ION GEOPHYSICAL CORP - FORM 10-Q

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EX-31.2 - EXHIBIT 31.2 - ION GEOPHYSICAL CORP	ex312cfosec302cert06302016.htm
EX-32.2 - EXHIBIT 32.2 - ION GEOPHYSICAL CORP	ex322cfosec906cert06302016.htm
EX-32.1 - EXHIBIT 32.1 - ION GEOPHYSICAL CORP	ex321ceosec906cert06302016.htm
EX-31.1 - EXHIBIT 31.1 - ION GEOPHYSICAL CORP	ex311ceosec302cert06302016.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016



¨	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 400
Houston, Texas		77042-2839
(Address of principal executive offices)		(Zip Code)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 933-3339

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	o	Accelerated filer	ý

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No ý

At July 25, 2016, there were 11,786,220 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 JUNE 30, 2016



	PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	3
Condensed Consolidated Statements of Operations for the three- and six-months ended June 30, 2016 and 2015	4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three- and six-months ended June 30, 2016 and 2015	5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	6
Footnotes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures about Market Risk	40
Item 4. Controls and Procedures	40

PART II. Other Information
Item 1. Legal Proceedings	41
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 5. Other Information	43
Item 6. Exhibits	44

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



	June 30, 2016			December 31, 2015
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	52,433		$	84,933
Accounts receivable, net	20,094			44,365
Unbilled receivables	22,011			19,937
Inventories	34,377			32,721
Prepaid expenses and other current assets	17,461			14,807
Total current assets	146,376			196,763
Property, plant, equipment and seismic rental equipment, net	58,412			72,027
Multi-client data library, net	118,547			132,237
Goodwill	24,025			26,274
Intangible assets, net	3,947			4,810
Other assets	2,514			2,977
Total assets	$	353,821		$	435,088
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	20,371		$	7,912
Accounts payable	26,969			29,799
Accrued expenses	27,284			34,287
Accrued multi-client data library royalties	23,473			25,045
Deferred revenue	7,666			6,560
Total current liabilities	105,763			103,603
Long-term debt, net of current maturities	145,130			175,080
Other long-term liabilities	44,051			44,365
Total liabilities	294,944			323,048
Equity:
Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 11,786,220 and 10,702,689 shares at June 30, 2016 and December 31, 2015, respectively, net of treasury stock	118			107
Additional paid-in capital	897,476			894,715
Accumulated deficit	(819,887		)	(759,531		)
Accumulated other comprehensive loss	(18,980		)	(14,781		)
Treasury stock, at cost, zero and 353,124 shares at June 30, 2016 and December 31, 2015 respectively	—			(8,551		)
Total stockholders’ equity	58,727			111,959
Noncontrolling interest	150			81
Total equity	58,877			112,040
Total liabilities and equity	$	353,821		$	435,088

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands, except per share data)
Service revenues	$	25,430		$	23,323		$	38,586		$	43,403
Product revenues	10,722			13,472			20,231			33,970
Total net revenues	36,152			36,795			58,817			77,373
Cost of services	27,175			38,817			53,012			84,351
Cost of products	4,124			8,113			9,882			18,945
Gross profit (loss)	4,853			(10,135		)	(4,077		)	(25,923		)
Operating expenses:
Research, development and engineering	4,761			7,239			10,370			14,959
Marketing and sales	4,684			8,638			8,694			16,471
General, administrative and other operating expenses	11,996			14,677			23,576			30,025
Total operating expenses	21,441			30,554			42,640			61,455
Loss from operations	(16,588		)	(40,689		)	(46,717		)	(87,378		)
Interest expense, net	(4,702		)	(4,607		)	(9,436		)	(9,232		)
Other income (expense), net	(1,717		)	101,600			(1,597		)	98,381
Income (loss) before income taxes	(23,007		)	56,304			(57,750		)	1,771
Income tax expense, net	2,256			532			2,549			1,515
Net income (loss)	(25,263		)	55,772			(60,299		)	256
Net (income) loss attributable to noncontrolling interests	(79		)	297			(57		)	549
Net income (loss) attributable to ION	$	(25,342	)	$	56,069		$	(60,356	)	$	805
Net income (loss) per share:
Basic	$	(2.22	)	$	5.11		$	(5.48	)	$	0.07
Diluted	$	(2.22	)	$	5.11		$	(5.48	)	$	0.07
Weighted average number of common shares outstanding:
Basic	11,415			10,979			11,008			10,975
Diluted	11,415			10,980			11,008			10,977

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)



	Three Months Ended June 30,					Six Months Ended June 30,
	2016			2015		2016			2015
	(In thousands)
Net income (loss)	$	(25,263	)	$	55,772	$	(60,299	)	$	256
Other comprehensive income (loss), net of taxes, as appropriate:
Foreign currency translation adjustments	(2,737		)	1,953		(4,199		)	608
Total other comprehensive income (loss), net of taxes	(2,737		)	1,953		(4,199		)	608
Comprehensive net income (loss)	(28,000		)	57,725		(64,498		)	864
Comprehensive (income) loss attributable to noncontrolling interest	(79		)	297		(57		)	549
Comprehensive net income (loss) attributable to ION	$	(28,079	)	$	58,022	$	(64,555	)	$	1,413

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Six Months Ended June 30,
	2016			2015
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	(60,299	)	$	256
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization (other than multi-client data library)	11,416			13,015
Amortization of multi-client data library	14,244			10,440
Stock-based compensation expense	1,610			3,047
Reduction of accrual for loss contingency related to legal proceedings	—			(101,978		)
Loss on extinguishment of debt	2,182			—
Deferred income taxes	381			(24		)
Change in operating assets and liabilities:
Accounts receivable	23,980			87,796
Unbilled receivables	(2,042		)	9,198
Inventories	1,329			(739		)
Accounts payable, accrued expenses and accrued royalties	(5,518		)	(40,649		)
Deferred revenue	1,151			2,405
Other assets and liabilities	(773		)	(5,262		)
Net cash used in operating activities	(12,339		)	(22,495		)
Cash flows from investing activities:
Cash invested in multi-client data library	(8,648		)	(13,598		)
Purchase of property, plant, equipment and seismic rental assets	(340		)	(17,213		)
Other investing activities	—			257
Net cash used in investing activities	(8,988		)	(30,554		)
Cash flows from financing activities:
Borrowings under revolving line of credit	15,000			—
Repurchase of common stock	(964		)	—
Payments on notes payable and long-term debt	(4,786		)	(3,560		)
Costs associated with issuance of debt	(6,174		)	—
Payment to repurchase bonds	(15,000		)	—
Other financing activities	13			22
Net cash used in financing activities	(11,911		)	(3,538		)
Effect of change in foreign currency exchange rates on cash and cash equivalents	738			39
Net decrease in cash and cash equivalents	(32,500		)	(56,548		)
Cash and cash equivalents at beginning of period	84,933			173,608
Cash and cash equivalents at end of period	$	52,433		$	117,060

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) 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, 2015 has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at June 30, 2016, and the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2016 and 2015 and the condensed consolidated statements of cash flows for the six months ended June 30, 2016 and 2015, are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The share numbers have been retroactively adjusted to reflect the one-for-fifteen reverse stock split completed on February 4, 2016. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the operating results for a full year or of future operations.

These condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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, 2015 and on Form 10-K/A Amendment No. 2, which was filed on June 27, 2016 and contains the separate consolidated financial statements of INOVA Geophysical Equipment Limited (“INOVA Geophysical”) for its fiscal year ended December 31, 2015.

(2) Restructurings and Special Items

The recent decline in crude oil prices to five-year lows and the depressed level of natural gas prices have negatively impacted the economic outlook of the Company’s exploration and production (“E&P”) customers, which has also negatively impacted the outlook for the Company’s seismic contractor customers. In response to the decline in crude oil prices, E&P companies have reduced their capital expenditures and shifted their spending from exploration activities to production-related activities on existing assets. Because seismic spending is discretionary, E&P companies have disproportionately cut their spending on seismic-related services and products.

In April, 2016, the Company implemented additional cost saving initiatives by reducing its current workforce by over 12%. Additional reductions were needed to further streamline the organization and bring it in line with the Company’s current revenue stream, while maintaining the necessary core capabilities to continue our operations and strategic initiatives. During the three and six months ended June 30, 2016, the Company recognized the following pre-tax charges (in thousands):



	Severance Charges^(a)		Loss on Bond Exchange^(b)		Total
Cost of goods sold	$	1,077	$	—	$	1,077
Operating expenses	932		—		932
Other expense	—		2,182		2,182
Consolidated total	$	2,009	$	2,182	$	4,191


^(a)	Represents severance charges related to the second quarter 2016 restructurings.


^(b)	Represents a loss on exchange of bonds during the second quarter 2016.

(3) Segment Information

The Company operates through four business segments – Solutions, Systems, Software and Ocean Bottom Services. The Company measures segment operating results based on income (loss) from operations. In addition, the Company has an equity ownership interest in its INOVA Geophysical joint venture. As of December 31, 2014, the Company wrote down its investment in INOVA Geophysical to zero and has suspended recording its share of losses in the joint venture. If at a future date, the Company’s cumulative share of earnings during the period of suspension becomes greater than its share of losses during the same period, the Company will begin to record its share of earnings in the joint venture as long as its net equity method investment remains greater than zero.

On August 4, 2016, the Company announced it plans to realign its four business segments into three. See further discussion at Footnote 18 “Subsequent Event” of Footnotes to Consolidated Financial Statements.”

The following table is a summary of segment information (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net revenues:
Solutions:
New Venture	$	4,579		$	3,636		$	7,885		$	8,665
Data Library	6,275			7,509			10,547			9,646
Total multi-client revenues	10,854			11,145			18,432			18,311
Data Processing	7,764			11,205			13,204			23,038
Total	$	18,618		$	22,350		$	31,636		$	41,349
Systems	$	6,626		$	7,674		$	11,985		$	20,443
Software:
Software Systems	$	4,096		$	5,798		$	8,246		$	13,527
Services	379			973			517			2,054
Total	$	4,475		$	6,771		$	8,763		$	15,581
Ocean Bottom Services	$	6,433		$	—		$	6,433		$	—
Total	$	36,152		$	36,795		$	58,817		$	77,373
Gross profit (loss):
Solutions	$	(3,533	)	$	(7,856	)	$	(13,306	)	$	(18,248	)
Systems	1,358			1,500			2,721			6,059
Software	2,761			4,208			5,287			9,798
Ocean Bottom Services	4,267			(7,987		)	1,221			(23,532		)
Total	$	4,853		$	(10,135	)	$	(4,077	)	$	(25,923	)
Gross margin:
Solutions	(19		)%	(35		)%	(42		)%	(44		)%
Systems	20		%	20		%	23		%	30		%
Software	62		%	62		%	60		%	63		%
Ocean Bottom Services	66		%	—		%	19		%	—		%
Total	13		%	(28		)%	(7		)%	(34		)%
Income (loss) from operations:
Solutions	$	(8,649	)	$	(19,756	)	$	(24,126	)	$	(41,534	)
Systems	(1,843		)	(2,379		)	(4,352		)	(1,365		)
Software	899			2,095			1,895			5,430
Ocean Bottom Services	2,884			(10,008		)	(1,330		)	(27,567		)
Corporate and other	(9,879		)	(10,641		)	(18,804		)	(22,342		)
Loss from operations	(16,588		)	(40,689		)	(46,717		)	(87,378		)
Interest expense, net	(4,702		)	(4,607		)	(9,436		)	(9,232		)
Other income (expense), net	(1,717		)	101,600			(1,597		)	98,381
Income (loss) before income taxes	$	(23,007	)	$	56,304		$	(57,750	)	$	1,771

(4) Long-term Debt

The following table is a summary of long-term debt obligations, net (in thousands):



Obligations (in thousands)	June 30, 2016			December 31, 2015
Senior secured second-priority notes (maturing December 15, 2021)	$	120,569		$	—
Senior secured third-priority notes (maturing May 15, 2018)	28,497			175,000
Revolving line of credit	15,000			—
Equipment capital leases	6,068			9,762
Other debt	685			1,558
Costs associated with issuances of debt ⁽¹⁾	(5,318		)	(3,328		)
Total	165,501			182,992
Current portion of long-term debt and lease obligations	(20,371		)	(7,912		)
Non-current portion of long-term debt and lease obligations	$	145,130		$	175,080


⁽¹⁾	Represents debt issuance costs presented as a direct deduction from the carrying amount of the associated debt liability.

Revolving Credit Facility

In August 2014, ION and its material U.S. subsidiaries, ION Exploration Products (U.S.A.), Inc., I/O Marine Systems, Inc. and GX Technology Corporation (collectively, the “Subsidiary Borrowers”), and together with the Company, collectively, the “Borrowers”) entered into a Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), as agent (the “Original Credit Agreement”), which was amended by the First Amendment to Revolving Credit and Security Agreement in August 2015 (the “First Amendment”) and the Second Amendment (as defined below) (the Original Credit Agreement, as amended by the First Amendment, and the Second Amendment, the “Credit Facility”). For a complete discussion of the terms, available credit and security of this Credit Facility, prior to the effectiveness of the Second Amendment, see Footnote 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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 amount of the revolving line of credit under the Credit Facility is the lesser of $40.0 million or a monthly borrowing base (which may be recalculated more frequently under certain circumstances).

On April 28, 2016, the Borrowers and PNC entered into a second amendment (the “Second Amendment”) to the Credit Facility. The Second Amendment, among other things:


•	increases the applicable margin for loans by 0.50% per annum (from 2.50% per annum to 3.00% per annum for alternate base rate loans and from 3.50% per annum to 4.00% per annum for LIBOR-based loans);


•	increases the minimum excess availability threshold to avoid triggering the agent’s rights to exercise dominion over cash and deposit accounts and increases certain of the thresholds upon which such dominion ceases;


•	increases the minimum liquidity threshold to avoid triggering the Company’s obligation to calculate and comply with the existing fixed charge coverage ratio and increases certain of the thresholds upon which such required calculation and compliance cease;


•	establishes a reserve that reduces the amount available to be borrowed by the aggregate amount owing under all Third Lien Notes that remain outstanding (if any) on or after February 14, 2018 (i.e., 90 days prior to the stated maturity of the Third Lien Notes);


•	increases the maximum amount of certain permitted junior indebtedness to $200.0 million (from $175.0 million);


•	incorporates technical and conforming changes to reflect that the Second Lien Notes and the remaining Third Lien Notes (and any permitted refinancing thereof or subsequently incurred replacement indebtedness meeting certain requirements) constitute permitted indebtedness;


•	clarifies the circumstances and mechanics under which the Company may prepay, repurchase or redeem the Second Lien Notes, the remaining Third Lien Notes and certain other junior indebtedness;


•	modifies the cross-default provisions to incorporate defaults under the Second Lien Notes, the remaining Third Lien Notes and certain other junior indebtedness; and


•	eliminates the potential early commitment termination date and early maturity date that would otherwise have occurred ninety (90) days prior the maturity date of the Third Lien Notes if any of the Third Lien Notes then remained outstanding.

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 $15.0 million for the multi-client data library data component). As of June 30, 2016, the borrowing

base under the Credit Facility was $26.9 million, and there was $15.0 million of indebtedness under the Credit Facility. The Credit Facility is scheduled to mature on August 22, 2019.

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.

The Credit Facility contains covenants that, among other things, limit or prohibit the Borrowers, subject to certain exceptions and qualifications, from incurring additional indebtedness (including capital 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, requires that ION and the Subsidiary 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 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) the failure to maintain a measure of liquidity greater than (i) $7.5 million for five consecutive business days or (ii) $6.5 million on any given business day. Liquidity, as defined in the Credit Facility, is the Company’s excess availability to borrow ($11.9 million at June 30, 2016) plus the aggregate amount of unrestricted cash held by ION, the Subsidiary Borrowers and their domestic subsidiaries.

At June 30, 2016, the Company was in compliance with all of the covenants under the Credit Facility.

The Credit Facility contains customary event of default provisions (including a “change of control” event affecting ION), the occurrence of which could lead to an acceleration of the Company’s obligations under the Credit Facility as amended.

Senior Secured Notes

In May 2013, the Company sold $175.0 million aggregate principal amount of 8.125% Senior Secured Second-Priority Notes due 2018 (the “Third Lien Notes”) in a private offering pursuant to an Indenture dated as of May 13, 2013 (the Third Lien Notes Indenture”). Prior to the completion of the Exchange Offer (as defined below) and Consent Solicitation (as defined below) on April 28, 2016, the Third Lien Notes were senior secured second-priority obligations of the Company. After giving effect to the Exchange Offer and Consent Solicitation, the remaining aggregate principal amount of approximately $28.5 million of outstanding Third Lien Notes became senior secured third-priority obligations of the Company subordinated to the liens securing all senior and second priority indebtedness of the Company, including under the Credit Facility and Second-Priority Lien Notes (defined below).

Pursuant to the Exchange Offer and Consent Solicitation, the Company (i) issued approximately $120.6 million in aggregate principal amount of the Company’s new 9.125% Senior Secured Second Priority Notes due 2021 (the “Second Lien Notes,” and collectively with the Third Lien Notes, the “Notes”) and 1,205,477 shares of the Company’s common stock in exchange for approximately $120.6 million in aggregate principal amount of Third Lien Notes, and (ii) purchased approximately $25.9 million in aggregate principal amount of Third Lien Notes in exchange for aggregate cash consideration totaling approximately $15.0 million, plus accrued and unpaid interest on the Third Lien Notes from the applicable last interest payment date to, but not including, April 28, 2016.

After giving effect to the Exchange Offer and Consent Solicitation, the aggregate principal amount of the Third Lien Notes remaining outstanding was approximately $28.5 million and the aggregate principal amount of Second Lien Notes outstanding was approximately $120.6 million. See “Exchange Offer” below.

The Third Lien Notes are guaranteed by the Company’s material U.S. subsidiaries, GX Technology Corporation, ION Exploration Products (U.S.A.), Inc. and I/O Marine Systems, Inc. (the “Guarantors”), and mature on May 15, 2018. Interest on the Third Lien Notes accrues at the rate of 8.125% per annum and will be payable semiannually in arrears on May 15 and November 15 of each year during their term. In May 2014, the holders of the Third Lien Notes exchanged their Third Lien Notes for a like principal amount of registered Third Lien Notes with the same terms. For a complete discussion of the terms and security the Third Lien Notes in effect prior to the completion of the Exchange Offer and Consent Solicitation on April 28, 2016, see Footnote 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Prior to the completion of the Exchange Offer and Consent Solicitation, the Third Lien Notes Indenture contained certain covenants that, among other things, limited or prohibited the Company’s ability and the ability of its restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Third Lien Notes, including among other things, incurring additional indebtedness, creating liens, paying dividends and making other distributions in respect of the Company’s capital stock, redeeming the Company’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 Third Lien Notes Indenture are subject to certain exceptions and qualifications. After giving effect to the Exchange Offer and Consent Solicitation, the Third Lien Notes Indenture was amended to, among other things, provide for the release of the second priority security interest in the collateral securing the remaining Third Lien Notes and the grant of a third priority security interest in the collateral, subordinate to liens securing all senior and second priority indebtedness of the Company, including the Credit Facility and the Second Lien Notes, and eliminate substantially all of the restrictive covenants and certain events of default pertaining to the remaining Third Lien Notes.

As of June 30, 2016, the Company was in compliance with the covenants with respect to the Third Lien Notes.

On or after May 15, 2015, the Company may on one or more occasions redeem all or a part of the Third Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Third Lien Notes redeemed during the twelve-month period beginning on May 15th of the years indicated below:



Date		Percentage
2015		104.063%
2016		102.031%
2017 and thereafter		100.000%

The Second Lien Notes are senior secured second-priority obligations guaranteed by the Guarantors. The Second Lien Notes mature on December 15, 2021. Interest on the Second Lien Notes accrues at the rate of 9.125% per annum and is payable semiannually in arrears on June 15 and December 15 of each year during their term, beginning June 15, 2016, except that the interest payment otherwise payable on June 15, 2021 will be payable on December 15, 2021.

The indenture dated April 28, 2016 governing the Second Lien Notes (the “Second Lien Notes Indenture”) contains certain covenants that, among other things, limits or prohibits the Company’s ability and the ability of its restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Second Lien Notes, including among other things, incurring additional indebtedness, creating liens, paying dividends and making other distributions in respect of the Company’s capital stock, redeeming the Company’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 Second Lien Notes Indenture are subject to certain exceptions and qualifications. All of the Company’s subsidiaries are currently restricted subsidiaries.

As of June 30, 2016, the Company was in compliance with the covenants with respect to the Second Lien Notes.

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		105.500%
2020		103.500%
2021 and thereafter		100.000%

For additional information regarding the terms and security of the Third Lien Notes and related Third Lien Notes Indenture and intercreditor agreement in effect prior to the completion of the Exchange Offer and Consent Solicitation, see the Company’s Current Report on Form 8-K filed with the SEC on May 13, 2013. For additional information regarding the terms and security of the Third Lien Notes after giving effect to the Exchange Offer and Consent Solicitation, the amendments to the Third Lien Notes Indenture, the terms and security of the Second Lien Notes, the Second Lien Notes Indenture and the related intercreditor agreement, see the Company’s Current Report on Form 8-K filed with the SEC on April 28, 2016.

Exchange Offer

On April 28, 2016, the Company successfully completed the previously announced exchange offer (the “Exchange Offer”) and consent solicitation (the “Consent Solicitation”) related to the Third Lien Notes. The Company did not receive any cash proceeds in connection with the Exchange Offer and Consent Solicitation.

Under the terms of the Exchange Offer, for each $1,000 principal amount of Third Lien Notes validly tendered for exchange and not validly withdrawn by an eligible holder (an “Exchange Participant”) prior to 11:59 P.M., New York City time, on April 25, 2016, and accepted for exchange by the Company, the Company offered the consideration (the “Exchange Consideration”) of (i) $1,000 principal amount of Second Lien Notes plus (ii) either (a) for Third Lien Notes tendered at or prior to 4:59 P.M., New York City time, on April 15, 2016 (the “Extended Early Tender Deadline”), ten (10) shares of the Company’s common stock (the “Early Stock Consideration”), or (b) for Third Lien Notes tendered after the Extended Early Tender Deadline, seven (7) shares of the Company’s common stock (the “Stock Consideration”) (such shares issued as the Early Stock Consideration or the Stock Consideration, together with the Second Lien Notes, the “Exchange Securities”), upon the terms and subject to the conditions set forth in the Company’s confidential Offer to Exchange and related Consent and Letter of Transmittal, each dated March 28, 2016 (the “Offer Documents”).

As part of the Exchange Offer, each Exchange Participant had the opportunity to tender all or a portion of its Third Lien Notes for a cash payment in lieu of the Exchange Consideration upon the terms and subject to the conditions set forth in the Offer Documents (the “Cash Tender Option”). The aggregate amount of cash consideration that could be paid by the Company for tendered Third Lien Notes accepted for purchase pursuant to the Cash Tender Option was approximately $15.0 million plus accrued and unpaid interest to, but not including, the settlement date of the Exchange Offer (collectively, the “Cash Tender Cap”).

Concurrently with the Exchange Offer, the Company solicited consents from eligible holders to proposed amendments to the Third Lien Notes Indenture (the “Proposed Amendments”). The Proposed Amendments, among other things, provide for the release of the second priority security interest in the collateral securing the Third Lien Notes and the grant of a third priority security interest in the collateral, subordinate to liens securing all the Company’s senior and second priority indebtedness, including the Credit Facility and the Second Lien Notes, and eliminate substantially all of the restrictive covenants and certain events of default pertaining to the Third Lien Notes.

The Exchange Offer, including the Cash Tender Option, and the Consent Solicitation expired at 11:59 P.M., New York City time, on April 28, 2016. In total, the Company accepted for exchange approximately $146.5 million in aggregate principal amount of the Third Lien Notes, or approximately 83.72% of the $175 million outstanding aggregate principal amount of the Third Lien Notes, validly tendered and not withdrawn in the Exchange Offer. The Third Lien Notes validly tendered and not withdrawn in the Exchange Offer were accepted by the Company.

Because the Company received the necessary consents to effect the Proposed Amendments, any Third Lien Notes not validly tendered pursuant to the Exchange Offer remain outstanding and the holders are subject to the terms of the supplemental indenture implementing the Proposed Amendments. No consideration was paid to holders of Third Lien Notes in connection with the Consent Solicitation. After giving effect to the Exchange Offer and Consent Solicitation, the aggregate principal amount of the Third Lien Notes remaining outstanding was approximately $28.5 million as of April 25, 2016, and such Third Lien Notes are secured on a third priority basis subordinated to the liens securing all senior and second priority indebtedness of the Company, including under the Credit Facility and Second Lien Notes.

In exchange for approximately $120.6 million in aggregate principal amount of Third Lien Notes, the Company issued approximately $120.6 million aggregate principal amount of Second Lien Notes and 1,205,477 shares of common stock, including 1,204,980 shares issued as Early Stock Consideration and 497 shares issued as Stock Consideration. The Company utilized 508,464 of treasury shares towards the total 1,205,477 shares issued. The securities issued in the Exchange Offer were issued in reliance on an exemption from registration set forth in Section 4(a)(2) of the Securities Act. The Company received no cash consideration in exchange for the issuance of the Exchange Securities.

The Cash Tender Option was fully subscribed. Pursuant to the terms of the Exchange Offer, the Company accepted for purchase tendered Third Lien Notes at the lowest bid prices until the Cash Tender Cap was reached, subject to proration. In exchange for aggregate cash consideration totaling approximately $15.0 million, the Company purchased approximately $25.9 million in aggregate principal amount of Third Lien Notes. The Company also paid in cash accrued and unpaid interest on Third Lien Notes accepted for purchase in the Exchange Offer from the applicable last interest payment date to, but not including, April 28, 2016.

(5) Net Income (Loss) per Share

Basic net income (loss) per common share is computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is determined 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 issued or reserved for future issuance under outstanding stock options at June 30, 2016 and 2015 was 900,623 and 621,443, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at June 30, 2016 and 2015 was 293,709 and 98,054, respectively. The foregoing share numbers have been retroactively adjusted to reflect the one-for-fifteen reverse stock split completed on February 4, 2016. All outstanding stock options for the three and six months ended June 30, 2016 were anti-dilutive.

The following table summarizes the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts):



	Three Months Ended June 30,					Six Months Ended June 30,
	2016			2015		2016			2015
Net income (loss) attributable to ION	$	(25,342	)	$	56,069	$	(60,356	)	$	805
Weighted average number of common shares outstanding	11,415			10,979		11,008			10,975
Effect of dilutive stock awards	—			1		—			2
Weighted average number of diluted common shares outstanding	11,415			10,980		11,008			10,977

Basic net income (loss) per share	$	(2.22	)	$	5.11	$	(5.48	)	$	0.07
Diluted net income (loss) per share	$	(2.22	)	$	5.11	$	(5.48	)	$	0.07

(6) Income Taxes

The Company maintains a valuation allowance for substantially all of its deferred tax assets. The valuation allowance is calculated in accordance with the provisions of the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 740 “Income Taxes,” which requires that a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. In the event the Company’s expectations of future operating results change, the valuation allowance may need to be adjusted downward. As of June 30, 2016, the Company has no unreserved U.S. deferred tax assets.

The provision for the six months ended June 30, 2016 has been calculated based on the actual tax expense incurred for those periods. 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 year-to-date tax expense. The Company’s effective tax rates for the three months ended June 30, 2016 and 2015 were (9.8)% and 0.9%, respectively, and for the six months ended June 30, 2016 and 2015 were (4.4)% and 85.5% respectively. The Company’s effective tax rates for the three and six months ended June 30, 2016 was impacted by the change in valuation allowance related to operating losses for which the Company cannot currently recognize a tax benefit. The Company’s income tax expense for the six months ended June 30, 2016 of $2.5 million primarily relates to income from the Company’s non-U.S. businesses. This foreign tax expense has not been offset by the tax benefits on losses within the U.S. and other jurisdictions, from which the Company cannot currently benefit; therefore negatively impacting the Company’s effective tax rate.

The Company has approximately $1.3 million of unrecognized tax benefits and does not expect to recognize significant increases in unrecognized tax benefits during the next 12-month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.

As of June 30, 2016, the Company’s U.S. federal tax returns for 2012 and subsequent years remain subject to examination by tax authorities. The Company is no longer subject to U.S. Internal Revenue Service (“IRS”) examination for periods prior to 2012, although carryforward attributes that were generated prior to 2012 may still be adjusted upon examination by the IRS if they either have been or will be used in an open year. In the Company’s foreign tax jurisdictions, tax returns for 2010 and subsequent years generally remain open to examination.

(7) Litigation

WesternGeco

In June 2009, WesternGeco L.L.C. (“WesternGeco”) filed a lawsuit against the Company in the United States District Court for the Southern District of Texas, Houston Division. In the lawsuit, styled WesternGeco L.L.C. v. ION Geophysical Corporation, WesternGeco alleged that the Company had infringed several method and apparatus claims contained in four of its United States patents regarding marine seismic streamer steering devices.

The trial began in July 2012. A verdict was returned by the jury in August 2012, finding that the Company infringed the claims contained in the four patents by supplying its DigiFIN^® lateral streamer control units and the related software from the United States and awarded WesternGeco the sum of $105.9 million in damages, consisting of $12.5 million in reasonable royalty and $93.4 million in lost profits.

In June 2013, the presiding judge entered a Memorandum and Order, ruling that WesternGeco is entitled to be awarded supplemental damages for the additional DigiFIN units that were supplied from the United States before and after the trial that were not included in the jury verdict due to the timing of the trial. In October 2013, the judge entered another Memorandum and Order, ruling on the number of DigiFIN units that are subject to supplemental damages and also ruling that the supplemental damages applicable to the additional units should be calculated by adding together the jury’s previous reasonable royalty and lost profits damages awards per unit, resulting in supplemental damages of $73.1 million.

In April 2014, the judge entered another Order, ruling that lost profits should not have been included in the calculation of supplemental damages in the October 2013 Memorandum and Order and reducing the supplemental damages award in the case from $73.1 million to $9.4 million. In the Order, the judge also further reduced the damages award in the case by $3.0 million to reflect a settlement and license that WesternGeco entered into with a customer of the Company that had purchased and used DigiFIN units that were also included in the damage amounts awarded against the Company.

In May 2014, the judge signed and entered a Final Judgment in the amount of $123.8 million related to the case. The Final Judgment also included an injunction that enjoins the Company, its agents and anyone acting in concert with it, from supplying in or from the United States the DigiFIN product or any parts unique to the DigiFIN product, or any instrumentality no more than colorably different from any of these products or parts, for combination outside of the United States. The Company has conducted its business in compliance with the district court’s orders in the case, and the Company has reorganized its operations such that it no longer supplies the DigiFIN product or any parts unique to the DigiFIN product in or from the United States.

The Company and WesternGeco each appealed the Final Judgment to the United States Court of Appeals for the Federal Circuit in Washington, D.C. On July 2, 2015, the Court of Appeals reversed in part the judgment, holding the district court erred by including lost profits in the Final Judgment. Lost profits were $93.4 million and prejudgment interest was approximately $10.9 million of the $123.8 million Final Judgment. Pre-judgment interest on the lost profits portion will be treated in the same way as the lost profits. Post-judgment interest will likewise be treated in the same fashion. On July 29, 2015, WesternGeco filed a petition for rehearing en banc before the Court of Appeals. On October 30, 2015 the Court of Appeals denied WesternGeco’s petition for rehearing en banc.

On February 26, 2016, WesternGeco filed a petition for writ of certiorari by the Supreme Court. The Company filed its response on April 27, 2016. On June 20, 2016, the Supreme Court refused to disturb the Court of Appeals ruling finding no lost profits as a matter of law. Separately, in light of the changes in case law regarding the standard of proof for willfulness in the Halo and Stryker cases, the Supreme Court indicated that the case should be remanded to the Federal Circuit for a determination of whether or not the willfulness determination by the District Court was appropriate.

On May 4, 2016, after referral from the district court, a Magistrate Judge issued an order and report and recommendation in the litigation. The order and report recommended entry of a final judgment against the Company on the royalty obligation plus interest, subject to final calculation upon entry of judgment, which is expected to be approximately $22 million and recommended the district court deny our motion to stay any obligation to pay the remaining $22 million that is not related to lost profits. The district court has not yet decided whether to adopt the recommendation of the magistrate. The Company will pursue all available objections and appeals to the order and report and recommendation.

As previously disclosed, the Company had taken a loss contingency accrual of $124 million. As a result of the reversal by the Court of Appeals, as of June 30, 2015, the Company reduced the loss contingency accrual to its current amount of $22 million. The Company’s assessment of its potential loss contingency may change in the future due to developments in the case and other events, such as changes in applicable law, and such reassessment could lead to the determination that no loss contingency is probable or that a greater or lesser loss contingency is probable. Any such reassessment could have a material effect on the Company’s financial condition or results of operations.

Prior to the reduction in damages by the Court of Appeals, the Company arranged with sureties to post an appeal bond at the trial court. The appeal bond is uncollateralized, but the terms of the appeal bond arrangements provide the sureties the contractual right for as long as the bond is outstanding to require the Company to post cash collateral. The Company has received a request for $11 million in collateral and has exchanged correspondence with the sureties in connection with this request. In July 2016, the sureties renewed their request for collateral and the Company is continuing to discuss terms and options with them. The appeal bond will remain outstanding during the pendency of appeals.

Other

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. Management currently believes that the ultimate resolution of these matters will not have a material adverse impact on the financial condition, results of operations or liquidity of the Company.

(8) Other Income (Expense), Net

The following table is a summary of other income (expense), net (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Reductions of loss contingency related to legal proceedings (Footnote 7)	$	—		$	101,978		$	—		$	101,978
Facility restructuring charges	—			—			—			(1,913		)
Loss on bond exchange	(2,182		)	—			(2,182		)	—
Other income (expense), net	465			(378		)	585			(1,684		)
Total other income (expense), net	$	(1,717	)	$	101,600		$	(1,597	)	$	98,381

(9) Details of Selected Balance Sheet Accounts

Inventories



The following table is a summary of inventories (in thousands):	June 30, 2016			December 31, 2015
Raw materials and subassemblies	$	34,430		$	34,949
Work-in-process	9,442			8,478
Finished goods	14,577			13,769
Reserve for excess and obsolete inventories	(24,072		)	(24,475		)
Total	$	34,377		$	32,721

Other Long-term Liabilities



The following table is a summary of other long-term liabilities (in thousands):	June 30, 2016		December 31, 2015
Accrual for loss contingency related to legal proceedings (Footnote 7)	$	22,000	$	22,000
Deferred rents	13,297		13,394
Facility restructuring accrual	2,410		3,006
Deferred income tax liability	5,186		4,734
Other long-term liabilities	1,158		1,231
Total	$	44,051	$	44,365

(10) Accumulated Other Comprehensive Loss

The following table is a summary of changes in accumulated other comprehensive loss by component (in thousands):



	Foreign currency translation adjustments				Total
Accumulated other comprehensive loss at December 31, 2015	$	(14,781	)		$	(14,781	)
Net current-period other comprehensive loss	(4,199		)	(a)	(4,199		)
Accumulated other comprehensive loss at June 30, 2016	$	(18,980	)		$	(18,980	)


^(a)	Represents the impact of foreign currency translation adjustments, primarily due to the devaluation of the British Pound Sterling (“GBP”) following the vote by the British people to leave the European Union (“Brexit”) on the Company’s GBP-denominated balances, including £15.7 million of goodwill.

(11) Supplemental Cash Flow Information and Non-cash Activity

The following table is a summary of cash paid for Interest and Income taxes and non-cash items from investing and financing activities (in thousands):



	Six Months Ended June 30,
	2016				2015
Cash paid during the period for:
Interest	$	8,149			$	7,843
Income taxes (refunds)	(6		)		9,649
Non-cash items from investing and financing activities:
Purchases of computer equipment financed through capital leases	—				1,178
Investment in multi-client data library financed through accounts payable	—				6,706
Bond exchange	10,740			^(a)	—
Transfer of inventory to property, plant, equipment and seismic rental equipment	—				15,936		^(b)


^(a)	This represents the non cash portion of the bond exchange.


^(b)	This transfer of inventory to property, plant, equipment and seismic rental equipment relates to ocean bottom seismic equipment manufactured by the Company to be deployed in the acquisition of ocean bottom seismic data.

(12) 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-level hierarchy, prioritizing and defining the types of inputs used to measure fair value.

The carrying amounts of the Company’s long-term debt as of June 30, 2016 and December 31, 2015 were $165.5 million and $183.0 million, respectively, compared to its fair values of $95.6 million and $104.3 million as of June 30, 2016 and December 31, 2015, respectively. The fair value of the long-term debt was calculated using an active market price, based on Level 1 inputs defined as quoted prices for identical instruments in active markets.

Fair Value of Other Financial Instruments. Due to their highly liquid nature, the amount of the Company’s other financial instruments, including cash and cash equivalents, accounts and unbilled receivables, notes receivable, accounts payable, and accrued multi-client data library royalties, represent their approximate fair value.

(13) Stock-based Compensation and Repurchase Plan

Stock Appreciation Rights

On March 1, 2016, the Company issued 1,210,000 Stock Appreciation Rights (“SARs”) awards to 15 individuals with an exercise price of $3.10. The vesting of these SARs is achieved through both a market condition and a service condition. The market condition is achieved, in part or in full, in the event that during the four-year period beginning on the date of grant the 20-day trailing volume-weighted average price of a share of common stock is (i) greater than 120% of the exercise price for the first 1/3 of the awards, (ii) greater than 125% of the exercise price for the second 1/3 of the awards and (iii) greater than 130% of the exercise price for the final 1/3 of the awards. The exercise condition restricts the ability of the holders to exercise awards until certain service milestones have been reached such that (i) no more than 1/3 of the awards may be exercised, if vested, on and after the first anniversary of the date of grant, (ii) no more than 2/3 of the awards may be exercised, if vested, on and after the second anniversary of the date of grant and (iii) all of the awards may be exercised, if vested, on and after the third anniversary of the date of grant. For the six months ended June 30, 2016, the Company recorded $0.2 million of share-based compensation expense attributable to SAR awards.

Pursuant to ASC 718, “Compensation – Stock Compensation,” the SARs are considered liability awards and as such, these amounts are accrued in the liability section of the balance sheet. The Company calculated the fair value of each SAR award on the date of grant using a Monte Carlo simulation model. The following assumptions were used:



	March 1, 2016
Risk-free interest rates	1.81%
Expected lives (in years)	4.0
Expected dividend yield	—%
Expected volatility	70.99%

Stock Repurchase Program

On November 4, 2015, the Company’s board of directors approved a stock repurchase program authorizing the Company to repurchase, from time to time from November 10, 2015, through November 10, 2017, up to $25.0 million in shares of the Company’s outstanding common stock. The stock repurchase program may be implemented through open market repurchases or privately negotiated transactions, at management’s discretion. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the shares of the Company’s common stock and general market and economic conditions, applicable legal requirements and compliance with the terms of the Company’s outstanding indebtedness. The repurchase program does not obligate the Company to acquire any particular amount of common stock and may be modified or suspended at any time and could be terminated prior to completion. Since the program’s inception on November 10, 2015, through June 30, 2016, the Company had repurchased 451,792 shares of its common stock under the repurchase program at an average price per share of $6.54, and the Company has approximately $22.0 million of remaining authorized capacity available pursuant to the repurchase program. The number of shares repurchased and the average price per repurchased share have been retroactively adjusted to reflect the one-for-fifteen reverse stock split completed on February 4, 2016. On June 30, 2016, the closing sale price for the Company’s common stock was $6.23 on the NYSE.

(14) Related Party Transactions

BGP Inc. (“BGP”) owned approximately 13.5% of the Company’s outstanding common stock as of June 30, 2016. For the six months ended June 30, 2016 and 2015, the Company recorded revenues from BGP of $2.0 million and $4.9 million, respectively. Total receivables from BGP were $0.3 million at June 30, 2016.

(15) Recent Accounting Pronouncements

Revenue Recognition — In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued new accounting guidance for recognition of revenue. This new guidance replaces virtually all existing U.S. GAAP and IFRS guidance on revenue recognition.

On July 9, 2015, the FASB voted to defer the effective date for its new revenue standard for public and nonpublic entities reporting under U.S. GAAP by one year. As a result, the new guidance is now effective for fiscal years beginning after December 15, 2017. This new guidance applies to all periods presented. Therefore, when the Company issues its financial statements on Forms 10-Q and 10-K for periods included in its year ended December 31, 2018, its comparative periods that are presented from the years ended December 31, 2016 and 2017 must be retrospectively presented in compliance with this new guidance. The new guidance requires companies to make more estimates and use more judgment than under current accounting guidance. Public entities will be permitted to adopt the standard as early as the original public entity effective date (i.e., annual reporting periods beginning after December 15, 2016 and interim periods therein). Early adoption prior to that date will not be permitted.

The FASB and IASB (collectively, the “Boards”) have discussed clarifying the guidance in their new revenue standards for: (1) licenses of intellectual property, (2) identifying performance obligations, (3) noncash consideration and (4) collectability. The Boards have also discussed whether to add practical expedients for the accounting for contract modifications at transition and the presentation of sales taxes, and the FASB separately discussed several technical corrections. The FASB and the IASB did not agree on the nature and breadth of all of the changes to be proposed. The Boards are expected to issue separate exposure drafts later this year.

The Company continues to evaluate (i) the two allowed adoption methods to determine which method it plans to use for retrospective presentation of comparative periods, (ii) the impact of proposed clarifications to the guidance on timing of the recognition of revenue within the Company’s various revenue streams, (iii) the Company’s option to adopt the new guidance either as of the originally proposed effective date or the proposed deferred effective date and (iv) whether the implementation of this new guidance will have a material impact on the Company’s consolidated financial position or results of operations for the periods presented.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. We are evaluating the effect of ASU 2016-002 on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," that will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the statement of income when the awards vest or are settled, the guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is changing and the update requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The amendments in this update will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We are evaluating the effect of ASU 2016-09 on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments” that will change how companies measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “insured loss” approach with and “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The amendments in this update will be effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018. We are evaluating the effect of ASU 2016-13 on our consolidated financial statements.

(16) Acquisition of In-process Research and Development

In March 2016, the Company acquired Global Dynamics Incorporated, an Ontario-based company that designs and develops marine towing systems and equipment, including its proprietary SailWings technology. SailWings configurations are designed to optimize towed source arrays and augment towed streamer deployment systems, and yield significantly less drag, faster towing, improved fuel efficiency, and safer operations through their flexible and smaller footprint.

The Company acquired the SailWings technology (in-process R&D) for a one-time expenditure of $1.0 million, which was recorded as a research, development and engineering expense within operating expenses. The acquisition agreement also contemplates cash payments (earn-outs) up to a total of $2.3 million for successful commercialization of this technology over the next ten years.

(17) Condensed Consolidating Financial Information

The Notes were issued by ION Geophysical Corporation and are guaranteed by the Guarantors, all of which are 100-percent-owned subsidiaries. The Guarantors have fully and unconditionally guaranteed the payment obligations of ION Geophysical Corporation with respect to the Notes. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:


•	ION Geophysical Corporation and the Guarantors (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).


•	All other subsidiaries of ION Geophysical Corporation that are not Guarantors.


•	The consolidating adjustments necessary to present ION Geophysical Corporation’s results on a consolidated basis.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and footnotes. For additional information pertaining to the Notes, See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Exchange Offer” in Part II of this Form 10-Q.



	June 30, 2016
Balance Sheet	ION Geophysical Corporation			The Guarantors			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	25,983		$	—		$	26,450		$	—		$	52,433
Accounts receivable, net	2,479			7,295			10,320			—			20,094
Unbilled receivables	—			16,766			5,245			—			22,011
Inventories	—			10,210			24,167			—			34,377
Prepaid expenses and other current assets	3,699			994			12,768			—			17,461
Total current assets	32,161			35,265			78,950			—			146,376
Property, plant, equipment and seismic rental equipment, net	2,617			15,616			40,179			—			58,412
Multi-client data library, net	—			107,922			10,625			—			118,547
Investment in subsidiaries	648,831			241,166			—			(889,997		)	—
Goodwill	—			—			24,025			—			24,025
Intangible assets, net	—			3,766			181			—			3,947
Intercompany receivables	303,615			—			—			(303,615		)	—
Other assets	2,135			145			234			—			2,514
Total assets	$	989,359		$	403,880		$	154,194		$	(1,193,612	)	$	353,821
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	15,053		$	4,896		$	422		$	—		$	20,371
Accounts payable	4,567			12,358			10,044			—			26,969
Accrued expenses	9,092			10,223			7,969			—			27,284
Accrued multi-client data library royalties	—			23,435			38			—			23,473
Deferred revenue	—			6,026			1,640			—			7,666
Total current liabilities	28,712			56,938			20,113			—			105,763
Long-term debt, net of current maturities	143,748			1,382			—			—			145,130
Intercompany payables	757,674			128,422			175,193			(1,061,289		)	—
Other long-term liabilities	498			33,639			9,914			—			44,051
Total liabilities	930,632			220,381			205,220			(1,061,289		)	294,944
Equity:
Common stock	118			290,460			19,138			(309,598		)	118
Additional paid-in capital	897,476			180,700			232,590			(413,290		)	897,476
Accumulated earnings (deficit)	(819,887		)	202,061			(20,569		)	(181,492		)	(819,887		)
Accumulated other comprehensive income (loss)	(18,980		)	4,420			(18,803		)	14,383			(18,980		)
Due from ION Geophysical Corporation	—			(494,142		)	(263,532		)	757,674			—
Total stockholders’ equity	58,727			183,499			(51,176		)	(132,323		)	58,727
Noncontrolling interests	—			—			150			—			150
Total equity	58,727			183,499			(51,026		)	(132,323		)	58,877
Total liabilities and equity	$	989,359		$	403,880		$	154,194		$	(1,193,612	)	$	353,821



	December 31, 2015
Balance Sheet	ION Geophysical Corporation			The Guarantors			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	33,734		$	—		$	51,199		$	—		$	84,933
Accounts receivable, net	—			35,133			9,232			—			44,365
Unbilled receivables	—			19,046			891			—			19,937
Inventories	—			10,939			21,782			—			32,721
Prepaid expenses and other current assets	5,435			1,458			7,914			—			14,807
Total current assets	39,169			66,576			91,018			—			196,763
Property, plant, equipment and seismic rental equipment, net	4,521			21,072			46,434			—			72,027
Multi-client data library, net	—			120,550			11,687			—			132,237
Investment in subsidiaries	680,508			243,319			—			(923,827		)	—
Goodwill	—			—			26,274			—			26,274
Intangible assets, net	—			4,523			287			—			4,810
Intercompany receivables	75,641			—			—			(75,641		)	—
Other assets	1,724			146			1,107			—			2,977
Total assets	$	801,563		$	456,186		$	176,807		$	(999,468	)	$	435,088
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	486		$	6,856		$	570		$	—		$	7,912
Accounts payable	2,086			19,839			7,874			—			29,799
Accrued expenses	11,199			16,200			6,888			—			34,287
Accrued multi-client data library royalties	—			25,045			—			—			25,045
Deferred revenue	—			5,071			1,489			—			6,560
Total current liabilities	13,771			73,011			16,821			—			103,603
Long-term debt, net of current maturities	171,672			3,408			—			—			175,080
Intercompany payables	503,621			68,286			7,355			(579,262		)	—
Other long-term liabilities	540			33,305			10,520			—			44,365
Total liabilities	689,604			178,010			34,696			(579,262		)	323,048
Equity:
Common stock	107			290,460			19,138			(309,598		)	107
Additional paid-in capital	894,715			180,700			234,234			(414,934		)	894,715
Accumulated earnings (deficit)	(759,531		)	231,208			(21,729		)	(209,479		)	(759,531		)
Accumulated other comprehensive income (loss)	(14,781		)	4,420			(14,604		)	10,184			(14,781		)
Due from ION Geophysical Corporation	—			(428,612		)	(75,009		)	503,621			—
Treasury stock	(8,551		)	—			—			—			(8,551		)
Total stockholders’ equity	111,959			278,176			142,030			(420,206		)	111,959
Noncontrolling interests	—			—			81			—			81
Total equity	111,959			278,176			142,111			(420,206		)	112,040
Total liabilities and equity	$	801,563		$	456,186		$	176,807		$	(999,468	)	$	435,088



	Three Months Ended June 30, 2016
Income Statement	ION Geophysical Corporation			The Guarantors			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
	(In thousands)
Net revenues	$	—		$	17,590		$	18,564		$	(2	)	$	36,152
Cost of sales	—			22,910			8,391			(2		)	31,299
Gross profit (loss)	—			(5,320		)	10,173			—			4,853
Total operating expenses	9,791			6,685			4,965			—			21,441
Income (loss) from operations	(9,791		)	(12,005		)	5,208			—			(16,588		)
Interest expense, net	(4,641		)	(77		)	16			—			(4,702		)
Intercompany interest, net	219			(1,095		)	876			—			—
Equity in earnings (losses) of investments	(8,976		)	5,932			—			3,044			—
Other income (expense)	(2,112		)	182			213			—			(1,717		)
Net income (loss) before income taxes	(25,301		)	(7,063		)	6,313			3,044			(23,007		)
Income tax expense	41			496			1,719			—			2,256
Net income (loss)	(25,342		)	(7,559		)	4,594			3,044			(25,263		)
Net income attributable to noncontrolling interests	—			—			(79		)	—			(79		)
Net income (loss) attributable to ION	(25,342		)	(7,559		)	4,515			3,044			(25,342		)
Comprehensive net loss	$	(28,057	)	$	(7,559	)	$	1,800		$	5,816		$	(28,000	)
Comprehensive income attributable to noncontrolling interest	—			—			(79		)	—			(79		)
Comprehensive net income (loss) attributable to ION	$	(28,057	)	$	(7,559	)	$	1,721		$	5,816		$	(28,079	)



	Three Months Ended June 30, 2015
Income Statement	ION Geophysical Corporation			The Guarantors			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
	(In thousands)
Net revenues	$	—		$	22,465		$	14,765		$	(435	)	$	36,795
Cost of sales	—			28,227			19,138			(435		)	46,930
Gross loss	—			(5,762		)	(4,373		)	—			(10,135		)
Total operating expenses	6,466			12,805			11,283			—			30,554
Loss from operations	(6,466		)	(18,567		)	(15,656		)	—			(40,689		)
Interest expense, net	(4,506		)	(100		)	(1		)	—			(4,607		)
Intercompany interest, net	143			(745		)	602			—			—
Equity in earnings (losses) of investments	66,986			(14,028		)	—			(52,958		)	—
Other income (expense)	(29		)	101,954			(325		)	—			101,600
Net income (loss) before income taxes	56,128			68,514			(15,380		)	(52,958		)	56,304
Income tax expense	59			123			350			—			532
Net income (loss)	56,069			68,391			(15,730		)	(52,958		)	55,772
Net loss attributable to noncontrolling interests	—			—			297			—			297
Net income (loss) attributable to ION	56,069			68,391			(15,433		)	(52,958		)	56,069
Comprehensive net income (loss)	$	58,022		$	70,390		$	(13,731	)	$	(56,956	)	$	57,725
Comprehensive loss attributable to noncontrolling interest	—			—			297			—			297
Comprehensive net income (loss) attributable to ION	$	58,022		$	70,390		$	(13,434	)	$	(56,956	)	$	58,022



	Six Months Ended June 30, 2016
Income Statement	ION Geophysical Corporation		The Guarantors			All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
	(In thousands)
Net revenues	$	—	$	28,752		$	30,065	$	—	$	58,817
Cost of sales	—		44,337			18,557		—		62,894
Gross profit (loss)	—		(15,585		)	11,508		—		(4,077		)
Total operating expenses	17,202		14,501			10,937		—		42,640
Income (loss) from operations

ION GEOPHYSICAL CORP - FORM 10-Q - August 4, 2016

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