Dawson Geophysical Co 8-K/A, filed Jun 7, 2023
Dawson Geophysical Co (DWSN)
About this 8-K/A
Dawson Geophysical Co filed this 8-K/A on June 7, 2023, reporting on events of March 21, 2023.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
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Explanatory Note
As previously disclosed in the Current Report on Form 8-K filed by Dawson Geophysical Company (the “Company”) on March 24, 2023 (the “Initial 8-K”) with the United States Securities and Exchange Commission (the “SEC”), on March 24, 2023, the Company consummated an acquisition (the “Acquisition”) as set forth in that certain Asset Purchase Agreement (as amended from time to time, the “Purchase Agreement”), by and among the Company, Wilks Brothers, LLC, a Texas limited liability company, for the limited purposes set forth therein (“Wilks”), and Breckenridge Geophysical, LLC, a Texas limited liability company and a wholly-owned subsidiary of Wilks (“Breckenridge”). Pursuant to the Purchase Agreement, and upon the terms and subject to the conditions described therein, the Company completed the purchase of substantially all of the Breckenridge assets related to seismic data acquisition services other than its multi-client data library (the “Assets”), in exchange for a combination of equity consideration and a convertible note (the “Transaction”). The consideration delivered by the Company to Wilks for the Assets consisted of the following equity consideration and convertible note (in the aggregate, the “Consideration”): (i) 1,188,235 newly-issued shares of common stock of the Company (the “Issued Common Shares”); and (ii) a convertible promissory note (the “Convertible Note”) in the principal amount of $9,880,000.50 payable on or after June 30, 2024 that, upon the terms and subject to the conditions described therein, will automatically convert into 5,811,765 newly-issued shares of common stock of the Company (the “Conversion Shares”) at a conversion price of $1.70 per share, subject to adjustment as described in the Convertible Note, after the Company receives stockholder approval of the proposal to issue the Conversion Shares upon conversion of the Convertible Note in accordance with Listing Rule 5635 of the NASDAQ Listed Company Manual.
The Company is filing this amendment to the Initial 8-K for the purpose of filing (i) the audited consolidated financial statements and related notes of Breckenridge as of and for the year ended December 31, 2022 and (ii) the unaudited proforma combined financial statements of the Company as of and for the year ended December 31, 2022, after giving effect to the Acquisition. This amendment should be read in conjunction with the Initial 8-K and the Company’s other filings with the SEC. Except as provided herein, the disclosures made in the Initial 8-K remain unchanged.
Item 9.01. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
The audited financial statements of Breckenridge, which comprise the balance sheet as of December 31, 2022 and the related statements of operations, changes in member’s equity and cash flows for the year then ended and the related notes thereto, are filed as Exhibit 99.1 hereto and incorporated herein by reference.
(b) Pro forma financial information.
The unaudited pro forma condensed combined balance sheet of the Company as of December 31, 2022, the unaudited proforma combined financial statements of operations of the Company for the year ended December 31, 2022 and the notes related thereto are filed as Exhibit 99.2 hereto and incorporated herein by reference. These unaudited proforma combined financial statements give effect to the Acquisition on the basis, and subject to the assumptions, set forth in accordance with Article 11 of Regulation S-X.
2
(c) Exhibits.
In accordance with General Instruction B.2 of Form 8-K, the information set forth in the attached Exhibit 99.1 is deemed to be “furnished” and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act.
EXHIBIT | | DESCRIPTION |
23.1 | — | |
99.1 | — | |
99.2 | — |
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| DAWSON GEOPHYSICAL COMPANY | |
| | |
| | |
Date: June 7, 2023 | By: | /s/ James K. Brata |
| | James K. Brata |
| | Executive Vice President, Chief Financial Officer, |
| | Secretary and Treasurer |
4
Exhibit 23.1
Consent of Independent Auditor
With respect to the following Registration Statements of Dawson Geophysical Company:
| (1) | Registration Statement (Form S-8 No. 333-199922) pertaining to the Post-Effective Amendment to the Registration Statement on Form S-4 related to the Amended and Restated Dawson Geophysical Company 2006 Stock and Performance Incentive Plan (the “Legacy Dawson Plan”), |
| (2) | Registration Statement (Form S-8 No. 333-142221) pertaining to the TGC Industries, Inc. 2006 Stock Awards Plan (the “Legacy TGC Plan”), |
| (3) | Registration Statement (Form S-8 No. 333-201923) pertaining to the Legacy TGC Plan, |
| (4) | Registration Statement (Form S-8 No.333-204643) pertaining to the Legacy Dawson Plan, |
| (5) | Registration Statement (Form S-8 No. 333-212577) pertaining to the Dawson Geophysical Company 2016 Stock and Performance Incentive Plan, and |
| (6) | Registration Statement (Form S-8 No. 333-257475) pertaining to the Amended and Restated Dawson Geophysical Company 2016 Stock and Performance Incentive Plan. |
We consent to the incorporation by reference of our report dated June 7, 2023, relating the financial statements of Breckenridge Geophysical LLC, appearing in this Amendment No. 1 to Current Report on Form 8-K of Dawson Geophysical Company dated March 24, 2023.
/s/ RSM US LLP
Houston, Texas
June 7, 2023
Exhibit 99.1
Breckenridge Geophysical, LLC
Independent Auditor’s Report and Audited Financial Statements
Year ended December 31, 2022
Table of Contents
Financial Statements
Independent Auditor’s Report
Members
Wilks Brothers, LLC
Opinion
We have audited the financial statements of Breckenridge Geophysical LLC (“the Company”), which comprise the balance sheet as of December 31, 2022, and the related statements of operations, changes in member’s equity and cash flows for the year then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (“GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
| ● | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| ● | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
| ● | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
| ● | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. |
| ● | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.
/s/ RSM US LLP
Houston, Texas
June 7, 2023
Breckenridge Geophysical, LLC Balance Sheet
As of December 31, 2022
Assets | | |
| | |
Current assets: | | |
Cash and cash equivalents | $ | 4,688,749 |
Accounts receivable, net | | 62,297 |
Accounts receivable - related party | | 963,232 |
Prepaid expenses and other current assets | | 75,619 |
Total current assets | | 5,789,897 |
| | |
Property and equipment | | 9,849,025 |
Less: accumulated depreciation | | (7,507,851) |
Property and equipment, net | | 2,341,174 |
| | |
| $ | 8,131,071 |
Total assets | | |
| | |
Liabilities and Member's Equity | | |
| | |
Current liabilities: | $ | 17,107 |
Accounts payable | | 136,974 |
Accounts payable - related party | | 101,751 |
Accrued expenses | | 180,764 |
Deferred revenue | | 436,596 |
Total current liabilities | | |
| | - |
Commitments and contingencies (Note 5): | | |
| | 7,694,475 |
Member's equity: | | |
| | |
Total liabilities and member's equity | $ | 8,131,071 |
See accompanying notes to the financial statements.
Breckenridge Geophysical, LLC
Statement of Operations
Year ended December 31, 2022
Operating revenues | $ | 16,891,457 |
| | |
Operating costs: | | |
Operating expenses | | 10,393,955 |
Depreciation expense | | 2,128,557 |
Selling, general and administrative expense | | 1,726,273 |
Loss on disposal of assets | | 769,868 |
Total Operating Expenses | | 15,018,653 |
| | |
Operating income | | 1,872,804 |
| | |
Other expense: | | 3,982 |
| | |
Net Income | $ | 1,868,822 |
See accompanying notes to the financial statements.
Breckenridge Geophysical, LLC
Statement of Changes in Member’s Equity
Year ended December 31, 2022
Balance as of January 1, 2022 | $ | 6,408,903 |
Net Income | | 1,868,822 |
Net distributions to parent | | (583,250) |
Balance as of December 31, 2022 | $ | 7,694,475 |
See accompanying notes to the financial statements.
Breckenridge Geophysical, LLC Statement of Cash Flows
Year ended December 31, 2022
Operating Activities | | |
Net income | $ | 1,868,822 |
| | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation expense | | 2,128,557 |
Loss on disposal of assets | | 769,868 |
Change in operating assets and liabilities: | | |
Accounts receivable | | 1,073,152 |
Accounts receivable - related party | | 349,036 |
Prepaid expenses and other assets | | 57,607 |
Accounts payable | | (169,062) |
Accounts payable - related party | | 49,493 |
Accrued expenses and deferred revenue | | (436,192) |
Net cash provided by operating activities | | 5,691,281 |
| | |
Investing Activities | | |
Purchase of property and equipment | | (535,174) |
Sale of assets | | 115,000 |
Net cash used in investing activities | | (420,174) |
| | |
Financing Activities | | |
Net distributions | | (583,250) |
Net cash used in financing activities | | (583,250) |
| | |
Net change in cash | | 4,687,857 |
Beginning cash | | 892 |
Ending cash | $ | 4,688,749 |
See accompanying notes to the financial statements.
Breckenridge Geophysical, LLC
Notes to financial statements
| 1. | Summary of significant accounting policies |
Organization and nature of operations
Breckenridge is a provider of onshore seismic data acquisition and processing services. 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. The Company operates in the lower 48 states of the U.S. For the year ended December 31, 2022, comprehensive income equals net income. The Company is organized as a limited liability company, and members are not liable for the debts, obligations or liabilities of the Company.
Basis of presentation
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For all periods presented, comprehensive loss equals net loss.
On March 24, 2023, Dawson Geophysical Company (“Dawson”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Wilks Brothers, LLC (“Wilks”) and Breckenridge Geophysical, LLC (“the Company”, “Breckenridge”, “we” or “our”). Pursuant to the Purchase Agreement, Dawson completed the purchase of substantially all of the Breckenridge assets related to seismic data acquisition services other than its multi-client data library (the “Assets”), in exchange for a combination of equity consideration and a convertible note (the “Transaction”). These financial statements present a carve-out of the historical financial information of Breckenridge for the Assets included in the Transaction, and all activity related to the Company’s multi-client data library have been excluded from these carve out financial statements. Balances due to and from Wilks with no historical settlement have been reflected in member’s equity and all transactions with Wilks or entities under common control have been reflected as related party transactions as disclosed in Note 4 to these financial statements.
Cash equivalents
For purposes of the financial statements, the Company considers demand deposits, certificates of deposit, overnight investments, money market funds and all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents.
Allowance for doubtful accounts
The Company’s allowance for doubtful accounts reflects its current estimate of credit losses expected to be incurred over the life of the financial instrument and is determined based on a number of factors. Management determines the need for any allowance for doubtful accounts receivable based on its review of past-due accounts, its past experience of historical write-offs, its current client base, when customer accounts exceed 90 days past due and specific customer account reviews. While the collectability of outstanding client invoices is continually assessed, the inherent volatility of the energy industry’s business cycle can cause swift and unpredictable changes in the financial stability of the Company’s clients. As of December 31, 2022, there is no recorded allowance for doubtful accounts.
Property, plant and equipment
Property, plant and equipment is capitalized at historical cost or the fair value of assets acquired in a business combination and is depreciated over the useful life of the asset. Management’s estimation of this useful life is based on circumstances that exist in the seismic industry and information available at the time of the purchase of the asset. As circumstances change and new information becomes available, these estimates could change.
Depreciation is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the consolidated balance sheet, and any resulting gain or loss is reflected in the results of operations for the period.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment when triggering events occur suggesting deterioration in the assets’ recoverability or fair value. Recognition of an impairment charge is required if future expected undiscounted net cash flows are insufficient to recover the carrying value of the assets and the fair value of the assets is below the carrying value of the assets. Management’s forecast of future cash flows used to perform impairment analysis includes estimates of future revenues and expenses based on the Company’s anticipated future results, while considering anticipated future oil and natural gas prices which is fundamental in assessing demand for the Company’s services. If the carrying amounts of the assets exceed the estimated expected undiscounted future cash flows, the Company measures the amount of possible impairment by comparing the carrying amount of the assets to the fair value. No impairment charge was recognized for the year ended December 31, 2022.
Leases
The Company adopted ASC 842, Leases, effective January 1, 2022, which had no impact on our financial statements. In connection with the adoption of ASC 842, we elected to not recognize right-to-use assets of lease liabilities for leases with a term of twelve months or less. The Company has not entered into any leases with a term of greater than 12 months. If we were to enter into a lease, we would evaluate each lease to determine its appropriate classification as an operating lease or a finance lease for financial reporting purposes. For the year ended December 31, 2022, we recognized short-term lease expense of $1,075,619, which were included in operating expenses and selling, general and administrative expenses on the statement of operations.
Revenue recognition
Services are provided under cancelable service contracts which usually have an original expected duration of one year or less. These contracts are either turnkey or term agreements. Under both types of agreements, the Company recognizes revenues as the services are performed. Revenue is generally recognized based on square miles of data recorded compared to total square miles anticipated to be recorded on the survey using the total estimated revenue for the service contract. In the case of a cancelled service contract, the client is billed and revenue is recognized for any third party charges and square miles of data recorded up to the date of cancellation.
The Company receives reimbursements for certain out-of-pocket expenses under the terms of the service contracts. The amounts billed to clients are included at their gross amount in the total estimated revenue for the service contract.
Clients are billed as permitted by the service contract. Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. If billing occurs prior to the revenue recognition or billing exceeds the revenue recognized, the amount is considered deferred revenue and a contract liability. Conversely, if the revenue recognition exceeds the billing, the excess is considered an unbilled receivable and a contract asset. As services are performed, those deferred revenue amounts are recognized as revenue. Contract assets consisted of accounts receivable and amounted to $2,447,717 and $1,025,529 as of January 1, 2022, and December 31, 2022, respectively. Contract liabilities consisted of deferred revenue and amounted to $568,482 and $180,764 as of January 1, 2022, and December 31, 2022, respectively. The Company recognized revenue amounting to $568,482 during the year ended December 31, 2022, which was included in deferred revenue as of January 1, 2022. As of December 31, 2022, deferred revenue was $180,764, which relates to projects that have not yet started.
Estimates for total revenue and total fulfillment cost on any service contract are based on certain qualitative and quantitative judgments supported by underlying facts. Management considers a variety of factors such as whether various components of the performance obligation will be performed internally or externally, cost of third party services, and facts and circumstances unique to the performance obligation in making these estimates.
Additionally, the Company’s policy includes (i) ignoring the financing component when estimating the transaction price for service contracts completed within one year, (ii) excluding sales tax collected from the customer when determining the transaction price, and (iii) expensing incremental costs to obtain a customer contract if the amortization period for those costs would otherwise be one year or less.
Income taxes
The Company is organized as a wholly owned limited liability company and treated as a disregarded entity for federal income tax purposes, whereby the ordinary business income or loss and certain deductions are passed-through and reported on the members’ income tax returns. As such, the Company is not required to provide for income taxes and no provision for federal income tax expense or deferred tax asset or liability is recorded. However, certain states subject the Company to entity-level taxation as a limited liability company, however these amounts have not historically been significant.
Use of estimates in the preparation of financial statements
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and (2) the reported amounts of revenue and expenses during the reporting period. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Ultimate results could differ materially from these estimates.
Concentration of credit risk
The Company’s assets that are potentially exposed to concentrations of credit risk consist primarily of cash, and accounts receivable. The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance
Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of
FDIC limits. As of December 31, 2022, the Company held cash of $4,438,749 in excess of FDIC insured amounts. During the year ended December 31, 2022, Waggoner Exploration & Operating, LLC accounted for 88% of total revenue.
| 2. | Fair value of financial instruments |
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases of categorization within the hierarchy upon the lowest level input that is available and significant to the fair value measurement:
• |
| Level One: The use of quoted prices in active markets for identical assets or liabilities. |
• |
| Level Two: Other than quoted prices included in Level One, inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
• |
| Level Three: The use of significantly unobservable inputs that typically require the use of management’s estimates of assumptions that market participants would use in pricing. |
At December 31, 2022, the Company’s financial instruments included cash, accounts receivable, other current assets, accounts payable and, other current liabilities. Due to the short-term maturities of cash, accounts receivable, other current assets, accounts payable and other current liabilities, the carrying amounts approximate fair value at the respective balance sheet dates.
| 3. | Property, plant and equipment |
The following table summarizes the components of our property, plant and equipment, net, and estimated useful lives, as of December 31, 2022:
| | | Useful Lives |
Land | $ | 33,265 | - |
Building and improvements | | 670,582 | 10 to 40 years |
Recording equipment | | 6,456,539 | 3 to 6 years |
Vehicles | | 2,505,337 | 4 to 10 years |
Office equipment and other | | 183,302 | 3 to 10 years |
Gross property and equipment | | 9,849,025 | |
Less accumulated depreciation | | (7,507,851) | |
Property and equipment, net | $ | 2,341,174 | |
| 4. | Related Party Transactions |
In the normal course of business, we entered into transactions with related parties with entities under common control of Wilks. During the year ended December 31, 2022, the Company had transactions with the following related party entities:
Cisco Logistics, LLC (“Cisco Logistics”) is a trucking and logistics company that transfers equipment on behalf of its customers, including Breckenridge. Amounts paid to Cisco Logistics are recorded in operating expenses on our statement of operations.
Interstate Explorations, LLC (“Interstate”) is an exploration and development company for which Breckenridge performs seismic data acquisition and processing services, and from which the Company has a short-term lease for certain office space. Breckenridge recognized revenues of $17,477 from Interstate for the year ended December 31, 2022, which is recorded as revenues on our statement of operations. Amounts incurred from Interstate are recorded in selling, general and administrative expenses on our statement of operations. As of December 31, 2022, accounts receivable due from Interstate was $963,232.
Wilks is a management company which provides administrative support to various businesses within their portfolio. Wilks and certain entities under its control will at times incur expenses on behalf of Breckenridge, billing Breckenridge for these expenses at cost as well as certain management fees. Amounts paid to Wilks are generally recorded in selling, general and administrative expenses on our statement of operations. As of December 31, 2022, accounts payable due to Wilks was $107,852.
3 Twenty-Three, LLC (“3 Twenty-Three”) is a payroll administrator which performs payroll services on behalf of its customers, including Breckenridge. Amounts paid to 3 Twenty-Three are recorded in selling, general and administrative expenses on our statement of operations. As of December 31, 2022, accounts payable due to 3 Twenty-Three was $29,122.
Dawson is a provider of onshore seismic data acquisition and processing services. Breckenridge rented equipment and crews from Dawson to perform seismic data acquisition services, which are recorded in operating expenses on our statement of operations.
The following table summarizes expenses with related parties for the year ended December 31, 2022:
Cisco Logistics | $ | 65,107 |
Interstate | | 26,535 |
Wilks | | 431,825 |
3 Twenty-Three | | 43,065 |
Dawson | | 2,321,084 |
Total | $ | 2,887,616 |
| 5. | Commitments and Contingencies |
We are involved in various legal and regulatory proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal or regulatory proceeding, individually or in the aggregate, would be material to our financial condition, results of operations, or cash flows.
| 6. | Subsequent Events |
The Company has evaluated events subsequent to December 31, 2022, through June 7, 2023, the date these financial statements were made available to be issued, and report the following events:
| (a) | On January 4, 2023, Breckenridge distributed $3.3 million to Wilks. |
Exhibit 99.2
DAWSON GEOPHYSICAL REPORTS
UNAUDITED PROFORMA COMBINED FINANCIAL INFORMATION
On March 24, 2023, Dawson Geophysical Company (“the Company”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Wilks Brothers, LLC (“Wilks”) and Breckenridge Geophysical, LLC (“Breckenridge”), a wholly owned subsidiary of Wilks. Pursuant to the Purchase Agreement, the Company completed the purchase of substantially all of the Breckenridge assets related to seismic data acquisition services other than its multi-client data library, in exchange for a combination of equity consideration and a convertible note (the “Transaction”). As part of the Purchase Agreement, in addition to the 1,188,235 shares of our common stock issued to Wilks at closing, we entered into a convertible note to deliver 5,811,765 shares of newly-issued common stock to Wilks after the Company receives shareholder approval of the proposal to issue the shares upon conversion of the convertible note in accordance with NASDAQ Listing Rule 5635. Until such approval, a convertible note payable amounting to approximately $9.9 million is included in non-current liabilities on the Company’s Consolidated Balance Sheets.
The Purchase Agreement has been accounted for as a transfer of net assets between entities under common control in a manner similar to a pooling of interests. The effects of transactions in Breckenridge’s equity prior to the Transaction have been presented as a separate component of stockholders’ equity in the proforma adjustments on the Unaudited Proforma Combined Balance Sheet.
The Unaudited Proforma Combined Balance Sheet as of December 31, 2022 gives effect to the Purchase Agreement and the Transaction as if each had been completed on December 31, 2022. The Unaudited Proforma Combined Statement of Operations for the year ended December 31, 2022 gives effect to the Purchase Agreement and the Transaction as if each had been completed on January 1, 2022. Assumptions and estimates underlying the proforma adjustments are described in the accompanying notes, which should be read in conjunction with the proforma financial statements.
The proforma financial statements and related notes have been prepared by management in accordance with Article 11 of Regulation S-X, are provided for illustrative purposes only, and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of the Company would have been had the Purchase Agreement and the Transaction occurred on the dates noted above, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. Future results may vary significantly from the results reflected because of various factors. The proforma adjustments are based on currently available information and certain estimates and assumptions that the Company believes provide a reasonable basis for presenting the significant effects of the Purchase Agreement.
The proforma financial statements and related notes do not reflect the benefits of projected efficiencies, potential cost savings or the costs that may be necessary to achieve such savings, opportunities to increase revenue generation or other factors that may result from the Purchase Agreement and, accordingly, do not attempt to predict or suggest future results. Management cannot identify the timing, nature and amount of such savings, costs or other factors, any of which could affect the future consolidated results of operations or consolidated financial position of the Company.
The unaudited proforma financial statements have been developed from and should be read in conjunction with:
| ● | The audited consolidated financial statements and accompanying notes of Dawson Geophysical Company contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022; and |
| ● | The audited consolidated financial statements and related notes of Breckenridge for the year ended December 31, 2022, which are filed as Exhibit 99.1 to the Current Report on this Form 8-K/A. |
DAWSON GEOPHYSICAL COMPANY
UNAUDITED PROFORMA COMBINED BALANCE SHEET
December 31, 2022
(amounts in thousands, except share data)
| Dawson Geophysical | | Breckenridge | | | | | Proforma | |||
| Company Historical | | Geophysical, LLC | | Proforma | | Combined | ||||
| Amounts | | Historical Amounts | | Adjustments | | Amounts | ||||
Assets | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 13,914 | | $ | 4,689 | | $ | | | $ | 18,603 |
Restricted cash | | 5,000 | | | | | | | | | 5,000 |
Short-term investments | | 265 | | | | | | | | | 265 |
Accounts receivable, net | | 6,945 | | | 1,027 | | | | | | 7,972 |
Employee retention credit receivable | | 3,035 | | | | | | | | | 3,035 |
Prepaid expenses and other current assets | | 8,876 | | | 75 | | | | | | 8,951 |
Total current assets | | 38,035 | | | 5,791 | | | — | | | 43,826 |
| | | | | | | | | | | |
Property and equipment, net | | 18,127 | | | 2,341 | | | | | | 20,468 |
Right-of-use assets | | 4,010 | | | | | | | | | 4,010 |
Intangibles, net | | 369 | | | | | | | | | 369 |
Total assets | $ | 60,541 | | $ | 8,132 | | $ | — | | $ | 68,673 |
| | | | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | |
Accounts payable | $ | 4,015 | | $ | 125 | | $ | | | $ | 4,140 |
Accrued liabilities: | | | | | | | | | | | |
Payroll costs and other taxes | | 1,973 | | | 28 | | | | | | 2,001 |
Other | | 1,178 | | | 102 | | | | | | 1,280 |
Deferred revenue | | 7,199 | | | 181 | | | | | | 7,380 |
Current maturities of notes payable and finance leases | | 275 | | | | | | | | | 275 |
Current maturities of operating lease liabilities | | 1,118 | | | | | | | | | 1,118 |
Total current liabilities | | 15,758 | | | 436 | | | — | | | 16,194 |
| | | | | | | | | | | |
Long-term liabilities: | | | | | | | | | | | |
Notes payable and finance leases, net of current maturities | | 207 | | | | | | | | | 207 |
Convertible note payable to controlling shareholder | | — | | | | | | 9,880 | (a) | | 9,880 |
Operating lease liabilities, net of current maturities | | 3,331 | | | | | | | | | 3,331 |
Deferred tax liabilities, net | | 136 | | | 1 | | | | | | 137 |
Total long-term liabilities | | 3,674 | | | 1 | | | 9,880 | | | 13,555 |
| | | | | | | | | | | |
Stockholders' equity: | | | | | | | | | | | |
Common stock | | 238 | | | | | | 12 | (b) | | 250 |
Additional paid-in capital | | 155,413 | | | | | | (2,197) | (c) | | 153,216 |
Accumulated deficit | | (112,469) | | | | | | | | | (112,469) |
Equity of Breckenridge prior to acquisition | | — | | | 7,695 | | | (7,695) | (d) | | — |
Accumulated other comprehensive loss, net | | (2,073) | | | | | | | | | (2,073) |
Total stockholders' equity | | 41,109 | | | 7,695 | | | (9,880) | | | 38,924 |
| | | | | | | | | | | |
Total liabilities and stockholders' equity | $ | 60,541 | | $ | 8,132 | | $ | — | | $ | 68,673 |
DAWSON GEOPHYSICAL COMPANY
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2022
(amounts in thousands, except share and per share data)
| Dawson Geophysical | | Breckenridge | | | | | Proforma | |||
| Company Historical | | Geophysical, LLC | | Proforma | | Combined | ||||
| Amounts | | Historical Amounts | | Adjustments | | Amounts | ||||
Operating revenues | $ | 37,480 | | $ | 16,891 | | $ | (2,201) | (e) | $ | 52,171 |
| | | | | | | | | | | |
Operating costs: | | | | | | | | | | | |
Operating expenses | | 37,910 | | | 11,164 | | | (2,201) | (e) | | 46,873 |
General and administrative | | 13,785 | | | 1,728 | | | | | | 15,513 |
Depreciation and amortization | | 9,795 | | | 2,129 | | | | | | 11,924 |
| | 61,490 | | | 15,020 | | | (2,201) | | | 74,309 |
| | | | | | | | | | | |
(Loss) income from operations | | (24,010) | | | 1,872 | | | — | | | (22,138) |
| | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | |
Interest income | | 316 | | | 1 | | | | | | 317 |
Interest expense | | (31) | | | | | | | | | (31) |
Other income (expense), net | | 415 | | | (4) | | | | | | 411 |
Gain from employee retention credit | | 2,966 | | | | | | | | | 2,966 |
(Loss) income before income tax | | (20,344) | | | 1,869 | | | — | | | (18,475) |
| | | | | | | | | | | |
Income tax benefit (expense): | | | | | | | | | | | |
Current | | 9 | | | | | | | | | 9 |
Deferred | | (116) | | | | | | | | | (116) |
| | (107) | | | — | | | — | | | (107) |
| | | | | | | | | | | |
Net (loss) income | $ | (20,451) | | $ | 1,869 | | $ | — | | $ | (18,582) |
| | | | | | | | | | | |
Basic loss per share of common stock | $ | (0.86) | | $ | — | | $ | 0.12 | (f) | $ | (0.74) |
| | | | | | | | | | | |
Diluted loss per share of common stock | $ | (0.86) | | $ | — | | $ | 0.12 | (f) | $ | (0.74) |
| | | | | | | | | | | |
Weighted average equivalent common shares outstanding | | 23,782,796 | | | — | | | 1,188,235 | (f) | | 24,971,031 |
| | | | | | | | | | | |
Weighted average equivalent common shares outstanding | | | | | | | | | | | |
- assuming dilution | | 23,782,796 | | | — | | | 1,188,235 | (f) | | 24,971,031 |
NOTES TO UNAUDITED COMBINED PROFORMA FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited proforma combined financial information was prepared based on the audited historical consolidated financial statements of Breckenridge and the audited historical consolidated financial statements of the Company, in each case, as of and for the year ended December 31, 2022. The Purchase Agreement has been accounted for as a transfer of net assets between entities under common control in a manner similar to a pooling of interests. The fair value of the consideration paid by the Company and allocation of that amount to the underlying assets acquired will be recorded by the Company as of the date of the closing of the Purchase Agreement. Costs directly related to the Purchase Agreement are expensed as incurred.
The Unaudited Proforma Combined Statement of Operations for the year ended December 31, 2022 was prepared assuming the Purchase Agreement and Transaction occurred on January 1, 2022. The Unaudited Proforma Combined Balance Sheet as of December 31, 2022 was prepared as if the Purchase Agreement and Transaction occurred on December 31, 2022.
The unaudited proforma combined financial information and related notes are presented for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of the Company would have been had the Purchase Agreement and Transaction occurred on the dates noted above, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. If the Purchase Agreement and the Transaction had occurred in the past, the Company’s operating results might have been materially different from those presented in the unaudited proforma combined financial information. The unaudited proforma combined financial information should not be relied upon as an indication of operating results that the Company would have achieved if the Purchase Agreement and the Transaction had taken place on the dates noted above. In addition, future results may vary significantly from the results reflected in the unaudited proforma combined financial statement of operations and should not be relied upon as an indication of the future results the Company will have after the consummation of the Purchase Agreement and the Transaction. The proforma adjustments are based on currently available information and certain estimates and assumptions that the Company believes provide a reasonable basis for presenting the significant effects of the Purchase Agreement.
Consideration and Purchase Price Allocation
The preliminary allocation of the total purchase price in the Purchase Agreement is based upon Breckenridge’s audited historical financial statements.
Total consideration for the asset purchase is as follows (in thousands):
Consideration Paid | | March 24, 2023 | |
Common stock issued | | $ | 2,020 |
Note payable issued | | | 9,880 |
Purchase price | | $ | 11,900 |
Because the Transaction constitutes a transaction among entities under common control, the excess purchase price over the historical carrying value of the net assets acquired was recorded as a charge to additional paid in capital. The excess purchase price over the historical carrying value of the assets at the acquisition date (unaudited and in thousands) is as follows:
Excess Purchase Price | | March 24, 2023 | |
Purchase price | | $ | 11,900 |
Historical carrying value of assets acquired | | | (1,335) |
Excess purchase price | | $ | 10,565 |
Notes detailing adjustments to Unaudited Proforma Combined Balance Sheet and Unaudited Proforma Combined Statement of Operations
The unaudited proforma combined financial information has been compiled in a manner consistent with the accounting policies adopted by the Company.
The proforma adjustments are based on currently available information and certain estimates and assumptions that the Company believes provide a reasonable basis for presenting the significant effects of the Purchase Agreement. General descriptions of the proforma adjustments are provided below.
| (a) | Upon execution of the Purchase Agreement on March 24, 2023, the Company delivered to Wilks a convertible promissory note in the principal amount of $9,880,000.50 payable on or after June 30, 2024 that, upon the terms and subject to the conditions described therein, will automatically convert into 5,811,765 newly–issued shares of common stock at a conversion price equal to $1.70 per share, subject to adjustments as described in the convertible note, after the Company receives shareholder approval of the proposal to issue the shares upon conversion of the convertible note in accordance with NASDAQ Listing Rule 5635. |
| (b) | This amount represents the par value of $0.01 per share for the 1,188,235 shares issued to Wilks upon execution of the Purchase Agreement on March 24, 2023. |
| (c) | This amount represents the impact to additional paid-in capital resulting from the shares issued associated with the Purchase Agreement and the reduction of Breckenridge’s pre-acquisition equity attributable to Wilks. |
The following is a summary of the proforma adjustment amount:
Fair Value of common stock issued | | $ | 2,020 |
Less: par value of common stock issued | | | (12) |
Less: excess purchase price over net assets of Breckenridge as of December 31, 2022 | | | (4,205) |
| | $ | (2,197) |
| (d) | This amount represents the equity of Breckenridge prior to the execution of the Purchase Agreement on March 24, 2023. |
| (e) | This amount represents all transactions between the Company and Breckenridge for the year ended December 31, 2022 that are being retrospectively eliminated on a combined, as pooled basis. For the year ended December 31, 2022, the Company recorded approximately $2,200,000 of related party revenue from Breckenridge. Note that sales tax charged to Breckenridge amounting to approximately $120,000 was included in operating expenses on Dawson’s Historical Consolidated Statement of Operations. |
| (f) | This amount represents the effect of the issuance of the 1,188,235 shares issued to Wilks upon execution of the Purchase Agreement as if such issuance had occurred on January 1, 2022. |