ION GEOPHYSICAL CORP - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - ION GEOPHYSICAL CORP	ex322cfosec906cert03312018.htm
EX-32.1 - EXHIBIT 32.1 - ION GEOPHYSICAL CORP	ex321ceosec906cert03312018.htm
EX-31.2 - EXHIBIT 31.2 - ION GEOPHYSICAL CORP	ex312cfosec302cert03312018.htm
EX-31.1 - EXHIBIT 31.1 - ION GEOPHYSICAL CORP	ex311ceosec302cert03312018.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, 2018



¨	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, 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	o

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

		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, 2018, there were 13,909,509 shares of common stock, par value $0.01 per share, outstanding.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS FOR FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018



	PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017	4
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2018 and 2017	5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	6
Footnotes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures about Market Risk	34
Item 4. Controls and Procedures	34

PART II. Other Information
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 5. Other Information	39
Item 6. Exhibits	40

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



	March 31, 2018			December 31, 2017
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	50,750		$	52,056
Accounts receivable, net	29,750			19,478
Unbilled receivables	16,349			37,304
Inventories	14,728			14,508
Prepaid expenses and other current assets	5,754			7,643
Total current assets	117,331			130,989
Deferred income tax asset	1,877			1,753
Property, plant, equipment and seismic rental equipment, net	50,007			52,153
Multi-client data library, net	84,433			89,300
Goodwill	25,188			24,089
Intangible assets, net	1,374			1,666
Other assets	843			1,119
Total assets	$	281,053		$	301,069
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,014		$	40,024
Accounts payable	22,817			24,951
Accrued expenses	26,195			38,697
Accrued multi-client data library royalties	28,324			27,035
Deferred revenue	11,330			8,910
Total current liabilities	89,680			139,617
Long-term debt, net of current maturities	116,916			116,720
Other long-term liabilities	12,938			13,926
Total liabilities	219,534			270,263
Equity:
Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 13,909,509 and 12,019,701 shares at March 31, 2018 and December 31, 2017, respectively	139			120
Additional paid-in capital	950,464			903,247
Accumulated deficit	(873,347		)	(854,921		)
Accumulated other comprehensive loss	(17,054		)	(18,879		)
Total stockholders’ equity	60,202			29,567
Noncontrolling interest	1,317			1,239
Total equity	61,519			30,806
Total liabilities and equity	$	281,053		$	301,069

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Three Months Ended March 31,
	2018			2017
	(In thousands, except per share data)
Service revenues	$	25,086		$	23,828
Product revenues	8,422			8,728
Total net revenues	33,508			32,556
Cost of services	22,329			22,299
Cost of products	4,326			4,156
Gross profit	6,853			6,101
Operating expenses:
Research, development and engineering	4,255			3,495
Marketing and sales	5,098			4,486
General, administrative and other operating expenses	10,140			12,032
Total operating expenses	19,493			20,013
Loss from operations	(12,640		)	(13,912		)
Interest expense, net	(3,836		)	(4,464		)
Other expense, net	(791		)	(5,068		)
Loss before income taxes	(17,267		)	(23,444		)
Income tax expense (benefit)	1,072			(418		)
Net loss	(18,339		)	(23,026		)
Net income attributable to noncontrolling interest	(87		)	(316		)
Net loss attributable to ION	$	(18,426	)	$	(23,342	)
Net loss per share:
Basic	$	(1.44	)	$	(1.98	)
Diluted	$	(1.44	)	$	(1.98	)
Weighted average number of common shares outstanding
Basic	12,813			11,818
Diluted	12,813			11,818

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)



	Three Months Ended March 31,
	2018			2017
	(In thousands)
Net loss	$	(18,339	)	$	(23,026	)
Other comprehensive loss, net of taxes, as appropriate:
Foreign currency translation adjustments	1,825			517
Comprehensive net loss	(16,514		)	(22,509		)
Comprehensive income attributable to noncontrolling interest	(87		)	(316		)
Comprehensive net loss attributable to ION	$	(16,601	)	$	(22,825	)

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Three Months Ended March 31,
	2018			2017
	(In thousands)
Cash flows from operating activities:
Net loss	$	(18,339	)	$	(23,026	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization (other than multi-client data library)	2,523			4,677
Amortization of multi-client data library	9,793			9,258
Stock-based compensation expense	812			634
Accrual for loss contingency related to legal proceedings	—			5,000
Deferred income taxes	(117		)	(1,909		)
Change in operating assets and liabilities:
Accounts receivable	(10,084		)	4,756
Unbilled receivables	20,919			(5,348		)
Inventories	(164		)	(274		)
Accounts payable, accrued expenses and accrued royalties	(10,155		)	(2,488		)
Deferred revenue	2,381			7,193
Other assets and liabilities	3,039			3,368
Net cash provided by operating activities	608			1,841
Cash flows from investing activities:
Cash invested in multi-client data library	(9,240		)	(3,363		)
Purchase of property, plant, equipment and seismic rental assets	(61		)	(49		)
Net cash used in investing activities	(9,301		)	(3,412		)
Cash flows from financing activities:
Payments under revolving line of credit	(10,000		)	—
Payments on notes payable and long-term debt	(29,144		)	(1,706		)
Net proceeds from issuance of stock	47,219			—
Other financing activities	(575		)	(286		)
Net cash provided by (used in) financing activities	7,500			(1,992		)
Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash	(113		)	409
Net decrease in cash, cash equivalents and restricted cash	(1,306		)	(3,154		)
Cash, cash equivalents and restricted cash at beginning of period	52,419			53,433
Cash, cash equivalents and restricted cash at end of period	$	51,113		$	50,279

The following table is a reconciliation of cash and cash equivalents to total cash, cash equivalents, and restricted cash:



	Three months ended March 31,
	2018		2017
	(In thousands)
Cash and cash equivalents	$	50,750	$	49,640
Restricted cash included in prepaid expenses and other current assets	60		285
Restricted cash included in other long-term assets	303		354
Total cash, cash equivalents, and restricted cash shown in statement of cash flows	$	51,113	$	50,279

Short-term restricted cash included in prepaid expenses and other current assets and long-term restricted cash included in other assets are primarily used to secure standby and commercial letters of credit.

See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The condensed consolidated balance sheet of ION Geophysical Corporation and its subsidiaries (collectively referred to as the “Company” or “ION,” unless the context otherwise requires) at December 31, 2017 has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at March 31, 2018, and the condensed consolidated statements of operations, comprehensive loss and cash flows for the three months ended March 31, 2018 and 2017, 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, 2018, are not necessarily indicative of the operating results for a full year or of future operations.

The Company’s financial statements reflect a non-redeemable noncontrolling interest in a majority-owned affiliate which is reported as a separate component of equity in “Noncontrolling interest” in the condensed consolidated balance sheets. The activity for this noncontrolling interest relates to proprietary processing projects in Brazil.

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 as amended for the year ended December 31, 2017.

(2) Recent Accounting Pronouncements

In February 2016, the Financials Account Standards Board (“FASB”) issued Accounting Standards Update (“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 will adopt ASU 2016-02 on January 1, 2019. The Company is currently evaluating its operating leases related to offices, processing centers, warehouse spaces and, to a lesser extent, certain equipment. The Company expects the recording of these leases as right-of-use assets and liabilities will result in a material impact on its consolidated balance sheet. However, the Company expects the income statement recognition to appear similar to its current methodology.

On January 1, 2018, the Company adopted FASB Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” and all the related amendments using the modified retrospective method. The adoption did not have a material impact to the Company’s revenue recognition policy under the previous standard (ASC 605) and adoption of the new standard, ASC 606, did not result in an adjustment to the Company’s beginning retained earnings balance.

On January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows - “Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-18)”, using a retrospective transition method to each period presented. The new standard no longer requires the Company to present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. Adoption of the new standard resulted in a decrease of $0.1 million in net cash provided by operating activities as previously reported for the three months ended March 31, 2017. See the consolidated statement of cash flows above which includes a reconciliation of cash and cash equivalents to total cash, cash equivalents, and restricted cash.

(3) Segment Information

The Company evaluates and reviews its results based on three business segments: E&P Technology & Services, Operations Optimization (formerly referred to as E&P Operations Optimization), and Ocean Bottom Integrated Technologies (formerly referred to as Ocean Bottom Seismic Services). The Company measures segment operating results based on income (loss) from operations.

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



	Three Months Ended March 31,
	2018			2017
Net revenues:
E&P Technology & Services:
New Venture	$	13,726		$	6,949
Data Library	5,948			10,606
Total multi-client revenues	19,674			17,555
Imaging Services	4,894			5,755
Total	24,568			23,310
Operations Optimization:
Devices	4,158			4,990
Optimization Software & Services	4,782			4,256
Total	8,940			9,246
Ocean Bottom Integrated Technologies	—			—
Total	$	33,508		$	32,556
Gross profit (loss):
E&P Technology & Services	$	4,343		$	4,010
Operations Optimization	4,311			4,787
Ocean Bottom Integrated Technologies	(1,801		)	(2,696		)
Total	$	6,853		$	6,101
Gross margin:
E&P Technology & Services	18		%	17		%
Operations Optimization	48		%	52		%
Ocean Bottom Integrated Technologies	—		%	—		%
Total	20		%	19		%
Income (loss) from operations:
E&P Technology & Services	$	(794	)	$	(1,096	)
Operations Optimization	786			1,549
Ocean Bottom Integrated Technologies	(2,829		)	(4,008		)
Support and other	(9,803		)	(10,357		)
Loss from operations	(12,640		)	(13,912		)
Interest expense, net	(3,836		)	(4,464		)
Other expense, net	(791		)	(5,068		)
Loss before income taxes	$	(17,267	)	$	(23,444	)

(4) Revenue From Contracts With Customers

The Company derives revenue from the sale or license of (i) multi-client and proprietary surveys, licenses of “on-the-shelf” data libraries and imaging services, within its E&P Technologies & Services segment; (ii) seismic data acquisition systems and other seismic equipment, (iii) seismic command and control software systems and software solutions for operations management within its Operations Optimization segment; and (iv) fully-integrated OBS solutions that include survey design and planning and data acquisition within its Ocean Bottom Integrated Technologies segment. All revenues of the E&P Technology & Services and Ocean Bottom Integrated Technologies segments and the services component of revenues for the Optimization Software & Services group as part of the Operations Optimization segment are classified as services revenues. All other revenues are classified as product revenues.

The Company uses a five-step model to determine proper revenue recognition from customer contracts. Revenue is recognized when (i) a contract is approved by all parties; (ii) the goods or services promised in the contract are identified; (iii) the consideration we expect to receive in exchange for the goods or services promised is determined; (iv) the consideration is allocated to the goods and services in the contract; and (v) control of the promised goods or services is transferred to the customer. The Company does not disclose the value of contractual future performance obligations with an original expected length of one year or less.

Multi-Client and Proprietary Surveys, and Imaging Services - As multi-client seismic surveys are being designed, acquired or processed (the “New Venture” phase), the Company enters into non-exclusive licensing arrangements with its customers, who pre-fund or underwrite these programs in part. License revenues from these surveys are recognized during the New Venture phase as the seismic data is acquired and/or processed on a proportionate basis as work is performed and control is transferred to the customer. Under this method, the Company recognizes revenue based upon quantifiable measures of progress, such as kilometers acquired or surveys of performance completed to date. Upon completion of a multi-client seismic survey, it is considered “on-the-shelf,” and licenses to the survey data are granted to customers on a non-exclusive basis.

The Company also performs seismic surveys, imaging and other services under contracts to specific customers, whereby the seismic data is owned by those customers. The Company recognizes revenue as the seismic data is acquired and/or processed on a proportionate basis as work is performed. The Company uses quantifiable measures of progress consistent with its multi-client seismic surveys.

Acquisition Systems and Other Seismic Equipment - For sales of seismic data acquisition systems and other seismic equipment, the Company recognizes revenue when control of the goods has transferred to the customer. Transfer of control generally occurs when (i) the Company has a present right to payment; (ii) the customer has legal title to the asset; (iii) the Company has transferred physical possession of the asset; (iv) the customer has significant rewards of ownership; and/or (v) the customer has accepted the asset.

Software - Licenses for the navigation, survey and quality control software systems provide the customer with a right to use the software. The Company offers usage-based licenses under which it receives a monthly fee based on the number of vessels and licenses used. For these usage-based licenses, revenue is recognized as the performance obligations are performed over the contract term, which is generally two to five years. In addition to usage-based licenses, the Company offers perpetual software licenses as it exists when made available to the customer. Revenue from these licenses is recognized upfront at the point in time when the software is made available to the customer.

These arrangements generally include the Company providing related services, such as training courses, engineering services and annual software maintenance. The Company allocates consideration to each element of the arrangement based upon directly observable or estimated standalone selling prices. Revenue is recognized for these services as control transfers to the customer over time.

Ocean Bottom Integrated Technologies - The Company recognizes revenue as the seismic data is acquired and control transfers to the customer. The Company uses quantifiable measures of progress consistent with our multi-client surveys. In connection with acquisition contracts, the Company may receive revenues for preparation and mobilization of equipment and personnel, capital improvements to vessels, or demobilization activities. The Company defers the revenues earned and incremental costs incurred that are directly related to these activities and recognize such revenues and costs over the primary contract term of the acquisition project as we transfer the goods and services to the customer. The Company recognizes the costs of relocating vessels without contracts to more promising market sectors as such costs are incurred.

Revenue by Geographic Area

The following table is a summary of net revenues by geographic area (in thousands):



	Three Months Ended March 31,
	2018		2017
Net revenues by geographic area:
Latin America	$	9,852	$	6,585
North America	8,048		7,395
Europe	5,549		5,636
Africa	5,019		560
Asia Pacific	3,934		4,823
Middle East	749		580
CIS	357		6,977
Total	$	33,508	$	32,556

See Footnote 3 “Segment Information” of Footnotes to Unaudited Condensed Financial Statements for revenue by segment for the periods ended March 31, 2018 and 2017.

Unbilled Receivables

Unbilled receivables relate to revenues recognized on multi-client surveys, imaging services and Devices equipment repairs on a proportionate basis, and on licensing of multi-client data libraries for which invoices have not yet been presented to

the customer. The following table is a summary of unbilled receivables (in thousands):



	March 31, 2018		December 31, 2017
New Venture	$	10,734	$	33,183
Imaging Services	5,412		4,121
Devices	203		—
Total	$	16,349	$	37,304

The changes in unbilled receivables were as follows (in thousands):




Unbilled Receivables at December 31, 2017	$	37,304
Recognition of unbilled receivables	25,843
Revenues billed to customers	(46,798		)
Unbilled Receivables at March 31, 2018	$	16,349

Deferred Revenue

Billing practices are governed by the terms of each contract based upon achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized on a proportionate basis as work is performed and control is transferred to the customer. Deferred revenue represents cash received in excess of revenue not yet recognized as of the reporting period, but will be recognized in future periods. The following table is a summary of deferred revenues (in thousands):



	March 31, 2018		December 31, 2017
New Venture	$	9,611	$	6,548
Imaging Services	453		676
Devices	360		633
Optimization Software & Services	906		1,053
Total	$	11,330	$	8,910

The changes in deferred revenues were as follows (in thousands):




Deferred revenue at December 31, 2017	$	8,910
Cash collected in excess of revenue recognized	10,083
Recognition of deferred revenue ^(a)	(7,663		)
Deferred revenue at March 31, 2018	$	11,330


^(a)	The majority of deferred revenue recognized relates to Company’s new venture and imaging services groups.

The Company expects to recognize all deferred revenue over the next 12 months.

(5) Long-term Debt

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



Obligations (in thousands)	March 31, 2018			December 31, 2017
Senior secured second-priority lien notes (maturing December 15, 2021)	$	120,569		$	120,569
Senior secured third-priority lien notes (redeemed on March 26, 2018)	—			28,497
Revolving line of credit (maturing August 22, 2019)	—			10,000
Equipment capital leases and other debt	1,014			1,661
Costs associated with issuances of debt	(3,653		)	(3,983		)
Total	117,930			156,744
Current portion of long-term debt and lease obligations	(1,014		)	(40,024		)
Non-current portion of long-term debt and lease obligations	$	116,916		$	116,720

Revolving Credit Facility

In August 2014, ION Geophysical Corporation and its material U.S. subsidiaries, GX Technology Corporation, ION Exploration Products (U.S.A.), Inc., and I/O Marine Systems, Inc. (collectively, the “Subsidiary Borrowers”; ION Geophysical Corporation and the Subsidiary Borrowers are, collectively, the “Borrowers”) entered into a Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), as agent (the “Original Credit Agreement”). The Original Credit Agreement 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, is herein called the “Credit Facility”).

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.

In April 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 ION Geophysical Corporation’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 was to reduce the amount available to be borrowed by the aggregate amount owing under all Third Lien Notes that remained 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 ION Geophysical Corporation 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 incorporate 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, 2018, the borrowing base under the Credit Facility was $23.6 million, and there was no indebtedness under the Credit Facility. Even though the Company experienced an increase in its accounts and unbilled receivables from one year ago, those increases were part of the Company’s foreign operations which are not included in the borrowing base calculation. 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 the Borrowers maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 as of the end of each fiscal quarter during the existence of a covenant testing trigger event. The fixed charge coverage ratio is defined as the ratio of (i) ION Geophysical Corporation’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 ION Geophysical Corporation’s excess availability to borrow ($23.6 million at March 31, 2018) plus the aggregate amount of unrestricted cash held by the Borrowers and their domestic subsidiaries. At March 31, 2018, the Borrowers and their domestic subsidiaries had unrestricted cash totaling $41.4 million and non-domestic subsidiaries had unrestricted cash totaling $9.4 million.

At March 31, 2018, ION Geophysical Corporation 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 Geophysical Corporation), the occurrence of which could lead to an acceleration of ION Geophysical Corporation’s obligations under the Credit Facility.

Senior Secured Notes

As of December 31, 2017, ION Geophysical Corporation’s 9.125% Senior Secured Second Priority Notes due December 2021 (the “Second Lien Notes”) had an outstanding aggregate principal amount of $120.6 million, and ION Geophysical Corporation’s 8.125% Senior Third Priority Notes due May 2018 (the “Third Lien Notes”) had an outstanding aggregate principal amount of $28.5 million (The Third Lien Notes and the Second Lien Notes, are herein, collectively the “Notes”). In March 2018, ION Geophysical Corporation obtained consent from a majority of the Second Lien Notes holders and from PNC to redeem, in full, the Third Lien Notes prior to their stated maturity. On March 26, 2018, ION Geophysical Corporation redeemed the Third Lien Notes by paying the then outstanding principal amount of $28.5 million, plus all accrued and unpaid interest through the redemption date. For additional discussion, see Footnote 14. For a complete discussion of the Third Lien Notes prior to their early redemption, see Footnote 3 to the Financial Statements included in the Company’s Annual Report on Form 10-K, as amended for the year ended December 31, 2017.

The Second Lien Notes remain outstanding and are senior secured second-priority obligations guaranteed by ION Geophysical Corporation’s material U.S. subsidiaries, GX Technology Corporation, ION Exploration Products (U.S.A.), Inc. and I/O Marine Systems, Inc. (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 April 2016 indenture, governing the Second Lien Notes (the “Second Lien Notes Indenture”) contains certain covenants that, among other things, limits or prohibits ION Geophysical Corporation’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 ION Geophysical Corporation’s capital stock, redeeming ION Geophysical Corporation’s capital stock, making investments or certain other restricted payments, selling certain kinds of assets, entering into transactions with affiliates, and effecting mergers or consolidations. These and other restrictive covenants contained in the Second Lien Notes Indenture are subject to certain exceptions and qualifications. All of ION Geophysical Corporation’s subsidiaries are currently restricted subsidiaries.

As of March 31, 2018, ION Geophysical Corporation 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%

(6) 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 total number of shares issued or reserved for future issuance under outstanding stock options at March 31, 2018 and 2017 was 871,757 and 838,582, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at March 31, 2018 and 2017 was 182,053 and 203,622, respectively.

(7) 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 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.

The tax provision for the three months ended March 31, 2018 has been calculated using the Company’s overall estimated annual effective tax rate based on projected 2018 full year results. The tax provision includes impacts of the Tax Cut and Jobs Act enacted on December 22, 2017, however, these impacts are minimal due to the Company’s U.S. net operating loss and valuation allowance position. The Company’s effective tax rates for the three months ended March 31, 2018 and 2017 were (6.2)% and 1.8%, respectively. The Company’s effective tax rates for the three months ended March 31, 2018 and 2017 were negatively impacted by the change in valuation allowance related to U.S. operating losses for which the Company cannot currently recognize a tax benefit. The Company’s income tax expense for the three months ended March 31, 2018 of $1.1 million primarily relates to results from the Company’s non-U.S. businesses.

The Company has approximately $0.4 million of unrecognized tax benefits and does not expect to recognize significant increases in unrecognized tax benefits during the next 12-month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.

As of March 31, 2018, the Company’s U.S. federal tax returns for 2014 and subsequent years remain subject to examination by tax authorities. In the Company’s foreign tax jurisdictions, tax returns for 2013 and subsequent years generally remain open to examination.

(8) 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 royalties and $93.4 million in lost profits.

In June 2013, the presiding judge entered a Memorandum and Order, denying the Company’s post-verdict motions that challenged the jury’s infringement findings and the damages amount. In the Memorandum and Order, the judge also ruled that WesternGeco was 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 were subject to supplemental damages and also ruling that the supplemental damages applicable to the additional units were to 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 awarded 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 against the Company in the amount of $123.8 million. 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. (the “Court of Appeals”). On July 2, 2015, the Court of Appeals reversed in part the Final Judgment of the District Court, holding the District Court erred by including lost profits in the Final Judgment. Lost profits were $93.4 million and prejudgment interest on lost profits 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.

As previously disclosed, the Company recorded 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 its loss contingency accrual to $22.0 million.

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 vacated the Court of Appeals’ ruling although it did not address the lost profits question at that time. Rather, 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 Court of Appeals for a determination of whether or not the willfulness determination by the District Court was appropriate.

On October 14, 2016, the Court of Appeals issued a mandate returning the case to the District Court for consideration of whether or not additional damages for willfulness were appropriate.

On November 14, 2016, the District Court ordered the sureties to pay principal and interest on the royalty damages previously awarded and declined to issue a final judgment until after consideration of whether enhanced damages for willfulness would be awarded. While the Company disagreed with the decision by the District Court ordering payment of the royalty damages and interest without a final judgment, on November 25, 2016, the Company paid WesternGeco the $20.8 million due pursuant to the order, at which point the Company reduced its loss contingency accrual to zero.

On March 14, 2017, the District Court held a hearing on whether or not additional damages for willfulness would be payable. The Judge found that the Company’s infringement was willful, based on his perception that the Company did not adequately investigate the scope of the patents, and the Company’s conduct during trial. However, in his ruling at the hearing, he limited enhanced damages to $5.0 million because it was a “close case,” there was no evidence of copying, and the Company was simply acting as a competitor in a capitalist marketplace. The District Court also ordered the appeal bond to be released and discharged. The Court’s findings and ruling were memorialized in an order issued on May 16, 2017. On June 30, 2017, WesternGeco and the Company jointly agreed that neither party would appeal the District Court's award of $5.0 million in enhanced damages. The parties also agreed that the $5.0 million would be paid over the course of 12 months with $1.25 million being paid in two installments of $0.625 million in 2017 and the remaining $3.75 million being paid in three quarterly payments of $1.25 million beginning January 1, 2018. This agreement was memorialized by the court in an order issued on July 26, 2017. Upon assessment of the $5.0 million in enhanced damages, the Company accrued $5.0 million in the first quarter of 2017. As the Company has made the payments, the accrual has been adjusted, and as of March 31, 2018, the loss contingency accrual was $2.5 million.

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 the Company addressed by opposing WesternGeco’s first petition, and also advancing a procedural argument that WesternGeco could not raise the same issue for a second time in a second petition for certiorari. On May 30, 2017, the Supreme Court called for the views of the U.S. Solicitor General regarding whether or not to grant certiorari. The Company and WesternGeco each met with the Solicitor General’s office in late July 2017. On December 6, 2017, the Solicitor General filed its brief, and took the position that the Supreme Court ought to grant certiorari. On January 12, 2018, the Supreme Court granted certiorari as to whether the Court of Appeals erred in holding that lost profits arising from use of prohibited combinations occurring outside of the United States are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. § 271(f)(2) (the specific statute under which the Company was ultimately held to have infringed WesternGeco’s patents and upon which the District Court and Court of Appeals relied in entering their final rulings).

The Supreme Court heard oral arguments on April 16, 2018. At oral arguments, the Company argued that the Court of Appeals’ decision that eliminated lost profits ought to be affirmed. WesternGeco and the Solicitor General argued that the Court of Appeals’ decision that eliminated lost profits ought to be reversed. We anticipate that the Supreme Court will issue a decision by the end of June of 2018.

At the Court of Appeals the Company presented multiple arguments as to why the District Court’s award of lost profits was improper. The lost profits damages awarded by the District Court were based on the use of the Company’s products by our customers outside of the United States. The Company argued at the Court of Appeals, and at the Supreme Court, that, as a matter of law, WesternGeco cannot recoup lost profits for the overseas use of the Company’s products. The Company also argued in the Court of Appeals that, under the jury instructions given in our case, the jury was required to find that the Company had been a direct competitor of WesternGeco in the survey markets where WesternGeco lost profits in order for WesternGeco to recoup them. Because the Court of Appeals ruled in favor of the Company on the first argument, and overturned the award of lost profits on that basis, the Court of Appeals did not rule on the Company’s “direct competitor” argument, and that argument was not presented to the Supreme Court for review. If the Supreme Court overturns the Court of Appeals’ decision that lost profits cannot be awarded to WesternGeco because the subsequent use of the apparatus was overseas, the case will likely be remanded back to the Court of Appeals, at which time the Company will present its second argument (that lost profits should not be awarded to WesternGeco because they were not the Company’s direct competitor).

Other proceedings may have an impact on WesternGeco’s ability to recover lost profits damages even if WesternGeco prevails in the Supreme Court, and even if the Company does not prevail on the “direct competitor” argument in the Court of Appeals. The Company was a party to a challenge to the validity of several of WesternGeco’s patent claims by means of an Inter Partes Review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”). While the above-described lawsuit was pending on appeal, the PTAB invalidated four of the six patent claims that formed the basis for the jury verdict in the lawsuit. WesternGeco appealed that decision to the Court of Appeals, which heard the Company’s and WesternGeco’s arguments on January 23, 2018. If the Court of Appeals affirms the PTAB’s invalidation of the patents, that may provide a separate ground for reducing or vacating any lost-profits award in the lawsuit. The Company expects the Court of Appeals to rule on the PTAB issue in the second quarter of 2018. In April of 2018, the United States Supreme Court issued a decision in a case the Company was not involved in (Oil States v. Greene’s Energy Group) that affirmed the constitutionality of the IPR process to invalidate patent claims.

The Company may not ultimately prevail in any of the appeals processes noted above and the Company could be required to pay some or all of the lost profits that were awarded by the District Court. The Company’s assessment that it does have a loss contingency (other than the $2.5 million noted above) may change in the future due to developments at the Supreme Court, Court of Appeals, or District Court, and other events, such as changes in applicable law, and such reassessment could lead to the determination that an additional loss contingency is probable, which could have a material effect on the Company’s business, financial condition and results of operations. The Company’s assessments disclosed in this Quarterly Report on Form 10-Q or elsewhere are based on currently available information and involve elements of judgment and significant uncertainties.

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.

(9) Other Expense, Net

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



	Three Months Ended March 31,
	2018			2017
Accrual for loss related to legal proceedings (Footnote 8)	$	—		$	(5,000	)
Other expense, net	(791		)	(68		)
Total other expense, net	$	(791	)	$	(5,068	)

(10) Inventories



The following table is a summary of inventories (in thousands):	March 31, 2018			December 31, 2017
Raw materials and subassemblies	$	20,455		$	20,448
Work-in-process	1,342			1,146
Finished goods	7,967			7,953
Reserve for excess and obsolete inventories	(15,036		)	(15,039		)
Total	$	14,728		$	14,508

(11) 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, 2017	$	(18,879	)	$	(18,879	)
Net current-period other comprehensive income	1,825			1,825
Accumulated other comprehensive loss at March 31, 2018	$	(17,054	)	$	(17,054	)

(12) 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,
	2018		2017
Cash paid during the period for:
Interest	$	1,039	$	206
Income taxes	546		819
Non-cash items from investing and financing activities:
Investment in multi-client data library in accounts payable and accrued expenses	—		1,654
Purchases of property, plant, and equipment financed through accounts payable	—		730

(13) Fair Value of Financial Instruments

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, under which the fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels, moving from quoted prices in active markets in (Level 1) to unobservable inputs in (Level 3).

The carrying amounts of the Company’s debt as of March 31, 2018 and December 31, 2017 were $121.6 million and $160.7 million, respectively, compared to its fair values of $121.6 million and $158.2 million as of March 31, 2018 and December 31, 2017, respectively. The fair value of the 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.

(14) Stockholder's Equity and Stock-Based Compensation Expense

Public Equity Offering

On February 21, 2018, the Company announced its successful completion of a public equity offering. The Company issued and sold 1,820,000 shares of common stock at a public offering price of $27.50 per share, and warrants to purchase an additional 1,820,000 shares of the Company’s common stock. The net proceeds from this offering were $47.2 million, including transaction expenses. A portion of the net proceeds were used to retire the Company’s $28.5 million Third Lien Notes in March 2018 (several weeks before their maturity date). The warrants have an exercise price of $33.60 per share, are immediately exercisable and expire on March 21, 2019. If the warrants are exercised in full prior to their expiration, the Company would receive additional proceeds of $61.2 million, excluding underwriter fees and other transaction expenses.

Stock-Based Compensation

The total number of shares issued or reserved for future issuance under outstanding stock options at March 31, 2018 and 2017 was 871,757 and 838,582, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at March 31, 2018 and 2017 was 182,053 and 203,622, respectively. The total number of stock appreciation rights awards outstanding at March 31, 2018 and 2017 was 530,865 and 1,416,133, respectively. The following table presents a summary of the activity related to stock options, restricted stock, restricted stock unit awards and stock appreciation rights awards for the three months ended March 31, 2018:



	Stock Options		Restricted Stock and Unit Awards		Stock Appreciation Rights
	Number of Shares
Outstanding at December 31, 2017	890,341		201,702		565,864
Granted	—		61,365		—
Stock options and stock appreciation rights exercised/restricted stock and unit awards vested	(11,250	)	(81,014	)	(34,999	)
Cancelled/forfeited	(7,334	)	—		—
Outstanding at March 31, 2018	871,757		182,053		530,865

Stock-based compensation expense recognized for the three months ended March 31, 2018 and 2017, totaled $0.8 million and $0.6 million, respectively. Stock appreciation rights expense recognized for the three months ended March 31, 2018 and 2017, totaled $0.8 million and $0.2 million, respectively.

(15) Condensed Consolidating Financial Information

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


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


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


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

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



	March 31, 2018
Balance Sheet	ION Geophysical Corporation			The Guarantors			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	41,380		$	—		$	9,370		$	—		$	50,750
Accounts receivable, net	8			7,762			21,980			—			29,750
Unbilled receivables	—			7,654			8,695			—			16,349
Inventories	—			9,094			5,634			—			14,728
Prepaid expenses and other current assets	2,057			1,015			2,682			—			5,754
Total current assets	43,445			25,525			48,361			—			117,331
Deferred income tax asset	1,263			—			614			—			1,877
Property, plant, equipment and seismic rental equipment, net	306			6,744			42,957			—			50,007
Multi-client data library, net	—			57,895			26,538			—			84,433
Investment in subsidiaries	693,059			329,545			—			(1,022,604		)	—
Goodwill	—			—			25,188			—			25,188
Intangible assets, net	—			1,374			—			—			1,374
Intercompany receivables	—			106,721			104,895			(211,616		)	—
Other assets	518			145			180			—			843
Total assets	$	738,591		$	527,949		$	248,733		$	(1,234,220	)	$	281,053
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	824		$	190		$	—		$	—		$	1,014
Accounts payable	3,195			17,247			2,375			—			22,817
Accrued expenses	11,450			8,154			6,591			—			26,195
Accrued multi-client data library royalties	—			28,109			215			—			28,324
Deferred revenue	—			2,749			8,581			—			11,330
Total current liabilities	15,469			56,449			17,762			—			89,680
Long-term debt, net of current maturities	116,916			—			—			—			116,916
Intercompany payables	545,556			—			—			(545,556		)	—
Other long-term liabilities	448			5,997			6,493			—			12,938
Total liabilities	678,389			62,446			24,255			(545,556		)	219,534
Equity:
Common stock	139			290,460			49,394			(339,854		)	139
Additional paid-in capital	950,464			180,701			202,290			(382,991		)	950,464
Accumulated earnings (deficit)	(873,347		)	245,094			68,288			(313,382		)	(873,347		)
Accumulated other comprehensive income (loss)	(17,054		)	4,324			(17,947		)	13,623			(17,054		)
Due from ION Geophysical Corporation	—			(255,076		)	(78,864		)	333,940			—
Total stockholders’ equity	60,202			465,503			223,161			(688,664		)	60,202
Noncontrolling interest	—			—			1,317			—			1,317
Total equity	60,202			465,503			224,478			(688,664		)	61,519
Total liabilities and equity	$	738,591		$	527,949		$	248,733		$	(1,234,220	)	$	281,053



	December 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	$	39,344		$	—		$	12,712		$	—		$	52,056
Accounts receivable, net	50			9,374			10,054			—			19,478
Unbilled receivables	—			16,666			20,638			—			37,304
Inventories	—			8,686			5,822			—			14,508
Prepaid expenses and other current assets	2,427			769			4,447			—			7,643
Total current assets	41,821			35,495			53,673			—			130,989
Deferred income tax asset	1,264			—			489			—			1,753
Property, plant, equipment and seismic rental equipment, net	511			7,170			44,472			—			52,153
Multi-client data library, net	—			62,438			26,862			—			89,300
Investment in subsidiaries	693,679			321,934			—			(1,015,613		)	—
Goodwill	—			—			24,089			—			24,089
Intangible assets, net	—			1,666			—			—			1,666
Intercompany receivables	—			132,184			90,227			(222,411		)	—
Other assets	686			145			288			—			1,119
Total assets	$	737,961		$	561,032		$	240,100		$	(1,238,024	)	$	301,069
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	39,774		$	250		$	—		$	—		$	40,024
Accounts payable	1,774			20,982			2,195			—			24,951
Accrued expenses	12,284			15,601			10,812			—			38,697
Accrued multi-client data library royalties	—			26,824			211			—			27,035
Deferred revenue	—			3,201			5,709			—			8,910
Total current liabilities	53,832			66,858			18,927			—			139,617
Long-term debt, net of current maturities	116,691			29			—			—			116,720
Intercompany payables	537,417			—			—			(537,417		)	—
Other long-term liabilities	454			6,084			7,388			—			13,926
Total liabilities	708,394			72,971			26,315			(537,417		)	270,263
Equity:
Common stock	120			290,460			49,394			(339,854		)	120
Additional paid-in capital	903,247			180,701			202,290			(382,991		)	903,247
Accumulated earnings (deficit)	(854,921		)	248,770			59,307			(308,077		)	(854,921		)
Accumulated other comprehensive income (loss)	(18,879		)	4,372			(19,681		)	15,309			(18,879		)
Due from ION Geophysical Corporation	—			(236,242		)	(78,764		)	315,006			—
Total stockholders’ equity	29,567			488,061			212,546			(700,607		)	29,567
Noncontrolling interest	—			—			1,239			—			1,239
Total equity	29,567			488,061			213,785			(700,607		)	30,806
Total liabilities and equity	$	737,961		$	561,032		$	240,100		$	(1,238,024	)	$	301,069



	Three Months Ended March 31, 2018
Income Statement	ION Geophysical Corporation			The Guarantors			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
	(In thousands)
Net revenues	$	—		$	11,788		$	21,720		$	—		$	33,508
Cost of sales	—			16,795			9,860			—			26,655
Gross profit (loss)	—			(5,007		)	11,860			—			6,853
Total operating expenses	8,909			6,994			3,590			—			19,493
Income (loss) from operations	(8,909		)	(12,001		)	8,270			—			(12,640		)
Interest expense, net	(3,883		)	(6		)	53			—			(3,836		)
Intercompany interest, net	273			(2,319		)	2,046			—			—
Equity in earnings (losses) of investments	(4,915		)	10,220			—			(5,305		)	—
Other income (expense)	(188		)	65			(668		)	—			(791		)
Net income (loss) before income taxes	(17,622		)	(4,041		)	9,701			(5,305		)	(17,267		)
Income tax expense (benefit)	804			(365		)	633			—			1,072
Net income (loss)	(18,426		)	(3,676		)	9,068			(5,305		)	(18,339		)
Net income attributable to noncontrolling interest	—			—			(87		)	—			(87		)
Net income (loss) attributable to ION	$	(18,426	)	$	(3,676	)	$	8,981		(5,305		)	$	(18,426	)
Comprehensive net income	$	(16,601	)	$	(3,724	)	$	10,802		$	(6,991	)	$	(16,514	)
Comprehensive income attributable to noncontrolling interest	—			—			(87		)	—			(87		)
Comprehensive net income (loss) attributable to ION	$	(16,601	)	$	(3,724	)	$	10,715		$	(6,991	)	$	(16,601	)



	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 interest	—			—			(316		)	—			(316		)
Net income (loss) attributable to ION	$	(23,342	)	$	(3,757	)	$	7,489		(3,732		)	$	(23,342	)
Comprehensive net income (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, 2018
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	$	(13,119	)	$	16,961		$	(3,234	)	$	608
Cash flows from investing activities:
Cash invested in multi-client data library	—			(7,642		)	(1,598		)	(9,240		)
Purchase of property, plant, equipment and seismic rental equipment	—			—			(61		)	(61		)
Net cash used in investing activities	—			(7,642		)	(1,659		)	(9,301		)
Cash flows from financing activities:
Payments under revolving line of credit	(10,000		)	—			—			(10,000		)
Payments on notes payable and long-term debt	(29,054		)	(90		)	—			(29,144		)
Intercompany lending	7,565			(9,229		)	1,664			—
Net proceeds from issuance of stock	47,219			—			—			47,219
Other financing activities	(575		)	—			—			(575		)
Net cash provided by (used in) financing activities	15,155			(9,319		)	1,664			7,500
Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash	—			—			(113		)	(113		)
Net increase (decrease) in cash, cash equivalents and restricted cash	2,036			—			(3,342		)	(1,306		)
Cash, cash equivalents and restricted cash at beginning of period	39,707			—			12,712			52,419
Cash, cash equivalents and restricted cash at end of period	$	41,743		$	—		$	9,370		$	51,113

The following table is a reconciliation of cash and cash equivalents to total cash, cash equivalents, and restricted cash:



	Three months ended March 31, 2018
	ION Geophysical Corporation		The Guarantors		All Other Subsidiaries		Consolidating Adjustments
	(In thousands)
Cash and cash equivalents	$	41,380	$	—	$	9,370	$	50,750
Restricted cash included in prepaid expenses and other current assets	60		—		—		60
Restricted cash included in other long-term assets	303		—		—		303
Total cash, cash equivalents, and restricted cash shown in statement of cash flows	$	41,743	$	—	$	9,370	$	51,113



	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	$	7,548		$	3,373		$	(9,080	)	$	1,841
Cash flows from investing activities:
Investment 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			—
Other financing activities	(286		)	—			—			(286		)
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, cash equivalents and restricted cash	—			—			409			409
Net increase (decrease) in cash, cash equivalents and restricted cash	5,182			—			(8,336		)	(3,154		)
Cash, cash equivalents and restricted cash at beginning of period	23,823			—			29,610			53,433
Cash, cash equivalents and restricted cash at end of period	$	29,005		$	—		$	21,274		$	50,279

The following table is a reconciliation of cash and cash equivalents to total cash, cash equivalents, and restricted cash:



	Three months ended March 31, 2017
	ION Geophysical Corporation		The Guarantors		All Other Subsidiaries		Consolidating Adjustments
	(In thousands)
Cash and cash equivalents	$	28,366	$	—	$	21,274	$	49,640
Restricted cash included in prepaid expenses and other current assets	285		—		—		285
Restricted cash included in other long-term assets	354		—		—		354
Total cash, cash equivalents, and restricted cash shown in statement of cash flows	$	29,005	$	—	$	21,274	$	50,279

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,” “WiBand,” and “4Sea” refer to VECTORSEIS^®, ORCA^®, WiBand^®and 4Sea^® registered marks owned by ION, and the terms “Marlin” and “Gator,” refers to the Marlin™ and GATOR™, trademarks owned by ION.

Leveraging innovative technologies, ION creates value through data capture, analysis and optimization to enhance companies’ critical decision-making abilities and returns. ION’s offerings are focused on improving E&P decision-making, enhancing reservoir management and optimizing offshore operations. While ION’s traditional focus for its cutting-edge technology has been on the E&P industry, we are now broadening and diversifying our business into relevant adjacent markets such as offshore logistics, military and marine robotics.

Our geoscience technology, services and solutions are designed to enable oil and gas companies to obtain higher resolution images of the Earth’s subsurface to reduce their risk and optimize value across the exploration and production lifecycle. Seismic imaging plays a fundamental role in hydrocarbon exploration and reservoir development by delineating structures, and rock types 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 both a proprietary and multi-client basis. The multi-client seismic surveys for our data library business are pre-funded, or underwritten, in part by our customers, and we utilize an asset light 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. In addition, our ocean bottom vessel leases expired in 2017, consistent with our asset light strategy. We serve customers in most major energy producing regions of the world from offices strategically located across six continents.

We provide our services and products through three business segments: E&P Technology & Services, Operations Optimization (formerly referred to as E&P Operations Optimization) and Ocean Bottom Integrated Technologies (formerly referred to as Ocean Bottom Seismic Services). In addition, we have a 49% ownership interest in our INOVA Geophysical Equipment Limited joint venture (“INOVA Geophysical,” or “INOVA”).

For 50 years, we have provided innovative technology, such as multicomponent imaging with VectorSeis products, the ability to record seismic data from basins below ice, and cableless data acquisition techniques. The advanced technologies we currently offer include our Orca and Gator command and control software systems, Full Waveform Inversion (FWI) data processing technology, our ocean bottom seismic (“OBS”) acquisition systems, 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 believe our new OBS technology, 4Sea, will open a much larger market due to the system’s increased flexibility and efficiency.

We have approximately 500 patents and pending patent applications in various countries around the world. Approximately 47% of our employees are in technical roles and over 23% of our employees have advanced degrees.

E&P Technology & Services. Our E&P Technology & Services segment provides three distinct service activities that often work together.

Our E&P Technology & Services segment creates digital data assets and delivers services to help E&P companies improve decision-making, reduce risk and maximize value. For example, E&P Technology & Services provides information to better understand new frontiers or complex subsurface geologies, how to maximize portfolio value, or how to optimize license round success and acreage values.

Our Ventures group leverages the world-class geoscience skills of both the Imaging Services and E&P Advisors groups to create global digital data assets that are licensed to multiple E&P companies to optimize their investment decisions. The global data library consists of over 595,000 km of 2-D and over 190,000 sq. km of 3-D multi-client seismic data in virtually all major offshore petroleum provinces. Ventures provides services to manage multi-client or proprietary surveys, from survey planning and design to data acquisition and management, to final subsurface imaging and reservoir characterization. We focus on the technologically intensive components of the image development process, such as survey planning and design, and data processing and interpretation, 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 maximize image quality, helping E&P companies reduce exploration and production risk, evaluate and develop reservoirs, and increase production. Imaging Services develops subsurface images by applying its processing technology to data owned or licensed by its customers. We maintain approximately 24 petabytes of digital seismic data storage in four global data centers, including two core data centers located in Houston and in the U.K.

Our E&P Advisors’ strategy is to provide technical, commercial and strategic advice to host governments, E&P companies and private equity firms to evaluate and market oil and gas opportunities and/or assets world-wide, sharing in the value we create.

Operations Optimization. Our Operations Optimization segment develops mission-critical subscription offerings and provides engineering services that enable operational control and optimization offshore. This segment is comprised of our Optimization Software & Services and Devices offerings.

Our Optimization Software & Services group provides survey design and command and control software systems and related services for marine towed streamer and seabed operations. Our Orca software is installed on towed streamer marine vessels worldwide, and our Gator software is used by seabed crews. Our latest offering, Marlin is used to optimize offshore operations.

Our Devices group is engaged in the manufacture and repairs of marine towed streamer positioning and control systems and analog geophone sensors.

Ocean Bottom Integrated Technologies. Higher quality data can be acquired from the sea floor compared to the traditional method of acquiring it near the surface, which enables companies to have a better image and better understanding of the subsurface to make optimal reservoir decisions. ION provides a full suite of OBS technology and services that includes survey design, planning, acquisition services, data processing, interpretation and reservoir services to optimize image quality, operational efficiency and safety. ION’s Ocean Bottom Integrated Technologies group integrates a variety of ION’s advanced technologies to accelerate OBS data capture and delivery for our clients’ enhanced reservoir decision-making, and improved returns.

Our team develops re-deployable ocean bottom seismic data acquisition systems and shipboard recorders for use in OBS data acquisition. We introduced our new fully integrated nodal system, 4Sea, in 2017. 4Sea is differentiated in its ability to deliver a step change in economics, QHSE performance and final image delivery time, creating more value for the client by providing it in time for critical decisions, such as determining drilling locations, fluid injections, and the like.

We evaluated numerous possible commercialization paths for 4Sea and are pursuing two asset light business models that we believe will deliver a higher, more sustainable return over the long-term for our shareholders. The first is making the individual components of 4Sea available more broadly to all OBS service providers on a value-based pricing model, allowing us to participate in the success we enable. The second approach is to license the right to manufacture and use the fully integrated system to a service provider on a value-based pricing model, such as a royalty stream. While the value-based pricing business models are our primary route to market, we will continue to evaluate OBS opportunities on a case-by-case basis that meet our long-term risk and return thresholds.

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. We wrote our investment in INOVA down to zero as of December 31, 2014.

Public Equity Offering and Retirement of Debt

On February 21, 2018, we announced our successful completion of a public equity offering to begin delevering our business. As part of the equity offering, we sold 1,820,000 of our common shares at a price of $27.50 per share, and issued warrants to purchase an additional 1,820,000 shares of our common stock. The warrants have an exercise price of $33.60 per share and are immediately exercisable and expire in March 2019. If the warrants are exercised in full, we would receive

additional proceeds of $61.2 million excluding underwriter fees and other transaction expenses. Our net cash flows for the first quarter of 2018 reflect the $47.2 million of net proceeds received from our equity offering, a portion of which were used to retire the $28.5 million of Third Lien Notes ahead of their scheduled maturity in May 2018. We also repaid the $10.0 million of outstanding indebtedness under our Credit Facility during the first quarter 2018. As a result of our first quarter 2018 debt repayments, we have $1.0 million of current debt remaining on our balance sheet at March 31, 2018, and our remaining long-term debt obligation is the $120.6 million of our indebtedness under our Second Lien Notes due in December 2021.

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. Third-party reports now indicate that global exploration and production spending is expected to increase 8% in 2018. This is an improvement from the 4% growth in 2017 that was preceded by 2 years of double-digit declines.

Recent Intercontinental Exchange Brent (“Brent”) and West Texas Intermediate (“WTI”) crude oil, and Henry Hub natural gas pricing trends are as follows:

ION GEOPHYSICAL CORP - FORM 10-Q - May 3, 2018

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