saex-10ka_20181231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10–K/A

(Amendment No. 1)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001–35471

 

SAExploration Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

27–4867100

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1160 Dairy Ashford, Suite 160

Houston, TX 77079

(Address of principal executive offices, including zip code)

(281) 258–4400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $0.0001 Par Value

 

SAEX

 

The NASDAQ Capital Market

(Title of each class)

 

(Trading symbol)

 

(Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well–known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No

 

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 filings 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.

 

Large accelerated filer

 

 

Accelerated filer

Non–accelerated filer

 

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Act). Yes ☐   No

 

As of June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non–affiliates was approximately $13.2 million.

 

As of March 19, 2019, the registrant has 4,052,157 shares of common stock, $0.0001 par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10–K/A.

 

 

 


 

EXPLANATORY NOTE

 

SAExploration Holdings, Inc. (together with its subsidiaries, “we”, “our” or “us”) is filing this Amendment No. 1 (this “Form 10–K/A”) to amend our Annual Report on Form 10–K for the year ended December 31, 2018, originally filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2019 (the “Original Filing”), to amend and restate our consolidated financial statements and related footnote disclosures as of December 31, 2018 and 2017 and for the years ended December 31, 2018 and 2017 (including the unaudited quarterly periods within 2018 and 2017).  In addition, this Form 10–K/A also includes restated selected consolidated statement of operations data for the years ended December 31, 2016, 2015 and 2014 and restated selected consolidated balance sheet data and other financial data as of December 31, 2016, 2015 and 2014 in “Item 6. Selected Financial Data” contained herein.  These consolidated financial statements include our accounts and those of our subsidiaries that are wholly–owned, controlled by us or a variable interest entity (“VIE”) where we are the primary beneficiary.  This Form 10–K/A also amends certain other items in the Original Filing, as listed in “Items Amended in This Filing” below.  In addition, concurrently with the filing of this Form 10–K/A, we are filing (i) an amendment to our Quarterly Report on Form 10–Q for the quarterly period ended March 31, 2019 and (ii) our Quarterly Reports on Form 10–Q for the quarterly periods ended June 30, 2019 and September 30, 2019.

 

We believe that presenting all of the amended and restated information for the periods described above in this Form 10–K/A allows investors and others to review all pertinent data in a single presentation.  Except for our Quarterly Report on Form 10–Q for the quarterly period ended March 31, 2019, we have not filed and do not intend to file amendments to any of our previously filed Annual Reports on Form 10–K or Quarterly Reports on Form 10–Q for the periods affected by the restatement of our consolidated financial statements as described below.  Accordingly, investors and others should rely only on the financial information and other disclosures regarding the periods described above in this Form 10–K/A and in future filings with the SEC (as applicable), and not rely on any previously issued or filed reports, earnings releases or similar communications relating to the periods affected by the restatement of our consolidated financial statements as described below.

 

Background of the Restatement

 

As previously disclosed, the SEC has been conducting an investigation of certain matters, including with respect to revenue recognition, accounts receivable and tax credits. The Department of Justice (the “DOJ”) is conducting a parallel investigation with the SEC. We have been cooperating and will continue to cooperate with the SEC and the DOJ in their investigations.  

 

On August 5, 2019, our Board of Directors (the “Board”) established a special committee of independent directors (the “Special Committee”) to oversee an internal investigation with respect to the SEC investigation and any related matters. In turn, the Special Committee engaged its own legal and forensic accounting advisors, in addition to certain consulting services providers.  Also in August 2019, the Audit Committee undertook an assessment of the accuracy of our historical financial statements and related disclosures that were contained in previously filed periodic reports.

 

On August 14, 2019, the Audit Committee and the Board concluded that our previously issued consolidated financial statements and financial information relating to each of the fiscal years ended December 31, 2015, 2016, 2017 and 2018, and our condensed consolidated financial statements for the quarters and year–to–date periods ended June 30, 2015 through March 31, 2019 (collectively, the “Non–Reliance Periods”) contained errors, should no longer be relied upon and should be restated, and that other financial information, any earnings releases, investor presentations or other communications related thereto covering the Non–Reliance Periods should also no longer be relied upon. The Audit Committee’s and the Board’s decision to restate our consolidated financial statements for the Non–Reliance Periods arose from our re–evaluation of our relationship with Alaskan Seismic Ventures, LLC (“ASV”), which had not been consolidated into our financial statements. In August 2019, we determined that ASV is a VIE, that we had a controlling financial interest in ASV, and that we are the primary beneficiary of ASV, which, among other factors, required us to consolidate ASV during the Non-Reliance Periods in accordance with GAAP. The Audit Committee discussed this accounting issue with Pannell Kerr Forster of Texas, P.C., our independent registered public accounting firm, and the firm supported this determination.

 

The Special Committee’s investigation identified that Global Equipment Solutions LLC (“Global Equipment”), one of our vendors in 2015 and 2016, was formed by Brent Whiteley, our former Chief Financial Officer and General Counsel, and controlled by Mr. Whiteley and/or Jeff Hastings, our former Chief Executive Officer. In 2015 and 2016, we paid an aggregate of approximately $12.0 million to Global Equipment pursuant to the following agreements. In August 2011, we entered into an agreement (the “Transfer Agreement”) with NES, LLC (“NES”), pursuant to which NES retained a transfer fee (the

 

(i)

 


 

“Transfer Fee”) in connection with the transfer of a customer contract from NES to us. NES is a legal entity that was previously owned and/or controlled by Mr. Hastings that we subsequently acquired in October 2011. The Transfer Fee was assigned to a separate legal entity controlled by Mr. Hastings prior to our acquisition of NES in October 2011 and was subsequently assigned to Global Equipment.  The authenticity of the Transfer Agreement and the subsequent assignments of the Transfer Fee have not been confirmed. Furthermore, the foregoing agreements and the obligation to pay the Transfer Fee to NES, Global Equipment and/or Mr. Hastings was not disclosed. The payments made to Global Equipment in satisfaction of the purported Transfer Fee were previously recorded as rental expense in 2015 and 2016. These amounts have now been reclassified in our consolidated statement of operations as loss from misappropriation of funds in 2015 and 2016.

 

Of the approximately $12.0 million paid to Global Equipment, approximately $5.9 million was transferred through entities formed and/or controlled by Mr. Hastings and Mr. Whiteley to ASV as capital contributions in December 2015. This investment in ASV was not disclosed. ASV was formed as a seismic data library company in 2015, and we previously reported revenue from ASV of approximately $57.3 million in 2016 and approximately $83.8 million in 2015.  The remaining approximately $6.1 million paid to Global Equipment was transferred to Mr. Hastings and Mr. Whiteley and/or to entities formed and/or controlled by them.  These payments were not disclosed.  

 

The Special Committee’s investigation also identified the misappropriation of approximately $4.1 million by Mr. Whiteley from 2012 to 2019, which amount has been reclassified in our consolidated statement of operations as a loss from a misappropriation of funds for such periods. A portion of these funds were paid to RVI Consulting, Inc. (“RVI”), a legal entity owned and/or controlled by Mr. Whiteley. The payments made to RVI were not disclosed. The majority of the payments to RVI were previously recorded as legal and professional expenses in the prior periods.

 

The Special Committee’s investigation also identified the misappropriation of approximately $0.5 million by Mr. Hastings during 2013 related to a reimbursement of Mr. Hastings’ individual tax liability, which has been corrected in our consolidated statement of operations during the year ended December 31, 2014 as a reduction to income tax expense.

 

Effect of the Restatement on Financial Statements

 

For a description of the effect of the restatement as of and for the years ended December 31, 2018 and 2017 (including the unaudited quarterly periods within 2018 and 2017), see “Note 3. Restatement of Previously Reported Consolidated Financial Statements” and “Note 24. Quarterly Data” to our consolidated financial statements in “Item 8.  Financial Statements and Supplementary Data” contained herein. In addition, see “Item 6. Selected Financial Data” contained herein for a summary of the effect of the restatement on selected consolidated statement of operations data for the years ended December 31, 2016, 2015 and 2014 and selected consolidated balance sheet and other financial data as of December 31, 2016, 2015 and 2014.

 

Effect of the Restatement on Debt Financing Agreements

 

As previously disclosed, as a result of certain circumstances giving rise to, or occurring as a result of, the restatement, certain events of default had occurred under our credit facility, senior loan facility, 6% senior secured convertible notes due 2023 (the “2023 Notes”) and 10% senior notes due 2019 (the “Senior Notes”).  We repaid in full the Senior Notes at maturity in September 2019.  In September 2019, we entered into forbearance agreements with respect to our credit facility, senior loan facility and 2023 Notes, whereby the holders of the indebtedness thereunder agreed to refrain from exercising their rights and remedies with respect to events of default that have occurred and other potential defaults or events of default that may occur as further specified in the forbearance agreements until 5:00 p.m. (New York City time) on the earlier of (i) November 30, 2019 and (ii) the date the forbearance agreements otherwise terminated in accordance with their terms.  The November 30, 2019 deadline was ultimately extended to February 7, 2020.  On February 7, 2020, we entered into amendments and waivers to our credit facility, senior loan facility and the indenture governing the 2023 Notes to, among other things, waive existing events of default thereunder and amend certain covenants requiring us to deliver financial statements, reports, projections and other items thereunder.

 

Internal Control Over Financial Reporting and Disclosure Controls and Procedures

 

In connection with the restatement of our consolidated financial statements in this Form 10–K/A, management determined that material weaknesses exist in our internal control over financial reporting and that our disclosure controls and procedures were ineffective during the Non–Reliance Periods. For a description of the material weaknesses identified by management and management’s implemented and planned remediations for those material weaknesses, please see “Item 9A. Controls and Procedures.”

 

 

(ii)

 


 

Items Amended in This Filing

 

This Form 10–K/A sets forth the Original Filing, in its entirety, as amended to reflect the restatement.  No attempt has been made in the Form 10–K/A to modify or update other disclosures presented in the Original Filing to reflect events occurring after the original filing date, except as required to reflect the effects of the restatement.

 

This Form 10–K/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing.

 

The following items have been amended as a result of this restatement:

 

 

Cautionary Note Regarding Forward–Looking Statements;

 

 

Item 1.  Business;

 

 

Item 1A.  Risk Factors;

 

 

Item 3.  Legal Proceedings

 

 

Item 6.  Selected Financial Data

 

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

 

Item 8.  Financial Statements and Supplementary Data;

 

 

Item 9A.  Controls and Procedures;

 

 

Item 13.  Certain Relationships and Related Transactions, and Director Independence; and

 

 

Item 15.  Exhibits and Financial Statement Schedules.

 

Our Principal Executive Officer and Principal Financial Officer are providing currently dated certifications in connection with this Annual Report on Form 10–K/A.  These certifications are filed as Exhibits 31.1, 31.2, 32.1 and 32.2.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(iii)

 

 


 

TABLE OF CONTENTS

 

 

 

PART I

 

 

 

 

 

 

 

Item 1.

 

Business

 

3

Item 1A.

 

Risk Factors

 

9

Item 2.

 

Properties

 

27

Item 3.

 

Legal Proceedings

 

27

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

29

Item 6.

 

Selected Financial Data

 

29

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

Item 8.

 

Financial Statements and Supplementary Data

 

36

 

 

Report of Independent Registered Public Accounting Firm

 

36

 

 

Consolidated Balance Sheets

 

38

 

 

Consolidated Statements of Operations

 

39

 

 

Consolidated Statements of Comprehensive Loss

 

40

 

 

Consolidated Statements of Changes in Stockholders' Deficit

 

41

 

 

Consolidated Statements of Cash Flows

 

42

 

 

Notes to Consolidated Financial Statements

 

43

Item 9A.

 

Controls and Procedures

 

86

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

90

Item 11.

 

Executive Compensation

 

90

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

90

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

90

Item 14.

 

Principal Accountant Fees and Services

 

91

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

92

 

 

Signatures

 

97

 

 

 

 


 

CAUTIONARY NOTE REGARDING FORWARDLOOKING STATEMENTS

 

This Annual Report on Form 10–K/A contains “forward–looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21F of the Securities Exchange Act of 1934, as amended (collectively, 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 Item 1A in this Annual Report on Form 10–K/A, may have a material adverse effect on our results as indicated in the following forward–looking statements.  You should read this Annual Report on Form 10–K/A 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:

 

 

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

 

 

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

 

 

the outcome of the investigations by the SEC, the DOJ and the Alaska Department of Revenue (the “DOR”), which is investigating our treatment of ASV as a VIE and related Alaska tax credit certificates, which could include sanctions or other actions against us and our officers and directors, civil lawsuits, and penalties;

 

 

the outcome of our internal investigation into the matters summarized in this Annual Report on Form 10–K/A;

 

 

developments with respect to the Alaskan oil and natural gas exploration tax credit system that continue to affect our ability to timely monetize tax credits, including litigation over the constitutionality of the legislation allowing Alaska to sell bonds to retire its liabilities relating to tax credit certificates;

 

 

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

 

 

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

 

 

delays in permitting and land access rights;

 

 

limited number of customers;

 

 

credit and delayed payment risks related to our customers;

 

 

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

 

 

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

 

 

need to manage rapid growth and contraction of our business;

 

 

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

 

 

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

 

 

crew availability and productivity;

 

 

whether we enter into turnkey or term contracts;

 

 

high fixed costs of operations;

 

1


 

 

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

 

 

risks relating to cyber incidents;

 

 

ability to retain key executives;

 

 

need to comply with diverse and complex laws and regulations;

 

 

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

 

 

risks related to a possible delisting from the NASDAQ Capital Market;

 

 

costs and outcomes of pending and future litigation; and

 

 

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

 

The 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 Item 1A in this Annual Report on Form 10–K/A.

2


 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

We are a publicly held Delaware corporation formed in 2011.  We were formed with the merger of Trio Merger Corp and SAExploration Holdings, Inc. (the “Former SAE”).  Our common stock is traded on the NASDAQ Capital Market under the symbol “SAEX.”  Our business activities are primarily conducted through wholly–owned subsidiaries, branch offices and VIEs in North America, South America, Asia Pacific and West Africa.

 

We are a full–service global provider of seismic data acquisition, logistical support and processing services to our customers in the oil and natural gas industry. In addition to 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, we offer a full–suite of logistical support and data processing and interpretation services utilizing our proprietary, patent–protected software. We operate crews around the world that are currently supported by over 160,000 owned land channels of seismic data acquisition equipment and other leased equipment as needed to complete particular projects. Seismic data is used by our customers, including major integrated oil companies, national oil companies and independent oil and gas exploration and production companies, to identify and analyze drilling prospects and maximize successful drilling. While the results of the seismic surveys we conduct generally belong to our customers and are proprietary in nature, ASV currently maintains a multiclient seismic data library of approximately 440 square kilometers in certain basins in Alaska which is available for future sale or license.

 

We specialize in the acquisition of seismic data in logistically complex and challenging environments and delicate ecosystems, including jungle, mountain, arctic and subaquatic terrains. We have extensive experience in deploying personnel and equipment in remote locations, while maintaining a strong quality, health, safety and environmental (“QHSE”) track record and building positive community relations in the locations where we operate. We employ highly specialized crews made up of personnel with the training and skills required to prepare for and execute each project and, over time, train and employ large numbers of people from the local communities where we conduct our surveys. Our personnel are equipped with the technology necessary to meet the specific needs of the particular project and to manage the challenges presented by sensitive environments.

 

As of December 31, 2018, we had approximately $184.9 million of backlog under contract, in addition to approximately $570.7 million of bids outstanding.  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.  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 delays, payment defaults or cancellations on the underlying contracts could reduce the amount of backlog currently reported and, consequently, could inhibit the conversion of that backlog into revenues.  

 

Our principal headquarters are located at 1160 Dairy Ashford Rd., Suite 160, Houston, Texas, 77079.  Our telephone number is (281) 258–4400, and our web address is www.saexploration.com.  We do not intend for information contained in our website to be a part of this report.

 

Industry Overview

 

Seismic technology is the primary tool used to locate oil and natural gas reserves, and it facilitates the development of complex reservoirs.  Seismic data is used to pinpoint and determine the locations of subsurface features favorable for the accumulation of hydrocarbons, as well as define the make–up of the sedimentary rock layers and their corresponding fluids.  Seismic data is acquired by introducing acoustic energy into the earth and water through controlled energy sources.  Seismic energy sources can consist of truck–mounted vibration equipment in accessible terrain, explosives such as dynamite in more difficult terrain, or vessel–mounted air guns in shallow water and certain marsh environments.  The sound waves created by explosives or vibration equipment are reflected back to the surface and collected by seismic sensors referred to as “geophones” or “hydrophones,” which measure ground and water displacement.  A typical project involves the use of thousands, and sometimes tens of thousands, of channels recording simultaneously over the survey area.  In general, the higher the number of recording channels employed in a given survey, the richer the data set that is produced.

 

3


 

A seismic survey is acquired with a surface geometry grid of seismic energy sources and receivers extending over very large areas.  The size of this grid varies with and depends on the size, depth and geophysical characteristics of the target to be imaged.  The lines must be accurately positioned, so the location of each source and receiver point is obtained using either GPS, inertial, or conventional optical survey methods depending upon the vegetation and environment in the prospect area.  Seismic receivers are deployed on the surface of the area being surveyed at regular intervals and patterns to measure and transmit reflected seismic energy to a set of specialized recording instruments.  

 

Two–dimensional, or 2D, seismic data is recorded using single lines of receivers crossing the earth’s surface, and, once processed, results in only a profile image of the earth, and the data is generally used only to identify gross structural features.  Prior to 1980, all seismic data acquired was 2D, and 2D surveys are still widely employed in locations previously unexplored by exploration and production (“E&P”) companies to provide preliminary data for broad–scale exploration evaluation.  Three–dimensional, or 3D, seismic data surveys have proven more effective in providing detailed views of subsurface structures.

 

The increased use of 3D seismic data by the oil and natural gas industry in the 1980s helped drive significant increases in drilling success rates as better data quality allowed operators to optimize well locations and results.  Today, the vast majority of seismic data acquired in North America is 3D, of which high density 3D is a growing component.

 

More recently, the seismic industry has seen the development of four–dimensional, or 4D, imaging technology, also known as time–lapse seismic.  4D seismic data incorporates numerous 3D seismic surveys over the same reservoir at specified intervals of time and can help determine changes in flow, pressure and saturation.  As hydrocarbons are depleted from a field, the pressure and composition of the fluids may change.  By scanning a reservoir over a given period of time, the flow of the hydrocarbons within can be traced and better understood.  In addition, 4D seismic data can help geologists understand how a reservoir reacts to gas injection or water flooding and can help locate untapped pockets of oil or natural gas within the reservoir.

 

Once seismic data is acquired, complex mathematical algorithms are used to transform the data into 2D profiles, 3D volumes of the earth’s subsurface or 4D time–lapse seismic data.  These images are then interpreted by geophysicists and geologists for use by oil and natural gas companies in evaluating prospective areas, designing drilling programs, selecting drilling sites and managing producing reservoirs.

 

Our Business

 

Seismic Data Acquisition Services

 

We provide a full range of seismic data acquisition services, including in–field data processing, and related logistics services. We currently provide our services on a proprietary basis to our customers and the seismic data acquired is owned by our customers once acquired, other than the multiclient seismic data library maintained by ASV.  Our seismic data acquisition and logistics services include the following:

 

Program Design, Planning and Permitting.  A seismic survey is initiated at the time the customer requests a proposal to acquire seismic data on its behalf.  We employ an experienced design team, including geophysicists with extensive experience in 2D, 3D, time–lapse 4D, and multi–component survey design, to recommend acquisition parameters and technologies to best meet the customer’s exploration objectives.  Our design team analyzes the request and works with the customer to put an operational, personnel and capital resource plan in place to execute the project.

 

Once a seismic program is designed, we may assist the customer in obtaining the necessary permits from governmental authorities and access rights of way from surface and mineral estate owners or lessees where the survey is to be conducted.  It is usually our permitting crew that is first to engage with the local residents and authorities.  We believe our knowledge of the local environment, cultural norms and excellent QHSE track record enable us to engender trust and goodwill with the local communities, which our customers are able to leverage over the longer exploration cycle in the area.

 

Camp Services.  We have developed efficient processes for assembling, operating and disassembling field camps in challenging and remote project locations.  We operate our camps to ensure the safety, comfort and productivity of the team working on each project and to minimize our environmental impact through the use of wastewater treatment, trash management, water purification, generators with full noise isolation and recycling areas.

 

4


 

In areas like South America and the Asia Pacific, logistical support needs to be in place to establish supply lines for remote jungle camps.  To insure the quality of services delivered to these remote camps, we own ten supply and personnel river vessels to gain access to remote jungle areas.  We also have five jungle camps and a series of 40 fly camps that act as advance camps from the main project camp.  Each of these jungle base camps contains a full service medical facility complete with doctors and nurses in the remote chance any potential injuries need to be stabilized for medical transport.  The camps are equipped with full meal kitchens held to high standards of cleanliness, sleeping and recreational quarters, power supply, communications links, air support, water purification systems, black water purification systems, offices, repair garages, fuel storage and many more support services.

 

Survey and Drilling.  In a typical seismic recording program, the first two stages of the program are survey and drilling.  Once the permitting is completed, our survey crews enter the project areas and begin establishing the source and receiver placements in accordance with the survey design agreed to by the customer.  The survey crew lays out the line locations to be recorded and, if explosives are being used, identifies the sites for shot–hole placement.  The drilling crew creates the holes for the explosive charges that produce the necessary acoustical impulse.

 

The surveying and drilling crews are usually employed by us but may be third party contractors depending on the nature of the project and its location.  Generally, the choice of whether to subcontract out services depends on the expertise available in a certain region and whether that expertise is more efficiently obtained through subcontractors or by using our own labor force.  For the most part, the surveying and drilling crews in North America are typically provided by third party contractors but are supervised by our personnel.  In South America and the Asia Pacific, we perform our own surveying and drilling, which is supported by up to 200 drilling units, including people–portable, low impact self–propelled walk behind, track–driven and heli–portable deployed drilling rigs.  Our senior drilling staff has a combined work experience of over 50 years in some of the most challenging environments in the world.  On most programs there are multiple survey and drilling crews that work at a coordinated pace to remain ahead of the data recording crews. When subcontractors are used, we manage them and require that they comply with our work policies and QHSE objectives.

 

Recording.  We use equipment capable of collecting 2D, 3D, time–lapse 4D and multi–component seismic data.  We utilize vibrator energy sources or explosives depending on the nature of the program and measure the reflected signals with strategically placed sensors.  For land applications, receivers may be buried, or partially buried, to ensure good coupling with the surface and to reduce wind noise.  The acoustic source for land seismic data acquisition is typically a fleet of vibrators but may also be explosives detonated in holes drilled for such purposes.

 

In marine surveys, air guns, which release high–pressure compressed air into the water column, are used as the acoustic energy source.  For ocean bottom nodal operations, a self–contained assembly of geophones and hydrophones is deployed on the sea floor to record seismic data.  Ocean bottom nodes positioned by remote operated vehicles are used in areas of obstructions (such as production platforms) or shallow water inaccessible to ships towing seismic streamers (such as submerged cables).

In the transition zone area where land and water come together, elements of both land data acquisition and offshore data acquisition are employed.  Transition zone seismic data acquisition is similar to ocean bottom nodal applications in that both hydrophones and geophones are lowered to the ocean floor.  However, due to the shallow water depths, only small vessels and manual labor can be used to deploy and retrieve the nodes.  Additionally, the source vessels and acoustic source arrays must be configured to run in shallow water.  In transition zone areas consisting of swamps and marshes, explosives must be used as an acoustic source in addition to air guns.

 

Reclamation.  We have experienced teams responsible for reclamation of the areas where work has been performed so as to minimize the environmental footprint from the seismic program.  These programs can include reforestation or other activities to restore the natural landscape at our worksites.

 

In–field Data Processing. Our knowledgeable and experienced team provides our customers with superior quality in–field data processing.  We believe that our strict quality control processes meet or surpass industry–established standards, including identifying and analyzing ambient noise, evaluating field parameters and employing obstacle–recovery strategies.  Using the latest technology, our technical and field teams electronically manage customer data from the field to the processing office, minimizing time between field production and processing.  All the steps employed in our in–field data processing sequence are tailored to the particular customer project and objectives.

 

We currently have available over 160,000 owned land seismic recording channels with the ability to access additional equipment, as needed, through rental or long–term leasing sources.  All our systems record equivalent seismic information but vary in the manner by which seismic data is transferred to the central recording unit, as well as their operational flexibility and channel count expandability.  

 

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Historically, we have made significant capital investments to increase the recording capacity of our crews by increasing channel count and the number of energy source units we operate.  This increase in channel count demand is driven by customer needs and is necessary in order to produce higher resolution images, increase crew efficiencies and undertake larger scale projects.  In response to project–based channel requirements, we routinely deploy a variable number of channels with a variable number of crews in an effort to maximize asset utilization and meet customer needs.  When recording equipment is at or near full utilization, we utilize rental equipment from strategic suppliers to augment our existing inventories.  We believe we will realize the benefit of increased channel counts and flexibility of deployment through increased crew efficiencies, higher revenues and increased margins.

 

Historically, we have also dedicated a significant portion of our capital investment to purchasing and leasing wireless recording systems rather than the traditional wired systems.  The wireless recording systems allow us to gain further efficiencies in data recording and provide greater flexibility in the complex environments in which we operate.  In addition, we have realized increased crew efficiencies and lessened the environmental impact of our seismic programs due to the wireless recording systems because they require the presence of fewer personnel and less equipment in the field.  We believe we will experience continued demand for wireless recording systems in the future.

 

We also utilize multi–component recording equipment on certain projects to further enhance the quality of data acquired and help our customers enhance their development of producing reservoirs.  Multi–component recording involves the collection of different seismic waves, including shear waves, which aids in reservoir analysis such as fracture orientation and intensity in shales and allows for more descriptive rock properties.

 

Seismic Data Processing Services

 

We provide a full suite of onshore and offshore proprietary seismic data processing services.  Seismic data are processed to produce an accurate image of the earth’s subsurface using proprietary computer software and internally developed technologies.  Advanced signal processing of 2D, 3D, time–lapse 4D and multi–component seismic data acquired by us, other industry contractors, as well as reprocessing of previously acquired legacy data, provides our clients with detailed subsurface information essential to reducing risk in their E&P activities. 

 

Multiclient Seismic Data Library

 

ASV currently maintains a multiclient seismic data library of approximately 440 square kilometers of certain basins in Alaska which is available for future sale or license.

 

Markets and Trends

 

North America

 

While the last several years have seen a decline in demand, the North American market has historically been a stable and sustainable market for 3D seismic data acquisition. The historic stability of this market was one of the reasons we acquired certain assets of Geokinetics, Inc. (“GEOK”) in July 2018.  Use of 3D technology is the norm in the United States and Canada as international oil companies seek to maximize the efficiency of their reservoirs and reduce exploration risk.

 

Our operations in the North American market are consistent with our strategy to help increase our equipment utilization rates, while concurrently increasing margins, by balancing growth in North and South America, which have complementary operating seasons.  While this model continues to be a viable operating model, the industry downturn has created significant pressure on competitive cost structures and pricing, particularly during the early 2018 winter season.  However, we are beginning to see signs that would suggest this trend may be shifting towards an increase in overall regional activity assuming there is a longer period of consistency in the commodity price environment.

 

South America

 

The economies in South American countries continue to expand and develop, demanding significantly more energy to fuel their growth. As the political environments stabilize, oil companies are increasing operations in the market and are seeking experienced seismic service providers with complex environment know–how, strong QHSE records and excellent relations with local communities to satisfy their exploration needs.

 

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We have maintained operations in South America since 2006 while further growing our presence in Bolivia, Brazil, Colombia, and Peru.  However, the global oil and natural gas industry downturn significantly impacted exploration activity in South America particularly during 2018 and 2017.  While some improvements in the level of customer interest can be seen by an increase in inquiries and subsequent tenders, no assurance can be given that this will result in increased activity or that future decreases in activity will not occur again.

 

Asia Pacific

 

Exploration activities in Asia Pacific have declined recently with lower commodity prices but there is a steady demand for energy in the region. We expect the Asia Pacific market to continue to be a predominantly marine–based market in the current commodity price environment.  This trend is expected to continue as long as customers remain hesitant to commit capital to large onshore projects that are more exploration driven.

 

West Africa

 

Historically, West Africa has presented numerous offshore marine opportunities.  More recently, offshore marine seismic activity has been increasing in certain West African countries.  These projects are more focused on production–enhancement initiatives than new exploration.  Despite the current macro–economic instability related to the oil and natural gas industry downturn, we expect overall offshore marine seismic activity to continue to improve in the near to medium–term future.

 

Seasonal Variation in Business

 

Seismic data acquisition services are performed outdoors and, consequently, are subject to weather and seasonality. In Alaska and Canada, the primary season for seismic data acquisition is during the winter since much of the terrain for seismic data acquisition cannot be accessed until the ground has frozen. The weather conditions during this time of year can affect the timing and efficiency of operations. In addition, this prime season can be shortened by warmer weather conditions.

 

In South America and the Asia Pacific, our operations are affected by the periods of heavy rain in the areas where seismic operations are conducted. Specifically, the jungle areas in South America are affected by heavy rain during certain parts of the year so we must either avoid taking projects during these time periods or limit the weather risk in a particular customer contract. Many of the heavy rain periods in South America, though, are during the high season for Alaska and Canada, and there are opportunities to maximize the utilization of equipment and personnel by moving them between these regions to take advantage of the different high seasons.

 

In all areas of operation, the weather is an uncontrollable factor that affects our operations at various times of the year. We try to minimize these risks during the bidding process by utilizing the expertise of our personnel as to the weather in a particular area and through the negotiation of downtime clauses in our contracts with our customers. Due to the unpredictability of weather conditions, there may be times when adverse conditions substantially affect our operations and the financial results of a particular project may be impacted.

 

Marketing

 

Our services are marketed from our various offices around the world. We have a corporate business development and marketing staff and also have local managers who interact with customers in each country of operations. Through these customer interactions, we are able to remain updated on a customer’s upcoming projects in the area and to work with the customer on projects in other countries.

 

Contracts are obtained primarily through competitive bidding. Most of our revenue historically has been generated through repeat customer sales and new sales to customers referred by existing and past customers. In addition, a significant portion of our engagements results from competitive bidding. Contracts are awarded primarily on the basis of price, experience, availability, technological expertise and reputation for dependability and safety. With the involvement and review of senior management, bids are prepared by knowledgeable regional operations managers who understand their respective markets, customers and operating conditions and who communicate directly with existing and target customers during the bid preparation process.

 

We also work closely with customers to plan particular seismic data acquisition projects. Due to the complexity of the areas where we do business, these projects can take a number of months in planning and consulting with the customer on exploration goals and parameters of the projects to fit within a particular budget. By working closely with the customer, we are able to acquire seismic data for a project efficiently and within the customer’s required timeframe.

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Contracts

 

We conduct our services under master service agreements with our customers that set forth certain obligations of our customers and us. A supplemental agreement setting forth the terms of a specific project, which may be canceled by either party on short notice, is entered into for every project. The supplemental agreements are either “turnkey” agreements that provide for a fixed fee to be paid to us for each unit of data acquired or processed, or “term” agreements that provide for a fixed hourly, daily or monthly fee during the term of the project. Turnkey agreements generally mean more profit potential, but involve more risks due to potential crew downtimes or operational delays. Under term agreements, we are ensured a more consistent revenue stream with improved protection from crew downtime or operational delays, but with a decreased profit potential.

 

Our contracts for proprietary seismic data acquisition services reflect a high proportion of turnkey contracts, which is preferred by our customers because it shifts much of the business interruption risk onto us; however, it provides us with the greatest opportunity to maximize the advantage we have from being a full–service provider and the operational efficiencies created by our vertical integration. We attempt to negotiate on a project–by–project basis some level of weather downtime protection within the turnkey agreements and increasingly use hybrid contracts where we may share with our customers a certain degree of the risks for certain business interruptions, such as weather, community relations and permitting delays, that are outside of our control.

 

Principal Customers

 

Our customers include both national and international oil and natural gas companies and independent oil and natural gas companies.  Our revenues are derived from a concentrated customer base; however, we are not substantially dependent on any one customer.  Based on the nature of our contracts and customer projects, our significant customers can and typically do change from year to year and the largest customers in any one year may not be indicative of the largest customers in the future.  

 

In 2018, we had three customers, TGS–NOPEC Geophysical Company, ConocoPhillips Alaska, Inc. and Hocol Petroleum Limited, that individually exceeded 10% of our consolidated revenue from services.  In 2017, we had three customers, ConocoPhillips Alaska, Inc., Star Deep Water Petroleum Limited and Hocol Petroleum Limited, that individually exceeded 10% of our consolidated revenue from services.  

 

Competition

 

The acquisition and processing of seismic data for the oil and natural gas industry is a highly competitive business. Factors such as price, experience, asset availability and capacity, technological expertise and reputation for dependability and safety of a crew significantly affect a potential customer’s decision to award a contract to us or one of our competitors.  In addition, the recent excess supply and downturn in commodity prices has decreased demand for seismic services, further intensifying the competitive landscape and causing further pressure on pricing and margins.

 

Our competitors include much larger companies with greater financial resources, more available equipment and more crews, as well as companies of comparable and smaller sizes.  In our land operations, our primary competitors are BGP, Inc. and Dawson Geophysical Company.  In our marine operations, our primary competitors are MagSeis Fairfield and Seabed Geosolutions.  In addition to those companies, we also compete for projects from time to time with smaller seismic companies that operate in local markets.  As the barriers to entry in the seismic industry are not prohibitive, it is not difficult for seismic companies outside of the U.S. to enter the domestic market and compete with us.

 

Intellectual Property

 

We rely on certain proprietary information, proprietary software, trade secrets and confidentiality and licensing agreements to conduct our operations.  We continually strive to improve our operating techniques and technologies, through internal development activities and working with vendors to develop new processes and technologies to maintain pace with industry innovation. Through this process, we have developed certain proprietary processes and methods of doing business, particularly with respect to logistics. Although those processes and methods may not be patentable, we seek to protect our proprietary information by entering into confidentiality agreements with our key managers and customers.

 

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Government and Environmental Regulations

 

Our operations are subject to various international, federal, provincial, state and local laws and regulations. Those laws and regulations govern various aspects of operations, including the discharge of explosive materials into the environment, requiring the removal and cleanup of materials that may harm the environment or otherwise relating to the protection of the environment and access to private and governmental land to conduct seismic surveys. We believe we have conducted our operations in material compliance with applicable laws and regulations governing our activities.

 

The costs of acquiring permits and remaining in compliance with environmental laws and regulations, title research, environmental studies and surveys are generally borne by our customers. Although our direct costs of complying with applicable laws and regulations have historically not been material, the changing nature of such laws and regulations makes it impossible to predict the cost or impact of such laws and regulations on future operations. Additional U.S. or foreign government laws or regulations would likely increase the compliance and insurance costs associated with our customers’ operations. Significant increases in compliance expenses for customers could have a material adverse effect on customers’ operating results and cash flows, which could also negatively impact the demand for our services.

 

Employees

 

As of December 31, 2018, we had 803 employees, 563 of whom were located in the United States. From time to time and on an as–needed basis, we supplement our regular workforce with individuals that we hire temporarily or as independent contractors in order to meet certain business needs. Our U.S. employees are not represented by any collective bargaining agreement, and we believe that our employee relations are good.

 

Available Information

 

Our annual reports on Form 10–K, quarterly reports on Form 10–Q and current reports on Form 8–K are made available free of charge on our website at www.saexploration.com as soon as reasonably practicable after these reports have been filed with the SEC.  These documents are also available on the SEC’s website at www.sec.gov.  Please note that our website address is provided as an inactive textual reference only.  The information provided on our website is not part of this Annual Report on Form 10–K/A and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this Annual Report on Form 10–K/A.  

 

ITEM 1A. RISK FACTORS

 

You should consider and read carefully all the risks and uncertainties described below, together with all the other information contained in this Annual Report on Form 10–K/A, including the consolidated financial statements and the related notes appearing at the end of this Annual Report on Form 10–K/A.  If any of the following risks actually occur, our business, business prospects, stock price, financial condition, results of operations or cash flows could be materially adversely affected.  The risks below are not the only ones facing our company.  Additional risks not currently known to us or that we currently deem immaterial may also have a material adverse effect on us.  This Annual Report on Form 10–K/A also contains forward–looking statements, estimates and projections that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward–looking statements as a result of specific factors, including the risks described below.

 

Risks Relating to Our Business

 

The restatement of our consolidated financial statements may lead to additional risks and uncertainties, including loss of investor and counterparty confidence and negative impacts on our stock price.

 

We have restated our consolidated financial statements for the Non–Reliance Periods to correct accounting errors related to, among other items, our re–evaluation of our relationship with ASV and our determination that ASV is a related party VIE, that we had a controlling financial interest in ASV, and that we are the primary beneficiary of ASV, which, among other things, required us to consolidate the financial results of ASV. For a discussion of the accounting errors identified and the restatement adjustments, please see “Explanatory Note” and “Note 3. Restatement of Previously Reported Consolidated Financial Statements” and “Note 24. Quarterly Data” to our consolidated financial statements in “Item 8. Financial Statements and Supplementary Data,” both contained herein.

 

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In connection with this restatement of our prior consolidated financial statements, we have also identified material weaknesses in our internal control over financial reporting, and management has concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2018. For a description of the material weaknesses, please see “Item 9A. Controls and Procedures” contained herein.

 

As a result of the circumstances giving rise to the restatement, we have become subject to a number of additional costs and risks, including unanticipated costs for accounting and legal fees in connection with or related to the restatement and the remediation of our disclosure controls and procedures and material weaknesses in internal control over financial reporting. In addition, the attention of our management team has been diverted by these efforts. The SEC and the DOJ are conducting investigations into, and we are subject to shareholder litigation related to, the circumstances giving rise to the restatement. In addition, 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 could be subject to further regulatory, or shareholder or other actions in connection with the restatement in the future. The current SEC, DOJ and DOR investigations and shareholder litigation and any future proceedings will, regardless of the outcome, consume management’s time and attention and may result in additional legal, accounting, insurance and other costs. In addition, the restatement and related matters could impair our reputation and could cause our counterparties to lose confidence in us. Each of these occurrences could have an adverse effect on our business, results of operations, financial condition and stock price.

 

We have identified material weaknesses in our internal control over financial reporting that, if not remediated, could result in additional material misstatements in our consolidated financial statements, which could materially and adversely affect our business.

 

As described in “Item 9A. Controls and Procedures” contained herein, management has identified and evaluated the control deficiencies relating to revenue recognition, complex accounting and management estimates (including VIEs, earnings per share and income taxes), financial statement close and reporting, customer and vendor setup, approval and maintenance, related parties, segregation of duties, and information technology that gave rise to the accounting errors related to the financial results of ASV not being consolidated, revenue recognition, earnings per share and income taxes, and has concluded that those deficiencies represent material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of those material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2018.

 

We are in the process of developing and implementing a remediation plan to address the material weaknesses; however, because of the inherent limitations in a cost–effective control system, misstatements due to error or fraud may occur undetected, and it is possible that additional material weaknesses in our internal control over financial reporting may be identified in the future. If our remediation efforts are insufficient or if additional material weaknesses in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could materially and adversely affect our business, results of operations and financial condition, result in delays in meeting our reporting obligations, restrict our ability to access the capital markets, require us to expend significant resources to correct the material weakness, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in investor confidence.

 

We are involved in governmental investigations, which are costly to conduct and may result in substantial financial and other penalties, as well as adverse effects on our business and financial condition.

 

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 DOJ is conducting a parallel investigation with the SEC.  We have been cooperating, and will continue to cooperate, with the SEC and 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 investigation. 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 other action or whether it could have a material impact on our financial condition, results of operations, or cash flow.

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If we are found to have violated securities laws or other federal or state statutes, we may be subject to criminal and civil penalties and other remedial measures, including, but not limited to, injunctive relief, disgorgement, civil and criminal fines and penalties, modifications of compliance programs and the retention of a monitor to oversee compliance. The imposition of any of these sanctions or remedial measures could have a material adverse impact on our business, reputation, revenues, results of operations and financial condition.

 

Our business largely depends on the levels of exploration and development activity in the oil and natural gas industry, a historically cyclical industry.  A decrease in this activity caused by low oil and natural gas prices, increased supply, and reduced demand, such as has occurred over the last several years, has had an adverse effect on our business, liquidity and results of operations.

 

Demand for our services depends upon the level of spending by oil and natural gas companies for exploration, production, development and field management activities which depend, in part, on oil and natural gas supplies and prices.  The markets for oil and natural gas have historically been volatile and are likely to continue to be so in the future.  In addition to the market prices of oil and natural gas, our customers’ willingness to explore, develop and produce depends largely upon prevailing industry conditions that are influenced by numerous factors over which our management has no control.  A decline in oil and natural gas exploration activities and commodity prices, as has occurred over the last several years, has adversely affected the demand for our services and our results of operations.

 

Factors affecting the prices of oil and natural gas and our customers’ desire to explore, develop and produce include:

 

 

the level of supply and demand for oil and natural gas;

 

 

expectations about future prices for oil and natural gas;

 

 

the worldwide political, military and economic conditions;

 

 

the ability of the Organization of Petroleum Exporting Countries to set and maintain production levels and prices for oil;

 

 

the rate of discovery of new oil and natural gas reserves and the decline of existing oil and natural gas reserves;

 

 

the cost of exploring for, developing and producing oil and natural gas;

 

 

the ability of exploration and production companies to generate funds or otherwise obtain capital for exploration, development and production operations;

 

 

technological advances affecting energy exploration, production and consumption;

 

 

government policies, including environmental regulations and tax policies, regarding the exploration for, production and development of oil and natural gas reserves, the use of fossil fuels and alternative energy sources and climate change; and

 

 

weather conditions, including large–scale weather events such as hurricanes that affect oil and natural gas operations over a wide area or affect prices.

 

The decreases in prices for oil and natural gas have led many E&P companies to reduce their capital expenditures, which has resulted in diminished demand for our services and products and downward pressure on the prices we charge or the level of work we do for our customers.

 

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We cannot assure you that the exploration and development activities by our customers will be maintained at current levels.  Any significant decline in exploration or production–related spending by our customers, whether due to a decrease in the prices for oil and natural gas or otherwise, would have a material adverse effect on our results of operations.  Additionally, increases in oil and natural gas prices may not increase demand for our products and services or otherwise have a positive effect on our results of operations or financial condition.

 

Our revenues, operating results and cash flows can be subject to fluctuations from period to period.  

 

Our revenues, operating results and cash flows may fluctuate from period to period.  Factors that cause variations include the timing of the receipt and commencement of contracts for seismic data acquisition, processing or interpretation and customers’ budgetary cycles, all of which are beyond our control.  In addition, in any given period, we could have idle crews which result in a significant portion of our revenues, cash flows and earnings coming from a relatively small number of crews.  Lower crew utilization rates can be caused by land access permit and weather delays, seasonal factors such as holiday schedules, shorter winter days or agricultural or hunting seasons, and crew repositioning and crew utilization and productivity.  Additionally, due to location, type of service or particular project, some of our individual crews may achieve results that constitute a significant percentage of our consolidated operating results.  Should any of our crews experience changes in timing or delays due to one or more of these factors, our financial results could be subject to significant variations from period to period.  Combined with our fixed costs, these revenue fluctuations could also produce unexpected adverse results of operations in any fiscal period.

 

Oil and natural gas prices, while showing improvement over the past year, have continued to be volatile and have resulted in significant demand fluctuations for our services.  There can be no assurance of future oil and gas price levels or stability. The demand for our services will be adversely affected by a significant reduction in oil and natural gas prices and by climate change legislation or material changes to U.S. energy policy.  Because our business has high fixed costs, the negative effect of one or more of these factors could trigger wide variations in our revenues, operating results and cash flows.

 

In addition to the above potential fluctuations in our revenue, we may also have significant third–party pass–through costs that are reflected in our revenues but correspond to a very small administrative margin charged to the customer.  Therefore, our revenues for certain periods may include a large amount of these third–party charges and can cause our gross profit margin to be lower.

 

Our profitability is determined, in part, by the utilization level and productivity of our crews and is affected by numerous external factors that are beyond our control.  

 

Our profitability is determined, in part, by the prices we receive for our services, the productivity of our crews and the accuracy of our cost estimates.  The productivity of our crews is partly a function of external factors, such as client cancellation or delay of projects, operating delays from inclement weather, obtaining land access rights and other factors, over which we have no control.  In addition, cost estimates for our projects may be inadequate due to unknown factors associated with the work to be performed and market conditions, resulting in cost over–runs.  If our crews encounter operational difficulties or delays, or if we have not correctly priced our services, our results of operation may vary and, in some cases, may be adversely affected.

 

Our projects are performed on both a (i) turnkey basis, where a defined amount and scope of work is provided by us for a fixed price and additional work, which is subject to customer approval, is billed separately, and (ii) term basis, where work is provided by us for a fixed hourly, daily or monthly fee.  The relative mix of turnkey and term agreements, as related to our projects, can vary widely from time to time.  The revenue, cost and gross profit realized on a turnkey contract can vary from our estimated amount because of changes in job conditions, variations in labor and equipment productivity from the original estimates, and the performance of subcontractors.  In addition, if conditions exist on a particular project that were not anticipated in the customer contract, such as excessive weather delays, community issues, governmental issues or equipment failure, then the revenue timing and amount from a project can be affected substantially.  Turnkey contracts may also cause us to bear substantially all of the risks of business interruption caused by weather delays and other hazards.  Those variations, delays and risks inherent in billing customers at a fixed price may result in us experiencing reduced profitability or losses on projects.

 

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The significant fixed costs of our operations could result in operating losses.

 

We are subject to significant fixed operating costs, which primarily consist of depreciation (a non–cash item) and maintenance expenses associated with our equipment, certain crew costs and interest expense on our outstanding indebtedness.  Extended periods of significant downtime or low productivity caused by reduced demand, weather interruptions, equipment failures, permit delays or other causes could negatively affect our results and have a material adverse effect on our financial condition and results of operations because we will not be able to reduce our fixed costs as fast as revenues decline.

 

Our working capital needs are difficult to forecast and may vary significantly, which could cause liquidity issues and require us to seek additional financing that we may not be able to obtain on satisfactory terms, or at all.

 

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, as we have done by the acquisition of certain assets from GEOK.  Even with the addition of these assets, we currently estimate that our capital expenditures for 2019 will not exceed $3.0 million, which is greater than the $1.3 million we incurred in 2018.  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 previously disclosed, as a result of certain circumstances giving rise to, or occurring as a result of, the restatement, certain events of default had occurred under our credit facility, senior loan facility, 2023 Notes and Senior Notes.  We repaid in full the Senior Notes at maturity in September 2019.  On February 7, 2020, we entered into amendments and waivers to our credit facility, senior loan facility and the indenture governing the 2023 Notes to, among other things, waive existing events of default thereunder and amend certain covenants requiring us to deliver financial statements, reports, projections and other items thereunder.  We currently have $9.5 million of available borrowing capacity under our credit facility, subject to the satisfaction of certain conditions precedent, including the absence of a default and the accuracy of representations and warranties.  Under the terms of the Fifth Amendment to our credit facility entered into in December 2019, we are also able to request the issuance of additional incremental commitments in an aggregate principal amount of up to $5.0 million which each lender may, in its sole and absolute discretion, agree to issue its pro rata share.  

 

We continue to diligently pursue improving our capitalization and reducing our long–term debt, but liquidity issues may continue to challenge us.  Until we are able to finally resolve the issues described above, we are likely to continue to experience liquidity and cash flow issues.

 

As a result of the delayed filing of our Quarterly Reports on Form 10–Q for the quarters ended June 30, 2019 and September 30, 2019 with the SEC, we are not currently eligible to use a registration statement on Form S–3 to register the offer and sale of securities, which may adversely affect our ability to raise additional capital.

 

As a result of the delayed filing of our Quarterly Reports on Form 10–Q for the quarters ended June 30, 2019 and September 30, 2019 with the SEC, we will not be eligible to register the offer and sale of our securities using a registration statement on Form S–3 until we have timely filed all periodic reports required under the Exchange Act for at least twelve calendar months. There can be no assurance that we will be able to timely file such reports in the future. In addition, it is possible that the SEC in connection with their investigation of the facts surrounding our restatement could further prolong our inability to register securities for sale to the public on Form S–3. As a result, should we wish to register the offer and sale of our securities to the public, our transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction timely and successfully and potentially harming our financial condition.

 

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

 

As of December 31, 2018, we have a $13.2 million tax credits receivable, net balance related to the tax credits earned by ASV.  Following our sale of seismic data and related assets in January 2020, the balance of this receivable has been reduced to $2.7 million.  We have classified this receivable as long–term because of the length of time we expect it will take to collect on it.  

 

Falling oil and natural gas 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 budget that passed in 2019 for fiscal year 2020, which started July 1, 2019, had no appropriation to the oil and gas tax credit fund, but did include an appropriation 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.

 

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 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.

 

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.

 

If we do not manage growth and contractions in our business effectively, our results of operations could be adversely affected.

 

Historically, we have experienced significant growth but for the last several years we have contracted our business in response to the decline in oil and natural gas exploration activities. Both growth and contraction have placed significant demands on our personnel, management, infrastructure and support mechanisms and other resources. We must continue to improve our operational, financial, management, legal compliance and information systems to keep pace with the growth of or contractions in our business. We may also expand through the strategic acquisition of companies and assets. We must plan and manage any acquisitions effectively to achieve revenue growth and maintain profitability in our evolving market. If we fail to manage growth of or contractions in our business effectively, our ability to provide services could be adversely affected, which could negatively affect our operating results.

 

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We face intense competition in our business that could result in downward pricing pressure and the loss of market share.

 

Competition among seismic contractors historically has been, and likely will continue to be, intense.  Competitive factors have in recent years included price, crew experience, asset availability and capacity, technological expertise and reputation for quality and dependability.  We also face increasing competition from nationally owned companies in various international jurisdictions that operate under less significant financial constraints than those we experience.  Many of our competitors have greater financial and other resources, more customers, greater market recognition and more established relationships and alliances in the industry than we do.  They and other competitors may be better positioned to withstand and adjust more quickly to volatile market conditions, such as fluctuations in oil and natural gas prices and production levels, as well as changes in government regulations.  Additionally, the seismic data acquisition business is extremely price competitive and has a history of protracted periods of months or years where seismic contractors under financial duress bid jobs at unattractive pricing levels and therefore adversely affect industry pricing.  Competition from those and other competitors could result in downward pricing pressure, which could adversely affect our margins, and could result in the loss of market share.

 

We derive a portion of our revenues from contracts awarded through a competitive bidding process which can involve significant costs and risks.  This effort may not result in awards of business, which could have adverse consequences on our future profitability.

 

Many or our customers award business through a competitive bidding process, which results in greater competition and increased pricing pressure.  This competitive bidding process involves substantial costs and presents a number of risks, including the:

 

 

substantial cost and managerial time and effort that we spend to prepare bids and proposals;

 

 

need to accurately estimate the resources and costs that will be required to service any contracts we are awarded; and

 

 

opportunity cost of not bidding on and winning other contracts we may have otherwise pursued.

  

Even if we are awarded contracts, we may fail to accurately estimate the resources and costs required to fulfill a contract, or to resolve problems with our subcontractors or suppliers, which could negatively impact the profitability of any contract award to us, particularly in the case of term contracts. In addition, following the award of a contract, we have experienced and may continue to experience significant expense or delay, contract modification or contract rescission as a result of customer actions that are beyond our control.

 

We have a history of losses and may not achieve consistent profitability in the future.

 

We have incurred substantial losses in prior years.  In 2018 and 2017, we generated net losses of $59.6 million and $39.7 million, respectively.  Our ability to be profitable in the future will depend on many factors beyond our control, but primarily on the level of demand for seismic data acquisition services by E&P companies.  Even if we do achieve profitability, we may not be able to maintain or increase our level of profitability.  

 

 

Our agreements with our customers may not adequately protect us from unforeseen events or address all issues that could arise with our customers.  The occurrence of unforeseen events or disputes with customers could result in increased liability, costs and expenses for our projects.

 

We enter into master service agreements with many of our customers that allocate certain operational risks.  Despite the inclusion of risk allocation provisions in our agreements, our operations may be affected by a number of events that are unforeseen or not within our control and our agreements may not adequately protect us from each possible event.  If an event occurs which we have not contemplated or otherwise addressed in our agreement we, and not our customer, will likely bear the increased cost or liability.

 

To the extent our agreements do not adequately address those and other issues, or we are not able to successfully resolve resulting disputes, we may incur increased liability, costs and expenses. This may have a material adverse effect on our results of operations.

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We operate under hazardous conditions that subject us and our employees to risk of damage to property or personal injury and limitations on our insurance coverage may expose us to potentially significant liability costs.

 

Our activities are often conducted in dangerous environments and include hazardous conditions, including operation of heavy equipment, the detonation of explosives, and operations in remote areas of developing countries.  Operating in such environments, and under such conditions, carries with it inherent risks, such as loss of human life or equipment, as well as the risk of downtime or reduced productivity resulting from equipment failures caused by an adverse operating environment.  Those risks could cause us to experience injuries to our personnel, equipment losses, and interruptions in our business.

 

Although we maintain insurance, our insurance contains certain coverage exclusions and policy limits.  There can be no assurance that our insurance will be sufficient or adequate to cover all losses or liabilities or that insurance will continue to be available to us on acceptable terms, or at all.  Further, we may experience difficulties in collecting from insurers as such insurers may deny all or a portion of our claims for insurance coverage.  A claim for which we are not fully insured, or which is excluded from coverage or exceeds the policy limits of our applicable insurance, could have a material adverse effect on our financial condition.

 

From time to time, we are subject to various claims, litigation and other proceedings that could ultimately be resolved against us, requiring material future cash payments or charges, which could impair our financial condition or results of operations.

 

We are currently, and may in the future become, subject to various claims, either in litigation or binding arbitration, which, if not resolved within amounts we have accrued, could have a material adverse effect on our financial position, results of operations or cash flows. Although we maintain insurance to cover litigation related claims, there can be no assurance that our insurance will be sufficient or adequate to cover all losses or liabilities or that insurance will continue to be available to us on acceptable terms, or at all. Similarly, any claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future.

 

Our operations are subject to weather and seasonality, which may affect our ability to timely complete projects.

 

Our seismic data acquisition services are performed outdoors, often in difficult or harsh climate conditions, and are therefore subject to weather and seasonality.  In Canada and Alaska, the primary season for seismic data acquisition is during the winter, as many areas are only accessible when the ground is frozen.  The weather conditions during this time of year can affect the timing and efficiency of operations.  In addition, this prime season can be shortened by warmer weather conditions.  In South America and Southeast Asia, our operations are affected by the periods of heavy rain in the areas where seismic operations are conducted.  

 

In all areas in which we operate, the weather is an uncontrollable factor that affects our operations at various times of the year.  Due to the unpredictability of weather conditions, there may be times when adverse conditions may cause our operations to be delayed and result in additional costs and may negatively affect our results of operations.  In addition, even if we negotiate weather protection provisions in our contracts, we may not be fully compensated by our clients for delays caused by inclement weather.

 

Our operations are subject to delays related to obtaining government permits and land access rights from third parties which could result in delays affecting our results of operations.

 

Our seismic data acquisition operations could be adversely affected by our inability to obtain timely right of way usage from both public and private land and/or mineral owners. We cannot begin surveys on property without obtaining any required permits from governmental entities as well as the permission of the private landowners who own the land being surveyed. In recent years, it has become more difficult, costly and time–consuming to obtain access rights of way as drilling activities have expanded into more populated areas. Additionally, while landowners generally are cooperative in granting access rights, some have become more resistant to seismic and drilling activities occurring on their property. In addition, governmental entities do not always grant permits within the time periods expected. Delays associated with obtaining such permits and rights of way may negatively affect our results of operations, as has occurred with the recent federal government shutdown that delayed permitting on a proposed seismic shoot in Alaska.

 

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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.

 

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 delays, payment defaults or cancellations on the underlying contracts could reduce the amount of backlog currently reported and, consequently, could inhibit the conversion of that backlog into revenues.  In addition, worsening overall market conditions could result in further reductions of backlog, which will impact our financial performance.

 

Capital requirements for the technology we use can be significant. If we are unable to finance these requirements, we may not be able to maintain our competitive advantage.

 

Seismic data acquisition technologies historically have steadily improved and progressed, and we expect this trend to continue.  Manufacturers of seismic equipment may develop new systems that have competitive advantages relative to systems now in use that either render the equipment we currently use obsolete or require us to make substantial capital expenditures to maintain our competitive position.  In order to remain competitive, we may need to continue to invest additional capital to maintain, upgrade and expand our seismic data acquisition capabilities.

 

Our capital requirements, which are primarily the cost of equipment, historically have been significant.  We attempt to minimize our capital expenditures by restricting our purchase of equipment to equipment that we believe will remain highly utilized, and we strategically rent equipment utilizing the most current technology to cover peak periods in equipment demands.  We may not be able to finance all our capital requirements, however, when and if needed, to acquire new equipment.  If we are unable to do so, there may be a material negative impact on our operations and financial condition.  Under our current business model, however, capital expenditures will be kept at minimum levels, other than for maintenance expenditures, until we see improvement in the market for seismic services.  While we own or can rent the equipment needed for our current levels of business, long–term limiting our capital expenditures may result in an increased competitive disadvantage.

 

A limited number of clients operating in a single industry account for a significant portion of our revenues, and the loss of one of these clients could adversely affect our results of operations.

 

We derive our revenues from a relatively small number of E&P companies.  Our largest customers can and typically do change from year to year and our largest customers in any one year may not be indicative of our largest customers in the future.  If any of our customers were to terminate their contract with us on a large project or fail to contract for our services in the future because they are acquired, alter their exploration or development strategy, experience financial difficulties, as a result of concerns over our current cash flow and liquidity difficulties or for any other reason, and we were not able to replace their business with business from other customers, our business, financial condition and results of operations could be materially and adversely affected.

We may be held liable for the actions of our subcontractors.

 

We often work as the general contractor on seismic data acquisition surveys and consequently engage a number of subcontractors to perform services and provide products.  While we generally obtain contractual indemnification and insurance covering the acts of those subcontractors and require the subcontractors to obtain insurance for our benefit, there can be no assurance we will not be held liable for the actions of those subcontractors.  In addition, subcontractors may cause damage or injury to our personnel and property that is not fully covered by insurance or by claims against the subcontractors.

 

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We, along with our customers, are subject to compliance with governmental laws and regulations that may expose us to significant costs and liabilities and may adversely affect the demand for our services.

 

Our operations, and those of our customers, are subject to a variety of federal, provincial, state and local laws and regulations relating to protection of the environment, particularly those relating to emissions to air, discharges of water, treatment, storage and disposal of regulated materials and remediation of soil and groundwater contamination.  Those laws and regulations may impose numerous obligations that are applicable to our operations including the acquisition of permits before commencing regulated activities and the limitation or prohibition of seismic activities in environmentally sensitive or protected areas such as wetlands or wilderness areas.

 

Numerous governmental authorities, such as the U.S. Environmental Protection Agency (the “EPA”) and analogous state agencies in the U.S. and governmental bodies with control over environmental matters in foreign jurisdictions, have the power to enforce compliance with those laws and regulations and any permits issued under them, oftentimes requiring difficult and costly actions.  We may incur substantial costs, including fines, damages, criminal or civil sanctions, remediation costs and natural resource damage claims, or experience interruptions in our operations for violations or liabilities arising under these laws and regulations.  Further, we may become liable for damages against which we cannot adequately insure or against which we may elect not to insure because of high costs or other reasons.  Our customers are subject to similar environmental laws and regulations.

 

We expend financial and managerial resources to comply with all the laws and regulations applicable to our operations.  Any changes in environmental laws and regulations or re–interpretation of enforcement policies that result in more stringent and costly regulations, or that change waste handling, storage, transport, disposal or remediation requirements could have a material adverse effect on our results of operations and financial position.  The fact that such laws or regulations change frequently makes it impossible for us to predict the cost or impact of such laws and regulations on our future operations.  The costs of complying with applicable environmental laws and regulations are likely to increase over time and we cannot provide any assurance that we will be able to remain in compliance with respect to existing or new laws and regulations or that such compliance will not have a material adverse effect on our business, financial condition and results of operations, or on the operations of our customers which could affect demand for our services.  Although regulatory developments that may occur in subsequent years could have the effect of reducing industry activity, we cannot predict the nature of any new restrictions or regulations that may be imposed.  We may be required to increase operating expenses or capital expenditures in order to comply with any new restrictions or regulations.

 

In addition, as a result of the mobility of our equipment, operations in foreign jurisdictions and the utilization of a multi–national work force, we and our customers are subject to various federal, provincial, state and local laws and regulations in the U.S. and foreign jurisdictions relating to the import or export of equipment and the immigration and employment of non–citizen employees or sub–contractors.  Numerous governmental authorities, such as the U.S. Customs and Border Protection, the Bureau of Industry and Security and the Office of Foreign Assets Control, and analogous governmental bodies in foreign jurisdictions have laws and regulations which prohibit or restrict operations in certain jurisdictions and doing business with certain persons in such jurisdictions, and we and our customers may be required to obtain and maintain licenses, permits, visas and similar documentation for operations.  We may incur substantial costs, including fines and damages, criminal or civil sanctions for violations or liabilities arising under these laws and regulations.

 

Current and future legislation or regulation relating to climate change and hydraulic fracturing could negatively affect the exploration and production of oil and natural gas and adversely affect demand for our services.

 

In response to concerns suggesting that emissions of certain gases, commonly referred to as “greenhouse gases” (“GHG”) (including carbon dioxide and methane), may be contributing to global climate change, legislative and regulatory measures to address the concerns are in various phases of discussion or implementation at the federal, state and international levels.  Many states, either individually or through multi–state regional initiatives, have already taken legal measures intended to reduce GHG emissions, primarily through the planned development of GHG emission inventories and/or GHG cap and trade programs.

 

This increasing focus on global warming may result in new environmental laws or regulations that may negatively affect us, our suppliers and our customers.  This could cause us to incur additional direct costs in complying with any new environmental regulations, as well as increased indirect costs resulting from our suppliers, customers or both incurring additional compliance costs that get passed on to us.  Moreover, passage of climate change legislation or other legislative or regulatory initiatives that regulate or restrict emissions of GHG may curtail production and demand for fossil fuels such as oil and natural gas in areas where our customers operate and thus adversely affect future demand for our services.  Reductions in our revenues or increases in our expenses as a result of climate control initiatives could have adverse effects on our business, financial position, results of operations and prospects.

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Hydraulic fracturing is an important and commonly used process in the completion of oil and natural gas wells.  Hydraulic fracturing involves the injection of water, sand and chemical additives under pressure into rock formations to stimulate oil and natural gas production.  Due to public concerns raised regarding potential impacts of hydraulic fracturing on groundwater quality, legislative and regulatory efforts at the federal level and in some states have been initiated to require or make more stringent the permitting, reporting and compliance requirements for hydraulic fracturing operations.

 

These legislative and regulatory initiatives imposing additional reporting obligations on, or otherwise limiting, the hydraulic fracturing process could make it more difficult or costly to complete oil and natural gas wells.  Shale natural gas and shale oil cannot be economically produced without extensive fracturing.  In the event such initiatives are successful, demand for our seismic acquisition services may be adversely affected.

 

We face various risks associated with increased activism against oil and natural gas exploration and development activities.

 

Opposition toward oil and natural gas drilling and development activity has been growing globally and is particularly pronounced in the United States. Companies in the oil and natural gas industry are often the target of activist efforts from both individuals and non–governmental organizations regarding safety, human rights, environmental matters, sustainability, and business practices. Anti–development activists are working to, among other things, reduce access to federal and state government lands and delay or cancel certain operations such as offshore drilling and development. For example, environmental activists have recently challenged lease sales, seismic acquisition activities and decisions to grant air quality permits in the U.S. Gulf of Mexico for offshore drilling and have challenged permitting and lease sales in the Arctic National Wildlife Refuge in Alaska.

 

Future activist efforts could result in the following:

 

 

reductions in governmental leasing permitting exploration and production activities;

 

 

delay or denial of government permits or land access rights;

 

 

restrictions on the use of certain operating practices;

 

 

legal challenges or lawsuits;

 

 

damaging publicity about us;

 

 

increased regulations;

 

 

increased costs of doing business;

 

 

reduction in demand for our services; and

 

 

other adverse effects on our ability to provide our services.

Our need to incur costs associated with responding to these initiatives or complying with any resulting new legal or regulatory requirements resulting from these activities that are substantial and not adequately provided for, could have a material adverse effect on our business, financial condition and results of operations.

 

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Our operations outside of the U.S. are subject to additional political, economic, and other risks and uncertainties that could adversely affect our business, financial condition, results of operations, or cash flows, and our exposure to such risks will increase as we expand our international operations.

 

Our operations outside of North America accounted for a substantial portion of our consolidated revenue.  Our international operations are subject to a number of risks inherent in any business operating in foreign countries, and especially those operating in emerging markets.  As we continue to increase our presence in those countries, our operations will continue to encounter the following risks, among others:

 

 

government instability or armed conflict, which can cause our potential customers to withdraw or delay investment in capital projects, thereby reducing or eliminating the viability of some markets for our services;

 

 

potential expropriation, seizure, nationalization or detention of assets;

 

 

risks relating to foreign currency, as described below;

 

 

high rates of inflation in certain foreign countries, which have significant negative effects on the economies of those countries and our operations in those countries;

 

 

import/export quotas or unexpected changes in regulatory environments and trade barriers;

 

 

civil uprisings, riots and war, which can make it unsafe to continue operations, adversely affect both budgets and schedules and expose us to losses;

 

 

availability of suitable personnel and equipment, which can be affected by government policy, or changes in policy, which limit the importation of qualified crew members or specialized equipment in areas where local resources are insufficient, and legal restrictions or other limitations on our ability to dismiss employees;

 

 

laws, regulations, decrees and court decisions under legal systems that are not always fully developed and that may be retroactively applied and cause us to incur unanticipated and/or unrecoverable costs, as well as delays which may result in real or opportunity costs; and

 

 

terrorist attacks, including kidnappings of our personnel.

 

If any of those or other similar events should occur, it could have a material adverse effect on our financial condition and results of operations.

 

We are subject to taxation in many foreign jurisdictions and the final determination of our tax liabilities involves the interpretation of the statutes and requirements of taxing authorities worldwide.  Our tax returns are subject to routine examination by taxing authorities, and those examinations may result in assessments of additional taxes, penalties and/or interest.

 

Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions.  We may not succeed in developing and implementing policies and strategies that are effective in each location where we do business, and we may experience project disruptions and losses, which could negatively affect our profitability.

 

Our results of operations can be significantly affected by foreign currency fluctuations and regulations.

 

A portion of our revenues is derived in the local currencies of the foreign jurisdictions in which we operate.  Accordingly, we are subject to risks relating to fluctuations in currency exchange rates.  In the future, and especially as we further expand our operations in international markets, our customers may increasingly make payments in non–U.S. currencies.  Fluctuations in foreign currency exchange rates could affect our revenues, operating costs and operating margins.  In addition, currency devaluation can result in a loss to us if we hold deposits of that currency.  Hedging foreign currencies can be difficult, especially if the currency is not actively traded.  We cannot predict the effect of future exchange rate fluctuations on our operating results.

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In addition, we are subject to risks relating to governmental regulation of foreign currency, which may limit our ability to:

 

 

transfer funds from or convert currencies in certain countries;

 

 

repatriate foreign currency received in excess of local currency requirements; and

 

 

repatriate funds held by our foreign subsidiaries to the United States at favorable tax rates.

 

As we continue to develop our operations in foreign countries, there is an increased risk that foreign currency controls may create difficulty in repatriating profits from foreign countries in the form of taxes or other restrictions, which could restrict our cash flow.

 

We may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other anti–corruption laws, and any determination that we violated the FCPA or other such laws could have a material adverse effect on our business, operations and reputation.

 

As a U.S. corporation, we are subject to the regulations imposed by the FCPA and other anti–corruption laws that prohibit U.S. companies and their intermediaries from making improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business.  

 

We operate in certain parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti–corruption laws may conflict with local customs and practices.  Thus, we face the risk of unauthorized payments or offers of payments by one of our employees or consultants, given that these parties may not always be subject to our control.  We could be held liable for actions taken by our strategic or local partners even though our partners are not subject to the FCPA or other anti–corruption laws.  Violations of the FCPA or other anti–corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.  

 

A cyber incident could result in loss or corruption of customer data or information theft, data corruption, operational disruption, and/or financial loss that affects us.

 

We have become increasingly dependent on our information systems and related infrastructure as well as cloud application and services, to process and record our customers’ seismic data, process our financial and operating data, communicate with our employees and for many other activities related to our business.  

As dependence on digital technologies has increased, cyber–attacks, including deliberate attacks or unintentional events, have also increased. A cyber–attack could include gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption, or result in denial of service on websites.

 

Our technologies, systems and networks may become the target of cyber–attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of customer proprietary and other information, or other disruption of our business operations.  In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period.  A cyber incident involving our information systems and related infrastructure could disrupt our business plans and negatively impact our operations, particularly if the incident affects our customers’ data.  Although to date we have not experienced any cyber–attacks, there can be no assurance that we will not be the target of cyber-attacks in the future or suffer such losses related to any cyber incident.  As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.

 

The enactment of legislation implementing changes in U.S. or foreign tax laws affecting the taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.

 

Changes to U.S. or foreign tax laws could impact the tax treatment of our foreign earnings. Due to the scope of our international business operations, any changes in the U.S. or foreign taxation of these operations may increase our worldwide effective tax rate and adversely affect our financial condition and operating results. The international scope of our operations and our corporate and financing structure may expose us to potentially adverse tax consequences. We are subject to taxation

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in and to the tax laws and regulations of multiple jurisdictions as a result of the international scope of our operations and our corporate and financing structure. We are also subject to intercompany pricing laws, including those relating to the flow of funds between our companies. Adverse developments in these laws or regulations, or any change in position regarding the application, administration or interpretation of these laws or regulations in any applicable jurisdiction, could have a material adverse effect on our business, financial condition and results of operations. In addition, the tax authorities in any applicable jurisdiction, including the United States, may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions, including the tax treatment or characterization of our indebtedness, intercompany loans and guarantees. If any applicable tax authorities, including the U.S. tax authorities, were to successfully challenge the tax treatment or characterization of any of our transactions, it could result in the disallowance of deductions and the imposition of tax, interest and penalties.

 

Our continued success depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.

 

Our continued success depends upon the continued services of our senior executives and other key personnel.  As a result of the circumstances giving rise to the restatement, we have undergone a reorganization of our senior level management.  Additional reorganization or the loss of additional senior level executives or key personnel could disrupt our operations, which in turn could materially and adversely affect our business, results of operations and financial condition.  In addition, competition for senior executives and key personnel in our industry is intense, and we may be unable to retain our senior executives and key personnel or attract and retain new senior executives and key personnel in the future, in which case our business may be severely disrupted.

 

Significant amounts of money were invested in acquiring and processing seismic data for the multiclient seismic data library maintained by ASV without knowing precisely how much of this seismic data will be able to be licensed or when and at what price such data will be licensed.

 

Significant amounts of money were invested in acquiring and processing seismic data for the multiclient seismic data library maintained by ASV. As a result, ASV is exposed to the following risks:

 

 

The costs of acquiring and processing seismic data may not be fully recovered through future licensing of seismic data. The amounts of these data sales are uncertain and depend on a variety of factors, many of which are beyond ASV’s control.

 

 

The timing of these sales is unpredictable and can vary greatly from quarter to quarter. The costs of each survey are capitalized and then amortized over no more than five years. This amortization will affect our earnings and when combined with the sporadic nature of sales, will result in increased earnings volatility.

 

Regulatory changes that affect companies’ ability to drill, either generally or in a specific location covered by the acquired seismic data, could materially adversely affect the value of the seismic data contained in the library maintained by ASV. In addition, technology changes could also make existing data sets less desirable or obsolete.

 

 

The value of the seismic data could be significantly adversely affected if any material adverse change occurs in the general prospects for oil and gas exploration, development and production activities.

 

The cyclical nature of the oil and natural gas industry can have a significant effect on our revenues and profitability. Historically, oil and natural gas prices, as well as the level of exploration and developmental activity, have fluctuated significantly. These fluctuations have in the past, and may in the future, adversely affect our business. We are unable to predict future oil and natural gas prices or the level of oil and natural gas industry activity. Prolonged periods of low commodity prices depress development activity, adversely affecting the demand for our products and services, including the multiclient seismic data library maintained by ASV, and our financial condition and results of operations.

 

The requirements of being a public company increase our operating expenses and divert management’s attention.

 

As a public company, we are subject to the requirements of the Exchange Act, the Sarbanes–Oxley Act, the Dodd–Frank Act and other applicable securities rules and regulations.  Compliance with these rules and regulations require us to incur significant additional legal, accounting and other expenses that we would not incur if we were not a public company.

 

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The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes–Oxley Act and the rules subsequently implemented by the SEC and the national securities exchanges, establish certain requirements for the corporate governance practices of public companies.  For example, as a result of becoming a public company, we have additional board committees and are required to maintain effective disclosure controls and procedures and internal control over financial reporting.  In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight are required.  As a result, management’s attention has been and will continue to be diverted from other business concerns, which could harm our business and operating results.

 

Because we are a smaller reporting company, to date our independent auditor has not been required to issue an attestation report regarding our internal control over financial reporting in the annual reports on Form 10–K that we file with the SEC, and we have been subject to scaled disclosure requirements.  We will remain a smaller reporting company as long as of the end of our second fiscal quarter each year (i) the market value of our securities held by non–affiliates (“public float”) is below $250.0 million or (ii) we have annual revenues of less than $100.0 million and our public float is less than $700.0 million. If we cease to be a smaller reporting company, our expenses will further increase, and additional time will be required of our management to comply with those additional requirements.

 

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our financial obligations.

 

As of September 30, 2019, we have $119.0 million in aggregate principal amount of long–term debt outstanding.  Our high level of indebtedness could affect our operations in several ways, including the following:

 

 

make it more difficult for us to satisfy our debt obligations and increase the risk that we may default on our debt obligations;

 

 

require us to use a substantial portion of our cash flow from operations to service our existing indebtedness, which reduces the funds available for working capital, capital expenditures and other general corporate purposes;

 

 

limit our ability to access the capital markets to raise capital on favorable terms or to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other expenses or to refinance existing indebtedness;

 

 

place restrictions on our ability to obtain additional financing, make investments, lease equipment, sell assets or engage in business combinations;

 

 

heighten our vulnerability to downturns in our business, our industry or in the general economy and restrict us from exploiting business opportunities or making acquisitions;

 

 

place us at a competitive disadvantage compared to those of our competitors with lower levels of indebtedness in relation to their overall size or less restrictive terms governing their indebtedness;

 

 

limit management’s discretion in operating our business; and

 

 

limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy.

 

Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance, which will be affected by a broad range of factors, including our ability to monetize our Tax Credits, prevailing economic conditions and financial, business and other factors affecting us and our industry, many of which are beyond our control.  If our operating results are not sufficient to service our existing and any future indebtedness, we will be forced to take actions such as reducing or delaying business activities or capital expenditures, selling assets or issuing equity, which could materially and adversely affect our financial condition, results of operations and cash flows.  We may not be able to affect any of these actions on satisfactory terms or at all.

 

23


 

Despite our current level of indebtedness, we may still be able to incur substantially more debt.  This could further exacerbate the risks associated with our substantial indebtedness.

 

We and our subsidiaries may be able to incur additional debt in the future, subject to certain limitations, including debt under our credit facility.  If new debt is added to our current debt levels, the related risks that we now face could increase.  Our level of indebtedness could, for instance, prevent us from engaging in transactions that might otherwise be beneficial to us or from making desirable capital expenditures.  This could put us at a competitive disadvantage relative to other less leveraged competitors that have more cash flow to devote to their operations.  In addition, the incurrence of additional indebtedness could make it more difficult to satisfy our existing financial obligations.  

 

Our debt agreements impose or may impose significant operating and financial restrictions on us and our subsidiaries that may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.

 

Our debt agreements contain covenants that restrict our and our restricted subsidiaries’ ability to take various actions, such as:

 

 

selling certain assets, including capital stock of restricted subsidiaries;

 

 

declaring or paying dividends on our common stock;

 

 

making certain investments;

 

 

incurring or guaranteeing additional indebtedness;

 

 

prepaying subordinated indebtedness;

 

 

creating or incurring liens;

 

 

agreeing to payment restrictions affecting our restricted subsidiaries;

 

 

consolidating, merging, selling or otherwise disposing of all or substantially all our assets;

 

 

entering into transactions with affiliates;

 

 

engaging in a business other than our current business and businesses related, ancillary or complementary, to our current businesses or immaterial businesses; and

 

 

designating certain of our subsidiaries as unrestricted subsidiaries.

 

In addition, our debt agreements restrict us and our restricted subsidiaries from taking or omitting to take certain actions that would adversely affect or impair in any material respect the collateral securing our indebtedness.

 

We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants contained in our debt agreements.  The requirement that we comply with these provisions may materially adversely affect our ability to plan for or react to market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business.  

24


 

 

If we are unable to comply with the restrictions and covenants in our debt agreements, there could be an event of default under the terms of such agreements, which could result in an acceleration of repayment.

 

If we are unable to comply with the restrictions and covenants in our debt agreements, there could be an event of default under the terms of those agreements.  Our ability to comply with these restrictions and covenants may be affected by events beyond our control.  As a result, we cannot assure that we will be able to comply with these restrictions and covenants.  In the event of a default under our debt agreements, lenders could terminate their commitments to lend or accelerate the loans and declare all amounts borrowed due and payable.  Borrowings under other debt that contain cross–acceleration or cross–default provisions may also be accelerated and become due and payable.  

 

If any of those events occur, our assets might not be sufficient to repay in full all our outstanding indebtedness and we may be unable to find alternative financing.  Even if we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us.  Additionally, we may not be able to amend our debt agreements or obtain needed waivers on satisfactory terms or without incurring substantial costs.  Failure to maintain existing or secure new financing could have a material adverse effect on our liquidity and financial position.

 

Risks Relating to Our Common Stock

 

Prices for our common stock may be volatile, and investors in our common stock could incur substantial losses.

 

Prices of our common stock, like that of the securities of other energy companies, have been and may continue to be highly volatile.  Factors such as announcements concerning changes in prices of oil and natural gas, exploration and development activities, the availability of capital, our cash flow and liquidity situation, our reverse stock splits and economic and other external factors, as well as quarterly or annual fluctuations in our financial results, may have a significant effect on the price of our common stock.  

 

There are limited trading markets for our securities.

 

From time to time, there has been limited trading volume in our common stock.  There can be no assurance that there will continue to be an active trading market for our common stock or that any securities research analysts will provide research coverage on our common stock.  It is possible that such factors will adversely affect the market for our common stock.  

 

In addition, there is currently no market for, and we do not intend to list, our outstanding warrants on any securities exchange or any automated dealer quotation system.  Accordingly, there may not be development of, or liquidity in, any market for the warrants.  If a market were to develop, the warrants could trade at prices that may be higher or lower than their initial price depending upon many factors, including the price of our common stock, prevailing interest rates, our operating results and markets for similar securities.

 

Ownership of our common stock is concentrated among our largest stockholders and their affiliates.

 

A small number of stockholders hold a majority of our common stock, warrants and 2023 Notes.  These stockholders have influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions.  This concentration of ownership may limit your ability to influence corporate matters, and as a result, actions may be taken that you may not view as beneficial.  Furthermore, these stockholders may sell their shares of common stock at any time. Such sales could be substantial and adversely affect the market price of our common stock.

 

We do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our stock appreciates.

 

We do not plan to declare dividends on shares of our common stock in the foreseeable future.  In addition, restrictive covenants in certain debt agreements to which we are, or may be, a party, may limit our ability to pay dividends or for us to receive dividends from our operating companies, any of which may negatively impact the trading price of our common stock.  Consequently, investors must rely on sales of their shares of common stock after price appreciation, which may never occur, as the only way to realize a return on their investment.

 

25


 

Provisions of our certificate of incorporation and bylaws could discourage potential acquisition proposals and could deter or prevent a change in control.

 

Some provisions in our certificate of incorporation and bylaws, as well as Delaware statutes, may have the effect of delaying, deferring or preventing a change in control.  These provisions, including those providing for the possible issuance of shares of our preferred stock and the right of the board of directors to amend the bylaws, may make it more difficult for other persons, without the approval of our board of directors, to make a tender offer or otherwise acquire a substantial number of shares of our common stock or to launch other takeover attempts that a stockholder might consider to be in his or her best interest.  These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.

 

Significant exercises of warrants or conversion of our 2023 Notes could adversely affect the market price of our common stock.

 

As of January 27, 2020, we had approximately 4.3 million shares of common stock outstanding; however, the total number of shares of our common stock issued and outstanding does not include approximately 4.5 million shares that may be issued upon the exercise of warrants or approximately 10.4 million shares issuable upon the conversion of our 2023 Notes. The exercise of warrants and the conversion of our 2023 Notes could adversely affect the price of our common stock, will reduce the percentage of common stock held by our current stockholders and may cause our current stockholders to suffer significant dilution, which may adversely affect the market price of our common stock.

 

We are currently not in compliance with the NASDAQ Capital Market listing standards. If our common stock is delisted, the market price and liquidity of our common stock and our ability to raise additional capital would be adversely impacted.  

 

Our common stock is currently listed on the NASDAQ Capital Market (“NASDAQ”). Continued listing of a security on NASDAQ is conditioned upon compliance with various continued listing standards. On August 16, 2019 and November 19, 2019, we received letters from NASDAQ (the “Notices”) stating that because we had not timely filed our Quarterly Reports on Form 10–Q for the quarterly periods ended June 30, 2019 and September 30, 2019 (the “Late Form 10–Qs”), we are no longer in compliance with NASDAQ Listing Rule 5250(c)(1), which requires listed companies to timely file all required public financial reports with the SEC.  

 

Pursuant to the Notices, we subsequently submitted a plan to regain compliance with NASDAQ Listing Rule 5250(c)(1) and requested documents and information to NASDAQ.  On January 20, 2020, we received a letter from NASDAQ stating that, based on its review and the materials we submitted, NASDAQ had granted us an extension to file the Late Form 10–Qs and regain compliance with NASDAQ Listing Rule 5250(c)(1) on or before February 11, 2020.  Concurrently with the filing of this Form 10–K/A, we are filing (i) an amendment to our Quarterly Report on Form 10–Q for the quarterly period ended March 31, 2019, and (ii) the Late Form 10–Qs and expect to regain compliance with NASDAQ Listing Rule 5250(c)(1); however, we cannot assure you that we will otherwise be in compliance with other NASDAQ continued listing standards.

 

If our common stock were to be delisted from NASDAQ, trading of our common stock most likely would be conducted in the over–the–counter market on an electronic bulletin board established for unlisted securities such as the OTC Bulletin Board. Such trading would likely reduce the market liquidity of our common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock. If our common stock is delisted from NASDAQ and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker–dealers in connection with any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities exchange or quoted on NASDAQ that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low–priced stocks to their clients. Moreover, various regulations and policies restrict the ability of stockholders to borrow against or “margin” low–priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers’ commissions on low–priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual stockholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker–dealers by these requirements could discourage broker–dealers from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade our common stock. As a result, the ability of our stockholders to resell their shares of common stock, and the price at which they could sell their shares, could be adversely affected. The delisting of our stock from NASDAQ would also make it more difficult for us to raise additional capital.

26


 

 

ITEM 2. PROPERTIES

 

We lease space for our principal executive offices in Houston, Texas and Calgary, Alberta, Canada.  We also lease numerous warehouse facilities and field offices throughout the geographic areas in which we operate.  Our leased properties are subject to various lease terms and expirations.  

 

As of December 31, 2018, our leased facilities categorized by geographic region are as follows:

 

Location

 

Offices

 

 

Warehouses

 

North America:

 

 

 

 

 

 

 

 

United States

 

 

4

 

 

 

3

 

Canada

 

 

1

 

 

 

2

 

South America:

 

 

 

 

 

 

 

 

Peru

 

 

1

 

 

 

2

 

Colombia

 

 

2

 

 

 

2

 

Bolivia

 

 

1

 

 

 

1

 

Asia Pacific:

 

 

 

 

 

 

 

 

Australia

 

 

1

 

 

 

1

 

Singapore

 

 

1

 

 

 

 

Other

 

 

1

 

 

 

 

 

We believe all properties that we currently occupy are suitable for their intended use.  We believe that our facilities are generally well maintained and adequate to meet our current and foreseeable requirements for the next several years.

 

ITEM 3. LEGAL PROCEEDINGS

 

Class Action Lawsuit

 

On August 18, 2019, a purported stockholder, John Bodin (the “Class Action Plaintiff”), filed a putative class action lawsuit against us and certain former executive officers named therein (the “Class Action Defendants”) in the U.S. District Court for the Southern District of Texas captioned John Bodin v. SAExploration Holdings, Inc., et al. Case No. 4:19–cv–03089. The Class Action Plaintiff seeks to represent a class of stockholders who purchased or otherwise acquired our publicly traded securities from March 15, 2016 through August 15, 2019 (the “Covered Period”). The complaint generally alleges that the Class Action Defendants violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b–5 by making false and misleading statements in our periodic reports filed with the SEC during the Covered Period. The complaint requests damages, including interest, and an award of reasonable costs and expenses, including counsel and expert fees.  

 

Derivative Lawsuit

 

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

 

27


 

Government Investigations

 

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 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.

 

Other

 

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.

28


 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock traded on the NASDAQ Global Market under the symbol “SAEX” until August 9, 2017 and now trades on the NASDAQ Capital Market under the symbol “SAEX.”  

 

At the close of business on March 19, 2019, based on information received from our transfer agent and brokers and nominees, we had approximately 128 holders of record of our common stock.  This is not the actual number of beneficial owners of our common stock as some shares are held in “street names” by brokers and others on behalf of individual owners.  

 

Dividend Policy

 

We have not declared or paid any cash dividends on our common stock, and we do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future.  The decision to pay dividends on our common stock is at the discretion of our board of directors and depends on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant.  

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following table presents historical selected financial data as of and for the periods indicated (in thousands, except per share amounts).  We have restated the selected financial data as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 as a result of our re–evaluation of our relationship with ASV and other items as more fully described in “Explanatory Note” and “Note 3. Restatement of Previously Reported Consolidated Financial Statements” and “Note 24. Quarterly Data” to our consolidated financial statements in “Item 8. Financial Statements and Supplementary Data,” both contained herein.  The selected historical financial data as of and for the years ended December 31, 2018 and 2017 were derived from our audited consolidated financial statements contained herein.  The selected financial data as of and for the years ended December 31, 2016, 2015 and 2014 were derived from our audited consolidated financial statements, adjusted for the effects of the restatement.  The selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data,” both contained herein.

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014 (2)

 

 

 

(Restated)

 

 

(Restated)

 

 

(Restated)

 

 

(Restated)

 

 

(Restated)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from services

 

$

98,670

 

 

$

127,022

 

 

$

161,615

 

 

$

171,344

 

 

$

386,820

 

Operating (loss) income (1)

 

 

(43,731

)

 

 

(3,971

)

 

 

(20,341

)

 

 

(11,902

)

 

 

16,667

 

Net loss

 

 

(59,560

)

 

 

(39,656

)

 

 

(55,416

)

 

 

(32,936

)

 

 

(38,917

)

Net loss available to common stockholders

 

 

(113,465

)

 

 

(41,628

)

 

 

(58,437

)

 

 

(31,468

)

 

 

(41,275

)

Basic and diluted loss per share

 

$

(32.91

)

 

$

(88.76

)

 

$

(9,070

)

 

$

(5,388

)

 

$

(7,583

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet Data (at end

   of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital (deficit)

 

$

4,776

 

 

$

(6,298

)

 

$

(2,919

)

 

$

(8,822

)

 

$

31,925

 

Total assets

 

 

102,347

 

 

 

81,263

 

 

 

126,360

 

 

 

130,830

 

 

 

191,453

 

Long-term debt, net

 

 

83,205

 

 

 

114,946

 

 

 

91,444

 

 

 

135,685

 

 

 

144,163

 

Total stockholders' deficit

 

 

(17,364

)

 

 

(56,061

)

 

 

(16,939

)

 

 

(51,805

)

 

 

(29,081

)

 

(1)

Includes approximately $1.1 million, $0.5 million, $0.4 million, $0.5 million and $0.2 million misappropriated by our former Chief Financial Officer and General Counsel in 2018, 2017, 2016, 2015 and 2014, respectively, and approximately $5.2 million and $6.8 million misappropriated by our former Chief Executive Officer and former Chief Financial Officer and General Counsel to Global Equipment in 2016 and 2015, respectively.  See “Explanatory Note” and “Note 3. Restatement of Previously Reported Consolidated Financial Statements” and “Note 24. Quarterly Data” to our consolidated financial statements in “Item 8. Financial Statements and Supplementary Data,” both contained herein.  

 

(2)

Includes $0.5 million misappropriated by our former Chief Executive Officer in 2013 that was previously recorded in income tax expense in 2014.  See “Explanatory Note” and “Note 3. Restatement of Previously Reported Consolidated Financial Statements” to our consolidated financial statements in “Item 8. Financial Statements and Supplementary Data,” both contained herein.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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.  

 

Restatement of Previously Consolidated Financial Statements

 

This “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been amended and restated to give effect to the restatement of our consolidated financial statements as more fully described in “Note 3. Restatement of Previously Reported Consolidated Financial Statements” to our consolidated financial statements in “Item 8.  Financial Statements and Supplementary Data” contained herein.  For further detail regarding the restatement adjustments, see “Explanatory Note” and “Item 9A. Controls and Procedures,” both 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 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.

 

Project visibility, while remaining constrained due to the uncertain sustainability of the recent rise in oil prices and seismic data acquisition budgets, has improved. Despite the improved environment, market conditions remain challenging and we continue to maintain a conservative approach. We have continued to explore ways to reduce costs and gain operating efficiencies through internal restructuring.

 

While our revenues are mainly affected by the level of customer demand for our services, our revenues are also affected by the bargaining power of our customers relating to our services, as well as the productivity and utilization levels of our data acquisition crews.  Factors impacting productivity and utilization levels include client demand, oil and natural gas prices, whether we enter into turnkey or 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.

 

While the markets for oil and natural gas have been very volatile and are likely to continue to be so in the future, we believe opportunities exist for us to enhance our market position by responding to our clients continuing desire for higher resolution subsurface images. If economic conditions weaken such that our clients reduce their capital expenditures or if there is a significant drop in oil and natural gas prices, these factors could result in diminished demand for our seismic services, could cause downward pressure on the prices we charge and would affect our results of operations.

30


 

 

Results of Operations

 

Net loss for 2018 was $59.6 million compared with $39.7 million for 2017.  The significant factors in this change were an increase of $16.0 million in selling, general and administrative (“SG&A”) expenses and decreases of $23.2 million in gross (loss) profit, $15.0 million in other expense, net and $4.9 million in income taxes.

 

Revenue from services for 2018 decreased $28.3 million compared with 2017.  In North America, revenue from services increased $16.4 million due to an increase in the number of projects performed in Canada and the contiguous United States of America (the “Lower 48”) offset by a decrease in the number of projects in Alaska.  While activity in Canada increased when comparing 2018 with 2017 due to marginal improvements in market conditions in Canada, activity in Alaska continued to decrease mainly due to uncertainties and changes in Alaska’s legislation affecting oil and natural gas exploration activities.  The increase in revenues in the Lower 48 is related to our increased market share due to the purchase of certain assets from GEOK in July 2018.    

 

Revenue from services in South America decreased $10.1 million due to a decrease in the amount of work performed in Colombia and no active projects in Bolivia in 2018.  Activity in Colombia in 2018 continued to decrease when compared with 2017 due to a fewer number of active customers.  Revenue from services in West Africa decreased $35.1 million due to a large ocean bottom marine project in Nigeria that was completed in 2017.  Revenue from services in Asia Pacific increased $0.5 million due to projects in Australia and India offset by no active projects in New Zealand in 2018 when compared with 2017.  

 

Gross (loss) profit for 2018 decreased $23.2 million compared with 2017.  Gross (loss) profit as a percentage of revenue from services was (1.1)% for 2018 compared with 17.4% for 2017.  Gross (loss) profit as a percentage of revenue from services decreased due to a decline in our revenue from services, resulting in a reduced ability to absorb our fixed costs, and tightening margins on projects. Although our cost of services primarily varies with our revenue from services, the substantial decrease in revenue from services we have experienced has caused significant decreases in our gross (loss) profit and gross (loss) profit margins.

 

SG&A expenses for 2018 increased $16.0 million compared with 2017.  The increase was primarily attributable to (i) $8.2 million of higher equity–based compensation costs, (ii) $2.3 million of legal and consultant costs related to the SEC investigation and (iii) an overall increase in expenses related to increased activity.  

 

As disclosed elsewhere in this Form 10–K/A, our former Chief Financial Officer and General Counsel misappropriated funds.  For more information, see “Explanatory Note” and Note 3, both contained herein.

 

Other expense, net for 2018 decreased $15.0 million compared with 2017 primarily due to a $15.5 million decrease in interest expense partially offset by a $2.1 million increase in foreign currency loss.  Of the $15.5 million decrease in interest expense, $11.0 million related to lower amortization of debt issuance costs primarily from the extension of our senior loan facility in September 2017 and $4.5 million related to the decrease in long–term debt outstanding from our debt exchange in January 2018. Of the $2.1 million increase in foreign currency loss, $3.5 million related to an increase in foreign currency losses in Canada and Brazil offset by a $1.6 million decrease in foreign currency losses from the trading of Nigerian currency in 2017.

Income taxes for 2018 decreased $4.9 million compared with 2017 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.  Our effective tax rates in 2018 and 2017 were 0.2% and (13.6)%, respectively.  Our effective tax rates differ from our U.S. statutory rate due to the effects of differences between U.S. and foreign tax rates, net of federal benefit, and recording of the valuation allowance against U.S. and foreign deferred tax assets.  

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 the United States.  The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures about contingent assets and liabilities.  Certain of our accounting policies involve estimates and assumptions to such an extent that there is reasonable

31


 

likelihood that materially different amounts could have been reported under different conditions or if different assumptions had been used.  We base these estimates and assumptions on historical experience and on various other information and assumptions that we believe to be reasonable at the time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as additional information is obtained, as more experience is acquired, as our operating environment changes and as new events occur.  

 

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.

 

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.

 

32


 

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 Guideline Public Company (“GPC”) methodology using GPCs that are considered to be similar to us and whose stock are actively traded.  Under the income approach, the fair value of the Reporting Unit is based on the expected present value of the future net cash flows. Significant assumptions associated with the calculation of the fair value include estimates of the appropriate valuation multiples for the GPCs, future prices and costs, appropriate risk–adjusted discount rates and other relevant data. Given the nature of these estimates and their application to specific assets and liabilities and time frames, it is not possible to reasonably quantify the impact of changes in these assumptions.

 

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.

 

Liquidity and Capital Resources

 

Our principal source of cash is from the seismic data acquisition services we provide to customers, supplemented as necessary by drawing against our credit facility.  Our cash is primarily used to provide additional seismic data acquisition services, including the payment of expenses related to operations and the acquisition of new seismic data equipment, and to pay the interest on outstanding debt obligations.  Our cash position and revenues depend on the level of demand for our services.  Historically, cash generated from operations, along with cash reserves and borrowings from commercial, private, and related parties, have been sufficient to fund our working capital and to acquire or lease seismic data equipment.

 

As of December 31, 2018, we had working capital of $4.8 million compared with $(6.3) million as of December 31, 2017.  The increase in working capital was related to an $20.4 million increase in accounts receivable, net partially offset by higher accounts payable, accrued liabilities and the current portion of long–term debt.  

 

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, as we have done by the acquisition of certain assets from GEOK.  Even with the addition of these assets, we currently estimate that our capital expenditures for 2019 will not exceed $3.0 million.  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.

33


 

 

As previously disclosed, as a result of certain circumstances giving rise to, or occurring as a result of, the restatement, certain events of default had occurred under our credit facility, senior loan facility, 2023 Notes and Senior Notes.  We repaid in full the Senior Notes at maturity in September 2019.  In September 2019, we entered into forbearance agreements with respect to our credit facility, senior loan facility and 2023 Notes, whereby the holders of the indebtedness thereunder agreed to refrain from exercising their rights and remedies with respect to events of default that have occurred and other potential defaults or events of default that may occur as further specified in the forbearance agreements until 5:00 p.m. (New York City time) on the earlier of (i) November 30, 2019 and (ii) the date the forbearance agreements otherwise terminated in accordance with their terms.  The November 30, 2019 deadline was ultimately extended to February 7, 2020.  On February 7, 2020, we entered into amendments and waivers to our credit facility, senior loan facility and the indenture governing the 2023 Notes to, among other things, waive existing events of default thereunder and amend certain covenants requiring us to deliver financial statements, reports, projections and other items thereunder.  We currently have $9.5 million of available borrowing capacity under our credit facility, subject to the satisfaction of certain conditions precedent, including the absence of a default and the accuracy of representations and warranties.  Under the terms of the Fifth Amendment to our credit facility entered into in December 2019, we are also able to request the issuance of additional incremental commitments in an aggregate principal amount of up to $5.0 million which each lender may, in its sole and absolute discretion, agree to issue its pro rate share.  

 

We continue to diligently pursue improving our capitalization and reducing our long–term debt, but liquidity issues may continue to challenge us.  Until we are able to finally resolve the issues described above, we could continue to experience liquidity and cash flow issues.

 

Long–term Debt

 

As of December 31, 2018, we have $108.3 million in aggregate principal amount of long–term debt outstanding.  For additional information about our long–term debt, please see “Item 8. Financial Statements and Supplementary Data” contained herein.

 

Cash Flows

 

Cash flows provided by (used in) by type of activity were as follows for the years ended December 31 (in thousands):

 

 

 

2018

 

 

2017

 

 

 

(Restated)

 

Operating activities

 

$

(30,143

)

 

$

(1,754

)

Investing activities

 

 

(22,181

)

 

 

(760

)

Financing activities

 

 

56,774

 

 

 

(6,178

)

 

Operating Activities

 

Cash flows from operating activities for 2018 decreased $28.4 million when compared with 2017.  The significant factors in the change were the decrease in our revenues from services and the increase in our SG&A expenses offset by the decrease in our cost of services and interest expense.  

 

Investing Activities

 

In 2018, cash flows used in investing activities consisted of $21.7 million for the acquisition of certain assets from GEOK and $1.3 million for the purchase of property and equipment offset by proceeds of $0.8 million from the sale of property and equipment.  In 2017, cash flows used in investing activities consisted of $2.7 million for the purchase of property and equipment offset by proceeds of $1.9 million from the sale of property and equipment.  

 

Financing Activities

 

In 2018, cash flows provided by financing activities consisted of $123.4 million of long–term debt borrowings offset by $59.2 million of long–term debt repayments, $2.7 million of debt issuance costs, $1.7 million of stock issuance costs, $1.8 million for the purchase of treasury stock and $1.2 million of distributions to our noncontrolling interest.  

34


 

 

In 2017, cash flows used in investing activities consisted of long–term debt repayments of $34.3 million, $1.2 million of debt issuance costs, $2.9 million of stock issuance costs, distribution to our noncontrolling interest of $1.1 million and purchases of treasury stock of $0.1 million offset by $33.4 million of long–term debt borrowings.  

 

Off–Balance Sheet Arrangements

 

As of December 31, 2018, we did not have any off–balance sheet arrangements.

 

Recently Issued Accounting Pronouncements

 

Please see “Item 8.  Financial Statements and Supplementary Data” contained herein for additional information.

35


 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of SAExploration Holdings, Inc.:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of SAExploration Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Changes in Accounting Principles

 

As discussed in Note 2 to the consolidated financial statements, in the first quarter of 2018, the Company changed its method of accounting for revenue due to the adoption of Accounting Standards Update 2014–09, Revenue from Contracts with Customers.  Also, as discussed in Note 2 to the consolidated financial statements, in the first quarter of 2018, the Company changed its method of accounting for income taxes due to the adoption of Accounting Standards Update 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.

 

Emphasis of Matter

 

As discussed in Note 3, the accompanying consolidated financial statements have been restated. In connection with the restatement of the accompanying consolidated financial statements, the Company has identified several material weaknesses in internal control over financial reporting related to the ineffectiveness of controls over: a) the review of revenue contracts, accounts receivable, and related journal entries used to record revenue transactions; b) complex accounting and management estimates, including those relating to variable interest entities and review and approval of entering into transactions with newly formed entities; c) financial statement close and reporting; d) customer and vendor set–up, approval and maintenance; e) identification and disclosure of related parties and related party transactions; f) controls to prevent unauthorized access to approve certain transactions, including appropriate analysis of segregation of duties conflicts; and g) controls to prevent unauthorized access to certain systems, programs and data, including periodic review and monitoring of access rights.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audits of the consolidated financial statements.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

36


 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ Pannell Kerr Forster of Texas, P.C.

 

We have served as the Company’s auditor since 2014.

 

Houston, Texas

March 25, 2019, except for the effects of the matters described in Note 3, as to which the date is February 7, 2020

37


 

SAExploration Holdings, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

(Restated)

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,579

 

 

$

3,693

 

Restricted cash

 

 

271

 

 

 

41

 

Accounts receivable, net

 

 

26,463

 

 

 

6,105

 

Deferred costs on contracts

 

 

3,746

 

 

 

1,780

 

Prepaid expenses and other current assets

 

 

2,843

 

 

 

3,853

 

Total current assets

 

 

40,902

 

 

 

15,472

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

35,334

 

 

 

32,946

 

Multiclient seismic data library, net

 

 

4,733

 

 

 

5,829

 

Goodwill

 

 

1,687

 

 

 

1,832

 

Intangible assets, net

 

 

4,066

 

 

 

671

 

Tax credits receivable, net

 

 

13,198

 

 

 

19,089

 

Deferred income taxes

 

 

2,160

 

 

 

2,338

 

Other assets

 

 

267

 

 

 

3,086

 

Total assets

 

$

102,347

 

 

$

81,263

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,103

 

 

$

4,553

 

Accrued liabilities

 

 

10,498

 

 

 

6,311

 

Income and other taxes payable

 

 

3,331

 

 

 

8,434

 

Current portion of long-term debt

 

 

7,837

 

 

 

995

 

Deferred revenue

 

 

4,357

 

 

 

1,477

 

Total current liabilities

 

 

36,126

 

 

 

21,770

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

83,205

 

 

 

114,946

 

Other long-term liabilities

 

 

380

 

 

 

608

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Common stock, 3,100,496 and 471,177 shares outstanding, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

232,661

 

 

 

133,742

 

Accumulated deficit

 

 

(249,349

)

 

 

(189,178

)

Accumulated other comprehensive loss

 

 

(3,035

)

 

 

(5,082

)

Treasury stock, 111,245 and 1,901 shares, respectively

 

 

(1,866

)

 

 

(113

)

SAExploration stockholders’ deficit

 

 

(21,589

)

 

 

(60,631

)

Noncontrolling interest

 

 

4,225

 

 

 

4,570

 

Total stockholders’ deficit

 

 

(17,364

)

 

 

(56,061

)

Total liabilities and stockholders’ deficit

 

$

102,347

 

 

$

81,263

 

 

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

38


 

SAExploration Holdings, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(Restated)

 

Revenue from services

 

$

98,670

 

 

$

127,022

 

Cost of services

 

 

87,601

 

 

 

93,229

 

Depreciation and amortization

 

 

12,207

 

 

 

11,725

 

Gross (loss) profit

 

 

(1,138

)

 

 

22,068

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

41,513

 

 

 

25,557

 

Misappropriation of funds

 

 

1,080

 

 

 

482

 

Total operating expenses

 

 

42,593

 

 

 

26,039

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(43,731

)

 

 

(3,971

)

 

 

 

 

 

 

 

 

 

Other (expense) income, net:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(13,858

)

 

 

(29,363

)

Foreign exchange loss, net

 

 

(3,417

)

 

 

(1,308

)

Other income (expense), net

 

 

1,326

 

 

 

(272

)

Total other expense, net

 

 

(15,949

)

 

 

(30,943

)

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(59,680

)

 

 

(34,914

)

 

 

 

 

 

 

 

 

 

Income taxes

 

 

(120

)

 

 

4,742

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(59,560

)

 

 

(39,656

)

 

 

 

 

 

 

 

 

 

Less: net income attributable to noncontrolling interest

 

 

905

 

 

 

1,972

 

 

 

 

 

 

 

 

 

 

Net loss attributable to SAExploration

 

$

(60,465

)

 

$

(41,628

)

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$

(32.91

)

 

$

(88.76

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic and diluted)

 

 

3,448

 

 

 

469

 

 

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

39


 

SAExploration Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

(In thousands)

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(Restated)

 

Net loss

 

$

(59,560

)

 

$

(39,656

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

2,047

 

 

 

(260

)

Comprehensive loss

 

 

(57,513

)

 

 

(39,916

)

Less: comprehensive income attributable to noncontrolling interest

 

 

905

 

 

 

1,972

 

Comprehensive loss attributable to SAExploration

 

$

(58,418

)

 

$

(41,888

)

 

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

 

 

40


 

SAExploration Holdings, Inc.

Consolidated Statements of Changes in Stockholders’ Deficit

(In thousands)

 

 

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Deficit

(Restated)

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Treasury

Stock

 

 

SAExploration

Stockholders’

Deficit

(Restated)

 

 

Noncontrolling

Interest

 

 

Total

Stockholders’

Deficit

(Restated)

 

Balances at December 31, 2016

 

$

 

 

$

131,817

 

 

$

(147,550

)

 

$

(4,822

)

 

$

 

 

$

(20,555

)

 

$

3,616

 

 

$

(16,939

)

Net (loss) income

 

 

 

 

 

 

 

 

(41,628

)

 

 

 

 

 

 

 

 

(41,628

)

 

 

1,972

 

 

 

(39,656

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(260

)

 

 

 

 

 

(260

)

 

 

 

 

 

(260

)

Equity-based compensation

   cost

 

 

 

 

 

1,925

 

 

 

 

 

 

 

 

 

 

 

 

1,925

 

 

 

 

 

 

1,925

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(113

)

 

 

(113

)

&n