10-K 1 a14-2710_110k.htm ANNUAL REPORT PURSUANT TO SECTION 13 AND 15(D)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                   .

 

Commission File Number 001-32472

 

TGC INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

Texas

 

74-2095844

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

101 East Park Blvd., Suite 955, Plano, Texas

 

75074

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (972) 881-1099

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $.01 per share

 

The NASDAQ Stock Market LLC

(Title of Class)

 

(Name of exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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.

 

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

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 x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $130,375,834.

 

Number of shares of Common Stock outstanding as of March 3, 2014:  21,957,167

 

Documents incorporated by reference

 

Listed below are documents, parts of which are incorporated herein by reference, and the part of this report into which the document is incorporated:

 

Proxy statement for the 2014 annual meeting of shareholders — Part III

 

 

 



 

Part I

 

Information Regarding Forward-Looking Statements

 

This Form 10-K includes “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our view with respect to future events.  We base these forward-looking statements on our current expectations and projections about future events.  These forward-looking statements are subject to risks, uncertainties, and assumptions about us, including:

 

·                  dependence upon energy industry spending for seismic data acquisition services;

 

·                  changes in economic conditions;

 

·                  the unpredictable nature of forecasting weather;

 

·                  the potential for contract delay or cancellation;

 

·                  the potential for fluctuations in oil and natural gas prices; and

 

·                  the availability of capital resources.

 

We use the words “may,” “will,” “can,” “could,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “target,” “continue,” “intend,” “plan,” “budget,” and other similar words to identify forward-looking statements.  You should read statements that contain these words carefully because they discuss future expectations, contain projections of results of operations or of our financial condition, and/or state other “forward-looking” information.  We do not undertake any obligation to update or revise publicly any forward-looking statements, except as required by law.  These statements also involve risks and uncertainties that could cause our actual results or financial condition to differ materially from our expectations in this Form 10-K.

 

We believe that it is important to communicate our expectations of future performance to our investors.  However, events may occur in the future that we are unable to accurately predict or over which we have no control.  When considering our forward-looking statements, you should keep in mind the risk factors and other cautionary statements contained in this Form 10-K and other factors noted throughout this Form 10-K.  There are many risks, uncertainties, and events that may cause our actual results to differ materially from those contained in any forward-looking statement. Please read the section entitled “Risk Factors” for a discussion of certain risks of our business and an investment in our common stock.

 

ITEM 1. BUSINESS.

 

General

 

TGC Industries, Inc. is a Texas corporation, and its wholly-owned subsidiary, Eagle Canada, Inc., a Delaware corporation (collectively “TGC” or the “Company”), are primarily engaged in the geophysical service business of conducting three-dimensional (“3-D”) surveys for clients in the oil and gas business.  TGC’s principal business office is located at 101 E. Park Blvd., Suite 955, Plano, Texas 75074 (Telephone: 972-881-1099).  TGC’s internet address is www.tgcseismic.com.  TGC makes available free of charge on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K as soon as reasonably practicable after filing or furnishing such information with the Securities and Exchange Commission.

 

In April of 1980, Supreme Industries, Inc. (“Supreme”), formerly ESI Industries, Inc., formed a wholly-owned subsidiary, Tidelands Geophysical Co., Inc. (“Tidelands”) that acquired certain equipment, instruments, and related supplies from a Houston-based corporation that was engaged in the business of conducting seismic, gravity, and magnetic surveys under contracts for oil and natural gas companies.  On June 30, 1986, the Boards of Directors of Supreme and Tidelands approved a spin-off of substantially all of the shares of Tidelands owned by Supreme which were distributed as a stock dividend to Supreme’s security holders.  In July of 1986, our name was changed from “Tidelands Geophysical Co., Inc.” to “TGC Industries, Inc.” (“TGC”).

 

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Overview

 

We are a leading provider of seismic data acquisition services throughout the continental United States and Canada.  As of December 31, 2013, we operated eight seismic crews consisting of five crews in the U.S. and three crews in Canada.  These seismic crews supply seismic data primarily to companies engaged in the exploration and development of oil and natural gas on land and in land-to-water transition areas.  Seismic acquisition services of our wholly-owned subsidiary, Eagle Canada, Inc. (“Eagle Canada”) are also used by the potash mining industry in Canada, and Eagle Canada has particular expertise through its heliportable capabilities.  Our customers rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of existing hydrocarbons, to optimize the development and production of hydrocarbon reservoirs, to better delineate existing oil and natural gas fields, and to augment reservoir management techniques.

 

We acquire geophysical data using the latest in 3-D survey techniques. We introduce acoustic energy into the ground by using vibration equipment or dynamite detonation, depending on the surface terrain and subsurface requirements. The reflected energy, or echoes, is received through geophones, converted into a digital signal at a multi-channel recording unit, and then transmitted to a central recording vehicle. Subsurface requirements dictate the number of channels necessary to perform our services. With our state-of-the-art seismic equipment, including computer technology and multiple channels, we acquire, on a cost effective basis, immense volumes of seismic data that, when processed and interpreted, produce more precise images of the earth’s subsurface. Our customers then use our seismic data to generate 3-D geologic models that help reduce finding costs and improve recovery rates from existing wells.

 

The Industry

 

Technological advances in seismic equipment and computing allow the seismic industry to acquire and process, on a cost-effective basis, immense volumes of seismic data which produce precise images of the earth’s subsurface.  The latest accepted method of seismic data acquisition, processing, and the subsequent interpretation of the processed data is the 3-D seismic method.  Geophysicists use computer workstations to interpret 3-D data volumes, identify subsurface anomalies, and generate a geologic model of subsurface features.

 

3-D seismic data are used in the exploration and development of new reserves and enable oil and natural gas companies to better delineate existing fields and to augment their reservoir management techniques. Benefits of incorporating high resolution 3-D seismic surveys into exploration and development programs include reducing drilling risk, decreasing oil and natural gas finding costs, and increasing the efficiencies of reservoir location, delineation, and management. In order to meet the requirements necessary to fully realize the benefits of 3-D seismic data, there is an increasing demand for improved data quality with greater subsurface resolution.

 

Currently, the seismic data acquisition industry is made up of a number of companies divided into two groups. The first group is made up of three publicly-traded companies with long operating histories that field numerous crews and work in a number of different regions and terrain.  This group includes us, Dawson Geophysical Company, and CGG-Veritas.  We believe that these companies field approximately half of the seismic crews currently operating in the continental U.S. and Canada.  The second group is made up of smaller companies which generally run one or two seismic crews and often specialize in specific regions or types of operations.

 

We provide our seismic data acquisition services primarily to onshore oil and natural gas exploration and development companies for use in the onshore drilling and production of oil and natural gas in the continental U.S. and Canada. The main factors influencing demand for seismic data acquisition services in our industry are the levels of drilling activity by oil and natural gas companies and the sizes of such companies’ exploration and development budgets, which, in turn, depend largely on current and anticipated future crude oil and natural gas prices and depletion rates.

 

Equipment and Crews

 

During 2011 and 2012, an increase in the demand for seismic services allowed for an expansion of the Company’s crew count from eleven crews at December 31, 2010, to twelve crews at December 31, 2011, and to fourteen crews at December 31, 2012.  Demand for seismic services softened beginning early in 2013, and as a result we decreased our crew count throughout the year, ending 2013 with eight crews.

 

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In January of 2011, the Company acquired its second new 3,000 channel OYO Geospace Seismic Recording System (“GSR System”) financed by a note payable with a commercial lender.  This new GSR System uses cable-free/radio-free autonomous nodal data recorders which have a built-in GPS and disciplined clock. The GSR System provides for up to 30 days of continuous data recording.  This system is fully compatible with our ARAM recording equipment. In addition, our crews continue to utilize the state-of-the-art ARAM ARIES recording systems.  These systems employ cable telemetry technology enhanced by multiple baseline and redundant cable connections that provide seismic data acquisition services with increased reliability.  In April of 2011, the Company purchased an additional 2,500 channels with existing cash that were added to this system.  In May of 2011, the Company purchased five new INOVA vibration vehicles with existing cash.  In July of 2011, the Company acquired its third new GSR System financed by a note payable to a commercial bank.  The third GSR System contains 5,000 channels.  In September of 2011, we purchased with existing cash an additional 5,000 channels of ARAM equipment to supplement existing ARAM systems.  In October of 2011, the Company purchased two new INOVA vibration vehicles with existing cash.  In November of 2011, the Company purchased an additional 3,000 channels of GSR equipment with existing cash.  In January of 2012, we purchased an additional 14,200 channels of GSR equipment financed by existing cash and a note payable to a commercial bank.  In April of 2012, the Company purchased seven new INOVA vibration vehicles with existing cash.  Also in April of 2012, the Company purchased 13,000 channels of GSR equipment financed partially with existing cash and partially by a note payable to a commercial bank.  In October of 2012, we purchased 8,000 stations of 3-channel GSX wireless recording system along with all peripheral equipment.  GSX wireless recording systems are the most current GSR wireless recording systems available.  The purchase of the OYO Geospace GSX recording system equipment was financed partially with existing cash and partially by a note payable to a commercial bank.  Beginning early in 2013, we experienced a softening in demand for seismic services and, as a result, the Company adopted a maintenance capital expenditures program curtailing large equipment purchases for the duration of the year and continuing into early 2014.

 

We currently own equipment for 16 land-based seismic data acquisition crews and 73 vibration vehicles.  Each crew consists of approximately 40 to 80 technicians with associated vehicles, geophones, a seismic recording system, energy sources, cables, and a variety of other equipment. Each ARAM crew has one central recording vehicle which captures seismic data. The GSR and GSX crews utilize a recorder to manage the data acquisition while the individual system captures and holds the data until they are placed in the Data Transfer Module.  The data is then transferred to a CD ROM or data tape which is delivered to a data processing center selected by the customer.

 

Capital Expenditures

 

We believe that it is essential to take advantage of advances in seismic technology and to commit capital to purchase and update our equipment cost-effectively. Purchasing and updating seismic equipment and technology involves a commitment to capital spending.  We also tie our capital expenditures closely to demand for our services. As a result, due to softening in demand for seismic services beginning early in 2013, the Company adopted a maintenance capital expenditures program curtailing large equipment purchases for the duration of 2013 and continuing into early 2014.  During the year ended December 31, 2013, we made capital expenditures of approximately $2,475,000, primarily to maintain existing equipment.  During the year ended December 31, 2012, capital expenditures of approximately $57,108,000 were used to acquire, maintain, and replace seismic equipment and vehicles. Major purchases in 2012 included our fourth GSR System with 7,200 channels, our fifth GSR System with 7,000 channels, our sixth GSR System with 13,000 channels, some of which were added to existing systems, an 8,000 station 3-channel GSX wireless recording system, and seven new INOVA vibration vehicles.  During the year ended December 31, 2011, capital expenditures of approximately $30,730,000 were used to acquire, maintain, and replace seismic equipment and vehicles. Major purchases in 2011 included our second GSR System with 3,000 channels to which we added an additional 2,500 channels, our third GSR System with 5,000 channels, an additional 3,000 GSR System channels which were added to existing systems, 5,000 additional ARAM channels, and seven new INOVA vibration vehicles.  These major investments should continue to bring us the benefits of these new technologies and allow us to be in a cash building mode in 2014.

 

Customers

 

Our customers are major and independent oil and natural gas exploration and development companies. The services we provide to our customers vary according to the size and needs of each customer.  Our services are marketed by supervisory and executive personnel who contact customers to determine their needs and respond to customer inquiries regarding the availability of crews. Contacts are based principally upon professional relationships developed over a number of years.

 

During 2013, our largest customer accounted for approximately 12% of revenues.  During 2012, our largest customer accounted for approximately 16% of revenues.  During 2011, our largest customer accounted for approximately 17% of revenues.  At December 31, 2013 and December 31, 2012, our backlog was approximately $52 million and $81 million, respectively.  We filled our 2012 backlog during fiscal 2013, and anticipate filling our 2013 backlog during fiscal year 2014.  Due to our backlog, we would not expect the loss of any single customer to have a material adverse effect on our operations.

 

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In order to avoid potential conflicts of interest with our customers, we do not participate in oil and natural gas ventures. The results of a seismic survey conducted for a customer belong to that customer. All of our customers’ information is maintained in strictest confidence.

 

Contracts

 

Our contracts are obtained either through competitive bidding or as a result of customer negotiations. Our services are conducted under general service agreements for seismic data acquisition services which define certain obligations for us and for our customers. A supplemental agreement setting forth the terms of a specific project, which may be cancelled by either party upon 30 days’ advance written notice, is entered into for every project. We currently operate under supplemental agreements that are either “turnkey” agreements providing for a fixed fee to be paid to us for each unit of data acquired or “term” agreements providing for a fixed hourly, daily, or monthly fee during the term of the project or projects.

 

Competition

 

The acquisition of seismic data for the oil and natural gas industry is a highly competitive business.  Contracts for such services generally are awarded on the basis of price quotations, crew experience, and the availability of crews to perform in a timely manner, although factors other than price, such as crew safety, performance history, and technological and operational expertise, are often determinative. Our competitors include companies with financial resources that are significantly greater than our own as well as companies of comparable and smaller size. Our primary competitors are Dawson Geophysical Company and CGG-Veritas.  In addition to the previously named companies, we also compete for projects from time to time with smaller seismic companies which operate in local markets with only one or two crews.

 

Employees

 

As of December 31, 2013, we employed a total of 653 full-time employees, of which 32 consisted of management, sales, and administrative personnel with the remainder being crew and crew support personnel.  We believe our relationship with our employees to be satisfactory.

 

Operating Risks and Insurance

 

Our business is subject to the hazards inherent in conducting seismic data acquisition activities in hostile environments with dangerous machinery, and in some instances explosives. These activities can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment, and marine life, and suspension of operations.

 

In addition, we could be subject to personal injury or real property damage claims in the normal operation of our business. Such claims may not be covered by the indemnification provisions in our general service agreements to the extent that the damage is due to our negligence or intentional misconduct.

 

We do not carry insurance against certain risks that we could experience such as business interruption resulting from equipment maintenance or weather delays. We obtain insurance against certain property and personal casualty risks and other risks when such insurance is available and when our management considers it advisable to do so. Currently, our insurance coverage consists of employers’ liability with limits of $1,000,000 per accident and $2,000,000 in the aggregate, commercial general liability of $1,000,000 per accident and $2,000,000 in the aggregate, pollution liability of $1,000,000 per accident and $2,000,000 in the aggregate, automobile liability with a $1,000,000 combined single limit, and a $20,000,000 umbrella policy. Our general service agreements require us to have specific amounts of insurance.  Management believes that the Company’s insurance coverage is adequate.  There can be no assurance, however, that any insurance obtained by us will be adequate to cover any losses or liabilities, or that this insurance will continue to be available or available on terms which are acceptable to us. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us.

 

ITEM 1A.  RISK FACTORS

 

Any investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information included in this Form 10-K before purchasing our common stock. Although the risks described below are the risks that we believe are material, they are not the only risks relating to our business and our common stock. Additional risks and uncertainties, including those that are not yet identified or that we currently believe are immaterial, may also adversely affect our business, financial condition, or results of operations. If any of the events described below occur, our business and financial results could be materially and adversely affected. The market price of our common stock could decline due to any of these risks, perhaps significantly, and you could lose part or all of your investment.

 

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Company Risks

 

We may incur losses.

 

We reported net loss of approximately $6,316,000 for the year ended December 31, 2013, compared to net income of approximately $15,672,000 for the year ended December 31, 2012, and net income of $10,833,000 for the year ended December 31, 2011. We also reported net loss for 2010 and net income for the years ended December 31, 2009, 2008, and 2007.  Our ability to be profitable in the future will depend on many factors beyond our control, but primarily on the level of demand for land-based seismic data acquisition services by oil and natural gas exploration and development companies.  Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

 

Our revenues and operating results can be expected to fluctuate from period to period.

 

Our revenues, operating results, and profitability may fluctuate from period to period. These fluctuations are attributable to the level of new business in a particular period, the timing of the initiation, progress, or cancellation of significant projects, higher revenues and expenses on our dynamite contracts, and costs we incur to train new crews we may add in the future to meet increased customer demand. Fluctuations in our operating results may also be affected by other factors that are outside of our control such as permit delays, weather delays, and crew productivity. Oil and natural gas prices continued to be volatile during the year ended December 31, 2013, and have resulted in demand fluctuations for our services. There can be no assurance of future oil and gas price levels or stability.  The demand for our services will be adversely affected by a significant reduction in oil and natural gas prices and by climate change legislation or material changes to U.S. energy policy.  Since our business has high fixed costs, the negative effect of one or more of these factors could trigger wide variations in our operating revenues, EBITDA margin, and profitability from quarter-to-quarter, which these factors render quarter-to-quarter comparisons unreliable as an indicator of performance.  Due to the factors discussed above, you should not expect sequential growth in our quarterly revenues and profitability.

 

We face intense competition in our business from companies with greater financial resources.

 

The seismic data acquisition services industry is a highly competitive business in the continental U.S. and Canada.  Our competitors include companies with financial resources that are significantly greater than our own as well as companies of comparable and smaller size.

 

We are subject to Canadian foreign currency exchange rate risk.

 

We conduct business in Canada which subjects us to foreign currency exchange rate risk.  Our results of operations and our cash flows could be impacted by changes in foreign currency exchange rates.

 

Technological change in our business creates risks of technological obsolescence and requirements for future capital expenditures. If we are unable to keep up with these technological advances, we may not be able to compete effectively.

 

Seismic data acquisition technologies historically have steadily improved and progressed, and we expect this progression to continue. Our strategy had been to upgrade our seismic data acquisition equipment on a regular basis to maintain our competitive position, however, we currently have in place a maintenance capital expenditures policy.  We are in a capital intensive industry and have limitations on our ability to obtain the financing necessary to enable us to purchase state-of-the-art equipment, some of our competitors may be able to purchase newer equipment when we may not be able to do so.

 

We are dependent on our management team and key employees, and the loss of any of them could harm our business.

 

We have limited management depth with the result of the loss, whether by death, departure, or illness, of Wayne A. Whitener, our President and Chief Executive Officer, or other senior executives could have a material adverse effect on the ability of management to continue operations at the same level of efficiency. We have key man insurance on the life of our President and Chief Executive Officer so that, in the event of his untimely death, we would receive insurance proceeds of $1,000,000 under this policy.

 

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Certain members of our management team are not subject to employment or non-competition agreements and may leave our employment at any time.

 

Our President and Chief Executive Officer and a salesman, and the President and an Operations Supervisor of Eagle Canada are subject to employment agreements and non-competition agreements.  Members of our management team who are not subject to employment or non-competition agreements could leave upon little or no notice, which could have a material adverse effect on our management’s ability to continue operations at the same level of effectiveness. Additionally, the lack of non-competition agreements would allow these members of our management team to immediately begin working for one of our competitors upon the termination of their relationship with us. This could have a negative impact on our strategic plan and our relationships with customers.

 

We extend credit to our customers without requiring collateral, and a default by a customer could have a material adverse effect on our operating revenues.

 

We perform ongoing credit evaluations of our customers’ financial conditions and, generally, require no collateral from our customers. A default in payment from one of our large customers could have a material adverse effect on our operating revenues for the period involved.

 

Certain of our core assets are pledged as collateral for short term notes that require large monthly payments.

 

Certain assets that are critical to our operations, including a 5,000 channel GSR System, acquired in 2011, an additional 7,200 channels of GSR equipment acquired in 2012, two GSR Systems with a total of 13,000 channels acquired in 2012, and an 8,000 station GSX system acquired in 2012 are pledged as collateral to commercial banks and could be subject to foreclosure in the event that we default on our indebtedness having 36 to 60 month terms.  We currently have debt obligations covering the purchase of this equipment that require monthly payments between approximately $128,000 and $223,000.  These debt obligations mature at various dates ranging from August of 2014 to January of 2017.  Any decline in our operations could inhibit our ability to make these substantial monthly payments. In view of the short terms of these notes, a failure to make the monthly payments on these notes could cause our lenders to foreclose quickly on the assets securing these notes.  The foreclosure on certain of our core assets securing these notes could severely limit our ability to continue operations.

 

We may be subject to liability claims that are not covered by our insurance.

 

Our business is subject to the general risks inherent in land-based seismic data acquisition activities. Our activities are often conducted in remote areas under dangerous conditions including the detonation of dynamite. These operations are subject to risks of injury to personnel and damage to equipment.  Our crews are mobile, and equipment and personnel are subject to vehicular accidents.  These risks could cause us to experience equipment losses, injuries to our personnel, and interruptions in our business.

 

In addition, we could be subject to personal injury or real property damage claims in the normal operation of our business.  Such claims may not be covered under the indemnification provisions contained in our general service agreements to the extent that the damage is due to our negligence or intentional misconduct.

 

We do not carry insurance against certain risks that could cause losses, including business interruption resulting from equipment maintenance or weather delays (see “Business - Operating Risks and Insurance”).

 

Our general service agreements require us to have specific amounts of insurance. There can be no assurance, however, that any insurance obtained by us will be adequate to cover all losses or liabilities or that this insurance will continue to be available or available on terms which are acceptable to us. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a materially adverse effect on us.

 

We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to maintain compliance with Section 404, or if the costs related to maintaining compliance are significant, our profitability, stock price, and results of operations and financial condition could be materially adversely affected.

 

If we are unable to maintain adequate internal controls in accordance with Section 404, as such standards are amended, supplemented, or modified from time to time, we may not be able to ensure that we have effective internal controls over financial reporting on an ongoing basis in accordance with Section 404.  Failure to achieve and maintain effective internal controls could have a material adverse effect on our stock price.  In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing, and/or require additional expenditures to comply with these requirements, each of which could negatively impact our business, profitability, and financial condition.

 

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Industry Risks

 

We derive nearly all of our revenues from companies in the oil and natural gas exploration and development industry, a historically cyclical industry, with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices.

 

Any prolonged reduction in the overall level of exploration and development activities, whether resulting from changes in oil and natural gas prices or otherwise, could adversely impact us in many ways by negatively affecting:

 

·                  our revenues, cash flows, and profitability;

 

·                  our ability to maintain or increase our borrowing capacity;

 

·                  our ability to obtain additional capital to finance our business and the cost of that capital; and

 

·                  our ability to attract and retain skilled personnel whom we would need in the event of an upturn in the demand for our services.

 

Worldwide political, economic, and military events have contributed to oil and natural gas price volatility and are likely to continue to do so in the future. Depending on the market prices of oil and natural gas, oil and natural gas exploration and development companies may cancel or curtail their drilling programs, thereby reducing demand for our services. Oil and natural gas prices have been highly volatile historically and, we believe, will continue to be so in the future. Many factors beyond our control affect oil and natural gas prices including:

 

·                  the cost of exploring for, producing, and delivering oil and natural gas;

 

·                  the discovery rate of new oil and natural gas reserves;

 

·                  the rate of decline of existing and new oil and natural gas reserves;

 

·                  available pipeline and other oil and natural gas transportation capacity;

 

·                  the ability of oil and natural gas companies to raise capital;

 

·                  actions by OPEC (the Organization of Petroleum Exporting Countries);

 

·                  political instability in the Middle East and other major oil and natural gas producing regions;

 

·                  economic conditions in the U.S. and elsewhere;

 

·                  domestic and foreign tax policy;

 

·                  domestic and foreign energy policy including the ever increasing emphasis on alternative sources of energy;

 

·                  weather conditions in the U.S. and elsewhere;

 

·                  the pace adopted by foreign governments for the exploration, development, and production of their national reserves;

 

·                  the price of foreign imports of oil and natural gas; and

 

·                  the overall supply and demand for oil and natural gas.

 

·                  An economic downturn could adversely affect our revenues and cash flows if our customers and/or potential customers, become unable to pay, or must delay payment of, amounts owing to the Company because such customers are not successful in generating revenues or are precluded from securing necessary financing.

 

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The high fixed costs of our operations could result in operating losses.

 

Companies within our industry are typically subject to high fixed costs which consist primarily of depreciation (a non-cash item) and maintenance expenses associated with seismic data acquisition and equipment and crew costs. In addition, ongoing maintenance capital expenditures, as well as new equipment investment, can be significant. As a result, any extended periods of significant downtime or low productivity caused by reduced demand, weather interruptions, equipment failures, permit delays, or other causes could result in operating losses.

 

We and our customers may be adversely affected by an economic downturn.

 

An economic downturn could have a material adverse effect on our financial results and proposed plan of operations and could lead to further significant fluctuations in the demand for and pricing of oil and gas.  Reduced demand and pricing pressures could adversely affect the financial condition and results of operations of our customers and their ability to purchase our services.  We are not able to predict the timing, extent, and duration of the economic cycles in the markets in which we operate.

 

Our operations are subject to delays related to obtaining land access rights of way from third parties which could affect our results of operations.

 

Our seismic data acquisition operations could be adversely affected by our inability to obtain timely right of way usage from both public and private land and/or mineral owners. Delays associated with obtaining such rights of way could negatively affect our results of operations.

 

Our business is subject to government regulation which may adversely affect our future operations.

 

Our operations are subject to a variety of federal, state, and provincial and local laws and regulations, including laws and regulations relating to the protection of the environment and archeological sites and those that may result from climate change legislation.  Canadian operations have been historically cyclical due to governmental restrictions on seismic acquisition during certain periods.  As a result, there is a risk that there will be a significant amount of unused equipment during those periods.  We are required to expend financial and managerial resources to comply with such laws and related permit requirements in our operations, and we anticipate that we will continue to be required to do so in the future. Although such expenditures historically have not been material to us, the fact that such laws or regulations change frequently makes it impossible for us to predict the cost or impact of such laws and regulations on our future operations. The adoption of laws and regulations that have the effect of reducing or curtailing exploration and development activities by energy companies could also adversely affect our operations by reducing the demand for our services.

 

Risks Related To Our Common Stock

 

Our common stock has experienced, and may continue to experience, price volatility and low trading volume.

 

Our stock price is subject to significant volatility. Overall market conditions, including a decline in oil and natural gas prices and other risks and uncertainties described in this “Risk Factors” section and elsewhere in this Form 10-K, could cause the market price of our common stock to fall. The high and low sales prices of our common stock for the year ended December 31, 2013, were $10.43 and $6.31, respectively.

 

Our common stock is listed on the NasdaqGS Stock Market under the symbol “TGE.” However, daily trading volumes for our common stock are, and may continue to be, relatively small compared to many other publicly traded securities.  For example, during 2013 our daily trading volume was as low as 8,100 shares.  It may be difficult for you to sell your shares in the public market at any given time at prevailing prices, and the price of our common stock may, therefore, be volatile.

 

Our officers and directors own a large percentage of our common stock, and they may exercise control over our business and affairs.

 

Our officers and directors as a group beneficially own approximately 29% of our common stock as of December 31, 2013  As a result, they will continue to be able to exercise significant influence, and in most cases control, over matters requiring shareholder approval, including the election of directors, changes to our charter documents, and significant corporate transactions.  This concentration of ownership makes it unlikely that any other holder or group of holders of our common stock will be able to affect the way we are managed or the direction of our business.  The continued concentrated ownership of our common stock will make it difficult for another company to acquire us and for you to receive any related takeover premium for your shares (unless the controlling group approves the acquisition).

 

9



 

Certain provisions of our Restated Articles of Incorporation may make it difficult for a third party to acquire us or may adversely impact your rights as a common shareholder.

 

Our Restated Articles of Incorporation contain provisions that require the approval of holders of 80% of our issued and outstanding shares before we can enter into a merger or other business combination or sell all or substantially all of our assets. Additionally, if we increase the size of our board from the current six to nine directors, we could be required to stagger our directors’ terms, and our directors could not be removed without approval of holders of 80% of our issued and outstanding shares. These provisions could discourage or impede a tender offer, proxy contest, or other similar transaction involving control of us.

 

In addition, our board of directors has the right to issue preferred stock upon such terms and conditions as it deems to be in the best interest of the Company. The terms of such preferred stock may adversely impact the dividend and liquidation rights of the common shareholders without the approval of the common shareholders.

 

We paid our first cash dividend in 2012 but did not pay a cash dividend in 2013 and may not pay cash dividends on our common stock in the foreseeable future, and therefore only appreciation of the price of our common stock may provide a return to our shareholders.

 

We paid our first cash dividend in December of 2012 but did not pay a cash dividend in 2013 and may not pay cash dividends on our common stock in the foreseeable future.  While there are currently no restrictions prohibiting us from paying dividends to our shareholders, it is at the discretion of the board of directors whether the Company pays any cash dividends on our common stock in the foreseeable future and will depend on our financial condition, results of operations, capital and legal requirements, and other factors deemed relevant by our board of directors. Earnings, if any, are expected to be retained to fund our future operations.  On May 14, 2013 and May 14, 2012, the Company paid 5% stock dividends to its shareholders.  No stock dividends were declared or paid in 2011.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None

 

ITEM 2. DESCRIPTION OF PROPERTY.

 

Our Houston sales office is in a 1,711-square foot facility.  The monthly rent is currently $3,422.  Our corporate office in Plano, Texas was increased from 8,523 square feet to 10,137 square feet of office space in March of 2012.  The monthly rent is currently $15,206.  We leased an 800-square foot facility in Oklahoma City, Oklahoma, as a sales office on a month-to-month basis, and the monthly rent was $665.  This office was closed on October 31, 2013.  We lease a 400-square foot facility in Pratt, Kansas, as a permit office on a month-to-month basis, and the current monthly rent is $500.  In October of 2012, we expanded our Denison, Texas repair warehouse facility with the addition of a third 10,000-square foot building.  The Denison, Texas, facility consists of one 5,000-square foot building, three 10,000-square foot adjacent buildings, and an outdoor storage area of approximately 60,500 square feet.  The monthly rent is currently $14,438.  We lease a 915-square foot office facility in Midland, Texas, as a sales office with a monthly rent of $1,296.  We lease 3,030 square feet of office space located in Calgary, Alberta.  The monthly rent is currently $11,922.  In addition, Eagle Canada leases a 10,088-square foot facility, also located in Calgary, Alberta, that is used as a shop and warehouse.  The monthly rent is currently $7,479.  We also lease a storage and parking area adjacent to the Eagle Canada shop and warehouse.  The monthly rent is currently $4,768.  The Company is not responsible for insuring these facilities.  The conditions of these facilities are good, and we believe that these properties are suitable and adequate for our foreseeable needs.

 

ITEM 3. LEGAL PROCEEDINGS.

 

The Company is a defendant in various legal actions that arose or may arise out of the normal course of business.  In our opinion, none of these actions has or will result in any significant loss to us.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

None.

 

10



 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Prices

 

On April 18, 2005, we began trading on the NYSE Amex (formerly the American Stock Exchange) (“AMEX”) under our current trading symbol “TGE.”  On October 26, 2007, we announced that our board of directors approved the decision to switch the listing of our common stock from AMEX to the NASDAQ Global Select Market (“NASDAQ.”)  As a result, on November 6, 2007, our stock began trading on NASDAQ under the symbol “TGE.”

 

The following table shows the high and low sales prices reported for our common stock on NASDAQ during 2013 and 2012.  On December 27, 2012, the Company paid its first cash dividend of $0.15 per common share to shareholders of record at the close of business on December 17, 2012.  The Company did not pay a cash dividend in 2013.  On May 14, 2013 and on May 14, 2012 the Company paid 5% stock dividends to shareholders of record at the close of business on April 30, 2013 and April 30, 2012, respectively.  No cash or stock dividends were declared or paid in 2011.  All prior share and per share amounts have been restated to reflect the stock dividends.

 

 

 

2013

 

2012

 

 

 

High

 

Low

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

1st quarter

 

$

10.43

 

$

8.05

 

$

10.83

 

$

7.09

 

2nd quarter

 

9.96

 

7.72

 

11.55

 

8.69

 

3rd quarter

 

10.01

 

7.50

 

10.46

 

5.96

 

4th quarter

 

8.30

 

6.31

 

8.39

 

6.46

 

 

The number of shareholders of record of TGE’s common stock as of March 3, 2014, was approximately 143.  Due to the number of shares held in nominee or street name, we believe that there are a significantly greater number of beneficial owners of our common stock.  As of such date, CEDE & CO. held 18,033,473 shares in street name.  On March 3, 2014, our common stock was quoted at a closing sales price of $6.34.

 

Performance Graph

 

The following graph is not “soliciting material,” is not deemed filed with the Securities and Exchange Commission, and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, respectively.

 

The following graph sets forth the five-year cumulative total shareholder return, which assumes reinvestment of dividends, of a $100 investment beginning in the Company’s common stock, a peer group made up of companies in the Philadelphia Oil Service Sector Index, and the S&P 500 Stock Index.  The Philadelphia Oil Service Sector Index consists of far larger companies that provide a variety of services as compared to the land-based geophysical services provided by the Company.

 

 

11



 

ITEM 6. SELECTED FINANCIAL DATA.

 

The following selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Company’s financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data.” A cash dividend of $0.15 per common share was declared and paid in December of 2012. No cash dividends were declared in any of the remaining four years shown below:

 

 

 

Year Ended December, 31,

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

(In thousands, except per share amounts)

 

Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

134,535

 

$

196,317

 

$

151,029

 

$

108,319

 

$

90,432

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,316

)

$

15,672

 

$

10,833

 

$

(1,223

)

$

1,880

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (loss) per common share - basic

 

$

(0.29

)

$

0.73

 

$

0.51

 

$

(0.06

)

$

0.09

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (loss) per common share - diluted

 

$

(0.29

)

$

0.72

 

$

0.50

 

$

(0.06

)

$

0.09

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

21,842

 

21,514

 

21,216

 

21,170

 

21,162

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

21,842

 

21,898

 

21,548

 

21,170

 

21,235

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

98,302

 

$

142,028

 

$

99,881

 

$

87,615

 

$

86,050

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

$

7,385

 

$

16,298

 

$

6,956

 

$

6,021

 

$

6,507

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

$

69,131

 

$

77,986

 

$

63,720

 

$

52,863

 

$

52,695

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

 

$

0.15

 

$

 

$

 

$

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Form 10-K. Portions of this document that are not statements of historical or current fact are forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. The cautionary statements made in this Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Form 10-K. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause our actual results to differ materially from those anticipated include those discussed in “Business,” “Information Regarding Forward-Looking Statements,” and “Risk Factors.”

 

Executive Overview

 

We are a leading provider of seismic data acquisition services throughout the continental United States and Canada.  We supply seismic data to companies engaged in the exploration and development of oil and natural gas on land and in land-to-water transition areas. Our customers rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of existing hydrocarbons, to optimize the development and production of hydrocarbon reservoirs, to better delineate existing oil and natural gas fields, and to augment reservoir management techniques.

 

We acquire geophysical data using the latest in 3-D survey techniques. We introduce acoustic energy into the ground by using vibration equipment or dynamite detonation, depending on the surface terrain and subsurface requirements. The reflected energy, or echoes, is received through geophones, converted into a digital signal at a multi-channel recording unit, and then transmitted to a central recording vehicle. Subsurface requirements dictate the number of channels necessary to perform our services. With our state-of-the-art seismic equipment, including computer technology and multiple channels, we acquire, on a cost-effective basis, immense volumes of seismic data that when processed and interpreted produce more precise images of the earth’s subsurface. Our customers then use

 

12



 

our seismic data to generate 3-D geologic models that help reduce finding costs and improve recovery rates from existing wells.

 

Currently, the seismic data acquisition industry is made up of a number of companies divided into two groups. The first group is made up of three publicly-traded companies with long operating histories which field numerous crews and work in a number of different regions and terrain.  This group includes us, Dawson Geophysical Company and CGG-Veritas.  We believe that these companies field approximately half of the seismic crews currently operating in the continental U.S. and Canada.  The second group is made up of smaller companies who generally run one or two seismic crews and often specialize in specific regions or types of operation.

 

We provide our seismic data acquisition services primarily to onshore oil and natural gas exploration and development companies for use in the onshore drilling and production of oil and natural gas in the continental U.S. and Canada.  The main factors influencing demand for seismic data acquisition services in our industry are the level of drilling activity by oil and natural gas companies and the sizes of such companies’ exploration and development budgets, which, in turn, depend largely on current and anticipated future crude oil and natural gas prices and depletion rates.

 

Our customers are major and independent oil and natural gas exploration and development companies. The services we provide to our customers vary according to the size and needs of each customer. Our services are marketed by sales, supervisory, and executive personnel who contact customers to determine their needs and respond to customer inquiries regarding the availability of crews. Contacts are based principally upon professional relationships developed over a number of years.

 

The acquisition of seismic data for the oil and natural gas industry is a highly competitive business. Contracts for such services generally are awarded on the basis of price quotations, crew experience, and the availability of crews to perform in a timely manner, although factors other than price, such as crew safety, performance history, and technological and operational expertise, are often determinative. Our competitors include companies with financial resources that are significantly greater than our own as well as companies of comparable and smaller size. Our primary competitors are Dawson Geophysical Company and CGG-Veritas. In addition to the previously named companies, we also compete for projects from time to time with smaller seismic companies which operate in local markets with only one or two crews.  We believe that our long-term industry expertise, the customer relationships developed over our history, and our financial stability gives us an advantage over most of our competitors in the industry.

 

Results of Operations

 

Year Ended December 31, 2013, Compared to Year Ended December 31, 2012

 

Revenues.  Our revenues were $134,534,540 for the year ended December 31, 2013, compared to $196,317,215 for the same period of 2012, a decrease of 31.5%.  Revenues for the 12 months ended December 31, 2013 decreased due to the softening in the seismic market that began early in 2013, our operation of fewer crews in the U.S. and Canada during the second, third, and fourth quarters of 2013 as compared to the same period of 2012, and severe weather conditions in many or our key markets in the U.S. and Canada during the fourth quarter of 2013.  In 2013 in the U.S., we operated nine crews in the first quarter, began the second quarter operating nine crews and ended the second quarter operating two crews.  We started the third quarter with three crews and ended the quarter operating five crews which we continued operating during the fourth quarter of 2013.  In Canada, we operated six crews in the first quarter of 2013, began the second quarter operating six crews, and ended the quarter operating two crews.  We operated no crews in Canada during the third quarter of 2013 and started and ended the fourth quarter operating three crews.  This compares to 2012 when we operated eight seismic crews in the U.S. during the first and second quarters, added a ninth crew in the third quarter, and continued operating nine crews during the fourth quarter of 2012.  We operated seven seismic crews in Canada during the first quarter, two crews during the second quarter, the equivalent of 1.5 crews during the third quarter, and five crews during the fourth quarter of 2012.

 

Cost of services.  Our cost of services was $107,675,356 for the year ended December 31, 2013, compared to $135,279,937 for the same period of 2012, a decrease of 20.4%.  This decrease is attributable to operating fewer crews.  When a crew is shut down, several key crew members continue as paid employees of the Company (to retain their skill sets), and the majority of the crew is laid off without pay.  As a percentage of revenues, cost of services was 80.0% for the year ended December 31, 2013, and 68.9% for the year ended December 31, 2012.  This increase was primarily attributable costs we incurred as we idled several crews in the U.S. in the second and third quarters due to the softening in the seismic market, adverse weather conditions in the U.S. and Canada, an increase in higher cost shot-hole work, and land permitting issues in Canada in the fourth quarter of 2013.

 

13



 

Selling, general, and administrative expenses.  SG&A expenses were $9,593,068 for the year ended December 31, 2013, compared to $8,755,270 for the same period of 2012, an increase of 9.6%.  This increase was primarily attributable to personnel additions and an increase in share-based compensation expense.  SG&A expense as a percentage of revenues was 7.1% for the year ended December 31, 2013, and 4.5% for the year ended December 31, 2012, reflecting the decrease in revenues in 2013.

 

Depreciation and amortization expense.  Depreciation and amortization expense was $24,644,190 for the year ended December 31, 2013, compared to $25,502,597 for the same period of 2012, a decrease of 3.4%.  This decrease was primarily attributable to our maintenance capital expenditures policy adopted early in the first quarter of 2013.  Depreciation and amortization expense as a percentage of revenues was 18.3% for the year ended December 31, 2013, compared to 13.0% for the same period of 2012 reflecting the decline in revenues in 2013.

 

Income (loss) from operations.  Loss from operations was $7,378,074 for the year ended December 31, 2013, compared to income from operations of $26,779,411 for the year ended December 31, 2012.  The decrease was attributable to idling of several crews in the U.S. in the second and third quarters of 2013 due to the softening in the seismic market, adverse weather conditions in the U.S. and Canada, an increase in shot-hole work which carries higher costs and lower margins than vibroseis work and land permitting issues in Canada in the fourth quarter of 2013.

 

EBITDA decreased $35,015,892 to $17,266,116 for the 12 months ended December 31, 2013, from $52,282,008 for the same period of 2012, a decrease of 67.0%.  This decrease was primarily a result of our net loss of $6,316,041 for 2013 compared to net income of $15,671,879 for the same period in 2012, and related decrease in income tax expense.  For a definition of EBITDA, a reconciliation of EBITDA to net income, and discussion of EBITDA, refer to the section entitled “EBITDA” found below.

 

Interest expense.  Interest expense was $1,091,476 for the year ended December 31, 2013, compared to $1,222,454 for the same period of 2012, a decrease of 10.7%.  This decrease was primarily attributable to our pay off in 2013 of three notes payable incurred for the purchase of seismic equipment.

 

Income tax (benefit) expense.  Income tax benefit was $2,153,509 for the year ended December 31, 2013, compared to income tax expense of $9,885,078 for the same period of 2012.  This decrease was attributable to the net loss in 2013 as compared to net income in 2012.  Income tax benefit for the year ended December 31, 2013 reflects the impact of state taxes, net of federal benefit, and permanent tax differences, including share based compensation.  See Note H of Notes to Financial Statements.

 

Year Ended December 31, 2012, Compared to Year Ended December 31, 2011

 

Revenues.  Our revenues were $196,317,215 for the year ended December 31, 2012, compared to $151,028,582 for the same period of 2011, an increase of 30.0%.  Approximately 74% of the increase in revenues was attributable to continued improvement in the North American land seismic acquisition market and increased efficiencies of new wireless recording technology, and approximately 26% of the increase in revenues was attributable to our operation of additional seismic crews.  We operated eight seismic crews in the U.S. during the first and second quarters, added a ninth crew in the third quarter, and continued operating nine crews during the fourth quarter of 2012, as compared to seven seismic crews in the U.S. during the first quarter, the addition of an eighth crew in the second quarter, and we continued operating eight crews during the third and fourth quarters of 2011.  We operated seven seismic crews in Canada during the first quarter, two crews during the second quarter, the equivalent of 1.5 crews during the third quarter, and five crews during the fourth quarter of 2012, as compared to six seismic crews during the first quarter, two crews during the second and third quarters, and four crews during the fourth quarter of 2011.

 

Cost of services.  Our cost of services was $135,279,937 for the year ended December 31, 2012, compared to $104,022,944 for the same period of 2011, an increase of 30.0%.  Virtually all of this increase was attributable to strong revenue growth during 2012.  As a percentage of revenues, cost of services was 68.9% for both the year ended December 31, 2012, and the year ended December 31, 2011.

 

Selling, general, and administrative expenses.  SG&A expenses were $8,755,270 for the year ended December 31, 2012, compared to $9,626,679 for the same period of 2011, a decrease of 9.0%.  This decrease was primarily attributable to $2,117,950 of transaction costs incurred in 2011 related to terminated merger discussions, partially offset by increased compensation costs and recent staff additions to handle increased business activity.  SG&A expense as a percentage of revenues was 4.5% for the year ended December 31, 2012, and 6.4% for the year ended December 31, 2011.

 

14



 

Depreciation and amortization expense.  Depreciation and amortization expense was $25,502,597 for the year ended December 31, 2012, compared to $19,214,069 for the same period of 2011, an increase of 32.7%.  This increase was primarily attributable to capital expenditures of approximately $57,108,000 for the 12 months ended December 31, 2012.  Depreciation and amortization expense as a percentage of revenues was 13.0% for the year ended December 31, 2012, compared to 12.7% for the same period of 2011.

 

Income from operations.  Income from operations was $26,779,411 for the year ended December 31, 2012, compared to $18,164,890 for the same period of 2011.  The increase was attributable to an increase in revenues, partially offset by increases in cost of services and depreciation expenses discussed above.  EBITDA increased $14,903,049 to $52,282,008 for the 12 months ended December 31, 2012, from $37,378,959 for the same period of 2011, an increase of 39.9%.  This increase was primarily a result of a $4,838,664 increase in net income, a $6,288,528 increase in depreciation, and a $3,337,828 increase in income tax expense.  For a definition of EBITDA, a reconciliation of EBITDA to net income, and discussion of EBITDA, refer to the section entitled “EBITDA” found below.

 

Interest expense.  Interest expense was $1,222,454 for the year ended December 31, 2012, compared to $784,425 for the same period of 2011, an increase of 55.8%.  This increase was primarily attributable to additional debt of $22,202,000 incurred in 2012 for the purchase of additional GSR and GSX systems, channels, and other seismic equipment and vehicles.  The increase was partially offset by our continuing principal payments of $11,338,000 on notes payable and capital lease obligations.

 

Income tax expense.  Income tax expense was $9,885,078 for the year ended December 31, 2012, compared to $6,547,250 for the same period of 2011.  This increase was attributable to the increase in pre-tax income in 2012 as compared to 2011.  Income tax expense for the year ended December 31, 2012 reflects the impact of state taxes, net of federal benefit, and permanent tax differences, including share based compensation.  See Note H of Notes to Financial Statements.

 

Non-GAAP Financial Measure

 

We define EBITDA as net income plus expenses of interest, income taxes, depreciation, and amortization. We use EBITDA as a supplemental financial measure to assess:

 

·                  the financial performance of our assets without regard to financing methods, capital structures, taxes, or historical cost basis;

 

·                  our liquidity and operating performance over time and in relation to other companies that own similar assets and that we believe calculate EBITDA in a manner similar to us; and

 

·                  the ability of our assets to generate cash sufficient for us to pay potential interest expenses.

 

We also understand that such data is used by investors to assess our performance. However, EBITDA is not a measure of operating income, operating performance, or liquidity presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). When assessing our operating performance or our liquidity, you should not consider this data in isolation or as a substitute for our net income, cash flow from operating activities, or other cash flow data calculated in accordance with GAAP.  EBITDA excludes some, but not all, items that affect net income and operating income, and these measures may vary among other companies. Therefore, EBITDA as presented below may not be comparable to similarly titled measures of other companies. Further, the results presented by EBITDA cannot be achieved without incurring the costs that the measure excludes: interest, taxes, depreciation, and amortization.

 

The following table reconciles our EBITDA to our net income (loss):

 

 

 

Year Ended
December 31,

 

 

 

2013

 

2012

 

2011

 

Net income (loss)

 

$

(6,316,041

)

$

15,671,879

 

$

10,833,215

 

Depreciation and amortization expense

 

24,644,190

 

25,502,597

 

19,214,069

 

Interest expense

 

1,091,476

 

1,222,454

 

784,425

 

Income tax expense (benefit)

 

(2,153,509

)

9,885,078

 

6,547,250

 

EBITDA

 

$

17,266,116

 

$

52,282,008

 

$

37,378,959

 

 

15



 

Liquidity and Capital Resources

 

Liquidity

 

Cash flows from operating activities.

 

Net cash provided by operating activities was $22,969,342 for the year ended December 31, 2013, compared to $39,283,062 for the same period of 2012.  The $16,313,720 decrease was principally attributable to a net loss of $6,316,041 in 2013 as compared to net income of $15,671,879 for the same period in 2012.  The timing of billings and revenue recognition, the collections of accounts receivable, the timing of receipt and payment of invoices, federal and state income taxes payable, depreciation and amortization, and the mix of contracts account for the remainder of the decrease.

 

Working capital increased $5,492,070 to $17,708,163 as of December 31, 2013, from the December 31, 2012, working capital of $12,216,093.  This increase was due primarily to increases in cash and cash equivalents of $7,516,130 and $3,909,198 in prepaid federal and state income taxes, and decreases of $9,582,719 in trade accounts payable, $2,958,078 in accrued liabilities, $3,104,129 in billings in excess of costs and estimated earnings on uncompleted contracts, and $2,180,400 in current maturities of notes payable, partially offset by decreases in trade accounts receivable of $24,898,346 and $3,950,996 in costs and estimated earnings in excess of billings on uncompleted contracts.

 

Cash flows used in investing activities.

 

Net cash used in investing activities was $667,498 for the year ended December 31, 2013, and $30,265,696 for the year ended December 31, 2012.  This $29,598,198 decrease was due to a decrease in capital expenditures of $30,121,740 and a decrease in proceeds from the sale of property and equipment of $523,542.

 

Cash flows used in financing activities.

 

Net cash used in financing activities was $14,996,672 for the year ended December 31, 2013, and $16,140,906 for the year ended December 31, 2012.  The $1,144,234 decrease was due primarily to no cash dividend payment in 2013 as compared with the payment of cash dividends of $3,099,014 in 2012, partially offset by an increase in principal payments on notes payable of $2,004,365.

 

Capital expenditures.

 

Early during the year ended December 31, 2013 we adopted a maintenance capital expenditures program and incurred capital expenditures of $2,474,865, primarily to maintain existing equipment.  During the year ended December 31, 2012, capital expenditures of $57,107,732 were used to acquire seismic equipment and vehicles, replace similar equipment and vehicles, and to purchase our fourth and fifth GSR systems consisting of a total of 14,200 channels and related equipment, our sixth GSR system with 13,000 channels, our first next-generation 3-channel GSX system with 8,000 stations, and seven new INOVA vibration vehicles.  Cash of $31,970,418, notes of $22,201,800 from a commercial bank, and capital lease obligations from a vehicle leasing company of $2,935,514 were used to finance these acquisitions.  This major investment should continue to bring us the benefits of these new technologies and allow us to be in a cash building mode in 2014.  We may, however, purchase additional equipment during 2014 as the demand for our services warrants.

 

Capital Resources

 

Historically, we have relied on cash generated from operations, short-term borrowings from commercial banks and equipment lenders, and loans from directors to fund our working capital requirements and capital expenditures.

 

The Company has a revolving line of credit agreement with a commercial bank.  The borrowing limit under the revolving line of credit agreement is $5,000,000 and was renewed on September 16, 2012, and again on September 16, 2013.  The revolving line of credit agreement does not expire until September 16, 2014.  Our obligations under this agreement are secured by a security interest in our accounts receivable.  Interest on the outstanding amount under the line of credit loan agreement is payable monthly at the greater of the prime rate of interest or five percent.  As of December 31, 2013, and since its inception, we have had no borrowings outstanding under the line of credit loan agreement.

 

16



 

At December 31, 2013, the Company had four outstanding notes payable to commercial banks for equipment purchases.  The notes have interest rates between 3.50% and 4.60%, are due in monthly installments between $128,363 and $215,863 plus interest, have a total outstanding balance of $14,416,225, and are collateralized by equipment.  Three notes payable with interest rates between 5.00% and 6.35% and monthly payments between $50,170 and $82,950 plus interest were paid off in 2013.  These notes were collateralized by equipment.

 

The Company had, at December 31, 2013, two outstanding notes payable to finance companies for corporate insurance.  The notes have interest rates between 4.00% and 4.95%, are due in monthly installments between $18,831 and $329,823 including interest, and have a total outstanding balance of $501,766.

 

Our Houston sales office is in a 1,711-square foot facility.  The monthly rent is currently $3,422.  Our corporate office in Plano, Texas was increased from 8,523 square feet to 10,137 square feet of office space in March of 2012.  The monthly rent is currently $15,206.  We leased an 800-square foot facility in Oklahoma City, Oklahoma, as a sales office on a month-to-month basis, and the monthly rent was $665.  This office was closed on October 31, 2013.  We lease a 400-square foot facility in Pratt, Kansas, as a permit office on a month-to-month basis, and the current monthly rent is $500.  In October of 2012, we expanded our Denison, Texas repair warehouse facility with the addition of a third 10,000-square foot building.  The Denison, Texas, facility consists of one 5,000-square foot building, three 10,000-square foot adjacent buildings, and an outdoor storage area of approximately 60,500 square feet.  The monthly rent is currently $14,438.  We lease a 915-square foot office facility in Midland, Texas, as a sales office with a monthly rent of $1,296.  Upon the acquisition of Eagle Canada, we assumed a lease for 3,030 square feet of office space located in Calgary, Alberta.  The monthly rent is currently $11,922.  In addition, Eagle Canada leases a 10,088-square foot facility, also located in Calgary, Alberta, that is used as a shop and warehouse.  The monthly rent is currently $7,479.  We also lease a storage and parking area adjacent to the Eagle Canada shop and warehouse.  The monthly rent is currently $4,768.  The Company is not responsible for insuring these facilities.  The conditions of these facilities are good, and we believe that these properties are suitable and adequate for our foreseeable needs.

 

Contractual Obligations

 

The following table summarizes payments due in specific periods related to our contractual obligations as of December 31, 2013:

 

 

 

Payments Due by Period

 

 

 

 

 

Within

 

 

 

 

 

After

 

Contractual Obligations

 

Total

 

1 Year

 

1-2 Years

 

3-5 Years

 

5 Years

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

Operating lease obligations

 

$

1,831

 

$

642

 

$

468

 

$

721

 

$

 

Debt obligations

 

$

14,918

 

$

8,435

 

$

4,814

 

$

1,669

 

$

 

Capital lease obligations

 

$

2,325

 

$

1,423

 

$

756

 

$

146

 

$

 

Total

 

$

19,074

 

$

10,500

 

$

6,038

 

$

2,536

 

$

 

 

We believe that our capital resources, including our short-term investments, funds available under our line of credit loan agreement, and cash flow from operations, are adequate to meet our current operational needs. We believe that we will be able to finance our 2014 capital expenditures through cash flow from operations, borrowings from commercial lenders, and the funds available under our line of credit loan agreement.  However, our ability to satisfy working capital requirements, meet debt repayment obligations, and fund future capital requirements will depend principally upon our future operating performance which is subject to the risks inherent in our business.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2013, we had no off-balance sheet arrangements.

 

17



 

Critical Accounting Policies

 

The preparation of our financial statements in conformity with GAAP 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.

 

Revenue Recognition

 

Seismic Surveys

 

The Company provides seismic data acquisition survey services to its customers under general service agreements which define certain obligations for the Company and for its customers.  We typically enter into a supplemental agreement setting forth the terms of each project, which may be cancelled by either party upon 30 days’ advance written notice.  These supplemental agreements are either “turnkey” agreements providing for a fixed fee to be paid for each unit of seismic data acquired or “term” agreements providing for a fixed hourly, daily, or monthly fee during the term of the project.  Under both types of agreements, the Company recognizes revenues when services have been performed and revenue is realizable.  Services are defined as the commencement of data acquisition.  Revenues are deemed realizable when earned according to the terms of the contracts.  Under turnkey agreements, the total number of units of seismic data to be gathered is set forth in the agreement.  Revenue under turnkey agreements is recognized on a per unit of seismic data acquired rate as services are performed.  Revenue under term agreements is recognized on a per unit of time worked rate as services are performed based on the time worked rate provided in the term agreement.  In the event of a cancelled contract, revenue is recognized and the client is billed for services performed to the date of contract cancellation.  When it becomes evident that the estimates of total costs to be incurred on a contract will exceed the total estimates of revenue to be earned, an estimated loss is recognized in the period in which the loss is identifiable.  The asset “Cost and estimated earnings in excess of billings on uncompleted contracts” represents cost incurred on turnkey agreements in excess of billings on those agreements.  The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings on turnkey agreements in excess of cost on those agreements.

 

Accumulated Other Comprehensive Income

 

Comprehensive income is a measure of income which includes both net income and other comprehensive income or loss.  Other comprehensive income or loss results from items deferred from recognition in the statement of earnings, which consists solely of foreign currency translation adjustments.  Accumulated other comprehensive income (loss) is presented on the Company’s consolidated balance sheet as a part of stockholder’s equity.  In addition, the Company reports comprehensive income and its components in a separate statement of comprehensive income.

 

Foreign currency translation income or loss represents changes in foreign currency rates used to translate the assets, liabilities, revenues and expenses of the Company’s international subsidiary from the local currency.  These changes in foreign currency rates may never be realized or may only be partially realized upon the ultimate disposition, if any, of the international subsidiary.  The Company’s foreign investment is considered permanent in nature as there are no plans in the foreseeable future for divestiture.

 

Business Combinations

 

We allocate the purchase price of acquired companies to the tangible assets acquired, liabilities assumed, and intangible assets acquired, based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions.

 

Allowance for Doubtful Accounts

 

We prepare our allowance for doubtful accounts receivable based on our past experience of historical write-offs, our current customer base, and our review of past due accounts. The inherent volatility of the energy industry’s business cycle can cause swift and unpredictable changes in the financial stability of our customers.  In 2013, 2012 and 2011, no allowances were necessary.

 

18



 

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 net cash flows are insufficient to recover the carrying value of the asset. Our forecast of future cash flows used to perform impairment analysis includes estimates of future revenues and profitability based on our historical results and analysis of future oil and natural gas prices which are fundamental to assessing demand for our services. If we are unable to achieve these cash flows, our estimates will be revised which could result in an impairment charge for the period of revision.

 

Depreciable Lives of Property, Plant, and Equipment

 

Our property, plant, and equipment are capitalized at historical cost and depreciated over the useful life of the asset. Our estimate 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. The technology of the equipment used to gather data in the seismic industry has historically evolved such that obsolescence does not occur quickly. As circumstances change and new information becomes available, these estimates could change. We amortize these capitalized items using the straight-line method. Capital assets are depreciated over their useful lives ranging from one to seven years, depending on the classification of the asset.

 

Tax Accounting

 

We account for our income taxes in accordance with the recognition of 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 assets 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.

 

Share-Based Compensation

 

We recognize the fair value of the stock-based compensation awards, including stock options and restricted stock, as wages in the consolidated statements of earnings on a straight-line basis over the vesting period of the related stock options or restricted stock awards.  This has resulted in the recognition of compensation expense, relative to stock-based awards, in wages in the consolidated statements of earnings of approximately $973,000 or approximately $0.04 per share for the year ended December 31, 2013, and $601,000 or approximately $0.03 per share for the year ended December 31, 2012

 

Shares of restricted stock were issued to employees of the Company under the 2006 Stock Awards Plan as follows:  18,000 in August of 2007; 10,000 in June of 2008; 5,000 in July of 2009; 5,000 in May of 2010; 25,331 in November of 2011; 21,520 in December of 2011; 6,000 in January of 2012; 213,125 in August of 2012; and 6,000 in February of 2013.  In June of 2013, 45,000 shares were rescinded from the August 2012 grant, and 30,000 shares were issued in their place.  In addition, stock options were issued to employees of the Company under the 2006 Stock Awards Plan as follows:  335,000 in October of 2008; 135,000 in November of 2009; and 15,000 in November of 2011.  No incentive stock options were granted to employees in 2010, 2012, or 2013.  As of December 31, 2013, there was approximately $389,000 of unrecognized compensation expense related to our share-based compensation plan.

 

19



 

Recently Issued Accounting Pronouncements

 

In July of 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, Intangibles-Goodwill and Other (Topic 350) — Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). This ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under accounting principles generally accepted in the United States (“U.S. GAAP”).  The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  The Company adopted this update in the first quarter of 2013, and it did not have a significant effect on its consolidated financial statements and related disclosures.

 

In July of 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”).  This ASU clarifies the balance sheet presentation of an unrecognized tax benefit and was issued to resolve the diversity in practice that had developed in the absence any specific U.S. GAAP.  ASU 2013-11 is applicable to all entities that have an unrecognized tax benefit due to a net operating loss carryforward, a similar tax loss, of a tax credit carryforward.  The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and does not create any new disclosure requirements.  The Company will adopt ASU 2013-11 on January 1, 2014.  The Company anticipates that the adoption of ASU 2013-11 will not have a significant effect on its consolidated financial statements.

 

Effect of Inflation

 

We do not believe that inflation has had a material effect on our business, results of operations, or financial condition during the past three years.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have not entered into any hedging agreements or swap agreements. Our principal market risk is the risk related to the concentration of our customers in the oil and natural gas industry. Since our customers are involved in the oil and natural gas industry, there may be a positive or a negative effect on our exposure to credit risk in that our customers may be similarly affected by changes in economic and industry conditions.  For the year ended December 31, 2013, our largest customer accounted for approximately 12% of revenues.  For the year ended December 31, 2012, our largest customer accounted for approximately 16% of revenues.  For the year ended December 31, 2011, our largest customer accounted for approximately 17% of revenues.  We conduct business in Canada which subjects us to a foreign currency exchange rate risk.  Our results of operations and our cash flows could be impacted by changes in foreign currency exchange rates.

 

We are exposed to foreign currency exchange risk, primarily through our operations in Canada.  Certain transactions in Canada are exposed to economic losses in the event of adverse changes in the currency exchange rate.  If the Canadian Dollar continues to appreciate with respect to the U.S. Dollar, our costs in Canada may increase.  Currently, we do not use derivative financial instruments to offset the risk of foreign currency.

 

For further information see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 1A. Risk Factors.”

 

20



 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Consolidated Financial Statements

December 31, 2013, 2012, and 2011

 

CONTENTS

 

Report of Independent Registered Public Accounting Firm

22

 

 

Audit Report Opinion for SOX 404

23

 

 

Consolidated Financial Statements

 

 

 

Consolidated Balance Sheets

24

 

 

Consolidated Statements of Operations

26

 

 

Consolidated Statements of Comprehensive Income (Loss)

27

 

 

Consolidated Statements of Shareholders’ Equity

28

 

 

Consolidated Statements of Cash Flows

29

 

 

Notes to Consolidated Financial Statements

30

 

21



 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

TGC Industries, Inc. and Subsidiary

 

We have audited the accompanying consolidated balance sheets of TGC Industries, Inc. and Subsidiary (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013.  The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TGC Industries, Inc. and Subsidiary as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), TGC Industries, Inc. and Subsidiary’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 17, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

/s/ LANE GORMAN TRUBITT, PLLC

 

 

Dallas, Texas

March 17, 2014

 

22



 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

TGC Industries, Inc. and Subsidiary

 

We have audited TGC Industries, Inc. and Subsidiary’s (the “Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, TGC Industries, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of TGC Industries, Inc. and Subsidiary as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2013 and our report dated March 17, 2014 expressed an unqualified opinion on those consolidated financial statements.

 

 

/s/ LANE GORMAN TRUBITT, PLLC

 

 

 

 

 

Dallas, Texas

 

March 17, 2014

 

 

23



 

TGC Industries, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,130,374

 

$

8,614,244

 

Trade accounts receivable

 

10,742,412

 

35,640,758

 

Cost and estimated earnings in excess of billings on uncompleted contracts

 

2,312,947

 

6,263,943

 

Prepaid expenses and other

 

1,808,411

 

1,824,779

 

Prepaid federal and state income tax

 

3,909,198

 

 

 

 

 

 

 

 

Total current assets

 

34,903,342

 

52,343,724

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT - at cost

 

 

 

 

 

 

 

 

 

 

 

Machinery and equipment

 

185,405,886

 

190,943,331

 

Automobiles and trucks

 

14,272,341

 

15,265,627

 

Furniture and fixtures

 

486,700

 

488,779

 

Leasehold improvements

 

14,994

 

14,994

 

 

 

200,179,921

 

206,712,731

 

Less accumulated depreciation and amortization

 

(137,072,725

)

(117,326,964

)

 

 

63,107,196

 

89,385,767

 

 

 

 

 

 

 

Goodwill

 

201,530

 

201,530

 

Other assets

 

89,470

 

96,817

 

 

 

291,000

 

298,347

 

 

 

 

 

 

 

Total assets

 

$

98,301,538

 

$

142,027,838

 

 

The accompanying notes are an integral part of these statements.

 

24



 

TGC Industries, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS — Continued

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

4,097,819

 

$

13,680,538

 

Accrued liabilities

 

2,585,993

 

5,544,071

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

653,220

 

3,757,349

 

Federal and state income tax payable

 

 

4,569,891

 

Current maturities of notes payable

 

8,434,879

 

10,615,279

 

Current portion of capital lease obligations

 

1,423,268

 

1,960,503

 

 

 

 

 

 

 

Total current liabilities

 

17,195,179

 

40,127,631

 

 

 

 

 

 

 

NOTES PAYABLE, less current maturities

 

6,483,112

 

14,412,598

 

 

 

 

 

 

 

CAPITAL LEASE OBLIGATIONS, less current portion

 

901,707

 

1,884,937

 

 

 

 

 

 

 

LONG-TERM DEFERRED TAX LIABILITY

 

4,590,739

 

7,617,111

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value; 4,000,000 shares authorized; issued - none

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 35,000,000 and 25,000,000 shares authorized; 22,090,127 and 20,732,500 shares issued and outstanding in each period, respectively

 

220,901

 

207,325

 

 

 

 

 

 

 

Additional paid-in capital

 

31,508,662

 

29,573,986

 

 

 

 

 

 

 

Retained earnings

 

41,757,515

 

48,073,556

 

 

 

 

 

 

 

Treasury stock, at cost; 145,335 and 80,076 shares in each period, respectively

 

(1,251,099

)

(691,009

)

 

 

 

 

 

 

Accumulated other comprehensive income (loss) — foreign currency translation adjustments

 

(3,105,178

)

821,703

 

 

 

69,130,801

 

77,985,561

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

98,301,538

 

$

142,027,838

 

 

The accompanying notes are an integral part of these statements

 

25



 

TGC Industries, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Revenue

 

$

134,534,540

 

$

196,317,215

 

$

151,028,582

 

 

 

 

 

 

 

 

 

Cost and expenses

 

 

 

 

 

 

 

Cost of services

 

107,675,356

 

135,279,937

 

104,022,944

 

Selling, general and administrative

 

9,593,068

 

8,755,270

 

9,626,679

 

Depreciation and amortization expense

 

24,644,190

 

25,502,597

 

19,214,069

 

 

 

141,912,614

 

169,537,804

 

132,863,692

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(7,378,074

)

26,779,411

 

18,164,890

 

 

 

 

 

 

 

 

 

Interest expense

 

1,091,476

 

1,222,454

 

784,425

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(8,469,550

)

25,556,957

 

17,380,465

 

 

 

 

 

 

 

 

 

Income tax expense (benefit):

 

 

 

 

 

 

 

Current

 

1,155,204

 

9,525,543

 

4,077,297

 

Deferred

 

(3,308,713

)

359,535

 

2,469,953

 

Income tax expense (benefit):

 

(2,153,509

)

9,885,078

 

6,547,250

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,316,041

)

$

15,671,879

 

$

10,833,215

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

Basic

 

$

(0.29

)

$

0.73

 

$

0.51

 

Diluted

 

$

(0.29

)

$

0.72

 

$

0.50

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

Basic

 

21,841,582

 

21,513,638

 

21,215,800

 

Diluted

 

21,841,582

 

21,898,376

 

21,548,401

 

 

The accompanying notes are an integral part of these statements

 

26



 

TGC Industries, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Years Ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Net Income (loss)

 

$

(6,316,041

)

$

15,671,879

 

$

10,833,215

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(3,926,881

)

714,576

 

(641,538

)

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(10,242,922

)

$

16,386,455

 

$

10,191,677

 

 

The accompanying notes are an integral part of these statements

 

27



 

TGC Industries, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Treasury

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Stock

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2010

 

19,242,251

 

$

192,423

 

$

27,512,709

 

$

24,666,326

 

$

(257,323

)

$

748,665

 

$

52,862,800

 

Issuance of common stock awards

 

31,851

 

318

 

224,681

 

 

 

 

224,999

 

Issuance of restricted common stock

 

15,000

 

150

 

(150

)

 

 

 

 

Exercise of stock options

 

59,334

 

593

 

180,912

 

 

 

 

181,505

 

Amortization of unearned compensation restricted stock awards

 

 

 

28,603

 

 

 

 

28,603

 

Amortization of compensation cost of unvested stock options

 

 

 

230,167

 

 

 

 

230,167

 

Purchase of treasury shares

 

 

 

 

 

(71

)

 

(71

)

Foreign currency translation adjustments

 

 

 

 

 

 

(641,538

)

(641,538

)

Net income

 

 

 

 

10,833,215

 

 

 

10,833,215

 

Balances at December 31, 2011

 

19,348,436

 

193,484

 

28,176,922

 

35,499,541

 

(257,394

)

107,127

 

63,719,680

 

5% common stock dividend

 

971,990

 

9,720

 

(10,870

)

 

 

 

(1,150

)

Cash dividend

 

 

 

 

(3,097,864

)

 

 

(3,097,864

)

Issuance of restricted common stock

 

219,125

 

2,191

 

(2,191

)

 

 

 

 

Exercise of stock options

 

192,949

 

1,929

 

809,066

 

 

(433,615

)

 

377,380

 

Amortization of unearned compensation restricted stock awards

 

 

 

317,109

 

 

 

 

317,109

 

Amortization of compensation cost of unvested stock options

 

 

 

283,950

 

 

 

 

283,950

 

Foreign currency translation adjustments

 

 

 

 

 

 

714,576

 

714,576

 

Net income

 

 

 

 

15,671,879

 

 

 

15,671,879

 

Balances at December 31, 2012

 

20,732,500

 

207,325

 

29,573,986

 

48,073,556

 

(691,009

)

821,703

 

77,985,561

 

5% common stock dividend

 

1,038,224

 

10,382

 

(11,321

)

 

 

 

(939

)

Issuance (rescindment) of restricted common stock

 

(9,000

)

(90

)

273,157

 

 

 

 

273,067

 

Exercise of stock options

 

328,403

 

3,284

 

973,196

 

 

(560,090

)

 

416,390

 

Amortization of unearned compensation restricted stock awards

 

 

 

492,692

 

 

 

 

492,692

 

Amortization of compensation cost of unvested stock options

 

 

 

206,952

 

 

 

 

206,952

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

(3,926,881

)

(3,926,881

)

Net income (loss)

 

 

 

 

(6,316,041

)

 

 

(6,316,041

)

Balances at December 31, 2013

 

22,090,127

 

$

220,901

 

$

31,508,662

 

$

41,757,515

 

$

(1,251,099

)

$

(3,105,178

)

$

69,130,801

 

 

The accompanying notes are an integral part of these statements

 

28



 

TGC Industries, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

 

 

 

2013

 

2012

 

2011

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,316,041

)

$

15,671,879

 

$

10,833,215

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

24,644,190

 

25,502,597

 

19,214,069

 

Gain on disposal of property and equipment

 

(676,422

)

(1,069,766

)

(441,524

)

Stock-based compensation

 

972,711

 

601,059

 

483,769

 

Deferred income taxes

 

(3,308,713

)

359,535

 

2,469,953

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Trade accounts receivable

 

24,086,780

 

(16,021,574

)

(2,442,223

)

Cost and estimated earnings in excess of billings on uncompleted contracts

 

3,950,483

 

(1,121,420

)

(589,429

)

Prepaid expenses and other

 

3,230,777

 

2,820,516

 

2,326,499

 

Prepaid federal and state income tax

 

(3,777,853

)

78,268

 

1,145,437

 

Other assets

 

3,755

 

(17,991

)

(18,035

)

Trade accounts payable

 

(9,439,503

)

4,328,707

 

2,763,004

 

Accrued liabilities

 

(2,856,390

)

2,911,755

 

823,278

 

Billings in excess of cost and estimated earnings on uncompleted contracts

 

(3,068,487

)

2,814,863

 

(4,550,293

)

Federal and state income tax payable

 

(4,475,945

)

2,424,634

 

2,156,447

 

Net cash provided by operating activities

 

22,969,342

 

39,283,062

 

34,174,167

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

(1,848,678

)

(31,970,418

)

(22,011,503

)

Proceeds from sale of property and equipment

 

1,181,180

 

1,704,722

 

740,658

 

Net cash used in investing activities

 

(667,498

)

(30,265,696

)

(21,270,845

)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Principal payments on notes payable

 

(13,342,462

)

(11,338,097

)

(9,006,101

)

Principal payments on capital lease obligations

 

(2,069,661

)

(2,081,176

)

(1,348,164

)

Proceeds from exercise of stock options

 

416,390

 

377,381

 

181,505

 

Purchase of treasury shares

 

 

 

(71

)

Payment of dividends

 

(939

)

(3,099,014

)

 

Net cash used in financing activities

 

(14,996,672

)

(16,140,906

)

(10,172,831

)

Net increase (decrease) in cash and cash equivalents

 

7,305,172

 

(7,123,540

)

2,730,491

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

210,958

 

(7,775

)

(57,435

)

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

8,614,244

 

15,745,559

 

13,072,503

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

$

16,130,374

 

$

8,614,244

 

$

15,745,559

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

1,129,581

 

$

1,222,454

 

$

784,425

 

Income taxes paid

 

$

9,474,481

 

$

7,022,640

 

$

774,136

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities

 

 

 

 

 

 

 

Capital lease obligations incurred

 

$

626,187

 

$

2,935,514

 

$

1,953,263

 

Financed equipment purchase

 

$

 

$

22,201,800

 

$

6,765,619

 

Financed insurance premiums

 

$

3,237,881

 

$

3,050,024

 

$

2,336,121

 

Restricted stock awards to employees, net of cancellations

 

$

25,440

 

$

1,334,014

 

$

101,475

 

Stock awards to employees

 

$

 

$

 

$

225,000

 

Treasury shares issued for stock options exercised

 

$

560,090

 

$

433,615

 

$

 

 

The accompanying notes are an integral part of these statements

 

29



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE A - NATURE OF OPERATIONS

 

TGC Industries, Inc. (“TGC” or the “Company”) is engaged in the geophysical services business and primarily conducts seismic surveys and sells gravity data to companies engaged in exploration in the oil and gas industry in the U.S. and Canada.

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of TGC Industries, Inc. and its wholly-owned subsidiary, Eagle Canada, Inc.  We have eliminated all significant intercompany accounts and transactions.

 

Business Combinations

 

We record acquisitions using the purchase method of accounting and, accordingly, have included the results of operations of acquired businesses in our consolidated results from the date of each acquisition.  We allocate the purchase price of our acquisitions to the tangible assets, liabilities, and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair value assigned to assets acquired is based on valuations provided by independent consultants and using management’s estimates and assumptions.

 

Foreign Currency

 

The functional currency of the Company’s international subsidiary is the local currency.  Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period.  The resulting translation adjustments are recorded directly into a separate component of stockholders’ equity and represents the only component of accumulated other comprehensive income (loss).

 

Cash Equivalents

 

The Company considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents. The Company maintains its accounts at financial institutions located in Texas and Alberta, Canada.  The Texas bank accounts are insured by the Federal Deposit Insurance Corporation up to $250,000.  The Alberta bank accounts are insured by the Canadian Depository Insurance Corporation up to $100,000 Canadian.

 

Trade Accounts Receivable

 

Trade accounts receivable are recorded in accordance with terms and amounts as specified in the related contracts on an ongoing basis. The Company evaluates the collectability of accounts receivable on a specific account basis using a combination of factors including the age of the outstanding balances, evaluation of the customer’s financial condition, and discussions with relevant Company personnel and with the customers directly. An allowance for doubtful accounts or direct write-off is recorded when it is determined that the receivable may not be collected, depending on the facts known and the probability of collection of the outstanding amount.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the individual assets ranging from 1 to 7 years.  The depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets.  Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.  Expenditures for maintenance and repairs are charged to expense as incurred.

 

30



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

 

Long-Lived Assets

 

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted cash flows estimated to be generated by those assets.  No impairment charge was necessary at December 31, 2013, 2012, and 2011.

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, in accordance with ASC Topic 740 (“Topic 740”).  Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.   Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.  The components of the deferred tax assets and liabilities are individually classified as current or non-current based on their characteristics.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  In accordance with Topic 740, the Company recognizes in its financial statements the impact of a tax position if that position is “more likely than not” to be sustained on audit, based on the technical merits of the position.  The Company’s estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time.  Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure.  Interest and penalties related to unrecognized tax benefits, if any, are recorded as income tax expense.  See Note H for further information.

 

Revenue Recognition

 

Seismic Surveys

 

The Company provides seismic data acquisition survey services to its customers under general service agreements which define certain obligations for the Company and for its customers.  We typically enter into a supplemental agreement setting forth the terms of each project, which may be cancelled by either party upon 30 days’ advance written notice.  These supplemental agreements are either “turnkey” agreements providing for a fixed fee to be paid for each unit of seismic data acquired or “term” agreements providing for a fixed hourly, daily, or monthly fee during the term of the project.  Under both types of agreements, the Company recognizes revenues when services have been performed and revenue is realizable.  Services are defined as the commencement of data acquisition.  Revenues are deemed realizable when earned according to the terms of the contracts.  Under turnkey agreements, the total number of units of seismic data to be gathered is set forth in the agreement.  Revenue under turnkey agreements is recognized on a per unit of seismic data acquired rate as services are performed.  Revenue under term agreements is recognized on a per unit of time worked rate as services are performed based on the time worked rate provided in the term agreement.  In the event of a cancelled contract, revenue is recognized and the client is billed for services performed to the date of contract cancellation.  When it becomes evident that the estimates of total costs to be incurred on a contract will exceed the total estimates of revenue to be earned, an estimated loss is recognized in the period in which the loss is identifiable.  The asset “Cost and estimated earnings in excess of billings on uncompleted contracts” represents cost incurred on turnkey agreements in excess of billings on those agreements.  The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings on turnkey agreements in excess of cost on those agreements.

 

31



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONTINUED

 

Accumulated Other Comprehensive Income

 

Comprehensive income is a measure of income which includes both net income and other comprehensive income or loss.  Other comprehensive income or loss results from items deferred from recognition in the statement of earnings, which consists solely of foreign currency translation adjustments.  Accumulated other comprehensive income (loss) is presented on the Company’s consolidated balance sheet as a part of stockholder’s equity.  In addition, the Company reports comprehensive income and its components in a separate statement of comprehensive income.

 

Foreign currency translation income or loss represents changes in foreign currency rates used to translate the assets, liabilities, revenues and expenses of the Company’s international subsidiary from the local currency.  These changes in foreign currency rates may never be realized or may only be partially realized upon the ultimate disposition, if any, of the international subsidiary.  The Company’s foreign investment is considered permanent in nature as there are no plans in the foreseeable future for divestiture.

 

Reclassifications

 

Certain reclassifications have been made to the 2012 financial statements to conform to the 2013 presentation.

 

Share-Based Compensation

 

The Company has two stock-based compensation plans, which are described more fully in Note G.  The Company recognizes the fair value of the share-based compensation awards as wages in the Statements of Operations on a straight-line basis over the vesting period.  As a result, during the years ended December 31, 2013, 2012, and 2011, the Company recognized compensation expense for unvested stock options of $206,952, $283,950, and $230,167, respectively, and unvested restricted stock of $492,692, $317,109, and $28,603, respectively.

 

No incentive stock options were granted during the years ended December 31, 2013 and 2012.  For the year ended December 31, 2011, the fair value of the single option grant was estimated on the date of the grant using the Binomial Lattice option pricing model with the following assumptions used for the outstanding grants: risk-free interest rate of 0.40%; expected dividend yield of 0.0%; expected life of 5.0 years; and expected volatility of 61.0%.

 

Financial Instruments

 

The Company’s financial instruments recorded on the consolidated balance sheet include cash and cash equivalents, accounts receivable, accounts payable, and debt. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short-term nature of these items.  The carrying amounts of debt obligations approximate fair value due to their relative short-term maturities and their contract rates which approximate market.

 

Earnings Per Share

 

Basic earnings per common share are based upon the weighted average number of shares of common stock outstanding.  Diluted earnings per share are based upon the weighted average number of common shares outstanding and, when dilutive, common shares issuable for stock options, warrants, and convertible securities.

 

All share and per share amounts for the years ended December 31, 2013, 2012 and 2011, have been adjusted to reflect 5% stock dividends paid May 14, 2013 and May 14, 2012 to shareholders of record as of April 30, 2013, and April 30, 2012, respectively.  No stock dividends were declared or paid during the year ended December 31, 2011.

 

32



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONCLUDED

 

Use of Estimates

 

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Recent Accounting Standards

 

In July of 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, Intangibles-Goodwill and Other (Topic 350) — Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). This ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under accounting principles generally accepted in the United States (“U.S. GAAP”).  The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  The Company adopted this update in the first quarter of 2013, and it did not have a significant effect on its consolidated financial statements and related disclosures.

 

In July of 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”).  This ASU clarifies the balance sheet presentation of an unrecognized tax benefit and was issued to resolve the diversity in practice that had developed in the absence any specific U.S. GAAP.  ASU 2013-11 is applicable to all entities that have an unrecognized tax benefit due to a net operating loss carryforward, a similar tax loss, of a tax credit carryforward.  The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and does not create any new disclosure requirements.  The Company will adopt ASU 2013-11 on January 1, 2014.  The Company anticipates that the adoption of ASU 2013-11 will not have a significant effect on its consolidated financial statements.

 

NOTE C — COSTS, BILLINGS, AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

The components of uncompleted contracts are as follows at December 31:

 

 

 

2013

 

2012

 

Costs incurred on uncompleted contracts and estimated earnings

 

$

2,476,716

 

$

11,299,753

 

Less billings to date

 

(816,989

)

(8,793,159

)

 

 

$

1,659,727

 

$

2,506,594

 

 

The components of uncompleted contracts are reflected in the consolidated balance sheets as follows at December 31:

 

 

 

2013

 

2012

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

$

2,312,947

 

$

6,263,943

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

(653,220

)

(3,757,349

)

 

 

$

1,659,727

 

$

2,506,594

 

 

33



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE D - ACCRUED LIABILITIES

 

Accrued liabilities consist of the following at December 31:

 

 

 

2013

 

2012

 

Compensation and payroll taxes

 

$

1,091,191

 

$

2,004,444

 

Accrued sales and use tax

 

56,486

 

336,870

 

Insurance

 

40,193

 

335,412

 

Accrued interest

 

35,000

 

73,105

 

Other

 

1,363,123

 

2,794,240

 

 

 

$

2,585,993

 

$

5,544,071

 

 

NOTE E - DEBT

 

Line of Credit

 

In September of 2012, and again in September of 2013, the Company renewed its revolving line of credit allowing the Company to borrow, repay, and re-borrow, from time to time, up to $5,000,000.  Interest on the outstanding amount under the line of credit loan agreement is payable monthly at the greater of the prime rate of interest or five percent.  The credit loan agreement is secured by a security interest in our accounts receivable.  As of December 31, 2013, and since its inception, we have had no borrowings outstanding under the line of credit loan agreement.  The line of credit expires September 16, 2014.

 

Notes Payable

 

Notes payable consists of the following at December 31:

 

 

 

2013

 

2012

 

Notes payable to commercial banks

 

 

 

 

 

 

 

 

 

 

 

Four outstanding notes payable as of 12/31/2013 with interest between 3.50% and 4.60%, due in monthly installments between $128,363 and $215,863 plus interest; collateralized by equipment

 

$

14,416,225

 

$

24,553,291

 

 

 

 

 

 

 

Notes payable to finance companies for insurance

 

 

 

 

 

 

 

 

 

 

 

Two outstanding notes payable as of 12/31/2013 with interest between 4.00% and 4.95%, due in monthly installments between $18,831 and $329,823 including interest

 

501,766

 

474,586

 

 

 

$

14,917,991

 

$

25,027,877

 

Less current maturities

 

(8,434,879

)

(10,615,279

)

 

 

$

6,483,112

 

$

14,412,598

 

 

Aggregate annual maturities of notes payable at December 31, 2013 are as follows:

 

Year Ending

 

 

 

December 31,

 

 

 

 

 

 

 

2014

 

$

8,434,879

 

2015

 

$

4,814,389

 

2016

 

$

1,540,360

 

2017

 

$

128,363

 

2018

 

$

 

 

 

$

14,917,991

 

 

34



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE F — LEASES

 

Capital Lease Obligations

 

The Company leases vehicles and certain specialized seismic equipment under leases classified as capital leases. The following is a schedule showing the future minimum lease payments under capital leases by years and the present value of the minimum lease payments as of December 31, 2013.

 

Year Ending

 

 

 

December 31,

 

 

 

2014

 

$

1,523,229

 

2015

 

784,925

 

2016

 

150,572

 

2017

 

 

Total minimum lease payments required

 

2,458,726

 

Less: Amount representing interest

 

(133,751

)

Present value of minimum lease payments

 

2,324,975

 

Less current maturities

 

(1,423,268

)

 

 

$

901,707

 

 

The net book value of the capital assets leased was approximately $2,954,000 and $4,957,000 as of December 31, 2013 and 2012, respectively. Total accumulated depreciation for fixed assets under capital lease with remaining obligations was approximately $7,221,000 and $5,114,000 as of December 31, 2013, and 2012, respectively.  Interest rates on these leases range from 4.58% to 8.17%.

 

Operating Lease Obligations

 

The Company leases five offices and two warehouse facilities under operating leases that expire at various dates between April 2014 and October 2018 with one lease on a month-to-month basis.  One of the office facilities, used by the Company as its corporate headquarters, is located in Plano, Texas.  One of the office facilities, used by Eagle Canada, is located in Calgary, Alberta. The warehouse facilities, used as warehouse and equipment repair facilities, are located in Denison, Texas, and Calgary, Alberta.  Two office facilities are used as sales offices and are located in Houston, Texas, and Midland, Texas.  On October 31, 2013, we closed our sales office in Oklahoma City, Oklahoma.  The remaining office facility, located in Pratt, Kansas, is used as a permitting office.  Rent expense for these facilities for the years ended December 31, 2013, 2012, and 2011 was approximately $750,000, $700,000, and $605,000, respectively.

 

The following is a schedule by years of future minimum rental payments required under the operating leases as of December 31, 2013:

 

2014

 

$

642,340

 

2015

 

467,755

 

2016

 

371,354

 

2017

 

244,845

 

2018 and thereafter

 

104,934

 

Total minimum payments required

 

$

1,831,228

 

 

35



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE G — SHAREHOLDERS’ EQUITY

 

Net Income (Loss) Per Share

 

The following is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted net income (loss) per share:

 

 

 

December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,316,041

)

$

15,671,879

 

$

10,833,215

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Basic - weighted average common shares outstanding

 

21,841,582

 

21,513,638

 

21,215,800

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities:

 

 

 

 

 

 

 

Stock options

 

 

384,738

 

332,601

 

 

 

21,841,582

 

21,898,376

 

21,548,401

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

$

(0.29

)

$

0.73

 

$

0.51

 

Diluted net income (loss) per share

 

$

(0.29

)

$

0.72

 

$

0.50

 

 

Outstanding options that were not included in the diluted calculation because their effect would be anti-dilutive totaled 35,373 and 44,370 for the years ended December 31, 2013 and 2012, respectively.

 

All share and per share amounts have been adjusted to reflect 5% stock dividends paid May 14, 2013, and May 14, 2012, to shareholders of record as of April 30, 2013, and April 30, 2012.

 

Share-Based Compensation Plans

 

The Company currently has in effect a 2006 stock award plan (the “2006 Plan”).  At the June 11, 2010 Annual Meeting of Shareholders, the shareholders approved an increase of 2,000,000 shares of common stock for issuance under the 2006 Plan.  This increased the total aggregate number of shares of common stock under the 2006 Plan to 3,000,000 shares.  The 2006 Plan provides for the granting of stock options, common stock, and restricted stock.  The 2006 Plan is administered by a committee of the Board of Directors (the “Committee”).  Currently the Committee is comprised of three directors.  Any stock options granted under the 2006 Plan will be exercisable as set forth in the option agreements pursuant to which they are issued, but in no event will stock options be exercisable after the expiration of five (5) years from the date of grant.  Outstanding options, under the 2006 Plan at December 31, 2013, have vesting periods ranging from the date of grant to the third annual anniversary of the grant.

 

During 2013, 117,611 options were granted, and 391,733 options were exercised or cancelled under the 2006 Plan.  During 2012, 143,602 options were granted, and 244,445 options were exercised or cancelled under the 2006 Plan.  During 2011, 109,347 options were granted, and 80,334 options were exercised or cancelled under the 2006 Plan.  Restricted stock consists of shares that are transferred by the Company to a participant, but are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the participant.  Any restricted stock granted or issued under the 2006 Plan will vest as set forth in the restricted stock agreement pursuant to which it was issued or granted.  The provisions of the restricted stock agreements need not be the same with respect to each participant.  In November of 2011, December of 2011, January of 2012, August of 2012, February 1, 2013 and June 25, 2013, the Committee granted 25,331, 21,520, 6,000, 213,125, 6,000, and 30,000 shares of restricted stock, respectively.  On April 30, 2013, the Committee rescinded 45,000 shares of restricted stock previously granted in August of 2012.  The shares of restricted stock were issued in the names of the grantees and had restrictive legends prohibiting their sales prior to vesting.  Vesting periods, for restricted stock issued to date, range from at grant date to the third annual anniversary of the grant.  Upon vesting, a new certificate is issued for the vested portion without the restrictive legend.

 

36



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE G — SHAREHOLDERS’ EQUITY — CONCLUDED

 

During the years ended December 31, 2013, 2012, and 2011, the Company recognized compensation expense associated with the restricted stock of $492,692, $317,109, and $28,603, respectively.  During the years ended December 31, 2013, 2012, and 2011, no unamortized deferred stock-based compensation was related to any employee that left the Company.

 

During the years ended December 31, 2013, 2012, and 2011, the Company recognized compensation expense associated with unvested options of $206,952, $283,950, and $230,167, respectively.

 

The following table summarizes activity under the 2006 Plan:

 

 

 

 

 

Weighted

 

 

 

Shares under

 

Average

 

 

 

Option

 

exercise price

 

 

 

 

 

 

 

Balance at December 31, 2010

 

803,681

 

$

3.63

 

Granted

 

109,347

 

$

5.78

 

Exercised

 

(59,334

)

$

3.06

 

Canceled

 

(21,000

)

$

4.10

 

Balance at December 31, 2011

 

832,694

 

$

3.97

 

Granted

 

143,602

 

$

6.86

 

Exercised

 

(192,949

)

$

4.20

 

Canceled

 

(51,496

)

$

8.94

 

Balance at December 31, 2012

 

731,851

 

$

4.16

 

Granted

 

117,611

 

$

7.61

 

Exercised

 

(328,403

)

$

2.97

 

Canceled

 

(63,330

)

$

6.61

 

Balance at December 31, 2013

 

457,729

 

$

5.31

 

 

The following information applies to options outstanding and exercisable at December 31, 2013:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

 

remaining

 

Weighted

 

 

 

Range of

 

Number

 

contractual

 

average

 

 

 

Exercise prices

 

outstanding

 

life (in years)

 

exercise price

 

Outstanding options

 

$3.52 – $7.18

 

457,729

 

2.84

 

$

5.31

 

Exercisable options

 

$3.52 – $7.18

 

402,724

 

2.58

 

$

5.08

 

 

37



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE H - INCOME TAXES

 

The income tax provision (benefit) charged to continuing operations for the years ended December 31, 2013, 2012, and 2011, was as follows:

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

U.S. federal

 

$

 

$

3,947,400

 

$

35,561

 

Foreign

 

949,207

 

5,313,874

 

3,343,374

 

State and local

 

205,997

 

264,269

 

698,362

 

 

 

1,155,204

 

9,525,543

 

4,077,297

 

 

 

 

 

 

 

 

 

Deferred expense (benefit)

 

(3,308,713

)

359,535

 

2,469,953

 

 

 

$

(2,153,509

)

$

9,885,078

 

$

6,547,250

 

 

The components of the Company’s income (loss) before income tax expense attributable to domestic and foreign operations amounted to $(12,635,002) and $4,165,452, respectively, for the year ended December 31, 2013. The components of the Company’s income before income tax expense attributable to domestic and foreign operations amounted to $6,018,971 and $19,537,986, respectively, for the year ended December 31, 2012. The components of the Company’s income before income tax expense attributable to domestic and foreign operations amounted to $6,085,192 and $11,295,273, respectively, for the year ended December 31, 2011. The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate (34% for 2013, 35% for 2012, and 34% for 2011) to pretax income (loss) from continuing operations for the years ended December 31, 2013, 2012, and 2011, due to the following:

 

 

 

2013

 

2012

 

2011

 

Computed “expected” tax expense

 

$

(2,879,647

)

$

8,944,935

 

$

5,909,358

 

Increase (decrease) in income taxes resulting from:

 

 

 

 

 

 

 

Change in effective rates used for deferred taxes

 

 

 

(503,693

)

Nondeductible expenses and other

 

590,180

 

768,652

 

534,742

 

State and local taxes, net of federal benefit

 

135,958

 

171,491

 

606,843

 

 

 

$

(2,153,509

)

$

9,885,078

 

$

6,547,250

 

 

Net deferred tax liabilities consist of the following components as of December 31, 2013 and 2012:

 

 

 

2013

 

2012

 

Deferred tax assets

 

 

 

 

 

Foreign tax credits

 

$

244,898

 

$

473,405

 

Net operating loss carry forwards

 

61,139

 

462,548

 

Other

 

88,911

 

92,983

 

Total deferred tax assets

 

394,948

 

1,028,936

 

Deferred tax liability

 

 

 

 

 

Property, equipment, and intangible asset

 

(4,985,687

)

(8,646,047

)

Net deferred tax liabilities

 

$

(4,590,739

)

$

(7,617,111

)

 

38



 

TGC Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

 

NOTE H - INCOME TAXES — CONCLUDED

 

The components giving rise to the net deferred tax items described above have been included in the accompanying balance sheets as of December 31, 2013 and 2012, as follows:

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Current assets

 

$

 

$

 

Noncurrent (liabilities)

 

(4,590,739

)

(7,617,111

)

 

 

$

(4,590,739

)

$