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SAEXPLORATION HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 07, 2014]

SAEXPLORATION HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Management's Discussion and Analysis of Financial Condition should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" in Part I, Item 1A of our 2013 Annual Report on Form 10-K, as amended, and in Part II, Item 1A in this Form 10-Q. See "Forward-Looking Statements" below. Amounts are in thousands, except for share amounts and as otherwise noted.



Highlights The following discussion is intended to assist in understanding our financial position at September 30, 2014, and our results of operations for the three and nine months ended September 30, 2014. Financial and operating results for the three months ended September 30, 2014 include: • Revenues from services for the three months ended September 30, 2014 increased to $107,812 from $47,429 in 2013.

13--------------------------------------------------------------------------------• Gross profit for the three months ended September 30, 2014 increased to 12.2% from a negative gross profit of (9.1)% in 2013.


• Operating income for the three months ended September 30, 2014 was $3,146 compared to an operating loss of $(12,858) in 2013.

• Net loss for the three months ended September 30, 2014 was $(21,546) compared to net loss of $(30,102) in 2013.

• Adjusted EBITDA for the three months ended September 30, 2014 increased to $7,429 compared to $(8,327) for 2013.

• Cash and cash equivalents totaled $28,380 as of September 30, 2014 compared to $16,762 as of September 30, 2013.

Overview We are an internationally-focused oilfield services company offering a full range of seismic data acquisition and logistical support services in Alaska, Canada, South America, and Southeast Asia to our customers in the oil and natural gas industry. We were initially formed on February 2, 2011 as a blank check company in order to effect a merger, capital stock exchange, asset acquisition or other similar business combination with one or more business entities. On June 24, 2013, the Merger with Former SAE was consummated, at which time our business became the business of Former SAE.

The Merger was accounted for as a reverse acquisition in accordance with U.S.

GAAP. Under this method of accounting, we were treated as the "acquired" company for financial reporting purposes. This determination was primarily based on Former SAE comprising the ongoing operations of the combined entity, Former SAE senior management comprising the senior management of the combined company, and the Former SAE common stockholders having a majority of the voting power of the combined entity. In accordance with guidance applicable to these circumstances, the Merger was considered to be a capital transaction in substance. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Former SAE issuing stock for our net assets, accompanied by a recapitalization. Our net assets were stated at fair value, with no goodwill or other intangible assets recorded. Operations prior to the Merger are those of Former SAE. The equity structure after the Merger reflects our equity structure.

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 of up to 5,000 feet. In addition, we offer a full suite of logistical support and in-field processing services. Our customers include major integrated oil companies, national oil companies and independent oil and gas exploration and production companies. Our services are primarily used by our customers to identify and analyze drilling prospects and to maximize successful drilling, making demand for such services dependent upon the level of customer spending on exploration, production, development and field management activities, which is influenced by the fluctuation in oil and natural gas commodity prices. Demand for our services is also impacted by long-term supply concerns based on national oil policies and other country-specific economic and geo-political conditions. We have expertise in logistics and focus upon providing a complete service package, particularly in our international operations, which allows efficient movement into remote areas, giving us what we believe to be a strategic advantage over our competitors and providing us with opportunities for growth. Many of the areas of the world where we work have limited seasons for seismic data acquisition, requiring high utilization of key personnel and redeployment of equipment from one part of the world to another.

All of our remote area camps, drills and support equipment are easily containerized and made for easy transport to locations anywhere in the world. As a result, if conditions deteriorate in a current location or demand rises in another location, we are able to quickly redeploy our crews and equipment to other parts of the world. By contrast, we tend to subcontract out more of our services in North America than in other regions, and our North American revenues tend to be more dependent upon data acquisition services rather than our full line of services.

While our revenues from services are mainly affected by the level of customer demand for our services, operating revenue is 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. Our logistical expertise can be a mitigating factor in service price negotiation with our customers, allowing us to maintain larger margins in certain regions of the world, particularly in the most remote or most challenging climates of the world. Factors impacting the productivity and utilization levels of our crews include permitting delays, downtime related to inclement weather, decrease in daylight working hours during winter months, time and expense of repositioning crews, the number and size of each crew, and the number of recording channels available to each crew. We have the ability to optimize the utilization of personnel and equipment, which is a key factor to stabilizing margins in the various regions in which we operate.

Specifically, we are investing in equipment that is lighter weight and more easily shipped between the different regions. The ability to reduce both the costs of shipment and the amount of shipping time increases our operating margins and utilization of equipment. Similar logic applies to the utilization of personnel. We focus on employing field managers who are mobile and have the expertise and knowledge of many different markets within our operations. This allows for better timing of operations and the ability of 14 -------------------------------------------------------------------------------- management staff to run those operations while at the same time minimizing personnel costs. An added benefit of a highly mobile field management team is better internal transfer of skill and operational knowledge and the ability to spread operational efficiencies rapidly between the various regions.

Our contracts are either term (variable pricing) or turnkey (fixed price).

Revenue is recognized on the term contracts at the rate provided in the particular contract. Under turnkey contracts, we recognize revenue based upon measurable outputs from the project. Generally, these outputs are verified by a customer representative in the field on a daily or weekly basis. Once the progress from the field is acknowledged by the customer representative, the information is then used to assemble the monthly invoices.

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, services are subcontracted within North America and our personnel are used in other regions where we operate. When subcontractors are used, we manage them and require that they comply with our work policies and QHSE objectives.

Our customers continue to request increased recording channel capacity on a per crew or project basis in order to produce higher resolution images, to increase crew efficiencies and to allow us to undertake larger scale projects. In order to meet these demands, we routinely deploy a variable number of land and marine channels through various sources with multiple crews in an effort to maximize asset utilization and meet customer needs. We believe that increased channel counts and more flexibility of deployment will result in increased crew efficiencies, which we believe should translate into higher revenues and margins.

The acquisition of seismic data for the oil and gas industry is a highly competitive business. Factors such as price, experience, availability, 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. 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. Our primary competitors are Compagnie Générale de Géophysique (CGG), Geokinetics, Inc., Global Geophysical Services, Inc. and ION Geophysical Corporation. In addition to those companies, we also compete for projects from time to time with smaller seismic companies that operate in local markets.

Contracts We conduct data acquisition 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 cancelled by either party on short notice, is entered into for every data acquisition 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 "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. We attempt to negotiate on a project-by-project basis some level of weather downtime protection within the turnkey agreements. 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.

How We Generate Revenues We provide a full range of seismic data acquisition services, including infield processing services, and related logistics services. We currently provide our services on only a proprietary basis to our customers and the seismic data acquired is owned by our customers once acquired.

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 and time-lapse 4D 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 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.

15 -------------------------------------------------------------------------------- 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.

In areas like South America and Papua New Guinea, 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 we need to stabilize any potential injuries 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, services are subcontracted within Alaska and Canada and our personnel are used in other regions where we operate. When subcontractors are used, we manage them and require that they comply with our work policies and QHSE objectives. In Alaska and Canada, the surveying and drilling crews are typically provided by third party contractors but are supervised by our personnel. In Alaska and Canada, our vibroseis source units consist of the latest source technology, including eight AHV IV 364 Commander Vibrators and six environmentally friendly IVI mini vibrators, complete with the latest Pelton DR electronics. In South America and Southeast Asia, 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.

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. Onshore, geophones are manually buried, or partially buried, to ensure good coupling with the surface and to reduce wind noise. Offshore, the reflected signals are recorded by either hydrophones towed behind a survey vessel or by geophones placed directly on the seabed. We increasingly employ ocean bottom nodes positioned by remote operated vehicles on the seafloor in our marine acquisition operations. We have available over 29,500 owned land and marine seismic recording channels with the ability to access additional equipment through rental or long-term leasing sources. All of 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. We utilize 11,500 channels of Sercel 428/408 equipment, 6,000 channels of Fairfield Land Nodal equipment and 2,000 units of Fairfield Ocean Bottom Nodal equipment and 10,000 channels of Oyo GSR equipment.

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.

During the past three years, we dedicated a significant portion of our capital investment to purchasing and leasing wireless recording systems rather than the traditional wired systems. We utilize this equipment as primarily stand-alone recording systems, but on occasion it is used in conjunction with cable-based 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.

16 -------------------------------------------------------------------------------- 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. We maintain a surplus of equipment, and augment our needs with leased equipment from time to time, to provide additional operational flexibility and to allow us to quickly deploy additional recording channels and energy source units as needed to respond to customer demand.

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 Processing. Our knowledgeable and experienced team provides our customers with superior quality in-field 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 of the steps employed in our in-field processing sequence are tailored to the particular customer project and objectives.

Results of Operations The following tables set forth, for the periods indicated, certain financial data derived from our unaudited condensed consolidated statements of operations.

Percentages shown in the table below are percentages of total revenue.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013 Our operating results for the three months ended September 30, 2014 and 2013 are highlighted below (amounts in thousands): Three Months Ended September 30, 2014 % of Revenue 2013 % of Revenue Revenue from services: North America $ 39,856 37.0 % $ 32,545 68.6 % South America 67,956 63.0 % 9,463 20.0 % Southeast Asia - - % 5,421 11.4 % Total revenue 107,812 100.0 % 47,429 100.0 % Gross profit (loss) 13,203 12.2 % (4,316 ) (9.1 )% Selling, general and administrative expenses 10,057 9.3 % 7,951 16.8 % Merger costs - - % 591 1.2 % Income (loss) from operations 3,146 2.9 % (12,858 ) (27.1 )% Other income (expense) (22,786 ) (21.1 )% (4,406 ) (9.3 )% Provision for income taxes 1,906 1.8 % 12,838 27.1 % Less net income attributable to noncontrolling interest 1,862 1.7 % - - % Net loss attributable to the Corporation $ (23,408 ) (21.7 )% $ (30,102 ) (63.5 )% Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013 Our operating results for the nine months ended September 30, 2014 and 2013 are highlighted below (amounts in thousands): 17 -------------------------------------------------------------------------------- Nine Months Ended September 30, 2014 % of Revenue 2013 % of Revenue Revenue from services: North America $ 119,797 40.1 % $ 85,934 49.2 % South America 178,068 59.6 % 64,690 37.1 % Southeast Asia 750 0.3 % 23,951 13.7 % Total revenue 298,615 100.0 % 174,575 100.0 % Gross profit 51,292 17.2 % 25,366 14.5 % Selling, general and administrative expenses 30,267 10.2 % 22,169 12.7 % Merger costs - - % 1,174 0.6 % Income from operations 21,025 7.0 % 2,023 1.2 % Other income (expense) (35,158 ) (11.8 )% (13,962 ) (8.0 )% Provision for income taxes 5,168 1.7 % 13,620 7.8 % Less net income attributable to noncontrolling interest 3,555 1.2 % - - % Net loss attributable to the Corporation $ (22,856 ) (7.7 )% $ (25,559 ) (14.6 )% Revenue from Services.

North America: Revenues in North America for the three and nine months ended September 30, 2014 increased by $7,311 or 22.5% and $33,863 or 39.4%, respectively, compared to $32,545 and $85,934, respectively, for the three and nine months ended September 30, 2013. The increase in revenues was due principally to increased 2014 revenues in Alaska resulting from an overall increase in seismic activity and market share in the North Slope region compared to 2013, partially offset by significantly reduced revenues in Canada. The market in the North Slope region of Alaska experienced significant growth during the 2014 winter season as a result of favorable market and regulatory conditions for oil and gas producers. In 2014, the Canadian market was adversely impacted by regulatory issues that slowed the government approval process, which resulted in cancelled and delayed projects.

South America: Revenues in South America for the three and nine months ended September 30, 2014 increased by $58,493 or 618.1% and $113,378 or 175.3%, respectively, compared to $9,463 and $64,690, respectively, for three and nine months ended September 30, 2013. The increase in revenues during 2014 was due mainly to major projects in Peru and Bolivia and overall increased exploration activity in South America.

Southeast Asia: Revenues in Southeast Asia for the three and nine months ended September 30, 2014 decreased by $(5,421) or (100.0)% and $(23,201) or (96.9)%, respectively, compared to $5,421 and $23,951, respectively, for three and nine months ended September 30, 2013. The decrease in revenue for Southeast Asia was due primarily to Papua New Guinea and Malaysia, which had major projects during 2013 compared to no activity in 2014. Southeast Asia remains a burgeoning, yet competitive market for shallow-water seismic activity.

Gross Profit. Gross profit was $13,203, or 12.2% of revenues for the three months ended September 30, 2014 compared to a negative gross profit of $(4,316), or a negative (9.1)% of revenues, for the three months ended September 30, 2013.

Factors contributing to the improvement in gross profit as a percentage of revenue during the three month period were: • In 2013, costs were incurred on a shallow-water fixed-fee project in Malaysia as a result of a lead vessel experiencing more than a week's downtime for repair. The downtime in Malaysia resulted in the entire seismic acquisition crew being placed on stand-by for the duration of the repairs. These costs amounted to approximately $6,300.

• In 2013, 52% of our revenues were in Canada during its off-season. Canada experiences a more competitive market during this time than is typical of its winter operations, resulting in lower margins.

For the nine months ended September 30, 2014, gross profit was $51,292, or 17.2% of revenues, compared to gross profit of $25,366, or 14.5% of revenues, for the nine months ended September 30, 2013. The lower 2013 gross profit as a percentage of revenues was primarily due to costs incurred on the shallow-water fixed-fee project in Malaysia discussed above.

Within the seismic data services industry, gross profit is presented both with or without depreciation and amortization expense on equipment used in operations. Our gross profit is presented after reduction for depreciation and amortization expense on equipment used in operations. The following table discloses gross profit on both bases: 18 -------------------------------------------------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, 2014 % of Revenue 2013 % of Revenue 2014 % of Revenue 2013 % of Revenue Gross profit (loss) as presented $ 13,203 12.2 % $ (4,316 ) (9.1 )% $ 51,292 17.2 % $ 25,366 14.5 % Depreciation and amortization expense included in cost of services 4,276 4.0 % 3,442 7.3 % 11,236 3.7 % 10,378 6.0 % Gross profit (loss) excluding depreciation and amortization expense included in cost of services $ 17,479 16.2 % $ (874 ) (1.8 )% $ 62,528 20.9 % $ 35,744 20.5 % Selling, General and Administrative Expenses. For the three months ended September 30, 2014, selling, general and administrative ("SG&A") expenses increased by $2,106 to $10,057 or 9.3% of revenues compared to $7,951 or 16.8% of revenues for the three months ended September 30, 2013. For the nine months ended September 30, 2014, SG&A increased by $8,098 to $30,267 or 10.2% of revenues compared to $22,169 or 12.7% of revenues for the nine months ended September 30, 2013. The decrease in SG&A expenses as a percentage of revenues was due to the overall increase in revenue and the benefits from our previously planned scaling of internal infrastructure we are building to manage our continuing growth. The increase in 2014 SG&A expenses was due to higher administrative costs to support our continued growth in South America, higher compensation expenses, and expenses related to additional accounting and financial staff and outside consultants, attorneys and auditors to satisfy our increased obligations as a public company.

Merger Costs. Expenses of $591 and $1,174 were incurred during the three and nine months ended September 30, 2013 in connection with the merger of Trio Merger Corp. and SAExploration Holdings, Inc. as discussed in Note 2 to the unaudited condensed consolidated financial statements.

Other Income (Expense). Other income (expense) increased by expense of $(18,380) for the three months ended September 30, 2014 and by expense of $(21,196) for the nine months ended September 30, 2014. The increase in expense in the three and nine month periods was primarily due to the loss on early extinguishment of debt recorded in the three and nine months ended September 30, 2014 of $17,157, which resulted from the repayment and termination of the 2012 Credit Agreement on July 2, 2014 as discussed further in Note 5 to the unaudited condensed consolidated financial statements. Additionally, for the nine months ended September 30, 2014, expense of $5,094 was recorded to reflect the change in the fair value of notes payable to Former SAE stockholders to the amount repaid with the proceeds of the senior secured notes compared to expense of $492 for the three and nine months ended September 30, 2013.

Provision for Income Taxes. For the three months ended September 30, 2014, the provision for income taxes was $1,906 representing a negative 9.7% effective tax rate compared to the provision for income taxes of $12,838 for the three months ended September 30, 2013 at a negative 74.4% effective tax rate. The decrease in the provision for income taxes of $10,932 was primarily due to the larger increase in the valuation allowance recorded in 2013. For the nine months ended September 30, 2014, the provision for income taxes was $5,168 representing a negative 36.6% effective tax rate compared to the provision for income taxes of $13,620 for the nine months ended September 30, 2013 at a negative 114.1% effective tax rate. The decrease in the provision for income taxes of $8,452 was primarily due to the larger increase in the valuation allowance recorded in 2013.

We record income tax expense for interim periods on the basis of an estimated annual effective tax rate. The estimated annual effective tax rate is recomputed on a quarterly basis and may fluctuate due to changes in forecasted annual operating income, positive or negative changes to the valuation allowance for net deferred tax assets, and changes to actual or forecasted permanent book to tax differences. In addition, we reflect the tax effect of discrete items such as merger expenses, specific capital issuance expenses and accelerated finance charges in the quarter these events occur. We believe that without positive evidence, it is more likely than not that the benefit from certain net operating losses ("NOL") carryforwards and foreign tax credits may not be realized. In recognition of this risk, we maintain a full valuation allowance for the deferred tax assets relating to these NOL carryforwards and foreign tax credits of certain countries, which caused the unusually high effective tax rate.

Net Loss Attributable to the Corporation. For the three months ended September 30, 2014, net loss attributable to the Corporation was $23,408 compared to $30,102 for the three months ended September 30, 2013. For the nine months ended September 30, 2014, net loss attributable to the Corporation was $22,856 compared to $25,559 for the nine months ended September 30, 2013.

The decrease in net loss for the three months ended September 30, 2014 was primarily due to the following factors: • Higher revenues, primarily in Peru and Alaska; • Higher gross profit, and lower SG&A expenses as a percentage of revenues; and 19 --------------------------------------------------------------------------------• Proportionately lower provision for income taxes; partially offset by • Loss on early extinguishment of debt resulting from the repayment of notes in connection with the issuance of the senior secured notes.

The decrease in net loss for the nine months ended September 30, 2014 was primarily due to the following factors: • Higher revenues, primarily in Alaska, Peru and Bolivia; • Higher gross profit, and lower SG&A expenses as a percentage of revenues; and • Proportionately lower provision for income taxes; partially offset by • Loss on early extinguishment of debt and change in fair value of notes payable to Former SAE stockholders resulting from the repayment of notes in connection with the issuance of senior secured notes.

Adjusted EBITDA. For the three months ended September 30, 2014, adjusted EBITDA was $7,429 compared to $(8,327) for the three months ended September 30, 2013.

For the nine months ended September 30, 2014, adjusted EBITDA was $34,423 compared to $15,394 for the nine months ended September 30, 2013. The increase was due primarily to higher revenue earned during the 2014 periods, improved gross profit due in part to the downtime costs incurred in 2013 of approximately $6,300 on the shallow-water fixed-fee project in Malaysia, and lower 2014 SG&A as a percentage of revenue resulting from the scaling of internal infrastructure we are building to manage our continuing growth.

Liquidity and Capital Resources Cash Flows. Cash used in operations for the first nine months of 2014 was $15,945, compared to cash used in operations of $7,133 for the first nine months of 2013, an increase in cash used in operations of $8,812. Cash provided by net loss and net cash adjustments to net loss increased to $9,831 for the nine months ended September 30, 2014 compared to cash used by net loss and net cash adjustments to net loss of $7,370 for the nine months ended September 30, 2013 as a result of higher income from operations in 2014. Net changes in operating assets and liabilities resulted in cash used of $25,776 for the nine months ended September 30, 2014 compared to cash provided of $237 for the nine months ended September 30, 2013, primarily due to higher accounts receivable from increased revenues and longer contractual payment terms in accordance with standard business practices for South American customers.

Working Capital. Working capital as of September 30, 2014 was $65,672 compared to $27,111 as of December 31, 2013. The increase in working capital during 2014 was principally the result of the increase in income from operations and the cash proceeds from the issuance of senior secured notes in July 2014.

Capital Expenditures. Cash used in investing activities for the first nine months of 2014 was $15,756, compared to cash used in investing activities of $3,906 for the first nine months of 2013, an increase in cash used of $11,850.

The increase was due to higher capital expenditures for the nine months ended September 30, 2014 of $15,828 compared to $3,906 for the nine months ended September 30, 2013. The increased capital expenditures consisted primarily of deposits on equipment for the Alaska operations, camp and drilling equipment purchases in Peru and Colombia in line with our focus on South American operations, and a combination of mechanical equipment, computer equipment and electronics associated with our wireless strategy in Southeast Asia and North and South America. Utilizing the proceeds of the senior secured notes discussed below, we intend to expend an additional $20 million on equipment for the Alaska market during the fourth quarter of 2014 .

Our focus on providing leading edge technology will be at the forefront of our capital expenditure plans in the coming years, which investments will continue to strengthen our position and growth in the global oil and gas exploration services market. Focusing on worldwide oil and gas markets, we will continue to employ and expand our wireless equipment on a worldwide basis while maintaining the ability to provide services to the still existing cable markets. Our capital purchases have and will allow us to take advantage of all aspects of the geophysical exploration services market, ranging from land, marine and transition zone data acquisition; 2D, 3D, 4D and multi-component data acquisition; and use of different methods to acquire data such as using vibroseis (vibrating) and impulsive sources; as well as vertical seismic profiling and reservoir monitoring. Investments in expanding further into our South America and Southeast Asia markets will also focus upon surveying, drilling and base camp operations.

During the last three years, in line with our focus on wireless land data acquisition, we purchased a cableless seismic data acquisition system which allows up to three crews to operate under the system at the same time. Following customer needs for higher density land programs using a single point receiver application and to answer the demand for conventional and unconventional oil and gas exploration, we purchased high sensitivity geophones and two types of vibrators, further strengthening our position as a full solution provider for land data acquisition methods and technologies. Additional equipment investments were made for ongoing operations in Alaska in order to increase efficiency. We also invested in cable equipment in order to provide customers in Latin America with cable systems as wireless technology is slower to take hold in that market.

20 -------------------------------------------------------------------------------- Financing. Cash provided by financing activities for the first nine months of 2014 was $42,215, compared to cash provided by financing activities of $12,376 for the first nine months of 2013, an increase in cash provided of $29,839. The increase in cash provided in the first nine months of 2014 was primarily due to the issuance of the senior secured notes discussed further below, less debt repaid with the proceeds and loan issuance costs incurred on the transaction.

The increase in cash provided in the first nine months of 2013 was primarily from the net proceeds of the Merger, less Merger costs and dividends paid to Former SAE common and preferred stockholders.

On July 2, 2014, we issued senior secured notes ("Notes") totaling $150,000 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. The proceeds of these Notes were used to pay the amounts owed under the 2012 Credit Agreement, the notes payable to Former SAE stockholders, and related professional fees and expenses, and will be used to fund the purchase of equipment for our Alaska operations and for general corporate purposes.

The Notes bear interest at the annual rate of 10.0% payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2015.

The Notes are guaranteed on a senior secured basis with a lien on substantially all assets of SAExploration Holdings, Inc. and each of our existing and future domestic subsidiaries, except for any immaterial subsidiaries ("Guarantors").

The liens securing the senior secured notes are subject to certain exceptions and permitted liens, which are contractually subordinated to a first priority lien on certain assets should we enter into a new credit facility in the future.

We have the right to redeem some or all of the Notes at the redemption prices (expressed as percentages of the principal amount to be redeemed) set forth below, together with accrued and unpaid interest to, but not including, the redemption date, if redeemed on or after January 15, 2017 as indicated: Period Percentage On or after January 15, 2017 and prior to July 15, 2017 107.50% On or after July 15, 2017 and prior to July 15, 2018 105.00% On and after July 15, 2018 100.00% We also have the right to redeem some or all of the Notes at any time or from time to time prior to January 15, 2017, at a redemption price equal to 100% of the principal amount thereof plus an applicable premium determined in accordance with the Indenture and accrued and unpaid interest to, but not including, the redemption date. In addition, we have the right to redeem from time to time up to 35% of the aggregate outstanding principal amount of the Notes before January 15, 2017, with the net proceeds of an equity offering at a redemption price equal to 110% of the principal amount thereof, plus accrued but unpaid interest to, but not including, the redemption date.

Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of Notes will have the right to require us to purchase that holder's Notes for a cash price equal to 101% of the principal amounts to be purchased, plus accrued and unpaid interest to the date of purchase. Upon the occurrence of an Asset Sale (as defined in the Indenture), each holder of Notes will have the right to require us to purchase that holder's Notes for a cash price equal to 100% of the principal amounts to be purchased, plus accrued and unpaid interest to the date of purchase, prepayment or redemption, from any proceeds from the Asset Sale in excess of $7.5 million that are not otherwise used by us to either reduce our debt, reinvest in assets or acquire a permitted business.

The Indenture contains various covenants, including, but not limited to, covenants that, subject to certain exceptions, limit our ability and our restricted subsidiaries, including the Guarantors, to, among other things: (i) transfer or sell assets; (ii) pay dividends, redeem subordinated indebtedness or make other restricted payments; (iii) incur or guarantee additional indebtedness or, with respect to our restricted subsidiaries, issue preferred stock; (iv) create or incur liens; (v) incur dividend or other payment restrictions affecting its restricted subsidiaries; (vi) consummate a merger, consolidation or sale of all or substantially all of its or its subsidiaries' assets; (vii) enter into transactions with affiliates; (viii) engage in business other than its current business and reasonably related extensions thereof; and (ix) take or omit to take any actions that would adversely affect or impair in any material respect the collateral securing the Notes.

In connection with the issuance of the Notes, we entered into a registration rights agreement in which we agreed to use our best efforts to register with the SEC a new series of freely tradable notes ("Exchange Notes"), which will be exchanged for the current Notes. We and the Guarantors further agreed to use best efforts to: (i) file a registration statement for the Exchange Notes with the SEC within 300 days after the issuance of the Notes; (ii) cause the registration statement to be declared effective within 390 days after the issue date of the Notes; and (iii) close the exchange offer 30 days after such registration statement is declared 21 --------------------------------------------------------------------------------effective. In certain circumstances, we may be required to file a shelf registration statement to cover resale of the Notes. If the deadlines set forth above are not met, additional interest as defined in the Indenture will be payable until the obligations described above are fulfilled.

Use of EBITDA (Non-GAAP measure) as a Performance Measure We use an adjusted form of EBITDA to measure period over period performance, which is not derived in accordance with U.S. GAAP. Adjusted EBITDA is defined as net income (loss) plus interest expense, less interest income, plus loss on early extinguishment of debt, plus unrealized loss on change in fair value of notes payable to Former SAE stockholders, plus income taxes, plus depreciation and amortization, plus non-recurring major expenses outside of operations, plus non-recurring one-time expenses and unrealized foreign exchange gain or loss.

Our management uses adjusted EBITDA as a supplemental financial measure to assess: • the financial performance of our assets without regard to financing methods, capital structures, taxes, historical cost basis or non-recurring expenses; • our liquidity and operating performance over time in relation to other companies that own similar assets and calculate EBITDA in a similar manner; and • the ability of our assets to generate cash sufficient to pay potential interest cost.

We consider adjusted EBITDA as presented below to be the primary measure of period-over-period changes in our operational cash flow performance.

The terms EBITDA and adjusted EBITDA are not defined under U.S. GAAP, and we acknowledge that these are not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating performance or liquidity, investors and others should not consider this data in isolation or as a substitute for net income (loss), cash flow from operating activities or other cash flow data calculated in accordance with U.S.

GAAP. In addition, our calculation of adjusted EBITDA may not be comparable to EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner. Further, the results presented by adjusted EBITDA cannot be achieved without incurring the costs that the measure excludes.

The computation of our adjusted EBITDA (a non-GAAP measure) from net income (loss), the most directly comparable U.S. GAAP financial measure, is provided in the table below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 Net loss $ (21,546 ) $ (30,102 ) $ (19,301 ) $ (25,559 ) Depreciation and amortization 4,579 (1) 3,701 12,125 (1) 11,159 Interest expense, net 4,196 4,185 12,367 10,997 Loss on early extinguishment of debt 17,157 (2) - 17,157 (2) - Unrealized loss on change in fair value of notes payable to Former SAE stockholders - (3) 492 5,094 (3) 492 Provision for income taxes 1,906 12,838 5,168 13,620 Foreign exchange (gain) loss, net 1,252 (120 ) 1,052 1,179 Non-recurring expense (115 ) (5) 679 (4) 761 (5) 3,506 (4) Adjusted EBITDA $ 7,429 $ (8,327 ) $ 34,423 $ 15,394 (1) Depreciation and amortization expense was charged to the statements of operations as follows: Three Months Ended Nine Months Ended September 30, September 30, 2014 2014 2014 2013 Cost of services $ 4,276 $ 3,442 $ 11,236 $ 10,378 Selling, general and administrative expenses 303 259 889 781 Total depreciation and amortization $ 4,579 $ 3,701 $ 12,125 $ 11,159 22 --------------------------------------------------------------------------------(2) The repayment and termination of the 2012 Credit Agreement on July 2, 2014 resulted in a $17,157 charge to loss on early extinguishment of debt in the three and nine month periods ended September 30, 2014. The charge consisted of prepayment penalties of $8,877, write-off of unamortized loan discount and issuance costs totaling $7,983, and legal fees of $297.

(3) The notes payable to Former SAE stockholders were recorded at fair value as discussed in Note 5 to the condensed consolidated financial statements. All amounts outstanding under the notes payable to Former SAE stockholders were repaid on July 2, 2014 from proceeds of the issuance of the senior secured notes and the promissory note terminated.

(4) 2013 non-recurring expenses primarily consist of third-party financing costs, share-based compensation expense related to the accelerated vesting of Former SAE's restricted shares in connection with the Merger, costs associated with the Merger, and one-time severance costs related to the reduction of staff in Colombia.

(5) 2014 non-recurring expenses primarily consist of the settlement of disputed fees with a former financial advisor to the Corporation. As of June 30, 2014, we recorded a liability of $657 related to this settlement which was paid during the third quarter of 2014. During the three months ended September 30, 2014, legal expenses of $120 were reclassified to loss on early extinguishment of debt.

Critical Accounting Policies There have been no changes to the critical accounting policies used in our reporting of results of operations and financial position. For a discussion of critical accounting policies see the section entitled "SAE's Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2013 Annual Report on Form 10-K, as amended.

Recently Issued Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)." ASU 2014-09 establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016, using one of two retrospective application methods. Early adoption is not permitted. We are currently reviewing this standard to assess the impact of adoption on our consolidated financial statements.

Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements.

Forward-Looking Statements This report contains "forward-looking statements" within the meaning of the federal securities laws, with respect to our financial condition, results of operations, cash flows and business, and our expectations or beliefs concerning future events. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "intends," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases. There are inherent risks and uncertainties in any forward-looking statements. Although we believe that our expectations are reasonable, we can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. Except as required by law, we undertake no obligation to update, amend or clarify any forward-looking statements to reflect events, new information or otherwise. Some of the important factors that could cause actual results to differ materially from our expectations are discussed below. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

Factors that could cause actual results to vary materially from our expectations include the following: • fluctuations in the levels of exploration and development activity in the oil and gas industry; • substantial international business exposing us to currency fluctuations and global factors, including economic,political and military uncertainties; • intense industry competition; • need to manage rapid growth; • delays, reductions or cancellations of service contracts; • operational disruptions due to seasonality and other external factors; • crew productivity; 23--------------------------------------------------------------------------------• whether we enter into turnkey or term contracts; • limited number of customers; • credit risk related to our customers; • high fixed costs of operations; • the availability of capital resources; • ability to retain key executives; and • need to comply with diverse and complex laws and regulations.

You should refer to our other periodic and current reports filed with the SEC and the risk factors from our 2013 Annual Report on Form 10-K, as amended, for specific risks which would cause actual results to be significantly different from those expressed or implied by any of our forward-looking statements. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Accordingly, readers of this report are cautioned not to place undue reliance on the forward-looking statements.

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