Pulse Seismic Inc. — Interim / Quarterly Report 2016

Jul 28, 2016

q2

FOR THE SIX MONTHS ENDED JUNE 30, 2016

SELECTED FINANCIAL AND OPERATING INFORMATION

(thousands of dollars except per share data, number of shares and kilometres of seismic data) Revenue Data library sales Participation surveys Total revenue Amortization of seismic data library Impairment loss Net loss Per share basic and diluted Cash provided by operating activities Per share basic and diluted Cash EBITDA(a) Per share basic and diluted(a) Shareholder free cash fow(a) Per share basic and diluted(a)	Three months ended June 30, 2016 2015 (unaudited) 2,779 6,461 – – 2,779 6,461 4,706 5,303 – – (2,441) (1,040) (0.04) (0.02) 1,183 438 0.02 0.01 1,504 4,986 0.03 0.09 1,465 4,871 0.03 0.09	Three months ended June 30, 2016 2015 (unaudited) 2,779 6,461 – – 2,779 6,461 4,706 5,303 – – (2,441) (1,040) (0.04) (0.02) 1,183 438 0.02 0.01 1,504 4,986 0.03 0.09 1,465 4,871 0.03 0.09	Six months ended June 30, 2016 2015 (unaudited) 4,550 7,777 – 3,220 4,550 10,997 9,615 12,595 – – (5,935) (4,387) (0.11) (0.08) 4,689 6,361 0.08 0.11 1,770 4,746 0.03 0.08 1,690 4,524 0.03 0.08	Six months ended June 30, 2016 2015 (unaudited) 4,550 7,777 – 3,220 4,550 10,997 9,615 12,595 – – (5,935) (4,387) (0.11) (0.08) 4,689 6,361 0.08 0.11 1,770 4,746 0.03 0.08 1,690 4,524 0.03 0.08	Year ended December 31, 2015 21,214 3,220 24,434 22,836 937 (5,308) (0.09) 17,094 0.30 15,121 0.27 14,745 0.26
Capital expenditures
Participation surveys	–	–	–	3,968	3,959
Seismic data purchases, digitization and related costs	65	–	2,215	183	933
Propertyand equipment additions	–	8	6	14	14
Total capital expenditures	65	8	2,221	4,165	4,906
Weighted average shares outstanding
Basic and diluted	56,175,306	56,874,385	56,109,173	56,932,213	56,628,524
Shares outstandingatperiod-end			56,161,432	56,796,689	55,592,689
Seismic library
2D in kilometres			447,000	339,991	339,991
3D in square kilometres			28,613	28,409	28,555
FINANCIAL POSITION AND RATIOS
			June 30,	June 30,	December 31,
(thousands of dollars except ratios)			2016	2015	2015
Working capital			4,085	4,965	4,996
Working capital ratio			4.99:1	2.18:1	4.44:1
Total assets			47,256	67,879	54,618
Long-term debt			–	5,426	–
TTM cash EBITDA(b)			12,145	24,131	15,121
Shareholders’ equity			40,667	50,168	45,389
Long-term debt to TTM cash EBITDA ratio			0.00:1	0.22:1	0.00:1
Long-term debt to equityratio			0.00:1	0.11:1	0.00:1

(a) These non-GAAP financial measures are defined in the Management’s Discussion and Analysis.

(b) TTM cash EBITDA is defined as the sum of the trailing 12 months’ cash EBITDA and is used to provide a comparable annualized measure.

pulseseismic.com

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2016

The following Management’s Discussion and Analysis (MD&A) of the financial condition and results of operations of Pulse Seismic Inc. (“Pulse” or “the Company”) for the three and six months ended June 30, 2016 was prepared taking into consideration information available to July 27, 2016 and should be read with the unaudited condensed consolidated interim financial statements and related notes for the three and six months ended June 30, 2016. This MD&A is supplemental to the MD&A, audited consolidated financial statements and related notes for the year ended December 31, 2015.

The unaudited condensed consolidated interim financial statements were prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting with comparative figures for the prior year. Certain figures were reclassified to conform to the current period’s presentation. The unaudited condensed consolidated interim financial statements, along with the MD&A for the three and six months ended June 30, 2016, were reviewed by Pulse’s Audit Committee and approved by Pulse’s Board of Directors. All financial information is reported in Canadian dollars. This MD&A discusses matters which Pulse’s management considers material. Management determines whether information is material based on whether it believes a reasonable investor’s decision whether or not to buy, sell or hold shares in the Company would likely be influenced or changed if the information were omitted or misstated. Readers should also read the cautionary statement in “Forward-Looking Information”.

OVERVIEW .............................................................................................................3 KEY PERFORMANCE INDICATORS ..............................................................3 SEISMIC INDUSTRY CYCLES AND SEASONALITY ................................4 OUTLOOK ..............................................................................................................4 DISCUSSION OF OPERATING RESULTS ....................................................5 REVIEW OF FINANCIAL POSITION ..............................................................8 FINANCIAL SUMMARY OF QUARTERLY RESULTS .............................10 CONTRACTUAL OBLIGATIONS ...................................................................10 LIQUIDITY, CAPITAL RESOURCES AND CAPITAL REQUIREMENTS .............................................................................10 NON-CAPITAL RESOURCES ..........................................................................13

NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS ................................................................................ 14 FINANCIAL INSTRUMENTS ........................................................................... 16 NEW IFRS STANDARDS .................................................................................. 16 CRITICAL ACCOUNTING ESTIMATES ........................................................17 DISCLOSURE CONTROLS AND PROCEDURES (DC&P) AND INTERNAL CONTROLS OVER FINANCIAL REPORTING (ICFR)....................................................................17 RISK FACTORS ....................................................................................................17 ADDITIONAL INFORMATION .........................................................................17 FORWARD-LOOKING INFORMATION ........................................................17

PULSE SEISMIC INC.

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Overview

About Pulse

Pulse is a market leader in the acquisition, marketing and licensing of two-dimensional (2D) and three-dimensional (3D) seismic data for the energy sector in Western Canada. Seismic data is used by oil and natural gas exploration and development companies to identify portions of geological formations that have the potential to hold hydrocarbons. Seismic data is used in conjunction with well logging data, well core comparisons, geological mapping and surface outcrops to create a detailed map of the Earth’s subsurface at various depths.

Pulse owns the second-largest licensable seismic data library in Canada, currently consisting of approximately 28,600 net square kilometres of 3D seismic and 447,000 net kilometres of 2D seismic. The library extensively covers the Western Canada Sedimentary Basin (WCSB), where most of Canada’s oil and natural gas exploration and development occur.

Pulse calculates net square kilometres of 3D data and net kilometres of 2D data by multiplying the number of square kilometres of seismic data in each individual 3D seismic dataset and the number of kilometres of seismic data in each 2D line by Pulse’s percentage of ownership in each.

Mission and Strategy

Pulse is a pure-play seismic data library company focused on the acquisition, marketing and licensing of seismic data to the western Canadian oil and gas sector. The Company’s business model is designed to generate a growing stream of cash flow by repeatedly licensing the data in its seismic data library to oil and natural gas companies. Pulse’s strategy is to pursue growth opportunities that meet its financial and technical criteria while maintaining a low cost structure.

Key Performance Indicators

The key performance indicators used by Pulse’s management to analyze business results are seismic revenue, in total and broken down between data library sales and participation survey revenue, net earnings, cash provided by operating activities, cash EBITDA, shareholder free cash flow, and the long-term debt to trailing twelve-month (TTM) cash EBITDA ratio. The definitions of cash EBITDA and shareholder free cash flow are provided in “Non-GAAP Financial Measures and Reconciliations”. The calculations of TTM cash EBITDA and the long-term debt to TTM cash EBITDA ratio are provided in “Liquidity, Capital Resources and Capital Requirements”.

Results for the key performance indicators for the three and six months ended June 30, 2016, with comparative figures for 2015, are set out in the following table:

2015, are set out in the following table:
	Three	months ended	June 30,	Six	months ended	June 30,
(thousands of dollars except
per share data and ratios)	2016	2015	Variance	2016	2015	Variance
Data library sales	2,779	6,461	(3,682)	4,550	7,777	(3,227)
Participation survey revenue	–	–	–	–	3,220	(3,220)
Total seismic revenue	2,779	6,461	(3,682)	4,550	10,997	(6,447)
Net loss	(2,441)	(1,040)	(1,401)	(5,935)	(4,387)	(1,548)
Per share basic and diluted	(0.04)	(0.02)	(0.02)	(0.11)	(0.08)	(0.03)
Cash provided by operating activities	1,183	438	745	4,689	6,361	(1,672)
Per share basic and diluted	0.02	0.01	0.01	0.08	0.11	(0.03)
Cash EBITDA	1,504	4,986	(3,482)	1,770	4,746	(2,976)
Per share basic and diluted	0.03	0.09	(0.06)	0.03	0.08	(0.05)
Shareholder free cash fow	1,465	4,871	(3,406)	1,690	4,524	(2,834)
Per share basic and diluted	0.03	0.09	(0.06)	0.03	0.08	(0.05)
Long-term debt to TTM cash EBITDA ratio				0.00:1	0.221	(0.22):1

MANAGEMENT’S DISCUSSION AND ANALYSIS

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The significant reduction in data library sales for the three and six months ended June 30, 2016 along with the fact that no participation surveys have been conducted in 2016 are the main factors contributing to the decline in the Company’s key performance metrics from the prior year’s periods. The Company experienced low data library sales in the first six months of 2016, due to drastic cutbacks in the energy-producing sector’s capital spending.

The net loss for the three months ended June 30, 2016 was $2.4 million compared to a loss of $1.0 million for the three months ended June 30, 2015. In the second quarter of 2016, data library sales were lower by $3.7 million but the reduction in amortization expense and all the other expenses partially offset the decrease in revenue.

Cash EBITDA for the three months ended June 30, 2016 was $1.5 million versus $5.0 million for the three months ended June 30, 2015. Shareholder free cash flow for the three months ended June 30, 2016 was $1.5 million versus $4.9 million for the three months ended June 30, 2015. The main factor behind the decrease in cash EBITDA and shareholder free cash flow period-over-period was the decrease in data library sales, as participation survey revenue is not included in the calculation of cash EBITDA or shareholder free cash flow.

Seismic Industry Cycles and Seasonality

Revenue fluctuations are a normal part of the seismic data library business and data library sales can vary significantly from quarter to quarter. Fourth-quarter data library sales have frequently been stronger than in other quarters, with seismic data sales being triggered as oil and natural gas companies finalize capital expenditures near year-end. Third-quarter data library sales are often lower than in other quarters due to slower business conditions during the summer months. Data library sales can, however, occur at any time during any quarter. This is due to the nearly continual changes in general oil and natural gas industry conditions, increased demand for seismic data covering a specific area or play, timing of public offerings of petroleum and natural gas rights (land sales), as well as corporate merger-and-acquisition, joint venture and asset disposition activity among Pulse’s clients.

Participation survey revenue also varies significantly from quarter to quarter and year to year. The majority of new 3D seismic data is typically acquired under frozen ground conditions from November to March. Summer seismic programs can only be completed in certain areas that have drier ground conditions and can be easily accessed without environmental harm. In addition, the size and pre-funding levels of individual participation surveys can vary significantly. The number and size of participation surveys undertaken from 2014 to 2016 has been considerably less than historical averages.

Outlook

Oil and natural gas prices are still weaker than one year ago and mineral lease auctions or “land sales” in Alberta and B.C. have been extremely low. According to the Canadian Association of Oilwell Drilling Contractors (CAODC), drilling rig utilization in western Canada averaged only 6 percent, 5 percent and 9.5 percent in April, May and June, respectively, approximately half the rates in the same months of 2015, an already-weak year. In late April, the Petroleum Services Association of Canada sharply reduced its 2016 drilling forecast to only 3,325 wells across Canada, down from its first revised forecast of 4,900 wells and well below the more than 5,300 wells drilled in 2015.

These indicators of industry weakness are all suggestive of low traditional seismic data sales and, accordingly, Pulse’s shortterm outlook remains more cautious than one year ago. Following slightly stronger first-quarter data library sales, secondquarter sales were down considerably from 2015 and it is possible that traditional sales for the year will be lower than in 2015.

Pulse does see improved prospects for merger and acquisition activity in 2016, however, as continued low commodity prices suppress E&P company cash flows and banks further curtail borrowing capacity in the face of declining financial ratios and net asset values. This should encourage the narrowing of bid-ask spreads on producing oil and gas assets and corporate entities, helping to close deals. Many asset packages and companies continue to be marketed.

While greater M&A activity would create favourable conditions for additional transaction-based seismic data sales, their unpredictability means that Pulse will continue to lack visibility as to its 2016 revenues. Corporate transactions are a necessary but not sufficient condition to generate seismic data relicensing fees; transaction-based sales also depend on the nature of the underlying corporate transaction and on the buyer’s plans for the assets in question.

PULSE SEISMIC INC.

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Pulse’s critical strengths continue to be its very low costs and strong balance sheet, including zero long-term debt, zero current short-term borrowing and cash at June 30 of over $1.8 million. The Company’s ability to generate cash EBITDA and shareholder free cash flow in the first and second quarters, with sales of only $1.8 million and $2.8 million, respectively, underscores the Company’s low cash cost structure.

With its annual cash costs having been reduced to approximately $6.0 million, Pulse can continue to generate cash EBITDA and shareholder free cash flow at low revenue levels while buying back additional shares and maintaining the financial flexibility to grow its seismic data library. Pulse’s revised $30.0 million credit facility is undrawn as of this date and includes an accordion feature for expansion to $70.0 million.

Pulse’s long-term goal continues to be growing into Western Canada’s largest licensable seismic data library. The Company’s history demonstrates that its revenues could accelerate at any time, and could increase significantly with virtually no increase in operating costs, making Pulse a high-margin business under even modestly positive industry conditions.

Discussion of Operating Results

Summary for the Three and Six Months Ended June 30, 2016

Loss Before Income Taxes

For the three months ended June 30, 2016, the Company had a loss before income taxes of $3.3 million ($0.06 loss per share basic and diluted) compared to a loss of $606,000 ($0.01 loss per share basic and diluted) for the comparable period of 2015.

For the six months ended June 30, 2016, the Company had a loss before income taxes of $8.1 million ($0.15 loss per share basic and diluted) compared to a loss of $5.1 million ($0.09 loss per share basic and diluted) for the comparable period of 2015.

The main reason for the increased loss period-over-period was the reduction in total seismic revenue, as discussed in the following section.

Revenue

Total revenue, which includes data library sales and participation survey revenue, for the three months ended June 30, 2016 was $2.8 million, consisting solely of data library sales, compared to $6.5 million for the three months ended June 30, 2015, also consisting solely of data library sales.

Total revenue for the six months ended June 30, 2016 was $4.6 million, consisting solely of data library sales, compared to $11.0 million for the six months ended June 30, 2015, which was comprised of $7.8 million of data library sales and $3.2 million of participation survey revenue.

Data Library Sales

Data library sales consist of traditional sales and transaction-based sales, which are further broken down according to their type of triggering event: partnership or joint venture sales, corporate merger or acquisition sales, and asset dispositionrelated sales. For further information on transaction-based sales, see “Transaction-based vs. Traditional Sales: Six-Year History” in the MD&A for the year ended December 31, 2015.

For the three months ended June 30, 2016, data library sales were $2.8 million, with 56 percent categorized as traditional sales. For the three months ended June 30, 2015, data library sales were $6.5 million, with 21 percent categorized as traditional sales. In the second quarter of 2015 the Company signed a $5.1 million seismic data licensing agreement.

For the six months ended June 30, 2016, data library sales were $4.6 million, with 71 percent categorized as traditional sales. For the six months ended June 30, 2015, data library sales were $7.8 million, with 31 percent categorized as traditional sales.

The Company experienced low data library sales in the first two quarters of 2016 and 2015 due to the ongoing cutbacks in the energy-producing sector’s capital spending and lower-than-expected merger-and-acquisition activities that would trigger transaction-based sales.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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Geographical Sales Breakdown

The Company’s customers are generally focusing on liquids-rich natural gas and oil reservoirs found primarily in a broad corridor running from northwest of Calgary, Alberta, along the Foothills of the Rocky Mountains to the British Columbia border, as compared to “dry” natural gas more often found in British Columbia and on Alberta’s eastern prairies. The pricing of natural gas liquids (such as propane, butane and condensate) is linked to crude oil, improving the economics of developing liquids-rich gas targets over “dry” gas, as long as crude oil prices remain above a certain level and natural gas liquids markets operate efficiently. Natural gas has suffered from very low pricing for several years, which has dampened Pulse’s traditional sales. The decline in oil prices over the past two years has further hampered traditional sales due to the deteriorating economics of unconventional light oil and liquids-rich gas plays. In addition, natural gas liquids markets have experienced very low pricing for some commodities. Some oil and gas companies are, however, engaged in a modest level of exploration to develop prospects in anticipation of higher commodity prices. In the first half of 2016, the Company licensed 2D data located in Saskatchewan and Manitoba, in addition to Alberta.

GEOGRAPHICAL SALES BREAKDOWN (%) GEOGRAPHICAL SALES BREAKDOWN (%) FOR THE THREE MONTHS ENDED JUNE 30 FOR THE SIX MONTHS ENDED JUNE 30 2016 2015 2016 2015

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100 100
98
80 83 80
79
75
60 60
40 40
25
20 16 20
14
7
0 2 1 0
Alberta British Columbia Other Alberta British Columbia Other
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PULSE SEISMIC INC.

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2D/3D Sales Breakdown

As 3D seismic sale contracts are generally larger than 2D seismic sale contracts, the percentage of seismic data library revenues generated from 2D and 3D seismic data can fluctuate significantly depending on the number of 3D seismic sale contracts signed during a given period. The breakdowns between 2016 and 2015 was not, however, significantly different as can be seen in the chart below.

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SALES BREAKDOWN 2D/3D (%) SALES BREAKDOWN 2D/3D (%)
FOR THE THREE MONTHS ENDED JUNE 30 FOR THE SIX MONTHS ENDED JUNE 30
2D 3D 2D 3D
100 100
85 91 85 83
80 80
60 60
40 40
20 20
17
15 15
9
2016 2015 2016 2015
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Participation Survey Revenue

The Company partners with customers on participation surveys; the data becomes the Company’s property, including the right to re-license the data. Participating customers are provided a licensed copy.

Participation survey revenue is recognized in the financial statements in proportion to the project’s stage of completion. This is assessed using the proportion of the total estimated contract cost that has been incurred for work performed to the period-end.

There was no survey activity in the first half of 2016. By comparison, in the first quarter of 2015, the Company recognized $3.2 million of revenue from the conduct of a participation survey.

Amortization of Seismic Data Library

Seismic data library amortization expense was $4.7 million for the second quarter of 2016 compared to $5.3 million in the second quarter of 2015. For the first six months of 2016, the Company recognized $9.6 million in seismic data library amortization expense, compared to $12.6 million during the comparable period of 2015.

Amortization expense for the three months ended June 30, 2016 fell from the comparable period of 2015 as certain older data sets reached full amortization. This also contributed to the reduction in amortization expense for the six months ended June 30, 2016 from the comparable period of 2015, which was mainly driven by the initial 50 percent amortization expense of $2.0 million recorded upon completion of the 3D participation survey during the first quarter of 2015. As stated above, there were no surveys completed in the first half of 2016.

Amortization of the seismic data library is described further under “Critical Accounting Estimates”.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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Salaries, Internal Commissions and Benefits (SCB)

SCB includes salaries, related benefits, incentive compensation and internal commissions. For the three months ended June 30, 2016, SCB was $821,000, compared to $1.0 million in the comparable period of 2015. During the six months ended June 30, 2016 SCB was $1.6 million, compared to $1.8 million in the comparable period in 2015.

Salaries and internal commissions have decreased significantly year-over-year due mainly to staff reduction and lower sales. Also, in 2015, as is normal practice, $51,000 of the salary expense related to the operations group was capitalized to the cost of the survey conducted in the first quarter. There was no similar reallocation in 2016.

With a lower number of staff, no increase in salaries for 2016 over 2015, and savings related to changes made to the employee benefits programs, the Company’s savings related to SCB are $171,000 for the first half of 2016.

Other Selling, General and Administrative Costs (SG&A)

SG&A includes external sales commissions, occupancy costs, office and general costs, information technology expenses, mapping, data storage expenses, directors’ fees and corporate costs, consulting fees and professional fees.

SG&A for the three months ended June 30, 2016 was $524,000 compared to $569,000 for the three months ended June 30, 2015. SG&A for the six months ended June 30, 2016 and 2015 was the same at $1.3 million.

Net Financing Costs

Net financing costs for the three months ended June 30, 2016 were $39,000, compared to $145,000 for the comparable period in 2015. For the six months ended June 30, 2016 net financing costs decreased to $95,000 from $281,000 for the comparable period in 2015.

Financing fees in 2016 do not include interest on long-term debt as the balance had been fully repaid by the end of 2015, but do include stand-by charges on the revolving credit facility and amortization of deferred financing charges related to the renewal of the credit facility. Both were lower in 2016 than in 2015, in line with the reduction to the size of the revolving facility from $50.0 million to $30.0 million.

Taxes

The income tax reduction for the three months ended June 30, 2016 was $906,000 compared to income tax expense of $434,000 for the comparable 2015 period. The income tax reduction for the six months ended June 30, 2016 was $2.2 million, reflecting an effective tax rate of 27.1 percent, compared to the income tax reduction of $689,000 and an effective tax rate of 13.6 percent for the comparable 2015 period.

Effective July 1, 2015 the government of Alberta increased the general corporate income tax rate from 10 percent to 12 percent.

Review of Financial Position

As at June 30, 2016

Seismic Data Library

The Company’s business model includes growing its seismic data library. Pulse acquires seismic data to add to its library through two main methods. The Company purchases proprietary rights to complementary seismic datasets when the opportunity arises, and it conducts participation surveys. Pulse partners with customers on participation surveys from which the seismic data collected is added to Pulse’s data library to generate future licensing revenue. Pulse retains full ownership of the data, and participating customers are provided with a licensed copy.

On January 26, 2016 the Company closed an acquisition and added approximately 107,000 net kilometres of 2D seismic data and 58 net square kilometres of 3D seismic data, increasing Pulse’s 2D seismic data library by 31.5 percent from approximately 340,000 net kilometres to approximately 447,000 net kilometres. The cost of the acquisition was $3.65 million.

At June 30, 2016, no indicators of impairment were identified for any cash-generating unit and, accordingly, an impairment test was not performed.

The Company continues to evaluate new opportunities to partner with customers on potential future participation surveys but to date has made no commitments for 2016.

PULSE SEISMIC INC.

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Other Long-Term Payable

Included in the other long-term payable is the long-term portion of the cash-settled liability related to the long-term incentive plan.

Share Capital Summary

The Company’s authorized share capital consists of an unlimited number of common shares and an unlimited number of preferred shares, issuable in series.

The following table provides details of the Company’s outstanding share capital:

	Three months	ended June 30,	Six months	ended June 30,
	2016	2015	2016	2015
Weighted average shares outstanding:
Basic and diluted	56,175,306	56,874,385	56,109,173	56,932,213
Shares outstanding at period-end			56,161,432	56,796,689
Shares outstanding at July 27, 2016			56,161,432

The purchase price of the $3.65 million acquisition discussed above was partially funded through the issuance of 669,643 Pulse common shares valued at approximately $2.24 per share, based on the 10-day volume-weighted average price of the shares on the Toronto Stock Exchange at close of trading on January 21, 2016.

Long-term Incentive Plan (LTIP)

On March 31, 2016 one-third of the awards which were eligible to vest under the LTIP were restricted share units (RSU) and two-thirds were performance share units (PSU). The Company’s performance in 2015 did not meet the predetermined performance criteria and, consequently, no PSUs vested on March 31, 2016. RSUs vest automatically based upon time; all of the eligible RSUs, therefore, vested automatically on March 31, 2016.

To satisfy its obligation, in April 2016 the Company provided $182,000 to the plan’s trustee to purchase common shares on the open market for the total after-tax number of cash- and equity-settled RSUs that vested on March 31, 2016. The related payroll taxes of $131,000 were paid in June 2016 to settle fully the accrued cash-settled portion of the share-based payment liabilities.

At June 30 and July 27, 2016, there were 347,414 RSUs and 527,664 PSUs outstanding. Details of the LTIP are disclosed in the Company’s MD&A and audited financial statements for the year ended December 31, 2015.

Deficit

On June 30, 2016 the Company’s deficit was $39.3 million, compared to $33.3 million at December 31, 2015. Contributing to the deficit was the $5.9 million net loss for the first half of 2016.

Dividends

No dividends were declared or paid in the first or second quarters of 2016.

Deferred Tax Liability

The net deferred income tax liability was $5.5 million at June 30, 2016 compared to $7.7 million at December 31, 2015. The decrease in the deferred income tax liability is mainly due to the increase in the non-capital losses carried forward and the reduction of the difference between the tax value and the accounting value of the seismic data library. The deferred income tax liability consists mainly of taxable temporary differences between the tax base of the seismic data library and the carrying amount on the statement of financial position, offset by non-capital tax losses carried forward.

The Canada Revenue Agency (CRA) may revise the way it assesses amortization for income tax purposes of certain seismic data library costs. To date the CRA has issued no policy related to this matter and, therefore, the Company is not able to estimate the impact any changes might have on its income tax calculations, carry-forward balances or consolidated financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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Financial Summary of Quarterly Results

		2016			2015			2014
(thousands of dollars, except per share data)	Q2	Q1	Q4	Q3	Q2	Q1	Q4	Q3
Data library sales	2,779	1,771	8,759	4,678	6,461	1,316	8,385	14,531
Participation survey revenue	–	–	–	–	–	3,220	–	–
Total revenue	2,779	1,771	8,759	4,678	6,461	4,536	8,385	14,531
Amortization of seismic data library	4,706	4,909	4,979	5,262	5,303	7,292	5,279	5,554
Impairment loss	–	–	937	–	–	–	–	–
Net earnings (loss)	(2,441)	(3,494)	658	(1,579)	(1,040)	(3,347)	824	5,086
Per share — basic and diluted	(0.04)	(0.06)	0.01	(0.03)	(0.02)	(0.06)	0.01	0.09

The revenue streams generated by Pulse’s operations are data library sales and participation survey revenue. Data library sales consist of traditional sales and transaction-based sales. There are three main types of transaction-based sale: partnership or joint venture sales, corporate merger or acquisition sales, and asset disposition-related sales. For further information on transaction-based sales, see “Transaction-based vs. Traditional Sales: Six-Year History” in the MD&A for the year ended December 31, 2015.

Pulse recognizes its participation survey revenue using the percentage-of-completion method. Under this method, participation survey revenue is recognized proportionately with the degree of each project’s completion.

In addition to the revenue fluctuations described in “Seismic Industry Cycles and Seasonality”, during the third quarter of 2014 and the second and third quarters of 2015, transaction-based sales contributed to data library sales to varying degrees. Very little transaction-based sales revenue was generated in the other five quarters covered by the above table. Seismic data library amortization is greater in quarters when participation surveys are completed, as each participation survey is amortized at 50 percent immediately upon delivery of data to the participant, with the remainder amortized equally over seven years.

During the past eight fiscal quarters, the fluctuations in net earnings or loss have largely been a function of revenue, data library amortization and impairment loss. Increases in data library sales have a highly positive impact on earnings, as the operating costs associated with licensing seismic data from the library fluctuate little from period to period.

All financial data included in the table above is presented in Canadian dollars, the Company’s functional currency, and was prepared using the latest international financial reporting standards (IFRS).

Contractual Obligations

There have been no material changes to Pulse’s contractual obligations from those discussed in the Company’s MD&A for the three months ended March 31, 2016.

Liquidity, Capital Resources and Capital Requirements

At June 30, 2016 Pulse had working capital of $4.1 million, including cash of $1.8 million, compared to working capital of $5.0 million, with $222,000 owing on the operating line of credit, at December 31, 2015. Given the flexibility of drawing and paying down debt, without penalty, on the revolving credit facility described below, and in order to reduce net financing costs, when the Company does have debt outstanding it maintains only a minimum cash balance as required for operations.

The Company utilized cash provided by operating activities during the first two quarters of 2016 for the following major cash outlays:

• / Investing activities of $2.2 million, consisting mostly of additions to the seismic data library;

• / Purchase and cancellation of 100,900 common shares through its NCIB, for a total of $231,000 (at an average price of $2.29 per common share including commissions); and

• / To purchase shares to settle the 2015 LTIP obligation for $166,000.

The Company has a $30 million revolving term credit facility of which up to $5.0 million can be used as an operating line of credit. The credit facility includes an accordion feature to increase the facility’s size up to $70.0 million with the lenders’ consent.

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On January 18, 2016, at its own discretion, the Company reduced the facility’s available borrowing amount to $30.0 million from $50.0 million.

The credit facility is secured by a charge on all of the assets of the Company and its material subsidiaries. The credit facility includes the following two financial covenants:

• / Total debt to adjusted EBITDA not to exceed a ratio of 2.50:1. Total debt is equal to the sum of, without limitation, debts and liabilities for borrowed money (including the negative mark-to-market exposure of hedging obligations), bankers’ acceptances, letters of credit, and letters of guarantee, capital leases and contingent guarantees.

• Adjusted EBITDA is to be calculated on a trailing twelve-month basis and is defined as earnings or loss before interest, income taxes, depreciation and amortization, plus extraordinary losses, non-cash losses and expense charges, and any other unusual or non-recurring cash charges, expenses or losses consented to by the lenders, less participation survey revenue, extraordinary gains and non-cash gains and income. Adjusted EBITDA is to be adjusted for acquisitions or dispositions to reflect such acquisition or disposition as if it occurred on the first day of such calculation period.

• / Interest coverage ratio is to be at least 3:1 at all times. The interest coverage ratio is equal to adjusted EBITDA divided by interest expense.

The covenants at June 30, 2016 were calculated as follows (financial figures are stated in thousands of dollars):

Total Debt to Adjusted EBITDA Ratio

(thousands of dollars except ratio)

Total debt	–
Divided by:
Adjusted EBITDA	12,145
Total debt to adjusted EBITDA ratio (not to exceed 2.50:1)	0.00:1

Total debt was calculated as follows:

Total debt was calculated as follows:
(thousands of dollars)
Long-term debt	–
Add: operating line of credit	–
Add: deferred fnancing charges	–
Total debt	–

Adjusted EBITDA was calculated as follows:

Adjusted EBITDA was calculated as follows:
(thousands of dollars)
Cash EBITDA for the twelve months ended December 31, 2015	15,121
Less: cash EBITDA for the Six months ended June 30, 2015	4,746
Add: cash EBITDA for the Six months ended June 30, 2016	1,770
TTM cash EBITDA	12,145
Adjustment for acquisitions or dispositions	–
Adjusted EBIDTA	12,145

MANAGEMENT’S DISCUSSION AND ANALYSIS

12

Interest Coverage Ratio

(thousands of dollars except ratio)

Adjusted EBITDA	12,145
Divided by:
Interest expense	183
Interest coverage ratio (to be at least 3:1)	66:1
Interest expense was calculated as follows:
Interest paid for the twelve months ended December 31, 2015	297
Less: interest paid for the six months ended June 30, 2015	190
Add: interest paid for the six months ended June 30, 2016	76
TTM interest paid	183
Adjustments	–
Interest expense	183

The Company was in compliance with the credit facility’s covenants at June 30, 2016.

At June 30, 2016, the applicable floating interest rate on the syndicated revolving credit facility was 3.20 percent, which is based on a combination of the bankers’ acceptance rate and an applicable margin tied to the Company’s total debt to adjusted EBITDA ratio. The Company pays a standby fee based on the daily undrawn balance of the credit facility and its total debt to adjusted EBITDA ratio. The interest and standby fee rates are adjusted two business days after the covenant’s calculation for the previous fiscal quarter is received and approved by the lenders. For the second quarter of 2016, the applicable margin and standby fee were set at the lowest rates available under the facility.

The applicable margin and standby fee rate are determined as follows:

	Applicable Margin for	Applicable Margin
	Canadian Prime	for Bankers’
Total Debt to Adjusted EBITDA Ratio	Rate Loans	Acceptances	Standby Fee Rate
Less than or equal to 1:1	0.50%	1.75%	0.35000%
Greater than 1:1 but less than or equal to 1.5:1	0.75%	2.00%	0.45000%
Greater than 1.5:1 but less than or equal to 2:1	1.00%	2.25%	0.50625%
Greater than 2:1 but less than or equal to 2.5:1	1.50%	2.75%	0.61875%

Toronto Stock Exchange (TSX) rules determine the number of shares the Company is permitted to purchase through its normal course issuer bid (NCIB). On December 21, 2015, the Company renewed its annual NCIB. The Company may purchase, for cancellation, up to a maximum of 3,509,326 common shares, equal to 10 percent of the public float of 35,093,268 common shares as at December 15, 2015. The Company is limited under the NCIB to purchasing up to 5,134 common shares in any one day, subject to the block purchase exemption under TSX rules. The NCIB will continue until December 20, 2016. Purchases will be made on the open market through the TSX or alternative trading platforms at the market price of such shares. All shares purchased under the NCIB will be cancelled.

During the second quarter, the Company bought 46,900 shares at an average price of $2.31 per common share including commissions. For the six months ended June 30, 2016 the Company bought 100,900 shares at an average price of $2.29 per common share including commissions. Purchases were made on the open market through the TSX or alternative trading platforms at the market price of such shares. All shares purchased under the NCIB were cancelled.

Funding for Pulse’s future capital expenditures will generally depend on the level of future data library sales. Pulse’s management believes that the Company’s capital resources will be sufficient to finance future operations and carry out the necessary capital expenditures through the remainder of 2016. The Company anticipates that future capital expenditures will be financed through customer pre-funding, cash on hand, available credit facilities, and cash provided by operating activities. The Company has a $30.0 million revolving credit facility for future draws, and an accordion feature allowing Pulse to increase the facility’s size up to $70.0 million, subject to the lender’s consent. If deemed appropriate by management and the Board of Directors, Pulse can also issue common or preferred shares.

PULSE SEISMIC INC.

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Pulse requires flexibility in managing its capital structure, including raising additional capital where required to take advantage of opportunities for seismic data acquisitions or participation surveys. Historically, the Company has used a combination of debt and equity to finance growth initiatives, and it continues to rely on key internal measures such as the long-term debt to TTM cash EBITDA ratio and long-term debt to equity ratio, to structure and forecast its capital requirements. Pulse’s management considers the current capital structure appropriate.

Long-Term Debt to TTM Cash EBITDA Ratio

Long-Term Debt to TTM Cash EBITDA Ratio
	As of June 30,
(thousands of dollars, except ratios)	2016	2015
Long-term debt	–	5,426
Divided by:
TTM cash EBITDA	12,145	24,131
Long-term debt to TTM cash EBITDA ratio	0.00:1	0.22:1

TTM cash EBITDA was calculated as follows:
	As of June 30,
(thousands of dollars)	2016	2015
Cash EBITDA for the 12 months ended December 31, 2015 and 2014	15,121	28,615
Less: cash EBITDA for the six months ended June 30, 2015 and 2014	4,746	9,230
Add: cash EBITDA for the six months ended June 30, 2016 and 2015	1,770	4,746
TTM cash EBITDA	12,145	24,131

The decrease in the long-term debt to TTM cash EBITDA ratio was attributable to the decrease in the long-term debt following repayments made during the fourth quarter of 2015, with no balance owing as of June 30, 2016.

Pulse uses debt strategically, to acquire high-quality seismic datasets that meet economic and technical criteria.

Long-Term Debt to Equity Ratio

The long-term debt-to-equity ratio is calculated using the long-term debt balance divided by total equity. At June 30, 2016 and 2015 the long-term debt-to-equity ratios were as follows:

and 2015 the long-term debt-to-equity ratios were as follows:
	As of June 30,
(thousands of dollars, except ratios)	2016	2015
Long-term debt	–	5,426
Divided by: equity	40,667	50,168
Long-term debt-to-equity ratio	0.00:1	0.11:1

Repayment of the long-term debt during 2015 resulted in the elimination of the long-term debt to equity ratio year over year.

This discussion on liquidity, capital resources and capital requirements contains forward-looking information; users of this information are cautioned that actual results may vary and are encouraged to review the discussions of risk factors and forward-looking statements below.

Non-Capital Resources

The Company’s main non-capital resource is its key management and staff. The Company has an experienced team with extensive knowledge about the seismic industry. Pulse’s management understands industry cycles and how to manage the business in the downturn and recovery phases. Pulse has built strong operations, sales, financial and information technology departments. Key management and staff are eligible to participate in the short-term and long-term incentive plans, which are tied to the Company’s shareholder free cash flow per share.

MANAGEMENT’S DISCUSSION AND ANALYSIS

14

Non-GAAP Financial Measures and Reconciliations

This MD&A and the Company’s continuous disclosure documents provide discussion and analysis of cash EBITDA and shareholder free cash flow. IFRS do not include standard definitions for these measures and, therefore, they may not be comparable to similar measures used and disclosed by other companies. As IFRS have been incorporated into Canadian generally accepted accounting principles (GAAP), these non-IFRS measures are also non-GAAP measures. The Company has included these non-GAAP financial measures because management, investors, analysts and others use them to evaluate the Company’s financial performance.

Cash EBITDA and shareholder free cash flow are not calculations based on IFRS and should not be considered in isolation or as a substitute for IFRS performance measures, nor should they be used as an exclusive measure of cash flow, because they do not consider working capital changes, capital expenditures, long-term debt repayments and other sources and uses of cash which are disclosed in the consolidated audited and interim statements of cash flows.

Cash EBITDA and Shareholder Free Cash Flow

Cash EBITDA represents the capital available to invest in growing the Company’s 2D and 3D seismic data library, to pay interest and principal on its long-term debt, to purchase its common shares, to pay taxes and to pay dividends if applicable.

Cash EBITDA is calculated as earnings or loss from operations before interest, taxes, depreciation and amortization less participation survey revenue, plus non-cash and non-recurring expenses. Cash EBITDA excludes participation survey revenue as this revenue is directly used to fund specific participation surveys and is unavailable for discretionary expenditures. The Company believes cash EBITDA helps investors compare Pulse’s results on a consistent basis without regard to participation survey revenue and non-cash items, such as depreciation and amortization, which can vary significantly depending on accounting methods or non-operating factors such as historical cost.

Shareholder free cash flow further refines the calculation of capital available to invest in growing the Company’s 2D and 3D seismic data library, to repay debt, to purchase its common shares and to pay dividends if applicable, by deducting non-discretionary expenditures from cash EBITDA. Non-discretionary expenditures are defined as debt financing costs (net of deferred financing expenses amortized in the current period) and current tax provisions.

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A reconciliation of net loss to EBITDA, cash EBITDA and shareholder free cash flow follows:

	Three months ended	June 30,	Six months ended	June 30,
(thousands of dollars, except per share data)	2016	2015	2016	2015
Net loss	(2,441)	(1,040)	(5,935)	(4,387)
Add:
Amortization of seismic data library	4,706	5,303	9,615	12,595
Net fnancing costs	39	145	95	281
Income tax expense (reduction)	(906)	434	(2,205)	(689)
Depreciation	36	46	72	92
EBITDA	1,434	4,888	1,642	7,892
Deduct:
Participation survey revenue	–	–	–	(3,220)
Add:
Non-cash expenses	70	98	128	74
Non-recurring expenses	–	–	–	–
Cash EBITDA	1,504	4,986	1,770	4,746
Deduct:
Net fnancing costs	(39)	(145)	(95)	(281)
Current income tax expense	–	–	–	–
Add:
Non-cash deferred fnancing charges	–	30	15	59
Current income tax reduction	–	–	–	–
Shareholder free cash fow (SFCF)	1,465	4,871	1,690	4,524
Cash EBITDA per share (basic and diluted)	0.03	0.09	0.03	0.08
SFCF per share (basic and diluted)	0.03	0.09	0.03	0.08

CASH EBITDA AND SFCF FOR THE SIX MONTHS ENDED JUNE 30 ($ millions)

2016 2015

CASH EBITDA AND SFCF PER SHARE (BASIC AND DILUTED) FOR THE SIX MONTHS ENDED JUNE 30 ($)

2016 2015

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5.0 0.10
4.7
4.5
0.08 0.08
4.0 0.08
3.0 0.06
2.0 1.8 0.04
1.7
0.03 0.03
1.0 0.02
0 0
Cash EBITDA SFCF Cash EBITDA SFCF
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MANAGEMENT’S DISCUSSION AND ANALYSIS

16

Financial Instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments are recognized on the statement of financial position when the Company becomes a party to the instrument’s contractual obligations. The Company’s financial assets include cash and cash equivalents, trade and other receivables. Its financial liabilities mainly comprise accounts payable and long-term debt.

Fair Value

The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amount largely due to the short-term maturities of these instruments.

Credit Risk

There have been no significant changes in Pulse’s credit risk as disclosed in the Company’s MD&A for the year ended December 31, 2015.

At June 30, 2016, 98 percent of the total accounts receivable were due from two customers. They are expected to be collected subsequent to quarter-end.

Interest Rate Risk

There have been no significant changes in Pulse’s interest rate risk as disclosed in the Company’s MD&A for the year ended December 31, 2015.

Liquidity Risk

There have been no significant changes in Pulse’s liquidity risk as disclosed in the Company’s MD&A for the year ended December 31, 2015.

Commodity Price Risk

The Company is not directly exposed to commodity price risk as it does not have any contracts directly based on commodity prices. A change in commodity prices, specifically oil and natural gas prices, has a material impact on the Company’s customers’ cash flows and influences their capital spending. Changing commodity prices, therefore, indirectly though often powerfully affect Pulse’s seismic data library sales and participation surveys. Commodity prices are affected by many factors, including supply and demand. The Company has not entered into any commodity price risk contracts. Given that changing oil and natural gas prices are an indirect influence, the financial impact on the Company is not reasonably determinable.

New IFRS Standards

A number of new standards, amendments and interpretations have been issued by the International Accounting Standards Board but were not effective for the periods ended June 30, 2016. They were not applied in preparing the condensed consolidated interim financial statements. None is expected to have a significant effect on the consolidated financial statements, except:

• / IFRS 15, Revenue from Contracts with Customers , which provides guidance on revenue recognition and relevant disclosures. The standard provides a single, principles-based five-step model to be applied to all contracts with customers. IFRS 15 was issued in May 2014 and applies to annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. The new standard will enhance revenue disclosure.

After review, Pulse’s management concluded that IFRS 15 would affect the Company’s policy for recognizing participation survey revenue. Pulse currently recognizes revenue on participation surveys based on the percentage of completion of the survey in question. With the amended standard, participation survey revenue can only be recognized in the financial statements when the survey is complete in all respects, meaning the risks and rewards of the final product have been passed on to the customer. Pulse will therefore have to adjust its revenue recognition policy accordingly and may choose to adopt IFRS 15 before January 2018. With this adjustment, the lag between the progressive recognition of participation survey revenue and initial amortization upon survey completion will disappear.

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• / IFRS 16, Leases . IFRS 16 was issued in January 2016, significantly revising the way in which companies account for leases by requiring almost all leases to be included on the balance sheet of lessees. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted for companies that also apply IFRS 15, Revenue from Contracts with Customers . The Company continues to evaluate the potential impact of IFRS 16 on the financial statements which, therefore, remains unknown.

Critical Accounting Estimates

There have been no significant changes in Pulse’s critical accounting estimates as disclosed in the Company’s MD&A for the year ended December 31, 2015.

Disclosure Controls and Procedures (DC&P) and Internal Controls Over Financial Reporting (ICFR)

The Company applies the COSO Internal Control — Integrated Framework (2013 Framework). There were no changes in the ICFR that occurred during the period beginning on April 1, 2016 and ending on June 30, 2016 that materially affected, or are reasonably likely to materially affect, the Company’s ICFR. No material weaknesses relating to the design of the ICFR were identified. As well, there were no limitations on the scope of the design of the DC&P or the ICFR.

Risk Factors

There have been no significant changes in Pulse’s risk factors as described in the Company’s MD&A for the year ended December 31, 2015.

Additional Information

You may find additional information relating to Pulse, including the Company’s Annual Information Form, on SEDAR at www.sedar.com.

Forward-Looking Information

This document contains information that constitutes “forward-looking information” or “forward-looking statements” (collectively, “forward-looking information”) within the meaning of applicable securities legislation.

The Outlook and the Liquidity, Capital Resources and Capital Requirements sections contain forward-looking information which includes, among other things, statements regarding:

• / Pulse’s short-term outlook remains more cautious than one year ago;

• / It is possible that traditional sales for the year will be lower than in 2015;

• / Pulse sees improved prospects for merger and acquisition activity in 2016;

• / Pulse will continue to lack visibility as to its 2016 revenues;

• / Pulse’s capital allocation strategy;

• / Pulse’s dividend policy;

• / Oil and natural gas prices;

• / Oil and natural gas drilling activity and land sales activity;

• / Oil and natural gas company capital budgets;

• / Future demand for seismic data;

• / Future seismic data sales;

• / Future demand for participation surveys;

• / Pulse’s business and growth strategy; and

• / Other expectations, beliefs, plans, goals, objectives, assumptions, information and statements about possible future events, conditions, results and performance.

MANAGEMENT’S DISCUSSION AND ANALYSIS

18

Sources for the forecasts and the material assumptions underlying this forward-looking information are, where applicable, noted in the relevant sections of this MD&A.

Undue reliance should not be placed on forward-looking information. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to vary and in some instances to differ materially from those anticipated in the forward-looking information. Pulse does not publish specific financial goals or otherwise provide guidance, due to the inherently poor visibility of seismic revenue.

The material risk factors include, without limitation:

• / Oil and natural gas prices;

• / Seismic industry cycles and seasonality;

• / The demand for seismic data and participation surveys;

• / The pricing of data library licensing sales;

• / Relicensing (change-of-control) fees, partner copy sales and asset disposition-related sales;

• / The level of pre-funding of participation surveys, and the Company’s ability to make subsequent data library sales from such participation surveys;

• / The Company’s ability to complete participation surveys on time and within budget;

• / Environmental, health and safety risks;

• / The effect of seasonality and weather conditions on participation surveys;

• / Federal and provincial government laws and regulations, including those pertaining to taxation, royalty rates, environmental protection and safety;

• / Competition;

• / Dependence on qualified seismic field contractors;

• / Dependence on key management, operations and marketing personnel;

• / The loss of seismic data;

• / Cybersecurity threats;

• / Protection of intellectual property rights; and

• / The introduction of new products.

The foregoing list is not exhaustive. Additional information on these risks and other factors which could affect the Company’s operations and financial results is included under “Risk Factors” for the most recently completed financial year and interim periods. Forward-looking information is based on the assumptions, expectations, estimates and opinions of the Company’s management at the time the information is presented.

PULSE SEISMIC INC.