SAEXPLORATION HOLDINGS, INC. The following discussion of our financial condition and results of operations should be read in conjunction with "Item 8. Financial Statements and Supplementary Data" contained herein.
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
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
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As of
Results of Operations
Net loss for 2019 was
Revenue from services for 2019 increased
Revenue from services for 2019 in
Gross profit (loss) for 2019 increased
Selling, general and administrative ("SG&A") expenses for 2019 increased
As previously disclosed, our former Chief Financial Officer and General Counsel
misappropriated
Gain on sale of property and equipment for 2019 increased
Other expense, net for 2019 increased
Income taxes for 2019 increased
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--------------------------------------------------------------------------------Critical Accounting Policies
This discussion and analysis of our financial condition and results of
operations is based upon information reported in our consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles in
We have defined a critical accounting policy as one that is both important to the portrayal of either our financial condition and results of operations and requires us to make difficult, subjective or complex assumptions or estimates about matters that are uncertain. There are other policies within our consolidated financial statements that require us to make estimates and assumptions, but they are not deemed critical as defined above. We believe that the following are the critical accounting policies used in the preparation of our consolidated financial statements.
Revenue Recognition
Our services are provided under cancelable service contracts that typically have an original expected duration of one year or less. These contracts are either fixed price agreements that provide for a fixed fee per unit of measure ("Turnkey") or variable price agreements that provide for a fixed hourly, daily or monthly fee during the term of the project ("Term"). Under both types of agreements, we recognize revenue as the services are performed. We recognize revenue based upon quantifiable measures of progress, such as square or linear kilometers surveyed, each unit of data recorded or other methods using the total estimated revenue for the service contract.
We receive reimbursements for certain out-of-pocket expenses under the terms of the service contracts. The amounts billed to clients are included at their gross amount in the total estimated revenue for the service contract.
Clients are billed as permitted by the service contract. Contract assets and contract liabilities are the result of timing differences between revenue recognition, billing and cash collections. If billing occurs prior to the revenue recognition or if billing exceeds the revenue recognized, the amount is considered deferred revenue and a contract liability. Conversely, if the revenue recognition exceeds the billing, the exceeded amount is considered unbilled receivable and a contract asset. As services are performed, those deferred revenue amounts are recognized as revenue.
In some instances, third party permitting, surveying, drilling, helicopter, equipment rental and mobilization costs that directly relate to the contract are utilized to fulfill the contract obligations. These fulfillment costs are capitalized and amortized consistent with how the related revenue is recognized unless we determine the costs are no longer recoverable, at which time they are expensed.
Estimates for our total revenue and total fulfillment cost on any service contract are based on significant qualitative and quantitative judgments. Our management considers a variety of factors such as whether various components of the performance obligation will be performed internally or externally, cost of third party services, and facts and circumstances unique to the performance obligation in making these estimates. As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update the estimates during each reporting period. We recognize these adjustments in revenues under the cumulative catch-up method which recognizes the impact of the adjustment on revenue to date in the period the adjustment is identified. Revenue in future periods of performance is recognized using the adjusted estimate.
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--------------------------------------------------------------------------------Impairment of Long-Lived Assets
We assess our long-lived assets, such and property and equipment, multiclient seismic data library and intangible assets, for possible impairment whenever events or circumstances indicate that the recorded carrying value of the long-lived asset may not be recoverable. If the carrying amount of the long-lived asset exceeds the sum of the estimated undiscounted future net cash flows, we recognize an impairment loss equal to the difference between the carrying value and the fair value of the long-lived asset, which is estimated through various valuation techniques including discounted cash flow models, quoted market prices and third-party appraisals.
We assess our goodwill, all of which resides in our Canadian operations reporting unit (the "Reporting Unit"), at least annually for impairment, or more frequently if facts and circumstances indicate that it is more likely than not impairment has occurred. We have the option of performing either a qualitative or quantitative assessment to determine if impairment may have occurred. If the qualitative assessment indicates that it is more likely than not that the fair value of the Reporting Unit is less than its carrying amount, then we would be required to perform the two step impairment test.
Under the first step in the impairment test, we compare the fair value of the Reporting Unit with its carrying amount, including goodwill. If the carrying amount of the Reporting Unit exceeds its fair value, the second step of the goodwill impairment test is performed. Under the second step in the impairment test, the implied fair value of goodwill is compared with its carrying amount. The implied fair value of goodwill is calculated by subtracting the estimated fair values of the Reporting Unit's assets net of liabilities from the fair value of the Reporting Unit. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss shall be recognized in an amount equal to that excess.
We determine the fair value of the Reporting Unit using a combination of the
market approach and the income approach. Under the market approach, the fair
value of the Reporting Unit is based on the
As of
Income Taxes
We use the liability method to determine our income tax provisions, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the need for valuation allowances, we have considered and made judgments and estimates regarding estimated future taxable income and ongoing prudent and feasible tax planning strategies. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets. The ultimate realization of the deferred tax assets depends on the generation of sufficient taxable income in the applicable taxing jurisdictions.
We are subject to the jurisdiction of various domestic and foreign tax authorities. Our operations in these different jurisdictions are taxed on various bases and determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, or our level of operations or profitability in each taxing jurisdiction could have an impact on the amount of income taxes that we pay during any given year.
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--------------------------------------------------------------------------------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.
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
As of
We have reported recurring losses from operations and have not generated cash
from operating activities for the six years ended
In addition, since
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--------------------------------------------------------------------------------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 this Annual Report on Form 10-K; (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 our financial statements included in this Annual Report on Form 10-K are issued.
Accordingly, our independent registered public accounting firm included an
explanatory paragraph in their report accompanying our consolidated financial
statements included in this Annual Report on Form 10-K, which results in 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. 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 events of default that have
occurred and are continuing as further specified in the forbearance agreements
until
As a result of the foregoing 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
Long-term Debt
As of
Cash Flows
Cash flows provided by (used in) by type of activity were as follows for the
years ended
2019 2018
Operating activities $ (14,880 ) $ (30,143 )
Investing activities 1,206 (22,181 )
Financing activities 11,352 56,774
Operating Activities
Cash flows from operating activities for 2019 increased
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--------------------------------------------------------------------------------Investing Activities
In 2019 and 2018, cash flows provided by (used in) investing activities
consisted of
Financing Activities
In 2019, cash flows provided by financing activities consisted of
Off-Balance Sheet Arrangements
As of
Recently Issued Accounting Pronouncements
Please see "Item 8. Financial Statements and Supplementary Data" contained herein for additional information.
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