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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________

FORM 10-Q
_______________________________________________
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-10165
_______________________________________________
 SEITEL, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________
Delaware
  
76-0025431
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
 
10811 S. Westview Circle Drive
Building C, Suite 100
Houston, Texas
  
77043
(Address of principal executive offices)
  
(Zip Code)
(713) 881-8900
(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  ¨    No  ý
(Explanatory Note: The registrant is a voluntary filer and is therefore not subject to the filing requirements of the Securities Exchange Act of 1934. However, during the preceding 12 months, the registrant has filed all reports that it would have been required to file by Section 13 or 15(d) of the Securities Exchange Act of 1934 if the registrant was subject to the filing requirements of the Securities Exchange Act of 1934 during such timeframe.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
ý
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  ý
As of November 7, 2016, there were 100 shares of the Company’s common stock outstanding, par value $.001 per share.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
Page
PART  I.
 
 
 
 
 
 
 
 
 
 
 
PART  II.
 
 
 
Item 1A. Risk Factors
 
Item 6. Exhibits
 

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PART I—FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS
SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
 
(Unaudited)
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Cash and cash equivalents
$
60,874

 
$
52,675

Receivables
 
 
 
Trade, net of allowance for doubtful accounts of $228 and $267, respectively
6,167

 
14,830

Notes and other
3,538

 
1,318

Due from Seitel Holdings, Inc.
1,175

 
1,156

Seismic data library, net of accumulated amortization of $1,168,969 and $1,098,398, respectively
128,089

 
161,363

Property and equipment, net of accumulated depreciation and amortization of $16,295 and $15,147, respectively
1,913

 
2,603

Prepaid expenses, deferred charges and other
2,512

 
2,183

Intangible assets, net of accumulated amortization of $47,166 and $43,232, respectively
2,462

 
5,528

Goodwill
183,771

 
179,792

Deferred income taxes
71

 
39

TOTAL ASSETS
$
390,572

 
$
421,487

LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
LIABILITIES
 
 
 
Accounts payable and accrued liabilities
$
23,261

 
$
23,650

Income taxes payable
173

 

Senior Notes
246,556

 
245,696

Obligations under capital leases
1,599

 
1,661

Deferred revenue
18,673

 
25,903

Deferred income taxes
1,002

 
2,361

TOTAL LIABILITIES
291,264

 
299,271

COMMITMENTS AND CONTINGENCIES (Note H)

 

STOCKHOLDER’S EQUITY
 
 
 
Common stock, par value $.001 per share; 100 shares authorized, issued and outstanding

 

Additional paid-in capital
400,564

 
400,505

Retained deficit
(287,308
)
 
(258,766
)
Accumulated other comprehensive loss
(13,948
)
 
(19,523
)
TOTAL STOCKHOLDER’S EQUITY
99,308

 
122,216

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
$
390,572

 
$
421,487


The accompanying notes are an integral part of these condensed consolidated financial statements.

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SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands)
 
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
REVENUE
$
23,255

 
$
31,242

 
$
59,545

 
$
86,290

EXPENSES:
 
 
 
 
 
 
 
Depreciation and amortization
18,933

 
24,627

 
58,839

 
68,114

Cost of sales
22

 
37

 
55

 
164

Selling, general and administrative
5,386

 
5,293

 
16,013

 
17,150

 
24,341

 
29,957

 
74,907

 
85,428

INCOME (LOSS) FROM OPERATIONS
(1,086
)
 
1,285

 
(15,362
)
 
862

Interest expense, net
(6,298
)
 
(6,381
)
 
(18,988
)
 
(19,020
)
Foreign currency exchange gains (losses)
(20
)
 
(138
)
 
143

 
(1,559
)
Other income
572

 

 
582

 
5

Loss before income taxes
(6,832
)
 
(5,234
)
 
(33,625
)
 
(19,712
)
Benefit for income taxes
(1,389
)
 
(1,179
)
 
(5,083
)
 
(5,735
)
NET LOSS
$
(5,443
)
 
$
(4,055
)
 
$
(28,542
)
 
$
(13,977
)
The accompanying notes are an integral part of these condensed consolidated financial statements.



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SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(In thousands)
 
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(5,443
)
 
$
(4,055
)
 
$
(28,542
)
 
$
(13,977
)
Foreign currency translation adjustments
(861
)
 
(8,255
)
 
5,575

 
(17,717
)
Comprehensive loss
$
(6,304
)
 
$
(12,310
)
 
$
(22,967
)
 
$
(31,694
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


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SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY (Unaudited)
(In thousands, except share amounts)
 
 
 
 
Additional
Paid-In
Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Common Stock
 
 
Shares
 
Amount
 
Balance, December 31, 2015
100

 
$

 
$
400,505

 
$
(258,766
)
 
$
(19,523
)
Amortization of stock-based compensation costs

 

 
59

 

 

Net loss

 

 

 
(28,542
)
 

Foreign currency translation adjustments

 

 

 

 
5,575

Balance, September 30, 2016
100

 
$

 
$
400,564

 
$
(287,308
)
 
$
(13,948
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


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SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

  
Nine Months Ended
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Reconciliation of net loss to net cash provided by operating activities:
 
 
 
Net loss
$
(28,542
)
 
$
(13,977
)
Depreciation and amortization
58,839

 
68,114

Deferred income tax benefit
(5,127
)
 
(5,704
)
Foreign currency exchange losses (gains)
(143
)
 
1,559

Amortization of deferred financing costs
922

 
889

Amortization of stock-based compensation
59

 
264

Decrease in allowance for doubtful accounts
(21
)
 

Gain on sale of property and equipment
(7
)
 

Non-cash other income
(572
)
 

Non-cash revenue
(2,713
)
 
(6,805
)
Decrease in receivables
6,508

 
33,923

Decrease in other assets
424

 
265

Decrease in deferred revenue
(7,244
)
 
(14,035
)
Increase in accounts payable and other liabilities
6,748

 
3,236

Net cash provided by operating activities
29,131

 
67,729

Cash flows from investing activities:
 
 
 
Cash invested in seismic data
(20,699
)
 
(61,218
)
Cash paid to acquire property and equipment
(176
)
 
(406
)
Cash from sale of property and equipment
18

 

Advances to Seitel Holdings, Inc.
(19
)
 
(10
)
Net cash used in investing activities
(20,876
)
 
(61,634
)
Cash flows from financing activities:
 
 
 
Principal payments on capital lease obligations
(152
)
 
(168
)
Net cash used in financing activities
(152
)
 
(168
)
Effect of exchange rate changes
96

 
(1,128
)
Net increase in cash and cash equivalents
8,199

 
4,799

Cash and cash equivalents at beginning of period
52,675

 
59,175

Cash and cash equivalents at end of period
$
60,874

 
$
63,974

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
12,195

 
$
12,230

Income taxes, net of refunds received
$
(7
)
 
$
(122
)
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Additions to seismic data library
$
2,640

 
$
7,959

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SEITEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited)
September 30, 2016
NOTE A-BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Seitel, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. In preparing the Company’s financial statements, a number of estimates and assumptions are made by management that affect the accounting for and recognition of assets, liabilities, revenues and expenses. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The condensed consolidated balance sheet of the Company as of December 31, 2015 has been derived from the audited balance sheet of the Company as of that date. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Effective January 1, 2016, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The new standard changed the presentation of debt issuance costs from an asset to a direct deduction from the related liability. The Company applied the provisions of the new standard retrospectively, which resulted in a decrease of $4.3 million in prepaid expenses, deferred charges and other assets and Senior Notes liability amounts in the consolidated balance sheet as of December 31, 2015. Other than the reclassification of the December 31, 2015 amount, the adoption of this standard did not have an impact on the Company’s consolidated Statements of Operations or Statements of Cash Flows.
NOTE B-REVENUE RECOGNITION
Revenue from Data Acquisition
The Company generates revenue when it creates a new seismic survey that is initially licensed by one or more of its customers to use the resulting data. The payments for the initial licenses are sometimes referred to as acquisition underwriting or prefunding. Customers make periodic payments throughout the creation period, which generally correspond to costs incurred and work performed. These payments are non-refundable. Contracts which are signed up to the time the Company makes a firm commitment to create the new seismic survey are considered acquisition underwriting. Any subsequent licensing of the data while the survey is in progress or once it is completed is considered a resale license (see “Revenue from Non-Exclusive Data Licenses”).
Acquisition underwriting revenue is recognized throughout the creation period using the proportional performance method based upon costs incurred and work performed to date as a percentage of total estimated costs and work required. Management believes that this method is the most reliable and representative measure of progress for its data creation projects. On average, the duration of the data creation process is approximately one year. Under these contracts, the Company creates new seismic data designed in conjunction with its customers and specifically suited to the geology of the area using the most appropriate technology available.
The Company outsources the substantial majority of the work required to complete data acquisition projects to third party contractors. The Company’s payments to these third party contractors comprise the substantial majority of the total estimated costs of the projects and are paid throughout the creation period. A typical survey includes specific activities required to complete the survey, each of which has value to the customers. Typical activities, that often occur concurrently, include:

permitting for land access, mineral rights, and regulatory approval;
surveying;
drilling for the placement of energy sources;
recording the data in the field; and
processing the data.
The customers paying for the initial licenses receive legally enforceable rights to any resulting product of each activity described above. The customers also receive access to and use of the newly acquired, processed data.
The customers’ access to and use of the results of the work performed and of the newly acquired, processed data is governed by a master license agreement, which is a separate agreement from the acquisition contract. The Company’s acquisition contracts

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require the customer either to have a master license agreement in place or to execute one at the time the acquisition contract is signed. The Company typically maintains sole ownership of the newly acquired data, which is added to its library, and is free to license the data to other customers.
Revenue from Non-Exclusive Data Licenses
The Company recognizes a substantial portion of its revenue from licensing of data once it is available for delivery. This revenue is sometimes referred to as resale licensing revenue, late sales or shelf sales.
These sales fall under the following four basic forms of non-exclusive license contracts.
Specific license contract—The customer licenses and selects specific data from the data library, including data currently in progress, at the time the contract is entered into and holds this license for a long-term period.

Library card license contract—The customer initially receives only access to certain data. The customer may then select specific data, from the collection of data to which it has access, to hold long-term under its license agreement. The length of the selection periods under the library card contracts is limited in time and varies from customer to customer.

Review and possession license contract—The customer obtains the right to review a certain quantity of data for a limited period of time. During the review period, the customer may select specific data from that available for review to hold long-term under its license agreement. Any data not selected for long-term licensing must be returned to the Company at the end of the review period.

Review only license contract—The customer obtains rights to review a certain quantity of data for a limited period of time, but does not obtain the right to select specific data to hold long-term.
The Company’s non-exclusive license contracts specify the following:

that all customers must also have in place or execute a master license agreement that governs the use of all data received under the Company’s non-exclusive license contracts;
the specific payment terms, generally ranging from 30 days to 12 months, and that such payments are non-cancelable and non-refundable;
the actual data that is accessible to the customer; and
that the data is licensed in its present form, as is, where is, and that the Company is under no obligation to make any enhancements, modifications or additions to the data unless specific terms to the contrary are included.
Revenue from the non-exclusive licensing of seismic data is recognized when the following criteria are met:

the Company has an agreement with the customer that is validated by a signed contract;
the sales price is fixed and determinable;
collection is reasonably assured;
the customer has selected the specific data or the contract has expired without full selection;
the data is currently available for delivery; and
the license term has begun.
Copies of the licensed data are available to the customer immediately upon request.
For licenses that have been invoiced for which payment is due or has been received, but that have not met the aforementioned criteria, revenue is deferred along with the related direct costs (primarily consisting of sales commissions). This normally occurs under the library card, review and possession or review only license contracts because the data selection may occur over time. Additionally, if the contract allows licensing of data that is not currently available or enhancements, modifications or additions to the data are required per the contract, revenue is deferred until such time that the data is available.

Revenue from Non-Monetary Exchanges
In certain cases, the Company will take ownership of a customer’s seismic data or revenue interest (collectively referred to as “data”) in exchange for a non-exclusive license to selected seismic data from the Company’s library and, in some cases, services provided by Seitel Solutions (“Solutions”). In connection with specific data acquisition contracts, the Company may choose to receive both cash and ownership of seismic data from the customer as consideration for the underwriting of new data acquisition. In addition, the Company may receive advanced data processing services on selected existing data in exchange for

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a non-exclusive license to selected data from the Company’s library. These exchanges are referred to as non-monetary exchanges. A non-monetary exchange for data always complies with the following criteria:

the data license delivered is always distinct from the data received;
the customer forfeits ownership of its data; and
the Company retains ownership in its data.
In non-monetary exchange transactions, the Company records a data library asset for the seismic data received or processed at the time the contract is entered into or the data is completed, as applicable, and recognizes revenue on the transaction in equal value in accordance with its policy on revenue from data licenses or data acquisition, or as services are provided by Solutions, as applicable. The data license to the customer is in the form of one of the four basic forms of contracts discussed above. These transactions are valued at the fair value of the data received or the fair value of the license granted or services provided, whichever is more readily determinable.
Fair value of the data exchanged is determined using a multi-step process as follows:

First, the Company considers the value of the data or services received from the customer. In determining the value of the data received, the Company considers the age, quality, current demand and future marketability of the data and, in the case of 3D seismic data, the cost that would be required to create the data. In addition, the Company applies a limitation on the value it assigns per square mile on the data received. In determining the value of the services received, the Company considers the cost of such similar services that it could obtain from a third-party provider.

Second, the Company determines the value of the license granted to the customer. Typically, the range of cash transactions by the Company for licenses of similar data during the prior six months are evaluated. In evaluating the range of cash transactions, the Company does not consider transactions that are disproportionately high or low.
Due to the Company’s revenue recognition policies, revenue recognized on non-monetary exchange transactions may not occur at the same time the seismic data acquired is recorded as an asset. The activity related to non-monetary exchanges was as follows (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Seismic data library additions
$
1,618

 
$
37

 
$
2,640

 
$
7,959

Revenue recognized on specific data licenses or selections of data
1,295

 
913

 
2,635

 
6,626

Revenue recognized related to acquisition contracts
54

 
2

 
78

 
166

Revenue recognized related to Solutions

 
13

 

 
13

Revenue from Solutions
Revenue from Solutions is recognized as the services for reproduction and delivery of seismic data are provided to customers.
NOTE C-SEISMIC DATA LIBRARY
The Company’s seismic data library consists of seismic surveys that are offered for license to customers on a non-exclusive basis. Costs associated with creating, acquiring or purchasing the seismic data library are capitalized and amortized principally on the income forecast method subject to a straight-line amortization period of four years, applied on a quarterly basis at the individual survey level.
Costs of Seismic Data Library
For purchased seismic data, the Company capitalizes the purchase price of the acquired data.
For data received through a non-monetary exchange, the Company capitalizes an amount equal to the fair value of the data received by the Company or the fair value of the license granted or services provided to the customer, whichever is more readily determinable. See Note B – “Revenue Recognition – Revenue from Non-Monetary Exchanges” for discussion of the process used to determine fair value.
For newly created data, the capitalized costs include costs paid to third parties for the acquisition of data and related permitting, surveying and other activities associated with the data creation activity. In addition, the Company capitalizes certain internal costs related to processing the created data and reprocessing existing data. Such costs include salaries and benefits of the Company’s processing personnel and certain other costs incurred for the benefit of the processing activity. The Company

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believes that the internal processing costs capitalized are not greater than, and generally are less than, those that would be incurred and capitalized if such activity were performed by a third party. Capitalized costs for internal data processing were $0.7 million and $1.0 million for the three months ended September 30, 2016 and 2015, respectively, and $2.3 million and $2.7 million for the nine months ended September 30, 2016 and 2015, respectively.
Data Library Amortization
The Company amortizes each survey in its seismic data library using the greater of the amortization that would result from the application of the income forecast method to each survey’s revenue, subject to a minimum amortization rate, or a straight-line basis over four years, commencing at the time such survey is completed and available for licensing to customers on a non-exclusive basis.
The Company applies the income forecast method by forecasting the ultimate revenue expected to be derived from a particular data library component over the estimated useful life of each survey comprising part of such component. This forecast is made by the Company annually and reviewed quarterly. If, during any such review, the Company determines that the ultimate revenue for a library component is expected to be significantly different than the most recent estimate of total revenue for such library component, the Company revises the amortization rate attributable to future revenue from each survey in such component. The Company applies a minimum amortization rate of 70%. In addition, in connection with the forecast reviews and updates, the Company evaluates the recoverability of its seismic data library investment, and if required, records an impairment charge with respect to such investment. See discussion on “Seismic Data Library Impairment” below.
The greater of the income forecast or straight-line amortization policy is applied quarterly on a cumulative basis at the individual survey level. Under this policy, the Company first records amortization using the income forecast method. The cumulative amortization recorded for each survey is then compared with the cumulative straight-line amortization. If the cumulative straight-line amortization is higher for any specific survey, additional amortization expense is recorded, resulting in accumulated amortization being equal to the cumulative straight-line amortization for such survey. This requirement is applied regardless of future-year revenue estimates for the library component of which the survey is a part and does not consider the existence of deferred revenue with respect to the library component or to any survey.
The actual aggregate rate of amortization depends on the specific seismic surveys licensed and selected by the Company’s customers during the period and the amount of straight-line amortization recorded. The income forecast amortization rates can vary by component and, as of October 1, 2016, is 70% for all components. For those seismic surveys which have been fully amortized, no amortization expense is required on revenue recorded.

Seismic Data Library Impairment
The Company evaluates its seismic data library investment by grouping individual surveys into components based on its operations and geological and geographical trends, resulting in the following data library segments for purposes of evaluating impairments: (I) North America 3D onshore comprised of the following components: (a) Texas Gulf Coast, (b) Eastern Texas, (c) Permian, (d) Anadarko Basin in North Texas/Oklahoma, (e) Southern Louisiana/Mississippi, (f) Northern Louisiana, (g) Rocky Mountains, (h) Utica/Marcellus in Pennsylvania, Ohio and West Virginia, (i) other United States, (j) Montney in British Columbia and Alberta, (k) Horn River in British Columbia, (l) Cardium in Alberta and (m) other Canada; (II) United States 2D; (III) Canada 2D; (IV) Mexico; (V) Gulf of Mexico offshore; and (VI) international data outside North America. The Company believes that these library components constitute the lowest levels of independently identifiable cash flows.
The Company evaluates its seismic data library investment for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company considers the level of sales performance in each component compared to projected sales, as well as industry conditions, among others, to be key factors in determining when its seismic data investment should be evaluated for impairment. In evaluating sales performance of each component, the Company generally considers five consecutive quarters of actual performance below forecasted sales to be an indicator of potential impairment.
The impairment evaluation is based first on a comparison of the undiscounted future cash flows over each component’s remaining estimated useful life with the carrying value of each library component. If the undiscounted cash flows are equal to or greater than the carrying value of such component, no impairment is recorded. If undiscounted cash flows are less than the carrying value of any component, the forecast of future cash flows related to such component is discounted to fair value and compared with such component’s carrying amount. The difference between the library component’s carrying amount and the discounted future value of the expected revenue stream is recorded as an impairment charge.
For purposes of evaluating potential impairment losses, the Company estimates the future cash flows attributable to a library component by evaluating, among other factors, historical and recent revenue trends, oil and gas prospectivity in particular regions, general economic conditions affecting its customer base and expected changes in technology and other factors that the

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Company deems relevant. The cash flow estimates exclude expected future revenues attributable to non-monetary data exchanges and future data creation projects.
The estimation of future cash flows and fair value is highly subjective and inherently imprecise. Estimates can change materially from period to period based on many factors, including those described in the preceding paragraph. Accordingly, if conditions change in the future, the Company may record impairment losses relative to its seismic data library investment, which could be material to any particular reporting period.
The Company did not have any impairment charges during the nine months ended September 30, 2016 or 2015.
NOTE D-INCOME TAXES
The following is the detail of income tax benefit recorded for the three and nine months ended September 30, 2016 (in thousands):
 
Three Months
Ended
September 30, 2016
 
Nine Months
Ended
September 30, 2016
Current operations
$
(2,217
)
 
$
(11,160
)
Change in unrecognized tax benefits
(864
)
 
(2,865
)
Change in valuation allowance
1,692

 
8,942

Income tax benefit
$
(1,389
)
 
$
(5,083
)
For the three and nine months ended September 30, 2016, the Company provided a full valuation allowance against the federal tax benefit generated from its U.S. operations as it was more likely than not that such benefit would not be realized. For the same periods, the Company recognized the tax benefits generated from its Canadian operations.
During the first nine months of 2016, the Company settled its outstanding appeal with Canada Revenue Agency related to certain royalty payments made to the Company’s U.S. entities for years 2003 to 2007 and a domestic audit for the years 2011 and 2012. As a result of these settlements, the Company recorded a tax benefit of $0.3 million and $2.4 million for the three and nine months ended September 30, 2016, respectively. The Company also recognized a $0.6 million tax benefit in the three and nine months ended September 30, 2016 due to a lapse in statute of limitations on previously unrecognized positions. The $2.9 million tax benefit recorded in the nine months ended September 30, 2016 also includes $0.1 million of additional interest expense on uncertain tax positions.
The Company believes that it is reasonably possible that a decrease of up to $0.2 million in unrecognized tax benefits may be necessary within the coming year due to a lapse in statute of limitations. Such a decrease in unrecognized tax benefits would also have a $0.2 million impact on the tax provision, which would affect the effective tax rate.
NOTE E-DEBT
The following is a summary of the Company’s debt (in thousands):
 
September 30,
2016
 
December 31,
2015
9½% Senior Notes
$
250,000

 
$
250,000

Credit Facility

 

 
250,000

 
250,000

Less: unamortized debt issuance costs
(3,444
)
 
(4,304
)
 
$
246,556

 
$
245,696

9½% Senior Unsecured Notes: On March 20, 2013, the Company issued, in a private placement, $250.0 million aggregate principal amount of 9½% senior notes (the “9½% Senior Notes”). As required by their terms, the 9½% Senior Notes were exchanged for senior notes of like amounts and terms in a publicly registered exchange offer in August 2013. The 9½% Senior Notes mature on April 15, 2019. Interest is payable in cash, semi-annually on April 15 and October 15 of each year. The 9½% Senior Notes are unsecured and are jointly and severally guaranteed by substantially all of the Company’s significant domestic subsidiaries on a senior basis. The 9½% Senior Notes contain restrictive covenants which limit the Company’s ability to, among other things, incur additional indebtedness, incur liens, pay dividends and make other restricted payments, engage in transactions with affiliates, and complete mergers, acquisitions and sales of assets.

12

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From time to time on or before April 15, 2016, the Company was entitled to redeem up to 35% of the aggregate principal amount of the 9½% Senior Notes with the net proceeds of equity offerings at a redemption price equal to 109.50% of the principal amount, plus accrued and unpaid interest. The Company did not exercise this redemption option before it expired. Upon a change of control (as defined in the indenture), each holder of the 9½% Senior Notes will have the right to require the Company to offer to purchase all of such holder's notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest.
Credit Facility: On May 25, 2011, the Company entered into a credit agreement (the “Credit Facility”) with Wells Fargo Capital Finance, LLC and Wells Fargo Capital Finance Corporation Canada. The Credit Facility provided a $30.0 million revolving credit facility with a Canadian sublimit of $5.0 million (Canadian), subject to borrowing base limitations based on the Company’s seismic data assets and eligible accounts receivable, each as defined in the Credit Facility, calculated on a monthly basis. The Credit Facility expired on its own terms in May 2016 and the Company decided not to extend or renew the Credit Facility. No amounts were outstanding at the maturity date.
NOTE F-FAIR VALUE MEASUREMENTS
Authoritative guidance on fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. In measuring the fair value of the Company’s assets and liabilities, market data or assumptions are used that the Company believes market participants would use in pricing an asset or liability, including assumptions about risk when appropriate. The Company’s assets that are measured at fair value on a recurring basis include the following (in thousands):
 
 
 
Fair Value Measurements Using
 
Total
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant  Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
At September 30, 2016:
 
 
 
 
 
 
 
Cash equivalents
$
60,675

 
$
60,675

 
$

 
$

At December 31, 2015:
 
 
 
 
 
 
 
Cash equivalents
$
52,421

 
$
52,421

 
$

 
$

The Company had no transfers of assets between any of the above levels during the nine months ended September 30, 2016 or 2015.
Cash equivalents include treasury bills and money market funds that invest in United States government obligations and a Canadian dollar investment account, all with original maturities of three months or less. The original costs of these assets approximate fair value due to their short-term maturities.
Other Financial Instruments:
At September 30, 2016, the carrying value of the Company’s debt was $246.6 million, net of $3.4 million of unamortized debt issuance costs. At December 31, 2015, the carrying value was $245.7 million, net of $4.3 million of unamortized debt issuance costs. The estimated fair value of the debt was approximately $208.8 million at September 30, 2016 and $152.5 million at December 31, 2015. The fair value of the Company’s 9½% Senior Notes is based on quoted market prices (Level 1 inputs).
NOTE G-STATEMENT OF CASH FLOW INFORMATION

Cash and cash equivalents at September 30, 2016 and December 31, 2015 included $0.5 million of restricted cash related to collateral on seismic operations bonds. The balance at December 31, 2015 also included $125,000 (Canadian) of restricted cash posted as security against Company issued credit cards.

Income taxes paid during the nine months ended September 30, 2016 and September 30, 2015 were $1.5 million and $0.3 million, respectively. During the first nine months of 2016 and 2015, the Company received income tax refunds of $1.5 million and $0.4 million, respectively.


13

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The Company had non-cash additions to its seismic data library comprised of the following (in thousands): 
 
Nine Months Ended
September 30,
 
2016
 
2015
Non-monetary exchanges related to resale licensing revenue
$
1,840

 
$
7,948

Non-monetary exchanges from underwriting of new data acquisition
408

 

Adjustment to prior year non-monetary exchange from underwriting of new data acquisition

 
(2
)
Non-monetary exchanges related to data processing and reproduction services
392

 
13

Total non-cash additions to seismic data library
$
2,640

 
$
7,959


Non-cash revenue consisted of the following (in thousands):
 
Nine Months Ended
September 30,
 
2016
 
2015
Acquisition revenue on underwriting from non-monetary exchange contracts
$
78

 
$
166

Licensing revenue from specific data licenses and selections on non-monetary exchange contracts
2,635

 
6,626

Solutions revenue recognized from non-monetary exchange contracts

 
13

Total non-cash revenue
$
2,713

 
$
6,805

NOTE H-COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in ordinary, routine claims and lawsuits incidental to its business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters should not be material to the Company’s financial position, results of operations or cash flows. However, it is not possible to predict or determine the outcomes of the legal actions brought against it or by it, or to provide an estimate of all additional losses, if any, that may arise. At September 30, 2016, the Company has recorded the estimated amount of potential exposure it may have with respect to claims. Such amounts are not material to the financial statements.
NOTE I-RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The objective of the ASU is to establish a single comprehensive model in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of the guidance is that an entity recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also significantly expands disclosure requirements concerning revenues for most entities. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” which deferred the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, amending the principal-versus-agent implementation guidance set forth in ASU 2014-09. Among other things, ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”, which amends certain aspects of the guidance related to identifying performance obligations and licensing implementation. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” to address certain issues in the guidance on assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The Company is required to adopt the guidance set forth by these ASUs on January 1, 2018. Early application is permitted, but not before January 1, 2017. Entities have the option of using either a full retrospective or modified approach to adopt the new guidance. The Company anticipates adopting the new revenue recognition guidance effective January 1, 2018 and is currently evaluating the method of adoption and the effect on its consolidated financial statements and financial statement disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” with the objective of increasing transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the present value of the rights and obligations created by all leases with terms of more than 12 months. The ASU will also require disclosures designed to give financial statement users information on the amount, timing and uncertainty of cash flows arising from leases. The amendments in this ASU are to be applied using a modified retrospective approach and will be effective for

14

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the Company as of January 1, 2019, but early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance is effective on January 1, 2017, with early adoption permitted. Adoption of ASU 2016-09 will not have a material effect on the Company's consolidated financial statements.
NOTE J-SUPPLEMENTAL GUARANTORS CONSOLIDATING CONDENSED FINANCIAL INFORMATION
On March 20, 2013, the Company completed a private placement of 9½% Senior Notes in the aggregate principal amount of $250.0 million. The Company’s payment obligations under the 9½% Senior Notes are jointly and severally guaranteed by substantially all of the Company’s significant 100% owned U.S. subsidiaries (“Guarantor Subsidiaries”). All subsidiaries of the Company that do not guarantee the 9½% Senior Notes are referred to as Non-Guarantor Subsidiaries.
The indenture governing the 9½% Senior Notes provides that the guarantees by the Guarantor Subsidiaries will be released in the following customary circumstances: (i) upon a sale or other disposition, whether by merger, consolidation or otherwise, of the equity interests of that guarantor to a person that is not the Company or a restricted subsidiary of the Company; (ii) the guarantor sells all or substantially all of its assets to a person that is not the Company or a restricted subsidiary of the Company; (iii) the guarantor is properly designated as an unrestricted subsidiary or ceases to be a restricted subsidiary; (iv) upon legal defeasance of the 9½% Senior Notes or satisfaction and discharge of the indenture governing the 9½% Senior Notes; (v) the guarantor becomes an immaterial subsidiary or (vi) the guarantor, having also been a guarantor under a credit facility, is released from its guarantee obligations under a credit facility and does not guarantee any indebtedness of the Company or the Guarantor Subsidiaries.
The consolidating condensed financial statements are presented below and should be read in connection with the condensed consolidated financial statements of the Company. Separate financial statements of the Guarantor Subsidiaries are not presented because (i) the Guarantor Subsidiaries are wholly-owned and have fully and unconditionally guaranteed the 9½% Senior Notes on a joint and several basis and (ii) the Company’s management has determined such separate financial statements are not material to investors.
The following consolidating condensed financial information presents the consolidating condensed balance sheets as of September 30, 2016 and December 31, 2015, and the consolidating condensed statements of operations, statements of comprehensive income (loss) for the three and nine months ended September 30, 2016 and September 30, 2015 and consolidating condensed statements of cash flows for the nine months ended September 30, 2016 and September 30, 2015 of (a) the Company; (b) the Guarantor Subsidiaries; (c) the Non-Guarantor Subsidiaries; (d) elimination entries; and (e) the Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis.
Investments in subsidiaries are accounted for under the equity method. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and intercompany sales.

15

Table of Contents


CONSOLIDATING CONDENSED BALANCE SHEET
As of September 30, 2016
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
54,959

 
$
5,915

 
$

 
$
60,874

Receivables
 
 
 
 
 
 
 
 
 
Trade, net

 
4,836

 
1,331

 

 
6,167

Notes and other

 
14

 
3,524

 

 
3,538

Due from Seitel Holdings, Inc.

 
1,175

 

 

 
1,175

Intercompany receivables (payables)
(40,279
)
 
41,740

 
(1,461
)
 

 

Investment in subsidiaries
410,049

 
416,236

 
633

 
(826,918
)
 

Net seismic data library

 
101,903

 
26,224

 
(38
)
 
128,089

Net property and equipment

 
733

 
1,180

 

 
1,913

Prepaid expenses, deferred charges and other
89

 
2,052

 
371

 

 
2,512

Intangible assets, net
900

 
1,205

 
357

 

 
2,462

Goodwill

 
107,688

 
76,083

 

 
183,771

Deferred income taxes

 
71

 

 

 
71

TOTAL ASSETS
$
370,759

 
$
732,612

 
$
114,157

 
$
(826,956
)
 
$
390,572

LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
10,947

 
$
8,345

 
$
3,969

 
$

 
$
23,261

Income taxes payable

 

 
173

 

 
173

Senior Notes
246,556

 

 

 

 
246,556

Obligations under capital leases

 

 
1,599

 

 
1,599

Deferred revenue

 
16,254

 
2,419

 

 
18,673

Deferred income taxes

 

 
1,002

 

 
1,002

TOTAL LIABILITIES
257,503

 
24,599

 
9,162

 

 
291,264

STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
Common stock

 

 

 

 

Additional paid-in capital
400,564

 

 

 

 
400,564

Parent investment

 
764,105

 
156,518

 
(920,623
)
 

Retained deficit
(287,308
)
 
(56,092
)
 
(37,335
)
 
93,427

 
(287,308
)
Accumulated other comprehensive loss

 

 
(14,188
)
 
240

 
(13,948
)
TOTAL STOCKHOLDER’S EQUITY
113,256

 
708,013

 
104,995

 
(826,956
)
 
99,308

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
$
370,759

 
$
732,612

 
$
114,157

 
$
(826,956
)
 
$
390,572



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Table of Contents


CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2015
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
51,192

 
$
1,483

 
$

 
$
52,675

Receivables
 
 
 
 
 
 
 
 
 
Trade, net

 
12,459

 
2,371

 

 
14,830

Notes and other

 
3

 
1,315

 

 
1,318

Due from Seitel Holdings, Inc.

 
1,156

 

 

 
1,156

Intercompany receivables (payables)
(29,144
)
 
31,537

 
(2,393
)
 

 

Investment in subsidiaries
420,547

 
419,499

 
692

 
(840,738
)
 

Net seismic data library

 
125,253

 
36,180

 
(70
)
 
161,363

Net property and equipment

 
1,273

 
1,330

 

 
2,603

Prepaid expenses, deferred charges and other
139

 
1,737

 
307

 

 
2,183

Intangible assets, net
900

 
3,613

 
1,015

 

 
5,528

Goodwill

 
107,688

 
72,104

 

 
179,792

Deferred income taxes

 
39

 

 

 
39

TOTAL ASSETS
$
392,442

 
$
755,449

 
$
114,404

 
$
(840,808
)
 
$
421,487

LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
5,007

 
$
13,253

 
$
5,390

 
$

 
$
23,650

Senior Notes
245,696

 

 

 

 
245,696

Obligations under capital leases

 

 
1,661

 

 
1,661

Deferred revenue

 
23,525

 
2,378

 

 
25,903

Deferred income taxes

 

 
2,361

 

 
2,361

TOTAL LIABILITIES
250,703

 
36,778

 
11,790

 

 
299,271

STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
Common stock

 

 

 

 

Additional paid-in capital
400,505

 

 

 

 
400,505

Parent investment

 
764,105

 
156,395

 
(920,500
)
 

Retained deficit
(258,766
)
 
(45,434
)
 
(34,102
)
 
79,536

 
(258,766
)
Accumulated other comprehensive loss

 

 
(19,679
)
 
156

 
(19,523
)
TOTAL STOCKHOLDER’S EQUITY
141,739

 
718,671

 
102,614

 
(840,808
)
 
122,216

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
$
392,442

 
$
755,449

 
$
114,404

 
$
(840,808
)
 
$
421,487



17

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2016
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
REVENUE
$

 
$
20,017

 
$
3,557

 
$
(319
)
 
$
23,255

EXPENSES:
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
15,071

 
3,875

 
(13
)
 
18,933

Cost of sales

 
19

 
1

 
2

 
22

Selling, general and administrative
315

 
3,799

 
1,593

 
(321
)
 
5,386

 
315

 
18,889

 
5,469

 
(332
)
 
24,341

INCOME (LOSS) FROM OPERATIONS
(315
)
 
1,128

 
(1,912
)
 
13

 
(1,086
)
Interest expense, net
(5,732
)
 
(497
)
 
(69
)
 

 
(6,298
)
Foreign currency exchange losses

 

 
(20
)
 

 
(20
)
Other income

 
572

 

 

 
572

Income (loss) before income taxes and equity in income (loss) of subsidiaries
(6,047
)
 
1,203

 
(2,001
)
 
13

 
(6,832
)
Provision (benefit) for income taxes

 
22

 
(1,411
)
 

 
(1,389
)
Equity in income (loss) of subsidiaries
604

 
(590
)
 

 
(14
)
 

NET INCOME (LOSS)
$
(5,443
)
 
$
591

 
$
(590
)
 
$
(1
)
 
$
(5,443
)


18

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended September 30, 2016
(In thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Net income (loss)
$
(5,443
)
 
$
591

 
$
(590
)
 
$
(1
)
 
$
(5,443
)
Foreign currency translation adjustments

 

 
(862
)
 
1

 
(861
)
Comprehensive income (loss)
$
(5,443
)
 
$
591

 
$
(1,452
)
 
$

 
$
(6,304
)


19

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2015
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
REVENUE
$

 
$
28,145

 
$
3,427

 
$
(330
)
 
$
31,242

EXPENSES:
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
18,754

 
5,885

 
(12
)
 
24,627

Cost of sales

 
22

 
15

 

 
37

Selling, general and administrative
232

 
3,833

 
1,558

 
(330
)
 
5,293

 
232

 
22,609

 
7,458

 
(342
)
 
29,957

INCOME (LOSS) FROM OPERATIONS
(232
)
 
5,536

 
(4,031
)
 
12

 
1,285

Interest expense, net
(5,563
)
 
(714
)
 
(104
)
 

 
(6,381
)
Foreign currency exchange losses

 

 
(138
)
 

 
(138
)
Income (loss) before income taxes and equity in loss of subsidiaries
(5,795
)
 
4,822

 
(4,273
)
 
12

 
(5,234
)
Provision (benefit) for income taxes
(1,937
)
 
1,820

 
(1,062
)
 

 
(1,179
)
Equity in loss of subsidiaries
(197
)
 
(3,211
)
 

 
3,408

 

NET LOSS
$
(4,055
)
 
$
(209
)
 
$
(3,211
)
 
$
3,420

 
$
(4,055
)


20

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF COMPREHENSIVE LOSS
For the Three Months Ended September 30, 2015
(In thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Net loss
$
(4,055
)
 
$
(209
)
 
$
(3,211
)
 
$
3,420

 
$
(4,055
)
Foreign currency translation adjustments

 

 
(8,262
)
 
7

 
(8,255
)
Comprehensive loss
$
(4,055
)
 
$
(209
)
 
$
(11,473
)
 
$
3,427

 
$
(12,310
)


21

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2016
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
REVENUE
$

 
$
49,297

 
$
11,279

 
$
(1,031
)
 
$
59,545

EXPENSES:
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
44,237

 
14,640

 
(38
)
 
58,839

Cost of sales

 
96

 
13

 
(54
)
 
55

Selling, general and administrative
888

 
11,256

 
4,846

 
(977
)
 
16,013

 
888

 
55,589

 
19,499

 
(1,069
)
 
74,907

LOSS FROM OPERATIONS
(888
)
 
(6,292
)
 
(8,220
)
 
38

 
(15,362
)
Interest expense, net
(17,034
)
 
(1,703
)
 
(251
)
 

 
(18,988
)
Foreign currency exchange gains

 

 
143

 

 
143

Other income

 
581

 
1

 

 
582

Loss before income taxes and equity in loss of subsidiaries
(17,922
)
 
(7,414
)
 
(8,327
)
 
38

 
(33,625
)
Provision (benefit) for income taxes

 
11

 
(5,094
)
 

 
(5,083
)
Equity in loss of subsidiaries
(10,620
)
 
(3,233
)
 

 
13,853

 

NET LOSS
$
(28,542
)
 
$
(10,658
)
 
$
(3,233
)
 
$
13,891

 
$
(28,542
)


22

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2016
(In thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Net loss
$
(28,542
)
 
$
(10,658
)
 
$
(3,233
)
 
$
13,891

 
$
(28,542
)
Foreign currency translation adjustments

 

 
5,491

 
84

 
5,575

Comprehensive income (loss)
$
(28,542
)
 
$
(10,658
)
 
$
2,258

 
$
13,975

 
$
(22,967
)


23

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2015
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
REVENUE
$

 
$
61,413

 
$
25,868

 
$
(991
)
 
$
86,290

EXPENSES:
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
44,180

 
23,972

 
(38
)
 
68,114

Cost of sales

 
109

 
55

 

 
164

Selling, general and administrative
807

 
11,933

 
5,401

 
(991
)
 
17,150

 
807

 
56,222

 
29,428

 
(1,029
)
 
85,428

INCOME (LOSS) FROM OPERATIONS
(807
)
 
5,191

 
(3,560
)
 
38

 
862

Interest expense, net
(16,597
)
 
(2,125
)
 
(298
)
 

 
(19,020
)
Foreign currency exchange losses

 
(3
)
 
(1,556
)
 

 
(1,559
)
Other income

 
5

 

 

 
5

Income (loss) before income taxes and equity in loss of subsidiaries
(17,404
)
 
3,068

 
(5,414
)
 
38

 
(19,712
)
Provision (benefit) for income taxes
(5,869
)
 
1,242

 
(1,108
)
 

 
(5,735
)
Equity in loss of subsidiaries
(2,442
)
 
(4,306
)
 

 
6,748

 

NET LOSS
$
(13,977
)
 
$
(2,480
)
 
$
(4,306
)
 
$
6,786

 
$
(13,977
)


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CONSOLIDATING CONDENSED STATEMENT OF COMPREHENSIVE LOSS
For the Nine Months Ended September 30, 2015
(In thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Net loss
$
(13,977
)
 
$
(2,480
)
 
$
(4,306
)
 
$
6,786

 
$
(13,977
)
Foreign currency translation adjustments

 

 
(17,852
)
 
135

 
(17,717
)
Comprehensive loss
$
(13,977
)
 
$
(2,480
)
 
$
(22,158
)
 
$
6,921

 
$
(31,694
)


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Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2016
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(12,525
)
 
$
35,409

 
$
6,247

 
$

 
$
29,131

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Cash invested in seismic data

 
(19,141
)
 
(1,558
)
 

 
(20,699
)
Cash paid to acquire property and equipment

 
(173
)
 
(3
)
 

 
(176
)
Cash from sale of property and equipment

 
17

 
1

 

 
18

Advances to Seitel Holdings, Inc.

 
(19
)
 

 

 
(19
)
Net cash used in investing activities

 
(19,316
)
 
(1,560
)
 

 
(20,876
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Principal payments on capital lease obligations

 

 
(152
)
 

 
(152
)
Intercompany transfers
12,525

 
(12,326
)
 
(199
)
 

 

Net cash provided by (used in) financing activities
12,525

 
(12,326
)
 
(351
)
 

 
(152
)
Effect of exchange rate changes

 

 
96

 

 
96

Net increase in cash and cash equivalents

 
3,767

 
4,432

 

 
8,199

Cash and cash equivalents at beginning of period

 
51,192

 
1,483

 

 
52,675

Cash and cash equivalents at end of period
$

 
$
54,959

 
$
5,915

 
$

 
$
60,874



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Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2015
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(12,797
)
 
$
64,937

 
$
15,589

 
$

 
$
67,729

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Cash invested in seismic data

 
(49,153
)
 
(12,065
)
 

 
(61,218
)
Cash paid to acquire property and equipment

 
(396
)
 
(10
)
 

 
(406
)
Advances to Seitel Holdings, Inc.

 
(10
)
 

 

 
(10
)
Net cash used in investing activities

 
(49,559
)
 
(12,075
)
 

 
(61,634
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Principal payments on capital lease obligations

 
(18
)
 
(150
)
 

 
(168
)
Intercompany transfers
12,797

 
(1,797
)
 
(11,000
)
 

 

Net cash provided by (used in) financing activities
12,797

 
(1,815
)
 
(11,150
)
 

 
(168
)
Effect of exchange rate changes

 
(3
)
 
(1,125
)
 

 
(1,128
)
Net increase (decrease) in cash and cash equivalents

 
13,560

 
(8,761
)
 

 
4,799

Cash and cash equivalents at beginning of period

 
48,525

 
10,650

 

 
59,175

Cash and cash equivalents at end of period
$

 
$
62,085

 
$
1,889

 
$

 
$
63,974



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Table of Contents


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes to the condensed consolidated financial statements included elsewhere in this document.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in this report about our future outlook, prospects, strategies and plans, and about industry conditions, demand for seismic services and the future economic life of our seismic data are forward-looking, among others. All statements that express belief, expectation, estimates or intentions, as well as those that are not statements of historical fact, are forward-looking. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,” “target,” “foresee,” “should,” “intend,” “may,” “will,” “would,” “could,” “potential” and similar expressions are intended to identify forward-looking statements. Forward-looking statements represent our present belief and are based on our current expectations and assumptions with respect to future events and their potential effect on us. While we believe our expectations and assumptions are reasonable, they involve risks and uncertainties beyond our control that could cause the actual results or outcome to differ materially from the expected results or outcome reflected in our forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report may not occur. Such risks and uncertainties include, without limitation, actual customer demand for our seismic data and related services, the timing and extent of changes in commodity prices for natural gas, crude oil and condensate and natural gas liquids, conditions in the capital markets during the periods covered by the forward-looking statements, the effect of economic conditions, our ability to obtain financing on satisfactory terms if internally generated cash flows are insufficient to fund our capital needs, the impact on our financial condition as a result of our debt and our debt service, our ability to obtain and maintain normal terms with our vendors and service providers, our ability to maintain contracts that are critical to our operations, changes in the oil and gas industry or the economy generally and changes in the capital expenditure budgets of our customers, as well as the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”).
The forward-looking statements contained in this report speak only as of the date hereof and readers are cautioned not to place undue reliance on such forward-looking statements. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason. All forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to herein, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC and in our future periodic reports filed with the SEC.
Overview
General
We are a leading provider of onshore seismic data to the oil and gas industry in North America. We own an extensive library of onshore and offshore seismic data that we have accumulated since our inception in 1982 that we offer for license to exploration and production (“E&P”) companies. Our primary areas of focus are onshore United States and Canada and, to a lesser extent, offshore U.S. Gulf of Mexico. As a result of the energy reform in Mexico, we began to expand our data library coverage into Mexico in 2015. We believe our data library is one of the largest onshore three-dimensional (“3D”) databases available for licensing in North America and includes leading positions in oil, liquids-rich and natural gas unconventional plays as well as conventional areas.
Our products and services are used by E&P companies in oil and gas exploration and development efforts to increase the probability of drilling success, to better delineate existing oil and gas fields and to augment their reservoir completion and management techniques. In unconventional plays, E&P companies use seismic data as a development tool to better identify efficient drilling plans and maximize production by identifying and understanding a series of critical characteristics of the targeted resource. We generate revenue primarily by licensing data from our data library and from new data creation projects, which are substantially underwritten or paid for by our clients. By participating in underwritten, non-exclusive surveys or purchasing licenses to existing data, E&P companies can obtain access to surveys at reduced costs as compared to acquiring seismic data on a proprietary basis.

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Table of Contents

E&P companies have further reduced their capital expenditure budgets in 2016 as compared to 2015 in an effort to protect cash flows. As a result, the demand for seismic data has remained weak throughout 2016. We are unable to predict the severity or duration of such weakness in demand. However, commodity prices have reached levels that have resulted in increased rig counts, which we believe signals a bottoming of the cycle. Our near-term outlook for the remainder of the year and into early 2017 remains cautious as we believe seismic spending will continue to fluctuate quarter to quarter. We have implemented a number of measures to continue to deal with the industry environment, including reducing our investment in new data acquisition and reducing our headcount by approximately 40% since the beginning of 2015. We believe we are well positioned to deal with this challenging environment due to our variable operating structure, asset-light business model and our strong cash balance at September 30, 2016.

Principal Factors Affecting Our Business
Our business is dependent upon a variety of factors, many of which are beyond our control. The following are those that we consider to be principal factors affecting our business.
Demand for Seismic Data: Demand for our products and services is cyclical due to the nature of the oil and gas industry. In particular, demand for our seismic data services depends upon exploration, production, development and field management spending by E&P companies and, in the case of new data creation, the willingness of these companies to forgo ownership in the seismic data. Capital expenditures by E&P companies depend upon several factors, including actual and forecasted oil and natural gas commodity prices, prospect availability and the companies’ own short-term and strategic plans. These capital expenditures may also be affected by worldwide economic or industry-wide conditions.
Merger and Acquisition/Joint Venture Activity: Merger and acquisition (“M&A”) activity continues to occur within our client base. This activity could have a negative impact on seismic companies that operate in markets with a limited number of participating clients. However, we believe that, over time, this activity could have a positive impact on our business, as it should generate re-licensing fees, result in increased vitality in the trading of mineral interests and result in the creation of new independent customers through the rationalization of staff within those companies affected by this activity.
Exploiting unconventional plays is a capital intensive endeavor and many technically proficient E&P companies remain subject to capital constraints. These companies find themselves needing to sell their positions to, or create partnerships with, large well-capitalized companies in order to develop their recoverable resource base. These joint venture partners or new owners will often need to purchase licenses to our seismic data for their own use.
North America Drilling Activity: The decline in crude oil prices and the reduction in capital spending by E&P companies in 2015 and 2016 has had a direct impact on drilling activity in North America. Since October 2014, the decline in the North American rig count peak to trough was approximately 82%. The North American land rig count began to improve in the second quarter of 2016 and, as of October 21, 2016, had increased to 671 rigs, an increase of 59% from a low of 422 rigs in May 2016.
Availability of Capital for Our Customers: Some of our customers are independent E&P companies and private prospect-generating companies that rely primarily on private capital markets to fund their exploration, production, development and field management activities. Certain of our customers have credit facilities with borrowing bases that are tied to the net present value of their reserves. Low oil prices have decreased the value of those reserves and, as a result, the borrowing bases under such facilities have been reduced. Reductions in cash flows resulting from lower commodity prices, along with the reduced availability of credit and increased costs of borrowing, has had, and could continue to have, a material impact on the ability of such companies to obtain funding necessary to purchase our seismic data.
Government Regulation: Our operations are subject to a variety of federal, provincial, state, foreign and local laws and regulations, including environmental and health and safety laws. We invest financial and managerial resources to comply with these laws and related permit requirements. Modification of existing laws or regulations and the adoption of new laws or regulations limiting or increasing exploration or production activities by oil and gas companies may have a material effect on our business operations.
Key Performance Measures

Management considers, among others, the following performance and financial measures in evaluating and managing our operating performance and financial condition. Some of these measures are not calculated in accordance with United States generally accepted accounting principles, or GAAP. Generally, a non-GAAP measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. These non-GAAP measures are intended to supplement the presentation of our financial results that are prepared in accordance with GAAP and should not be considered substitutes for GAAP financial measures.

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Cash Resales: Cash resales represent new contracts for data licenses from our library, including data currently in progress, payable in cash. We believe cash resales are an important measure of our operating performance and are useful in assessing overall industry and client activity. Cash resales are likely to fluctuate quarter to quarter as they do not require the longer planning and lead times necessary for new data creation.

Cash resales for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Cash resales
$
9,314

 
$
4,045

 
$
31,147

 
$
31,352


Cash EBITDA: Cash EBITDA represents cash generated from licensing data from our seismic library net of recurring cash operating expenses. We believe this measure is helpful in determining the level of cash from operations we have available for debt service and funding of capital expenditures (net of the portion funded or underwritten by our customers). Cash EBITDA includes cash resales plus all other cash revenues other than from data acquisitions, less cost of goods sold and cash selling, general and administrative expenses (excluding severance and other non-routine costs).

The following is a quantitative reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure, cash flows from operating activities (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Cash EBITDA
$
5,126

 
$
(602
)
 
$
18,385

 
$
16,120

Add (subtract) other components not included in cash EBITDA:
 
 
 
 
 
 
 
Cash acquisition underwriting revenue
7,571


16,496

 
17,408

 
38,517

Revenue recognition adjustments from contracts payable in cash
4,538

 
9,207

 
6,890

 
7,935

Severance and other non-routine costs
(754
)
 
(50
)
 
(1,860
)
 
(137
)
Interest expense, net
(6,298
)
 
(6,381
)
 
(18,988
)
 
(19,020
)
Amortization of deferred financing costs
294

 
304