas companies, independent oil and gas operators, and providers of multi-client data libraries. In recent years, our primary customer base has consisted of providers of multi-client data libraries. Demand for our services depends upon the level of spending by these companies for exploration, production, development and field management activities, which depends, in a large part, on oil and natural gas prices. Significant fluctuations in domestic oil and natural gas exploration and development activities related to commodity prices, as we have recently experienced, have affected, and will continue to affect, demand for our services and our results of operations, and such fluctuations continue to be the single most important factor affecting our business and results of operations.

Activity levels during the third quarter of 2021 remained depressed, as we had one seismic data acquisition crew operating in the lower 48 with extended periods of low utilization. Our one active crew was idle from early September to mid-October. The near-term outlook for seismic data acquisition activity in the U.S. remains challenged, notwithstanding the currently elevated prices for oil and natural gas. Based on currently available information, our one active lower 48 crew resumed operation in mid-October on a small, few thousand channel count project with a duration of approximately seven days, and is further scheduled through early February of 2022 with current projects of various sizes and channel count requirements, the largest of which is 65,000 channels with a duration of approximately 45 days.

The Canadian season should begin earlier than in recent years. We expect to operate two crews in Canada in the back half of the fourth quarter of 2021 through the end of the winter season which concludes at the end of the first quarter of 2022. We have or anticipate to be

13

awarded several additional mid-sized projects in the lower 48, each of which will be pushed into late 2022 primarily due to land access issues. Bid activity remains at historically low levels and visibility into 2022 is limited in the lower 48. Due to a lack of demand for seismic data acquisition projects in both Canada and the lower 48, prices for our services softened in the last quarter.

In our continuing response to these difficult times, we significantly limited capital budget spending, reduced fixed and variable operating expenses, and implemented a comprehensive equipment maintenance program in preparation for a rapid response to anticipated increased activity levels. In addition, we maintain our commitment to our robust Health, Safety and Environmental program, ongoing client relationships and product quality.

While our revenues are mainly affected by the level of client demand for our services, our revenues are also affected by the pricing for our services that we negotiate with our clients and the productivity and utilization level of our data acquisition crews. Factors impacting productivity and utilization levels include: client demand, commodity prices, whether we enter into turnkey or dayrate contracts with our clients, the number and size of crews, the number of recording channels per crew, crew downtime related to inclement weather, delays in acquiring land access permits, agricultural or hunting activity, holiday schedules, short winter days, crew repositioning and equipment failure. To the extent we experience these factors, our operating results may be affected from quarter to quarter. 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. Further, the ongoing COVID-19 pandemic may further compound one or more of the foregoing factors and could directly affect our productivity.

Results of Operations

Operating Revenues. Operating revenues for the third quarter of 2021 decreased 78.1% to $1,914,000 compared to $8,738,000 in the same period of 2020. Operating revenues decreased 82.1% to $13,855,000 during the first nine months of 2021 compared to $77,216,000 in the same period of 2020. The decreased revenue during the third quarter and first nine months of 2021 compared to the same periods of 2020 was primarily due to lower demand and extended periods of low utilization during those periods of 2021.

Operating Expenses. Operating expenses for the third quarter of 2021 decreased 57.9% to $3,975,000 compared to $9,441,000 in the same period of 2020. Operating expenses decreased 68.6% to $18,247,000 during the first nine months of 2021 compared to $58,189,000 in the same period of 2020. The decrease in operating expenses during the third quarter and first nine months of 2021 compared to the same periods of 2020 was primarily due to decreased crew utilization during those periods of 2021.

General and Administrative Expenses. General and administrative expenses were 127.6% and 57.7% of revenues in the third quarter and first nine months of 2021, respectively compared to 37.4% and 14.5% of revenues in the same periods of 2020. General and administrative expenses decreased $827,000 or 25.3% to $2,443,000 during the third quarter of 2021 from $3,270,000 during the same period of 2020, and decreased $3,209,000 or 28.6% to $7,996,000 during the first nine months of 2021 from $11,205,000 during the same period of 2020.The primary factors for the decrease in general and administrative expenses during the third quarter and first nine months of 2021 compared to the same periods of 2020 was due to workforce reductions, salary reductions, and continued cost reduction efforts by management.

Depreciation and Amortization Expense. Depreciation and amortization expense for the third quarter and first nine months of 2021 totaled $3,249,000 and $10,083,000, respectively, compared to $4,125,000 and $13,412,000 for the same periods of 2020. Depreciation expense decreased in 2021 compared to 2020 as a result of multiple years of reduced capital expenditures. Our depreciation expense is expected to remain below that of 2020 for the remainder of 2021 due to the anticipated continuation of maintenance levels of capital expenditures to maintain our existing asset base.

Total operating costs for the third quarter of 2021 were $9,667,000, representing a 42.6% decrease from the same period of 2020. The operating costs for the first nine months of 2021 were $36,326,000, representing a 56.1% decrease from the same period of 2020. The decrease in operating costs for the third quarter and first nine months of 2021 compared to 2020 was primarily due to the factors described above.

Income Taxes. Income tax expense for the third quarter and first nine months of 2021 was $0 and $0, respectively, compared to income tax expense of $15,000 and $15,000 for the same periods of 2020. These amounts represent effective tax rates of 0.0% and 0.0% for the third quarter and first nine months of 2021, respectively, compared to -0.2% and -0.3% for the third quarter and first nine months of 2020. The Company’s nominal or no effective tax rate for the periods above was due to the presence of net operating loss carryovers and adjustments to the valuation allowance on deferred tax assets.

Our effective tax rates differ from the statutory federal rate of 21.0% for certain items such as state and local taxes, valuation allowances, non-deductible expenses and discrete items. For further information, see Note 9 of the Notes to the Condensed Consolidated Financial Statements.

14

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 operating activities, which are the most directly comparable GAAP financial measures, are provided in the following tables (in thousands):

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

2021

    

2020

    

2021

    

2020

Net loss

$

(7,865)

$

(7,840)

$

(22,110)

$

(5,347)

Depreciation and amortization

3,249

4,125

10,083

13,412

Interest (income) expense, net

(46)

(96)

(160)

(246)

Income tax expense

15

15

EBITDA

$

(4,662)

$

(3,796)

$

(12,187)

$

7,834

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

2021

2020

Net cash (used in) provided by operating activities

$

(4,075)

$

15,472

 

$

(5,373)

 

$

24,448

Changes in working capital and other items

 

(205)

 

(18,831)

 

(5,706)

 

(15,098)

Non-cash adjustments to net loss

 

(382)

 

(437)

 

(1,108)

 

(1,516)

EBITDA

$

(4,662)

$

(3,796)

$

(12,187)

$

7,834

Liquidity and Capital Resources

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 $5,373,000 for the nine months ended September 30, 2021 compared to net cash provided by operating activities of $24,448,000 for the same period of 2020. This was primarily due to a significantly larger net loss for the first nine months of 2021 compared to the same period of 2020 as well as changes in the balances of our operating assets and liabilities.

Net cash provided by investing activities was $373,000 for the nine months ended September 30, 2021 compared to net cash used in investing activities of $804,000 for the same period of 2020. The decrease in cash used in investing activities between periods of $1,177,000 was primarily due to minimal capital expenditures during the first nine months of 2021 compared to capital expenditures of $2,822,000 for the same period of 2020 offset by proceeds from maturities of short-term investments of $1,767,000 for the same period of 2020.

Net cash provided by financing activities was $42,000 for the nine months ended September 30, 2021 and was primarily comprised of proceeds from notes payable of $550,000 offset by principal payments of $387,000 and $46,000 under our notes payable and finance leases, respectively. Net cash used in financing activities for the nine months ended September 30, 2020 was $4,380,000 and was primarily

15

comprised of principal payments of $8,393,000 and $2,291,000 under our notes payable and finance leases, respectively, offset by proceeds from notes payable of $6,374,000.

Capital Expenditures. The Board of Directors approved an initial 2021 capital budget in the amount of $1,000,000 for capital expenditures, which was limited to necessary maintenance capital requirements and incremental recording channel replacement or increase. For the nine months ended September 30, 2021, we have spent $329,000 on capital expenditures. In recent years, we have funded most of our capital expenditures through cash flow from operations, cash reserves, equipment term loans and finance 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. We have funded some of our capital expenditures through commercial bank borrowings, finance leases and equipment term loans. From time to time in the past, we have also funded our capital expenditures and other financing needs through public equity offerings. The amount of borrowings available to us under our existing credit facility are determined in part by the amount of our eligible accounts receivable, which have been declining in recent months.

Loan Agreement

Dominion Credit Facility. On September 30, 2019, we entered into a Loan and Security Agreement with Dominion Bank. On September 30, 2021, we entered into the Second Modification to the Loan and Security Agreement for the purpose of (a) amending and extending the maturity of our line of credit with Dominion Bank by one year and (b) amending our obligation to maintain a certain tangible net worth. The Loan Agreement provides for a Revolving Credit Facility in an amount up to the lesser of (i) $15,000,000 or (ii) a sum equal to (a) 80% of our eligible accounts receivable plus 100% of the amount on deposit with Dominion Bank in our collateral account, consisting of a restricted CDARS account of $5,000,000. As of September 30, 2021, we have not borrowed any amounts under the Revolving Credit Facility.

Under the Revolving Credit Facility, interest will accrue at an annual rate equal to the lesser of (i) 6.00% and (ii) the greater of (a) the prime rate as published from time to time in The Wall Street Journal or (b) 3.50%. We will pay a commitment fee of 0.10% per annum on the difference of (a) $15,000,000 minus the Deposit minus (b) the daily average usage of the Revolving Credit Facility. The Loan Agreement contains customary covenants for credit facilities of this type, including limitations on disposition of assets. We are also obligated to meet certain financial covenants under the Loan Agreement, including maintaining a tangible net worth of not less than $55,000,000 and specified ratios with respect to current assets and liabilities and debt to tangible net worth. Our obligations under the Loan Agreement are secured by a security interest in the collateral account (including the Deposit) with Dominion Bank and future accounts receivable and related collateral. The maturity date of the Loan Agreement is September 30, 2022.

We do not currently have any notes payable under the Revolving Credit Facility.

Dominion Letters of Credit. As of September 30, 2021, Dominion Bank has issued one letter of credit in the amount of $265,000 to support our workers compensation insurance. The letter of credit is secured by a certificate of deposit with Dominion Bank.

Other Indebtedness

As of September 30, 2021, we have one short-term note payable to a finance company for various insurance premiums totaling $203,000.

In addition, we lease certain seismic recording equipment and vehicles under leases classified as finance leases. Our Condensed Consolidated Balance Sheet as of September 30, 2021 includes finance leases of $53,000.

16

Maturities and Interest Rates of Debt

The following tables set forth the aggregate principal amount (in thousands) under our outstanding notes payable and the interest rates as of September 30, 2021 and December 31, 2020:

    

September 30, 2021

December 31, 2020

Notes payable to finance company for insurance

Aggregate principal amount outstanding

$

203

$

40

Interest rate

4.99%

4.99%

The aggregate maturities of finance leases as of September 30, 2021 are as follows (in thousands):

October 2021 - September 2022

$

43

October 2022 - September 2023

10

Obligations under finance leases

$

53

Interest rates on these leases range from 4.83% to 5.37%.

Contractual Obligations

We believe that our capital resources, including our cash on hand, short-term investments, cash flow from operations, and funds available under our Revolving Credit Facility will be adequate to meet our current operational needs. We believe that we will be able to finance our 2021 capital expenditures through cash flow from operations, borrowings from commercial lenders, and the funds available under our Revolving Credit Facility. 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 adversely affects the ability of our customers, and/or potential customers, to promptly pay amounts owing to us under their service contracts with us.

Critical Accounting Policies

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, 2020.

Recently Issued Accounting Pronouncements

In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements, which clarifies the Codification or corrects unintended application of guidance by improving the consistency of the codification for disclosure on multiple topics. They are not expected to change current practice. This ASU is effective for the annual period beginning after December 15, 2020, including interim periods within that annual period and should be applied on a retrospective basis for all periods presented. We adopted this guidance in the first quarter of 2021 and it did not have a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by eliminating certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance to improve consistent application. This ASU is effective for the annual period beginning after December 15, 2020, including interim periods within that annual period. Certain amendments within this ASU are required to be applied on a retrospective basis for all periods presented; others are to be applied using a modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, as of the beginning of the first reporting period in which the guidance is adopted; and yet others are to be applied using either basis. All other amendments not specified in the ASU should be applied on a prospective basis. We adopted this guidance in the first quarter of 2021 prospectively as it relates to currency translation adjustments in other comprehensive income and it did not have a material impact on our consolidated financial statements.

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.

17

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 September 30, 2021. This does not necessarily indicate that it would be adequate to cover a payment default by one large or several smaller 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 Revolving Credit Facility which has variable interest rates.

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 September 30, 2021, cash, restricted cash and short term investments totaled $41,601,000.

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 September 30, 2021, 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 September 30, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to Note 7 – Operating Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for a discussion of the Company’s legal proceedings.

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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, 2020, which could materially affect our financial condition or results of operations.

Additionally there are certain risks, listed below, associated with our pending merger with Wilks.  See Note 10 – Subsequent Events, above, for a discussion of this proposed transaction.

Risks Related to the Proposed Merger

Failure to complete the pending tender offer and merger could adversely affect our stock price and our future business and operations.

The merger with Wilks is subject to customary closing conditions, including the tender of at least 80% of the outstanding shares of the Company pursuant to the Offer, and the approval of the merger by at least 80% of the outstanding shares of the Company. Neither we nor Wilks can assure you that the merger will occur. In the event that the merger is not consummated, we will be required to pay certain costs related to the merger, including legal, accounting and advisory fees, which may be required to be paid even if the merger is not completed. In the event that the Offer is not completed, or the merger is not consummated, our business, stock price and results of operations could be negatively impacted.

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ITEM 6. 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.

3.3

Statement of Resolutions Establishing Series of Shares designated Series A Junior Participating Preferred Stock of Dawson Geophysical Company, filed on April 8, 2021 as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference.

10.1

Second Loan Modification Agreement to Loan and Security Agreement, by and between Dawson Geophysical Company and Dominion Bank, dated September 30, 2021, filed on October 1, 2021 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-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 September 30, 2021, formatted in Inline XBRL ( Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020, (ii) Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020, and (v) Notes to Condensed Consolidated Financial Statements.

104*

Cover Page Interactive Data File (formatted in Inline XBRL and included as Exhibit 101).

*         Filed herewith.

+

Management contract or compensatory plan or arrangement.

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SIGNATURES

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

DAWSON GEOPHYSICAL COMPANY

DATE: November 4, 2021

By:

/s/ Stephen C. Jumper

Stephen C. Jumper

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

DATE: November 4, 2021

By:

/s/ James K. Brata

James K. Brata

Executive Vice President, Chief Financial Officer, Secretary and Treasurer

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