VGS Seismic Canada has announced its results of operations for the three and nine month periods ended September 30, 2008.
At September 30, 2008, VGS had grown its seismic data library to 5,020 square kilometers of 3D seismic data and 5,041 linear kilometers of 2D seismic data with a total capital cost of $75.4 million.
VGS contracted a small 2D shoot at the end of June 2008. Fieldwork was completed and data was delivered to the processor in August 2008.
VGS had a loss of $3.3 million ($0.11 per share basic and fully diluted) from revenues of $1.6 million for the three months ended September 30, 2008 compared to a loss of $3.4 million ($0.11 per share basic and fully diluted) from gross revenues of $0.8 million for the three months ended September 30, 2007. The most significant expense contributing to the current period loss was amortization of $3.0 million.
Additionally, during the three-month period ended September 30, 2008 the Company incurred non-recurring net restructuring costs of $0.3 million as a result of the departure of three members of senior management. The year-to-date loss at September 30, 2008 is $7.7 million ($0.25 per share basic and fully diluted) compared to $5.0 million ($0.16 per share basic and fully diluted) for the nine months ended September 30, 2007, with the most significant difference being amortization of $12.0 million for the current year-to-date compared with $5.9 million for the same period in 2007. The increased amortization is largely the result of a $3.6 million initial charge representing 35% of the cost of a survey completed in the first quarter of 2008.
Data acquisition revenue recognized in the quarter was $235,259 related to a 2D project completed in August 2008, compared to nil in the third quarter of 2007. VGS also completed a large 3D acquisition project in Q1, 2008. Previously, data acquisition revenue was deferred until the data was released from its proprietary period and available for sale to the industry.
In late 2007, the Company prospectively adopted a policy of recognizing this revenue on a percentage of completion basis, and charging the initial amortization on the data in the month that the survey is completed. This policy change resulted in $4.7 million in acquisition revenue being recognized in the first nine months of 2008, compared to nil acquisition revenue in the first nine months of the prior year.
For the quarter ended September 30, 2008, VGS had cash license sales of $1.3 million compared to $0.8 million for Q3, 2007. Cash license sales 2008 year-to-date were $3.7 million compared to $6.7 million a year ago. VGS believes this decrease in sales revenue is attributable to weak natural gas prices and a general reduction in gas exploration in the first quarter of 2008, in areas where VGS owns data.
Cash EBITDA was higher in Q3 2008 than the comparable quarter of 2007 due to both higher sales and lower operating costs in 2008 as VGS continued its efforts to reduce operating expenses. Year-to-date cash EBITDA is lower in the nine months ended September 30, 2008 than the comparable period for 2007 due to weak license sales in the first quarter of 2008.
However, despite a softening of natural gas prices in the fall of 2008 and the negative general economic climate, management believes that there is continued interest in exploration of gas prone areas particularly in North Eastern British Columbia. Brokerage and other income is $43,070 for the quarter compared to $17,445 in the same quarter last year, and year-to-date brokerage revenue is down 31.6%.
This decrease is due to the fact that one large sale contributed the majority of brokerage revenue in the second quarter of 2007, and no similar transaction was completed in Q2 of 2008.
Amortization for the third quarter of 2008 is $3.0 million, compared to $2.0 million for the same quarter in 2007. This 50% increase is due to an increase to both the size and cost of the data library from the prior year.
Despite an increase in the net debt outstanding, interest, accretion on long-term debt and deferred financing costs has decreased from $784,004 in Q3 2007 to $778,213 in Q3 2008, and from $2,369,841 year-to-date 2007 to $2,214,754 year-to-date 2008.
This is as a result of the extension of the maturity date providing a longer period over which to accrete the debentures and deferred financing costs, a reduction in the "ticking fee" paid on funds available but not yet drawn, a change in Canada Revenue Agency policy removing the requirement to withhold income tax on interest paid to non-residents effective January 1, 2008 and the fact that $3.0 million of the additional debt was drawn on September 30, 2008.
The total long-term debt has increased by $8 million since December 31, 2007, proceeds of which were used to pay for data purchase and creation opportunities committed to in 2007. Interest on the convertible debenture is 9.5 per cent plus all applicable withholding taxes, payable semi-annually at February 15 and August 15. The debentures have no early repayment option and are convertible at the option of the debenture holder only, at any time up to maturity on February 16, 2010.
General and administrative expenses for third quarter of 2008 are $540,728 reflecting a 16.6% reduction from $648,306 incurred in Q3 2007, and a 12.7% reduction year-to-date, as a result of management's focus on cost efficiencies. Commission rates vary depending on whether the source of the referral is external brokers or internal sales staff and whether the related revenue is license sales or data acquisition revenue. Commissions on data acquisition revenue are incurred at time that the acquisition project is committed; hence commission expense on acquisition revenue is generally incurred in advance of the revenue recognition.
Q3 2008 commissions are reduced from Q3 2007 by 9.2% and 2008 year-to-date commissions are reduced by 38% from 2007, due to the reduction in 2008 license sales revenue and the 2007 accrual of commissions on acquisition revenue recognised in the first half of 2008. Consulting and professional fees are 28.6% lower than Q3 of 2007 and 43.3% lower for the nine months ended September 30, 2008 compared to the same period in 2007 due to management focus on reducing discretionary spending and the ongoing experience of VGS staff allowing more analysis and review to be completed ""in-house".
During Q3 2008, the President and Chief Executive Officer resigned and the Chief Operating Officer and Vice-President of Operations departed from the Company. Related severance costs net of stock based compensation and bonus provision recoveries amounted to $280,677 and are considered to be non-recurring. A Director with considerable experience in the industry served as interim President and CEO until the new President and CEO assumed his duties on October 20, 2008. The duties of the Chief Operating Officer and Vice-President of Operations were assumed by other members of senior management.
Accessing existing seismic data is a means for exploration and production companies to mitigate the risk of drilling unsuccessful wells. Therefore, as long as it is economical for companies to explore for oil and gas, VGS expects there will be a market for seismic data.
The Company does acknowledge that lower commodity prices typically lead to explorers and producers having less capital to spend on the products provided by VGS. The first quarter of 2008 was a difficult one for VGS, as license sale revenues were well below expectations, and while sales improved in the second and third quarters, the year-to-date results are not generating sufficient funds for VGS to grow its data library.
It is the Company's desire to continue to grow the seismic library by creating new data and purchasing pre-existing data in areas where license sales are expected to be strong. Until VGS can generate sufficient cash flow internally to participate in more seismic acquisition projects, it is management's intent to attempt to grow the database by leveraging off the data the Company currently owns.
As always, the availability of external capital at acceptable terms, in conjunction with the Company's ability to generate cash flow internally, will be the most important factors in determining the rate at which VGS will add to its library.
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