Pulse Seismic Inc. — Interim / Quarterly Report 2017

Jul 27, 2017

q2

FOR THE SIX MONTHS ENDED JUNE 30, 2017

SELECTED FINANCIAL AND OPERATING INFORMATION

	Three months ended June 30,	Three months ended June 30,	Six months	ended June 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	2,929	2,779	5,648	4,550	14,339
Amortization of seismic data library	4,638	4,706	9,273	9,615	18,973
Net loss	(2,426)	(2,441)	(4,928)	(5,935)	(7,490)
Per share basic and diluted	(0.04)	(0.04)	(0.09)	(0.11)	(0.13)
Cash provided by operating activities	833	1,183	4,131	4,689	9,471
Per share basic and diluted	0.02	0.02	0.07	0.08	0.17
Cash EBITDA(a)	1,542	1,504	2,872	1,770	9,119
Per share basic and diluted(a)	0.03	0.03	0.05	0.03	0.16
Shareholder free cash fow(a)	1,605	1,465	2,859	1,690	9,029
Per share basic and diluted(a)	0.03	0.03	0.05	0.03	0.16
Capital expenditures
Seismic data purchases, digitization and related costs	60	65	125	2,215	2,444
Propertyand equipment	10	–	37	6	6
Total capital expenditures	70	65	162	2,221	2,450
Weighted average shares outstanding
Basic and diluted	55,337,560	56,175,306	55,539,541	56,109,173	56,105,593
Shares outstandingatperiod-end			55,337,560	56,161,432	55,921,060
Seismic library
2D in kilometres			447,000	447,000	447,000
3D in square kilometres			28,647	28,613	28,647
FINANCIAL POSITION AND RATIO
			June 30,	June 30,	December 31,
(thousands of dollars except ratio)			2017	2016	2016
Working capital			11,811	4,085	10,674
Working capital ratio			11.2:1	5.0:1	8.9:1
Cash and cash equivalents			8,263	1,849	5,847
Total assets			36,632	47,256	44,957
Long-term debt			–	–	–
Trailing twelve-month (TTM) cash EBITDA(b)			10,221	12,145	9,119
Shareholders’ equity			32,338	40,667	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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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2017

Overview	3	Non-Capital Resources	14
Key Performance Indicators	3	Non-GAAP Financial Measures and Reconciliations	15
Seismic Revenue Fluctuations	4	Financial Instruments	17
Outlook	4	New IFRS Standards	17
Discussion of Operating Results	5	Critical Accounting Estimates	18
Review of Financial Position	8	Disclosure Controls and Procedures (DC&P)
Financial Summary of Quarterly Results	10	and Internal Controls Over Financial Reporting (ICFR)	18
Contractual Obligations	11	Risk Factors	18
Liquidity, Capital Resources and Capital Requirements	11	Additional Information	19
		Forward-Looking Information	19

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, 2017 was prepared taking into consideration information available to July 26, 2017 and should be read with the unaudited condensed consolidated interim financial statements and related notes for the three and six months ended June 30, 2017. This MD&A is supplemental to the MD&A, audited consolidated financial statements and related notes for the year ended December 31, 2016.

The consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) with comparative figures for the prior year. The consolidated financial statements and the MD&A were reviewed by Pulse’s Audit and Risk 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”.

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OVERVIEW

ABOUT PULSE

Pulse is a market leader in the acquisition, marketing and licensing of two-dimensional (2D) and threedimensional (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 kilometres of 2D data and net square kilometres of 3D data by multiplying the number of kilometres of seismic data in each 2D line and the number of square kilometres of seismic data in each individual 3D seismic dataset 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 EBITDA and shareholder free cash flow. The definitions, calculations and reconciliations of cash EBITDA and shareholder free cash flow to the nearest GAAP financial measures are provided in “Non-GAAP Financial Measures and Reconciliations”.

Results for the key performance indicators for the three and six months ended June 30, 2017, with comparative figures for 2016, are set out in the following table:

		Three months ended	June 30,		Six months ended	June 30,
(thousands of dollars except
per share data)	2017	2016	Variance	2017	2016	Variance
Total revenue - data library sales	2,929	2,779	150	5,648	4,550	1,098
Net loss	(2,426)	(2,441)	15	(4,928)	(5,935)	1,007
Per share basic and diluted	(0.04)	(0.04)	0.00	(0.09)	(0.11)	0.02
Cash EBITDA	1,542	1,504	38	2,872	1,770	1,102
Per share basic and diluted	0.03	0.03	0.00	0.05	0.03	0.02
Shareholder free cash fow	1,605	1,465	140	2,859	1,690	1,169
Per share basic and diluted	0.03	0.03	0.00	0.05	0.03	0.02

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The 24 percent increase in data library sales for the six months ended June 30, 2017 over the comparable period last year, combined with the low cost structure of the business, are the main factors contributing to the improvement in all of the Company’s key performance metrics from the prior year’s period. The large majority of the $1.1 million first-half sales increase over last year stems from the first quarter’s $948,000 increase over the first quarter of 2016.

There were no participation surveys conducted in the first half of 2017 or throughout 2016.

SEISMIC REVENUE FLUCTUATIONS

Revenue fluctuations are a normal part of the seismic data library business, and data library sales can vary significantly from quarter to quarter and year-over-year.

Data library sales consist of traditional sales and transaction-based sales, which are further broken down according to their type of triggering event: corporate merger or acquisition sales, partnership or joint venture sales and asset disposition-related sales. For further information on transaction-based sales, see “Traditional Sales vs. Transaction-Based Sales: Seven-Year History” in the MD&A for the year ended December 31, 2016.

Traditional data library sales can occur at any time. This is due to the nearly continual changes in oil and natural gas industry conditions, to sudden increases in demand for seismic data covering a specific area or play, and to the timing of public offerings of petroleum and natural gas rights (land sales). Pulse no longer sees any patterns in traditional sales by quarter or by season.

Transaction-based sales can also occur at any time. This is due to corporate merger-and-acquisition, joint venture and asset disposition activity by Pulse’s clients, which is unpredictable.

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 date has been considerably less than historical averages.

OUTLOOK

Following its two quarters of modestly improved data library sales over the comparable periods of last year, and with industry indicators continuing to fluctuate within indecisive bands – neither especially strong nor particularly weak – Pulse maintains its cautiously optimistic outlook for continued modest improvement in its traditional sales business through the remainder of 2017. The Company does not believe that a stronger rebound in its traditional sales business is imminent.

The slide in the crude oil price since the end of the first quarter, to US$47.77 per bbl WTI on July 25, and the continued weakness in the Canadian gas price, standing at only $1.74 per mcf for AECO spot on July 25, raise concerns that commodity pricing may no longer be sufficient to sustain the recent increases in Canadian industry capital spending, land sales and drilling rates.

Earlier in the year, positive indicators had included the April revision by the Petroleum Services Association of Canada to its 2017 Canadian drilling forecast to 6,680 wells, an increase of over 60 percent from 2016 and of 28 percent since the organization’s previous 2017 forecast. Also, industry spending on mineral rights increased

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PULSE SEISMIC

over 2016. Land sales in Alberta and B.C. in the first half of 2017 totalled $250.2 million compared to only $68 million in the first half of 2016, an increase of 268 percent. Historically, commodity prices, land sales and drilling rates, while not directly correlated to Pulse’s data library sales were in fact key indicators of activity levels. The Company believes that a recovery in its traditional data library sales depends on materially increased capital investment and higher field activity by the oil and gas industry on a sustained basis.

In the United States, natural gas storage is down from year-ago levels and only modestly exceeds the fiveyear weekly average. Weekly net injections are down year-over-year, and U.S. LNG exports are often exceeding 2 bcf per day. This is positive for natural gas prices. On the other hand, the active U.S. drilling rig fleet has soared over the past year and in mid-July exceeded 950 rigs, suggesting that U.S. oil and gas production will remain robust, dampening expectations for crude oil and natural gas prices.

Given this basket of ambivalent and in some cases contradictory signals, Pulse’s optimism is tempered by the possibility of continued weakness in traditional sales for the short term. Transaction-based sales of any size could occur at any time.

With zero long-term debt, cash reserves of $8.3 million at June 30, 2017, unutilized credit facilities, an experienced management team and Board of Directors, annual cash costs below $6.0 million, and a valuable, competitive and technically high-quality asset – its seismic data library – Pulse remains positioned to grow. The Company continues to be a pure-play seismic data provider with the goal of becoming the largest licensable seismic dataset in Western Canada.

DISCUSSION OF OPERATING RESULTS

SUMMARY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017

LOSS BEFORE INCOME TAXES

For the three months ended June 30, 2017, and the comparable period of 2016, the Company incurred a loss before income taxes of $3.3 million ($0.06 per share basic and diluted).

For the six months ended June 30, 2017, the Company incurred a loss before income taxes of $6.8 million ($0.12 per share basic and diluted) compared to a loss before income taxes of $8.1 million ($0.15 per share basic and diluted) for the comparable period of 2016.

REVENUE

Total revenue for the three months ended June 30, 2017 was $2.9 million compared to $2.8 million for the three months ended June 30, 2016. Revenue was comprised entirely of data library sales, there being no participation survey revenue in either period.

Total revenue for the six months ended June 30, 2017 was $5.6 million compared to $4.6 million for the six months ended June 30, 2016 and was also comprised entirely of data library sales in both periods.

DATA LIBRARY SALES

For the three months ended June 30, 2017, data library sales were $2.9 million, with 78 percent categorized as traditional sales. For the three months ended June 30, 2016, data library sales were $2.8 million, with 57 percent categorized as traditional sales.

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For the six months ended June 30, 2017, data library sales were $5.6 million, with 73 percent categorized as traditional sales. For the six months ended June 30, 2016, data library sales were $4.6 million, with 74 percent categorized as traditional sales.

The Company experienced lower data library sales in 2017 and 2016 than in previous years due to the ongoing cutbacks in the energy-producing sector’s capital spending that generate traditional sales and lower-thanexpected merger-and-acquisition activities that could trigger transaction-based sales, followed by a modest upturn in data library sales in the first half of 2017 over the first half of 2016.

GEOGRAPHICAL SALES BREAKDOWN

The Company’s customers are generally focusing on liquids-rich natural gas and oil pools 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, on Alberta’s eastern prairies and in Saskatchewan and Manitoba. In the first half of 2017, 53 percent of the data library sales were from data located in Alberta, 31 percent in British Columbia and 16 percent in other provinces.

GEOGRAPHICAL SALES BREAKDOWN (%) FOR THE

THREE MONTHS ENDED JUNE 30, 2017 AND 2016

GEOGRAPHICAL SALES BREAKDOWN (%) FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

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0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100
18 53
Alberta Alberta
98 75
61 31
British British
Columbia Columbia
0 0
21 16
Other Other
2 25
----- End of picture text -----

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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 fluctuates significantly depending on the number of 3D seismic sale contracts signed during a given period. In the first half of 2017, 77 percent of data library sales revenue was from 3D data compared to 85 percent in the comparable period in 2016.

SALES BREAKDOWN 2D AND 3D (%) FOR THE

THREE MONTHS ENDED JUNE 30

SALES BREAKDOWN 2D AND 3D (%) FOR THE

SIX MONTHS ENDED JUNE 30

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----- Start of picture text -----

0 20 40 60 80 100 0 20 40 60 80 100
2017 25 2017 23
75 77
2016 15 2016 15
85 85
----- End of picture text -----

AMORTIZATION OF SEISMIC DATA LIBRARY

For the three months ended June 30, 2017, seismic data library amortization expense was $4.6 million compared to $4.7 million in the comparable period of 2016. For the six months ended June 30, 2017, seismic data library amortization expense was $9.3 million compared to $9.6 million in the comparable period of 2016. The slight decrease in both the three and six-month periods is due to data acquired in previous years becoming fully amortized.

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

SALARIES, INTERNAL COMMISSIONS AND BENEFITS (SCB)

SCB for the three months ended June 30, 2017 was $927,000 compared to $821,000 in the comparable period of 2016. SCB for the six months ended June 30, 2017 was $1.8 million compared to $1.6 million in the comparable period of 2016.

The increase in both the three-and-six month periods is mainly attributable to higher internal selling commissions, which are due in turn to higher data library sales, and to higher short-term and long-term incentive plan expenses that were due in turn to changes made to the incentive plans for 2017 and future years.

OTHER SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)

SG&A for the three months ended June 30, 2017 was $652,000 compared to $524,000 for the three months ended June 30, 2016. The increase was primarily due to the Company’s move to a new office in May 2017. The Company incurred $22,000 of moving costs in the second quarter and wrote off the remaining net book value of some office furniture as the new office space is fully furnished. The Company also wrote off the net book value of certain computer equipment and software which became obsolete due to system changes and upgrades including the implementation of a Cloud-based solution for its operations information back up. The total amount written off in the second quarter was $104,000.

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SG&A for the six months ended June 30, 2017 was $1.2 million compared to $1.3 million for the six months ended June 30, 2016. The decrease was primarily due to lower consulting fees, legal fees, regulatory costs and public reporting costs that offset the expenses previously detailed, that were incurred in the second quarter.

NET FINANCING COSTS

For the three months ended June 30, 2017, net financing costs decreased to $7,000 from $39,000 for the same period in 2016.

For the six months ended June 30, 2017, net financing costs decreased to $13,000 from $95,000 for the same period in 2016.

Financing expenses are primarily stand-by fees on the undrawn credit facility and were largely offset by the interest income earned from having the cash surplus invested in term deposits as well as the interest income from discounted accounts receivable from clients that had benefited from extended payment terms. The Company fully repaid its long-term debt in 2015 and the balance was nil at both June 30, 2017 and 2016.

INCOME TAXES

The income tax reduction for the three months ended June 30, 2017 was $897,000, compared to $906,000 for the comparable 2016 period. The income tax reduction for the six months ended June 30, 2017 was $1.8 million compared to $2.2 million for the comparable 2016 period. The effective rate for both periods was the same at 27 percent.

REVIEW OF FINANCIAL POSITION

AS AT JUNE 30, 2017

SEISMIC DATA LIBRARY

The Company’s business model includes seismic data library growth as a priority. 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 also 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.

During the first half of 2017, the Company did not conduct surveys or purchase data. Pulse incurred $125,000 of digitization cost related to the data acquired in January 2016.

At June 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.

The Company continues to seek and evaluate new opportunities to partner with customers on potential future participation surveys.

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.

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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,
	2017	2016	2017	2016
Weighted average shares outstanding:
Basic and diluted	55,337,560	56,175,306	55,539,541	56,109,173
Shares outstanding at period-end			55,337,560	56,161,432
Shares outstanding at July 26, 2017			55,337,560

DILUTED EARNINGS PER SHARE RECONCILIATION

The Company does not have any dilutive securities.

LONG-TERM INCENTIVE PLAN (LTIP)

The Company has an LTIP for employees, officers and directors designed to align the Company’s long-term incentive compensation with its performance and to increase levels of stock ownership. Participants are granted restricted share units (RSUs) and performance share units (PSUs). LTIP awards are at the discretion of the Board of Directors.

RSUs and PSUs have accompanying dividend-equivalent rights and, therefore, when applicable, additional RSUs and PSUs are issued to reflect dividends declared on the common shares. The plan’s trustee purchases common shares on the open market for the after-tax number of RSUs and PSUs vested using funds provided by the Company.

On March 31, 2017, one-third of the LTIP 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 criteria and, consequently, no PSUs vested. RSUs vest automatically based upon time; all of the eligible RSUs, therefore, 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 the fully accrued cash-settled portion of the share-based payment liabilities.

For the March 31, 2017 LTIP 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 RSUs and two-thirds PSUs in the previous years.

At June 30 and July 26, 2017 there were 520,808 RSUs and 665,108 PSUs outstanding.

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DEFICIT

On June 30, 2017 the Company had a deficit of $46.6 million, compared to $41.1 million at December 31, 2016. Contributing to the deficit is the net loss for the period of $4.9 million and the reduction of $597,000 to retained earnings due to the required accounting treatment of the Company purchasing and cancelling its common shares through its normal course issuer bid (NCIB). The adjustment relates to the difference between the price paid by the Company for the shares purchased and cancelled and the average historical cost of the Company’s shares. The average historical cost of the shares purchased and cancelled was recorded as a reduction to share capital.

DEFERRED TAX LIABILITY

The net deferred income tax liability was $3.0 million at June 30, 2017 compared to $4.9 million at December 31, 2016. The decrease in the deferred income tax liability is mainly due to the decrease in the difference between the tax base of the seismic data library and the carrying amount on the statement of financial position partially offset by the decrease in the non-capital tax losses carried forward.

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, partially offset by non-capital tax losses carried forward.

The Company is aware that the Canada Revenue Agency (CRA) may revise the way it assesses amortization for income tax purposes of certain seismic data library costs. No policy document has been issued by the CRA and, therefore, the Company is unable to estimate the impact any change might have on its income tax calculations, carry-forward balances or consolidated financial statements.

FINANCIAL SUMMARY OF QUARTERLY RESULTS

		2017			2016			2015
(thousands of dollars, except per share data)	Q2	Q1	Q4	Q3	Q2	Q1	Q4	Q3
Data library sales	2,929	2,719	4,176	5,613	2,779	1,771	8,759	4,678
Participation survey revenue	–	–	–	–	–	–	–	–
Total revenue	2,929	2,719	4,176	5,613	2,779	1,771	8,759	4,678
Amortization of seismic data library	4,638	4,635	4,657	4,701	4,706	4,909	4,979	5,262
Impairment loss	–	–	–	–	–	–	937	–
Net earnings (loss)	(2,426)	(2,502)	(1,253)	(302)	(2,441)	(3,494)	658	(1,579)
Per share - basic and diluted	(0.04)	(0.04)	(0.02)	(0.01)	(0.04)	(0.06)	0.01	(0.03)

The revenue streams generated by Pulse’s operations are data library sales and customer pre-funding of participation surveys. Data library sales consist of traditional sales and transaction-based sales, as described in “Traditional Sales vs. Transaction-based Sales: Seven-Year History” in the Company’s MD&A for the year ended December 31, 2016. See also “Seismic Revenue Fluctuations”.

During the second quarter of 2017, the second and third quarters of 2016 and the third and fourth 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 quarters depicted in the above table.

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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. There is a lag between the progressive recognition of participation survey revenue and initial amortization upon survey completion. As amortization is a non-cash expense, the Company continued to generate cash EBITDA and shareholder free cash flow in each quarter.

During the past eight fiscal quarters, the fluctuations in net earnings or loss have largely been a function of fluctuating data library sales, decreasing data library amortization and a one-time impairment expense recorded in 2015. Increases in data library sales have a highly positive impact on earnings, as the operating costs fluctuate little from period to period.

All financial data included in the above table is presented in Canadian dollars, the Company’s functional currency, and was prepared in accordance with 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 year ended December 31, 2016.

In January 2017, the Company signed a sublease agreement for new office space, which started in April and expires in March 2023. The new space is smaller and has a lower base rent which will reduce the Company’s annual rental expense by approximately 40 percent over the new term.

LIQUIDITY, CAPITAL RESOURCES AND CAPITAL REQUIREMENTS

At June 30, 2017 Pulse had working capital of $11.8 million and a working capital ratio of 11.2:1.

In the first six months of 2017 the Company generated cash from operating activities of $4.1 million compared to $4.7 million in the same period of 2016.

The Company utilized cash provided by operating activities during the first two quarter of 2017 for the following cash outlays:

• Purchase and cancellation of 583,500 common shares through its NCIB, for a total of $1.4 million (at an average price of $2.41 per common share including commissions);

• To purchase shares to settle the 2016 LTIP obligation for $147,000;

• Seismic data digitization for $125,000; and

• Additions of property and equipment for $37,000.

Over this period, the cash balance increased by $2.4 million from the 2017 opening balance of $5.8 million to $8.3 million at June 30, 2017.

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The Company has a three-year extendable revolving credit facility of $30.0 million with a syndicate of two banks. Up to $5.0 million of the revolving facility is available as an operating line of credit.

On an annual basis, the Company has the option to extend the maturity date for one additional year with the lenders’ approval. On December 13, 2016, the Company extended the maturity date to February 13, 2020.

Highlights of the credit facility:

• Four-tier margin structure based on the Company’s total debt to adjusted EBITDA ratio as described below;

• Accordion feature allowing the Company to increase the facility’s size up to an additional $40.0 million, subject to the lenders’ consent;

• No regularly scheduled principal payments, with voluntary prepayments permitted in whole or part at any time, without premium or penalty; and

• Three-year term, with an extension of up to one year available on February 15 of every year with the approval of the lenders. If the extension is not granted, any outstanding amounts will be payable on the then-current applicable maturity date.

At June 30, 2017 and July 26, 2017 the Company had no balance owing on the revolving credit facility and $30 million available for future draws.

The credit facility is secured by a charge on all of the assets of the Company and its material subsidiaries. The credit facility also 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 12-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 total debt to adjusted EBITDA ratio was zero as there was no debt outstanding at June 30, 2017.

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The interest coverage ratio at June 30, 2017 was calculated as follows:

Interest Coverage Ratio (ICR)
(thousands of dollars except ratio)
Adjusted EBITDA	10,221
Divided by:
Interest expense	105
ICR (to be at least 3:1)	97:1

Adjusted EBITDA was calculated as follows:

Adjusted EBITDA was calculated as follows:
(thousands of dollars)
Cash EBITDA for the twelve months ended December 31, 2016	9,119
Less: cash EBITDA for the six months ended June 30, 2016	1,770
Add: cash EBITDA for the six months ended June 30, 2017	2,872
TTM cash EBITDA	10,221
Adjustment for acquisitions or dispositions	-
Adjusted EBITDA	10,221

Interest expense was calculated as follows:

Interest expense was calculated as follows:
(thousands of dollars)
Interest paid for the twelve months ended December 31, 2016	128
Less: interest paid for the six months ended June 30, 2016	76
Add: interest paid for the six months ended June 30, 2017	53
TTM interest paid	105
Adjustments	–
Interest expense	105

The Company was in compliance with the credit facility’s covenants at June 30, 2017.

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. On June 30, 2017 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%

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Toronto Stock Exchange (TSX) rules determine the number of shares the Company is permitted to purchase through its NCIB.

On December 19, 2016, the Company renewed its NCIB. The Company may purchase, for cancellation, up to a maximum of 3,493,536 common shares, equal to 10 percent of the public float of 34,935,363 common shares as at December 15, 2016. The Company is limited under the NCIB to purchasing up to 4,728 common shares in any one day, subject to the block purchase exemption under TSX rules. The NCIB will continue until December 20, 2017. 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.

From January 1, 2017 to March 31, 2017, the Company purchased 583,500 common shares under the NCIB. No shares were purchased in the second quarter of 2017. 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 2017. The Company anticipates that future capital expenditures will be financed through cash on hand, available credit facilities, funds from operations and customer pre-funding on surveys. The Company has a $30.0 million revolving credit facility for future draws in 2017, and an accordion feature allowing Pulse to increase the facility’s size by up to $40.0 million, subject to the lenders’ consent. If deemed appropriate by management and the Board of Directors, Pulse can also issue common or preferred shares.

Pulse requires flexibility in managing its capital structure to take advantage of opportunities in raising additional capital where opportunities for seismic data acquisitions or participation surveys arise. Historically, the Company has used a combination of debt and equity to finance various growth initiatives, and it continues to rely on internal measures such as the long-term debt to cash EBITDA ratio and long-term debt to equity ratio, to structure and forecast its capital requirements. Long-term debt is defined as long-term debt, excluding deferred financing costs. At June 30, 2017, both ratios were 0.00:1 as the long-term debt was zero. Pulse’s management considers the current capital structure appropriate.

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 sales, financial and information technology departments. Key management and staff are eligible to participate in the shortterm and long-term incentive plans, which are tied to the Company’s shareholder free cash flow per share.

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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 SHAREHOLDERS 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)	2017	2016	2017	2016
Net loss	(2,426)	(2,441)	(4,928)	(5,935)
Add:
Amortization of seismic data library	4,638	4,706	9,273	9,615
Net fnancing costs	7	39	13	95
Income tax reduction	(897)	(906)	(1,828)	(2,205)
Depreciation	28	36	63	72
EBITDA	1,350	1,434	2,593	1,642
Deduct:
Participation survey revenue	–	–	–	–
Add:
Non-cash expenses	192	70	279	128
Non-recurring expenses	–	–	–	–
Cash EBITDA	1,542	1,504	2,872	1,770
Deduct:
Net fnancing costs	(7)	(39)	(13)	(95)
Current income tax expense	–	–	–	–
Add:
Non-cash deferred fnancing charges	–	–	–	15
Current income tax reduction	70	–	–	–
Shareholder free cash fow (SFCF)	1,605	1,465	2,859	1,690
Cash EBITDA per share (basic and diluted)	0.03	0.03	0.05	0.03
SFCF per share (basic and diluted)	0.03	0.03	0.05	0.03

CASH EBITDA AND SFCF ($ millions) FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

CASH EBITDA AND SFCF PER SHARE (basic and diluted) ($) FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

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2.9
SFCF
1.7
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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, if applicable.

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. The fair value of the long-term debt, if applicable, approximates the carrying value because interest charges under the bank loan are based on current Canadian bankers’ acceptance rates and margins.

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, 2016.

At June 30, 2017, 82 percent of the total accounts receivable were due from four customers. They are expected to be collected subsequent to quarter-end.

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, 2016.

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, could have a material impact on the Company’s customers’ cash flows and could therefore affect 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 this is an indirect influence, the financial impact on the Company of changing oil and natural gas prices is not reasonably determinable.

NEW IFRS STANDARDS

A number of new standards, amendments to standards and interpretations have been issued by the International Accounting Standards Board (IASB) but are not yet effective for the year ended December 31, 2017. Accordingly, 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 for:

• 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.

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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 percentage of completion. 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 to the customer. Pulse will, therefore, have to adjust its revenue recognition policy accordingly and may choose to adopt the standard before January 2018. With this adjustment, the lag between the progressive recognition of participation survey revenue and initial amortization upon survey completion will disappear.

• 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. The Company continues to evaluate the potential impact of IFRS 9 on the financial statements, which 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, 2016.

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, 2017 and ending on June 30, 2017 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, 2016.

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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 maintains its cautiously optimistic outlook for continued modest improvement in its traditional sales business through the remainder of 2017;

• The Company does not believe that a stronger rebound in its traditional sales business is imminent;

• 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 2017;

• Pulse’s capital allocation strategy;

• Oil and natural gas prices;

• Oil and natural gas drilling 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.

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 forwardlooking 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;

• The demand for seismic data and participation surveys;

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PULSE SEISMIC p 19

• The pricing of data library license sales;

• Relicensing (change-of-control) fees and partner copy sales;

• Cybersecurity;

• 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;

• 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;

• 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” in the MD&A 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.

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