UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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. 

At July 29,October 28, 2019, there were 14,177,81114,201,650 shares of common stock, par value $0.01 per share, outstanding.

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS FOR FORM 10-Q

Item 1. Financial Statements

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

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ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

(UNAUDITED)

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Basis of Presentation

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.

Significant Accounting Policies

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 not limited to, accounts and unbilled receivables, inventory valuation, sales forecast related to multi-client data libraries, impairment of property, plant and equipment and goodwill and deferred taxes. Actual results could materially differ from those estimates.

The adoption of the standard resulted in ROU assets of $59.5 million and operating lease liabilities of $70.6 million on the condensed consolidated balance sheets as of January 1, 2018. The difference between the ROU assets and operating lease liabilities is due to the derecognition of $11.1 million in deferred rent recorded within other long-term liabilities. There was no

Accounting Pronouncements Not Yet Adopted

(3)    Segment Information

During the first quarter of 2019, the Company consolidated its operating segments from three into two, eliminating the separate presentation of its Ocean Bottom Integrated Technologies segment. This consolidation aligns with the Company’s asset light business model and evolved strategy to commercialize components of the Company’s next generation ocean bottom nodal system, 4Sea™, instead of operating a crew. The Company is offering 4Sea components more broadly to the growing number of Ocean Bottom Seismic (“OBS”) service providers under recurring revenue commercial strategies to enable it to share in the value the technology delivers.strategies. The Company may also license the right to manufacture and use the 4Sea nodal technology to a service provider on a value-based pricing model, such as a royalty stream. Revenues from 4Sea would beare being recognized through the relevant segments, either E&P Technology & Services or Operations Optimization.

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.

Previously reported segment information has been retrospectively revised throughout the condensed consolidated financial statements, as applicable, for all periods presented to reflect the changes in the Company’s reporting segments. These changes did not have an impact on the Company’s condensed consolidated financial statements. These changes did not affect the Company’s reporting units used for allocating and testing goodwill for impairment.

The Company derives revenue from the (i) sale or license of multi-client and proprietary data, imaging services and E&P Advisors consulting 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 in accordance with Accounting Standards Codification Topic 606 (“ASC 606”). Revenue is recognized when (i) a contract is approved by all parties; (ii) the goods or services promised in the contract are identified; (iii) the consideration we expect to receive in exchange for the goods or services promised is determined; (iv) the consideration is allocated to the goods and services in the contract; and (v) control of the promised goods or services is transferred to the customer. The Company applies the practical expedient in ASC 606 and does not disclose information about remaining contractual future performance obligations with an original term of one year or less within the footnotes. The Company does not have any contractual future performance obligations with an original term of over one year.

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 will be recognized in future periods. The following table is a summary of deferred revenues (in thousands):

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

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

Credit Risks

TheFor the nine months ended September 30, 2019 and 2018, the Company had one customer with sales that exceeded 10% of the Company’s consolidated net revenues for the six months ended June 30, 2019. There were no customers with sales that exceeded 10% of the Company’s consolidated net revenues for the six months ended June 30, 2018.revenues. Revenues related to each of these customers are included within the E&P Technology & Services segment.

At JuneSeptember 30, 2019, the Company had two customers with balances that, combined, accounted for 26%40% of the Company’s total combined accounts receivable and unbilled receivable balances. At JuneSeptember 30, 2018, the Company had one customer with a balance that accounted for 11%29% of the Company’s total combined accounts receivable and unbilled receivable balances.

(5)    Long-term Debt

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:

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.  As of JuneSeptember 30, 2019, the undrawn borrowing base availability under the Credit Facility was $38.0$37.6 million, and there was no outstanding indebtedness under the Credit Facility.

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 EBITDA,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 JuneSeptember 30, 2019, 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.

(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 loss per common share is determined based on the assumption that dilutive restricted stock and restricted stock unit awards have vested and outstanding dilutive stock options have been exercised and the aggregate proceeds were used to reacquire common stock using the average price of such common stock for the period. The total number of shares issuable pursuant to outstanding stock options at JuneSeptember 30, 2019 and 2018 of 766,659700,759 and 815,791,804,936, 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 JuneSeptember 30, 2019 and 2018 of 794,994926,917 and 128,131, 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 sixnine months ended JuneSeptember 30, 2019 has been calculated using the Company’s overall estimated annual effective tax rate based on projected 2019 full year results. The Company’s effective tax rates for the three months ended JuneSeptember 30, 2019 and 2018 were (48.8)%822.1% and (0.6)(38.6)%, respectively. The Company’s effective tax rates for the sixnine months ended JuneSeptember 30, 2019 and 2018 were (16.2)(31.7)% and (2.9)(6.9)%, respectively. The Company’s effective tax rates for the three and sixnine months ended JuneSeptember 30, 2019 and 2018 were negatively impacted by the change in valuation allowance related to U.S. operating losses for which the Company cannot currently recognize a tax benefit. The Company’s income tax expense for the sixnine months ended JuneSeptember 30, 2019 of $4.1$7.9 million primarily relates to results from the Company’s non-U.S. businesses.

As of JuneSeptember 30, 2019, 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.

As of JuneSeptember 30, 2019, the Company’s U.S. federal tax returns for 20152016 and subsequent years remain subject to examination by tax authorities. In the Company’s foreign tax jurisdictions, tax returns for 2012 and subsequent years generally remain open to examination.

(8) Litigation

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 itsthe Company’s DigiFIN® lateral streamer control units from the United States, and awarded WesternGeco more than $100 million in damages.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. This included the jury award ($12.5 million in reasonable royalties plus $93.4 million in lost profits), $10.9 million in pre-judgment interest on lost profits, and $9.4 million in supplemental damages that the judge imposed for DigiFIN units that were supplied from the U.S. during the trial and during other periods that the jury did not consider. The Final Judgment also enjoined the Company from supplying DigiFINs or any parts unique to DigiFINs in or from the United States. The Company has conducted its business in compliance with the District Court’s orders, and has reorganized its operations such that it no longer supplies DigiFINs or any parts unique to DigiFINs in or from the United States.

The Final Judgment was vacated after it was appealed to the United States Court of Appeals for the Federal Circuit in Washington, D.C. (the “Court of Appeals”) reversed, in part, the District Court, holding that the lost profits, which were attributable to foreign seismic surveys, were not available to WesternGeco under the Patent Act. The Company had recorded a loss contingency accrual of $123.8 million because of the District Court’s ruling. As a result of the reversal by the Court of Appeals, the Company reduced the loss contingency accrual to $22.0 million.

On January 11, 2019, the Court of Appeals issued its ruling. In its ruling, the Court of Appeals refused to disturb the award of reasonable royalties to WesternGeco (which the Company paid in 2016), and rejectedbut did not reinstate the Company’s “direct competitor” argument, but vacated the District Court’s award of lost profits damages andaward; rather, the Court of Appeals remanded the case back to the District Court to determine whether to hold a new trial as to lost profits. The

The Company may not ultimately prevail in the litigation and it could be required to pay some or all of the lost profits that were awarded by the District Court, plus interest, if the District Court denies a new trial on lost profits, or if a new trial is granted and when a new judgment issues.issues in the new trial. The Company’s assessment that it does not have a loss contingency may change in the future due to developments at the Supreme Court, Court of Appeals, or District Court, and other events, such as changes in applicable law, and such reassessment could lead to the determination that a significant loss contingency is probable, which could have a material effect on the Company’s business, financial condition and results of operations. The Company’s assessments disclosed in this Quarterly Report on Form 10-Q or elsewhere are based on currently available information and involve elements of judgment and significant uncertainties.

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.

(9)    Details of Selected Balance Sheet Accounts

Total depreciation expense, including amortization of assets recorded under equipment finance leases, for the sixnine months ended JuneSeptember 30, 2019 and 2018 was $1.6$2.4 million and $4.2$6.0 million, respectively.

The Company periodically reviewsTotal amortization expense for the value of its multi-client data library assetsnine months ended September 30, 2019 and related liabilities2018 was $29.8 million and makes adjustments, as necessary.$32.5 million, respectively.

Public Equity Offering

On February 21, 2018, the Company completed a public equity offering (“Offering”) of its 1,820,000 shares of common stock at a public offering price of $27.50 per share, and warrants to purchase an additional 1,820,000 shares of the Company’s common stock pursuant to the Registration Statement on Form S-3 (No. 33-213769) filed with the Securities and Exchange Commission under the Securities Act of 1933 and declared effective on December 2, 2016.  The net proceeds from this offering were $47.0 million, including transaction expenses. A portion of the net proceeds were used to retire the Company’s $28.5 million Third Lien Notes in March 2018. The warrants have an exercise price of $33.60 per share, are immediately exercisable and were to expire on March 21, 2019. On February 4, 2019, the Company extended expiration of the warrants to March 21, 2020.

Stock-Based Compensation

The total number of shares issued or reserved for future issuance under outstanding stock options at JuneSeptember 30, 2019 and 2018 was 766,659700,759 and 815,791,804,936, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at JuneSeptember 30, 2019 and 2018 was 794,994926,917 and 128,131, respectively. The total number of stock appreciation rights (“SARs”) awards outstanding at JuneSeptember 30, 2019 and 2018 was 1,063,013963,013 and 530,865, 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 sixnine months ended JuneSeptember 30, 2019:

Cancelled/forfeited SARs relates to the 2015 issuance of 176,528 awards that expired during the current period and also 192,000 forfeited awards of the former Chief Executive Officer. On September 1, 2019, the Company granted 130,000 shares of restricted stock to the new Chief Executive Officer. The vesting of the 65,000 shares is achieved through a time based condition and the vesting of the remaining 65,000 shares is achieved through both a time based condition and performance based condition.

Stock-based compensation expense recognized for the sixnine months ended JuneSeptember 30, 2019 and 2018, totaled $2.8$3.7 million and $2.0$2.5 million, respectively. SARs expense recognized for the sixnine months ended JuneSeptember 30, 2019 and 2018, totaled $2.0$2.7 million and $2.5$2.8 million, respectively.

SARs awards are considered liability awards and as they are ultimately settled in cash. As such, these amounts are incrementally accrued in the liability section of the condensed consolidated balance sheets.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 as of JuneSeptember 30, 2019 and December 31, 2018 using a Monte Carlo simulation model. The following assumptions were used:

The Company determines if an arrangement is a lease at inception by considering whether (1) explicitly or implicitly identified assets have been deployed in the agreement and (2) the Company obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the agreement. Amounts related to operating leases are included in “Right-of-use assets”, “Current maturities of operating lease liabilities” and “Operating lease liabilities, net of current maturities” in the condensed consolidated balance sheets. Amounts related to finance leases are included in “Property, plant and equipment, net”, “Current maturities of long-term debt”, and “Long-term debt, net of current maturities” in the condensed consolidated balance sheets.

The Company leases offices, processing centers, warehouse spaces and, to a lesser extent, certain equipment. These leases have remaining terms of 1 year to 7 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 ROU assets and operating lease liabilities as the Company is not reasonably certain that it will exercise these options.

Total operating lease expense, including short-term lease expense was $5.7$8.9 million and $6.2$12.3 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.

Future maturities of lease obligations follows (in thousands):

The weighted average remaining lease term as of JuneSeptember 30, 2019 and December 31, 2018 was 5.105.00 years and 5.26 years, respectively. The weighted average discount rate used to determine the operating lease liability as of JuneSeptember 30, 2019 and December 31, 2018 was 6.47%6.53% and 6.25%, respectively.

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 rates from 4.3% to 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.

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

Supplemental disclosure of cash flow information are as follows (in thousands):

(13)    Fair Value of Financial Instruments

The carrying amounts of the Company’s long-term debt as of JuneSeptember 30, 2019 and December 31, 2018 were $123.3$122.7 million and $124.7 million, respectively, compared to its fair values of $118.9$118.8 million and $120.7 million as of JuneSeptember 30, 2019 and December 31, 2018, respectively. The fair value of the long-term debtSecond Lien Notes was calculated using Level 1 inputs, including an active market price.