UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ | ||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE QUARTERLY PERIOD ENDED September 30, 2020
OR
☐ | |||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
COMMISSION FILE NUMBER: 1-12691
ION GEOPHYSICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware | 22-2286646 |
(State or other jurisdiction of | (I.R.S. Employer | |||||
incorporation or organization) | Identification No.) | |||||
2105 CityWest Blvd. Suite 100
Houston, Texas 77042-2855
(Address of principal executive offices) (Zip Code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 933-3339
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||
Common Stock, $0.01 par value | IO | New York Stock Exchange | ||||||||
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 ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | |||||||||||||||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | ||||||||||||||
Emerging growth company | ☐ | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
At November 2, 2020,1, 2021, there were 14,993,47429,617,040 shares of common stock, par value $0.01 per share, outstanding.
TABLE OF CONTENTS FOR FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBERSeptember 30, 2020
PAGE | |||||||||
PART I. Financial Information | |||||||||
Item 1. Financial Statements (Unaudited) | |||||||||
Condensed Consolidated Balance Sheets as of September 30, | |||||||||
Condensed Consolidated Statements of Operations for the | |||||||||
Condensed Consolidated Statements of Comprehensive Loss for the | |||||||||
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, | |||||||||
Condensed Consolidated Statements of Stockholders' Deficit for the | |||||||||
Footnotes to Condensed Consolidated Financial Statements | |||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | |||||||||
Item 4. Controls and Procedures | |||||||||
PART II. Other Information | |||||||||
Item 1. Legal Proceedings | |||||||||
Item 1A. Risk Factors | |||||||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |||||||||
Item 5. Other Information | |||||||||
Item 6. Exhibits | |||||||||
PART I. FINANCIAL INFORMATION Item 1. ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, December 31, 2021 2020 (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Unbilled receivables Inventories, net Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Multi-client data library, net Goodwill Right-of-use assets Other assets Total assets LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Current maturities of long-term debt Accounts payable Accrued expenses Accrued multi-client data library royalties Deferred revenue Current maturities of operating lease liabilities Total current liabilities Long-term debt, net of current maturities Operating lease and other long-term liabilities, net of current maturities Total liabilities Commitment and contingencies (see Footnote 8) Deficit: Common stock, $0.01 par value; authorized 100,000,000 shares; outstanding 28,627,268 and 14,333,101 shares at September 30, 2021 and December 31, 2020, respectively. Preferred stock Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total stockholders’ deficit Noncontrolling interests Total deficit Total liabilities and deficit See accompanying Footnotes to Condensed Consolidated Financial Statements. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands, except per share data) Service revenues Product revenues Total net revenues Cost of services Cost of products Impairment of multi-client data library Gross profit Operating expenses: Research, development and engineering Marketing and sales General, administrative and other operating expenses Impairment of goodwill Total operating expenses Income (loss) from operations Interest expense, net Other income (expense), net Income (loss) before income taxes Income tax expense Net loss Less: Net income (loss) attributable to noncontrolling interests Net loss attributable to ION Net loss per share: Basic and Diluted Weighted average number of common shares outstanding: Basic and Diluted See accompanying Footnotes to Condensed Consolidated Financial Statements. $ 24,143 $ 37,486 15,890 8,045 17,541 11,262 10,673 11,267 5,808 7,116 74,055 75,176 9,067 9,511 56,513 50,914 19,449 19,565 29,896 35,501 1,928 2,926 $ 190,908 $ 193,593 $ 26,447 $ 143,731 28,061 33,418 30,402 16,363 20,003 21,359 3,009 3,648 8,263 7,570 116,185 226,089 107,379 0 32,509 38,594 256,073 264,683 285 143 0 0 995,821 958,584 (1,042,718 ) (1,011,516 ) (19,772 ) (19,913 ) (66,384 ) (72,702 ) 1,219 1,612 (65,165 ) (71,090 ) $ 190,908 $ 193,593 (UNAUDITED)September 30, 2020 December 31, 2019 (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 51,056 $ 33,065 Accounts receivable, net 8,288 29,548 Unbilled receivables 9,629 11,815 Inventories, net 11,873 12,187 Prepaid expenses and other current assets 5,861 6,012 Total current assets 86,707 92,627 Deferred income tax asset, net 8,092 8,734 Property, plant and equipment, net 11,227 13,188 Multi-client data library, net 53,289 60,384 Goodwill 18,684 23,585 Right-of-use assets 37,730 32,546 Other assets 2,136 2,130 Total assets $ 217,865 $ 233,194 LIABILITIES AND DEFICIT Current liabilities: Current maturities of long-term debt $ 23,527 $ 2,107 Accounts payable 35,107 49,316 Accrued expenses 29,197 30,328 Accrued multi-client data library royalties 20,534 18,831 Deferred revenue 2,156 4,551 Current maturities of operating lease liabilities 6,727 11,055 Total current liabilities 117,248 116,188 Long-term debt, net of current maturities 119,349 119,352 Operating lease liabilities, net of current maturities 40,380 30,833 Other long-term liabilities 412 1,453 Total liabilities 277,389 267,826 Deficit: Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 14,315,453 and 14,224,787 shares at September 30, 2020 and December 31, 2019, respectively. 144 142 Additional paid-in capital 958,189 956,647 Accumulated deficit (998,380) (974,291) Accumulated other comprehensive loss (21,012) (19,318) Total stockholders’ deficit (61,059) (36,820) Noncontrolling interest 1,535 2,188 Total deficit (59,524) (34,632) Total liabilities and deficit $ 217,865 $ 233,194 �� $ 36,455 $ 10,202 $ 56,285 $ 73,234 7,936 6,032 21,856 22,145 44,391 16,234 78,141 95,379 18,349 11,491 38,842 47,033 3,812 3,454 12,572 12,962 0 0 0 1,167 22,230 1,289 26,727 34,217 3,156 2,899 9,485 9,943 3,142 2,811 9,080 8,888 9,158 6,743 19,003 21,546 0 0 0 4,150 15,456 12,453 37,568 44,527 6,774 (11,164 ) (10,841 ) (10,310 ) (2,736 ) (3,669 ) (9,297 ) (10,304 ) (855 ) (525 ) (5,532 ) 6,675 3,183 (15,358 ) (25,670 ) (13,939 ) 3,623 1,056 5,550 9,982 (440 ) (16,414 ) (31,220 ) (23,921 ) (13 ) (193 ) 18 (168 ) $ (453 ) $ (16,607 ) $ (31,202 ) $ (24,089 ) $ (0.02 ) $ (1.16 ) $ (1.33 ) $ (1.69 ) 28,590 14,278 23,546 14,255 (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands, except per share data) Service revenues $ 10,202 $ 41,990 $ 73,234 $ 100,525 Product revenues 6,032 11,249 22,145 31,445 Total net revenues 16,234 53,239 95,379 131,970 Cost of services 11,491 22,690 47,033 61,931 Cost of products 3,454 5,261 12,962 15,256 Impairment of multi-client data library 0 0 1,167 0 Gross profit 1,289 25,288 34,217 54,783 Operating expenses: Research, development and engineering 2,899 4,878 9,943 15,421 Marketing and sales 2,811 5,591 8,888 17,444 General, administrative and other operating expenses 6,743 10,961 21,546 36,550 Impairment of goodwill 0 0 4,150 0 Total operating expenses 12,453 21,430 44,527 69,415 Income (loss) from operations (11,164) 3,858 (10,310) (14,632) Interest expense, net (3,669) (3,155) (10,304) (9,378) Other income (expense), net (525) (242) 6,675 (938) Income (loss) before income taxes (15,358) 461 (13,939) (24,948) Income tax expense 1,056 3,790 9,982 7,916 Net loss (16,414) (3,329) (23,921) (32,864) Less: Net income attributable to noncontrolling interest (193) (394) (168) (841) Net loss attributable to ION $ (16,607) $ (3,723) $ (24,089) $ (33,705) Net loss per share: Basic $ (1.16) $ (0.26) $ (1.69) $ (2.39) Diluted $ (1.16) $ (0.26) $ (1.69) $ (2.39) Weighted average number of common shares outstanding: Basic 14,278 14,181 14,255 14,104 Diluted 14,278 14,181 14,255 14,104
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
(In thousands) | ||||||||||||||||
Net loss | $ | (440 | ) | $ | (16,414 | ) | $ | (31,220 | ) | $ | (23,921 | ) | ||||
Other comprehensive loss, net of taxes, as appropriate: | ||||||||||||||||
Foreign currency translation adjustments | (494 | ) | 772 | 73 | (1,743 | ) | ||||||||||
Comprehensive net loss | (934 | ) | (15,642 | ) | (31,147 | ) | (25,664 | ) | ||||||||
Comprehensive (income) loss attributable to noncontrolling interests | �� | 107 | (144 | ) | 86 | (119 | ) | |||||||||
Comprehensive net loss attributable to ION | $ | (827 | ) | $ | (15,786 | ) | $ | (31,061 | ) | $ | (25,783 | ) | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net loss | $ | (16,414) | $ | (3,329) | $ | (23,921) | $ | (32,864) | |||||||||||||||
| Other comprehensive loss, net of taxes, as appropriate: | |||||||||||||||||||||||
| Foreign currency translation adjustments | 772 | (1,028) | (1,743) | (998) | |||||||||||||||||||
| Comprehensive net loss | (15,642) | (4,357) | (25,664) | (33,862) | |||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | (144) | (394) | (119) | (841) | |||||||||||||||||||
| Comprehensive net loss attributable to ION | $ | (15,786) | $ | (4,751) | $ | (25,783) | $ | (34,703) | |||||||||||||||
See accompanying Footnotes to Condensed Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, | |||||||||
2021 | 2020 | ||||||||
(In thousands) | |||||||||
Cash flows from operating activities: | |||||||||
Net loss | $ | (31,220 | ) | $ | (23,921 | ) | |||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||||
Depreciation and amortization (other than multi-client library) | 3,277 | 2,936 | |||||||
Amortization of multi-client data library | 21,970 | 16,674 | |||||||
Impairment of multi-client data library | 0 | 1,167 | |||||||
Impairment of goodwill | 0 | 4,150 | |||||||
Stock-based compensation expense | 1,306 | 1,637 | |||||||
Amortization of government relief funding | 0 | (6,923 | ) | ||||||
Loss on restructuring transactions | 4,696 | 0 | |||||||
Deferred income taxes | 0 | 237 | |||||||
Change in operating assets and liabilities: | |||||||||
Accounts receivable | (7,880 | ) | 21,065 | ||||||
Unbilled receivables | (6,291 | ) | 1,181 | ||||||
Inventories | 397 | 77 | |||||||
Accounts payable, accrued expenses and accrued royalties | (2,787 | ) | (6,429 | ) | |||||
Deferred revenue | (619 | ) | (2,246 | ) | |||||
Other assets and liabilities | 7,195 | 3,563 | |||||||
Net cash provided by (used in) operating activities | (9,956 | ) | 13,168 | ||||||
Cash flows from investing activities: | |||||||||
Investment in multi-client data library | (22,307 | ) | (19,841 | ) | |||||
Purchase of property, plant and equipment | (2,038 | ) | (865 | ) | |||||
Net cash used in investing activities | (24,345 | ) | (20,706 | ) | |||||
Cash flows from financing activities: | |||||||||
Borrowings under revolving line of credit | 0 | 27,000 | |||||||
Repayments under revolving line of credit | (3,150 | ) | (4,500 | ) | |||||
Proceeds from the rights offering | 41,836 | (a) | 0 | ||||||
Payments on notes payable and long-term debt | (18,704 | ) | (b) | (1,814 | ) | ||||
Costs associated with debt issuance | (8,185 | ) | (c) | 0 | |||||
Net proceeds from the registered direct offering | 9,802 | 0 | |||||||
Receipt of Paycheck Protection Program loan | 0 | 6,923 | |||||||
Other financing activities | (603 | ) | (308 | ) | |||||
Net cash provided by financing activities | 20,996 | 27,301 | |||||||
Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash | (65 | ) | 501 | ||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (13,370 | ) | 20,264 | ||||||
Cash, cash equivalents and restricted cash at beginning of period | 39,813 | 33,118 | |||||||
Cash, cash equivalents and restricted cash at end of period (see Footnote 12) | $ | 26,443 | $ | 53,382 | |||||
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (23,921) | $ | (32,864) | |||||||
| Adjustments to reconcile net loss to cash provided by operating activities: | |||||||||||
| Depreciation and amortization (other than multi-client data library) | 2,936 | 2,903 | |||||||||
| Amortization of multi-client data library | 16,674 | 29,787 | |||||||||
| Stock-based compensation expense | 1,637 | 3,736 | |||||||||
| Impairment of multi-client data library | 1,167 | 0 | |||||||||
| Impairment of goodwill | 4,150 | 0 | |||||||||
| Amortization of government relief funding expected to be forgiven | (6,923) | 0 | |||||||||
| Deferred income taxes | 237 | (1,248) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 21,065 | 2,115 | |||||||||
| Unbilled receivables | 1,181 | 12,772 | |||||||||
| Inventories | 77 | 729 | |||||||||
| Accounts payable, accrued expenses and accrued royalties | (6,429) | 1,528 | |||||||||
| Deferred revenue | (2,246) | (2,398) | |||||||||
| Other assets and liabilities | 3,563 | 2,244 | |||||||||
| Net cash provided by operating activities | 13,168 | 19,304 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Investment in multi-client data library | (19,841) | (21,225) | |||||||||
| Purchase of property, plant and equipment | (865) | (1,272) | |||||||||
| Net cash used in investing activities | (20,706) | (22,497) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under revolving line of credit | 27,000 | 15,000 | |||||||||
| Payments under revolving line of credit | (4,500) | (15,000) | |||||||||
| Proceeds from government relief funding | 6,923 | 0 | |||||||||
| Payments on notes payable and long-term debt | (1,814) | (1,960) | |||||||||
| Dividend payment to noncontrolling interest | (217) | 0 | |||||||||
| Other financing activities | (91) | (655) | |||||||||
| Net cash provided by (used in) financing activities | 27,301 | (2,615) | |||||||||
| Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash | 501 | 151 | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 20,264 | (5,657) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 33,118 | 33,854 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 53,382 | $ | 28,197 | |||||||
(a) Represents $30.1 million in New Notes and $11.7 million of ION common stock issued in connection with the Rights Offering described in the footnotes.
(b) Consists primarily of $17.1 million payment for the Old Notes resulting from the Exchange Offer.
(c) Represents transaction costs incurred in connection with the Restructuring Transactions.
See accompanying Footnotes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| Common Stock | Additional | Accumulated | Accumulated Other | Noncontrolling | Total | |||||||||||||||||||||||
(In thousands, except shares) | Shares | Amount | Paid-In Capital | Deficit | Comprehensive Loss | Interests | Deficit | |||||||||||||||||||||
Balance at July 1, 2021 | 28,577,886 | 285 | 995,323 | (1,042,265 | ) | (19,398 | ) | 1,326 | (64,729 | ) | ||||||||||||||||||
Net (loss) income | — | 0 | 0 | (453 | ) | 0 | 13 | (440 | ) | |||||||||||||||||||
Translation adjustment | — | 0 | 0 | 0 | (374 | ) | (120 | ) | (494 | ) | ||||||||||||||||||
Stock-based compensation expense | — | 0 | 526 | 0 | 0 | 0 | 526 | |||||||||||||||||||||
Vesting of restricted stock units/awards | 71,897 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Vested restricted stock cancelled for employee minimum income taxes | (22,515 | ) | 0 | (28 | ) | 0 | 0 | 0 | (28 | ) | ||||||||||||||||||
Balance at September 30, 2021 | 28,627,268 | $ | 285 | $ | 995,821 | $ | (1,042,718 | ) | $ | (19,772 | ) | $ | 1,219 | $ | (65,165 | ) | ||||||||||||
| For the Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
Common Stock | Additional | Accumulated | Accumulated Other | Noncontrolling | Total | |||||||||||||||||||||||
(In thousands, except shares) | Shares | Amount | Paid-In Capital | Deficit | Comprehensive Loss | Interests | Deficit | |||||||||||||||||||||
Balance at January 1, 2021 | 14,333,101 | $ | 143 | $ | 958,584 | $ | (1,011,516 | ) | $ | (19,913 | ) | $ | 1,612 | $ | (71,090 | ) | ||||||||||||
Net (loss) income | — | 0 | 0 | (31,202 | ) | 0 | (18 | ) | (31,220 | ) | ||||||||||||||||||
Translation adjustment | — | 0 | 0 | 0 | 141 | (68 | ) | 73 | ||||||||||||||||||||
Dividend payment to noncontrolling interest | — | 0 | 0 | 0 | 0 | (307 | ) | (307 | ) | |||||||||||||||||||
Stock-based compensation expense | — | 0 | 1,306 | 0 | 0 | 0 | 1,306 | |||||||||||||||||||||
Vesting of restricted stock units/awards | 545,101 | 5 | (5 | ) | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Vested restricted stock cancelled for employee minimum income taxes | (146,197 | ) | (2 | ) | (294 | ) | 0 | 0 | 0 | (296 | ) | |||||||||||||||||
Stocks issued as part of the registered direct offering | 2,990,001 | 30 | 9,772 | 0 | 0 | 0 | 9,802 | |||||||||||||||||||||
Stocks issued as part of the Restructuring Transactions | 10,905,262 | 109 | 26,458 | 0 | 0 | 0 | 26,567 | |||||||||||||||||||||
Balance at September 30, 2021 | 28,627,268 | 285 | $ | 995,821 | $ | (1,042,718 | ) | $ | (19,772 | ) | $ | 1,219 | $ | (65,165 | ) | |||||||||||||
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Deficit | Common Stock | Additional | Accumulated | Accumulated Other | Noncontrolling | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except shares) | (In thousands, except shares) | Shares | Amount | Noncontrolling Interests | Amount | Paid-In Capital | Deficit | Comprehensive Loss | Interests | Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2020 | Balance at July 1, 2020 | 14,245,829 | $ | 142 | $ | 957,746 | $ | (981,773) | $ | (21,833) | $ | 1,608 | $ | (44,110) | 14,245,829 | 142 | 957,746 | (981,773 | ) | (21,833 | ) | 1,608 | (44,110 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | Net (loss) income | — | — | — | (16,607) | — | 193 | (16,414) | — | 0 | 0 | (16,607 | ) | 0 | 193 | (16,414 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Translation adjustments | — | — | — | — | 821 | (49) | 772 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Translation adjustment | — | 0 | 0 | 0 | 821 | (49 | ) | 772 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend payment to noncontrolling interest | Dividend payment to noncontrolling interest | — | — | — | — | — | (217) | (217) | — | 0 | 0 | 0 | 0 | (217 | ) | (217 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | Stock-based compensation expense | — | — | 543 | — | — | — | 543 | — | 0 | 543 | 0 | 0 | 0 | 543 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | — | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units/awards | Vesting of restricted stock units/awards | 111,094 | 2 | (2) | — | — | — | 0 | 111,094 | 2 | (2 | ) | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock cancelled for employee minimum income taxes | Vested restricted stock cancelled for employee minimum income taxes | (41,470) | — | (98) | — | — | — | (98) | (41,470 | ) | 0 | (98 | ) | 0 | 0 | 0 | (98 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | Balance at September 30, 2020 | 14,315,453 | $ | 144 | $ | 958,189 | $ | (998,380) | $ | (21,012) | $ | 1,535 | $ | (59,524) | 14,315,453 | $ | 144 | $ | 958,189 | $ | (998,380 | ) | $ | (21,012 | ) | $ | 1,535 | $ | (59,524 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | For the Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Deficit | Common Stock | Additional | Accumulated | Accumulated Other | Noncontrolling | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except shares) | (In thousands, except shares) | Shares | Amount | Noncontrolling Interests | Amount | Paid-In Capital | Deficit | Comprehensive Loss | Interests | Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | Balance at January 1, 2020 | 14,224,787 | $ | 142 | $ | 956,647 | $ | (974,291) | $ | (19,318) | $ | 2,188 | $ | (34,632) | 14,224,787 | $ | 142 | $ | 956,647 | $ | (974,291 | ) | $ | (19,318 | ) | $ | 2,188 | $ | (34,632 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | Net (loss) income | — | — | — | (24,089) | — | 168 | (23,921) | — | 0 | 0 | (24,089 | ) | 0 | 168 | (23,921 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Translation adjustments | — | — | — | — | (1,694) | (604) | (2,298) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Translation adjustment | — | 0 | 0 | 0 | (1,694 | ) | (604 | ) | (2,298 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend payment to noncontrolling interest | Dividend payment to noncontrolling interest | — | — | — | — | — | (217) | (217) | — | 0 | 0 | 0 | 0 | (217 | ) | (217 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | Stock-based compensation expense | — | — | 1,637 | — | — | — | 1,637 | — | 0 | 1,637 | 0 | 0 | 0 | 1,637 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | Exercise of stock options | 5,000 | — | 15 | — | — | — | 15 | 5,000 | 0 | 15 | 0 | 0 | 0 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units/awards | Vesting of restricted stock units/awards | 128,183 | 2 | (2) | — | — | — | 0 | 128,183 | 2 | (2 | ) | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock cancelled for employee minimum income taxes | Vested restricted stock cancelled for employee minimum income taxes | (42,517) | — | (108) | — | — | — | (108) | (42,517 | ) | 0 | (108 | ) | 0 | 0 | 0 | (108 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | Balance at September 30, 2020 | 14,315,453 | $ | 144 | $ | 958,189 | $ | (998,380) | $ | (21,012) | $ | 1,535 | $ | (59,524) | 14,315,453 | $ | 144 | $ | 958,189 | $ | (998,380 | ) | $ | (21,012 | ) | $ | 1,535 | $ | (59,524 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Deficit | ||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except shares) | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2019 | 14,171,561 | $ | 142 | $ | 954,904 | $ | (956,074) | $ | (20,412) | $ | 2,059 | $ | (19,381) | ||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | (3,723) | 394 | (3,329) | |||||||||||||||||||||||||||||||||||||||||
| Translation adjustment | — | — | — | (1,028) | (169) | (1,197) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 905 | — | — | — | 905 | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 58,400 | — | 26 | — | — | — | 26 | ||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units/awards | 1,066 | — | — | — | — | — | 0 | ||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock cancelled for employee minimum income taxes | (29,377) | — | (130) | — | — | — | (130) | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 14,201,650 | $ | 142 | $ | 955,705 | $ | (959,797) | $ | (21,440) | $ | 2,284 | $ | (23,106) | ||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Deficit | ||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except shares) | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | 14,015,615 | $ | 140 | $ | 952,626 | $ | (926,092) | $ | (20,442) | $ | 1,592 | $ | 7,824 | ||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | (33,705) | — | 841 | (32,864) | ||||||||||||||||||||||||||||||||||||||||
| Translation adjustment | — | — | — | — | (998) | (149) | (1,147) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 3,736 | — | — | — | 3,736 | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 82,900 | 1 | 102 | — | — | — | 103 | ||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units/awards | 202,697 | 2 | (2) | — | — | — | 0 | ||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock cancelled for employee minimum income taxes | (99,562) | (1) | (757) | — | — | — | (758) | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 14,201,650 | $ | 142 | $ | 955,705 | $ | (959,797) | $ | (21,440) | $ | 2,284 | $ | (23,106) | ||||||||||||||||||||||||||||||||||
See accompanying Footnotes to Condensed Consolidated Financial Statements.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) | Summary of Significant Accounting Policies |
Basis of Presentation
The condensed consolidated balance sheet of ION Geophysical Corporation and its subsidiaries (collectively referred to as the “Company” or “ION,” unless the context otherwise requires) at December 31, 2019,2020, has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at September 30, 2020,2021, and the condensed consolidated statements of operations, condensed consolidated statements of comprehensive loss, condensed consolidated statements of stockholders' deficit for the three and nine months ended September 30, 2020 2021 and 20192020 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2020 2021 and 2019,2020, are unaudited. In the opinion of management, all adjustments of a normal recurring nature that are necessary for a fair presentation of the results of the interim period have been included. Interim results are not necessarily indicative of the operating results for a full year or of future operations. Intercompany transactions and balances have been eliminated.
The Company’s condensed consolidated financial statements reflect a non-redeemable noncontrolling interest in a majority-owned affiliate which is reported as a separate component of equity in “Noncontrolling interest” in the condensed consolidated balance sheets. Net (income) loss attributable to noncontrolling interest is stated separately in the condensed consolidated statements of operations. The activity for this noncontrolling interest relates to proprietary processing projects in Brazil.
Certain reclassifications were made to previously reported amounts in the condensed consolidated financial statements and notes thereto; particularly, the presentation of revenue by geographic area to make previously reported amounts consistent with current period presentation.
These condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q10-Q and applicable rules of Regulation S-XS-X of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with GAAP have been omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K10-K for the year ended December 31, 2019.
Going Concern
On April 20, 2021, the Company completed the Restructuring Transactions (as further discussed below) that extended the maturity of the notes tendered in the Exchange Offer (as defined below) by four years to December 2025 and provided additional liquidity. While the Company completed the Restructuring Transactions and revenues in the third quarter significantly improved, the timing of the market recovery remains uncertain and overall revenues were lower than expected. Though the significant revenues generated during the third quarter are expected to have a positive impact on the Company's near-term cash collection, it may not be sufficient to fund the Company's operations and meet the Company's debt and other obligations.
In the fourth quarter, the following amounts totaling $16.8 million will become due and payable: (i) principal and interest on the Old Notes of $7.7 million; (ii) interest on the New Notes of $4.6 million and (iii) an escrow payment of $4.5 million with respect to the India litigation described in Footnote 8 "Litigations". Based on the Company's current available liquidity, these near-term payment obligations, and its obligations from the Company's on-going operations, such as amounts due to its seismic acquisition partners and royalty obligations, there is substantial doubt about the Company's ability to continue as a going concern. Furthermore, any failure to make the above-described required payments on the Old Notes or the New Notes would likely result in a default under that indebtedness and likely cause cross-defaults under the Company's other indebtedness further limiting its ability to access capital, including under its Credit Agreement.
As a result of these liquidity issues, the Company is considering various strategic alternatives, which include, among others, a sale or other business combination transaction, sales of assets, private or public equity transactions, debt financing, or some combination of these alternatives. This process is ongoing and there can be no assurance that the Company's efforts will be successful. If the Company is unable to significantly increase its revenues and cash collection in the fourth quarter or raise additional funds through equity issuances, further debt financing arrangements, sales of assets or through other means of preserving cash through cost reduction initiatives, the Company would be unable to continue as a going concern.
The COVID-19Company is implementing a significant cost reduction program, building on the over $40 million eliminated last year, in an effort to right size its business. Approximately $16 million of additional annualized savings were identified through a combination of both short-term and long-term reductions. In addition to maintaining ongoing cost discipline, the Company will continue to identify opportunities for government relief such as employee retention credits. For further details, refer to Footnote 5, “Government Relief Funding.” This management plan reflects the Company’s continued focus on preserving cash and managing liquidity in the current uncertain macroeconomic environment.
The condensed consolidated financial statements conform with accounting principles generally accepted in the United States of America ("GAAP") on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Accordingly, the Company’s condensed consolidated financial statements exclude certain adjustments that might result if the Company is unable to continue as a going concern.
Old Notes Restructuring
On April 20, 2021, the Company successfully completed its previously announced offer to exchange (the “Exchange Offer”) the Old Notes for newly issued 8.00% Senior Secured Second Priority Notes due 2025 (the “New Notes”) and other consideration in the form of cash and ION common stock, as described in the Company's Prospectus dated March 10, 2021 and its previously announced rights offering (the "Rights Offering") to its holders of the Company's common stock, par value $0.01 per share (the "Common Stock") to purchase for (i) $2.78 principal amount of the New Notes per right, at a purchase price of 100% of the principal amount thereof or (ii) 1.08 shares of common stock per right, at a purchase price of $2.57 per whole share of common stock. The Exchange Offer and the Rights Offering are sometimes referred to herein as the "Restructuring Transactions".
As described in more detail in Footnote 4"Long-term Debt", the holders of the New Notes may convert all or any portion of their New Notes at their option at any time prior maturity. The initial conversion price is $3.00 per share of Common Stock and is subject to adjustment as described in the New Notes Indenture. The total number of shares of Common Stock that may be issued upon conversion of the New Notes is 38.7 million shares, which excludes an additional 6.5 million shares that may be issued upon a conversion resulting from a make-whole change of control.
In the Exchange Offer, approximately $113.5 million, or approximately 94.1%, of the $120.6 million outstanding Old Notes were accepted and exchanged for (i) $84.7 million aggregate principal amount of its New Notes, (ii) 6.1 million shares of Common Stock, including 1.5 million shares issued as the early participation payment and 4.6 million shares issued as stock consideration in lieu of the New Notes and (iii) $20.7 million paid in cash, including $3.6 million of accrued and unpaid interest that became due on the Old Notes as part of the exchange. The Company accepted for exchange all such Old Notes validly tendered and not validly withdrawn in the Exchange Offer as of the expiration time on April 12, 2021. Pursuant to the Exchange Offer, the Company will make an offer to participants to repurchase New Notes at par for up to 50% of the proceeds raised in excess of $35.0 million from the Rights Offering valued at $3.4 million. As of September 30, 2021, the Company has yet to initiate such offer.
In the concurrent Rights Offering, an aggregate amount of $41.8 million of rights (including over-subscription) was validly exercised by the holders of Common Stock, apportioned as $30.1 million in New Notes and $11.7 million in Common Stock allocated in 4.6 million shares. All over-subscription rights were exercised without proration as the $50.0 million limit on proceeds was not exceeded. Backstop parties were paid 5% backstop fees, in kind, resulting in the issuance of an additional $1.5 million in aggregate principal amount of New Notes and 0.2 million shares of Common Stock.
In total, $116.2 million in aggregate principal amount of New Notes and 10.9 million shares of Common Stock were issued. The Company received approximately $14 million in net proceeds from the transactions after deducting noteholder obligations, estimated transaction fees and accrued and unpaid interest paid on the Old Notes. After the Restructuring Transactions, $7.1 million of Old Notes remain outstanding and are due along with unpaid interest (at a rate of 9.125% per annum) on December 15, 2021.
The Restructuring Transactions resulted in amendment to the Old Notes Indenture (as defined in Footnote 4,"Long-term Debt") effective as of April 20, 2021. The Old Notes were modified to, among other things, provide for the release of the second priority security interest in the collateral securing the Old Notes, and deleted in their entirety substantially all of the restrictive covenants and certain events of default pertaining to the Old Notes. Refer to Footnote 4"Long-term Debt - Old Notes" for further details.
COVID-19 Business Impact and Response
The COVID-19 pandemic caused the global economy to enter a recessionary period which may be prolonged and severe, and significantly reducestarting in the availabilitysecond quarter of capital and liquidity from banks and other providers of credit. The2020. During 2020, the exploration and production (“E&P”) industry is facingfaced the dual impact of demand deterioration from COVID-19COVID-19 and market oversupply from increased production, which caused oil and natural gas prices to decline significantly since the startfor most of the year. Brent crude oil prices, which are most relevant to ION’s internationally focused business, dropped 66% during the first quarter from $66 on January 1, 2020 to $23 on March 31, 2020. By the end of the second quarter, Brent crude oil prices rebounded to $41 per barrel benefiting from increased global demand as pandemic restrictions started to ease and decreased production. Brent crude oil prices have remained relatively stable at that level throughout the third quarter. While the consistency is beneficial, prices are significantly lower compared to the start of the year. The record production cut agreed to by OPEC and other oil producing countries was extended through December 2020 in an effort to stabilize oil prices by limiting supply.
During 2021, the global economy has surpassed pre-pandemic levels and Brent crude prices, which are most relevant to ION’s internationally focused business, have rebounded above pre-pandemic levels, averaging over $80 per barrel during October 2021. This reflects the continued expectation of rising oil demand as both the global economic activity and COVID-19 vaccination rates increase, combined with ongoing crude oil production limits from members of OPEC and partner countries. However, energy companies’ capital discipline remains firmly in place and management expects the seismic market to continue gradually improving yet remain challenging into 2021.in the near-term.
COVID-19 has disrupted supply chains globally related to raw materials, manufacturing and shipping. To date, ION has successfully mitigated these operational impacts by maintaining close relationships with strategic suppliers.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in Note Footnote 1
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the use ofmanagement to make estimates and assumptions by management that affectsaffect the reported amounts inof assets and liabilities at the date of the condensed consolidated financial statements and accompanying notes.the reported amounts of revenues and expenses during the reporting period. Significant estimates are made at discrete points in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Areas involving significant estimates include, but are not limited to, collectability of accounts and unbilled receivables, inventory valuation reserves, sales forecastforecasts related to multi-client data library, impairment of property, plant and equipment and goodwill and deferred taxes. Actual results could materially differ from those estimates.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
(2) | Segment Information |
The Company evaluates and reviews its results of operations based on 2two reporting segments: E&P Technology & Services and Operations Optimization. Refer to Item 2. “
The segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Operating Decision Maker in determining how to allocate resources and evaluate performance. The Company measures segment operating results based on income (loss) from operations.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Net revenues: | ||||||||||||||||||||||||||
| E&P Technology & Services: | ||||||||||||||||||||||||||
| New Venture | $ | 1,213 | $ | 5,905 | $ | 7,340 | $ | 24,394 | ||||||||||||||||||
| Data Library | 5,085 | 27,288 | 52,083 | 55,030 | ||||||||||||||||||||||
| Total multi-client revenues | 6,298 | 33,193 | 59,423 | 79,424 | ||||||||||||||||||||||
| Imaging and Reservoir Services | 3,795 | 7,048 | 12,410 | 16,443 | ||||||||||||||||||||||
| Total | 10,093 | 40,241 | 71,833 | 95,867 | ||||||||||||||||||||||
| Operations Optimization: | ||||||||||||||||||||||||||
| Optimization Software & Services | 3,007 | 6,895 | 10,811 | 17,648 | ||||||||||||||||||||||
| Devices | 3,134 | 6,103 | 12,735 | 18,455 | ||||||||||||||||||||||
| Total | 6,141 | 12,998 | 23,546 | 36,103 | ||||||||||||||||||||||
| Total net revenues | $ | 16,234 | $ | 53,239 | $ | 95,379 | $ | 131,970 | ||||||||||||||||||
| Gross profit (loss): | ||||||||||||||||||||||||||
| E&P Technology & Services | $ | (1,092) | $ | 18,316 | $ | 24,902 | $ | 36,113 | ||||||||||||||||||
| Operations Optimization | 2,381 | 6,972 | 9,315 | 18,670 | ||||||||||||||||||||||
| Total gross profit | $ | 1,289 | $ | 25,288 | $ | 34,217 | $ | 54,783 | ||||||||||||||||||
| Gross margin: | ||||||||||||||||||||||||||
| E&P Technology & Services | (11) | % | 46 | % | 35 | % | 38 | % | ||||||||||||||||||
| Operations Optimization | 39 | % | 54 | % | 40 | % | 52 | % | ||||||||||||||||||
| Total gross margin | 8 | % | 47 | % | 36 | % | 42 | % | ||||||||||||||||||
| Income (loss) from operations: | ||||||||||||||||||||||||||
| E&P Technology & Services | $ | (4,591) | $ | 11,878 | $ | 13,803 | (a) | $ | 15,500 | |||||||||||||||||
| Operations Optimization | (232) | 2,994 | (3,965) | (b) | 5,808 | |||||||||||||||||||||
| Support and other | (6,341) | (11,014) | (20,148) | (35,940) | ||||||||||||||||||||||
| Income (loss) from operations | (11,164) | 3,858 | (10,310) | (14,632) | ||||||||||||||||||||||
| Interest expense, net | (3,669) | (3,155) | (10,304) | (9,378) | ||||||||||||||||||||||
| Other income (expense), net | (525) | (242) | 6,675 | (c) | (938) | |||||||||||||||||||||
| Income (loss) before income taxes | $ | (15,358) | $ | 461 | $ | (13,939) | $ | (24,948) | ||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||
Net revenues: | |||||||||||||||||||
E&P Technology & Services: | |||||||||||||||||||
New Venture | $ | 26,287 | $ | 1,213 | $ | 31,256 | $ | 7,340 | |||||||||||
Data Library | 6,225 | 5,085 | 14,102 | 52,083 | |||||||||||||||
Total multi-client revenues | 32,512 | 6,298 | 45,358 | 59,423 | |||||||||||||||
Imaging and Reservoir Services | 3,308 | 3,795 | 9,402 | 12,410 | |||||||||||||||
Total | $ | 35,820 | $ | 10,093 | $ | 54,760 | $ | 71,833 | |||||||||||
Operations Optimization: | |||||||||||||||||||
Optimization Software & Services | $ | 3,814 | $ | 3,007 | $ | 10,028 | $ | 10,811 | |||||||||||
Devices | 4,757 | 3,134 | 13,353 | 12,735 | |||||||||||||||
Total | $ | 8,571 | $ | 6,141 | $ | 23,381 | $ | 23,546 | |||||||||||
Total net revenues | $ | 44,391 | $ | 16,234 | $ | 78,141 | $ | 95,379 | |||||||||||
Gross profit (loss): | |||||||||||||||||||
E&P Technology & Services | $ | 17,925 | $ | (1,092 | ) | $ | 17,336 | $ | 24,902 | (d) | |||||||||
Operations Optimization | 4,305 | 2,381 | 9,391 | 9,315 | |||||||||||||||
Total gross profit | $ | 22,230 | $ | 1,289 | $ | 26,727 | $ | 34,217 | |||||||||||
Gross margin: | |||||||||||||||||||
E&P Technology & Services | 50 | % | (11 | )% | 32 | % | 35 | % | |||||||||||
Operations Optimization | 50 | % | 39 | % | 40 | % | 40 | % | |||||||||||
Total gross margin | 50 | % | 8 | % | 34 | % | 36 | % | |||||||||||
Income (loss) from operations: | |||||||||||||||||||
E&P Technology & Services | $ | 13,973 | $ | (4,591 | ) | $ | 6,429 | $ | 13,803 | (c) | |||||||||
Operations Optimization | 624 | (232 | ) | 48 | (3,965 | ) | (d) | ||||||||||||
Support and other | (7,823 | ) | (a) | (6,341 | ) | (17,318 | ) | (a) | (20,148 | ) | |||||||||
Income (loss) from operations | 6,774 | (11,164 | ) | (10,841 | ) | (10,310 | ) | ||||||||||||
Interest expense, net | (2,736 | ) | (3,669 | ) | (9,297 | ) | (10,304 | ) | |||||||||||
Other income (expense), net | (855 | ) | (525 | ) | (5,532 | ) | (b) | 6,675 | (e) | ||||||||||
Income (loss) before income taxes | $ | 3,183 | $ | (15,358 | ) | $ | (25,670 | ) | $ | (13,939 | ) | ||||||||
| (a) | Includes severance expense of $1.9 million for the three and nine months ended September 30, 2021. |
| (b) | Includes loss on restructuring transactions of $4.7 million for the nine months ended September 30, 2021 resulting from the exchange of the Company's Old Notes for New Notes. |
(c) | Includes impairment of multi-client data library of $1.2 million for the nine months ended September 30, 2020. |
(d) | Includes impairment of goodwill of $4.2 million for the nine months ended September 30, 2020. |
| (e) | Includes amortization of government relief funding of $6.9 million for the nine months ended September 30, 2020. |
Intersegment sales are insignificant for all periods presented.
(3) | Revenue from Contracts with Customers |
The Company derives revenue from the (i) sale or license of multi-client and proprietary data, imaging and reservoir services within its E&P Technologies & Services segment; (ii) sale, license and repair of seismic data acquisition systems and other equipment; and (iii) sale or license of seismic command and control software systems and software solutions for operations management within its Operations Optimization segment. All E&P Technology & Services’ revenues and the services component of Optimization Software & Services’ revenues under Operations Optimization segment are classified as service revenues. All other revenues are classified as product revenues.
The Company uses a five-stepfive-step model to determine proper revenue recognition from customer contracts. Revenue is recognized when (i) a contract is approved by all parties; (ii) the goods or services promised in the contract are identified; (iii) the consideration the Company expects to receive in exchange for the goods or services promised is determined; (iv) the consideration is allocated to the goods and services in the contract; and (v) control of the promised goods or services is transferred to the customer. The Company is not required to disclose information about remaining contractual future performance obligations with an original term of one year or less. The Company does not have any contractual future performance obligations with an original term of over one year.
Revenues by Geographic Area
The following table is a summary of net revenues by geographic area (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| North America | $ | 479 | $ | 12,182 | $ | 37,920 | $ | 32,984 | |||||||||||||||
| Latin America | 7,925 | 22,720 | 22,695 | 50,572 | |||||||||||||||||||
| Asia Pacific | 3,777 | 2,744 | 15,696 | 8,287 | |||||||||||||||||||
| Europe | 3,011 | 8,335 | 12,997 | 24,850 | |||||||||||||||||||
| Middle East | 306 | 3,899 | 2,202 | 6,364 | |||||||||||||||||||
| Africa | 344 | 2,874 | 1,939 | 7,541 | |||||||||||||||||||
| Other | 392 | 485 | 1,930 | 1,372 | |||||||||||||||||||
| Total | $ | 16,234 | $ | 53,239 | $ | 95,379 | $ | 131,970 | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Latin America | $ | 24,808 | $ | 7,925 | $ | 29,383 | $ | 35,978 | ||||||||
Europe | 11,557 | 3,257 | 22,522 | 15,413 | ||||||||||||
Africa | 1,800 | 361 | 10,051 | 16,719 | ||||||||||||
Asia Pacific | 1,801 | 2,332 | 7,439 | 12,725 | ||||||||||||
Middle East | 2,867 | 474 | 4,298 | 2,370 | ||||||||||||
North America | 1,262 | 1,493 | 3,404 | 7,585 | ||||||||||||
Other | 296 | 392 | 1,044 | 4,589 | ||||||||||||
Total | $ | 44,391 | $ | 16,234 | $ | 78,141 | $ | 95,379 | ||||||||
Product revenues are allocated to geographic locations on the basis of the ultimate destination of the equipment, if known. If the ultimate destination of such equipment is not known, product revenues are allocated to the geographic location of initial shipment. Service revenues, which primarily relate to the Company's E&P Technology & Services segment, are allocated based upon the billing location of the customer and the geographic location of the data.
See Note 3
Unbilled Receivables
Unbilled receivables balances relate to revenues recognized on multi-client surveys, imaging and reservoir services and devices equipment repairs on a proportionate basis, and on licensing of multi-client data for which invoices have not yet been presented to the customer. The following table is a summary of unbilled receivables (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| New Venture | $ | 4,144 | $ | 5,222 | |||||||
| Imaging and Reservoir Services | 3,705 | 6,539 | |||||||||
| Devices | 1,780 | 54 | |||||||||
| Total | $ | 9,629 | $ | 11,815 | |||||||
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
New Venture | $ | 15,899 | $ | 9,158 | ||||
Imaging and Reservoir Services | 1,469 | 680 | ||||||
Devices | 173 | 1,424 | ||||||
Total | $ | 17,541 | $ | 11,262 | ||||
The changes in unbilled receivables are as follows (in thousands):
Unbilled receivables at December 31, 2020 | $ | 11,262 | ||
Recognition of unbilled receivables (a) | 75,583 | |||
Revenues billed to customers (a) | (69,304 | ) | ||
Unbilled receivables at September 30, 2021 | $ | 17,541 |
(a)
Includes all gross revenue recognition and related billing activity of the Company. As a matter of process, all net revenue recognized is initially reflected as an unbilled receivable and subsequently billed to customers, as applicable, including net revenue for all of software and a portion of devices within the Operations Optimization segment, although they are billed at the time of recognition.Deferred Revenue
Billing practices are governed by the terms of each contract based upon achievement of milestones or pre-agreed schedules. Billing does not necessarily correlate with revenue recognized on a proportionate basis as work is performed and control is transferred to the customer. Deferred revenue represents cash received in excess of revenue not yet recognized as of the reporting period but tothat will be recognized in future periods. The following table is a summary of deferred revenues (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| New Venture | $ | 500 | $ | 1,956 | |||||||
| Imaging and Reservoir Services | 608 | 1,501 | |||||||||
| Optimization Software & Services | 1,000 | 642 | |||||||||
| Devices | 48 | 452 | |||||||||
| Total | $ | 2,156 | $ | 4,551 | |||||||
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
New Venture | $ | 1,590 | $ | 2,169 | ||||
Imaging and Reservoir Services | 255 | 665 | ||||||
Optimization Software & Services | 1,023 | 766 | ||||||
Devices | 141 | 48 | ||||||
Total | $ | 3,009 | $ | 3,648 | ||||
The changes in deferred revenues arewere as follows (in thousands):
Deferred revenue at December 31, 2020 | $ | 3,648 | ||
Cash collected in excess of revenue recognized | 1,919 | |||
Recognition of deferred revenue | (2,558 | ) | ||
Deferred revenue at September 30, 2021 | $ | 3,009 |
The Company expects to recognize thea majority of deferred revenue within the next 12twelve months.
Credit Risks
For the nine months ended September 30, 2020 2021 and 2019,2020, the Company had one customerthree and two customers, respectively, with sales that each exceeded 10% of the Company’s consolidated net revenues. Revenues related to each of these customers are included within the E&P Technology & Services segment.
At September 30, 2021 and 2020, the Company had two large multi-national and national oil company customers with balances that accounted for 53% and 39%, respectively, of the Company’s total combined accounts receivable and unbilled receivable balances. The Company routinely evaluates the financial stability and creditworthiness of its customers. At September 30, 2019, the Company had two customers with a combined balance that accounted for 40% of the Company’s total combined accounts receivable and unbilled receivable balances.
The Company routinely evaluates the financial stability and creditworthiness of its customers. The Company has a corporate credit policy that is intended to minimize the risk of financial loss due to a customer’s inability to pay. Credit coverage decisions for customers are based on references, payment histories, financial and other data. The Company utilizes a third party-party trade credit insurance policy. The Company has historically not extended long-term credit to its customers.
Concentration of Foreign Sales Risk
The majority of the Company’s foreign sales are denominated in U.S. dollars. For the nine months ended September 30, 2021 and 2020, international sales comprised 96% and 92%, respectively, of total net revenues. To the extent that world events or economic conditions negatively affect the Company’s future sales to customers in many regions of the world, as well as the collectability of the Company’s existing receivables, the Company’s future results of operations, liquidity and financial condition would be adversely affected.
(4) | Long-term Debt |
The following table is a summary of long-term debt (in thousands):
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
New notes (maturing December 15, 2025) | $ | 116,193 | $ | 0 | ||||
Old notes (maturing December 15, 2021) | 7,097 | 120,569 | ||||||
Revolving credit facility (maturing August 16, 2023) | 19,350 | 22,500 | ||||||
Equipment finance leases (see Footnote 11) | 0 | 734 | ||||||
Other debt | 0 | 905 | ||||||
Costs associated with issuances of debt | (8,814 | ) | (977 | ) | ||||
Total | 133,826 | 143,731 | ||||||
Current maturities of long-term debt | (26,447 | ) | (143,731 | ) | ||||
Long-term debt, net of current maturities | $ | 107,379 | $ | 0 | ||||
Old Notes
The Old Notes were senior secured second-priority debt obligations guaranteed by GX Technology Corporation, ION Exploration Products (U.S.A.) Inc., I/O Marine Systems Inc. and GX Geoscience Corporation, S. de R.L. de C.V. (the "Guarantors"). As a result of the Restructuring Transactions on April 20, 2021 as further discussed in Footnote 1"Summary of Significant Accounting Policies - Old Notes Restructuring", $113.5 million in aggregate principal amount outstanding of Old Notes were tendered and exchanged for New Notes. At September 30, 2021, $7.1 million of Old Notes remain outstanding and are due along with unpaid interest (at a rate of 9.125% per annum) on December 15, 2021.
The April 2016 indenture governing the Old Notes (the "Old Notes Indenture") contained certain covenants that, among other things, limited or prohibited ION Geophysical Corporation’s and its restricted subsidiaries from taking certain actions or permitting certain conditions to exist during the term of the Old Notes, including among other things, incurring additional indebtedness in excess of permitted indebtedness, creating liens, paying dividends and making other distributions in respect of ION Geophysical Corporation’s capital stock, redeeming ION Geophysical Corporation’s capital stock, making investments or certain other restricted payments, selling certain kinds of assets, entering into transactions with affiliates, and effecting mergers or consolidations. These and other restrictive covenants contained in the Old Notes Indenture were subject to certain exceptions and qualifications.
On April 20, 2021, the Company, the Guarantors, Wilmington Savings Fund Society, FSB, as trustee, and collateral agent, entered into a supplemental indenture (the “Supplemental Indenture”) to the Old Notes Indenture, dated as of April 28, 2016, among the Company, the Guarantors, Wilmington Savings Fund Society, FSB (as successor to Wilmington Trust, National Association), as trustee, and U.S. Bank National Association, as collateral agent, governing the Old Notes Indenture. The Supplemental Indenture, among other things, provided for the release of the second priority security interest in the collateral securing the Old Notes, and deleted in their entirety substantially all of the restrictive covenants and certain events of default pertaining to the Old Notes. The Old Notes Indenture, as modified by the Supplemental Indenture, is materially less restrictive and affords significantly reduced protection to holders of such securities as compared to the restrictive covenants, events of default and other provisions previously contained in the Old Notes Indenture.
At September 30, 2021, the Company was in compliance with all of the covenants under the Old Notes.
| September 30, 2020 | December 31, 2019 | |||||||||||||
Senior secured second-priority lien notes (maturing December 15, 2021) | $ | 120,569 | $ | 120,569 | ||||||||||
Revolving credit facility (maturing August 16, 2023) (a) | 22,500 | 0 | ||||||||||||
| Equipment finance leases (Note 12) | 1,027 | 1,869 | ||||||||||||
| Other debt | 0 | 972 | ||||||||||||
| Costs associated with issuances of debt | (1,220) | (1,951) | ||||||||||||
| Total | 142,876 | 121,459 | ||||||||||||
| Current maturities of long-term debt | (23,527) | (2,107) | ||||||||||||
| Long-term debt, net of current maturities | $ | 119,349 | $ | 119,352 | ||||||||||
Each guarantee of the New Notes are senior obligations of each Guarantor; secured on a second-priority basis, equally and ratably with all obligations of that Guarantor under any other future Parity Lien Debt, by Liens on all of the assets of that Guarantor other than the Excluded Assets, subject to the Liens securing that Guarantor’s guarantee of the Credit Facility will accelerateAgreement obligations and any other Priority Lien Debt and other Permitted Prior Liens; are effectively junior, to the extent of the value of the Collateral (as defined in the New Notes Indenture), to that Guarantor’s guarantee of the Credit Agreement and any other Priority Lien Debt, which are secured on a first-priority basis by the same assets of that Guarantor that secure the New Notes; are effectively junior to any Permitted Prior Liens, to the extent of the value of the assets of that Guarantor subject to those Permitted Prior Liens; and are senior in right of payment to any future subordinated Indebtedness of that Guarantor, if any.
The New Notes Indenture contains covenants that, among other things, limit the Company's ability, and the ability of ION's restricted subsidiaries (all of ION Geophysical Corporation’s subsidiaries are currently restricted subsidiaries) to incur additional debt or issue certain preferred stock; make certain investments or pay dividends or distributions on ION's capital stock, purchase or redeem or retire capital stock, or make other restricted payments; sell assets, including capital stock of ION's restricted subsidiaries; restrict dividends or other payments by restricted subsidiaries; create liens; create unrestricted subsidiaries; enter into transactions with affiliates; and merge or consolidate with another company. These covenants are subject to a number of important limitations and exceptions that are described in the New Notes Indenture.
At September 30, 2021, the Company is unablewas in compliance with all of the covenants under the New Notes.
Holders of New Notes may convert all or any portion of their New Notes at their option at any time prior to repay or extendthe close of business on the business day immediately preceding the maturity date. The conversion rate will initially be 333 shares of Common Stock per $1,000 principal amount of New Notes (equivalent to an initial conversion price of approximately $3.00 per share of Common Stock) and is subject to adjustment as described in the New Notes Indenture. Upon conversion of a New Note, ION will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of its Common Stock or a combination of cash and Common Stock, at ION’s election. If ION satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of its Common Stock, the amount of cash and shares of Common Stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 30 trading day observation period. The total number of shares of Common Stock that may be issued upon conversion of the Second LienNew Notes is 38.7 million shares, which excludes an additional 6.5 million shares that may be issued upon a conversion resulting from a make-whole change of control.
On or after the day that is the eighteen (18) month anniversary of the issue date of the New Notes (the “Issue Date”), ION may require the conversion of all or part of the New Notes, at its option, if Common Stock, as determined by ION, has a 20-day volume weighted average price of at least 175% of the conversion price then in effect ending on, and including, the trading day immediately preceding the date on which ION provides notice of conversion (an “Optional Conversion”). If ION undergoes an Optional Conversion prior to the third anniversary of the Issue Date, holders of New Notes will be entitled to a make-whole premium payment in cash equal to the applicable premium amount.
The New Notes will be redeemable, in whole or in part, at ION's option at any time prior to December 15,2023, at a cash redemption price equal to 100.0% of the principal amount of New Notes to be redeemed plus a make-whole premium and accrued and unpaid interest. The New Notes will also be redeemable, in whole or in part, at the Company's option at any time on or after December 15,2023, at a cash redemption price equal to 100.0% of the principal amount of New Notes to be redeemed plus accrued and unpaid interest.
If a Change of Control (as described in the New Notes Indenture) occurs, holders of the New Notes may require the Company to repurchase their New Notes at a cash repurchase price equal to 101% of the principal amount of the New Notes to be repurchased, plus accrued and unpaid interest.
Upon certain asset sales, the Company may be required to use the net proceeds therefrom to purchase New Notes at an offer price in cash equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest.
The Company issued one (1) shares of Series A Preferred Stock (the “Series A Preferred Stock”) to the New Notes Trustee to (i) provide certain rights and protections to holders of the New Notes and (ii) allow, under certain circumstances, the holders of New Notes to vote on an as-converted basis. The New Notes Trustee shall take direction from holders of 50.1% of the New Notes for any action requiring the consent of the holder of the Series A Preferred Stock or each act on which the holder of the Series A Preferred Stock is entitled to vote.
Following a default or event of default under the New Notes Indenture, the Series A Preferred Stock will be entitled to vote with the Common Stock of the Company as a single class and having voting power equal to the number of shares of Common Stock issuable upon the conversion of the New Notes. In addition, at all times when the Common Stock is entitled to vote, the Series A Preferred Stock will be entitled to vote with the Common Stock as a single class and having voting powers equal to the number of shares of Common Stock issuable upon the conversion of the New Notes for any transaction (a) modifying, amending, supplementing, or waiving any provision of ION’s organizational documents or (b) entering into any merger, consolidation, sale of all or substantially all of ION’s assets, or other business combination transactions. The holder of the Series A Preferred Stock has the right to appoint two (2) directors to ION’s board of directors, both of whom must be independent. This holder exercised this right in June 2021.
The one share of Series A Preferred Stock (i) ranks pari passu in respect of voting rights with respect to Common Stock, (ii) has a liquidation preference equal to $1.00, (iii) will not produce preferred dividends or ordinary dividends, (iv) is not transferable, except to a successor New Notes Trustee under the terms of the New Notes Indenture, (v) is not convertible into any other class of equity of ION, and (vi) will not be granted registration rights. The Series A Preferred Stock may be redeemed by the Company upon the conversion into Common Stock, in the aggregate, of 75% or more of the New Notes. The redemption price will be $1.00.
On April 20, 2021, the Company and the Guarantors acknowledged and agreed to an intercreditor agreement (the “Intercreditor Agreement”) by and among PNC Bank, National Association ("PNC"), as first lien representative and collateral agent for the first lien secured parties, and UMB Bank, National Association, as second lien representative and collateral agent for the second lien secured parties. The Intercreditor Agreement, among other things, defines the relative priorities of the respective security interests in the collateral securing the New Notes and the obligations under the Company’s senior secured credit facility and certain other matters relating to the administration of security interests, exercise of remedies, certain bankruptcy-related provisions and other intercreditor matters.
The Intercreditor Agreement superseded and replaced the second lien intercreditor agreement, dated as of April 28, 2016, by and among PNC Bank, National Association, as first lien representative for the first lien secured parties and collateral agent for the first lien secured parties, and Wilmington Savings Fund Society, FSB, as second lien representative and collateral agent for the second lien secured parties and third lien representative for the third lien secured parties and U.S. Bank National Association, as collateral agent for the third lien secured parties.
Derivative Liabilities Associated with the New Notes
On April 20, 2021, the Company issued New Notes in exchange for Old Notes (see detailed discussion belowabove on both the New Notes and the Old Notes). Due to the interest make-whole premium payable in cash associated with the Optional Conversion Feature of the New Notes (as described above in more details), the Company has determined that the Optional Conversion Feature is a derivative liability. Further, the interest make-whole premium is not clearly and closely related to the New Notes and is therefore considered a derivative liability (the Optional Conversion Feature and interest make-whole premium are referenced herein as "derivative financial instruments" or "derivatives"). The accounting treatment for derivative financial instruments requires that the Company record the fair value of the derivatives at inception and is adjusted for fair value changes at each reporting date. Considering the impact of other features in the New Notes, the fair value of these derivative instruments using the "with or without" scenario under a lattice option pricing model was determined to be zero over the life of the derivative financial instruments.
Loss on Extinguishment of Old Notes
As discussed in more detail in Footnote 1"Summary of Significant Accounting Policies - Old Notes Restructuring", on April 20, 2021, the Company successfully completed its offer to exchange the Old Notes for New Notes. As a result of these transactions, the Old Notes with a carrying value of $113.5 million were replaced with $84.7 million of New Notes issued at par and other consideration in the form of cash of $17.1 million and ION common stock of $15.7 million, including the early participation payment.
In accordance with ASC Topic No.470,“Debt – Modifications and Extinguishments”(Topic 470), the transactions noted above were determined to be an extinguishment of the existing debt and an issuance of new debt. As a result, the Company recorded a loss on the extinguishment of debt in the amount of $4.7 million presented in "Other income (expense)" account in the Condensed Consolidated Statements of Operations. Of the $4.7 million loss on the extinguishment of debt, $4.0 million represents the 1.5 million shares the Company issued to the holders of the Old Notes as the early participation payment. The remaining $0.7 million represents the write-off of the remaining debt issuance costs related to the Old Notes.
Revolving Credit Facility”).
On August 16, 2018, April 20, 2021, ION Geophysical Corporation and its material U.S. subsidiaries — GX Technology Corporation, ION Exploration Products (U.S.A)(U.S.A.) Inc. and I/O Marine Systems Inc. (the “Material U.S. Subsidiaries”) — along with GX Geoscience Corporation, S. de R.L. de C.V., a limited liability company (Sociedad de Responsibilidad Limitada de Capital Variable) organized under the laws of Mexico, and a subsidiary of the Company (the “Mexican Subsidiary”), (the Material U.S. Subsidiaries and the Mexican Subsidiary are collectively, the “Subsidiary Borrowers”, together with ION Geophysical Corporation are the “Borrowers”) — the financial institutions party thereto, as lenders, and PNC, Bank, National Association (“PNC”), as agent for the lenders, entered into that certain ThirdFourth Amendment and Joinder to Revolving Credit and Security Agreement (the “Third“Fourth Amendment”), amending the Revolving Credit and Security Agreement, dated as of August 22, 2014 (as(as previously amended by the First Amendment to Revolving Credit and Security Agreement, dated as of August 4, 2015, and the Second Amendment to Revolving Credit and Security Agreement, dated as of April 28, 2016 and the Third Amendment to Revolving Credit and Security Agreement, dated as of August 16, 2018, the “Credit Agreement”). The Credit Agreement, as amended by the First Amendment, the Second Amendment, the Third Amendment and the ThirdFourth Amendment is herein called the “Credit Facility”). The Credit Agreement, as amended by the Fourth Amendment, among other things, permitted the consummation of the Restructuring Transactions, including the issuance of the New Notes and certain cash payments to the Company's noteholders in connection with the Exchange Offer and the Rights Offering, and made certain other changes to the Credit Agreement’s definitions and other provisions, including with respect to LIBOR, where the successor LIBOR rate index will be the benchmark replacement determined by PNC. The Credit Facility is available to provide for the Borrowers’ general corporate needs, including working capital requirements, capital expenditures, surety deposits and acquisition financing.
The maximum interest rate in the Credit Facility is 3.00%3% per annum for domestic rate loans and 4.00%4% per annum for LIBOR rate loans with a minimum interest rate of 2.00%2% for domestic rate loans and 3.00%3% for LIBOR rate loans based on a leverage ratio for the preceding four-quarterfour-quarter period. The Credit Facility matures on August 16, 2023. The terms include a minimum excess borrowing availability threshold (excess borrowing availability less than $6.25 million for five consecutive days or $5.0 million on any given day), which (if the Borrowers have minimum excess borrowing availability below any such threshold) triggers the agent’s right to exercise dominion over cash and deposit accounts.
The maximum amount available under the Credit Facility is the lesser of $50.0 million or a monthly borrowing base. The borrowing base under the Credit Facility will increase or decrease monthly using a formula based on certain eligible receivables, eligible inventory and other amounts, including a percentage of the net orderly liquidation value of the Borrowers’ multi-client data library (not(not to exceed $28.5 million for the multi-client data library component). The borrowing base calculation includes the eligible billed receivables of the Mexican Subsidiary up to a maximum of $5.0 million. At September 30, 2020,2021, there was $22.5$19.4 million outstanding indebtedness under the Credit Facility which was presented as a current liability in the Condensed Consolidated Balance Sheets due to the lockbox requirement within the terms of the Credit Facility and thewith PNC. The undrawn remaining borrowing base capacity was $8.3$10.9 million.
The obligations of Borrowers under the Credit Facility are secured by a first-priorityfirst-priority security interest in 100% of the stock of the Subsidiary Borrowers and 65% of the equity interest in ION International Holdings L.P., and by substantially all other assets of the Borrowers. However, the first-priorityfirst-priority security interest in the other assets of the Mexican Subsidiary is capped to a maximum exposure of $5.0 million.
The Credit Facility contains covenants that, among other things, limit or prohibit the Borrowers, subject to certain exceptions and qualifications, from incurring additional indebtedness in excess of permitted indebtedness (including finance lease obligations), repurchasing equity, paying dividends or distributions, granting or incurring additional liens on the Borrowers’ properties, pledging shares of the Borrowers’ subsidiaries, entering into certain merger transactions, entering into transactions with the Company’s affiliates, making certain sales or other dispositions of the Borrowers’ assets, making certain investments, acquiring other businesses and entering into sale-leaseback transactions with respect to the Borrowers’ property. The Credit Facility contains customary event of default provisions (including a “change of control” event affecting ION Geophysical Corporation).
The Credit Facility requires that the Borrowers maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 as of the end of each fiscal quarter during the existence of a covenant testing trigger event. The fixed charge coverage ratio is defined as the ratio of (i) ION Geophysical Corporation’sION’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), minus unfunded capital expenditures made during the relevant period, minus distributions (including tax distributions) and dividends made during the relevant period, minus cash taxes paid during the relevant period, to (ii) certain debt payments made during the relevant period. A covenant testing trigger event occurs upon (a) the occurrence and continuance of an event of default under the Credit Facility or (b) by a two-steptwo-step process based on (i) a minimum excess borrowing availability threshold (excess borrowing availability less than $6.25 million for five consecutive business days or $5.0 million on any given business day), and (ii) the Borrowers’ unencumbered cash maintained in a PNC deposit account is less than the Borrowers’ then outstanding obligations.
At September 30, 2020,2021, the Company was in compliance with all of the covenants under the Credit Facility.
A summary of future principal obligations guaranteed byunder long-term debt and equipment capital lease obligations follows (in thousands):
Years Ending September 30, | Notes | Other Financing (1) | Total | |||||||||
2022 | $ | 7,097 | $ | 19,350 | $ | 26,447 | ||||||
2023 | 0 | 0 | 0 | |||||||||
2024 | 0 | 0 | 0 | |||||||||
2025 | 0 | 0 | 0 | |||||||||
Thereafter | 116,193 | 0 | 116,193 | |||||||||
Total | $ | 123,290 | $ | 19,350 | $ | 142,640 | ||||||
(1) While the Material U.S. Subsidiaries and the Mexican Subsidiary (each as defined above and herein below, with the reference to the Second Lien Notes, the “Guarantors”). Interest on the Second Lien Notes is payable semiannually in arrears on June 15 and December 15outstanding balance of each year during their term, except that the interest payment otherwise payable on June 15, 2021 will be payable on December 15, 2021.
(5) | Government Relief Funding |
Paycheck Protection Program
On or after December 15, 2019, the Company may, on one or more occasions, redeem all or a part of the Second Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Second Lien Notes redeemed during the twelve-month period beginning on December 15th of the years indicated below:
| Date | Percentage | |||||||
| 2019 | 105.50% | |||||||
| 2020 | 103.50% | |||||||
| 2021 | 100.00% | |||||||
The Company recognized the entireNote of $6.9 million was recognized as a deferred income liability during second quarter2020 and fully amortized to other income in the condensed consolidated income statements for the sixnine months ended JuneSeptember 30, 2020, as the related expenses it was intended to offset were incurred from April 2020 to June 2020. If, despite
Employee Retention Credit
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to the Company’s good-faith belief that given its circumstancesemployee retention tax credits previously made available under the Company satisfied all eligible requirements forCARES Act, including modifying and extending the PPP Loan, the Company is later determined to have not been in compliance with these requirements or it is otherwise determined that it was ineligible to receive the PPP Loan, the Company may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. Should the Company be audited or reviewed by federal or state regulatory authorities asEmployee Retention Credit ("ERC") through December 31, 2021. As a result of filing an application for forgivenessthe new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the PPP Loan or otherwise, such audit or review could resultqualified wages they pay to employees after December 31, 2020 through December 31, 2021. This resulted in a change inan ERC of $4.8 million for the Company’s estimatenine months ended September 30, 2021, $3.2 million of which has been received as of the amountthird quarter 2021 and the remaining $1.6 million is expected to be received during the fourth quarter 2021.The Company will continue to monitor the availability of forgiveness recorded in the condensed consolidated financial statements.ERC for the fourth quarter of 2021 which, if available, would be received during the first quarter of 2022.
(6) | Net Loss per Common Share |
Basic net loss per share is computed by dividing net loss attributable to ION by the weighted average number of common shares outstanding during the period. In computing diluted net lossincome per share, basic net lossincome per share is adjusted based on the assumption that dilutive restricted stock and restricted stock unit awards have vested and outstanding dilutive stock options have been exercised and the aggregate proceeds were used to reacquire common stock using the average price of such common stock for the period. The total number of shares issuable pursuant to outstanding stock options at September 30, 2020 2021 and 20192020 of 569,673405,070 and 700,759,569,673, respectively, were excluded as their inclusion would have an anti-dilutive effect. The total number of shares issuable pursuant to restricted stock unit awards outstanding at September 30, 2020 2021 and 20192020 of 762,2771,134,617 and 926,917,762,277, respectively, were excluded as their inclusion would have an anti-dilutive effect.
(7) | Income Taxes |
The Company maintains a valuation allowance for substantially all of its deferred tax assets. A valuation allowance is established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. Based on all available positive and negative evidence, the Company believed that it is more likely than not that the Company's deferred tax assets will not be realized. A significant item of objectively verifiable negative evidence is the substantial doubt that the Company will continue as a going concern within the next twelve months. The Company will continue to record a valuation allowance for the substantial majority of its deferred tax assets until there is sufficient evidence to warrant reversal.
The tax provision for the nine months ended September 30, 20202021 has been calculated usingbased on actual tax expense incurred during the period. Given the current uncertainty in expected income generated in various foreign jurisdictions, where tax rates can vary greatly, the Company’s overall estimated annual effectiveactual tax rate based on projected 2020 full year results.is the best estimate of the year-to-date tax expense. The Company’s effective tax rates for the three and nine months ended September 30, 2020 2021 and 20192020 were negatively impacted by the change in valuation allowance related to U.S. operating losses for which the Company cannot currently recognize a tax benefit. The Company’s effective tax rates for the nine months ended September 30, 2020 were also negatively impacted by the valuation allowance related to certain foreign losses. Due to the impact of the valuation allowances on tax expense, the Company’s effective tax rates are not meaningful for all periods presented. The Company’s income tax expense for the nine months ended September 30, 2021 and 2020 of $5.6 million and $10.0 million primarily relates to results from the Company’s non-U.S. businesses, including $2.2 million of valuation allowance. The valuation allowance was established as a result of a change infor the expectation of future revenues after entering into the settlement agreement with WesternGeco described in Note 9 “
In response to the global pandemic related to COVID-19,COVID-19, the President of the United States signed into law the CARES Act on March 27, 2020. The CARES Act provides numerous relief provisions for corporate tax payers,taxpayers, including modificationmodifications of the utilization limitations on net operating losses, favorable expansions of the deduction for business interest expense under Internal Revenue Code Section 163(j)163(j), and the ability to accelerate timing of refundable AMT credits. For the nine months ended September 30, 2021 and 2020, there were no material tax impacts to ourthe Company's condensed consolidated financial statements as it relates to COVID-19COVID-19 measures. The Company received an AMT credit refund of $0.8 million for the nine months ended September 30, 2020. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue ServiceServices ("IRS") and others.
At September 30, 2020,2021, the Company has approximately $0.4 million of unrecognized tax benefits and does not expect to recognize significant increases in unrecognized tax benefits during the next twelve-monthtwelve-month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.
At September 30, 2020,2021, the Company’s U.S. federal tax returns for 20162017 and subsequent years remain subject to examination by tax authorities. In the Company’s foreign tax jurisdictions, tax returns for 20142016 and subsequent years generally remain open to examination.
(8) | Litigation |
In July 2018, the Company prevailed in an arbitration that it initiated against the Indian Directorate General of Hydrocarbons (“DGH”) relating to the Company’s ability to continue to license data under the Company’s IndiaSPAN program. The DGH filed a lawsuit in court in India to vacate the arbitration award; in connection with that lawsuit, the Company was ordered to escrow approximately $4.5 million in sales proceeds that it had received in respect of sales from the IndiaSPAN program, pending the outcome of the DGH’s challenge to the arbitration award. The Company challenged the escrow order, but on December 9, 2019, the Supreme Court of India ordered the Company to comply with it. The Company prepared a petition to file with the court to request that a March 2020 deadline to deposit approximately $4.5$4.5 million in escrow in early 2020 be extended due to the changes to the Company’s business, and to the markets, that have been spurred by the COVID-19COVID-19 pandemic. The Company was unable to file the application because the courts in India were closed due to the pandemic (other than for emergencies), and were not accepting filings at that time. The Company served a copy of its draft petition on the DGH’s counsel on March 26, 2020 and intends to file itaddress the escrow issue in advance of the next hearing, which has been repeatedly delayed due to the COVID-19COVID-19 pandemic. The Company prevailed on the merits in the arbitration and expects to have that award upheld in Indian court, which would result in release of the Company’s portion of any money escrowed by the escrowed money.Company. The DGH’s request to vacate the arbitration award is currently scheduled to be heard by the court in India on January 18, December 1,2021.The Company has not escrowed the money as of September 30, 2020.
The Company has been named in various other lawsuits or threatened actions that are incidental to its ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. The Company currently believes that the ultimate resolution of these matters will not have a material adverse effect on its financial condition or results of operations.
(9) | Details of Selected Balance Sheet Accounts |
Accounts Receivable
A summary of Selected Balance Sheet Accounts
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
Accounts receivable, principally trade | $ | 17,010 | $ | 10,458 | ||||
Less: allowance for expected credit losses | (1,120 | ) | (2,413 | ) | ||||
Accounts receivable, net | $ | 15,890 | $ | 8,045 | ||||
Inventories
| A summary of inventories follows (in thousands): | September 30, 2020 | December 31, 2019 | |||||||||
| Raw materials and subassemblies | $ | 18,622 | $ | 18,509 | |||||||
| Work-in-process | 1,372 | 2,079 | |||||||||
| Finished goods | 4,652 | 4,932 | |||||||||
| Less: reserve for excess and obsolete inventories | (12,773) | (13,333) | |||||||||
| Inventories, net | $ | 11,873 | $ | 12,187 | |||||||
A summary of inventories follows (in thousands):
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
Raw materials and purchased subassemblies | $ | 17,636 | $ | 18,638 | ||||
Work-in-process | 1,762 | 1,218 | ||||||
Finished goods | 4,396 | 4,417 | ||||||
Less: reserve for excess and obsolete inventories | (13,121 | ) | (13,006 | ) | ||||
Inventories, net | $ | 10,673 | $ | 11,267 | ||||
The Company's inventories relate to its Operations Optimization segment. No significant provision for excess and obsolete inventories was recognized during the nine months ended September 30, 2021 and 2020.
Property, Plant and Equipment
| A summary of property, plant and equipment follows (in thousands): | September 30, 2020 | December 31, 2019 | |||||||||
| Buildings | $ | 15,739 | $ | 15,486 | |||||||
| Machinery and equipment | 133,900 | 133,048 | |||||||||
| Seismic rental equipment | 1,851 | 1,669 | |||||||||
| Furniture and fixtures | 3,164 | 3,347 | |||||||||
Other (a) | 30,269 | 31,142 | |||||||||
| Total | 184,923 | 184,692 | |||||||||
| Less: accumulated depreciation | (137,143) | (134,951) | |||||||||
| Less: impairment of long-lived assets | (36,553) | (36,553) | |||||||||
| Property, plant and equipment, net | $ | 11,227 | $ | 13,188 | |||||||
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
Buildings | $ | 15,642 | $ | 15,675 | ||||
Machinery and equipment | 122,056 | 120,949 | ||||||
Seismic rental equipment | 2,169 | 2,003 | ||||||
Furniture and fixtures | 3,169 | 3,172 | ||||||
Other (a) | 31,515 | 30,287 | ||||||
Total | 174,551 | 172,086 | ||||||
Less: accumulated depreciation | (128,931 | ) | (126,022 | ) | ||||
Less: impairment of long-lived assets | (36,553 | ) | (36,553 | ) | ||||
Property, plant, equipment and seismic rental equipment, net | $ | 9,067 | $ | 9,511 | ||||
(a)
Consists primarily of cable-based ocean bottom acquisition technologies that were fully impaired.Total depreciation expense, including amortization of assets recorded under equipment finance leases, for both the nine months ended September 30, 2020 2021 and 20192020 was $2.8$3.3 million and $2.4$2.9 million, respectively. NaNNo impairment charge was recognized during the nine months ended September 30, 2020 2021 and 2019.2020.
Multi-client Data Library
| The change in multi-client data library are as follows (in thousands): | September 30, 2020 | December 31, 2019 | |||||||||
| Gross costs of multi-client data creation | $ | 1,018,509 | $ | 1,007,762 | |||||||
| Less: accumulated amortization | (833,075) | (816,401) | |||||||||
| Less: impairments to multi-client data library | (132,145) | (130,977) | |||||||||
| Multi-client data library, net | $ | 53,289 | $ | 60,384 | |||||||
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
Gross costs of multi-client data creation | $ | 1,049,327 | $ | 1,021,758 | ||||
Less: accumulated amortization | (860,670 | ) | (838,700 | ) | ||||
Less: impairments to multi-client data library | (132,144 | ) | (132,144 | ) | ||||
Multi-client data library, net | $ | 56,513 | $ | 50,914 | ||||
Total amortization expense for the nine months ended September 30, 2020 2021 and 20192020 was $16.7$22.0 million and $29.8$16.7 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company recognized an impairment to multi-client data library of zero and $1.2 million. NaN impairment to multi-client data library was recognized duringmillion, respectively, for programs with capitalized costs exceeding the nine months ended September 30, 2019.
| Goodwill | E&P Technology & Services | Optimization Software & Services | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Balance at January 1, 2019 | $ | 2,943 | $ | 19,972 | $ | 22,915 | |||||||||||||||||
| Impact of foreign currency translation adjustments | 0 | 670 | 670 | ||||||||||||||||||||
| Balance at December 31, 2019 | 2,943 | 20,642 | 23,585 | ||||||||||||||||||||
| Impairment of goodwill | 0 | (4,150) | (4,150) | ||||||||||||||||||||
| Impact of foreign currency translation adjustments | 0 | (751) | (751) | ||||||||||||||||||||
| Balance at September 30, 2020 | $ | 2,943 | $ | 15,741 | $ | 18,684 | |||||||||||||||||
Goodwill
E&P Technology & Services | Optimization Software & Services | Total | ||||||||||
Balance at January 1, 2020 | $ | 2,943 | $ | 20,642 | $ | 23,585 | ||||||
Impairment of goodwill | 0 | (4,150 | ) | (4,150 | ) | |||||||
Impact of foreign currency translation adjustments | 0 | 130 | 130 | |||||||||
Balance at December 31, 2020 | 2,943 | 16,622 | 19,565 | |||||||||
Impact of foreign currency translation adjustments | 0 | (116 | ) | (116 | ) | |||||||
Balance at September 30, 2021 | $ | 2,943 | $ | 16,506 | $ | 19,449 | ||||||
The Company, following the qualitative consideration, assessed the relevant events and circumstances in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. During the first quarter of 2020, markets for oil and gas, as well as other commodities and equities, experienced significant volatility and price declines amid concerns over the economic effects of the COVID-19COVID-19 pandemic. As a result, the Company’s stock price experienced a significant decline. Based on these facts, the Company performed a goodwill impairment test at March 31,2020 to determine if it was more likely than not that the fair value of certain reporting units was less than their carrying value.
The Company, following the quantitative consideration, compared the fair value of each reporting unit against its carrying value. If the carrying value of the reporting unit exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. The fair value of each reporting unit at March 31, 2020 was determined using a discounted cash flow model. The Company utilized a discount rate of 19% for both reporting units. The Company used reasonable assumptions based on historical data supplemented by anticipated market conditions and estimated growth rates. However, given the uncertainty in determining the assumptions underlying a discounted cash flow analysis, actual results may differ which could result in additional impairment charges in the future.
As a result of this assessment, the Company recorded an impairment charge of $4.2 million for the nine months ended September 30, 2020 related to its Optimization Software & Services reporting unit, which is included within the Operations Optimization segment. No impairment charge was recognized for the Optimization Software & Services reporting unit for the nine months ended September 30, 2021. No impairment charge was recognized for the E&P Technology Services reporting unit for the nine months ended September 30, 2020.2021 and 2020.
Accrued Expenses
A summary of accrued expenses follows (in thousands):
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
Compensation, including compensation-related taxes and commissions | $ | 8,221 | $ | 8,923 | ||||
Accrued multi-client data library acquisition costs | 9,288 | 1,622 | ||||||
Income tax payable | 6,754 | 3,512 | ||||||
Other | 6,139 | 2,306 | ||||||
Total | $ | 30,402 | $ | 16,363 | ||||
(10) | Stockholders' Equity and Stock-based Compensation |
Registered Direct Offering
On February 16, 2021, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) which provided for the sale and issuance by the Company of an aggregate of 2,990,001 shares (the “Shares”) of the Company’s common stock, $0.01 par value per share (the “Common Stock”) at an offering price of $3.50 per share for gross proceeds of approximately $10.5 million before deducting the placement agent’s fees and related offering expenses. The Securities Purchase Agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company, other obligations of the parties and termination provisions. The Company used the net proceeds for working capital and general corporate purposes.
The Registered Direct Offering was made pursuant to a Registration Statement (No.333-234606) on Form S-3, which was filed by the Company with the SEC on November 8, 2019, as amended on December 19, 2019, and declared effective on December 23, 2019.
Stock-Based Compensation Expense
The total number of shares issued or reserved for future issuance under outstanding stock options at September 30, 2020 2021 and 20192020 was 569,673405,070 and 700,759,569,673, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at September 30, 2020 2021 and 20192020 was 762,2771,134,617 and 926,917,762,277, respectively. The total number of stock appreciation rights (“SARs”) awards outstanding at September 30, 2020 2021 and 20192020 was 811,415659,257 and 963,013,811,415, respectively. The following table presents a summary of the activity related to stock options, restricted stock, restricted stock unit awards and SARs awards for the nine months ended September 30, 2020:
| Stock Options | Restricted Stock and Unit Awards | Stock Appreciation Rights | |||||||||||||||
| Number of Shares | |||||||||||||||||
| Outstanding at December 31, 2019 | 689,209 | 908,754 | 954,679 | ||||||||||||||
| Granted | 0 | 67,500 | 0 | ||||||||||||||
| Stock options and SARs exercised/restricted stock and unit awards vested | (5,000) | (128,183) | 0 | ||||||||||||||
| Cancelled/forfeited | (114,536) | (85,794) | (143,264) | ||||||||||||||
| Outstanding at September 30, 2020 | 569,673 | 762,277 | 811,415 | ||||||||||||||
Restricted Stock | Stock Appreciation | |||||||||||
Stock Options | and Units Awards | Rights | ||||||||||
Outstanding at January 1, 2021 | 533,320 | 732,707 | 754,582 | |||||||||
Increase in shares authorized | — | 23,533 | — | |||||||||
Granted | 0 | 990,422 | 0 | |||||||||
Stock options and SARs exercised/restricted stock and unit awards vested | 0 | (545,101 | ) | (5,000 | ) | |||||||
Cancelled/forfeited | (128,250 | ) | (66,944 | ) | (90,325 | ) | ||||||
Outstanding at September 30, 2021 | 405,070 | 1,134,617 | 659,257 | |||||||||
Stock-based compensation expense recognized for the nine months ended September 30, 2020 2021 and 2019,2020, totaled $1.6$1.3 million and $3.7$1.6 million, respectively. SARs expense (credit) expense recognized for the nine months ended September 30, 2020 2021 and 2019,2020, totaledzero and $(1.0) million, and $2.7 million, respectively.
SARs awards are considered liability awards as they are ultimately settled in cash. As such, these amounts are incrementally accrued in the liability section of the condensed consolidated balance sheets over the service period. All of the Company’s currently outstanding SARs awards achieve vesting through both a market condition and a service condition. SARs awards that are fully vested under both conditions are measured at intrinsic value (i.e. the difference between the market price on the last day of the quarter and the strike price of the awards times the number of awards vested and outstanding) and marked to market each quarter until settled. SARs awards that are not fully vested are incrementally accrued over the service period and adjusted to their fair value each quarter until settled based on a valuation model. TheAs of September 30, 2021, all of the outstanding SARs awards are fully vested as a result of the Restructuring Transactions (as further discussed in Footnote 1, "Summary of Significant Account Policies - Old Notes Restructuring") and are measured at intrinsic value. Previously, the Company has calculated the fair value of each award at September 30, 2020 and December 31, 2019 using a Monte Carlo simulation model. The following assumptions were used:
Risk-free interest rates | 0.7 | % | |||||||||
Expected lives (in years) | 5.31 | ||||||||||
Expected dividend yield | 0 | % | |||||||||
Expected volatility | 94.7 | % | |||||||||
At-The-Market Equity Offering Program
On April 26, 2021, the Company filed a prospectus supplement under which it may sell up to $10.0 million of its common stock through an "at-the-market" equity offering program (the "ATM Program"). The Company is currently subject to baby-shelf rule limitation, which as of September 30, 2021, only $1.6 million of the ATM Program would have been available. The Company intends to use the net proceeds from sales under the ATM Program for working capital and general corporate purposes. The timing of any sales will depend on a variety of factors to be determined by the Company.
(11) | Lease Obligations |
The Company leases offices, processing centers, warehouse spaces and, to a lesser extent, certain equipment. These leases have remaining terms of 1 year to 10 years, some of which have options to extend for up to 10 years and/or options to terminate within 1 year. The options to renew are not recognized as part of the Company’s right-of-use assets and operating lease liabilities as the Company is not reasonably certain that it will exercise these options.
In January 2020, the Company amended its existing Houston, Texas headquarters lease agreement by extending the lease term from September 30, 2023 to June 30, 2029 and surrendering back to the landlord floors for which the Company had previously vacated. In July 2020, the Company re-negotiated the above-mentioned lease agreement to modify the rent abatement period from October 2023 through February 2024 to July 2020 through March 2021.
In May 2020, the Company amended its Houston data center lease agreement to reflect changes in the monthly base rent throughout the term of the lease and extend the lease term three months to December 2025. The execution of this amendment and the amendment to the Houston, Texas headquarters lease resulted in the Company obtaining rent relief of approximately $4.0 million.
Total operating lease expense, including short-term lease expense was $8.1$6.9 million and $8.9$8.1 million for the nine months ended September 30, 2020 2021 and 2019,2020, respectively.
Equipment Finance Leases
The Company has entered into equipment finance leases that are due in installments for the purpose of financing the purchase of computer equipment. As of September 30, 2021, there were 0 outstanding balance related to the equipment through August 2021.finance leases. Interest accrues under these leases was at a rate of 8.7% per annum, and the leases arewere collateralized by liens on the computer equipment. The assets are amortized over the lesser of their related lease terms or their estimated usefulproductive lives and such charges are reflected within depreciation expense.
(12) | Supplemental Cash Flow Information and Non-Cash Activity |
Supplemental disclosure of cash flow information are as follows (in thousands):
| Nine Months Ended September 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Cash paid during the period for: | ||||||||||||||
| Interest | $ | 6,628 | $ | 6,085 | ||||||||||
| Income taxes | 6,759 | 7,607 | ||||||||||||
| Non-cash items from investing and financing activities: | ||||||||||||||
| Investment in multi-client data library in accounts payable and accrued expenses | 0 | 4,741 | ||||||||||||
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Cash paid during the period for: | ||||||||
Interest | $ | 6,186 | $ | 6,628 | ||||
Income taxes | 2,417 | 6,759 | ||||||
Non-cash items from investing and financing activities: | ||||||||
Purchase of fixed assets financed through trade payables | 1,242 | 0 | ||||||
Investment in multi-client data library financed through trade payables and accruals | 7,666 | 0 | ||||||
Exchange of Old Notes for ION common stock | 11,755 | 0 | ||||||
Restructuring transaction costs in accounts payable | 414 | 0 | ||||||
The following table is a reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets:
| September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| Cash and cash equivalents | $ | 51,056 | $ | 27,894 | |||||||
| Restricted cash included in prepaid expenses and other assets | 2,326 | (a) | 303 | ||||||||
| Total cash, cash equivalents, and restricted cash shown in statements of cash flows | $ | 53,382 | $ | 28,197 | |||||||
September 30, | ||||||||
2021 | 2020 | |||||||
(In thousands) | ||||||||
Cash and cash equivalents | $ | 24,143 | $ | 51,056 | ||||
Restricted cash included in prepaid expenses and other current assets | 2,300 | 2,326 | ||||||
Total cash, cash equivalents, and restricted cash shown in consolidated statements of cash flows | $ | 26,443 | $ | 53,382 | ||||
(13) | Fair Value of Financial Instruments |
Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-levelthree-level hierarchy, under which the fair value hierarchy prioritizes the inputs used to measure fair value. The three-tieredthree-tiered hierarchy is summarized as follows:
Level 1—Quoted prices in active markets for identical assets and liabilities.
Level 2—Other significant observable inputs including quoted prices or other market data for similar assets and liabilities in active markets or quoted prices for identical or similar assets and liabilities in less active markets.
Level 3—Significant unobservable inputs that require significant judgment for which there is little or no market data.
Due to their highly liquid nature, the amount of the Company’s other financial instruments, including cash and cash equivalents, restricted cash, accounts and unbilled receivables, accounts payable and accrued multi-client data library royalties, represent their approximate fair value.
The carrying amounts of the Company’s Second LienOld Notes at September 30, 2020 2021 and December 31, 20192020 were $7.1 million and $120.6 million, respectively, compared to its fair values of $7.2 million and $87.9 million at September 30, 2021 and $113.8December 31, 2020, respectively. The carrying amounts of the Company’s New Notes at September 30, 2021 were $116.2 compared to its fair values of $93.0 million at September 30, 2020 and December 31, 2019, respectively.2021. Market conditions could cause an instrument to be reclassified from Level 1 to Level 2, or Level 2 to Level 3. The fair value of the Second LienOld Notes was reclassified from Level 1 to Level 2 during the nine months ended September 30, 2020 resulting from less active market trading. The fair value of the Second Lienand New Notes was calculated using Level 2 inputs using significant observable data points for similar liabilities where estimated values are determined from observable transactions.
The carrying amount of any borrowings outstanding under the Credit Facility approximate fair value, as the interest rate is variable based on LIBOR and reflective of market rates.
Fair value measurements are applied with respect to non-financial assets and liabilities on a non-recurring basis (e.g. when possible indicators of impairment exist,exist), which would consist primarilyof measurements of goodwill, multi-client data library and property, plant and equipment. The fair value of these assets is determined based on valuation techniques using the best information available and may include comparable market comparablesdata and discounted cash flow projections.
| September 30, 2020 | |||||||||||||||||||||||||||||
| Balance Sheet | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 32,106 | $ | 31 | $ | 18,919 | $ | 0 | $ | 51,056 | |||||||||||||||||||
| Accounts receivable, net | 0 | 4,985 | 3,303 | 0 | 8,288 | ||||||||||||||||||||||||
| Unbilled receivables | 0 | 7,186 | 2,443 | 0 | 9,629 | ||||||||||||||||||||||||
| Inventories, net | 0 | 7,182 | 4,691 | 0 | 11,873 | ||||||||||||||||||||||||
| Prepaid expenses and other current assets | 3,858 | 1,006 | 997 | 0 | 5,861 | ||||||||||||||||||||||||
| Total current assets | 35,964 | 20,390 | 30,353 | 0 | 86,707 | ||||||||||||||||||||||||
| Deferred income tax asset | 0 | 7,982 | 110 | 0 | 8,092 | ||||||||||||||||||||||||
| Property, plant and equipment, net | 1,439 | 6,550 | 3,238 | 0 | 11,227 | ||||||||||||||||||||||||
| Multi-client data library, net | 0 | 44,957 | 8,332 | 0 | 53,289 | ||||||||||||||||||||||||
| Investment in subsidiaries | 847,775 | 280,647 | 0 | (1,128,422) | 0 | ||||||||||||||||||||||||
| Goodwill | 0 | 0 | 18,684 | 0 | 18,684 | ||||||||||||||||||||||||
| Intercompany receivables | 0 | 279,010 | 118,944 | (397,954) | 0 | ||||||||||||||||||||||||
| Right-of-use assets | 20,656 | 12,770 | 4,304 | 0 | 37,730 | ||||||||||||||||||||||||
| Other assets | 1,300 | 786 | 50 | 0 | 2,136 | ||||||||||||||||||||||||
| Total assets | $ | 907,134 | $ | 653,092 | $ | 184,015 | $ | (1,526,376) | $ | 217,865 | |||||||||||||||||||
| LIABILITIES AND (DEFICIT) EQUITY | |||||||||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||||||||
| Current maturities of long-term debt | $ | 22,500 | $ | 1,027 | $ | 0 | $ | 0 | $ | 23,527 | |||||||||||||||||||
| Accounts payable | 1,948 | 31,401 | 1,758 | 0 | 35,107 | ||||||||||||||||||||||||
| Accrued expenses | 14,917 | 7,544 | 6,736 | 0 | 29,197 | ||||||||||||||||||||||||
| Accrued multi-client data library royalties | 0 | 20,319 | 215 | 0 | 20,534 | ||||||||||||||||||||||||
| Deferred revenue | 0 | 1,143 | 1,013 | 0 | 2,156 | ||||||||||||||||||||||||
| Current maturities of operating lease liabilities | 1,938 | 3,630 | 1,159 | 0 | 6,727 | ||||||||||||||||||||||||
| Total current liabilities | 41,303 | 65,064 | 10,881 | 0 | 117,248 | ||||||||||||||||||||||||
| Long-term debt, net of current maturities | 119,349 | 0 | 0 | 0 | 119,349 | ||||||||||||||||||||||||
| Operating lease liabilities, net of current maturities | 22,227 | 14,359 | 3,794 | 0 | 40,380 | ||||||||||||||||||||||||
| Intercompany payables | 784,937 | 0 | 0 | (784,937) | 0 | ||||||||||||||||||||||||
| Other long-term liabilities | 377 | 35 | 0 | 0 | 412 | ||||||||||||||||||||||||
| Total liabilities | 968,193 | 79,458 | 14,675 | (784,937) | 277,389 | ||||||||||||||||||||||||
| (Deficit) Equity: | |||||||||||||||||||||||||||||
| Common stock | 144 | 290,460 | 47,776 | (338,236) | 144 | ||||||||||||||||||||||||
| Additional paid-in capital | 958,189 | 180,700 | 203,909 | (384,609) | 958,189 | ||||||||||||||||||||||||
| Accumulated earnings (deficit) | (998,380) | 398,464 | 26,645 | (425,109) | (998,380) | ||||||||||||||||||||||||
| Accumulated other comprehensive income (loss) | (21,012) | 4,238 | (23,770) | 19,532 | (21,012) | ||||||||||||||||||||||||
| Due from ION Geophysical Corporation | 0 | (300,228) | (86,755) | 386,983 | 0 | ||||||||||||||||||||||||
| Total stockholders’ (deficit) equity | (61,059) | 573,634 | 167,805 | (741,439) | (61,059) | ||||||||||||||||||||||||
| Noncontrolling interest | 0 | 0 | 1,535 | 0 | 1,535 | ||||||||||||||||||||||||
| Total (deficit) equity | (61,059) | 573,634 | 169,340 | (741,439) | (59,524) | ||||||||||||||||||||||||
| Total liabilities and (deficit) equity | $ | 907,134 | $ | 653,092 | $ | 184,015 | $ | (1,526,376) | $ | 217,865 | |||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Balance Sheet | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 8,426 | $ | 26 | $ | 24,613 | $ | 0 | $ | 33,065 | |||||||||||||||||||
| Accounts receivable, net | 8 | 19,493 | 10,047 | 0 | 29,548 | ||||||||||||||||||||||||
| Unbilled receivables | 0 | 7,314 | 4,501 | 0 | 11,815 | ||||||||||||||||||||||||
| Inventories, net | 0 | 6,902 | 5,285 | 0 | 12,187 | ||||||||||||||||||||||||
| Prepaid expenses and other current assets | 3,292 | 1,513 | 1,207 | 0 | 6,012 | ||||||||||||||||||||||||
| Total current assets | 11,726 | 35,248 | 45,653 | 0 | 92,627 | ||||||||||||||||||||||||
| Deferred income tax asset | 402 | 8,417 | (85) | 0 | 8,734 | ||||||||||||||||||||||||
| Property, plant and equipment, net | 786 | 8,112 | 4,290 | 0 | 13,188 | ||||||||||||||||||||||||
| Multi-client data library, net | 0 | 54,479 | 5,905 | 0 | 60,384 | ||||||||||||||||||||||||
| Investment in subsidiaries | 841,522 | 279,327 | 0 | (1,120,849) | 0 | ||||||||||||||||||||||||
| Goodwill | 0 | 0 | 23,585 | 0 | 23,585 | ||||||||||||||||||||||||
| Intercompany receivables | 0 | 287,692 | 99,884 | (387,576) | 0 | ||||||||||||||||||||||||
| Right-of-use assets | 11,934 | 15,802 | 4,810 | 0 | 32,546 | ||||||||||||||||||||||||
| Other assets | 1,171 | 905 | 54 | 0 | 2,130 | ||||||||||||||||||||||||
| Total assets | $ | 867,541 | $ | 689,982 | $ | 184,096 | $ | (1,508,425) | $ | 233,194 | |||||||||||||||||||
| LIABILITIES AND (DEFICIT) EQUITY | |||||||||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||||||||
| Current maturities of long-term debt | $ | 972 | $ | 1,135 | $ | 0 | $ | 0 | $ | 2,107 | |||||||||||||||||||
| Accounts payable | 2,259 | 44,641 | 2,416 | 0 | 49,316 | ||||||||||||||||||||||||
| Accrued expenses | 9,933 | 9,982 | 10,413 | 0 | 30,328 | ||||||||||||||||||||||||
| Accrued multi-client data library royalties | 0 | 18,616 | 215 | 0 | 18,831 | ||||||||||||||||||||||||
| Deferred revenue | 0 | 3,465 | 1,086 | 0 | 4,551 | ||||||||||||||||||||||||
| Current maturities of operating lease liabilities | 4,429 | 5,469 | 1,157 | 0 | 11,055 | ||||||||||||||||||||||||
| Total current liabilities | 17,593 | 83,308 | 15,287 | 0 | 116,188 | ||||||||||||||||||||||||
| Long-term debt, net of current maturities | 118,618 | 734 | 0 | 0 | 119,352 | ||||||||||||||||||||||||
| Operating lease liabilities, net of current maturities | 11,208 | 15,346 | 4,279 | 0 | 30,833 | ||||||||||||||||||||||||
| Intercompany payables | 755,524 | 0 | 0 | (755,524) | 0 | ||||||||||||||||||||||||
| Other long-term liabilities | 1,418 | 35 | 0 | 0 | 1,453 | ||||||||||||||||||||||||
| Total liabilities | 904,361 | 99,423 | 19,566 | (755,524) | 267,826 | ||||||||||||||||||||||||
| (Deficit) Equity: | |||||||||||||||||||||||||||||
| Common stock | 142 | 290,460 | 47,776 | (338,236) | 142 | ||||||||||||||||||||||||
| Additional paid-in capital | 956,647 | 180,700 | 203,909 | (384,609) | 956,647 | ||||||||||||||||||||||||
| Accumulated earnings (deficit) | (974,291) | 396,793 | 18,837 | (415,630) | (974,291) | ||||||||||||||||||||||||
| Accumulated other comprehensive income (loss) | (19,318) | 4,281 | (21,907) | 17,626 | (19,318) | ||||||||||||||||||||||||
| Due from ION Geophysical Corporation | 0 | (281,675) | (86,273) | 367,948 | 0 | ||||||||||||||||||||||||
| Total stockholders’ (deficit) equity | (36,820) | 590,559 | 162,342 | (752,901) | (36,820) | ||||||||||||||||||||||||
| Noncontrolling interest | 0 | 0 | 2,188 | 0 | 2,188 | ||||||||||||||||||||||||
| Total (deficit) equity | (36,820) | 590,559 | 164,530 | (752,901) | (34,632) | ||||||||||||||||||||||||
| Total liabilities and (deficit) equity | $ | 867,541 | $ | 689,982 | $ | 184,096 | $ | (1,508,425) | $ | 233,194 | |||||||||||||||||||
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Income Statement | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Net revenues | $ | 0 | $ | 9,799 | $ | 6,435 | $ | 0 | $ | 16,234 | |||||||||||||||||||
| Cost of sales | 0 | 11,326 | 3,619 | 0 | 14,945 | ||||||||||||||||||||||||
| Gross profit (loss) | 0 | (1,527) | 2,816 | 0 | 1,289 | ||||||||||||||||||||||||
| Total operating expenses | 6,335 | 4,270 | 1,848 | 0 | 12,453 | ||||||||||||||||||||||||
| Income (loss) from operations | (6,335) | (5,797) | 968 | 0 | (11,164) | ||||||||||||||||||||||||
| Interest expense, net | (3,368) | (322) | 21 | 0 | (3,669) | ||||||||||||||||||||||||
| Intercompany interest, net | (247) | (1,425) | 1,672 | 0 | 0 | ||||||||||||||||||||||||
| Equity in earnings (losses) of investments | (6,081) | 1,722 | 0 | 4,359 | 0 | ||||||||||||||||||||||||
| Other expense, net | (4) | (282) | (239) | 0 | (525) | ||||||||||||||||||||||||
| Net income (loss) before income taxes | (16,035) | (6,104) | 2,422 | 4,359 | (15,358) | ||||||||||||||||||||||||
| Income tax expense | 572 | 185 | 299 | 0 | 1,056 | ||||||||||||||||||||||||
| Net income (loss) | (16,607) | (6,289) | 2,123 | 4,359 | (16,414) | ||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 0 | 0 | (193) | 0 | (193) | ||||||||||||||||||||||||
| Net income (loss) attributable to ION | $ | (16,607) | $ | (6,289) | $ | 1,930 | $ | 4,359 | $ | (16,607) | |||||||||||||||||||
| Comprehensive net income (loss) | $ | (15,786) | $ | (6,289) | $ | 2,746 | $ | 3,687 | $ | (15,642) | |||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | 0 | 0 | (144) | 0 | (144) | ||||||||||||||||||||||||
| Comprehensive net income (loss) attributable to ION | $ | (15,786) | $ | (6,289) | $ | 2,602 | $ | 3,687 | $ | (15,786) | |||||||||||||||||||
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Income Statement | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Net revenues | $ | 0 | $ | 21,474 | $ | 31,765 | $ | 0 | $ | 53,239 | |||||||||||||||||||
| Cost of sales | 0 | 20,165 | 7,786 | 0 | 27,951 | ||||||||||||||||||||||||
| Gross profit | 0 | 1,309 | 23,979 | 0 | 25,288 | ||||||||||||||||||||||||
| Total operating expenses | 9,514 | 7,976 | 3,940 | 0 | 21,430 | ||||||||||||||||||||||||
| Income (loss) from operations | (9,514) | (6,667) | 20,039 | 0 | 3,858 | ||||||||||||||||||||||||
| Interest expense, net | (3,197) | (49) | 91 | 0 | (3,155) | ||||||||||||||||||||||||
| Intercompany interest, net | 65 | (2,077) | 2,012 | 0 | 0 | ||||||||||||||||||||||||
| Equity in earnings of investments | 8,988 | 18,398 | 0 | (27,386) | 0 | ||||||||||||||||||||||||
| Other income (expense), net | 16 | (55) | (203) | 0 | (242) | ||||||||||||||||||||||||
| Net income (loss) before income taxes | (3,642) | 9,550 | 21,939 | (27,386) | 461 | ||||||||||||||||||||||||
| Income tax expense (benefit) | 81 | (403) | 4,112 | 0 | 3,790 | ||||||||||||||||||||||||
| Net income (loss) | (3,723) | 9,953 | 17,827 | (27,386) | (3,329) | ||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 0 | 0 | (394) | 0 | (394) | ||||||||||||||||||||||||
| Net income (loss) attributable to ION | $ | (3,723) | $ | 9,953 | $ | 17,433 | $ | (27,386) | $ | (3,723) | |||||||||||||||||||
| Comprehensive net income (loss) | $ | (4,751) | $ | 9,953 | $ | 16,403 | $ | (25,962) | $ | (4,357) | |||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | 0 | 0 | (394) | 0 | (394) | ||||||||||||||||||||||||
| Comprehensive net income (loss) attributable to ION | $ | (4,751) | $ | 9,953 | $ | 16,009 | $ | (25,962) | $ | (4,751) | |||||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Income Statement | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Net revenues | $ | 0 | $ | 61,969 | $ | 33,410 | $ | 0 | $ | 95,379 | |||||||||||||||||||
| Cost of sales | 0 | 46,357 | 13,638 | 0 | 59,995 | ||||||||||||||||||||||||
| Impairment of multi-client data library | 0 | 1,167 | 0 | 0 | 1,167 | ||||||||||||||||||||||||
| Gross profit | 0 | 14,445 | 19,772 | 0 | 34,217 | ||||||||||||||||||||||||
| Total operating expenses | 19,787 | 13,974 | 6,616 | 0 | 40,377 | ||||||||||||||||||||||||
| Impairment of goodwill | 0 | 0 | 4,150 | 0 | 4,150 | ||||||||||||||||||||||||
| Income (loss) from operations | (19,787) | 471 | 9,006 | 0 | (10,310) | ||||||||||||||||||||||||
| Interest expense, net | (9,923) | (484) | 103 | 0 | (10,304) | ||||||||||||||||||||||||
| Intercompany interest, net | (705) | (4,884) | 5,589 | 0 | 0 | ||||||||||||||||||||||||
| Equity in earnings (losses) of investments | 1,865 | 7,614 | 0 | (9,479) | 0 | ||||||||||||||||||||||||
| Other expense, net | 8,139 | (276) | (1,188) | 0 | 6,675 | ||||||||||||||||||||||||
| Net income (loss) before income taxes | (20,411) | 2,441 | 13,510 | (9,479) | (13,939) | ||||||||||||||||||||||||
| Income tax expense | 3,678 | 770 | 5,534 | 0 | 9,982 | ||||||||||||||||||||||||
| Net income (loss) | (24,089) | 1,671 | 7,976 | (9,479) | (23,921) | ||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 0 | 0 | (168) | 0 | (168) | ||||||||||||||||||||||||
| Net income (loss) attributable to ION | $ | (24,089) | $ | 1,671 | $ | 7,808 | $ | (9,479) | $ | (24,089) | |||||||||||||||||||
| Comprehensive net income (loss) | $ | (25,783) | $ | 1,628 | $ | 6,113 | $ | (7,622) | $ | (25,664) | |||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | 0 | 0 | (119) | 0 | (119) | ||||||||||||||||||||||||
| Comprehensive net income (loss) attributable to ION | $ | (25,783) | $ | 1,628 | $ | 5,994 | $ | (7,622) | $ | (25,783) | |||||||||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Income Statement | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Net revenues | $ | 0 | $ | 65,552 | $ | 66,418 | $ | 0 | $ | 131,970 | |||||||||||||||||||
| Cost of sales | 0 | 56,106 | 21,081 | 0 | 77,187 | ||||||||||||||||||||||||
| Gross profit | 0 | 9,446 | 45,337 | 0 | 54,783 | ||||||||||||||||||||||||
| Total operating expenses | 31,330 | 26,204 | 11,881 | 0 | 69,415 | ||||||||||||||||||||||||
| Income (loss) from operations | (31,330) | (16,758) | 33,456 | 0 | (14,632) | ||||||||||||||||||||||||
| Interest expense, net | (9,560) | (156) | 338 | 0 | (9,378) | ||||||||||||||||||||||||
| Intercompany interest, net | 588 | 521 | (1,109) | 0 | 0 | ||||||||||||||||||||||||
| Equity in earnings of investments | 7,330 | 26,786 | 0 | (34,116) | 0 | ||||||||||||||||||||||||
| Other income (expense), net | 4 | (265) | (677) | 0 | (938) | ||||||||||||||||||||||||
| Net income (loss) before income taxes | (32,968) | 10,128 | 32,008 | (34,116) | (24,948) | ||||||||||||||||||||||||
| Income tax expense (benefit) | 737 | (532) | 7,711 | 0 | 7,916 | ||||||||||||||||||||||||
| Net income (loss) | (33,705) | 10,660 | 24,297 | (34,116) | (32,864) | ||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | 0 | 0 | (841) | 0 | (841) | ||||||||||||||||||||||||
| Net income (loss) applicable to ION | $ | (33,705) | $ | 10,660 | $ | 23,456 | $ | (34,116) | $ | (33,705) | |||||||||||||||||||
| Comprehensive net income (loss) | $ | (34,703) | $ | 10,617 | $ | 22,444 | $ | (32,220) | $ | (33,862) | |||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | 0 | 0 | (841) | 0 | (841) | ||||||||||||||||||||||||
| Comprehensive net income (loss) attributable to ION | $ | (34,703) | $ | 10,617 | $ | 21,603 | $ | (32,220) | $ | (34,703) | |||||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Statement of Cash Flows | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Total Consolidated | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 3,917 | $ | 2,253 | $ | 6,998 | $ | 13,168 | |||||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||||||||
| Cash invested in multi-client data library | 0 | (8,344) | (11,497) | (19,841) | |||||||||||||||||||||||||
| Purchase of property, plant and equipment | (35) | (415) | (415) | (865) | |||||||||||||||||||||||||
| Net cash used in investing activities | (35) | (8,759) | (11,912) | (20,706) | |||||||||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||||||||
| Borrowings under revolving line of credit | 27,000 | 0 | 0 | 27,000 | |||||||||||||||||||||||||
| Payments under revolving line of credit | (4,500) | 0 | 0 | (4,500) | |||||||||||||||||||||||||
| Proceeds from government relief funding | 6,923 | 0 | 0 | 6,923 | |||||||||||||||||||||||||
| Payments on notes payable and long-term debt | (972) | (842) | 0 | (1,814) | |||||||||||||||||||||||||
| Intercompany lending | (6,289) | 7,353 | (1,064) | 0 | |||||||||||||||||||||||||
| Dividend payment to non-controlling interest | 0 | 0 | (217) | (217) | |||||||||||||||||||||||||
| Other financing activities | (91) | 0 | 0 | (91) | |||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 22,071 | 6,511 | (1,281) | 27,301 | |||||||||||||||||||||||||
| Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash | 0 | 0 | 501 | 501 | |||||||||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 25,953 | 5 | (5,694) | 20,264 | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 8,479 | 26 | 24,613 | 33,118 | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 34,432 | $ | 31 | $ | 18,919 | $ | 53,382 | |||||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Total Consolidated | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 32,106 | $ | 31 | $ | 18,919 | $ | 51,056 | |||||||||||||||
| Restricted cash included in prepaid expenses and other assets | 2,326 | 0 | 0 | 2,326 | |||||||||||||||||||
| Total cash, cash equivalents, and restricted cash shown in statements of cash flows | $ | 34,432 | $ | 31 | $ | 18,919 | $ | 53,382 | |||||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Statement of Cash Flows | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Total Consolidated | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 8,955 | $ | 9,619 | $ | 730 | $ | 19,304 | |||||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||||||||
| Investment in multi-client data library | 0 | (15,197) | (6,028) | (21,225) | |||||||||||||||||||||||||
| Purchase of property, plant and equipment | (259) | (118) | (895) | (1,272) | |||||||||||||||||||||||||
| Net cash used in investing activities | (259) | (15,315) | (6,923) | (22,497) | |||||||||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||||||||
| Borrowings under revolving line of credit | 15,000 | 0 | 0 | 15,000 | |||||||||||||||||||||||||
| Payments under revolving line of credit | (15,000) | 0 | 0 | (15,000) | |||||||||||||||||||||||||
| Payments on notes payable and long-term debt | (1,159) | (801) | 0 | (1,960) | |||||||||||||||||||||||||
| Intercompany lending | (13,511) | 6,495 | 7,016 | 0 | |||||||||||||||||||||||||
| Other financing activities | (655) | 0 | 0 | (655) | |||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | (15,325) | 5,694 | 7,016 | (2,615) | |||||||||||||||||||||||||
| Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash | 0 | 0 | 151 | 151 | |||||||||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | (6,629) | (2) | 974 | (5,657) | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 14,085 | 47 | 19,722 | 33,854 | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 7,456 | $ | 45 | $ | 20,696 | $ | 28,197 | |||||||||||||||||||||
| September 30, 2019 | |||||||||||||||||||||||
| ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Total Consolidated | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 7,153 | $ | 45 | $ | 20,696 | $ | 27,894 | |||||||||||||||
| Restricted cash included in prepaid expenses and other current assets | 303 | 0 | 0 | 303 | |||||||||||||||||||
| Total cash, cash equivalents, and restricted cash shown in statement of cash flows | $ | 7,456 | $ | 45 | $ | 20,696 | $ | 28,197 | |||||||||||||||
In this Form 10-Q, “ION Geophysical,” “ION,” “the company” (or, “the Company”), “we,” “our,” “ours” and “us” refer to ION Geophysical Corporation and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicated.
The information contained in this Quarterly Report on Form 10-Q contains references to trademarks, service marks and registered marks of ION and our subsidiaries, as indicated. Except where stated otherwise or unless the context otherwise requires, the term “DigiFIN” refers to DigiFIN
Going Concern
On April 20, 2021, we completed the Restructuring Transactions (as further discussed below) that extended the maturity of the notes tendered in the Exchange Offer (as defined below) by four years to December 2025 and provided additional liquidity. While we completed the Restructuring Transactions and revenues in the third quarter significantly improved, the timing of the market recovery remains uncertain and overall revenues were lower than expected. Though the significant revenues generated during the third quarter are expected to have a positive impact on our near-term cash collection, it may not be sufficient to fund our operations and meet our debt and other obligations. This has raised substantial doubt about our ability to continue as a going concern. For further discussion regarding our fourth quarter cash requirements, refer to Liquidity and Capital Resources below. The condensed consolidated financial statements conform with accounting principles generally accepted in the United States of America ("GAAP") on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Accordingly, our condensed consolidated financial statements exclude certain adjustments that might result if we are unable to continue as a going concern.
We will continue to explore additional funding opportunities through private or public equity transactions, debt financing or other capital sources such as the sale of non-strategic assets to meet our ongoing cash needs. In addition, we are implementing a significant cost reduction program, building on the over $40 million eliminated last year, in an effort to right size our business. Approximately $16 million of additional annualized savings were identified through a combination of both short-term and long-term reductions. In addition to maintaining our ongoing cost discipline, we will continue to identify opportunities for government relief such as employee retention credits. For further details, refer to Footnote 5, “Government Relief Funding” of Footnotes to Condensed Consolidated Financial Statements. This management plan reflects our continued focus on preserving cash and managing liquidity in the current uncertain macroeconomic environment.
On September 15, 2021, we announced that our Board of Directors initiated a process to evaluate a range of strategic alternatives to strengthen our financial position and maximize stakeholder value as we continue to assess conditions in the capital markets and right size the business. These strategic alternatives include, among others, a sale or other business combination transaction, sales of assets, private or public equity transactions, debt financing, or some combination of these alternatives.
This process is ongoing and there can be no assurance that our efforts will be successful. If we are unable to significantly increase our revenues and cash collections in the fourth quarter or raise additional funds through equity issuances, further debt financing arrangements, sales of assets or through other means of preserving cash through cost reduction initiatives, we would be unable to continue as a going concern. For further discussion regarding our near-term cash requirements, refer to Liquidity and Capital Resources below.
Old Notes Restructuring
On April 20, 2021, we successfully completed our previously announced offer to exchange (the “Exchange Offer”) ION's Old Notes for newly issued 8.00% Senior Secured Second Priority Notes due 2025 (the “New Notes”) and other consideration in the form of cash and ION common stock, as described in ION's Prospectus dated March 10, 2021 and our previously announced rights offering (the "Rights Offering") to the holders of ION's common stock, par value $0.01 per share (the "Common Stock") to purchase for (i) $2.78 principal amount of the New Notes per right, at a purchase price of 100% of the principal amount thereof or (ii) 1.08 shares of common stock per right, at a purchase price of $2.57 per whole share of common stock. The Exchange Offer and the Rights Offering are sometimes referred to herein as the "Restructuring Transactions".
As described in more detail in Footnote 4 "Long-term Debt" of Footnotes to the Condensed Consolidated Financial Statements, the holders of the New Notes may convert all or any portion of their New Notes at their option at any time prior maturity. The initial conversion price is $3.00 per share of Common Stock and is subject to adjustment as described in the New Notes Indenture. The total number of shares of Common Stock that may be issued upon conversion of the New Notes is 38.7 million shares, which excludes an additional 6.5 million shares that may be issued upon a conversion resulting from a make-whole change of control.
In the Exchange Offer, approximately $113.5 million, or approximately 94.1%, of the $120.6 million outstanding Old Notes were accepted and exchanged for (i) $84.7 million aggregate principal amount of our New Notes, (ii) 6.1 million shares of Common Stock, including 1.5 million shares issued as the early participation payment and 4.6 million shares issued as stock consideration in lieu of the New Notes and (iii) $20.7 million paid in cash, including $3.6 million of accrued and unpaid interest that became due on the Old Notes as part of the exchange. We have accepted for exchange all such Old Notes validly tendered and not validly withdrawn in the Exchange Offer as of the expiration time on April 12, 2021. Pursuant to the Exchange Offer, we will make an offer to participants to repurchase New Notes at par for up to 50% of the proceeds raised in excess of $35.0 million from the Rights Offering valued at $3.4 million. As of September 30, 2021, we have yet to initiate such offer.
In the concurrent Rights Offering, an aggregate amount of $41.8 million of rights (including over-subscription) was validly exercised by the holders of ION's Common Stock, apportioned as $30.1 million in New Notes and $11.7 million in Common Stock allocated in 4.6 million shares. All over-subscription rights were exercised without proration as the $50.0 million limit on proceeds was not exceeded. Backstop parties were paid 5% backstop fees, in kind, resulting in the issuance of an additional $1.5 million aggregate principal amount of New Notes and 0.2 million shares of Common Stock.
In total, $116.2 million in aggregate principal amount of New Notes and 10.9 million shares of Common Stock were issued. We received approximately $14 million in net proceeds from the transactions after deducting noteholder obligations, estimated transaction fees and accrued and unpaid interest paid on the Old Notes. After the Restructuring Transactions, $7.1 million of Old Notes remain outstanding and are due along with unpaid interest (at a rate of 9.125% per annum) on December 15, 2021.
The Restructuring Transactions resulted in amendment to the Old Notes Indenture (as defined in Footnote 4 "Long-term Debt - New Notes" of Footnotes to the Condensed Consolidated Financial Statements) effective as of April 20, 2021. The Old Notes were modified, among other things, to provide for the release of the second priority security interest in the collateral securing the Old Notes and deleted in their entirety substantially all of the restrictive covenants and certain events of default pertaining to the Old Notes. For further details, refer to Footnote 4 "Long-term Debt - New Notes" of Footnotes to the Condensed Consolidated Financial Statements.
COVID-19 Business Impact and Response
The COVID-19 pandemic caused the global economy to enter a recessionary period which may be prolonged and severe, and significantly reducestarting in the availabilitysecond quarter of capital and liquidity from banks and other providers of credit. The2020. During 2020, the exploration and production (“E&P”) industry is facingfaced the dual impact of demand deterioration from COVID-19 and market oversupply from increased production, which caused oil and natural gas prices to decline significantly since the startfor most of the year. Brent crude oil prices, which are most relevant to our internationally focused business, dropped 66% during the first quarter from $66 on January 1, 2020 to $23 on March 31, 2020. By the end of the second quarter, Brent crude oil prices rebounded to $41 per barrel from increased global demand as pandemic restrictions started to ease and decreased production and remained relatively stable at that level throughout the third quarter. While the consistency is beneficial, prices are significantly lower compared to the start of the year. The record production cut agreed to by OPEC and other oil producing countries was extended through December 2020 in an effort to stabilize oil prices by limiting supply.
During 2021, the global economy has surpassed pre-pandemic levels and Brent crude prices, which are most relevant to ION’s internationally focused business, have rebounded above pre-pandemic levels, averaging over $80 per barrel during October 2021. This reflects the continued expectation of rising oil demand as both the global economic activity and COVID-19 vaccination rates increase, combined with ongoing crude oil production limits from members of OPEC and partner countries. However, energy companies’ capital discipline remains firmly in place and management expects the seismic market to continue gradually improving yet remain challenging into 2021.in the near-term.
COVID-19 has disrupted supply chains globally related to raw materials, manufacturing and shipping. To date, ION has successfully mitigated these operational impacts by maintaining close relationships with strategic suppliers.
In January 2021, the Biden Administration ordered an indefinite moratorium on new U.S. oil and gas leasing and drilling permits on federal lands onshore and offshore waters. Management believes this will have a negligible impact on our business given ION's diversified global footprint and international offshore focus. Should the moratorium result in longer-term change, this could drive large scale E&P company portfolio investment more towards international offshore, which would be well aligned with our offerings.
Our management expects continued portfolio rationalization and high grading as E&P companies seek to find the best return on investment opportunities to meet oil and gas demand in the next decade. Near-term, due to the impact of the COVID-19 pandemic, project high grading will likely be more acute due to budget reductions. Over the last several years, we have already strategically shifted our portfolio closer to the reservoir, where revenue tends to be higher and more consistent. New Venture data acquisition offshore and Software and related personnel-based offshore services are expected to continue to be most impacted by COVID-19 travel restrictions. While offshore operations have been temporarily impacted by travel restrictions, we believe the demand for digitalization technologies will remain strong. In some cases, ION technology is expected to be more relevant and valuable in the current environment, (for instance,such as offerings that facilitate remote working).
We continue to work closely with our clients to understand their revised budgets and spending priorities and to scale our business appropriately. We partially mitigated the impact of the current macroeconomic environment by fully benefiting from the structural changes and associated cost reductions that were outlined in the first quarter. To further mitigate the impactthrough salary cuts of COVID-19 and oil price volatility, management implemented a plan to preserve cash and manage liquidity as follows:
Our Business
ION is an innovative, asset light global technology company that delivers powerful data-driven decision-making offerings to offshore energy ports and defense industries.maritime operations markets. We are entering a fourth industrial revolution where technology is fundamentally changing how decisions are made. Decision-making is shifting from what was historically an art to a science. Data, analytics and digitalization provide a step-change opportunity to translate information into insights, enabling our clients to enhance decisions gain a competitive edge and deliver superior returns.
We have been a leading technology innovator for over 50 years. While the traditional focus of our cutting-edge technology has been on the E&P industry, we are now broadening and diversifying our business into relevant adjacentnew markets such as offshoreenergy logistics, portsport management and harbors, defense and marine robotics.maritime monitoring. Our offerings are focused on improving subsurface knowledge to enhance E&P decision-making and improving situational awareness to optimize offshore operations.operations. We serve customers in most major energy producing regions of the world from strategically located offices.
The Company is publicly listed on the New York Stock Exchange under the ticker IO. We are headquartered in Houston, Texas with regional offices around the world. We have approximately 450360 employees, 42%44% of whom are in technical roles and 20%22% have advanced degrees.
We provide our services and products through two business segments: E&P Technology & Services and Operations Optimization. In addition, we have a 49% ownership interest in INOVA Geophysical Equipment Limited (“INOVA Geophysical” or “INOVA”), a joint venture with BGP Inc. (“BGP”), a subsidiary of China National Petroleum Corporation. BGP owns the remaining 51% equity interest in INOVA. We wrote our investment in INOVA down to zero in 2014. See further discussion below on our agreement to sell our interest in INOVA.
Our E&P Technology & Services segment creates digital data assets and delivers services to help E&P companies improve decision-making, reduce risk and maximize value. Across the E&P lifecycle, our E&P offerings focus on driving customer decisions, such as which blocks to bid on and for how much, how to maximize portfolio value, where to drill wells or how to optimize production.
Our Operations Optimization segment develops mission-critical subscription offerings and provides engineering services that enable operational control and optimization offshore. This segment is comprised of our Optimization Software & Services and Devices offerings. While we primarily sell to service providers, we began selling existing technology to new customersOur hardware and software offerings facilitate some of the largest man-made mobile operations and in E&P, ports and harbors, defense and academic industries.
We historically conducted our land seismic equipment business through INOVA, which manufactures land seismic data acquisition systems, digital sensors, vibroseis vehicles (i.e., vibrator trucks), and energy source controllers.
E&P Technology & Services
. Our offerings are designed to help E&P companies improve decision-making, reduce risk and maximize value. Within our E&P Technology and Services segment, there are two synergistic groups: Imaging and Reservoir Services and Ventures.While our Imaging and Reservoir Services group processes and images data for customers on a proprietary basis, mostthe majority of these resources support our higher potential return multi-client business. The proprietary work we take on is complex, where our advanced technology is valued and where we closely collaborate with our customers to solve their toughest challenges. We maintain approximately 19 petabytes of digital seismic data storage through our global data centers, including a core data center located in Houston. We utilize a globally distributed network of Linux-cluster processing centers in combination with our major hubs in Houston and London to process seismic data using advanced, proprietary algorithms and workflows.
Our Ventures group leverages the geoscience skills of the Imaging and Reservoir Services group to create global digital data assets that are licensed to multiple E&P companies to optimize their investment decisions. Our global data library consists of over 740,000745,000 km of 2D and over 355,000 sq.410,000 sq km of 3D multi-client seismic data in virtually all major offshore petroleum provinces. Ventures provides services to manage multi-client or proprietary surveys, from survey planning and design to data acquisition and management, to final subsurface imaging and reservoir characterization. We focus on the technologically intensive components of the image development process, such as survey planning and design, and data processing and interpretation, while outsourcing asset-intensive components (such as field acquisition) to experienced contractors.
Occasionally we develop proprietary technology solutions that fill a gap we have identified in the market and support our multi-client program development efforts. For example, previously we created an under-ice acquisition solution to collect data in the Arctic and Marlin™ was initially developed to help manage our own complex survey operations. In 2020, we commercialized Gemini™ extended frequency source technology. Gemini’s unique design efficiently supports substantially improved data quality and lower environmental impact desired by the industry. This important ingredient to enhancing subsurface knowledge differentiates ION as we expand into the larger 3D multi-client new acquisition market while maintaining our asset light approach.
We offer our services to customers on both a proprietary and multi-client (non-exclusive) basis. In both cases, a majority of our survey expensescosts are generally pre-funded by our customers, limiting our cost exposure. The period during which our multi-client surveys are being designed, acquired or processed is referred to as the “New Venture” phase. Once the New Venture phase is completed, the program becomessurveys become part of our Data Library. For proprietary services, the customer has exclusive ownership of the data. For multi-client surveys, we generally retain ownership of our long-term exclusive marketing rights to the data and receive ongoing revenue from subsequent data license sales.
We invested $19.8$22.3 million in our multi-client data library during the first nine months of 20202021 and we expect investments in our multi-client data library to be in the range of $25.0$30.0 million to $30.0$35.0 million for 2020 (a portion2021 (dependent upon the level of which will be pre-fundedpre-funding or underwrittenunderwriting by our customers) compared to the $28.8$27.2 million invested in 20192020. Whether remaining planned expenditures will be spent in 2021 depends on industry conditions, project approvals and down from the $30.0 million to $40.0 million initial range for 2020 due to COVID-19.
At September 30, 2020,2021, our E&P Technology & Services segment backlog, which consists of commitments for (i) imaging and reservoir services work and (ii) new venture projects (both multi-client and proprietary) by our Ventures group underwritten by our customers, was $17.7$12.0 million compared to $10.0 million at June 30, 2020, $18.9$19.7 million at December 31, 20192020 and $24.8$17.7 million at September 30, 2019.2020. The decline in our backlog resulted from revenues recognized as the second phase of our Mid North Sea High 3D multi-client program in the North Sea wrapped up this quarter. We anticipate that most of our backlog will be recognized as revenue overduring the next twelve months.
Over the last five years, we have made an effort to diversify our offerings across the E&P life cycle and move closer to the reservoir, where capital investment tends to be higher and more consistent. Historically, our data library was largely 2D and exploration focused. We had not materially participated infocused, which limited our revenues to approximately 3% of a $2.0 to $3.0 billion-dollar offshore multi-client market. In 2020, we entered the 3D multi-client projects. Asnew acquisition market, where revenue and earnings potential are at least five times a result, our 3D revenues and data volumes only accounted for 3% of the market, giving us substantial upside growth potential. In 2019, we grewtypical new 2D exploration program. This strategy shift builds on our 3D multi-client data library 56% to 350,000 sq. km. through cost effective, contiguous reimaging of existing data. 37% ofsuccess and leverages our 2019 multi-client revenue was from 3D data, an offering that barely registered just four years ago. Our successful foray into 3D reimaging has given us credibilitytier 1 imaging and experience in the 3D market segment, creating a pipeline of opportunities for new 3D towed streamer and/or seabed programs we have not seen prior. We also completed development of enabling technologies like our Gemini enhanced frequencyseismic source and 4Sea ocean bottom platform to further increase the likelihood of our participation success in new 3D multi-client programs.
Operations Optimization.
Our Operations Optimization segment develops mission-criticalThis segment is comprised of our Optimization Software & Services and Devices offerings. While we primarily sell to oil and gas service providers, we began selling existing technology to new customers in E&P, ports and harbors, defense and academic industries. Service providers rely on our industry-leading marine imaging systems and services to acquire the highest quality data - safely and efficiently - in both towed streamer and seabed operations. Our integrated technology platforms combined with advanced prediction tools enable survey optimization.
Our Optimization Software & Services group provides survey design, command and control software systems and related services for marine towed streamer and seabed operations. We are market leaders in our core business and adapted our platform to more broadly optimize operations.operations beyond our core market. Our software offerings leverage a leading data integration platform to control and optimize operations. Engineering services experts deliver in-field optimization services, equipment maintenance and training to maximize value from our offerings.
Our software is focused on creating high value information that drives efficiency and related resource utilization, and reductions in HSE exposure and greenhouse gas emissions. We are expanding our Marlin software to optimize maritime detection, port management, and energy logistics markets. Marlin is the only system that links vessel plans and schedules to live offshore activities, providing greater control and transparency in the management of offshore operations. By monitoring plans and providing feedback in real time, clients can minimize fuel consumption, decrease emissions and operate with just-in-time efficiency.
ION continued to advance its diversification strategy in new maritime markets, most recently securing a competitive tender to supply Marlin SmartPort to 17 of CalMac Ferries' ports and ferry terminals in December 2020.
Our Devices group develops intelligent equipment controlled byhardware and devices integrated with our software to optimize operations. Our Devices group develops, manufactures and repairs marine towed streamer and seabed data acquisition technology, sensors and compasses whichthat have been deployed in marine robotics, defense, E&P and other commercial applications.
Our Operations Optimization net revenues decreased comparedDevices diversification strategy is to develop real-time monitoring solutions that improve the third quartersafety and environmental compliance of 2019 resultingoffshore oil and gas operations. WellAlert™ leverages our core competencies, targets a growing market associated with sustainability and aligns with our strategy to provide decision support data and analytics. Clients are seeking advancements in technology to cost-effectively shift from COVID-19 reduced seismic activityreactive to proactive systems that provide more frequent, accurate measurements to assure safe operating environments. Our solution integrates sensing and vessel stacking. When E&P companies reviewed their 2020 exploration planscommunications technologies to monitor temporarily plugged and budgets in light of lower commodity prices, many contracts were postponed or canceled, and tender activity dropped dramatically.
It is our view that technologies that provide a competitive advantage through improved imaging, lower costs, higher productivity, or enhanced safety will continue to be valued in the market. We believe our newest technologies will continue to attract customer interest because these technologies are designed to deliver those desirable attributes.
INOVA Geophysical
. INOVA manufactures land acquisition systems, land source products, vibroseis vehicles, and source controllers and multicomponent sensors.Key Financial Metrics
The table below provides an overview of key financial metrics for our company as a whole and our two business segments for the three and nine months ended September 30, 2020,2021, compared to the same period of 2019.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (in thousands, except share data) | |||||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| E&P Technology & Services: | |||||||||||||||||||||||
| New Venture | $ | 1,213 | $ | 5,905 | $ | 7,340 | $ | 24,394 | |||||||||||||||
| Data Library | 5,085 | 27,288 | 52,083 | 55,030 | |||||||||||||||||||
| Total multi-client revenues | 6,298 | 33,193 | 59,423 | 79,424 | |||||||||||||||||||
| Imaging and Reservoir Services | 3,795 | 7,048 | 12,410 | 16,443 | |||||||||||||||||||
| Total | 10,093 | 40,241 | 71,833 | 95,867 | |||||||||||||||||||
| Operations Optimization: | |||||||||||||||||||||||
| Optimization Software & Services | 3,007 | 6,895 | 10,811 | 17,648 | |||||||||||||||||||
| Devices | 3,134 | 6,103 | 12,735 | 18,455 | |||||||||||||||||||
| Total | 6,141 | 12,998 | 23,546 | 36,103 | |||||||||||||||||||
| Total net revenues | $ | 16,234 | $ | 53,239 | $ | 95,379 | $ | 131,970 | |||||||||||||||
| Gross profit (loss): | |||||||||||||||||||||||
| E&P Technology & Services | $ | (1,092) | $ | 18,316 | $ | 24,902 | (a) | $ | 36,113 | ||||||||||||||
| Operations Optimization | 2,381 | 6,972 | 9,315 | 18,670 | |||||||||||||||||||
| Total gross profit | $ | 1,289 | $ | 25,288 | $ | 34,217 | $ | 54,783 | |||||||||||||||
| Gross margin: | |||||||||||||||||||||||
| E&P Technology & Services | (11) | % | 46 | % | 35 | % | 38 | % | |||||||||||||||
| Operations Optimization | 39 | % | 54 | % | 40 | % | 52 | % | |||||||||||||||
| Total gross margin | 8 | % | 47 | % | 36 | % | 42 | % | |||||||||||||||
| Income (loss) from operations: | |||||||||||||||||||||||
| E&P Technology & Services | $ | (4,591) | $ | 11,878 | $ | 13,803 | (a) | $ | 15,500 | ||||||||||||||
| Operations Optimization | (232) | 2,994 | (3,965) | (b) | 5,808 | ||||||||||||||||||
| Support and other | (6,341) | (11,014) | (20,148) | (c) | (35,940) | ||||||||||||||||||
| Income (loss) from operations | $ | (11,164) | $ | 3,858 | $ | (10,310) | $ | (14,632) | |||||||||||||||
| Operating margin: | |||||||||||||||||||||||
| E&P Technology & Services | (45) | % | 30 | % | 19 | % | 16 | % | |||||||||||||||
| Operations Optimization | (4) | % | 23 | % | (17) | % | 16 | % | |||||||||||||||
| Support and other | (39) | % | (21) | % | (21) | % | (27) | % | |||||||||||||||
| Total operating margin | (69) | % | 7 | % | (11) | % | (11) | % | |||||||||||||||
| Net loss | (16,414) | (3,329) | (23,921) | (32,864) | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | (193) | (394) | (168) | (841) | |||||||||||||||||||
| Net loss attributable to ION | $ | (16,607) | $ | (3,723) | $ | (24,089) | $ | (33,705) | |||||||||||||||
| Net loss per share: | |||||||||||||||||||||||
| Basic | $ | (1.16) | $ | (0.26) | $ | (1.69) | $ | (2.39) | |||||||||||||||
| Diluted | $ | (1.16) | $ | (0.26) | $ | (1.69) | $ | (2.39) | |||||||||||||||
| Weighted average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | 14,278 | 14,181 | 14,255 | 14,104 | |||||||||||||||||||
| Diluted | 14,278 | 14,181 | 14,255 | 14,104 | |||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||
Net revenues: | |||||||||||||||||||
E&P Technology & Services: | |||||||||||||||||||
New Venture | $ | 26,287 | $ | 1,213 | $ | 31,256 | $ | 7,340 | |||||||||||
Data Library | 6,225 | 5,085 | 14,102 | 52,083 | |||||||||||||||
Total multi-client revenues | 32,512 | 6,298 | 45,358 | 59,423 | |||||||||||||||
Imaging and Reservoir Services | 3,308 | 3,795 | 9,402 | 12,410 | |||||||||||||||
Total | $ | 35,820 | $ | 10,093 | $ | 54,760 | $ | 71,833 | |||||||||||
Operations Optimization: | |||||||||||||||||||
Optimization Software & Services | $ | 3,814 | $ | 3,007 | $ | 10,028 | $ | 10,811 | |||||||||||
Devices | 4,757 | 3,134 | 13,353 | 12,735 | |||||||||||||||
Total | $ | 8,571 | $ | 6,141 | $ | 23,381 | $ | 23,546 | |||||||||||
Total net revenues | $ | 44,391 | $ | 16,234 | $ | 78,141 | $ | 95,379 | |||||||||||
Gross profit (loss): | |||||||||||||||||||
E&P Technology & Services | $ | 17,925 | $ | (1,092 | ) | $ | 17,336 | $ | 24,902 | (d) | |||||||||
Operations Optimization | 4,305 | 2,381 | 9,391 | 9,315 | |||||||||||||||
Total gross profit | $ | 22,230 | $ | 1,289 | $ | 26,727 | $ | 34,217 | |||||||||||
Gross margin: | |||||||||||||||||||
E&P Technology & Services | 50 | % | (11 | )% | 32 | % | 35 | % | |||||||||||
Operations Optimization | 50 | % | 39 | % | 40 | % | 40 | % | |||||||||||
Total gross margin | 50 | % | 8 | % | 34 | % | 36 | % | |||||||||||
Income (loss) from operations: | |||||||||||||||||||
E&P Technology & Services | $ | 13,973 | $ | (4,591 | ) | $ | 6,429 | $ | 13,803 | (c) | |||||||||
Operations Optimization | 624 | (232 | ) | 48 | (3,965 | ) | (d) | ||||||||||||
Support and other | (7,823 | ) | (a) | (6,341 | ) | (17,318 | ) | (a) | (20,148 | ) | |||||||||
Income (loss) from operations | 6,774 | (11,164 | ) | (10,841 | ) | (10,310 | ) | ||||||||||||
Interest expense, net | (2,736 | ) | (3,669 | ) | (9,297 | ) | (10,304 | ) | |||||||||||
Other income (expense), net | (855 | ) | (525 | ) | (5,532 | ) | (b) | 6,675 | (e) | ||||||||||
Income (loss) before income taxes | $ | 3,183 | $ | (15,358 | ) | $ | (25,670 | ) | $ | (13,939 | ) | ||||||||
| (a) | Includes severance expense of $1.9 million for the three and nine months ended September 30, 2021. |
| (b) | Includes loss on restructuring transactions of $4.7 million for the nine months ended September 30, 2021 resulting from the exchange of our Old Notes for New Notes. |
(c) | Includes impairment of multi-client data library of $1.2 million for the nine months ended September 30, 2020. |
(d) | Includes impairment of goodwill of $4.2 million for the nine months ended September 30, 2020. |
| (e) | Includes amortization of government relief funding of $6.9 million for the nine months ended September 30, 2020. |
For a discussion of factors that could impact our future operating results and financial condition, see (i) Item 1A. “
Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,Three Months Ended September 30, 20202021 Compared to Three Months Ended September 30, 2019
Our consolidated net revenues of $44.4 million for the three months ended September 30, 2021 (the “Current Quarter”) increased by $28.2 million, or 173%, compared to consolidated net revenues of $16.2 million for the three months ended September 30, 2020 (the “Current Quarter”) decreased by $37.0 million, or 70%, compared to consolidated net revenues of $53.2 million for the three months ended September 30, 2019 (the “Comparable Quarter”). Our total gross margin was 8%50% in the Current Quarter, as compared to 47%8% in the Comparable Quarter. For the Current Quarter, our income from operations was $6.8 million, compared to a loss from operations wasof $11.2 million, compared to an income of $3.9 million for the Comparable Quarter.
Net loss attributable to ION for the Current Quarter was $0.5 million, or $0.02 loss per share, compared to $16.6 million, or $1.16 loss per share, compared to a Net loss attributable to ION of $3.7 million, or $0.26 loss per share, for the Comparable Quarter.
Net Revenues, Gross Profits and Gross Margins
E&P Technology & Services
— Net revenues for the Current QuarterOperations Optimization — Net revenues for the Current Quarter decreasedincreased by $6.9$2.5 million, or 53%41% to $6.1$8.6 million, compared to $13.0$6.1 million for the Comparable Quarter. Optimization Software & Services net revenues for the Current Quarter decreasedincreased by $3.9$0.8 million, or 57%27% to $3.0$3.8 million compared to $6.9 million for the Comparable Quarter due to reducedincreased seismic vessel activity and associated services demand resulting from COVID-19offshore.. Devices net revenues for the Current Quarter decreasedincreased by $3.0$1.7 million, or 49%55%, to $3.1$4.8 million, compared to $6.1$3.1 million for the Comparable Quarter primarily due to lowerhigher sales of towed streamer equipment spares and repairs.spares. The Current Quarter reflects a gross profit of $4.3 million, representing a 50% gross margin compared to a gross profit of $2.4 million, representing a 39% gross margin compared to a gross profit of $7.0 million, representing a 54% gross margin for the Comparable Quarter. Changes in gross profit and margin were due to the decline in our net revenues as discussed above.
Operating Expenses
Research, Development and Engineering
— Research, development and engineeringMarketing and Sales — Marketing and sales expenses were $3.1 million for the Current Quarter, an increase of $0.3 million, or 12% compared to $2.8 million for the Comparable Quarter primarily due to increase in commission expense during the Current Quarter.
General, Administrative and Other Operating Expenses — General, administrative and other operating expenses were $9.2 million for the Current Quarter, an increase of $2.5 million, or 37% compared to $6.7 million for the Comparable Quarter primarily due to the cost cutting initiative implemented following the COVID-19 related market impact.
Other Items
Interest Expense, Net
— Interest expense, net, wasIncome Tax Expense
— Income tax expense for the Current Quarter wasNine Months Ended September 30, 20202021 Compared to Nine Months Ended September 30, 2019
Our consolidated net revenues of $78.1 million for the nine months ended September 30, 2021 (the “Current Period”) decreased by $17.3 million, or 18%, compared to consolidated net revenues of $95.4 million for the nine months ended September 30, 2020 (the “Current“Comparable Period”) decreased by $36.6 million, or 28%,. While the revenues generated during the Current Quarter significantly increased compared to total net revenuesthe Comparable Quarter, the increase was not enough to offset a one-time significant data library sale during the first quarter of $132.0 million for the nine months ended September 30, 2019 (the “Comparable Period”).2020. Our total gross margin forwas 34% in the Current Period, was 36%,as compared to 42%, for36% in the Comparable Period. For the Current Period, our loss from operations was $10.3$10.8 million, compared to a loss of $14.6$10.3 million for the Comparable Period.
Net loss attributable to ION for the Current Period was $31.2 million, or $1.33 loss per share, compared to $24.1 million, or $1.69 loss per share, compared to a Net loss attributable to ION of $33.7 million, or $2.39 loss per share, infor the Comparable Period.
Net Revenues, Gross Profits and Gross Margins
E&P Technology & Services
— Net revenues for the Current Period decreased byOperations Optimization
— Net revenues for the Current PeriodOperating Expenses
Research, Development and Engineering
— Research, development and engineeringMarketing and Sales
— Marketing and salesGeneral, Administrative and Other Operating Expenses — General, administrative and other operating expenses were $19.0 million for the Current Period, a decrease of $8.5$2.5 million, or 49%,12% compared to $17.4$21.5 million for the Comparable Period primarily due to the reduction of commission expense resulting from reduced revenues during the Current Period, as well as the cost cutting initiative implemented earlier in the year.
Impairment of Goodwill — Impairment of goodwill was zero for the Current Period compared to $4.2 million for the Comparable Period resulting from an impairment charge recognized during the first quarter of 2020.Comparable Quarter. See further discussion at Note 10Footnote 9 “
Other Items
Interest Expense, net
Income Tax Expense
Liquidity and Capital Resources
Sources of Capital
At September 30, 2020, we had2021, total liquidity of $59.4was $35.0 million, consisting of $51.1$24.1 million of cash on hand and $8.3$10.9 million of remaining borrowing capacity under our Credit Facility. In response to the market uncertainty resulting from the COVID-19 pandemic combined with weaker oil and gas prices,As of September 30, 2021, we drewhad outstanding indebtedness of $19.4 million under our Credit Facility during the first quarter 2020, of which $22.5 million remains outstanding and in our cash balances as of September 30, 2020.
Our cash requirements include working capital requirements and cash required for our debt service payments, multi-client seismic data acquisition activities and capital expenditures. As of September 30, 2020,2021, we had negative working capital of $30.5$42.1 million compared to negative working capital of $23.6$150.9 million as of December 31, 2019. 2020. Improvement in working capital resulted from the completion of the Restructuring Transactions (refer to Footnote 1 "Summary of Significant Accounting Policies - Old Notes Restructuring" of Footnotes to the Condensed Consolidated Financial Statements for further details) as well as an increase in our unbilled and accounts receivable balances resulting from higher revenues during the current quarter. However, our accounts payable and accrued expenses also increased as a result of our investment in our multi-client data library (specifically related to our Mid North Sea High 3D programs) and taxes payable on revenues generated from our reimaging projects in Brazil. Working capital requirements are primarily driven by our investment in our multi-client data library ($19.822.3 million in the Current Period and $25.0$30.0 million to $30.0$35.0 million expected for the full year, a portiondependent upon the level of which will be pre-fundedpre-funding or underwrittenunderwriting by our customers) and royalty payments forrelated to multi-client sales. Our multi-client data library investment during the first nine month of 2021 includes $5.0 million of payments to our acquisition partners for seismic acquisition costs incurred in prior years. Approximately 27% of our accounts payable balance as of September 30, 2021 relates to amounts owed to our seismic acquisition partners. Whether remaining planned expenditures will actually be spent in 20202021 depends on industry conditions, project approvals and schedules, and careful monitoring of our levelsliquidity.
In the fourth quarter, the following amounts totaling $16.8 million will become due and payable: (i) principal and interest on the Old Notes of liquidity.
As a result of these liquidity issues, we are considering various strategic alternatives, which include, among others, a sale or other business combination transaction, sales of assets, private or public equity transactions, debt financing, or some combination of these alternatives. This process is ongoing and there can be no assurance that our efforts will be successful. If we are unsuccessful or we are otherwise unable to significantly increase our revenues and cash collections in the fourth quarter, we would be unable to continue as a going concern.
Our headcount has traditionally beenremains a significant driver of our working capital needs. Our headcount decreased to approximately 450 employees as of September 30, 2020 from approximately 520 employees as of December 31, 2019 resulting from our cost reduction initiative earlier this year, a significant portion of which is reduction in our personnel costs. As a significant portion of our business is involved in the planning, processing and interpretation of seismic data services, one of our largest investments is in our employees, which requires cash expenditures for their salaries, bonuses, payroll taxes and related compensation expenses, including stock appreciation awards, typically in advance of related revenue billings and collections.
Our working capital requirements may change from time to time depending upon manyon factors, including our operating results and adjustments in our operating plan in response to industry conditions, competition and unexpected events. In recent years, our primary sources of funds have been cash flows generated from operations, existing cash balances, debt and equity issuances and borrowings under our Credit Facility.
Registered Direct Offering
On AugustFebruary 16, 2018,2021, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) which provided for the sale and our material U.S. subsidiaries — GX Technology Corporation,issuance by us of an aggregate of 2,990,001 shares of ION Exploration Products (U.S.A), Inc.common stock, $0.01 par value per share (the “Common Stock”) at an offering price of $3.50 per share for gross proceeds of approximately $10.5 million before deducting the placement agent’s fees and I/O Marine Systems, Inc. (the “Material U.S. Subsidiaries”) — along with GX Geoscience Corporation, S. de R.L. de C.V., a limited liability company (Sociedad de Responsibilidad Limitada de Capital Variable) organized under the lawsrelated offering expenses. The Securities Purchase Agreement contained customary representations, warranties and agreements by us, customary conditions to closing, indemnification obligations of Mexico, and a subsidiaryION, other obligations of the Company (the “Mexican Subsidiary”) (the Material U.S. Subsidiariesparties and termination provisions. We used the Mexican Subsidiary are collectively,net proceeds for working capital and general corporate purposes.
The Registered Direct Offering was made pursuant to a Registration Statement (No. 333-234606) on Form S-3, which was filed with the “Subsidiary Borrowers”, together with ION Geophysical Corporation are the “Borrowers”) — the financial institutions party thereto, as lenders, and PNC Bank, National Association (“PNC”), as agent for the lenders, entered into that certain Third Amendment and Joinder to Revolving Credit and Security Agreement (the “Third Amendment”), amending the Revolving Credit and Security Agreement, dated as of August 22, 2014 (as previously amended by the First Amendment to Revolving Credit and Security Agreement, dated as of August 4, 2015 and the Second Amendment to Revolving Credit and Security Agreement, dated as of April 28, 2016, the “Credit Agreement”). The Credit Agreement,SEC on November 8, 2019, as amended by the First Amendment, the Second Amendmenton December 19, 2019, and the Third Amendment is herein called the “Credit Facility”).declared effective on December 23, 2019.
On April 20, 2021, we successfully completed our offer to October 31, 2021 if we are unable to repay or extend the maturity of the Second Lien Notes.
As described in more detail in Footnote 4 "Long-term Debt" of Footnotes to the Condensed Consolidated Financial Statements, the holders of the New Notes may convert all or any portion of their New Notes at their option at any time prior maturity. The initial conversion price is $3.00 per share of Common Stock and is subject to adjustment as described in the New Notes Indenture. The total number of shares of Common Stock that may be issued upon conversion of the New Notes is 38.7 million shares, which excludes an outstandingadditional 6.5 million shares that may be issued upon a conversion resulting from a make-whole change of control.
In total, $116.2 million in aggregate principal amount of $120.6New Notes and 10.9 million shares of ION common stock were issued. We received approximately $14 million in net proceeds from the transactions after deducting noteholders obligations, estimated transaction fees and accrued and unpaid interest paid on the Old Notes. After the Restructuring Transactions, $7.1 million of Old Notes remain outstanding and are due along with unpaid interest (at a rate of 9.125% per annum) on December 15, 2021. For further details, refer to Footnote 1 "Summary of Significant Accounting Policies - Old Notes Restructuring" of Footnotes to the Condensed Consolidated Financial Statements.
Old Notes
The Old Notes were senior secured second-priority obligations guaranteed by the Material U.S. Subsidiaries and the Mexican Subsidiary. InterestSubsidiary (each as defined above and herein below, with the reference to the Old Notes, the “Guarantors”). As a result of the Restructuring Transactions on the Second LienApril 20, 2021 as further discussed in Footnote 1 "Summary of Significant Accounting Policies - Old Notes is payable semiannuallyRestructuring" of Footnotes to Condensed Consolidated Financial Statements, $113.5 million in arrears on June 15aggregate principal amount outstanding of Old Notes were tendered and December 15exchanged for New Notes. At September 30, 2021, $7.1 million of each year during their term, except that theOld Notes remain outstanding and are due along with unpaid interest payment otherwise payable on June 15, 2021 will be payable(at a rate of 9.125% per annum) on December 15, 2021.
The April 2016 indenture governing the Second LienOld Notes contains(the "Old Notes Indenture") contained certain covenants that, among other things, limitslimited or prohibits our ability and the ability of our restricted subsidiaries to takeprohibited us from taking certain actions or permitpermitting certain conditions to exist during the term of the Second LienOld Notes, including among other things, incurring additional indebtedness in excess of permitted indebtedness, creating liens, paying dividends and making other distributions in respect of our capital stock, redeeming our capital stock, making investments or certain other restricted payments, selling certain kinds of assets, entering into transactions with affiliates, and effecting mergers or consolidations. These and other restrictive covenants contained in the Second LienOld Notes Indenture arewere subject to certain exceptions and qualifications. All
On April 20, 2021, we, the Guarantors, Wilmington Savings Fund Society, FSB, as trustee, and collateral agent, entered into a supplemental indenture (the “Supplemental Indenture”) to the Old Notes Indenture, dated as of April 28, 2016, among us, the Guarantors, Wilmington Savings Fund Society, FSB (as successor to Wilmington Trust, National Association), as trustee, and U.S. Bank National Association, as collateral agent, governing the Old Notes Indenture. The Supplemental Indenture, among other things, provides for the release of the second priority security interest in the collateral securing the Old Notes, and deletes in their entirety substantially all of the restrictive covenants and certain events of default pertaining to the Old Notes. The Old Notes Indenture, as modified by the Supplemental Indenture, is materially less restrictive and affords significantly reduced protection to holders of such securities as compared to the restrictive covenants, events of default and other provisions previously contained in the Old Notes Indenture.
At September 30, 2020,2021, we were in compliance with all of the covenants under the Second LienOld Notes. For further information regarding our Old Notes, see above Footnote 4 “Long-term Debt” of Footnotes to Condensed Consolidated Financial Statements.
Revolving Credit Facility
On April 20, 2021, we and special interest, if any, onour material U.S. subsidiaries — GX Technology Corporation, ION Exploration Products (U.S.A), Inc. and I/O Marine Systems, Inc. (the “Material U.S. Subsidiaries”) — along with GX Geoscience Corporation, S. de R.L. de C.V., a limited liability company (Sociedad de Responsibilidad Limitada de Capital Variable) organized under the laws of Mexico, and our subsidiary (the “Mexican Subsidiary”) (the Material U.S. Subsidiaries and the Mexican Subsidiary are collectively, the “Subsidiary Borrowers”, together with ION Geophysical Corporation are the “Borrowers”) — the financial institutions party thereto, as lenders, and PNC Bank, National Association (“PNC”), as agent for the lenders, entered into that certain Fourth Amendment and Joinder to Revolving Credit and Security Agreement (the “Fourth Amendment”), amending the Revolving Credit and Security Agreement, dated as of August 22, 2014 (as previously amended by the First Amendment to Revolving Credit and Security Agreement, dated as of August 4, 2015, the Second Lien Notes redeemed duringAmendment to Revolving Credit and Security Agreement, dated as of April 28, 2016 and the twelve-month period beginningThird Amendment to Revolving Credit and Security Agreement, dated as of August 16, 2018, the “Credit Agreement”). The Credit Agreement, as amended by the First Amendment, the Second Amendment, the Third Amendment and the Fourth Amendment is herein called the “Credit Facility”). The Credit Facility matures on December 15thAugust 16, 2023. The Credit Agreement, as amended by the Fourth Amendment, among other things, permitted the consummation of the years indicated below:Restructuring Transactions, including the issuance of the New Notes and certain cash payments to our noteholders in connection with the Exchange Offer and the Rights Offering, and made certain other changes to the Credit Agreement’s definitions and other provisions, including with respect to LIBOR, where the successor LIBOR rate index will be the benchmark replacement determined by PNC.
The maximum amount available under the Credit Facility is the lesser of $50.0 million or a monthly borrowing base. The borrowing base under the Credit Facility will increase or decrease monthly using a formula based on certain eligible receivables, eligible inventory and other amounts, including a percentage of the net orderly liquidation value of the Borrowers’ multi-client data library (not to exceed $28.5 million for the multi-client data library component). At September 30, 2021, there was $19.4 million outstanding indebtedness under the Credit Facility which was presented as a current liability in the Condensed Consolidated Balance Sheets due to the lockbox requirement within the terms of the Credit Facility with PNC. The undrawn remaining borrowing base capacity was $10.9 million.
The Credit Facility requires us to maintain compliance with various covenants. At September 30, 2021, we were in compliance with all of the covenants under the Credit Facility. For further information regarding our Credit Facility, see above Footnote 4 “Long-term Debt” of Footnotes to Condensed Consolidated Financial Statements.
| Date | Percentage | |||||||
| 2019 | 105.50% | |||||||
| 2020 | 103.50% | |||||||
| 2021 | 100.00% | |||||||
Government Relief Funding
On April 11, 2020, we entered into a Note Agreement (“Note”) with PNC amounting to $6.9 million pursuant to the Coronavirus Aid, Relief, and Economic Security Act’s (“CARES Act”) Paycheck Protection Program (“PPP”). Amounts outstanding under this Note will bearbore interest at 1% per annum beginning on the six-month anniversary of the date of the Note. Interest will be calculated based on the actual number of days that principal is outstanding over a year of 360 days. The Note matureswas scheduled to mature in two years after the receipt of the loan proceeds.
We recognized the entireNote of $6.9 million was recognized as a deferred income liability during second quarter2020 and fully amortized to other income in the condensed consolidated income statements for the sixnine months ended JuneSeptember 30, 2020, as the related expenses it was intended to offset were incurred from April 2020 to June 2020. If, despite our good-faith belief that given our circumstances
Further, we satisfied all eligible requirementsqualified for an employee retention credit ("ERC") of $4.8 million for the PPP Loan,nine months ended September 30, 2021, $3.2 million of which has been received as of the third quarter 2021 and the remaining $1.6 million is expected to be received during the fourth quarter 2021. We will continue to monitor the availability of the ERC for the fourth quarter of 2021 which, if available, would be received during the first quarter of 2022. Refer to Footnote 5 "Government Relief Funding" of Footnotes to Condensed Consolidated Financial Statements.
Disclosure of Guarantees
As discussed in Footnote 4 “Long-term Debt” of Footnotes to Condensed Consolidated Financial Statements, prior to the Restructuring Transactions,the Old Notes were senior secured second-priority obligations issued by ION and are guaranteed by Guarantors, all of which are wholly owned subsidiaries. The Old Notes contains certain covenants that, among other things, limited or prohibited us and the ability of our restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Old Notes, including among other things, incurring additional indebtedness in excess of permitted indebtedness, creating liens, paying dividends and making other distributions in respect of ION’s capital stock, redeeming ION’s capital stock, making investments or certain other restricted payments, selling certain kinds of assets, entering into transactions with affiliates, and effecting mergers or consolidations. On April 20, 2021, we entered into a Supplemental Indenture (refer to "Old Notes" above and in Footnote 4 “Long-term Debt” of Footnotes to Condensed Consolidated Financial Statements) to the Old Notes Indenture that among other things, provided for the release of the second priority security interest in the collateral securing the Old Notes, and deleted in their entirety substantially all of the restrictive covenants and certain events of default pertaining to the Old Notes. The Old Notes Indenture, as modified by the Supplemental Indenture, are later determinedmaterially less restrictive and affords significantly reduced protection to have not beenholders of such securities as compared to the restrictive covenants, events of default and other provisions previously contained in compliancethe Old Notes Indenture.
Each guarantee of the New Notes are senior obligations of each Guarantor; secured on a second-priority basis, equally and ratably with these requirements or it is otherwise determinedall obligations of that we were ineligible to receiveGuarantor under any other future Parity Lien Debt, by Liens on all of the PPP Loan, we may be required to repayassets of that Guarantor other than the PPP Loan in its entirety and/or beExcluded Assets, subject to additional penalties. Should we be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgivenessthe Liens securing that Guarantor’s guarantee of the PPP Loan or otherwise, such audit or review could resultCredit Agreement obligations and any other Priority Lien Debt and other Permitted Prior Liens; are effectively junior, to the extent of the value of the Collateral (as defined in the diversionNew Notes Indenture), to that Guarantor’s guarantee of management’s timethe Credit Agreement and attentionany other Priority Lien Debt, which are secured on a first-priority basis by the same assets of that Guarantor that secure the New Notes; are effectively junior to any Permitted Prior Liens, to the extent of the value of the assets of that Guarantor subject to those Permitted Prior Liens; and are senior in right of payment to any future subordinated Indebtedness of that Guarantor, if any.
The following is a description of the terms and conditions of the guarantees under the Old Notes (prior to the Restructuring Transactions) and New Notes:
● | The Guarantors jointly and severally, unconditionally guarantee the payment of the principal, premium (if any) and interest on the Old Notes and New Notes in full when due, whether at maturity, by acceleration or redemption. If we fail to make a scheduled payment, Guarantors will be jointly and severally obligated to pay the same immediately. | |
● | The guarantees are subject to release in the following circumstances: (i) the sale or disposition either through merger, consolidation or otherwise of the assets or capital stock of a Guarantor that does not violate the provisions of the Old Notes Indenture and New Notes Indenture other than to us or any of our restricted subsidiary; or (ii) the designation of a Guarantor as an “Unrestricted Subsidiary” (All of ION subsidiaries are currently restricted subsidiaries) or (iii) upon legal defeasance or covenant defeasance or (iv) upon liquidation or dissolution provided no default of event or (v) if consent is provided by an act of approximately 67% of our noteholders. | |
● | Each guarantee is limited to an amount that will not render the guarantee, as it relates to each Guarantor, voidable under applicable law relating to fraudulent conveyances or fraudulent transfers. |
On the basis of historical financial information, operating history and other factors, we believe that each of the Guarantors, after giving effect to the issuance of its guarantee of the Old Notes and New Notes when the guarantee was issued, was not insolvent and did not and has not incurred debts beyond its ability to pay such debts as they mature. We cannot predict, however, what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.
The following tables include the summarized financial information of ION, the Guarantors, all other subsidiaries of ION that are not Guarantors and the incurrence of additional costs.
September 30, 2021 | ||||||||||||||||||||
Summarized Balance Sheet | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | |||||||||||||||
(In thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Total current assets | $ | 25,960 | $ | 22,032 | $ | 26,063 | $ | — | $ | 74,055 | ||||||||||
Investment in subsidiaries | 838,895 | 300,830 | — | (1,139,725 | ) | — | ||||||||||||||
Intercompany receivables | — | — | 147,335 | (147,335 | ) | — | ||||||||||||||
Total noncurrent assets | 858,907 | 366,511 | 178,495 | (1,287,060 | ) | 116,853 | ||||||||||||||
Total assets | $ | 884,867 | $ | 388,543 | $ | 204,558 | $ | (1,287,060 | ) | $ | 190,908 | |||||||||
LIABILITIES | ||||||||||||||||||||
Total current liabilities | $ | 42,524 | $ | 60,397 | $ | 13,264 | $ | — | $ | 116,185 | ||||||||||
Intercompany payables | 781,906 | 21,553 | — | (803,459 | ) | — | ||||||||||||||
Total noncurrent liabilities | 908,376 | 32,193 | 2,778 | (803,459 | ) | 139,888 | ||||||||||||||
Total liabilities | $ | 950,900 | $ | 92,590 | $ | 16,042 | $ | (803,459 | ) | $ | 256,073 | |||||||||
Nine Months Ended September 30, 2021 | ||||||||||||||||||||
Summarized Income Statement | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Total net revenues | $ | — | $ | 40,337 | $ | 37,804 | $ | — | $ | 78,141 | ||||||||||
Gross profit | — | 4,358 | 22,369 | — | 26,727 | |||||||||||||||
Income (loss) from operations | (16,578 | ) | (9,310 | ) | 15,047 | — | (10,841 | ) | ||||||||||||
Equity earnings (losses) | 523 | 15,200 | — | (15,723 | ) | — | ||||||||||||||
Net income (loss) | (31,202 | ) | 271 | 15,434 | (15,723 | ) | (31,220 | ) | ||||||||||||
This summarized financial information should be read in conjunction with the accompanying condensed consolidated financial statements and footnotes.
At September 30, 2020,2021, our total outstanding indebtedness (including equipment finance leases) was approximately $142.9$133.8 million, consisting primarily of approximately $120.6$116.2 million outstanding Second LienNew Notes, $1.0$7.1 million of equipment finance leases and other short-term debt,outstanding Old Notes, $19.4 million outstanding indebtedness under our Credit Facility, which is partially offset by $1.2$8.8 million of debt issuance costs. In response to the market uncertainty resulting from COVID-19 pandemic combined with weaker oil and gas prices, we drew under our Credit Facility during the first quarter 2020, of which $22.5 million remains outstanding and in our cash balances as of September 30, 2020.
For the Current Period, total capital expenditures, including the investments in our multi-client data library, were $20.7$22.3 million. We expect that our total capital expenditures, primarily related to investments in our multi-client data library, this year to be in the range of $25.0$30.0 million to $35.0 million, a portiondependent upon the level of which will be pre-fundedpre-funding or underwrittenunderwriting by our customers. Whether remaining planned expenditures will actually be spent in 20202021 depends on industry conditions, project approvals and schedules, and careful monitoring of our levels of liquidity.
Wecompleted the repercussions of the oil price volatility earlier this year and the ongoing uncertainty from the COVID-19 pandemic, we made progress executing our strategy. Backlog increased 77% sequentially, reversing several consecutive quarters of steady decline due to the strategic shift to enter the 3D new acquisition multi-client market. We continue to work closely with our clients to understand their revised budgets and to scale our business appropriately. We partially mitigated the impact of the current macroeconomic environment by fully benefiting from the structural changes and associated cost reductionsRestructuring Transactions (as further discussed below) that were outlined in the first quarter. To further mitigate the impact of COVID-19 and oil price volatility, management implemented a plan to preserve cash and manage liquidity as follows:
On April 20, 2021, we successfully completed our previously announced offer to exchange (the “Exchange Offer”) ION's 9.125% Senior Secured Second LienPriority Notes due 2021 (the “Old Notes”) for newly issued 8.00% Senior Secured Second Priority Notes due 2025 (the “New Notes”) and other consideration in the form of cash and ION common stock, as described in ION's Prospectus dated March 10, 2021 and our previously announced rights offering (the "Rights Offering") to our holders of ION's common stock, par value $0.01 per share (the "Common Stock") to purchase for (i) $2.78 principal amount of the New Notes per right, at a date not earlier than October 31, 2023,purchase price of 100% of the principal amount thereof or (3) submitted(ii) 1.08 shares of common stock per right, at a written proposal summarizing our planpurchase price of $2.57 per whole share of common stock.
In total, $116.2 million in aggregate principal amount of New Notes and 10.9 million shares of ION common stock were issued. We received approximately $14 million in net proceeds from the transactions after deducting noteholders obligations, estimated transaction fees and accrued and unpaid interest paid on the Old Notes. After the Restructuring Transactions, $7.1 million of Old Notes remain outstanding and are due along with unpaid interest (at a rate of 9.125% per annum) on December 15, 2021. For further details, refer to either repay or extend the notesFootnote 1 "Summary of Significant Accounting Policies - Old Notes Restructuring" of Footnotes to the agent for
Cash Flow from Operations
In the Current Period, we generatedused cash from operating activities of $13.2$10.0 million compared to cash generated from operating activities of $19.3$13.2 million for the Comparable Period. The decrease was driven primarily by a reductionthe decline in net revenues duringin the Current Period, partially offset by a reduction of operating expenses due to cost savings initiatives fully realized during the Current Period, as well as collection of our accounts receivables in the second quarter of 2020.
Cash Flow from Investing Activities
Cash used in investing activities was $20.7$24.3 million in the Current Period compared to $22.5$20.7 million for the Comparable Period. The principal uses of cash in our investing activities during the Current Period were $19.8$22.3 million invested in our multi-client data library and $0.9$2.0 million for capital expenditures related to property, plant and equipment.
Cash Flow from Financing Activities
Net cash provided by financing activities was $27.3$21.0 million in the Current Period, compared to net cash used in financing activities of $2.6$27.3 million for the Comparable Period. Cash provided by financing activities during the Current Period was related to a $22.5the $41.8 million net drawdown on our credit facility, $6.9proceeds from the rights offering, $9.8 million of government relief funding,received from the registered direct offering, partially offset by $1.8 million of payments of long-term debt, including equipment finance leases.
COVID-19 has not had a material effect on our cost of goods or labor, or the prices for our products or services. disrupted supply chains globally related to raw materials, manufacturing and shipping. To date, ION has successfully mitigated these operational impacts by maintaining close relationships with strategic suppliers.
Traditionally, our business has been seasonal, with strongest demand often occurring in the second half of our fiscal year.
Critical Accounting Policies and Estimates
Refer to our Annual Report on Form 10-K for the year ended December 31, 2019,2020, for a complete discussion of our significant accounting policies and estimates.
Foreign Sales Risks
The majority of our foreign sales are denominated in U.S. dollars. Product revenues are allocated to geographicalgeographic locations on the basis of the ultimate destination of the equipment, if known. If the ultimate destination of such equipment is not known, product revenues are allocated to the geographicalgeographic location of initial shipment. Service revenues, which primarily relate to our E&P Technology & Services segment, are allocated based upon the billing location of the customer.customer and the geographic location of the data. The table below includes certain reclassifications to make Comparable Period amounts consistent with the Current Period presentation. For the Current and Comparable Periods, international sales comprised 60%96% and 75%92%, respectively, of total net revenues.
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net revenues by geographic area: | (In thousands) | ||||||||||
| North America | $ | 37,920 | $ | 32,984 | |||||||
| Latin America | 22,695 | 50,572 | |||||||||
| Asia Pacific | 15,696 | 8,287 | |||||||||
| Europe | 12,997 | 24,850 | |||||||||
| Middle East | 2,202 | 6,364 | |||||||||
| Africa | 1,939 | 7,541 | |||||||||
| Other | 1,930 | 1,372 | |||||||||
| Total | $ | 95,379 | $ | 131,970 | |||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Latin America | $ | 24,808 | $ | 7,925 | $ | 29,383 | $ | 35,978 | ||||||||
Europe | 11,557 | 3,257 | 22,522 | 15,413 | ||||||||||||
Africa | 1,800 | 361 | 10,051 | 16,719 | ||||||||||||
Asia Pacific | 1,801 | 2,332 | 7,439 | 12,725 | ||||||||||||
Middle East | 2,867 | 474 | 4,298 | 2,370 | ||||||||||||
North America | 1,262 | 1,493 | 3,404 | 7,585 | ||||||||||||
Other | 296 | 392 | 1,044 | 4,589 | ||||||||||||
Total | $ | 44,391 | $ | 16,234 | $ | 78,141 | $ | 95,379 | ||||||||
Credit Risks
For the nine months ended September 30, 20202021 and 2019,2020, we had one customerthree and two customers, respectively, with sales that each exceeded 10% of the Company’sour consolidated net revenues.
At September 30, 2021 and 2020, we had two large multi-national and national oil company customers with balances that accounted for 53% and 39%, respectively, of our total combined accounts receivable and unbilled receivable balances. At September 30, 2019, we had two customers with a combined balance that accounted for 40% of our total combined accounts receivable and unbilled receivable balances.
The loss of these customers or deterioration in our relationship with these customers could have a material adverse effect on our results of operations and financial condition.
We routinely evaluate the financial stability and creditworthiness of our customers. We have a corporate credit policy that is intended to minimize the risk of financial loss due to a customer’s inability to pay. Credit coverage decisions for customers are based on references, payment histories, financial and other data. We utilize a third partythird-party trade credit insurance policy. We have historically not extended long-term credit to itsour customers.
For the three and nine months ended September 30, 2020,2021, we recorded net foreign currency translation losses of approximately $0.5$0.7 million and $1.8$0.9 million, respectively, primarily due to currency fluctuations related to our operations in Brazil.
Refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 20192020 for a discussion regarding our quantitative and qualitative disclosures about market risk. There have been no material changes to those disclosures during the Current Period.
Disclosure Controls and Procedures
. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file with or submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms. Disclosure controls and procedures are defined in Rule 13a-15(e) under the Exchange Act, and they include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.Our management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020.2021. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2020.
Changes in Internal Control over Financial Reporting.
There was not any change in our internal control over financial reporting that occurred during the three months ended September 30,In July 2018, we prevailed in an arbitration that we initiated against the Indian Directorate General of Hydrocarbons (“DGH”) relating to our ability to continue to license data under our IndiaSPAN program. The DGH filed a lawsuit in court in India to vacate the arbitration award; in connection with that lawsuit, we were ordered to escrow approximately $4.5 million in sales proceeds that we had received in respect of sales from ourthe IndiaSPAN program, pending the outcome of the DGH’s challenge to the arbitration award. We challenged the escrow order, but on December 9, 2019, the Supreme Court of India ordered us to comply with it. We prepared a petition to file with the court to request that a March 2020 deadline to deposit approximately $4.5 million in escrow in early 2020 be extended due to the changes to our business, and to the markets, that have been spurred by the COVID-19 pandemic. We were unable to file the application because the courts in India were closed due to the pandemic (other than for emergencies), and were not accepting filings at that time. We served a copy of our draft petition on the DGH’s counsel on March 26, 2020 and intendintends to file itaddress the escrow issue in advance of the next hearing, which has been repeatedly delayed due to the COVID-19 pandemic. We prevailed on the merits in the arbitration and expect to have that award upheld in Indian court, which would result in release of ourthe portion of theany money escrowed money.by us. The DGH’s request to vacate the arbitration award is currently scheduled to be heard by the court in India on January 18,on December 1, 2021. We have not escrowed the money as of September 30, 2020.
We have been named in various other lawsuits or threatened actions that are incidental to our ordinary business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time-consuming, cause us to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. We currently believe that the ultimate resolution of these matters will not have a material adverse effect on our financial condition or results of operations or our liquidity.
This report contains or incorporates by reference statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). These statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “would,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of such terms or other comparable terminology. Examples of other forward-looking statements contained or incorporated by reference in this report include statements regarding:
| • | the substantial doubt about our ability to continue as a going concern; | |
| • | the outcome or changes, if any, of our consideration of various strategic alternatives; | |
| • | the timing and extent of the recovery of customer demand for seismic data; | |
| • | the ultimate benefits of our completed restructuring transactions; | |
| • | our ability to comply with our debt financial covenants; | |
• | the impact of the COVID-19 pandemic on our business, financial condition, and results of operations; |
• | future levels of our capital expenditures and of our customers for seismic activities; |
• | future oil and gas commodity prices; |
• | the effects of current and future worldwide economic conditions (particularly in developing countries) and demand for oil and natural gas and seismic equipment and services; |
• | future implication of our negative working capital and stockholders’ deficit, including future cash needs and availability of cash, to fund our operations and pay our obligations; |
• | the effects of current and future unrest in the Middle East, North Africa and other regions; |
• | the timing of anticipated revenues and the recognition of those revenues for financial accounting purposes; |
• | the effects of ongoing and future industry consolidation; |
• | the timing of future revenue realization of anticipated orders for multi-client survey projects and data processing work in our E&P Technology & Services segment; |
• | future government laws or regulations pertaining to the oil and gas industry, including trade restrictions, embargoes and sanctions imposed by the U.S government or laws curtailing the exploration for, or use of; hydrocarbons; |
• | future government actions that may result in the deprivation of our contractual rights, including the potential for adverse decisions by judicial or administrative bodies in foreign countries with unpredictable or corrupt judicial systems; |
• | expected net revenues, gross margins, income from operations and net income for our services and products; |
• | future seismic industry fundamentals, including future demand for seismic services and equipment; |
• | future benefits to our customers to be derived from new services and products; |
• | future benefits to be derived from our investments in technologies, joint ventures and acquired companies; |
• | future growth rates for our services and products; |
• | the degree and rate of future market acceptance of our new services and products; |
• | expectations regarding E&P companies and seismic contractor end-users purchasing our more technologically-advanced services and products; |
• | anticipated timing and success of commercialization and capabilities of services and products under development and start-up costs associated with their development; |
• | future opportunities for new products and projected research and development expenses; |
• | limitations on our ability to utilize deferred tax assets; |
• | expectations regarding the impact of the U.S. Tax Cuts, Jobs Act and CARES Act; |
• | anticipated results with respect to certain estimates we make for financial accounting purposes; |
• | future success dependent on our continuing ability to identify, hire, develop, motivate and retain skilled personnel for all areas of our organization; |
• | breaches to our systems could lead to loss of intellectual property, dissemination of highly confidential information, increased costs and impairment of our ability to conduct our operations; |
• | evolving cybersecurity risks, such as those involving unauthorized access or control, denial-of-service attacks, malicious software, data privacy breaches by employees, insiders or others with authorized access, cyber or phishing-attacks, ransomware, malware, social engineering, physical breaches or other actions; |
• | compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties; | |
| • | expectations regarding the sale of our shares INOVA; | |
| • | expectations regarding the collectability of our accounts receivables; and | |
| • | the adoption of additional executive orders, regulatory action, and/or legislation targeting greenhouse gas emissions, or prohibiting, delaying or restricting oil and gas development activities in certain areas, during the Biden Administration. |
Risks Related to the New Notes
Our indebtedness could adversely affect our liquidity, financial condition and results of operations;
We have already implemented workplace restrictions, including guidance for our employees to work remotely if able, in our offices and work sites for health and safety reasons and are continuing to monitor national, state and local government directives wherea substantial amount of indebtedness. As of September 30, 2021, we have operations. Currently the majorityhad approximately $133.8 million of our workforce is working from home. The extent to which the COVID-19 pandemic will adversely affect our business, resultstotal outstanding indebtedness, consisting primarily of operations, and financial condition will depend on future developments that are highly uncertain. The course, scope and durationapproximately $116.2 million of the pandemic, and actions taken by governmental authorities and other third parties in response to the pandemic, cannot be predicted.
| • | we may have difficulty satisfying our obligations with respect to our outstanding debt; |
| • | we may have difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes; |
| • | we may need to use all, or a substantial portion, of our available cash flow to pay interest and principal on our debt, which will reduce the amount of money available to finance our operations and other business activities; |
| • | our vulnerability to general economic downturns and adverse industry conditions could increase; |
| • | our flexibility in planning for, or reacting to, changes in our business and in our industry in general could be limited; |
| • | our amount of debt and the amount we must pay to service our debt obligations could place us at a competitive disadvantage compared to our competitors that have less debt; |
| • | our customers may react adversely to our significant debt level and seek or develop alternative licensors or suppliers; |
| • | we may have insufficient funds, and our debt level may also restrict us from raising the funds necessary to repurchase all of the News Notes tendered to us upon the occurrence of a change of control, which would constitute an event of default under the New Notes; and |
| • | our failure to comply with the restrictive covenants in our debt instruments which, among other things, limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or prospects. |
We may not be able to takegenerate sufficient cash flow to meet our debt service obligations.
Our ability to make payments on our indebtedness, including the New Notes and any Old Notes remaining outstanding after the Restructuring Transactions, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to conditions in the oil and gas industry, the COVID-19 pandemic, general economic and financial conditions and the impact of legislative and regulatory actions on how we conduct our business and other factors, all of which are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations to service our outstanding indebtedness, or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other capital needs. If our business does not generate sufficient cash flow from operations to service our outstanding indebtedness, we may have to undertake alternative financing plans, such actions,as:
| • | refinancing or restructuring our debt; |
| • | selling assets; |
| • | reducing or delaying acquisition programs; or | |
| • | seeking to raise additional capital. |
However, we cannot assure you that we would be able to implement alternative financing plans, if necessary, on commercially reasonable terms or at all.all, or that implementing any such alternative financing plans would allow us to meet our debt obligations. In addition, if by September 15, 2021 we have not (1) repaidany failure to make scheduled payments of interest and principal on our outstanding indebtedness, including the Second LienNew Notes, (2) extended the maturitywould likely result in a reduction of the Second Lien Notesour credit rating, which could harm our ability to a date not earlier than October 31, 2023, or (3) submitted a written proposal summarizing our plan to either repay or extend the notes to the agent for the lenders (as defined in Note 5, “
Our inability to generate sufficient cash flowsflow to satisfy our debt obligations, including our obligations under the New Notes, or to obtain alternative financings, could materially and adversely affect our business, financial condition, results of operations and prospects.
Despite our current level of indebtedness, we may incur substantially more debt.
We may incur substantial additional indebtedness in the future, subject to certain limitations, including under our revolving credit facility (the “Credit Facility”) and the indenture governing the New Notes (the “New Notes Indenture”). If new indebtedness is added to our current debt levels, the related risks that we now face could increase. Our level of indebtedness could, for instance, prevent us from engaging in transactions that might otherwise be beneficial to us or from making desirable capital expenditures. This could put us at a competitive disadvantage relative to other less leveraged competitors that have more cash flow to devote to their operations. In addition, the incurrence of additional indebtedness could make it more difficult to satisfy our existing financial obligations, including those relating to the New Notes. Furthermore, the New Notes Indenture permits us to incur up to $75 million of priority debt (inclusive of borrowings under the Credit Facility). If we incur any additional indebtedness that ranks prior to the New Notes, the holders of such indebtedness will be entitled to receive proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of us before the holders of the New Notes, and if we incur additional indebtedness that ranks equal to the New Notes, the holders of that indebtedness will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of us.
Our Credit Facility and the New Notes Indenture contain, a number of restrictive covenants that will limit our ability to finance future operations or capital needs or engage in other business activities that may be in our interest.
Our Credit Facility and the New Notes Indenture impose, and the terms of any future indebtedness may impose, operating and other restrictions on us and our subsidiaries. Such restrictions affect or will affect, and in many respects limit or prohibit, among other things, our ability and the ability of our restricted subsidiaries to:
| • | incur additional indebtedness (including certain capital lease obligations), grant or incur additional liens on our properties, pledge shares of our subsidiaries, enter into certain merger or other change-in-control transactions, enter into certain transactions with our affiliates, make certain sales or other dispositions of assets, make certain investments and acquire other businesses; |
| • | pay cash dividends on our common stock; and | |
| • | repurchase and acquire our capital stock. |
Our Credit Facility contains other restrictions and covenants which require us to achieve certain financial and operating results and maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
The restrictions contained in our Credit Facility and the New Notes Indenture could:
| • | limit our ability to plan for or react to market or economic conditions or meet capital needs or otherwise restrict our activities or business plans; and |
| • | adversely affect our ability to finance our operations or other capital needs or to engage in other business activities that would be in our interest. |
A failure to comply with the restrictions in our Credit Facility or the New Notes Indenture could result in an event of default under the New Notes Indenture. Our future operating results may not be sufficient to enable compliance with the covenants in our Credit Facility or New Notes Indenture or to remedy any such default. In addition, in the event of an acceleration, we may not have or be able to obtain sufficient funds to refinance our indebtedness or make any accelerated payments, including those under our Credit Facility or our outstanding notes. Also, we may not be able to obtain new financing. Even if we were able to obtain new financing, we cannot guarantee that the new financing will be on commercially reasonable terms or at all,terms that are acceptable to us. If we default on our indebtedness, our business, financial condition or results of operations could be materially and adversely affected.
Risks Related to the Operation of our Business
There is substantial doubt about our ability to continue as a going concern.
Regardless of our improved sales in the third quarter of 2021, the timing and extent of the recovery of customer demand for seismic data remains uncertain and our lower revenues overall may still not be sufficient to fund our operations and meet our debt and other obligations over the next twelve months. If we are unable to generate additional positive cash flow from operations in the fourth quarter or to adequately supplement such cash flow from operations with proceeds from any of the strategic alternatives that we are considering, we would be unable to continue as a going concern.
Such doubt about our ability to continue as a going concern may materially and adversely affect our financial position and results or operations.
| • | third parties lose confidence in our ability to continue to operate in the ordinary course, which could impact our ability to execute on our business strategy; | |
| • | it may become more difficult for us to attract, retain or replace employees; | |
| • | employees, including senior management, could be distracted from performance of their duties; | |
| • | we could lose some or a significant portion of our liquidity; and | |
| • | our vendors and service providers could seek to renegotiate the terms of our arrangements, terminate their relationships with us or require financial assurances from us. |
Our business depends on the datelevel of exploration and production activities by the first disbursementoil and natural gas industry. If capital expenditures by E&P companies decline, typically because of lower price realizations for oil and natural gas, the PPP Loan. The amountdemand for our services and products would decline and our results of operations would be materially adversely
affected.
Demand for our services and products depends upon the PPP Loan eligiblelevel of spending by E&P companies and seismic contractors for exploration and production activities, and those activities depend in large part on oil and gas prices. Spending by our customers on services and products that we provide is highly discretionary in nature, and subject to be forgiven may be reducedrapid and material change. Any decline in certain circumstances, including as a result of certain headcount or salary reductions. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest.
| • | the timing and extent of the recovery of customer demand for seismic data; |
| • | the supply of and demand for oil and gas; | |
| • | the level of prices, and expectations about future prices, of oil and gas; | |
| • | the cost of exploring for, developing, producing and delivering oil and gas; | |
| • | the expected rates of decline for current production; | |
| • | the discovery rates of new oil and gas reserves; | |
| • | weather conditions, including hurricanes, that can affect oil and gas operations over a wide area, as well as less severe inclement weather that can preclude or delay seismic data acquisition; | |
| • | domestic and worldwide economic conditions; | |
| • | public health crises, such as the coronavirus outbreak at the beginning of 2020; | |
| • | changes in government leadership; | |
| • | political instability in oil and gas producing countries; | |
| • | technical advances affecting energy consumption; | |
| • | government policies regarding the exploration, production and development of oil and gas reserves; | |
| • | the ability of oil and gas producers to raise equity capital and debt financing; | |
| • | merger and divestiture activity among oil and gas companies and seismic contractors; and | |
| • | compliance by members of OPEC and non-OPEC members, such as Russia, with agreements to cut oil production. |
The disruptionlevel of oil and uncertainty spurred by COVID-19gas exploration and production activity has created new avenuesbeen volatile in recent years. Trends in oil and gas exploration and development activities have declined, together with demand for phishingour services and other cyberattacks, which may impact usproducts. Any prolonged substantial reduction in oil and gas prices would likely further affect oil and gas production levels and therefore adversely affect demand for the services we provide and products we sell.
If we engage in one or more strategic alternatives, we could face a variety of risks that could adversely affect our business or our stockholders.
On September 15, 2021, we announced that our Board of Directors initiated a process to evaluate a greater extentrange of strategic alternatives to strengthen our financial position and maximize stakeholder value as we allowcontinue to assess conditions in the capital markets and right size the business. These strategic alternatives include, among others, a significant numbersale or other business combination transaction, sales of assets, private or public equity transactions, debt financing, or some combination of these alternatives. If we pursue any of these strategies, we could, among other things, spend substantial operational, financial and management resources to affect any transaction, incur or assume substantial additional liabilities, suffer the loss of key personnel, or enter into a business combination transaction that our stockholders may not deem desirable.
There can be no assurance that such evaluation will result in one or more transactions or other strategic change or outcome. We have not set a timetable for the conclusion of our employees to work remotely
(c)
Purchase of Equity Securities by the Issuer and Affiliated PurchasersDuring the three months ended September 30, 2020,2021, in connection with the vesting of (or lapse of restrictions on) shares of our restricted stock held by certain employees, we acquired shares of our common stock in satisfaction of tax withholding obligations that were incurred on the vesting date. The date of acquisition, number of shares and average effective acquisition price per share were as follows:
| Period | (a) Total Number of Shares Acquired | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program | (d) Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Program | ||||||||||||||||||||||
| July 1, 2020 to July 31, 2020 | — | $ | — | Not applicable | Not applicable | |||||||||||||||||||||
| August 1, 2020 to August 31, 2020 | — | $ | — | Not applicable | Not applicable | |||||||||||||||||||||
| September 1, 2020 to September 30, 2020 | 41,470 | $ | 2.39 | Not applicable | Not applicable | |||||||||||||||||||||
| Total | 41,470 | $ | 2.39 | |||||||||||||||||||||||
(a) | (b) | (c) | (d) | ||||||||
Period | Total Number of Shares Acquired | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Program | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Program | |||||||
July 1, 2021 to July 31, 2021 | — | $ | — | Not applicable | Not applicable | ||||||
August 1, 2021 to August 31, 2021 | — | — | Not applicable | Not applicable | |||||||
September 1, 2021 to September 30, 2021 | 22,515 | 1.28 | Not applicable | Not applicable | |||||||
Total | 22,515 | $ | 1.28 | ||||||||
None.
31.1 | ||||||||||||
31.2 | ||||||||||||
32.1 | ||||||||||||
32.2 | ||||||||||||
| 101 | The following materials are formatted in Inline Extensible Business Reporting Language | |||||||||||
| Inline XBRL Instance Document. | ||||||||||||
| 101.SCH | Inline XBRL Taxonomy Schema Document. | |||||||||||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document. | |||||||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document. | |||||||||||
| 101.LAB | Inline XBRL Taxonomy Label Linkbase Document. | |||||||||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document. | |||||||||||
104 | Cover page interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ION GEOPHYSICAL CORPORATION | |||||||||||||||||||||
(Registrant) | |||||||||||||||||||||
By | /s/ Mike Morrison | ||||||||||||||||||||
Mike Morrison | |||||||||||||||||||||
Executive Vice President and Chief Financial Officer | |||||||||||||||||||||
Date: November 5, 2020