Dawson(DWSN) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part contains the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents the unaudited condensed consolidated financial statements and comprehensive accounting notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (Amounts in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------- | :------------ | :---------------- | | Assets | | | | Total current assets | $69,562 | $65,618 | | Property and equipment, net | $46,396 | $53,549 | | Total assets | $122,293 | $127,608 | | Liabilities | | | | Total current liabilities | $11,298 | $18,257 | | Total long-term liabilities | $5,475 | $6,186 | | Stockholders' Equity | | | | Total stockholders' equity | $105,520 | $103,165 | - Total assets decreased by $5.315 million from December 31, 2019, to June 30, 2020, primarily due to a reduction in property and equipment, net[10] - Total current liabilities significantly decreased by $6.959 million, mainly driven by reductions in deferred revenue and current maturities of notes payable and finance leases[10] Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Amounts in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating revenues | $29,499 | $24,076 | $68,478 | $75,240 |\ | Income (loss) from operations | $1,123 | $(11,622) | $2,508 | $(11,939) |\ | Net income (loss) | $1,500 | $(11,246) | $2,493 | $(11,383) |\ | Basic income (loss) per share of common stock | $0.06 | $(0.49) | $0.11 | $(0.49) |\ | Diluted income (loss) per share of common stock | $0.06 | $(0.49) | $0.11 | $(0.49) | - Operating revenues for the three months ended June 30, 2020, increased by 22.5% compared to the same period in 2019, while for the six months, they decreased by 9%[13] - The Company reported a net income of $1.5 million for the three months ended June 30, 2020, a significant improvement from a net loss of $11.246 million in the prior year period[13] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $8,976 | $12,069 |\ | Net cash used in investing activities | $(2,545) | $(2,809) |\ | Net cash used in financing activities | $(2,959) | $(3,973) |\ | Net increase in cash and cash equivalents and restricted cash | $3,207 | $5,549 |\ | Cash and cash equivalents and restricted cash at end of period | $34,478 | $34,278 | - Net cash provided by operating activities decreased by $3.093 million for the six months ended June 30, 2020, compared to the same period in 2019[17] - Net cash used in financing activities decreased by $1.014 million, primarily due to proceeds from a PPP Loan of $6.374 million, partially offset by principal payments on notes payable and finance leases[17] Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (Amounts in thousands, except share data) | Metric | Balance December 31, 2019 | Balance June 30, 2020 | | :----------------------------------- | :------------------------ | :-------------------- | | Common Stock Amount | $233 | $234 |\ | Additional Paid-in Capital | $154,235 | $154,691 |\ | Retained Deficit | $(49,731) | $(47,238) |\ | Accumulated Other Comprehensive (Loss) Income | $(1,572) | $(2,167) |\ | Total Stockholders' Equity | $103,165 | $105,520 | - Total stockholders' equity increased by $2.355 million from December 31, 2019, to June 30, 2020, driven by net income and stock-based compensation expense, partially offset by accumulated other comprehensive loss[19] Notes to Condensed Consolidated Financial Statements (UNAUDITED) 1. ORGANIZATION AND NATURE OF OPERATIONS Dawson Geophysical Company is a leading provider of North American onshore seismic data acquisition services, including 2-D, 3-D, and multicomponent seismic data acquisition and processing for oil and gas companies and multi-client data libraries in the U.S. and Canada - The Company provides North American onshore seismic data acquisition services, including 2-D, 3-D, and multicomponent seismic data[22] - Clients range from major oil and gas companies to independent operators and providers of multi-client data libraries[22] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the Company's significant accounting policies, including the basis of presentation for condensed consolidated financial statements, principles of consolidation, allowance for doubtful accounts (with adoption of Topic 326 CECL model), notes receivable, leases, property and equipment depreciation, impairment of long-lived assets, stock-based compensation, use of estimates, and revenue recognition - The Company adopted ASU No. 2016-13 (Topic 326) on January 1, 2020, using the modified retrospective method, which did not materially impact its consolidated financial statements[29] - Revenue is recognized as services are performed, generally based on square miles of data recorded compared to total anticipated square miles for the service contract[37] - The Company is evaluating ASU No. 2019-12, Income Taxes, effective after December 15, 2020, to determine its impact on financial statements[44] 3. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments, including cash, restricted cash, short-term investments, receivables, payables, and lease liabilities, are generally carried at amounts approximating fair value due to their short-term maturities or comparison with prevailing market interest rates - Carrying amounts of most financial instruments (cash, receivables, payables) approximate fair value due to short-term maturities[46] - Notes receivable, notes payable, and investments in certificates of deposit are Level 2 measurements in the fair value hierarchy[46] 4. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION This section disaggregates operating revenues by geographic region, showing a significant portion from the United States, and details decreases in deferred costs and revenue due to project completions Operating Revenues by Geographic Region (Amounts in thousands) | Geographic Region | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $29,482 | $22,046 | $56,670 | $59,682 |\ | Canada | $17 | $2,030 | $11,808 | $15,558 |\ | Total | $29,499 | $24,076 | $68,478 | $75,240 | - Deferred costs decreased from $2.525 million at January 1, 2020, to $0.878 million at June 30, 2020, primarily due to project completions[48][51] - Deferred revenue decreased from $3.481 million at January 1, 2020, to $1.159 million at June 30, 2020, mainly due to completing projects with large prepayments[53] 5. DEBT The Company has a revolving credit facility with Dominion Bank, which was undrawn as of June 30, 2020, and two letters of credit with Veritex Community Bank - The Company has a $15 million revolving credit facility with Dominion Bank, undrawn as of June 30, 2020, maturing September 30, 2020[55][56] - Two letters of credit totaling $2.35 million are issued by Veritex Community Bank, secured by certificates of deposit, for insurance obligations[58] Notes Payable and Finance Leases (Amounts in thousands) | Debt Type | June 30, 2020 | December 31, 2019 | | :-------------------------------------- | :------------ | :---------------- | | Notes payable to finance company | $711 | $1,746 |\ | Finance leases (aggregate principal) | $918 | N/A | 6. LEASES The Company leases vehicles, seismic recording equipment, real property, and office equipment, classifying them as operating or finance leases, with total lease costs of $1.505 million for the six months ended June 30, 2020 Total Lease Cost (Amounts in thousands) | Lease Cost Component | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total finance lease cost | $359 | $400 | $730 | $806 |\ | Operating lease cost | $387 | $366 | $775 | $809 |\ | Total lease cost | $746 | $766 | $1,505 | $1,615 | Lease Liabilities and Weighted Averages (Amounts in thousands) | Metric | June 30, 2020 | June 30, 2019 | | :-------------------------------------- | :------------ | :------------ | | Total operating lease liabilities | $6,492 | $7,700 |\ | Total finance lease liabilities | $918 | $3,775 |\ | Weighted average remaining operating lease term | 6.0 years | 6.7 years |\ | Weighted average remaining finance lease term | 0.4 years | 1.3 years |\ | Weighted average discount rate (Operating leases) | 5.04% | 5.04% |\ | Weighted average discount rate (Finance leases) | 4.69% | 4.66% | 7. OPERATING COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings, including a groundwater contamination lawsuit, but management believes their resolution will not materially adversely affect financial condition or results - The Company is a defendant in a groundwater contamination lawsuit filed by Weatherford International, LLC, alleging contribution to contamination[67] - Management believes the resolution of pending legal actions will not materially adversely affect the Company's financial condition, results of operations, or liquidity[66][67] 8. NET INCOME (LOSS) PER SHARE Basic and diluted net income (loss) per share are calculated based on net income (loss) and weighted average shares outstanding, showing significant improvement in 2020 with dilutive awards included Net Income (Loss) Per Share (Amounts in thousands, except share and per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $1,500 | $(11,246) | $2,493 | $(11,383) |\ | Basic income (loss) per share of common stock | $0.06 | $(0.49) | $0.11 | $(0.49) |\ | Diluted income (loss) per share of common stock | $0.06 | $(0.49) | $0.11 | $(0.49) | - For the three and six months ended June 30, 2020, the Company had net income, resulting in dilutive restricted stock unit awards being included in the diluted EPS calculation[69] - For the three and six months ended June 30, 2019, all stock options and awards were anti-dilutive due to net losses and were excluded from diluted EPS[69] 9. INCOME TAXES The Company's effective tax rate for Q2 and H1 2020 was 0.1% and 0.0%, respectively, a decrease from the prior year due to quarterly profitability versus a projected annual loss - Effective tax rates for Q2 and H1 2020 were 0.1% and 0.0%, respectively, down from 1.1% in 2019, primarily due to quarterly profitability against a projected annual loss[72] - Valuation allowances are recorded against significantly all Federal, state, and foreign deferred tax assets due to cumulative losses, limiting the recognition of tax benefits[74] - The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is expected to only accelerate the ability to take the remainder of the Company's refundable minimum tax credit[75] 10. SUBSEQUENT EVENTS No subsequent events were reported - No subsequent events were reported[76] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis covers financial condition, operational results, and capital resources Forward Looking Statements - Statements regarding future events, financial position, business strategy, and management objectives are forward-looking and subject to risks[76] - Key risks include dependence on energy industry spending, volatility of oil and natural gas prices, economic conditions, the COVID-19 pandemic's impact, OPEC+ production decisions, and industry competition[76] - The Company disclaims any obligation to revise forward-looking statements[78] Overview - Dawson Geophysical Company is a leading provider of North American onshore seismic data acquisition services, with revenues primarily from seismic data acquisition[79] - Demand for services is highly dependent on oil and natural gas prices and client spending for exploration and production activities[79] - Second quarter results were positively impacted by two large channel count crews in the U.S., despite challenges from OPEC+ easing production cuts and a surge in COVID-19 cases[80] Results of Operations Operating Revenues Operating revenues increased by 22.5% for the second quarter of 2020 compared to the same period in 2019, driven by higher crew productivity, but decreased by 9% for the first six months due to lower crew count Operating Revenues (Amounts in thousands) | Period | 2020 | 2019 | Change (%) | | :----------------------------------- | :---------- | :---------- | :--------- | | Three Months Ended June 30 | $29,499 | $24,076 | 22.5% |\ | Six Months Ended June 30 | $68,478 | $75,240 | -9.0% | - Increased Q2 2020 revenue was primarily due to higher crew productivity and equipment utilization[86] - Decreased H1 2020 revenue was primarily due to a lower crew count and reduced equipment utilization during Q1 2020[87] Operating Expenses Operating expenses decreased by 22.1% for Q2 2020 and 26.3% for H1 2020, primarily due to decreased crew counts and a reduced crew cost structure from workforce reductions Operating Expenses (Amounts in thousands) | Period | 2020 | 2019 | Change (%) | | :----------------------------------- | :---------- | :---------- | :--------- | | Three Months Ended June 30 | $19,732 | $25,324 | -22.1% |\ | Six Months Ended June 30 | $48,748 | $66,180 | -26.3% | - The decrease in operating expenses was primarily due to decreased crew counts and reduced crew cost structure related to workforce reductions in Q2 2020[88] General and Administrative Expenses General and administrative expenses decreased by 15.6% for Q2 and 17.3% for H1 2020, primarily due to workforce reductions, salary reductions, and ongoing cost-reduction efforts General and Administrative Expenses (Amounts in thousands) | Period | 2020 | 2019 | Change (%) | | :----------------------------------- | :---------- | :---------- | :--------- | | Three Months Ended June 30 | $4,261 | $5,049 | -15.6% |\ | Six Months Ended June 30 | $7,935 | $9,593 | -17.3% | - The decrease was attributed to workforce reductions, salary reductions, and continued cost reduction efforts by management[89] Depreciation and Amortization Expense Depreciation and amortization expense decreased for both Q2 and H1 2020 compared to 2019, a result of multiple years of reduced capital expenditures, a trend expected to continue Depreciation and Amortization Expense (Amounts in thousands) | Period | 2020 | 2019 | Change (%) | | :----------------------------------- | :---------- | :---------- | :--------- | | Three Months Ended June 30 | $4,383 | $5,325 | -17.7% |\ | Six Months Ended June 30 | $9,287 | $11,406 | -18.5% | - The decrease in depreciation expense is a result of multiple years of reduced capital expenditures[90] Income Taxes Income tax expense for Q2 and H1 2020 was minimal ($1 thousand and $0, respectively), compared to a benefit in 2019, with effective tax rates of 0.1% and 0.0% Income Tax Expense (Benefit) (Amounts in thousands) | Period | 2020 | 2019 | | :----------------------------------- | :---------- | :---------- | | Three Months Ended June 30 | $1 | $(121) |\ | Six Months Ended June 30 | $0 | $(121) | - Effective tax rates were 0.1% for Q2 2020 and 0.0% for H1 2020, compared to 1.1% for both periods in 2019[92] Use of EBITDA (a Non-GAAP measure) EBITDA is presented as a supplemental non-GAAP financial measure to assess financial performance, liquidity, and operating performance, with H1 2020 EBITDA at $11.63 million, a significant improvement - EBITDA is used by management to assess financial performance, liquidity, and operating performance without regard to financing methods, capital structures, taxes, or historical cost basis[94] EBITDA Reconciliation (Amounts in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $1,500 | $(11,246) | $2,493 | $(11,383) |\ | Depreciation and amortization | $4,383 | $5,325 | $9,287 | $11,406 |\ | Interest (income) expense, net | $(85) | $(29) | $(150) | $(13) |\ | Income tax expense (benefit) | $1 | $(121) | $0 | $(121) |\ | EBITDA | $5,799 | $(6,071) | $11,630 | $(111) | Liquidity and Capital Resources Cash Flows Net cash provided by operating activities decreased by $3.093 million for H1 2020, while net cash used in investing and financing activities also decreased, influenced by a PPP Loan - Net cash provided by operating activities decreased by $3.093 million for the six months ended June 30, 2020, compared to 2019, mainly due to changes in operating assets and liabilities[100] - Net cash used in investing activities decreased by $264 thousand for the six months ended June 30, 2020, primarily due to additional cash capital expenditures in 2019[101] - Net cash used in financing activities decreased by $1.014 million, influenced by $6.374 million in proceeds from a PPP Loan and principal payments on notes payable and finance leases[102] Capital Expenditures The Board approved an initial 2020 capital budget of $5 million, with $2.703 million utilized for maintenance and equipment in the first six months, historically funded by operations and reserves - Initial 2020 capital budget was $5 million, focused on necessary maintenance capital and equipment replacement/increase[103] - For the six months ended June 30, 2020, $2.703 million was utilized for maintenance capital, additional seismic equipment, and refurbishment[103] Capital Resources The Company primarily relies on cash from operations, cash reserves, and commercial bank borrowings to fund working capital and capital expenditures, with recent funding also including finance leases and equipment term loans - Primary capital resources include cash from operations, cash reserves, and commercial bank borrowings[105] - Recent capital expenditures have also been funded through finance leases and equipment term loans[105] Loan Agreement The Company has a $15 million Revolving Credit Facility with Dominion Bank, undrawn as of June 30, 2020, and two letters of credit totaling $2.35 million with Veritex Community Bank - The Dominion Bank Revolving Credit Facility provides up to $15 million, secured by eligible accounts receivable and a $5 million restricted CDARS account[107] - As of June 30, 2020, no amounts were borrowed under the Revolving Credit Facility, which matures on September 30, 2020[108] - Veritex Community Bank has issued two letters of credit totaling $2.35 million, secured by certificates of deposit, to support insurance obligations[109] Other Indebtedness As of June 30, 2020, the Company has two notes payable for insurance premiums totaling $0.711 million and finance leases for equipment and vehicles amounting to $0.918 million - Two notes payable for insurance premiums total $0.711 million as of June 30, 2020[110] - Finance leases for seismic recording equipment and vehicles total $0.918 million as of June 30, 2020[110] Maturities and Interest Rates of Debt As of June 30, 2020, notes payable for insurance totaled $0.711 million (interest rates 4.05% to 4.99%) and finance lease obligations totaled $0.918 million (interest rates 4.65% to 5.37%), primarily maturing by June 2021 Notes Payable to Finance Company for Insurance (Amounts in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Aggregate principal amount outstanding | $711 | $1,746 |\ | Interest rate | 4.05% - 4.99% | 4.05% - 4.99% | Aggregate Maturities of Finance Leases (Amounts in thousands) | Period | Amount | | :-------------------- | :----- | | July 2020 - June 2021 | $851 |\ | July 2021 - June 2022 | $43 |\ | July 2022 - June 2023 | $24 |\ | Obligations under finance leases | $918 | Contractual Obligations The Company believes its capital resources are adequate for current operational needs and 2020 capital expenditures, though future ability to meet obligations depends on operating performance and customer payment ability - Capital resources are believed to be adequate for current operational needs and 2020 capital expenditures[113] - Future ability to meet obligations depends on operating performance and customer payment ability, subject to business risks and economic conditions[114] Off-Balance Sheet Arrangements - As of June 30, 2020, the Company had no off-balance sheet arrangements[115] Critical Accounting Policies - Information on critical accounting policies and estimates is included in the Annual Report on Form 10-K for the year ended December 31, 2019[116] Recently Issued Accounting Pronouncements - The Company is evaluating ASU No. 2019-12, Income Taxes, effective after December 15, 2020, to determine its impact[117] - ASU No. 2018-13, Fair Value Measurement, was adopted in Q1 2020 and did not have a material impact on consolidated financial statements[118] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company faces market risks from financial instruments, including credit, interest rate, and foreign currency risks Concentration of Credit Risk - Principal market risks include fluctuations in commodity prices, affecting demand and pricing for services, and concentration of clients in the oil and natural gas industry[120] - The Company provides credit terms to clients and maintains an allowance for doubtful accounts of $0.25 million at June 30, 2020[120] - Credit risk is concentrated with key clients in the oil and natural gas industry, whose financial stability can be affected by economic and industry conditions[121] Interest Rate Risk - The Company is exposed to interest rate changes on outstanding indebtedness under its Revolving Credit Facility, which has variable interest rates[124] - Cash, restricted cash, and short-term investments totaled $36.828 million at June 30, 2020, with potential credit risk from financial market volatility[125] ITEM 4. CONTROLS AND PROCEDURES Management evaluated disclosure controls and procedures, concluding effectiveness with no material internal control changes Management's Evaluation of Disclosure Controls and Procedures - Management concluded that disclosure controls and procedures were effective as of June 30, 2020[126] Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020[127] PART II. OTHER INFORMATION This part includes legal proceedings, risk factors, exhibits, and signatures related to the report ITEM 1. LEGAL PROCEEDINGS Legal proceedings, including a groundwater contamination lawsuit, are discussed in Note 7 of the financial statements - Legal proceedings are discussed in Note 7 to the Condensed Consolidated Financial Statements[129] ITEM 1A. RISK FACTORS No material changes to risk factors from the 2019 Annual Report on Form 10-K, as updated by subsequent 10-Q - No material changes in risk factors from those disclosed in the 2019 Annual Report on Form 10-K, as updated by the subsequent Quarterly Report on Form 10-Q[131] ITEM 6. EXHIBITS Exhibits filed with Form 10-Q include organizational documents, CEO/CFO certifications, and XBRL financial statements - Exhibits include Amended and Restated Certificate of Formation, Bylaws, CEO and CFO certifications (Rule 13a-14(a) and 13a-14(b)), and XBRL formatted financial statements[133] SIGNATURES The report is signed by the Chairman, President, CEO, and EVP, CFO on August 4, 2020 - The report was signed by Stephen C. Jumper (Chairman, President, CEO) and James K. Brata (EVP, CFO, Secretary, Treasurer) on August 4, 2020[136]