Pulse Seismic Inc. — Interim / Quarterly Report 2017

Nov 2, 2017

q3 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

SELECTED FINANCIAL AND OPERATING INFORMATION

	Three months	ended Sept. 30,	Nine months	ended Sept. 30,	Year ended
(thousands of dollars except per share data,	2017	2016	2017	2016	December 31,
numbers of shares and kilometres of seismic data)	(unaudited)		(unaudited)		2016
Revenue
Data library sales	32,428	5,613	38,076	10,163	14,339
Amortization of seismic data library	4,639	4,701	13,912	14,316	18,973
Net earnings (loss)	18,704	(302)	13,776	(6,237)	(7,490)
Per share basic and diluted	0.34	(0.01)	0.25	(0.11)	(0.13)
Cash provided by operating activities	32,544	2,265	36,675	6,954	9,471
Per share basic and diluted	0.59	0.04	0.66	0.12	0.17
Cash EBITDA(a)	30,407	4,353	33,279	6,123	9,119
Per share basic and diluted(a)	0.55	0.08	0.60	0.11	0.16
Shareholder free cash fow(a)	23,569	4,336	26,428	6,026	9,029
Per share basic and diluted(a)	0.43	0.08	0.48	0.11	0.16
Capital expenditures
Seismic data purchases, digitization and related costs	–	165	125	2,380	2,444
Propertyand equipment	4	–	41	6	6
Total capital expenditures	4	165	166	2,386	2,450
Weighted average shares outstanding
Basic and diluted	55,069,815	56,161,432	55,381,245	56,126,720	56,105,593
Shares outstandingatperiod-end			54,593,017	56,161,432	55,921,060
Seismic library
2D in kilometres			447,000	447,000	447,000
3D in square kilometres			28,647	28,642	28,647

FINANCIAL POSITION AND RATIO

	September 30,	September 30,	December 31,
(thousands of dollars except ratio)	2017	2016	2016
Working capital	33,315	8,008	10,674
Working capital ratio	4.7:1	9.6:1	8.9:1
Cash and cash equivalents	38,686	3,949	5,847
Total assets	61,309	46,782	44,957
Long-term debt	–	–	–
Trailing twelve-month (TTM) cash EBITDA(b)	36,275	13,166	9,119
Shareholders’ equity	49,106	40,406	38,646

(a) These non-GAAP financial measures are defined, calculated and reconciled to the nearest GAAP financial measures 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.

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CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

		As atSeptember 30,	As at December 31,
(thousands of Canadian dollars) (unaudited)	Note	2017	2016
Assets
Cash and cash equivalents		38,686	5,847
Trade and other receivables		3,353	5,809
Prepaid expenses		271	364
Total current assets		42,310	12,020
Seismic data library	4	18,807	32,594
Property and equipment		192	343
Total non-current assets		18,999	32,937
Total assets		61,309	44,957
Liabilities and Shareholders’ Equity
Accounts payable and accrued liabilities		1,216	558
Deferred revenue		901	788
Current income tax liabilities		6,878	–
Total current liabilities		8,995	1,346
Deferred income tax liabilities		3,064	4,873
Other long-term payable		144	92
Total non-current liabilities		3,208	4,965
Total liabilities		12,203	6,311
Shareholders’ Equity
Share capital		75,690	77,531
Contributed surplus		2,424	2,217
Defcit		(29,008)	(41,102)
Total shareholders’ equity		49,106	38,646
Total liabilities and shareholders’ equity		61,309	44,957
Subsequent event	11

See accompanying notes to condensed consolidated interim financial statements.

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CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME AND LOSS

(thousands of Canadian dollars		Three months ended	Sept. 30,	Nine months ended	Sept. 30,
except per share data) (unaudited)	Note	2017	2016	2017	2016
Revenue
Data library sales		32,428	5,613	38,076	10,163
Operating expenses
Amortization of seismic data library		4,639	4,701	13,912	14,316
Salaries, internal commissions and benefts		1,764	714	3,609	2,349
Other selling, general and administrative costs		420	594	1,630	1,867
Depreciation		30	36	93	108
Total operating expenses		6,853	6,045	19,244	18,640
Results from operating activities		25,575	(432)	18,832	(8,477)
Financing costs (income)
Financing expenses		39	39	116	134
Interest income		(75)	(3)	(139)	(3)
Net fnancing costs (income)		(36)	36	(23)	131
Earning (loss) before income taxes		25,611	(468)	18,855	(8,608)
Current income tax (reduction)		6,874	(19)	6,874	(19)
Deferred income tax (reduction)		33	(147)	(1,795)	(2,352)
Income tax expense (reduction)		6,907	(166)	5,079	(2,371)
Net earnings (loss) and comprehensive income (loss)		18,704	(302)	13,776	(6,237)
Net earnings (loss) per share, basic and diluted	8	0.34	(0.01)	0.25	(0.11)

See accompanying notes to condensed consolidated interim financial statements.

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CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY

		Number of
(thousands of Canadian dollars,		shares issued	Share	Contributed		Total
except number of shares) (unaudited)	Note	(repurchased)	capital	surplus	Defcit	equity
Balance at January 1, 2016		55,592,689	76,504	2,184	(33,299)	45,389
Net loss for the period		–	–	–	(6,237)	(6,237)
Share-based compensation		–	–	176	–	176
Settlement of vested long-term
incentive plan award		–	–	(172)	–	(172)
Shares issued		669,643	1,500	–	–	1,500
Tax effect of equity-settled
share-based compensation		–	–	(19)	–	(19)
Normal course issuer bid	6	(100,900)	(140)	–	(91)	(231)
Balance at September 30, 2016		56,161,432	77,864	2,169	(39,627)	40,406
		Number of
		shares issued	Share	Contributed		Total
	Note	(repurchased)	capital	surplus	Defcit	equity
Balance at January 1, 2017		55,921,060	77,531	2,217	(41,102)	38,646
Net earnings for the period		–	–	–	13,776	13,776
Share-based compensation		–	–	343	–	343
Settlement of vested long-term
incentive plan award		–	–	(150)	–	(150)
Tax effect of equity-settled
share-based compensation		–	–	14	–	14
Normal course issuer bid	6	(1,328,043)	(1,841)	–	(1,682)	(3,523)
Balance at September 30, 2017		54,593,017	75,690	2,424	(29,008)	49,106

See accompanying notes to condensed consolidated interim financial statements.

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CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

		Nine months ended	September 30,
(thousands of Canadian dollars) (unaudited)	Note	2017	2016
Cash fows provided by (used in):
Operating:
Net earnings (loss) and comprehensive income (loss)		13,776	(6,237)
Adjustment for:
Amortization of seismic data library		13,912	14,316
Depreciation		93	108
Loss on disposition of capital assets		99	–
Income tax expense (reduction)		5,079	(2,371)
Equity-settled share-based compensation		343	176
Net fnancing costs (income)		(23)	131
Interest and standby fees paid		(79)	(102)
Interest received		34	1
Interest tax received		4	19
		33,238	6,041
Net change in non-cash working capital	9	3,437	913
Cash provided by operating activities		36,675	6,954
Financing:
Normal course issuer bid		(3,523)	(231)
Shares purchased for equity-settled share-based payments		(147)	(166)
Cash used in fnancing activities		(3,670)	(397)
Investing:
Seismic data purchases, digitization and related costs		(125)	(2,380)
Additions to property and equipment		(41)	(6)
Cash used in investing activities		(166)	(2,386)
Increase in cash and cash equivalents		32,839	4,171
Cash and cash equivalents (operating line of credit), beginning of period		5,847	(222)
Cash and cash equivalents, end of period		38,686	3,949

See accompanying notes to condensed consolidated interim financial statements.

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

Information as at September 30, 2017, December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016. (Tabular amounts in thousands of Canadian dollars, except per share data, numbers of shares and other exceptions as indicated.)

1. REPORTING ENTITY

Pulse Seismic Inc. (the Company) was incorporated under the Canada Business Corporations Act and is a publicly-listed company on the Toronto Stock Exchange (TSX) trading under the symbol PSD and on the OTCQX International trading under the symbol PLSDF. The Company’s registered office is in Calgary, Alberta. The Company is a provider of seismic data to the energy sector in western Canada.

2. BASIS OF PREPARATION

(A) STATEMENT OF COMPLIANCE

The condensed consolidated interim financial statements were prepared in accordance with International Financial Reporting Standards (IFRS).

The condensed consolidated interim financial statements were prepared by the Company’s management and were approved by the Board of Directors on November 1, 2017.

(B) BASIS OF PRESENTATION

The condensed consolidated interim financial statements include the accounts of the Company’s whollyowned subsidiaries.

(C) BASIS OF MEASUREMENT

The condensed consolidated interim financial statements were prepared on the historical cost basis.

(D) FUNCTIONAL AND PRESENTATION CURRENCY

The condensed consolidated interim financial statements are presented in Canadian dollars, which is the Company’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand, except per share data, numbers of shares and other exceptions as indicated.

(E) BASIS OF CONSOLIDATION

I) JOINT OPERATIONS

• Certain of the Company’s seismic data library assets are jointly owned with others. The condensed consolidated interim financial statements include the Company’s share in the joint assets, joint liabilities, expenses incurred and income earned from the joint operations.

II) TRANSACTIONS ELIMINATED ON CONSOLIDATION

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the condensed consolidated interim financial statements.

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(F) USE OF ESTIMATES AND JUDGEMENTS

Preparing the condensed consolidated interim financial statements in accordance with IFRS required management to make estimates and judgements that affected the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the revenue and expenses attributed to the reporting period. Actual results could differ from those estimates.

The significant judgments made by management in applying the accounting policies and the key sources of estimation uncertainty in preparing the condensed consolidated interim financial statements were the same as those applied to the audited consolidated financial statements as at and for the year ended December 31, 2016.

The Company is aware that the Canada Revenue Agency (CRA) may revise the way it assesses the income tax amortization of certain seismic data library costs. No policy document has been issued by the CRA and, therefore, the Company is not able to estimate the impact any change might have on its income tax calculations, carry-forward balances or consolidated financial statements.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies adopted by the Company are described in the audited consolidated financial statements for the year ended December 31, 2016 and were the same throughout the first three quarters of 2017 except for the depreciation of property and equipment. Effective January 1, 2017, as a result of a review of the remaining life and pattern of usage of its property and equipment, the Company adopted the straight-line method of depreciation for its property and equipment, which were previously depreciated using the declining balance method. In accordance with IFRS, a change in depreciation method is treated on a prospective basis as a change in estimate and, therefore, prior-period results have not been restated. The Company believes that the new method reflects the pattern of consumption of the future benefits to be derived from the assets being depreciated. The change in method had an immaterial effect for the three and nine months ended September 30, 2017.

A number of new standards, and amendments to standards and interpretations, have been issued by the International Accounting Standards Board (IASB) and are not yet effective for the year ended December 31, 2017. 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 also 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. Under 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. The other data library sale contracts will not be impacted by IFRS 15 and the revenue recognition policy will remain the same than in previous periods and years.

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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 remains unknown.

• IFRS 9, Financial Instruments . IFRS 9 was issued in 2014 and brings together the classification and measurement, impairment and hedge accounting to replace IAS 39, Financial Instruments: Recognition and Measurement . IFRS 9 is built on a logical, single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cashflow characteristics. The standard also includes an improved hedge accounting model to better link the economics of risk management with its accounting treatment. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. After review, Pulse’s management concluded that IFRS 9 will not have a significant effect on the consolidated financial statements.

4. SEISMIC DATA LIBRARY

IC DATA LIBRARY
	September 30,	December 31,
As at	2017	2016
Cost
Opening balance, January 1	443,399	439,455
Acquisitions through purchases, digitization and related cost	125	3,944
Closing balance	443,524	443,399
Accumulated amortization
Opening balance, January 1	410,805	391,832
Amortization for the period	13,912	18,973
Closing balance	424,717	410,805
Carrying amount	18,807	32,594

At September 30, 2017, the Company has considered indicators of impairment for each of its cash-generating units and based on that review no impairment tests were performed.

5. LONG-TERM DEBT

The Company has a $30.0 million three-year extendible revolving credit facility with a syndicate of banks. There are no scheduled principal payments. Voluntary prepayments are permitted in whole or part at any time without premium or penalty.

Up to $5.0 million of the revolving facility is available as an operating line of credit. As at September 30, 2017, long-term debt was $nil (December 31, 2016 – $nil). The credit facility includes an accordion feature which allows the Company to increase the facility to $70.0 million with the lenders’ consent. The accordion

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incurs no renewal or standby fees. The Company has the option on an annual basis to extend the maturity date for one additional year with the lenders’ approval and has done so each year. The maturity date is currently February 13, 2020.

Interest on the syndicated revolving bank loan is calculated based on the lender’s prime rate, bankers’ acceptance rate or LIBOR, plus an applicable margin based on the covenant ratio of total debt to adjusted earnings before interest, tax, depreciation and amortization (adjusted EBITDA). At September 30, 2017 the applicable interest rate on the long-term debt, if any were incurred, was 3.70 percent.

The Company pays a standby fee based on the daily undrawn balance of the credit facility and an applicable margin based on the covenant ratio of total debt to adjusted EBITDA.

The covenants include two financial ratio tests. The first is that the total debt to adjusted EBITDA must not exceed a ratio of 2.50:1. The ratio was 0.00:1 at September 30, 2017. The second is that the interest coverage ratio must be at least 3:1 at all times. The ratio was 345:1 at September 30, 2017. The Company was in compliance with all covenants at September 30, 2017.

The credit facility is secured by a charge on all of the assets of the Company and its material subsidiaries.

6. NORMAL COURSE ISSUER BID

During the nine months ended September 30, 2017 the Company purchased and cancelled 1,328,043 common shares (nine months ended September 30, 2016 – 100,900 common shares) through its normal course issuer bid, for a total of $3.5 million (nine months ended September 30, 2016 – $231,000) at an average price of $2.65 per common share (nine months ended September 30, 2016 – $2.29 per common share) including commissions.

7. SHARE-BASED PAYMENTS

In 2012, the Company’s Board of Directors approved a new long-term incentive plan (LTIP) for employees, officers and Directors designed to align the Company’s long-term incentive compensation with its performance and to increase individual share ownership.

The LTIP awards consist of restricted share units (RSU) and performance share units (PSU), with Directors being granted RSUs only. Upon vesting, each RSU and PSU entitles the holder to one common share of the Company. RSUs and PSUs have accompanying dividend-equivalent rights and, therefore, additional RSUs and PSUs are issued to reflect dividends declared, if applicable, on the common shares.

On March 31, 2017 one-third of the awards which were eligible to vest were RSUs and two-thirds were PSUs. The Company’s performance in 2016 did not meet the predetermined performance measures and, consequently, no PSUs vested on March 31, 2017. RSUs vest automatically based upon time and, consequently, all of the eligible RSUs vested automatically on March 31, 2017.

To satisfy its obligation, in April 2017 the Company provided $150,000 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, 2017. The related payroll taxes of $99,000 were paid in May 2017 to settle fully the accrued cash-settled portion of the share-based payment liabilities.

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For the March 31, 2017 replenishment, the Board of Directors approved the following changes:

• The salary multiplier applicable for the determination of RSUs and PSUs in the notional accounts of the executive officers was increased; and

• The RSUs and PSUs in the notional accounts for the other employees were split half-and-half compared to one-third, two-thirds in previous years.

The changes in the numbers of RSUs and PSUs granted are included in the table below.

In determining the amount of equity-settled share-based compensation related to PSUs, management makes estimates about future results and vesting criteria. It is reasonably possible that future outcomes could differ from the estimates, which are based on current knowledge, and require a material adjustment to the sharebased compensation expense recorded in future periods. The impact of any change in the number of PSUs expected to vest is recognized in the period the estimate is revised.

In the condensed consolidated interim statement of comprehensive earnings (loss) for the nine months ended September 30, 2017, the Company recognized $627,000 in compensation expense (nine months ended September 30, 2016 – $287,000) related to the LTIP in salaries, internal commissions and benefits. The equitysettled portion was $343,000 (nine months ended September 30, 2016 – $176,000) and the cash-settled portion was $284,000 (nine months ended September 30, 2016 – $111,000). At September 30, 2017 the obligation related to the cash-settled portion of the LTIP was $356,000 (September 30, 2016 – $150,000) with $212,000 included in accounts payable and accrued liabilities (September 30, 2016 – $76,000) and $144,000 included in other longterm liabilities (September 30, 2016 – $74,000).

The following summarizes activity in the Company’s LTIP notional accounts during the periods ended September 30, 2017 and 2016:

September 30, 2017 and 2016:
	Three	months ended	Nine	months ended
	September 30,		September 30,
RSUs	2017	2016	2017	2016
Outstanding, beginning of period	520,808	347,414	343,440	344,729
Vested	–	–	(97,108)	(121,713)
Granted	–	–	291,676	142,055
Cancelled or forfeited	–	(3,974)	(17,200)	(21,631)
Outstanding, end of period	520,808	343,440	520,808	343,440
	Three	months ended	Nine	months ended
	September 30,		September 30,
PSUs	2017	2016	2017	2016
Outstanding, beginning of period	665,108	527,664	519,717	498,746
Granted	–	–	330,899	208,469
Cancelled or forfeited	–	(7,947)	(185,508)	(187,498)
Outstanding, end of period	665,108	519,717	665,108	519,717

In May 2017, 97,108 RSUs vested and were settled. The 142,840 PSUs which were eligible to vest did not meet the performance criteria and were cancelled from the notional accounts on the vesting date.

The RSUs and PSUs cancelled or forfeited during the periods include employees and a director no longer with the Company and also include the LTIP changes approved by the Board of Directors for the March 31, 2017 replenishment.

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8. EARNINGS PER SHARE

(A) BASIC EARNINGS PER SHARE

The calculation of basic earnings per share for the nine months ended September 30, 2017 was based on the net earnings attributable to common shareholders of $13.8 million (nine months ended September 30, 2016 – net loss of $6.2 million) and a weighted average number of common shares outstanding of 55,381,245 (nine months ended September 30, 2016 – 56,126,720), calculated as follows:

For the three and nine months ended September 30,	2017	2016	2017	2016
Common shares outstanding at beginning of period	55,337,560	56,161,432	55,921,060	55,592,689
Effect of common shares issued during period	–	–	–	606,100
Effect of common shares purchased and cancelled during period	(267,745)	–	(539,815)	(72,069)
Weighted average number of common shares	55,069,815	56,161,432	55,381,245	56,126,720

(B) DILUTED EARNINGS PER SHARE

The Company does not have any dilutive securities.

9. NET CHANGE IN NON-CASH OPERATING WORKING CAPITAL

AL
For the nine months ended September 30,	2017	2016
Trade and other receivables	2,456	1,489
Prepaid expenses	93	22
Accounts payable and accrued liabilities	658	(296)
Deferred revenue	113	–
Current income tax liabilities	6,878	–
Other long-term payable	52	(2)
Others	(6,813)	(300)
Net change in non-cash operating working capital	3,437	913

10. MAJOR CUSTOMERS

Data library sales to one customer represented approximately $29.1 million or 76 percent of the Company’s total data library sales for the nine months ended September 30, 2017 (nine months ended September 30, 2016 – sales to four customers represented approximately $6.9 million or 67 percent).

11. SUBSEQUENT EVENT

On November 1, 2017 the Company declared a special dividend of $0.20 per common share. The estimated dividend of $10.9 million will be paid on December 8, 2017 to shareholders of record at the close of business on November 16, 2017.

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