Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-33460
GEOKINETICS INC.
(Name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
|
|
94-1690082
(I.R.S. Employer
Identification No.)
|
1500 CityWest Blvd., Suite 800
Houston, TX 77042
Telephone number:
(713) 850-7600
Website:
www.geokinetics.com
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted
and posted 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 and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of accelerated filer, large accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes
o
No
x
At
November 5, 2010, there were 17,697,731 shares of common stock, par value
$0.01 per share, outstanding.
Table
of Contents
Geokinetics Inc. and Subsidiaries
Condensed Consolidated Balance
Sheets
(In thousands, except share amounts)
|
|
December
31,
|
|
September
30,
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
(Unaudited)
|
|
ASSET
S
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,176
|
|
$
|
53,772
|
|
Restricted cash
|
|
121,837
|
|
3,574
|
|
Accounts receivable, net of allowance for doubtful
accounts of $1,167 at December 31, 2009 and $3,894 at September 30,
2010
|
|
143,944
|
|
126,216
|
|
Deferred costs
|
|
14,364
|
|
36,527
|
|
Prepaid expenses and other current assets
|
|
10,488
|
|
22,610
|
|
Total current assets
|
|
300,809
|
|
242,699
|
|
Property and equipment, net
|
|
187,833
|
|
278,786
|
|
Restricted cash to be used for PGS Onshore
acquisition
|
|
183,920
|
|
|
|
Goodwill
|
|
73,414
|
|
126,988
|
|
Multi-client data library, net
|
|
6,602
|
|
47,221
|
|
Deferred financing costs, net
|
|
10,819
|
|
10,874
|
|
Other assets, net
|
|
8,293
|
|
16,614
|
|
Total assets
|
|
$
|
771,690
|
|
$
|
723,182
|
|
|
|
|
|
|
|
LIABILITIES, MEZZANINE AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Short-term debt and current portion of long-term
debt and capital lease obligations
|
|
$
|
68,256
|
|
$
|
27,572
|
|
Accounts payable
|
|
55,390
|
|
69,951
|
|
Accrued liabilities
|
|
61,814
|
|
78,077
|
|
Deferred revenue
|
|
14,081
|
|
48,384
|
|
Income taxes payable
|
|
15,335
|
|
7,328
|
|
Total current liabilities
|
|
214,876
|
|
231,312
|
|
Long-term debt and capital lease obligations, net
of current portion
|
|
296,601
|
|
296,421
|
|
Deferred income tax
|
|
6,486
|
|
21,394
|
|
Other long-term liabilities
|
|
|
|
1,122
|
|
Mandatorily redeemable preferred stock
|
|
32,104
|
|
32,278
|
|
Derivative liability
|
|
9,317
|
|
8,514
|
|
Total liabilities
|
|
559,384
|
|
591,041
|
|
|
|
|
|
|
|
Commitments & Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity:
|
|
|
|
|
|
Preferred stock, Series B Senior Convertible,
$10.00 par value; 2,500,000 shares authorized, 290,197 shares issued and
outstanding as of December 31, 2009 and 311,940 shares issued and
outstanding as of September 30, 2010
|
|
66,976
|
|
72,935
|
|
Stockholders equity:
|
|
|
|
|
|
Common stock, $.01 par value; 100,000,000 shares
authorized, 15,578,528 shares issued and 15,296,839 shares outstanding as of
December 31, 2009 and 18,135,084 shares issued and 17,697,731 shares
outstanding as of September 30, 2010
|
|
156
|
|
179
|
|
Additional paid-in capital
|
|
215,859
|
|
232,509
|
|
Accumulated deficit
|
|
(70,705
|
)
|
(173,502
|
)
|
Accumulated other comprehensive income
|
|
20
|
|
20
|
|
Total stockholders equity
|
|
145,330
|
|
59,206
|
|
Total liabilities, mezzanine and stockholders
equity
|
|
$
|
771,690
|
|
$
|
723,182
|
|
See accompanying notes to the condensed consolidated financial
statements.
3
Table of
Contents
Condensed Consolidated Statements
of Operations
(In thousands, except per share amounts)
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Seismic acquisition
|
|
$
|
94,338
|
|
$
|
132,111
|
|
$
|
380,796
|
|
$
|
352,566
|
|
Data processing
|
|
2,511
|
|
1,909
|
|
7,812
|
|
6,750
|
|
Total revenue
|
|
96,849
|
|
134,020
|
|
388,608
|
|
359,316
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Seismic acquisition
|
|
65,203
|
|
110,585
|
|
271,507
|
|
291,965
|
|
Data processing
|
|
2,010
|
|
1,998
|
|
6,420
|
|
6,869
|
|
Depreciation and amortization
|
|
16,315
|
|
26,360
|
|
41,678
|
|
70,562
|
|
General and administrative
|
|
13,205
|
|
19,980
|
|
39,113
|
|
61,022
|
|
Total Expenses
|
|
96,733
|
|
158,923
|
|
358,718
|
|
430,418
|
|
Loss on disposal of property and equipment
|
|
(1,406
|
)
|
(700
|
)
|
(2,142
|
)
|
(1,750
|
)
|
Income (loss) from operations
|
|
(1,290
|
)
|
(25,603
|
)
|
27,748
|
|
(72,852
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
12
|
|
477
|
|
198
|
|
1,429
|
|
Interest expense
|
|
(1,244
|
)
|
(10,037
|
)
|
(4,526
|
)
|
(30,007
|
)
|
Loss on early redemption of debt
|
|
|
|
|
|
|
|
(2,517
|
)
|
Gain (loss) from change in fair value of
derivative liabilities
|
|
(4,999
|
)
|
(3,454
|
)
|
(9,628
|
)
|
1,370
|
|
Foreign exchange gain (loss)
|
|
1,169
|
|
407
|
|
1,299
|
|
(412
|
)
|
Other, net
|
|
96
|
|
2,272
|
|
192
|
|
2,817
|
|
Total other expenses, net
|
|
(4,966
|
)
|
(10,335
|
)
|
(12,465
|
)
|
(27,320
|
)
|
Income (loss) before income taxes
|
|
(6,256
|
)
|
(35,938
|
)
|
15,283
|
|
(100,172
|
)
|
Provision for income taxes
|
|
1,482
|
|
311
|
|
18,281
|
|
2,625
|
|
Net loss
|
|
(7,738
|
)
|
(36,249
|
)
|
(2,998
|
)
|
(102,797
|
)
|
Returns to preferred stockholders:
|
|
|
|
|
|
|
|
|
|
Dividend and accretion costs
|
|
(2,463
|
)
|
(2,317
|
)
|
(7,261
|
)
|
(6,525
|
)
|
Loss applicable to common stockholders
|
|
$
|
(10,201
|
)
|
(38,566
|
)
|
$
|
(10,259
|
)
|
$
|
(109,322
|
)
|
|
|
|
|
|
|
|
|
|
|
For Basic and Diluted Shares:
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
$
|
(0.95
|
)
|
$
|
(2.18
|
)
|
$
|
(0.95
|
)
|
$
|
(6.31
|
)
|
Weighted average common shares outstanding
|
|
10,776
|
|
17,698
|
|
10,542
|
|
17,337
|
|
See accompanying notes to the condensed consolidated financial statements.
4
Table
of Contents
Geokinetics Inc. and Subsidiaries
Condensed Consolidated Statements
of Cash Flows
(In thousands)
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
Net loss
|
|
$
|
(2,998
|
)
|
$
|
(102,797
|
)
|
Adjustments to reconcile net loss to net cash
provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
41,675
|
|
70,562
|
|
Loss on prepayment of debt, amortization of
deferred financing costs, and accretion of debt discount
|
|
349
|
|
5,613
|
|
Stock-based compensation
|
|
1,611
|
|
2,059
|
|
Loss on sale of assets and insurance claims
|
|
2,092
|
|
1,750
|
|
(Gain) Loss from change in fair value of derivative
liabilities
|
|
9,628
|
|
(1,370
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Restricted cash
|
|
7,907
|
|
(1,620
|
)
|
Accounts receivable
|
|
(25,878
|
)
|
81,984
|
|
Prepaid expenses and other assets
|
|
(2,274
|
)
|
(4,221
|
)
|
Accounts payable
|
|
(12,879
|
)
|
(3,163
|
)
|
Accrued and other liabilities
|
|
40,210
|
|
(9,807
|
)
|
Net cash provided by operating activities
|
|
59,443
|
|
38,990
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
Investment in multi-client data library
|
|
(7,490
|
)
|
(30,637
|
)
|
Acquisition, net of cash acquired
|
|
|
|
(180,832
|
)
|
Proceeds from disposal of property and equipment
and insurance claims
|
|
885
|
|
1,210
|
|
Purchase of other assets
|
|
|
|
(3,295
|
)
|
Purchases and acquisition of property and
equipment
|
|
(26,517
|
)
|
(40,999
|
)
|
Change in restricted cash held for purchase of PGS
Onshore
|
|
|
|
303,803
|
|
Net cash (used in) provided by investing
activities
|
|
(33,122
|
)
|
49,250
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
Proceeds from borrowings
|
|
118,840
|
|
26,000
|
|
Stock issuance costs
|
|
(145
|
)
|
(92
|
)
|
Proceeds from stock issuance
|
|
|
|
1,806
|
|
Payments of debt issuance costs
|
|
|
|
(3,047
|
)
|
Payments on capital lease obligations and vendor
financings
|
|
(30,251
|
)
|
(24,447
|
)
|
Payments on debt
|
|
(108,711
|
)
|
(44,864
|
)
|
Net cash used in financing activities
|
|
(20,267
|
)
|
(44,644
|
)
|
Net increase in cash
|
|
6,054
|
|
43,596
|
|
Cash at beginning of period
|
|
13,341
|
|
10,176
|
|
Cash at end of period
|
|
$
|
19,395
|
|
$
|
53,772
|
|
|
|
|
|
|
|
Supplemental disclosures related to cash flows:
|
|
|
|
|
|
Interest paid
|
|
$
|
4,671
|
|
$
|
15,355
|
|
Taxes paid
|
|
$
|
5,838
|
|
$
|
11,386
|
|
Purchase of equipment under capital lease and
vendor financing obligations
|
|
$
|
4,569
|
|
$
|
|
|
Capitalized depreciation on multi-client data
library
|
|
$
|
|
|
709
|
|
See accompanying notes to the condensed consolidated financial
statements.
5
Table of
Contents
Geokinetics Inc. and Subsidiaries
Condensed
Consolidated Statements of Stockholders Equity
and Other Comprehensive Income
(In thousands, except share data)
(Unaudited)
|
|
Common
Shares
Issued
|
|
Common
Stock
|
|
Additional
Paid-in Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
|
|
Balance
at January 1, 2010
|
|
15,578,528
|
|
$
|
156
|
|
$
|
215,859
|
|
$
|
(70,705
|
)
|
$
|
20
|
|
$
|
145,330
|
|
Stock-based
compensation
|
|
|
|
|
|
2,059
|
|
|
|
|
|
2,059
|
|
Restricted
stock issued, net
|
|
195,740
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of preferred issuance costs
|
|
|
|
|
|
(1,089
|
)
|
|
|
|
|
(1,089
|
)
|
Accrual
of preferred dividends
|
|
|
|
|
|
(5,436
|
)
|
|
|
|
|
(5,436
|
)
|
Issuance
of common stock to underwriters under overallotment option
|
|
207,200
|
|
2
|
|
1,804
|
|
|
|
|
|
1,806
|
|
Issuance
of common stock for PGS Onshore Acquisition
|
|
2,153,616
|
|
21
|
|
19,405
|
|
|
|
|
|
19,426
|
|
Cost
of issuance of securities
|
|
|
|
|
|
(93
|
)
|
|
|
|
|
(93
|
)
|
Net
loss
|
|
|
|
|
|
|
|
(102,797
|
)
|
|
|
(102,797
|
)
|
Balance
at September 30, 2010
|
|
18,135,084
|
|
$
|
179
|
|
$
|
232,509
|
|
$
|
(173,502
|
)
|
$
|
20
|
|
$
|
59,206
|
|
See accompanying notes to the condensed consolidated financial
statements
6
Table
of Contents
GEOKINETICS INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1:
Organization
and Recent Developments
Organization
Geokinetics Inc.
(collectively with its subsidiaries, the Company), a Delaware corporation,
founded in 1980, is based in Houston, Texas. The Company is a global provider
of seismic data acquisition, processing and interpretation services, and a
leader in providing land, marsh and swamp (Transition Zone) and shallow water
ocean bottom cable (OBC) environment acquisition services to the oil and
natural gas industry. Seismic data is used by oil and natural gas exploration
and production (E&P) companies to identify and analyze drilling prospects
and maximize successful drilling. The Company, which has been operating in some
regions for over twenty years, provides seismic data acquisition services in
North, Central and South America, Africa, the Middle East, Australia/New
Zealand and the Far East. The Company primarily performs three-dimensional (3D)
seismic data surveys for customers in the oil and natural gas industry, which
include many national oil companies, major international oil companies and
smaller independent E&P companies. In addition, the Company performs a
significant amount of work for seismic data library companies that acquire
seismic data to license to other E&P companies, and it also maintains its
own multi-client data library whereby the Company maintains full or partial ownership
of data acquired for future licensing. The Companys multi-client data library
consists of data covering various areas in the United States and Canada.
Recent
developments
On June 30 and September 30,
2010, the Company was unable to satisfy certain maintenance covenants in its
revolving credit facility (RBC Credit Facility or credit facility) the
terms of which is more fully described in Note 5. The Company received waivers of the covenants
that it was unable to meet at June 30 and September 30, 2010. It
expects to require an additional waiver of certain of the original financial
covenants at December 31, 2010 and possibly beyond which are based on
results from the trailing twelve months.
In connection with these waivers, the revolving facility agreement was
amended to reduce the maximum borrowings available from $50 to $40 million. In
addition, the Company is required to adhere to monthly consolidated total
revenue and monthly consolidated cumulative adjusted EBITDA targets commencing
with the month ending September 30, 2010 through the month ending November 30,
2010. The Company complied with the
financial covenant minimums of $50 million of revenue and $7.9 million
cumulative monthly EBITDA for the month ending September 30, 2010.
The Company has experienced
a recent increase in the number of seismic acquisition contracts awarded, which
has resulted in increased crew mobilization costs and associated cash
uses. In order to ensure that the
Company will have sufficient liquidity to finance the increased business
activity, meet existing debt service requirements and finance its business,
Management has initiated the following actions,
·
They continued to work with the credit
facility lenders to receive the required waivers and increase the available
borrowings under the facility;
·
They are exploring the issuance of additional
debt or equity securities; and
·
They are exploring sales of non-core assets.
If unable to consummate one
of the foregoing transactions, the Company may not be able to meet its
liquidity needs in the short term. While
no assurances can be made, management believes that given the increased business
in the last several months, the Company should be able to execute on one of the
foregoing alternatives.
7
Table of
Contents
NOTE 2:
Basis
of Presentation and Significant Accounting Policies
The
unaudited condensed consolidated financial statements contained herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). The accompanying financial
statements include all adjustments which are, in the opinion of management,
necessary to provide a fair presentation of the financial condition and results
of operations for the periods presented. All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of
the SEC. These financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Companys latest
Annual Report on Form 10-K/A for the year ended December 31, 2009.
The results of operations for the three and nine months ended
September 30, 2010, are not necessarily indicative of the results to be
expected for the full year ending December 31, 2010.
Effective
February 12, 2010, the Company completed the acquisition of the onshore
seismic data acquisition and multi-client data library business of Petroleum
Geo-Services ASA (PGS Onshore). The results of operations and financial
condition of the Company as of and for the three and nine months ended
September 30, 2010 have been impacted by this acquisition, which may
affect the comparability of certain of the financial information contained in
this Quarterly Report on Form 10-Q. This acquisition is described in more
detail in Note 3.
Certain
reclassifications have been made to prior period financial statements to
conform to the current presentation.
Multi-client Data
Library
The
multi-client data library consists of seismic surveys that are licensed to
customers on a non-exclusive basis. The Company capitalizes all costs directly associated
with acquiring and processing the data, including the depreciation of the
assets used in production of the surveys. The capitalized cost of the
multi-client data is charged to depreciation and amortization in the period the
sales occur based on the greater of the percentage of total estimated costs to
the total estimated sales multiplied by actual sales, known as the sales
forecast method, or the straight-line amortization method over five years. This
minimum straight-line amortization is recorded only if minimum amortization
exceeds the cost of services calculated using the sales forecast method. Amortization
for the three and nine months ended September 30, 2010 was
$7.0 million and $17.4 million, respectively. Amortization for the
three and nine months ended September 30, 2009 was $2.4 million and
$2.7 million, respectively.
The
Company periodically reviews the carrying value of the multi-client data
library to assess whether there has been a permanent impairment of value and
records losses when it is determined that estimated future sales are not
expected to be sufficient to cover the carrying value of the asset.
The
Company accounts for multi-client data sales as follows:
(a) Pre-funding
arrangementsThe Company obtains funding from a limited number of customers
before a seismic project is completed. In return for the pre-funding, the
customer typically gains the ability to direct or influence the project
specifications, to access data as it is being acquired and to pay discounted
prices. The Company recognizes pre-funding revenue as the services are
performed on a proportional performance basis usually determined by comparing
the completed square miles of a seismic survey to the survey size unless
specific facts and circumstances warrant another measure. Progress is measured
in a manner generally consistent with the physical progress on the project, and
revenue is recognized based on the ratio of the projects progress to date,
provided that all other revenue recognition criteria are satisfied.
(b) Late
salesThe Company grants a license to a customer, which entitles the customer
to have access to a specifically defined portion of the multi-client data
library. The customers license payment is fixed and determinable and typically
is required at the time that the license is granted. The Company recognizes
revenue for late sales when the customer executes a valid license agreement and
has received the underlying data or has the right to access the licensed
portion of the data and collection is reasonably assured.
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(c) Sales of
data jointly owned by the Company and a partnerOn certain surveys, the Company
jointly acquires data with a partner whereby the Company may share the costs of
acquisition and earn license revenues when processed data is delivered by the
Companys partner to the ultimate client. As such, these revenues are
recognized when the processed data is delivered to the ultimate client.
Investments
In
June 2010, the Company acquired a working interest in a drilling program
in Australia in an area where the Company expects to complete a seismic survey
in 2010. The carrying cost of this investment is approximately $3.3 million
as of September 30, 2010 which is included in other assets. The Company
accounts for this investment using the full cost method of accounting.
Deferred Financing Costs
Deferred
financing costs include costs related to the issuance of debt which are
amortized to interest expense using the straight-line method, which
approximates the effective interest method, over the maturity periods of the
related debt. During the first nine months of 2010, in connection with the PGS
Onshore acquisition, the Company recorded approximately $0.8 million of
additional costs related to the registration of its Senior Secured Notes. Also,
the Company recorded approximately $2.2 million of additional costs
primarily related to its new credit facility with Royal Bank of Canada (RBC).
Amortization of deferred financing costs for the nine months ended
September 30, 2010 was $2.0 million. Write-off of deferred financing
costs for the nine months ended September 30, 2010, was $1.0 million.
Derivative Liabilities
As
further described in Note 6, Preferred and Common Stock, the Company has
convertible preferred stock issued and outstanding and common stock warrants
issued in connection with a preferred stock issuance in July 2008. Both
the convertible preferred stock conversion feature and warrants contain a price
protection provision (or down-round provision) which reduces their price in the
event the Company issues additional shares at a more favorable price than the
strike price.
The
Financial Accounting Standard Board (FASB) accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts is included in Accounting Standards Codification (ASC)
815-40-15 Derivatives and Hedging-Contracts in Entitys Own Equity-Scope and
Scope Exceptions,. This standard provides that an instruments strike price or
the number of shares used to calculate the settlement amount are not fixed if
its terms provide for any potential adjustment, regardless of the probability
of such adjustment(s) or whether such adjustments are in the entitys
control. If equity-linked financial instrument (or embedded feature) is indexed
to its own stock, based on the instruments contingent exercise and settlement
provisions, for periods ended after the adoption date of January 1, 2009,
the fair value of the conversion feature is bifurcated from the host instrument
and recognized as a liability on the Companys condensed consolidated balance
sheet. The warrants are recognized at fair value as a liability on the Companys
condensed consolidated balance sheet. The fair value of the conversion feature,
the warrants and other issuance costs of the preferred stock financing
transaction, are recognized as a discount to the preferred stock host. The
discount will be accreted to the preferred stock host from the Companys paid
in capital, treated as a deemed dividend, over the period from the issuance
date through the earliest redemption date of the preferred stock.
Fair Values of Financial Instruments
Effective
January 1, 2008, the Company adopted ASC Topic 820 as it relates to
financial assets and financial liabilities, which defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principals and expands disclosures about fair value measurements.
The provisions of this standard apply to other accounting pronouncements that
require or permit fair value measurements.
This
guidance defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Hierarchical levels, as defined in this
guidance and directly related to the amount of subjectivity associated with the
inputs to fair valuations of these assets and liabilities are as follows:
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Level 1Unadjusted
quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2Inputs other
than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly, including quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or
similar assets or liabilities in markets that are not active; inputs other than
quoted prices that are observable for the asset or liability (e.g., interest
rates); and inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
Level 3Inputs that are
both significant to the fair value measurement and unobservable. Unobservable
inputs reflect the Companys judgment about assumptions market participants
would use in pricing the asset or liability estimated impact to quoted market
prices.
The
reported fair values for financial instruments that use Level 2 and
Level 3 inputs to determine fair value are based on a variety of factors
and assumptions. Accordingly, certain fair values may not represent actual
values of the Companys financial instruments that could have been realized as
of September 30, 2010 or that will be realized in the future and do not
include expenses that could be incurred in an actual sale or settlement. The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and short-term debt approximate their fair value due to the short
maturity of those instruments. The Companys liabilities measured at fair value
on a recurring basis were determined using the following inputs (in thousands):
|
|
Fair Value Measurements at September 30, 2010
|
|
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Conversion feature embedded in Preferred Stock
|
|
$
|
7,861
|
|
$
|
|
|
$
|
|
|
$
|
7,861
|
|
Warrants
|
|
653
|
|
|
|
|
|
653
|
|
Total derivative liabilities
|
|
$
|
8,514
|
|
$
|
|
|
$
|
|
|
$
|
8,514
|
|
Beginning
January 1, 2009, the Company records derivative liabilities on its balance
sheet as derivative liabilities related to certain warrants and the conversion
feature embedded in the preferred stock. As of September 30, 2010, it
determined that, using a Monte Carlo Valuation Model, the fair value of
the conversion feature embedded in the Series B preferred stock and
warrants to be $7.8 million and $0.7 million, respectively. These derivatives have increased in fair
value since June 30, 2010 and the Company recognized a loss on the change
in fair value of $3.5 million for the three months ended September 30,
2010. The change in fair value since December 31, 2009 was a gain of $1.4
million for the nine months ended September 30, 2010.
At
December 31, 2009, the assumptions used in the model to determine the fair
value of the warrants included the warrant exercise price of $9.25 per share.
The assumptions used in the model to determine the fair value of the embedded
conversion feature included the Series B conversion price of $17.44 per
share on December 31, 2009. The Companys stock price on December 31,
2009 of $9.62, risk-free discount rate of 3.03% (embedded conversion feature)
and 1.99% (warrants) and volatility of 106.31% were used in both models to
determine the fair value.
At
September 30, 2010, the assumptions used in the model to determine the
fair value of the warrants included the warrant exercise price of $9.25 per
share. The assumptions used in the model to determine the fair value of the
embedded conversion feature included the Series B conversion price of
$17.44 per share on September 30, 2010. The Companys stock price on
September 30, 2010 of $6.20, risk-free discount rate of 1.34% (embedded
conversion feature) and 0.60% (warrants) and volatility of 87.78% were used in
both models to determine the fair value.
The
accretion of the additional discount to the preferred stock resulting from
bifurcating the Series B conversion feature totaled $0.2 million, and $0.7
million for the three and nine months ended September 30, 2010,
respectively. The fair value of the Series B conversion feature, related
to preferred shares issued, were $0.2 million, and $0.6 million for the three
and nine months ended September 30, 2010, respectively.
10
Table
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A
reconciliation of the Companys liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) were as
follows (in thousands):
|
|
Fair Value
Measurements
Using
Significant
Unobservable
Inputs
(Level 3)
|
|
Balance December 31, 2009
|
|
$
|
9,317
|
|
Total unrealized gains
|
|
|
|
Included in earnings
|
|
(1,370
|
)
|
Included in other comprehensive income
|
|
|
|
Settlements/Issuances
|
|
567
|
|
Transfers in and/or out of Level 3
|
|
|
|
Balance September 30, 2010
|
|
$
|
8,514
|
|
The
Company is not a party to any hedge arrangements, commodity swap agreement or
any other derivative financial instruments. The seismic data acquisition and
seismic data processing segments utilize foreign subsidiaries and branches to
conduct operations outside of the United States. These operations expose the
Company to market risks from changes in foreign exchange rates.
Recent Accounting Pronouncements
In October 2009, the FASB
issued ASU 2009-13 on Topic 605, Revenue Recognition Multiple Deliverable
Revenue Arrangements a consensus of the FASB Emerging Issues Task Force. The
ASU provides guidance on accounting for products or services (deliverables)
separately rather than as a combined unit utilizing a selling price hierarchy
to determine the selling price of a deliverable. The selling price is based on
vendor-specific evidence, third-party evidence or estimated selling price. The
Company will be required to apply the standard prospectively to any contracts
that may contain multiple-element arrangements entered into or materially
modified on or after January 1, 2011; however, earlier application is
permitted. The Company does not currently expect the adoption of this new accounting
update to have a material impact on its condensed consolidated financial
statements.
In January 2010, the
FASB issued new accounting guidance to require additional fair value related
disclosures including transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements
relating to Level 3 measurements. It also clarifies existing fair value
disclosure guidance about the level of disaggregation and about inputs and
valuation techniques. This new guidance is effective for the first reporting
period beginning after December 15, 2009 except for the requirement to
separately disclose purchases, sales, issuances and settlements relating to
Level 3 measurements, which is effective for the first reporting period
beginning after December 15, 2010. The Companys adoption of this new
guidance did not have a material impact on its financial position, results of
operations or cash flows. The Company has included additional disclosure
related to early adoption of the Level 3 related gross disclosure
requirement, which is effective in 2011; disclosures had no impact on the
condensed consolidated financial statements.
In February 2010, the
FASB amended its guidance on subsequent events to remove the requirement for
SEC filers to disclose the date through which an entity has evaluated
subsequent events. The guidance was effective upon issuance. The Company
adopted this guidance in the period ended March 31, 2010.
In May 2010, the FASB
issued ASU No. 2010-19, which is included ASC under Topic 830, Foreign
Currency. This update addresses the multiple foreign currency exchange rates
and the impact of highly inflationary accounting in Venezuela. Current
operations in Venezuela are immaterial; therefore, the adoption of this update
did not have an impact on its consolidated financial position, results of
operations or cash flows. The Company
will continue to monitor newly identified highly inflationary economies as
identified by FASB.
NOTE 3: Acquisition
On
December 3, 2009, the Company agreed with Petroleum Geo-Services ASA and
certain of its subsidiaries (PGS) to acquire PGS Onshore. The Company closed
this transaction on February 12, 2010. The PGS Onshore acquisition (the Acquisition)
provides the Company a significant business expansion into Mexico, North
Africa, the
11
Table of
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Far
East, and in the United States, including Alaska. In addition, the Acquisition
substantially increased the Companys multi-client data library. As a result of
the Acquisition, the Company has acquired a multi-client data library covering
approximately 5,500 square miles located primarily in Texas, Oklahoma, Wyoming
and Alaska.
The
operations of PGS Onshore have been combined with those of the Company since February 12,
2010. The Acquisition was accounted for by the purchase method, with the
purchase price being allocated to the fair value of assets purchased and
liabilities assumed. The allocation of the purchase price of PGS Onshore was
based upon fair value studies and was computed using various estimates and
assumptions. These estimates and assumptions are subject to change upon
managements review of the final valuations and the completion of various
audits that could impact the beginning balance sheet of PGS Onshore. The
preliminary allocations of the purchase price for the Acquisition are as
follows (in thousands):
Purchase price:
|
|
|
|
|
|
Cash
|
|
$
|
183,411
|
|
|
|
Issuance of 2,153,616 shares of the Companys
common stock at market value of $9.02 per share
|
|
19,426
|
|
|
|
Total consideration
|
|
|
|
$
|
202,837
|
|
Allocation of purchase price:
|
|
|
|
|
|
Current assets, including cash of
$2.6 million
|
|
$
|
74,753
|
|
|
|
Property and equipment
|
|
104,138
|
|
|
|
Multi-client data library
|
|
26,700
|
|
|
|
Other intangible assets
|
|
6,200
|
|
|
|
Other long-term assets
|
|
1,429
|
|
|
|
Goodwill
|
|
53,574
|
|
|
|
Total assets acquired
|
|
|
|
$
|
266,794
|
|
Current liabilities
|
|
$
|
47,001
|
|
|
|
Other long-term liabilities
|
|
1,122
|
|
|
|
Deferred income taxes
|
|
15,834
|
|
|
|
Total liabilities assumed
|
|
|
|
$
|
(63,957
|
)
|
Net assets acquired
|
|
|
|
$
|
202,837
|
|
The
purchase price is subject to certain additional working capital adjustments. In
addition, in connection with the acquisition, the Company agreed to reimburse
PGS for certain costs incurred through the acquisition date related to two
ongoing multi-client data library projects subject to certain requirements
being met. The Company paid approximately $202.8 million at closing.
To
fund the cash portion of the purchase price, Geokinetics Holdings USA, Inc,
a wholly-owned subsidiary of Geokinetics, issued $300 million aggregate
principal amount of its 9.75% senior secured notes due 2014 in a private
offering in 2009. The proceeds of this sale were held in escrow until the
closing of the PGS Onshore acquisition. On February 12, 2010, the Company
used the restricted cash amounts held in escrow to finance the cash portion of
the Acquisition for approximately $183.4 million. The Company also repaid its
existing revolving credit facility with an outstanding balance of approximately
$45.8 million and repaid outstanding capital leases and other vendor financing
for approximately $22.0 million. Costs associated with the Acquisition of
approximately $1.3 million in the fourth quarter of 2009 and $1.5 million in
the first quarter of 2010 are included in general and administrative expenses.
12
Table of
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The
following summarized unaudited pro forma consolidated income statement
information for the three months and nine months ended September 30, 2009
and 2010, assumes that the PGS Onshore acquisition had occurred as of the
beginning of the periods presented. The Company has prepared these unaudited
pro forma financial results for comparative purposes only. These unaudited pro
forma financial results may not be indicative of the results that would have
occurred if Geokinetics had completed the acquisition as of the beginning of
the periods presented or the results that may be attained in the future.
Amounts presented below are in thousands, except for the per share amounts:
|
|
Pro forma
Three Months Ended
September 30,
(Unaudited)
|
|
Pro forma
Nine Months Ended
September 30,
(Unaudited)
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Pro forma revenues
|
|
$
|
153,372
|
|
$
|
134,020
|
|
$
|
530,166
|
|
$
|
379,939
|
|
Pro forma income (loss) from operations
|
|
$
|
(2,371
|
)
|
$
|
(25,603
|
)
|
$
|
15,532
|
|
$
|
(78,088
|
)
|
Pro forma net loss
|
|
$
|
(17,081
|
)
|
$
|
(36,249
|
)
|
$
|
(35,298
|
)
|
$
|
(110,018
|
)
|
Pro forma dividends and accretion on preferred
stock
|
|
$
|
2,110
|
|
$
|
(2,317
|
)
|
$
|
15,262
|
|
$
|
(6,525
|
)
|
Pro forma net loss applicable to common
stockholders
|
|
$
|
(19,191
|
)
|
$
|
(38,566
|
)
|
$
|
(50,560
|
)
|
$
|
(116,543
|
)
|
Pro forma basic and diluted net loss per common
share
|
|
$
|
(1.09
|
)
|
$
|
(2.18
|
)
|
$
|
(2.86
|
)
|
$
|
(6.59
|
)
|
NOTE 4:
Multi-client
Data Library
At
December 31, 2009 and September 30, 2010, multi-client data library
costs and accumulated amortization consisted of the following (in thousands):
|
|
December 31,
2009
|
|
September 30,
2010
(Unaudited)
|
|
Acquisition and processing costs
|
|
$
|
14,841
|
|
$
|
72,888
|
|
Less accumulated amortization
|
|
(8,239
|
)
|
(25,667
|
)
|
Multi-client data library, net
|
|
$
|
6,602
|
|
$
|
47,221
|
|
The
change in the carrying amount of multi-client seismic library costs and
accumulated amortization consisted of the following (in thousands):
Balance at December 31, 2009
|
|
$
|
6,602
|
|
Capitalized in period
|
|
31,347
|
|
Fair value of acquired library
|
|
26,700
|
|
Amortization during period
|
|
(17,428
|
)
|
Balance at September 30, 2010
|
|
$
|
47,221
|
|
13
Table of
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NOTE 5:
Debt and Capital Lease Obligations
The
Companys long-term debt and capital lease obligations were as follows (in
thousands):
|
|
|
|
September 30,
|
|
|
|
December 31,
2009
|
|
2010
(Unaudited)
|
|
|
|
|
|
|
|
Revolving credit lines and foreign lines of
credit4.75% to 8.75%
|
|
$
|
45,883
|
|
$
|
27,572
|
|
Senior Secured Notes, net of discount9.75%
|
|
294,279
|
|
295,185
|
|
Capital lease obligations10.1%
|
|
14,836
|
|
1,236
|
|
Notes payable from vendor financing
arrangements7.00% to 13.06%
|
|
9,859
|
|
|
|
|
|
364,857
|
|
323,993
|
|
Less: current portion
|
|
(68,256
|
)
|
(27,572
|
)
|
|
|
$
|
296,601
|
|
$
|
296,421
|
|
Revolving Credit Facilities
PNC Credit Facility.
Until
February 12, 2010, the Company had a Revolving Credit, Term Loan and
Security Agreement with PNC Bank, National Association (PNC), as lead lender,
which provided the Company with a $70.0 million revolving credit facility
(Revolver) maturing May 24, 2012. At December 31, 2009, the Company
had a balance of $44.6 million drawn under the Revolver. The rate of the
PNC facility was the prime rate plus 1.5%, 4.75% at December 31, 2009. On
February 12, 2010, the Companys Revolver balance of $45.8 million
was repaid in connection with the closing of the PGS Onshore acquisition. The
Company recorded a loss of $1.2 million on the redemption of the facility
which consisted of $1 million related to the acceleration of costs that
were being amortized over the expected life of the facility, and approximately
$0.2 million related to prepayment penalties.
RBC Credit Facility.
On
February 12, 2010, Geokinetics Holdings entered into a revolving credit
and letters of credit, with a group of lenders lead by RBC (the RBC Facility
or the revolving credit facility The revolving credit facility matures on
February 12, 2013. Effective June 30, 2010, the Company entered into
Amendment No. 1 to the revolving credit facility which reset certain
financial covenants for the quarters ending June 30, 2010 and
September 30, 2010 and reduced the permitted outstanding borrowing under
the facility from $50 million to $40 million. On September 30,
2010, Geokinetics Holdings entered into Waiver and Amendment No. 2 which
provides a waiver of specific events of default that would have occurred on
September 30, 2010 for failure to comply with financial covenant
requirements (minimum total leverage ratio, minimum interest coverage ratio and
maximum fixed charge coverage ratio) and revise certain covenant and reporting
requirements for future periods.
Borrowings
outstanding under the revolving credit facility bear interest at a floating
rate based on the greater of: (i) 3% per year, (ii) the Prime Rate,
(iii) 0.5% above the Federal Funds Rate, or iv) 1% above one month
LIBOR; plus an applicable margin from 4.5% to 6.5% depending on the Companys
total leverage ratio. The rate was 8.75% at September 30, 2010. The
outstanding balance of this revolving credit facility was $26 million as
of September 30, 2010 and $29 million on November 5, 2010.
Borrowings
under the revolving credit facility are guaranteed by Geokinetics and each of
its existing and subsequently acquired or organized direct or indirect
wholly-owned U.S. subsidiaries. Each of the entities guaranteeing the revolving
credit facility will secure the guarantees on a first priority basis with a
lien on substantially all of the assets of such guarantor. Borrowings under the
facility are effectively senior to the outstanding senior secured notes
pursuant to an inter-creditor agreement. The facility also contains
restrictions on liens, investments, indebtedness, mergers and acquisitions,
dispositions, certain payments, and other specific transactions.
The
revised financial covenants, in Amendment No. 2, include monthly minimum
total consolidated total revenues and consolidated cumulative adjusted EBITDA
for the months ending September 30, October 31, and November 30,
2010. Minimum total consolidated revenues per month must total $50
million, $60 million, and $60 million for the months ended September 30,
October 31, and November 30, 2010, respectively. Monthly
minimum consolidated cumulative adjusted EBITDA must total $7.9 million, $17.6
million, and $30.1 million for the period beginning on September 1, 2010
until and including September 30, October 31, and November 30,
2010, respectively. The Company was in compliance with the revised
covenant minimums of $50 million of total
14
Table of Contents
consolidated
revenue and $7.9 million cumulative EBITDA for the month ending September 30,
2010. While the Company believes it will remain in compliance with the revised
covenants, at least through November 30, 2010, our actual results may
differ from our forecasts, and these differences may be material. Our ability
to comply with these restrictions and covenants, including meeting financial
ratios and tests, and may be affected by events beyond the Companys control.
As a result, we cannot assure you that we will be able to comply with these
restrictions and covenants or meet such financial ratios and tests.
Further,
the financial covenants defined in the original revolving credit facility have
not been amended for the December 31, 2010 measurement date and beyond.
Based on our current forecasts, it is likely that we will be unable to comply
with certain of the original financial covenants in our senior revolving credit
facility at the December 31, 2010 measurement date and possibly beyond
which have not been amended beyond the November 30, 2010 measurement date
and which are based on results from the trailing twelve months. We are in
ongoing discussions with the lenders under the credit facility to amend the
covenants, but no assurance can be made that we will be successful in such
negotiations, or as to the terms or costs of any such amendment or waiver if
agreed to. Therefore, the outstanding balance of $26 million has been presented
as short term debt in the September 30, 2010 balance sheet.
If
we are unable to comply with the restrictions and covenants in our debt
agreements, including our senior secured revolving credit facility, there could
be a default under the terms of these agreements. In the event of a default
under these agreements, lenders could terminate their commitments to lend or
accelerate the loans and declare all amounts borrowed due and payable.
Borrowings under other debt instruments that contain cross-acceleration or
cross-default provisions may also be accelerated and become due and payable. If
any of these events occur, our assets might not be sufficient to repay in full
all of 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 its 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.
Senior Secured Notes Due 2014
On
December 23, 2009, Geokinetics Holdings, a wholly owned subsidiary of the
Company, issued $300 million of 9.75% Senior Secured Notes due 2014 (the Notes)
in a private placement to institutional buyers at an issue price of 98.093% of
the principal amount. The discount is being accreted as an increase to interest
expense over the term of the Notes. At September 30, 2010, the effective
interest rate on the Notes was 10.2%, which includes the effect of the discount
accretion.
The
Notes bear interest at the rate of 9.75% per year, payable semi-annually in
arrears on June 15 and December 15 of each year. The Notes are fully
and unconditionally guaranteed, by the Company, and by each of the Companys
current and future domestic subsidiaries (other than Geokinetics Holdings,
which is the issuer of the Notes).
Until
the second anniversary following their issuance, the Company may redeem up to
10% of the original principal amount of the Notes during each 12-month period
at 103% of the principal amount plus accrued interest. Thereafter, the Company
may redeem all or part of the Notes at a prepayment premium which will decline
over time. The Company will be required to make an offer to repurchase the
Notes at 101% of the principal amount plus accrued interest if the Company
experiences a change of control. The indenture for the Notes contains customary
covenants for non-investment grade indebtedness, including restrictions on the
Companys ability to incur indebtedness, to declare or pay dividends and
repurchase its capital stock, to invest the proceeds of asset sales, and to
engage in transactions with affiliates.
Capital Lease Obligations
The
Company had several equipment lease agreements with CIT Group Equipment
Financing, Inc. (CIT) on seismic and other transportation equipment with
terms of up to 36 months and various interest amounts. The original amount
of the leases was approximately $39.9 million and the balance at
December 31, 2009 was approximately $12.1 million. These amounts were
repaid on February 12, 2010 in connection with the closing of the PGS
Onshore acquisition. The Company recorded a loss of approximately
$0.3 million on the redemption of these obligations related to prepayment
penalties.
15
Table
of Contents
The
Company also has four equipment lease agreements with Bradesco Leasing in
Brazil with terms of 36 months at a rate of 10.1% per year. The original
amount of the leases was approximately $3.0 million and the balance at
September 30, 2010 was approximately $1.2 million.
Other
The
Company had vendor financing arrangements to purchase certain equipment. The
total balance of vendor financing arrangements at December 31, 2009, was
approximately $9.9 million. These amounts were repaid on February 12,
2010 in connection with the closing of the PGS Onshore acquisition. The Company
recorded a loss of $1.0 million on the redemption of these financing
arrangements related to prepayment penalties.
The
Company maintains various foreign bank lines of credit and overdraft facilities
used to fund short-term working capital needs. At September 30, 2010, the
balance of the foreign line of credit facilities was $1.6 million. There were
no outstanding balances under the overdraft facilities at September 30,
2010, and the Company had approximately $5.1 million of availability.
NOTE 6:
Preferred
and Common Stock
Preferred Stock
On
December 15, 2006, the Company issued 228,683 shares of its Series B
Preferred Stock, $10.00 par value, to Avista Capital Partners, L.P. (Avista),
an affiliate of Avista and another institutional investor (the Series B-1
Preferred Stock).
On
July 28, 2008, the Company issued 120,000 shares of its Series B
Preferred Stock, $10.00 par value (the Series B-2 Preferred Stock) and
warrants to purchase 240,000 shares of common stock to Avista and an affiliate
of Avista for net proceeds of $29.1 million. The Company recorded the
preferred stock net of the fair value of the warrants issued and recorded the
fair value of the warrants for approximately $1.5 million as additional
paid in capital. Effective January 1, 2009 the company adopted ASC 815-15
which requires the Company to bifurcate the embedded derivative relating to the
conversion feature in the Companys preferred stock (see accounting policy
relating to derivative liabilities in Note 2).
The
Company may cause the conversion of the Series B Preferred Stock into
common stock if the Company issues common stock at a price per share yielding
net proceeds to the Company of not less than $35.00 per share in an
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933 (the Securities Act), which provides net
proceeds to the Company and selling stockholders, if any, of not less than
$75 million.
As
long as at least 55,000 shares of Series B Preferred Stock are outstanding,
the consent of the holders of a majority of the Companys Series B
Preferred Stock is required to, among other things, make any material change to
the Companys certificate of incorporation or by-laws, declare a dividend on
the Companys common stock, enter into a business combination, or increase or
decrease the size of its board of directors, holders of the preferred stock are
allowed to elect one member of the board of directors.
If
the Company authorizes the issuance and sale of additional shares of its common
stock other than pursuant to an underwritten public offering registered under
the Securities Act, or for non-cash consideration pursuant to a merger or
consolidation approved by its board of directors, the Company must first offer
in writing to sell to each holder of its Series B Preferred Stock an
equivalent pro rata portion of the securities being issued. The conversion
price in the preferred stock is subject to a down-round provision whereby
subsequent equity issuances at a price below the existing conversion price will
result in a downward adjustment to the conversion price.
16
Table of
Contents
On
December 18, 2009, the holders of the Series B-1 Preferred Stock and
the Company, as a condition of the common stock offering on the same date and
agreement for the issuance of shares in connection with the closing of the PGS
Onshore acquisition, agreed to the following changes:
·
the conversion price was reduced from the previous $25 to $17.436;
·
the Company will be able to pay dividends in kind until
December 15, 2015;
·
the Company will not be required to redeem the series B-1
preferred stock until December 15, 2015; and
·
the Company increased the dividend rate on the series B-1
preferred stock from 8% to 9.75%;
·
the Company paid a cash fee of 2% of the liquidation amount,
$2.1 million, plus accrued and unpaid dividends of the series B-1 and
B-2 preferred stock
As
of September 30, 2010, the series B-1 preferred stock is presented as
mezzanine equity due to the series B preferred stock characteristics
described below:
Each
holder of Series B-1 Preferred Stock is also entitled to receive
cumulative dividends at the rate of 9.75% per annum on the liquidation
preference of $250 per share, compounded quarterly. At the Companys option
through December 15, 2015, dividends may be paid in additional shares of
Series B-1 Preferred Stock. After such date, dividends are required to be
paid in cash if declared.
After
December 15, 2015, holders of not less than a majority of outstanding
shares of Series B-1 Preferred Stock may require payment, upon written
notice of the redemption of all outstanding shares of Series B-1 Preferred
Stock, in cash, at a price equal to $250 per share, plus any accrued dividends.
Dividends
on the Series B Preferred Stock have been paid in kind exclusively to
date.
Mandatorily
Redeemable Preferred Stock
In
December, 2009, in conjunction with the structuring of the PGS Onshore
acquisition, the Company agreed to exchange its series B-2 preferred stock
for new series C redeemable preferred stock plus the issuance of 750,000
shares of common stock. The fair value of the series C preferred stock at
the date of exchange was $32.1 million.
The
series C redeemable preferred stock were issued to Avista, and have an
aggregate liquidation preference equal to the liquidation preference of the
series B-2 preferred stock ($32.3 million), and are not required to
be redeemed until one year after the maturity date of the Senior Secured Notes.
The series C preferred stock accrue dividends at a rate of 11.75%.
Dividends may accrue or may be paid in kind with additional shares of
series C preferred stock, at the election of Avista, until
December 13, 2015. The series C preferred stock is not convertible or
exchangeable for the Companys common stock. This stock is classified as
long-term liability as it is considered a mandatorily redeemable financial
instrument in accordance with ASC Topic 480, Distinguishing liabilities from
equity. Dividends paid are reflected as interest expense in results of
operations of $1,047 and $3,194 for the three and nine months ended
September 30, 2010, respectively.
Common Stock
The
holders of common stock have full voting rights on all matters requiring
stockholder action, with each share of common stock entitled to one vote.
Holders of common stock are not entitled to cumulate votes in elections of
directors. No stockholder has any preemptive right to subscribe to an
additional issue of any stock or to any security convertible into such stock.
In
addition, as long as any shares of the Series B-1 and C Preferred Stock
discussed above are outstanding, the Company may not pay or declare any
dividends on common stock unless the Company has paid, or at the same time pays
or provides for the payment of, all accrued and unpaid dividends on the
Series B-1 Preferred Stock. In addition, the credit facilities restrict
the Companys ability to pay dividends on common stock. No dividends on common
stock have been declared for any periods presented.
On
December 18, 2009, the Company issued 4,000,000 shares of its common stock
at a public offering price of $9.25 per share. In connection with this public
offering, underwriters subsequently exercised their overallotment option,
resulting in issuance of 207,200 shares of common stock. In 2009, the Company
issued 750,000 shares to Avista in connection with the exchange of the
Series B-2 preferred stock for the new series C preferred stock.
On
February 12, 2010, the Company issued 2,153,616 shares of its common stock
to PGS in connection with the Acquisition of PGS Onshore.
17
Table of
Contents
Common Stock
Warrants
As
part of the Trace acquisition in December 2005, the Company issued 274,105
warrants at an exercise price of $20.00, which expire on December 1, 2010.
As
part of the issuance of Series B-2 Preferred Stock on July 28, 2008,
the Company issued an additional 240,000 warrants at an exercise price of
$20.00, which expire on July 28, 2013. The exercise price of these
warrants is subject to a down-round provision whereby subsequent equity
issuances at a price below the existing exercise price will result in a
downward adjustment to the exercise price and may extend the expiration date of
the warrants.
On
December 18, 2009, the exercise price of the July 28, 2008 warrants
was adjusted to $9.25 per share as a result of the issuance in December 2009
of common stock in accordance with price adjustment provisions. At December 31,
2009 and September 30, 2010, there are 514,105 warrants outstanding.
NOTE 7: Loss per Common Share
The
following table sets forth the computation of basic and diluted earnings per
common share (in thousands, except per share data):
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Loss applicable to common stockholders
|
|
$
|
(10,201
|
)
|
$
|
(38,566
|
)
|
$
|
(10,259
|
)
|
$
|
(109,322
|
)
|
Denominator for basic and diluted earnings per
common share
|
|
10,776
|
|
17,698
|
|
10,542
|
|
17,337
|
|
Basic and Diluted Loss per common share
|
|
$
|
(0.95
|
)
|
$
|
(2.18
|
)
|
$
|
(0.95
|
)
|
$
|
(6.31
|
)
|
The
denominator used for the calculation of diluted earnings per common share for
the three months and nine months ended September 30, 2009 and 2010,
excludes the effect of any stock options, restricted stock, warrants and convertible
preferred stock because the effect is anti-dilutive. At September 30,
2010, there were options to purchase 282,471 shares of common stock, 406,888
shares of unvested restricted stock, warrants to purchase 514,105 shares of
common stock, and preferred stock convertible into 4,472,643 shares of common
stock.
The
numerator used for the calculation of diluted earnings per share for the three
and nine months ended September 30, 2009 and 2010, is Income applicable
to common stockholders as the convertible preferred stock was deemed to be
anti-dilutive in that period.
NOTE 8:
Segment
Information
The
Company has two reportable segments: seismic data acquisition and seismic data
processing and interpretation. The Company further breaks down its seismic data
acquisition segment into two geographic reporting units: North American seismic
data acquisition and international seismic data acquisition. The North American
reporting unit acquires data for customers by conducting seismic shooting
operations in the United States and Canada; and the international seismic data
acquisition reporting unit operates in Latin America (including Mexico),
Africa, the Middle East, Australia, New Zealand and the Far East. The data
processing and interpretation segment operates processing centers in Houston,
Texas and London, United Kingdom to process seismic data for oil and gas
exploration companies worldwide.
The
Companys reportable segments are strategic business units that offer different
services to customers. Each segment is managed separately, has a different
customer base, and requires unique and sophisticated technology. The accounting
policies of the segments are the same as those described in Note 2: Basis
of Presentation and Significant Accounting Policies. There are no significant
inter-segment sales or transfers.
18
Table of
Contents
The
following unaudited table sets forth significant information concerning the
Companys reportable segments and geographic reporting units as of and for the
three and nine months ended September 30, 2009 and 2010 (in thousands):
|
|
For the Three Months Ended September 30, 2009
|
|
|
|
Data Acquisition
|
|
Data
|
|
|
|
|
|
|
|
North America
|
|
International
|
|
Processing
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
11,429
|
|
$
|
82,909
|
|
$
|
2,511
|
|
$
|
|
|
$
|
96,849
|
|
Segment income (loss)
|
|
$
|
(6,340
|
)
|
$
|
16,320
|
|
$
|
(91
|
)
|
$
|
(17,627
|
)
|
$
|
(7,738
|
)
|
Segment assets (at end of period)
|
|
$
|
84,822
|
|
$
|
267,393
|
|
$
|
9,327
|
|
$
|
97,987
|
|
$
|
459,529
|
|
|
|
For the Three Months Ended September 30, 2010
|
|
|
|
Data Acquisition
|
|
Data
|
|
|
|
|
|
|
|
North America
|
|
International
|
|
Processing
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
57,620
|
|
$
|
74,491
|
|
$
|
1,909
|
|
$
|
|
|
$
|
134,020
|
|
Segment income (loss)
|
|
$
|
3,310
|
|
$
|
(18,440
|
)
|
$
|
(845
|
)
|
$
|
(20,274
|
)
|
$
|
(36,249
|
)
|
Segment assets (at end of period)
|
|
$
|
250,098
|
|
$
|
389,240
|
|
$
|
10,213
|
|
$
|
73,631
|
|
$
|
723,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2009
|
|
|
|
Data Acquisition
|
|
Data
|
|
|
|
|
|
|
|
North America
|
|
International
|
|
Processing
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
65,361
|
|
$
|
315,435
|
|
$
|
7,812
|
|
$
|
|
|
$
|
388,608
|
|
Segment income (loss)
|
|
$
|
(7,556
|
)
|
$
|
57,594
|
|
$
|
208
|
|
$
|
(53,244
|
)
|
$
|
(2,998
|
)
|
Segment assets (at end of period)
|
|
$
|
84,822
|
|
$
|
267,393
|
|
$
|
9,327
|
|
$
|
97,987
|
|
$
|
459,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2010
|
|
|
|
Data Acquisition
|
|
Data
|
|
|
|
|
|
|
|
North America
|
|
International
|
|
Processing
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
135,981
|
|
$
|
216,585
|
|
$
|
6,750
|
|
$
|
|
|
$
|
359,316
|
|
Segment income (loss)
|
|
$
|
(2,566
|
)
|
$
|
(32,125
|
)
|
$
|
(1,633
|
)
|
$
|
(66,473
|
)
|
$
|
(102,797
|
)
|
Segment assets (at end of period)
|
|
$
|
250,098
|
|
$
|
389,240
|
|
$
|
10,213
|
|
$
|
73,631
|
|
$
|
723,182
|
|
NOTE 9:
Income
Taxes
The
provision for income tax for the three and nine months ended September 30,
2009 was $1,482 and $18,281 compared to $311 and $2,625 for the three and nine
months ended September 30, 2010, respectively. While the Company had
pretax losses during the three and nine months ended September 30, 2010
the income tax provision for these periods relate primarily to taxes due in
countries with deemed profit tax regimes, withholding taxes and the release of
valuation allowance in certain foreign jurisdictions with current year
operating profits based on the Companys reevaluation of the realizability of
these future tax benefits.
The
following summarizes changes in the Companys uncertain tax positions for the
nine months ended September 30, 2010 (in thousands):
|
|
September 30,
2010
|
|
|
|
(unaudited)
|
|
Balance at January 1, 2010
|
|
$
|
7,233
|
|
Increase for tax positions related to current year
|
|
|
|
Interest
|
|
574
|
|
Balance at September 30, 2010
|
|
$
|
7,807
|
|
All
additions or reductions to the above liability affect the Companys effective
tax rate in the respective period of change. The Company accounts for any
applicable interest and penalties on uncertain tax positions, which was $0.6
million for the nine months ended September 30, 2010, as a component of
income tax expense. At December 31, 2009, and September 30, 2010, the
Company had $1.2 million and $1.8 million of accrued interest related
to unrealized tax benefits, respectively. The tax years that remain subject to
examination by major tax jurisdictions are from 2004 to 2010.
19
Table of Contents
NOTE 10: Fair Value of
Financial Instruments
The
carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable and short-term debt approximate their fair value due to the
short maturity of those instruments, and therefore, have been excluded from the
table below. The fair value of the Notes is determined by multiplying the
principal amount by the market price. The fair value of the mandatorily
redeemable preferred stock and the Series B Preferred stock was calculated
by using the discounted cash flow method of the income approach. In addition,
the Monte-Carlo Pricing Model was used to determine the value of the conversion
feature of the Series B Preferred stock. The following table sets forth
the fair value of the Companys remaining financial assets and liabilities as
of December 31, 2009 and September 30, 2010 (in thousands):
|
|
December 31, 2009
|
|
September 30, 2010
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
364,857
|
|
$
|
400,000
|
|
$
|
323,993
|
|
$
|
265,836
|
|
Mandatorily
redeemable preferred stock
|
|
32,104
|
|
32,104
|
|
32,278
|
|
32,278
|
|
Preferred
stock, Series B
|
|
66,976
|
|
74,290
|
|
72,935
|
|
93,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company is not a party to any hedge arrangements, commodity swap agreement or
other derivative financial instruments.
The Companys seismic data acquisition and seismic data processing
segments utilize foreign subsidiaries and branches to conduct operations
outside of the United States. These operations expose the Company to market
risks from changes in foreign exchange rates.
NOTE 11: Commitments &
Contingencies
The
Company is involved in various claims and legal actions arising in the ordinary
course of business. Management is of the opinion that none of the claims and
actions will have a material adverse impact on the Companys financial
position, results of operations, or cash flows.
NOTE 12: Related Party
Transactions
During
fiscal 2009, the Company received food, drink, and other catering services for
its crews in one of its international locations from a company that was
substantially owned by certain employees and former employees of the Company. For
the nine months ended September 30, 2009 the Company spent approximately
$3.3 million with this Company. The Company believes that all transactions
were arms-length on terms at least as favorable as market rates. The Company
stopped receiving services from this Company in the third quarter of 2009.
PGS
owns 2,153,616 shares or approximately 12% of the Companys common shares
outstanding. In connection with the Acquisition, the Company entered into a
transition services agreement with PGS effective February 12, 2010 for up
to a maximum of 120 days. This agreement includes office facilities,
accounting, information, payroll and human resource services. The Company
stopped receiving services from PGS as of June 30, 2010; accordingly there
were no billed services from PGS for the three months ended September 30,
2010. Total services of $3.2 million were billed to date in 2010. These costs
are included in the Companys general and administrative expenses for the same
period.
In
addition, PGS and the Company have agreed to reimburse each other for certain
amounts resulting from adjustments from the Acquisition as follows (in
thousands):
|
|
September 30,
2010
|
|
|
|
(unaudited)
|
|
Receivable from PGSshort term
|
|
$
|
907
|
|
Receivable from PGSlong term
|
|
1,122
|
|
Payable to PGSshort term(1)
|
|
(3,125
|
)
|
|
|
|
|
|
(1)This amount is included in accounts payable and
primarily consists of an outstanding payable of approximately $2.3 million
related to the transition services agreement with PGS, and approximately $0.8
related to income taxes payable.
20
Table of
Contents
NOTE 13: Condensed
Consolidating Financial Information
On
February 12, 2010, upon completion of the PGS Onshore acquisition, the
$300 million Notes due 2014 became fully and unconditionally guaranteed,
jointly and severally, by the Company, and by each of the Companys current and
future domestic subsidiaries (other than Geokinetics Holdings, which is the
issuer of the Notes). The non-guarantor subsidiaries consist of all
subsidiaries and branches outside of the United States. Separate condensed
consolidating financial statement information for the parent, guarantor
subsidiaries and non-guarantor subsidiaries as of December 31, 2009 and
September 30, 2010 and for the three and nine months ended
September 30, 2009 and 2010 is as follows (in thousands):
|
|
BALANCE SHEET
December 31, 2009
|
|
|
|
Guarantor
Parent
Company
|
|
Issuer
Subsidiary
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
5,117
|
|
$
|
119,893
|
|
15,237
|
|
160,562
|
|
$
|
|
|
$
|
300,809
|
|
Property
and equipment, net
|
|
21,354
|
|
|
|
158,949
|
|
7,530
|
|
|
|
187,833
|
|
Investment
in subsidiaries
|
|
140,139
|
|
174,526
|
|
109,182
|
|
(2
|
)
|
(423,845
|
)
|
|
|
Intercompany
accounts
|
|
195,976
|
|
(17,349
|
)
|
(88,815
|
)
|
(89,820
|
)
|
8
|
|
|
|
Other
non-current assets
|
|
2,985
|
|
191,745
|
|
76,121
|
|
12,197
|
|
|
|
283,048
|
|
Total
assets
|
|
$
|
365,571
|
|
$
|
468,815
|
|
$
|
270,674
|
|
$
|
90,467
|
|
$
|
(423,837
|
)
|
$
|
771,690
|
|
Liabilities, Mezzanine and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
110,635
|
|
$
|
731
|
|
$
|
15,479
|
|
$
|
88,031
|
|
$
|
|
|
$
|
214,876
|
|
Long-term
debt and capital lease obligations, net of current portion
|
|
32,104
|
|
294,279
|
|
|
|
2,322
|
|
|
|
328,705
|
|
Derivative
liabilities
|
|
9,317
|
|
|
|
|
|
|
|
|
|
9,317
|
|
Deferred
Income tax and other non-current liabilities
|
|
(6,722
|
)
|
|
|
10,932
|
|
2,276
|
|
|
|
6,486
|
|
Total
liabilities
|
|
145,334
|
|
295,010
|
|
26,411
|
|
92,629
|
|
|
|
559,384
|
|
Mezzanine
equity
|
|
66,976
|
|
|
|
|
|
|
|
|
|
66,976
|
|
Stockholders
equity
|
|
153,261
|
|
173,805
|
|
244,263
|
|
(2,162
|
)
|
(423,837
|
)
|
145,330
|
|
Total
liabilities, mezzanine and stockholders equity
|
|
$
|
365,571
|
|
$
|
468,815
|
|
$
|
270,674
|
|
$
|
90,467
|
|
$
|
(423,837
|
)
|
$
|
771,690
|
|
21
Table
of Contents
|
|
BALANCE SHEET
September 30, 2010
(unaudited)
|
|
|
|
Guarantor
Parent
Company
|
|
Issuer
Subsidiary
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
35,561
|
|
|
|
57,440
|
|
149,969
|
|
(271
|
)
|
242,699
|
|
Property and equipment, net
|
|
18,848
|
|
|
|
171,834
|
|
88,104
|
|
|
|
278,786
|
|
Investment in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany accounts
|
|
(35,089
|
)
|
108,313
|
|
7,039
|
|
(86,527
|
)
|
6,264
|
|
|
|
Other non-current assets
|
|
174,308
|
|
388,048
|
|
241,165
|
|
37,800
|
|
(639,624
|
)
|
201,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
193,628
|
|
496,361
|
|
477,478
|
|
189,346
|
|
(633,631
|
)
|
723,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, Mezzanine and
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
41,563
|
|
34,877
|
|
62,719
|
|
91,710
|
|
443
|
|
231,312
|
|
Long-term debt and capital lease obligations, net
of current portion
|
|
32,278
|
|
295,185
|
|
|
|
1,236
|
|
|
|
328,699
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income tax and other non-current
liabilities
|
|
16
|
|
0
|
|
27,532
|
|
3,482
|
|
|
|
31,030
|
|
Total liabilities
|
|
73,857
|
|
330,062
|
|
90,251
|
|
96,428
|
|
443
|
|
591,041
|
|
Mezzanine equity
|
|
72,935
|
|
|
|
|
|
|
|
|
|
72,935
|
|
Stockholders equity
|
|
46,836
|
|
166,299
|
|
387,227
|
|
92,918
|
|
(634,074
|
)
|
59,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, mezzanine and stockholders
equity
|
|
193,628
|
|
496,361
|
|
477,478
|
|
189,346
|
|
(633,631
|
)
|
723,182
|
|
|
|
STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2009 (unaudited)
|
|
|
|
Guarantor
Parent
Company
|
|
Issuer
Subsidiary
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net revenues
|
|
$
|
|
|
|
|
15,105
|
|
83,897
|
|
(2,153
|
)
|
96,849
|
|
Equity in earnings of subsidiaries
|
|
(7,202
|
)
|
|
|
6,279
|
|
|
|
923
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seismic acquisition and data processing
|
|
2,662
|
|
|
|
10,461
|
|
56,243
|
|
(2,153
|
)
|
67,213
|
|
Depreciation and amortization
|
|
1,113
|
|
|
|
14,284
|
|
918
|
|
|
|
16,315
|
|
General and administrative
|
|
(9,439
|
)
|
|
|
302
|
|
22,342
|
|
|
|
13,205
|
|
Other, net
|
|
|
|
|
|
7
|
|
1,399
|
|
|
|
1,406
|
|
Total expenses
|
|
(5,664
|
)
|
|
|
25,054
|
|
80,902
|
|
(2,153
|
)
|
98,139
|
|
Income (loss) from operations
|
|
(1,538
|
)
|
|
|
(3,670
|
)
|
2,995
|
|
923
|
|
(1,290
|
)
|
Interest income (expense), net
|
|
(1,164
|
)
|
|
|
(43
|
)
|
(25
|
)
|
|
|
(1,232
|
)
|
Other income (expenses), net
|
|
(5,035
|
)
|
|
|
(3,587
|
)
|
4,888
|
|
|
|
(3,734
|
)
|
Income (loss) before income taxes
|
|
(7,737
|
)
|
|
|
(7,300
|
)
|
7,858
|
|
923
|
|
(6,256
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
1,482
|
|
|
|
1,482
|
|
Net income (loss)
|
|
$
|
(7,737
|
)
|
|
|
(7,300
|
)
|
6,376
|
|
923
|
|
(7,738
|
)
|
22
Table of
Contents
|
|
STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2010 (unaudited)
|
|
|
|
Guarantor
Parent
Company
|
|
Issuer
Subsidiary
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net revenues
|
|
$
|
|
|
|
|
53,547
|
|
82,086
|
|
(1,613
|
)
|
134,020
|
|
Equity in earnings of subsidiaries
|
|
(30,052
|
)
|
|
|
(5,749
|
)
|
(448
|
)
|
36,249
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seismic acquisition and data processing
|
|
2,443
|
|
|
|
36,274
|
|
75,478
|
|
(1,612
|
)
|
112,583
|
|
Depreciation and amortization
|
|
1,154
|
|
|
|
23,588
|
|
1,618
|
|
|
|
26,360
|
|
General and administrative
|
|
4,327
|
|
|
|
5,517
|
|
10,136
|
|
|
|
19,980
|
|
Other, net
|
|
|
|
|
|
593
|
|
107
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
7,924
|
|
|
|
65,972
|
|
87,339
|
|
(1,612
|
)
|
159,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
(37,976
|
)
|
|
|
(18,174
|
)
|
(5,701
|
)
|
36,248
|
|
(25,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
(1,115
|
)
|
(8,840
|
)
|
220
|
|
175
|
|
|
|
(9,560
|
)
|
Other income (expenses), net
|
|
(3,623
|
)
|
|
|
528
|
|
1,718
|
|
602
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
(42,714
|
)
|
(8,840
|
)
|
(17,426
|
)
|
(3,808
|
)
|
36,850
|
|
(35,938
|
)
|
Provision (benefit) for income taxes
|
|
(1,369
|
)
|
|
|
64
|
|
1,616
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(41,345
|
)
|
(8,840
|
)
|
(17,490
|
)
|
(5,424
|
)
|
36,850
|
|
(36,249
|
)
|
|
|
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2009 (Unaudited)
|
|
|
|
Guarantor
Parent
Company
|
|
Issuer
Subsidiary
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net revenues
|
|
$
|
|
|
|
|
77,997
|
|
331,114
|
|
(20,503
|
)
|
388,608
|
|
Equity in earnings of subsidiaries
|
|
25,849
|
|
|
|
40,355
|
|
|
|
(66,204
|
)
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seismic acquisition and data processing
|
|
7,467
|
|
|
|
48,418
|
|
242,545
|
|
(20,503
|
)
|
277,927
|
|
Depreciation and amortization
|
|
2,147
|
|
|
|
34,890
|
|
4,641
|
|
|
|
41,678
|
|
General and administrative
|
|
5,407
|
|
|
|
4,455
|
|
29,251
|
|
|
|
39,113
|
|
Other, net
|
|
(1
|
)
|
|
|
98
|
|
2,045
|
|
|
|
2,142
|
|
Total expenses
|
|
15,020
|
|
|
|
87,861
|
|
278,482
|
|
(20,503
|
)
|
360,860
|
|
Income (loss) from operations
|
|
10,829
|
|
|
|
30,491
|
|
52,632
|
|
(66,204
|
)
|
27,748
|
|
Interest income (expense), net
|
|
(4,094
|
)
|
|
|
(196
|
)
|
(39
|
)
|
|
|
(4,329
|
)
|
Other income (expenses), net
|
|
(9,733
|
)
|
|
|
(5,112
|
)
|
6,708
|
|
|
|
(8,137
|
)
|
Income (loss) before income taxes
|
|
(2,998
|
)
|
|
|
25,183
|
|
59,301
|
|
(66,204
|
)
|
15,282
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
18,280
|
|
|
|
18,280
|
|
Net income (loss)
|
|
$
|
(2,998
|
)
|
|
|
25,183
|
|
41,021
|
|
(66,204
|
)
|
(2,998
|
)
|
23
Table of
Contents
|
|
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2010 (Unaudited)
|
|
|
|
Guarantor
Parent
Company
|
|
Issuer
Subsidiary
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net revenues
|
|
$
|
|
|
|
|
150,992
|
|
232,912
|
|
(24,588
|
)
|
359,316
|
|
Equity in earnings of subsidiaries
|
|
(81,315
|
)
|
|
|
(6,414
|
)
|
(15,068
|
)
|
102,797
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seismic acquisition and data processing
|
|
7,667
|
|
|
|
90,084
|
|
225,671
|
|
(24,588
|
)
|
298,834
|
|
Depreciation and amortization
|
|
3,285
|
|
|
|
62,615
|
|
4,662
|
|
|
|
70,562
|
|
General and administrative
|
|
26,027
|
|
1,565
|
|
8,551
|
|
24,879
|
|
|
|
61,022
|
|
Other, net
|
|
2
|
|
|
|
2,563
|
|
(815
|
)
|
|
|
1,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
36,981
|
|
1,565
|
|
163,813
|
|
254,397
|
|
(24,588
|
)
|
432,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
(118,296
|
)
|
(1,565
|
)
|
(19,235
|
)
|
(36,553
|
)
|
102,797
|
|
(72,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
(4,114
|
)
|
(25,553
|
)
|
(16
|
)
|
1,105
|
|
|
|
(28,578
|
)
|
Other income (expenses), net
|
|
(1,191
|
)
|
200
|
|
(751
|
)
|
3,271
|
|
(271
|
)
|
1,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
(123,601
|
)
|
(26,918
|
)
|
(20,002
|
)
|
(32,177
|
)
|
102,526
|
|
(100,172
|
)
|
Provision (benefit) for income taxes
|
|
(3,665
|
)
|
14
|
|
426
|
|
5,850
|
|
|
|
2,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(119,936
|
)
|
(26,932
|
)
|
(20,428
|
)
|
(38,027
|
)
|
102,526
|
|
(102,797
|
)
|
|
|
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2009 (Unaudited)
|
|
|
|
Guarantor
Parent
Company
|
|
Issuer
Subsidiary
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net cash provided by (used in) operating
activities
|
|
$
|
(5,641
|
)
|
$
|
|
|
$
|
53,514
|
|
$
|
11,570
|
|
$
|
|
|
$
|
59,443
|
|
Net cash used in investing activities
|
|
(7,546
|
)
|
|
|
(17,157
|
)
|
(8,419
|
)
|
|
|
(33,122
|
)
|
Net cash provided (used in) financing activities
|
|
15,339
|
|
|
|
(39,717
|
)
|
4,111
|
|
|
|
(20,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
2,152
|
|
$
|
|
|
$
|
(3,360
|
)
|
$
|
7,262
|
|
$
|
|
|
$
|
6,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENT CASH FLOWS
For the Nine Months Ended September 30, 2010 (Unaudited)
|
|
|
|
Guarantor
Parent
Company
|
|
Issuer
Subsidiary
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net cash provided by (used in) operating
activities
|
|
$
|
7,852
|
|
|
|
(45,014
|
)
|
(26,374
|
)
|
102,526
|
|
38,990
|
|
Net cash provided (used in) investing activities
|
|
(3,505
|
)
|
122,971
|
|
(49,000
|
)
|
(21,216
|
)
|
|
|
49,250
|
|
Net cash provided (used in) financing activities
|
|
(46,450
|
)
|
|
|
1,806
|
|
|
|
|
|
(44,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
(42,103
|
)
|
122,971
|
|
(92,208
|
)
|
(47,590
|
)
|
102,526
|
|
43,596
|
|
NOTE 14: Subsequent
Events
The Companys management conducted our subsequent
events review through the date of the issuance of this Quarterly report on Form 10-Q
and concluded noted no events subsequent to the balance sheet date through the
date of this filing which required recognition in these Financial Statements or
disclosure in the Notes to Financial Statements other than those described
above
.
24
Table
of Contents
Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read
in combination with our Interim Condensed Financial Statements contained in
this Form 10-Q and our Annual Report on Form 10-K/A for the year
ended December 31, 2009 (2009 Form 10-K).
Forward Looking Statements
This
report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are often accompanied by words
such as believe, should, anticipate, plan, expect, potential, scheduled,
estimate, intend, seek, goal, may and similar expressions. These statements
include, without limitation, statements about our ability to meet our
short-term liquidity needs, our market opportunity, our growth strategy,
competition, expected activities, future acquisitions and investments, and the
adequacy of our available cash resources. We urge you to read these statements
carefully and caution you that matters subject to forward-looking statements
involve risks and uncertainties, including economic, regulatory, competitive
and other factors that may affect our business. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, we do not assume
any responsibility for the accuracy and completeness of such statements in the
future.
Forward-looking
statements involve known and unknown risks and uncertainties that may cause our
actual results in future periods to differ materially from those projected or
contemplated in the forward-looking statements as a result of, but not limited
to, the following factors:
·
our ability to comply with the covenants in
our revolving credit facility or to obtain an amendment or waiver of such
covenants;
·
our ability to raise capital or sell assets to meet our short-term
liquidity needs;
·
our ability to successfully integrate PGS Onshore into our existing
operations;
·
a decline in capital expenditures by oil and gas exploration and
production companies;
·
market developments affecting, and other changes in, the demand for
seismic data and related services;
·
the timing and extent of changes in the price of oil and gas;
·
our future capital requirements and availability of financing on
satisfactory terms;
·
availability or increases in the price of seismic equipment;
·
availability of crew personnel and technical personnel;
·
competition;
·
technological obsolescence of our seismic data acquisition equipment;
·
the condition of the capital markets
generally, which will be affected by interest rates, foreign currency
fluctuations and general economic conditions;
·
the effects of weather or other delays on our operations;
·
cost and other effects of legal proceedings,
settlements, investigations and claims, including liabilities which may not be
covered by indemnity or insurance;
·
governmental regulation; and
·
the political and economic climate in the foreign or domestic
jurisdictions in which we conduct business.
Given
these risks and uncertainties, we can give no assurances that results projected
in any forward-looking statements will in fact occur and therefore caution
investors not to place undue reliance on them. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise, except as required by law. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this report and the documents incorporated by reference herein
might not occur.
25
Table of
Contents
Overview
We
are a full-service, global provider of seismic data acquisition, multi-client
data library and seismic data processing and interpretation services to the oil
and natural gas industry. As an acknowledged industry leader in land, marsh,
swamp, transition zone and shallow water (up to 500 feet water depths) ocean
bottom cable or OBC environments, we have the capacity to operate up to 32
seismic crews with approximately 204,000 recording channels worldwide and the
ability to process seismic data collected throughout the world. Crew count,
configuration and location can change depending upon industry demand and
requirements.
We
provide a suite of geophysical services including acquisition of
two-dimensional (2D), three-dimensional (3D), and multi-component seismic
data surveys, data processing and interpretation services and other geophysical
services for customers in the oil and natural gas industry, which include many
national oil companies, major international oil companies and smaller
independent E&P companies in the Gulf Coast, Mid-Continent, California,
Appalachian and Rocky Mountain regions of the United States, Western Canada,
Canadian Arctic, Latin America, Africa, the Middle East, Australia/New Zealand
and the Far East. Seismic data is used by E&P companies to identify and
analyze drilling prospects, maximize drilling success, optimize field
development and enhance production economics. We also maintain a multi-client
data library whereby we maintain full or partial ownership of data acquired for
future licensing. Our multi-client data library consists of data covering
various areas in the United States and Canada.
The
seismic services industry is dependent upon the spending levels of oil and
natural gas companies for exploration, development, exploitation and production
of oil and natural gas. These spending levels have traditionally been heavily
influenced by the prices of oil and natural gas; however, budget cycles of
National Oil Companies (NOCs) and International Oil Companies (IOCs) tend to be
more strategic and longer term in nature. Since the third quarter of 2008, oil
and natural gas prices have shown significant volatility, and E&P spending
has been adjusted accordingly. To the extent that exploration spending does not
increase, our cash flows from operations could be directly affected. While
there are signs of recovery, if the global recession continues for a long
period of time, commodity prices may be depressed for an extended period of time,
which could alter acquisition and exploration plans, and adversely affect our
growth strategy.
In response to the recent
oil spill in the Gulf of Mexico, the United States Congress is considering a
number of legislative proposals relating to the upstream oil and gas industry
both onshore and offshore that could result in significant additional laws or
regulations governing operations in the United States. Additionally,
governments around the world have become increasingly focused on similar
regulatory matters which may result in significant changes in laws or
regulations elsewhere. While we do not
provide seismic services in the deepwater, our customers include national and
international oil companies involved in deepwater drilling projects. In
addition, in the past we have conducted transition area and ocean bottom
seismic acquisition surveys in the Gulf, and may do so in the future. Although
it is not possible at this time to predict whether proposed legislation or
regulations will be adopted, or how legislation or new regulation that may be
adopted would impact our business, any such future laws and regulations could
result in increased compliance costs or additional operating restrictions for
our customers. Additional costs or operating restrictions associated with
legislation or regulations could have a material adverse effect on our customers
operating results and cash flows, which could also negatively impact the demand
for our services. Conversely, capital
that was previously dedicated to the Gulf of Mexico may be redirected onshore
in the near-term, which could positively impact demand for our services. Longer term, we do not know the extent of the
impact on revenue or earnings as they are dependent among other things on our
customers actions and the potential impact of increases in their costs.
Developments related to our
business during 2010 include the following:
·
On January 14, 2010, we issued 207,200 shares of common stock as
part of the overallotment option to the underwriters of the December 18,
2009 stock issuance for $1.8 million.
·
On February 12, 2010, we consummated the acquisition of PGS
Onshore, refinanced our senior secured revolving credit facility and paid off
substantially all our existing capital lease obligations.
·
Our multi-client data library increased substantially through the PGS
Onshore acquisition. We have continued to expand this library through 2010;
including jobs in progress, this library now contains approximately 7,900
square miles and 2,400 linear miles of data as of November 3, 2010.
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Table of
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·
We have seen our backlog increase in each sequential quarter from
$378 million at December 31, 2009 (pro-forma combined with PGS
Onshore) to $642 million at September 30, 2010.
·
We launched our new
Geotiger
Series II
highly transportable 4 component (4C) OBC crew
to the Canadian Arctic and commenced operations in the second quarter. This
crew completed its first job in October and is currently mobilizing to
Mexico.
·
Bid activity has been strong throughout 2010 as we had approximately
$1.1 billion in outstanding bids as of October 27, 2010.
·
Our lenders have granted us a financial covenants waiver related to
the revolving credit facility for the September 30, 2010 measurement date.
The waiver agreement also amended our revolving credit to, among other things,
define newly imposed monthly financial covenants.
Recent developments
On June 30 and September 30,
2010, we were unable to satisfy certain maintenance covenants in our revolver
credit facility. We have received
waivers of the covenants that we were unable to meet at June 30 and September 30,
2010. We expect to require an additional
waiver of certain of the financial covenants at December 31, 2010 and
possibly beyond which are based on results from the trailing twelve months. In
connection with these waivers we amended the revolving facility to reduce the
maximum borrowings available from $50 to $40 million. In addition, the Company
is required to adhere to monthly consolidated total revenue and monthly consolidated
cumulative adjusted EBITDA targets commencing with the month ending September 30,
2010 through the month ending November 30, 2010. The Company complied with the financial
covenant minimums of $50 million of revenue and $7.9 million monthly cumulative
EBITDA for the month ending September 30, 2010.
We have experienced a recent
increase in the number of seismic acquisition contracts awarded to us, which
has resulted in increased crew mobilization costs and associated cash
uses. In order to ensure that we will have
sufficient liquidity to finance the increased business activity, meet our debt
service requirements and finance our business, we have initiated the following
actions,
·
We have continued to work with the lenders
under our credit facility to receive the required waivers and increase the
available borrowings under the facility;
·
We are exploring the issuance of additional
debt or equity securities; and
·
We are exploring sales of non-core assets.
If we are unable to
consummate one of the foregoing transactions, we may not be able to meet our
liquidity needs in the short term. While
no assurances can be made, management believes that given the increased business
we have experienced in the last several months, we should be able to execute on
one of the foregoing alternatives.
Backlog
Even
though the oil and gas business has continued to experience a period of reduced
spending on exploration and development in certain markets, our backlog has
increased since the first quarter of 2010. At September 30, 2010, our
estimated total backlog of commitments for services was approximately
$642 million compared to $519 million at June, 2010 and
$259 million at September 30, 2009.
Backlog at September 30, 2010 included $523 million or 81%
from international projects, and $119 million or 19% from North American
(excluding Mexico) projects, of which approximately $82 million is attributable
to the multi-client business in the United States. We expect to realize
approximately 40% of the total multi-client backlog during the fourth quarter
of this year. Of the total international
backlog, approximately $243 million, or 46%, is with national oil companies
(NOCs) or partnerships including NOCs.
Furthermore, approximately $256 million, or 49%, of the international
backlog is in shallow water transition zones and OBC environments. It is anticipated that at approximately 30%
of the backlog at September 30, 2010, will be completed in 2010 with the
remaining amount to be completed in 2011 and 2012. Contracts for services are
occasionally varied or modified by mutual consent and in many instances may be
27
Table of
Contents
cancelled
by the customer on short notice without penalty. As a result, our backlog as of
any particular date may not be indicative of our actual operating results for
any succeeding fiscal period.
Acquisition
On
December 3, 2009, we entered into a purchase agreement with PGS and its
subsidiaries in which we agreed to purchase PGS Onshore for
$210.0 million, consisting of $183.9 million of cash and 2,153,616
shares of our common stock, subject to adjustment, primarily for changes in
working capital. In addition, we agreed to assume approximately
$20.7 million of current liabilities associated with the ordinary course
operations of PGS Onshore as specified in the purchase agreement. Under the terms
of the purchase agreement, we agreed to purchase seven corporations or other
entities owned by PGS or its subsidiaries, and to acquire assets and assume
liabilities from four other subsidiaries of PGS. The entities and assets
acquired represent substantially all of PGS Onshore. We closed the acquisition
on February 12, 2010.
To
fund the cash portion of the purchase price, Geokinetics Holdings USA, Inc,
a wholly-owned subsidiary of Geokinetics (Geokinetics Holdings) issued
$300 million aggregate principal amount of its 9.75% senior secured notes
due 2014 in a private offering. The proceeds of this sale were held in escrow
until the closing of the PGS Onshore acquisition. We refinanced our existing
senior credit facility and repaid existing borrowings thereunder and repaid
significantly all of our capital lease and other obligations. See discussion
under Liquidity and Capital Resources below.
Change
in Executive Officer
Effective
October 13, 2010, our board of directors appointed Gary L. Pittman as
Executive Vice President and Chief Financial Officer. Also, on this date
Geokinetics and Mr. Pittman entered into an employment agreement. For
clarification purposes, Gary L. Pittman is not related to Gary M. Pittman, a
current member of the Companys Board of Directors.
Ronald
D. Cayon, previously named as the Companys interim Chief Financial Officer on August 19,
2010, remains a consultant to the Company and has been acting as interim Chief
Accounting Officer since March 2010. Scott A. McCurdy, Senior Vice President
and Chief Financial Officer, resigned from his position effective August 18,
2010.
Results of Operations
The
following discussion compares our consolidated financial results of operations
for the three and nine months ended September 30, 2010 to the three and
nine months ended September 30, 2009. As of September 30, 2010, our
core operating business segments were seismic data acquisition and seismic data
processing and interpretation. Our corporate activities include our corporate
general and administrative functions.
The operations of PGS Onshore have been combined with ours since
February 12, 2010 including in the results of operations for the three and
nine months ended September 30, 2010 which may affect the comparability of
results of operations to prior periods.
Three Months Ended September 30, 2010
Compared to Three Months Ended September 30, 2009
Consolidated
revenues increased $37.2 million or 38.4% to $134.0 million during the three
months ended September 30, 2010 from $96.8 million during the three
months ended September 30, 2009. This increase is attributed to growth in
seismic acquisition revenue in our North America operations of $46.1 million,
which was offset by decrease of $8.4 million in our International operations
and data processing decrease of $0.5 million. Increases in North America
seismic acquisition revenues are attributed to higher crew utilization and also
due to the Multi-Client data library sales and the impact of the PGS Onshore
acquisition as further discussed below.
International operations were affected by a job mix that included less
shallow water work, project commencement delays and lower international
utilization during the three months ended September 30, 2010.
For the three months ended
September 30, 2010, seismic acquisition revenue totaled
$132.0 million as compared to $94.3 million for the same period of
2009, an increase of $37.7 million or 40.0%. This increase in
28
Table of Contents
seismic acquisition revenue is primarily
attributable to the $46.1 million increase in our North America operations
which were offset by decrease of $8.4 million in our International operations.
The increase in our revenues was primarily as a result of our entrance into the
multi-client data library business, and the PGS Onshore acquisition. We have
increased our crew counts in the North America from an average of 3.5 during
the quarter ended September 30, 2009 to an average of 7.0 during the
quarter ended September 30, 2010 which included an OBC crew working for
most of the quarter in the Canadian Arctic. Revenues also include multi-client
data library licensing revenues of $15.4 million and $3.9 million for
the three months ended September 30, 2010 and 2009, respectively.
Seismic
acquisition revenues from international operations for the three months ended
September 30, 2010 were $74.5 million or 56.4% of total seismic data
acquisition revenue compared to $82.9 million or 85.6% of total seismic
data acquisition related revenue for the same period in 2009. During the
quarter ended September 30, 2010, our international operations were
impacted by a job mix that included less shallow water work and weather related
downtime in Australia and Mexico that contributed to lower overall utilization
along with project commencement delays in Indonesia.. Conversely, the decrease in international
revenues was offset by a full quarters contribution from projects in Trinidad
and Peru and from a second land crew in Brazil.
Data
processing revenue declined to $1.9 million for the three months ended
September 30, 2010 as compared to $2.5 million for the same period of
2009. The decline in revenue is the result of depressed pricing in North
America and internationally. Additionally, the revenue generated from
proprietary data processing work has declined slightly due to the Companys
increased focus on multi-client work in the United States.
Operating Expenses.
Consolidated
direct operating costs increased to $112.6 million in the three months
ended September 30, 2010 from $67.2 million for the same period in
2009. Changes in operating expense as a percentage of revenues is discussed
below and is related to overall increased costs related to operating additional
PGS Onshore crews in North America and internationally. Seismic acquisition
operating expenses from North America increased by $29.2 million to $39.1
million for the three months ended September 30, 2010. International
seismic acquisition expenses also increased by $16.2 million to $71.5 million
for the three months ended September 30, 2010.
Seismic
acquisition operating expenses increased to $110.6 million for the three
months ended September 30, 2010 from $65.2 million for the same
period of 2009. Seismic acquisition operating expenses as a percentage of
revenue were 82% for the three months ended September 30, 2010 as compared
to 67% for the same period in the prior year. This increase in operating expenses
as a percentage of revenue is a result of variances in crew utilization and the
shift in revenues between North American and international operations.
Seismic
acquisition operating expenses from North America for the three months ended
September 30, 2010 were $39.1 million, or 68% of total North America
seismic data acquisition revenue, compared to $9.9 million, or 87% of
total North America seismic data acquisition revenue for the same period in
2009. The costs as a percentage of revenue have decreased due to a higher
contribution from multi-client data library sales.
Seismic
acquisition operating expenses from international operations for the three
months ended September 30, 2010 were $71.5 million, or 96% of total
international seismic data acquisition revenue, compared to $55.3 million,
or 67% of total international seismic data acquisition revenue for the same
period in 2009. International operating expenses are higher as a result of
lower utilization and certain fixed costs for idle crews and vessels.
Data
processing expenses remained consistent at $2.0 million for the three months
ended September 30, 2010 and 2009.
Depreciation and amortization.
Depreciation
and amortization expense for the three months ended September 30, 2010
totaled $26.4 million as compared to $16.3 million for the same
period of 2009, an increase of $10.1 million or 62%. This is primarily
attributable to an increase in fixed assets of $104.1 million from the
Acquisition and our entrance into the multi-client data library business in
2009. Amortization of multi-client data for the three months ended
September 30, 2010 was $7.0 million, compared to $2.4 million for the
same period in 2009.
General and Administrative expenses.
General
and administrative expenses for the three months ended September 30, 2010
were $20.0 million, or 15% of revenues, as compared to $13.2 million,
or 14% of revenues, for
29
Table of
Contents
the
same period of 2009. General and administrative expenses have increased
primarily as a result of integration costs and training and ongoing
implementation costs for our new enterprise-wide system to improve the timing
and quality of bidding, cost tracking, project management, and financial and
operational reporting.
Interest Expense.
Interest
expense for the three months ended September 30, 2010 increased by
$8.8 million to $10.0 million as compared to $1.2 million for
the same period of 2009. This increase is primarily due to the issuance in December of
2009 of the $300 million Senior Secured Notes due 2014, and the conversion
of the Preferred Series B-2 shares to mandatorily redeemable preferred
stock (Preferred Series C stock) for which dividends are reflected as
interest expense in accordance with ASC Topic 480, Distinguishing
liabilities from equity. Interest on the outstanding bonds is due semiannually
on June 15 and December 15 of each year.
Change in Derivative Liabilities.
The
$3.5 million non-cash loss for the three months ended September 30,
2010 compared to a non-cash loss of $5.0 million for the three months
ended September 30, 2009 is related to recording the change in fair value
of the derivatives liabilities. The derivatives were revalued using available
market information and commonly accepted valuation methodologies. The valuation
of the derivative liabilities is significantly influenced by our stock price
which was $21.20 and $6.20 per share at September 30, 2009 and 2010,
respectively, compared to $13.65 and $3.83 per share at June 30, 2009 and
2010.
Income Tax.
Provision
for income taxes was $0.3 million for the three months ended September 30,
2010 compared to $1.5 million for the same period in 2009. The decrease is
due to lower taxable income in 2010 compared to 2009. While the Company had
pretax losses during the three months ended September 30, 2010 the income tax
provision for this period relates primarily to taxes due in countries with
deemed profit tax regimes, withholding taxes and the release of valuation
allowance in certain foreign jurisdictions with current year operating profits
based on the Companys reevaluation of the realizability of these future tax
benefits.
EBITDA and Net Loss.
EBITDA
was $1.5 million for the three months ended September 30, 2010, compared
to $16.4 million for the same period of 2009. We had a loss applicable to
common stockholders of $38.6 million, or $2.18 per share, for the three
months ended September 30, 2010, as compared to a loss applicable to
common stockholders of $10.2 million, or $0.95 per share, for the same
period of 2009. The decrease in our income applicable to common stockholders of
$28.4 million is primarily due to a decrease in operating margin, and
increase in depreciation and amortization expense on newly acquired PGS and
multi-client data library assets and increase in interest expense, offset by a
slight decrease in income taxes.
We
define EBITDA as net income (loss) (the most directly generally accepted
accounting principle or GAAP financial measure) before Interest, Taxes, Other
Income (Expense) (including derivative liabilities fair value gains/losses,
foreign exchange gains/losses, gains/losses on sale of equipment and insurance
proceeds, warrant expense and other income/expense), and Depreciation and
Amortization. EBITDA, as used and defined by us, may not be comparable to
similarly titled measures employed by other companies and is not a measure of
performance calculated in accordance with GAAP. EBITDA should not be considered
in isolation or as a substitute for operating income, net income or loss, cash
flows provided by operating, investing and financing activities, or other
income or cash flow statement data prepared in accordance with GAAP. However,
we believe EBITDA is useful to an investor in evaluating our operating
performance because this measure: (1) is widely used by investors in the
energy industry to measure a companys operating performance without regard to
items excluded from the calculation of such term, which can vary substantially
from company to company depending upon accounting methods and book value of
assets, capital structure and the method by which assets were acquired, among
other factors; (2) helps investors to more meaningfully evaluate and
compare the results of our operations from period to period by removing the
effect of our capital structure and asset base from its operating structure;
and (3) is used by our management for various purposes, including as a
measure of operating performance, in presentations to our board of directors,
as a basis for strategic planning and forecasting, and as a component for
setting incentive compensation. There are significant limitations to using
EBITDA as a measure of performance, including the inability to analyze the
effect of certain recurring and non-recurring items that materially affect our
net income or loss, and the lack of comparability of results of operations of
different companies.
30
Table
of Contents
See
below for reconciliation from net loss applicable to common stockholders to
EBITDA (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
2010
|
|
Net loss (Income) Applicable to Common
Stockholders
|
|
$
|
(10,201
|
)
|
(38,566
|
)
|
Preferred Stock Dividends
|
|
2,463
|
|
2,317
|
|
Net (Loss) Income
|
|
(7,738
|
)
|
(36,249
|
)
|
Provision for Income Taxes
|
|
1,482
|
|
311
|
|
Interest Expense, net (including Lender Fees)
|
|
1,232
|
|
9,560
|
|
Other Expense (Income) (as defined above)
|
|
5,140
|
|
1,475
|
|
Depreciation and Amortization
|
|
16,315
|
|
26,360
|
|
EBITDA
|
|
$
|
16,431
|
|
1,457
|
|
Nine Months Ended September 30, 2010
Compared to Nine Months Ended September 30, 2009
Consolidated
revenues decreased $29.3 million or 8% to $359.3 million during the nine months
ended September 30, 2010 from $388.6 million during the nine months
ended September 30, 2009. This decrease is attributed to lower overall
utilization and a job mix that included less shallow water work and project
commencement delays that led to reduced production during the nine months ended
September 30, 2010. The reduced
production will not affect the size or contract value of the jobs involved with
these delays. Increases in North America
seismic acquisition revenues offset the decrease in consolidated revenues and
are attributed to higher utilization of crews in both proprietary and
multi-work work. Additionally, late
sales on the Companys existing data library added to the revenue increase for
the region.
For the nine months ended
September 30, 2010, seismic acquisition revenue totaled $352.6 million
as compared to $380.8 million for the same period of 2009, a decrease of
$28.2 million or 7%. North America revenues increased by $70.6 million to
a total of $136.0 million, which represents an increase of 108% from the same
nine month period in 2009. Revenues increased as a result of higher crew
utilization in the United States coupled with revenues from multi-client in
both pre-funding deliveries and late sales.
Multi-client data library licensing revenues totaled $34.3 million
and $4.0 million for the nine months ended September 30, 2010 and September 30,
2009, respectively.
Seismic
acquisition revenues from international operations for the nine months ended
September 30, 2010 were $216.6 million or 61% of total seismic data
acquisition revenue compared to $315.4 million or 83% of total seismic
data acquisition related revenue for the same period in 2009. Our international
operations were impacted by a job mix that included less shallow water work,
lower utilization due to delays in contract awards and weather issues along
project commencement delays in Angola.
The shortfall in revenues was partially offset by higher production in
Peru and Brazil.
Data
processing revenue declined to $6.8 million for the nine months ended
September 30, 2010 as compared to $7.8 million for the same period of
2009. The decline in revenue is the result of depressed pricing in North
America and internationally. Additionally, the revenue generated from
proprietary data processing work has declined slightly due to the Companys
increased focus on multi-client work in the United States.
Operating Expenses.
Consolidated
direct operating costs increased to $298.8 million in the nine months
ended September 30, 2010 from $277.9 million for the same period in
2009. Changes in operating expense as a percentage of revenues is discussed
below and is related to overall increased costs related to operating additional
PGS Onshore crews in North America and internationally. Seismic acquisition
operating expenses from North America increased by $42.8 million to $95.8
million for the nine months ended September 30, 2010. International seismic
acquisition expenses decreased by $22.3 million to $196.2 million for the nine
months ended September 30, 2010.
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Seismic
acquisition operating expenses increased to $292.0 million for the nine
months ended September 30, 2010 from $271.5 million for the same
period of 2009. Seismic acquisition operating expenses as a percentage of
revenue were 83% for the nine months ended September 30, 2010 as compared
to 71% for the same period in the prior year. This increase in operating
expenses as a percentage of revenue is a result of higher idle costs in
International operations coupled with a change in the Companys job mix
globally.
Seismic
acquisition operating expenses from North America for the nine months ended
September 30, 2010 were $95.8 million, or 70% of total North America
seismic data acquisition revenue, compared to $53.0 million, or 81% of
total North America seismic data acquisition revenue for the same period in
2009. The costs as a percentage of revenue have decreased due to a higher
contribution from multi-client data library sales coupled with increased crew
efficiency and equipment utilization as a result of the Acquisition.
Seismic
acquisition operating expenses from international operations for the nine
months ended September 30, 2010 were $196.2 million, or 91% of total
international seismic data acquisition revenue, compared to
$218.5 million, or 69% of total international seismic data acquisition
revenue for the same period in 2009. International operating expenses are lower
as a result of decreased activity levels due to delays in project awards and
project commencements; however the percentage as compared to revenue is higher
due to certain fixed costs for idle crews and vessels.
Data
processing expenses were slightly higher at $6.9 million for the nine months
ended September 30, 2010 compared to $6.4 million for the same period in
2009. To remain competitive, we accepted lower margin jobs while processing a
higher volume of data during 2010.
Depreciation and amortization.
Depreciation
and amortization expense for the nine months ended September 30, 2010
totaled $70.6 million as compared to $41.7 million for the same
period of 2009, an increase of $28.9 million or 69%. This is attributable
to an increase in fixed assets of $104.1 million from the Acquisition and
our entrance into the multi-client data library business in late 2009.
Amortization of multi-client data for the nine months ended September 30,
2010 was $17.4 million. The Company did not
have results from the multi-client business in the nine month period ended September 30,
2009.
General and Administrative expenses.
General
and administrative expenses for the nine months ended September 30, 2010
were $61.0 million, or 17% of revenues, as compared to $39.1 million,
or 10% of revenues, for the same period of 2009. General and administrative
expenses have increased primarily as a result of integration costs and training
and ongoing implementation costs for our new enterprise-wide system to improve
the timing and quality of bidding, cost tracking, project management, and
financial and operational reporting. The Company anticipates these costs to be
a reduced part of ongoing business.
Interest Expense.
Interest
expense for the nine months ended September 30, 2010 increased by $25.5 million
to $30.0 million as compared to $4.5 million for the same period of
2009. This increase is primarily due to the issuance in December 2009 of
the $300 million Senior Secured Notes due 2014, and the conversion of the
Preferred Series B-2 shares to mandatorily redeemable preferred stock
(Preferred Series C stock) for which dividends are reflected as interest
expense in accordance with ASC Topic 480, Distinguishing liabilities from
equity. Interest on the outstanding
bonds is due semiannually on June 15 and December 15 of each year.
Change in Derivative Liabilities.
The
$1.4 million non-cash gain for the nine months ended September 30,
2010 compared to a non-cash loss of $9.6 million for the nine months ended
September 30, 2009 is related to recording the change in fair value of the
derivatives liabilities. The derivatives were revalued using available market
information and commonly accepted valuation methodologies.
Income Tax.
Provision
for income taxes was $2.6 million for the nine months ended
September 30, 2010 compared to $18.3 million for the same period in
2009. The decrease is due to lower taxable income in 2010 compared to 2009.
While the Company had pretax losses during the nine months ended
September 30, 2010 the income tax provision for this period relates
primarily to taxes due in countries with deemed profit tax regimes, withholding
taxes and the release of valuation allowance in certain foreign jurisdictions
with current year operating profits based on the Companys reevaluation of
these future tax benefits.
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EBITDA and Net Loss.
EBITDA
was a loss of $0.5 million for the nine months ended September 30, 2010,
compared to $71.6 million for the same period of 2009. We had a loss
applicable to common stockholders of $109.3 million, or $6.31 per share,
for the nine months ended September 30, 2010, as compared to a loss
applicable to common stockholders of $10.3 million, or $0.95 per share,
for the same period of 2009. The decrease in our income applicable to common
stockholders of $99.0 million is primarily due to a decrease in operating
margin, an increase in depreciation and amortization expense on newly acquired
PGS and multi-client data library assets and an increase in interest expense as
a result of the bonds issued in December 2009. These costs were offset by a slight decrease
in income taxes due to the lower income from continuing operations.
See
below for reconciliation from net loss applicable to common stockholders to
EBITDA (in thousands):
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
2010
|
|
Net loss (Income) Applicable to Common
Stockholders
|
|
$
|
(10,259
|
)
|
(109,322
|
)
|
Preferred Stock Dividends
|
|
7,261
|
|
6,525
|
|
Net (Loss) Income
|
|
(2,998
|
)
|
(102,797
|
)
|
Provision for Income Taxes
|
|
18,281
|
|
2,625
|
|
Interest Expense, net (including Lender Fees)
|
|
4,328
|
|
31,095
|
|
Other Expense (Income) (as defined above)
|
|
10,279
|
|
(2,025
|
)
|
Depreciation and Amortization
|
|
41,678
|
|
70,562
|
|
EBITDA
|
|
$
|
71,568
|
|
(540
|
)
|
Liquidity and Capital Resources
Our
primary sources of cash flow are generated from our operations including
multi-client prefunding, debt and equity offerings, our revolving credit
facility, and trade credit. Our primary uses of cash are operating expenses,
crew mobilizations and expenditures associated with upgrading and expanding our
capital asset base. As of September 30, 2010, we had available liquidity
as follows:
Available cash:
|
|
$
|
53.8 million
|
|
Undrawn borrowing capacity under the RBC Facility
(as defined below):
|
|
$
|
14.0 million
|
|
Net available liquidity at September 30,
2010:
|
|
$
|
67.8 million
|
|
We
maintain various foreign bank overdraft facilities used to fund short-term
working capital needs. At September 30, 2010, there were no amounts
outstanding under these facilities and we had approximately $5.1 million
of availability. However, due to the limitations on the ability to remit funds
to the United States, this amount has not been included in the available
liquidity table above although it is available for use in other countries.
The
following table summarizes the net cash provided by (used in) operating,
investing and financing activities for the nine months ended September 30,
2009 and 2010 (in thousands):
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
|
$
|
59,443
|
|
$
|
38,990
|
|
Investing activities
|
|
(33,122
|
)
|
49,250
|
|
Financing activities
|
|
(20,267
|
)
|
(44,644
|
)
|
|
|
|
|
|
|
|
|
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Net
cash provided by operating activities was $39.0 million for the nine months
ended September 30, 2010 compared to $59.4 million for the nine
months ended September 30, 2009. The decrease in operational cash flow is
mainly driven by operating loss during the period, offset by non cash charges
and receivable collections of $82.0 million.
Net
cash provided by investing activities was $49.3 million for the nine
months ended September 30, 2010 compared to net cash used in investing
activities of $33.1 million for the nine months ended September 30,
2009. The 2010 amounts primarily result from changes in restricted cash for
$303.8 million, offset by cash used for the Acquisition of
$180.8 million, investments in multi-client data library of $30.6 million
and capital expenditures of $41.0 million.
During 2009, $34.0 million in cash was invested in equipment and
multi-client data library, which was offset slightly by $0.9 million in funds
received for disposition of property and equipment.
Net
cash used in financing activities was $44.6 million for the nine months
ended September 30, 2010 as compared to net cash used by financing
activities of $20.3 million for the nine months ended September 30,
2009. The cash used in financing activities during the 2010 period represents
primarily amounts used for repayment of substantially all of our
pre-acquisition debt, except for our Senior Secured Notes, on the date of the
Acquisition. Net cash used during this period was partially offset by net
borrowings under the RBC Facility of $26.0 million. For the nine months ended September 30,
2009, borrowings of $118.8 million were offset by repayment of debt, capital
leases and vendor financing totaling $139.0 million and $0.1 million in stock
issuance costs.
Revolving Credit Facility
RBC Credit Facility.
On
February 12, 2010, Geokinetics Holdings entered into a revolving credit
and letters of credit facility with a group of lenders led by RBC. The
revolving credit facility matures on February 12, 2013. Effective
June 30, 2010, the Company entered into Amendment No. 1 to the
revolving credit facility which reset certain financial covenants for the
quarters ending June 30, 2010 and September 30, 2010 and reduced the
permitted outstanding borrowing under the facility from $50 million to
$40 million. On September 30, 2010, Geokinetics Holdings entered into
Waiver and Amendment No. 2 which provides a waiver of specific events of
default that would have occurred on September 30, 2010 for failure to
comply with financial covenant requirements (minimum total leverage ratio,
minimum interest coverage ratio and maximum fixed charge coverage ratio) and
revise certain covenant and reporting requirements for future periods.
Borrowings
outstanding under the revolving credit facility bear interest at a floating
rate based on the greater of: (i) 3% per year, (ii) the Prime Rate,
(iii) 0.5% above the Federal Funds Rate, or iv) 1% above one month
LIBOR; plus an applicable margin from 4.5% to 6.5% depending on the Companys
total leverage ratio. The rate was 8.75% at September 30, 2010. The
outstanding balance of this revolving credit facility was $26 million as
of September 30, 2010 and $29 million on November 5, 2010.
Borrowings
under the revolving credit facility are guaranteed by Geokinetics and each of
its existing and each subsequently acquired or organized wholly-owned U.S.
direct or indirect subsidiary of Geokinetics. Each of the entities guaranteeing
the revolving credit facility will secure the guarantees on a first priority
basis with a lien on substantially all of the assets of such guarantor. Borrowings
under the facility are effectively senior to the outstanding senior secured
notes pursuant to an inter-creditor agreement. The facility also contains
restrictions on liens, investments, indebtedness, mergers and acquisitions,
dispositions, certain payments, and other specific transactions.
The
revised financial covenants in Amendment No. 2 including monthly minimum
total revenues and consolidated cumulative adjusted EBITDA for the months
ending September 30, October 31, and November 30, 2010.
Minimum total revenues per month must total $50 million, $60 million, and $60
million for the months ended September 30, October 31, and
November 30, 2010, respectively. Monthly minimum consolidated
cumulative adjusted EBITDA must total $7.9 million, $17.6 million, and $30.1
million for the period beginning on September 1, 2010 until and including
September 30, October 31, and November 30, 2010,
respectively. he Company was in compliance with the revised covenant
minimums of $50 million of revenue and $7.9 million cumulative EBITDA for the
month ending September 30, 2010. While the Company believes it will remain
in compliance with the revised covenants through November 30, 2010, our
actual results may differ from our forecasts, and may be affected by events
beyond the Companys control. As a result, we cannot assure you that we will be
able to comply with these restrictions and covenants or meet such financial
ratios and tests.
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Further,
the financial covenants defined in the original revolving credit facility have
not been amended for the December 31, 2010 measurement date and beyond.
Based on our current forecasts, it is likely that we will be unable to comply
with certain of the financial covenants in our revolving credit facility at the
December 31, 2010 measurement date or beyond, which are based on results
from the trailing twelve months. We are in ongoing discussions with the lenders
under the credit facility to amend the covenants, but no assurance can be made
that we will be successful in such negotiations, or as to the terms or costs of
any such amendment or waiver if agreed to.
Therefore, the outstanding balance of $26 million has been presented as
short term debt in the September 30, 2010 balance sheet.
If
we are unable to comply with the restrictions and covenants in our debt
agreements, including our senior secured revolving credit facility, there could
be a default under the terms of these agreements. In the event of a default
under these agreements, lenders could terminate their commitments to lend or
accelerate the loans and declare all amounts borrowed due and payable.
Borrowings under other debt instruments that contain cross-acceleration or
cross-default provisions may also be accelerated and become due and payable. If
any of these events occur, our assets might not be sufficient to repay in full
all of 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 its 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.
Senior Secured Notes Due 2014
On
December 23, 2009, Geokinetics Holdings issued $300 million of 9.75%
Senior Secured Notes due 2014 (the Notes) in a private placement to
institutional buyers at an issue price of 98.093% of the principal amount. The
net proceeds the Company received in connection with the issuance of the Notes
have been recorded in long-term debt ($294.3 million) in the consolidated
financial statements. The discount is being accreted as an increase to interest
expense over the term of the Notes. At September 30, 2010, the effective
interest rate on the Notes was 10.2%, which includes the effect of the discount
accretion.
The
Notes bear interest at the rate of 9.75% per year, payable semi-annually in
arrears on June 15 and December 15 of each year. The Notes are fully
and unconditionally guaranteed, by the Company, and by each of the Companys
current and future domestic subsidiaries (other than Geokinetics Holdings,
which is the issuer of the Notes).
Until
the second anniversary following their issuance, the Company may redeem up to
10% of the original principal amount of the Notes during each 12-month period
at 103% of the principal amount plus accrued interest. Thereafter, the Company
may redeem all or part of the Notes at a prepayment premium which will decline
over time. The Company will be required to make an offer to repurchase the
Notes at 101% of the principal amount plus accrued interest if the Company
experiences a change of control. The indenture for the Notes contains customary
covenants for non-investment grade indebtedness, including restrictions on the
Companys ability to incur indebtedness, to declare or pay dividends and
repurchase its capital stock, to invest the proceeds of asset sales, and to
engage in transactions with affiliates.
Capital Lease Obligations
We
have four equipment lease agreements with Bradesco Leasing in Brazil with terms
of 36 months at a rate of 10.1% per year. The original amount of the
leases was approximately $3.0 million and the balance at
September 30, 2010 was approximately $1.2 million.
Other
We
maintain a foreign bank line of credit and overdraft facilities used to fund
short-term working capital needs. At September 30, 2010, the balance of
the foreign line of credit facilities was $1.6 million. There were no
outstanding balances under the overdraft facilities at September 30, 2010,
and we had approximately $5.1 million of availability.
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Off-Balance Sheet Arrangements
We
had no off-balance sheet arrangements during the first nine months of 2010 that
have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources
that are material to investors.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
We
are exposed to certain market risks arising from the use of financial
instruments in the ordinary course of business. These risks arise primarily as
a result of potential changes to operating concentration and credit risk,
changes in interest rates and foreign currency exchange rate risks. Additionally, we are exposed to market risk
with respect to our own equity securities.
These risks are further discussed below.
·
Concentration and credit risk:
Our principal
market risks include fluctuations in commodity prices which affect demand for
and pricing of our services and the risk related to the concentration of our
customers in the oil and natural gas industry. Since all of our customers
are involved in the oil and natural gas industry, there may be a positive or
negative effect on our exposure to credit risk because our customers may be
similarly affected by changes in economic and industry conditions. As an
example, changes to existing regulations or the adoption of new regulations may
unfavorably impact us, our suppliers or our customers. In the normal
course of business, we provide credit terms to our customers. Accordingly, we
perform ongoing credit evaluations of our customers and maintain allowances for
possible losses which, when realized, have been within the range of our
expectations. We believe that our unreserved trade receivables at September 30,
2010, of $126.2 are collectible and that our allowance for doubtful accounts is
adequate.
We
generally provide services to a relatively small group of key customers that
account for a significant percentage of our accounts receivable at any given
time. Our key customers vary over time. We extend credit to various companies
in the oil and natural gas industry, including our key customers, for the
acquisition of seismic data, which results in a concentration of credit risk.
This concentration of credit risk may be affected by changes in the economic or
other conditions of our key customers and may accordingly impact our overall
credit risk. If any of these significant clients were to terminate their
contracts or fail to contract for our services in the future because they are
acquired, alter their exploration or development strategy, or for any other
reason, our results of operations could be affected. For the year ended
December 31, 2009, our top ten customers were Sonangol, Petroandina,
Petrobel, Petroleo Brasileiro S.A.-Petrobras (Petrobras), ANH Sinu,
Staatsolie, Agência Nacional do Petróleo (ANP), Petronas Carigali Pertamina
Petrovietnam Operating Company, Sdn bhd.(PCPPOC), International Egyptian
Oil Company (IEOC), and Seismic Exchange , Inc. These top 10 customers
represented 70% of our consolidated revenue for 2009.
Our
two largest customers in 2009, Sonangol and Petroandina, accounted for 20% and
14% of total revenue, respectively. Because of the nature of our contracts and
customers projects, our largest customers can change from year to year and the
largest customers in any year may not be indicative of the largest customers in
any subsequent year.
·
Interest
Rate Risk.
We are exposed to changes in interest
rates through our fixed rate long-term debt. Typically, the fair market value
of fixed rate long-term debt will increase as prevailing interest rates
decrease and will decrease as prevailing interest rates increase. The fair
value of our long-term debt is estimated based on quoted market prices where
applicable, or based on the present value of expected cash flows relating to
the debt discounted at rates currently available to us for long-term borrowings
with similar terms and maturities. The estimated fair value of our long-term
debt was $265.8 million as of September 30, 2010 and $400.0 million
at December 31, 2009, which was $58.2 million less than its carrying value
of $324.0 million as of September 30, 2010 and $35.1 million more than its
carrying value of $364.9 million as of December 31, 2009
36
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We are exposed to the impact
of interest rate changes on the outstanding indebtedness under our senior
credit facility which has variable interest rates. Amounts drawn under the
credit facility bear interest at variable rates based on LIBOR plus a margin or
the alternative base rate as defined in the agreement. The interest rate margin
applicable to LIBOR advances varies based on our total leverage ratio. The
hypothetical impact on an average outstanding balance of our variable rate
indebtedness of $20 million from a hypothetical 100 basis point increase in
interest rates would be an increase in interest expense of approximately
$0.5 million per quarter.
We
have cash in bank and restricted cash which, at times, may exceed federally
insured limits. Restricted cash includes cash held to collateralize standby
letters of credit and performance guarantees. Historically, we have not
experienced any losses in such accounts. Recent volatility in financial markets
may impact our credit risk on cash and short-term investments. At September 30,
2010, unrestricted and restricted cash and cash equivalents totaled $57.3
million.
·
Foreign
Currency Exchange Rate Risk.
We operate in a
number of international areas and are involved in transactions denominated in
currencies other than the U.S. dollar, which expose us to foreign currency
exchange rate risk. We utilize the payment structure of customer contracts to
selectively reduce our exposure to exchange rate fluctuations in connection
with monetary assets, liabilities and cash flows denominated in certain foreign
currencies. We do not hold or issue foreign currency forward contracts, option
contracts or other derivative financial instruments for speculative purposes.
We have designated the
U.S. dollar as the functional currency for most of our operations in
international locations because we contract with customers, purchase equipment
and finance capital using the U.S. dollar. In those countries where we
have designated the U.S. dollar as the functional currency, certain assets
and liabilities of foreign operations are translated at historical exchange
rates, revenues and expenses in these countries are translated at the average
rate of exchange for the period, and all translation gains or losses are
reflected in the periods results of operations. In those countries where the
U.S. dollar is not designated as the functional currency, revenues and
expenses are translated at the average rate of exchange for the period, assets
and liabilities are translated at end of period exchange rates and all
translation gains and losses are included in accumulated other comprehensive
income (loss) within stockholders equity.
Our net foreign exchange loss
attributable to our international operations was $0.4 million for the nine
months ended September 30, 2010. There are many factors affecting foreign
exchange rates and resulting exchange gains and losses, most of which are
beyond our control. During the nine months ended, September 30, 2010, we
derived $216.6 million or 61% of our revenues from international operations. It
is not possible for us to predict the extent to which we may be affected by
future changes in exchange rates and exchange controls.
·
Equity
risk:
Under the terms of our Series B-1 Preferred Stock and existing
warrants and options to purchase our common stock, the holders of these
instruments are given an opportunity to profit from a rise in the market price
of our common stock that, upon the conversion of our Series B-1 Preferred
Stock and the exercise of the warrants and/or options, could result in dilution
in the interests of our other stockholders. As fully described in
Note 6 to the Condensed Consolidated Financial Statements, Series B-1
stockholders have various additional rights, including dividends, consent of
holders to, among other things, enter into a business combination or declare
dividends. The holders of our preferred stock have the preemptive right to
acquire shares of our common stock that we may offer for cash in the future,
other than shares sold in a public offering and the conversion price of the Series B-1
shares is subject to a down-round provision which may increase their holdings
in the event of any offering. The terms
on which we may obtain additional financing may be adversely affected by the
existence and potentially dilutive impact of our Series B-1 Preferred
Stock, and common stock options and warrants.
The
Company is required to account for the conversion feature preferred stock
related embedded derivative and investor warrants as derivative
liabilities. The Company is required to mark to market in each
reporting quarter the value of the embedded derivative and investor warrants.
The Company revalues these derivative liabilities at the end of each reporting
period. Derivative liabilities are presented as a long-term liability on
the balance sheet and totaled $8.5 million and $9.3 million as of September 30,
2010 and December 31, 2009, respectively. The periodic change in
value of the derivative liabilities is recorded as either non-cash derivative
income (if the value of the embedded derivative and investor warrants decrease)
or as non-cash derivative expense (if the value of the embedded derivative and
investor warrants increase). Although the values of the embedded
derivative and warrants are affected by interest rates, the remaining
contractual conversion period and the Companys stock volatility, the primary
cause of the change in the values will be the value of the Companys common
stock. If the stock price goes up, the value of these derivatives
will generally increase and if the stock price goes down the value of these
derivatives will generally decrease. Our
stock has historically been volatile; as a result, periodic gain or loss from
change in fair value of derivative liabilities may be material. Change in fair-value of derivatives is
detailed in the Condensed Consolidated Statements of Operations under the section
Other Income (expenses) and is discussed in the previous section. Gain (loss) from change in fair value of
derivative liabilities was ($3.5) million and $1.4 million for the three and
nine months ended September 30, 2010, respectively.
37
Table
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls
and Procedures
Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we have performed
an evaluation of the design, operation and effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Exchange
Act) as of September 30, 2010. Based on that evaluation, our principal
executive officer and principal financial officer concluded that such
disclosure controls and procedures were not effective. See Material Weaknesses
below.
Changes in Internal Control
Other
than the remediation measure described below under Remediation there have not
been any changes in our internal control over financial reporting (as defined
in the Exchange Act Rule 13a-15(f) of the Securities Exchange Act)
during the three months ending September 30, 2010, that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
Material Weaknesses
In
connection with the preparation of our consolidated financial statements for
the year ended December 31, 2009 and the nine months ended
September 30, 2010, we identified control deficiencies that constitute
material weaknesses in the design and operation of our internal control over
financial reporting. The following material weaknesses were present at December 31,
2009 and at September 30, 2010.
·
Financial Statement Close Process:
During
2009, we dedicated significant resources implementing a new management
information system and new business processes and controls around domestic and
international operations. Due to the demands created by this implementation,
the increasing complexity of our international operations and the Acquisition
and related financing transactions at the end of the year, we identified a
material weakness in our financial statement close process, including
insufficient controls over analyzing and reconciling accounts, maintaining
appropriate support and analyses of certain non-routine accruals, and properly
assessing the accounting and reporting implications related to new contractual
agreements and certain other accounting matters.
·
Taxes Related to International Operations
: We
identified another material weakness related to accounting for income taxes
associated with our international operations, including insufficient controls
and training over the proper identification and application of the relevant tax
rules, which affected our calculation of the tax provision of our international
operations.
·
Accounting for Derivative Financial Instruments
: We
identified a material weakness related to accounting for derivatives. The
Companys procedures to assess and identify the impact of Recently Issued
Accounting Pronouncements were not sufficient, as evidenced by our failure to
identify the impact of ASC 815-40-15 Derivatives and Hedging-Contracts in
Entitys Own Equity-Scope and Scope Exceptions, which became effective
January 1, 2009 and require us to account for derivative liabilities
related to the conversion feature of our preferred stock and warrants at fair
value and to mark to market each instrument at the end of each reporting
period.
Our
lack of resources, in terms of size, technical expertise and institutional
knowledge to address certain financial and tax aspects of our multi-national
operations, was identified as the underlying cause of these material
weaknesses.
These
material weaknesses resulted in the recording of a number of post-closing
adjustments to our 2009 consolidated financial statements. The adjustments
primarily affected non-routine accruals, deferred cost accounts, derivative
liabilities, deferred taxes and the tax provision related to our international
operations, including, as applicable, the corresponding income statement
accounts.
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Additionally,
these material weaknesses could result in a material misstatement to our annual
or interim consolidated financial statements that would not be prevented or
detected. Accordingly, we determined that our internal control over financial
reporting was not effective.
Remediation
We
have implemented a remediation program, including the establishment of
additional controls that are intended to strengthen our internal controls over
financial reporting generally and to specifically address the material
weaknesses discussed above. This remediation program includes the following:
·
Financial Statement Close Process:
We
continue updating existing accounting policies and procedures, and developing
new policies and procedures when identified, enhancing our corporate, regional,
and local accounting controls, optimizing our period-end close processes and
activities, and filling key positions to bring experience in financial
statement preparation, as well as skills related to the review and analysis of
complex accounting transactions, including further SEC reporting depth at both
the corporate and subsidiary levels. On October 13, 2010, our board of
directors appointed Gary L. Pittman as Executive Vice President and Chief
Financial Officer. He has more than 25 years of senior financial management
experience and has previously served as the Chief Financial Officer at five
public companies, primarily in the energy industry. His experience will add
depth to our SEC reporting process.
In early 2010, we engaged outside advisors to serve as interim Chief
Information Officer, Chief Accounting Officer, and Corporate Controller. As
part of the PGS Onshore acquisition, the Company began integrating additional
experienced accounting and finance professionals who will further enhance the
financial statement close process.
·
Taxes Related to International Operations
: We
re-designed our controls around the corporate income tax provision to include
enhancing existing controls, adding new controls, and targeting efforts on
improving our accounting for intercompany transactions. We also significantly
improved our tax experience and knowledge base by hiring a Vice President of
Tax and Corporate Tax Manager with over 30 and 27 years of experience,
respectively, in international tax matters. In addition, we have added an intercompany
accountant and intend to add additional tax resources at our corporate and
international locations. These individuals will analyze and monitor the related
income and other tax obligations and provide training in all the taxing
jurisdictions in which we operate. The addition of staff in these areas will
provide for an enhanced level of pre-bid planning, research, analysis and
review of complex international tax issues related to our existing and future
tax jurisdictions. We have in the past used, and we intend to continue to use,
third-party tax service providers for the more complex areas of our income tax,
accounting and related issues.
·
Accounting for Derivative Financial Instruments
: During
July 2010, the Company engaged a Big 4 public accounting firm to advise
the Companys management on proper identification, measurement and reporting
derivative financial instruments and determination of the related fair values.
During the quarter ended September 30, 2010, we filed restated
consolidated financial statements from the proper adoption date of January 1,
2009. In these financial statements for the three and nine months ended September 30,
2009 and 2010, we have recorded derivative financial instruments and their
related changes in fair value in accordance with current accounting principles.
In
addition to the remediation efforts to address material weaknesses, we have
engaged an independent international accounting firm to assist us with our
review of internal controls, our risk assessment, rationalization of
significant processes and key controls and preparation of the appropriate
documentation to support those significant processes and key controls on a
timely basis.
We
will continue to assess the adequacy of our finance and accounting
organization, both in terms of size and expertise in the future.
We
believe that these actions and resulting improvement in controls will
strengthen our disclosure controls and procedures, as well as our internal
control over financial reporting, and will, over time, address the material
weaknesses that we identified as of December 31, 2009 and
September 30, 2010.
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PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
Neither
the Company nor any of its subsidiaries is a party to any pending legal
proceedings other than certain routine litigation that is incidental to the
Companys business and that the Company believes is unlikely to materially
impact the Company. Moreover, the Company is not aware of any such legal
proceedings that are contemplated by governmental authorities with respect to
the Company, any of its subsidiaries, or any of their respective properties.
Item 1A. Risk Factors
Other
than as described in this Section, there has been no material changes in the
risk factors included in our Form 10-K/A for the year ended
December 31, 2009.
As discussed in our risk factors in our Form 10-K/A,
we are subject to stringent environmental laws and regulations that may expose
us to significant costs and liabilities.
Our customers are also impacted by these laws and regulations. The
recent oil spill in the Gulf of Mexico
may increase proposed
legislation or new regulation, any such future laws and regulations could
result in increased compliance costs or additional operating restrictions which
may adversely affect the financial health of our customers or decrease the
demand for our services.
We may be unable to comply with the
maintenance covenants in our senior revolving credit facility. If we are unable
to comply with the restrictions and covenants in our debt agreements, there
could be a default under the terms of such agreements, which could result in an
acceleration of repayment. Failure to
maintain existing or secure new financing could have a material adverse effect
on our liquidity and financial position.
On
October 1, 2010, we amended the credit agreement for our senior revolving
credit facility to provide a waiver of specific events of default for the
quarter ended September 30, 2010. The amendment defines newly imposed
financial covenants including monthly minimum total revenues and consolidated
cumulative adjusted EBITDA for the months ending September 30,
October 31, and November 30, 2010. While the Company believes it
will remain in compliance with these covenants, through November 30, 2010,
our actual results may differ from our forecasts, and these differences may be
material. Our ability to comply with these restrictions and covenants,
including meeting financial ratios and tests, may be affected by events beyond
the Companys control. As a result, we cannot assure you that we will be able
to comply with these restrictions and covenants or meet such financial ratios
and tests.
Further,
based on our current forecasts, it is likely that we will be unable to comply
with all financial covenants in our senior revolving credit facility at the December 31,
2010 measurement date or beyond which have not been amended beyond the November 30,
2010 measurement date, which are based on results from the trailing twelve
months. We are in ongoing discussions with the lenders under the credit
facility to amend the covenants, but no assurance can be made that we will be
successful in such negotiations, or as to the terms or costs of any such
amendment or waiver if agreed to. Therefore, the outstanding balance of $26
million has been presented as short term debt in the September 30, 2010 balance
sheet.
If
we are unable to comply with the restrictions and covenants in our debt
agreements, including our senior secured revolving credit facility, there could
be a default under the terms of these agreements. In the event of a default
under these agreements, lenders could terminate their commitments to lend or
accelerate the loans and declare all amounts borrowed due and payable.
Borrowings under other debt instruments that contain cross-acceleration or
cross-default provisions may also be accelerated and become due and payable. If
any of these events occur, our assets might not be sufficient to repay in full
all of 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.
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Holders of our preferred stock vote
as a class with our common stock and have the ability to cast approximately 31%
of the votes on matters submitted to a vote of our stockholders, and so will
have significant influence on matters submitted to a vote of our
stockholders. Holders of our preferred
stock also have the right to consent to certain corporate actions, which will
prevent us from undertaking those actions without the consent of the holders of
our preferred stock.
Approximately 91% of our outstanding convertible preferred stock is
held by Avista and its affiliates, and Avista owns an additional 2,863,954
shares of our common stock at September 30, 2010. The preferred stock votes as a class with our
common stock on an as converted basis, and represents approximately 31% of the
outstanding voting power of the Company. In addition, the terms of the
preferred stock provide that while the preferred stock is outstanding, the
holders of preferred stock voting together as a class are entitled to elect one
director of the Company. Accordingly, Avista and the holders of our preferred
stock are able to substantially influence matters submitted to a vote of our
stockholders, including the election of directors. Currently, two members of our board of
directors are affiliates of Avista.
In addition, the holders of a majority of the outstanding shares of
preferred stock, are required to approve each of the following transactions,
·
Any amendment
to our certificate of incorporation or by-laws,
·
Any payment of
a dividend to holders of our common stock or any repurchase of our common
stock,
·
Any sale of all
or substantially all of our assets and the assets of our subsidiaries, or any
merger or consolidation with another person if our stockholders immediately
prior to the merger own less than 50% of the entity resulting from the merger,
·
Any
reclassification or reorganization of our common stock,
·
The issuance of
any stock on parity with or having preference to the preferred stock,
·
Certain
transaction with our management, related parties or affiliates, unless
unaffiliated members of our board of directors approve the transaction, or
·
Any increase or
decrease in the number of directors on our board.
The holders of our preferred stock have the preemptive right to acquire
shares of our common stock that we may offer for cash in the future, other than
shares sold in a public offering.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior
Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None
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Item 6. Exhibits
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Amendment
No. 2 to the Credit Agreement dated as of October 1, 2010 by and
among Geokinetics Holdings and Royal Bank of Canada as administrative and
collateral agent to the certain lenders named therein (incorporated by
reference to Exhibit 10.1 to the Form 8-K filed October 4,
2010, file no. 0001104659-10-051144)
|
|
|
|
10.2
|
|
Employment
Agreement dated as of October 13, 2010 between Gary L. Pittman and
Geokinetics Inc. (incorporated by reference to Exhibit 10.1 to
Form 8-K filed October 14, 2010, file no. 0001104659-10-052352)
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,
filed herewith.
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,
filed herewith.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(b) or
Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(b) or
Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
|
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Table of
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
GEOKINETICS INC.
|
|
|
Date:
November 9, 2010
|
/s/ Richard F. Miles
|
|
Richard F. Miles
|
|
President and Chief Executive Officer
|
|
|
Date:
November 9, 2010
|
/s/ Gary L. Pittman
|
|
Gary L. Pittman
|
|
Executive Vice President and Chief
Financial Officer
|
|
|
Date:
November 9, 2010
|
/s/ Ronald D. Cayon
|
|
Ronald D. Cayon
|
|
Principal Accounting Officer
|
43
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