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EX-32.2 - EXHIBIT 32.2 - ION GEOPHYSICAL CORPex322cfosec906cert03312017.htm
EX-32.1 - EXHIBIT 32.1 - ION GEOPHYSICAL CORPex321ceosec906cert03312017.htm
EX-31.2 - EXHIBIT 31.2 - ION GEOPHYSICAL CORPex312cfosec302cert03312017.htm
EX-31.1 - EXHIBIT 31.1 - ION GEOPHYSICAL CORPex311ceosec302cert03312017.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 MARCH 31, 2017
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  ¨    No  ý
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (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
 
 
 
 
 
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨    No  ý
At May 1, 2017, there were 11,871,647 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 MARCH 31, 2017
 
 
PAGE
PART I. Financial Information
 
Item 1. Financial Statements
 
Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016
Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 and 2016
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016
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)
 
March 31, 2017
 
December 31, 2016
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
49,640

 
$
52,652

Accounts receivable, net
16,173

 
20,770

Unbilled receivables
17,423

 
13,415

Inventories
15,220

 
15,241

Prepaid expenses and other current assets
7,262

 
9,559

Total current assets
105,718

 
111,637

Property, plant, equipment and seismic rental equipment, net
63,173

 
67,488

Multi-client data library, net
101,493

 
105,935

Goodwill
22,542

 
22,208

Intangible assets, net
2,745

 
3,103

Other assets
2,457

 
2,845

Total assets
$
298,128

 
$
313,216

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
12,966

 
$
14,581

Accounts payable
26,662

 
26,889

Accrued expenses
29,878

 
26,240

Accrued multi-client data library royalties
23,613

 
23,663

Deferred revenue
10,834

 
3,709

Total current liabilities
103,953

 
95,082

Long-term debt, net of current maturities
144,373

 
144,209

Other long-term liabilities
18,026

 
20,527

Total liabilities
266,352

 
259,818

Equity:
 
 
 
Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 11,871,647 and 11,792,447 shares at March 31, 2017 and December 31, 2016, respectively
119

 
118

Additional paid-in capital
900,056

 
899,198

Accumulated deficit
(848,021
)
 
(824,679
)
Accumulated other comprehensive loss
(21,231
)
 
(21,748
)
Total stockholders’ equity
30,923

 
52,889

Noncontrolling interest
853

 
509

Total equity
31,776

 
53,398

Total liabilities and equity
$
298,128

 
$
313,216

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

3

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended March 31,
 
2017
 
2016
 
(In thousands, except per share data)
Service revenues
$
23,828

 
$
13,156

Product revenues
8,728

 
9,509

Total net revenues
32,556

 
22,665

Cost of services
22,299

 
25,837

Cost of products
4,156

 
5,758

Gross profit (loss)
6,101

 
(8,930
)
Operating expenses:
 
 
 
Research, development and engineering
3,495

 
5,609

Marketing and sales
4,486

 
4,010

General, administrative and other operating expenses
12,032

 
11,580

Total operating expenses
20,013

 
21,199

Loss from operations
(13,912
)
 
(30,129
)
Interest expense, net
(4,464
)
 
(4,734
)
Other income (expense), net
(5,068
)
 
120

Loss before income taxes
(23,444
)
 
(34,743
)
Income tax expense (benefit)
(418
)
 
293

Net loss
(23,026
)
 
(35,036
)
Net (income) loss attributable to noncontrolling interests
(316
)
 
22

Net loss attributable to ION
$
(23,342
)
 
$
(35,014
)
Net loss per share:
 
 
 
Basic
$
(1.98
)
 
$
(3.30
)
Diluted
$
(1.98
)
 
$
(3.30
)
Weighted average number of common shares outstanding:
 
 
 
Basic
11,818

 
10,600

Diluted
11,818

 
10,600


See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.



4

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
 
Three Months Ended March 31,
 
2017
 
2016
 
(In thousands)
Net loss
$
(23,026
)
 
$
(35,036
)
Other comprehensive income (loss), net of taxes, as appropriate:
 
 
 
Foreign currency translation adjustments
517

 
(1,462
)
Comprehensive net loss
(22,509
)
 
(36,498
)
Comprehensive (income) loss attributable to noncontrolling interest
(316
)
 
22

Comprehensive net loss attributable to ION
$
(22,825
)
 
$
(36,476
)

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.


5

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(23,026
)
 
$
(35,036
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
Depreciation and amortization (other than multi-client data library)
4,677

 
5,672

Amortization of multi-client data library
9,258

 
7,139

Stock-based compensation expense
634

 
743

Accrual for loss contingency related to legal proceedings
5,000

 

Deferred income taxes
(1,909
)
 
54

Change in operating assets and liabilities:
 
 
 
Accounts receivable
4,756

 
29,211

Unbilled receivables
(5,348
)
 
2,212

Inventories
(274
)
 
350

Accounts payable, accrued expenses and accrued royalties
(2,488
)
 
(10,558
)
Deferred revenue
7,193

 
(527
)
Other assets and liabilities
3,510

 
3,219

Net cash provided by operating activities
1,983

 
2,479

Cash flows from investing activities:
 
 
 
Cash invested in multi-client data library
(3,363
)
 
(6,327
)
Purchase of property, plant, equipment and seismic rental assets
(49
)
 
(266
)
Net cash used in investing activities
(3,412
)
 
(6,593
)
Cash flows from financing activities:
 
 
 
Repurchase of common stock

 
(964
)
Payments on notes payable and long-term debt
(1,706
)
 
(2,212
)
Costs associated with issuance of debt

 
(1,315
)
Costs associated with issuance of equity
(123
)
 

Other financing activities
(163
)
 
13

Net cash used in financing activities
(1,992
)
 
(4,478
)
Effect of change in foreign currency exchange rates on cash and cash equivalents
409

 
329

Net decrease in cash, and cash equivalents
(3,012
)
 
(8,263
)
Cash and cash equivalents at beginning of period
52,652

 
84,933

Cash and cash equivalents at end of period
$
49,640

 
$
76,670

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, 2016 has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at March 31, 2017, and the condensed consolidated statements of operations, comprehensive loss and cash flows for the three months ended March 31, 2017 and 2016, are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2017, are not necessarily indicative of the operating results for a full year or of future operations.
The Company has non-redeemable noncontrolling interests. Non-redeemable noncontrolling interests in majority-owned affiliates are reported as a separate component of equity in “Noncontrolling interests” in the Consolidated Balance Sheets.
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, 2016.
(2)    Segment Information
The Company evaluates and reviews its results based on three business segments: E&P Technology & Services, E&P Operations Optimization, and Ocean Bottom Seismic Services. The Company measures segment operating results based on income (loss) from operations.

7

    

The following table is a summary of segment information (in thousands):
 
Three Months Ended March 31,
 
 
2017
 
2016
 
Net revenues:
 
 
 
 
E&P Technology & Services:
 
 
 
 
New Venture
$
6,949

 
$
3,306

 
Data Library
10,606

 
4,272

 
Total multi-client revenues
17,555

 
7,578

 
Imaging Services
5,755

 
5,440

 
Total
23,310

 
13,018

 
E&P Operations Optimization:
 
 
 
 
Devices
4,990

 
5,359

 
Optimization Software & Services
4,256

 
4,288

 
Total
9,246

 
9,647

 
Ocean Bottom Seismic Services

 

 
Total
$
32,556

 
$
22,665

 
Gross profit (loss):




E&P Technology & Services
$
4,010

 
$
(9,773
)
 
E&P Operations Optimization
4,787

 
4,719

 
Ocean Bottom Seismic Services
(2,696
)
 
(3,876
)
 
Total
$
6,101

 
$
(8,930
)
 
Gross margin:
 
 
 
 
E&P Technology & Services
17
%
 
(75
)%
 
E&P Operations Optimization
52
%
 
49
 %
 
Ocean Bottom Seismic Services
%
 
 %
 
Total
19
%
 
(39
)%
 
Income (loss) from operations:
 
 
 
 
E&P Technology & Services
$
(1,096
)
 
$
(14,714
)
 
E&P Operations Optimization
1,549

 
1,601

 
Ocean Bottom Seismic Services
(4,008
)
 
(7,631
)
 
Support and other
(10,357
)
 
(9,385
)
 
Loss from operations
(13,912
)
 
(30,129
)
 
Interest expense, net
(4,464
)
 
(4,734
)
 
Other income (expense), net
(5,068
)
 
120

 
Loss before income taxes
$
(23,444
)
 
$
(34,743
)
 
 
 
 
 
 

(3)    Long-term Debt

The following table is a summary of long-term debt obligations, net (in thousands):    
Obligations (in thousands)
 
March 31, 2017
 
December 31, 2016
Senior secured second-priority lien notes (maturing December 15, 2021)
 
$
120,569

 
$
120,569

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

 
28,497

Revolving line of credit (maturing August 22, 2019)
 
10,000

 
10,000

Equipment capital leases
 
2,304

 
3,446

Other debt
 
852

 
1,415

Costs associated with issuances of debt (1)
 
(4,883
)
 
(5,137
)
Total
 
157,339

 
158,790

Current portion of long-term debt and lease obligations
 
(12,966
)
 
(14,581
)
Non-current portion of long-term debt and lease obligations
 
$
144,373

 
$
144,209


8

    

(1) 
Represents debt issuance costs presented as a direct deduction from the carrying amount of the debt liability associated with the Senior Secured Second-Priority and Senior Secured Third-Priority Lien Notes. These amounts do not include $0.9 million and $1.2 million of debt issuance costs associated with the Revolving Credit Facility as of March 31, 2017 and December 31, 2016 respectively, which are included within other assets on the balance sheet.
Revolving Credit Facility
In August 2014, ION and its material U.S. subsidiaries, GX Technology Corporation, ION Exploration Products (U.S.A.), Inc., I/O Marine Systems, Inc. and (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, 2016.
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.
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;
establish a reserve that will reduce 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 to 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 library (not to exceed $15.0 million for the multi-client data library data component).  As of March 31, 2017, the borrowing base under the Credit Facility was $19.5 million, and there was $10.0 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.

9

    

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 ($9.5 million at March 31, 2017) plus the aggregate amount of unrestricted cash held by ION, the Subsidiary Borrowers and their domestic subsidiaries.
At March 31, 2017, 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”). On April 28, 2016, the Company successfully completed an exchange offer (the “Exchange Offer”) and consent solicitation (the “Consent Solicitation”) related to the Third Lien Notes. For a complete discussion of the terms of the Exchange Offer and Consent Solicitation, see Footnote 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Prior to the completion of the Exchange Offer and Consent Solicitation 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.
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.
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 March 31, 2017, 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 12-month period beginning on May 15th of the years indicated below:

10

    

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, 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 March 31, 2017, 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%
(4)    Net Loss per Share
Basic net loss per common share is computed by dividing net loss applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted net 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 outstanding stock options were anti-dilutive for all periods presented.
(5)    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 March 31, 2017, the Company has no unreserved U.S. deferred tax assets.
The provision for the three months ended March 31, 2017, 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 March 31, 2017 and 2016 were 1.8% and (0.8)%, respectively. The Company’s effective tax rates for the three months ended March 31, 2017 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 benefit for the three months ended March 31, 2017 of $(0.4) million primarily relates to results from the Company’s non-U.S. businesses. The Company cannot currently benefit from U.S. losses which negatively impacted the Company’s effective tax rate.

11

    

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 March 31, 2017, 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 related to losses 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.
(6) 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 reduced 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.
On November 14, 2016, the District Court issued an order reducing the amount of the appeal bond from $120.0 million to $65.0 million, ordered the sureties to pay principal and interest on the royalty previously awarded and declined to issue a final judgment until after consideration of whether enhanced damages related to willfulness should be awarded in the case. While the Company does not agree with the unusual decision by the District Court ordering payment of the royalty damages and interest without a final judgment, the Company paid the $20.8 million due pursuant to the order to WesternGeco on November 25, 2016.

12

    

On March 14, 2017, the District Court held a hearing on whether or not additional damages for willfulness would be payable. In a ruling from the bench, the District Court stated that additional damages in the amount of $5.0 million would be awarded by the court. The District Court has not yet issued a final order to memorialize the ruling, but it is anticipated that the final order will be consistent with the ruling from the bench. After a final order is issued, ION will decide whether to appeal the $5.0 million or pay the award without further appeal.
WesternGeco filed a second petition for writ of certiorari in the U.S. Supreme Court on February 17, 2017, appealing the lost profits issue again. The Company filed its response to WesternGeco’s second attempt to appeal to the Supreme Court the lost profits issue, raising both the substantive matters addressed by ION in opposing WesternGeco’s first petition, and also raising a procedural argument that WesternGeco cannot raise the same issue for a second time in a second petition for certiorari. At present, the only remaining issues in the litigation are payment or appeal of the $5.0 million in enhanced damages and WesternGeco’s second appeal of the same issue to the Supreme Court on lost profits.
Pending issuance of the final order for $5.0 million from the District Court, ION has taken a loss contingency accrual of $5.0 million. The Company’s assessment of the need for and amount of its potential loss contingency may change in the future. 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 District Court. The appeal bond is uncollateralized. The sureties have a new motion to release the bond that is currently pending. In light of the payment of the $20.8 million in royalty damages by the Company, the only liquidated exposure to the sureties under the bond is the $5.0 million, when the order is issued.
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.
(7)    Other Income (Expense), Net
The following table is a summary of other income (expense), net (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Accrual for loss contingency related to legal proceedings (Footnote 6)
$
(5,000
)
 
$

Other income (expense), net
(68
)
 
120

Total other income (expense), net
$
(5,068
)
 
$
120


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

March 31, 2017
 
December 31, 2016
Raw materials and subassemblies
$
20,609

 
$
21,454

Work-in-process
1,999

 
2,255

Finished goods
7,634

 
6,581

Reserve for excess and obsolete inventories
(15,022
)
 
(15,049
)
Total
$
15,220

 
$
15,241


13

    

Other Long-term Liabilities
The following table is a summary of other long-term liabilities (in thousands):
March 31, 2017
 
December 31, 2016
Deferred rents
13,684

 
13,955

Facility restructuring accrual
1,434

 
1,765

Deferred income tax liability
1,774

 
3,679

Other long-term liabilities
1,134

 
1,128

Total
$
18,026

 
$
20,527

(9)    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, 2016
 
$
(21,748
)
 
$
(21,748
)
Net current-period other comprehensive loss
 
517

 
517

Accumulated other comprehensive loss at March 31, 2017
 
$
(21,231
)
 
$
(21,231
)
 
 
 
 
 

(10)    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):
 
Three Months Ended March 31,
 
2017
 
2016
Cash paid during the period for:
 
 
 
Interest
$
206

 
$
154

Income taxes (refunds)
819

 
(762
)
Non-cash items from investing and financing activities:
 
 
 
Investment in multi-client data library financed through accounts payable
1,654

 
3,885

Purchases of property, plant, and equipment financed through accounts payable
730

 
179

(11)    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 March 31, 2017 and December 31, 2016 were $162.2 million and $163.9 million, respectively, compared to its fair values of $114.7 million and $114.8 million as of March 31, 2017 and December 31, 2016, respectively. The fair value of the long-term debt was calculated using a readily observable price (Level 1).
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.
(12)    Stockholder's Equity, Stock-Based Compensation Expense and Repurchase Plan
At-The-Market Equity Offering Program

14

    

On December 22, 2016 the Company announced that it has filed a prospectus supplement under which it may sell up to $20 million of its common stock through an "at-the-market" equity offering program (the "ATM Program"). ION would intend to use the net proceeds from sales under the ATM Program to be positioned to capitalize on opportunities such as acquiring complementary distressed assets, or other value-added transactions. The timing of any sales will depend on a variety of factors to be determined by ION. Effective May 2, 2017, the Company terminated and canceled the ATM Program.  No shares were sold pursuant to the ATM Program.
Stock-Based Compensation
The total number of shares issued or reserved for future issuance under outstanding stock options at March 31, 2017 and 2016 was 838,582 and 938,606, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at March 31, 2017 and 2016 was 203,622 and 253,738, respectively. The following table presents a summary of the activity related to stock options, restricted stock and restricted stock unit awards for the three months ended March 31, 2017:
 
Stock Options
 
Restricted Stock and Unit Awards
 
Number of Shares
Outstanding at December 31, 2016
847,635

 
285,308

Granted

 
17,500

Stock options exercised/restricted stock/unit awards vested

 
(99,186
)
Cancelled/forfeited
(9,053
)
 

Outstanding at March 31, 2017
838,582

 
203,622

Stock-based compensation expense recognized for the three months ended March 31, 2017 and 2016, totaled $0.6 million and $0.7 million, respectively.
In the first quarter 2017, the Company adopted ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," that changed how the Company accounts for certain aspects of share-based payments to employees. The Company is 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. There was no impact of adoption of ASU 2016-09 on net income, basic and diluted earnings per share, deferred tax assets or net cash from operations.
Stock Repurchase Program
On November 4, 2015, the Company’s board of directors approved a stock repurchase program authorizing a Company stock repurchase, from time to time from November 10, 2015, through November 10, 2017, up to $25 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 our common stock and general market and economic conditions, applicable legal requirements and compliance with the terms of our 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. As of March 31, 2017, the Company was authorized to repurchase up to $25 million through November 17, 2017, and had repurchased $3.0 million or 451,792 shares of its common stock under the repurchase program at an average price per share of $6.41.


15

    

(13)    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 to years beginning after December 15, 2017, 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.
In December 2016, the FASB issued amendments to Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. The amendments allow entities not to make quantitative disclosures about remaining performance obligations in certain cases and require entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. It also makes additional technical corrections and improvements to the new revenue standard. The guidance will be effective with the same date and transition requirements as those in ASC 606.
While the Company continues to evaluate the two allowed adoption methods (either the full retrospective method or the modified retrospective method) to determine which method it plans to use, the Company currently expects to use the modified retrospective method. The Company also continues to assess whether the implementation of this new guidance will have a material impact on the Company’s New Venture and Devices groups’ consolidated financial position or results of operations for the periods presented. While the Company continues to evaluate the impact on its consolidated financial statements for all of its business segments, the Company does not currently expect the adoption of ASC 606 to have a material impact on its consolidated balance sheets or consolidated statement of operations for its Imaging Services group, Optimization Software & Services group or its Ocean Bottom Services segment.
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. The Company currently expects that the adoption of ASU 2016-002 may have a material impact related to its facility operating leases on its consolidated financial statements, and continues to evaluate the impact of vessel leases in the Company’s Ocean Bottom Services segment.
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 “incurred loss” approach with an “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. 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. The Company is evaluating the effect of ASU 2016-13 on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230), Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-18),” that will require entities to show changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet is required. The guidance will be effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company does not currently expect the adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.
(14)    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.

16

    

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” in Part II of this Form 10-Q.
  
 
March 31, 2017
Balance Sheet
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
28,366

 
$

 
$
21,274

 
$

 
$
49,640

Accounts receivable, net

 
5,489

 
10,684

 

 
16,173

Unbilled receivables

 
6,250

 
11,173

 

 
17,423

Inventories

 
8,583

 
6,637

 

 
15,220

Prepaid expenses and other current assets
2,591

 
2,219

 
2,452

 

 
7,262

Total current assets
30,957

 
22,541

 
52,220

 

 
105,718

Property, plant, equipment and seismic rental equipment, net
1,576

 
11,216

 
50,381

 

 
63,173

Multi-client data library, net

 
91,474

 
10,019

 

 
101,493

Investment in subsidiaries
660,937

 
261,565

 

 
(922,502
)
 

Goodwill

 

 
22,542

 

 
22,542

Intangible assets, net

 
2,673

 
72

 

 
2,745

Intercompany receivables

 
193,054

 
46,606

 
(239,660
)
 

Other assets
2,049

 
145

 
263

 

 
2,457

Total assets
$
695,519

 
$
582,668

 
$
182,103

 
$
(1,162,162
)
 
$
298,128

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
10,852

 
$
2,114

 
$

 
$

 
$
12,966

Accounts payable
3,123

 
19,887

 
3,652

 

 
26,662

Accrued expenses
14,525

 
7,782

 
7,571

 

 
29,878

Accrued multi-client data library royalties

 
23,613

 

 

 
23,613

Deferred revenue

 
2,199

 
8,635

 

 
10,834

Total current liabilities
28,500

 
55,595

 
19,858

 

 
103,953

Long-term debt, net of current maturities
144,183

 
190

 

 

 
144,373

Intercompany payables
491,440

 

 

 
(491,440
)
 

Other long-term liabilities
473

 
11,744

 
5,809

 

 
18,026

Total liabilities
664,596

 
67,529

 
25,667

 
(491,440
)
 
266,352

Equity:
 
 
 
 
 
 
 
 
 
Common stock
119

 
290,460

 
49,394

 
(339,854
)
 
119

Additional paid-in capital
900,056

 
180,699

 
202,291

 
(382,990
)
 
900,056

Accumulated earnings (deficit)
(848,021
)
 
212,973

 
3,850

 
(216,823
)
 
(848,021
)
Accumulated other comprehensive income (loss)
(21,231
)
 
4,372

 
(21,537
)
 
17,165

 
(21,231
)
Due from ION Geophysical Corporation

 
(173,365
)
 
(78,415
)
 
251,780

 

Total stockholders’ equity
30,923

 
515,139

 
155,583

 
(670,722
)
 
30,923

Noncontrolling interests

 

 
853

 

 
853

Total equity
30,923

 
515,139

 
156,436

 
(670,722
)
 
31,776

Total liabilities and equity
$
695,519

 
$
582,668

 
$
182,103

 
$
(1,162,162
)
 
$
298,128


17

    

 
December 31, 2016
Balance Sheet
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
23,042

 
$

 
$
29,610

 
$

 
$
52,652

Accounts receivable, net

 
12,775

 
7,995

 

 
20,770

Unbilled receivables

 
5,275

 
8,140

 

 
13,415

Inventories

 
8,610

 
6,631

 

 
15,241

Prepaid expenses and other current assets
3,387

 
4,624

 
1,548

 

 
9,559

Total current assets
26,429

 
31,284

 
53,924

 

 
111,637

Property, plant, equipment and seismic rental equipment, net
1,745

 
12,369

 
53,374

 

 
67,488

Multi-client data library, net

 
97,369

 
8,566

 

 
105,935

Investment in subsidiaries
660,880

 
257,732

 

 
(918,612
)
 

Goodwill

 

 
22,208

 

 
22,208

Intangible assets, net

 
3,008

 
95

 

 
3,103

Intercompany receivables

 

 
32,174

 
(32,174
)
 

Other assets
2,469

 
145

 
231

 

 
2,845

Total assets
$
691,523

 
$
401,907

 
$
170,572

 
$
(950,786
)
 
$
313,216

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
11,281

 
$
3,166

 
$
134

 
$

 
$
14,581

Accounts payable
2,101

 
19,720

 
5,068

 

 
26,889

Accrued expenses
8,579

 
10,016

 
7,645

 

 
26,240

Accrued multi-client data library royalties

 
23,663

 

 

 
23,663

Deferred revenue

 
2,667

 
1,042

 

 
3,709

Total current liabilities
21,961

 
59,232

 
13,889

 

 
95,082

Long-term debt, net of current maturities
143,930

 
279

 

 

 
144,209

Intercompany payables
472,276

 
10,155

 

 
(482,431
)
 

Other long-term liabilities
467

 
12,117

 
7,943

 

 
20,527

Total liabilities
638,634

 
81,783

 
21,832

 
(482,431
)
 
259,818

Equity:
 
 
 
 
 
 
 
 
 
Common stock
118

 
290,460

 
19,138

 
(309,598
)
 
118

Additional paid-in capital
899,198

 
180,700

 
232,590

 
(413,290
)
 
899,198

Accumulated earnings (deficit)
(824,679
)
 
216,730

 
(3,639
)
 
(213,091
)
 
(824,679
)
Accumulated other comprehensive income (loss)
(21,748
)
 
4,420

 
(21,787
)
 
17,367

 
(21,748
)
Due from ION Geophysical Corporation

 
(372,186
)
 
(78,071
)
 
450,257

 

Total stockholders’ equity
52,889

 
320,124

 
148,231

 
(468,355
)
 
52,889

Noncontrolling interests

 

 
509

 

 
509

Total equity
52,889

 
320,124

 
148,740

 
(468,355
)
 
53,398

Total liabilities and equity
$
691,523

 
$
401,907

 
$
170,572

 
$
(950,786
)
 
$
313,216


18

    

 
Three Months Ended March 31, 2017
Income Statement
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
Net revenues
$

 
$
13,034

 
$
19,522

 
$

 
$
32,556

Cost of sales

 
17,587

 
8,868

 

 
26,455

Gross profit (loss)

 
(4,553
)
 
10,654

 

 
6,101

Total operating expenses
9,340

 
6,159

 
4,514

 

 
20,013

Income (loss) from operations
(9,340
)
 
(10,712
)
 
6,140

 

 
(13,912
)
Interest expense, net
(4,460
)
 
(27
)
 
23

 

 
(4,464
)
Intercompany interest, net
328

 
(1,497
)
 
1,169

 

 

Equity in earnings (losses) of investments
(5,044
)
 
8,776

 

 
(3,732
)
 

Other income (expense)
(4,759
)
 
(339
)
 
30

 

 
(5,068
)
Net income (loss) before income taxes
(23,275
)
 
(3,799
)
 
7,362

 
(3,732
)
 
(23,444
)
Income tax expense (benefit)
67

 
(42
)
 
(443
)
 

 
(418
)
Net income (loss)
(23,342
)
 
(3,757
)
 
7,805

 
(3,732
)
 
(23,026
)
Net income attributable to noncontrolling interests

 

 
(316
)
 

 
(316
)
Net income (loss) attributable to ION
$
(23,342
)
 
$
(3,757
)
 
$
7,489

 
(3,732
)
 
$
(23,342
)
Comprehensive net loss
$
(22,825
)
 
$
(3,805
)
 
$
8,054

 
$
(3,933
)
 
$
(22,509
)
Comprehensive income attributable to noncontrolling interest

 

 
(316
)
 

 
(316
)
Comprehensive net income (loss) attributable to ION
$
(22,825
)
 
$
(3,805
)
 
$
7,738

 
$
(3,933
)
 
$
(22,825
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
Income Statement
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
Net revenues
$

 
$
11,162

 
$
11,501

 
$
2

 
$
22,665

Cost of sales

 
21,427

 
10,166

 
2

 
31,595

Gross profit (loss)

 
(10,265
)
 
1,335

 

 
(8,930
)
Total operating expenses
7,411

 
7,816

 
5,972

 

 
21,199

Loss from operations
(7,411
)
 
(18,081
)
 
(4,637
)
 

 
(30,129
)
Interest expense, net
(4,693
)
 
(70
)
 
29

 

 
(4,734
)
Intercompany interest, net
232

 
(1,017
)
 
785

 

 

Equity in losses of investments
(23,135
)
 
(1,808
)
 

 
24,943

 

Other income (expense)
26

 
(359
)
 
453

 

 
120

Net loss before income taxes
(34,981
)
 
(21,335
)
 
(3,370
)
 
24,943

 
(34,743
)
Income tax expense
33

 
253

 
7

 

 
293

Net loss
(35,014
)
 
(21,588
)
 
(3,377
)
 
24,943

 
(35,036
)
Net loss attributable to noncontrolling interests

 

 
22

 

 
22

Net loss attributable to ION
$
(35,014
)
 
$
(21,588
)
 
$
(3,355
)
 
24,943

 
$
(35,014
)
Comprehensive net loss
$
(36,498
)
 
$
(21,588
)
 
$
(4,839
)
 
$
26,427

 
$
(36,498
)
Comprehensive loss attributable to noncontrolling interest

 

 
22

 

 
22

Comprehensive net loss attributable to ION
$
(36,498
)
 
$
(21,588
)
 
$
(4,817
)
 
$
26,427

 
$
(36,476
)
 
 
 
 
 
 
 
 
 
 

19

    

 
Three Months Ended March 31, 2017
Statement of Cash Flows
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Total Consolidated
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
7,690

 
$
3,373

 
$
(9,080
)
 
$
1,983

Cash flows from investing activities:
 
 
 
 
 
 
 
Cash invested in multi-client data library

 
(1,527
)
 
(1,836
)
 
(3,363
)
Purchase of property, plant, equipment and seismic rental equipment

 

 
(49
)
 
(49
)
Net cash used in investing activities

 
(1,527
)
 
(1,885
)
 
(3,412
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Payments on notes payable and long-term debt
(506
)
 
(1,142
)
 
(58
)
 
(1,706
)
Intercompany lending
(1,574
)
 
(704
)
 
2,278

 

Costs associated with issuance of equity
(123
)
 

 

 
(123
)
Other financing activities
(163
)
 

 

 
(163
)
Net cash provided by (used in) financing activities
(2,366
)
 
(1,846
)
 
2,220

 
(1,992
)
Effect of change in foreign currency exchange rates on cash and cash equivalents

 

 
409

 
409

Net increase (decrease) in cash and cash equivalents
5,324

 

 
(8,336
)
 
(3,012
)
Cash and cash equivalents at beginning of period
23,042

 

 
29,610

 
52,652

Cash and cash equivalents at end of period
$
28,366

 
$

 
$
21,274

 
$
49,640



 
Three Months Ended March 31, 2016
Statement of Cash Flows
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Total Consolidated
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(8,953
)
 
$
(3,804
)
 
$
15,236

 
$
2,479

Cash flows from investing activities:
 
 
 
 
 
 
 
Investment in multi-client data library

 
(6,327
)
 

 
(6,327
)
Purchase of property, plant, equipment and seismic rental equipment

 
(266
)
 

 
(266
)
Net cash used in investing activities

 
(6,593
)
 

 
(6,593
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Repurchase of common stock
(964
)
 

 

 
(964
)
Payments on notes payable and long-term debt
(167
)
 
(1,859
)
 
(186
)
 
(2,212
)
Cost associated with issuance of notes
(1,315
)
 

 

 
(1,315
)
Intercompany lending
4,749

 
12,256

 
(17,005
)
 

Other financing activities
13

 

 

 
13

Net cash provided by (used in) financing activities
2,316

 
10,397

 
(17,191
)
 
(4,478
)
Effect of change in foreign currency exchange rates on cash and cash equivalents

 

 
329

 
329

Net decrease in cash and cash equivalents
(6,637
)
 

 
(1,626
)
 
(8,263
)
Cash and cash equivalents at beginning of period
33,734

 

 
51,199

 
84,933

Cash and cash equivalents at end of period
$
27,097

 
$

 
$
49,573

 
$
76,670


20

    

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Our Business
In this Form 10-Q, “ION Geophysical,” “ION,” “the company” (or, “the Company”), “we,” “our,” “ours” and “us” refer to ION Geophysical Corporation and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicated.
The information contained in this Quarterly Report on Form 10-Q contains references to trademarks, service marks and registered marks of ION and our subsidiaries, as indicated. Except where stated otherwise or unless the context otherwise requires, the terms “VectorSeis,” “Orca,” and “WiBand,” refer to VECTORSEIS®, ORCA® and WiBand® registered marks owned by ION, and the terms “Marlin”, “Gator,” and “Calypso,” refers to the Marlin™, GATOR™ and Calypso™, trademarks owned by ION.
We provide geoscience technology, services and solutions to the global oil and gas industry. Our offerings are designed to allow oil and gas companies to obtain higher resolution images of the Earth’s subsurface to reduce their risk and optimize assets across the exploration and production lifecycle. Seismic imaging plays a fundamental role in hydrocarbon exploration and reservoir development by delineating structures, rock types and fluid locations in the subsurface. The high-resolution images of the Earth’s subsurface can be used to reduce uncertainty associated with identifying sources of hydrocarbons and pinpointing drilling locations for wells, which can be costly and risky.
We acquire and process seismic data on a proprietary or multi-client basis. The multi-client seismic surveys for our data library business are pre-funded, or underwritten, in part by our customers, and, with the exception of our ocean bottom seismic (“OBS”) data acquisition company, OceanGeo B.V. (“OceanGeo”), we utilize an “asset lite” strategy by contracting with third party seismic data acquisition companies to acquire the seismic data, all of which is intended to minimize our risk exposure. We serve customers in most major energy producing regions of the world from strategically located offices across six continents.
We provide our services and products through three business segments – E&P Technology & Services, E&P Operations Optimization and Ocean Bottom Seismic Services. In addition, we have a 49% ownership interest in our INOVA Geophysical Equipment Limited joint venture (“INOVA Geophysical,” or “INOVA”). As of December 31, 2014, we wrote down our investment in INOVA Geophysical to zero, and therefore no longer record our share of losses in the joint venture.
For decades, we have provided innovative seismic data acquisition technology, such as multicomponent imaging with VectorSeis products, the ability to record seismic data from basins below ice, and cableless seismic techniques. The advanced technologies we currently offer include our Orca and Gator command and control software systems, WiBand broadband data processing technology, Calypso OBS acquisition system, and other technologies, each of which is designed to deliver improvements in both image quality and productivity. In 2015, we introduced our Marlin solution for optimizing simultaneous operations offshore. We have approximately 500 patents and pending patent applications in various countries around the world. Approximately 48% of our employees are involved in technical roles and over 24% of our employees have advanced degrees.
E&P Technology & Services. Our E&P Technology & Services business provides three distinct service activities that often work together.
Our E&P Technology & Services business focuses on providing services to help E&P companies to make better decisions, reduce risk and maximize value. For example, E&P Technology & Services provides information to better understand new frontiers, imaging services to better understand complex subsurface geologies, and consulting services to optimize asset decisions and portfolios, help host governments maximize assets by supporting a license round, etc. Since 2002, our basin exploration seismic data programs have resulted in a substantial data library that covers significant portions of many of the frontier basins in the world, including offshore East and West Africa, India, South America, the Arctic, the Gulf of Mexico and Australia.
Our Ventures services are designed to manage the entire seismic process, from survey planning and design to data acquisition and management, to final subsurface imaging and reservoir characterization. Our Ventures group focuses on the technologically intensive components of the image development process, such as survey planning and design, and data processing and interpretation, outsourcing the logistics components (such as field acquisition) to experienced seismic and other geophysical contractors.
Our Imaging Services group offers data processing and imaging services designed to help our E&P customers reduce exploration and production risk, evaluate and develop reservoirs, and increase production. Imaging Services develops a series of subsurface images by applying its processing technology to data owned or licensed by its customers. We maintain approximately 17 petabytes of digital seismic data information storage in four global data centers, including two core data centers located in Houston and in the U.K.

21

    

Our E&P Advisors group partners with operators, energy industry regulators and capital institutions to capture and monetize E&P opportunities worldwide. This group provides technical, commercial and strategic advice across the E&P value chain, working at basin, prospect and field scales.
E&P Operations Optimization. Our E&P Operations Optimization business combines our Optimization Software & Services and Devices offerings.
Our Optimization Software & Services group provides command and control software systems, related software and services for towed marine streamer and seabed operations, as well as survey design. Our Orca software is installed on towed streamer marine vessels worldwide, and our Gator software is used by many re-deployable and permanent seabed acquisition systems. Our Marlin solution is used for optimizing simultaneous operations offshore.
Our Devices group is engaged in the manufacture and repairs of marine towed streamer positioning and control systems; and analog geophone sensors.
Ocean Bottom Seismic Services. Through our experienced OceanGeo team, we offer a fully integrated OBS solution that includes survey design, planning, and acquisition services performed by our crew using custom designed vessels to maximize image quality, operational efficiency and safety. Our team manufactures and repairs re-deployable ocean bottom cable seismic data acquisition systems and shipboard recorders for use in OBS data acquisition. In addition, our team provides superior imaging via OceanGeo’s exclusive use of our seabed acquisition systems; and data processing, interpretation and reservoir services, by our Imaging Services and E&P Advisors groups.
INOVA Geophysical. Historically, we conducted our land seismic equipment business through INOVA Geophysical, which is a joint venture with BGP Inc. (“BGP”). BGP is a subsidiary of China National Petroleum Corporation, and is generally regarded as the world’s largest land geophysical service contractor. BGP owns a 51% equity interest in INOVA Geophysical, and we own the remaining 49% interest. INOVA manufactures cable-based and cableless data acquisition systems, digital sensors, vibroseis vehicles (i.e., vibrator trucks) and source controllers for land seismic surveys.
Macroeconomic Conditions
Demand for our services and products is cyclical and dependent upon activity levels in the oil and gas industry, particularly our customers’ willingness to invest capital in the exploration for oil and natural gas. Our customers’ capital spending programs are generally based on their outlook for near-term and long-term commodity prices, economic growth, commodity demand and estimates of resource production. Following an unprecedented two years of double-digit declines, third-party reports now indicate that global exploration and production spending is expected to increase 7% in 2017, with North American spending expected to increase 27%.
In the past few years, crude oil prices have been volatile due to global economic uncertainties. Significant downward oil price volatility began late in 2014 and reached a low average of $33 per barrel in early 2016. The material decrease in crude oil prices can be attributed principally to high levels of global crude oil inventories resulting from significant production growth in the U.S. shale plays, the strengthening of the U.S. dollar relative to other foreign currencies and the Organization of Petroleum Exporting Countries (“OPEC”) increasing its production, causing a global supply and demand imbalance for crude oil. In late November 2016, OPEC and other non-OPEC participants such as Russia reached an agreement to cut their oil production.
The prices for West Texas Intermediate (“WTI”) and Intercontinental Exchange Brent (“Brent”) crude oil increased to an average of $52 per barrel and $54 per barrel, respectively, in the first quarter of 2017 from an average of $42 per barrel and $43 per barrel, respectively, for the full year 2016. The recent stabilization in crude oil prices can be attributed principally to reports indicating a 90% compliance level from OPEC producers during the first quarter of 2017, which have kept prices in check between $50 and $55 a barrel. This price stability has encouraged North American drillers to increase shale production by adding 137 oil rigs during the first quarter of 2017, with forecasts indicating that the U.S. rig count is expected to average 730 rigs in 2017, with up to approximately 875 rigs by year end.
Given the historical volatility of crude prices, there is a continued risk that if prices do not continue to improve, or if they start to decline again due to high levels of crude oil production, there is a potential for slowing growth rates in various global regions and/or for ongoing supply/demand imbalances.
Prices for natural gas in the U.S. averaged $3.02 per mmBtu for the first quarter 2017, compared to $2.40 per mmBtu for the full year 2016, and $4.57 per mmBtu for the first nine months of 2014. As a result of natural gas production growth outpacing demand in the U.S., natural gas prices continue to be weak relative to prices experienced from 2006 through 2008 and are expected to remain below levels considered economical for new investments in numerous natural gas fields. Total U.S. natural gas in storage stands at 2.1 trillion cubic feet, 16.8% lower than levels at this time a year ago, although 14.6% above the five-year average for this time of year.


22

    

After a period of growth in exploration activities and spending by E&P companies leading up to the fourth quarter of 2014, many E&P companies shifted their focus to production activities, away from exploration, as the continued decline in oil and gas prices resulted in decreasing revenues, prompting cost reduction initiatives across the industry. From the end of 2014, through 2016, E&P companies decreased spending on exploration and reportedly focused their spending on critical production requirements and existing commitments. We believe this was due to several factors, but primarily because operational cash flows of E&P companies were no longer sufficient to cover capital expenditures while continuing to pay cash dividends to shareholders. E&P companies relied on asset sales and debt financings to fund capital requirements amid demands for greater returns to shareholders. The combination of these factors placed many E&P companies in a position where they were unable to cover both their capital expenditure budgets and targeted cash returns to shareholders. As a result, E&P companies dramatically cut spending, with exploration spending receiving the largest reductions and seismic spending being one of the most discretionary parts of their exploration budgets. As a result of this industry downturn, many customers experienced a significant reduction in their liquidity with challenges accessing the capital markets. Several exploration and production companies declared bankruptcy, or exchanged equity for the forgiveness of debt, while others were forced to sell assets in an effort to preserve liquidity.
During the first quarter of 2017, E&P spending has started to rebound and is expected to increase during the year and into 2018 as commodity prices are forecasted to remain stable, with lower production and ongoing demand beginning to draw down global inventories. This positive trend in E&P spending aided by favorable macroeconomic conditions have resulted in increased revenues during the first quarter of 2017. If the global supply of oil decreases due to reduced capital investment by E&P companies, government instability in a major oil-producing nation or energy demand increases in the U.S. or in countries such as China and India, the recovery in WTI and Brent crude oil prices could continue to improve. If commodity prices do not continue to improve or if they start to deteriorate again, demand for our services and products could decline.
Impact to Our Business
During the first quarter of 2017, revenues increased by 44% as compared to the first quarter of 2016. Investments in our multi-client data library are dependent upon the timing of our new ventures projects and the availability of underwriting by our customers. During the first quarter of 2017, we saw renewed interest in customer underwriting of our new venture programs as the oil market began to stabilize. We continue to maintain high standards for underwriting of any new projects, and have delayed certain new venture programs that were originally planned to occur during 2016. Our “asset lite” strategy enables us to scale our business to avoid significant fixed costs and to remain financially flexible as we manage the timing and levels of our capital expenditures.
In our E&P Technology & Services segment, data library sales have increased compared to the first quarter of 2016. As a result of renewed interest in the underwriting of new venture projects, we recently sanctioned three programs which met our conservative underwriting standards, for which we expect acquisition to begin within the next 90 days. Our Imaging business has remained flat with a slight increase in revenue as compared to the first quarter of 2016. We invested $3.4 million in our multi-client data library during the first quarter of 2017 and we expect investments in our multi-client data library to be in a range of $20 million to $35 million for the full-year 2017, compared to the $14.9 million invested in 2016.
As of March 31, 2017, our E&P Technology & Services segment backlog, which consists of commitments for (i) data processing work and (ii) both multi-client new venture projects and proprietary projects by our Ventures group underwritten by our customers, was $25.2 million, compared to $33.9 million at December 31, 2016 and $20.9 million at March 31, 2016. The decrease in our backlog during the first quarter of 2017 is due to the recognition of revenue on our Campeche 3-D reimaging program. We anticipate that the majority of our backlog will be recognized as revenue over the next six months of 2017.
For the first quarter of 2017, our Ocean Bottom Seismic Services segment continues to be affected by E&P companies delaying or canceling decisions to commit capital to OBS projects, causing our vessels to remain idle.  We have cold-stacked our crew and vessels while we actively pursue tenders for longer-term OBS work. Despite the extended market downturn and uncertainty, we see significant long-term potential for OceanGeo and our technologies to improve OBS productivity, and we expect long-term demand for OBS surveys to increase.
Our seismic contractor customers are also experiencing weakened demand due to the reduction in seismic spending by their oil company customers. Since early 2014, seismic contractors have taken approximately 40 seismic vessels, or about 32% of the fleet, out of the market. As a result, our E&P Operations Optimization segment experienced flat year-over-year sales.
We continue to monitor the global economy, the demand for crude oil and natural gas and the resulting impact on the capital spending plans and operations of our E&P customers to plan our business. We remain confident that, despite current marketplace challenges described above, we have positioned ourselves to take advantage of the next E&P market upturn by reducing our cost structure, shifting our focus toward E&P solutions and away from equipment sales, and by diversifying our offerings across the E&P lifecycle.
It is our view that technologies that provide a competitive advantage through improved imaging, lower costs, higher productivity, or enhanced safety will continue to be valued in our marketplace. We believe that our newest technologies, such

23

    

as WiBand, Marlin and Calypso, will continue to attract customer interest, because those technologies are designed to deliver those desirable qualities.
WesternGeco Litigation
On July 2, 2015, the United States Court of Appeals for the Federal Circuit in Washington, D.C. reversed in part the district court’s 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. We filed our 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.
On November 14, 2016, the District Court issued an order reducing the amount of the appeal bond from $120.0 million to $65.0 million, ordered the sureties to pay principal and interest on the royalty previously awarded and declined to issue a final judgment until after consideration of whether enhanced damages related to willfulness should be awarded in the case. While we do not agree with the unusual decision by the District Court ordering payment of the royalty damages and interest without a final judgment, we paid the $20.8 million due pursuant to the order to WesternGeco on November 25, 2016.
On March 14, 2017, the District Court held a hearing on whether or not additional damages for willfulness would be payable. In a ruling from the bench, the District Court stated that additional damages in the amount of $5.0 million would be awarded by the court. The District Court has not yet issued a final order to memorialize the ruling, but it is anticipated that the final order will be consistent with the ruling from the bench. After a final order is issued, we will decide whether to appeal the $5.0 million or pay the award without further appeal.
WesternGeco filed a second petition for writ of certiorari in the U.S. Supreme Court on February 17, 2017, appealing the lost profits issue again. We filed our response to WesternGeco’s second attempt to appeal to the Supreme Court the lost profits issue, raising both the substantive matters we addressed by opposing WesternGeco’s first petition, and also raising a procedural argument that WesternGeco cannot raise the same issue for a second time in a second petition for certiorari. At present, the only remaining issues in the litigation are payment or appeal of the $5.0 million in enhanced damages and WesternGeco’s second appeal of the same issue to the Supreme Court on lost profits.
Pending issuance of the final order for $5.0 million from the District Court, we have taken a loss contingency accrual of $5.0 million. The Company’s assessment of the need for and amount of its potential loss contingency may change in the future. 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, we arranged with sureties to post an appeal bond at the District Court. The appeal bond is uncollateralized. The sureties have a new motion to release the bond that is currently pending. In light of our payment of the $20.8 million in royalty damages, the only liquidated exposure to the sureties under the bond is the $5.0 million, when the order is issued. See Footnote 6Litigation” of Footnotes to Unaudited Condensed Financial Statements.
Key Financial Metrics
The table below provides an overview of key financial metrics for our company as a whole and our three business segments for the three months ended March 31, 2017, compared to the same period of 2016 (in thousands, except share data). 
 
Three Months Ended March 31,
 
2017
 
2016
Net revenues:
 
 
 
E&P Technology & Services:
 
 
 
New Venture
$
6,949

 
$
3,306

Data Library
10,606

 
4,272

Total multi-client revenues
17,555

 
7,578

Imaging Services
5,755

 
5,440

Total
23,310

 
13,018


24

    

 
Three Months Ended March 31,
 
2017
 
2016
E&P Operations Optimization:
 
 
 
Devices
4,990

 
5,359

Optimization Software & Services
4,256

 
4,288

Total
9,246

 
9,647

Ocean Bottom Seismic Services

 

Total
$
32,556

 
$
22,665

Gross profit (loss):
 
 
 
E&P Technology & Services
$
4,010

 
$
(9,773
)
E&P Operations Optimization
4,787

 
4,719

Ocean Bottom Seismic Services
(2,696
)
 
(3,876
)
Total
$
6,101

 
$
(8,930
)
Gross margin:
 
 
 
E&P Technology & Services
17
 %
 
(75
)%
E&P Operations Optimization
52
 %
 
49
 %
Ocean Bottom Seismic Services
 %
 
 %
Total
19
 %
 
(39
)%
Income (loss) from operations:
 
 
 
E&P Technology & Services
$
(1,096
)
 
$
(14,714
)
E&P Operations Optimization
1,549

 
1,601

Ocean Bottom Seismic Services
(4,008
)
 
(7,631
)
Support and other
(10,357
)
 
(9,385
)
Loss from operations
$
(13,912
)
 
$
(30,129
)
Operating margin:
 
 
 
E&P Technology & Services
(5
)%
 
(113
)%
E&P Operations Optimization
17
 %
 
17
 %
Ocean Bottom Seismic Services
 %
 
 %
Support and other
(32
)%
 
(41
)%
Total
(43
)%
 
(133
)%
Net loss attributable to ION
$
(23,342
)
 
$
(35,014
)
Net loss per share:
 
 
 
Basic
$
(1.98
)
 
$
(3.30
)
Diluted
$
(1.98
)
 
$
(3.30
)
 
 
 
 
Loss contingency accrual related to legal proceedings (special item)
5,000

(a)

Net loss attributable to ION as adjusted
$
(18,342
)
 
$
(35,014
)
Net loss per share as adjusted:
 
 
 
<