ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Form 10-Q. Portions of this document that are not statements of historical or current fact are forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. The cautionary statements made in this Form 10-Q should be read as applying to all related forward-looking statements wherever they appear in this Form 10-Q. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause our actual results to differ materially from anticipated results include those discussed in Part II, Item 1A. “RISK FACTORS.”

Forward Looking Statements

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  All statements other than statements of historical fact included in this report regarding the Company’s strategies and plans for growth are forward-looking statements.  These forward-looking statements are often characterized by the terms “may,” “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” and other words and terms of similar meanings and do not reflect historical facts.  Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.  Important factors that could cause actual results to differ materially from such expectations are disclosed in the Company’s SEC filings, and include, but are not limited to, the dependence upon energy industry spending for seismic services, the unpredictable nature of forecasting weather, the potential for contract delay or cancellation, the potential for fluctuations in oil and gas prices, the availability of capital resources, and the current economic downturn which could adversely affect our revenues and cash flow if our customers, and/or potential customers, become unable to pay, or must delay payment of, amounts owing to the Company because such customers are not successful in generating revenues or are precluded from securing necessary financing.  The forward-looking statements contained herein reflect the current views of the Company’s management, and the Company assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those contemplated by such forward-looking statements.

Executive Overview

TGC Industries, Inc. is a Texas corporation, and with its wholly-owned subsidiary, Eagle Canada, Inc., a Delaware corporation, (collectively “TGC” or the “Company”), is primarily engaged in the geophysical service business of conducting Three-D (“3-D”) surveys for clients in the oil and gas business.  TGC’s principal business office is located at 101 E. Park Blvd., Suite 955, Plano, Texas 75074 (Telephone: 972-881-1099).  TGC’s internet address is www.tgcseismic.com.  TGC makes available free of charge on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K as soon as reasonably practicable after filing with, or furnishing such information to, the SEC.

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The Company is a leading provider of seismic data acquisition services throughout the continental United States and Canada.  We supply seismic data to companies engaged in the domestic exploration and development of oil and natural gas on land and in land-to-water transition areas. Our customers rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of existing hydrocarbons, to optimize the development and production of hydrocarbon reservoirs, to better delineate existing oil and natural gas fields, and to augment reservoir management techniques.  We operated six seismic crews in the lower 48 states during the third quarter of 2010.  We operated one crew in Canada during the third quarter.  Due to the seasonality of the Canadian market, the third quarter is usually a weak quarter for activity in Canada, and we expect increasing levels of seismic activity in that region for the next two quarters starting with the fourth quarter of 2010.

We acquire geophysical data using the latest in 3-D survey techniques. We introduce acoustic energy into the ground by using vibration equipment or dynamite detonation, depending on the surface terrain and subsurface requirements. The reflected energy, or echoes, is received through geophones, converted into a digital signal at a multi-channel recording unit, and then transmitted to a central recording vehicle. Subsurface requirements dictate the number of channels necessary to perform our services. With our state-of-the-art seismic equipment, including computer technology and multiple channels, we acquire, on a cost effective basis, immense volumes of seismic data that when processed and interpreted produce more precise images of the earth’s subsurface. Our customers then use our seismic data to generate 3-D geologic models that help reduce finding costs and improve recovery rates from existing wells.

We provide our seismic data acquisition services primarily to major and independent domestic onshore oil and natural gas exploration and development companies for use in the onshore drilling and production of oil and natural gas in the continental United States and Canada. The main factors influencing demand for seismic data acquisition services in our industry are the level of drilling activity by oil and natural gas companies and the sizes of such companies’ exploration and development budgets, which, in turn, depend largely on current and anticipated future crude oil and natural gas prices and depletion rates.

The services we provide to our customers vary according to the size and needs of each customer. Our services are marketed by supervisory and executive personnel who contact customers to determine their needs and respond to customer inquiries regarding the availability of crews. Contacts are based principally upon professional relationships developed over a number of years. There are a number of consultants in the oil and natural gas industry who process and interpret seismic data for oil and natural gas companies. These consultants can have an influence in determining which company their customers use to acquire seismic data.

The acquisition of seismic data for the oil and natural gas industry is a highly competitive business.  There are approximately 57 seismic crews currently operating in the continental United States and Canada. Contracts for such services generally are awarded on the basis of price quotations, crew experience, and the availability of crews to perform in a timely manner, although factors other than price, such as crew safety performance history, and technological and operational expertise, are often determinative. Our competitors include companies with financial resources that are significantly greater than our own as well as companies of comparable and smaller size. Our primary competitors are Dawson Geophysical Company, Geo Kinetics, Inc., and CGG-Veritas.  These competitors are publicly-traded companies with long operating histories which field numerous crews and work in a number of different regions and terrain.  In addition to the previously named companies, we also compete for projects from time to time with smaller seismic companies which operate in local markets with only one or two crews and often specialize in specific regions or type of operations.  We believe that our long-term industry expertise, the customer relationships developed over our history, and our financial stability give us an advantage over most of our competitors in the industry.

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Results of Operations

The Company’s business is subject to seasonal variations; thus the results of operations for the three and nine months ended September 30, 2010, are not necessarily indicative of a full year’s results.  The results of operations for the three and nine months ended September 30, 2010, include Eagle Canada which was acquired by the Company in October of 2009.

Nine Months Ended September 30, 2010, Compared to Nine Months Ended September 30, 2009 (Unaudited)

Revenues .  Our revenues were $75,618,349 for the nine months ended September 30, 2010, compared to $74,685,172 for the same period of 2009, an increase of 1.2%.  We operated six seismic crews in the U.S. during each of the three quarters in the nine months ended September 30, 2010, compared to nine crews during the first quarter, six crews during most of the second quarter, and four crews during the third quarter of 2009.  Revenues from Eagle Canada also contributed to the increase.

Cost of services .  Our cost of services was $60,854,197 for the nine months ended September 30, 2010, compared to $51,931,010 for the same period of 2009, an increase of 17.2%.  This increase was primarily attributable to the inclusion of Canadian operations, continuing pricing pressures as a result of the current recession and industry wide slow-down, and additional costs incurred for equipment and helicopter rentals during the first quarter of 2010.  As a percentage of revenue, cost of services was 80.5% for the nine months ended September 30, 2010, compared to 69.5% for the same period of 2009.

Selling, general, and administrative expenses.  SG&A expenses were $5,008,469 for the nine months ended September 30, 2010, compared to $3,136,509 for the same period of 2009, an increase of 59.7%.  This increase was primarily attributable to additional expenses associated with management and the integration costs of the Eagle Canada acquisition.  SG&A expense as a percentage of revenues was 6.6% for the nine months ended September 30, 2010, compared with 4.2% for the same period of 2009.

Depreciation and amortization expense .  Depreciation and amortization expense was $11,520,417 for the nine months ended September 30, 2010, compared to $10,881,764 for the same period of 2009, an increase of 5.9%.  Depreciation and amortization expense as a percentage of revenues was 15.2% for the nine months ended September 30, 2010, compared to 14.6% for the same period of 2009.

Income and loss from operations .  Loss from operations was $1,764,734 for the nine months ended September 30, 2010, compared to income from operations of $8,735,889 for the same period of 2009.  The decrease was attributable to several factors, including the fact that income from operations for the nine months ended September 30, 2009 was among the highest in Company history.  Other factors contributing to the decrease include lower overall demand, a competitive pricing environment for seismic services, continuing uncertainty regarding the future energy policy in the United States, and our operation of six seismic crews in the U.S. during each of the three quarters in the nine months ended September 30, 2010, compared to nine crews during the first quarter, six crews during most of the second quarter, and four crews during the third quarter of 2009.  EBITDA decreased $9,861,970 to $9,755,683 for the nine months ended September 30, 2010, from $19,617,653 for the same period of 2009, a decrease of 50.3%.  This decrease resulted from those factors discussed above.  For a definition of EBITDA, a reconciliation of EBITDA to net income, and discussion of EBITDA, refer to the section entitled “EBITDA” found below.

Interest expense .  Interest expense was $617,142 for the nine months ended September 30, 2010, compared to $782,711 for the same period of 2009, a decrease of 21.1%.  This decrease was primarily attributable to our continuing principal payments on notes payable and capital lease obligations.

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Income tax expense .  The income tax benefit was $450,970 for the nine months ended September 30, 2010, compared to income tax expense of $3,410,612 for the same period of 2009.  The effective tax benefit rate for the nine months ended September 30, 2010, was 18.9% primarily due to state margin taxes and permanent tax differences compared to an effective tax rate of 42.9% for the same period of 2009.  See Note E of Notes to Financial Statements in Item 1.

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

Revenues .  Our revenues were $22,843,724 for the three months ended September 30, 2010, compared to $16,083,161 for the same period of 2009, an increase of 42.0%.  This increase was primarily due to our operation of six crews in the U.S. during the third quarter of 2010 compared with four crews in the U.S. during the third quarter of 2009.

Cost of services .  Our cost of services was $18,932,507 for the three months ended September 30, 2010, compared to $14,120,847 for the same period of 2009, an increase of 34.1%.  This increase was primarily attributable to increased revenue.  As a percentage of revenues, cost of services was 82.9% for the three months ended September 30, 2010, compared to 87.8% for the same period of 2009.

Selling, general, and administrative expenses.  SG&A expenses were $1,579,159 for the three months ended September 30, 2010, compared to $994,643 for the same period of 2009, an increase of 58.8%.  This increase was primarily due to the inclusion of Eagle Canada in this year’s third quarter.  SG&A expense as a percentage of revenues was 6.9% for the three months ended September 30, 2010, compared with 6.2% for the same period of 2009.

Depreciation and amortization expense .  Depreciation and amortization expense was $3,863,486 for the three months ended September 30, 2010, compared to $3,449,011 for the same period of 2009, an increase of 12.0%.  This increase was primarily attributable to additions of seismic recording equipment, vibration vehicles, and other equipment and vehicles resulting from the acquisition of Eagle Canada, and the recent purchase of a new 5,000 channel GSR (Geospace Seismic Recorder) wireless recording system.  Depreciation and amortization expense as a percentage of revenues was 16.9% for the three months ended September 30, 2010, compared to 21.4% for the same period of 2009.

Loss from operations .  Loss from operations was $1,531,428 for the three months ended September 30, 2010, compared to $2,481,340 for the same period of 2009.  This decrease was primarily attributable to an increase in revenues partially offset by increases in SG&A expenses, cost of services, and depreciation and amortization expenses discussed above.  EBITDA increased $1,364,387 to $2,332,058 for the three months ended September 30, 2010, from $967,671 for the same period of 2009, an increase of 141.0%.  This increase was a result of those factors mentioned above.  For a definition of EBITDA, a reconciliation of EBITDA to net income, and discussion of EBITDA, please refer to the section entitled “EBITDA” found below.

Interest expense .  Interest expense was $187,328 for the three months ended September 30, 2010, compared to $245,751 for the same period of 2009, a decrease of 23.8%.  This decrease was primarily attributable to our continuing payments on notes payable and capital lease obligations.

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Income tax benefit .  Income tax benefit was $447,949 for the three months ended September 30, 2010, compared to $992,726 for the same period of 2009.  The effective tax benefit rate was 26.1% for the three months ended September 30, 2010, compared to 36.4% for the same period of 2009.  See Note E of Notes to Financial Statements in Item 1.

EBITDA

We define EBITDA as net income plus interest expense, income taxes, and depreciation and amortization expense. We use EBITDA as a supplemental financial measure to assess:

·                   the financial performance of our assets without regard to financing methods, capital structures, taxes, or historical cost basis;

·                   our liquidity and operating performance over time and in relation to other companies that own similar assets and that we believe calculate EBITDA in a manner similar to us; and

·                   the ability of our assets to generate cash sufficient for us to pay potential interest costs.

We also understand that such data is used by investors to assess our performance. However, EBITDA is not a measure of operating income, operating performance, or liquidity presented in accordance with generally accepted accounting principles. When assessing our operating performance or our liquidity, you should not consider this data in isolation or as a substitute for our net income, cash flow from operating activities, or other cash flow data calculated in accordance with generally accepted accounting principles.  EBITDA excludes some, but not all, items that affect net income and operating income, and these measures may vary among other companies.  Therefore, EBITDA as presented below may not be comparable to similarly titled measures of other companies.  Further, the results presented by EBITDA cannot be achieved without incurring the costs that the measure excludes: interest expense, income taxes, and depreciation and amortization.

The following table reconciles our EBITDA to our net income:

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Liquidity and Capital Resources

Cash Flows

Cash flows from operating activities .

Net cash provided by operating activities was $5,917,877 for the nine months ended September 30, 2010, compared to $16,426,345 for the same period of 2009.  The $10,508,468 decrease during the first nine months of 2010 from the same period of 2009 was primarily attributable to the decrease in net income, the timing of billings and revenue recognition, the collections of accounts receivable, the timing of receipt and payment of invoices, federal and state income taxes payable, and the mix of contracts.

Working capital decreased $1,494,349 to $15,801,285 as of September 30, 2010, from the December 31, 2009 working capital of $17,295,634.  This decrease was primarily due to a $5,925,549 decrease in cash and cash equivalents, partially offset by an increase in costs and estimated earnings in excess of billings on uncompleted contracts of $714,126, an increase in prepaid expenses and other of $1,121,211, and a decrease in billings in excess of costs and estimated earnings on uncompleted contracts of $3,055,087.

Cash flows used in investing activities .

Net cash used in investing activities was $4,973,656 for the nine months ended September 30, 2010, and $555,745 for the nine months ended September 30, 2009.  This increase was due to an increase in capital expenditures of $4,227,822 and a decrease in proceeds from the sale of property and equipment of $190,089.

Cash flows used in financing activities.

Net cash used in financing activities was $6,868,256 for the nine months ended September 30, 2010, and $5,893,997 for the nine months ended September 30, 2009.  The increase was due primarily to principal payments on notes payable attributable to Eagle Canada.

Capital expenditures .

During the nine months ended September 30, 2010, the Company acquired $8,229,554 of vehicles and equipment, primarily to replace similar vehicles and equipment, and purchased a new 5,000 channel seismic recording system.  Cash of $5,085,358, notes payable of $1,988,910 from a commercial bank, and capital lease obligations from a vehicle leasing company of $1,155,286 were used to finance these acquisitions.  Although we do not budget for our capital expenditures, we may purchase additional equipment during 2010 should the demand for our services increase.

Liquidity

Our primary source of liquidity is cash generated from operations and short-term borrowings from commercial banks and equipment lenders.  Based on current forecasts, we believe that we have sufficient available cash and borrowing capacity to fund our working capital needs over the next 12 months.

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Capital Resources

We have relied on cash generated from operations, short-term borrowings from commercial banks and equipment lenders, and proceeds from a public offering of our common stock to fund our working capital requirements and capital expenditures.

In December of 2007, we completed a $4,120,254 loan transaction with a commercial lender for the purpose of providing funds for the purchase of our seventh new ARAM ARIES recording system. This loan is repayable over a period of 48 months at a fixed per annum interest rate of 6.38%. This loan is collateralized by the new recording system equipment and the recording vehicles and two semi-trailers that transport the newly purchased equipment between jobs.  In January of 2008, the Company entered into a $2,463,101 loan agreement with a bank to provide financing for the purchase of new vibration vehicles.  The loan is repayable over a period of 57 months at a fixed per annum interest rate of 6.35% and is collateralized by the vibration vehicles.  In February of 2008, the Company exercised its purchase option for seismic recording equipment it had been renting.  In March of 2008, the Company entered into a $2,975,844 loan agreement with a commercial lender to provide financing for the purchase of this rented equipment and to replace an existing loan the Company had with the lender.  This loan is repayable over a period of 48 months at a fixed per annum interest rate of 5.75% and is collateralized by the equipment.  In July of 2008, the Company entered into a $3,200,000 loan agreement with a bank to provide financing for the purchase of seismic recording equipment.  This loan is repayable over 36 months at a fixed per annum interest rate of 6.00% and is collateralized by the equipment.  In August of 2008, the Company entered into a $2,003,700 loan agreement with a bank to provide financing for the purchase of new vibration vehicles.  This loan is repayable over 36 months at a fixed per annum interest rate of 6.00% and is collateralized by the vibration vehicles.  In September of 2008, the Company entered into a $2,690,402 loan agreement with a commercial lender to provide financing for our eighth new ARAM ARIES recording system. This loan is repayable over a period of 48 months at a fixed per annum interest rate of 6.00% and is collateralized by the recording system.  Also in September of 2008, the Company entered into a $1,092,053 loan agreement with the same commercial lender to provide financing for recording equipment that goes with the eighth ARAM ARIES recording system.  This loan is co-terminus with the loan for the recording system, carries a fixed per annum interest rate of 6.00%, and is collateralized by the recording equipment.  In January of 2008, Eagle Canada entered into a $4,660,070 loan agreement with a bank to provide financing for the purchase of a new ARAM ARIES recording system. This loan is repayable over a period of 36 months at a fixed per annum interest rate of 6.14% and is collateralized by the recording system.  In June of 2010, we purchased a 3,000 channel Geosource seismic recording system for approximately $3,598,000.  This system was paid for in July of 2010 with existing cash.  In September of 2010, the Company entered into a $1,988,910 loan agreement with a commercial lender to purchase 2,000 additional recording channels that was added to the 3,000 channel Geosource seismic recording system purchased in July 2010.  This loan carries a fixed per annum interest rate of 5.00%, and is collateralized by the 2,000 channels of recording equipment.

In April of 2005, we entered into a revolving credit agreement with a commercial bank.  Effective September 16, 2006, we renewed our revolving credit agreement and increased the borrowing limit from $3,500,000 to $5,000,000.  The borrowing limit under that revolving line of credit agreement remains at $5,000,000 and was renewed on September 16, 2007, September 16, 2008, September 16, 2009, and again on September 16, 2010.  The revolving line of credit agreement does not expire until September 16, 2011.  Our obligations under this agreement are secured by a security interest in our accounts receivable.  Interest on the outstanding amount under the revolving credit agreement is payable monthly at the greater of the prime rate of interest or five percent.  As of September 30, 2010, we had no borrowings outstanding under the revolving credit agreement.

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Contractual Obligations

We believe that our capital resources, including our short-term investments, funds available under our revolving credit agreement, and cash flow from operations, will be adequate to meet our current operational needs. We believe that we will be able to finance our 2010 capital expenditures through cash flow from operations, borrowings from commercial lenders, and the funds available under our line of credit loan agreement.  However, our ability to satisfy working capital requirements, meet debt repayment obligations, and fund future capital requirements will depend principally upon our future operating performance which is subject to the risks inherent in our business, and will also depend on the extent to which the current recession adversely affects the ability of our customers, and/or potential customers, to pay promptly amounts owing to the Company under their service contracts with us.

Off-Balance Sheet Arrangements

As of September 30, 2010, we had no off-balance sheet arrangements.

Critical Accounting Policies

A discussion of our critical accounting policies can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.  There have been no material changes to these policies (including critical accounting estimates and assumptions or judgments affecting the application of those estimates and assumptions) during the first nine months of 2010.

Recently Issued Accounting Pronouncements

A discussion of recently issued accounting pronouncements can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.