Dawson Geophysical Company — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
Dawson Geophysical provides North American onshore 2-D, 3-D and multicomponent seismic data acquisition and processing services to major and independent oil and gas companies and multi-client data-library providers. The filing covers the three and nine months ended September 30, 2022; financial statements are unaudited.
- Operations span the continental United States and Canada, with one reportable segment.
- The company operated one small U.S. crew for most of the third quarter and a second small crew intermittently; it operated no Canadian crew during the quarter.
Financial Performance and Liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Operating revenue | $3.538 million | $1.914 million | $22.818 million | $13.855 million |
| Loss from operations | $(7.748) million | $(7.753) million | $(18.150) million | $(22.471) million |
| Net loss | $(7.603) million | $(7.865) million | $(17.672) million | $(22.110) million |
| Loss per diluted share | $(0.32) | $(0.33) | $(0.74) | $(0.94) |
| EBITDA | $(5.332) million | $(4.662) million | $(10.334) million | $(12.187) million |
- Revenue increased 84.8% in Q3 and 64.7% for the first nine months, primarily from higher crew utilization.
- Operating margins were approximately negative 219% in Q3 and negative 80% for the nine-month period, compared with approximately negative 405% and negative 162%, respectively, in the prior-year periods.
- Net margins were approximately negative 215% in Q3 and negative 77% year to date. Despite improved revenue and lower losses, the company remained substantially unprofitable.
- Operating expenses rose 59.9% in Q3 and 26.1% year to date, while general and administrative expenses rose 4.6% and 31.3%, respectively. Year-to-date G&A included $2.872 million of transaction costs related to a proposed merger with a Wilks Brothers subsidiary.
- Depreciation and amortization declined to $2.373 million in Q3 and $7.458 million year to date, reflecting multiple years of reduced capital expenditures.
Cash Flow, Debt and Liquidity
- Cash used in operating activities was $4.569 million for the first nine months of 2022, compared with $5.373 million in the prior-year period.
- Capital expenditures were $0.470 million, compared with $0.011 million in the prior-year period. Investing cash flow was negative $0.281 million.
- Financing cash flow was negative $1.404 million, including $1.103 million of principal payments, $0.034 million of finance-lease payments and $0.301 million for cash settlement of restricted stock units.
- Cash, restricted cash and short-term investments totaled $23.864 million at September 30, 2022, consisting of $18.599 million of cash, $5.000 million of restricted cash and $0.265 million of short-term investments.
- Total current assets were $34.772 million versus current liabilities of $11.141 million. The company had approximately $7.700 million available under its revolving credit facility and no borrowings under that facility.
- The Dominion Bank facility has a maximum commitment of $10.000 million, subject to borrowing-base limitations, and matures September 30, 2023. It requires at least $38.000 million of tangible net worth and $5.000 million of unencumbered liquid assets, among other covenants.
- Other debt consisted of a $0.107 million insurance-premium note and $0.009 million of finance leases. Operating lease liabilities totaled $4.708 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected increased crew utilization and a significant increase in Canadian revenue for the nine-month period: $11.751 million versus $2.964 million. Canada contributed only $0.076 million in Q3 2022, as no Canadian crew operated during the quarter.
- Losses improved year over year, but Q3 operating loss was essentially unchanged because higher operating costs offset the revenue increase.
- Accounts receivable declined to $4.017 million from $8.905 million at December 31, 2021, while deferred revenue increased to $4.378 million from $1.344 million, primarily from client prepayments for future third-party reimbursable project costs.
- Prepaid expenses and other current assets increased to $6.891 million, including $3.636 million of deferred contract-fulfillment costs.
- Total assets declined to $58.488 million from $74.038 million at year-end 2021, and stockholders’ equity declined to $43.713 million from $62.477 million, primarily reflecting continuing losses and foreign-exchange translation losses.
- Accumulated deficit increased to $109.690 million from $92.018 million. Foreign-exchange translation losses were $1.238 million for the first nine months.
Outlook, Commentary, Risks and Unusual Items
- Management expects crew activity to increase in the lower 48 states and Canada during Q4 2022 and into Q1 2023. It anticipated one mid-size U.S. crew increasing to a large-channel-count crew, intermittent operation of a second U.S. crew, and up to two Canadian crews in the back half of Q4.
- Management stated that visibility into 2023 had improved, with potential support for up to two mid-to-large U.S. crews beginning in late Q1 or early Q2 and up to three Canadian crews during Q1 2023. These are expectations, not formal financial guidance.
- Demand remains target-specific and difficult to predict. Key drivers include oil and natural gas prices, exploration and production spending, crew utilization, pricing, weather, land-access permissions, productivity and equipment availability.
- The company has limited capital spending to maintenance requirements, reduced fixed and variable costs, and implemented an equipment-maintenance program in preparation for increased activity.
- Risks include dependence on energy-sector spending, customer concentration and credit risk, contract delays or cancellations, high fixed costs, limited operating scale, commodity-price volatility, foreign-exchange exposure, competition, COVID-19-related disruptions and geopolitical or economic disruptions.
- The company is defending a Weatherford contamination-related lawsuit. Management believes the matter will not have a material adverse effect, but the outcome cannot be predicted with certainty.
- A January 2022 Section 382 ownership-change event may limit use of some net operating losses. The company maintains valuation allowances against substantially all deferred tax assets and may recognize little or no tax benefit from future losses.
- Approximately 75% of outstanding common stock is held by Wilks Brothers, LLC, creating controlled-company and governance risks. The company also identifies limited share-market liquidity and possible Nasdaq delisting as risks.
Important Facts for Investors to Verify
- Whether anticipated Q4 2022 and 2023 crew deployments occur and translate into sustained utilization, revenue growth and improved margins.
- Compliance with the Dominion Bank facility’s tangible-net-worth, liquidity and other financial covenants through its September 2023 maturity.
- The company’s ability to fund continuing operating cash burn while maintaining equipment and meeting lease and other obligations.
- Customer concentration, collection of receivables and the adequacy of the $0.250 million allowance for doubtful accounts.
- The status and potential exposure from the Weatherford litigation and other client contractual disputes.
- The effect of the proposed merger transaction costs, Section 382 limitations and continuing valuation allowances on future earnings and tax benefits.