e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2010
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o |
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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. 001-34404
DAWSON GEOPHYSICAL COMPANY
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Texas
(State or other jurisdiction of
incorporation or organization)
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75-0970548
(I.R.S. Employer
identification No.) |
508 West Wall, Suite 800, Midland, Texas 79701
(Principal Executive Office)
Telephone Number: 432-684-3000
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date.
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Title of Each Class |
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Outstanding at May 7, 2010 |
Common Stock, $.33 1/3 par value
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7,817,756 shares |
DAWSON GEOPHYSICAL COMPANY
INDEX
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Page |
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Number |
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1 |
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2 |
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3 |
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4 |
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10 |
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15 |
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16 |
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16 |
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16 |
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16 |
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17 |
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18 |
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19 |
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Certification of CEO Pursuant to Rule 13a-14(a) |
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Certification of CFO Pursuant to Rule 13a-14(a) |
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Certification of CEO Pursuant to Rule 13a-14(b) |
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Certification of CFO Pursuant to Rule 13a-14(b) |
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EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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Six Months Ended |
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March 31, |
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March 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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Operating revenues |
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$ |
48,585,000 |
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$ |
64,625,000 |
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$ |
84,915,000 |
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$ |
144,841,000 |
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Operating costs: |
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Operating expenses |
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44,428,000 |
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45,737,000 |
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79,147,000 |
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104,752,000 |
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General and administrative |
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1,792,000 |
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2,408,000 |
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3,646,000 |
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4,563,000 |
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Depreciation |
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6,695,000 |
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6,529,000 |
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13,172,000 |
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13,130,000 |
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52,915,000 |
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54,674,000 |
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95,965,000 |
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122,445,000 |
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(Loss) income from operations |
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(4,330,000 |
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9,951,000 |
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(11,050,000 |
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22,396,000 |
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Other income: |
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Interest income |
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28,000 |
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62,000 |
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58,000 |
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140,000 |
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Other income |
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95,000 |
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272,000 |
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97,000 |
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310,000 |
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(Loss) income before income tax |
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(4,207,000 |
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10,285,000 |
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(10,895,000 |
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22,846,000 |
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Income tax benefit (expense) |
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1,501,000 |
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(4,115,000 |
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3,973,000 |
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(8,942,000 |
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Net (loss) income |
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$ |
(2,706,000 |
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$ |
6,170,000 |
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$ |
(6,922,000 |
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$ |
13,904,000 |
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Net (loss) income per common share |
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$ |
(0.35 |
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$ |
0.79 |
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$ |
(0.89 |
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$ |
1.78 |
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Net (loss) income per common share-assuming dilution |
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$ |
(0.35 |
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$ |
0.79 |
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$ |
(0.89 |
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$ |
1.78 |
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Weighted average equivalent common shares
outstanding |
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7,779,256 |
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7,799,744 |
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7,775,483 |
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7,797,986 |
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Weighted average equivalent common shares
outstanding
-assuming dilution |
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7,779,256 |
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7,850,508 |
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7,775,483 |
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7,824,202 |
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See accompanying notes to the financial statements (unaudited).
1
DAWSON GEOPHYSICAL COMPANY
BALANCE SHEETS
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March 31, |
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September 30, |
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2010 |
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2009 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
19,117,000 |
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$ |
36,792,000 |
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Short-term investments |
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30,123,000 |
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25,267,000 |
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Accounts receivable, net of allowance
for doubtful accounts of $639,000 in March 2010
and $533,000 in September 2009 |
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54,009,000 |
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40,106,000 |
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Prepaid expenses and other assets |
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7,143,000 |
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7,819,000 |
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Current deferred tax asset |
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921,000 |
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1,694,000 |
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Total current assets |
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111,313,000 |
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111,678,000 |
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Property, plant and equipment |
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246,333,000 |
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240,820,000 |
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Less accumulated depreciation |
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(118,322,000 |
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(115,341,000 |
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Net property, plant and equipment |
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128,011,000 |
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125,479,000 |
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Total assets |
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$ |
239,324,000 |
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$ |
237,157,000 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
16,894,000 |
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$ |
6,966,000 |
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Accrued liabilities: |
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Payroll costs and other taxes |
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3,160,000 |
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2,720,000 |
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Other |
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9,822,000 |
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10,600,000 |
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Deferred revenue |
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1,512,000 |
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2,230,000 |
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Total current liabilities |
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31,388,000 |
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22,516,000 |
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Deferred tax liability |
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15,987,000 |
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16,262,000 |
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Stockholders equity: |
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Preferred stock-par value $1.00 per share;
5,000,000 shares authorized, none outstanding |
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Common stock-par value $.33 1/3 per share;
50,000,000 shares authorized, 7,817,756
and 7,822,994 shares issued and outstanding
in each period |
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2,606,000 |
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2,608,000 |
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Additional paid-in capital |
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89,690,000 |
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89,220,000 |
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Other comprehensive income, net of tax |
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42,000 |
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18,000 |
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Retained earnings |
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99,611,000 |
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106,533,000 |
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Total stockholders equity |
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191,949,000 |
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198,379,000 |
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Total liabilities and stockholders equity |
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$ |
239,324,000 |
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$ |
237,157,000 |
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See accompanying notes to the financial statements (unaudited).
2
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended |
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March 31, |
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2010 |
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2009 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net (loss) income |
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$ |
(6,922,000 |
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$ |
13,904,000 |
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Adjustments to reconcile net (loss) income to
net cash provided by operating activities: |
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Depreciation |
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13,172,000 |
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13,130,000 |
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Noncash compensation |
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840,000 |
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818,000 |
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Deferred income tax expense |
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486,000 |
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816,000 |
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Provision for bad debts |
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156,000 |
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1,169,000 |
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Other |
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(273,000 |
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(8,000 |
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Change in current assets and liabilities: |
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(Increase) decrease in accounts receivable |
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(14,059,000 |
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17,312,000 |
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Decrease (increase) in prepaid expenses and other assets |
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676,000 |
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(649,000 |
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Increase (decrease) in accounts payable |
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9,490,000 |
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(3,496,000 |
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Decrease in accrued liabilities |
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(338,000 |
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(5,854,000 |
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(Decrease) increase in deferred revenue |
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(718,000 |
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1,149,000 |
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Net cash provided by operating activities |
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2,510,000 |
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38,291,000 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures, net of noncash capital additions
summarized below in noncash investing activities |
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(15,220,000 |
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(3,986,000 |
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Proceeds from disposal of assets |
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6,000 |
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89,000 |
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Proceeds from maturity of short-term investments |
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5,000,000 |
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Acquisition of short-term investments |
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(9,971,000 |
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Partial proceeds on fire insurance claim |
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2,843,000 |
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Net cash used in investing activities |
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(20,185,000 |
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(1,054,000 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net (decrease) increase in cash and cash equivalents |
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(17,675,000 |
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37,237,000 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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36,792,000 |
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8,311,000 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
19,117,000 |
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$ |
45,548,000 |
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SUPPLEMENTAL CASH FLOW INFORMATION: |
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Cash paid during the period for income taxes |
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$ |
121,000 |
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$ |
9,686,000 |
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Cash received during the period for income taxes |
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$ |
6,000,000 |
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$ |
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NONCASH INVESTING ACTIVITIES: |
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Accrued purchases of property and equipment |
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$ |
438,000 |
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$ |
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Equipment purchase through reduction of insurance proceeds |
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$ |
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$ |
638,000 |
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Equipment purchase through asset trade in |
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$ |
2,170,000 |
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$ |
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Unrealized gain on investments |
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$ |
37,000 |
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$ |
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See accompanying notes to the financial statements (unaudited).
3
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS
Founded in 1952, the Company acquires and processes 2-D, 3-D and multi-component seismic data
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. OPINION OF MANAGEMENT
Although the information furnished is unaudited, in the opinion of management of the Company,
the accompanying financial statements reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair statement of the results for the periods presented. The results of
operations for the three months and the six months ended March 31, 2010 are not necessarily
indicative of the results to be expected for the fiscal year.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been condensed or omitted
in this Form 10-Q report pursuant to certain rules and regulations of the Securities and Exchange
Commission (the SEC). These financial statements should be read with the financial statements and
notes included in the Companys Form 10-K for the fiscal year ended September 30, 2009.
Critical Accounting Policies
The preparation of the Companys financial statements in conformity with generally accepted
accounting principles requires that certain assumptions and estimates be made that affect the
reported amounts of 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.
Concentrations of Credit Risk. Financial instruments that potentially expose the Company to
concentrations of credit risk at any given time may consist of cash and cash equivalents, money
market funds and overnight investment accounts, short-term investments, trade and other receivables
and other current assets. At March 31, 2010 and September 30, 2009, the Company had deposits with
domestic banks in excess of federally insured limits. Management believes the credit risk
associated with these deposits is minimal. Money market funds seek to preserve the value of the
investment, but it is possible to lose money investing in these funds. The Company invests funds
overnight under a repurchase agreement with its bank which is collateralized by securities of the
United States Federal agencies. The Company generally invests in short-term U.S. Treasury
Securities; however, the Company currently also has funds invested in FDIC guaranteed bonds. The
Company believes all of its investments are low risk investments. The Companys sales are to
clients whose activities relate to oil and natural gas exploration and production. The Company
generally extends unsecured credit to these clients; therefore, collection of receivables may be
affected by the economy surrounding the oil and natural gas industry. The Company closely monitors
extensions of credit and may negotiate payment terms that mitigate risk.
Revenue Recognition. Services are provided under cancelable service contracts. These contracts
are either turnkey or term agreements. Under both types of agreements, the Company recognizes
revenues when revenue is realizable and services have been performed. Services are defined as the
commencement of data acquisition or processing operations. Revenues are considered realizable when
earned according to the terms of the service contracts. Under turnkey agreements, revenue is
recognized on a per unit of data acquired rate as services are performed. Under term agreements,
revenue is recognized on a per unit of time worked rate as services are performed. In the case of a
cancelled service contract, revenue is recognized and the customer is billed for services performed
up to the date of cancellation.
The Company receives reimbursements for certain out-of-pocket expenses under the terms of the
service contracts. Amounts billed to clients are recorded in revenue at the gross amount including
out-of-pocket expenses that are reimbursed by the client.
In some instances, customers are billed in advance of the services performed. In those cases,
the Company recognizes the liability as deferred revenue. As services are performed, those amounts
are reversed and recognized as revenue.
4
Allowance for Doubtful Accounts. Management prepares its allowance for doubtful accounts
receivable based on its review of past-due accounts, its past experience of historical write-offs
and its current client base. While the collectability of outstanding client invoices is continually
assessed, the inherent volatility of the energy industrys business cycle can cause swift and
unpredictable changes in the financial stability of the Companys clients.
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. Managements forecast of future cash flows used to perform impairment analysis
includes estimates of future revenues and expenses based on the Companys anticipated future
results while considering anticipated future oil and natural gas prices which is fundamental in
assessing demand for the Companys services. If the carrying amount of the assets exceeds the
estimated expected undiscounted future cash flows, the Company measures the amount of possible
impairment by comparing the carrying amount of the assets to their fair value.
Depreciable Lives of Property, Plant and Equipment. Property, plant and equipment are
capitalized at historical cost and depreciated over the useful lives of the assets. Managements
estimation of useful lives is based on circumstances that exist in the seismic industry and
information available at the time of the purchase of the assets. 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.
Tax Accounting. The Company accounts for income taxes by recognizing amounts of taxes payable
or refundable for the current year and an asset and liability approach in recognizing the amount of
deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in the Companys financial statements or tax returns. Management determines deferred
taxes by identifying the types and amounts of existing temporary differences, measuring the total
deferred tax asset or liability using the applicable tax rate and reducing the deferred tax asset
by a valuation allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. Managements methodology for
recording income taxes requires judgment regarding assumptions and the use of estimates, including
determining the annual effective tax rate and the valuation of deferred tax assets, which can
create variances between actual results and estimates and could have a material impact on the
Companys provision or benefit for income taxes.
Stock-Based Compensation. The Company accounts for stock-based compensation awards, including
stock options and restricted stock, using the fair value method and recognizes compensation cost,
net of forfeitures, in its financial statements. The Company records compensation expense as
operating or general and administrative expense as appropriate in the Statements of Operations on a
straight-line basis over the vesting period of the related stock options or restricted stock
awards.
Reclassifications. Certain prior year amounts have been reclassified in the current year in
order to be consistent with the current year presentation.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued ASC 820-10, Fair
Value Measurements and Disclosures. ASC 820-10 clarifies that fair value is the amount that would
be exchanged to sell an asset or transfer a liability in an orderly transaction between market
participants. Further, the standard establishes a framework for measuring fair value in generally
accepted accounting principles and expands certain disclosures about fair value measurements. ASC
820-10 became effective for all financial assets and financial liabilities as of October 1, 2008,
and upon adoption, ASC 820-10 did not have a material impact on the Companys financial statements.
In February 2008, the FASB issued ASC 820-10-15-1A, Fair Value Measurements and Disclosures
Transition and Open Effective Date Information, which delayed the effective date of ASC 820-10 for
all non-financial assets and non-financial liabilities such as asset impairments, except for items
that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually). Effective at the beginning of fiscal 2010, the Company adopted the FASB
authoritative guidance for non-financial assets and non-financial liabilities. The adoption for
non-financial assets and non-financial liabilities did not have a material impact on the Companys
financial statements.
5
In January 2010, the FASB issued Accounting Standards Update 2010-06 Fair Value Measurements
and Disclosures (Topic 820) as new guidance and clarification for improving disclosures about fair
value measurements. ASU 2010-06 requires enhanced disclosures regarding transfers in and out of
the levels within the fair value hierarchy. Separate disclosures are required for transfers in and
out of Level 1 and 2 fair value measurements, and the reasons for the transfers must be disclosed.
The new disclosures and clarifications of existing disclosures were effective for the Company as of
January 1, 2010. The adoption of this guidance did not have a material impact on the Companys
financial statements.
In February 2010, the FASB issued Accounting Standards Update 2010-09 Subsequent Events
(Topic 855) allowing SEC filers to remove the date through which subsequent events have been
reviewed. ASU 2010-09 became effective upon issuance, and the adoption of this guidance did not
have a material impact on the Companys financial statements.
3. SHORT-TERM INVESTMENTS
The components of the Companys short-term investments for March 31, 2010 and September 30,
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 (in 000s) |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills |
|
$ |
14,980 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
14,979 |
|
U.S. Treasury notes |
|
|
10,029 |
|
|
|
47 |
|
|
|
|
|
|
|
10,076 |
|
FDIC guaranteed bonds |
|
|
5,047 |
|
|
|
21 |
|
|
|
|
|
|
|
5,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,056 |
|
|
$ |
68 |
(a) |
|
$ |
1 |
|
|
$ |
30,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other comprehensive income reflected on the Balance Sheet
reflects unrealized gains and losses net of
the tax effect of approximately $25,000. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009 (in 000s) |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills |
|
$ |
9,987 |
|
|
$ |
7 |
|
|
$ |
|
|
|
$ |
9,994 |
|
U.S. Treasury notes |
|
|
10,153 |
|
|
|
20 |
|
|
|
|
|
|
|
10,173 |
|
FDIC guaranteed bonds |
|
|
5,096 |
|
|
|
4 |
|
|
|
|
|
|
|
5,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,236 |
|
|
$ |
31 |
(a) |
|
$ |
|
|
|
$ |
25,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other comprehensive income reflected on the Balance Sheet reflects unrealized gains and
losses net of the tax effect of approximately $13,000. |
The Companys existing short-term investments have contractual maturities ranging from April
2010 to January 2011. These investments have been classified as available-for-sale.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 2010 and September 30, 2009, the Companys financial instruments included cash
and cash equivalents, short-term investments, trade and other receivables, other current assets,
accounts payable and other current liabilities. Due to the short-term maturities of cash and cash
equivalents, trade and other receivables, other current assets, accounts payable and other current
liabilities, the carrying amounts approximate fair value at the respective balance sheet dates.
The Company measures certain financial assets and liabilities at fair value on a recurring
basis, including short-term investments.
6
The fair value measurements of these short-term investments were determined using the
following inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 (in 000s) |
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills |
|
$ |
14,979 |
|
|
$ |
14,979 |
|
|
$ |
|
|
|
$ |
|
|
U.S. Treasury notes |
|
|
10,076 |
|
|
|
10,076 |
|
|
|
|
|
|
|
|
|
FDIC guaranteed bonds |
|
|
5,068 |
|
|
|
5,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,123 |
|
|
$ |
30,123 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009 (in 000s) |
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills |
|
$ |
9,994 |
|
|
$ |
9,994 |
|
|
$ |
|
|
|
$ |
|
|
U.S. Treasury notes |
|
|
10,173 |
|
|
|
10,173 |
|
|
|
|
|
|
|
|
|
FDIC guaranteed bonds |
|
|
5,100 |
|
|
|
5,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,267 |
|
|
$ |
25,267 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in U.S. Treasury bills and notes and FDIC guaranteed bonds classified as
available-for-sale are measured using unadjusted quoted market prices (Level 1) at the reporting
date.
5. DEBT
The Companys revolving line of credit loan agreement is with Western National Bank. The
agreement permits the Company to borrow, repay and reborrow, from time to time until June 2, 2011,
up to $20.0 million based on the borrowing base calculation as defined in the agreement. The
Companys obligations under this agreement are secured by a security interest in its accounts
receivable, equipment and related collateral. Interest on the facility accrues at an annual rate
equal to either the 30-day London Interbank Offered Rate (LIBOR), plus two and one-quarter
percent or the Prime Rate, minus three-quarters percent as the Company directs monthly, subject to
an interest rate floor of 4%. Interest on the outstanding amount under the loan agreement is
payable monthly. The loan agreement contains customary covenants for credit facilities of this
type, including limitations on disposition of assets, mergers and reorganizations. The Company is
also obligated to meet certain financial covenants under the loan agreement, including maintaining
specified ratios with respect to cash flow coverage, current assets and liabilities and debt to
tangible net worth. The Company was in compliance with all covenants as of March 31, 2010. The
Company has not utilized the line of credit loan agreement since it paid off the entire outstanding
balance as of September 30, 2008.
6. STOCK-BASED COMPENSATION
The
Companys stock-based compensation activity for the three months
and six months ended March 31, 2010 and 2009
is summarized below.
Incentive Stock Options:
The Company estimates the fair value of each stock option on the date of grant using the
Black-Scholes option pricing model. The expected volatility is based on historical volatility. The
expected term represents the average period that the Company expects stock options to be
outstanding and is determined based on the Companys historical experience. The risk free interest
rate used by the Company as the discounting interest rate is based on the U.S. Treasury rates on
the grant date for securities with maturity dates of approximately the expected term. As the
Company has not historically declared dividends and does not expect to declare dividends over the
near term, the dividend yield used in the calculation is zero. Actual value realized, if any, is
dependent on the future performance of the Companys common stock and overall stock market
conditions. There is no assurance the value realized by an optionee will be at or near the value
estimated by the Black-Scholes model. Options granted by the Company vest in equal
7
installments annually over four years from the date of grant and expire ten years from the
date of the grant. Compensation cost is recognized on a straight-line basis as the options vest.
No options were granted during the six months ended March 31, 2010 or the quarter ended March
31, 2009. The Company granted 152,000 stock option awards to officers and employees during the
quarter ended December 31, 2008. There were no options exercised during the six months ended March
31, 2010 and 2009.
Stock options issued under the Companys stock-based compensation plans are incentive stock
options. No tax deduction is recorded when options are awarded. If an exercise and sale of vested
options results in a disqualifying disposition, a tax deduction for the Company occurs. For the six
months ended March 31, 2010 and 2009, there were no excess tax benefits from disqualifying
dispositions of options.
The Company recognized compensation expense associated with stock option awards of $182,000
and $122,000 during the six months ended March 31, 2010 and 2009, respectively. This amount is
included in operating expenses and general and administrative costs in the Statements of
Operations.
Stock Awards:
There were no restricted stock awards granted to employees in the first or second quarters of
fiscal 2010 or 2009.
The Companys tax benefit with regards to restricted stock awards is consistent with the tax
election of the recipient of the award. No elections under IRC Section 83(b) have been made for the
restricted stock awards granted by the Company. As a result, the compensation expense recorded for
restricted stock resulted in a deferred tax asset for the Company equal to the tax effect of the
amount of compensation expense recorded.
The Company recognized compensation expense of $478,000 during the first six months of fiscal
2010 and $605,000 during the first six months of fiscal 2009 related to restricted stock awards.
This amount is included in operating expenses and general and administrative costs in the
Statements of Operations.
The Company granted 8,140 shares with immediate vesting to outside directors during the first
quarter of fiscal 2010 as compensation and 5,000 shares with immediate vesting to outside directors
during the first quarter of fiscal 2009 as compensation. The grant date fair value equaled $22.11
and $18.19 in each quarter, respectively. The Company recognized expense of $180,000 and $91,000
during the quarters ended December 31, 2009 and 2008, respectively. These amounts are included in
general and administrative costs in the Statements of Operations.
7. COMMITMENTS AND CONTINGENCIES
On March 14, 2008, a wildfire in West Texas burned a remote area in which one of the Companys
data acquisition crews was operating. The fire destroyed approximately $2,900,000 net book value of
the Companys equipment, all of which was covered by the Companys liability insurance, net of the
deductible. In addition to the loss of equipment, a number of landowners in the fire area suffered
damage to their grazing lands, livestock, fences and other improvements. The total cost to repair
landowner damages was approximately $1,800,000. In November 2008 and February 2009, the Company
received insurance proceeds for equipment losses sustained by the Company during the fire and for
the Companys debris pick-up costs. In December 2009, the Company received insurance proceeds for
all costs incurred to repair landowner damages.
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 Companys financial condition, results of operations or liquidity as the Company
believes it is adequately indemnified and insured.
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 in the past, and may in the future,
experience disputes that could affect its revenues and results of operations in any period.
8
During the quarter ended March 31, 2009, one of the Companys clients filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. The Company increased
its allowance for doubtful accounts during the second quarter of fiscal 2009 to cover estimated
exposures related to this bankruptcy. As of March 31, 2010 this client had an accounts receivable
balance with the Company of approximately $1.0 million, and the estimated exposure remains
unchanged.
The Company has non-cancelable operating leases for office space in Midland, Houston, Denver,
Oklahoma City and Lyon Township, Michigan.
The following table summarizes payments due in specific periods related to the Companys
contractual obligations with initial terms exceeding one year as of March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (in 000s) |
|
|
|
|
|
|
|
Within |
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Operating lease obligations |
|
$ |
1,706 |
|
|
$ |
576 |
|
|
$ |
708 |
|
|
$ |
326 |
|
|
$ |
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Some of the Companys operating leases contain predetermined fixed increases of the minimum
rental rate during the initial lease term. For these leases, the Company recognizes the related
expense on a straight-line basis and records the difference between the amount charged to expense
and the rent paid as deferred rent. Rental expense under the Companys operating leases with
initial terms exceeding one year was $292,000 and $283,000 for the six months ended March 31, 2010
and 2009, respectively.
As of March 31, 2010, the Company had unused letters of credit totaling $4,080,000. The
Companys letters of credit principally back obligations associated with the Companys self-insured
retention on workers compensation claims.
8. SUBSEQUENT EVENTS
The Company has evaluated events subsequent to the balance sheet date (March 31, 2010) through
the issue date of this Form 10-Q and concluded that no subsequent events have occurred that require
recognition in the Financial Statements or disclosure in the Notes to the Financial Statements.
9. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share is computed by dividing the net income (loss) for the period
by the weighted average number of common shares outstanding during the period. Diluted net income
(loss) per share is computed by dividing the net income (loss) for the period by the weighted
average number of common shares and common share equivalents outstanding during the period.
The following table sets forth the computation of basic and diluted net income (loss) per
common share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
NUMERATOR: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income and numerator for basic and
diluted net (loss) income per common
share-income available to common shareholders |
|
$ |
(2,706,000 |
) |
|
$ |
6,170,000 |
|
|
$ |
(6,922,000 |
) |
|
$ |
13,904,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DENOMINATOR: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net (loss) income per
common share-weighted average common shares |
|
|
7,779,256 |
|
|
|
7,799,744 |
|
|
|
7,775,483 |
|
|
|
7,797,986 |
|
Effect of dilutive securities-employee stock
options and restricted stock grants |
|
|
|
|
|
|
50,764 |
|
|
|
|
|
|
|
26,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net (loss) income per
common share-adjusted weighted average common
shares and assumed conversions |
|
|
7,779,256 |
|
|
|
7,850,508 |
|
|
|
7,775,483 |
|
|
|
7,824,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share |
|
$ |
(0.35 |
) |
|
$ |
0.79 |
|
|
$ |
(0.89 |
) |
|
$ |
1.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share-assuming dilution |
|
$ |
(0.35 |
) |
|
$ |
0.79 |
|
|
$ |
(0.89 |
) |
|
$ |
1.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Companys financial statements
and notes thereto included elsewhere in this Form 10-Q.
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 Managements Discussion and Analysis of Financial Condition and Results of
Operations regarding technological advancements and our financial position, business strategy and
plans and objectives of our management for future operations, may be deemed to be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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 our 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, including but not limited to the volatility of oil and
natural gas prices, disruptions in the global economy, dependence upon energy industry spending,
delays, reductions or cancellations of service contracts, high fixed costs of operations, weather
interruptions, inability to obtain land access rights of way, industry competition, limited number
of customers, credit risk related to our customers, asset impairments, the availability of capital
resources and operational disruptions. A discussion of these factors, including risks and
uncertainties, is set forth under Risk Factors in our annual report on Form 10-K for the year
ended September 30, 2009 and in our other reports filed from time to time with the Securities and
Exchange Commission. These forward-looking statements reflect our current views with respect to
future events and are subject to these and other risks, uncertainties and assumptions relating to
our operations, results of operations, growth strategies and liquidity. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this paragraph. We assume no obligation to update any such
forward-looking statements.
Overview
We are the leading provider of onshore seismic data acquisition services in the lower 48
states of the United States as measured by the number of active data acquisition crews.
Substantially all of our revenues are derived from the seismic data acquisition services we provide
to our clients, mainly domestic oil and natural gas companies. Demand for our services depends upon
the level of spending by these companies for exploration, production, development and field
management activities, which depends, in part, on oil and natural gas prices. Significant
fluctuations in domestic oil and natural gas exploration activities and commodity prices have
affected the demand for our services and our results of operations in years past, and such
fluctuations continue today to be the single most important factor affecting our business and
results of operations.
Our strong results from 2004 through 2008 were directly related to increases in exploration
activities for domestic oil and natural gas reserves by the petroleum industry during this period.
The increased level of exploration was a function of higher prices for oil and natural gas. As a
result of the increase in domestic exploration spending, we experienced an increased demand for our
seismic data acquisition and processing services during this period, particularly from entities
seeking natural gas reserves. Beginning in August 2008, the prices of oil and especially natural
gas declined significantly from historic highs due to reduced demand from the global economic
slowdown, and during 2009 many domestic oil and natural gas companies reduced their capital
expenditures due to the decrease in market prices and disruptions in the credit markets. These
factors led to a severe reduction in demand for our services and in our industry in general during
2009 as well as downward pressure on the prices we charge our customers for our services. In order
to better align our crew capacity with reduced demand and to reduce short term-utilization issues,
we reduced the number of data acquisition crews we operated from sixteen at the end of fiscal 2008
to nine in October 2009. During the end of calendar 2009, we began to experience an increase in
demand for our services across a number of oil and natural gas basins. While the Company remains in
a competitive pricing environment and the pace of future economic activity remains uncertain, the
recent increase in demand has somewhat mitigated our short-term utilization issues and allowed us
to redeploy two previously out of service data acquisition crews during January 2010, bringing the
number of currently operating crews to eleven.
Due to the reductions in the number of our active data acquisition crews and lower utilization
rates for our remaining operating crews, we experienced a reduction in operating revenues and
operating costs during calendar 2009. We anticipate that, despite the recent increase in demand
from the low levels of 2009, such reductions will continue through calendar 2010, and possibly
beyond,
10
depending on future market prices for oil and natural gas and the level of domestic
exploration spending. In light of continuing market difficulties, we are maintaining our focus and
efforts on reducing costs, limiting capital expenditures and maintaining our financial strength.
Equipment and key personnel from crews taken out of service continue to be redeployed on remaining
crews as needed or otherwise remain available for rapid expansion of crew count as demand and
market conditions dictate in the future. Although our clients may cancel their service contracts
on short notice, our current order book reflects commitment levels sufficient to maintain operation
of eleven data acquisition crews well into calendar 2010.
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, the
productivity of our data acquisition crews, including factors such as crew downtime related to
inclement weather, delays in acquiring land access permits or
equipment failure, and whether we
enter into turnkey or day rate contracts with our clients. Consequently, our efforts to negotiate
favorable contract terms in our supplemental service agreements, to mitigate access permit delays
and to improve overall crew productivity may partially offset the impact of reduced demand and
anticipated contract price weaknesses. During the second quarter, a majority of our client
contracts were turnkey contracts. While turnkey contracts allow us to capitalize on improved crew
productivity, we also bear more risks related to weather and other
crew downtime.
During the years prior to the 2009 economic slowdown, we made significant
investments in seismic data acquisition equipment, with much of that equipment incorporating new
and improved technologies. As we continue to integrate the new equipment into our operations,
including the OYO GSR recording equipment purchased in February 2010, we will continue to closely
monitor our entire equipment base for the purpose of evaluating the remaining useful lives of our
older equipment and to assess possible impairment. There are numerous uncertainties factored into
the estimates of the life cycle of a seismic recording system including the future cash flows
estimated to be generated by a particular system. Estimated cash flows can be affected by changes
in oil and natural gas prices, reduced demand for our services, a competitive pricing environment
as we have experienced since the beginning of 2009, technological advances in seismic data
acquisition equipment and reductions in future utilization resulting from the expected size and
geographical location of future prospects.
While the markets for oil and natural gas have been very volatile and are likely to continue
to be volatile in the future, and we can make no assurances as to future levels of domestic
exploration or commodity prices, we believe opportunities exist for us to enhance our market
position by responding to our clients continuing desire for higher resolution subsurface images.
If economic conditions do not improve or were to worsen, our customers do not increase their
capital expenditures or there is a significant sustained drop in oil and natural gas prices, it
could result in continued diminished demand for our seismic services, may cause continued downward
pressure on the prices we charge and could continue to affect our results of operations. Because a
majority of our current clients are focused on the exploration for and production of natural gas, a
continued pressure on the price of natural gas in particular could have a negative effect on the
demand for our services. In recent quarters this risk has been mitigated somewhat as we have
experienced increased demand for our services in several oil producing basins based on oil prices
that began to rebound in the second and third quarters of fiscal 2009.
Results of Operations
Operating Revenues. Our operating revenues for the first six months of fiscal 2010 decreased
41% to $84,915,000 from $144,841,000 for the first six months of fiscal 2009. For the three months
ended March 31, 2010, operating revenues totaled $48,585,000 as compared to $64,625,000 for the
same period of fiscal 2009, a 25% decrease. The revenue decreases in the second quarter and the
first six months of fiscal 2010 compared to the same periods of fiscal 2009 were primarily the
result of previously announced reductions in active crew count from sixteen to nine beginning in
the second quarter of fiscal 2009 (four crews), third quarter of fiscal 2009 (two crews), and first
quarter of fiscal 2010 (one crew), a more competitive pricing environment, substantially lower
utilization rates of the remaining crews and increased downtime for weather. Our financial
performance in the second fiscal quarter of 2010 improved compared to our performance in the first
fiscal quarter as a result of increased demand for our services and higher crew utilization rates
during the second quarter despite extremely difficult weather conditions during the second quarter,
particularly heavy snowfalls in the northern and northeastern regions of the country along with wet
and icy conditions in the mid and southern regions. As previously announced, we redeployed two
seismic data acquisition crews during the second quarter bringing the number of currently active
crews to eleven. Revenues in the quarter continued to include relatively high third-party charges
related to the use of helicopter support services, specialized survey technologies and dynamite
energy sources. The high level of these charges during the second quarter was driven by increased
demand levels for our services in areas with limited access. We are reimbursed for these charges by
our clients.
Operating Costs. Operating expenses for the six months ended March 31, 2010 totaled
$79,147,000 as compared to $104,752,000 for the same period of fiscal 2009, a decrease of 24%.
Operating expenses for the three months ended March 31, 2010 decreased 3%
11
to $44,428,000 as compared to $45,737,000 for the same period of fiscal 2009. The decrease for
the six months period ended March 31, 2010 compared to the six month period ended March 31, 2009
was primarily due to reductions in field personnel and other expenses associated with operating
data acquisition crews taken out of service during 2009 and 2010. As we have experienced reductions
in our active crew count, we have retained our key technical and operational employees to allow us
to capitalize on opportunities as they emerge. As discussed above, reimbursed expenses have a
similar impact on operating costs.
General and administrative expenses were 4.3% of revenues in the first six months of fiscal
2010, as compared to 3.2% of revenues in the same period of 2009. For the quarters ended March 31,
2010 and March 31, 2009, general and administrative expenses were approximately 3.7% of revenues.
The ratio of general and administrative expenses to revenue increased in the first six months of
fiscal 2010 compared to the same period of fiscal 2009 due to the substantial decrease in revenues
between the two periods which outpaced the decline in general and administrative expenses over the
same period. The dollar amount decreases to $1,792,000 during the second quarter of fiscal 2010
from $2,408,000 during the second quarter of fiscal 2009 and to $3,646,000 during the six months
ended March 31, 2010 from $4,563,000 during the six months ended March 31, 2009 reflect our lower
level of administrative costs in response to reduced revenues.
Depreciation for the six months ended March 31, 2010 totaled $13,172,000 compared to
$13,130,000 for the six months ended March 31, 2009. We recognized $6,695,000 of depreciation
expense in the second quarter of fiscal 2010 as compared to $6,529,000 in the comparable quarter of
fiscal 2009. The increases in depreciation expense in both the six month and three month periods
were the result of the relatively modest capital expenditures we made during fiscal 2009 and the
somewhat larger expenditures we made during the second quarter of fiscal 2010 as discussed below in
Liquidity and Capital Resources Capital Expenditures. We expect our depreciation expense to
increase only slightly during fiscal 2010 reflecting these capital expenditures in fiscal 2009 and
fiscal 2010.
Our total operating costs for the first six months of fiscal 2010 were $95,965,000, a decrease
of 22% from the first six months of fiscal 2009. For the quarter ended March 31, 2010, our
operating expenses were $52,915,000 representing a 3% decrease from the comparable quarter of
fiscal 2009. These decreases in the first six months and for the second quarter were primarily due
to the factors described above.
Taxes. We provide for income taxes during interim periods based on our estimate of the
effective tax rate for the year. Discrete items and changes in our estimate of the annual effective
tax rate are recorded in the period in which they occur. We recognize interest and penalties
related to uncertain tax positions as part of income tax expense.
Income tax benefit was $3,973,000 for the six months ended March 31, 2010
compared to income tax expense of $8,942,000 for the six months ended March 31, 2009. The effective
tax rates for the income tax provision for the six months ended March 31, 2010 and 2009 were
approximately 36.5% and 39.1%, respectively. Our effective tax rates differ from the statutory
federal rate of 35.0% for certain items, such as state and local taxes, non-deductible expenses,
expenses related to share-based compensation that were not expected to result in a tax deduction
and changes in reserves for uncertain tax positions.
Liquidity and Capital Resources
Introduction. Our principal sources of cash are amounts earned from the seismic data
acquisition services we provide to our clients. Our principal uses of cash are the amounts used to
provide these services, including expenses related to our operations and acquiring new equipment.
Accordingly, our cash position depends (as do our revenues) on the level of demand for our
services. Historically, cash generated from our operations along with cash reserves and short-term
borrowings from commercial banks have been sufficient to fund our working capital requirements, and
to some extent, our capital expenditures.
Cash Flows. Net cash provided by operating activities was $2,510,000 for the first six months
of fiscal 2010 and $38,291,000 for the first six months of fiscal 2009. These amounts primarily
reflect our decline in revenues during 2009 and the effects of depreciation resulting from our
significant capital expenditures over the last few years, while the working capital components in
fiscal 2009 include a decrease in accounts receivable and in fiscal 2010 include an increase in
accounts receivable. Although our cash flows from accounts receivable fluctuated during this
period, this did not reflect any change in our collection experience during the period as the
average number of days in accounts receivable has remained at approximately fifty-five over the
last twelve months. Amounts in our accounts receivable that are over sixty days represent
approximately 8% of our total accounts receivables and are generally ultimately collected. As
discussed above, the decrease in revenues during the first six months of fiscal 2010 was not
matched by a decrease in operating expenses, and as a result, our margins and net results from
operating activities were negatively affected.
12
Net cash used in investing activities was $20,185,000 in the six months ended March 31, 2010
and $1,054,000 in the six months ended March 31, 2009. In fiscal 2010, we reinvested the proceeds
of a matured treasury investment and invested in an additional treasury instrument. The net cash
used in investing activities in both years presented primarily represents capital expenditures made
with cash generated from operations.
We had no cash flows from financing activities in the first six months of fiscal 2010 or the
first six months of fiscal 2009.
Capital Expenditures. During the quarter ended March 31, 2010, the Companys Board of
Directors approved an additional $10,000,000 capital budget for fiscal 2010, bringing the total
fiscal 2010 budget to $20,000,000. At the end of the second quarter, we spent $8,007,000 after
trade-in allowance on the purchase of 5,500 additional ARAM channels and 6,000 RSR channels. The
purchase of additional channels reflects our clients continuing desire for increased channel count
to provide higher resolution images and improved operational efficiencies. Total capital
expenditures for the fiscal year to date are $15,658,000 including the purchase of the 2,000
stations of OYO GSR four channel three-component recording equipment reported in the first quarter.
The balance of the fiscal 2010 capital budget will be used for maintenance capital requirements and
the purchase of additional geophones.
We continually strive to supply our clients with technologically advanced 3-D seismic data
acquisition recording systems 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 short-term borrowings from commercial banks to fund our working capital
requirements and, to some extent, our capital expenditures. We have also funded our capital
expenditures and other financing needs from time to time through public equity offerings.
Our revolving line of credit loan agreement is with Western National Bank. The agreement
permits us to borrow, repay and reborrow, from time to time until June 2, 2011, up to $20.0 million
based on the borrowing base calculation as defined in the agreement. Our obligations under this
agreement are secured by a security interest in our accounts receivable, equipment and related
collateral. Interest on the facility accrues at an annual rate equal to either the 30-day London
Interbank Offered Rate (LIBOR), plus two and one-quarter percent or the Prime Rate, minus
three-quarters percent as we direct monthly, subject to an interest rate floor of 4%. Interest on
the outstanding amount under the loan agreement is payable monthly. The loan agreement contains
customary covenants for credit facilities of this type, including limitations on disposition of
assets, mergers and reorganizations. We are also obligated to meet certain financial covenants
under the loan agreement, including maintaining specified ratios with respect to cash flow
coverage, current assets and liabilities and debt to tangible net worth. We were in compliance with
all covenants as of March 31, 2010 and May 7, 2010. We have not utilized the line of credit loan
agreement since we paid off the entire outstanding balance as of September 30, 2008.
On March 31, 2009, we filed a shelf registration statement with the SEC covering the periodic
offer and sale of up to $100.0 million in debt securities, preferred and common stock and warrants.
The registration statement allows us to sell securities in one or more separate offerings with the
size, price and terms to be determined at the time of sale. The terms of any securities offered
would be described in a related prospectus to be filed separately with the SEC at the time of the
offering. The filing of the shelf registration statement will enable us to act quickly as
opportunities arise.
The following table summarizes payments due in specific periods related to our contractual
obligations with initial terms exceeding one year as of March 31, 2010.
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Payments Due by Period (in 000s) |
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Within |
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After |
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Total |
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1 Year |
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|
1-3 Years |
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3-5 Years |
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5 Years |
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Operating lease obligations |
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$ |
1,706 |
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|
$ |
576 |
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$ |
708 |
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$ |
326 |
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$ |
96 |
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We believe that our capital resources and cash flow from operations are adequate to meet our
current operational needs. We believe we will be able to finance our capital requirements through
cash flow from operations, cash on hand and through borrowings under our revolving line of credit.
However, our ability to satisfy our working capital requirements and to fund future capital
requirements will depend principally upon our future operating performance, which is subject to the
risks inherent in our business including the demand for our seismic services from clients.
13
Off-Balance Sheet Arrangements
As of March 31, 2010, we had no off-balance sheet arrangements.
Critical Accounting Policies
The preparation of our financial statements in conformity with generally accepted accounting
principles requires us to make certain assumptions and estimates that affect the reported amounts
of assets and liabilities at the date of our 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.
Concentrations of Credit Risk. Financial instruments that potentially expose us to
concentrations of credit risk at any given time may consist of cash and cash equivalents, money
market funds and overnight investment accounts, short-term investments, trade and other receivables
and other current assets. At March 31, 2010 and September 30, 2009, we had deposits with domestic
banks in excess of federally insured limits. We believe the credit risk associated with these
deposits is minimal. Money market funds seek to preserve the value of the investment, but it is
possible to lose money investing in these funds. We invest funds overnight under a repurchase
agreement with our bank which is collateralized by securities of the United States Federal
agencies. We generally invest in short-term U.S. Treasury Securities; however, currently we also
have funds invested in FDIC guaranteed bonds. We believe all of our investments are low risk
investments. Our sales are to clients whose activities relate to oil and natural gas exploration
and production. We generally extend unsecured credit to these clients; therefore, collection of
receivables may be affected by the economy surrounding the oil and natural gas industry. We closely
monitor extensions of credit and may negotiate payment terms that mitigate risk.
Revenue Recognition. Our services are provided under cancelable service contracts. These
contracts are either turnkey or term agreements. Under both types of agreements, we recognize
revenues when revenue is realizable and services are performed. Services are defined as the
commencement of data acquisition or processing operations. Revenues are considered realizable when
earned according to the terms of the service contracts. Under turnkey agreements, revenue is
recognized on a per unit of data acquired rate, as services are performed. Under term agreements,
revenue is recognized on a per unit of time worked rate, as services are performed. In the case of
a cancelled service contract, we recognize revenue and bill our client for services performed up to
the date of cancellation.
We also receive reimbursements for certain out-of-pocket expenses under the terms of our
service contracts. We record amounts billed to clients in revenue at the gross amount, including
out-of-pocket expenses that are reimbursed by the client.
In some instances, we bill clients in advance of the services performed. In those cases, we
recognize the liability as deferred revenue. As services are performed, those amounts are reversed
and recognized as revenue.
Allowance for Doubtful Accounts. We prepare our allowance for doubtful accounts receivable
based on our review of past-due accounts, our past experience of historical write-offs and our
current customer base. While the collectability of outstanding client invoices is continually
assessed, the inherent volatility of the energy industrys business cycle can cause swift and
unpredictable changes in the financial stability of our customers.
Impairment of Long-Lived Assets. We review long-lived assets 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. Our forecast of future cash flows used to perform impairment analysis includes
estimates of future revenues and expenses based on our anticipated future results while considering
anticipated future oil and gas prices, which is fundamental in assessing demand for our services.
If the carrying amount of the assets exceeds the estimated expected undiscounted future cash flows,
we measure the amount of possible impairment by comparing the carrying amount of the assets to
their fair value.
Depreciable Lives of Property, Plant and Equipment. Our property, plant and equipment are
capitalized at historical cost and depreciated over the useful lives of the assets. Our estimation
of useful lives is based on circumstances that exist in the seismic industry and information
available at the time of the purchase of the assets. 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.
14
Tax Accounting. We account for our income taxes by recognizing amounts of taxes payable or
refundable for the current year and an asset and liability approach in recognizing the amount of
deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in our financial statements or tax returns. We determine deferred taxes by identifying
the types and amounts of existing temporary differences, measuring the total deferred tax asset or
liability using the applicable tax rate and reducing the deferred tax asset by a valuation
allowance if, based on available evidence, it is more likely than not that some portion or all of
the deferred tax asset will not be realized. Our methodology for recording income taxes requires
judgment regarding assumptions and the use of estimates, including determining our annual effective
tax rate and the valuation of deferred tax assets, which can create a variance between actual
results and estimates and could have a material impact on our provision or benefit for income
taxes.
Stock-Based Compensation. We measure all employee stock-based compensation awards, including
stock options and restricted stock, using the fair value method and recognize compensation cost,
net of forfeitures, in our financial statements. We record compensation expense as operating or
general and administrative expense as appropriate in the Statements of Operations on a
straight-line basis over the vesting period of the related stock options or restricted stock
awards.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued ASC 820-10, Fair
Value Measurements and Disclosures. ASC 820-10 clarifies that fair value is the amount that would
be exchanged to sell an asset or transfer a liability in an orderly transaction between market
participants. Further, the standard establishes a framework for measuring fair value in generally
accepted accounting principles and expands certain disclosures about fair value measurements. ASC
820-10 became effective for all financial assets and financial liabilities as of October 1, 2008,
and upon adoption, ASC 820-10 did not have a material impact on our financial statements. In
February 2008, the FASB issued ASC 820-10-15-1A, Fair Value Measurements and Disclosures
Transition and Open Effective Date Information, which delayed the effective date of ASC 820-10 for
all non-financial assets and non-financial liabilities such as asset impairments, except for items
that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually). Effective at the beginning of fiscal 2010, we adopted the FASB authoritative
guidance for non-financial assets and non-financial liabilities. The adoption for non-financial
assets and non-financial liabilities did not have a material impact on our financial statements.
In January 2010, the FASB issued Accounting Standards Update 2010-06 Fair Value Measurements
and Disclosures (Topic 820) as new guidance and clarification for improving disclosures about fair
value measurements. ASU 2010-06 requires enhanced disclosures regarding transfers in and out of
the levels within the fair value hierarchy. Separate disclosures are required for transfers in and
out of Level 1 and 2 fair value measurements, and the reasons for the transfers must be disclosed.
The new disclosures and clarifications of existing disclosures were effective for us as of January
1, 2010. The adoption of this guidance did not have a material impact on our financial statements.
In February 2010, the FASB issued Accounting Standards Update 2010-09 Subsequent Events
(Topic 855) allowing SEC filers to remove the date through which subsequent events have been
reviewed. ASU 2010-09 became effective upon issuance, and the adoption of this guidance did not
have a material impact on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary sources of market risk include fluctuations in commodity prices which affect
demand for and pricing of our services as well as interest rate fluctuations. Our revolving line of
credit carries a variable interest rate that is tied to market indices and, therefore, our results
of operations and our cash flows could be impacted by changes in interest rates. Outstanding
balances under our revolving line of credit bear interest at our monthly direction of the lower of
the Prime rate minus three-quarters percent or the 30-day LIBOR plus two and one-quarter percent,
subject to an interest rate floor of 4%. At March 31, 2010, we had no balances outstanding on our
revolving line of credit. The contractual maturities of our short-term investments range from April
2010 to January 2011. Our short-term investments are classified for accounting purposes as
available-for-sale. If these short-term investments are not held to maturity, the proceeds obtained
when the instruments are sold will be impacted by the current interest rates at the time they are
sold. We have not entered into any hedge arrangements, commodity swap agreements, commodity
futures, options or other derivative financial instruments. We do not currently conduct business
internationally, so we are not generally subject to foreign currency exchange rate risk.
15
ITEM 4. CONTROLS AND PROCEDURES
Managements 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 principal financial officers, of the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 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, Secretary and Chief Financial Officer concluded
that, as of March 31, 2010, 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 SECs 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,
Secretary and Chief Financial Officer, 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
Securities Exchange Act of 1934) during the quarter ending March 31, 2010 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
From time to time, we are a party to various legal proceedings arising in the ordinary course
of business. Although we cannot predict the outcomes of any such legal proceedings, our management
believes that the resolution of pending legal actions will not have a material adverse effect on
our financial condition, results of operations or liquidity.
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 fiscal year ended September 30, 2009, which could materially affect our financial
condition or results of operations. There have been no material changes in our risk factors from
those disclosed in our 2009 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth for the periods indicated certain information with respect to
our purchases of our common stock:
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Total Number of |
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Shares Purchased as |
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Maximum Number of |
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a Part of a |
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Shares That May be |
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Total Number of |
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Average Price Paid |
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Publicly Announced |
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Purchased Under |
Period |
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Shares Purchased (1) |
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per Share |
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Plan (2) |
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Plan (2) |
October 1-31, 2009 |
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13,578 |
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$ |
25.99 |
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N/A |
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N/A |
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November 1-30, 2009 |
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N/A |
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N/A |
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December 1-31, 2009 |
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N/A |
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N/A |
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January 1-31, 2010 |
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N/A |
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N/A |
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February 1-28, 2010 |
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N/A |
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N/A |
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March 1-31, 2010 |
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N/A |
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N/A |
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(1) |
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Represents the surrender of shares of our common stock to satisfy tax withholding obligations
in connection with the vesting of
restricted stock issued to employees under our stockholder-approved long-term incentive plan. |
|
(2) |
|
We did not have at any time during the first six months of
fiscal 2010, and currently do not have, a share repurchase
program in place. |
16
|
|
|
|
|
ITEM 5. OTHER INFORMATION
|
|
The Annual Meeting of Stockholders was held on January 26, 2010.
The following proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until the next annual meeting of shareholders and
until their successors are elected and qualified.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
|
Broker |
|
|
|
For |
|
|
Withheld |
|
|
Non-Votes |
|
Paul H. Brown |
|
|
2,536,795 |
|
|
|
2,213,738 |
|
|
|
2,097,351 |
|
|
L. Decker Dawson |
|
|
2,539,637 |
|
|
|
2,210,897 |
|
|
|
2,097,351 |
|
|
Gary M. Hoover |
|
|
2,552,594 |
|
|
|
2,197,939 |
|
|
|
2,097,351 |
|
|
Stephen C. Jumper |
|
|
2,547,477 |
|
|
|
2,203,056 |
|
|
|
2,097,351 |
|
|
Jack D. Ladd |
|
|
2,543,706 |
|
|
|
2,206,827 |
|
|
|
2,097,351 |
|
|
Ted R. North |
|
|
2,556,327 |
|
|
|
2,194,206 |
|
|
|
2,097,351 |
|
|
Tim C. Thompson |
|
|
2,537,367 |
|
|
|
2,213,166 |
|
|
|
2,097,351 |
|
|
|
|
2. |
|
To ratify the appointment of KPMG LLP as the Companys independent registered public accounting
firm for the fiscal year ending September 30, 2010. |
|
|
|
|
|
For |
|
|
5,954,316 |
|
|
Against |
|
|
221,721 |
|
|
Abstain |
|
|
671,848 |
|
17
ITEM 6. EXHIBITS
The information required by this Item 6 is set forth in the Index to Exhibits accompanying
this Form 10-Q and is hereby incorporated by reference.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
DAWSON GEOPHYSICAL COMPANY
|
|
DATE: May 7, 2010 |
By: |
/s/ Stephen C. Jumper
|
|
|
|
Stephen C. Jumper |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
DATE: May 7, 2010 |
By: |
/s/ Christina W. Hagan
|
|
|
|
Christina W. Hagan |
|
|
|
Executive Vice President, Secretary and
Chief Financial Officer |
|
19
INDEX TO EXHIBITS
|
|
|
Number |
|
Exhibit |
3.1
|
|
Second Restated Articles of Incorporation of the Company, as
amended (filed on February 9, 2007 as Exhibit 3.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
December 31, 2006 (File No. 000-10144) and incorporated herein
by reference and filed on November 28, 2007 as Exhibit 3.1 to
the Companys Current Report on Form 8-K (File No. 000-10144)
and incorporated herein by reference). |
|
|
|
3.1A
|
|
Statement of Resolution Establishing Series of Shares of Series
A Junior Participating Preferred Stock of the Company (filed on
July 9, 2009 as Exhibit 3.1 to the Companys Current Report on
Form 8-K (File No. 000-10144) and incorporated herein by
reference). |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Company (filed on August 7,
2007 as Exhibit 3.2 to the Companys Quarterly Report on Form
10-Q for the third quarter ended June 30, 2007 (File No.
000-10144) and incorporated herein by reference) |
|
|
|
4.1
|
|
Rights Agreement effective as of July 23, 2009 between the
Company and Mellon Investor Services LLC , as Rights Agent,
which includes as Exhibit A the form of Statement of Resolution
Establishing Series of Shares of Series A Junior Participating
Preferred Stock setting forth the terms of the Preferred Stock,
as Exhibit B the form of Rights Certificate and as Exhibit C
the Summary of Rights to Purchase Preferred Stock (filed on
July 9, 2009 as Exhibit 4.1 to the Companys Current Report on
Form 8-K (File No. 000-10144) and incorporated herein by
reference). Pursuant to the Rights Agreement, Rights
Certificates will not be mailed until after the Distribution
Date (as defined in the Rights Agreement). |
|
|
|
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. |
20