ION GEOPHYSICAL CORP - FORM 10-Q - November 3, 2016

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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 SEPTEMBER 30, 2016
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
 
77042-2839
(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 October 25, 2016, there were 11,786,297 shares of common stock, par value $0.01 per share, outstanding.


1
    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS FOR FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
 
 
PAGE
PART I. Financial Information
 
Item 1. Financial Statements
 
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
Condensed Consolidated Statements of Operations for the three- and nine-months ended September 30, 2016 and 2015
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three- and nine-months ended September 30, 2016 and 2015
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015
Footnotes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
 
 
PART II. Other Information
 
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits

2
    

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 30, 2016
 
December 31, 2015
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
62,536

 
$
84,933

Accounts receivable, net
34,686

 
44,365

Unbilled receivables
23,680

 
19,937

Inventories
33,308

 
32,721

Prepaid expenses and other current assets
9,910

 
14,807

Total current assets
164,120

 
196,763

Property, plant, equipment and seismic rental equipment, net
53,524

 
72,027

Multi-client data library, net
112,705

 
132,237

Goodwill
23,412

 
26,274

Intangible assets, net
3,526

 
4,810

Other assets
2,395

 
2,977

Total assets
$
359,682

 
$
435,088

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
19,226

 
$
7,912

Accounts payable
32,034

 
29,799

Accrued expenses
32,753

 
34,287

Accrued multi-client data library royalties
22,344

 
25,045

Deferred revenue
4,395

 
6,560

Total current liabilities
110,752

 
103,603

Long-term debt, net of current maturities
144,299

 
175,080

Other long-term liabilities
44,157

 
44,365

Total liabilities
299,208

 
323,048

Equity:
 
 
 
Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 11,786,297 and 10,702,689 shares at September 30, 2016 and December 31, 2015, respectively, net of treasury stock
118

 
107

Additional paid-in capital
898,238

 
894,715

Accumulated deficit
(818,188
)
 
(759,531
)
Accumulated other comprehensive loss
(20,063
)
 
(14,781
)
Treasury stock, at cost, zero and 353,124 shares at September 30, 2016 and December 31, 2015 respectively
—

 
(8,551
)
Total stockholders’ equity
60,105

 
111,959

Noncontrolling interest
369

 
81

Total equity
60,474

 
112,040

Total liabilities and equity
$
359,682

 
$
435,088

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

3
    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Service revenues
$
65,914

 
$
53,515

 
$
104,500

 
$
96,918

Product revenues
12,708

 
13,159

 
32,939

 
47,129

Total net revenues
78,622

 
66,674

 
137,439

 
144,047

Cost of services
40,694

 
47,883

 
93,706

 
132,234

Cost of products
6,163

 
7,683

 
16,045

 
26,628

Gross profit (loss)
31,765

 
11,108

 
27,688

 
(14,815
)
Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
4,231

 
6,537

 
14,601

 
21,496

Marketing and sales
4,680

 
6,904

 
13,374

 
23,375

General, administrative and other operating expenses
10,990

 
10,541

 
34,566

 
40,566

Total operating expenses
19,901

 
23,982

 
62,541

 
85,437

Income (loss) from operations
11,864

 
(12,874
)
 
(34,853
)
 
(100,252
)
Interest expense, net
(4,607
)
 
(4,854
)
 
(14,043
)
 
(14,086
)
Other income (expense), net
(2,027
)
 
(346
)
 
(3,624
)
 
98,035

Income (loss) before income taxes
5,230

 
(18,074
)
 
(52,520
)
 
(16,303
)
Income tax expense, net
3,316

 
2,082

 
5,865

 
3,597

Net income (loss)
1,914

 
(20,156
)
 
(58,385
)
 
(19,900
)
Net (income) loss attributable to noncontrolling interests
(215
)
 
(227
)
 
(272
)
 
322

Net income (loss) attributable to ION
$
1,699

 
$
(20,383
)
 
$
(58,657
)
 
$
(19,578
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
(1.86
)
 
$
(5.21
)
 
$
(1.78
)
Diluted
$
0.14

 
$
(1.86
)
 
$
(5.21
)
 
$
(1.78
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
11,786

 
10,984

 
11,269

 
10,978

Diluted
11,907

 
10,984

 
11,269

 
10,978


See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.



4
    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Net income (loss)
$
1,914

 
$
(20,156
)
 
$
(58,385
)
 
$
(19,900
)
Other comprehensive loss, net of taxes, as appropriate:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,083
)
 
(1,365
)
 
(5,282
)
 
(757
)
Comprehensive net income (loss)
831

 
(21,521
)
 
(63,667
)
 
(20,657
)
Comprehensive (income) loss attributable to noncontrolling interest
(215
)
 
(227
)
 
(272
)
 
322

Comprehensive net income (loss) attributable to ION
$
616

 
$
(21,748
)
 
$
(63,939
)
 
$
(20,335
)

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.


5
    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(58,385
)
 
$
(19,900
)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization (other than multi-client data library)
17,024

 
19,660

Amortization of multi-client data library
23,161

 
24,531

Stock-based compensation expense
2,512

 
4,174

Reduction of accrual for loss contingency related to legal proceedings
—

 
(101,978
)
Loss on extinguishment of debt
2,182

 
—

Deferred income taxes
1,031

 
5,992

Change in operating assets and liabilities:
 
 
 
Accounts receivable
9,325

 
92,424

Unbilled receivables
(3,711
)
 
(9,837
)
Inventories
2,374

 
464

Accounts payable, accrued expenses and accrued royalties
3,381

 
(43,676
)
Deferred revenue
(2,103
)
 
(2,576
)
Other assets and liabilities
6,441

 
(5,274
)
Net cash provided by (used in) operating activities
3,232

 
(35,996
)
Cash flows from investing activities:
 
 
 
Cash invested in multi-client data library
(11,601
)
 
(28,152
)
Purchase of property, plant, equipment and seismic rental assets
(567
)
 
(17,601
)
Other investing activities
—

 
1,262

Net cash used in investing activities
(12,168
)
 
(44,491
)
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
(6,726
)
 
(5,431
)
Costs associated with issuance of debt
(6,638
)
 
(146
)
Payment to repurchase bonds
(15,000
)
 
—

Other financing activities
13

 
94

Net cash used in financing activities
(14,315
)
 
(5,483
)
Effect of change in foreign currency exchange rates on cash and cash equivalents
854

 
601

Net decrease in cash and cash equivalents
(22,397
)
 
(85,369
)
Cash and cash equivalents at beginning of period
84,933

 
173,608

Cash and cash equivalents at end of period
$
62,536

 
$
88,239

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.


6
    

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 September 30, 2016, and the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2016 and 2015 and the condensed consolidated statements of cash flows for the nine months ended September 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 nine months ended September 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 approximately 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 nine months ended September 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.

During the nine months ended September 30, 2015, the Company recognized the following pre-tax charges (in thousands):

7
    

 
Severance Charges(a)
 
Facility Charges(b)
 
Reduction of Loss Contingency Accrual (c)
 
Total
Cost of goods sold
$
3,981

 
$
—

 
$
—

 
$
3,981

Operating expenses
1,910

 
1,323

 
—

 
3,233

Other expense
—

 
1,618

 
(101,978
)
 
(100,360
)
Income tax benefit
(119
)
 
(150
)
 
—

 
(269
)
Net income attributable to noncontrolling interest
(172
)
 
—

 
—

 
(172
)
Consolidated total
$
5,600

 
$
2,791

 
$
(101,978
)
 
$
(93,587
)
(a) 
Represents severance charges related to 2015 restructurings, a portion of which relates to noncontrolling interest.
(b) 
Represents facility charges related to 2015 restructurings.
(c) 
Represents reduction of loss contingency related to legal proceedings (Footnote 7).



8
    

(3)    Segment Information
The Company evaluates and reviews its results based on three business segments: E&P Technology and Services, E&P Operations Optimization, and Ocean Bottom Services. In August 2016, the Company announced its plans to realign its four business segments into three. Beginning in the third quarter of 2016, the Company changed its reportable segments as described below:
•
E&P Technology and Services, formerly referred to as Solutions, continues to be comprised of the groups that support the Company’s New Venture and Data Library (together multi-client) revenues and Imaging Services group.
•
E&P Operations Optimization is comprised of Devices, formerly referred to as Systems, and Optimization Software & Services, formerly referred to as Software. The manufacturing, engineering, research and development of ocean bottom systems is no longer a part of Devices, and are now within Ocean Bottom Services as noted below.
•
Ocean Bottom Services is comprised of OceanGeo, an ocean bottom data acquisition services company along with the manufacturing, engineering, research and development of ocean bottom systems.
The Company also 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 at the point its net equity method investment becomes greater than zero.
The following table is a summary of segment information (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net revenues:
 
 
 
 
 
 
 
E&P Technology & Services:
 
 
 
 
 
 
 
New Venture
$
8,393

 
$
26,650

 
$
16,278

 
$
35,315

Data Library
21,510

 
15,302

 
32,057

 
24,948

Total multi-client revenues
29,903

 
41,952

 
48,335

 
60,263

Imaging Services
6,134

 
10,693

 
19,338

 
33,731

Total
36,037

 
52,645

 
67,673

 
93,994

E&P Operations Optimization:
 
 
 
 
 
 
 
Devices
8,679

 
7,290

 
20,664

 
27,733

Optimization Software & Services
3,922

 
6,739

 
12,685

 
22,320

Total
12,601

 
14,029

 
33,349

 
50,053

Ocean Bottom Services
29,984

 
—

 
36,417

 
—

Total
$
78,622

 
$
66,674

 
$
137,439

 
$
144,047

Gross profit (loss):






 
E&P Technology & Services
$
12,888

 
$
11,294

 
$
(418
)
 
$
(6,954
)
E&P Operations Optimization
6,866

 
7,039

 
16,647

 
25,971

Ocean Bottom Services
12,011

 
(7,225
)
 
11,459

 
(33,832
)
Total
$
31,765

 
$
11,108

 
$
27,688

 
$
(14,815
)
Gross margin:
 
 
 
 
 
 
 
E&P Technology & Services
36
%
 
21
%
 
(1
)%
 
(7
)%
E&P Operations Optimization
54
%
 
50
%
 
50
 %
 
52
 %
Ocean Bottom Services
40
%
 
—
%
 
31
 %
 
—
 %
Total
40
%
 
17
%
 
20
 %
 
(10
)%
Income (loss) from operations:
 
 
 
 
 
 
 
E&P Technology & Services
$
7,259

 
$
1,642

 
$
(16,867
)
 
$
(37,401
)
E&P Operations Optimization
3,682

 
3,916

 
7,162

 
15,786

Ocean Bottom Services
9,320

 
(10,287
)
 
2,053

 
(46,457
)
Support and other
(8,397
)
 
(8,145
)
 
(27,201
)
 
(32,180
)
Income (loss) from operations
11,864

 
(12,874
)
 
(34,853
)
 
(100,252
)
Interest expense, net
(4,607
)
 
(4,854
)
 
(14,043
)
 
(14,086
)
Other income (expense), net
(2,027
)
 
(346
)
 
(3,624
)
 
98,035

Income (loss) before income taxes
$
5,230

 
$
(18,074
)
 
$
(52,520
)
 
$
(16,303
)
 
 
 
 
 
 
 
 

9
    


(4)    Long-term Debt

The following table is a summary of long-term debt obligations, net (in thousands):    
Obligations (in thousands)
 
September 30, 2016
 
December 31, 2015
Senior secured second-priority lien notes (maturing December 15, 2021)
 
$
120,569

 
$
—

Senior secured third-priority lien notes (maturing May 15, 2018)
 
28,497

 
175,000

Revolving line of credit
 
15,000

 
—

Equipment capital leases
 
4,701

 
9,762

Other debt
 
111

 
1,558

Costs associated with issuances of debt (1)
 
(5,353
)
 
(3,328
)
Total
 
163,525

 
182,992

Current portion of long-term debt and lease obligations
 
(19,226
)
 
(7,912
)
Non-current portion of long-term debt and lease obligations
 
$
144,299

 
$
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:
•
increased 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);
•
increased 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;
•
increased the minimum liquidity threshold to avoid triggering the Company’s obligation to calculate and comply with the existing fixed charge coverage ratio and increased certain of the thresholds upon which such required calculation and compliance cease;
•
established a reserve that reduced 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);
•
increased the maximum amount of certain permitted junior indebtedness to $200.0 million (from $175.0 million);
•
incorporated 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;
•
clarified 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;
•
modified the cross-default provisions to incorporated defaults under the Second Lien Notes, the remaining Third Lien Notes and certain other junior indebtedness; and
•
eliminated 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.


10
    

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 September 30, 2016, the borrowing base under the Credit Facility was $30.9 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 ($15.9 million at September 30, 2016) plus the aggregate amount of unrestricted cash held by ION, the Subsidiary Borrowers and their domestic subsidiaries.
At September 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.

11
    

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 September 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 September 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

12
    

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.

13
    

(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 September 30, 2016 and 2015 was 877,569 and 576,225, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at September 30, 2016 and 2015 was 293,340 and 90,902, respectively. The foregoing share numbers have been retroactively adjusted to reflect the one-for-fifteen reverse stock split completed on February 4, 2016. Except for the three months ended September 30, 2016, the outstanding stock options were anti-dilutive for all periods presented, as reflected in the table below.
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss) attributable to ION
$
1,699

 
$
(20,383
)
 
$
(58,657
)
 
$
(19,578
)
Weighted average number of common shares outstanding
11,786

 
10,984

 
11,269

 
10,978

Effect of dilutive stock awards
121

 
—

 
—

 
—

Weighted average number of diluted common shares outstanding
11,907

 
10,984

 
11,269

 
10,978

 
 
 
 
 
 
 
 
Basic net income (loss) per share
$
0.14

 
$
(1.86
)
 
$
(5.21
)
 
$
(1.78
)
Diluted net income (loss) per share
$
0.14

 
$
(1.86
)
 
$
(5.21
)
 
$
(1.78
)
(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 September 30, 2016, the Company has no unreserved U.S. deferred tax assets.
The provision for the nine months ended September 30, 2016 has been calculated based on the actual tax expense incurred for 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 year-to-date tax expense. The Company’s effective tax rates for the three months ended September 30, 2016 and 2015 were 63.4% and (11.5)%, respectively, and for the nine months ended September 30, 2016 and 2015 were (11.2)% and (22.1)% respectively. The Company’s effective tax rates for the three and nine months ended September 30, 2016 were 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 nine months ended September 30, 2016 of $5.9 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 September 30, 2016, the Company’s U.S. federal tax returns for 2013 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 2013, although carryforward attributes that were generated prior to 2013 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.

14
    

(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. Subsequently, 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.
Separately, proceedings remained ongoing in the district court on other issues not resolved by the original mandate. 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 $22.0 million and recommended the district court deny our motion to stay any obligation to pay the remaining $22.0 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.
On October 14, 2016, the United States Court of Appeals for the Federal Circuit issued a mandate returning the case to the district court for consideration of whether or not additional damages for willfulness are appropriate. After the dismissal of damages related to lost profits, the damages currently existing are limited to $22 million in royalties (exclusive of interest). The Company will argue enhancement is not proper here under the new law, just as it was not under prior law, but in any event should be based on the royalty award, not the award plus interest.

15
    

As previously disclosed, the Company had taken a loss contingency accrual of $123.8 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 $22.0 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 $11.0 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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Reductions of loss contingency related to legal proceedings (Footnote 7)
$
—

 
$
—

 
$
—

 
$
101,978

Facility restructuring charges
—

 
296

 
—

 
(2,791
)
Loss on bond exchange
—

 
—

 
(2,182
)
 
—

Foreign currency losses
(2,774
)
 
(879
)
 
(3,024
)
 
(2,355
)
Other income, net
747

 
237

 
1,582

 
1,203

Total other income (expense), net
$
(2,027
)
 
$
(346
)
 
$
(3,624
)
 
$
98,035


(9)    Details of Selected Balance Sheet Accounts
Inventories
The following table is a summary of inventories (in thousands):

September 30, 2016
 
December 31, 2015
Raw materials and subassemblies
$
34,298

 
$
34,949

Work-in-process
4,843

 
8,478

Finished goods
18,293

 
13,769

Reserve for excess and obsolete inventories
(24,126
)
 
(24,475
)
Total
$
33,308

 
$
32,721


16
    

Other Long-term Liabilities
The following table is a summary of other long-term liabilities (in thousands):
September 30, 2016
 
December 31, 2015
Accrual for loss contingency related to legal proceedings (Footnote 7)
$
22,000

 
$
22,000

Deferred rents
13,078

 
13,394

Facility restructuring accrual
2,090

 
3,006

Deferred income tax liability
5,843

 
4,734

Other long-term liabilities
1,146

 
1,231

Total
$
44,157

 
$
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
 
(5,282
)
(a)
(5,282
)
Accumulated other comprehensive loss at September 30, 2016
 
$
(20,063
)
 
$
(20,063
)
 
 
 
 
 
(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):
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
Cash paid during the period for:
 
 
 
 
Interest
$
8,819

 
$
8,036

 
Income taxes
2,579

 
7,614

 
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
—

 
13,617

 
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 to be deployed by the Company’s Ocean Bottom Services segment.

17
    

(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 September 30, 2016 and December 31, 2015 were $163.5 million and $183.0 million, respectively, compared to its fair values of $108.3 million and $104.3 million as of September 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 nine months ended September 30, 2016, the Company recorded $0.4 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 September 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.

18
    

(14)    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. In August 2015, the FASB issued guidance deferring the effective date by one year to December 15, 2017 for fiscal years and interim periods within those years. This new guidance replaces virtually all existing U.S. GAAP and IFRS guidance on revenue recognition. The underlying principle is that the entity will recognize revenue to depict the transfer of goods and services to customers at an amount that the entity expects to be entitled to in the exchange of goods and services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.
The Company continues to evaluate (i) the two allowed adoption methods to determine which method it plans to use for either a retrospective or cumulative effect transition method, (ii) the Company’s option to adopt the new guidance either as of the originally proposed effective date or the proposed deferred effective date and (iii) 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.

(15) 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.
(16)    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).

19
    

•
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.
  

20
    

 
September 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
$
25,658

 
$
—

 
$
36,878

 
$
—

 
$
62,536

Accounts receivable, net
2,479

 
10,313

 
21,894

 
—

 
34,686

Unbilled receivables
—

 
16,619

 
7,061

 
—

 
23,680

Inventories
—

 
9,676

 
23,632

 
—

 
33,308

Prepaid expenses and other current assets
3,101

 
578

 
6,231

 
—

 
9,910

Total current assets
31,238

 
37,186

 
95,696

 
—

 
164,120

Property, plant, equipment and seismic rental equipment, net
2,205

 
13,505

 
37,814

 
—

 
53,524

Multi-client data library, net
—

 
102,791

 
9,914

 
—

 
112,705

Investment in subsidiaries
661,892

 
255,554

 
—

 
(917,446
)
 
—

Goodwill
—

 
—

 
23,412

 
—

 
23,412

Intangible assets, net
—

 
3,387

 
139

 
—

 
3,526

Intercompany receivables
—

 
30,609

 
—

 
(30,609
)
 
—

Other assets
2,008

 
145

 
242

 
—

 
2,395

Total assets
$
697,343

 
$
443,177

 
$
167,217

 
$
(948,055
)
 
$
359,682

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
14,533

 
$
4,374

 
$
319

 
$
—

 
$
19,226

Accounts payable
2,894

 
18,925

 
10,215

 
—

 
32,034

Accrued expenses
12,330

 
11,395

 
9,028

 
—

 
32,753

Accrued multi-client data library royalties
—

 
22,344

 
—

 
—

 
22,344

Deferred revenue
—

 
3,013

 
1,382

 
—

 
4,395

Total current liabilities
29,757

 
60,051

 
20,944

 
—

 
110,752

Long-term debt, net of current maturities
143,713

 
586

 
—

 
—

 
144,299

Intercompany payables
463,282

 
—

 
20,799

 
(484,081
)
 
—

Other long-term liabilities
486

 
34,255

 
9,416

 
—

 
44,157

Total liabilities
637,238

 
94,892

 
51,159

 
(484,081
)
 
299,208

Equity:
 
 
 
 
 
 
 
 
 
Common stock
118

 
290,460

 
19,138

 
(309,598
)
 
118

Additional paid-in capital
898,238

 
180,700

 
232,590

 
(413,290
)
 
898,238

Accumulated earnings (deficit)
(818,188
)
 
216,453

 
(6,428
)
 
(210,025
)
 
(818,188
)
Accumulated other comprehensive income (loss)
(20,063
)
 
4,420

 
(19,886
)
 
15,466

 
(20,063
)
Due from ION Geophysical Corporation
—

 
(343,748
)
 
(109,725
)
 
453,473

 
—

Total stockholders’ equity
60,105

 
348,285

 
115,689

 
(463,974
)
 
60,105

Noncontrolling interests
—

 
—

 
369

 
—

 
369

Total equity
60,105

 
348,285

 
116,058

 
(463,974
)
 
60,474

Total liabilities and equity
$
697,343

 
$
443,177

 
$
167,217

 
$
(948,055
)
 
$
359,682


21
    

 
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


22
    

 
Three Months Ended September 30, 2016
Income Statement
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
Net revenues
$
—

 
$
30,155

 
$
48,467

 
$
—

 
$
78,622

Cost of sales
—

 
22,724

 
24,133

 
—

 
46,857

Gross profit
—

 
7,431

 
24,334

 
—

 
31,765

Total operating expenses
7,692

 
7,186

 
5,023

 
—

 
19,901

Income (loss) from operations
(7,692
)
 
245

 
19,311

 
—

 
11,864

Interest expense, net
(4,583
)
 
(32
)
 
8

 
—

 
(4,607
)
Intercompany interest, net
276

 
(1,138
)
 
862

 
—

 
—

Equity in earnings of investments
13,494

 
15,039

 
—

 
(28,533
)
 
—

Other income (expense)
245

 
948

 
(3,220
)
 
—

 
(2,027
)
Net income before income taxes
1,740

 
15,062

 
16,961

 
(28,533
)
 
5,230

Income tax expense
41

 
670

 
2,605

 
—

 
3,316

Net income
1,699

 
14,392

 
14,356

 
(28,533
)
 
1,914

Net income attributable to noncontrolling interests
—

 
—

 
(215
)
 
—

 
(215
)
Net income attributable to ION
$
1,699

 
$
14,392

 
$
14,141

 
(28,533
)
 
$
1,699

Comprehensive net loss
$
616

 
$
14,392

 
$
13,058

 
$
(27,235
)
 
$
831

Comprehensive income attributable to noncontrolling interest
—

 
—

 
(215
)
 
—

 
(215
)
Comprehensive net income attributable to ION
$
616

 
$
14,392

 
$
12,843

 
$
(27,235
)
 
$
616

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
Income Statement
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
Net revenues
$
—

 
$
41,768

 
$
25,072

 
$
(166
)
 
$
66,674

Cost of sales
—

 
31,712

 
24,020

 
(166
)
 
55,566

Gross profit
—

 
10,056

 
1,052

 
—

 
11,108

Total operating expenses
3,914

 
11,266

 
8,802

 
—

 
23,982

Loss from operations
(3,914
)
 
(1,210
)
 
(7,750
)
 
—

 
(12,874
)
Interest expense, net
(4,769
)
 
(107
)
 
22

 
—

 
(4,854
)
Intercompany interest, net
184

 
(806
)
 
622

 
—

 
—

Equity in losses of investments
(14,248
)
 
(12,141
)
 
—

 
26,389

 
—

Other income (expense)
326

 
(9
)
 
(663
)
 
—

 
(346
)
Net loss before income taxes
(22,421
)
 
(14,273
)
 
(7,769
)
 
26,389

 
(18,074
)
Income tax expense (benefit)
(2,038
)
 
65

 
4,055

 
—

 
2,082

Net loss
(20,383
)
 
(14,338
)
 
(11,824
)
 
26,389

 
(20,156
)
Net income attributable to noncontrolling interests
—

 
—

 
(227
)
 
—

 
(227
)
Net loss attributable to ION
$
(20,383
)
 
$
(14,338
)
 
$
(12,051
)
 
26,389

 
$
(20,383
)
Comprehensive net loss
$
(21,748
)
 
$
(15,543
)
 
$
(12,940
)
 
$
28,710

 
$
(21,521
)
Comprehensive income attributable to noncontrolling interest
—

 
—

 
(227
)
 
—

 
(227
)
Comprehensive net loss attributable to ION
$
(21,748
)
 
$
(15,543
)
 
$
(13,167
)
 
$
28,710

 
$
(21,748
)
 
 
 
 
 
 
 
 
 
 

23
    

 
Nine Months Ended September 30, 2016
Income Statement
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
Net revenues
$
—

 
$
58,907

 
$
78,532

 
$
—

 
$
137,439

Cost of sales
—