UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10–Q

 

For the quarterly period ended

June 30, 2020

 

For the transition period from ______________ to _______________

 

Commission File Number 001-35471

 

SAExploration Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

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:

 

 

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”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

 

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 August 12, 2020, the registrant has 6,612,332 shares of common stock outstanding.

 

 

 

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TABLE OF CONTENTS

 

 

 

 

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS 

 

SAExploration Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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SAExploration Holdings, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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SAExploration Holdings, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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SAExploration Holdings, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

(In thousands)

(Unaudited)

 

Three Months Ended June 30, 2020

 

 

Three Months Ended June 30, 2019

 

 

Six Months Ended June 30, 2020

 

 

Six Months Ended June 30, 2019

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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SAExploration Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1.  GENERAL

Description of the Business

SAExploration 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. If we cannot continue as a going concern, adjustments to the carrying values and classification of our assets and liabilities and the reported amounts of income and expenses could be required and could be material.

Although we generated net income and cash from operating activities in the first six months 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 June 30, 2020, we had a stockholders’ deficit of $33.2 million. We anticipate negative cash flows from operating activities to begin to occur again in the second half of 2020 and 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. We are unable to predict when industry market conditions may improve and, through June 30, 2020, we have had two significant contracts cancelled by the operators due to the COVID–19 coronavirus pandemic and other scheduled and anticipated projects have been delayed.  There is no assurance as to when they may resume, if at all.

Management, along with its legal and financial advisors, continues to explore various strategic alternatives to address our capital structure, which has included engaging in discussions with certain of our debt holders with respect to potential deleveraging or restructuring transactions that may include, but not be limited to, seeking a restructuring, amendment or refinancing of existing debt through a private restructuring or reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”).  We have attempted during this time to manage operating costs by actively pursuing cost–cutting measures to maximize liquidity consistent with current industry market expectations.  However, we have been unable to negotiate an extension of the January 2021 maturity date of our senior loan facility or waivers of the events of default under our credit facility and our senior loan facility, and a cross default under the indenture governing our 6.0% Senior Secured Convertible Notes due 2023 (the “2023 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.

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 unaudited condensed consolidated financial statements, and the holders of our securities could lose all or part of their investment.

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Basis of Presentation

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 for the year ended December 31, 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.  

New Accounting Standards to be Adopted

No new accounting pronouncements issued or effective during the three months ended June 30, 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 six months ended June 30:

 

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 June 30, 2020 and December 31, 2019, the tax credits receivable are net of an allowance of $27.7 million and $53.0 million, respectively.

 

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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:

 

 

We repaid $14.5 million of the amounts outstanding under our credit facility with the net proceeds received from the sale of certain seismic data and related assets in January 2020 (see Note 2).  

In May 2020, we received the proceeds from an unsecured loan in the amount of $6.8 million pursuant to the Paycheck Protection Program (the “PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The PPP loan matures in May 2022 and bears 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 maturity with no prepayment penalties.

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 limitations, based on the use of loan proceeds for payment of payroll costs and 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, and we would record a gain on extinguishment for the amount forgiven when we are legally released from being the primary obligor. 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 credit agreements and indentures for our credit facility, senior loan facility and 2023 Notes contain certain representations, warranties, covenants and other terms and conditions which are customary for agreements of these types. As 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 going concern, which results in events of default under the credit facility and the senior loan facility, and a cross default under the indenture governing the 2023 Notes. We have 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

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

events of default that have occurred and are continuing as further specified in the forbearance agreements until 5:00 p.m. (New York City time) on the earlier of (i) August 31, 2020 and (ii) the date the forbearance agreements otherwise terminate in accordance with their terms.  We have also amended the indenture governing the 2023 Notes to, among other things, provide that a fundamental change resulting from the failure of our common stock to be listed or quoted on any of the NYSE American, The New York Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market, The NASDAQ Capital Market, the OTCQX Market or the OTCQB Market (or any of their respective successors) will not be deemed to have occurred as a result of such failure until the earlier of (i) August 31, 2020 or (ii) the termination date of the forbearance period set forth in the existing forbearance agreement with respect to the 2023 Notes. However, the long–term debt outstanding under the credit facility, senior loan facility and 2023 Notes has been reclassified as current portion of long–term debt in these unaudited condensed consolidated financial statements.   

NOTE 4.  COMMITMENTS AND CONTINGENCIES

On August 18, 2019, a purported stockholder filed a putative class action lawsuit against us and certain former executive officers named therein 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.  Three other purported stockholders moved for appointment as lead plaintiff and approval of their counsel as lead counsel on October 2, 2019.  An order was entered on February 7, 2020, appointing Amrit Kumar and Tony Tep as co–lead plaintiffs (the “Class Action Plaintiffs”) and approving their counsel as co–lead counsel.  Pursuant to an agreed scheduling stipulation and order, the Class Action Plaintiffs filed their Amended Complaint on July 15, 2020 against us and certain of our former and current executive officers and directors named therein (the “Class Action Defendants”).  The Class Action Plaintiffs seek to represent a class of stockholders who purchased or otherwise acquired our publicly traded securities from March 15, 2016 through February 7, 2020 (the “Covered Period”). The amended 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. Pursuant to an agreed scheduling stipulation and order, the Class Action Defendants must answer, move to dismiss, or otherwise respond to the amended complaint by September 17, 2020, with responsive briefing to be completed by January 11, 2021.

On September 6, 2019, a purported stockholder, M. Shane Hamilton (the “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 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. 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.

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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.

NOTE 5.  STOCKHOLDERS' EQUITY

 

As of June 30, 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:

 

 

In January 2020, we issued 0.4 million of our Series F warrants upon receipt of NASDAQ approval of the issuance.  

In the six months ended June 30, 2020, 2.8 million Series C warrants and Series D warrants were exercised.  As of June 30, 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 six months ended June 30:

 

 

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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 six months ended June 30:

 

Disaggregated Revenue

The following table disaggregates our revenue by major source:

 

Remaining Performance Obligations

As of June 30, 2020, we had $64.6 million of remaining performance obligations.  We expect to recognize revenue of approximately 3% of these performance obligations in 2020, approximately 38% in 2021 and the remaining approximately 59% 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 $0.2 million and $1.6 million in the three months ended June 30, 2020 and 2019, respectively, and $0.3 million and $2.4 million in the six months ended June 30, 2020 and 2019, respectively.  These costs are included in “Selling, general and administrative expenses” on our unaudited condensed consolidated statements of operations.  

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

As of June 30, 2020, we had $0.4 million of unrecognized equity–based compensation cost, which is expected to be recognized over a weighted average period of 0.8 years.

 

NOTE 8.  LEASES

 

We have entered into various non–cancellable operating 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 lease 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 seven 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 we would exercise the options to extend the lease.  Therefore, as of the lease commencement date, our lease terms generally do 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.  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:

 

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The components of lease expense on our unaudited condensed consolidated statement of operations are as follows:

 

 

 

As of June 30, 2020, our operating leases have a weighted average remaining lease term of 4.0 years and a weighted average discount rate of 13.0%.

 

 

Supplemental cash flows information related to leases where we are the lessee is as follows:

 

 

As of June 30, 2020, the maturities of the liabilities related to our operating leases are as follows:

 

 

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. 

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Our effective tax rates were (5.5)% and (118.1)% for the three months ended June 30, 2020 and 2019, respectively, and 12.0% and 131.1% for the six months ended June 30, 2020 and 2019, respectively. The changes in our effective tax rates and the primary reasons 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.

The CARES Act, among other things, permits net operating loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021.  In addition, the CARES Act allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding years to generate a refund for previously paid income taxes.  The CARES Act also contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020.  These modifications increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income.  Based upon current facts and circumstances, we do not expect that these provisions would result in a material cash benefit or impact to the effective tax rate.

 

NOTE 10.  (LOSS) EARNINGS PER COMMON SHARE

 

The computation of basic and diluted (loss) earnings per common share is as follows: 

 

 

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,

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

accounts payable, accrued liabilities and long–term debt.  The carrying amounts of our financial instruments, other than our 2023 Notes, approximate fair value because of the short–term nature of the items.

As of June 30, 2020, the estimated fair value and carrying value of our 2023 Notes was $16.4 million and $48.1 million, respectively.  As of December 31, 2019, the estimated fair value and carrying value of our 2023 Notes was $42.0 million and $46.7 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.  

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:

 

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:

 

Allowance for Doubtful Accounts

Changes in the allowance for doubtful accounts are as follows:

 

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Accrued Liabilities

Accrued liabilities are comprised of the following:

 

Other accrued liabilities primarily consist of accruals for project related expenses.

Supplemental Cash Flows Information

Supplemental cash flows information is as follows:

 

Noncash Transactions

Supplemental noncash transactions are as follows as of June 30:

 

 

NOTE 13.  RELATED PARTY TRANSACTIONS  

As of June 30, 2020, Jeff Hastings, our former Chief Executive Officer, 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.

Brent Whiteley, our former Chief Financial Officer and General Counsel, owns and/or controls RVI Consulting, Inc. No amounts were billed by RVI in the three months or six months ended June 30, 2020.  In the three months and six months ended June 30, 2019, RVI billed us $0.1 million and $0.3 million, respectively, for legal and professional services that were determined to be a misappropriation of funds from us.  These amounts are included in “Misappropriation of funds” on our unaudited condensed consolidated statements of operations.

ASV is a VIE indirectly owned and/or controlled by Mr. Hastings and Mr. Whiteley.

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SAExploration Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Other related party transactions are as follows:

 

As of June 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, 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.

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 August 2020, we issued 2.2 million shares of our common stock upon the exercise of 2.4 million Series C warrants, 5.0 million Series D warrants, 29.2 million Series E warrants and 0.3 million Series F warrants by one of the holders of the indebtedness outstanding under our credit facility, senior loan facility and 2023 Notes.

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 other material items that required recognition or disclosure in our unaudited condensed consolidated financial statements.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 for the year ended December 31, 2019.

OVERVIEW

We are a full–service global provider of seismic data acquisition, logistical support and processing services to customers in the oil and natural gas industry.  Our business activities are primarily conducted in North America, South America, Asia Pacific and 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 logistical support and 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.

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 term 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.

As of June 30, 2020, we had approximately $64.6 million of backlog under contract, in addition to approximately $290.7 million of bids outstanding.  Of the $64.6 million of backlog under contract, we expect $2.3 million to be completed in 2020. However, our project visibility has continued to deteriorate. 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, 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.  See “Liquidity and Capital Resources” contained herein for a discussion of how these developments have impacted our financial position, results of operations and cash flows.

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2020 Compared with the Three Months Ended June 30, 2019

Net loss for the three months ended June 30, 2020 was $4.4 million compared with a net loss of $5.3 million for the three months ended June 30, 2019.  The significant factors in this change were a decrease of $3.2 million in gross profit partially offset by decreases of $2.6 million in income taxes and $1.6 million in selling, general and administrative (“SG&A”) expenses.

Revenue from services in the three months ended June 30, 2020 decreased $53.7 million compared with the three months ended June 30, 2019 driven primarily by a $59.9 million decrease in revenue from services in Asia Pacific, related to the completions of a land job in Australia and two marine projects in India and Dubai in the three months ended June 30, 2019, partially offset by the recognition of $6.4 million of revenue from services related to the termination of two marine projects in West Africa that were terminated by the operator in April 2020, presumably due to uncertainty regarding government restrictions during the COVID–19 pandemic.  

Gross profit for the three months ended June 30, 2020 decreased $3.2 million compared with the three months ended June 30, 2019. Gross profit as a percentage of revenues was 21.9% for the three months ended June 30, 2020 compared with 12.3% for the three months ended June 30, 2019.  The positive impact on gross profit as a percentage of revenues 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 June 30, 2020 decreased $1.6 million compared with the three months ended June 30, 2019.  The decrease was primarily attributable to a $1.4 million decrease in equity compensation costs and decreased legal and professional fees related to our SEC and internal investigations.  

As previously disclosed, our former Chief Financial Officer and General Counsel misappropriated $0.1 million of funds in the three months ended June 30, 2019.  For more information, see Note 13 contained herein.

Other expense, net for the three months ended June 30, 2020 increased $0.3 million compared with the three months ended June 30, 2019 due to a $0.6 million decrease in other income partially offset by a $0.3 million increase in foreign currency gain (loss) primarily in Colombia.  

Income taxes for the three months ended June 30, 2020 decreased $2.6 million compared with the three months ended June 30, 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.

Six Months Ended June 30, 2020 Compared with the Six Months Ended June 30, 2019

Net income for the six months ended June 30, 2020 was $5.7 million compared with a net loss of $1.5 million for the six months ended June 30, 2019.  The significant factors in this change were an increase of $7.8 million in gross profit and a decrease of $5.7 million in income taxes partially offset by an increase of $5.3 million other expense, net.

Revenue from services in the six months ended June 30, 2020 decreased $21.4 million compared with the six months ended June 30, 2019.  In North America, revenue from services increased $31.0 million due to the sale by ASV and us of certain seismic data coupled with an increase in the number and scope of projects performed in Alaska and Canada offset by a decrease in activity in the contiguous United States of America.  

Revenue from services in South America increased $8.5 million due to the completion of a marine job in Brazil and a small project in Colombia.  Revenue from services in Asia Pacific decreased $67.3 million primarily due to the completions of a land job in Australia and two marine projects in India and Dubai in the six months ended June 30, 2019.  Revenue from services in West Africa consisted of the recognition of $6.4 million of revenue from services related to the termination of two marine projects in West Africa that were terminated by the operator in April 2020 due to the COVID–19 pandemic.  

Gross profit for the six months ended June 30, 2020 increased $7.8 million compared with the six months ended June 30, 2019.  Gross profit as a percentage of revenues was 24.1% for the six months ended June 30, 2020 compared with 17.0% for the six months ended June 30, 2019.  The positive impact on gross profit as a percentage of revenues can be attributed to more favorable pricing when taking into account the fixed costs involved in our projects.

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SG&A expenses for the six months ended June 30, 2020 increased $1.3 million compared with the six months ended June 30, 2019.  The increase was primarily attributable to increased legal and professional fees related to the SEC and internal investigations partially offset by a $2.1 million decrease in equity compensation costs.    

As previously disclosed, our former Chief Financial Officer and General Counsel misappropriated $0.3 million of funds in the six months ended June 30, 2019.  For more information, see Note 13 contained herein.

Other expense, net for the six months ended June 30, 2020 increased $5.3 million compared with the six months ended June 30, 2019 primarily due to a change in foreign currency gain (loss) primarily in Canada and Brazil.  

Income taxes for the six months ended June 30, 2020 decreased $5.7 million compared with the six months ended June 30, 2019 primarily due to fluctuations in earnings among the various jurisdictions in which we operate, partially 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.  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.

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 2020 will not exceed $3.0 million, of which we have spent $1.0 million through June 30, 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 June 30, 2020, we had cash and cash equivalents, working capital and stockholders’ deficit of $28.2 million, $(65.6) million and $(33.2) million, respectively, and $125.0 million in aggregate principal amount of long–term debt outstanding.  Although we generated net income and cash from operating activities in the first six months 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. We anticipate negative cash flows from operating activities to begin to occur again in the second half of 2020 and 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.  We are unable to predict when industry market conditions may improve and, through June 30, 2020, we have had two contracts cancelled by the operators due to the COVID–19 coronavirus pandemic and other scheduled and anticipated projects have been delayed.  There is no assurance as to when they may resume, if at all.  

Management, along with its legal and financial advisors, continues to explore various strategic alternatives to address our capital structure, which has included engaging in discussions with certain of our debt holders with respect to potential deleveraging or restructuring transactions that may include, but not be limited to, seeking a restructuring, amendment or refinancing of existing debt through a private restructuring or reorganization under the Bankruptcy Code.  We have attempted during this time to manage operating costs by actively pursuing cost–cutting measures to maximize liquidity consistent with current industry market expectations.  However, we have been unable to negotiate an extension of the January 2021 maturity date of our senior loan facility or waivers of the events of default under our credit facility and our senior loan facility, and a cross default under the indenture governing our 2023 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.  

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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.  Our long–term liquidity requirements, the adequacy of capital resources and our ability to continue as a going concern are difficult to predict at this time.  

Long–term Debt

As of June 30, 2020, we have $125.0 million in aggregate principal amount of long–term debt 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):

 

Operating Activities

Cash flows from operating activities provided $39.6 million and $10.8 million in the six months ended June 30, 2020 and 2019, respectively. The significant factor in the change was our increase in operating income primarily driven by our increase in gross profit.

Investing Activities

In the six months ended June 30, 2020 and 2019, cash flows used in (provided by) investing activities consisted of $1.0 million and $0.6 million, respectively, to maintain, expand and upgrade our seismic data acquisition capabilities, partially offset by $0.3 million and $0.7 million, respectively, from the sale of property and equipment.  

Financing Activities  

In the six months ended June 30, 2020, cash flows used in financing activities included $16.1 million of long–term debt repayments and $6.0 million in distributions to our noncontrolling interest partially offset by $6.8 million of long–term debt borrowings.  In the six months ended June 30, 2019, cash flows provided by financing activities consisted of $9.7 million of long–term debt borrowings partially offset by $1.5 million of distributions to our noncontrolling 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 for the year ended December 31, 2019 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:

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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 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 for the year ended December 31, 2019 and Item 1A of this Quarterly Report on Form 10–Q.

 

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 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 June 30, 2020.

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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.  Our 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 June 30, 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

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.

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Related Parties

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–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–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.

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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 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:

We expect that our former 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

Except 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 June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Except 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 for the year ended December 31, 2019.

ITEM 1A.  RISK FACTORS

Except 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 for the year ended December 31, 2019.

The COVID–19 coronavirus pandemic has adversely affected our business, financial condition and results of operations.

The 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 has resulted in a significant decrease in business from our customers and/or may cause our customers to be unable to meet existing payment or other obligations to us. Through June 30, 2020, we have had two significant contracts cancelled by the operators 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. 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 of June 30, 2020, we had approximately $64.6 million of backlog under contract, in addition to approximately $290.7 million of bids outstanding.  Of the $64.6 million of backlog under contract, we expect $2.3 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 potential 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 the 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 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, 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.

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Our common stock is no longer quoted on, and will be delisted from, the NASDAQ Capital Market, which could require us, 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 June 15, 2020, we received written notice from the Nasdaq Hearings Panel (the “Panel”) that the Panel had determined to suspend trading in our common stock at the opening of business on June 17, 2020. The Panel denied our request for an exception to Listing Rule 5550(b)(1), which requires a company to demonstrate at least $2.5 million of stockholders’ equity for continued listing on the NASDAQ Capital Market while it implements a plan of compliance. The delisting of our common stock from the NASDAQ Stock Market will become effective ten days after the August 11, 2020 filing by the NASDAQ Stock Market of a Form 25–NSE with the SEC.

Once our common stock ceases to be listed or quoted on the NASDAQ Capital Market for a period of five consecutive trading days (which period has been extended as a result of a fourth supplemental indenture dated June 16, 2020 to the indenture governing the 2023 Notes), such event will constitute a “fundamental change” under the terms of the indenture governing the 2023 Notes on the earlier of (i) August 31, 2020 or (ii) the termination date of the forbearance period set forth in the existing forbearance agreement regarding certain events of default under the indenture governing the 2023 Notes (the “Fundamental Change Effective Date”). In such event, we will be required to provide notice (the “Notice”) to all of the holders of the $60.0 million principal amount of outstanding 2023 Notes of such fundamental change on or before the 20^th calendar day after the Fundamental Change Effective Date and could be required, at the option of any or all of such holders, to repurchase for cash all of their 2023 Notes on the date specified by us that is not less than 20 calendar days or more than 35 calendar days following the date of the Notice at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon to, but excluding, the repurchase date. If we are unable to obtain a waiver of this fundamental change from the holders of the 2023 Notes prior to the Fundamental Change Effective Date and if we are required by such holders to repurchase some or all of the 2023 Notes for cash, we do not expect that it would have sufficient funds to make such repurchase and therefore may need to seek bankruptcy protection, which would have a material adverse effect on our business, financial condition and results of operations.

There is substantial risk that it may be necessary for us to seek protection under the Bankruptcy Code, which may have a material adverse impact on our business, financial condition, results of operations, and cash flows, would have a material adverse impact on the trading price of our securities, and could place our stockholders at significant risk of losing all of their investment in our stock.

We have, with the assistance of our financial and legal advisors, analyzed various strategic alternatives to address our liquidity and capital structure, including strategic and refinancing alternatives to restructure our indebtedness in private transactions. Due to our current financial constraints, there is a substantial risk that it may be necessary for us to seek protection under the Bankruptcy Code.

Seeking bankruptcy court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. As long as a Chapter 11 proceeding continues, our senior management would be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing on our business operations. Bankruptcy court protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, during the period of time we are involved in a bankruptcy proceeding, our customers and suppliers might lose confidence in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships.

Additionally, we have a significant amount of indebtedness that is senior to our existing common stock and warrants to purchase shares of our common stock in our capital structure. As a result, we believe that seeking bankruptcy court protection under a Chapter 11 proceeding could cause the shares of our existing common stock and warrants to purchase shares of our common stock to be extinguished and our common stockholders and warrantholders will be entitled to no recovery, which would place stockholders and warrantholders at significant risk of losing all of their investment in our securities.

We face several risks regarding the monetization of tax credits under Alaska’s tax credits program.

As of June 30, 2020, we have a $2.7 million tax credits receivable, net of an allowance of $27.7 million, related to the tax credits earned by ASV.   We have classified this receivable as long–term because of the length of time we expect it will take to collect on it.  

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Falling oil prices have substantially reduced Alaska’s revenue from production taxes and other petroleum sources, resulting in appropriations to the oil and gas tax credit fund for purchase of tax credit certificates in the last several fiscal years at or below the amounts indicated by a statutory formula rather than amounts needed to pay for all the tax credit certificates in the queue for purchase.  The Alaska budgets that passed in 2019 for fiscal year 2020, which ended June 30, 2020 in 2020 for fiscal year 2021, which started July 1, 2020, had no appropriation to the oil and gas tax credit fund, but did include appropriations of an estimated $700 million for purchases of tax credit certificates through the bond program described below.  According to statements made by DOR officials, that amount would be enough to pay for the outstanding tax credit certificates awaiting purchase by the State of Alaska.  However, the fiscal year 2021 budget did not include an appropriation for debt service for the bond program, which will need to be addressed before the program will move forward and the legal challenge to the bond program described below will also need to be resolved.

In June 2018, Alaska passed legislation allowing Alaska to issue bonds to finance the purchase of up to $1.0 billion in tax credit certificates.  If issued, Alaska will use the proceeds from the bonds to purchase tax credit certificates.  Seismic companies will basically have two options from which to pick on a program–by–program basis.  One option allows for the purchase of the tax credit certificates at a 10% discount rate based on the time Alaska would otherwise pay from the oil and gas tax credit fund under the statutory formula.  The second option allows for the purchase of the tax credit certificates at a discount rate as low as the true interest costs plus 1.5% (estimated to be approximately 5.1%) but only if the seismic data is made publicly available earlier than the ten year confidentiality period that would otherwise apply.  There are other options to obtain the lower discount rate, but those are less likely to be available to us as they require grant of an overriding royalty interest in an oil or gas property or a commitment to make capital investment in Alaska at or above the purchase amount within 24 months after purchase.

While we continue to pursue other options to monetize the tax credit certificates, at this time we believe that the most likely path to monetize the tax credit certificates may be from proceeds that Alaska realizes from issuing its own bonds.  This path has, however, complexities and risks.  Although the Alaska Attorney General issued an opinion that the issuance of the bonds is not prohibited by the Alaska Constitution, a lawsuit was filed asserting constitutional challenges to Alaska’s ability to issue the bonds.  An Alaskan Superior Court judge dismissed the challenge to the constitutionality of the issuance of the bonds, and that ruling has been appealed to the Alaska Supreme Court.  The DOR has indicated, however, that until the courts have resolved the legal issues, which we estimate may take at least several more months, it will not go into the bond markets.

In addition, the DOR is conducting an investigation with respect to our determination that ASV is a variable interest entity and related tax credit certificates. We have been cooperating, and will continue to cooperate, with the DOR. The DOR investigation is continuing, and we are currently unable to predict the eventual scope, duration or outcome of any potential DOR legal action or whether it could have a material impact on our financial condition, results of operations, or cash flow.

As a result of the above, we face several risks regarding the monetization of the tax credits.  While we believe that we will get paid some amount of the tax credits, we cannot assure you when that will occur or how much.  The longer it takes to monetize the tax credits, the more it could have a negative impact on our liquidity and cash flows.

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.  In April 2020, we entered into a series of forbearance agreements with:

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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 are continuing as further specified in the Forbearance Agreements until 5:00 p.m. (New York City time) on the earlier of (a) May 31, 2020 and (b) the date the Forbearance Agreements otherwise terminate in accordance with their terms.  The May 31, 2020 deadline was ultimately extended to August 31, 2020.

ITEM 6.  EXHIBITS

The exhibits listed below are filed or furnished as part of this report:

 

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SIGNATURES

 

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.

 

 

Date: August 14, 2020

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