io20210930_10q.htm
0000866609 ION GEOPHYSICAL CORP false --12-31 Q3 2021 0.01 0.01 100,000,000 100,000,000 28,627,268 14,333,101 4 2 1.9 6.9 3 2 2 2 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 0 0 0 0 0 0 0 Includes severance expense of $1.9 million for the three and nine months ended September 30, 2021. Includes impairment of goodwill of $4.2 million for the nine months ended September 30, 2020. Includes impairment of multi-client data library of $1.2 million for the nine months ended September 30, 2020. Represents transaction costs incurred in connection with the Restructuring Transactions. 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. 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. While the outstanding balance of $19.4 million under the Credit Facility is shown as a current liability, the Credit Facility matures on August 16, 2023. Consists primarily of cable-based ocean bottom acquisition technologies that were fully impaired. Consists primarily of $17.1 million payment for the Old Notes resulting from the Exchange Offer. 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. The majority of deferred revenue recognized relates to Company’s Ventures group. 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Table of Contents

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, 2021

 

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: (281933-3339

 

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). Yes     No  ☒

 

At November 1, 2021, there were 29,617,040 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS FOR FORM 10-Q

FOR THE QUARTER ENDED September 30, 2021

 

 

PAGE

PART I. Financial Information

 

Item 1. Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020

4

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020

6

Condensed Consolidated Statements of Stockholders' Deficit for the three and nine months ended September 30, 2021 and 2020

7

Footnotes to Condensed Consolidated Financial Statements

8

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

21

Item 3. Quantitative and Qualitative Disclosures about Market Risk

32

Item 4. Controls and Procedures

32

   

PART II. Other Information

 

Item 1. Legal Proceedings

33

Item 1A. Risk Factors

34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 5. Other Information

39

Item 6. Exhibits

40

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

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

 $24,143  $37,486 

Accounts receivable, net

  15,890   8,045 

Unbilled receivables

  17,541   11,262 

Inventories, net

  10,673   11,267 

Prepaid expenses and other current assets

  5,808   7,116 

Total current assets

  74,055   75,176 

Property, plant and equipment, net

  9,067   9,511 

Multi-client data library, net

  56,513   50,914 

Goodwill

  19,449   19,565 

Right-of-use assets

  29,896   35,501 

Other assets

  1,928   2,926 

Total assets

 $190,908  $193,593 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

Current liabilities:

        

Current maturities of long-term debt

 $26,447  $143,731 

Accounts payable

  28,061   33,418 

Accrued expenses

  30,402   16,363 

Accrued multi-client data library royalties

  20,003   21,359 

Deferred revenue

  3,009   3,648 

Current maturities of operating lease liabilities

  8,263   7,570 

Total current liabilities

  116,185   226,089 

Long-term debt, net of current maturities

  107,379    

Operating lease and other long-term liabilities, net of current maturities

  32,509   38,594 

Total liabilities

  256,073   264,683 

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.

  285   143 

Preferred stock

      

Additional paid-in capital

  995,821   958,584 

Accumulated deficit

  (1,042,718)  (1,011,516)

Accumulated other comprehensive loss

  (19,772)  (19,913)

Total stockholders’ deficit

  (66,384)  (72,702)

Noncontrolling interests

  1,219   1,612 

Total deficit

  (65,165)  (71,090)

Total liabilities and deficit

 $190,908  $193,593 

 

See accompanying Footnotes to Condensed Consolidated Financial Statements.

 

 

 

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

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

  $ 36,455     $ 10,202     $ 56,285     $ 73,234  

Product revenues

    7,936       6,032       21,856       22,145  

Total net revenues

    44,391       16,234       78,141       95,379  

Cost of services

    18,349       11,491       38,842       47,033  

Cost of products

    3,812       3,454       12,572       12,962  

Impairment of multi-client data library

                      1,167  

Gross profit

    22,230       1,289       26,727       34,217  

Operating expenses:

                               

Research, development and engineering

    3,156       2,899       9,485       9,943  

Marketing and sales

    3,142       2,811       9,080       8,888  

General, administrative and other operating expenses

    9,158       6,743       19,003       21,546  

Impairment of goodwill

                      4,150  

Total operating expenses

    15,456       12,453       37,568       44,527  

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 )     6,675  

Income (loss) before income taxes

    3,183       (15,358 )     (25,670 )     (13,939 )

Income tax expense

    3,623       1,056       5,550       9,982  

Net loss

    (440 )     (16,414 )     (31,220 )     (23,921 )

Less: Net income (loss) attributable to noncontrolling interests

    (13 )     (193 )     18       (168 )

Net loss attributable to ION

  $ (453 )   $ (16,607 )   $ (31,202 )   $ (24,089 )

Net loss per share:

                               

Basic and Diluted

  $ (0.02 )   $ (1.16 )   $ (1.33 )   $ (1.69 )

Weighted average number of common shares outstanding:

                               

Basic and Diluted

    28,590       14,278       23,546       14,255  

 

See accompanying Footnotes to Condensed Consolidated Financial Statements.

 

 

 

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 )

 

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

      1,167 

Impairment of goodwill

      4,150 

Stock-based compensation expense

  1,306    1,637 

Amortization of government relief funding

      (6,923)

Loss on restructuring transactions

  4,696     

Deferred income taxes

      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

      27,000 

Repayments under revolving line of credit

  (3,150)   (4,500)

Proceeds from the rights offering

  41,836 

(a)

   

Payments on notes payable and long-term debt

  (18,704)

(b)

  (1,814)

Costs associated with debt issuance

  (8,185)

(c)

   

Net proceeds from the registered direct offering

  9,802     

Receipt of Paycheck Protection Program loan

      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 

 

(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.

 

 

 

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

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

                      (453 )           13       (440 )

Translation adjustment

                            (374 )     (120 )     (494 )

Stock-based compensation expense

                526                         526  

Vesting of restricted stock units/awards

    71,897                                      

Vested restricted stock cancelled for employee minimum income taxes

    (22,515 )           (28 )                       (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

                      (31,202 )           (18 )     (31,220 )

Translation adjustment

                            141       (68 )     73  

Dividend payment to noncontrolling interest

                                  (307 )     (307 )

Stock-based compensation expense

                1,306                         1,306  

Vesting of restricted stock units/awards

    545,101       5       (5 )                        

Vested restricted stock cancelled for employee minimum income taxes

    (146,197 )     (2 )     (294 )                       (296 )

Stocks issued as part of the registered direct offering

    2,990,001       30       9,772                         9,802  

Stocks issued as part of the Restructuring Transactions

    10,905,262       109       26,458                         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

 
    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, 2020

    14,245,829       142       957,746       (981,773 )     (21,833 )     1,608       (44,110 )

Net (loss) income

                      (16,607 )           193       (16,414 )

Translation adjustment

                            821       (49 )     772  

Dividend payment to noncontrolling interest

                                  (217 )     (217 )

Stock-based compensation expense

                543                         543  

Vesting of restricted stock units/awards

    111,094       2       (2 )                        

Vested restricted stock cancelled for employee minimum income taxes

    (41,470 )           (98 )                       (98 )

Balance at September 30, 2020

    14,315,453     $ 144     $ 958,189     $ (998,380 )   $ (21,012 )   $ 1,535     $ (59,524 )

 

      For the Nine Months Ended September 30, 2020  
   

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, 2020

    14,224,787     $ 142     $ 956,647     $ (974,291 )   $ (19,318 )   $ 2,188     $ (34,632 )

Net (loss) income

                      (24,089 )           168       (23,921 )

Translation adjustment

                            (1,694 )     (604 )     (2,298 )

Dividend payment to noncontrolling interest

                                  (217 )     (217 )

Stock-based compensation expense

                1,637                         1,637  

Exercise of stock options

    5,000             15                         15  

Vesting of restricted stock units/awards

    128,183       2       (2 )                        

Vested restricted stock cancelled for employee minimum income taxes

    (42,517 )           (108 )                       (108 )

Balance at September 30, 2020

    14,315,453     $ 144     $ 958,189     $ (998,380 )   $ (21,012 )   $ 1,535     $ (59,524 )

 

See accompanying Footnotes to Condensed Consolidated Financial Statements.

 

 

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

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, 2020, has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at September 30, 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, 2021 and 2020 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 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-Q and applicable rules of Regulation S-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-K for the year ended December 31, 2020.

 

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 Company 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.

 

8

 

COVID-19 Business Impact and Response

 

The COVID-19 pandemic caused the global economy to enter a recessionary period starting in the second quarter of 2020. During 2020, the exploration and production (“E&P”) industry faced 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 for most of 2020. The sharp commodity price decline triggered E&P companies to reduce budgets by approximately 25%.  Exploration offerings and data purchases are often discretionary and, therefore, receive disproportionately higher reductions than overall budget cuts. Consequently, there has been a material slowdown in offshore seismic spending since second quarter of 2020, and while the market remains uncertain, there are signs of sequential improvement and gradual market recovery. 

 

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 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 its business given the Company'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 the Company's offerings.
 
The Company 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, the Company had strategically shifted its 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, the Company believes 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, such as offerings that facilitate remote working.  
 
ION continues to work closely with its clients to understand their budgets and spending priorities and to scale its business appropriately. The Company partially mitigated the impact of the current macroeconomic environment by fully benefiting from the structural changes and associated cost reductions totaling approximately $40 million through salary cuts, reduced capital expenditures, renegotiation of the Company's leases and application for various government assistance programs, among others. In addition, the Company is implementing a further cost reduction program of approximately  $16 million of annualized savings identified through a combination of both short-term and long-term reductions in an effort to right size its business. The management plan reflects the Company’s continued focus on preserving cash and managing liquidity in the current uncertain macroeconomic environment.

 

Significant Accounting Policies

 

The Company’s significant accounting policies are disclosed in Footnote 1 “Summary of Significant Accounting Policies” of the Annual Report on Form 10-K for the year ended December 31, 2020. There have been no changes in such policies or the application of such policies during the nine months ended September 30, 2021.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and 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 forecasts 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 Pronouncement

 

In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-06,Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The new guidance eliminates two of the three models in Accounting Standards Codification ("ASC") 470-202 that require separating embedded conversion features from convertible instruments. As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-153 will be accounted for separately. For contracts in an entity’s own equity, the new guidance eliminates some of the requirements in ASC 815-404 for equity classification. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. For public business entities other than smaller reporting companies as defined by the SEC, the guidance is effective for annual periods beginning after December 15, 2021, and interim periods therein. For all other entities, it is effective for annual periods beginning after December 15, 2023, and interim periods therein. Early adoption is permitted in fiscal years beginning after December 15, 2020. The Company adopted the standard as of January 1, 2021. This resulted in presenting the New Notes holders' conversion option within "long-term debt, net of current maturities" account in the condensed consolidated balance sheets instead of a separate presentation in equity. See Footnote 4, "Long-term Debt - New Notes" for further details.

 

(2)

Segment Information

 

The Company evaluates and reviews its results of operations based on two reporting segments: E&P Technology & Services and Operations Optimization. Refer to Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information about each business segment’s business, products and services.

 

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.

 

9

 

A summary of segment information follows (in thousands):

 

  

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.

 

10

 
 

(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-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,

 
  

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 Footnote 2“Segment Information” for total net revenues by segment for the three and nine months ended September 30, 2021 and 2020.

 

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,

  

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.

 

11

 

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 that will be recognized in future periods. The following table is a summary of deferred revenues (in thousands):

 

  

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 were 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 a majority of deferred revenue within the next twelve months.

 

Credit Risks

 

For the nine months ended September 30, 2021 and 2020, the Company had three 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. 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 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     $  

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)

          734  

Other debt

          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     $  

 

12

 

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.

 

New Notes
 
The $116.2 million aggregate principal amount outstanding New Notes are governed by the Indenture (the "New Notes Indenture") dated as of April 20, 2021, among the Company, certain of the Company’s subsidiaries, as Guarantors (as defined under Old Notes above), and UMB Bank, National Association, as trustee and collateral agent (the “New Notes Trustee”). The New Notes are senior secured second-priority debt obligations of the Company and will mature on December 15, 2025. The New Notes bear interest at a rate of 8.00% per annum. Interest on the New Notes will be payable on each June 15 and December 15, commencing on June 15, 2021. The New Notes are guaranteed by the Guarantors (as defined under Old Notes above). For further details, refer to Footnote 1 "Summary of Significant Accounting Policies - Old Notes Restructuring."
 
The New Notes are senior obligations of ION; secured on a second-priority basis, equally and ratably with all obligations of ION under any future Parity Lien Debt (as defined in the New Notes Indenture), by Liens on all of the assets of ION other than the Excluded Assets, subject to the Liens securing ION’s obligations under the Credit Agreement (as defined under Revolving Credit Facility below) and any other Priority Lien Debt and other Permitted Prior Liens (as defined in the New Notes Indenture); are effectively junior to any Permitted Prior Liens, to the extent of the value of the assets of ION subject to those Permitted Prior Liens; are senior in right of payment to any future subordinated Indebtedness of ION, if any; are unconditionally guaranteed by the Guarantors; and are structurally subordinated to all existing and future Indebtedness (as defined in the New Notes Indenture), claims of holders of preferred stock and other liabilities of subsidiaries of ION that do not guarantee the New Notes.

 

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 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 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 was 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 the 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 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.

 

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.

 

13

 

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 above 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 April 20, 2021, ION and its 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 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, 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 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 Fourth 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% per annum for domestic rate loans and 4% per annum for LIBOR rate loans with a minimum interest rate of 2% for domestic rate loans and 3% for LIBOR rate loans based on a leverage ratio for the preceding four-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 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, 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 obligations of Borrowers under the Credit Facility are secured by a first-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-priority security interest in the other assets of the Mexican Subsidiary is capped to a maximum exposure of $5.0 million.

 

14

 

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 occurrence of which could lead to an acceleration of the Company's obligations under the Credit Facility.

 

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’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-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, 2021, the Company was in compliance with all of the covenants under the Credit Facility.

 

A summary of future principal obligations under 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

                 

2024

                 

2025

                 

Thereafter

    116,193             116,193  

Total

  $ 123,290     $ 19,350     $ 142,640  

 

(1) While the outstanding balance of $19.4 million under the Credit Facility is shown as a current liability, the Credit Facility matures on August 16, 2023. 

 

(5)

Government Relief Funding

 

Paycheck Protection Program

 

On April 11, 2020, the Company 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 bore interest at 1% per annum as of the date of disbursement. The Note was scheduled to mature in two years after the receipt of the loan proceeds. On June 16, 2021, the Company received the notice of forgiveness from the Small Business Administration for the full amount of the Note including all accrued interest.

 

The Company recognized the Note of $6.9 million as a deferred income liability during 2020 and fully amortized to other income in the condensed consolidated income statements for the nine months ended September 30, 2020, as the related expenses it was intended to offset were incurred from April 2020 to June 2020.

 

Employee Retention Credit

 

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to the employee retention tax credits previously made available under the CARES Act, including modifying and extending the Employee Retention Credit ("ERC") through December 31, 2021. As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020 through December 31, 2021. This resulted in an ERC of $4.8 million for the 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. The Company 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.

 

(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 income per share, basic net income 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, 2021 and 2020 of 405,070 and 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, 2021 and 2020 of 1,134,617 and 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 until there is sufficient evidence to warrant reversal, including the removal of the substantial doubt that the Company will continue as a going concern.

 

The tax provision for the nine months ended September 30, 2021 has been calculated based 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 actual tax rate 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, 2021 and 2020 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 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 for the nine months ended September 30, 2020.

 

In response to the global pandemic related to 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 taxpayers, including modifications of the utilization limitations on net operating losses, favorable expansions of the deduction for business interest expense under Internal Revenue Code Section 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 the Company's condensed consolidated financial statements as it relates to COVID-19 measures. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Services ("IRS") and others.

 

At September 30, 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-month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.

 

At September 30, 2021, the Company’s U.S. federal tax returns for 2017 and subsequent years remain subject to examination by tax authorities. In the Company’s foreign tax jurisdictions, tax returns for 2016 and subsequent years generally remain open to examination.

 

15

 
 

(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 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-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 address the escrow issue in advance of the next hearing, which has been repeatedly delayed due to the COVID-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 portion of any money escrowed by the Company. The DGH’s request to vacate the arbitration award is currently scheduled to be heard by the court in India on December 1, 2021. The Company has not escrowed the money as of  November 3, 2021.

 

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 accounts receivable follows (in thousands):

 

  

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,

  

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

 

  

September 30,

  

December 31,

 
  

2021

  

2020