Geokinetics (GEOKQ) 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

ý         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-9268

GEOKINETICS INC.

(Name of registrant as specified in its charter)

DELAWARE	94-1690082
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

ONE RIVERWAY, SUITE 2100

HOUSTON, TX  77056

(713) 850-7600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý     No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No   ý

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

At September 30, 2005, there were 18,992,113 shares of common stock, par value $0.01 per share, outstanding.

GEOKINETICS INC.

INDEX

Certification of CEO Pursuant to Rule 13a-14(a)/15d-14a

Certification of CFO Pursuant to Rule 13a-14(a)/15d-14a

Certification of CEO Pursuant to Section 1350

Certification of CFO Pursuant to Section 1350

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

GEOKINETICS INC.

Consolidated Balance Sheets

ASSETS

	September 30 2005			December 31 2004
	Unaudited
Current Assets:
Cash	$	4,210,143		$	2,399,927
Receivables	4,961,788			4,969,822
Work in Progress	2,083,037			1,214,722
Prepaid expenses	83,585			373,622
Total Current Assets	11,338,553			8,958,093
Property and Equipment:
Equipment	24,467,709			21,717,334
Buildings	299,672			289,864
Land	23,450			23,450
	24,790,831			22,030,648
Less accumulated depreciation	(20,409,197		)	(19,784,088		)
Total Property and Equipment	4,381,634			2,246,560
Other Assets:
Deferred charges	149,341			115,911
Restricted investments	196,907			210,407
Other assets	45,583			45,583
Total Other Assets	391,831			371,901
Total Assets	$	16,112,018		$	11,576,554

See accompanying notes to the financial statements.

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LIABILITIES AND STOCKHOLDERS’ DEFICIT

	September 30			December 31
	2005			2004
	Unaudited
Current Liabilities:
Current maturities of long-term debt	$	354,697		$	685,052
Current portion of GeoLease liability	1,138,588			1,072,495
Current portion of capital leases	1,849,521			237,313
Accounts payable	5,655,969			2,307,907
Accrued liabilities	1,422,985			1,387,414
Due to officers and stockholders	552,373			552,373
Deferred revenue	3,262,572			2,427,269
Notes payable	—			283,190
Advances for lease bank	100,000			100,000
Total Current Liabilities	14,336,705			9,053,013
Long-term debt, net of current maturities	—			181,834
GeoLease liability, long-term	1,287,132			2,256,057
Other Liabilities:
Non-current portion of capital leases	73,861			66,193
Total Liabilities	15,697,698			11,557,097
Redeemable Preferred Stock
Redeemable preferred stock, Series A, $10.00 par value, 100,000 shares authorized, 8,333 shares issued and outstanding	2,528,113			2,397,843
Stockholders’ Equity:
Common stock, $.01 par value, 100,000,000 shares authorized, 18,992,113 shares outstanding	189,922			189,922
Additional paid in capital	35,639,761			35,770,031
Accumulated other comprehensive (loss) – foreign currency translation	(49,501		)	—
Accumulated (deficit)	(37,893,975		)	(38,338,339		)
Total Stockholders’ (Deficit)	(2,113,793		)	(2,378,386		)
Total Liabilities and Stockholders’ Deficit	$	16,112,018		$	11,576,554

See accompanying notes to the financial statements.

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GEOKINETICS INC.

Statements of Operations

	Three Months Ended September 30						Nine Months Ended September 30
	(Unaudited)						(Unaudited)
	2005			2004			2005			2004
Revenues:
Seismic acquisition revenue	$	14,666,531		$	10,934,704		$	38,988,278		$	30,932,361
Data processing revenue	851,400			1,160,985			3,118,469			2,509,319
Total Revenues	15,517,931			12,095,689			42,106,747			33,441,680
Expenses:
General and administrative	692,833			555,111			1,910,559			1,785,336
Seismic acquisition operating expense	12,583,793			8,943,297			34,060,881			27,394,070
Data processing operating expense	1,513,541			1,530,920			4,828,466			4,192,680
Depreciation and amortization expense	238,685			183,609			627,273			628,716
Total Expenses	15,028,852			11,212,937			41,427,179			34,000,802
Income (Loss) from Operations	489,079			882,752			679,568			(559,122		)
Other Income (Expense):
Interest income	29,776			5,315			61,039			17,131
Other income	500			107			735			619
Interest expense	(103,074		)	(110,920		)	(296,978		)	(333,282		)
Total Other Income (Expense)	(72,798		)	(105,498		)	(235,204		)	(315,532		)
Income (Loss) before provision for income tax	416,281			777,254			444,364			(874,654		)
Provision for income tax	—			—			—			—
Net Income (Loss)	$	416,281		$	777,254		$	444,364		$	(874,654	)
Returns to preferred stockholders
Dividend and accretion costs	(43,424		)	—			(130,271		)	—
Income (Loss) applicable to common Stockholders	$	372,857		$	777,254		$	314,093		$	(874,654)
Earnings (Loss) per common share	$	0.02		$	0.04		$	0.02		$	(0.05)
Basic	$	0.01		$	0.04		$	0.02		$	(0.05)
Diluted
Weighted average common shares and equivalents outstanding
Basic	18,992,113			18,992,113			18,992,113			18,992,113
Diluted	28,494,972			19,199,111			28,383,996			18,992,113

See accompanying notes to the financial statements.

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GEOKINETICS INC.

Statements of Cash Flows

	Nine Months Ended September 30
	(Unaudited)
	2005			2004
OPERATING ACTIVITIES
Net Income (Loss)	$	444,364		$	(874,654	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation and amortization	627,273			628,716
Changes in operating assets and liabilities
Accounts receivable and work in progress	(860,281		)	905,449
Prepaid expenses and other assets	270,107			425,112
Accounts payable	3,348,062			(1,970,410		)
Accrued liabilities and deferred revenue	869,762			(461,750		)
Net cash provided by (used in) operating activities	4,699,287			(1,347,537		)
INVESTING ACTIVITIES
Purchases of capital assets	(488,623		)	(332,833		)
Net cash (used in) investing activities	(488,623		)	(332,833		)
FINANCING ACTIVITIES
Proceeds from short-term debt	9,813			51,215
Payments on capital leases	(680,770		)	(278,306		)
Principal paid on long-term debt	(1,416,631		)	(1,176,994		)
Principal paid on short-term debt	(292,753		)	(559,637		)
Net cash (used in) financing activities	(2,380,341		)	(1,963,722		)
Other comprehensive (loss)	(20,107		)	—
Net increase (decrease) in cash	1,810,216			(3,644,092		)
Cash at beginning of period	2,399,927			5,057,892
Cash at end of period	$	4,210,143		$	1,413,800

Supplemental disclosures related to cash flows:

Equipment totaling $2,254,883 and $350,126 was acquired in the first nine months of 2005 and 2004, respectively, through the issuance of capital leases.

Interest of $296,978 and $333,282 was paid in the first nine months of 2005 and 2004, respectively.

See accompanying notes to the financial statements.

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GEOKINETICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.Organization

Geokinetics Inc. (the “Company”), a Delaware corporation, was incorporated in 1980.  The Company is a technologically advanced provider of seismic acquisition and high-end seismic data processing services to the oil and gas industry.

2.Basis of Presentation and Significant Accounting Policies

The unaudited financial statements contained herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  The accompanying financial statements include all adjustments which are, in the opinion of management, necessary to provide a fair presentation of the financial condition and results of operations for the periods presented.  All such adjustments are of a normal recurring nature.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission.  These financial statements should be read in conjunction with the financial statements and notes included in the Company’s latest Annual Report on Form 10-KSB for the year ended December 31, 2004.  The results of operations for the nine months ended September 30, 2005, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2005.

There were no changes to the Company’s Critical Accounting Policies, as described in its Annual Report on Form 10-KSB, during the nine months ended September 30, 2005.

Stock Based Compensation

As permitted under generally accepted accounting principles, stock-based awards granted to employees are accounted for following APB 25.  Accordingly, the Company has not recognized compensation expense for its stock-based awards to employees.  Outlined below are pro forma results had compensation costs for the Company’s stock-based compensation plans been determined based on the fair value approach of SFAS 123.

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	Three Months Ended September 30
	2005			2004
Income applicable to common stockholders	$	372,857		$	777,254
Less compensation cost determined under the fair value method	(55,413		)	(10,990		)
Pro forma Income applicable to common stockholders	$	317,444		$	766,264
Basic earnings per share:
As reported	$	0.02		$	0.04
Pro forma	0.02			0.04
Diluted earnings per share:
As reported	$	0.01		$	0.04
Pro forma	0.01			0.04

	Nine Months Ended September 30
	2005			2004
Income (loss) applicable to common stockholders	$	314,093		$	(874,654	)
Less compensation cost determined under the fair value method	(166,238		)	(32,970		)
Pro forma income (loss) applicable to common stockholders	$	147,855		$	(907,624	)
Basic earnings per share:
As reported	$	0.02		$	(0.05	)
Pro forma	0.01			(0.05		)
Diluted earnings per share:
As reported	0.02			(0.05		)
Pro forma	0.01			(0.05		)

These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years.

The Financial Accounting Standards Board (FASB) has announced it will require all public companies to expense the fair value of employee stock awards.  The final requirements will be effective for the Company for periods beginning after December 31, 2005.  The impact to the Company’s financial statements will be in the form of additional compensation expense upon the award of any stock option.  The amount of the compensation expense recognized will be dependent upon the value of the Company’s common stock and the number of options awarded.

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3.Long Term Debt

At September 30, 2005, the Company’s long-term debt was $354,697, all of which was current.  Long-term debt consists of a note to a financial institution, bearing interest at prime plus 1.5%.

At September 30, 2005, the Company had a long-term liability to GeoLease Partners, L.P., a Delaware limited partnership (“GeoLease”), in the amount of $2,425,720, including $1,138,588 in current maturities.  GeoLease is the holder of the Company’s seismic acquisition equipment lease.

At September 30, 2005, the Company had long-term capital leases in the amount of $1,923,382, including $1,849,521 in current maturities, with interest rates ranging from 8% to 12%.

4.Bonuses and Comparability

The results for the first nine months of 2005 include discretionary bonuses of approximately $475,000.  Discretionary bonuses of approximately $204,000 were paid and expensed during the same period of 2004.

5.Segment Information

The following table sets forth the Company’s significant information from reportable segments.

	For the Quarter Ended September 30, 2005
	Seismic Acquisition		Data Processing			Totals
Revenues from external customers	$	14,666,531	$	851,400		$	15,517,931
Segment Profit (Loss)	1,730,864		(996,126		)	734,738
Segment Assets	8,208,379		2,687,280			10,895,659

	For the Quarter Ended September 30, 2004
	Seismic Acquisition		Data Processing			Totals
Revenues from external customers	$	10,934,704	$	1,160,985		$	12,095,689
Segment Profit (Loss)	1,683,011		(673,326		)	1,009,685
Segment Assets	4,472,862		3,378,159			7,851,021

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	For the Nine Months Ended September 30, 2005
	Seismic Acquisition		Data Processing			Totals
Revenues from external customers	$	38,988,278	$	3,118,469		$	42,106,747
Segment Profit (Loss)	3,967,308		(2,689,912		)	1,277,396
Segment Assets	8,208,379		2,687,280			10,895,659

	For the Nine Months Ended September 30, 2004
	Seismic Acquisition		Data Processing			Totals
Revenues from external customers	$	30,932,361	$	2,509,319		$	33,441,680
Segment Profit (Loss)	2,507,324		(2,584,318		)	(76,994		)
Segment Assets	4,472,862		3,378,159			7,851,021

The following table reconciles reportable segment profit (loss) to consolidated profit (loss):

	For the Quarter Ended September 30
	2005			2004
PROFIT OR (LOSS)
Total profit (loss) for reportable segments	$	734,738		$	1,009,685
Unallocated amounts:
Corporate expenses net of interest earnings	(315,328		)	(229,273		)
Corporate interest expense	(2,357		)	(2,120		)
Depreciation	(772		)	(1,038		)
Total Consolidated Profit (Loss)	$	416,281		$	777,254

	For the Nine Months Ended September 30
	2005			2004
PROFIT OR (LOSS)
Total profit (loss) for reportable segments	$	1,277,396		$	(76,994	)
Unallocated amounts:
Corporate expenses net of interest earnings	(822,946		)	(788,000		)
Corporate interest expense	(7,502		)	(6,620		)
Depreciation	(2,584		)	(3,040		)
Total Consolidated Profit (Loss)	$	444,364		$	(874,654	)

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6.Comprehensive Income (Loss)

SFAS 130 “Reporting Comprehensive Income” establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements.  Comprehensive income generally represents all changes in stockholders equity (deficit) during the period except those resulting from investments by, or distributions to, stockholders.  The Company has comprehensive income (loss) related to changes in foreign currency to U.S. dollar exchange rates, which is recorded as follows:

	Three Months Ended September 30
	2005			2004
Net income	$	416,281		$	777,254
Foreign currency translation adjustment	(24,639		)	—
Comprehensive income	$	391,642		$	777,254

	Nine Months Ended September 30
	2005			2004
Net income (loss)	$	444,364		$	(874,654	)
Foreign currency translation adjustment	(49,501		)	—
Comprehensive income (loss)	$	394,863		$	(874,654	)

7.Earnings (Loss) per Common Share

The Company accounts for earnings per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (Statement 128).  Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share.  Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities.  Diluted earnings per share is similar to the previously reported fully diluted earnings per share.  All earnings per share amounts for all periods have been presented, and when appropriate, restated to conform to the Statement 128 requirements.

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The following table sets forth the computation of basic and diluted earnings (loss) per common share:

	Three Months Ended September 30				Nine Months Ended September 30
	2005		2004		2005		2004
Numerator:
Income (Loss) applicable to common stockholders	$	372,857	$	777,254	$	314,093	$	(874,654	)
Denominator:
Denominator for basic earnings (loss) per common share	18,992,113		18,992,113		18,992,113		18,992,113
Effect of dilutive securities
Employee stock options	1,159,859		206,998		1,058,883		—
Convertible preferred stock	8,333,000		—		8,333,000		—
Denominator for diluted earnings (loss)	28,484,972		19,199,111		28,383,996		18,992,113
Earnings (Loss) per common share
Basic	$	0.02	$	0.04	$	0.02	$	(0.05	)
Diluted	$	0.01	$	0.04	$	0.02	$	(0.05	)

8.Acquisition

On August 1, 2005, the Company announced it had entered into an agreement to purchase all of the stock of Trace Energy Services, Ltd. (“Trace”) of Calgary, Alberta, Canada for approximately CDN $35,000,000 in cash, subject to certain adjustments, and 1,000,000 shares of Geokinetics Common Stock.  Trace, which operates in the United States and Canada, performs 2-D, 3-D and 4-D seismic surveys using both conventional analog and digital seismic equipment for a wide range of customers exploring for oil and gas reserves.  Trace also has the technical capability to record shear wave data utilizing the I/O System Four Vectorseis recording system.  Closing of the transaction is subject to certain conditions contained in the purchase agreement, including receipt of satisfactory financing.  The Company anticipates completing a private equity offering or a combination of equity and debt financing to allow it to complete the Trace acquisition during the fourth quarter of 2005.  Completion of the transaction will provide the Company with geographic diversification and revenue expansion opportunities and allow the Company to operate as many as nine seismic crews in the North American market.

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

Forward Looking Statements

Certain matters discussed in this quarterly report, except for historical information contained herein, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  When used in this report, words such as “anticipates”, “believes”, “expects”, “estimates”, “intends”, “plans”, “projects” and similar expressions, as they relate to the Company or management, identify forward-looking statements.  Forward-looking statements include, among other things, business strategy and expectations concerning industry conditions, market position, future operations, profitability, liquidity and capital resources.  Management’s expectations and assumptions regarding Company operations and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements.  Although we believe that the expectations reflected in such statements are reasonable, we can give no assurance that such expectations will be correct.

Overview

The Company provides seismic acquisition and high-end seismic data processing services to the oil and gas industry through its wholly-owned subsidiaries, Quantum Geophysical, Inc. (“Quantum”) and Geophysical Development Corporation (“GDC”).

The seismic service industry is dependent upon the spending levels established by oil and gas companies for exploration, development, exploitation and production of oil and natural gas.  These spending levels have traditionally depended upon the prices paid for oil and natural gas.  During the late 1990’s and early 2000’s, oil and natural gas exploration activities slowed as a result of a precipitous drop in oil and natural gas prices which occurred during 1998 and 1999.  However, the oil and natural gas industry has seen significant increases in activity resulting from continuing high commodity prices for oil and natural gas.  The Company’s seismic acquisition segment has benefited from these increased levels of activity as well as from its reputation as a provider of high quality seismic surveys.  The Company has seen its seismic acquisition revenues increase year over year for the past several years.  Results for the first nine months of 2005 increased from the levels attained during the same period of 2004.  While demand for the Company’s services has significantly improved, the Company continues to experience significant competition in its marketplace which has prevented the Company from benefiting from increased pricing for its services.

During the third quarter of 2005, the Company continued to operate three seismic acquisition crews on a continuous basis.  The Company believes that its current backlog for seismic acquisition projects is sufficient to keep three seismic acquisition crews in operation into the third quarter of 2006.  During the third quarter, the Company elected to exercise an option to purchase a 5,040 channel RSR System II from an industry equipment supplier.  Prior to exercising this option, the Company had been leasing the underlying equipment on a month-to-month basis since mid-

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January of this year.  The Company will continue to aggressively compete for additional seismic acquisition projects from both existing and prospective clients.

During the third quarter of 2005, the Gulf Coast region of the United States was directly impacted by Hurricanes Katrina and Rita.  The Company’s ongoing operations were not affected by Hurricane Katrina.  However, the Company had one seismic acquisition crew which was operating in an area directly impacted by Hurricane Rita.  This seismic acquisition crew lost approximately ten days of recording activities, at the end of the third quarter, as a result of Hurricane Rita.  The Company did not sustain any material equipment damage as a consequence of Hurricane Rita.  Startup operations on another Company project in the immediate area were also curtailed for the last ten days of the quarter due to the effect of Rita.  The Company estimates that the negative impact on its third quarter revenues as a result of Hurricane Rita was approximately $900,000.

Although revenues at the Company’s seismic data processing segment for the nine months ended September 30, 2005 increased, when compared to the same period of 2004, revenues for the third quarter of 2005 declined, when compared to the third quarter of 2004.  Prior to this quarter, quarterly revenues had increased for four consecutive quarters when compared to the respective prior year’s quarterly periods.  The Company anticipates that this decline in revenues will continue into the fourth quarter.  Additionally, this segment continues to operate at a significant loss and has not as yet benefited from improved industry conditions.  The Company is continuing in its efforts to upgrade both its technological capabilities as well as the capabilities of its professional staff.

The Company announced on August 1, 2005 that it had entered into an agreement to purchase all of the stock of Trace Energy Services, Ltd. (“Trace”) of Calgary, Alberta, Canada for approximately CDN $35,000,000 in cash, subject to certain adjustments, and 1,000,000 shares of Geokinetics Common Stock.  Trace, which operates in the United States and Canada, performs 2-D, 3-D and 4-D seismic surveys using both conventional analog and digital seismic equipment for a wide range of customers exploring for oil and gas reserves.  Trace also has the technical capability to record shear wave data utilizing the I/O System Four Vectorsies recording system.  Closing of the transaction is subject to certain conditions contained in the purchase agreement, including receipt of satisfactory financing.  The Company anticipates completing a private equity offering or a combination of equity and debt financing to allow it to complete the Trace acquisition during the fourth quarter of 2005.  Completion of the transaction, will provide the Company with geographic diversification and revenue expansion opportunities and allow the Company to operate as many as nine seismic crews in the North American market.

Results of Operations

Revenues for the nine months ended September 30, 2005 totaled $42,106,747 as compared to $33,441,680 for the same period of 2004, an increase of 26%.  For the three months ended September 30, 2005, revenues totaled $15,517,931, as compared to $12,095,689 for the same period of 2004, an increase of 28%.  This increase in revenue is primarily attributable to the Company’s seismic acquisition segment.  Seismic acquisition revenue totaled $38,988,278 as compared to $30,932,361 for the first nine months of 2004, an increase of 26%.  For the three months ended September 30, 2005, seismic acquisition revenue totaled $14,666,531 as compared to $10,934,704 for the same period of 2004, an increase of 34%.  Seismic data processing revenue

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totaled $3,118,649 for the nine months ended September 30, 2005 as compared to $2,509,319 for the same period of 2004, an increase of 24%.  However, for the three months ended September 30, seismic data processing revenue decreased from $1,160,985 in 2004 to $851,400 in 2005, a decrease of 27%.  The Company continues to experience significant competition in both its operating segments.

Operating expenses for the nine months ended September 30, 2005 totaled $38,889,347 as compared to $31,586,750 for the same period of 2004, an increase of 23%.  For the quarter ended September 30, 2005, operating expenses totaled $14,097,334 as compared to $10,474,217 for the same quarter of 2004, an increase of 35%.  These increases are primarily the result of increased activity at both of the Company’s operating segments.  Seismic acquisition operating expenses for the first nine months of 2005 increased 24% to $34,060,881 from $27,394,070 for the same period of 2004.  For the nine months ended September 30, 2005, seismic data processing operating expenses totaled $4,828,466 as compared to $4,192,680 for the same period of 2004, an increase of 15%.  Increased operating expenses at the seismic acquisition segment resulted primarily from increased activity and the fielding of a third crew.  Operating expenses increased at the Company’s seismic data processing segment primarily due to increased levels of activity as well as costs associated with the upgrading of the segment’s professional staff.

General and administrative expense for the nine months ended September 30, 2005 was $1,910,559 as compared to $1,785,336 for the same period of 2004, an increase of 7%.  For the quarter ended September 30, 2005 general and administrative expense totaled $692,833, as compared to $555,111 for the same period of fiscal 2004, an increase of 25%.  Increases in general and administrative expense are primarily attributable to personnel costs and increased audit and accounting fees.

Depreciation and amortization expense for the nine months ended September 30, 2005 totaled $627,273 as compared to $628,716 for the same period of 2004.  For the three months ended September 30, depreciation and amortization expense increased from $183,609 in 2004 to $238,685 in 2005, an increase of 30%. This increase is primarily the result of the addition of new equipment at both operating segments.

Interest expense (net of interest income) for the first nine months of 2005 decreased 25% to $235,939 as compared to $316,151 for the same period of 2004.  Interest expense (net of interest income) for the quarter ended September 30, 2005 decreased to $73,298, as compared to $105,605 for the same period of 2004, a decrease of 31%.  This decrease was primarily due to the continuing reduction in the balances of the Company’s long-term debt and GeoLease liability.

The Company had income applicable to common stockholders of $314,093, or $0.02 per share, for the nine months ended September 30, 2005 as compared to a loss applicable to common stockholders of $874,654, or $(0.05) per share, for the same period of 2004.  For the three months ended September 30, 2005, the Company had income applicable to common stockholders of $372,857, or $0.02 per share, as compared to income applicable to common stockholders of $777,254, or $0.04 per share for the same period of 2004.  The improvement in the Company’s nine month results is primarily due to an increase in operating profits at the Company’s seismic acquisition segment.

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Liquidity and Capital Resources

The Company’s primary sources of cash are cash flow generated by its seismic acquisition and seismic data processing segments, private equity transactions, equipment financing and trade credit.  The Company’s primary uses of cash are for operating expenses associated with its seismic acquisition and seismic data processing segments and expenditures associated with upgrading and expanding of the Company’s operating segments capital asset base.  As such, the Company’s ability to maintain adequate cash balances is dependent upon levels of future demand for the services it provides to its customers.  In the past, the Company has relied upon cash flows from operations and private placements of equity and debt to meet its working capital and capital expenditure requirements.

On May 2, 2003, the Company completed a comprehensive debt restructuring with its principal creditors.  Pursuant to the restructuring the Company (i) effected a reverse stock split of its common stock at a ratio of 1-for-100, (ii) eliminated approximately $80,000,000 in long-term debt obligations through cash settlements or debt conversions into common stock, (iii) reduced and restructured its obligations to GeoLease and (iv) completed a $3,500,000 private placement from a group of private investors.

At the time of the May, 2003 restructuring, the Company’s accrued lease obligation to GeoLease was reduced to $3,700,000 from $6,675,530.  The outstanding balance of $3,700,000 was frozen as of May 2, 2003 but accrued interest at 6% per annum from May 1, 2002 until April 30, 2004 when such balance, plus accrued and unpaid interest, was payable in full.  In addition, the Company’s monthly payments under the lease, for continuing use of the seismic acquisition equipment, were reduced from $260,000 to $62,400 (inclusive of any applicable taxes) beginning May 1, 2002 until April 30, 2004.

On April 14, 2004, the Company and GeoLease agreed to a comprehensive restructuring of the equipment lease pursuant to the Amendment No. 2 of the equipment lease.  Under the terms of the restructuring, the Company is allowed to pay GeoLease the outstanding accrued lease obligation as of April 30, 2004 (totaling $4,170,419) in forty-eight monthly installments beginning May 1, 2004 and ending with a final payment in April, 2008.  The outstanding balance accrues interest at 8% per annum.  The Company’s monthly lease payments were reduced from $62,400 to $31,200 per month for the period beginning May 1, 2004 until October 31, 2004, further reduced to $21,200 per month for the period beginning November 1, 2004 until April 30, 2005, further reduced to $11,200 per month for the period beginning May 1, 2005 until April 30, 2007, and further reduced to $5,600 per month for the period beginning May 1, 2007 until April 30, 2008.  Under the terms of Amendment No. 2, the Company is also required to make mandatory annual prepayments of the outstanding accrued lease obligation should the Company have positive “Free Cash Flow” (as defined in Amendment No. 2), as calculated for each of the calendar years ending December 31, 2004 through December 31, 2007, until the balance is paid in full.  At the year end of each period, the Company will calculate its consolidated “Free Cash Flow” and for the period ended December 31, 2004 pay 37.5% of its calculated “Free Cash Flow” as a prepayment to GeoLease and in each of the subsequent yearly periods pay 50% of its calculated “Free Cash Flow” to GeoLease.   Any such prepayment will be applied to the last installments of the outstanding accrued lease obligation first.  Amendment No. 2 also requires the Company to make prepayments of cash proceeds received

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pursuant to certain financing transactions and certain sales of assets outside the ordinary course of business.  At December 31, 2004, the Company was not obligated to make a prepayment to GeoLease.

On November 30, 2004, the Company completed a $2,499,900 equity financing from private investment sources.  The financing consisted of an issue of 8,333 shares of Series A Senior Convertible Preferred Stock (“Convertible Preferred Stock”) priced at $300 per share, which is convertible into common at $.30 cents per share.  The Convertible Preferred Stock accrues dividends at the rate of 6% per annum, compounded annually which are payable in cash when, and if, declared.  All unpaid dividends are cumulative and accrue, compounded annually, regardless of whether or not the Company has funds legally available for the payment of such dividends.  The Convertible Preferred Stock is convertible, at the option of the holder thereof, at any time after the date of issuance.  The Convertible Preferred Stock is automatically converted into common stock immediately upon the Company’s sale of common stock in an underwritten public offering (a) at a price per share yielding the Company net proceeds of not less than $1.20, (b) resulting in net proceeds to the Company and selling stockholders, if any, of not less than $20,000,000 and (c) after which the Company’s common stock is listed on the New York Stock Exchange, the American Stock Exchange or the National Association of Securities Dealers Automated Quotation System National Market (the “NASDAQ”) .  If, at any time after October 31, 2009, the holders of not less than 51% of the Convertible Preferred Stock then outstanding deliver written notice to the Company of such holders desire to redeem, all outstanding Convertible Preferred Stock, if not previously converted, shall be redeemed.  At any time after October 31, 2011, the Company is entitled to redeem all outstanding Convertible Preferred Stock, if not previously converted.  After completion of this transaction, the Company had 27,325,113 shares of common stock outstanding, assuming conversion of the Convertible Preferred Stock.

Net cash provided by operating activities was $4,699,287 for the first nine months of 2005 as compared to net cash used in operating activities of $1,347,537 for the first nine months of 2004.  These amounts result from the Company’s operating results adjusted by changes in working capital and depreciation.  The increase in cash provided by operating activities in the first nine months of 2005 was primarily the result of improvement in the Company’s net income and an increase in the Company’s accounts payable and accrued liabilities balances.

Net cash used in investing activities was $488,623 for the first nine months of 2005 and $332,833 for the first nine months of 2004.  These amounts represent capital expenditures made during the respective nine month periods.

Net cash used in financing activities was $2,380,341 for the nine months ended September 30, 2005 and $1,963,722 for the nine months ended September 30, 2004.  These totals represent payments made on the Company’s various debt obligations.

Quantum’s exercise of an option to purchase certain leased equipment during the third quarter created an obligation to make payments totaling approximately $1,753,000 during the period of July, 2005 through May, 2006.

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The Company believes that its current cash balances and anticipated cash flow from its seismic acquisition and seismic data processing operations will provide sufficient liquidity to continue operations beyond 2005.  While industry conditions appear to be improving, the Company continues to experience significant competition in its markets.  Should the Company’s current sources of liquidity not meet its operating requirements, the Company would be forced to seek outside sources of capital to meet its operating and capital requirements.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements for the nine-month period ended September 30, 2005 that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Critical Accounting Policies and Estimates

There were no changes to the Company’s Critical Accounting Policies, as described in its Annual Report on Form 10-KSB, during the nine months ended September 30, 2005.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of operations, the Company is exposed to market risks arising from adverse changes in interest rates.  Market risk is defined for these purposes as the potential for change in the fair value of debt instruments resulting from an adverse movement in interest rates.  As of September 30, 2005, the Company’s financial instruments consist of cash, accounts receivable, accounts payable and notes payable, the GeoLease liability and redeemable preferred stock.  The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable approximate fair market value due to the short maturity of those instruments.  The carrying amount of debt reported in the consolidated balance sheets approximate fair value because, in general, the interest on the underlying instruments approximates market rates.  The carrying amount of redeemable preferred stock approximates fair value as the securities were sold on November 30, 2004 in an arm’s length transaction for which a fairness opinion was issued by an independent third party.  The Company is not a party to any hedge arrangements, commodity swap agreement or other derivative financial instruments.  The Company’s seismic acquisition segment operates exclusively within the United States.  The Company’s seismic data processing segment utilizes a foreign subsidiary, located in the United Kingdom, to conduct operations outside of the United States.  This operation exposes the Company to market risks from changes in foreign exchange rates.  However, to date, the level of activity has not been of a material nature.

Item 4. Controls and Procedures

Under the supervision and with the participation, of the Company’s management, including the Company’s principal executive officer and principal financial officer, the Company has performed an evaluation of the design, operation and effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2005.  Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded

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that such disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in its reports filed or submitted under the Exchange Act within the required time period.  There have not been any changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act) during the nine months ended September 30, 2005 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

Neither the Company nor any of its subsidiaries is a party to any pending legal proceedings other than certain routine litigation that is incidental to the Company’s business and that the Company believes is unlikely to materially impact the Company.  Moreover, the Company is not aware of any such legal proceedings that are contemplated by governmental authorities with respect to the Company, any of its subsidiaries, or any of their respective properties.

Item 6.  Exhibits

(a)Exhibits filed with this report:

3.1	Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3(a) to Amendment No. 1 to the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on March 25, 1980 (file no. 000-09268)).
3.2	Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3.2 to Form 10-KSB filed with the Securities and Exchange Commission on April 24, 1996 (file no. 000-09268)).
3.3	Certificate of Amendment of Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on July 14, 1997 (incorporated by reference from Exhibit 3.3 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no. 000-09268))
3.4	Certificate of Amendment of Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on November 24, 1997 (incorporated by reference from Exhibit 3.4 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no. 000-09268)).
3.5	Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.5 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no. 000-09268)).
10.1	Stock Purchase Agreement, dated July 29, 2005, by and among Geokinetics Inc., SCF-III, L.P., and James White (incorporated by reference from Exhibit 10.1 to Form 8-K filed with the Securities and Exchange Commission on August 4, 2005 (file no 000-09268)).
10.2	Letter Agreement, effective August 8, 2005, by and between Mitcham Industries, Inc., and Quantum Geophysical Inc., (incorporated by reference from Exhibit 10.1 to Form 8-K filed with the Securities and Exchange Commission on August 11, 2005 (file no 000-09268)).
10.3	Lease Agreement No. C001887 dated June 10, 2005, by and between Mitcham Industries, Inc., and Quantum Geophysical, Inc., (incorporated by reference from Exhibit 10.2 to Form 8-K filed with the Securities and Exchange Commission on August 11, 2005 (file no 000-09268)).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, filed herewith.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, filed herewith.
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.

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SIGNATURES

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

	GEOKINETICS INC.
Date: November 21, 2005	/s/ David A. Johnson
	David A. Johnson
	President and Chief Executive Officer
Date: November 21, 2005	/s/ Thomas J. Concannon
	Thomas J. Concannon
	Vice President and Chief Financial Officer

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