General

9 Months Ended

Sep. 30, 2012

General

General

NOTE 1: General

Organization

Geokinetics Inc., a Delaware corporation founded in 1980, is based in Houston, Texas. The Company is a global provider of seismic data acquisition, processing and integrated reservoir geosciences services, and a leader in providing land, transition zone and shallow water OBC environment geophysical services. These geophysical services include acquisition of 2D, 3D, time-lapse 4D and multi-component seismic data surveys, data processing and integrated reservoir geosciences services for customers in the oil and natural gas industry, which include national oil companies, major international oil companies and independent oil and gas exploration and production companies worldwide. Seismic data is used by these companies to identify and analyze drilling prospects and maximize successful drilling. The Company also owns a multi-client seismic data library whereby it maintains full or partial ownership of data acquired; client access is provided via licensing agreements. The Company’s multi-client seismic data library consists of data covering various areas in the United States, Canada and Brazil.

Basis of Presentation

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared on the accrual basis of accounting in accordance with GAAP and pursuant to the rules and regulations of the SEC. Accordingly, certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The Company believes that the presentations and disclosures herein are adequate for a fair presentation. The unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods presented. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its 2011 Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

The unaudited interim condensed consolidated financial statements include the accounts of Geokinetics Inc. and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Certain prior period amounts have been reclassified to conform to current period financial statement presentation.

Liquidity and Recent Developments

On October 23, 2012, the Company was notified by NYSE MKT of noncompliance with certain continued listing standards set forth in the Exchange’s Company Guide.  The Company is required to submit a plan to the Exchange by November 23, 2012, addressing how the Company intends to regain compliance with the continued listing standards by April 23, 2014.  If the Company does not submit a plan to the Exchange or if the plan is not accepted by the Exchange, the Exchange will initiate delisting proceedings.

On May 31, 2012, the Company appointed David J. Crowley as the President and Chief Operating Officer of the Company.

On May 9, 2012, the Company entered into (i) a Series B Preferred Stock Subscription and Exchange Agreement (the “Series B Exchange Agreement”) pursuant to which all the shares of Series B Senior Convertible Preferred Stock were exchanged for shares of the Series B-1 Senior Convertible Preferred Stock of the Company and (ii) a Series C Preferred Stock Subscription and Exchange Agreement pursuant to which all the shares of Series C Senior Preferred Stock were exchanged for shares of the Series C-1 Senior Preferred Stock of the Company. Additionally, on May 9, 2012, the Company amended the terms of the 2008 Warrants and 2010 Warrants. See notes 4 and 5.

On March 16, 2012, the Company entered into a commitment letter with Avista and an affiliate of Avista to provide up to an additional $10.0 million in debt financing until January 1, 2013. Avista’s obligations under the commitment letter are subject to the execution and delivery of definitive documents and other closing conditions. See note 3.  The Avista debt financing is unlikely to be available if the Company is not able to implement a restructuring of its indebtedness and capital structure, and the Company is currently pursuing various financing alternatives.  There can be no assurances that the Company will be successful in procuring any such alternatives.

On March 15, 2012, the Company entered into a purchase and sale agreement pursuant to which the Company agreed to sell certain North American seismic data in exchange for $10.0 million in cash. The transaction closed on March 30, 2012. See note 2.

During 2011, the Company incurred operating losses primarily due to the Mexico lift boat incident, delays in project commencements, low asset utilization, and idle crew costs, which resulted in serious concerns about the Company’s liquidity.   In an effort to address these liquidity issues that continued into 2012, the Company’s management instituted a number of steps, including closing some regional offices and exiting certain operations around the world where the long-term prospects for profitability were not in line with the Company’s business goals. Additionally, the Company’s management continues to focus on cost reductions, potential additional sales of assets, further centralization of bidding and management services to provide a higher level of control over costs and bidding on seismic acquisition services under careful consideration of required capital expenditures for additional equipment or restrictions in cash required for bid or performance bonds.

Although management has continued to focus on improving liquidity through the implementation of the actions described above, we anticipate that additional efforts will be required to address the Company’s high levels of indebtedness.     As a result, management  continues to focus on maintaining sufficient liquidity to continue to operate its commercial business and anticipates that it will only make the December 15, 2012 interest payment on the Notes, which also contains a 30 day grace period with respect to interest payments, in the event that following such payment it believes it will have sufficient liquidity to continue to fund its ongoing commercial operations.    If the Company determines that it does not have sufficient cash on hand to both fund the interest payment and meet the ongoing commercial operating needs of the Company following any such payment, the Company would likely need to implement a restructuring of its indebtedness and capital structure in an out-of-court restructuring if the terms of such a restructuring can be agreed upon by the requisite parties.  If agreement with respect to an out-of-court restructuring cannot be reached, the Company would likely be required to implement an in-court restructuring since the failure to meet our debt service obligations would constitute an event of default under the Whitebox Revolving Credit Facility and the Notes, and the Lenders or Note holders could declare all amounts outstanding under the Whitebox Revolving Credit Facility or Notes to be immediately due and payable.  In the event the Company determines that it has sufficient cash on hand to both fund the December 15, 2012 interest payment and to meet the ongoing commercial operational needs of the Company following such payment, the Company still expects that it will nevertheless need to implement a capital restructuring in the near term following any such interest payment to address its high debt levels.

The Company continues to work with its financial advisor to address these issues with a focus on effecting an out-of -court restructuring of the Company’s indebtedness and capital structure.  In particular, the Company is currently in discussions with some of its Lenders, preferred stock holders and certain of its Note holders regarding a restructuring of certain of its indebtedness which may involve, among other things, conversion of certain of its preferred securities and debt into equity securities of the Company.  Given the Company’s high levels of indebtedness and outstanding preferred stock that have preference over its common stock, however, the Company believes it is unlikely that more than a nominal value, if any, would be ascribed to its existing common stock after any such restructuring.  In connection with its ongoing assessment of its liquidity requirements with respect to the interest payment on the Notes described above and related restructuring efforts, and even though such restructuring will likely result in only nominal, if any, value being ascribed to its existing common stock in connection therewith, management believes it will be able to preserve sufficient liquidity to provide for the continuity of its commercial operations and the provision of services to its customers on an uninterrupted basis and believes that if its restructuring efforts are successful that it will ultimately be in a stronger financial position enabling it to better serve its customers.

In addition to working with the Company’s financial advisor regarding a restructuring of our indebtedness and capital structure, the Company’s management is currently reviewing other alternatives, and may adopt strategies such as reducing or delaying capital investments, delaying bids on new sales or seeking to raise additional capital through debt or equity financing. However, the Company’s current credit rating limits the Company’s ability to access the debt capital markets and the recent low trading price of the Company’s common stock severely limits the Company’s ability to raise substantial capital in the equity capital markets. Among other restrictions, our Notes and the Whitebox Revolving Credit Facility also limit our ability to incur or guarantee additional debt or to grant additional liens on our assets which further limits our ability to raise additional capital through debt financing. The ability to timely raise sufficient capital may also be limited by NYSE MKT stockholder approval requirements for certain transactions involving the issuance of the Company’s common stock or securities convertible into the Company’s common stock.  These alternatives may not be successful, and the Company could face a substantial liquidity shortfall and might be required to dispose of certain assets or take other actions to meet its operating and debt service obligations.  In addition, any unforeseen unfavorable developments could have a further material adverse effect on the Company’s liquidity and financial condition.

Recent Accounting Standards Not Yet Adopted

In December 2011, the FASB issued an update to ASC 220, Presentation of Comprehensive Income. This ASU defers a specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. The amendment will be temporary to allow the FASB time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income.

In December 2011, the FASB and the IASB issued an update to ASC 210, Balance Sheet—Disclosures about Offsetting Assets and Liabilities. This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures required by this ASU should be presented retrospectively for all comparative periods presented. The Company is currently evaluating the provisions of this ASU.

Recent Accounting Standards Adopted

In June 2011, the FASB issued an update to ASC 220, Presentation of Comprehensive Income. This ASU provides an entity with the option to present comprehensive income in either (i) a single statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income; or (ii) a two-statement approach which presents the components of net income and total net income in a first statement, immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The presentation of other comprehensive income in the statement of changes in equity was eliminated. The guidance is applied retrospectively and the Company adopted the provisions of this ASU on January 1, 2012, with the exception of those amendments relating to the presentation of reclassification adjustments out of accumulated other comprehensive income, which has been deferred as mentioned above. The Company elected the option to present comprehensive income in a single statement. However, the adoption of this guidance did not have an impact on the Company’s consolidated financial statements as there were no items related to comprehensive income during the three and nine months ended September 30, 2012 and 2011.

In May 2011, the FASB issued an update to ASC 820, Fair Value Measurements. This ASU clarifies the application of certain fair value measurement requirements and requires, among other things, expanded disclosures for Level 3 fair value measurements and the categorization by level for items for which fair value is required to be disclosed in accordance with ASC 825, Financial Instruments. The guidance is applied prospectively and the Company adopted the provisions of this ASU on January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. See note 6.