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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2010**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number 001-34709**

 

**GLOBAL GEOPHYSICAL SERVICES, INC.**

(Name of registrant as specified in its charter)

 

| **DELAWARE**                                                    | ** ** | **05-0574281**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**13927 South Gessner Road**

**Missouri City, TX 77489**

 

Telephone number: (**713) 972-9200**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes o No x

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definition of “accelerated filer”, “large acceleratedfiler”, and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.  (check one):

 

| Large accelerated filer o |   | Accelerated filer o         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer x   |   | Smaller reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined by Rule 12b-2of the Exchange Act).  Yes o No x

 

AtNovember 3, 2010, there were 36,036,163 shares of common stock, par value$0.01 per share, outstanding.

 

 

 

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**GLOBAL GEOPHYSICAL SERVICES, INC.**

**INDEX**

 
| PART I.  FINANCIAL  INFORMATION                                                                      |   |
|---------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                |   |
| Item 1.  Financial Statements                                                                             |   |
|                                                                                                                |   |
| Consolidated  Balance Sheets as of September 30, 2010 and December 31, 2009                               | 1      |
|                                                                                                                |   |
| Consolidated  Statements of Operations for the Three Months and Nine Months Ended  September 30, 2010 and 2009 | 3      |
|                                                                                                                |   |
| Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2010  and 2009                  | 4      |
|                                                                                                                |   |
| Consolidated  Statements of Stockholders’ Equity                                                               | 5      |
|                                                                                                                |   |
| Notes to  Consolidated Financial Statements                                                                         | 6      |
|                                                                                                                |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                | 23     |
|                                                                                                                |   |
| Item 3.  Quantitative and Qualitative Disclosure About Market Risk                                                  | 31     |
|                                                                                                                |   |
| Item 4. Controls  and Procedures                                                                                    | 32     |
|                                                                                                                |   |
| PART II.  OTHER  INFORMATION                                                                         |   |
|                                                                                                                |   |
| Item 1. Legal  Proceedings                                                                                          | 32     |
|                                                                                                                |   |
| Item 1A. Risk Factors                                                                                               | 32     |
|                                                                                                                |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                | 32     |
|                                                                                                                |   |
| Item 3.  Defaults Upon Senior Securities                                                                            | 32     |
|                                                                                                                |   |
| Item 4. Removed and  Reserved                                                                                       | 33     |
|                                                                                                                |   |
| Item 5. Other  Information                                                                                          | 33     |
|                                                                                                                |   |
| Item 6.  Exhibits                                                                                                   | 33     |

 

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**GLOBALGEOPHYSICAL SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                             | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **2010**               | ** **  | **2009**              | ** ** |
| ** **                                                                                                                             | ** ** | **(unaudited)**        | ** **  | ** **            | ** ** |
| ASSETS                                                                                                                                 |       |                   |        |                  |       |
|                                                                                                                                   |       |                   |        |                  |       |
| CURRENT ASSETS                                                                                                                         |       |                   |        |                  |       |
| Cash and cash equivalents                                                                                                              |       | $                      | 63,206,756  |                  | $          | 17,026,865 |   |
| Restricted cash investments                                                                                                            |       | 6,546,590              |        | 5,346,066             |       |
| Accounts receivable, net of allowances for  doubtful accounts of $4,713,100 at September 30, 2010 and $1,697,830 at  December 31, 2009 |       | 49,795,640             |        | 73,568,184            |       |
| Income and other taxes receivable                                                                                                      |       | 10,010,841             |        | 10,159,498            |       |
| Prepaid expenses and other current assets                                                                                              |       | 3,109,990              |        | 10,626,831            |       |
| TOTAL CURRENT ASSETS                                                                                                                   |       | 132,669,817            |        | 116,727,444           |       |
|                                                                                                                                   |       |                   |        |                  |       |
| MULTI-CLIENT LIBRARY, net                                                                                                              |       | 132,828,047            |        | 37,395,521            |       |
|                                                                                                                                   |       |                   |        |                  |       |
| PROPERTY AND EQUIPMENT, net                                                                                                            |       | 111,497,295            |        | 140,217,953           |       |
|                                                                                                                                   |       |                   |        |                  |       |
| GOODWILL AND OTHER INTANGIBLES, net                                                                                                    |       | 15,560,554             |        | 15,974,103            |       |
|                                                                                                                                   |       |                   |        |                  |       |
| OTHER                                                                                                                                  |       | 11,883,384             |        | 6,304,570             |       |
|                                                                                                                                   |       |                   |        |                  |       |
| TOTAL ASSETS                                                                                                                           |       | $                      | 404,439,097 |                  | $          | 316,619,591 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**GLOBAL GEOPHYSICAL SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS (CONTINUED)**

 
| ** **                                                                                                                                                                                                            | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                            | ** ** | **2010**               | ** **  | **2009**              | ** ** |
| ** **                                                                                                                                                                                                            | ** ** | **(unaudited)**        | ** **  | ** **            | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                             |       |                   |        |                  |       |
|                                                                                                                                                                                                                  |       |                   |        |                  |       |
| CURRENT LIABILITIES                                                                                                                                                                                                   |       |                   |        |                  |       |
| Accounts payable and accrued expenses                                                                                                                                                                                 |       | $                      | 56,533,159  |                  | $          | 34,272,606 |   |
| Current portion of long-term debt                                                                                                                                                                                     |       | —                 |        | 1,983,282             |       |
| Current portion of capital lease obligations                                                                                                                                                                          |       | —                 |        | 1,767,353             |       |
| Income and other taxes payable                                                                                                                                                                                        |       | 2,453,613              |        | 875,255               |       |
| Deferred revenue                                                                                                                                                                                                      |       | 48,412,716             |        | 43,545,291            |       |
| Liability on derivative instruments                                                                                                                                                                                   |       | —                 |        | 331,163               |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                                                                             |       | 107,399,488            |        | 82,774,950            |       |
|                                                                                                                                                                                                                  |       |                   |        |                  |       |
| DEFERRED INCOME TAXES                                                                                                                                                                                                 |       | —                 |        | 3,826,131             |       |
|                                                                                                                                                                                                                  |       |                   |        |                  |       |
| LONG-TERM DEBT, net of current portion and unamortized  discount                                                                                                                                                      |       | 194,264,873            |        | 165,794,658           |       |
|                                                                                                                                                                                                                  |       |                   |        |                  |       |
| CAPITAL LEASE OBLIGATIONS, net of current portion                                                                                                                                                                     |       | —                 |        | 295,665               |       |
|                                                                                                                                                                                                                  |       |                   |        |                  |       |
| TOTAL LIABILITIES                                                                                                                                                                                                     |       | 301,664,361            |        | 252,691,404           |       |
|                                                                                                                                                                                                                  |       |                   |        |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                         |       |                   |        |                  |       |
|                                                                                                                                                                                                                  |       |                   |        |                  |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                                             |       |                   |        |                  |       |
| Common Stock, $.01 par value, authorized  100,000,000 and 0 shares, 45,393,401 and 0 issued and 35,987,013 and 0  outstanding at September 30, 2010 and December 31, 2009, respectively                               |       | 453,934                |        | —                |       |
| Series A Convertible Preferred Stock, $.01 par  value, authorized 0 and 50,000,000 shares, 0 and 28,358,394  issued and 0 and 20,617,751 outstanding at  September 30, 2010 and December 31, 2009, respectively, |       | —                 |        | 283,584               |       |
| Class A Common stock, $.01 par value, authorized 0  and 30,000,000 shares, 0 and 4,000,000 issued and 0 and 3,709,100 outstanding  at September 30, 2010 and December 31, 2009                                        |       | —                 |        | 40,000                |       |
| Class B Common stock, $.01 par value, authorized 0  and 120,000,000 shares, 0 and 5,736,107 issued and 0 and 4,471,021  outstanding at September 30, 2010 and December 31, 2009, respectively                         |       | —                 |        | 57,361                |       |
| Additional paid-in capital                                                                                                                                                                                            |       | 238,333,155            |        | 160,362,017           |       |
| Accumulated deficit                                                                                                                                                                                                   |       | (40,377,180            | )           | (2,429,862            | )          |
|                                                                                                                                                                                                                  |       | 198,409,909            |        | 158,313,100           |       |
| Less: treasury stock, at cost, 9,406,388 and  9,296,629 shares at September 30, 2010 and December 31, 2009, respectively                                                                                              |       | 95,635,173             |        | 94,384,913            |       |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                                                                                       |       | 102,774,736            |        | 63,928,187            |       |
|                                                                                                                                                                                                                  |       |                   |        |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                       |       | $                      | 404,439,097 |                  | $          | 316,619,591 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**GLOBAL GEOPHYSICAL SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                    | ** ** | **Three Month Period Ended** | ** **  | **Nine Month Period Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                    | ** ** | **September 30,**            | ** **  | **September 30,**           | ** ** |
| ** **                                    | ** ** | **2010**                     | ** **  | **2009**                    | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                    | ** ** | **(unaudited)**              | ** **  | **(unaudited)**             | ** ** |
|                                          |       |                         |        |                        |       |   |   |   |   |
| REVENUES                                      |       | $                            | 60,469,517  |                        | $          | 89,709,234 |   | $ | 161,240,902 |   | $ | 214,237,104 |   |
|                                          |       |                         |        |                        |       |   |   |   |   |
| OPERATING EXPENSES                            |       | 54,040,413                   |        | 72,965,982                  |       | 152,117,059 |   | 180,080,451 |   |
|                                          |       |                         |        |                        |       |   |   |   |   |
| GROSS PROFIT                                  |       | 6,429,104                    |        | 16,743,252                  |       | 9,123,843 |   | 34,156,653 |   |
|                                          |       |                         |        |                        |       |   |   |   |   |
| SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES |       | 10,183,285                   |        | 7,117,600                   |       | 30,210,560 |   | 23,963,690 |   |
|                                          |       |                         |        |                        |       |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS                 |       | (3,754,181                   | )           | 9,625,652                   |       | (21,086,717 | ) | 10,192,963 |   |
|                                          |       |                         |        |                        |       |   |   |   |   |
| OTHER INCOME (EXPENSE)                        |       |                         |        |                        |       |   |   |   |   |
| Interest expense, net                         |       | (5,626,367                   | )           | (3,644,998                  | )          | (15,635,670 | ) | (12,580,847 | ) |
| Unrealized gain on derivative instruments     |       | —                       |        | 72,075                      |       | 331,163 |   | 522,496 |   |
| Foreign exchange gain (loss)                  |       | (44,028                      | )           | (281,680                    | )          | (210,279 | ) | 460,050 |   |
| Loss on extinguishment of debt                |       | —                       |        | —                      |       | (6,035,841 | ) | — |   |
| Other expense                                 |       | (100,229                     | )           | (10,600                     | )          | (24,583 | ) | (22,299 | ) |
| TOTAL OTHER EXPENSE                           |       | (5,770,624                   | )           | (3,865,203                  | )          | (21,575,210 | ) | (11,620,600 | ) |
|                                          |       |                         |        |                        |       |   |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAXES             |       | (9,524,805                   | )           | 5,760,449                   |       | (42,661,927 | ) | (1,427,637 | ) |
|                                          |       |                         |        |                        |       |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                  |       | 9,120,597                    |        | (607,125                    | )          | (4,714,609 | ) | (3,078,705 | ) |
|                                          |       |                         |        |                        |       |   |   |   |   |
| NET INCOME (LOSS)                             |       | $                            | (18,645,402 | )                           | $          | 6,367,574 |   | $ | (37,947,318 | ) | $ | 1,651,068 |   |
|                                          |       |                         |        |                        |       |   |   |   |   |
| INCOME (LOSS) PER COMMON SHARE                |       |                         |        |                        |       |   |   |   |   |
| Basic and diluted                             |       | $                            | (.52        | )                           | $          | .78 |   | $ | (1.54 | ) | $ | .20 |   |
|                                          |       |                         |        |                        |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING           |       |                         |        |                        |       |   |   |   |   |
| Basic and diluted                             |       | 35,908,480                   |        | 8,204,124                   |       | 24,652,434 |   | 8,213,728 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**GLOBAL GEOPHYSICAL SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                                | ** ** | **Nine Month Period Ended** | ** **  |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                                                | ** ** | **September 30,**           | ** **  |
| ** **                                                                                | ** ** | **2010**                    | ** **  | **2009** | ** ** |
| ** **                                                                                | ** ** | **(unaudited)**             | ** **  |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                      |       |                        |        |   |   |
| Net (loss) income                                                                         |       | $                           | (37,947,318 | ) | $ | 1,651,068 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities: |       |                        |        |   |   |
| Depreciation and amortization expense                                                     |       | 97,612,551                  |        | 53,694,505 |   |
| Capitalized depreciation for multi-client library                                         |       | (22,316,593                 | )           | (2,165,074 | ) |
| Amortization of debt issuance costs                                                       |       | 735,610                     |        | 679,567 |   |
| Loss on extinguishment of debt                                                            |       | 6,035,841                   |        | — |   |
| Stock-based compensation                                                                  |       | 2,259,625                   |        | 1,104,211 |   |
| Non-cash charitable contribution                                                          |       | 51,595                      |        | — |   |
| Non-cash revenue from multi-cleint data exchange                                          |       | (5,650,101                  | )           | — |   |
| Deferred tax benefit                                                                      |       | (3,826,131                  | )           | (96,060 | ) |
| Unrealized gain on derivative instrument                                                  |       | (331,163                    | )           | (522,496 | ) |
| Loss on disposal of property and equipment                                                |       | 2,337,778                   |        | — |   |
| Effects of changes in operating assets and  liabilities:                                  |       |                        |        |   |   |
| Accounts receivable                                                                       |       | 23,772,544                  |        | 10,897,058 |   |
| Prepaid expenses and other current assets                                                 |       | 9,066,841                   |        | (9,504,245 | ) |
| Non-current deferred tax asset                                                            |       | (3,278,000                  | )           | — |   |
| Other assets                                                                              |       | 759,228                     |        | (886,308 | ) |
| Accounts payable and accrued expenses                                                     |       | 11,058,494                  |        | 3,656,182 |   |
| Deferred revenue                                                                          |       | 438,825                     |        | 2,204,932 |   |
| Income and other taxes receivable                                                         |       | 148,657                     |        | (9,790,212 | ) |
| Income and other taxes payable                                                            |       | 1,578,358                   |        | (6,146,054 | ) |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                                 |       | 82,506,641                  |        | 44,777,074 |   |
|                                                                                      |       |                        |        |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                      |       |                        |        |   |   |
| Purchase of property and equipment                                                        |       | (8,632,772                  | )           | (14,822,982 | ) |
| Investment in multi-client library                                                        |       | (117,993,803                | )           | (18,484,639 | ) |
| Change in restricted cash investments                                                     |       | (1,200,524                  | )           | 2,142,272 |   |
| Proceeds from the sale of property and equipment                                          |       | 173,369                     |        | — |   |
| NET CASH USED IN INVESTING ACTIVITIES                                                     |       | (127,653,730                | )           | (31,165,349 | ) |
|                                                                                      |       |                        |        |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                      |       |                        |        |   |   |
| Proceeds from long-term debt, net of discount                                             |       | 194,018,000                 |        | 7,455,926 |   |
| Principal payments on long-term debt                                                      |       | (169,890,253                | )           | (10,298,434 | ) |
| Net payments on revolving credit facility                                                 |       | —                      |        | (25,832,055 | ) |
| Debt issuance costs                                                                       |       | (5,922,307                  | )           | — |   |
| Principal payments on capital lease obligations                                           |       | (2,063,018                  | )           | (4,171,472 | ) |
| Purchase of treasury stock                                                                |       | (1,250,260                  | )           | (1,250,017 | ) |
| Issuances of stock, net                                                                   |       | 76,434,818                  |        | — |   |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES                                      |       | 91,326,980                  |        | (34,096,052 | ) |
|                                                                                      |       |                        |        |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                     |       | 46,179,891                  |        | (20,484,327 | ) |
|                                                                                      |       |                        |        |   |   |
| CASH AND CASH EQUIVALENTS, beginning of period                                            |       | 17,026,865                  |        | 30,444,316 |   |
|                                                                                      |       |                        |        |   |   |
| CASH AND CASH EQUIVALENTS, end of period                                                  |       | $                           | 63,206,756  |   | $ | 9,959,989 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**GLOBAL GEOPHYSICAL SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**(Unaudited)**

 
| ** **                                                        | ** ** | ** **    | ** ** | ** **            | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **      | ** ** | ** **             | ** **  | **Total**   | ** ** |
|-------------------------------------------------------------------|------------|---------------|------------|-----------------------|------------|------------------|------------|-------------|------------|----------------|------------|-----------------|------------|------------------------|-------------|-------------|------------|
| ** **                                                        | ** ** | **Preferred** | ** ** | **Common Stock** | ** ** | **Common**       | ** ** | **Paid-in** | ** ** | **Treasury**   | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** **  |
| ** **                                                        | ** ** | **Stock**     | ** ** | **Class A**      | ** ** | **Class B** | ** ** | **Stock**   | ** ** | **Capital**    | ** ** | **Stock**       | ** ** | **Deficit**            | ** **  | **Equity**  | ** ** |
| Balances  at December 31, 2009                               |       | $             | 283,584    |                  | $          | 40,000           |       | $           | 57,361     |           | $          | —          |       | $                      | 160,362,017 |        | $          | (94,384,913 | ) | $ | (2,429,862 | ) | $ | 63,928,187 |   |
|                                                              |       |          |       |                  |       |             |       |        |       |           |       |            |       |                   |        |        |       |
| Issuance  of common stock, net of costs of issuance of $7,568,172 |       | —        |       | —                |       | 1,021            |       | 71,968      |       | 76,361,828     |       | —          |       | —                 |        | 76,434,817  |       |
|                                                              |       |          |       |                  |       |             |       |        |       |           |       |            |       |                   |        |        |       |
| Conversion  to common stock                                       |       | (283,584      | )          | (40,000               | )          | (58,382          | )          | 381,966     |       | —         |       | —          |       | —                 |        | —      |       |
|                                                              |       |          |       |                  |       |             |       |        |       |           |       |            |       |                   |        |        |       |
| Compensation  expense associated with stock grants                |       | —        |       | —                |       | —           |       | —      |       | 2,259,625      |       | —          |       | —                 |        | 2,259,625   |       |
|                                                              |       |          |       |                  |       |             |       |        |       |           |       |            |       |                   |        |        |       |
| Charitable  contribution expense associated with stock grant      |       | —        |       | —                |       | —           |       | —      |       | 51,595         |       | —          |       | —                 |        | 51,595      |       |
|                                                              |       |          |       |                  |       |             |       |        |       |           |       |            |       |                   |        |        |       |
| Put  option liability                                             |       | —        |       | —                |       | —           |       | —      |       | (701,910       | )          | —          |       | —                 |        | (701,910    | )          |
| .                                                                 |       |          |       |                  |       |             |       |        |       |           |       |            |       |                   |        |        |       |
| Purchase  of treasury stock                                       |       | —        |       | —                |       | —           |       | —      |       | —         |       | (1,250,260      | )          | —                 |        | (1,250,260  | )          |
|                                                              |       |          |       |                  |       |             |       |        |       |           |       |            |       |                   |        |        |       |
| Net  loss                                                         |       | —        |       | —                |       | —           |       | —      |       | —         |       | —          |       | (37,947,318            | )           | (37,947,318 | )          |
|                                                              |       |          |       |                  |       |             |       |        |       |           |       |            |       |                   |        |        |       |
| Balances  at September 30, 2010                              |       | $             | —     |                  | $          | —           |       | $           | —     |           | $          | 453,934         |       | $                      | 238,333,155 |        | $          | (95,635,173 | ) | $ | (40,377,180 | ) | $ | 102,774,736 |   |

 

See accompanying notes to consolidated financial statements.

 

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**GLOBALGEOPHYSICAL SERVICES, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1 - BASIS OF PRESENTATION**

 

Theconsolidated financial statements of Global Geophysical Services, Inc. andSubsidiaries (the “Company”) included herein are unaudited and have beenprepared on the same basis as the audited consolidated financial statements asof and for the year ended December 31, 2009.  In the opinion of management, theaccompanying unaudited financial information includes all adjustments,consisting of normal recurring adjustments necessary for a fair presentation ofthe interim financial information. Operating results for the interim periods are not necessarily indicativeof the results of any subsequent periods. Certain information in the footnote disclosures normally included inannual financial statements has been condensed or omitted for the interimperiods presented.  These interimconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements for the year ended December 31,2009.

 

**NOTE 2- SELECTED BALANCE SHEET ACCOUNTS**

 

Restricted cash:

 
| ** **                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                                                 | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                                       |       |                   |       |                  |       |
| Pledged for letters of credit                              |       | $                      | 5,996,019  |                  | $          | 4,462,500 |   |
|                                                       |       |                   |       |                  |       |
| Bank guarantee to foreign government for export  equipment |       | 550,571                |       | 883,566               |       |
|                                                       |       |                   |       |                  |       |
|                                                       |       | $                      | 6,546,590  |                  | $          | 5,346,066 |   |

 

Prepaidexpenses and other current assets:

 
| ** **                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                                | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                      |       |                   |       |                  |       |
| Mobilization costs, net                   |       | $                      | —     |                  | $          | 9,410,108 |   |
|                                      |       |                   |       |                  |       |
| Prepaid expenses and other current assets |       | 1,559,990              |       | 1,216,723             |       |
|                                      |       |                   |       |                  |       |
| Note receivable, current portion          |       | 1,550,000              |       | —                |       |
|                                      |       |                   |       |                  |       |
|                                      |       | $                      | 3,109,990  |                  | $          | 10,626,831 |   |

 

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Accountsreceivable:

 
| ** **                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                      | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                            |       |                   |       |                  |       |
| Accounts receivable, trade      |       | $                      | 37,456,893 |                  | $          | 57,731,675 |   |
|                            |       |                   |       |                  |       |
| Unbilled                        |       | 17,051,847             |       | 17,534,339            |       |
|                            |       |                   |       |                  |       |
| Allowance for doubtful accounts |       | (4,713,100             | )          | (1,697,830            | )          |
|                            |       |                   |       |                  |       |
|                            |       | $                      | 49,795,640 |                  | $          | 73,568,184 |   |

 

Included in accounts receivable at September 30,2010 are net receivables aggregating approximately $5,900,000 from twocustomers. Such receivables are in dispute; however, management and outsidelegal counsel believe the Company has performed services in accordance with theterms of the contract and, as such, they are fully collectible.  The Company is in negotiations/arbitration torecover such amounts. Bad debt expense for the three months ended September 30,2010 and 2009 was $93,314 and $15,549, respectively, and $3,097,996 and$3,413,641 for the nine months ended September 30, 2010 and 2009,respectively.

 

Other: 

 
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                              | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                    |       |                   |       |                  |       |
| Debt issuance costs, net                |       | $                      | 5,677,898  |                  | $          | 4,167,856 |   |
|                                    |       |                   |       |                  |       |
| Note receivable, net of current portion |       | 1,550,000              |       | —                |       |
|                                    |       |                   |       |                  |       |
| Non-current deferred tax asset          |       | 3,278,000              |       | —                |       |
|                                    |       |                   |       |                  |       |
| Other                                   |       | 1,377,486              |       | 2,136,714             |       |
|                                    |       |                   |       |                  |       |
|                                    |       | $                      | 11,883,384 |                  | $          | 6,304,570 |   |

 

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**NOTE 3 - MULTI-CLIENT LIBRARY**

 

Multi-client library consisted of the following: 

 
| ** **                     | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                     | ** ** | **2010**               | ** **  | **2009**              | ** ** |
| ** **                     | ** ** | **(unaudited)**        | ** **  | ** **            | ** ** |
|                           |       |                   |        |                  |       |
| Multi-client library, at cost  |       | $                      | 225,558,422 |                  | $          | 75,169,326 |   |
|                           |       |                   |        |                  |       |
| Less: accumulated amortization |       | 92,730,375             |        | 37,773,805            |       |
|                           |       |                   |        |                  |       |
| Multi-client library, net      |       | $                      | 132,828,047 |                  | $          | 37,395,521 |   |

 

Amortization expense for the three months ended September 30,2010 and 2009 was $32,021,587 and $839,580, respectively, and $54,956,570 and$7,692,486 for the nine months ended September 30, 2010 and 2009,respectively.

 

**NOTE 4 - PROPERTY AND EQUIPMENT**

 

Propertyand equipment consisted of the following:

 
| ** **                     | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                     | ** ** | **2010**               | ** **  | **2009**              | ** ** |
| ** **                     | ** ** | **(unaudited)**        | ** **  | ** **            | ** ** |
|                           |       |                   |        |                  |       |
| Furniture and fixtures         |       | $                      | 138,976     |                  | $          | 138,976 |   |
| Boats                          |       | 6,424,288              |        | 6,424,288             |       |
| Machinery and equipment        |       | 278,261,735            |        | 270,210,793           |       |
| Computers and software         |       | 10,041,470             |        | 9,177,907             |       |
| Land                           |       | 2,035,153              |        | 2,035,153             |       |
| Buildings                      |       | 11,721,548             |        | 11,721,548            |       |
|                           |       | 308,623,170            |        | 299,708,665           |       |
| Less: accumulated depreciation |       | 200,601,170            |        | 160,759,486           |       |
|                           |       | 108,022,000            |        | 138,949,179           |       |
| Construction in process        |       | 3,475,295              |        | 1,268,774             |       |
|                           |       |                   |        |                  |       |
| Net property and equipment     |       | $                      | 111,497,295 |                  | $          | 140,217,953 |   |

 

Depreciation expense for the three months ended September 30,2010 and 2009 was $13,212,943 and $15,500,940, respectively, and $42,242,432and $45,271,103 for the nine months ended September 30, 2010 and 2009,respectively.

 

Disposals are removed at cost less accumulateddepreciation with any resulting gain or loss reflected in income fromoperations within the statement of operations during the reporting period.During the three months ended September 30, 2010, the Company disposed ofproperty and equipment, incurring a loss of $2,337,778 which is included inoperating expenses.

 

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**NOTE 5 - GOODWILL AND OTHER INTANGIBLES**

 

Goodwill and other intangibles includedthe following:

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                           | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                 |       |                   |       |                  |       |
| Customer list                        |       | $                      | 3,934,000  |                  | $          | 3,934,000 |   |
| Trademark                            |       | 924,000                |       | 924,000               |       |
| Patents                              |       | 450,852                |       | 450,852               |       |
| Non-compete agreements               |       | 200,000                |       | 200,000               |       |
|                                 |       | 5,508,852              |       | 5,508,852             |       |
| Less: accumulated amortization       |       | 1,290,648              |       | 877,099               |       |
|                                 |       | 4,218,204              |       | 4,631,753             |       |
| Goodwill                             |       | 11,342,350             |       | 11,342,350            |       |
|                                 |       |                   |       |                  |       |
| Total goodwill and other intangibles |       | $                      | 15,560,554 |                  | $          | 15,974,103 |   |

 

Intangible assets subject toamortization are amortized over their estimated useful lives which are betweentwo and fifteen years.  Amortizationexpense for the three months ended September 30, 2010 and 2009 was$121,183 and $146,183, respectively, and $413,549 and $730,916 for the ninemonths ended September 30, 2010 and 2009, respectively.

 

**NOTE 6 - INCOME TAXES**

 

The Company provides for income taxes during interimperiods based on an estimate of the effective tax rate for the year.  Discrete items and changes in the estimate ofthe annual effective tax rate are recorded in the period in which they occur.

 

The Company assesses the likelihood that deferred taxassets will be recovered from the existing deferred tax liabilities or futuretaxable income in each jurisdiction.  Tothe extent the Company believes that recovery is not likely, it establishes avaluation allowance.  The Company hasrecorded valuation allowances in several non-US jurisdictions for its netdeferred tax assets since management believes it is more likely than not thatthese assets will not be realized because the future taxable income necessaryto utilize these losses cannot be established, projected, or the Company nolonger has operations in these jurisdictions.

 

The effective income tax rate for the nine months ended September 30,2010 and 2009 was 11.0% and 215.7%, respectively.

 

The Company’s effective income tax rate in 2010 and 2009differs from the federal statutory rate primarily due to state income taxes,non-deductible expenses, tax rate differential from US operations, andvaluation allowances in non-US jurisdictions.

 

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**NOTE 7 — INITIAL PUBLIC OFFERING**

 

OnApril 21, 2010, the Company entered into an underwriting agreement (the “UnderwritingAgreement”) with Credit Suisse Securities (USA) LLC and Barclays Capital Inc.,as representatives of the several underwriters named therein (collectively, the“Underwriters”), providing for the offer and sale in a firm commitment offeringof 7,500,000 shares of the Company’s common stock, par value $0.01 (the “CommonStock”), of which 500,000 shares were sold by selling stockholders, at a publicoffering price of $12.00 per share. Pursuant to the Underwriting Agreement, theCompany and the selling stockholders granted the Underwriters a 30-day optionto purchase up to an additional 625,000 shares and 500,000 shares of CommonStock, respectively, to cover over-allotments, which subsequently expiredwithout being exercised.

 

Thetransactions contemplated by the Underwriting Agreement were consummated onApril 27, 2010. The Company’s net proceeds from this offering wereapproximately $76.4 million after deducting underwriting discounts, fees andoffering expenses. As described in the Company’s final prospectus datedApril 22, 2010 (the “Prospectus”) contained in its Registration Statementon Form S-1 (File No. 333-162540), the Company used the net proceedsof the offering to pay down indebtedness and will use the remaining proceedsfor anticipated capital expenditures and general working capital purposes. TheCompany did not receive any of the proceeds from the sale of the Common Stocksold by the selling stockholders.

 

Upon completion of the initial public offering, allexisting shares of the Company’s outstanding Class A and Class Bcommon stock and the Company’s Series A convertible preferred stock wereconverted into one class of common stock (the “Stock Conversions”). Under theterms of its amended certificate of incorporation the Company is authorized toissue 105,000,000 shares of capital stock which consists of 100,000,000 sharesof common stock, par value $0.01 per share, and 5,000,000 shares of preferredstock, par value $0.01 per share.

 

**NOTE 8 - LONG-TERM DEBT**

 

SeniorNotes: On April 22, 2010, the Company entered into a Purchase Agreement(the “Purchase Agreement”) with Barclays Capital Inc., Credit Suisse Securities(USA) LLC and Banc of America Securities LLC, as representatives of the initialpurchasers (the “Initial Purchasers”), relating to the offer and sale by theCompany of $200 million aggregate principal amount of its 10-1/2% senior notesdue 2017 (the “Notes”).  The Company’s net proceeds from the offering wereapproximately $188.1 million after deducting the Initial Purchasers’ discounts,offering expenses and original issue discount. The issuance of the Notesoccurred on April 27, 2010. The Notes were offered and sold to the InitialPurchasers and resold only to qualified institutional buyers in compliance withthe exemption from registration provided by Rule 144A under the SecuritiesAct of 1933, as amended (the “Securities Act”), and in offshore transactions inreliance on Regulation S under the Securities Act.

 

TheNotes are a general unsecured, senior obligation of the Company. The Notes areunconditionally guaranteed as to principal, premium, if any, and interest bythe Company’s domestic subsidiaries (the “Guarantors”) on a senior unsecuredbasis.

 

TheCompany used the proceeds from the offering and sale of the Notes to repay outstandingindebtedness and plans to use the remaining proceeds for anticipated capitalexpenditures and for general working capital purposes.

 

OnApril 27, 2010, in connection with the offering of the Notes, the Companyentered into (i) an Indenture with The Bank of New York Mellon TrustCompany, N.A., (the “Trustee”), and (ii) a Registration Rights Agreementwith the Initial Purchasers. The following is a brief summary of the materialterms and conditions of the Indenture and the Registration Rights Agreement.

 

TheCompany and the Guarantors entered into an Indenture with the Trustee, pursuantto which the Company issued the Notes at a price equal to 97.009% of their facevalue.

 

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*Interest* — The Notes will bearinterest from April 27, 2010 at a rate of 10-1/2% per annum. The Companywill pay interest on the Notes semi-annually, in arrears, on May 1 andNovember 1 of each year, beginning November 1, 2010.

 

*Principal and Maturity* — The Notes were issuedwith a $200 million aggregate principal amount and will mature on May 1,2017.

 

*Optional Redemption by the Company*— At any timeprior to May 1, 2013, the Company may redeem up to 35% of the aggregateprincipal amount of the Notes with the net cash proceeds of certain equityofferings at a redemption price of 110.500% of the aggregate principal amountof the Notes redeemed if at least 65% of the aggregate principal amount of theNotes remains outstanding immediately after such redemption and the redemptionoccurs within 90 days of the closing date of such equity offering. On or afterMay 1, 2014, the Company may redeem the Notes at the following percentagesof the original principal amount: (i) 105.250% from May 1, 2014 toApril 30, 2015; (ii) 102.625% from May 1, 2015 to April 30,2016; and (iii) 100% from May 1, 2016 and thereafter.

 

*Repurchase Obligations by the Company*— If there is achange of control of the Company (as defined in the Indenture), each holder ofthe Notes may require the Company to purchase their Notes at a price equal to101% of the principal amount thereof, plus accrued and unpaid interest, if any,to the date of repurchase.

 

*Events of Default*— The Indenture alsocontains events of default including, but not limited to, the following:(i) nonpayment; (ii) defaults in certain other indebtedness of theCompany or the Guarantors; and (iii) the failure of the Company or theGuarantors to comply with their respective covenants in the event of amandatory redemption, optional redemption, option to repurchase, or a merger,consolidation or sale of assets. Upon an event of default, the holders of theNotes or the Trustee may declare the Notes due and immediately payable. As of September 30,2010, the Company is in compliance with all respective covenants.

 

Bankof America Revolving Credit Facility: On April 30, 2010,the Company entered into a new revolving credit facility under the terms of aCredit Agreement (the “Revolving Credit Facility”) with Bank of America, N.A.,as Administrative Agent, Swing Line Lender and L/C Issuer, and each lender fromtime to time party thereto. The Revolving Credit Facility provides forborrowings of up to $50.0 million. The loans under the Revolving CreditFacility bear interest at a rate equal to LIBOR plus the Applicable Rate or theBase Rate plus the Applicable Rate. The Base Rate is defined as the higher of(x) the prime rate and (y) the Federal Funds rate plus 0.50%. TheApplicable Rate is defined as a percentage determined in accordance with apricing grid based upon the Company’s leverage ratio, that will decline fromLIBOR plus 4.00% or the prime rate plus 3.00% to a minimum rate equal to LIBORplus 3.50% or the prime rate plus 2.50%. The Company is able to prepayborrowings under the Revolving Credit Facility at any time without penalty orpremium, subject to reimbursement of the lenders’ breakage and redeploymentcosts in the case of prepayment of LIBOR borrowings. The Company also will paya commitment fee of 0.75% per annum on the actual daily unused portions of theRevolving Credit Facility.

 

TheCompany’s Revolving Credit Facility is secured by a first priority lien onsubstantially all of the Company’s assets, the assets of the Company’snon-foreign subsidiaries, the stock of the Company’s non-foreign subsidiariesand 66% of the stock of certain of the Company’s foreign subsidiaries. Inaddition, the Company’s non-foreign subsidiaries will guarantee the Company’sobligations under the Revolving Credit Facility.

 

Theterms of the Revolving Credit Facility will limit the Company’s ability and theability of certain of the Company’s subsidiaries to, among other things: incuror guarantee additional indebtedness; grant additional liens on theCompany’s assets; make certain investments or certain acquisitions ofsubstantially all or a portion of another entity’s business orassets; merge with another entity or dispose of the Company’s assets; paydividends; enter into transactions with affiliates; engage in other lines ofbusiness and repurchase stock.

 

Additionally,the Revolving Credit Facility requires that the Company maintain certain ratiosof total senior, secured debt to consolidated EBITDA (as defined therein), andof consolidated EBITDA to consolidated interest. The Revolving Credit Facilityincludes customary provisions with respect to events of default. Upon theoccurrence and continuation of an event of default under the Revolving Credit Facility,the lenders will be able to, among other things, terminate their revolving loancommitments, accelerate the repayment of the loans outstanding and declare

 

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thesame to be immediately due and payable. As of September 30, 2010, theCompany is in compliance with all respective covenants.

 

Inconnection with the closing of the Company’s initial public offering and thesale of $200 million of the Company’s 10-1/2% senior notes due 2017 onApril 27, 2010, the Company repaid all outstanding borrowings under theFirst Lien Credit Agreement, the Second Lien Credit Agreement, and theConstruction Loan Agreement. These repayments resulted in the termination ofeach of these borrowing arrangements. The prepayment of the Construction LoanAgreement resulted in the incurrence of $160,000 in prepayment penalties.

 

NotesPayable - Insurance:  During2009, in exchange for insurance services provided, the Company issued twonegotiable promissory notes for $1,602,706 and $453,220 at an interest rate of3.69% per annum. The notes matured on March 8, 2010 and June 29,2010, respectively, and have been paid in full.

 

Lineof Credit:  In February 2007,the Company entered into a $5 million revolving line of credit which is securedby $5 million cash.  The terms of therevolving line of credit as currently written only allow for letters of creditto be drawn on the available credit, however, the cash balance above the totaloutstanding letters of credit may be withdrawn at any time lowering theavailable credit dollar-for-dollar.  Asof September 30, 2010, the line of credit serves as collateral for severalletters of credit totaling $2,882,700.

 

Long-termdebt consisted of the following:

 
| ** **                                                      | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                      | ** ** | **2010**               | ** **  | **2009**              | ** ** |
| ** **                                                      | ** ** | **(unaudited)**        | ** **  | ** **            | ** ** |
|                                                            |       |                   |        |                  |       |
| Senior notes                                                    |       | $                      | 200,000,000 |                  | $          | — |   |
| First lien term loan                                            |       | —                 |        | 113,900,000           |       |
| Second lien term loan                                           |       | —                 |        | 50,000,000            |       |
| Notes payable - insurance                                       |       | —                 |        | 627,816               |       |
| Mortgage                                                        |       | —                 |        | 5,362,437             |       |
|                                                            |       | 200,000,000            |        | 169,890,253           |       |
| Less: unamortized discount                                      |       | 5,735,127              |        | 2,112,313             |       |
|                                                            |       | 194,264,873            |        | 167,777,940           |       |
| Less: current portion                                           |       | —                 |        | 1,983,282             |       |
|                                                            |       |                   |        |                  |       |
| Total notes payable and line of credit, net of current  portion |       | $                      | 194,264,873 |                  | $          | 165,794,658 |   |

 

InterestRate Swap:  On March 7,2007, the Company entered into a $70 million notional value interest ratecollar to protect its interests from unanticipated fluctuations in cash flowscaused by volatility in the interest rate on its floating-rate debt.  The 2 year swap arrangement effectivelycapped the 3-month LIBOR rate at 5.75% and set the floor at 4.55%. The interestrate swap was terminated on March 31, 2010.

 

**NOTE 9 —FAIR VALUES OF FINANCIAL INSTRUMENTS**

 

EffectiveJanuary 1, 2009, the Company adopted guidance as it relates to financialassets and financial liabilities, which defines fair value, establishes aframework for measuring fair value under generally accepted accountingprinciples and expands disclosures about fair valuemeasurements.  The provisions of this standard apply to otheraccounting pronouncements that require or permit fair value measurements.

 

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Thisguidance defines fair value as the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date.   Hierarchical levels, asdefined in this guidance and directly related to the amount of subjectivityassociated with the inputs to fair valuations of these assets and liabilitiesare as follows:

 

Level1 — Unadjusted quoted prices in active markets that are accessible at themeasurement date for identical, unrestricted assets or liabilities.

 

Level2 — Inputs other than quoted prices included within Level 1 that are observablefor the asset or liability, either directly or indirectly, including quotedprices for similar assets or liabilities in active markets; quoted prices foridentical 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 orcorroborated by observable market data by correlation or other means.

 

Level3 — Inputs that are both significant to the fair value measurement andunobservable.

 

Thereported fair values for financial instruments that use Level 2 and Level 3inputs to determine fair value are based on a variety of factors andassumptions.  Accordingly, certain fair values may not representactual values of the 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 thatcould be incurred in an actual sale or settlement.

 

Inthe normal course of operations, the Company is exposed to market risks arisingfrom adverse changes in interest rates.  Market risk is defined forthese purposes as the potential for change in the fair value of debtinstruments resulting from an adverse movement in interest rates.

 

Thecarrying amounts of cash and cash equivalents, accounts receivable, accountspayable and short-term debt approximate their fair value due to the shortmaturity of those instruments, and therefore, have been excluded from the tablebelow.  The fair value of the Notes is determined by multiplying theprincipal amount by the market price.  The following table sets forththe fair value of the Company’s financial assets and liabilities as of September 30,2010 and December 31, 2009:

 
| ** **     | ** ** | **September 30, 2010** | ** **  | **December 31, 2009** | ** ** |
|----------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **     | ** ** | **(unaudited)**                  | ** **  | ** **                      | ** ** | ** ** | ** ** |
| ** **     | ** ** | **Carrying**                     | ** **  | **Fair**                        | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **     | ** ** | **Amount**                       | ** **  | **Value**                       | ** ** | **Amount** | ** ** | **Value** | ** ** |
|           |       |                             |        |                            |       |   |   |   |   |
| Long-term debt |       | $                                | 194,264,873 |                            | $          | 202,750,000 |   | $ | — |   | $ | — |   |
|                |            |                                  |             |                                 |            |  |  |  |  |  |  |  |  |

 

TheCompany is not a party to any hedge arrangements, commodity swap agreement orother derivative financial instruments.

 

TheCompany utilizes foreign subsidiaries and branches to conduct operationsoutside of the United States. These operations expose the Company to marketrisks from changes in foreign exchange rates.

 

**NOTE 10- DEBT ISSUANCE COSTS**

 

Thecosts related to the issuance of debt are capitalized and amortized to interestexpense using the effective interest method over the maturity period of therelated debt. Accumulated amortization is $1,566,138 and $1,159,580 at September 30,2010 and December 31, 2009, respectively.

 

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TheCompany recognized a loss on the extinguishment of debt in the amount of$6,035,841, which consisted of $4,005,707 and $2,030,134 for the debt issuancecosts and the unamortized portion of the original issue discount, respectively,related to the Company’s Prior Facilities upon refinancing with the Notesoffering in April 2010.

 

**NOTE 11- STOCK-BASED COMPENSATION**

 

TheCompany follows the accounting guidance for share-based payments which requiresall stock-based payments, including stock options, to be recognized as anoperating expense over the vesting period, based on their grant date fairvalues.

 

InJuly 2006, the Company’s board of directors and stockholders adopted theGlobal Geophysical Services, Inc. 2006 Incentive Compensation Plan (the “2006Incentive Plan”).  The 2006 IncentivePlan provides for a variety of  incentiveawards, including nonstatutory stock options, incentive stock options withinthe meaning of Section 422 of the Internal Revenue Code, or (the “Code”),stock appreciation rights, restricted stock awards, restricted stock unitawards, performance-based awards, and other stock-based awards.  A total of 9,203,058 shares of common stockare reserved for issuance under the 2006 Incentive Plan.  As of September 30, 2010, a total of4,681,400 options have been granted and 1,751,100 have been forfeited.

 

Incentive Stock Options:  The Company estimates the fair value of eachstock option on the date of grant using the Black-Scholes-Merton valuationmodel.  The volatility is based onexpected volatility over the expected life of eighty-four months.  As the Company has not historically declareddividends, the dividend yield used in the calculation is zero.  Actual value realized, if any, is dependenton the future performance of the Company’s common stock and overall stockmarket conditions.  There is no assurancethe value realized by an optionee will be at or near the value estimated by theBlack-Scholes-Merton model. The following assumptions were used:

 
| ** **                | ** ** | **Nine Months**             | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **Ended**                        | ** ** |
| ** **                | ** ** | **September 30, 2010** | ** ** |
|                      |       |                             |       |
| Risk-free interest rates  |       | 2.76                             | %          |
| Expected lives (in years) |       | 7.00                             |       |
| Expected dividend yield   |       | 0.00                             | %          |
| Expected volatility       |       | 60.58                            | %          |

 

Thecomputation of expected volatility during the nine months ended September 30,2010 was based on the historical volatility. Historical volatility wascalculated from historical data for the time approximately equal to theexpected term of the option award starting from the grant date. The risk-freeinterest rate assumption is based upon the U.S. Treasury yield curve in effectat the time of grant for the period corresponding with the expected life of theoption.

 

Asummary of the activity of the Company’s stock option plan for the nine monthsended September 30, 2010 is presented below:

 

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| ** **                                | ** ** | ** **   | ** ** | ** **         | ** ** | **Weighted**                | ** ** | ** **    | ** ** | **Weighted**        | ** ** |
|-------------------------------------------|------------|--------------|------------|--------------------|------------|-----------------------------|------------|---------------|------------|---------------------|------------|
| ** **                                | ** ** | **Weighted** | ** ** | ** **         | ** ** | **Average**                 | ** ** | ** **    | ** ** | **Average**         | ** ** |
| ** **                                | ** ** | **Average**  | ** ** | **Number of** | ** ** | **Remaining**               | ** ** | **Aggregate** | ** ** | **Optioned**        | ** ** |
| ** **                                | ** ** | **Exercise** | ** ** | **Optioned**       | ** ** | **Contractual**             | ** ** | **Intrinsic** | ** ** | **Grant Date** | ** ** |
| ** **                                | ** ** | **Price**    | ** ** | **Shares**         | ** ** | **Term in Years** | ** ** | **Value**     | ** ** | **Fair Value** | ** ** |
|                                      |       |         |       |               |       |                        |       |          |       |                |       |
| Balance as of December 31, 2009      |       | $            | 22.95      |               | 2,642,200  |                        | 10         |          | $          | —              |       | $ | 4.97 |   |
| Expired                                   |       |         |       | —             |       |                        |       |          |       |                |       |
| Granted                                   |       | 22.53        |       | 478,900            |       | 10                          |       | —        |       | 11.98               |       |
| Exercised                                 |       |         |       | —             |       |                        |       |          |       |                |       |
| Forfeited                                 |       | 22.70        |       | (190,800           | )          | —                      |       | —        |       | 6.48                |       |
|                                      |       |         |       |               |       |                        |       |          |       |                |       |
| Balance as of September 30, 2010     |       | $            | 22.90      |               | 2,930,300  |                        |       |          |       |                | $          | 6.02 |   |
|                                      |       |         |       |               |       |                        |       |          |       |                |       |
| Exercisable as of September 30, 2010 |       | $            | 23.07      |               | 1,326,475  |                        | —     |          | $          | —              |       | $ | — |   |

 

Compensationexpense associated with stock options for the three months ended September 30,2010 and 2009 was $434,025 and $195,809, respectively, and $1,196,010 and$520,981 for the nine months ended September 30, 2010 and 2009,respectively, is included in selling, general and administrative expenses inthe statement of operations.  At September 30,2010 and 2009, the Company had 1,603,825 and 1,595,075 of nonvested stockoption awards, respectively.  The totalcost of nonvested stock option awards which the Company had not yet recognizedwas approximately $4,344,000 at September 30, 2010.  Such amount is expected to be recognized overa period of 4 years from September 30, 2010.

 

StockWarrants:  At September 30,2010, the Company has outstanding warrants which entitle the holders topurchase an aggregate of 390,000 shares of common stock of the Company at anexercise price of $4.25 per share.

 

RestrictedStock:  To encourage retention andperformance, the Company granted certain employees and consultants restrictedshares of common stock with a fair value per share determined in accordancewith conventional valuation techniques, including but not limited to, arm’slength transactions, net book value or multiples of comparable company earningsbefore interest, taxes, depreciation and amortization, as applicable. 

 
| ** **                                                       | ** ** | **Number of**    | ** ** | **Weighted**        | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                       | ** ** | **Nonvested**         | ** ** | **Average**         | ** ** |
| ** **                                                       | ** ** | **Restricted**        | ** ** | **Grant Date** | ** ** |
| ** **                                                       | ** ** | **Share Awards** | ** ** | **Fair Value** | ** ** |
| Nonvested Restricted Shares Outstanding  January 1, 2010    |       | 281,289               |       | $                   | 7.88       |   |
| Granted                                                          |       | 298,900               |       | 9.85                |       |
| Vested                                                           |       | (87,438               | )          | 5.07                |       |
| Forfeited                                                        |       | (21,848               | )          | 7.17                |       |
|                                                             |       |                  |       |                |       |
| Nonvested Restricted Shares Outstanding September 30,  2010 |       | 470,903               |       | $                   | 9.69       |   |

 

Compensation / charitable contribution expense associatedwith restricted stock for the three months ended September 30, 2010 and2009 was $416,080 and $186,384, respectively, and $1,115,210 and $582,339 forthe nine months ended September 30, 2010 and 2009, respectively, isincluded in selling, general and administrative expenses in the statements ofoperations.  The total cost of non-vestedstock awards which the Company has not yet recognized at September 30,2010 was approximately $3,271,000. This amount is expected to be recognizedover the next three years.

 

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**NOTE 12 - EARNINGS PER SHARE**

 

TheCompany adopted the guidance for share-based payments which are considered asparticipating securities on January 1, 2009.  Upon adoption, all share-based payment awardsthat contained non-forfeitable rights to dividends, whether paid or unpaid,were designated as participating securities and included in the computation ofearnings per share (“EPS”).

 

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                             | ** **  | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                                      | ** **  | **(Unaudited)**                                     | ** ** |
|                                        |       |                                                 |        |                                                |       |   |   |   |   |
| Net loss                                    |       | $                                                    | (18,645,402 | )                                                   | $          | 6,367,574 |   | $ | (37,947,318 | ) | $ | 1,651,068 |   |
|                                        |       |                                                 |        |                                                |       |   |   |   |   |
| Basic and diluted common shares outstanding |       | 35,908,480                                           |        | 8,204,124                                           |       | 24,652,434 |   | 8,213,728 |   |
|                                        |       |                                                 |        |                                                |       |   |   |   |   |
| Basic and diluted (loss) income per share   |       | $                                                    | (.52        | )                                                   | $          | .78 |   | $ | (1.54 | ) | $ | .20 |   |

 

For the nine months ended September 30, 2010 and2009, 2,930,300 and 2,449,000, respectively, out-of-the-money stock optionshave been excluded from diluted earnings per share because they are consideredanti-dilutive.

 

For the nine months ended September 30, 2010 and2009, 390,000 and 0, respectively, stock warrants have been excluded fromdiluted earnings per share because they are considered anti-dilutive.

 

**NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION**

 

The following is supplemental cash flow information:

 
| ** **        | ** ** | **Nine Month Period Ended  September 30,** | ** ** |
|-------------------|------------|----------------------------------------------------------------|------------|
| ** **        | ** ** | **2010**                                                       | ** ** | **2009** | ** ** |
| ** **        | ** ** | **(unaudited)**                                                | ** ** |
|              |       |                                                           |       |   |   |
| Interest paid     |       | $                                                              | 5,788,141  |   | $ | 11,794,044 |   |
|              |       |                                                           |       |   |   |
| Income taxes paid |       | $                                                              | 3,495,631  |   | $ | 3,559,375 |   |

 

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The following is supplementaldisclosure of non-cash investing and financing activities:

 
| ** **                                                                               | ** ** | **Nine Month Period Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2010**                                                       | ** ** | **2009** | ** ** |
| ** **                                                                               | ** ** | **(unaudited)**                                                | ** ** |
| ** **                                                                               | ** ** | ** **                                                     | ** ** |
| Property and equipment additions financed through  capital leases                        |       | $                                                              | —     |   | $ | 176,619 |   |
|                                                                                     |       |                                                           |       |   |   |
| Property and equipment additions financed through  accounts payable and accrued expenses |       | $                                                              | 10,500,149 |   | $ | 5,628,883 |   |
|                                                                                     |       |                                                           |       |   |   |
| Option payable recorded against additional paid in  capital                              |       | $                                                              | 701,910    |   | $ | — |   |
|                                                                                     |       |                                                           |       |   |   |
| Note payable converted to preferred stock                                                |       | $                                                              | —     |   | $ | 8,000,000 |   |
|                                                                                     |       |                                                           |       |   |   |
| Original issue discount on notes payable                                                 |       | $                                                              | 5,982,000  |   | $ | — |   |
|                                                                                     |       |                                                           |       |   |   |
| Property and equipment sale financed through note  receivable                            |       | $                                                              | 3,100,000  |   | $ | — |   |
|                                                                                     |       |                                                           |       |   |   |
| Non-cash multi-client asset recorded as deferred  revenue                                |       | $                                                              | 4,428,599  |   | $ | — |   |

 

**NOTE 14— RECENTLY ISSUED ACCOUNTING STANDARDS**

 

Thereare no new accounting pronouncements that have a material impact on the Company’sconsolidated financial statements.

 

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**NOTE 15— GUARANTEES OF REGISTERED SECURITIES**

 

On August 3, 2010, theCompany filed a registration statement on Form S-4 with the Securities andExchange Commission. Under this registration statement, the Company exchanged$200 million of its publicly registered 10.50% senior notes due 2017 for a likeamount of its privately placed 10.50% senior notes due 2017. The debtsecurities sold are fully and unconditionally guaranteed, on a joint andseveral basis, by the guarantor subsidiaries which will correspond to allsubsidiaries located in the United States. The non-guarantor subsidiariesconsist of all subsidiaries outside of the United States.

 

Separate condensedconsolidating financial statement information for the guarantor subsidiariesand non-guarantor subsidiaries as of September 30, 2010 and December 31,2009 and for the three and nine months ended September 30, 2010 and 2009is as follows:

 
| ** **                                                            | ** ** | **September 30, 2010 (Unaudited)** | ** **  |
|-----------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                            | ** ** | **Guarantors**                                    | ** **  | **Non-guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| BALANCE SHEET                                                         |       |                                              |        |   |   |   |   |   |   |
| ASSETS                                                                |       |                                              |        |   |   |   |   |   |   |
| Current assets                                                        |       | $                                                 | 136,672,036 |   | $ | 23,975,461 |   | $ | (27,977,680 | ) | $ | 132,669,817 |   |
| Property and equipment, net                                           |       | 111,089,702                                       |        | 407,593 |   | — |   | 111,497,295 |   |
| Multi-client library, net                                             |       | 132,828,047                                       |        | — |   | — |   | 132,828,047 |   |
| Investment in subsidiaries                                            |       | 1,099                                             |        | — |   | (1,099 | ) | — |   |
| Intercompany accounts                                                 |       | 16,466,157                                        |        | (16,466,157 | ) | — |   | — |   |
| Other non-current assets                                              |       | 27,480,958                                        |        | (37,020 | ) | — |   | 27,443,938 |   |
| TOTAL ASSETS                                                          |       | $                                                 | 424,537,999 |   | $ | 7,879,877 |   | $ | (27,978,779 | ) | $ | 404,439,097 |   |
|                                                                  |       |                                              |        |   |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                             |       |                                              |        |   |   |   |   |   |   |
| Current liabilities                                                   |       | $                                                 | 111,102,050 |   | $ | 24,275,118 |   | $ | (27,977,680 | ) | $ | 107,399,488 |   |
| Long-term debt and capital lease obligations, net  of current portion |       | 194,264,873                                       |        | — |   | — |   | 194,264,873 |   |
| Deferred income tax and other non-current  liabilities                |       | —                                            |        | — |   | — |   | — |   |
| TOTAL LIABILITIES                                                     |       | 305,366,923                                       |        | 24,275,118 |   | (27,977,680 | ) | 301,664,361 |   |
|                                                                  |       |                                              |        |   |   |   |   |   |   |
| Stockholders’ equity                                             |       | 119,171,076                                       |        | (16,395,241 | ) | (1,099 | ) | 102,774,736 |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                       |       | $                                                 | 424,537,999 |   | $ | 7,879,877 |   | $ | (27,978,779 | ) | $ | 404,439,097 |   |

 

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| ** **                                                            | ** ** | **December 31, 2009** | ** **  |
|-----------------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                            | ** ** | **Guarantors**                  | ** **  | **Non-guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| BALANCE SHEET                                                         |       |                            |        |   |   |   |   |   |   |
| ASSETS                                                                |       |                            |        |   |   |   |   |   |   |
| Current assets                                                        |       | $                               | 82,022,731  |   | $ | 56,456,406 |   | $ | (21,751,693 | ) | $ | 116,727,444 |   |
| Property and equipment, net                                           |       | 138,394,183                     |        | 1,823,770 |   | — |   | 140,217,953 |   |
| Multi-client library, net                                             |       | 37,395,521                      |        | — |   | — |   | 37,395,521 |   |
| Investment in subsidiaries                                            |       | 1,099                           |        | — |   | (1,099 | ) | — |   |
| Intercompany accounts                                                 |       | 37,679,846                      |        | (37,679,846 | ) | — |   | — |   |
| Other non-current assets                                              |       | 22,211,327                      |        | 67,346 |   | — |   | 22,278,673 |   |
| TOTAL ASSETS                                                          |       | $                               | 317,704,707 |   | $ | 20,667,676 |   | $ | (21,752,792 | ) | $ | 316,619,591 |   |
|                                                                  |       |                            |        |   |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                             |       |                            |        |   |   |   |   |   |   |
| Current liabilities                                                   |       | $                               | 79,948,550  |   | $ | 24,578,093 |   | $ | (21,751,693 | ) | $ | 82,774,950 |   |
| Long-term debt and capital lease obligations, net  of current portion |       | 166,090,323                     |        | — |   | — |   | 166,090,323 |   |
| Deferred income tax and other non-current  liabilities                |       | 3,826,131                       |        | — |   | — |   | 3,826,131 |   |
| TOTAL LIABILITIES                                                     |       | 249,865,004                     |        | 24,578,093 |   | (21,751,693 | ) | 252,691,404 |   |
|                                                                  |       |                            |        |   |   |   |   |   |   |
| Stockholders’ equity                                             |       | 67,839,703                      |        | (3,910,417 | ) | (1,099 | ) | 63,928,187 |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                       |       | $                               | 317,704,707 |   | $ | 20,667,676 |   | $ | (21,752,792 | ) | $ | 316,619,591 |   |

 

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| ** **                                   | ** ** | **Three months ended September 30, 2010 (Unaudited)** | ** **  |
|----------------------------------------------|------------|-------------------------------------------------------------------------------------|-------------|
| ** **                                   | ** ** | **Guarantors**                                                                      | ** **  | **Non-guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| STATEMENTS OF OPERATIONS                     |       |                                                                                |        |   |   |   |   |   |   |
| Revenues                                     |       | $                                                                                   | 60,679,392  |   | $ | 1,427,755 |   | $ | (1,637,630 | ) | $ | 60,469,517 |   |
|                                         |       |                                                                                |        |   |   |   |   |   |   |
| Expenses:                                    |       |                                                                                |        |   |   |   |   |   |   |
| Operating expenses                           |       | 51,437,628                                                                          |        | 3,996,278 |   | (1,393,493 | ) | 54,040,413 |   |
| Selling, general and administrative expenses |       | 8,937,310                                                                           |        | 1,490,112 |   | (244,137 | ) | 10,183,285 |   |
| Total expenses                               |       | 60,374,938                                                                          |        | 5,486,390 |   | (1,637,630 | ) | 64,223,698 |   |
| Income (loss) from operations                |       | 304,454                                                                             |        | (4,058,635 | ) | — |   | (3,754,181 | ) |
| Interest income (expense), net               |       | (5,626,396                                                                          | )           | 29 |   | — |   | (5,626,367 | ) |
| Other expenses, net                          |       | (136,276                                                                            | )           | (7,981 | ) | — |   | (144,257 | ) |
| Loss before income taxes                     |       | (5,458,218                                                                          | )           | (4,066,587 | ) | — |   | (9,524,805 | ) |
| Provision for income taxes                   |       | 9,104,750                                                                           |        | 15,847 |   | — |   | 9,120,597 |   |
| Net loss                                     |       | $                                                                                   | (14,562,968 | ) | $ | (4,082,434 | ) | $ | — |   | $ | (18,645,402 | ) |

 
| ** **                                   | ** ** | **Three months ended September 30, 2009 (Unaudited)** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Guarantors**                                                                      | ** ** | **Non-guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| STATEMENTS OF OPERATIONS                     |       |                                                                                |       |   |   |   |   |   |   |
| Revenues                                     |       | $                                                                                   | 79,874,377 |   | $ | 15,093,712 |   | $ | (5,258,855 | ) | $ | 89,709,234 |   |
|                                         |       |                                                                                |       |   |   |   |   |   |   |
| Expenses:                                    |       |                                                                                |       |   |   |   |   |   |   |
| Operating expenses                           |       | 57,837,193                                                                          |       | 20,139,555 |   | (5,010,766 | ) | 72,965,982 |   |
| Selling, general and administrative expenses |       | 5,130,626                                                                           |       | 2,235,063 |   | (248,089 | ) | 7,117,600 |   |
| Total expenses                               |       | 62,967,819                                                                          |       | 22,374,618 |   | (5,258,855 | ) | 80,083,582 |   |
| Income (loss) from operations                |       | 16,906,558                                                                          |       | (7,280,906 | ) | — |   | 9,625,652 |   |
| Interest expense, net                        |       | (3,644,998                                                                          | )          | — |   | — |   | (3,644,998 | ) |
| Other income (expenses), net                 |       | (332,689                                                                            | )          | 112,484 |   | — |   | (220,205 | ) |
| Income (loss) before income taxes            |       | 12,928,871                                                                          |       | (7,168,422 | ) | — |   | 5,760,449 |   |
| Provision (benefit) for income taxes         |       | (687,176                                                                            | )          | 80,051 |   | — |   | (607,125 | ) |
| Net income (loss)                            |       | $                                                                                   | 13,616,047 |   | $ | (7,248,473 | ) | $ | — |   | $ | 6,367,574 |   |

 

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| ** **                                   | ** ** | **Nine months ended September 30, 2010 (Unaudited)** | ** **  |
|----------------------------------------------|------------|------------------------------------------------------------------------------------|-------------|
| ** **                                   | ** ** | **Guarantors**                                                                     | ** **  | **Non-guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| STATEMENTS OF OPERATIONS                     |       |                                                                               |        |   |   |   |   |   |   |
| Revenues                                     |       | $                                                                                  | 145,035,359 |   | $ | 28,502,999 |   | $ | (12,297,456 | ) | $ | 161,240,902 |   |
|                                         |       |                                                                               |        |   |   |   |   |   |   |
| Expenses:                                    |       |                                                                               |        |   |   |   |   |   |   |
| Operating expenses                           |       | 130,603,998                                                                        |        | 32,975,309 |   | (11,462,248 | ) | 152,117,059 |   |
| Selling, general and administrative expenses |       | 24,004,281                                                                         |        | 7,041,487 |   | (835,208 | ) | 30,210,560 |   |
| Total expenses                               |       | 154,608,279                                                                        |        | 40,016,796 |   | (12,297,456 | ) | 182,327,619 |   |
| Loss from operations                         |       | (9,572,920                                                                         | )           | (11,513,797 | ) | — |   | (21,086,717 | ) |
| Interest income (expense), net               |       | (15,635,719                                                                        | )           | 49 |   | — |   | (15,635,670 | ) |
| Other expenses, net                          |       | (5,746,515                                                                         | )           | (193,025 | ) | — |   | (5,939,540 | ) |
| Loss before income taxes                     |       | (30,955,154                                                                        | )           | (11,706,773 | ) | — |   | (42,661,927 | ) |
| Provision (benefit) for income taxes         |       | (5,492,660                                                                         | )           | 778,051 |   | — |   | (4,714,609 | ) |
| Net loss                                     |       | $                                                                                  | (25,462,494 | ) | $ | (12,484,824 | ) | $ | — |   | $ | (37,947,318 | ) |

 
| ** **                                   | ** ** | **Nine months ended September 30, 2009 (Unaudited)** | ** **  |
|----------------------------------------------|------------|------------------------------------------------------------------------------------|-------------|
| ** **                                   | ** ** | **Guarantors**                                                                     | ** **  | **Non-guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| STATEMENTS OF OPERATIONS                     |       |                                                                               |        |   |   |   |   |   |   |
| Revenues                                     |       | $                                                                                  | 165,245,357 |   | $ | 71,785,729 |   | $ | (22,793,982 | ) | $ | 214,237,104 |   |
|                                         |       |                                                                               |        |   |   |   |   |   |   |
| Expenses:                                    |       |                                                                               |        |   |   |   |   |   |   |
| Operating expenses                           |       | 136,458,939                                                                        |        | 65,708,136 |   | (22,086,624 | ) | 180,080,451 |   |
| Selling, general and administrative expenses |       | 15,236,156                                                                         |        | 9,434,892 |   | (707,358 | ) | 23,963,690 |   |
| Total expenses                               |       | 151,695,095                                                                        |        | 75,143,028 |   | (22,793,982 | ) | 204,044,141 |   |
| Income (loss) from operations                |       | 13,550,262                                                                         |        | (3,357,299 | ) | — |   | 10,192,963 |   |
| Interest expense, net                        |       | (12,580,847                                                                        | )           | — |   | — |   | (12,580,847 | ) |
| Other income, net                            |       | 903,502                                                                            |        | 56,745 |   | — |   | 960,247 |   |
| Income (loss) before income taxes            |       | 1,872,917                                                                          |        | (3,300,554 | ) | — |   | (1,427,637 | ) |
| Provision (benefit) for income taxes         |       | (5,931,963                                                                         | )           | 2,853,258 |   | — |   | (3,078,705 | ) |
| Net income (loss)                            |       | $                                                                                  | 7,804,880   |   | $ | (6,153,812 | ) | $ | — |   | $ | 1,651,068 |   |

 

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| ** **                                           | ** ** | **Nine months ended September 30, 2010 (Unaudited)** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Guarantors**                                                                     | ** ** | **Non-guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| STATEMENTS OF CASH FLOWS                             |       |                                                                               |       |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities  |       | $                                                                                  | 82,669,411 |   | $ | (162,770 | ) | $ | — |   | $ | 82,506,641 |   |
| Net cash provided by (used in) investing  activities |       | (129,368,849                                                                       | )          | 1,715,119 |   | — |   | (127,653,730 | ) |
| Net cash provided by financing activities            |       | 91,326,980                                                                         |       | — |   | — |   | 91,326,980 |   |
| Net increase in cash and cash equivalents            |       | $                                                                                  | 44,627,542 |   | $ | 1,552,349 |   | $ | — |   | $ | 46,179,891 |   |

 
| ** **                                           | ** ** | **Nine months ended September 30, 2009 (Unaudited)** | ** **  |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------|-------------|
| ** **                                           | ** ** | **Guarantors**                                                                     | ** **  | **Non-guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| STATEMENTS OF CASH FLOWS                             |       |                                                                               |        |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities  |       | $                                                                                  | 51,608,681  |   | $ | (6,831,607 | ) | $ | — |   | $ | 44,777,074 |   |
| Net cash provided by (used in) investing  activities |       | (31,527,661                                                                        | )           | 362,312 |   | — |   | (31,165,349 | ) |
| Net cash used in financing activities                |       | (34,096,052                                                                        | )           | — |   | — |   | (34,096,052 | ) |
| Net decrease in cash and cash equivalents            |       | $                                                                                  | (14,015,032 | ) | $ | (6,469,295 | ) | $ | — |   | $ | (20,484,327 | ) |

 

**NOTE 16- SUBSEQUENT EVENTS**

 

The Companyevaluates events and transactions that occur after the balance sheet date butbefore the consolidated financial statements are issued. The Company evaluatedsuch events and transactions through the date when the consolidated financialstatements were filed electronically with the Securities and ExchangeCommission.

 

Subsequentto September 30, 2010, the Company acquired a business for an aggregate purchaseprice of $5.5 million.

 

Subsequentto September 30, 2010, the Company cancelled certain operating leases andpurchased the equipment from the lessor.

 

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**Item 2.   Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*The following discussion and analysis should be readin combination with our Interim Financial Statements contained in this Form 10-Qand our Financial Statements for the year ended December 31, 2009 includedin our Registration Statement on Form S-1 (File No. 333-162540).*

 

**Forward Looking Statements**

 

Statementsother than statements of historical fact included in this Form 10-Q thatrelate to forecasts, estimates or other expectations regarding future eventsregarding technological advancements and our financial position, businessstrategy and plans and objectives of our management for future operations, maybe deemed to be forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. When used in this Form 10-Q, words suchas “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similarexpressions, as they relate to us or our management, identify forward-lookingstatements. Forward-looking statements include, but are not limited to,statements about business outlook for the year, backlog and bid activity,business strategy, and related financial performance and statements withrespect to future events.  Suchforward-looking statements are based on certain assumptions made by the Companybased on management’s experience and perception of historical trends, industryconditions, market position, future operations, profitability, liquidity,backlog, capital resources and other information currently available tomanagement and believed to be appropriate. Actual results could differmaterially from those contemplated by the forward-looking statements as aresult of certain factors, including but not limited to, the volatility of oiland natural gas prices, disruptions in the global economy, dependence uponenergy industry spending, delays, reductions or cancellations of servicecontracts, high fixed costs of operations, weather interruptions, inability toobtain land access rights of way, industry competition, limited number ofcustomers, credit risk related to our customers, asset impairments, theavailability of capital resources, and operational disruptions. A discussion ofthese factors, including risks and uncertainties, is set forth under “RiskFactors” in our Registration Statement on Form S-1/A filed with theSecurities and Exchange Commission. These forward-looking statements reflectour current views with respect to future events and are subject to these andother risks, uncertainties and assumptions relating to our operations, resultsof operations, growth strategies and liquidity. Although the Company believesthat the expectations reflected in such statements are reasonable, the Companycan give no assurance that such expectations will be correct.  All subsequent written and oralforward-looking statements attributable to us or persons acting on our behalfare expressly qualified by these cautionary statements and any other cautionarystatements that may accompany such forward-looking statements. We assume noobligation to update any such forward-looking statements.

 

Backlogestimates are based on a number of assumptions and estimates includingassumptions related to foreign exchange rates, proportionate performance ofcontracts and our valuation of assets, such as seismic data, to be received byus as payment under certain agreements. The realization of our backlog estimatesare further affected by our performance under term rate contracts, as the earlyor late completion of a project under term rate contracts will generally resultin decreased or increased, as the case may be, revenues derived from theseprojects. Contracts for services are occasionally modified by mutual consentand may be cancelable by the client under certain circumstances. Consequently,backlog as of any particular date may not be indicative of actual operatingresults for any future period.

 

**Overview**

 

Weprovide an integrated suite of seismic data solutions to the global oil and gasindustry, including our high resolution RG-3D Reservoir GradeTM (“RG3D”) seismicsolutions. Our seismic data solutions consist primarily of seismic dataacquisition, processing and interpretation services. Through these services, wedeliver data that enable the creation of high resolution images of the earth’ssubsurface and reveal complex structural and stratigraphic details. Theseimages are used primarily by oil and gas companies to identify geologicstructures favorable to the accumulation of hydrocarbons, to reduce riskassociated with oil and gas exploration, to optimize well completion techniquesand to monitor changes in hydrocarbon reservoirs. We integrate seismic surveydesign, data acquisition, processing and interpretation to deliver enhancedservices to our clients. In addition, we own and market a growing multi-clientseismic data library and license this data to clients on a non-exclusive basis.

 

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Weprovide seismic data acquisition for land, transition zone and shallow marineareas, including challenging environments such as marshes, forests, jungles,arctic climates, mountains and deserts worldwide. Our management team hassignificant operational experience in most of the major U.S. shale plays,including the Haynesville, Barnett, Bakken, Fayetteville, Eagle Ford and Woodford,where we believe our high resolution RG3D seismic solutions are particularlywell-suited. Our seismic solutions are used by many of the world’s largest andmost technically advanced oil and gas exploration and production companiesincluding national oil companies, major integrated oil companies, and largeindependent oil companies.

 

Wecurrently own, or operate under long-term leases, approximately 161,500recording channels. Our recording channels and systems operate on a commontechnology platform which provides operational scalability and efficiency. Thisoperational scalability and efficiency enables us to execute on large andtechnologically complex projects.

 

Theseismic data services industry historically has been cyclical. Volatility inoil and gas prices can produce significant changes in the demand for seismicservices and the prices seismic contractors can negotiate for their services.Oil and gas exploration, development, exploitation and production spendinglevels traditionally have been heavily influenced by expected future prices ofoil and natural gas. Prior to mid-2008, the oil and gas industry sawsignificant increases in activity resulting from high commodity prices for oiland natural gas. We benefited from this increased spending. However, during theperiod from mid-2008 through mid-2009, oil and natural gas prices declinedsignificantly, which resulted in significant curtailments in capitalexpenditures by independent oil and gas companies, including spending forseismic data acquisition services.

 

Wehave observed a trend among certain of our clients to direct an increasingportion of their seismic data budgets toward the licensing of data on anon-exclusive basis from multi-client seismic data libraries. Notably, withinNorth America, the present focus on unconventional resource plays (e.g., theHaynesville, Marcellus and Eagle Ford shales, among others) is prompting anexamination by our clients of whether acquiring seismic data on a multi-clientbasis is a more cost effective allocation of resources than acquiring seismicdata on a proprietary basis. Should such a trend continue, we expect therelative mix of our revenues between our seismic data services and multi-clientservices will shift more toward multi-client services within the North Americanmarket. We have not yet observed a similar trend in overseas markets where wecurrently expect seismic data services will continue to constitute the majorityof the services we provide.

 

Wegenerate revenues by providing seismic data services and multi-client servicesto our clients. Our seismic data services generate revenues by conductinggeophysical surveys for our clients on a contractual basis where our clientsgenerally acquire all rights to the seismic data obtained through such survey.We also generate revenues by providing seismic data processing andinterpretation services. Our multi-client services generate revenues by sellinglicenses, on a non-exclusive basis, to data we own as a part of our seismicdata library.

 

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**Resultsof Operations**

 

***Three Months Ended September 30, 2010Compared to Three Months Ended September 30, 2009 (unaudited)***

 

The following table setsforth our consolidated revenues for the period indicated:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** |
| ** **                          | ** ** | **(unaudited)**                  | ** ** |
| ** **                          | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **(Amounts in millions)** | ** ** | **Amount**                       | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Seismic data services               |       | $                                | 18.3       |   | 30 | % | $ | 89.6 |   | 100 | % |
| Multi-client                        |       | 42.2                             |       | 70 | % | 0.1 |   | 0 | % |
| Total                               |       | $                                | 60.5       |   | 100 | % | $ | 89.7 |   | 100 | % |

 

Revenues by Region

 
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **September 30,**           | ** ** |
| ** **                         | ** ** | **(unaudited)**                  | ** ** |
| ** **                         | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **                         | ** ** | **Amount**                       | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| US                                 |       | $                                | 43.5       |   | 72 | % | $ | 70.5 |   | 79 | % |
| Latin America                      |       | 12.5                             |       | 21 | % | 7.0 |   | 7 | % |
| Europe, Africa, Middle East (EAME) |       | 4.5                              |       | 7 | % | 12.2 |   | 14 | % |
| Asia Pacific                       |       | 0.0                              |       | 0 | % | 0.0 |   | 0 | % |
| Total                              |       | $                                | 60.5       |   | 100 | % | $ | 89.7 |   | 100 | % |

 

*Revenues.* We recorded $60.5 million for the three monthsended September 30, 2010 compared to $89.7 million for the correspondingperiod of the previous year, a decline of $29.2 million or 33%.  The revenue decrease in the third quarter of2010 compared to the same quarter of 2009 was primarily the result of a largeproprietary project performed in 2009 in the US.  This was offset by an increase in ourmulti-client revenues during this same period.

 

TheCompany’s proprietary seismic acquisition revenue totaled $18.3 million ascompared to $89.6 million for the same period of 2009, a decrease of $71.3million or 80%.  The decrease in U.S.seismic acquisition revenue of $69.1 million is primarily a result of a shiftfrom proprietary to multi-client demand in the North American unconventionalresource plays.

 

Internationalproprietary seismic acquisition revenues for the same period in 2010 declined$2.2 million or 12% compared to the same period in 2009. The revenues from ourEurope, Africa and Middle East operations decreased by $7.7 million, primarilydue to crew reductions in 2010, while the revenues from our Latin Americaincreased by $5.5 million or 79% compared to the same period in 2009.

 

Ourmulti-client revenues increased to $42.2 million for the three months ended September 30,2010 from $0.1 million. The $42.2 million in multi-client revenues included$36.0 million of pre-commitment revenue, $0.9 million of late sale revenue and$5.3 million in a data swap transaction. The increase was mainly the result ofadditional projects in Eagle Ford and Haynesville shale plays.

 

*Operating expenses.*Our operating expenses,excluding depreciation and amortization decreased by $47.9 million to $9.0million for the three months ended September 30, 2010, a decrease of84%. Operating expenses represented 14.9% of revenue for the third quarter2010 compared to 63.4% in the same period of 2009. Multi-client costs arecapitalized when incurred and later expensed through proportional performancein line with our multi-

 

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clientrevenue recognition. In the three months ended September 30, 2010, thecompany’s capitalized multi-client investments less depreciation was $52.2million compared to $6.4 million in the same period in 2009.  In the three months ended September 30, 2010,the company disposed of property and equipment incurring a loss of $2.4 millioncompared to nil in the same period of 2009.

 

*Selling, General and Administrative Expenses.* SG&A, excluding depreciation andamortization, increased by $3.1 million, or 46%, to $9.8 million for thequarter ended September 30, 2010. Our bad debt expense was $0.1 million for the three months ending September 30,2010, compared to nil in the same period in 2009. Overall compensation andemployee benefits increased by $1.3 million and legal fees increased by $0.4million in the third quarter of 2010 attributable to our increase in sales andmarketing staff and certain added costs related to being a public company.

 

*Depreciation and Amortization Expenses.*Depreciation andamortization expense combined increased by $28.9 million, or 175%, to $45.4million for the three months ended September 30, 2010.  Depreciation expense decreased by $2.3million, or 15%, to $13.2 million at September 30, 2010 as some of ourolder equipment is becoming fully depreciated and capital investments in recentquarters has been less than our historical average. Multi-client amortizationincreased by $31.3 million, or 3913%, to $32.1 million as a result of theincrease in multi-client data sales. Also included in our results is $4.6 million of additional amortizationcharge against our data library attributable to the weather related delaysexperienced in the first three quarters during 2010.

 

*Interest Expense, Net.*Interest expense, net,increased by $2.0 million, or 56%, to $5.6 million for the quarter ended September 30,2010.  The increase is a result ofincreases in borrowing costs from the issuance of $200 million, 10.5% seniornotes.

 

*Other Income (Expense), Net.*Other income (expense), net,was a loss of $.01 million for the quarter ended September 30, 2010compared to a loss of $0.2 million in the same quarter of 2009. The primarydifference related to a foreign exchange loss in 2009 for $0.3 million versusnil in 2010.

 

*Income Tax Expense (benefit)*. Our income tax expense forthe three months ended September 30, 2010 was an expense of $9.1 millioncompared to a benefit of $0.6 million in the same period in 2009. The $9.1million tax expense brings the full year estimated tax rate in line with theexpected year end estimate. The Company’s effective income tax rate in 2010 and2009 differs from the federal statutory rate primarily due to state incometaxes, non-deductible expenses, tax rate differential from US operations, andvaluation allowances in non-US jurisdictions.

 

*EBITDA.* We define EBITDA as net income before interest,taxes, depreciation and amortization. EBITDA is not a measure of financialperformance derived in accordance with Generally Accepted Accounting Principles(GAAP) and should not be considered in isolation or as an alternative to netincome as an indication of operating performance. The table below presents areconciliation of EBITDA to net income (loss):

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** |
| **(Amounts in millions)** | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Net (loss) income                   |       | $                                | (18.6      | ) | $ | 6.4 |   |
| Interest expense, net               |       | 5.6                              |       | 3.7 |   |
| Income tax expense (benefit)        |       | 9.1                              |       | (0.6 | ) |
| Depreciation and amortization       |       | 47.7                             | (1)        | 16.5 |   |
| EBITDA                              |       | $                                | 43.8       |   | $ | 26.0 |   |

 

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(1)  Includes $2.4million loss on sale of assets

 

Our management believes EBITDA is useful to aninvestor in evaluating our operating performance because this measure is widelyused by investors in the energy industry to measure a company’s operatingperformance without regard to items excluded from the calculation of such term,which can vary substantially from company to company depending upon, amongother factors, accounting methods, book value of assets, capital 

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structure and the method by which assets wereacquired. We believe EBITDA helps investors more meaningfully evaluate andcompare the results of our operations from period to period by removing theeffect of our capital structure and asset base from our operating structure.EBITDA is also used as a supplemental financial measure by our management inpresentations to our board of directors, as a basis for strategic planning andforecasting, and as a component for setting incentive compensation.

 

***Nine Months EndedSeptember 30, 2010 Compared to Nine Months Ended September 30, 2009(unaudited)***

 

The following table sets forth our consolidatedrevenues for the period indicated:

 
| ** **                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **September 30,**          | ** ** |
| ** **                          | ** ** | **(unaudited)**                 | ** ** |
| ** **                          | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| **(Amounts in millions)** | ** ** | **Amount**                      | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Seismic data services               |       | $                               | 79.4       |   | 49 | % | $ | 204.9 |   | 96 | % |
| Multi-client                        |       | 81.8                            |       | 51 | % | 9.3 |   | 4 | % |
| Total                               |       | $                               | 161.2      |   | 100 | % | $ | 214.2 |   | 100 | % |

 

Revenues by Region

 
| ** **                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,**          | ** ** |
| ** **                         | ** ** | **(unaudited)**                 | ** ** |
| ** **                         | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| ** **                         | ** ** | **Amount**                      | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| US                                 |       | $                               | 89.3       |   | 56 | % | $ | 119.5 |   | 56 | % |
| Latin America                      |       | 39.3                            |       | 24 | % | 32.2 |   | 15 | % |
| Europe, Africa, Middle East (EAME) |       | 7.8                             |       | 5 | % | 32.6 |   | 15 | % |
| Asia Pacific                       |       | 24.8                            |       | 15 | % | 29.9 |   | 14 | % |
| Total                              |       | $                               | 161.2      |   | 100 | % | $ | 214.2 |   | 100 | % |

 

*Revenues.*The revenue decrease of $53.0 million for the ninemonths ended September 30, 2010 compared to the same period of 2009 wasprimarily the result of program delays caused by adverse weather conditions,permit and access considerations, crew scheduling and program start-up cycles,and an overall slowdown in seismic demand.

 

TheCompany’s proprietary seismic acquisition revenue totaled $79.4 million for thenine months ended September 30, 2010 as compared to $204.9 million for thesame period of 2009, a decrease of $125.5 million or 61%.  The decrease in U.S. seismic acquisitionrevenue of $102.7 million is primarily a result of a shift from proprietary tomulti-client demand in the North American unconventional resource plays.

 

Internationalproprietary seismic acquisition revenues for the nine months ended September 30,2010 declined $22.8 million, or 24%, compared to the same period in 2009. Therevenues from our Europe, Africa and Middle East operations decreased by $24.8million, primarily due to crew reductions in 2010, while the revenues from ourLatin America and Asia Pacific operations increased by $7.1 million anddecreased by $5.1 million, respectively.

 

Multi-clientrevenues increased to $81.8 million for the nine months ended September 30,2010 from $9.3 million, an increase of $72.5 million.. The $81.8 million inmulti-client revenues included $70.5 million of pre-commitment revenue, $5.7million of late sale revenue and $5.6 million in data swap transactions. Theincrease was mainly the result of additional projects in Eagle Ford,Haynesville, and Bakken shale plays.

 

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*Operating expenses.*Our operating expenses,excluding depreciation and amortization decreased by $72.1 million to $55.6million for the nine months ended September 30, 2010, a decrease of57%. Operating expenses represented 34.5% of revenue for the first ninemonths of the year compared to 59.6% in the same period of 2009. OurMulti-client investment costs are up year over year.  Multi-client costs are capitalized whenincurred and later expensed through proportional performance in line with ourmulti-client revenue recognition. In the nine months ended September 30,2010, the company’s capitalized multi-client investments less depreciation was$116.8 million compared to $18.5 million in the same period in 2009.  Mobilization costs are capitalized whenincurred and later expensed as data acquisition progresses which increased ouroperating expenses. For the nine months ended September 30, 2010, werecognized previously capitalized expenses of $9.4 million as compared to thesame period in 2009 where we capitalized $8.9 million of expenses associatedwith crew mobilization.  This had theeffect of increasing operating costs by $18.3 million.  In the nine months ended September 30, 2010,the company disposed of property and equipment incurring a loss of $2.3 millioncompared to nil in the same period of 2009.

 

*Selling, General and Administrative Expenses.*SG&A,excluding depreciation and amortization, increased by $6.6 million, or 29%, to$29.2 million for the nine months ended September 30, 2010.  Our bad debt expense was $3.1 million for thenine months ending September 30, 2010, a decrease of $0.3 million comparedto the same period in 2009. Overall compensation and employee benefitsincreased by $4.9 million and legal fees increased by $1.0 million for the ninemonths ended September 30, 2010 mainly attributable to our increase insales and marketing staff and certain added costs related to being a publiccompany.

 

*Depreciation and Amortization Expenses.*Depreciation andamortization expense combined increased by $43.9 million, or 82%, to $97.6million for the nine months ended September 30, 2010.  Depreciation expense decreased by $3.1million, or 7%, to $42.2 million at September 30, 2010 as some of ourolder equipment is becoming fully depreciated and capital investments in recentquarters has been less than our historical average.  Multi-client amortization increased by $47.3million, or 614%, to $55.0 million as a result of the increase in multi-clientdata sales. Amortization related to intangible assets decreased $0.3 million,or 43%, to $0.4 million for the nine months ended September 30, 2010.  Also included in our results is $4.6 millionof additional amortization charge against our data library attributable to theweather related delays experienced in the first three quarters during 2010.

 

*Interest Expense, Net.*Interest expense, net,increased by $3.0 million, or 24%, to $15.6 million for the nine months ended September 30,2010. The increase is a result of increases in borrowing costs from theissuance of $200 million, 10-1/2% senior notes.

 

*Other Income (Expense), Net.*Other income (expense), net,was a loss of $5.9 million for the nine months ended September 30, 2010compared to a gain of $1.0 million in the same quarter of 2009.  The carrying value of the interest rate hedgeheld as a requirement under our previous credit facility decreased by $0.2million, or 40% to $0.3 million for the nine months ended September 30,2010.  In the nine month ended September 30,2010 there was a $6.0 million loss attributable to the extinguishment of debtfrom the previous credit facility versus nil in the same period in 2009. In thenine month period ended September 30, 2010 we recorded a foreign exchangeloss of $0.2 million compared to a gain of $0.5 million in the same period of2009.

 

*Income Tax Benefit*. Our income tax expense fornine month ended September 30, 2010 was a benefit of $4.7 million comparedto a benefit of $3.1 million at the period in 2009.   The effective income tax rate for the ninemonth ended September 30, 2010 and 2009 was 11.0 % and 215.7% respectively.  The Company’s effective income tax rate in2010 and 2009 differs from the federal statutory rate primarily due to stateincome taxes, non-deductible expenses, tax rate differential from USoperations, and valuation allowances in non-US jurisdictions.

 

*EBITDA.* We define EBITDA as net income before interest,taxes, depreciation and amortization. EBITDA is not a measure of financialperformance derived in accordance with Generally Accepted Accounting Principles(GAAP) and should not be considered in isolation or as an alternative to netincome as an indication of operating performance. The table below presents areconciliation of EBITDA to net income (loss):

 

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| ** **                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **September 30,**          | ** ** |
| **(Amounts in millions)** | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Net (loss) income                   |       | $                               | (37.9      | ) | $ | 1.7 |   |
| Interest expense, net               |       | 21.6                            | (1)        | 12.6 |   |
| Income tax benefit                  |       | (4.7                            | )          | (3.1 | ) |
| Depreciation and amortization       |       | 99.9                            | (2)        | 53.7 |   |
| EBITDA                              |       | $                               | 78.9       |   | $ | 64.9 |   |

 

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(1)   Includes $6.0 millionloss on extinguishment of debt

(2)   Includes $2.3 millionloss on sale of assets

 

**Liquidityand Capital Resources**

 

Ourprimary sources of liquidity are cash generated by the seismic data servicesand multi-client services we provide to our clients, debt and equity offerings,our revolving credit facility, and equipment financings such as capital leases.Our primary uses of capital include the acquisition of seismic data recordingequipment, seismic vehicles and vessels, other equipment needed to outfit newcrews and to enhance the capabilities of and maintain existing crews’ energysources, and investments in multi-client data for our library. We also usecapital to fund the working capital required to launch new crews and operateexisting crews.  Our cash position,consistent with our revenues, depends to a large extent on the level of demandfor our services. Historically, we have supplemented cash from operations withborrowings under our Revolving Credit Facility periodically from time to timeas the need arises.

 

Asof September 30, 2010, we had available liquidity as follows:

 
| **(Amounts in millions)**                         | ** ** | **September 30, 2010** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| Available cash                                              |       | $                                | 63.2       |   |
| Undrawn borrowing capacity under Revolving Credit  Facility |       | 50.0                             |       |
| Net available liquidity                                     |       | $                                | 113.2      |   |

 

Thefollowing table summarizes the net cash provided by (used in) operating,investing and financing activities for the nine months ended September 30,2010 and 2009:

 
| ** **                          | ** ** | **Nine Month Period Ended** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **September 30,**                     | ** ** |
| **(Amounts in millions)** | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| Operating activities                |       | 82.5                                       |       | 44.8 |   |
| Investing activities                |       | (127.7                                     | )          | (31.2 | ) |
| Financing activities                |       | 91.3                                       |       | (34.1 | ) |

 

*Operating Activities*. Net cash provided byoperating activities was $82.5 million for the nine months ended September 30,2010 compared to $44.8 million for the nine months ended September 30,2009, an increase of $37.7 million. The increase was largely driven by changesin depreciation and amortization expenses.

 

*Investing Activities.*Net cash used in investingactivities was $127.7 million for the nine months ended September 30, 2010compared to $31.2 million for the nine months ended September 30, 2009, anincrease of $96.5 million. The increase was primarily the result of increasedinvestment in our multi-client library.  The followingtable sets forth our investment in our multi-client library for the periodindicated:

 

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| ** **                                     | ** ** | **Nine Month Period Ended** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **September 30,**                     | ** ** |
| **(Amounts in millions)**            | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| Cash investment in multi-client library assets |       | 118.0                                      |       | 18.5 |   |
| Capitalized depreciation (1)                   |       | 22.3                                       |       | 2.2 |   |
| Non-cash data exchange                         |       | 10.1                                       |       | 0.0 |   |

 
| ** **                                                         | ** ** | **At September 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Total capitalized investment at cost (cummulative,  at period end) |       | $                              | 225.5      |   | $ | 75.2 |   |
| Less: Accumulated amortization of multi-client  library assets     |       | 92.7                           |       | 37.8 |   |
| Multi-client net book value (at period end)                        |       | $                              | 132.8      |   | $ | 37.4 |   |

 

----

(1)          Represents capitalized cost of the equipment, ownedor leased, and utilized in connection with multi-client seismic acquisition.

 

*Financing Activities.* Net cash provided byfinancing activities was $91.3 million in the nine months ended September 30,2010 compared to net cash used in financing activities of $34.1 million in thenine months ended September 30, 2009, an increase of $125.4 million. Theincrease is primarily the result of our initial public offering and the sale ofour $200 million 10-1/2% senior notes (described below).

 

*Capital Resources.*In connection with theclosing of our initial public offering and the sale of our $200 million 10-1/2%senior notes due 2017 on April 27, 2010 (described below), we repaid alloutstanding borrowings under our First Lien Credit Agreement, our Second LienCredit Agreement, and our Construction Loan Agreement. These repaymentsresulted in the termination of each of these borrowing arrangements. Theprepayment of our Construction Loan Agreement resulted in the incurrence of$160,000 in prepayment penalties.  Inaddition, we repaid all outstanding capital lease commitments.

 

OnApril 22, 2010, we entered into a Purchase Agreement with Barclays CapitalInc., Credit Suisse Securities (USA) LLC and Banc of America Securities LLC, asrepresentatives of the initial purchasers (the “Initial Purchasers”), relatingto the offer and sale by us of $200 million aggregate principal amount, 10-1/2%senior notes due May 1, 2017 (the “Notes”).  We received net proceeds from the offering ofapproximately $188.1 million after deducting the Initial Purchasers’ discounts,offering expenses and original issue discount. The issuance of the Notesoccurred on April 27, 2010. The Notes were offered and sold to the InitialPurchasers and resold only to qualified institutional buyers in compliance withthe exemption from registration provided by Rule 144A under the SecuritiesAct of 1933, as amended (the “Securities Act”), and in offshore transactions inreliance on Regulation S under the Securities Act.

 

OnApril 27, 2010, we completed an initial public offering of our shares onthe New York Stock Exchange.  The netproceeds from this offering were approximately $76.4 million after deductingunderwriting discounts, fees and offering expenses. As described in our finalprospectus dated April 22, 2010 (the “Prospectus”) contained in ourRegistration Statement on Form S-1 (File No. 333-162540), we used thenet proceeds of the offering to pay down indebtedness and the remainingproceeds will be used for anticipated capital expenditures and general workingcapital purposes. The Company will not receive any of the proceeds from thesale of the Common Stock sold by the selling stockholders.

 

OnApril 30, 2010, we completed the closing of a new revolving creditfacility under the terms of a Credit Agreement (the “Revolving Credit Facility”)with Bank of America, N.A., as administrative agent for each lender party tothe Revolving Credit Facility.  OurRevolving Credit Facility provides for borrowings of up to $50.0 million. Theloans under our Revolving Credit Facility bear interest at a rate equal toLIBOR plus the Applicable Rate or the Base Rate plus the Applicable Rate. TheBase Rate is defined as the higher of (x) the prime rate and (y) theFederal Funds rate plus 0.50%. The Applicable Rate is defined as a percentagedetermined in accordance with a pricing grid based upon our leverage ratio,that will decline from LIBOR plus 4.00% or the prime rate plus 3.00% to aminimum rate equal to LIBOR plus 3.50% or the prime rate plus 2.50%. We areable to prepay borrowings under 

 

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ourRevolving Credit Facility at any time without penalty or premium, subject toreimbursement of the lenders’ breakage and redeployment costs in the case ofprepayment of LIBOR borrowings. We also will pay a commitment fee of 0.75% perannum on the actual daily unused portions of the Revolving Credit Facility.

 

*Capital Expenditures.* Capital expenditures forthe nine months ended September 30, 2010 were $126.6 million consisting ofpurchases of property and equipment of $8.6 million and investments in ourmulti-client library of $118.0 million.

 

**ContractualObligations**

 

Thefollowing table summarizes the payments due in specific periods related to ourcontractual obligations as of September 30, 2010:

 
| **(Amounts in millions)** | ** ** | **Total** | ** ** | **Within 1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5 Years** | ** ** |
|-------------------------------------|------------|-----------|------------|-----------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
|                                |       |      |       |                        |       |               |       |               |       |                        |       |
| Debt obligations                    |       | $         | 200.0      |                        | $          | 0.0                |       | $                  | 0.0        |                        | $          | 0.0 |   | $ | 200.0 |   |
| Operating lease obligations         |       | 7.7       |       | 7.2                         |       | 0.4                |       | 0.1                |       | 0.0                         |       |
| Option payable (1)                  |       | 0.7       |       | 0.7                         |       | 0.0                |       | 0.0                |       | 0.0                         |       |
|                                |       | $         | 208.4      |                        | $          | 7.9                |       | $                  | 0.4        |                        | $          | 0.1 |   | $ | 200.0 |   |

 

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(1)  Represents an option to purchase from a former employee46,794 shares of common stock at $15 per share

 

**Off BalanceSheet Arrangements**

 

We do not currently have anyoff balance sheet arrangements.

 

**Backlog**

 

TheCompany’s Backlog as of September 30, 2010 was approximately $225 millioncompared to $145 million as of September 30, 2009. Backlog as of June 30,2010 was approximately $179 million.

 

**Item 3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Theprimary sources of market risk are the volatility of oil and gas prices and theconcentration of our clients in the oil and gas industry. The volatility of oiland gas prices may have a positive or negative effect on demand and pricing forour services. The concentration of substantially all of our clients in the oiland gas industry may have a positive or negative effect on our exposure tocredit risk since all of our clients are similarly affected by changes inindustry and economic conditions. We regularly maintain deposits in our bankaccounts in excess of the $250,000 guaranteed by the Federal Deposit InsuranceCorporation. We are subject to market risk exposure related to changes ininterest rates on our outstanding floating rate debt. Borrowings under ourRevolving Credit Facility bear floating-rate interest, at our option, based onLIBOR or the prime rate. We do not enter into interest rate hedges or otherderivatives for speculative purposes.

 

Financialinstruments, which potentially subject us to concentration of credit risk,consist primarily of unsecured trade receivables. In the normal course ofbusiness, we provide credit terms to our clients. Accordingly, we performongoing credit evaluations of our clients and maintain allowances for possiblelosses.

 

Weconduct business in many foreign countries. We are subject to foreign exchangerisks because our contracts may, from time-to-time, be denominated incurrencies other than the U.S. dollar while a significant portion of our 

 

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operatingexpenses and income taxes accrue in other currencies. Movements in the exchangerates between the U.S. dollar and other currencies may adversely affect ourfinancial results. Historically, we have not attempted to hedge foreignexchange risk. For the nine months ended September 30, 2010, approximately19% of our revenues were recorded in foreign currencies, and we recorded netforeign exchange loss of $0.2 million, or 0.1% of revenues. We attempt to matchour foreign currency revenues and expenses in order to balance our net positionof receivables and payables in foreign currency. Nevertheless, during the pastthree years, foreign-denominated revenues have exceeded foreign-denominatedpayables primarily as a result of contract terms required by our national oilcompany clients. Our management believes that this will continue to be the casein the future.

 

**Item 4. Controls and Procedures**

 

Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by an issuer inthe reports that it files or submits under the Securities Exchange Act of 1934,as amended, is accumulated and communicated to the issuer’s management,including its principal executive and principal financial officers, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure. Under the supervision and with the participationof our management, including our principal executive officer and principalfinancial officer, we have performed an evaluation of the design, operation andeffectiveness of the Company disclosure controls and procedures (as defined in Rule 13a-15(e) ofthe Exchange Act) as of September 30, 2010.  Based on that evaluation, the Company’sprincipal executive and principal financial officers have concluded that theCompany’s disclosure controls and procedures were effective as of September 30,2010.

 

Therewere no changes in the Company’s internal control over financial reporting thatoccurred during the Company’s last fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**PART II.  OTHERINFORMATION**

 

**Item 1.  Legal Proceedings**

 

Neitherthe Company nor any of its subsidiaries is a party to any pending legalproceedings other than certain routine litigation that is incidental to theCompany’s business and that the Company believes is unlikely to materiallyimpact the Company.  Moreover, the Company is not aware of any suchlegal proceedings that are contemplated by governmental authorities withrespect to the Company, any of its subsidiaries, or any of their respectiveproperties.

 

**Item 1A.  Risk Factors**

 

Therehave been no material changes in the risk factors included in our RegistrationStatement on Form S-1 (File No. 333-162540).

 

**Item 2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None.

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

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**Item 4.  (Removed and Reserved)**

 

**Item 5.  Other Information**

 

None

 

**Item 6.  Exhibits (items indicated by an (*)are filed herewith)**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                     |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                |
| 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.                                                                     |
|             |       |                                                                                                                                                                                                                                |
| 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.                                                                     |
|             |       |                                                                                                                                                                                                                                |
| 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. |
|             |       |                                                                                                                                                                                                                                |
| 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. |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                                    | **GLOBAL GEOPHYSICAL SERVICES, INC.**         |
|-----------------------------------------|----------------------------------------------------|
|                                    | ** **                                         |
|                                    |                                               |
| Date:  November 3,  2010 | /s/  Richard A. Degner                             |
|                                    | Richard  A. Degner                                 |
|                                    | President  and Chief Executive Officer             |
|                                    | (Authorized  Officer)                              |
|                                    |                                               |
|                                    |                                               |
| Date:  November 3,  2010 | /s/  P. Mathew Verghese                            |
|                                    | P.  Mathew Verghese                                |
|                                    | Senior  Vice President and Chief Financial Officer |
|                                    | (Principal  Financial and Accounting Officer)      |

 

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