UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10–Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
September 30, 2019March 31, 2020
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _______________
Commission File Number 001-35471
SAExploration Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 27-4867100 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1160 Dairy Ashford Road, Suite 160, Houston, Texas, 77079
(Address of principal executive offices)
(Zip Code)
(281) 258-4400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common stock, par value $0.0001 |
| SAEX |
| NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”filer”, “accelerated filer,”filer”, “smaller reporting company,”company” and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
| Accelerated filer | ☐ |
Non-accelerated filer | ☒ |
| Smaller reporting company | ☒ |
|
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 27,May 8, 2020, the registrant has 4,299,6704,436,292 shares of common stock outstanding.
SAExploration Holdings, Inc. (together with its subsidiaries, “we,” “our” or “us”) has filed an amendment to our Annual Report on Form 10–K for the year ended December 31, 2018 (the “Form 10–K/A”), to amend and restate our consolidated financial statements and related footnote disclosures as of December 31, 2018 and 2017 and for the years ended December 31, 2018 and 2017 (including the unaudited quarterly periods within 2018 and 2017). The Form 10–K/A also includes under “Item 6. Selected Financial Data” restated selected consolidated statement of operations data for the years ended December 31, 2016, 2015 and 2014 and restated selected consolidated balance sheet data as of December 31, 2016, 2015 and 2014. Accordingly, this Form 10–Q for the quarterly period ended September 30, 2019 (this “Form 10–Q”) contains our restated unaudited condensed consolidated financial statements and related disclosures as of December 31, 2018 and for the three–month and nine–month periods ended September 30, 2018. These unaudited condensed consolidated financial statements include our accounts and those of our subsidiaries that are wholly–owned, controlled by us or a variable interest entity (“VIE”).
Please see the “Explanatory Note” to the Form 10–K/A and “Note 3. Restatement of Previously Reported Consolidated Financial Statements” and “Note 24. Quarterly Data” to our consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” of the Form 10–K/A for additional information about the restatement. We delayed the filing of this Form 10–Q pending the restatement described therein.
For a description of the effect of the restatement as of December 31, 2018 and for the three–month and nine–month periods ended September 30, 2018, see “Note 2. Restatement of Previously Reported Unaudited Condensed Consolidated Financial Statements” to our consolidated financial statements in “Item 1. Financial Statements” contained herein. In connection with the restatement of our consolidated financial statements in the Form 10–K/A, management determined that material weaknesses exist in our internal control over financial reporting and that our disclosure controls and procedures were ineffective during the Non–Reliance Periods. For a description of the material weaknesses identified by management and management’s implemented and planned remediations for those material weaknesses, please see “Item 4. Controls and Procedures” contained herein.
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I. FINANCFINANCIIALAL INFORMATION
SAExploration Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except number of shares)thousands)
(Unaudited)
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| September 30, 2019 |
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| December 31, 2018 |
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| (Restated) |
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| March 31, 2020 |
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| December 31, 2019 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 13,378 |
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| $ | 7,579 |
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| $ | 8,543 |
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| $ | 5,441 |
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Restricted cash |
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| 257 |
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| 271 |
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| 76 |
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| 74 |
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Accounts receivable, net |
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| 27,140 |
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| 26,463 |
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| 65,482 |
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| 51,582 |
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Deferred costs on contracts |
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| 5,360 |
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| 3,746 |
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| 4,387 |
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| 14,966 |
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Prepaid expenses and other current assets |
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| 4,102 |
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| 2,843 |
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| 6,423 |
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| 5,324 |
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Total current assets |
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| 50,237 |
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| 40,902 |
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| 84,911 |
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| 77,387 |
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Property and equipment, net of accumulated depreciation and amortization of $89,372 and $81,904, respectively |
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| 27,881 |
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| 35,334 |
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Property and equipment, net of accumulated depreciation and amortization of $91,899 and $92,204, respectively |
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| 34,826 |
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| 37,289 |
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Multiclient seismic data library, net |
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| 3,684 |
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| 4,733 |
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| 570 |
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| 2,719 |
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Operating lease right-of-use assets |
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| 6,976 |
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| — |
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| 6,992 |
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| 6,421 |
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Goodwill |
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| 1,736 |
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| 1,687 |
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| 1,622 |
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| 1,766 |
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Intangible assets, net of accumulated amortization of $1,157 and $932, respectively |
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| 3,828 |
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| 4,066 |
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Intangible assets, net of accumulated amortization of $1,354 and $1,270, respectively |
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| 3,631 |
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| 3,751 |
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Tax credits receivable, net |
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| 12,104 |
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| 13,198 |
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| 2,708 |
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| 12,104 |
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Deferred income taxes |
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| 56 |
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| 2,160 |
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Other assets |
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| 270 |
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| 267 |
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| 775 |
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| 778 |
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Total assets |
| $ | 106,772 |
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| $ | 102,347 |
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| $ | 136,035 |
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| $ | 142,215 |
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LIABILITIES AND STOCKHOLDERS' DEFICIT |
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Current liabilities: |
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Accounts payable |
| $ | 10,691 |
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| $ | 10,103 |
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| $ | 30,090 |
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| $ | 30,966 |
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Accrued liabilities |
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| 7,724 |
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| 10,498 |
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| 8,762 |
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| 6,034 |
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Income and other taxes payable |
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| 2,600 |
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| 3,331 |
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| 2,395 |
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| 5,902 |
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Operating lease liabilities |
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| 3,056 |
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| — |
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| 2,029 |
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| 2,576 |
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Current portion of long-term debt and finance leases |
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| 582 |
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| 7,837 |
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| 98,998 |
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| 112,401 |
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Deferred revenue |
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| 5,432 |
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| 4,357 |
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| 7,477 |
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| 8,724 |
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Total current liabilities |
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| 30,085 |
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| 36,126 |
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| 149,751 |
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| 166,603 |
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Long-term debt and finance leases |
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| 103,358 |
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| 83,205 |
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| 6,341 |
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| 7,145 |
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Other long-term liabilities |
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| 4,318 |
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| 380 |
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| 5,092 |
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| 4,280 |
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Commitments and contingencies |
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Stockholders' deficit: |
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Common stock, 4,299,670 and 3,100,496 shares outstanding, respectively |
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| — |
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| — |
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Common stock |
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| — |
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| — |
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Additional paid-in capital |
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| 235,583 |
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| 232,661 |
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| 240,201 |
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| 240,068 |
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Accumulated deficit |
|
| (266,453 | ) |
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| (249,349 | ) |
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| (265,886 | ) |
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| (274,535 | ) |
Accumulated other comprehensive loss |
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| (2,435 | ) |
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| (3,035 | ) |
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| (129 | ) |
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| (2,912 | ) |
Treasury stock, at cost, 208,009 and 111,245 shares, respectively |
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| (2,232 | ) |
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| (1,866 | ) | ||||||||
Treasury stock |
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| (2,232 | ) |
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| (2,232 | ) | ||||||||
SAExploration stockholders’ deficit |
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| (35,537 | ) |
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| (21,589 | ) |
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| (28,046 | ) |
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| (39,611 | ) |
Noncontrolling interest |
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| 4,548 |
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| 4,225 |
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| 2,897 |
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| 3,798 |
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Total stockholders’ deficit |
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| (30,989 | ) |
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| (17,364 | ) |
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| (25,149 | ) |
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| (35,813 | ) |
Total liabilities and stockholders’ deficit |
| $ | 106,772 |
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| $ | 102,347 |
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| $ | 136,035 |
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| $ | 142,215 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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| Three Months Ended March 31, |
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| (Restated) |
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| (Restated) |
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| 2020 |
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| 2019 |
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Revenue from services |
| $ | 23,274 |
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| $ | 15,003 |
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| $ | 205,866 |
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| $ | 69,009 |
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| $ | 125,385 |
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| $ | 93,055 |
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Cost of services |
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| 17,075 |
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| 16,193 |
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| 162,122 |
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| 61,908 |
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| 89,259 |
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| 70,125 |
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Depreciation and amortization |
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| 2,930 |
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| 2,951 |
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| 9,405 |
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| 7,667 |
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| 5,133 |
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| 2,862 |
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Gross profit (loss) |
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| 3,269 |
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| (4,141 | ) |
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| 34,339 |
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| (566 | ) | ||||||||
Gross profit |
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| 30,993 |
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| 20,068 |
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Operating expenses: |
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Selling, general and administrative expenses |
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| 13,698 |
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| 14,576 |
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| 33,806 |
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| 28,628 |
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| 12,149 |
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| 9,287 |
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Misappropriation of funds |
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| 55 |
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| 265 |
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| 328 |
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| 626 |
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| — |
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| 152 |
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Total operating expenses |
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| 13,753 |
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| 14,841 |
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| 34,134 |
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| 29,254 |
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| 12,149 |
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| 9,439 |
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Operating (loss) income |
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| (10,484 | ) |
|
| (18,982 | ) |
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| 205 |
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| (29,820 | ) | ||||||||
Operating income |
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| 18,844 |
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| 10,629 |
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Other (expense) income, net: |
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Interest expense, net |
|
| (3,714 | ) |
|
| (4,738 | ) |
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| (10,843 | ) |
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| (10,225 | ) |
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| (3,708 | ) |
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| (3,497 | ) |
Foreign exchange loss, net |
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| (1,351 | ) |
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| (331 | ) |
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| (851 | ) |
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| (2,510 | ) | ||||||||
Foreign exchange (loss) gain, net |
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| (5,454 | ) |
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| 127 |
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Other income, net |
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| 1,875 |
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| 1,372 |
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| 2,788 |
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| 1,609 |
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| 928 |
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| 129 |
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Total other expense, net |
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| (3,190 | ) |
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| (3,697 | ) |
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| (8,906 | ) |
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| (11,126 | ) |
|
| (8,234 | ) |
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| (3,241 | ) |
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Loss before income taxes |
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| (13,674 | ) |
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| (22,679 | ) |
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| (8,701 | ) |
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| (40,946 | ) | ||||||||
Income before income taxes |
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| 10,610 |
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| 7,388 |
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Income taxes |
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| (689 | ) |
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| (48 | ) |
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| 5,830 |
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| (83 | ) |
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| 541 |
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| 3,666 |
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Net loss |
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| (12,985 | ) |
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| (22,631 | ) |
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| (14,531 | ) |
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| (40,863 | ) | ||||||||
Net income |
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| 10,069 |
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| 3,722 |
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Less: net income attributable to noncontrolling interest |
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| — |
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| 10 |
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| 2,573 |
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| 904 |
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| 1,420 |
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| 1,409 |
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Net loss attributable to SAExploration |
| $ | (12,985 | ) |
| $ | (22,641 | ) |
| $ | (17,104 | ) |
| $ | (41,767 | ) | ||||||||
Net income attributable to SAExploration |
| $ | 8,649 |
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| $ | 2,313 |
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Loss per common share (basic and diluted) |
| $ | (1.64 | ) |
| $ | (8.41 | ) |
| $ | (2.19 | ) |
| $ | (45.34 | ) | ||||||||
Earnings per common share: |
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Basic |
| $ | 0.87 |
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| $ | 0.30 |
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Diluted |
| $ | 0.50 |
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| $ | 0.21 |
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Weighted average common shares outstanding (basic and diluted) |
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| 7,930 |
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| 3,384 |
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| 7,818 |
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| 2,090 |
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Weighted average common shares outstanding: |
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Basic |
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| 9,967 |
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| 7,616 |
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Diluted |
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| 20,421 |
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| 18,056 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive LossIncome
(In thousands)
(Unaudited)
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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| (Restated) |
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| (Restated) |
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Net loss |
| $ | (12,985 | ) |
| $ | (22,631 | ) |
| $ | (14,531 | ) |
| $ | (40,863 | ) |
Other comprehensive (loss) income: |
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Foreign currency translation adjustment |
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| 990 |
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| 192 |
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| 600 |
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| 2,005 |
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Comprehensive loss |
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| (11,995 | ) |
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| (22,439 | ) |
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| (13,931 | ) |
|
| (38,858 | ) |
Less: comprehensive income attributable to noncontrolling interest |
|
| — |
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|
| 10 |
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| 2,573 |
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|
| 904 |
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Comprehensive loss attributable to SAExploration |
| $ | (11,995 | ) |
| $ | (22,449 | ) |
| $ | (16,504 | ) |
| $ | (39,762 | ) |
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| Three Months Ended March 31, |
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| 2020 |
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| 2019 |
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Net income |
| $ | 10,069 |
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| $ | 3,722 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
|
| 2,783 |
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|
| (43 | ) |
Comprehensive income |
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| 12,852 |
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|
| 3,679 |
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Less: comprehensive income attributable to noncontrolling interest |
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| 1,420 |
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|
| 1,409 |
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Comprehensive income attributable to SAExploration |
| $ | 11,432 |
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| $ | 2,270 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit
(In thousands)
(Unaudited)
Three Months Ended September 30, 2019
|
| Common Stock |
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| Additional Paid-In Capital |
|
| Accumulated Deficit (Restated) |
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| Accumulated Other Comprehensive Loss |
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| Treasury Stock |
|
| Total SAExploration Stockholders’ Deficit (Restated) |
|
| Noncontrolling Interest |
|
| Total Stockholders’ Deficit (Restated) |
| ||||||||
Balances at June 30, 2019 |
| $ | — |
|
| $ | 235,638 |
|
| $ | (253,468 | ) |
| $ | (3,425 | ) |
| $ | (2,232 | ) |
| $ | (23,487 | ) |
| $ | 5,298 |
|
| $ | (18,189 | ) |
Net (loss) income |
|
| — |
|
|
| — |
|
|
| (12,985 | ) |
|
| — |
|
|
| — |
|
|
| (12,985 | ) |
|
| — |
|
|
| (12,985 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 990 |
|
|
| — |
|
|
| 990 |
|
|
| — |
|
|
| 990 |
|
Equity-based compensation cost |
|
| — |
|
|
| (55 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (55 | ) |
|
| — |
|
|
| (55 | ) |
Distributions to noncontrolling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (750 | ) |
|
| (750 | ) |
Balances at September 30, 2019 |
| $ | — |
|
| $ | 235,583 |
|
| $ | (266,453 | ) |
| $ | (2,435 | ) |
| $ | (2,232 | ) |
| $ | (35,537 | ) |
| $ | 4,548 |
|
| $ | (30,989 | ) |
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Accumulated Deficit |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Total SAExploration Stockholders’ Deficit |
|
| Noncontrolling Interest |
|
| Total Stockholders’ Deficit |
| ||||||||
Balances at December 31, 2019 |
| $ | — |
|
| $ | 240,068 |
|
| $ | (274,535 | ) |
| $ | (2,912 | ) |
| $ | (2,232 | ) |
| $ | (39,611 | ) |
| $ | 3,798 |
|
| $ | (35,813 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| 8,649 |
|
|
| — |
|
|
| — |
|
|
| 8,649 |
|
|
| 1,420 |
|
|
| 10,069 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,783 |
|
|
| — |
|
|
| 2,783 |
|
|
| — |
|
|
| 2,783 |
|
Equity-based compensation cost |
|
| — |
|
|
| 133 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 133 |
|
|
| — |
|
|
| 133 |
|
Distributions to noncontrolling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,321 | ) |
|
| (2,321 | ) |
Balances at March 31, 2020 |
| $ | — |
|
| $ | 240,201 |
|
| $ | (265,886 | ) |
| $ | (129 | ) |
| $ | (2,232 | ) |
| $ | (28,046 | ) |
| $ | 2,897 |
|
| $ | (25,149 | ) |
Three Months Ended September 30, 2018
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Accumulated Deficit (Restated) |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Total SAExploration Stockholders’ Deficit (Restated) |
|
| Noncontrolling Interest |
|
| Total Stockholders’ Deficit (Restated) |
| ||||||||
Balances at June 30, 2018 |
| $ | — |
|
| $ | 177,023 |
|
| $ | (208,010 | ) |
| $ | (3,269 | ) |
| $ | (288 | ) |
| $ | (34,544 | ) |
| $ | 5,464 |
|
| $ | (29,080 | ) |
Net (loss) income |
|
| — |
|
|
| — |
|
|
| (22,641 | ) |
|
| — |
|
|
| — |
|
|
| (22,641 | ) |
|
| 10 |
|
|
| (22,631 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 192 |
|
|
| — |
|
|
| 192 |
|
|
| — |
|
|
| 192 |
|
Equity-based compensation cost |
|
| — |
|
|
| 6,473 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,473 |
|
|
| — |
|
|
| 6,473 |
|
Purchase of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,578 | ) |
|
| (1,578 | ) |
|
| — |
|
|
| (1,578 | ) |
Accretion of discount on Series A preferred stock |
|
| — |
|
|
| (5,336 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,336 | ) |
|
| — |
|
|
| (5,336 | ) |
Dividend on Series A preferred stock |
|
| — |
|
|
| (495 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (495 | ) |
|
| — |
|
|
| (495 | ) |
Conversion of Series A preferred stock |
|
| — |
|
|
| (15,427 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,427 | ) |
|
| — |
|
|
| (15,427 | ) |
Common stock and Series E warrants issued in conversion of Series A preferred stock |
|
| — |
|
|
| 54,045 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 54,045 |
|
|
| — |
|
|
| 54,045 |
|
Conversion option related to 6% convertible notes due 2023, net of allocated costs |
|
| — |
|
|
| 15,361 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15,361 |
|
|
| — |
|
|
| 15,361 |
|
Distribution to noncontrolling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (500 | ) |
|
| (500 | ) |
Balances at September 30, 2018 |
| $ | — |
|
| $ | 231,644 |
|
| $ | (230,651 | ) |
| $ | (3,077 | ) |
| $ | (1,866 | ) |
| $ | (3,950 | ) |
| $ | 4,974 |
|
| $ | 1,024 |
|
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (continued)
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2019
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Accumulated Deficit (Restated) |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Total SAExploration Stockholders’ Deficit (Restated) |
|
| Noncontrolling Interest |
|
| Total Stockholders’ Deficit (Restated) |
| ||||||||
Balances at December 31, 2018 |
| $ | — |
|
| $ | 232,661 |
|
| $ | (249,349 | ) |
| $ | (3,035 | ) |
| $ | (1,866 | ) |
| $ | (21,589 | ) |
| $ | 4,225 |
|
| $ | (17,364 | ) |
Net (loss) income |
|
| — |
|
|
| — |
|
|
| (17,104 | ) |
|
| — |
|
|
| — |
|
|
| (17,104 | ) |
|
| 2,573 |
|
|
| (14,531 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 600 |
|
|
| — |
|
|
| 600 |
|
|
| — |
|
|
| 600 |
|
Issuance of common stock |
|
| — |
|
|
| 578 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 578 |
|
|
| — |
|
|
| 578 |
|
Purchase of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (366 | ) |
|
| (366 | ) |
|
| — |
|
|
| (366 | ) |
Equity-based compensation cost |
|
| — |
|
|
| 2,344 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,344 |
|
|
| — |
|
|
| 2,344 |
|
Distributions to noncontrolling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,250 | ) |
|
| (2,250 | ) |
Balances at September 30, 2019 |
| $ | — |
|
| $ | 235,583 |
|
| $ | (266,453 | ) |
| $ | (2,435 | ) |
| $ | (2,232 | ) |
| $ | (35,537 | ) |
| $ | 4,548 |
|
| $ | (30,989 | ) |
Nine Months Ended September 30, 2018
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Accumulated Deficit (Restated) |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Total SAExploration Stockholders’ Deficit (Restated) |
|
| Noncontrolling Interest |
|
| Total Stockholders’ Deficit (Restated) |
| ||||||||
Balances at December 31, 2017 |
| $ | — |
|
| $ | 133,742 |
|
| $ | (189,178 | ) |
| $ | (5,082 | ) |
| $ | (113 | ) |
| $ | (60,631 | ) |
| $ | 4,570 |
|
| $ | (56,061 | ) |
Adoption of ASU 2016-16 |
|
| — |
|
|
| — |
|
|
| 294 |
|
|
| — |
|
|
| — |
|
|
| 294 |
|
|
| — |
|
|
| 294 |
|
Net (loss) income |
|
| — |
|
|
| — |
|
|
| (41,767 | ) |
|
| — |
|
|
| — |
|
|
| (41,767 | ) |
|
| 904 |
|
|
| (40,863 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,005 |
|
|
| — |
|
|
| 2,005 |
|
|
| — |
|
|
| 2,005 |
|
Equity-based compensation cost |
|
| — |
|
|
| 9,114 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,114 |
|
|
| — |
|
|
| 9,114 |
|
Purchase of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,753 | ) |
|
| (1,753 | ) |
|
| — |
|
|
| (1,753 | ) |
Common stock issued in debt exchange |
|
| — |
|
|
| 472 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 472 |
|
|
| — |
|
|
| 472 |
|
Discount on Series A preferred stock issued in debt exchange |
|
| — |
|
|
| 61,971 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 61,971 |
|
|
| — |
|
|
| 61,971 |
|
Accretion of discount on Series A preferred stock |
|
| — |
|
|
| (61,971 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (61,971 | ) |
|
| — |
|
|
| (61,971 | ) |
Accretion of Series A preferred stock to redemption value |
|
| — |
|
|
| 21,376 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 21,376 |
|
|
| — |
|
|
| 21,376 |
|
Dividend on Series A preferred stock |
|
| — |
|
|
| (1,614 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,614 | ) |
|
| — |
|
|
| (1,614 | ) |
Conversion of Series A preferred stock |
|
| — |
|
|
| (15,427 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,427 | ) |
|
| — |
|
|
| (15,427 | ) |
Common stock and Series E warrants issued in conversion of Series A preferred stock |
|
| — |
|
|
| 54,045 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 54,045 |
|
|
| — |
|
|
| 54,045 |
|
Series B preferred stock issued in debt exchange |
|
| — |
|
|
| 10,791 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,791 |
|
|
| — |
|
|
| 10,791 |
|
Discount on Series B preferred stock issued in debt exchange |
|
| — |
|
|
| (10,791 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,791 | ) |
|
| — |
|
|
| (10,791 | ) |
Accretion of discount on Series B preferred stock |
|
| — |
|
|
| 10,791 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,791 |
|
|
| — |
|
|
| 10,791 |
|
Conversion of Series B preferred stock |
|
| — |
|
|
| (22,981 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,981 | ) |
|
| — |
|
|
| (22,981 | ) |
Common stock and Series D warrants issued in conversion of Series B preferred stock |
|
| — |
|
|
| 22,981 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 22,981 |
|
|
| — |
|
|
| 22,981 |
|
Series C warrants issued in debt exchange |
|
| — |
|
|
| 4,810 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,810 |
|
|
| — |
|
|
| 4,810 |
|
Stock issuance costs |
|
| — |
|
|
| (1,026 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,026 | ) |
|
| — |
|
|
| (1,026 | ) |
Conversion option related to 6% convertible notes due 2023, net of allocated costs |
|
| — |
|
|
| 15,361 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15,361 |
|
|
| — |
|
|
| 15,361 |
|
Distribution to noncontrolling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (500 | ) |
|
| (500 | ) |
Balances at September 30, 2018 |
| $ | — |
|
| $ | 231,644 |
|
| $ | (230,651 | ) |
| $ | (3,077 | ) |
| $ | (1,866 | ) |
| $ | (3,950 | ) |
| $ | 4,974 |
|
| $ | 1,024 |
|
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Accumulated Deficit |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Total SAExploration Stockholders’ Deficit |
|
| Noncontrolling Interest |
|
| Total Stockholders’ Deficit |
| ||||||||
Balances at December 31, 2018 |
| $ | — |
|
| $ | 232,661 |
|
| $ | (249,349 | ) |
| $ | (3,035 | ) | �� | $ | (1,866 | ) |
| $ | (21,589 | ) |
| $ | 4,225 |
|
| $ | (17,364 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| 2,313 |
|
|
| — |
|
|
| — |
|
|
| 2,313 |
|
|
| 1,409 |
|
|
| 3,722 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (43 | ) |
|
| — |
|
|
| (43 | ) |
|
| — |
|
|
| (43 | ) |
Issuance of common stock |
|
| — |
|
|
| 578 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 578 |
|
|
| — |
|
|
| 578 |
|
Equity-based compensation cost |
|
| — |
|
|
| 800 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 800 |
|
|
| — |
|
|
| 800 |
|
Distributions to noncontrolling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (750 | ) |
|
| (750 | ) |
Balances at March 31, 2019 |
| $ | — |
|
| $ | 234,039 |
|
| $ | (247,036 | ) |
| $ | (3,078 | ) |
| $ | (1,866 | ) |
| $ | (17,941 | ) |
| $ | 4,884 |
|
| $ | (13,057 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2019 |
|
| 2018 |
|
| Three Months Ended March 31, |
| |||||||
|
|
|
|
|
| (Restated) |
|
| 2020 |
|
| 2019 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (14,531 | ) |
| $ | (40,863 | ) | ||||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net income |
| $ | 10,069 |
|
| $ | 3,722 |
| ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
| ||||||||
Tax credits returned to State of Alaska |
|
| 9,396 |
|
|
| — |
| ||||||||
Depreciation and amortization |
|
| 9,886 |
|
|
| 7,960 |
|
|
| 5,305 |
|
|
| 3,032 |
|
Tax credits used to offset production taxes |
|
| 1,094 |
|
|
| — |
| ||||||||
Reserve for potential tax credits monetization |
|
| — |
|
|
| 1,700 |
| ||||||||
Reserve for doubtful accounts |
|
| 1,619 |
|
|
| 135 |
| ||||||||
Equity-based compensation cost |
|
| 2,344 |
|
|
| 9,114 |
|
|
| 133 |
|
|
| 800 |
|
Gain on disposal of property and equipment |
|
| (648 | ) |
|
| (335 | ) | ||||||||
Provision for doubtful accounts |
|
| 1,432 |
|
|
| 941 |
| ||||||||
Gain on sale of property and equipment |
|
| (206 | ) |
|
| (473 | ) | ||||||||
Amortization of loan issuance costs and debt discounts |
|
| 2,835 |
|
|
| 4,115 |
|
|
| 1,033 |
|
|
| 921 |
|
Gain on debt extinguishment |
|
| — |
|
|
| (53 | ) | ||||||||
Unrealized loss on foreign currency transactions |
|
| 610 |
|
|
| 2,420 |
| ||||||||
Unrealized loss (gain) on foreign currency transactions |
|
| 5,254 |
|
|
| (255 | ) | ||||||||
Deferred taxes |
|
| 2,023 |
|
|
| 148 |
|
|
| — |
|
|
| 2,024 |
|
Changes in operating assets and liabilities |
|
| (6,607 | ) |
|
| (6,920 | ) |
|
| (11,267 | ) |
|
| (17,476 | ) |
Net cash used in operating activities |
|
| (1,375 | ) |
|
| (22,579 | ) | ||||||||
Net cash provided by (used in) operating activities |
|
| 21,149 |
|
|
| (6,764 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset purchase |
|
| — |
|
|
| (21,749 | ) | ||||||||
Purchase of property and equipment |
|
| (1,158 | ) |
|
| (1,044 | ) | ||||||||
Purchases of property and equipment |
|
| (283 | ) |
|
| (327 | ) | ||||||||
Proceeds from sale of property and equipment |
|
| 696 |
|
|
| 677 |
|
|
| 206 |
|
|
| 143 |
|
Net cash used in investing activities |
|
| (462 | ) |
|
| (22,116 | ) |
|
| (77 | ) |
|
| (184 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and finance lease repayments |
|
| (7,604 | ) |
|
| (56,271 | ) |
|
| (15,240 | ) |
|
| (210 | ) |
Long-term debt borrowings |
|
| 17,666 |
|
|
| 123,411 |
|
|
| — |
|
|
| 9,666 |
|
Debt issuance costs |
|
| — |
|
|
| (1,602 | ) | ||||||||
Proceeds from issuance of common stock |
|
| 100 |
|
|
| — |
|
|
| — |
|
|
| 100 |
|
Stock issuance costs |
|
| — |
|
|
| (1,712 | ) | ||||||||
Purchase of treasury stock |
|
| (366 | ) |
|
| (1,753 | ) | ||||||||
Distribution to noncontrolling interest |
|
| (2,250 | ) |
|
| (500 | ) |
|
| (2,321 | ) |
|
| (750 | ) |
Net cash provided by financing activities |
|
| 7,546 |
|
|
| 61,573 |
| ||||||||
Net cash (used in) provided by financing activities |
|
| (17,561 | ) |
|
| 8,806 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| 76 |
|
|
| (219 | ) |
|
| (407 | ) |
|
| 31 |
|
Net change in cash, cash equivalents and restricted cash |
|
| 5,785 |
|
|
| 16,659 |
|
|
| 3,104 |
|
|
| 1,889 |
|
Cash, cash equivalents and restricted cash at the beginning of year |
|
| 7,850 |
|
|
| 3,734 |
|
|
| 5,515 |
|
|
| 7,850 |
|
Cash, cash equivalents and restricted cash at the end of period |
| $ | 13,635 |
|
| $ | 20,393 |
|
| $ | 8,619 |
|
| $ | 9,739 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESGENERAL
Description of the Business
We areSAExploration Holdings, Inc. (“we,” “our” or “us”) is a full–service provider of seismic data acquisition, logistical support and processing services in North America, South America, Asia Pacific, West Africa and the Middle East to customers in the oil and natural gas industry.
Our chief operating decision maker regularly reviews financial data by country to assess performance and allocate resources, resulting in the conclusion that each country in which we operate represents a reporting unit. As these reporting units are similar in terms of economic characteristics, nature of products, processes and type of customers, we have concluded that our seismic data contract services operations comprise one single reportable segment.
Going Concern Uncertainty
Our unaudited condensed consolidated financial statements included herein have been prepared on a going concern basis in accordance with generally accepted accounting principles in the United States. The going concern basis assumes that we will continue in operation for the next 12 months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. Our unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Although we generated net income and cash flow from operations in the first quarter of 2020, we have reported recurring losses from operations and have not generated cash from operating activities for the six years ended December 31, 2019 and, as of March 31, 2020, we had a stockholders’ deficit of $25.1 million. Our recurring losses and negative cash flows from operating activities on an annual basis, stockholders’ deficit, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We anticipate negative cash flows from operating activities to continue for the foreseeable future due to, among other things, the significant uncertainty in the outlook for oil and natural gas development as a result of the significant decline in oil prices since the beginning of 2020 due to the COVID–19 coronavirus pandemic and its impact on the worldwide economy and global demand for oil and the inability of members of OPEC and other producing countries to adequately address the reduced demand. In April 2020, we had a contract cancelled by the operator presumably due to uncertainty on government restrictions on operations due to the COVID–19 coronavirus pandemic and other scheduled and anticipated projects have been delayed and there is no assurance as to when they may resume, if at all. We are also unable to predict when industry market conditions may improve. Our senior loan facility matures in January 2021 and to date, we have been unable to negotiate an extension of the maturity date with our debt holders. If we are unable to extend or otherwise address the maturity date of the senior loan facility, we expect that we will be unable to repay the senior loan facility when due in January 2021.
Our management continues to: (i) discuss with our debt holders an extension of the maturity date of the senior loan facility and waivers of the events of default due to the inclusion of an explanatory paragraph raising substantial doubt about our ability to continue as a going concern in the report of our independent registered public accounting firm on our financial statements included in our Annual Report on Form 10–K for the year ended December 31, 2019; (ii) seek to obtain additional financing through the issuance of debt or equity securities; and (iii) manage operating costs by actively pursuing cost cutting measures to maximize liquidity consistent with current industry market expectations. There is no assurance that we will be successful in extending the maturity date of the senior loan facility or obtaining additional financing on satisfactory terms or at all. In addition, there is no assurance that any such financing, if obtained, will be adequate to meet our needs and support our working capital needs.
Based on the uncertainty of achieving these goals and the significance of the factors described, there is substantial doubt as to our ability to continue as a going concern for a period of 12 months after the date our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10–Q are issued. If we become unable to continue as a going concern, we may have to liquidate our assets, and potentially realize significantly less than the values at which they are carried on our financial statements, and the holders of our securities could lose all or part of their investment.
6
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Our unaudited condensed consolidated financial statements included herein include our accounts and those of our subsidiaries that are wholly–owned, controlled by us or a VIE where we are the primary beneficiary, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) for a fair presentation of the interim periods. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in Item 8 of our Annual Report on Form 10–K/AK for the year ended December 31, 2018.
2019.
All intercompany accounts and transactions have been eliminated in consolidation. In the Notes to Unaudited Condensed Consolidated Financial Statements, all dollar and share amounts in tabulations are in thousands of dollars and shares, respectively, unless otherwise indicated.
Recently Adopted Accounting Pronouncements
On January 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016–02, Leases, as amended by ASU 2018–10, Codification Improvements to Topic 842, ASU 2018–11, Targeted Improvements, and 2019–01, Codification Improvements. These ASUs required the recognition of lease assets and lease liabilities for virtually all leases and required disclosure of key information about leasing arrangements. We elected to adopt these new standards using the modified retrospective method of transition for all leases existing at or commencing after the date of initial application.
The new standards provide for certain practical expedients when adopting the new guidance. We have elected the practical expedient package outlined in ASU No. 2016–02 under which we can carryforward our previous classification of a lease as either an operating or capital lease, and we do not have to reassess previously recorded initial direct costs. Additionally, we made policy elections allowing us to exclude leases with original terms of 12 months or less from lease assets and liabilities and to not separate nonlease components from the associated lease component and instead account for both as a single lease component for all asset classes. We did not elect the practical expedient allowing us to use hindsight to determine the lease term and to assess any impairment of lease assets during the lookback period.
The adoption of the new standards had a material impact on our unaudited condensed consolidated balance sheet, with the most significant being the recognition of operating lease right–of-use (“ROU”) assets and operating lease liabilities of $9.9 million and $9.9 million, respectively. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. The standard did not materially impact our unaudited condensed consolidated statement of operations and unaudited condensed consolidated statement of cash flows.
New Accounting Standards to be Adopted
No new accounting pronouncements issued or effective during the ninethree months ended September 30, 2019March 31, 2020 have had or are expected to have a material impact on our unaudited condensed consolidated financial statements.
NOTE 2. TAX CREDITS RECEIVABLE, NET
In January 2020, we and Alaskan Seismic Ventures, LLC (“ASV”) sold certain seismic data and related assets for a purchase price payable as follows: (i) $15.0 million paid in cash on the closing date and (ii) earnout payments in an amount of up to $5.0 million to be paid based on the licensing fees related to the licensing of certain seismic data following the closing date in an amount in excess of $15.0 million of licensing fees. As required by the terms of the sale, we notified the Alaska Department of Revenue (the “DOR”) that we were withdrawing our application for $9.4 million of tax credits, net relating to the seismic data sold. We and ASV also entered into an agreement that provides that we will receive all the proceeds paid or payable pursuant to the sale, which proceeds will be credited by us towards outstanding amounts owed to us by ASV.
Changes in the carrying value of our tax credits receivable, net are as follows for the three months ended March 31:
|
| 2020 |
|
| 2019 |
| ||
Balance at beginning of year |
| $ | 12,104 |
|
| $ | 13,198 |
|
Returned to State of Alaska |
|
| (9,396 | ) |
|
| — |
|
Balance at end of period |
| $ | 2,708 |
|
| $ | 13,198 |
|
We have established an allowance for these tax credits receivable due to the uncertainty of the future monetization of the tax credits and the potential for the DOR to disallow the tax credits as management has determined that the costs submitted to the DOR by ASV did not reflect the affiliate status of ASV. As of March 31, 2020 and December 31, 2019, the tax credits receivable are net of an allowance of $27.7 million and $53.0 million, respectively.
7
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 2. RESTATEMENT OF PREVIOUSLY REPORTED UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Background of the Restatement
As previously disclosed, the SEC has been conducting an investigation of certain matters, including with respect to revenue recognition, accounts receivable and tax credits. The Department of Justice (the “DOJ”) is conducting a parallel investigation with the SEC. We have been cooperating and will continue to cooperate with the SEC and the DOJ in their investigations.
On August 5, 2019, our Board of Directors (the “Board”) established a special committee of independent directors (the “Special Committee”) to oversee an internal investigation with respect to the SEC investigation and any related matters. In turn, the Special Committee engaged its own legal and forensic accounting advisors, in addition to certain consulting services providers. Also in August 2019, the Audit Committee undertook an assessment of the accuracy of our historical financial statements and related disclosures that were contained in previously filed periodic reports.
On August 14, 2019, the Audit Committee and the Board concluded that our previously issued consolidated financial statements and financial information relating to each of the fiscal years ended December 31, 2015, 2016, 2017 and 2018 and our condensed consolidated financial statements for the quarters and year–to–date periods ended June 30, 2015 through March 31, 2019 (collectively, the “Non–Reliance Periods”) contained errors, should no longer be relied upon and should be restated, and that other financial information, any earnings releases, investor presentations or other communications related thereto covering the Non–Reliance Periods should also no longer be relied upon. The Audit Committee’s and the Board’s decision to restate our consolidated financial statements for the Non–Reliance Periods arose from our re–evaluation of our relationship with Alaskan Seismic Ventures, LLC (“ASV”), which had not been consolidated into our financial statements. In August 2019, we determined that ASV is a variable interest entity (“VIE”), that we had a controlling financial interest in ASV, and that we are the primary beneficiary of ASV, which, among other factors, required us to consolidate ASV during the Non-Reliance Periods in accordance with GAAP.
The Special Committee’s investigation identified that Global Equipment Solutions LLC (“Global Equipment”), one of our vendors in 2015 and 2016, was formed by Brent Whiteley, our former Chief Financial Officer and General Counsel, and controlled by Mr. Whiteley and/or Jeff Hastings, our former Chief Executive Officer. In 2015 and 2016, we paid an aggregate of approximately $12.0 million to Global Equipment pursuant to the following agreements. In August 2011, we entered into an agreement (the “Transfer Agreement”) with NES, LLC (“NES”), pursuant to which NES retained a transfer fee (the “Transfer Fee”) in connection with the transfer of a customer contract from NES to us. NES is a legal entity that was previously owned and/or controlled by Mr. Hastings that we subsequently acquired in October 2011. The Transfer Fee was assigned to a separate legal entity controlled by Mr. Hastings prior to our acquisition of NES in October 2011 and was subsequently assigned to Global Equipment. The authenticity of the Transfer Agreement and the subsequent assignments of the Transfer Fee have not been confirmed. Furthermore, the foregoing arrangements and the obligation to pay the Transfer Fee to NES, Global Equipment and/or Mr. Hastings was not disclosed. The payments made to Global Equipment in satisfaction of the purported Transfer Fee were previously recorded as rental expense in 2015 and 2016. These amounts have now been reclassified in our consolidated statement of operations as loss from misappropriation of funds in 2015 and 2016.
Of the approximately $12.0 million paid to Global Equipment, approximately $5.9 million was transferred through entities formed and/or controlled by Mr. Hastings and Mr. Whiteley to ASV as capital contributions in December 2015. This investment in ASV was not disclosed. ASV was formed as a seismic data library company in 2015, and the Company previously reported revenue from ASV of approximately $57.3 million in 2016 and approximately $83.8 million in 2015. The remaining approximately $6.1 million paid to Global Equipment was transferred to Mr. Hastings and Mr. Whiteley and/or to entities formed and/or controlled by them. These payments were not disclosed.
The Special Committee’s investigation also identified the misappropriation of approximately $4.1 million by Mr. Whiteley from 2012 to 2019, which amount has been reclassified in our consolidated statement of operations as a loss from a misappropriation of funds for such periods. A portion of these funds were paid to RVI Consulting, Inc. (“RVI”), a legal entity owned and/or controlled by Mr. Whiteley. The payments made to RVI were not disclosed. The majority of the payments to RVI were previously recorded as legal and professional expenses in the prior periods.
8
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
As a result of the determination that ASV is a VIE, in which we have a controlling financial interest and are the primary beneficiary, we are consolidating ASV for all periods beginning in 2015. The consolidation of ASV as of December 31, 2018 resulted in a reduction of stockholders’ equity of approximately $34.0 million due to the consolidation and elimination of inter-company transactions. The assets of ASV consist of a seismic data library in Alaska for which we provided the seismic data acquisition services, tax credits received from the State of Alaska under the rebatable oil and gas production tax credit regime and cash on hand. The tax credits were recorded as a reduction in the value of the seismic data library as a reimbursement of the costs incurred to acquire the data library. ASV has no significant liabilities other than its payable to us for the seismic data acquisition services and has approximately $5.9 million in capital contributions as described above. As of September 30, 2019, considering the approximately $34.0 million reduction in stockholders equity discussed above, the consolidation of ASV resulted in a decrease in stockholders’ equity of approximately $1.1 million.
We have reclassified certain items in our consolidated statement of operations as loss from a misappropriation of funds disclosed above, of which approximately $55 thousand, $328 thousand, $265 thousand and $626 thousand, respectively, are related to the misappropriation of funds by Mr. Whiteley in the three and nine months ended September 30, 3019 and 2018, respectively.
In addition, we are restating our consolidated financial statements to correct for unrelated material accounting errors in prior periods, including the following:
Three Months Ended September 30, 2018
We identified an error related to the recording of deferred taxes in our Colombia and Bolivia subsidiaries. Based upon our internal review of the decision to record a 100% valuation allowance in 2018 related to these subsidiaries, we determined that the factors leading to the full valuation allowance of the deferred tax assets were present in previous periods and were not appropriately considered. As of result of this error, we have decreased income tax expense by approximately $1.4 million in the three months ended September 30, 2018.
We failed to record royalty income related to our acquisition of certain assets of Geokinetics, Inc. We acquired a royalty agreement relating to a multiclient seismic data library, which was sold by Geokinetics to a third party prior to our acquisition of the Geokinetics assets. The royalty agreement provided for a royalty of 20% of future sales of the multiclient seismic data library for a three-year period, not to exceed $5.0 million in royalty income. To correct this error, we have recorded royalty income related to this agreement of approximately $1.3 million in the quarter ended September 30, 2018. The royalty income is included in accounts receivable and other income in the accompanying financial statements, which resulted in an increase to our current assets and a decrease to our net loss.
Nine Months Ended September 30, 2018
In the nine months ended September 30, 2018, we recorded an allowance for doubtful accounts of approximately $19.0 million against our accounts receivable related to ASV. The receivable was eliminated upon consolidation of ASV and the allowance for doubtful accounts was reversed.
We also corrected a prior error related to Delaware Franchise Taxes as part of the restatement. In the first quarter of 2018, we settled a multiyear audit with the State of Delaware. As part of the restatement, we have properly recorded the franchise expense in the proper periods resulting in a decrease to selling, general and administrative expense by $547 thousand.
We failed to record royalty income related to our acquisition of certain assets of Geokinetics, Inc. We acquired a royalty agreement relating to a multiclient seismic data library, which was sold by Geokinetics. to a third party prior to our acquisition of the Geokinetics assets. The royalty agreement provided for a royalty of 20% of future sales of the multiclient seismic data library for a three-year period, not to exceed $5.0 million in royalty income. To correct this error, we have recorded royalty income related to this agreement of approximately $1.4 million in the nine months ended September 30, 2018. The royalty income is included in accounts receivable and other income in the accompanying financial statements, which resulted in an increase to our current assets and a decrease to our net loss.
9
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Along with restating our unaudited condensed consolidated financial statements to correct the errors discussed above, we corrected our weighted average shares outstanding (basic and diluted) to include penny warrants in the computation of loss per common share and we recorded adjustments for certain immaterial accounting errors and reclassifications related to the periods covered in this Form 10–Q.
In connection with the restatement of our condensed consolidated financial statements in this Form 10–Q, management determined that material weaknesses exist in our internal control over financial reporting and that our disclosure controls and procedures were ineffective during the Non–Reliance Periods and as of September 30, 2019. For a description of the material weaknesses identified by management and management’s implemented and planned remediations for those material weaknesses, please see “Item 4. Controls and Procedures” of this Form 10-Q.
The tables below summarize the effects of the restatement on our (i) unaudited condensed consolidated balance sheet at December 31, 2018; (ii) unaudited condensed consolidated statements of operations for the three months and nine months ended September 30, 2018; and (iii) unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2018. A summary of the effect of the restatement on the unaudited condensed consolidated statements of changes to stockholders’ deficit for the nine months ended September 30, 2018 and the unaudited condensed consolidated statement of comprehensive income (loss) for the three months and nine months ended September 30, 2018 are not presented because the impact to accumulated deficit and comprehensive income (loss) are reflected below in the unaudited condensed consolidated balance sheet summaries and unaudited condensed consolidated statements of operations summaries.
10
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Summary of Restatement – Unaudited Condensed Consolidated Balance Sheet
The effects of the restatement on our unaudited condensed consolidated balance sheet are as follows:
|
| December 31, 2018 |
| |||||||||
|
| Previously Reported |
|
| Adjustments |
|
| Restated |
| |||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 7,192 |
|
| $ | 387 |
|
| $ | 7,579 |
|
Restricted cash |
|
| 271 |
|
|
| — |
|
|
| 271 |
|
Accounts receivable, net |
|
| 24,859 |
|
|
| 1,604 |
|
|
| 26,463 |
|
Deferred costs on contracts |
|
| 3,717 |
|
|
| 29 |
|
|
| 3,746 |
|
Prepaid expenses and other current assets |
|
| 2,813 |
|
|
| 30 |
|
|
| 2,843 |
|
Total current assets |
|
| 38,852 |
|
|
| 2,050 |
|
|
| 40,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 35,334 |
|
|
| — |
|
|
| 35,334 |
|
Multiclient seismic data library, net |
|
| — |
|
|
| 4,733 |
|
|
| 4,733 |
|
Goodwill |
|
| 1,687 |
|
|
| — |
|
|
| 1,687 |
|
Intangible assets, net |
|
| 4,066 |
|
|
| — |
|
|
| 4,066 |
|
Long-term accounts receivable, net |
|
| 52,804 |
|
|
| (52,804 | ) |
|
| — |
|
Tax credits receivable, net |
|
| — |
|
|
| 13,198 |
|
|
| 13,198 |
|
Deferred income taxes |
|
| 2,015 |
|
|
| 145 |
|
|
| 2,160 |
|
Other assets |
|
| 2,715 |
|
|
| (2,448 | ) |
|
| 267 |
|
Total assets |
| $ | 137,473 |
|
| $ | (35,126 | ) |
| $ | 102,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 10,103 |
|
| $ | — |
|
| $ | 10,103 |
|
Accrued liabilities |
|
| 10,498 |
|
|
| — |
|
|
| 10,498 |
|
Income and other taxes payable |
|
| 3,331 |
|
|
| — |
|
|
| 3,331 |
|
Current portion of long-term debt and finance leases |
|
| 7,837 |
|
|
| — |
|
|
| 7,837 |
|
Deferred revenue |
|
| 4,298 |
|
|
| 59 |
|
|
| 4,357 |
|
Total current liabilities |
|
| 36,067 |
|
|
| 59 |
|
|
| 36,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and finance leases |
|
| 85,653 |
|
|
| (2,448 | ) |
|
| 83,205 |
|
Other long-term liabilities |
|
| 380 |
|
|
| — |
|
|
| 380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
| — |
|
|
| — |
|
|
| — |
|
Additional paid-in capital |
|
| 232,661 |
|
|
| — |
|
|
| 232,661 |
|
Accumulated deficit |
|
| (216,612 | ) |
|
| (32,737 | ) |
|
| (249,349 | ) |
Accumulated other comprehensive loss |
|
| (3,035 | ) |
|
| — |
|
|
| (3,035 | ) |
Treasury stock, at cost |
|
| (1,866 | ) |
|
| — |
|
|
| (1,866 | ) |
SAExploration stockholders’ equity (deficit) |
|
| 11,148 |
|
|
| (32,737 | ) |
|
| (21,589 | ) |
Noncontrolling interest |
|
| 4,225 |
|
|
| — |
|
|
| 4,225 |
|
Total stockholders’ equity (deficit) |
|
| 15,373 |
|
|
| (32,737 | ) |
|
| (17,364 | ) |
Total liabilities and stockholders’ equity (deficit) |
| $ | 137,473 |
|
| $ | (35,126 | ) |
| $ | 102,347 |
|
11
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Summary of Restatement – Unaudited Condensed Consolidated Statements of Operations
The effects of the restatement on our unaudited condensed consolidated statements of operations are as follows:
|
| Three Months Ended September 30, 2018 |
| |||||||||
|
| Previously Reported |
|
| Adjustments |
|
| Restated |
| |||
Revenue from services |
| $ | 15,003 |
|
| $ | — |
|
| $ | 15,003 |
|
Cost of services |
|
| 16,085 |
|
|
| 108 |
|
|
| 16,193 |
|
Depreciation and amortization |
|
| 2,951 |
|
|
| — |
|
|
| 2,951 |
|
Gross loss |
|
| (4,033 | ) |
|
| (108 | ) |
|
| (4,141 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 14,858 |
|
|
| (282 | ) |
|
| 14,576 |
|
Misappropriation of funds |
|
| — |
|
|
| 265 |
|
|
| 265 |
|
Total operating expenses |
|
| 14,858 |
|
|
| (17 | ) |
|
| 14,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
| (18,891 | ) |
|
| (91 | ) |
|
| (18,982 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (4,738 | ) |
|
| — |
|
|
| (4,738 | ) |
Foreign exchange loss, net |
|
| (331 | ) |
|
| — |
|
|
| (331 | ) |
Other income, net |
|
| 27 |
|
|
| 1,345 |
|
|
| 1,372 |
|
Total other expense, net |
|
| (5,042 | ) |
|
| 1,345 |
|
|
| (3,697 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
| (23,933 | ) |
|
| 1,254 |
|
|
| (22,679 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
| 1,364 |
|
|
| (1,412 | ) |
|
| (48 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| (25,297 | ) |
|
| 2,666 |
|
|
| (22,631 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net income attributable to noncontrolling interest |
|
| 10 |
|
|
| — |
|
|
| 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to SAExploration |
| $ | (25,307 | ) |
| $ | 2,666 |
|
| $ | (22,641 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share (basic and diluted) |
| $ | (27.80 | ) |
| $ | 19.39 |
|
| $ | (8.41 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic and diluted) |
|
| 1,120 |
|
|
| 2,264 |
|
|
| 3,384 |
|
12
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
| Nine Months Ended September 30, 2018 |
| ||||||||||
|
| Previously Reported |
|
| Adjustments |
|
| Restated |
| |||
Revenue from services |
| $ | 69,009 |
|
| $ | — |
|
| $ | 69,009 |
|
Cost of services |
|
| 61,800 |
|
|
| 108 |
|
|
| 61,908 |
|
Depreciation and amortization |
|
| 7,667 |
|
|
| — |
|
|
| 7,667 |
|
Gross loss |
|
| (458 | ) |
|
| (108 | ) |
|
| (566 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 46,998 |
|
|
| (18,370 | ) |
|
| 28,628 |
|
Misappropriation of funds |
|
| — |
|
|
| 626 |
|
|
| 626 |
|
Total operating expenses |
|
| 46,998 |
|
|
| (17,744 | ) |
|
| 29,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
| (47,456 | ) |
|
| 17,636 |
|
|
| (29,820 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (10,225 | ) |
|
| — |
|
|
| (10,225 | ) |
Foreign exchange loss, net |
|
| (2,510 | ) |
|
| — |
|
|
| (2,510 | ) |
Other income, net |
|
| 181 |
|
|
| 1,428 |
|
|
| 1,609 |
|
Total other expense, net |
|
| (12,554 | ) |
|
| 1,428 |
|
|
| (11,126 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
| (60,010 | ) |
|
| 19,064 |
|
|
| (40,946 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
| 107 |
|
|
| (190 | ) |
|
| (83 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| (60,117 | ) |
|
| 19,254 |
|
|
| (40,863 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net income attributable to noncontrolling interest |
|
| 904 |
|
|
| — |
|
|
| 904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to SAExploration |
| $ | (61,021 | ) |
| $ | 19,254 |
|
| $ | (41,767 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share (basic and diluted) |
| $ | (141.82 | ) |
| $ | 96.48 |
|
| $ | (45.34 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic and diluted) |
|
| 804 |
|
|
| 1,286 |
|
|
| 2,090 |
|
13
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Summary of Restatement – Unaudited Condensed Consolidated Statement of Cash Flows
The effects of the restatement on our unaudited condensed consolidated statement of cash flows are as follows:
|
| Nine Months Ended September 30, 2018 |
| |||||||||
|
| Previously Reported |
|
| Adjustments |
|
| Restated |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (60,117 | ) |
| $ | 19,254 |
|
| $ | (40,863 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 7,960 |
|
|
| — |
|
|
| 7,960 |
|
Reserve for potential tax credits monetization |
|
| — |
|
|
| 1,700 |
|
|
| 1,700 |
|
Reserve for doubtful accounts |
|
| 19,120 |
|
|
| (18,985 | ) |
|
| 135 |
|
Equity-based compensation cost |
|
| 9,114 |
|
|
| — |
|
|
| 9,114 |
|
Gain on disposal of property and equipment |
|
| (315 | ) |
|
| (20 | ) |
|
| (335 | ) |
Amortization of loan issuance costs and debt discounts |
|
| 4,115 |
|
|
| — |
|
|
| 4,115 |
|
Gain on debt extinguishment |
|
| (53 | ) |
|
| — |
|
|
| (53 | ) |
Unrealized (gain) loss on foreign currency transactions |
|
| 2,420 |
|
|
| — |
|
|
| 2,420 |
|
Deferred taxes |
|
| — |
|
|
| 148 |
|
|
| 148 |
|
Changes in operating assets and liabilities |
|
| (4,308 | ) |
|
| (2,612 | ) |
|
| (6,920 | ) |
Net cash used in operating activities |
|
| (22,064 | ) |
|
| (515 | ) |
|
| (22,579 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Asset purchase |
|
| (21,749 | ) |
|
| — |
|
|
| (21,749 | ) |
Purchase of property and equipment |
|
| (1,044 | ) |
|
| — |
|
|
| (1,044 | ) |
Proceeds from sale of property and equipment |
|
| 657 |
|
|
| 20 |
|
|
| 677 |
|
Net cash used in investing activities |
|
| (22,136 | ) |
|
| 20 |
|
|
| (22,116 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and finance lease repayments |
|
| (56,271 | ) |
|
| — |
|
|
| (56,271 | ) |
Long-term debt borrowings |
|
| 123,411 |
|
|
| — |
|
|
| 123,411 |
|
Debt issuance costs |
|
| (1,602 | ) |
|
| — |
|
|
| (1,602 | ) |
Stock issuance costs |
|
| (2,179 | ) |
|
| 467 |
|
|
| (1,712 | ) |
Purchase of treasury stock |
|
| (1,753 | ) |
|
| — |
|
|
| (1,753 | ) |
Distribution to noncontrolling interest |
|
| (500 | ) |
|
| — |
|
|
| (500 | ) |
Net cash provided by financing activities |
|
| 61,106 |
|
|
| 467 |
|
|
| 61,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| (219 | ) |
|
| — |
|
|
| (219 | ) |
Net change in cash, cash equivalents and restricted cash |
|
| 16,687 |
|
|
| (28 | ) |
|
| 16,659 |
|
Cash, cash equivalents and restricted cash at the beginning of year |
|
| 3,654 |
|
|
| 80 |
|
|
| 3,734 |
|
Cash, cash equivalents and restricted cash at the end of period |
| $ | 20,341 |
|
| $ | 52 |
|
| $ | 20,393 |
|
14
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 3. LONG–TERM DEBT AND FINANCE LEASES
Long–term debt and finance leases consisted of the following:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
|
|
|
|
| (Restated) |
|
| March 31, 2020 |
|
| December 31, 2019 |
| |||
Credit facility: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal outstanding |
| $ | 30,000 |
|
| $ | 12,334 |
|
| $ | 20,500 |
|
| $ | 35,000 |
|
Unamortized debt issuance costs |
|
| (89 | ) |
|
| (125 | ) |
|
| (172 | ) |
|
| (205 | ) |
Carrying amount |
|
| 29,911 |
|
|
| 12,209 |
|
|
| 20,328 |
|
|
| 34,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loan facility: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal outstanding |
|
| 29,000 |
|
|
| 29,000 |
|
|
| 29,000 |
|
|
| 29,000 |
|
Unamortized debt issuance costs |
|
| (1,538 | ) |
|
| (2,448 | ) |
|
| (929 | ) |
|
| (1,232 | ) |
Carrying amount |
|
| 27,462 |
|
|
| 26,552 |
|
|
| 28,071 |
|
|
| 27,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6% senior secured convertible notes due 2023: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal outstanding |
|
| 60,000 |
|
|
| 60,000 |
|
|
| 60,000 |
|
|
| 60,000 |
|
Unamortized debt discount and debt issuance costs |
|
| (14,015 | ) |
|
| (15,906 | ) |
|
| (12,643 | ) |
|
| (13,341 | ) |
Carrying amount |
|
| 45,985 |
|
|
| 44,094 |
|
|
| 47,357 |
|
|
| 46,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% senior notes due 2019: |
|
|
|
|
|
|
|
| ||||||||
Principal outstanding |
|
| — |
|
|
| 6,957 |
| ||||||||
Unamortized debt issuance costs |
|
| — |
|
|
| (4 | ) | ||||||||
Carrying amount |
|
| — |
|
|
| 6,953 |
| ||||||||
Note payable |
|
| 9,472 |
|
|
| 9,974 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
| 582 |
|
|
| 1,234 |
|
|
| 111 |
|
|
| 350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
| 103,940 |
|
|
| 91,042 |
|
|
| 105,339 |
|
|
| 119,546 |
|
Current portion of long-term debt and finance leases |
|
| (582 | ) |
|
| (7,837 | ) |
|
| (98,998 | ) |
|
| (112,401 | ) |
Total long-term debt and finance leases |
| $ | 103,358 |
|
| $ | 83,205 |
|
| $ | 6,341 |
|
| $ | 7,145 |
|
In March 2019, the maturity date of our senior loan facility was extended to January 4, 2021.
In the three months and nine months ended September 30, 2019, weWe recorded interest expense of $1.6 million and $4.6 million, respectively, related to the 6% senior secured convertible notes due 2023 (the “2023 Notes”), of which $0.9 million and $2.7 million, respectively, related to contractual interest expense.
In September 2019, we repaid in full our 10% Senior Notes due 2019 (the “Senior Notes”) and borrowed the remaining $8.0$14.5 million of available borrowing capacitythe amounts outstanding under our credit facility. facility with the net proceeds received from the sale of certain seismic data and related assets in January 2020 (see Note 2).
The credit agreements and indentures for our credit facility, senior loan facility and 6% Senior Secured Convertible Notes due 2023 Notes and Senior Notes(the “2023 Notes”) contain certain representations, warranties, covenants and other terms and conditions which are customary for agreements of these types. As previously disclosed,discussed in Note 1, the report of our independent registered public accounting firm on our consolidated financial statements included in our Annual Report on Form 10–K for the year ended December 31, 2019 contains an explanatory paragraph raising substantial doubt about our ability to continue as a result of certain circumstances giving rise to, or occurring as a result of, the restatement, as of September 30, 2019, certaingoing concern, which results in events of default had occurred under these agreements. the credit facility and the senior loan facility, and a cross default under the indenture governing the 2023 Notes. We repaid in full the Senior Notes at maturity in September 2019. In September 2019, wehave entered into forbearance agreements with respect to our credit facility, senior loan facility and 2023 Notes, whereby the holders of the indebtedness thereunder have agreed to refrain from exercising their rights and remedies with respect to these existing defaults and other events of default that have occurred and other potential defaults or events of default that may occurare continuing as further specified in the forbearance agreements until 5:00 p.m. (New York City time) on the earlier of (i) November 30, 2019May 31, 2020 and (ii) the date the forbearance agreements otherwise terminatedterminate in accordance with their terms. The November 30, 2019 deadline was ultimately extended to February 7, 2020. On February 7, 2020, we entered into amendments and waivers to ourHowever, the long–term debt outstanding under the credit facility, senior loan facility and the indenture governing the 2023 Notes to, among other things, waive existing eventshas been reclassified as current portion of long–term debt in these unaudited condensed consolidated financial statements.
15
8
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
of default thereunder and amend certain covenants requiring us to deliver financial statements, reports, projections and other items thereunder.
NOTE 4. COMMITMENTS AND CONTINGENCIES
On August 18, 2019, a purported stockholder, John Bodin (the “Class Action Plaintiff”), filed a putative class action lawsuit against us and certain former executive officers named therein (the “Class Action Defendants”) in the U.S. District Court for the Southern District of Texas captioned John Bodin v. SAExploration Holdings, Inc., et al. Case No. 4:19–cv–03089. The Class Action Plaintiff seeks to represent a class of stockholders who purchased or otherwise acquired our publicly traded securities from March 15, 2016 through August 15, 2019 (the “Covered Period”). The complaint generally alleges that the Class Action Defendants violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b–5 by making false and misleading statements in our periodic reports filed with the SEC during the Covered Period. The complaint requests damages, including interest, and an award of reasonable costs and expenses, including counsel and expert fees. The Class Action Plaintiff must file an amended complaint by May 18, 2020, and the Class Action Defendants must answer, move to dismiss, or otherwise respond to the amended complaint by July 17, 2020, with responsive briefing to be completed by November 9, 2020.
On September 6, 2019, a purported stockholder, M. Shane Hamilton (the “Derivate“Derivative Plaintiff”), filed a stockholder derivative lawsuit against certain of our former and current executive officers and directors named therein (the “Derivative Defendants”) in the U.S. District Court for the District of Delaware captioned M. Shane Hamilton, derivatively on behalf of SAExploration Holdings, Inc., v. Jeff Hastings, et al. The derivative complaint generally alleges (i) breaches by the Derivative Defendants of their fiduciary duties as our directors and/or officers, (ii) unjust enrichment, (iii) waste of corporate assets, and (iv) violations of Section 14(a) of the Exchange Act. The derivative complaint seeks, among other things, relief (i) directing us and the Derivative Defendants to take actions to reform and improve our corporate governance and internal procedures, (ii) awarding us restitution from the Derivative Defendants, and (iii) awarding the Derivative Plaintiff’s costs and attorneys’ and experts’ fees. This matter is stayed pending the resolution of any motions to dismiss filed in John Bodin v. SAExploration Holdings, Inc., et al. Case No. 4:19–cv–03089 pending in the U.S. District Court for the Southern District of Texas.
As previously disclosed, the SEC has been conducting an investigation of certain matters, including with respect to revenue recognition, accounts receivable, and tax credits. The DOJDepartment of Justice (the “DOJ”) is conducting a parallel investigation with the SEC. We have been cooperating and will continue to cooperate with the SEC and the DOJ in their investigations. The SEC and DOJ investigations are continuing, and we are currently unable to predict the eventual scope, duration or outcome of any potential SEC or DOJ legal action or other action or whether it could have a material impact on our financial condition, results of operations, or cash flow.
The DOR is conducting an investigation with respect to our determination that ASV is a variable interest entity and related Alaska tax credit certificates. We have been cooperating, and will continue to cooperate, with the DOR in its investigation. The DOR investigation is continuing, and we are unable to predict the eventual scope, duration or outcome of any potential DOR legal action or other action or whether it could have a material impact on our financial condition, results of operations, or cash flow.
In the ordinary course of business, we may be subject to legal proceedings involving contractual and employment relationships, liability claims and a variety of other matters. Although the results of these other legal proceedings cannot be predicted with certainty, we do not believe that the final outcome of these proceedings should have a material adverse effect on our business, results of operations, cash flows or financial condition. However, we cannot predict the occurrence or outcome of these proceedings with certainty, and if we are unsuccessful in these proceedings and any loss exceeds our available insurance, if any, this could have a material adverse effect on our results of operations.
9
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
As of March 31, 2020, we are authorized to issue 40.0 million shares of common stock with a par value of $0.0001 per share.
The following table presents the changes in the number of shares outstanding:
|
| 2020 |
|
| 2019 |
| ||
Shares issued: |
|
|
|
|
|
|
|
|
Balance as of January 1 |
|
| 4,508 |
|
|
| 3,211 |
|
Issue of shares on exercises of warrants |
|
| 136 |
|
|
| 710 |
|
Issue of shares as consideration for services |
|
| — |
|
|
| 243 |
|
Issue of shares in private placement |
|
| — |
|
|
| 30 |
|
Balance as of March 31 |
|
| 4,644 |
|
|
| 4,194 |
|
|
|
|
|
|
|
|
|
|
Shares held as treasury stock: |
|
|
|
|
|
|
|
|
Balance as of January 1 |
|
| 208 |
|
|
| 111 |
|
Purchase of treasury stock |
|
| — |
|
|
| 1 |
|
Balance as of March 31 |
|
| 208 |
|
|
| 112 |
|
|
|
|
|
|
|
|
|
|
Shares outstanding as of March 31 |
|
| 4,436 |
|
|
| 4,082 |
|
In January 2020, we issued 0.4 million of our Series F warrants upon receipt of NASDAQ approval of the issuance.
In the three months ended March 31, 2020, 2.8 million Series C warrants and Series D warrants were exercised. As of March 31, 2020, we have 71.0 million warrants outstanding, which are potentially exercisable into 4.4 million shares of our common stock.
NOTE 6. REVENUE FROM SERVICES
Deferred Costs on Contracts
In some instances, we incur third party costs that directly relate to the contract to fulfill the contract obligations. These fulfillment costs are capitalized and amortized consistent with how the related revenue is recognized. Changes in our deferred costs on contracts are as follows for the three months ended March 31:
|
| 2020 |
|
| 2019 |
| ||
Balance at beginning of year |
| $ | 14,966 |
|
| $ | 3,746 |
|
Fulfillment costs incurred |
|
| 6,883 |
|
|
| 4,386 |
|
Amortization of fulfillment costs |
|
| (17,462 | ) |
|
| (2,750 | ) |
Balance at end of period |
| $ | 4,387 |
|
| $ | 5,382 |
|
10
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Typically, our mobilization services are paid by the customer at the beginning of the contract while the revenue is recognized as control transfers to the customer, which can result in deferred revenue. Normally all other revenue is billed as work progresses, which generally will not result in significant deferred revenue except in those cases where a large mobilization is required for the contract. Changes in our deferred revenue are as follows for the three months ended March 31:
|
| 2020 |
|
| 2019 |
| ||
Balance at beginning of year |
| $ | 8,724 |
|
| $ | 4,357 |
|
Cash received, excluding amounts recognized as revenue from services |
|
| 12,740 |
|
|
| 5,006 |
|
Amounts recognized as revenue from services |
|
| (13,987 | ) |
|
| (7,495 | ) |
Balance at end of period |
| $ | 7,477 |
|
| $ | 1,868 |
|
Disaggregated Revenue
The following table disaggregates our revenue by major source for the three months ended March 31:
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||
|
| Land |
|
| Marine |
|
| Total |
|
| Land |
|
| Marine |
|
|
|
|
| |||||
North America |
| $ | 91,148 |
|
| $ | — |
|
| $ | 91,148 |
|
| $ | 60,554 |
|
| $ | — |
|
| $ | 60,554 |
|
South America |
|
| 1,403 |
|
|
| 7,843 |
|
|
| 9,246 |
|
|
| 50 |
|
|
| — |
|
|
| 50 |
|
Asia Pacific |
|
| 109 |
|
|
| 24,882 |
|
|
| 24,991 |
|
|
| 536 |
|
|
| 31,915 |
|
|
| 32,451 |
|
Total |
| $ | 92,660 |
|
| $ | 32,725 |
|
| $ | 125,385 |
|
| $ | 61,140 |
|
| $ | 31,915 |
|
| $ | 93,055 |
|
Remaining Performance Obligations
As of March 31, 2020, we had $109.7 million of remaining performance obligations. We expect to recognize revenue of approximately 30% of these performance obligations in 2020, approximately 35% in 2021 and the remaining approximately 35% in 2022.
NOTE 7. EQUITY–BASED COMPENSATION
We grant various forms of equity–based compensation to our senior management and directors. These equity–based awards currently consist of restricted stock units (“RSUs”).
In March 2020, we issued 0.1 million RSUs to our senior management, which will vest in September 2021. The fair value of the RSUs on the date of grant was $0.2 million.
We recognized equity–based compensation costs of $0.1 million and $0.8 million in the three months ended March 31, 2020 and 2019, respectively. These costs are included in “Selling, general and administrative expenses” on our unaudited condensed consolidated statements of operations.
As of March 31, 2020, we had $0.6 million of unrecognized equity–based compensation cost, which is expected to be recognized over a weighted average period of 1.01 years.
NOTE 8. LEASES
We have entered into various non–cancellable operating and finance lease agreements for certain of our offices, shop and warehouse facilities, equipment and vehicles. We determine if an arrangement is a lease, or contains a lease, at inception and record the leaseslease in our unaudited condensed consolidated financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.
Our leases have remaining lease terms ranging from one year to eightseven years and often include options to extend the lease term for up to three years. Some of our leases also include options to terminate the lease prior to the end of the agreed upon lease term. For the majority of leases entered into during the current period, we have concluded it is not reasonably certain that
11
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
we would exercise the options to extend the lease. Therefore, as of the lease commencement date, our lease terms generally do
16
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
not include these options. We include options to extend the lease when it is reasonably certain that we will exercise that option.
Lease expense for operating lease payments is recognized on a straight–line basis over the lease term. Certain operating leases provide for annual increases to lease payments based on an index or rate. We estimate the annual increase in lease payments based on the index or rate at the lease commencement date, for both our historical leases and for new leases commencing after January 1, 2019.date. Differences between the estimated lease payment and actual payment are expensed as incurred. Lease expense for finance lease payments is recognized as amortization expense of the finance lease ROU asset and interest expense on the finance lease liability over the lease term.
The balances for the operating and finance leases where we are the lessee are presented on our unaudited condensed consolidated balance sheet as follows:
|
| Classification on Unaudited Condensed Consolidated Balance Sheet |
| September 30, 2019 |
|
| Classification on Unaudited Condensed Consolidated Balance Sheet |
| March 31, 2020 |
|
| December 31, 2019 |
| |||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets |
| Operating lease right-of-use assets |
| $ | 6,976 |
|
|
Operating lease right-of-use assets |
| $ | 6,992 |
|
| $ | 6,421 |
|
Finance lease assets |
| Property and equipment, net |
|
| 545 |
|
| Property and equipment, net |
|
| 101 |
|
|
| 324 |
|
Total lease assets |
|
|
| $ | 7,521 |
|
|
|
| $ | 7,093 |
|
| $ | 6,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
| Operating lease liabilities |
| $ | 3,056 |
|
| Operating lease liabilities |
| $ | 2,029 |
|
| $ | 2,576 |
|
Finance lease liabilities |
| Current portion of long-term debt and finance leases |
|
| 582 |
|
| Current portion of long-term debt and finance leases |
|
| 111 |
|
|
| 350 |
|
Long-term - Operating lease liabilities |
| Other long-term liabilities |
|
| 4,018 |
| ||||||||||
Long-term - operating lease liabilities |
|
Other long-term liabilities |
|
| 5,092 |
|
|
| 3,980 |
| ||||||
Total lease liabilities |
|
|
| $ | 7,656 |
|
|
|
| $ | 7,232 |
|
| $ | 6,906 |
|
The components of lease expense on our unaudited condensed consolidated statement of operations are as follows:follows for the three months ended March 31:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, 2019 |
|
| September 30, 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Operating lease expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease expense (1) |
| $ | 1,294 |
|
| $ | 3,958 |
|
| $ | 1,237 |
|
| $ | 1,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of leased assets |
| $ | 221 |
|
| $ | 664 |
|
| $ | 223 |
|
| $ | 221 |
|
Interest on lease liabilities |
|
| 24 |
|
|
| 93 |
|
|
| 9 |
|
|
| 38 |
|
Total finance lease expense |
| $ | 245 |
|
| $ | 757 |
|
| $ | 232 |
|
| $ | 259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease expense |
| $ | 1,539 |
|
| $ | 4,715 |
|
| $ | 1,469 |
|
| $ | 1,599 |
|
(1) | Includes short–term leases and variable lease costs, both of which are immaterial. |
As of September 30, 2019,March 31, 2020, our operating leases and finance leases have weighted average remaining lease terms of 3.84.2 years and 0.60.1 years, respectively, and both our operating leases and finance leases have a weighted average discount rate of 13.0%.
1712
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Supplemental cash flows information related to leases where we are the lessee is as follows:follows for the three months ended March 31:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, 2019 |
|
| September 30, 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 1,010 |
|
| $ | 2,583 |
|
| $ | 861 |
|
| $ | 1,340 |
|
Operating cash flows from finance leases |
|
| 24 |
|
|
| 93 |
|
|
| 9 |
|
|
| 38 |
|
Financing cash flows from finance leases |
|
| 224 |
|
|
| 652 |
|
|
| 239 |
|
|
| 210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating right-of-use assets obtained in exchange for new operating lease liabilities |
| $ | — |
|
| $ | 162 |
| ||||||||
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities |
|
| 1,306 |
|
|
| — |
|
As of September 30, 2019,March 31, 2020, the maturities of the liabilities related to our operating leases and finance leases are as follows:
|
| Operating Leases |
|
| Finance Leases |
|
| Operating Leases |
|
| Finance Leases |
| ||||
Six months ended December 31, 2019 |
| $ | 1,168 |
|
| $ | 248 |
| ||||||||
2020 |
|
| 3,480 |
|
|
| 361 |
| ||||||||
Nine months ended December 31, 2020 |
| $ | 2,499 |
|
| $ | 112 |
| ||||||||
2021 |
|
| 1,209 |
|
|
| — |
|
|
| 1,999 |
|
|
| — |
|
2022 |
|
| 871 |
|
|
| — |
|
|
| 1,685 |
|
|
| — |
|
2023 |
|
| 701 |
|
|
| — |
|
|
| 1,499 |
|
|
| — |
|
2024 |
|
| 1,077 |
|
|
| — |
| ||||||||
Thereafter |
|
| 479 |
|
|
| — |
|
|
| 807 |
|
|
| — |
|
Total minimum lease payments |
|
| 7,908 |
|
|
| 609 |
|
|
| 9,566 |
|
|
| 112 |
|
Less: interest |
|
| 834 |
|
|
| 27 |
| ||||||||
Less interest |
|
| 2,445 |
|
|
| 1 |
| ||||||||
Present value of lease liabilities |
|
| 7,074 |
|
|
| 582 |
|
|
| 7,121 |
|
|
| 111 |
|
Less: current lease liabilities |
|
| 3,056 |
|
|
| 582 |
| ||||||||
Less current lease liabilities |
|
| 2,029 |
|
|
| 111 |
| ||||||||
Long-term lease liabilities |
| $ | 4,018 |
|
| $ | — |
|
| $ | 5,092 |
|
| $ | — |
|
NOTE 6. STOCKHOLDERS' EQUITY
As of September 30, 2019, we are authorized to issue 40.0 million shares of common stock with a par value of $0.0001 per share.
The following table presents the changes in the number of shares outstanding:
| ||||
| ||||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
| ||||
|
| |||
|
| |||
|
| |||
|
|
18
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
In the nine months ended September 30, 2019, 1.0 million, 0.7 million and 13.2 million of our Series C warrants, Series D warrants and Series E warrants, respectively, were exercised. As of September 30, 2019, 6.9 million, 11.1 million and 54.6 million of our Series C warrants, Series D warrants and Series E warrants, respectively, are outstanding.
In February 2019, we issued 0.2 million shares of common stock as partial consideration for services provided to us related to our acquisition of certain assets from Geokinetics, Inc. (“GEOK”). The shares were valued at $0.5 million. These shares were sold and issued without registration under the Securities Act in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act.
In March 2019, we issued 0.03 million shares of common stock in a private placement. The shares were valued at $0.1 million based on the closing price of our common stock on the date of issuance. These shares were sold and issued without registration under the Securities Act in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act.
NOTE 7. REVENUE FROM SERVICES
Deferred Costs on Contracts
In some instances, we incur third party costs that directly relate to the contract to fulfill the contract obligations. These fulfillment costs are capitalized and amortized consistent with how the related revenue is recognized. Changes in our deferred costs on contracts are as follows for the nine months ended September 30:
|
| 2019 |
|
| 2018 |
| ||
|
|
|
|
|
| (Restated) |
| |
Balance at beginning of year |
| $ | 3,746 |
|
| $ | 1,780 |
|
Fulfillment costs incurred |
|
| 10,561 |
|
|
| 5,487 |
|
Amortization of fulfillment costs |
|
| (8,947 | ) |
|
| (6,819 | ) |
Balance at end of period |
| $ | 5,360 |
|
| $ | 448 |
|
Deferred Revenue
Typically, our mobilization services are paid by the customer at the beginning of the contract while the revenue is recognized as control transfers to the customer, which can result in deferred revenue. Normally all other revenue is billed as work progresses, which generally will not result in significant deferred revenue except in those cases where a large mobilization is required for the contract. Changes in our deferred revenue are as follows for the nine months ended September 30:
|
| 2019 |
|
| 2018 |
| ||
|
|
|
|
|
| (Restated) |
| |
Balance at beginning of year |
| $ | 4,357 |
|
| $ | 1,477 |
|
Cash received, excluding amounts recognized as revenue from services |
|
| 13,674 |
|
|
| 3,566 |
|
Amounts recognized as revenue from services |
|
| (12,599 | ) |
|
| (3,000 | ) |
Balance at end of period |
| $ | 5,432 |
|
| $ | 2,043 |
|
19
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table disaggregates our revenue by major source:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
|
|
|
|
|
| (Restated) |
|
|
|
|
|
| (Restated) |
| ||
North America |
| $ | 20,481 |
|
| $ | 12,857 |
|
| $ | 109,910 |
|
| $ | 45,296 |
|
South America |
|
| 2,160 |
|
|
| 1,224 |
|
|
| 2,911 |
|
|
| 22,791 |
|
Asia Pacific (1) |
|
| 633 |
|
|
| 922 |
|
|
| 93,045 |
|
|
| 922 |
|
Total |
| $ | 23,274 |
|
| $ | 15,003 |
|
| $ | 205,866 |
|
| $ | 69,009 |
|
|
|
Remaining Performance Obligations
As of September 30, 2019, we had $123.8 million of remaining performance obligations. We expect to recognize revenue of approximately 59% of these performance obligations in 2019 and the remaining approximately 41% in 2020.
NOTE 8. EQUITY–BASED COMPENSATION
We grant various forms of equity–based compensation to our senior management and directors. These equity–based awards currently consist of restricted stock units (“RSUs”).
In March 2019, we issued 0.5 million RSUs to our senior management, which vested 50% on April 12, 2019 and the remaining 50% will vest on January 29, 2021, and an additional 0.2 million RSUs, all of which vest on September 29, 2020. The fair value of the RSUs on the date of grant was $2.5 million.
We recognized equity–based compensation costs of $(0.1) million and $6.5 million in the three months ended September 30, 2019 and 2018 and $2.3 million and $9.1 million in the nine months ended September 30, 2019 and 2018, respectively. Included in these costs for the three months and nine months ended September 30, 2019 is $(0.8) million related to the forfeiture of equity–based compensation. These costs are included in “Selling, general and administrative expenses” on our unaudited condensed consolidated statements of operations.
As of September 30, 2019, we had $3.4 million of unrecognized equity–based compensation cost, which is expected to be recognized over a weighted average period of 1.3 years.
NOTE 9. INCOME TAXES
We record income taxes for interim periods based on an estimated annual effective tax rate. The estimated annual effective tax rate is recomputed on a quarterly basis and may fluctuate due to changes in forecasted annual operating income, positive or negative changes to the valuation allowance for net deferred tax assets, and changes to actual or forecasted permanent book to tax differences.
Our effective tax rates were 4.9%5.1% and 0.2%49.6% for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and (65.3)% and 0.2% for the nine months ended September 30, 2019 and 2018, respectively. The changes in our effective tax rates and the primary reason whyreasons that these effective tax rates differ from the applicable federal statutory rates are the fluctuations in earnings among the various jurisdictions in which we operate, increases in valuation allowances and foreign tax rate differentials.
2013
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 10. LOSSEARNINGS PER COMMON SHARE
The computation of basic and diluted lossearnings per common share is as follows:follows for the three months ended March 31:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
|
|
|
|
|
| (Restated) |
|
|
|
|
|
| (Restated) |
| ||
Loss per common share (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to SAExploration |
| $ | (12,985 | ) |
| $ | (22,641 | ) |
| $ | (17,104 | ) |
| $ | (41,767 | ) |
Amortization of discounts on Series A and Series B preferred stock |
|
| — |
|
|
| (5,336 | ) |
|
| — |
|
|
| (72,762 | ) |
Accretion of Series A preferred stock to redemption value |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 21,376 |
|
Dividends on Series A preferred stock |
|
| — |
|
|
| (495 | ) |
|
| — |
|
|
| (1,614 | ) |
Net loss available to common stockholders |
| $ | (12,985 | ) |
| $ | (28,472 | ) |
| $ | (17,104 | ) |
| $ | (94,767 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic and diluted) |
|
| 7,930 |
|
|
| 3,384 |
|
|
| 7,818 |
|
|
| 2,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share (basic and diluted) |
| $ | (1.64 | ) |
| $ | (8.41 | ) |
| $ | (2.19 | ) |
| $ | (45.34 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded from diluted loss per common share (1) |
|
| 11,026 |
|
|
| 10,709 |
|
|
| 11,026 |
|
|
| 10,709 |
|
|
| 2020 |
|
| 2019 |
| ||
Basic earnings per common share: |
|
|
|
|
|
|
|
|
Net income attributable to SAExploration |
| $ | 8,649 |
|
| $ | 2,313 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
| 9,967 |
|
|
| 7,616 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
| $ | 0.87 |
|
| $ | 0.30 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
Net income attributable to SAExploration |
| $ | 8,649 |
|
| $ | 2,313 |
|
Effect of dilutive securities |
|
| 1,597 |
|
|
| 1,509 |
|
Net income attributable to SAExploration adjusted for effect of dilutive securities |
| $ | 10,246 |
|
| $ | 3,822 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
| 9,967 |
|
|
| 7,616 |
|
Effect of dilutive securities |
|
| 10,454 |
|
|
| 10,440 |
|
Weighted average common shares outstanding, as adjusted |
|
| 20,421 |
|
|
| 18,056 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
| $ | 0.50 |
|
| $ | 0.21 |
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded from diluted earnings per common share (1) |
|
| 56 |
|
|
| 274 |
|
(1) | Includes our Series A and Series B warrants and certain unvested equity–based compensation. |
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values determined based on quoted prices for similar assets or liabilities in active markets or inputs that are observable to the asset or liability, either directly or indirectly through market corroboration. Level 3 refers to fair values determined based on unobservable inputs used in the measurement of assets and liabilities at fair value.
The estimated fair values of our financial instruments have been determined at discrete points in time based on relevant market information. Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and long–term debt. The carrying amounts of our financial instruments, other than our 2023 Notes, and Senior Notes, approximate fair value because of the short–term nature of the items.
As of September 30,March 31, 2020, the estimated fair value and carrying value of our 2023 Notes was $38.1 million and $47.4 million, respectively. As of December 31, 2019, the estimated fair value and carrying value of our 2023 Notes was $47.2$42.0 million and $46.0$46.7 million, respectively. As of December 31, 2018, the estimated aggregate fair values and aggregate carrying values of our 2023 Notes and Senior Notes was $50.7 million $51.0 million, respectively.
As our 2023 Notes are not actively traded, the fair value determination of the 2023 Notes is categorized as Level 3 as the valuation was based on valuation techniques when observable market data is not available. The fair value determination of our Senior Notes was categorized as Level 2 as this valuation used dealer quoted prices in active markets obtained from independent third–party sources.
21
14
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 12. OTHER SUPPLEMENTAL INFORMATION
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash are recorded in our unaudited condensed consolidated balance sheet as follows:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
|
|
|
|
| (Restated) |
|
| March 31, 2020 |
|
| December 31, 2019 |
| |||
Cash and cash equivalents |
| $ | 13,378 |
|
| $ | 7,579 |
|
| $ | 8,543 |
|
| $ | 5,441 |
|
Restricted cash |
|
| 257 |
|
|
| 271 |
|
|
| 76 |
|
|
| 74 |
|
Total cash, cash equivalents and restricted cash |
| $ | 13,635 |
|
| $ | 7,850 |
|
| $ | 8,619 |
|
| $ | 5,515 |
|
Our restricted cash served as collateral for labor claims, office rental and cash in another country restricted by exchange control regulations.
Accounts Receivable, net
Total accounts receivable, net is comprised of the following:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
|
|
|
|
| (Restated) |
|
| March 31, 2020 |
|
| December 31, 2019 |
| |||
Trade receivables |
| $ | 25,116 |
|
| $ | 23,330 |
|
| $ | 64,838 |
|
| $ | 50,447 |
|
Other receivables |
|
| 3,958 |
|
|
| 3,681 |
|
|
| 3,989 |
|
|
| 3,199 |
|
Total accounts receivable |
|
| 29,074 |
|
|
| 27,011 |
|
|
| 68,827 |
|
|
| 53,646 |
|
Less: allowance for doubtful accounts |
|
| (1,934 | ) |
|
| (548 | ) |
|
| (3,345 | ) |
|
| (2,064 | ) |
Total accounts receivable, net |
| $ | 27,140 |
|
| $ | 26,463 |
|
| $ | 65,482 |
|
| $ | 51,582 |
|
Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts are as follows for the three months ended March 31:
|
| 2020 |
|
| 2019 |
| ||
Balance at beginning of year |
| $ | 2,064 |
|
| $ | 548 |
|
Provisions for doubtful accounts |
|
| 1,432 |
|
|
| 941 |
|
Cumulative translation adjustment |
|
| (151 | ) |
|
| (188 | ) |
Balance at end of period |
| $ | 3,345 |
|
| $ | 1,301 |
|
Accrued Liabilities
Accrued liabilities are comprised of the following:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
|
|
|
|
| (Restated) |
|
| March 31, 2020 |
|
| December 31, 2019 |
| |||
Accrued payroll liabilities |
| $ | 2,751 |
|
| $ | 3,622 |
|
| $ | 3,716 |
|
| $ | 2,385 |
|
Accrued interest |
|
| 163 |
|
|
| 306 |
|
|
| 216 |
|
|
| 181 |
|
Other accrued liabilities |
|
| 4,810 |
|
|
| 6,570 |
|
|
| 4,830 |
|
|
| 3,468 |
|
Total accrued liabilities |
| $ | 7,724 |
|
| $ | 10,498 |
|
| $ | 8,762 |
|
| $ | 6,034 |
|
Other accrued liabilities primarily consist of accruals for project related expenses.
Supplemental Cash Flows Information
Supplemental cash flows information is as follows:
|
| Nine Months Ended September 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash paid for interest |
| $ | 8,115 |
|
| $ | 6,961 |
|
Cash paid for income taxes |
|
| 266 |
|
|
| 2,124 |
|
2215
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Supplemental Cash Flows Information
Supplemental cash flows information is as follows for the three months ended March 31:
|
| 2020 |
|
| 2019 |
| ||
Cash paid for interest |
| $ | 2,445 |
|
| $ | 2,540 |
|
Cash paid for income taxes |
|
| 585 |
|
|
| (273 | ) |
Noncash Transactions
Supplemental noncash transactions are as follows:follows as of March 31:
|
| As of September 30, |
|
| 2020 |
|
| 2019 |
| |||||||
|
| 2019 |
|
| 2018 |
| ||||||||||
Common stock and preferred stock issued to retire long-term debt |
| $ | — |
|
| $ | 73,234 |
| ||||||||
Costs for additions to property and equipment in accounts payable |
|
| — |
|
|
| 26 |
|
| $ | 384 |
|
| $ | 156 |
|
Proceeds from sale of property and equipment in accounts receivable |
|
| — |
|
|
| 334 |
| ||||||||
Accrual for stock issued for services |
|
| 478 |
|
|
| — |
|
|
| — |
|
|
| 478 |
|
NOTE 13. RELATED PARTY TRANSACTIONS
Mr.As of March 31, 2020, Jeff Hastings, our former Chief Executive Officer, Mr. Whiteley, our former Chief Financial Officer and General Counsel, and our former Vice President Finance were owners in Speculative Seismic Investments, LLC (“SSI”), which was a lender under our senior loan facility in the principal amount of $0.6 million. In February 2019, SSI assigned its entire principal amount to another unaffiliated lender in a private transaction. As of September 30, 2019, SSI is no longer a lender under our senior loan facility.
As of September 30, 2019, Mr. Hastings is a lender under our credit facility in the principal amount of $0.5 million and a holder of our 2023 Notes in the principal amount of $1.0 million.
Mr. Hastings has an ownership interest in Fairweather Science, LLC (“Fairweather Science”), a company that provides specialized environmental support services to clients in Alaska’s natural resource industry. In the three months ended September 30, 2018, we recorded $17 thousand of expenses related to services provided by Fairweather Science. We did not record any expenses related to services provided by Fairweather Science in the three months ended September 30, 2019. In the nine months ended September 30,March 31, 2020 and 2019, and 2018, we recorded expenses of $31$3 thousand and $17$31 thousand, respectively, related to services provided by Fairweather Science.
Mr. Hastings also has an ownership interestBrent Whiteley, our former Chief Financial Officer and General Counsel, owns and/or controls RVI Consulting, Inc. No amounts were billed by RVI in Fairweather, LLC (“Fairweather”), a company that provides aviation weather observation services to remote regions in Alaska. In each of the three months and nine months ended September 30, 2019 and 2018, we did not record any expenses related to services provided by Fairweather.
Mr. Whiteley owns RVI.March 31, 2020. In the three months ended September 30,March 31, 2019, and 2018, RVI billed us $55 thousand and $0.3$0.2 million for legal and professional services. In the nine months ended September 30, 2019 and 2018, RVI billed us $0.3 million and $0.6 million, respectively, for legal and professional services. These paymentsservices that were determined to be a misappropriation of funds andfrom us. These amounts are included in misappropriation“Misappropriation of fundsfunds” on our unaudited condensed consolidated statements of operations.
A member of our operations management team owns Inupiate Resources LLC which provides us with certain specialty personnel. In each of the three months ended September 30,March 31, 2020 and 2019, and 2018, we incurred $3 thousand and $10 thousand, respectively,$0.2 million in expenses associated with contract labor. In the nine months ended September 30, 2019 and 2018, we incurred $0.3 million and $0.1 million, respectively, in expenses associated with contract labor.
Three members of our operations management team own Inupiate Resources Leasing LLC which provides us with certain equipment. In January 2020, we purchased $0.1 million of previously leased equipment from Inupiate Resources Leasing LLC, terminating the equipment leasing relationship. In the three months and nine months ended September 30,March 31, 2019, we incurred $18 thousand and $0.2$0.1 million respectively, in expenses associated with leased equipment. We did not incur any expenses in the three months and nine months ended September 30, 2018.
A member of our operations management team owns Summit Air Resources which provided us with certain salvage services. We did not incur any expenses related to these services in each ofIn the three months ended September 30,March 31, 2020 and 2019, and 2018. In the nine months ended September 30, 2019 and 2018, we incurred $32$35 thousand and $34$32 thousand, respectively, related to these services.
ASV is a VIE indirectly owned and/or controlled by Mr. Hastings and Mr. Whiteley (see Note 2).Whiteley.
23
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
As of January 27,April 30, 2020, three of the holders of the indebtedness outstanding under our credit facility, senior loan facility and 2023 Notes represent (together with their affiliates) approximately 90%, 72% and 90%, respectively, of the total principal amounts outstanding under such debt financing arrangements. These holders also collectively own 18% of the shares of our outstanding common stock, 62%61% of the shares of our outstanding common stock, including shares of common stock issuable upon the exercise of our outstanding Series C, D, E and F common stock warrants (including the Series F warrants to be issued upon receipt of shareholder approval), and 76% of the shares of our outstanding common stock, including shares of common stock issuable upon the exercise of our outstanding Series C, D, E and F common stock warrants (including the Series F warrants to be issued upon receipt of shareholder approval) and upon conversion of our 2023 Notes, respectively.
16
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Moreover, the three lenders are parties to certain registration rights agreements, by and among us and certain of our stockholders.
NOTE 14. SUBSEQUENT EVENTS
In November 2019, we financedDue to the purchase of property and equipment pursuant to a secured promissory notesignificant uncertainty in the amount of $10.0 million. The note bears interest at a fixed rate equal to 7.0% per annumoutlook for oil and matures on January 1, 2023. We also amended our credit facility, senior loan facility and indenture governing our 2023 Notes to permit the purchase pursuant to the note.
In November 2019, we consummated the sale of substantially all of our assets in Australia for up to $9.0 million (Australian), payable as follows: (i) $6.0 million (Australian) paid in cash at closing, (ii) $0.6 million (Australian) payable no later than 30 business days after closing and (iii) earnout payments based on the utilization of certain of these assets following the closing in an amount up to $3.0 million (Australian). The earnout payments will be paid over a two–year period and capped at $1.5 million (Australian) in each such year. Subject to certain conditions, we will receive a minimum earnout payment equal to $750 thousand (Australian) in each such year. We also amended our credit facility and senior loan facility to permit the sale and to allow us to retain up to $6.0 million (Australian) of the net proceeds received from the sale, instead of using such net proceeds to repay amounts owed under our credit facility and senior loan facility.
In December 2019, we amended our credit facility to, among other things, (i) request and receive advances in the aggregate principal amount of $5.0 million (the “First Advance”); (ii) provide for the ability to request and receive additional advances in the aggregate principal amount of $5.0 million (the “Additional Advances”); and (iii) provide for the issuance of Series F warrants pursuant to a warrant agreement (the “Warrant Agreement”) exercisable for shares of our common stock. We then borrowed the entire amount of the First Advance to be used for additional working capital. Under the Warrant Agreement, subject to certain conditions, we will issue up to approximately 2.0 million Series F warrants (the “First Advance Warrants”) and may issue additional Series F warrants representing up to 10% of the issued and outstanding shares of our common stock, on a fully diluted basis as of the date of the Additional Advances (or approximately 2.3 million shares of our common stock as of the closing date), upon the issuance of the Additional Advances. Each Series F warrant entitles the holder thereof to purchase one share of our common stock at an initial exercise price of $0.0001 per share. We have issued approximately 0.9 million First Advance Warrants and, upon approval by our shareholders, will issue the remaining First Advance Warrants. Our credit facility requires us to use our best efforts to obtain shareholder approval for the issuance of the Series F warrants.
In January 2020, we and ASV sold certain seismic data and related assets for a purchase price payable as follows: (i) $14.5 million paid to us, on behalf of ASV and us, in cash on the closing date, (ii) $0.5 million paid to us in cash on the closing date, and (iii) earnout payments in an amount of up to $5.0 million to be paid to us, on behalf of ASV and us, based on the licensing fees related to the licensing of certain seismic data following the closing date in an amount in excess of $15.0 million of licensing fees. In connection with the sale, we and ASV also entered into an agreement (the “Sellers’ Agreement”) with respect to certain post–closing indemnification obligations. The Sellers’ Agreement also provides that we will receive all the proceeds paid or payable pursuant to the sale pursuant to clauses (i) and (iii) above, which proceeds will be credited by us towards outstanding amounts owed to us by ASV. We also amended our credit facility, senior loan facility and the indenture governing the 2023 Notes to permit the sale and transactions contemplated by the Sellers’ Agreement and to provide for the application of $14.5 million of the net proceeds received from the sale to reduce indebtedness under our credit facility. Following the sale, the balance of our tax credits receivable, net has been reduced to $2.7 million.
24
SAExploration Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
As previously disclosed, as a result of certain circumstances giving rise to, or occurringnatural gas development as a result of the restatement,significant decline in oil prices since the beginning of 2020 due to the COVID–19 coronavirus pandemic and its impact on the worldwide economy and global demand for oil and the inability of members of OPEC and other producing countries to adequately address the reduced demand, certain events of default had occurred under our credit facility, senior loan facility, 2023 Notesscheduled and Senior Notes.anticipated projects have recently been cancelled or delayed and there is no assurance as to when they may be reinitiated or awarded, if at all. We repaidare unable to predict when market conditions may improve, and worsening overall market conditions could result in fulladditional reductions of backlog and bids outstanding, which will impact our financial performance.
On March 27, 2020, the Senior Notes at maturity in September 2019. In September 2019, we entered into forbearance agreements with respect to our credit facility, senior loan facility and 2023 Notes, whereby the holdersPresident of the indebtedness thereunder agreed to refrain from exercising their rightsUnited States signed into law the Coronavirus Aid, Relief, and remedies with respect to events of default that have occurred and other potential defaults or events of default that may occur as further specified in the forbearance agreements until 5:00 p.m. (New York City time) on the earlier of (i) November 30, 2019 and (ii) the date the forbearance agreements otherwise terminated in accordance with their terms.Economic Security (“CARES”) Act. The November 30, 2019 deadline was ultimately extended to February 7, 2020. On February 7, 2020, we entered into amendments and waivers to our credit facility, senior loan facility and the indenture governing the 2023 Notes to,CARES Act, among other things, waive existing eventsincludes the Paycheck Protection Program (the “PPP”), provisions relating to refundable payroll tax credits, deferment of default thereunderthe employer portion of social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to net interest deduction limitations, increased limitations on qualified charitable contributions, and amend certain covenants requiring ustechnical corrections to deliver financial statements, reports, projectionstax depreciation methods for qualified improved property.
In April 2020, we began deferring the employer portion of social security payments. In May 2020, we received the proceeds from an unsecured loan in the amount of approximately $6.8 million pursuant to the PPP. We are continuing to evaluate the other impacts that the CARES Act and other items thereunder.
stimulus measures will have on our financial condition, results of operations, or liquidity.
We evaluated subsequent events for appropriate accounting and disclosure through the date these unaudited condensed consolidated financial statements were issued and determined that there were no material items that required recognition or disclosure in our unaudited condensed consolidated financial statements, except as described above.
statements.
ITEM 2. MANAGEMENT'S DISCUSSIONDISCUSSION AND ANALYSIS OFOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto, as well as our Annual Report on Form 10–K/AK for the year ended December 31, 2018.2019.
RESTATEMENT OF PREVIOUSLY UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
This “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” gives effect to the restatement of our unaudited condensed consolidated financial statements as more fully described in Note 2 in “Item 1. Financial Statements” and “Item 4. Controls and Procedures”, both contained herein.
OVERVIEW
We are an international oilfield services company offering a full rangefull–service global provider of vertically–integrated seismic data acquisition, data processing and interpretation, and logistical support and processing services throughoutto customers in the oil and natural gas industry. Our business activities are primarily conducted in North America, South America, Asia Pacific Africa and the Middle East to the oil and natural gas industry.West Africa. Our services include the acquisition of 2D, 3D, time–lapse 4D and multi–component seismic data on land, in transition zones between land and water, and offshore in depths reaching 3,000 meters. In addition, we offer a full suite of data processing and interpretation services utilizing our proprietary, patent–protected software, and also provide in–house logistical support services, such as program design, planning and permitting, camp services and infrastructure, surveying, drilling, environmental assessment and reclamation and community relations.processing services. We currently provide our services on a proprietary basis only to our customers and the seismic data acquired is owned by our customers, other than the multiclient seismic data library currently maintained by ASV of approximately 440 square kilometers in certain basins in Alaska, which is available for future sales or license.
Our customers include major integrated oil companies, national oil companies and independent oil and natural gas exploration and production companies. Demand for our services depends on the level of spending by these customers for exploration, production, development and field management activities, which is influenced, in a large part, by oil and natural gas prices. Demand for our services is also impacted by long–term supply concerns based on national oil policies and other country–specific economic and geopolitical conditions. Significant fluctuations in oil and natural gas exploration activities and oil and natural gas prices have affected, and will continue to affect, demand for our services and our results of operations.
Project visibility, while remaining constrained due to the uncertain sustainability of the recent rise in oil prices and seismic data acquisition budgets, has improved. Despite the improved environment, market conditions remain challenging and we continue to maintain a conservative approach. We have continued to explore ways to reduce costs and gain operating efficiencies through internal restructuring.
While our revenues are mainly affected by the level of customer demand for our services, our revenues are also affected by the bargaining power of our customers relating to our services, as well as the productivity and utilization levels of our data acquisition crews. Factors impacting productivity and utilization levels include client demand, oil and natural gas prices, whether we enter into turnkey or dayrateterm contracts with our clients, the number and size of crews, the number of recording channels per crew, crew downtime related to inclement weather, delays in acquiring land access permits, agricultural or hunting activity, holiday schedules, short winter days, crew repositioning and equipment failure. To the extent we experience these factors, our operating results may be affected from quarter to quarter. Consequently, our efforts to negotiate more favorable contract terms in our supplemental service agreements, mitigate permit access delays and improve overall crew productivity may contribute to growth in our revenues.
Most of our client contracts are turnkey contracts. While turnkey contracts allow us to capitalize on improved crew productivity, we also bear more risks related to weather and crew downtime. We expect the percentage of turnkey contracts to remain high as we continue our operations in the regions of the U.S. and internationally in which turnkey contracts are more common.
WhileAs of March 31, 2020, we had approximately $109.7 million of backlog under contract, in addition to approximately $196.1 million of bids outstanding. Of the markets$109.7 million of backlog under contract, we expect $33.6 million to be completed in 2020. However, our project visibility has recently deteriorated. Due to the significant uncertainty in the outlook for oil and natural gas development as a result of the significant decline in oil prices since the beginning of 2020 due to the COVID–19 coronavirus pandemic and its impact on the worldwide economy and global demand for oil and the inability of member of OPEC and other producing countries to adequately address the reduced demand, certain of our scheduled and anticipated projects have recently been very volatilecancelled or delayed and are likely to continue to be so in the future, we believe opportunities exist for us to enhance our market position by responding to our clients continuing desire for higher resolution subsurface images. If economic conditions weaken such that our clients reduce their capital expenditures or if there is a significant drop in oilno assurance as to when they may be reinitiated or awarded, if at all. We are unable to predict when market conditions may improve and natural gas prices, itworsening overall market conditions could result in diminished demandadditional reductions of backlog and bids outstanding. See “Liquidity and Capital Resources” contained herein for a discussion of how these developments have impacted our seismic services, could cause downward pressure on the prices we charge and would affect ourfinancial position, results of operations.operations and cash flows.
Three Months Ended September 30, 2019 Compared with the Three Months Ended September 30, 2018
Net lossincome for the three months ended September 30, 2019March 31, 2020 was $13.0$10.1 million compared with a net loss of $22.6$3.7 million for the three months ended September 30, 2018.March 31, 2019. The significant factors in this change were an increase of $7.4$10.9 million in gross profit (loss) and a decrease of $0.8$3.1 million in income taxes offset by increases of $2.9 million in selling, general and administrative (“SG&A”) expenses.
expenses and $5.0 million in other expenses, net.
Revenue from services in the three months ended September 30, 2019March 31, 2020 increased $8.3$32.3 million compared with the three months ended September 30, 2018.March 31, 2019. In North America, revenue from services increased $7.6$30.6 million due to an increasethe sale by ASV and us of certain seismic data coupled with increases in market sharethe number and scope of projects performed in Alaska and Canada offset by a decrease in activity in the contiguous United States (the “Lower 48”) due to the purchase of certain assets from Geokinetics, Inc. in 2018.
America.
Revenue from services in South America increased $0.9$9.2 million due to the completion of a marine job in Brazil and a small project in Bolivia offset by a decrease in the amount of work performed in Colombia as a result of a fewer number of active customers.Colombia. Revenue from services in Asia Pacific decreased $0.2$7.5 million primarily due to finishingthe completion of a marine job in Malaysia in the three months ended March 31, 2020 compared with the completion of a marine job in India offset by a land project in Australia.
the three months ended March 31, 2019.
Gross profit (loss) for the three months ended September 30, 2019March 31, 2020 increased $7.4$10.9 million compared with the three months ended September 30, 2018.March 31, 2019. Gross profit (loss) as a percentage of revenues was 14.0%24.7% for the three months ended September 30, 2019March 31, 2020 compared with (27.6)%21.6% for the three months ended September 30, 2018.March 31, 2019. The positive impact on gross profit (loss) can be attributed to more favorable pricing when taking into account the fixed costs involved in our projects.
SG&A expenses for the three months ended September 30, 2019 decreased $0.8March 31, 2020 increased $2.9 million compared with the three months ended September 30, 2018March 31, 2019. The increase was primarily dueattributable to a decrease of $6.6 million of equity–based compensation costs offset by an increase of $5.2 million of costsincreased legal and professional fees related to the SEC investigation and an increase of $0.7 million in reserve for doubtful accounts.
internal investigations and our debt compliance issues.
As previously disclosed, elsewhere in this Form 10–Q, our former Chief Financial Officer and General Counsel misappropriated funds.$0.2 million of funds in the three months ended March 31, 2019. For more information, see Note 213 contained herein.
Other expense, net for the three months ended September 30, 2019 decreased $0.5March 31, 2020 increased $5.0 million compared with the three months ended September 30, 2018March 31, 2019 primarily due to a $1.0 million decrease in interest expense and an increase of $0.5 million in other income offset by a $1.0$5.6 million increase in foreign currency loss. Of the $1.0 million decrease in interest expense, $1.5 million related to decreased interest expense from the extension of our senior loan facility in February 2019 partially offset by $0.4 million of increased interest expense from the 2023 Notes. The $1.0 million increase in foreign currency loss relates to increases in foreign currency losses primarily in Brazil, Canada and Colombia.
Colombia, partially offset by a $0.8 million increase in other income, net.
Income taxes for the three months ended September 30, 2019March 31, 2020 decreased $0.6$3.1 million compared with the three months ended September 30, 2018March 31, 2019 primarily due to fluctuations in earnings among the various jurisdictions in which we operate, offset by increases in valuation allowances and increases in foreign tax rate differentials.
Nine Months Ended September 30, 2019 Compared with the Nine Months Ended September, 2018
Net loss for the nine months ended September 30, 2019 was $14.5 million compared with a net loss of $40.9 million for the nine months ended September 30, 2018. The significant factors in this change were an increase of $34.9 million in gross profit (loss) and a decrease of $2.2 million in other expense, net partially offset by increases of $5.2 million in SG&A expenses and $5.9 million in income taxes.
Revenue from services in the nine months ended September 30, 2019 increased $136.9 million compared with the nine months ended September 30, 2018. In North America, revenue from services increased $64.6 million due to an increase in the number of projects performed in Alaska, as a result of a return to activity on the North Slope, and the increase in market share in the Lower 48 due to the purchase of certain assets from Geokinetics, Inc. in 2018.
Revenue from services in South America decreased $19.9 million due to a decrease in the amount of work performed in Colombia offset by an increase in the number of active projects in Mexico and Bolivia. Activity in Colombia continued to decrease due to a fewer number of active customers. Revenue from services in Asia Pacific increased $92.1 million primarily due to projects in India, Australia and Dubai.
Gross profit (loss) for the nine months ended September 30, 2019 increased $34.9 million compared with the nine months ended September 30, 2018. Gross profit (loss) as a percentage of revenues was 16.7% for the nine months ended September 30, 2019 compared with (0.8)% for the nine months ended September 30, 2018. The positive impact on gross profit can be attributed to more favorable pricing when taking into account the fixed costs involved in our projects.
SG&A expenses for the nine months ended September 30, 2019 increased $5.2 million compared with the nine months ended September 30, 2018 primarily due to (i) $6.9 million of costs related to the SEC investigation, (ii) $1.6 million of reserve for doubtful accounts and (iii) an overall increase in SG&A expenses from increases in revenue from services and activity partially offset by a decrease of $5.9 million in equity–based compensation costs.
As disclosed elsewhere in this Form 10–Q, our former Chief Financial Officer and General Counsel misappropriated funds. For more information, see Note 2 contained herein.
Other expense, net for the nine months ended September 30, 2019 decreased $2.2 million compared with the nine months ended September 30, 2018 primarily due to a decrease of $1.7 million in foreign currency loss and a $1.2 million increase in other income partially offset by a $0.6 million increase in interest expense. The $1.7 million decrease in foreign currency loss relates to decreases in foreign currency losses in Brazil and Canada. Of the $0.6 million increase in interest expense, $2.1 million related to increased interest expense from the 2023 Notes partially offset by $1.5 million of decreased interest expense from the extension of our senior loan facility in February 2019 and the decrease in long–term debt outstanding from the debt exchange in January 2018.
Income taxes for the nine months ended September 30, 2019 increased $5.9 million compared with the nine months ended September 30, 2018 primarily due to fluctuations in earnings among the various jurisdictions in which we operate, offset by increases in valuation allowances and increases in foreign tax rate differentials.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash is from the seismic data acquisition services we provide to customers, supplemented as necessary by drawing against our credit facility. Our cash is primarily used to provide additional seismic data acquisition services, including the payment of expenses related to operations and the acquisition of new seismic data equipment, and to pay the interest on outstanding debt obligations. Our cash position and revenues depend on the level of demand for our services. Historically, cash generated from operations, along with cash reserves and borrowings from commercial, private, and related parties, have been sufficient to fund our working capital and to acquire or lease seismic data equipment.
As of September 30, 2019, we had working capital of $20.2 million compared with $4.8 million as of December 31, 2018. The increase in working capital was related to a $5.8 million increase in cash and cash equivalents and decreases in accrued liabilities and current portion of long–term debt and finance leases.
Our working capital needs are difficult to predict and can be subject to significant and rapid increases in our needs. Our available cash varies as a result of the timing of our projects, our customers’ budgetary cycles and our receipt of payment. Our working capital requirements may continue to increase due to the expansion of infrastructure that may be required to keep pace with technological advances. In addition, some of our larger projects require significant upfront expenditures.
Over time, we must continue to invest additional capital to maintain, upgrade and expand our seismic data acquisition capabilities. We currently estimate that our capital expenditures for 20192020 will not exceed $3.0 million, of which we have spent $1.2$0.3 million through September 30, 2019.March 31, 2020. This amount will permit us to maintain the operational capability of our current fleet of equipment so that we can execute ongoing projects without delay or increased costs but will not allow us to purchase any new technology or upgrade existing capital assets.
As of March 31, 2020, we had cash and cash equivalents and working capital of $8.5 million and $(64.8) million, respectively, compared with $5.4 million and $(89.2) million, respectively, as of December 31, 2019. The increase in working capital was primarily related to a decrease of $13.4 million of current portion of long–term debt and finance leases and an increase of $13.9 million in accounts receivable, net.
As previously disclosed,On March 27, 2020, the CARES Act was signed into law. The CARES Act, among other things, includes the Paycheck Protection Program (“the PPP”), provisions relating to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improved property. In April 2020, we began deferring the employer portion of social security payments. In May 2020, we received the proceeds from an unsecured loan in the amount of approximately $6.8 million pursuant to the PPP. We are currently continuing to evaluate the other impacts that the CARES Act and other stimulus measures will have on our financial condition, results of operations, or liquidity.
Although we generated net income and cash from operating activities in the first quarter of 2020, we have reported recurring losses from operations and have not generated cash from operating activities for the six years ended December 31, 2019, and as of March 31, 2020, we had a stockholders’ deficit of $25.1 million. Our recurring losses and negative cash flows from operating activities on an annual basis, stockholders’ deficit, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a resultgoing concern. We anticipate negative cash flows from operating activities to begin to occur again in the second quarter of certain circumstances giving rise2020 and continue for the foreseeable future due to, or occurringamong other things, the significant uncertainty in the outlook for oil and natural gas development as a result of the restatement,significant decline in oil prices since the beginning of 2020 due to the COVID–19 coronavirus pandemic and its impact on the worldwide economy and global demand for oil and the inability of members of OPEC and other producing countries to adequately address the reduced demand. In April 2020, we had a contract cancelled by the operator presumably due to uncertainty on government restrictions on operations during the COVID–19 coronavirus pandemic and other scheduled and anticipated projects have been delayed and there is no assurance as to when they may resume, if at all. We are also unable to predict when industry market conditions may improve. Our senior loan facility matures in January 2021 and to date, we have been unable to negotiate an extension of the maturity date with our debt holders. If we are unable to extend or otherwise address the maturity date of the senior loan facility, we expect that we will be unable to repay the senior loan facility when due in January 2021.
Our management continues to: (i) discuss with our debt holders an extension of the maturity date of the senior loan facility and waivers of the events of default due to the inclusion of an explanatory paragraph raising substantial doubt about our ability to continue as a going concern in the report of our independent registered public accounting firm on our consolidated financial statements included in our Annual Report on Form 10–K for the year ended December 31, 2019; (ii) seek to obtain additional financing through the issuance of debt or equity securities; and (iii) manage operating costs by actively pursuing cost cutting measures to maximize liquidity consistent with current industry market expectations. To assist us in managing our operating costs, our Board of Directors has reduced its cash compensation by 10%, effective beginning with the second quarter of 2020, until further notice. There is no assurance that we will be successful in extending the maturity date of the senior loan facility or obtaining additional financing on satisfactory terms or at all. In addition, there is no assurance that any such financing, if obtained, will be adequate to meet our needs and support our working capital needs. Based on the uncertainty of achieving these goals and the significance of the factors described, there is substantial doubt as to our ability to continue as a going concern for a period of 12 months after the date these unaudited condensed consolidated financial statements are issued.
As previously disclosed, certain events of default had occurred under our credit facility, senior loan facility and 2023 Notes and Senior Notes. As a result of such events of default, we are unable to borrow additional amounts under our credit facility without the requisite approval of the lenders under such credit facility. We repaid in full the Senior Notes at maturity in September 2019. In September 2019, wehave entered into forbearance agreements with respect to our credit facility, senior loan facility and 2023 Notes, whereby the holders of the indebtedness thereunder have agreed to refrain from exercising their rights and remedies with respect to these existing defaults and other events of default that have occurred and other potential defaults or events of default that may occurare continuing as further specified in the forbearance agreements until 5:00 p.m. (New York City time) on the earlier of (i) November 30, 2019May 31, 2020 and (ii) the date the forbearance agreements otherwise terminatedterminate in accordance with their terms. The November 30, 2019 deadline was ultimately extendedIf we are unable to February 7, 2020. On February 7, 2020, we entered into amendments andobtain waivers to our credit facility, senior loan facility andof the indenture governing the 2023 Notes to, among other things, waive existing events of default, thereunderour debt holders may take action to accelerate the maturity date of the applicable debt and amend certain covenants requiring us to deliver financial statements, reports, projectionsexercise their other respective rights and remedies, such as foreclosure, among other items thereunder. We currently have $9.5 million of available borrowing capacity underthings. In that event, our credit facility, subjectdebt holders would likely be entitled to the satisfactionfirst proceeds of certain conditions precedent, including the absencesale of a defaultour assets and the accuracyholders of representations and warranties. Under the termsour securities may lose some or all of their investment.
As a result of the Fifth Amendmentforegoing factors, we have initiated a process to analyze and evaluate various strategic alternatives to address our capital structure and to position us for future success. To assist us in analyzing and evaluating these alternatives, we have retained a financial advisor. We do not intend to disclose or comment on developments related to our credit facility entered intoreview until such time as we have determined that further disclosure is necessary or appropriate. There can be no assurance that our analysis and evaluation will result in December 2019, we are also ablethe identification or completion of any strategic alternative, or any assurance as to request the issuance of additional incremental commitments in an aggregate principal amount of up to $5.0 million which each lender may, in its sole and absolute discretion, agree to issue its pro rate share.
We continue to diligently pursue improving our capitalization and reducing our long–term debt, but liquidity issues may continue to challenge us. Until we are able to finally resolve the issues described above, we could continue to experience liquidity and cash flow issues.
outcome or timing.
Long–term Debt
As of September 30, 2019,March 31, 2020, we have $119.0 million in aggregate principal amount of long–term debt (excluding finance leases) outstanding. For additional information about our long–term debt, please see “Part I. Financial Information – Item 1. Financial Statements” contained herein.
Cash Flows
Cash flows provided by (used in) type of activity were as follows (in thousands):
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| Nine Months Ended September 30, |
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| 2019 |
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| 2018 |
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| Three Months Ended March 31, |
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| (Restated) |
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| 2020 |
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| 2019 |
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Operating activities |
| $ | (1,375 | ) |
| $ | (22,579 | ) |
| $ | 21,149 |
| �� | $ | (6,764 | ) |
Investing activities |
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| (462 | ) |
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| (22,116 | ) |
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| (77 | ) |
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| (184 | ) |
Financing activities |
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| 7,546 |
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| 61,573 |
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| (17,561 | ) |
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| 8,806 |
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Operating Activities
Cash flows from operating activities used $1.4provided $21.1 million and $22.6used $6.8 million in the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. The significant factor in the change was a favorable change in working capital as a result ofour increased revenue from services.
Investing Activities
DuringIn each of the ninethree months ended September 30,March 31, 2020 and 2019, cash flows used in investing activities consisted of $1.2$0.3 million for the purchase of propertyto maintain, expand and equipmentupgrade our seismic data acquisition capabilities, partially offset by $0.7$0.2 million and $0.1 million in the three months ended March 31, 2020 and 2019, respectively, from the sale of excess property and equipment. During
Financing Activities
In the ninethree months ended September 30, 2018,March 31, 2020, cash flows used in investing activities consistedincluded $15.2 million of $21.7long–term debt repayments and $2.3 million forin distributions to our noncontrolling interest. In the purchase of assets and $1.0 million for the purchase of property and equipment offset by proceeds of $0.7 million from the sale of excess property and equipment.
During the ninethree months ended September 30,March 31, 2019, cash flows provided by financing activities consisted of $17.7$9.7 million of long–term debt borrowings partially offset by $7.6 million of long–term debt and finance lease repayments, $2.3$0.8 million of distributions to our noncontrolling interest and $0.4 million for the purchase of treasury stock. During the nine months ended September 30, 2018, cash flows provided by financing activities consisted of $123.4 million of long–term debt borrowings offset by $56.3 million of long–term debt repayments, $1.6 million of debt issuance costs, $1.7 million of stock issuance costs and $1.8 million of treasury stock purchases.
interest.
FORWARD–LOOKING STATEMENTS
This Quarterly Report on Form 10–Q contains forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based our forward–looking statements on our current expectations and estimates of future events and trends, which affect or may affect our business and operations. Although we believe that these forward–looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Many important factors, in addition to the risk factors identified in the “Risk Factors” section included in Item 1A of our Annual Report on Form 10–K/AK for the year ended December 31, 20182019 and Item 1A of this Quarterly Report on Form 10–Q, may have a material adverse effect on our results as indicated in the following forward–looking statements. You should read this Quarterly Report on Form 10–Q and the documents that we have filed as exhibits hereto completely and with the understanding that our actual results may be materially different from what we expect.
Our forward–looking statements may be influenced by the following factors, among others:
our ability to identify, evaluate and complete any strategic alternative with respect to our capital structure;
the impact of the announcement of our review of strategic alternatives on our business, including our financial and operating results, or our employees, suppliers and customers;
substantial doubt about our ability to continue as a going concern as of March 31, 2020;
the impact of the COVID–19 coronavirus pandemic on our business, financial condition and results of operations;
fluctuations in the levels of exploration and development activity in the oil and natural gas industry;
delays, reductions or cancellations of project awards and our ability to realize revenue projected in our backlog;
continuing events of default outstanding under our debt instruments, including the risk that the holders of the debt take action to accelerate the maturity date of the applicable debt and exercise their other respective rights and remedies, such as foreclosure, among other things;
risks arising from the holders of our debt taking other actions against us, including by seeking a bankruptcy filing;
the potential need for us to seek bankruptcy protection;
the impact of the restatement of our previously issued consolidated financial statements;
the identified material weaknesses in our internal control over financial reporting and our ability to remediate those material weaknesses;
the outcome of the investigations by the SEC, the DOJ and the Alaska DepartmentDOR with respect to the circumstances giving rise to the restatement of Revenue (the “DOR”), which is investigating our treatment of ASV as a VIE and related Alaska tax credit certificates,previously issued consolidated financial statements, which could include sanctions or other actions against us and our officers and directors, civil lawsuits, and penalties;
the outcome of our internal investigation intoof the matters summarized incircumstances giving rise to the Annual Report on Form 10-K/A for the year ended December 31, 2018;restatement of our previously issued consolidated financial statements;
developments with respect to the Alaskan oil and natural gas exploration tax credit system that continue to affect our ability to timely monetize tax credits, including litigation over the constitutionality of the legislation allowing Alaska to sell bonds to retire its liabilities relating topurchase tax credit certificates;certificates and Alaska budget constraints driven primarily by oil prices;
fluctuations in the levels of exploration and development activity in the oil and natural gas industry;
intense industry competition involving a competitive bidding process that involves significant costs and risks;
delays in permitting and land access rights;
limited number of customers;
credit and delayed payment risks related to our customers;
the availability of liquidity and capital resources, including our need to obtain additional working capital for upfront expenditures for upcoming projects, and the potential impact this has on our business and competitiveness;
increases in the level of activism against oil and natural gas exploration and development activities;
need to manage rapid growth and contraction of our business;
delays, reductions or cancellations of project awardsoperational disruptions due to seasonality, weather and our ability to realize revenue projected in our backlog;other external factors;
crew availability and productivity;
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crew availability and productivity;
whether we enter into turnkey or term contracts;
high fixed costs of operations;
substantial international business exposing us to currency fluctuations and global factors, including economic, political and military uncertainties;
risks relating to cyber incidents;
ability to retain key executives;
need to comply with diverse and complex laws and regulations;
the possible impact on payments received from the State of Alaska regarding tax credits that have been issued;
risks related to a possibleour delisting from the NASDAQ Capital Market;
costs and outcomes of pending and future litigation; and
the time and expense required for us to respond to the SEC, DOJ and DOR investigations and for us to complete the restatement and our internal investigation, which expenses have been and are likely to continue to be material and are likely to have a material adverse impact on our cash balance, cash flow and liquidity.
These words “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan to,” “ought,” “could,” “will,” “should,” “likely,” “appear,” “project,” “forecast,” “outlook” or other similar words or phrases are intended to identify forward–looking statements. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other “forward–looking” information. The forward–looking statements speak only as of the date they were made and, except as required by law, we undertake no obligation to update, amend or clarify any forward–looking statements because of new information, future events or other factors. All of our forward–looking information involves risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of the risk factors identified in the “Risk Factors” section included in Item 1A of our Annual Report on Form 10–K/AK for the year ended December 31, 2018.2019.
ITEM 4. CONTROLS AND PROCEDURES
Overview
Notwithstanding the existence of the material weaknesses described below, we believe that the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10–Q fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with generally accepted accounting principles.
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a–15 and 15d–15, we carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.
Quarterly Report on Form 10–Q. As described below, management has identified material weaknesses in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures. As a result of those material weaknesses, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) were not effective as of September 30, 2019. March 31, 2020.
Disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Material Weaknesses in Internal Control over Financial Reporting
The control environment, which is the responsibility of senior management, helps set the tone of the organization, influences the control consciousness of its officers and employees, and is an important component affecting how the organization performs financial analysis, accounting and financial reporting. A proper organizational tone can be promoted through a variety of means, such as well–documented and communicated policies, a commitment to hiring competent employees, the manner and content of oral and written communications, strong internal controls and effective governance. WeOur former senior management, including our former principal executive officer and our former principal financial officer, did not design or maintain a proper control environment or proper tone at the senior management level.
Beginning with the replacement of our former principal executive officer and our former principal financial officer in August 2019, we have taken the steps noted below in “Remediation Plan for Material Weaknesses in Internal Control Over Financial Reporting and Status” to address the tone at the senior management level and the material weaknesses described below that were previously identified in our Amendment No. 1 to Annual Report on Form 10–K/A for the year ended December 31, 2018 and that continue to exist as of March 31, 2020.
We did not design or maintain effective monitoring activities and activities surrounding our control environment, which was primarily attributable to not performing ongoing evaluations to ascertain whether the components of internal control are present and functioning and not having a sufficient complement of accounting, information technology and financial reporting personnel with an appropriate level of knowledge to address our financial reporting requirements. The failures within these two components of Internal Control – Integrated Framework (2013) contributed to the following material weaknesses at the control activity level:
Revenues
Revenues – We did not design or maintain effective controls over the review of revenue contracts for proper revenue recognition and accounts receivable reconciliations and the review of journal entries used to record revenue transactions.
Complex accounting and management estimates –
We did not appropriately design or maintain effective controls over complex accounting relating to variable interest entities or over the review and approval of entering into transactions with newly formed entities, which resulted in certain instances of incorrect accounting and improper consolidation decisions. We also did not appropriately design or maintain effective controls over complex accounting relating to earning per share calculations and the accounting for income taxes. Although the issue relating to income taxes, which was an incorrect valuation allowance on deferred tax assets, arose and was subsequently corrected in fiscal year 2018, sufficient controls were not in place that would necessarily identify a recurrence of such an error.
Financial statement close and reporting –
We did not design or maintain effective controls to support accurate reporting and disclosures within our quarterly and annual reporting.
Customer and vendor set–up, approval and maintenance –
We did not design or maintain effective controls to ensure that necessary procedures regarding the establishment and maintenance of both customers and vendors were followed.
We did not properly disclose related parties in our consolidated financial statements and some of our officers and employees charged with making the proper notifications for such disclosures were inadequately trained on what constitutes a related party. Furthermore, there were instances where related parties were known to be related parties and were still not properly reported and disclosed.
Segregation of Duties –
We did not properly design or maintain effective controls to prevent unauthorized access to approve certain transactions, including appropriate analysis of segregation of duties conflicts. As a result of this failure, high level employees had the ability to approve transactions, and vendor set up and payments without necessary approvals at the transaction level and oversight at the Board level.
Information Technology –
We did not design or maintain effective controls to prevent unauthorized access to certain systems, programs and data, and provide for periodic review and monitoring of access including review of security logs and analysis of segregation of duties conflicts.
These material weaknesses resulted in the restatement of our audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017 and the restatement of our unaudited condensed consolidated financial statements for the quarterly period ended March 31, 2019 and each of the quarterly periods in the years ended December 31, 2018 and 2017.
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting and Status
We have identified and implemented and continue to identify and implement actions to improve our internal control over financial reporting and disclosure controls and procedures, including actions to enhance our resources and training with respect to financial reporting, including technical accounting, and disclosure responsibilities. We have established a disclosure committee to assist our principal executive officer and principal financial officer in fulfilling their responsibility to oversee the
accuracy, completeness and timeliness of our public disclosures. Additional actions that have been implemented include updating our audit committee charter, code of business conduct and ethics and anti-corruptionanti–corruption policy, adopting a new related party transaction policy and creating a more robust conflict of interest questionnaire for employees. An updated mandatory training course has been implemented for all employees in English and in Spanish which covers the code of business conduct and ethics as well as the anti-corruptionanti–corruption policy in accordance with the updated policies. Also, we will seek to hire more accounting personnel as deemed necessary to both strengthen reporting lines and segregation of duties as well as improve technical accounting functionality.
We have taken, and continue to take, the actions described below to remediate the identified material weaknesses and believe that the actions described below will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to evaluate and improve our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, our senior management may determine to take additional measures to address control deficiencies or determine to modify the remediation efforts described in this section. While the Audit Committee and senior management are closely monitoring the implementation, until the remediation efforts discussed in this section, including any additional remediation efforts that our senior management identifies as necessary, are completed, tested and determined effective, the material weaknesses described above will continue to exist.
Our Board has directed senior management to ensure that a proper, consistent tone is communicated throughout the organization, which emphasizes the expectation that previously existing deficiencies will be rectified through implementation of processes and controls to ensure strict compliance with generally accepted accounting principles and regulatory requirements. We also have taken steps to affect a proper tone through our policies and personnel, which includes the reorganization of our senior level management. Our former Chief Financial Officer and former Chief Operating Officer have been terminated, and agreements were reached with our former Chief Executive Officer and former Vice President, Finance allowing them to resign and provide limited consulting services to assist with the transition of their job duties. In addition, our Chairman, Chief Executive Officer and President has emphasized to all employees the importance of acting ethically and adhering to our code of business conduct and ethics as well as our anti-corruption policy.
We have retained a third–party consulting firm that specializes in internal audit work, and more specifically internal controls work. This firm has assisted, and will continue to assist, management with its risk assessment of internal control over financial reporting as well as documentation and testing of our internal control structure and evaluation of material weaknesses. The controls that exist at the entity level will be particularly scrutinized in this effort.
On May 1, 2020, we hired a permanent Chief Financial Officer who will assume the full responsibilities of the position upon the filing of this Quarterly Report on Form 10–Q with the SEC. Our new Chief Financial Officer has significant experience in internal controls and he, with the assistance of our third–party consulting firm, will oversee the remediation of the material weaknesses described above.
With oversight from the Audit Committee, our management has begun to design and implement certain remediation measures to address the material weaknesses described above and enhance our internal control over financial reporting. We have taken or will take the following actions to improve the design and operating effectiveness of our internal control in order to remediate these material weaknesses:
assign process owners to ensure that controls are adequately evaluated and that the design of controls appropriately address risk related to critical functionality;
strengthen controls around revenue recognition, including stricter reconciliation procedures and the engagement of a third third–party consultant to assist in the review and analysis of complex contracts;
improve complex and technical accounting capabilities within our accounting structure by (i) changing senior leadership including the engagement of an interim Chief Financial Officer in August 2019 with significant accounting knowledge and experience, (ii) initiating and the initiation ofcompleting a search to fill this role on a more permanent basis. In addition,basis, (iii) hiring new accounting personnel will be hired as needed and supported(iv) supporting our accounting personnel with third party resources as needed;
require that the Board review and approve all significant transactions;
strengthen controls around financial close and reporting, including increased review of account reconciliations and imposing stricter monthly and quarterly close procedures and monitoring through a close checklist and additional layers of review;
formalize the approval and maintenance process for both customers and vendors, including higher level approvals of such where necessary;
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improve controls around related party reporting and transactions, including training on proper related party disclosures on currently used annual forms and the implementation of a new quarterly review process which will require updates from officers and the Board;
improve segregation of duties issues through the strengthening of internal controls and a separate review and analysis of segregation of duties conflicts, which would include both systems and manual processes; and
institute new controls and strengthen existing controls in the information technology area, including performing a full review of the information technology general controls, which will include review, testing and updating necessary controls that will address the existing weaknesses and the addition of controls to prevent unauthorized access to systems, programs and data, and controls to provide for periodic review and monitoring of access including review of security logs and analysis of segregation of duties conflicts.
We expect that our current Interim Chief Financial Officer will continue to assist us as a consultant to enhance our accounting knowledge and experience. We have commenced our analysis of our segregation of duties conflicts and expect to complete the analysis and incorporate the results into our 2020 internal control planning and remediation efforts. We have also updated and formalized our information technology policies, which will serve as the foundation for remediating the material weakness in the information technology area.
Changes in Internal Control over Financial Reporting
ThereExcept as described above in “Remediation Plan for Material Weaknesses in Internal Control Over Financial Reporting and Status,” there have not been any changes in our internal control over financial reporting during the three months ended September 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ThereExcept as described in Note 4 in “Part 1. Financial Information – Item 1. Financial Statements” contained herein, there have been no material changes in the legal proceedings as described in the section entitled “Legal Proceedings” in our Annual Report on Form 10–K/AK for the year ended December 31, 2018.
2019.
ThereExcept as set forth below, there have been no material changes in the significant risk factors that may affect our business, financial position, results of operations or liquidity as described in the section entitled “Risk Factors” in our Annual Report on Form 10–K/AK for the year ended December 31, 2018.2019.
The COVID–19 coronavirus pandemic has adversely affected our business, financial condition and results of operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIESThe outbreak of the COVID–19 coronavirus, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity, including the global demand for oil and natural gas. A pandemic, including the COVID–19 coronavirus or other public health epidemic, poses the risk that we or our employees, contractors, suppliers, customers and other partners may be prevented from conducting business activities for an indefinite period of time, including due to spread of the disease within these groups or due to restrictions that may be requested or mandated by governmental authorities, including quarantines of certain geographic areas, restrictions on travel and other restrictions that prohibit employees from going to work, both around the world as well as in certain jurisdictions in the United States. The continued spread of the COVID–19 coronavirus and the related mitigation measures may result in a significant decrease in business from our customers and/or cause our customers to be unable to meet existing payment or other obligations to us. In April 2020, we had a contract cancelled by the operator presumably due to uncertainty on government restrictions on operations during the COVID–19 coronavirus pandemic and other scheduled and anticipated projects have been delayed and there is no assurance as to when they may resume, if at all. If the COVID–19 coronavirus continues to spread or the response to contain the COVID–19 coronavirus pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations.
Our backlog can vary significantly from time to time. Our backlog estimates are based on certain assumptions and are subject to unexpected adjustments and cancellations and thus may not be timely converted to revenues in any particular fiscal period, if at all, or be indicative of our actual operating results for any future period.
As previously disclosed,of March 31, 2020, we had approximately $109.7 million of backlog under contract, in addition to approximately $196.1 million of bids outstanding. Of the $109.7 million of backlog under contract, we expect $33.6 million to be completed in 2020. Our backlog estimates represent those projects for which a customer has executed a contract or signed a binding letter of award. Our backlog can vary significantly from time to time, particularly if the backlog is made up of multi–year contracts with some of our more significant customers. Backlog estimates are based on a number of assumptions and estimates including assumptions related to foreign exchange rates and proportionate performance of contracts. The realization of our backlog estimates is further affected by our performance under term rate contracts, as the early or late completion of a project under term rate contracts will generally result in decreased or increased, as the case may be, revenues derived from those projects. Contracts for services are also occasionally modified by mutual consent and often can be terminated for convenience by the customer. Because of certain circumstances giving risepotential changes in the scope or schedule of our customers’ projects, and the possibility of early termination of customer contracts, we cannot predict with certainty when or if our backlog will be realized. Material modifications, delays, payment defaults or cancellations on the underlying contracts (including those modifications, delays, defaults and cancellations relating to or occurringthe COVID–19 coronavirus pandemic) could reduce the amount of backlog currently reported and, consequently, could inhibit the conversion of that backlog into revenues. Due the significant uncertainty in the outlook for oil and gas development as a result of the restatement,significant decline in oil prices since the beginning of 2020 due to the COVID–19 coronavirus pandemic and its impact on the worldwide economy and global demand for oil and the inability ofmembers of OPEC and other producing countries to adequately address the reduced demand, certain of our scheduled and anticipated projects have recently been cancelled or delayed and there is no assurance as to when they may be reinitiated or awarded, if at all. We are unable to predict when market conditions may improve and worsening overall market conditions could result in additional reductions of backlog and bids outstanding.
We are currently not in compliance with the NASDAQ Capital Market listing standards. If our common stock is delisted, we could be required, at the option of the holders of our 2023 Notes, to repurchase all or a portion of their notes, which could have a material adverse effect on our business, financial condition and results of operations.
On April 29, 2020, we received written notice from the Listings Qualification Department of the NASDAQ Stock Market that its staff had determined to suspend trading in our common stock at the opening of business on May 8, 2020 and file a Form 25-NSE with the SEC to commence proceedings to delist our common stock from the NASDAQ Capital Market. The NASDAQ Stock Market reached its decision to delist our common stock from the NASDAQ Capital Market pursuant to Listing Rule 5550(b)(1) because we had not complied with the minimum $2.5 million stockholders’ equity requirement for continued listing on the NASDAQ Capital Market. As previously disclosed, on February 11, 2020, we received written notice from the NASDAQ Stock Market indicating that we were not in compliance with Listing Rule5550(b)(1). We had previously submitted a plan to regain compliance with the NASDAQ minimum stockholders’ equity requirement.
We have appealed the NASDAQ staff’s determination to a hearings panel pursuant to the procedures set forth in the NASDAQ Listing 5800 Series. The hearing is currently scheduled for June 4, 2020. The appeal has stayed the suspension of trading in our common stock and our common stock will continue to be listed on the NASDAQ Capital Market and will continue to trade under the symbol “SAEX” pending a decision by the hearings panel. We had previously applied for our common stock to be traded on the Over–the–Counter OTCQB Venture Market but the application was not approved due to the existence of the previously disclosed investigations by the SEC, the DOJ and DOR. We cannot assure you that the hearings panel will grant our request for continued listing.
If our common stock was to be delisted from NASDAQ and was not otherwise listed or traded on another qualifying exchange for a period of five consecutive trading days, such event would constitute a “fundamental change” under the terms of the indentures governing our 2023 Notes. In such event, we would be required to provide notice to the holders of our 2023 Notes of such fundamental change and could be required, at the option of such holders, to repurchase all or a portion of their notes. A requirement by such holders for us to repurchase some or all of such notes for cash would likely have a material adverse effect on our business, financial condition and results of operations, including if we do not have sufficient funds or are otherwise unable to comply with such requirement in accordance with the indenture governing our 2023 Notes.
If our common stock is delisted from the NASDAQ, as a result of our not being in compliance with its listing standards, the market price and liquidity of our common stock and our ability to raise additional capital would be adversely impacted.
If our common stock was to be delisted from NASDAQ, trading of our common stock most likely would be conducted in the over–the–counter market on an electronic bulletin board established for unlisted securities such as the OTC Bulletin Board. Such trading would likely reduce the market liquidity of our common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock. If our common stock is delisted from NASDAQ and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker–dealers in connection with any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities exchange or quoted on NASDAQ that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low–priced stocks to their clients. Moreover, various regulations and policies restrict the ability of stockholders to borrow against or “margin” low–priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers’ commissions on low–priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual stockholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker–dealers by these requirements could discourage broker–dealers from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade our common stock. As a result, the ability of our stockholders to resell their shares of common stock, and the price at which they could sell their shares, could be adversely affected. The delisting of our stock from NASDAQ would also make it more difficult for us to raise additional capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As previously disclosed, certain events of default had occurred under our credit facility, senior loan facility and 2023 Notes and Senior Notes. We repaid in full the Senior Notes at maturity in September 2019. In September 2019,April 2020, we entered into a series of forbearance agreements with:
certain lenders (the “ABL Forbearing Parties”) of approximately 98% of the outstanding principal amount of the loans under the Third Amended and Restated Credit and Security Agreement (as amended, the “ABL Agreement”), dated as of September 26, 2018, by and among SAExploration Inc., a subsidiary of us, as the borrower, us, the other Guarantors from time to time party thereto, the Lenders from time to time party thereto, and Cantor Fitzgerald Securities, as the agent (the “ABL Forbearance Agreement”);
certain lenders (the “Term Loan Forbearing Parties”) of at least 82% of the outstanding principal amount of the term loans under the Term Loan and Security Agreement (as amended, the “Term Loan Agreement”), dated as of June 29, 2016, by and among us, as the borrower, the Guarantors from time to time party thereto, the Lenders from time to time party thereto, and Delaware Trust Company, as the Collateral Agent and as the Administrative Agent (the “Term Loan Forbearance Agreement”); and
certain holders (the “Notes Forbearing Parties” and together with respect to our credit facility, senior loan facilitythe Term Loan Forbearing Parties and the ABL Forbearing Parties, the “Forbearing Parties”) of approximately 98% of the outstanding principal amount of the 2023 Notes wherebyissued pursuant to the holdersindenture (as amended, the “2023 Notes Indenture” and, together with the Term Loan Agreement and the ABL Agreement, the “Debt Instruments”), dated as of September 26, 2018, by and among us, the indebtedness thereunderguarantors party thereto and Wilmington Savings Fund Society, FSB, as trustee and collateral trustee (the “2023 Notes Forbearance Agreement” and together with the Term Loan Forbearance Agreement and the ABL Forbearance Agreement, the “Forbearance Agreements”).
Pursuant to the Forbearance Agreements, the Forbearing Parties have agreed to refrain from exercising their rights and remedies under the Debt Instruments and applicable law with respect to the existing defaults and other events of default that have occurred and other potential defaults or events of default that may occurare continuing as further specified in the forbearance agreementsForbearance Agreements until 5:00 p.m. (New York City time) on the earlier of (i) November 30, 2019(a) May 31, 2020 and (ii)(b) the date the forbearance agreementsForbearance Agreements otherwise terminatedterminate in accordance with their terms. The November 30, 2019 deadline was ultimately extended to February 7, 2020. On February 7, 2020, we entered into amendments and waivers to our credit facility, senior loan facility and the indenture governing the 2023 Notes to, among other things, waive existing events of default thereunder and amend certain covenants requiring us to deliver financial statements, reports, projections and other items thereunder.
ITEM 5. OTHER EVENTSINFORMATION
PPP Loan
On February 7,May 8, 2020, we entered into amendmentsreceived the proceeds from an unsecured loan in the amount of approximately $6.8 million (the “PPP Loan”) from Texas Champions Bank, as lender, pursuant to the PPP of the CARES Act. The PPP Loan matures on May 8, 2022 and waiversbears interest at a rate of 1.0% per annum. Principal and interest are payable monthly beginning seven months from the date of the PPP Loan and may be prepaid at any time prior to our credit facility, senior loan facility and the indenture governing the 2023 Notesmaturity with no prepayment penalties. The PPP Loan is evidenced by a promissory note dated May 8, 2020 (the “Note”), which contains customary events of default relating to, among other things, waive existing eventspayment defaults and breaches of default thereunderrepresentations and amend certain covenants requiring uswarranties.
Under the term of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan. Such forgiveness will be determined, subject to deliver financial statements, reports, projectionslimitations, based on the use of loan proceeds for payment of payroll costs and other items thereunder. any covered payments of mortgage interest, rent, and utilities. In the event the loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. We intend to use the proceeds of the PPP Loan to maintain payroll and make lease, rent and utility payments; however, there is no assurance that the PPP Loan will be forgiven, in whole or in part.
The foregoing description of the amendments and waivers to our credit facility, senior loan facility and the indenture governing the 2023 Notes are summaries onlyPPP Loan is not complete and is qualified in its entirety by reference to the complete text of (i) the amendment to our credit facility, attachedNote, a copy of which is filed as Exhibit 10.28 hereto, (ii)10.16 to this Quarterly Report on Form 10–Q and incorporated herein by reference.
In connection with the amendmentPPP Loan, we received the consents of the lenders under the Debt Instruments (the “Consents”) to our senior loan facility, attached as Exhibit 10.29 hereto,the entry into the PPP Loan, subject to certain limitations.
The foregoing description of the Consents is not complete and (iii) the third supplemental indenture, attached as Exhibit 10.30 hereto, each incorporatedis qualified in its entirety by reference intoto the complete text of the Consents, copies of which are filed as Exhibits 10.17, 10.18 and 10.19 to this Quarterly Report on Form 10–Q.
Q and incorporated herein by reference.
On April 29, 2020, we received written notice from the Listings Qualification Department of the NASDAQ Stock Market that its staff had determined to suspend trading in our common stock at the opening of business on May 8, 2020 and file a Form 25–NSE with the SEC to commence proceedings to delist our common stock from the NASDAQ Capital Market. The NASDAQ Stock Market reached its decision to delist our common stock from the NASDAQ Capital Market pursuant to Listing Rule 5550(b)(1) because we had not complied with the minimum $2.5 million stockholders’ equity requirement for continued listing on the NASDAQ Capital Market. As previously disclosed, on February 11, 2020, we received written notice from the NASDAQ Stock Market indicating that we were not in compliance with Listing Rule 5550(b)(1). We had also previously submitted a plan to regain compliance with the NASDAQ minimum stockholders’ equity requirement.
We have appealed the NASDAQ staff’s determination to a hearings panel pursuant to the procedures set forth in the NASDAQ Listing 5800 Series. The hearing is currently scheduled for June 4, 2020. The appeal has stayed the suspension of trading in our common stock and our common stock will continue to be listed on the NASDAQ Capital Market and will continue to trade under the symbol “SAEX” pending a decision by the hearings panel. We had previously submitted an application for our common stock to be listed on the Over–the–Counter OTCQB Venture Market but the application was not approved due to the existence of the previously disclosed investigations by the SEC, the DOJ and DOR. There can be no assurance that the hearings panel will grant our request for continued listing.
The exhibits listed below are filed or furnished as part of this report:
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Executive Employment Agreement, dated May 1, 2020, between John Simmons and SAExploration Holdings, Inc. (incorporated by reference from Exhibit 10.1 to SAExploration Holdings, Inc.’s Current Report on Form 8–K filed with the SEC on May 1, 2020) | ||
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31.1* |
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32.1** |
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32.2** |
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101* |
| Interactive Data Files |
* | Filed herewith |
** | Furnished herewith |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SAExploration Holdings, Inc. | ||
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| By: |
| /s/ Michael Faust |
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| Michael Faust |
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| Chief Executive Officer and President |
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| (Duly Authorized Officer and Principal Executive Officer) |
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| By: |
| /s/ Kevin Hubbard |
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| Kevin Hubbard |
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| Interim Chief Financial Officer |
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| (Duly Authorized Officer and Principal Financial Officer) |
Date: February 7,May 12, 2020
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