Dawson(DWSN) - 2021 Q4 - Annual Report

Part I Business The company provides onshore seismic data acquisition services in North America, with demand highly dependent on energy industry spending - The company is a leading provider of North American onshore seismic data acquisition services, serving clients from major oil and gas companies to independent operators[8] - Demand for services is primarily driven by the exploration and development spending of oil and natural gas companies, which is influenced by commodity prices[10] - Following a tender offer, Wilks Brothers, LLC acquired approximately 74.46% of the company's common stock, making Dawson a controlled company[18][19] - As of December 31, 2021, the company operates 112 vibrator energy source units and approximately 276,000 recording channels[27] - The company has a high client concentration, with three clients accounting for approximately 65% of revenues during the twelve months ended December 31, 2021[30] - The company's primary competitors include SAExploration Holdings, Inc (SAE), Echo Seismic Ltd (ECHO), Breckenridge Geophysical Inc, and Paragon Geophysical Services, Inc[22][36] Risk Factors Key risks stem from oil and gas industry volatility, its "controlled company" status, high client concentration, and a history of net losses - The business is highly dependent on the cyclical oil and natural gas industry, with demand for services significantly affected by volatile commodity prices and E&P spending levels[46][47] - As a "controlled company" with Wilks holding ~74.46% of voting power, Dawson is exempt from certain Nasdaq corporate governance requirements, which may reduce stockholder protections[51][52] - A limited number of clients account for a significant portion of revenues (three largest clients were ~65% in 2021), and the loss of any of these clients could adversely affect results[53][54] - The company has a history of financial losses, incurring a net loss of $29.1 million for the year ended December 31, 2021, and $13.2 million for the year ended December 31, 2020[60] - The high fixed costs of operations, primarily depreciation and maintenance, can lead to significant operating losses during periods of reduced demand or low productivity[62] - The business is subject to increasing government regulation related to environmental protection, climate change, and hydraulic fracturing, which could curtail exploration activities[108][112][120] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[127] Properties The company leases its headquarters in Midland, Texas, owns two other local properties, and leases additional offices in Texas, Oklahoma, and Canada - The company's principal executive offices are located in a leased facility in Midland, Texas[131] - Owned properties in Midland include a 61,402 sq ft field office and a 6,600 sq ft storage facility[131] - Leased facilities include sales and operational offices in Houston, Plano, Oklahoma City, and Calgary[132][138] Legal Proceedings Legal proceedings, including lawsuits related to a failed merger and a groundwater contamination case, are detailed in the financial statement notes - Details on legal proceedings are provided in "Note 16, Commitments and Contingencies" of the financial statements[134] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[139] Part II Market for Our Common Equity and Related Stockholder Matters The company's stock trades on NASDAQ under "DWSN," with no dividends paid and no plans to issue any in the foreseeable future - The company's common stock trades on the NASDAQ under the symbol "DWSN"[135] - No cash dividends were paid in 2021 or 2020, and none are expected for the foreseeable future[136][141] Equity Compensation Plan Information as of December 31, 2021 | Plan Category | Number of Securities to be Issued Upon Exercise or Vesting | Weighted Average Exercise Price of Outstanding Options | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plan approved by security holders | 335,000 | — (1) | 1,049,437 | | Total | 335,000 | — | 1,049,437 | (1) Restricted stock unit awards have no exercise price Selected Financial Data This item is not applicable as the company is a smaller reporting company - Not applicable[145] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a significant 2021 revenue decline and widened net loss, anticipating limited activity despite high energy prices - The company anticipates limited crew activity in the second and third quarters of 2022, as demand remains weak despite high commodity prices, with E&P companies prioritizing capital discipline[152] Results of Operations (Year Ended December 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Operating Revenues | $24,695 | $86,100 | -71.3% | | Operating Expenses | $29,016 | $68,998 | -58.0% | | G&A Expenses | $12,046 | $13,920 | -13.5% | | Depreciation Expense | $12,863 | $17,174 | -25.1% | | Net Loss | ($29,091) | ($13,196) | Increased Loss | EBITDA Reconciliation (Non-GAAP) | Metric (in thousands) | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net loss | $(29,091) | $(13,196) | | Depreciation and amortization | 12,863 | 17,174 | | Interest (income) expense, net | (199) | (319) | | Income tax (benefit) expense | (26) | 24 | | EBITDA | $(16,453) | $3,683 | Cash Flow Summary (Year Ended December 31) | Cash Flow (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by Operating activities | $(16,050) | $19,641 | | Net cash provided by (used in) Investing activities | $264 | $(512) | | Net cash provided by (used in) Financing activities | $95 | $(4,534) | - The company maintains a revolving credit facility with Dominion Bank for up to $15 million, secured by accounts receivable and a $5 million restricted deposit; $10.3 million was available at year-end 2021[177] Quantitative and Qualitative Disclosures about Market Risk Market risk exposure is primarily from credit risk concentration in the oil and gas industry, along with interest rate and foreign currency risks - The principal market risk is the concentration of clients within the volatile oil and natural gas industry; the three largest clients accounted for approximately 65% of revenue in 2021[204][205] - The company is exposed to interest rate risk on outstanding indebtedness and foreign currency exchange rate risk from its business in Canada[203][206] - The company does not utilize derivative financial instruments to mitigate market risks[203] Financial Statements and Supplementary Data This section incorporates the company's consolidated financial statements and supplementary data by reference - The required financial statements and supplementary data are included on pages F-1 through F-21 of the Form 10-K[207] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure matters - None[207] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2021 - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[208] - Management's evaluation concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO 2013 framework[211] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2021[212] Other Information The company reports no other information for this item - None[213] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's proxy statement - Information is incorporated by reference from the company's definitive proxy statement[215] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's proxy statement - Information is incorporated by reference from the company's definitive proxy statement[216] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's proxy statement - Information is incorporated by reference from the company's definitive proxy statement[217] Certain Relationships and Related Transactions and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's proxy statement - Information is incorporated by reference from the company's definitive proxy statement[219] Principal Accounting Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's proxy statement - Information is incorporated by reference from the company's definitive proxy statement[220] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and an index of all exhibits filed with the report - The consolidated financial statements are filed as part of the report and are located on pages F-1 through F-21[223] - All financial statement schedules have been omitted because they are not applicable or the required information is included elsewhere[224] - An index of exhibits is provided, which includes agreements related to the Wilks merger, corporate governance documents, and employment agreements[225][236] Financial Statements Report of Independent Registered Public Accounting Firm The independent auditor, RSM US LLP, issued an unqualified opinion on the financial statements with no critical audit matters identified - RSM US LLP provided an unqualified audit opinion on the company's consolidated financial statements[266] - The auditor determined there were no critical audit matters arising from the audit[270] Consolidated Financial Statements Financial statements show a significant decrease in total assets, a sharp revenue decline, a widening net loss, and negative operating cash flow Consolidated Balance Sheet Data (as of Dec 31, in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Total current assets | $42,859 | $58,590 | | Property and equipment, net | $26,349 | $38,900 | | Total assets | $74,038 | $103,377 | | Total current liabilities | $7,591 | $7,441 | | Total long-term liabilities | $3,970 | $4,962 | | Total stockholders' equity | $62,477 | $90,974 | Consolidated Statement of Operations Data (Year ended Dec 31, in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Operating revenues | $24,695 | $86,100 | | Total operating costs | $53,925 | $100,092 | | Loss from operations | $(29,230) | $(13,992) | | Net loss | $(29,091) | $(13,196) | | Loss per share (basic & diluted) | $(1.23) | $(0.56) | Consolidated Statement of Cash Flows Data (Year ended Dec 31, in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(16,050) | $19,641 | | Net cash provided by (used in) investing activities | $264 | $(512) | | Net cash provided by (used in) financing activities | $95 | $(4,534) | | Net change in cash | $(15,579) | $14,684 | Notes to Consolidated Financial Statements Notes detail key accounting policies, debt facilities, lease obligations, major client concentrations, and ongoing litigation - Revenue is recognized as services are performed, generally based on the proportion of square miles of data recorded for a survey[305] - The company has a revolving credit facility with Dominion Bank for up to $15 million, with availability tied to accounts receivable and a $5 million restricted deposit, maturing September 30, 2022[331][333][334] - As of December 31, 2021, the company had total operating lease liabilities of $4.9 million and total finance lease liabilities of $45,000[343] - The company recorded a full valuation allowance against its foreign, federal, and state deferred tax assets, determining it is more likely than not that these assets will not be realizable[368] Major Client Revenue Concentration (Year Ended Dec 31) | Client | 2021 | 2020 | | :--- | :--- | :--- | | A | 30% | — | | B | 23% | 10% | | C | 12% | — | | D | — | 35% | | E | — | 24% | - The company is a defendant in lawsuits related to the failed merger agreement and a separate case alleging groundwater contamination[379][380][384]