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ION GEOPHYSICAL CORP - Quarter Report: 2020 March (Form 10-Q)

    

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, 2020
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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
IO
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  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. 
Large accelerated filer
 
o
 
Accelerated filer
ý
 
 
 
 
 
 
Non-accelerated filer
 
o  
 
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 4, 2020, there were 15,036,648 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, 2020
 
 
PAGE
PART I. Financial Information
 
Item 1. Financial Statements (Unaudited)
 
Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019
Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020 and 2019
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019
Condensed Consolidated Statements of Stockholders' Deficit for the three months ended March 31, 2020 and 2019
Footnotes to 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, 2020
 
December 31, 2019
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
42,663

 
$
33,065

Accounts receivable, net
51,149

 
29,548

Unbilled receivables
8,356

 
11,815

Inventories, net
12,820

 
12,187

Prepaid expenses and other current assets
5,681

 
6,012

Total current assets
120,669

 
92,627

Deferred income tax asset, net
7,905

 
8,734

Property, plant and equipment, net
12,706

 
13,188

Multi-client data library, net
54,344

 
60,384

Goodwill
18,298

 
23,585

Right-of-use assets
42,166

 
32,546

Other assets
3,299

 
2,130

Total assets
$
259,387

 
$
233,194

LIABILITIES AND DEFICIT
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
28,646

 
$
2,107

Accounts payable
43,827

 
49,316

Accrued expenses
29,078

 
30,328

Accrued multi-client data library royalties
21,424

 
18,831

Deferred revenue
4,882

 
4,551

Current maturities of operating lease liabilities
9,873

 
11,055

Total current liabilities
137,730

 
116,188

Long-term debt, net of current maturities
119,296

 
119,352

Operating lease liabilities, net of current maturities
40,531

 
30,833

Other long-term liabilities
433

 
1,453

Total liabilities
297,990

 
267,826

Deficit:
 
 
 
Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 14,240,126 and 14,224,787 shares at March 31, 2020 and December 31, 2019, respectively.
142

 
142

Additional paid-in capital
957,254

 
956,647

Accumulated deficit
(976,554
)
 
(974,291
)
Accumulated other comprehensive loss
(21,099
)
 
(19,318
)
Total stockholders’ deficit
(40,257
)
 
(36,820
)
Noncontrolling interest
1,654

 
2,188

Total deficit
(38,603
)
 
(34,632
)
Total liabilities and deficit
$
259,387

 
$
233,194

See accompanying Footnotes to Condensed Consolidated Financial Statements.

3

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands, except per share data)
Service revenues
$
47,485

 
$
28,128

Product revenues
8,929

 
8,828

Total net revenues
56,414

 
36,956

Cost of services
22,275

 
22,446

Cost of products
4,628

 
4,598

Impairment of multi-client data library
1,167

 

Gross profit
28,344

 
9,912

Operating expenses:
 
 
 
Research, development and engineering
4,008

 
5,357

Marketing and sales
4,858

 
5,793

General, administrative and other operating expenses
9,002

 
14,699

Impairment of goodwill
4,150

 

Total operating expenses
22,018

 
25,849

Income (loss) from operations
6,326

 
(15,937
)
Interest expense, net
(3,221
)
 
(3,112
)
Other income (expense), net
429

 
(792
)
Income (loss) before income taxes
3,534

 
(19,841
)
Income tax expense
5,874

 
1,407

Net loss
(2,340
)
 
(21,248
)
Less: Net (income) loss attributable to noncontrolling interest
77

 
(112
)
Net loss attributable to ION
$
(2,263
)
 
$
(21,360
)
Net loss per share:
 
 
 
Basic
$
(0.16
)
 
$
(1.52
)
Diluted
$
(0.16
)
 
$
(1.52
)
Weighted average number of common shares outstanding:
 
 
 
Basic
14,230

 
14,033

Diluted
14,230

 
14,033

See accompanying Footnotes to Condensed Consolidated Financial Statements.



4

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Net loss
$
(2,340
)
 
$
(21,248
)
Other comprehensive loss, net of taxes, as appropriate:
 
 
 
Foreign currency translation adjustments
(1,781
)
 
970

Total other comprehensive income (loss), net of taxes
(1,781
)
 
970

Comprehensive net loss
(4,121
)
 
(20,278
)
Comprehensive (income) loss attributable to noncontrolling interest
77

 
(112
)
Comprehensive net loss attributable to ION
$
(4,044
)
 
$
(20,390
)
See accompanying Footnotes to Condensed Consolidated Financial Statements.


5

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(2,340
)
 
$
(21,248
)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization (other than multi-client data library)
840

 
1,035

Amortization of multi-client data library
8,020

 
11,100

Stock-based compensation expense
617

 
1,293

Impairment of multi-client data library
1,167

 

Impairment of goodwill
4,150

 

Deferred income taxes
421

 
(1,398
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(21,868
)
 
(2,870
)
Unbilled receivables
2,666

 
29,498

Inventories
(772
)
 
81

Accounts payable, accrued expenses and accrued royalties
1,688

 
(2,013
)
Deferred revenue
355

 
(333
)
Other assets and liabilities
(1,910
)
 
253

Net cash (used in) provided by operating activities
(6,966
)
 
15,398

Cash flows from investing activities:
 
 
 
Investment in multi-client data library
(9,668
)
 
(8,767
)
Purchase of property, plant and equipment
(496
)
 
(807
)
Net cash used in investing activities
(10,164
)
 
(9,574
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving line of credit
27,000

 

Payments on notes payable and long-term debt
(760
)
 
(715
)
Other financing activities
(10
)
 
(239
)
Net cash provided by (used in) financing activities
26,230

 
(954
)
Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash
470

 
81

Net increase in cash, cash equivalents and restricted cash
9,570

 
4,951

Cash, cash equivalents and restricted cash at beginning of period
33,118

 
33,854

Cash, cash equivalents and restricted cash at end of period
$
42,688

 
$
38,805

See accompanying Footnotes to Condensed Consolidated Financial Statements.

6

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
 
Three Months Ended March 31, 2020
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interests
 
Total
Deficit
 (In thousands, except shares)
Shares
 
Amount
 
Balance at January 1, 2020
14,224,787

 
$
142

 
$
956,647

 
$
(974,291
)
 
$
(19,318
)
 
$
2,188

 
$
(34,632
)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(2,263
)
 

 
(77
)
 
(2,340
)
Translation adjustments

 

 

 

 
(1,781
)
 
(457
)
 
(2,238
)
Stock-based compensation expense

 

 
617

 

 

 

 
617

Vesting of restricted stock units/awards
16,089

 

 

 

 

 

 

Vested restricted stock cancelled for employee minimum income taxes
(750
)
 

 
(10
)
 

 

 

 
(10
)
Balance at March 31, 2020
14,240,126

 
$
142

 
$
957,254

 
$
(976,554
)
 
$
(21,099
)
 
$
1,654

 
$
(38,603
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interests
 
Total
Deficit
 (In thousands, except shares)
Shares
 
Amount
 
Balance at January 1, 2019
14,015,615

 
$
140

 
$
952,626

 
$
(926,092
)
 
$
(20,442
)
 
$
1,592

 
$
7,824

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 


Net (loss) income

 

 

 
(21,360
)
 

 
112

 
(21,248
)
Translation adjustments

 

 

 

 
970

 
(39
)
 
931

Stock-based compensation expense

 

 
1,293

 

 

 

 
1,293

Exercise of stock options
5,750

 

 
18

 

 

 

 
18

Vesting of restricted stock units/awards
68,199

 
1

 
(1
)
 

 

 

 

Vested restricted stock cancelled for employee minimum income taxes
(20,044
)
 

 
(257
)
 

 

 

 
(257
)
Balance at March 31, 2019
14,069,520

 
$
141

 
$
953,679

 
$
(947,452
)
 
$
(19,472
)
 
$
1,665

 
$
(11,439
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Footnotes to Condensed Consolidated Financial Statements.


7

    


ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1)    Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated balance sheet of ION Geophysical Corporation and its subsidiaries (collectively referred to as the “Company” or “ION,” unless the context otherwise requires) at December 31, 2019, has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at March 31, 2020, and the condensed consolidated statements of operations, comprehensive loss, condensed consolidated statements of stockholders' deficit, and cash flows for the three months ended March 31, 2020 and 2019, are unaudited. In the opinion of management, all adjustments of a normal recurring nature that are necessary for a fair presentation of the results of the interim period have been included. Interim results are not necessarily indicative of the operating results for a full year or of future operations. Intercompany transactions and balances have been eliminated.
The Company’s condensed consolidated financial statements reflect a non-redeemable noncontrolling interest in a majority-owned affiliate which is reported as a separate component of equity in “Noncontrolling interest” in the condensed consolidated balance sheets. Net income attributable to noncontrolling interest is stated separately in the condensed consolidated statements of operations. The activity for this noncontrolling interest relates to proprietary processing projects in Brazil.
These condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with GAAP have been omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Overview
The COVID-19 pandemic caused the global economy to enter a recessionary period, which may be prolonged and severe, and significantly reduced the availability of capital and liquidity from banks and other providers of credit. The E&P industry is facing the double impact of demand destruction from COVID-19 and market oversupply from increased production, which caused oil and natural gas prices to decline significantly since the start of the year. While Organization of the Petroleum Exporting Countries (“OPEC”) and other oil producing countries agreed to a production cut in April 2020, oil prices nonetheless declined further to record low levels during the month. While commodity prices can be volatile, this sharp decline triggered E&P companies to reduce budgets and will likely curtail demand for some of the Company’s products and services.  Spending on exploration tends to be among the most discretionary and is expected to bear some of the deepest cuts in percentage terms, although spending reductions in the offshore basins where the Company operates are projected to be less severe than onshore in the United States.
While the duration and extent of COVID-19 is difficult to predict, the Company recorded its highest first quarter revenues since 2014. A number of large multi-client contracts were closed in the first quarter 2020, some of which were delayed from the fourth quarter 2019, even after E&P market dynamics changed. The Company worked closely with clients to assess the effect of E&P budget reductions to its business and took decisive action to proactively manage its business. To mitigate the impact of COVID-19 and oil price volatility, management implemented a plan to preserve cash and manage liquidity as follows:
Scaling down personnel costs and operating expenses by another $18.0 million during the remaining nine months of 2020, building on the over $20.0 million (net of severance expense of $3.1 million) of cuts made in January 2020. These further reductions are primarily through a variety of furlough programs and reduced compensation arrangements across the Company’s worldwide workforce. The Company executives have taken a 20% base salary reduction and a tiered reduction scheme has been cascaded to the rest of the worldwide workforce. The Company’s Board of Directors has taken a 20% reduction in directors’ fees. In addition, the Company has curtailed use of external contractors, decreased travel and event costs and implemented new systems and processes that more efficiently support its business.
Reducing capital expenditures to an estimated $20.0 million to $35.0 million (a portion of which will be pre-funded or underwritten by the customers), down from $35.0 million to $50.0 million, to reflect both reduced seismic demand and travel/border restrictions impacting new data acquisition offshore. This provides flexibility to aggressively reduce cash outflows while shifting to much lower cost reimaging programs. 

8

    

Applied for various government assistance programs of which $6.9 million has been received in April 2020. Receipt of this $6.9 million allowed the Company to avoid further staff reductions while supporting its ongoing operations. Additional global government relief of between $2.0 million to $7.0 million may be possible.
Announced the sale of its interest in INOVA Geophysical for $12.0 million that is expected to close during the second half of the year, subject to regulatory approvals and other closing conditions.
Entered into a settlement agreement with WesternGeco ending the uncertainty surrounding the decade-long patent litigation. See Note 8Litigation” for further details.
In addition, the Company reviewed its debt covenants and expects that it will remain in compliance for the next twelve months.
The Company believes that the above management plan, including actions already taken, gives the Company the ability to operate for at least the next twelve months from the date the condensed consolidated financial statements are issued.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in Note 1 “Summary of Significant Accounting Policies.” of the Annual Report on Form 10-K for the year ended December 31, 2019. There have been no changes in such policies or the application of such policies during the three months ended March 31, 2020 except as discussed in Note 2 “Recent Accounting Pronouncements.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions by management that affects the reported amounts in the condensed consolidated financial statements and accompanying notes. Areas involving significant estimates include, but are not limited to, accounts and unbilled receivables, inventory valuation, sales forecast related to multi-client data library, impairment of property, plant and equipment and goodwill and deferred taxes. Actual results could materially differ from those estimates.
(2)    Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.” The guidance replaces the incurred loss impairment methodology under the current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets ranging from short-term accounts receivables to long-term receivable financing. The Company adopted the standard using the prospective transition approach for its trade receivables and unbilled receivables. The adoption of the standard had no material impact on the Company’s condensed consolidated financial statements.
On January 1, 2020, the Company adopted ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This guidance simplifies the accounting for goodwill impairment by eliminating step 2 from the goodwill impairment test. As a result, an entity should recognize a goodwill impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should be recorded. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Impairment loss on goodwill cannot be reversed once recognized. The goodwill balance at March 31, 2020 before impairment charge was comprised of $19.5 million in the Optimization Software & Services and $2.9 million in the E&P Technology & Services reporting units. The Company recognized an impairment charge related to the goodwill of its Optimization Software & Service reporting unit, included within Operations Optimization segment, of $4.2 million for the three months ended March 31, 2020. See Note 9Details of Selected Balance Sheet Accountsfor details.
(3)    Segment Information
The Company evaluates and reviews its results of operations based on two reporting segments: E&P Technology & Services and Operations Optimization. Refer to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information about each business segment’s business, products and services.
The segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Operating Decision Maker in determining how to allocate resources and evaluate performance. The Company measures segment operating results based on income (loss) from operations.

9

    

The following table is a summary of segment information (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Net revenues:
 
 
 
E&P Technology & Services:
 
 
 
New Venture
$
1,441

 
$
13,471

Data Library
40,131

 
9,948

Total multi-client revenues
41,572

 
23,419

Imaging and Reservoir Services
4,942

 
3,684

Total
46,514

 
27,103

Operations Optimization:
 
 
 
Optimization Software & Services
4,427

 
5,033

Devices
5,473

 
4,820

Total
9,900

 
9,853

Total net revenues
$
56,414

 
$
36,956

Gross profit (loss):



E&P Technology & Services
$
23,730

(a) 
$
5,440

Operations Optimization
4,614

 
4,516

Segment gross profit
28,344

 
9,956

Other

 
(44
)
Total gross profit
$
28,344

 
$
9,912

Gross margin:
 
 
 
E&P Technology & Services
51
%
 
20
%
Operations Optimization
47
%
 
46
%
Total gross margin
50
%
 
27
%
Income (loss) from operations:
 
 
 
E&P Technology & Services
$
17,952

(a) 
$
(1,615
)
Operations Optimization
(3,259
)
(b) 
170

Support and other
(8,367
)
 
(14,492
)
Income (loss) from operations
6,326

 
(15,937
)
Interest expense, net
(3,221
)
 
(3,112
)
Other income (expense), net
429

 
(792
)
Income (loss) before income taxes
$
3,534

 
$
(19,841
)
(a)  
Includes impairment of multi-client data library of $1.2 million for the three months ended March 31, 2020.
(b)  
Includes impairment of goodwill of $4.2 million for the three months ended March 31, 2020.
Intersegment sales are insignificant for all periods presented.
(4)     Revenue From Contracts With Customers
The Company derives revenue from the (i) sale or license of multi-client and proprietary data, imaging services and reservoir services within its E&P Technologies & Services segment; (ii) sale, license and repair of seismic data acquisition systems and other equipment; and (iii) sale or license of seismic command and control software systems and software solutions for operations management within its Operations Optimization segment. All E&P Technology & Services’ revenues and the services component of Optimization Software & Services’ revenues under Operations Optimization segment are classified as service revenues. All other revenues are classified as product revenues.
The Company uses a five-step model to determine proper revenue recognition from customer contracts. Revenue is recognized when (i) a contract is approved by all parties; (ii) the goods or services promised in the contract are identified; (iii) the consideration the Company expects to receive in exchange for the goods or services promised is determined; (iv) the consideration is allocated to the goods and services in the contract; and (v) control of the promised goods or services is transferred to the customer. The Company is not required to disclose information about remaining contractual future performance obligations with an original term of one year or less. The Company does not have any contractual future performance obligations with an original term of over one year.

10

    

Revenue by Geographic Area
The following table is a summary of net revenues by geographic area (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
North America
$
31,810

 
$
7,157

Latin America
9,804

 
13,531

Asia Pacific
9,288

 
1,867

Europe
3,810

 
10,392

Middle East
954

 
1,359

Africa
591

 
2,389

Other
157

 
261

Total
$
56,414

 
$
36,956

See Note 3“Segment Information” for revenue by segment for the three months ended March 31, 2020 and 2019.
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 for which invoices have not yet been presented to the customer. The following table is a summary of unbilled receivables (in thousands):
 
March 31, 2020
 
December 31, 2019
New Venture
$
1,586

 
$
5,222

Imaging and Reservoir Services
5,643

 
6,539

Devices
1,127

 
54

Total
$
8,356

 
$
11,815

The changes in unbilled receivables are as follows (in thousands):
 Unbilled receivables at December 31, 2019
$
11,815

 Recognition of unbilled receivables
55,132

 Revenues billed to customers
(58,591
)
Unbilled receivables at March 31, 2020
$
8,356

Deferred Revenue
Billing practices are governed by the terms of each contract based upon achievement of milestones or pre-agreed schedules. Billing does not necessarily correlate with revenue recognized on a proportionate basis as work is performed and control is transferred to the customer. Deferred revenue represents cash received in excess of revenue recognized as of the reporting period but to be recognized in future periods. The following table is a summary of deferred revenues (in thousands):
 
March 31, 2020
 
December 31, 2019
New Venture
$
2,456

 
$
1,956

Imaging and Reservoir Services
1,141

 
1,501

Optimization Software & Services
832

 
642

Devices
453

 
452

Total
$
4,882

 
$
4,551

The changes in deferred revenues are as follows (in thousands):
Deferred revenue at December 31, 2019
$
4,551

Cash collected in excess of revenue recognized
1,613

Recognition of deferred revenue (a)
(1,282
)
Deferred revenue at March 31, 2020
$
4,882


11

    

(a) The majority of deferred revenue recognized relates to Company’s Ventures group.
The Company expects to recognize the majority of deferred revenue within the next 12 months.
Credit Risks
For the three months ended March 31, 2020, the Company had two customers with sales that each exceeded 10% of the Company’s consolidated net revenues. For three months ended March 31, 2019, the Company had one customer with sales that exceeded 10% of the Company’s consolidated net revenues. Revenues related to each of these customers are included within the E&P Technology & Services segment.
At March 31, 2020, the Company had one customer with balances that accounted for 51% of the Company’s total combined accounts receivable and unbilled receivable balances. The Company routinely evaluates the financial stability and creditworthiness of its customers. At March 31, 2019, the Company had two customers with a combined balance that accounted for 26% of the Company’s total combined accounts receivable and unbilled receivable balances.
(5)    Long-term Debt

The following table is a summary of long-term debt (in thousands):    
 
 
March 31, 2020
 
December 31, 2019
Senior secured second-priority lien notes (maturing December 15, 2021)
 
$
120,569

 
$
120,569

Revolving credit facility (maturing August 16, 2023) (a)
 
27,000

 

Equipment finance leases (Note 11)
 
1,595

 
1,869

Other debt
 
486

 
972

Costs associated with issuances of debt
 
(1,708
)
 
(1,951
)
Total
 
147,942

 
121,459

Current maturities of long-term debt
 
(28,646
)
 
(2,107
)
Long-term debt, net of current maturities
 
$
119,296

 
$
119,352

(a) The maturity of the Credit Facility will accelerate to October 31, 2021 if the Company is unable to repay or extend the maturity of the Second Lien Notes.
Revolving Credit Facility
On August 16, 2018, 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. (the “Material U.S. Subsidiaries”) — along with GX Geoscience Corporation, S. de R.L. de C.V., a limited liability company (Sociedad de Responsibilidad Limitada de Capital Variable) organized under the laws of Mexico, and a subsidiary of the Company (the “Mexican Subsidiary”) (the Material U.S. Subsidiaries and the Mexican Subsidiary are collectively, the “Subsidiary Borrowers”, together with ION Geophysical Corporation are the “Borrowers”) — the financial institutions party thereto, as lenders, and PNC Bank, National Association (“PNC”), as agent for the lenders, entered into that certain Third Amendment and Joinder to Revolving Credit and Security Agreement (the “Third Amendment”), amending the Revolving Credit and Security Agreement, dated as of August 22, 2014 (as previously amended by the First Amendment to Revolving Credit and Security Agreement, dated as of August 4, 2015 and the Second Amendment to Revolving Credit and Security Agreement, dated as of April 28, 2016, the “Credit Agreement”). The Credit Agreement, as amended by the First Amendment, the Second Amendment and the Third 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 Third Amendment amended the Credit Agreement to, among other things:
extend the maturity date of the Credit Facility by approximately four years (from August 22, 2019 to August 16, 2023), subject to the Company’s retirement or extension of the maturity date of its Second Lien Notes, as defined below, which mature on December 15, 2021;
increase the maximum revolver amount by $10.0 million (from $40.0 million to $50.0 million);
increase the borrowing base percentage of the net orderly liquidation value as it relates to the multi-client data library (not to exceed $28.5 million, up from the previous maximum of $15.0 million for the multi-client data library component);
include the eligible billed receivables of the Mexican Subsidiary up to a maximum of $5.0 million in the borrowing base calculation and joins the Mexican Subsidiary as a borrower thereunder (with a maximum exposure of $5.0 million) and require the equity and assets of the Mexican Subsidiary to be pledged to secure obligations under the facility;
modify the interest rate such that the maximum interest rate remains consistent with the fixed interest rate prior to the Third Amendment (that is, 3.00% per annum for domestic rate loans and 4.00% per annum for LIBOR rate loans), but now lowers

12

    

the range down to a minimum interest rate of 2.00% for domestic rate loans and 3.00% for LIBOR rate loans based on a leverage ratio for the preceding four-quarter period;
decrease the minimum excess borrowing availability threshold which (if the Borrowers have minimum excess borrowing availability below any such threshold) triggers the agent’s right to exercise dominion over cash and deposit accounts; and
modify the trigger required to test for compliance with the fixed charges coverage ratio, which is further described below.
The maximum amount under the Credit Facility is the lesser of $50.0 million or a monthly borrowing base. The borrowing base under the Credit Facility will increase or decrease monthly using a formula based on certain eligible receivables, eligible inventory and other amounts, including a percentage of the net orderly liquidation value of the Borrowers’ multi-client library. At March 31, 2020, there was $27.0 million outstanding indebtedness under the Credit Facility and the undrawn remaining borrowing base capacity was $11.1 million.
The obligations of Borrowers under the Credit Facility are secured by a first-priority security interest in 100% of the stock of the Subsidiary Borrowers and 65% of the equity interest in ION International Holdings L.P., and by substantially all other assets of the Borrowers. However, the first-priority security interest in the other assets of the Mexican Subsidiary is capped to a maximum exposure of $5.0 million.
The Credit Facility contains covenants that, among other things, limit or prohibit the Borrowers, subject to certain exceptions and qualifications, from incurring additional indebtedness in excess of permitted indebtedness (including finance lease obligations), repurchasing equity, paying dividends or distributions, granting or incurring additional liens on the Borrowers’ properties, pledging shares of the Borrowers’ subsidiaries, entering into certain merger transactions, entering into transactions with the Company’s affiliates, making certain sales or other dispositions of the Borrowers’ assets, making certain investments, acquiring other businesses and entering into sale-leaseback transactions with respect to the Borrowers’ property.
The Credit Facility 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 earnings before interest, taxes, depreciation and amortization (“EBITDA”), minus unfunded capital expenditures made during the relevant period, minus distributions (including tax distributions) and dividends made during the relevant period, minus cash taxes paid during the relevant period, to (ii) certain debt payments made during the relevant period. A covenant testing trigger event occurs upon (a) the occurrence and continuance of an event of default under the Credit Facility or (b) by a two-step process based on (i) a minimum excess borrowing availability threshold (excess borrowing availability less than $6.25 million for five consecutive days or $5.0 million on any given day), and (ii) the Borrowers’ unencumbered cash maintained in a PNC deposit account is less than the Borrowers’ then outstanding obligations.
At March 31, 2020, 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 Geophysical Corporation), the occurrence of which could lead to an acceleration of ION Geophysical Corporation’s obligations under the Credit Facility.
Senior Secured Notes
ION Geophysical Corporation’s 9.125% Senior Secured Second Priority Notes due December 2021 (the “Second Lien Notes”) are senior secured second-priority obligations guaranteed by the Material U.S. Subsidiaries and the Mexican Subsidiary (each as defined above and herein below, with the reference to the Second Lien Notes, the “Guarantors”). Interest on the Second Lien Notes 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 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 in excess of permitted indebtedness, creating liens, paying dividends and making other distributions in respect of ION Geophysical Corporation’s capital stock, redeeming ION Geophysical Corporation’s capital stock, making investments or certain other restricted payments, selling certain kinds of assets, entering into transactions with affiliates, and effecting mergers or consolidations. These and other restrictive covenants contained in the Second Lien Notes Indenture are subject to certain exceptions and qualifications. All of ION Geophysical Corporation’s subsidiaries are currently restricted subsidiaries.
At March 31, 2020, the Company was in compliance with all of the covenants under 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:

13

    

Date
 
Percentage
2019
 
105.50%
2020
 
103.50%
2021
 
100.00%
(6)    Net Loss Per Share
Basic net loss per 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 income 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 issuable pursuant to outstanding stock options at March 31, 2020 and 2019 of 669,209 and 778,875, respectively, were excluded as their inclusion would have an anti-dilutive effect. The total number of shares issuable pursuant to restricted stock units awards outstanding at March 31, 2020 and 2019 of 903,204 and 988,426, respectively, were excluded as their inclusion would have an anti-dilutive effect.
(7)    Income Taxes
The Company maintains a valuation allowance for substantially all of its deferred tax assets. A valuation allowance is established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. The Company will continue to record a valuation allowance for the substantial majority of its deferred tax assets until there is sufficient evidence to warrant reversal.
The tax provision for the three months ended March 31, 2020 has been calculated using the Company’s overall estimated annual effective tax rate based on projected 2020 full year results. The Company’s effective tax rates for the three months ended March 31, 2020 and 2019 were 166.2% and (7.1)%, respectively. The Company’s effective tax rates for the three months ended March 31, 2020 and 2019 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 effective tax rate for the three months ended March 31, 2020 was also negatively impacted by the establishment of a valuation allowance related to certain foreign operating losses. The Company’s income tax expense for the three months ended March 31, 2020 of $5.9 million primarily relates to results from the Company’s non-U.S. businesses, including $2.2 million of valuation allowance. The valuation allowance was established as a result of a change in the expectation of future revenues after entering into the settlement agreement with WesternGeco described in Note 8Litigation”.
In response to the global pandemic related to COVID-19, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020.  The CARES Act provides numerous relief provisions for corporate tax payers, including modification of the utilization limitations on net operating losses, favorable expansions of the deduction for business interest expense under Internal Revenue Code Section 163(j), and the ability to accelerate timing of refundable AMT credits. For the three months ended March 31, 2020, there were no material tax impacts to our condensed consolidated financial statements as it relates to COVID-19 measures. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Services and others.
At March 31, 2020, the Company has approximately $0.4 million of unrecognized tax benefits and does not expect to recognize significant increases in unrecognized tax benefits during the next twelve-month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.
At March 31, 2020, the Company’s U.S. federal tax returns for 2016 and subsequent years remain subject to examination by tax authorities. In the Company’s foreign tax jurisdictions, tax returns for 2014 and subsequent years generally remain open to examination.
(8) Litigation
WesternGeco
Settlement
On April 7, 2020, the Company entered into a settlement agreement with WesternGeco that ended the ongoing litigation.
Pursuant to the settlement agreement, WesternGeco granted the Company a license to the underlying patents, lifted the injunction that prevented the Company from manufacturing DigiFIN® in the United States and, on April 13, 2020, the District Court permanently dismissed the pending lawsuit.

14

    

In exchange, the Company agreed to pay WesternGeco a settlement based on future revenues from the Company’s multi-client data library, consisting of (1) small percentage of 2D multi-client late sales for a ten year period, and (2) the transfer of a majority of the Company’s future revenue share relating to the parties’ existing joint multi-client reimaging programs offshore Mexico (WesternGeco will receive 90%, instead of 50%, of net revenues from the program, except that the revenue share for the Perdido South portion of the program shall remain 50/50). A copy of the settlement agreement is filed as an exhibit to this Form 10-Q.
Background
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 (the “District Court”). In the lawsuit, styled WesternGeco L.L.C. v. ION Geophysical Corporation, WesternGeco alleged that the Company had infringed four of their patents concerning marine seismic surveys.
Trial began in July 2012, and the jury returned a verdict in August 2012. The jury found that the Company infringed the six “claims” contained in four of WesternGeco’s patents by supplying the Company’s DigiFIN® lateral streamer control units from the United States. (In patent law, a “claim” is a technical legal term; an infringer infringes on one or more “claims” of a given patent.)
In May 2014, the District Court entered a Final Judgment against the Company in the amount of $123.8 million. The Final Judgment also enjoined the Company from supplying DigiFINs or any parts unique to DigiFINs in or from the United States.
As of 2018, the Company had paid WesternGeco the $25.8 million of the Final Judgment (the portion of the judgment representing reasonable royalty damages and enhanced damages, plus interest).
The balance of the judgment against the Company ($98.0 million, representing lost profits from surveys performed by the Company’s customers outside of the United State, plus interest) was vacated by the United States Court of Appeals for the Federal Circuit, and a new trial ordered, to determine what lost profit damages, if any, WesternGeco was entitled to.
As noted above, the lawsuit has been dismissed in accordance with the parties’ settlement agreement.
Other Litigation
In July 2018, the Company prevailed in an arbitration that it initiated against the Indian Directorate General of Hydrocarbons (“DGH”) relating to the Company’s ability to continue to license data under the Company’s IndiaSPAN program. The DGH filed a lawsuit in court in India to vacate the arbitration award; in connection with that lawsuit, the Company was ordered to escrow approximately $4.5 million in sales proceeds that it had received in respect of sales from the IndiaSPAN program, pending the outcome of the DGH’s challenge to the arbitration award. The Company challenged the escrow order, but on December 9, 2019, the Supreme Court of India ordered the Company to comply with it, which would have required the Company to deposit approximately $4.5 million in escrow in late February 2020. Since then, the Company received a court order deferring the deadline for depositing the required amount in escrow from late February 2020 to late March 2020. The Company prepared a petition to file with the court to request that the March 2020 deadline be extended due to the changes to the Company’s business, and to the markets, that have been spurred by the COVID-19 pandemic. The Company was unable to file the application because the courts in India are closed due to the pandemic (other than for emergencies) and are not accepting filings. The Company served a copy of its draft petition on the DGH’s counsel and intend to file it as soon as the courts re-open and resume accepting filings. The Company prevailed on the merits in the arbitration and expect to have that award upheld in Indian court, which would result in release of the Company’s portion of the escrowed money. The DGH’s request to vacate the arbitration award is scheduled to be heard by the court in India on July 15, 2020.
The Company has been named in various other lawsuits or threatened actions that are incidental to its ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. The Company currently believes that the ultimate resolution of these matters will not have a material adverse effect on its financial condition or results of operations.

15

    

(9)    Details of Selected Balance Sheet Accounts
Inventories
A summary of inventories follows (in thousands):
March 31, 2020
 
December 31, 2019
Raw materials and subassemblies
$
18,181

 
$
18,509

Work-in-process
2,340

 
2,079

Finished goods
5,518

 
4,932

Less: reserve for excess and obsolete inventories
(13,219
)
 
(13,333
)
Inventories, net
$
12,820

 
$
12,187

Property, Plant and Equipment
A summary of property, plant and equipment follows (in thousands):
March 31, 2020
 
December 31, 2019
Buildings
$
15,665

 
$
15,486

Machinery and equipment
133,722

 
133,048

Seismic rental equipment
1,668

 
1,669

Furniture and fixtures
3,158

 
3,347

Other
29,955

 
31,142

Total
184,168

 
184,692

Less: accumulated depreciation
(134,909
)
 
(134,951
)
Less: impairment of long-lived assets
(36,553
)
 
(36,553
)
Property, plant and equipment, net
$
12,706

 
$
13,188

Total depreciation expense, including amortization of assets recorded under equipment finance leases, for both the three months ended March 31, 2020 and 2019 was $0.8 million. No impairment charge was recognized during the three months ended March 31, 2020 and 2019.
Multi-Client Data Library
The change in multi-client data library are as follows (in thousands):
March 31, 2020
 
December 31, 2019
Gross costs of multi-client data creation
$
1,010,909

 
$
1,007,762

Less: accumulated amortization
(824,421
)
 
(816,401
)
Less: impairments to multi-client data library
(132,144
)
 
(130,977
)
Multi-client data library, net
$
54,344

 
$
60,384

Total amortization expense for the three months ended March 31, 2020 and 2019 was $8.0 million and $11.1 million, respectively. For the three months ended March 31, 2020, the Company recognized an impairment to multi-client data library of $1.2 million. No impairment to multi-client data library was recognized during the three months ended March 31, 2019.

16

    

Goodwill
 
E&P Technology & Services
 
Optimization Software & Services
 
Total
Balance at January 1, 2019
$
2,943

 
$
19,972

 
$
22,915

Impact of foreign currency translation adjustments

 
670

 
670

Balance at December 31, 2019
2,943

 
20,642

 
23,585

Impairment of goodwill

 
(4,150
)
 
(4,150
)
Impact of foreign currency translation adjustments

 
(1,137
)
 
(1,137
)
Balance at March 31, 2020
$
2,943

 
$
15,355

 
$
18,298

The Company assessed the relevant events and circumstances in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. During the quarter, markets for oil and gas, as well as other commodities and equities, have experienced significant volatility and price declines amid concerns over the economic effects of the COVID-19 pandemic. As a result, the Company’s stock price experienced a significant decline during the first quarter of 2020. Based on these facts, the Company performed a goodwill impairment test at March 31, 2020 to determine if it was more likely than not that the fair value of certain reporting units were less than their carrying value.
The Company compared the fair value of each reporting unit against its carrying value. If the carrying value of the reporting unit exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. The fair value of each reporting unit at March 31, 2020 was determined using a discounted cash flow model. The Company utilized a discount rate of 19% for both reporting units. The Company used reasonable assumptions based on historical data supplemented by anticipated market conditions and estimated growth rates. However, given the uncertainty in determining the assumptions underlying a discounted cash flow analysis, actual results may differ which could result in additional impairment charge in the future.
The Company recorded an impairment charge of $4.2 million for the three months ended March 31, 2020 related to its Optimization Software & Services reporting unit, which is included within the Operations Optimization segment. No impairment charge was recognized for the E&P Technology Services reporting unit for the three months ended March 31, 2020.
(10)    Stockholder's Equity and Stock-Based Compensation Expense
Stock-Based Compensation
The total number of shares issued or reserved for future issuance under outstanding stock options at March 31, 2020 and 2019 was 669,209 and 778,875, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at March 31, 2020 and 2019 was 903,204 and 988,426, respectively. The total number of stock appreciation rights (“SARs”) awards outstanding at March 31, 2020 and 2019 was 937,597 and 1,305,013, respectively. The following table presents a summary of the activity related to stock options, restricted stock, restricted stock unit awards and SARs awards for the three months ended March 31, 2020:
 
Stock Options
 
Restricted Stock and Unit Awards
 
Stock Appreciation Rights
 
Number of Shares
Outstanding at December 31, 2019
689,209

 
908,754

 
954,679

Granted

 
67,500

 

Stock options and SARs exercised/restricted stock and unit awards vested

 
(16,089
)
 

Cancelled/forfeited
(20,000
)
 
(56,961
)
 
(17,082
)
Outstanding at March 31, 2020
669,209

 
903,204

 
937,597

Stock-based compensation expense recognized for the three months ended March 31, 2020 and 2019, totaled $0.6 million and $1.3 million, respectively. SARs (credit) expense recognized for the three months ended March 31, 2020 and 2019, totaled $(1.1) million and $4.5 million, respectively.

17

    

SARs awards are considered liability awards as they are ultimately settled in cash. As such, these amounts are incrementally accrued in the liability section of the condensed consolidated balance sheets over the service period. All of the Company’s currently outstanding SARs awards achieve vesting through both a market condition and a service condition. SARs awards that are fully vested under both conditions are measured at intrinsic value (i.e. the difference between the market price on the last day of the quarter and the strike price of the awards times the number of awards vested and outstanding) and marked to market each quarter until settled. SARs awards that are not fully vested are incrementally accrued over the service period and adjusted to their fair value each quarter until settled based on a valuation model. The Company calculated the fair value of each award at March 31, 2020 and December 31, 2019 using a Monte Carlo simulation model. The following assumptions were used:
Risk-free interest rates
1.9
%
Expected lives (in years)
5.31

Expected dividend yield
%
Expected volatility
79
%
(11)    Lease Obligations
The Company leases offices, processing centers, warehouse spaces and, to a lesser extent, certain equipment. These leases have remaining terms of 1 year to 10 years, some of which have options to extend for up to 10 years and/or options to terminate within 1 year. The options to renew are not recognized as part of the Company’s right-of-use assets and operating lease liabilities as the Company is not reasonably certain that it will exercise these options. In January 2020, the Company amended its existing Houston, Texas headquarters lease agreement by extending the lease term to June 30, 2029 and surrendering back to the landlord floors for which the Company had previously vacated.
Total operating lease expense, including short-term lease expense was $2.5 million and $3.1 million for the three months ended March 31, 2020 and 2019, respectively.
Future maturities of lease obligations are as follows (in thousands):
For the year ending March 31,
Operating Leases
 
Finance Leases
 
Total
2021
$
11,260

 
$
1,254

 
$
12,514

2022
9,618

 
443

 
10,061

2023
9,538

 

 
9,538

2024
6,783

 

 
6,783

2025
8,878

 

 
8,878

Thereafter
19,906

 

 
19,906

Total lease payments
65,983

 
1,697

 
67,680

Less imputed interest
(15,579
)
 
(102
)
 
(15,681
)
Total
$
50,404

 
$
1,595

 
$
51,999

The weighted average remaining lease term as of March 31, 2020 and December 31, 2019 was 5.37 years and 4.71 years, respectively. The weighted average discount rate used to determine the operating lease liability at March 31, 2020 and December 31, 2019 was 6.51% and 6.47%, respectively.
 
Three Months Ended March 31,
 
2020
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating leases
$
2,604

 
$
3,156

Equipment finance leases
275

 
281

Equipment Finance Leases
The Company has entered into equipment finance leases that are due in installments for the purpose of financing the purchase of computer equipment through August 2021. Interest accrues under these leases at a rate of 8.7% per annum, and the leases are collateralized by liens on the computer equipment. The assets are amortized over the lesser of their related lease terms or their estimated useful lives and such charges are reflected within depreciation expense.

18

    

(12)    Supplemental Cash Flow Information and Non-cash Activity
Supplemental disclosure of cash flow information are as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Cash paid during the period for:
 
 
 
Interest
$
160

 
$
198

Income taxes
4,304

 
3,176


The following table is a reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets:
 
March 31,
 
2020
 
2019
 
(In thousands)
 Cash and cash equivalents
$
42,663

 
$
38,407

 Restricted cash included in prepaid expenses and other current assets

 
398

 Restricted cash included in other long-term assets
25

 

 Total cash, cash equivalents, and restricted cash shown in statements of cash flows
$
42,688

 
$
38,805


(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. The three‑tiered hierarchy is summarized as follows:
Level 1—Quoted prices in active markets for identical assets and liabilities.
Level 2—Other significant observable inputs.
Level 3—Significant unobservable inputs.
Due to their highly liquid nature, the amount of the Company’s other financial instruments, including cash and cash equivalents, restricted cash, accounts and unbilled receivables, accounts payable and accrued multi-client data library royalties, represent their approximate fair value.
The carrying amounts of the Company’s long-term debt at March 31, 2020 and December 31, 2019 were $149.7 million and $123.4 million, respectively, compared to its fair values of $77.4 million and $116.6 million at March 31, 2020 and December 31, 2019, respectively. The fair value of the long-term debt was calculated using Level 2 inputs using significant observable data points for similar liabilities where estimated values are determined from observable transactions.
Fair value measurements are applied with respect to non-financial assets and liabilities when possible indicators of impairment exists, which would consist primarily of goodwill, multi-client data library and property, plant and equipment. The fair value of these assets is determined based on valuation techniques using the best information available and may include market comparables and discounted cash flow projections.
(14)    Condensed Consolidating Financial Information
The Second Lien Notes were issued by ION Geophysical Corporation and are guaranteed by 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.

19

    

This condensed consolidating financial information should be read in conjunction with the accompanying condensed consolidated financial statements and footnotes. For additional information pertaining to the Second Lien 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, 2020
Balance Sheet
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
28,602

 
$
54

 
$
14,007

 
$

 
$
42,663

Accounts receivable, net
8

 
42,390

 
8,751

 

 
51,149

Unbilled receivables

 
5,206

 
3,150

 

 
8,356

Inventories, net

 
7,603

 
5,217

 

 
12,820

Prepaid expenses and other current assets
3,168

 
1,319

 
1,194

 

 
5,681

Total current assets
31,778

 
56,572

 
32,319

 

 
120,669

Deferred income tax asset

 
7,799

 
106

 

 
7,905

Property, plant and equipment, net
1,609

 
7,711

 
3,386

 

 
12,706

Multi-client data library, net

 
46,771

 
7,573

 

 
54,344

Investment in subsidiaries
855,539

 
274,923

 

 
(1,130,462
)
 

Goodwill

 

 
18,298

 

 
18,298

Intercompany receivables

 
288,207

 
112,830

 
(401,037
)
 

Right-of-use assets
22,699

 
14,572

 
4,895

 

 
42,166

Other assets
2,381

 
865

 
53

 

 
3,299

Total assets
$
914,006

 
$
697,420

 
$
179,460

 
$
(1,531,499
)
 
$
259,387

LIABILITIES AND (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
27,486

 
$
1,160

 
$

 
$

 
$
28,646

Accounts payable
2,008

 
40,192

 
1,627

 

 
43,827

Accrued expenses
13,536

 
8,371

 
7,171

 

 
29,078

Accrued multi-client data library royalties

 
21,209

 
215

 

 
21,424

Deferred revenue

 
3,610

 
1,272

 

 
4,882

Current maturities of operating lease liabilities
3,556

 
5,143

 
1,174

 

 
9,873

Total current liabilities
46,586

 
79,685

 
11,459

 

 
137,730

Long-term debt, net of current maturities
118,861

 
435

 

 

 
119,296

Operating lease liabilities, net of current maturities
21,900

 
14,283

 
4,348

 

 
40,531

Intercompany payables
766,521

 

 

 
(766,521
)
 

Other long-term liabilities
395

 
38

 

 

 
433

Total liabilities
954,263

 
94,441

 
15,807

 
(766,521
)
 
297,990

(Deficit) Equity:
 
 
 
 
 
 
 
 
 
Common stock
142

 
290,460

 
47,776

 
(338,236
)
 
142

Additional paid-in capital
957,254

 
180,700

 
203,909

 
(384,609
)
 
957,254

Accumulated earnings (deficit)
(976,554
)
 
406,440

 
20,550

 
(426,990
)
 
(976,554
)
Accumulated other comprehensive income (loss)
(21,099
)
 
4,238

 
(23,611
)
 
19,373

 
(21,099
)
Due from ION Geophysical Corporation

 
(278,859
)
 
(86,625
)
 
365,484

 

Total stockholders’ (deficit) equity
(40,257
)
 
602,979

 
161,999

 
(764,978
)
 
(40,257
)
Noncontrolling interest

 

 
1,654

 

 
1,654

Total (deficit) equity
(40,257
)
 
602,979

 
163,653

 
(764,978
)
 
(38,603
)
Total liabilities and (deficit) equity
$
914,006

 
$
697,420

 
$
179,460

 
$
(1,531,499
)
 
$
259,387


20

    

 
December 31, 2019
Balance Sheet
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
8,426

 
$
26

 
$
24,613

 
$

 
$
33,065

Accounts receivable, net
8

 
19,493

 
10,047

 

 
29,548

Unbilled receivables

 
7,314

 
4,501

 

 
11,815

Inventories, net

 
6,902

 
5,285

 

 
12,187

Prepaid expenses and other current assets
3,292

 
1,513

 
1,207

 

 
6,012

Total current assets
11,726

 
35,248

 
45,653

 

 
92,627

Deferred income tax asset
402

 
8,417

 
(85
)
 

 
8,734

Property, plant and equipment, net
786

 
8,112

 
4,290

 

 
13,188

Multi-client data library, net

 
54,479

 
5,905

 

 
60,384

Investment in subsidiaries
841,522

 
279,327

 

 
(1,120,849
)
 

Goodwill

 

 
23,585

 

 
23,585

Intercompany receivables

 
287,692

 
99,884

 
(387,576
)
 

Right-of-use assets
11,934

 
15,802

 
4,810

 

 
32,546

Other assets
1,171

 
905

 
54

 

 
2,130

Total assets
$
867,541

 
$
689,982

 
$
184,096

 
$
(1,508,425
)
 
$
233,194

LIABILITIES AND (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
972

 
$
1,135

 
$

 
$

 
$
2,107

Accounts payable
2,259

 
44,641

 
2,416

 

 
49,316

Accrued expenses
9,933

 
9,982

 
10,413

 

 
30,328

Accrued multi-client data library royalties

 
18,616

 
215

 

 
18,831

Deferred revenue

 
3,465

 
1,086

 

 
4,551

Current maturities of operating lease liabilities
4,429

 
5,469

 
1,157

 

 
11,055

Total current liabilities
17,593

 
83,308

 
15,287

 

 
116,188

Long-term debt, net of current maturities
118,618

 
734

 

 

 
119,352

Operating lease liabilities, net of current maturities
11,208

 
15,346

 
4,279

 

 
30,833

Intercompany payables
755,524

 

 

 
(755,524
)
 

Other long-term liabilities
1,418

 
35

 

 

 
1,453

Total liabilities
904,361

 
99,423

 
19,566

 
(755,524
)
 
267,826

(Deficit) Equity:
 
 
 
 
 
 
 
 
 
Common stock
142

 
290,460

 
47,776

 
(338,236
)
 
142

Additional paid-in capital
956,647

 
180,700

 
203,909

 
(384,609
)
 
956,647

Accumulated earnings (deficit)
(974,291
)
 
396,793

 
18,837

 
(415,630
)
 
(974,291
)
Accumulated other comprehensive income (loss)
(19,318
)
 
4,281

 
(21,907
)
 
17,626

 
(19,318
)
Due from ION Geophysical Corporation

 
(281,675
)
 
(86,273
)
 
367,948

 

Total stockholders’ (deficit) equity
(36,820
)
 
590,559

 
162,342

 
(752,901
)
 
(36,820
)
Noncontrolling interest

 

 
2,188

 

 
2,188

Total (deficit) equity
(36,820
)
 
590,559

 
164,530

 
(752,901
)
 
(34,632
)
Total liabilities and (deficit) equity
$
867,541

 
$
689,982

 
$
184,096

 
$
(1,508,425
)
 
$
233,194


21

    

 
Three Months Ended March 31, 2020
Income Statement
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
Net revenues
$

 
$
40,422

 
$
15,992

 
$

 
$
56,414

Cost of sales

 
21,800

 
5,103

 

 
26,903

Impairment of multi-client data library

 
1,167

 

 

 
1,167

Gross profit

 
17,455

 
10,889

 

 
28,344

Total operating expenses
8,120

 
6,980

 
6,918

 

 
22,018

Income (loss) from operations
(8,120
)
 
10,475

 
3,971

 

 
6,326

Interest expense, net
(3,245
)
 
(38
)
 
62

 

 
(3,221
)
Intercompany interest, net
(190
)
 
(1,927
)
 
2,117

 

 

Equity in earnings of investments
9,628

 
1,732

 

 
(11,360
)
 

Other income (expense), net
1,385

 

 
(956
)
 

 
429

Net income (loss) before income taxes
(542
)
 
10,242

 
5,194

 
(11,360
)
 
3,534

Income tax expense
1,721

 
595

 
3,558

 

 
5,874

Net income (loss)
(2,263
)
 
9,647

 
1,636

 
(11,360
)
 
(2,340
)
Net loss attributable to noncontrolling interest

 

 
77

 

 
77

Net income (loss) attributable to ION
$
(2,263
)
 
$
9,647

 
$
1,713

 
$
(11,360
)
 
$
(2,263
)
Comprehensive net income (loss)
$
(4,044
)
 
$
13,754

 
$
4,082

 
$
(17,913
)
 
$
(4,121
)
Comprehensive loss attributable to noncontrolling interest

 

 
77

 

 
77

Comprehensive net income (loss) attributable to ION
$
(4,044
)
 
$
13,754

 
$
4,159

 
$
(17,913
)
 
$
(4,044
)
 
Three Months Ended March 31, 2019
Income Statement
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
Net revenues
$

 
$
17,613

 
$
19,343

 
$

 
$
36,956

Cost of sales

 
20,200

 
6,844

 

 
27,044

Gross profit (loss)

 
(2,587
)
 
12,499

 

 
9,912

Total operating expenses
12,839

 
9,075

 
3,935

 

 
25,849

Income (loss) from operations
(12,839
)
 
(11,662
)
 
8,564

 

 
(15,937
)
Interest expense, net
(3,166
)
 
(49
)
 
103

 

 
(3,112
)
Intercompany interest, net
300

 
4,649

 
(4,949
)
 

 

Equity in earnings (losses) of investments
(5,169
)
 
2,001

 

 
3,168

 

Other income (expense), net
7

 
(122
)
 
(677
)
 

 
(792
)
Net income (loss) before income taxes
(20,867
)
 
(5,183
)
 
3,041

 
3,168

 
(19,841
)
Income tax expense (benefit)
493

 
(1,291
)
 
2,205

 

 
1,407

Net income (loss)
(21,360
)
 
(3,892
)
 
836

 
3,168

 
(21,248
)
Net income attributable to noncontrolling interest

 

 
(112
)
 

 
(112
)
Net income (loss) attributable to ION
$
(21,360
)
 
$
(3,892
)
 
$
724

 
$
3,168

 
$
(21,360
)
Comprehensive net income (loss)
$
(20,390
)
 
$
(3,935
)
 
$
1,699

 
$
2,348

 
$
(20,278
)
Comprehensive income attributable to noncontrolling interest

 


 
(112
)
 

 
(112
)
Comprehensive net income (loss) attributable to ION
$
(20,390
)
 
$
(3,935
)
 
$
1,587

 
$
2,348

 
$
(20,390
)
 
 
 
 
 
 
 
 
 
 

22

    

 
Three Months Ended March 31, 2020
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
$
330

 
$
(1,570
)
 
$
(5,726
)
 
$
(6,966
)
Cash flows from investing activities:
 
 
 
 
 
 
 
Cash invested in multi-client data library

 
(5,382
)
 
(4,286
)
 
(9,668
)
Purchase of property, plant and equipment
(398
)
 
(98
)
 

 
(496
)
Net cash used in investing activities
(398
)
 
(5,480
)
 
(4,286
)
 
(10,164
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Borrowings under revolving line of credit
27,000

 

 

 
27,000

Payments on notes payable and long-term debt
(485
)
 
(275
)
 

 
(760
)
Intercompany lending
(6,289
)
 
7,353

 
(1,064
)
 

Other financing activities
(10
)
 

 

 
(10
)
Net cash provided by (used in) financing activities
20,216

 
7,078

 
(1,064
)
 
26,230

Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash

 

 
470

 
470

Net increase (decrease) in cash, cash equivalents and restricted cash
20,148

 
28

 
(10,606
)
 
9,570

Cash, cash equivalents and restricted cash at beginning of period
8,479

 
26

 
24,613

 
33,118

Cash, cash equivalents and restricted cash at end of period
$
28,627

 
$
54

 
$
14,007

 
$
42,688

The following table is a reconciliation of cash and cash equivalents to total cash, cash equivalents, and restricted cash:
 
March 31, 2020
 
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Total Consolidated
 
(In thousands)
 Cash and cash equivalents
$
28,602

 
$
54

 
$
14,007

 
$
42,663

 Restricted cash included in other long-term assets
25

 

 

 
25

 Total cash, cash equivalents, and restricted cash shown in statements of cash flows
$
28,627

 
$
54

 
$
14,007

 
$
42,688




23

    

 
Three Months Ended March 31, 2019
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
$
5,216

 
$
(825
)
 
$
11,007

 
$
15,398

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

 
(5,363
)
 
(3,404
)
 
(8,767
)
Proceeds from sale (purchase) of property, plant and equipment
(24
)
 
(48
)
 
(735
)
 
(807
)
Net cash used in investing activities
(24
)
 
(5,411
)
 
(4,139
)
 
(9,574
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Payments on notes payable and long-term debt
(434
)
 
(281
)
 

 
(715
)
Intercompany lending
(13,511
)
 
6,495

 
7,016

 

Other financing activities
(239
)
 

 

 
(239
)
Net cash provided by (used in) financing activities
(14,184
)
 
6,214

 
7,016

 
(954
)
Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash

 

 
81

 
81

Net increase (decrease) in cash, cash equivalents and restricted cash
(8,992
)
 
(22
)
 
13,965

 
4,951

Cash, cash equivalents and restricted cash at beginning of period
14,085

 
47

 
19,722

 
33,854

Cash, cash equivalents and restricted cash at end of period
$
5,093

 
$
25

 
$
33,687

 
$
38,805

The following table is a reconciliation of cash and cash equivalents to total cash, cash equivalents, and restricted cash:
 
March 31, 2019
 
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Total Consolidated
 
(In thousands)
 Cash and cash equivalents
$
4,695

 
$
25

 
$
33,687

 
$
38,407

 Restricted cash included in prepaid expenses and other current assets
398

 

 

 
398

 Total cash, cash equivalents, and restricted cash shown in statement of cash flows
$
5,093

 
$
25

 
$
33,687

 
$
38,805


24

    

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Overview
The COVID-19 pandemic caused the global economy to enter a recessionary period, which may be prolonged and severe, and significantly reduced the availability of capital and liquidity from banks and other providers of credit. The E&P industry is facing the double impact of demand destruction from COVID-19 and market oversupply from increased production, which caused oil and natural gas prices to decline significantly since the start of the year.  Brent crude oil prices, which are most relevant to ION’s internationally-focused business, dropped 66% during the first quarter from $66 on January 1, 2020 to $23 on March 31, 2020. While members of OPEC and other oil producing countries agreed to cut production in April 2020, oil prices nonetheless declined further to record low levels during the month. While commodity prices can be volatile, this sharp decline triggered E&P companies to reduce budgets and will likely curtail demand for some of our products and services. Spending on exploration tends to be among the most discretionary and is expected to bear some of the deepest cuts in percentage terms, although spending reductions in the offshore basins where we operate are projected to be less severe than onshore in the United States.
ION management expects continued portfolio rationalization and high grading as E&P companies seek to find the best return on investment opportunities to meet oil and gas demand in the next decade. Near-term, due to the impact of the COVID-19, project high grading will likely be more acute due to budget cuts. ION had already shifted its portfolio closer to reservoir, where revenue tends to be higher and more consistent. New Ventures data acquisition offshore and Software and related personnel-based offshore services are expected to be most impacted by COVID-19 travel restrictions. While offshore operations will be temporarily impacted by travel restrictions, we believe the demand for digitalization technologies will remain robust. In some cases, ION technology is expected to more relevant and valuable in the current environment, such as offerings that facilitate remote working.  
While the duration and extent of COVID-19 is difficult to predict, ION recorded its highest first quarter revenues since 2014. A number of large multi-client contracts were closed in the first quarter 2020, some of which were delayed from the fourth quarter 2019, even after E&P market dynamics changed. ION worked closely with clients to assess the effect of E&P budget reductions to its business and took decisive action to proactively manage its business. To mitigate the impact of COVID-19 and oil price volatility, management implemented a plan to preserve cash and manage liquidity as follows:
Scaling down personnel costs and operating expenses by another $18.0 million during the remaining nine months of 2020, building on the over $20.0 million (net of severance expense of $3.1 million) of cuts made in January 2020. These further reductions are primarily through a variety of furlough programs and reduced compensation arrangements across ION’s worldwide workforce. ION executives have taken a 20% base salary reduction and a tiered reduction scheme has been cascaded to the rest of the worldwide workforce. ION’s board of directors has taken a 20% reduction in directors’ fees. In addition, ION has curtailed use of external contractors, decreased travel and event costs and implemented new systems and processes that more efficiently support its business.
Reducing capital expenditures to an estimated $20.0 million to $35.0 million (a portion of which will be pre-funded or underwritten by our customers), down from $35.0 million to $50.0 million, to reflect both reduced seismic demand and travel/border restrictions impacting new data acquisition offshore. The majority of capital expenditures relate to investments in multi-client data. This provides flexibility to aggressively reduce cash outflows while shifting to much lower cost reimaging programs.
Applied for various government assistance programs of which $6.9 million has been received in April 2020. Receipt of this $6.9 million allowed us to avoid further staff reductions while supporting our ongoing operations. Additional global government relief of between $2.0 million to $7.0 million may be possible.
Announced the sale of its interest in INOVA Geophysical for $12.0 million that is expected to close during the second half of the year, subject to regulatory approvals and other closing conditions.
Entered into a settlement agreement with WesternGeco ending the uncertainty surrounding the decade-long patent litigation. See Note 8Litigation” for further details.
We reviewed our debt covenants and expect that we will remain in compliance for the next twelve months.
In addition, ION is launching new offerings to support remote working, exploring new business models and finding new ways to remotely engage with clients. While the global COVID-19 pandemic and decline in oil and gas prices will likely reduce demand for our products and services in the near-term, management believes the industry’s long-term prospects are favorable due to projections about the number of new conventional offshore discoveries required to meet long-term oil demand. Management believes that data and technology that improve decision-making, safety, efficiency or sustainability will continue to be valued, even in the current challenging market.

25

    

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 “DigiFIN” and “VectorSeis” refer to DigiFIN® and VectorSeis® registered marks owned by ION or INOVA Geophysical or their affiliates, and the terms “Marlin,” “Marlin SmartPort,” “Gator,” “SailWing,” and “4Sea” refers to the Marlin™, Marlin SmartPort™, Gator™, SailWing™ and 4Sea™ trademarks and service marks owned by ION.
ION is an innovative, asset light global technology company that delivers powerful data-driven decision-making offerings to offshore energy, ports and defense industries. We are entering a fourth industrial revolution where technology is fundamentally changing how decisions are made. Decision-making is shifting from what was historically an art to a science. Data, analytics and digitalization provide a step-change opportunity to translate information into insights, enabling our clients to enhance decisions, gain a competitive edge and deliver superior returns.
We have been a leading technology innovator for over 50 years. While the traditional focus of our cutting-edge technology has been on the exploration and production (“E&P”) industry, we are now broadening and diversifying our business into relevant adjacent markets such as offshore logistics, ports and harbors, defense and marine robotics. Our offerings are focused on improving subsurface knowledge to enhance E&P decision-making and improving situational awareness to optimize offshore operations. We serve customers in most major energy producing regions of the world from strategically located offices.
The Company is publicly listed on the New York Stock Exchange under the ticker IO. We are headquartered in Houston, Texas with regional offices around the world. We have approximately 470 employees, 41% of whom are in technical roles and 20% have advanced degrees.
We provide our services and products through two business segments: E&P Technology & Services and Operations Optimization. In addition, we have a 49% ownership interest in our INOVA Geophysical Equipment Limited (“INOVA Geophysical” or “INOVA”), a joint venture with BGP Inc. (“BGP”), a subsidiary of China National Petroleum Corporation (“CNPC”). BGP owns the remaining 51% equity interest in INOVA. See further discussion below on our agreement to sell our interest in INOVA.
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. Across the E&P lifecycle, our E&P offerings focus on driving customer decisions, such as which blocks to bid on and for how much, how to maximize portfolio value, where to drill wells or how to optimize production.
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. While we primarily sell to service providers, we began selling existing technology to new customers in E&P, ports and harbors, defense and academic industries.
We historically conducted our land seismic equipment business through INOVA, which manufactures land seismic data acquisition systems, digital sensors, vibroseis vehicles (i.e., vibrator trucks), and energy source controllers.
E&P Technology & Services. Our offerings are designed to help E&P companies improve decision-making, reduce risk and maximize value. Within our E&P Technology and Services segment, there are two synergistic groups: Imaging and Reservoir Services and Ventures.
Our Imaging and Reservoir Services group provides advanced data processing, imaging and reservoir services designed to maximize image quality and subsurface insights, helping E&P companies reduce exploration and production risk, evaluate and develop reservoirs, and increase production. Imaging and Reservoir Services continually develops and applies proprietary processing algorithms via its cutting-edge imaging engine to data owned or licensed by our customers to translate raw data into subsurface images. We continually enhance our novel workflows and invest in leading-edge infrastructure to efficiently deliver the best image quality.
While our Imaging and Reservoir Services group processes and images data for customers on a proprietary basis, most of these resources support our higher potential return multi-client business. The proprietary work we take on is complex, where our advanced technology is valued and where we closely collaborate with our customers to solve their toughest challenges, keeping our toolkit sharp. We maintain approximately 19 petabytes of digital seismic data storage in four global data centers, including a core data center located in Houston. We utilize a globally distributed network of Linux-cluster processing centers in combination with our major hubs in Houston and London to process seismic data using advanced, proprietary algorithms and workflows.

26

    

Our Ventures group leverages the world-class geoscience skills of the Imaging and Reservoir Services group to create global digital data assets that are licensed to multiple E&P companies to optimize their investment decisions. Our global data library consists of over 715,000 km of 2D and over 350,000 sq. km of 3D 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, while outsourcing asset-intensive components (such as field acquisition) to experienced contractors.
We offer our services to customers on both a proprietary and multi-client (non-exclusive) basis. In both cases, a majority of our survey expenses are generally pre-funded by our customers, limiting our cost exposure. The period during which our multi-client surveys are being designed, acquired or processed is referred to as the “New Venture” phase. Once the New Venture phase is completed, they become part of our Data Library. For proprietary services, the customer has exclusive ownership of the data. For multi-client surveys, we generally retain ownership of or long-term exclusive marketing rights to the data and receive ongoing revenue from subsequent data license sales.
In our E&P Technology & Services segment, new venture revenues decreased compared to the first quarter of 2019. This decrease was more than offset by the significant increase in our data library revenues. We invested $9.7 million in our multi-client data library during the first quarter of 2020 and we expect investments in our multi-client data library to be in the range of $20.0 million to $30.0 million for 2020 (a portion of which will be pre-funded or underwritten by our customers) compared to the $28.8 million invested in 2019 and down from the $30.0 million to $40.0 million initial range for 2020 due to COVID-19.
At March 31, 2020, our E&P Technology & Services segment backlog, which consists of commitments for (i) Imaging and Reservoir Services work and (ii) new venture projects (both multi-client and proprietary) by our Ventures group underwritten by our customers, was $14.6 million compared to $18.9 million at December 31, 2019 and $29.3 million at March 31, 2019. The majority of our backlog relates to our multi-client seismic programs and our proprietary imaging and reservoir services work. We anticipate that most of our backlog will be recognized as revenue over the remainder of 2020.
In the E&P Technology & Services segment, to accelerate our shift in portfolio weighting from 2D to 3D, we restructured our multi-client business development and streamlined our product delivery strategy.
Over the last five years, we have made an effort to diversify our offerings across the E&P life cycle and move closer to the reservoir, where capital investment tends to be higher and more consistent. Historically, our data library was largely 2D exploration focused. We had not materially participated in 3D multi-client projects. As a result, our 3D revenues and data volumes only accounted for 3% of the market, giving us substantial upside growth potential. In 2019, we grew our 3D multi-client data library 56% to 350,000 sq. km. through cost effective, seamless reimaging of existing data. 37% of our 2019 revenue was from 3D multi-client sales, an offering that barely registered just four years ago. Our successful foray into 3D reimaging has given us credibility and experience in the 3D market segment, creating a pipeline of opportunities for new 3D towed streamer and/or seabed programs we have not seen prior. We also completed development of enabling technologies like our Enhanced Frequency Source and 4Sea ocean bottom platform to further increase the likelihood of our participation success in new 3D multi-client programs.
Operations Optimization. Our Operations Optimization segment develops mission-critical subscription offerings and provides engineering services that enable operational control and optimization offshore. Our advanced systems improve situational awareness, communication and risk management to enable rapid and informed decisions in challenging offshore environments. Our industry-leading mission management, navigation, communications and sensing technologies enable the operations of modern 3D operations.
This segment is comprised of our Optimization Software & Services and Devices offerings. While we primarily sell to oil and gas service providers, we began selling existing technology to new customers in E&P, ports and harbors, defense and academic industries. Service providers rely on our industry-leading marine imaging systems and services to acquire the highest quality data - safely and efficiently - in both towed streamer and seabed operations. Our integrated technology platforms combined with advanced prediction tools enable safer, more efficient surveys.
We also leverage our core competencies to develop custom solutions. Our capabilities include data management, navigation, software development, acoustics, sensing, telemetry, fluid dynamics, positioning and control devices and electrical and mechanical engineering expertise.
Our Optimization Software & Services group provides survey design, command and control software systems and related services for marine towed streamer and seabed operations. Our software business commands recurring, premium subscription revenues. We are market leaders in our core business and adapted our platform to more broadly optimize operations. Our software offerings leverage a leading data integration platform to control and optimize operations. Engineering services experts deliver in-field optimization services, equipment maintenance and training to maximize value from our offerings.

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Our Devices group develops intelligent equipment controlled by our software to optimize operations. Our Devices group develops, manufactures and repairs marine towed streamer and seabed data acquisition technology, sensors and compasses which have been deployed in marine robotics, defense, E&P and other commercial applications.
Our Operations Optimization revenues were consistent compared to the first quarter of 2019.
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 as Marlin and 4Sea, will continue to attract customer interest because these technologies are designed to deliver those desirable attributes.
INOVA Geophysical. INOVA manufactures land acquisition systems, including the G3i HD, Hawk and Quantum recording platforms, land source products, including the AHV-IV series, UNIVIB®, and UNIVIB 2 vibroseis vehicles, and source controllers and multicomponent sensors, including the VectorSeis digital 3C receivers. We wrote our investment in INOVA down to zero in 2014.
In March 2020, we announced that we had entered into an agreement to sell our 49% ownership interest in INOVA for a total consideration of $12.0 million. The transaction is expected to close in the second half of the year, subject to regulatory approvals and other closing conditions.
WesternGeco Litigation Settlement
On April 7, 2020, we entered into a settlement agreement with WesternGeco that ended the ongoing litigation.
Pursuant to the settlement agreement, WesternGeco granted us a license to the underlying patents, lifted the injunction that prevented us from manufacturing DigiFIN in the United States and, on April 13, 2020, the District Court permanently dismissed the pending lawsuit.
In exchange, we agreed to pay WesternGeco a settlement based on future revenues from our multi-client data library, consisting of 1) small percentage of 2-D multi-client late sales for a ten-year period, and 2) the transfer of a majority of our revenue share relating to the parties’ existing joint multi-client reimaging programs offshore Mexico. (WesternGeco will receive 90%, instead of 50%, of Net Revenues from the program, except that the revenue share for the Perdido South portion of the program shall remain 50/50). A copy of the settlement agreement is filed as an exhibit to this Form 10-Q.
See Note 8Litigation” of Footnotes to Unaudited Condensed Financial Statements” and Part II - Item 1. “Legal Proceedings” for further details.
Key Financial Metrics
The table below provides an overview of key financial metrics for our company as a whole and our two business segments for the three months ended March 31, 2020, compared to the same period of 2019. 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(in thousands, except share data)
Net revenues:
 
 
 
 
E&P Technology & Services:
 
 
 
 
New Venture
$
1,441

 
$
13,471

 
Data Library
40,131

 
9,948

 
Total multi-client revenues
41,572

 
23,419

 
Imaging and Reservoir Services
4,942

 
3,684

 
Total
46,514

 
27,103

 
Operations Optimization:
 
 
 
 
Optimization Software & Services
4,427

 
5,033

 
Devices
5,473

 
4,820

 
Total
9,900

 
9,853

 
Total net revenues
$
56,414

 
$
36,956

 

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Three Months Ended March 31,
 
 
2020
 
2019
 
Gross profit (loss):
 
 
 
 
E&P Technology & Services
$
23,730

(a)
$
5,440

 
Operations Optimization
4,614

 
4,516

 
Segment gross profit
28,344

 
9,956

 
Other

 
(44
)
 
Total gross profit
$
28,344

 
$
9,912

 
Gross margin:
 
 
 
 
E&P Technology & Services
51
 %
 
20
 %
 
Operations Optimization
47
 %
 
46
 %
 
Total gross margin
50
 %
 
27
 %
 
Income (loss) from operations:
 
 
 
 
E&P Technology & Services
$
17,952

(a)
$
(1,615
)
 
Operations Optimization
(3,259
)
(b)
170

 
Support and other
(8,367
)
 
(14,492
)
 
Income (loss) from operations
$
6,326

 
$
(15,937
)
 
Operating margin:
 
 
 
 
E&P Technology & Services
39
 %
 
(6
)%
 
Operations Optimization
(33
)%
 
2
 %
 
Support and other
(15
)%
 
(39
)%
 
Total operating margin
11
 %
 
(43
)%
 
 
 
 
 
 
Net loss attributable to ION
$
(2,263
)
 
$
(21,360
)
 
Special items:
6,975

(c)
4,460

(d)
Net income (loss) attributable to ION, as adjusted
$
4,712

 
$
(16,900
)
 
 
 
 
 
 
Net loss per share:
 
 
 
 
Basic
$
(0.16
)
 
$
(1.52
)
 
Diluted
$
(0.16
)
 
$
(1.52
)
 
 
 
 
 
 
Net income (loss) per share as adjusted:
 
 
 
 
Basic
$
0.33

 
$
(1.20
)
 
Diluted
$
0.33

 
$
(1.20
)
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
Basic
14,230

 
14,033

 
Diluted
14,230

 
14,033

 
(a) Includes impairment of multi-client data library of $1.2 million for the three months ended March 31, 2020.
(b) Includes impairment of goodwill of $4.2 million for the three months ended March 31, 2020.
(c) Represents impairment of goodwill of $4.2 million, severance expense of $3.1 million, impairment of multi-client data library of $1.2 million and related income tax benefit of $0.4 million, partially offset by stock appreciation right awards credit of $1.1 million.
(d) Represents stock appreciation right awards expense in the first quarter of 2019.

We intend that the following discussion of our financial condition and results of operations will provide information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes. The financial results are reported in accordance with Generally Accepted Accounting Principles (“GAAP”). However, management believes that certain non-GAAP performance measures may provide users of this financial information, additional meaningful comparisons between current results and results in prior operating periods. One such non-GAAP financial measure is Net income (loss) attributable to ION as adjusted or adjusted net income (loss), which excludes certain charges or amounts. This adjusted net income (loss) amount is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for income (loss) from operations, net income (loss) or other income data prepared in accordance with GAAP.
For a discussion of factors that could impact our future operating results and financial condition, see (i) Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, and (ii) Item 1A. “Risk Factors” in Part II of this Form 10-Q.

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Results of Operations
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Our consolidated net revenues of $56.4 million for the three months ended March 31, 2020 (the “Current Quarter”) increased by $19.5 million, or 53%, compared to consolidated net revenues of $37.0 million for the three months ended March 31, 2019 (the “Comparable Quarter”). Our total gross margin was 50% in the Current Quarter, as compared to 27% in the Comparable Quarter. For the Current Quarter, our income from operations was $6.3 million, compared to a loss of $15.9 million for the Comparable Quarter.
Net loss for the Current Quarter was $2.3 million, or $0.16 loss per share, compared to $21.4 million, or $1.52 loss per share, for the Comparable Quarter. Adjusted net income for the Current Quarter was $4.7 million, or $0.33 per share, compared to an adjusted net loss of $16.9 million, or $1.20 loss per share for the Comparable Quarter.
Net Revenues, Gross Profits and Gross Margins
E&P Technology & Services — Net revenues for the Current Quarter increased by $19.4 million, or 72%, to $46.5 million, compared to $27.1 million for the Comparable Quarter. Within the E&P Technology & Services segment, total multi-client revenues were $41.6 million, an increase of 78%. This increase was driven by increased sales of global 2D data library, partly offset by a reduction in new venture revenues. Imaging and Reservoir Services revenues were $4.9 million, a $1.3 million increase compared to the Comparable Quarter resulting from working through existing backlog. The Current Quarter reflects a gross profit of $23.7 million, representing a 51% gross margin, compared to a gross profit of $5.4 million, or 20% gross margin, in the Comparable Quarter. These improvements in gross profit and margin were due to an increase in our Data Library revenues.
Operations Optimization — Total net revenues for the Current Quarter are consistent with the Comparable Quarter. Optimization Software & Services net revenues for the Current Quarter decreased by $0.6 million, or 12% to $4.4 million, compared to $5.0 million for the Comparable Quarter is due to reduced command and control hardware sales, and to a lesser extent, COVID-19 reduced seismic activity and associated services demand. Devices net revenues for the Current Quarter increased by $0.7 million, or 14%, to $5.5 million, compared to $4.8 million for the Comparable Quarter primarily due to an increase in sales of towed streamer equipment spares and repairs. The Current Quarter reflects a gross profit of $4.6 million, representing a 47% gross margin compared to a gross profit of $4.5 million, representing a 46% gross margin for the Comparable Quarter.
Operating Expenses
Research, Development and Engineering — Research, development and engineering expense were $4.0 million for the Current Quarter, a decrease of $1.4 million, or 25% compared to $5.4 million for the Comparable Quarter primarily due to the cost cutting initiative implemented during the quarter.
Marketing and Sales — Marketing and sales expense were $4.9 million for the Current Quarter, a decrease of $0.9 million, or 16% compared to $5.8 million for the Comparable Quarter primarily due to the cost cutting initiative implemented during the quarter.
General, Administrative and Other Operating Expenses — General, administrative and other operating expenses were $9.0 million for the Current Quarter, a decrease of $5.7 million, or 39% compared to $14.7 million for the Comparable Quarter primarily due to the cost cutting initiative implemented during the quarter as well as decrease in stock appreciation rights expense partly offset by an increase in severance expense.
Other Items
Interest Expense, Net — Interest expense, net, was $3.2 million for the Current Quarter compared to $3.1 million for the Comparable Quarter. For additional information, please refer to “Liquidity and Capital Resources — Sources of Capital” below.
Income Tax Expense — Income tax expense for the Current Quarter was $5.9 million compared to $1.4 million for the Comparable Quarter. Our effective tax rates for the Current Quarter and Comparable Quarter were 166.2% and (7.1)%, respectively. The income tax expense for the Current Quarter and Comparable Quarter primarily relates to results generated by our non-U.S. businesses. The income tax expense for the Current Quarter includes $2.2 million of valuation allowance related to our non-U.S. businesses. Our effective tax rates for the Current Quarter and Comparable Quarter were negatively impacted by the change in valuation allowances related to U.S and certain foreign operating losses. See further discussion of establishment of the deferred tax valuation allowance at Note 7Income Taxes of Footnotes to Condensed Consolidated Financial Statements.

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Liquidity and Capital Resources
Sources of Capital
As of March 31, 2020, we had total liquidity of $53.8 million, consisting of $42.7 million of cash on hand and $11.1 million of remaining borrowing capacity under our Credit Facility. In response to the market uncertainty resulting from the COVID-19 pandemic combined with weaker oil and gas prices, in March we drew $27.0 million under our Credit Facility that remains outstanding and in our cash balances. Our cash requirements include working capital requirements and cash required for our debt service payments, multi-client seismic data acquisition activities and capital expenditures. As of March 31, 2020, we had negative working capital of $17.0 million compared to $23.6 million as of December 31, 2019. Working capital requirements are primarily driven by our investment in our multi-client data library ($9.7 million in the Current Quarter and $20.0 million to $30.0 million expected, for the full year, a portion of which will be pre-funded or underwritten by our customers) and royalty payments for multi-client sales. Whether planned expenditures will actually be spent in 2020 depends on industry conditions, project approvals and schedules, and careful monitoring of our levels of liquidity. Also, our headcount has traditionally been a significant driver of our working capital needs. Our headcount decreased to 470 employees as of March 31, 2020 from 520 employees as of December 31, 2019 resulting from our cost reduction initiative in January 2020. As a significant portion of our business is involved in the planning, processing and interpretation of seismic data services, one of our largest investments is in our employees, which requires cash expenditures for their salaries, bonuses, payroll taxes and related compensation expenses, including stock appreciation awards, typically in advance of related revenue billings and collections.
Our working capital requirements may change from time to time depending upon many factors, including our operating results and adjustments in our operating plan in response to industry conditions, competition and unexpected events. In recent years, our primary sources of funds have been cash flows generated from operations, existing cash balances, debt and equity issuances and borrowings under our Credit Facility.
Revolving Credit Facility
On August 16, 2018, we and our material U.S. subsidiaries — GX Technology Corporation, ION Exploration Products (U.S.A), Inc. and I/O Marine Systems, Inc. (the “Material U.S. Subsidiaries”) — along with GX Geoscience Corporation, S. de R.L. de C.V., a limited liability company (Sociedad de Responsibilidad Limitada de Capital Variable) organized under the laws of Mexico, and a subsidiary of the Company (the “Mexican Subsidiary”) (the Material U.S. Subsidiaries and the Mexican Subsidiary are collectively, the “Subsidiary Borrowers”, together with ION Geophysical Corporation are the “Borrowers”) — the financial institutions party thereto, as lenders, and PNC Bank, National Association (“PNC”), as agent for the lenders, entered into that certain Third Amendment and Joinder to Revolving Credit and Security Agreement (the “Third Amendment”), amending the Revolving Credit and Security Agreement, dated as of August 22, 2014 (as previously amended by the First Amendment to Revolving Credit and Security Agreement, dated as of August 4, 2015 and the Second Amendment to Revolving Credit and Security Agreement, dated as of April 28, 2016, the “Credit Agreement”). The Credit Agreement, as amended by the First Amendment, the Second Amendment and the Third Amendment is herein called the “Credit Facility”). The Third Amendment amended the Credit Agreement to, among other things:
extend the maturity date of the Credit Facility by approximately four years (from August 22, 2019 to August 16, 2023), subject to our retirement or extension of the maturity date of our Second Lien Notes, as defined below, which mature on December 15, 2021;
increase the maximum revolver amount by $10.0 million (from $40.0 million to $50.0 million);
increase the borrowing base percentage of the net orderly liquidation value as it relates to the multi-client data library (not to exceed $28.5 million, up from the previous maximum of $15.0 million for the multi-client data library component);
include the eligible billed receivables of the Mexican Subsidiary up to a maximum of $5.0 million in the borrowing base calculation and joins the Mexican Subsidiary as a borrower thereunder (with a maximum exposure of $5.0 million) and require the equity and assets of the Mexican Subsidiary to be pledged to secure obligations under the facility;
modify the interest rate such that the maximum interest rate remains consistent with the fixed interest rate prior to the Third Amendment (that is, 3.00% per annum for domestic rate loans and 4.00% per annum for LIBOR rate loans), but now lowers the range down to a minimum interest rate of 2.00% for domestic rate loans and 3.00% for LIBOR rate loans based on a leverage ratio for the preceding four-quarter period;
decrease the minimum excess borrowing availability threshold which (if the Borrowers have minimum excess borrowing availability below any such threshold) triggers the agent’s right to exercise dominion over cash and deposit accounts; and
modify the trigger required to test for compliance with the fixed charges coverage ratio.
The maximum amount under the Credit Facility is the lesser of $50.0 million or a monthly borrowing base. The borrowing base under the Credit Facility will increase or decrease monthly using a formula based on certain eligible

31

    

receivables, eligible inventory and other amounts, including a percentage of the net orderly liquidation value of the Borrowers’ multi-client data library. As of March 31, 2020, there was $27.0 million outstanding indebtedness under the Credit Facility and the undrawn remaining borrowing base capacity was $11.1 million. The maturity of the Credit Facility will accelerate to October 31, 2021 if we are unable to repay or extend the maturity of the Second Lien Notes.
The Credit Facility requires us to maintain compliance with various covenants. At March 31, 2020, we were in compliance with all of the covenants under the Credit Facility. For further information regarding our Credit Facility, see above Note 5Long-term Debt” of Footnotes to Condensed Consolidated Financial Statements.
Senior Secured Notes
As of March 31, 2020, 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 are senior secured second-priority obligations guaranteed by the Material U.S. Subsidiaries and the Mexican Subsidiary. Interest on the Second Lien Notes 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 contains certain covenants that, among other things, limits or prohibits our ability and the ability of our 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 in excess of permitted indebtedness, creating liens, paying dividends and making other distributions in respect of our capital stock, redeeming our 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 our subsidiaries are currently restricted subsidiaries.
At March 31, 2020, we were in compliance with all of the covenants under the Second Lien Notes.
On or after December 15, 2019, we 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
 
105.50%
2020
 
103.50%
2021
 
100.00%
Meeting our Liquidity Requirements
At March 31, 2020, our total outstanding indebtedness (including equipment finance leases) was approximately $147.9 million, consisting primarily of approximately $120.6 million outstanding Second Lien Notes, $1.6 million of equipment finance leases and other short-term debt, partially offset by $1.7 million of debt issuance costs. In response to the market uncertainty resulting from COVID-19 pandemic combined with weaker oil and gas prices, in March we drew $27.0 million under our Credit Facility which remains outstanding and in our cash balances.
For the Current Quarter, total capital expenditures, including the investments in our multi-client data library, were $10.2 million. We expect that our total capital expenditures, primarily related to investments in our multi-client data library, this year to be in the range of $20.0 million to $35.0 million, a portion of which will be pre-funded or underwritten by our customers. Whether planned expenditures will actually be spent in 2020 depends on industry conditions, project approvals and schedules, and careful monitoring of our levels of liquidity.
While the duration and extent of COVID-19 is difficult to predict, we recorded its highest first quarter revenues since 2014. A number of large multi-client contracts were closed in the first quarter 2020, some of which were delayed from the fourth quarter 2019, even after E&P market dynamics changed. ION worked closely with clients to assess the effect of E&P budget reductions to our business and took decisive action to proactively manage its business. To mitigate the impact of COVID-19 and oil price volatility, management implemented a plan to preserve cash and manage liquidity as follows:
Scaling down personnel costs and operating expenses by another $18.0 million during the remaining nine months of 2020, building on the over $20.0 million (net of severance expense of $3.1 million) of cuts made in January 2020. These further reductions are primarily through a variety of furlough programs and reduced compensation arrangements across ION’s worldwide workforce. ION executives have taken a 20% base salary reduction and a tiered reduction scheme has been cascaded to the rest of the worldwide workforce. ION’s board of directors has taken a 20%

32

    

reduction in directors’ fees. In addition, ION has curtailed use of external contractors, decreased travel and event costs and implemented new systems and processes that more efficiently support its business.
Reducing capital expenditures to an estimated $20.0 million to $35.0 million (a portion of which will be pre-funded or underwritten by our customers), down from $35.0 million to $50.0 million, to reflect both reduced seismic demand and travel/border restrictions impacting new data acquisition offshore. The majority of capital expenditures relate to investments in multi-client data. This provides flexibility to aggressively reduce cash outflows while shifting to much lower cost reimaging programs.
Applied for various government assistance programs of which $6.9 million has been received in April 2020. Receipt of this $6.9 million allowed us to avoid further staff reductions while supporting our ongoing operations. Additional global government relief of between $2.0 million to $7.0 million may be possible.
Announced the sale of its interest in INOVA Geophysical for $12.0 million that is expected to close during the second half of the year, subject to regulatory approvals and other closing conditions.
Entered into a settlement agreement with WesternGeco ending the uncertainty surrounding the decade-long patent litigation. See Note 8Litigation” for further details.
In addition, we reviewed our debt covenants and expect that we will remain in compliance for the next twelve months.
We believe that the above plan, which includes the use of government assistance programs, along with our existing cash balance, and the undrawn remaining borrowing capacity under our Credit Facility will be sufficient to meet our anticipated cash needs for at least the next twelve months.
Cash Flow from Operations
In the Current Period, we used $7.0 million of cash from operating activities compared to cash generated from operating activities of $15.4 million for the Comparable Period. This was driven primarily by an increase in our accounts receivables related to significantly increased current quarter sales, that a majority are expected to be collected during the second quarter and payments of our payables in the Current Period.
Cash Flow from Investing Activities
Cash used in investing activities was $10.2 million in the Current Period compared to $9.6 million for the Comparable Period. The principal uses of cash in our investing activities during the Current Quarter were $9.7 million invested in our multi-client data library and $0.5 million for capital expenditures related to property, plant and equipment.
The principal use of cash in our investing activities during the Comparable Quarter were $8.8 million invested in our multi-client data library and $0.8 million for capital expenditures related to property, plant and equipment.
Cash Flow from Financing Activities
Net cash provided by financing activities was $26.2 million in the Current Period, compared to net cash used in financing activities of $1.0 million for the Comparable Quarter. Cash provided by financing activities was related to $27.0 million of drawdown on our credit facility partly offset by $0.8 million of payments of long-term debt, including equipment finance leases in the Current Quarter.
The net cash used in financing activities during the Comparable Quarter was related to $0.7 million of payments of long-term debt, including equipment finance leases in the Comparable Quarter.
Inflation and Seasonality
Inflation in recent years has not had a material effect on our cost of goods or labor, or the prices for our products or services. Traditionally, our business has been seasonal, with strongest demand often occurring in the second half of our fiscal year.
Critical Accounting Policies and Estimates
Refer to our Annual Report on Form 10-K for the year ended December 31, 2019, for a complete discussion of our significant accounting policies and estimates.

33

    

Foreign Sales Risks
The majority of our foreign sales are denominated in U.S. dollars. Product revenues are allocated to geographical locations on the basis of the ultimate destination of the equipment, if known. If the ultimate destination of such equipment is not known, product revenues are allocated to the geographical location of initial shipment. Service revenues, which primarily relate to our E&P Technology & Services segment, are allocated based upon the billing location of the customer. For the Current and Comparable Periods, international sales comprised 44% and 81%, respectively, of total net revenues.
 
Three Months Ended March 31,
 
2020
 
2019
Net revenues by geographic area:
(In thousands)
North America
$
31,810

 
$
7,157

Latin America
9,804

 
13,531

Asia Pacific
9,288

 
1,867

Europe
3,810

 
10,392

Middle East
954

 
1,359

Africa
591

 
2,389

Other
157

 
261

Total
$
56,414

 
$
36,956

Credit Risks
For the three months ended March 31, 2020, we had two customers with sales that each exceeded 10% of the Company’s consolidated net revenues. For three months ended March 31, 2019, we had one customer with sales that exceeded 10% of the Company’s consolidated net revenues.
We routinely evaluate the financial stability and creditworthiness of our customers. At March 31, 2020, we had one customer with balances that accounted for 51% of our total combined accounts receivable and unbilled receivable balances. At March 31, 2019, we had two customers with a combined balance that accounted for 26% of our total combined accounts receivable and unbilled receivable balances.
The loss of these customers or deterioration in our relationship with these customers could have a material adverse effect on our results of operations and financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion regarding our quantitative and qualitative disclosures about market risk. There have been no material changes to those disclosures during the Current Quarter.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file with or submit to the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms. Disclosure controls and procedures are defined in Rule 13a-15(e) under the Exchange Act, and they include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2020.
Changes in Internal Control over Financial Reporting. There was not any change in our internal control over financial reporting that occurred during the three months ended March 31, 2020, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

34

    

PART II — OTHER INFORMATION
Item 1. Legal Proceedings
WesternGeco
Settlement
On April 7, 2020, we entered into a settlement agreement with WesternGeco that ended the ongoing litigation.
Pursuant to the settlement agreement, WesternGeco granted us a license to the underlying patents, lifted the injunction that prevented us from manufacturing DigiFIN in the United States and, on April 13, 2020, the District Court permanently dismissed the pending lawsuit.
In exchange, we agreed to pay WesternGeco a settlement based on future revenues from our multi-client data library, consisting of 1) small percentage of 2-D multi-client late sales for a ten-year period, and 2) the transfer of a majority of our revenue share relating to the parties’ existing joint multi-client reimaging programs offshore Mexico. (WesternGeco will receive 90%, instead of 50%, of Net Revenues from the program, except that the revenue share for the Perdido South portion of the program shall remain 50/50). A copy of the settlement agreement is filed as an exhibit to this Form 10-Q.
Background
In June 2009, WesternGeco L.L.C. (“WesternGeco”) filed a lawsuit against us in the United States District Court for the Southern District of Texas (the “District Court”). In the lawsuit, styled WesternGeco L.L.C. v. ION Geophysical Corporation, WesternGeco alleged that we infringed four of their patents concerning marine seismic surveys.
Trial began in July 2012, and the jury returned a verdict in August 2012. The jury found that we infringed the six “claims” contained in four of WesternGeco’s patents by supplying our DigiFIN lateral streamer control units from the United States. (In patent law, a “claim” is a technical legal term; an infringer infringes on one or more “claims” of a given patent.)
In May 2014, the District Court entered a Final Judgment against the Company in the amount of $123.8 million. The Final Judgment also enjoined the Company from supplying DigiFINs or any parts unique to DigiFINs in or from the United States.
As of 2018, we paid WesternGeco the $25.8 million of the Final Judgment (the portion of the judgment representing reasonable royalty damages and enhanced damages, plus interest).
The balance of the judgment against us ($98.0 million, representing lost profits from surveys performed by our customers outside of the United States, plus interest) was vacated by the United States Court of Appeals for the Federal Circuit, and a new trial ordered, to determine what lost profit damages, if any, WesternGeco was entitled to.
As noted above, the lawsuit has been dismissed in accordance with the parties’ settlement agreement.
Our 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. See Note 8Litigation” of Notes to Condensed Consolidated Financial Statements.
Other Litigation
In July 2018, we prevailed in an arbitration that we initiated against the Indian Directorate General of Hydrocarbons (“DGH”) relating to our ability to continue to license data under our IndiaSPAN program.  The DGH filed a lawsuit in court in India to vacate the arbitration award; in connection with that lawsuit, we were ordered to escrow approximately $4.5 million in sales proceeds that we had received in respect of sales from our IndiaSPAN program, pending the outcome of the DGH’s challenge to the arbitration award. We challenged the escrow order, but on December 9, 2019, the Supreme Court of India ordered us to comply with it which would have required us to deposit approximately $4.5 million in escrow in late February 2020. Since then, we received a court order deferring the deadline for depositing the required amount in escrow from late February 2020 to late March 2020. We prepared a petition to file with the court to request that the March 2020 deadline be extended due to the changes to our business, and to the markets, that have been spurred by the COVID-19 pandemic (other than for emergencies) and are not accepting filings. We were unable to file the application because the courts in India are closed due to the pandemic. We served a copy of our draft petition on the DGH’s counsel and intend to file it as soon as the courts re-open and resume accepting filings. We prevailed on the merits in the arbitration and expect to have that award upheld in Indian court, which would result in release of our portion of the escrowed money. The DGH’s request to vacate the arbitration award is scheduled to be heard by the court in India on July 15, 2020.

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We have been named in various other lawsuits or threatened actions that are incidental to our ordinary business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time-consuming, cause us 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. We currently believe that the ultimate resolution of these matters will not have a material adverse effect on our financial condition or results of operations or our liquidity.
Item 1A. Risk Factors
This report contains or incorporates by reference statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). These statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “would,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of such terms or other comparable terminology. Examples of other forward-looking statements contained or incorporated by reference in this report include statements regarding:
future levels of our capital expenditures and of our customers for seismic activities;
future oil and gas commodity prices;
the effects of current and future worldwide economic conditions (particularly in developing countries) and demand for oil and natural gas and seismic equipment and services;
future implication of our negative working capital and shareholders deficit, including future cash needs and availability of cash, to fund our operations and pay our obligations;
the effects of current and future unrest in the Middle East, North Africa and other regions;
the timing of anticipated revenues and the recognition of those revenues for financial accounting purposes;
the effects of ongoing and future industry consolidation;
the timing of future revenue realization of anticipated orders for multi-client survey projects and data processing work in our E&P Technology & Services segment;
future government laws or regulations pertaining to the oil and gas industry, including trade restrictions, embargoes and sanctions imposed by the U.S government;
future government actions that may result in the deprivation of our contractual rights, including the potential for adverse decisions by judicial or administrative bodies in foreign countries with unpredictable or corrupt judicial systems;
expected net revenues, gross margins, income from operations and net income for our services and products;
future seismic industry fundamentals, including future demand for seismic services and equipment;
future benefits to our customers to be derived from new services and products;
future benefits to be derived from our investments in technologies, joint ventures and acquired companies;
future growth rates for our services and products;
the degree and rate of future market acceptance of our new services and products;
expectations regarding E&P companies and seismic contractor end-users purchasing our more technologically-advanced services and products;
anticipated timing and success of commercialization and capabilities of services and products under development and start-up costs associated with their development, including 4Sea and Marlin SmartPorts;
future opportunities for new products and projected research and development expenses;
expected continued compliance with our debt financial covenants;
expectations regarding realization of deferred tax assets;
expectations regarding the impact of the U.S. Tax Cuts and Jobs Act;
anticipated results with respect to certain estimates we make for financial accounting purposes;

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future success dependent on our continuing ability to identify, hire, develop, motivate and retain skilled personnel for all areas of our organization;
breaches to our systems could lead to loss of intellectual property, dissemination of highly confidential information, increased costs and impairment of our ability to conduct our operations; and
compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties.
The COVID-19 pandemic has adversely affected our business; the ultimate effect on our operations and financial condition will depend on future developments that are highly uncertain.
The COVID-19 pandemic has adversely affected the global economy.  It has disrupted supply chains, caused downward pressure on stock prices, depressed the demand for many goods and services, and created significant volatility in the financial markets. The pandemic has also resulted in travel restrictions, business closures and other restrictions on movement and interactions in many locations.  There has been a significant reduction in the demand for oil, and a significant drop in the price of oil. If the reduced demand and reduced prices continue for a prolonged period, our operations, financial condition, and cash flows may be materially and adversely affected.
Our operations also may be adversely affected if significant portions of our workforce are unable to work effectively, whether because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.
We have already implemented workplace restrictions, including guidance for our employees to work remotely if able, in our offices and work sites for health and safety reasons and are continuing to monitor national, state and local government directives where we have operations.  Currently around 95% of our workforce is working from home. The notable exception to this is our manufacturing operations in Louisiana; currently, employees are not restricted by the government from reporting to work in Louisiana, but they are subject to enhanced safety precautions. The extent to which the COVID-19 pandemic will adversely affect our business, results of operations, and financial condition will depend on future developments that are highly uncertain. The course, scope and duration of the pandemic, and actions taken by governmental authorities and other third parties in response to the pandemic, cannot be predicted.
Crude oil prices have declined significantly in 2020 and, if oil prices fail to rebound, our operations and financial condition may be materially and adversely affected.
In the first quarter of 2020, crude oil prices fell dramatically, due in part to significantly decreased demand as a result of the COVID-19 pandemic and an increase in global production.  While members of OPEC and other oil producing countries agreed to certain production cuts in April 2020, these cuts are not expected to offset near-term demand loss attributable to the COVID-19 pandemic. If crude oil prices fail to rebound for a prolonged period, our operations, financial condition, and cash flows may be materially and adversely affected.
We face a significant debt maturity in December 2021.
Our $120.6 million aggregate principal amount of Senior Secured Second-Priority Lien notes mature on December 15, 2021. If our cash flows from operations and other capital resources are insufficient to pay off such notes, we may face substantial liquidity problems and may be forced to reduce or delay investments, dispose of material assets or operations, or issue additional debt or equity. We may not be able to take such actions, if necessary, on commercially reasonable terms or at all. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results or operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchase of Equity Securities by the Issuer and Affiliated Purchasers
During the three months ended March 31, 2020, in connection with the vesting of (or lapse of restrictions on) shares of our restricted stock held by certain employees, we acquired shares of our common stock in satisfaction of tax withholding obligations that were incurred on the vesting date. The date of acquisition, number of shares and average effective acquisition price per share were as follows: 

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Period
 
(a)
Total Number of
Shares Acquired
 
(b)
Average Price Paid Per Share
 
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Program
 
(d)
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Program
January 1, 2020 to January 31, 2020
 

 
$

 
Not applicable
 
Not applicable
February 1, 2020 to February 29, 2020
 

 
$

 
Not applicable
 
Not applicable
March 1, 2020 to March 31, 2020
 
750

 
$
3.52

 
Not applicable
 
Not applicable
Total
 
750

 
$
3.52

 
 
 
 

Item 5. Other Information
None.

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Item 6. Exhibits
3.1
 
 
 
 
3.2
 
 
 
 
4.1
 

 
 
 
4.2
 
 
 
 
4.3
 
 
 
 
4.4
 
 
 
 
10.1
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101
 
The following materials are formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019, (iii) Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020 and 2019, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019, (v) Condensed Consolidated Statements of Stockholders' Deficit for the three months ended March 31, 2020 and 2019 and (vi) Footnotes to Condensed Consolidated Financial Statements.
 
 
 
*

Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K.

 
 
 



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
ION GEOPHYSICAL CORPORATION
 
 
(Registrant)
 
 
 
 
By
 
/s/ Mike Morrison
 
 
 
Mike Morrison
 
 
 
Executive Vice President and Interim Chief Financial Officer
Date: May 7, 2020

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