SAEXPLORATION HOLDIN

SAEX
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SAEXPLORATION : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/13/2020 | 06:05am

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 March 31, 2020, we had approximately $109.7 million of backlog under
contract, in addition to approximately $196.1 million of bids outstanding. Of
the $109.7 million of backlog under contract, we expect $33.6 million to be
completed in 2020. However, our project visibility has recently deteriorated.
Due to the significant uncertainty in the outlook for oil and natural gas
development as a result of the significant decline in oil prices since the
beginning of 2020 due to the COVID-19 coronavirus pandemic and its impact on the
worldwide economy and global demand for oil and the inability of member of OPEC
and other producing countries to adequately address the reduced demand, certain
of our scheduled and anticipated projects have recently been 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



Net income for the three months ended March 31, 2020 was $10.1 million compared
with $3.7 million for the three months ended March 31, 2019. The significant
factors in this change were an increase of $10.9 million in gross profit and a
decrease of $3.1 million in income taxes offset by increases of $2.9 million in
selling, general and administrative ("SG&A") expenses and $5.0 million in other
expenses, net.



Revenue from services in the three months ended March 31, 2020 increased $32.3
million
compared with the three months ended March 31, 2019. In North America,
revenue from services increased $30.6 million due to the sale by ASV and us of
certain seismic data coupled with increases 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 $9.2 million due to the
completion of a marine job in Brazil and a small project in Colombia. Revenue
from services in Asia Pacific decreased $7.5 million primarily due to the
completion of a marine job in Malaysia in the three months ended March 31, 2020
compared with the completion of a marine job in India in the three months ended
March 31, 2019.



Gross profit for the three months ended March 31, 2020 increased $10.9 million
compared with the three months ended March 31, 2019. Gross profit as a
percentage of revenues was 24.7% for the three months ended March 31, 2020
compared with 21.6% for the three months ended March 31, 2019. The positive
impact on gross profit can be attributed to more favorable pricing when taking
into account the fixed costs involved in our projects.



SG&A expenses for the three months ended March 31, 2020 increased $2.9 million
compared with the three months ended March 31, 2019. The increase was primarily
attributable to increased legal and professional fees related to the SEC and
internal investigations and our debt compliance issues.



As previously disclosed, our former Chief Financial Officer and General Counsel
misappropriated $0.2 million of funds in the three months ended March 31,
2019
. For more information, see Note 13 contained herein.



Other expense, net for the three months ended March 31, 2020 increased $5.0
million
compared with the three months ended March 31, 2019 primarily due to a
$5.6 million increase in foreign currency losses primarily in Brazil, Canada and
Colombia, partially offset by a $0.8 million increase in other income, net.



Income taxes for the three months ended March 31, 2020 decreased $3.1 million
compared with the three months ended March 31, 2019 primarily due to
fluctuations in earnings among the various jurisdictions in which we operate,
offset by increases in valuation allowances and increases in foreign tax rate
differentials.



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 $3.0 million, of which we have
spent $0.3 million through March 31, 2020. This amount will permit us to
maintain the operational capability of our current fleet of equipment so that we
can execute ongoing projects without delay or increased costs but will not allow
us to purchase any new technology or upgrade existing capital assets.




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As of March 31, 2020, we had cash and cash equivalents and working capital of
$8.5 million and $(64.8) million, respectively, compared with $5.4 million and
$(89.2) million, respectively, as of December 31, 2019. The increase in working
capital was primarily related to a decrease of $13.4 million of current portion
of long-term debt and finance leases and an increase of $13.9 million in
accounts receivable, net.



On March 27, 2020, the CARES Act was signed into law. The CARES Act, among other
things, includes the Paycheck Protection Program ("the PPP"), provisions
relating to refundable payroll tax credits, deferment of the employer portion of
social security payments, net operating loss carryback periods, alternative
minimum tax credit refunds, modifications to net interest deduction limitations,
increased limitations on qualified charitable contributions, and technical
corrections to tax depreciation methods for qualified improved property. In
April 2020, we began deferring the employer portion of social security
payments. In May 2020, we received the proceeds from an unsecured loan in the
amount of approximately $6.8 million pursuant to the PPP. We are currently
continuing to evaluate the other impacts that the CARES Act and other stimulus
measures will have on our financial condition, results of operations, or
liquidity.



Although we generated net income and cash from operating activities in the first
quarter of 2020, we have reported recurring losses from operations and have not
generated cash from operating activities for the six years ended December 31,
2019
, and as of March 31, 2020, we had a stockholders' deficit of $25.1
million
. Our recurring losses and negative cash flows from operating activities
on an annual basis, stockholders' deficit, need for additional financing and the
uncertainties surrounding our ability to obtain such financing, raise
substantial doubt about our ability to continue as a going concern. We
anticipate negative cash flows from operating activities to begin to occur again
in the second quarter 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 and the inability of
members of OPEC and other producing countries to adequately address the reduced
demand. In April 2020, we had a contract cancelled by the operator presumably
due to uncertainty on government restrictions on operations during the COVID-19
coronavirus pandemic and other scheduled and anticipated projects have been
delayed and there is no assurance as to when they may resume, if at all. We are
also unable to predict when industry market conditions may improve. Our senior
loan facility matures in January 2021 and to date, we have been unable to
negotiate an extension of the maturity date with our debt holders. If we are
unable to extend or otherwise address the maturity date of the senior loan
facility, we expect that we will be unable to repay the senior loan facility
when due in January 2021.



Our management continues to: (i) discuss with our debt holders an extension of
the maturity date of the senior loan facility and waivers of the events of
default due to the inclusion of an explanatory paragraph raising substantial
doubt about our ability to continue as a going concern in the report of our
independent registered public accounting firm on our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2019; (ii) seek to obtain additional financing through the issuance
of debt or equity securities; and (iii) manage operating costs by actively
pursuing cost cutting measures to maximize liquidity consistent with current
industry market expectations. To assist us in managing our operating costs, our
Board of Directors has reduced its cash compensation by 10%, effective beginning
with the second quarter of 2020, until further notice. There is no assurance
that we will be successful in extending the maturity date of the senior loan
facility or obtaining additional financing on satisfactory terms or at all. In
addition, there is no assurance that any such financing, if obtained, will be
adequate to meet our needs and support our working capital needs. Based on the
uncertainty of achieving these goals and the significance of the factors
described, there is substantial doubt as to our ability to continue as a going
concern for a period of 12 months after the date these unaudited condensed
consolidated financial statements are issued.



As previously disclosed, certain events of default had occurred under our credit
facility, senior loan facility and 2023 Notes. 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 5:00 p.m. (New York City time) on the earlier of (i) May 31, 2020 and (ii)
the date the forbearance agreements otherwise terminate in accordance with their
terms. If we are unable to obtain waivers of the events of default, our debt
holders may take action to accelerate the maturity date of the applicable debt
and exercise their other respective rights and remedies, such as foreclosure,
among other things. In that event, our debt holders would likely be entitled to
the first proceeds of the sale of our assets and the holders of our securities
may lose some or all of their investment.




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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 a financial advisor. We do not intend to disclose
or comment on developments related to our review until such time as we have
determined that further disclosure is necessary or appropriate. There can be no
assurance that our analysis and evaluation will result in the identification or
completion of any strategic alternative, or any assurance as to its outcome or
timing.



Long-term Debt



As of March 31, 2020, we have $119.0 million in aggregate principal amount of
long-term debt (excluding finance leases) outstanding. For additional
information about our long-term debt, please see "Part I. Financial Information
- Item 1. Financial Statements" contained herein.



Cash Flows




Cash flows provided by (used in) type of activity were as follows (in
thousands):



Three Months
Ended March 31,
2020 2019
Operating activities $ 21,149 $ (6,764 )
Investing activities (77 ) (184 )
Financing activities (17,561 ) 8,806



Operating Activities



Cash flows from operating activities provided $21.1 million and used $6.8
million
in the three months ended March 31, 2020 and 2019, respectively. The
significant factor in the change was our increased revenue from services.



Investing Activities



In each of the three months ended March 31, 2020 and 2019, cash flows used in
investing activities consisted of $0.3 million to maintain, expand and upgrade
our seismic data acquisition capabilities, partially offset by $0.2 million and
$0.1 million in the three months ended March 31, 2020 and 2019, respectively,
from the sale of property and equipment.



Financing Activities



In the three months ended March 31, 2020, cash flows used in investing
activities included $15.2 million of long-term debt repayments and $2.3 million
in distributions to our noncontrolling interest. In the three months ended March
31, 2019
, cash flows provided by financing activities consisted of $9.7 million
of long-term debt borrowings partially offset by $0.8 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.




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Our forward-looking statements may be influenced by the following factors, among
others:




• our ability to identify, evaluate and complete any strategic alternative
with respect to our capital structure;


• the impact of the announcement of our review of strategic alternatives on
our business, including our financial and operating results, or our
employees, suppliers and customers;


• substantial doubt about our ability to continue as a going concern as of
March 31, 2020;


• the impact of the COVID-19 coronavirus pandemic on our business, financial
condition and results of operations;


• fluctuations in the levels of exploration and development activity in the
oil and natural gas industry;


• delays, reductions or cancellations of project awards and our ability to
realize revenue projected in our backlog;


• continuing events of default outstanding under our debt instruments,
including the risk that the holders of the debt take action to accelerate
the maturity date of the applicable debt and exercise their other respective
rights and remedies, such as foreclosure, among other things;


• risks arising from the holders of our debt taking other actions against us,
including by seeking a bankruptcy filing;


• the potential need for us to seek bankruptcy protection;


• the impact of the restatement of our previously issued consolidated
financial statements;


• the identified material weaknesses in our internal control over financial
reporting and our ability to remediate those material weaknesses;


• the outcome of the investigations by the SEC, the DOJ and the DOR with
respect to the circumstances giving rise to the restatement of our
previously issued consolidated financial statements, which could include
sanctions or other actions against us and our officers and directors, civil
lawsuits, and penalties;


• the outcome of our internal investigation of the circumstances giving rise
to the restatement of our previously issued consolidated financial
statements;


• developments with respect to the Alaskan oil and natural gas tax credit
system that continue to affect our ability to timely monetize tax credits,
including litigation over the constitutionality of the legislation allowing
Alaska to sell bonds to purchase tax credit certificates and Alaska budget
constraints driven primarily by oil prices;


• intense industry competition involving a competitive bidding process that
involves significant costs and risks;


• delays in permitting and land access rights;


• limited number of customers;


• credit and delayed payment risks related to our customers;


• the availability of liquidity and capital resources, including our need to
obtain additional working capital for upfront expenditures for upcoming
projects, and the potential impact this has on our business and
competitiveness;


• increases in the level of activism against oil and natural gas exploration
and development activities;


• need to manage rapid growth and contraction of our business;


• operational disruptions due to seasonality, weather and other external
factors;


• crew availability and productivity;


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• whether we enter into turnkey or term contracts;


• high fixed costs of operations;


• substantial international business exposing us to currency fluctuations and
global factors, including economic, political and military uncertainties;


• risks relating to cyber incidents;


• ability to retain key executives;


• need to comply with diverse and complex laws and regulations;


• the possible impact on payments received from the State of Alaska regarding
tax credits that have been issued;


• risks related to our delisting from the NASDAQ Capital Market;


• costs and outcomes of pending and future litigation; and


• the time and expense required for us to respond to the SEC, DOJ and DOR
investigations and for us to complete our internal investigation, which
expenses have been and are likely to continue to be material and are likely
to have a material adverse impact on our cash balance, cash flow and
liquidity.



These words "expect," "anticipate," "believe," "estimate," "intend," "plan to,"
"ought," "could," "will," "should," "likely," "appear," "project," "forecast,"
"outlook" or other similar words or phrases are intended to identify
forward-looking statements. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. The forward-looking statements speak only
as of the date they were made and, except as required by law, we undertake no
obligation to update, amend or clarify any forward-looking statements because of
new information, future events or other factors. All 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.

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