Item 1.
Financial Statements
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
(In thousands, except share data)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
76,670
|
|
|
$
|
84,933
|
|
Accounts receivable, net
|
15,057
|
|
|
44,365
|
|
Unbilled receivables
|
17,730
|
|
|
19,937
|
|
Inventories
|
33,071
|
|
|
32,721
|
|
Prepaid expenses and other current assets
|
13,724
|
|
|
14,807
|
|
Total current assets
|
156,252
|
|
|
196,763
|
|
Property, plant, equipment and seismic rental equipment, net
|
65,785
|
|
|
72,027
|
|
Multi-client data library, net
|
123,581
|
|
|
132,237
|
|
Goodwill
|
25,595
|
|
|
26,274
|
|
Intangible assets, net
|
4,381
|
|
|
4,810
|
|
Other assets
|
3,029
|
|
|
2,977
|
|
Total assets
|
$
|
378,623
|
|
|
$
|
435,088
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current maturities of long-term debt
|
$
|
32,933
|
|
|
$
|
7,912
|
|
Accounts payable
|
20,907
|
|
|
29,799
|
|
Accrued expenses
|
29,001
|
|
|
34,287
|
|
Accrued multi-client data library royalties
|
21,790
|
|
|
25,045
|
|
Deferred revenue
|
6,021
|
|
|
6,560
|
|
Total current liabilities
|
110,652
|
|
|
103,603
|
|
Long-term debt, net of current maturities
|
148,410
|
|
|
175,080
|
|
Other long-term liabilities
|
44,215
|
|
|
44,365
|
|
Total liabilities
|
303,277
|
|
|
323,048
|
|
Equity:
|
|
|
|
Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 10,580,058 and 10,702,689 shares at March 31, 2016 and December 31, 2015, respectively, net of treasury stock
|
106
|
|
|
107
|
|
Additional paid-in capital
|
895,481
|
|
|
894,715
|
|
Accumulated deficit
|
(794,545
|
)
|
|
(759,531
|
)
|
Accumulated other comprehensive loss
|
(16,243
|
)
|
|
(14,781
|
)
|
Treasury stock, at cost, 508,427 and 353,124 shares at March 31, 2016 and December 31, 2015 respectively
|
(9,515
|
)
|
|
(8,551
|
)
|
Total stockholders’ equity
|
75,284
|
|
|
111,959
|
|
Noncontrolling interest
|
62
|
|
|
81
|
|
Total equity
|
75,346
|
|
|
112,040
|
|
Total liabilities and equity
|
$
|
378,623
|
|
|
$
|
435,088
|
|
See accompanying
Footnotes to Unaudited Condensed Consolidated Financial Statements
.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
(In thousands, except per share data)
|
Service revenues
|
$
|
13,156
|
|
|
$
|
20,080
|
|
|
Product revenues
|
9,509
|
|
|
20,498
|
|
|
Total net revenues
|
22,665
|
|
|
40,578
|
|
|
Cost of services
|
25,837
|
|
|
45,534
|
|
|
Cost of products
|
5,758
|
|
|
10,832
|
|
|
Gross loss
|
(8,930
|
)
|
|
(15,788
|
)
|
|
Operating expenses:
|
|
|
|
|
Research, development and engineering
|
5,609
|
|
|
7,720
|
|
|
Marketing and sales
|
4,010
|
|
|
7,833
|
|
|
General, administrative and other operating expenses
|
11,580
|
|
|
15,348
|
|
|
Total operating expenses
|
21,199
|
|
|
30,901
|
|
|
Loss from operations
|
(30,129
|
)
|
|
(46,689
|
)
|
|
Interest expense, net
|
(4,734
|
)
|
|
(4,625
|
)
|
|
Other income (expense), net
|
120
|
|
|
(3,219
|
)
|
|
Loss before income taxes
|
(34,743
|
)
|
|
(54,533
|
)
|
|
Income tax expense
|
293
|
|
|
983
|
|
|
Net loss
|
(35,036
|
)
|
|
(55,516
|
)
|
|
Net loss attributable to noncontrolling interests
|
22
|
|
|
252
|
|
|
Net loss attributable to ION
|
$
|
(35,014
|
)
|
|
$
|
(55,264
|
)
|
|
Net loss per share:
|
|
|
|
|
Basic
|
$
|
(3.30
|
)
|
|
$
|
(5.04
|
)
|
|
Diluted
|
$
|
(3.30
|
)
|
|
$
|
(5.04
|
)
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
Basic
|
10,600
|
|
|
10,971
|
|
|
Diluted
|
10,600
|
|
|
10,971
|
|
|
See accompanying
Footnotes to Unaudited Condensed Consolidated Financial Statements
.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Net loss
|
$
|
(35,036
|
)
|
|
$
|
(55,516
|
)
|
Other comprehensive loss, net of taxes, as appropriate:
|
|
|
|
Foreign currency translation adjustments
|
(1,462
|
)
|
|
(1,345
|
)
|
Total other comprehensive loss, net of taxes
|
(1,462
|
)
|
|
(1,345
|
)
|
Comprehensive net loss
|
(36,498
|
)
|
|
(56,861
|
)
|
Comprehensive loss attributable to noncontrolling interest
|
22
|
|
|
252
|
|
Comprehensive net loss attributable to ION
|
$
|
(36,476
|
)
|
|
$
|
(56,609
|
)
|
See accompanying
Footnotes to Unaudited Condensed Consolidated Financial Statements
.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(35,036
|
)
|
|
$
|
(55,516
|
)
|
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
|
|
|
|
Depreciation and amortization (other than multi-client data library)
|
5,672
|
|
|
6,525
|
|
Amortization of multi-client data library
|
7,139
|
|
|
5,289
|
|
Stock-based compensation expense
|
743
|
|
|
1,480
|
|
Deferred income taxes
|
54
|
|
|
(12
|
)
|
Change in operating assets and liabilities:
|
|
|
|
Accounts receivable
|
29,211
|
|
|
74,388
|
|
Unbilled receivables
|
2,212
|
|
|
(1,523
|
)
|
Inventories
|
350
|
|
|
(468
|
)
|
Accounts payable, accrued expenses and accrued royalties
|
(10,558
|
)
|
|
(39,144
|
)
|
Deferred revenue
|
(527
|
)
|
|
3,137
|
|
Other assets and liabilities
|
3,219
|
|
|
(862
|
)
|
Net cash provided by (used in) operating activities
|
2,479
|
|
|
(6,706
|
)
|
Cash flows from investing activities:
|
|
|
|
Cash invested in multi-client data library
|
(6,327
|
)
|
|
(9,088
|
)
|
Purchase of property, plant, equipment and seismic rental assets
|
(266
|
)
|
|
(11,994
|
)
|
Other investing activities
|
—
|
|
|
257
|
|
Net cash used in investing activities
|
(6,593
|
)
|
|
(20,825
|
)
|
Cash flows from financing activities:
|
|
|
|
Repurchase of common stock
|
(964
|
)
|
|
—
|
|
Payments on notes payable and long-term debt
|
(2,212
|
)
|
|
(2,066
|
)
|
Costs associated with issuance of debt
|
(1,315
|
)
|
|
—
|
|
Other financing activities
|
13
|
|
|
31
|
|
Net cash used in financing activities
|
(4,478
|
)
|
|
(2,035
|
)
|
Effect of change in foreign currency exchange rates on cash and cash equivalents
|
329
|
|
|
396
|
|
Net decrease in cash and cash equivalents
|
(8,263
|
)
|
|
(29,170
|
)
|
Cash and cash equivalents at beginning of period
|
84,933
|
|
|
173,608
|
|
Cash and cash equivalents at end of period
|
$
|
76,670
|
|
|
$
|
144,438
|
|
See accompanying
Footnotes to Unaudited Condensed Consolidated Financial Statements
.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed consolidated balance sheet of ION Geophysical Corporation and its subsidiaries (collectively referred to as the “Company” or “ION,” unless the context otherwise requires) at
December 31, 2015
has been derived from the Company’s audited consolidated financial statements at that date.
The condensed consolidated balance sheet at March 31, 2016, and the condensed consolidated statements of operations, comprehensive loss and cash flows for the three months ended March 31, 2016 and 2015, are unaudited.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the
three months ended March 31, 2016
are not necessarily indicative of the operating results for a full year or of future operations.
These condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with accounting principles generally accepted in the United States have been omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the
year ended December 31, 2015
.
(2)
Segment Information
The Company operates through
four
business segments – Solutions, Systems, Software and Ocean Bottom Services. The Company measures segment operating results based on income (
loss
) from operations. In addition, the Company has an equity ownership interest in its INOVA Geophysical joint venture. As of December 31, 2014, the Company wrote down its investment in INOVA Geophysical to
zero
and has suspended recording its share of losses in the joint venture. If at a future date, the Company’s cumulative share of earnings during the period of suspension becomes greater than its share of losses during the same period, the Company will begin to record its share of earnings in the joint venture as long as its net equity method investment remains greater than zero.
The following table is a summary of segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net revenues:
|
|
|
|
Solutions:
|
|
|
|
New Venture
|
$
|
3,306
|
|
|
$
|
5,029
|
|
Data Library
|
4,272
|
|
|
2,137
|
|
Total multi-client revenues
|
7,578
|
|
|
7,166
|
|
Data Processing
|
5,440
|
|
|
11,833
|
|
Total
|
$
|
13,018
|
|
|
$
|
18,999
|
|
Systems:
|
|
|
|
Towed Streamer
|
$
|
2,457
|
|
|
$
|
5,165
|
|
Other
|
2,902
|
|
|
7,604
|
|
Total
|
$
|
5,359
|
|
|
$
|
12,769
|
|
Software:
|
|
|
|
Software Systems
|
$
|
4,150
|
|
|
$
|
7,729
|
|
Services
|
138
|
|
|
1,081
|
|
Total
|
$
|
4,288
|
|
|
$
|
8,810
|
|
Ocean Bottom Services
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
$
|
22,665
|
|
|
$
|
40,578
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Gross profit (loss):
|
|
|
|
Solutions
|
$
|
(9,773
|
)
|
|
$
|
(10,392
|
)
|
Systems
|
1,363
|
|
|
4,559
|
|
Software
|
2,526
|
|
|
5,590
|
|
Ocean Bottom Services
|
(3,046
|
)
|
|
(15,545
|
)
|
Total
|
$
|
(8,930
|
)
|
|
$
|
(15,788
|
)
|
Gross margin:
|
|
|
|
Solutions
|
(75
|
)%
|
|
(55
|
)%
|
Systems
|
25
|
%
|
|
36
|
%
|
Software
|
59
|
%
|
|
63
|
%
|
Ocean Bottom Services
|
—
|
%
|
|
—
|
%
|
Total
|
(39
|
)%
|
|
(39
|
)%
|
Income (loss) from operations:
|
|
|
|
Solutions
|
$
|
(15,477
|
)
|
|
$
|
(21,778
|
)
|
Systems
|
(2,509
|
)
|
|
1,014
|
|
Software
|
996
|
|
|
3,335
|
|
Ocean Bottom Services
|
(4,214
|
)
|
|
(17,559
|
)
|
Corporate and other
|
(8,925
|
)
|
|
(11,701
|
)
|
Loss from operations
|
(30,129
|
)
|
|
(46,689
|
)
|
Interest expense, net
|
(4,734
|
)
|
|
(4,625
|
)
|
Other income (expense), net
|
120
|
|
|
(3,219
|
)
|
Loss before income taxes
|
$
|
(34,743
|
)
|
|
$
|
(54,533
|
)
|
|
|
|
|
(3)
Long-term Debt
|
|
|
|
|
|
|
|
|
|
Obligations (in thousands)
|
|
March 31, 2016
|
|
December 31, 2015
|
Senior secured second-priority notes
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
Equipment capital leases
|
|
8,075
|
|
|
9,762
|
|
Other debt
|
|
1,246
|
|
|
1,558
|
|
Costs associated with issuances of debt
(1)
|
|
(2,978
|
)
|
|
(3,328
|
)
|
Total
|
|
181,343
|
|
|
182,992
|
|
Current portion of long-term debt and lease obligations
|
|
(32,933
|
)
|
|
(7,912
|
)
|
Non-current portion of long-term debt and lease obligations
|
|
$
|
148,410
|
|
|
$
|
175,080
|
|
|
|
(1)
|
Represents presentation of debt issuance costs associated with debt liability to be presented as a direct deduction from the carrying amount of the debt liability.
|
|
|
|
|
|
|
|
|
|
|
Pro forma impact of bond exchange program in (thousands)
|
|
April 28, 2016
|
|
March 31, 2016
|
Senior secured second-priority notes
(maturing December 15, 2021)
|
|
$
|
120,569
|
|
|
$
|
175,000
|
|
Senior secured third-priority notes
(maturing May 15, 2018)
|
|
28,497
|
|
|
—
|
|
Total senior secured second and third-priority notes
(1)
|
|
$
|
149,066
|
|
|
$
|
175,000
|
|
|
|
(1)
|
For further discussion see
“S
enior Secured Notes”
below.
|
Revolving
Credit Facility
In August 2014, ION and its material U.S. subsidiaries, ION Exploration Products (U.S.A.), Inc., I/O Marine Systems, Inc. and GX Technology Corporation (collectively, the “
Subsidiary Borrowers
”), and together with the Company, collectively, the “Borrowers”) entered into a Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), as agent (the “Original Credit Agreement”), which was amended by the First Amendment to Revolving Credit and Security Agreement in August 2015 (the “First Amendment”) and the Second Amendment (as defined below) (the Original Credit Agreement, as amended by the First Amendment, and the Second Amendment, the “
Credit Facility
”). For a complete discussion of the terms, available credit and security of this
Credit Facility
, prior to the effectiveness of the Second Amendment, see Footnote 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2015
. T
he Credit Facility is available to provide for the Borrowers’ general corporate needs, including working capital requirements, capital expenditures, surety deposits and acquisition financing. The maximum amount of the revolving line of credit under the
Credit Facility
is the lesser of
$40.0 million
or a monthly borrowing base (which may be recalculated more frequently under certain circumstances).
On April 28, 2016, the Borrowers and PNC entered into a second amendment (the “Second Amendment”) to the Credit Facility. The Second Amendment, among other things:
|
|
•
|
increases the applicable margin for loans by
0.50%
per annum (from
2.50%
per annum to
3.00%
per annum for alternate base rate loans and from
3.50%
per annum to
4.00%
per annum for LIBOR-based loans);
|
|
|
•
|
increases the minimum excess availability threshold to avoid triggering the agent’s rights to exercise dominion over cash and deposit accounts and increases certain of the thresholds upon which such dominion ceases;
|
|
|
•
|
increases the minimum liquidity threshold to avoid triggering the Company’s obligation to calculate and comply with the existing fixed charge coverage ratio and increases certain of the thresholds upon which such required calculation and compliance cease;
|
|
|
•
|
establishes a reserve that reduces the amount available to be borrowed by the aggregate amount owing under all Third Lien Notes that remain outstanding (if any) on or after February 14, 2018 (i.e.,
90
days prior to the stated maturity of the Third Lien Notes);
|
|
|
•
|
increases the maximum amount of certain permitted junior indebtedness to
$200.0 million
(from $
175.0 million
);
|
|
|
•
|
incorporates technical and conforming changes to reflect that the Second Lien Notes and the remaining Third Lien Notes (and any permitted refinancing thereof or subsequently incurred replacement indebtedness meeting certain requirements) constitute permitted indebtedness;
|
|
|
•
|
clarifies the circumstances and mechanics under which the Company may prepay, repurchase or redeem the Second Lien Notes, the remaining Third Lien Notes and certain other junior indebtedness;
|
|
|
•
|
modifies the cross-default provisions to incorporate defaults under the Second Lien Notes, the remaining Third Lien Notes and certain other junior indebtedness; and
|
|
|
•
|
eliminates the potential early commitment termination date and early maturity date that would otherwise have occurred ninety (
90
) days prior the maturity date of the Third Lien Notes if any of the Third Lien Notes then remained outstanding.
|
The borrowing base under the Credit Facility will increase or decrease monthly using a formula based on certain eligible receivables, eligible inventory and other amounts, including a percentage of the net orderly liquidation value of the Borrowers’ multi-client data library (not to exceed
$15.0 million
for the multi-client data library data component). As of March 31, 2016, the borrowing base under the Credit Facility was
$25.8 million
, and there was no outstanding indebtedness under the Credit Facility. The Credit Facility is scheduled to mature on August 22, 2019.
The obligations of Borrowers under the Credit Facility are secured by a first-priority security interest in
100%
of the stock of the Subsidiary Borrowers and
65%
of the equity interest in ION International Holdings L.P. and by substantially all other assets of the Borrowers.
The Credit Facility contains covenants that, among other things, limit or prohibit the Borrowers, subject to certain exceptions and qualifications, from incurring additional indebtedness (including capital lease obligations), repurchasing equity, paying dividends or distributions, granting or incurring additional liens on the Borrowers’ properties, pledging shares of the Borrowers’ subsidiaries, entering into certain merger transactions, entering into transactions with the Company’s affiliates, making certain sales or other dispositions of the Borrowers’ assets, making certain investments, acquiring other businesses and entering into sale-leaseback transactions with respect to the Borrowers’ property.
The Credit Facility, requires that ION and the
Subsidiary Borrowers
maintain a minimum fixed charge coverage ratio of
1.1
to 1.0 as of the end of each fiscal quarter during the existence of a covenant testing trigger event. The fixed charge coverage ratio is defined as the ratio of (i) ION’s EBITDA, minus unfunded capital expenditures made during the relevant period, minus distributions (including tax distributions) and dividends made during the relevant period, minus cash taxes paid during the relevant period, to (ii) certain debt payments made during the relevant period. A covenant testing trigger event occurs upon (a) the occurrence and continuance of an event of default under the Credit Facility or (b) the failure to maintain a measure of liquidity greater than (i)
$7.5 million
for five consecutive business days or (ii)
$6.5 million
on any given business day. Liquidity, as defined in the Credit Facility, is the Company’s excess availability to borrow (
$25.8 million
at March 31, 2016) plus the aggregate amount of unrestricted cash held by ION, the Subsidiary Borrowers and their domestic subsidiaries.
At
March 31, 2016
, the Company was in compliance with all of the covenants under the Credit Facility.
The Credit Facility contains customary event of default provisions (including a “change of control” event affecting ION), the occurrence of which could lead to an acceleration of the Company’s obligations under the Credit Facility as amended.
Senior Secured Notes
In May 2013, the Company sold
$175.0 million
aggregate principal amount of
8.125%
Senior Secured Second-Priority Notes due 2018 (
the “Third Lien Notes
”) in a private offering pursuant to an Indenture dated as of May 13, 2013 (the Third Lien Notes Indenture”). Prior to the completion of the Exchange Offer (as defined below) and Consent Solicitation (as defined below) on April 28, 2016, the Third Lien Notes were senior secured second-priority obligations of the Company. After giving effect to the Exchange Offer and Consent Solicitation, the remaining aggregate principal amount of approximately
$28.5 million
of outstanding Third Lien Notes became senior secured third-priority obligations of the Company subordinated to the liens securing all senior and second priority indebtedness of the Company, including under the Credit Facility and Second Lien Notes (defined below).
Pursuant to the Exchange Offer and Consent Solicitation, the Company (i) issued approximately
$120.6 million
in aggregate principal amount of the Company’s new
9.125%
Senior Secured Second Priority Notes due 2021 (the “Second Lien Notes,” and collectively with the Third Lien Notes, the “Notes”) and
1,205,477
shares of the Company’s common stock in exchange for approximately
$120.6 million
in aggregate principal amount of Third Lien Notes, and (ii) purchased approximately
$25.9 million
in aggregate principal amount of Third Lien Notes in exchange for aggregate cash consideration totaling approximately
$15.0 million
, plus accrued and unpaid interest on the Third Lien Notes from the applicable last interest payment date to, but not including, April 28, 2016.
After giving effect to the Exchange Offer and Consent Solicitation, the aggregate principal amount of the Third Lien Notes remaining outstanding was approximately
$28.5 million
and the aggregate principal amount of Second Lien Notes outstanding was approximately
$120.6 million
. See “
Subsequent Events - Exchange Offer
” below.
The Third Lien Notes are guaranteed by the Company’s material U.S. subsidiaries, GX Technology Corporation, ION Exploration Products (U.S.A.), Inc. and I/O Marine Systems, Inc. (the “Guarantors”), and mature on May 15, 2018. Interest on the Third Lien Notes accrues at the rate of
8.125%
per annum and will be payable semiannually in arrears on May 15 and November 15 of each year during their term. In May 2014, the holders of the Third Lien Notes exchanged their Third Lien Notes for a like principal amount of registered Third Lien Notes with the same terms. For a complete discussion of the terms and security the Third Lien Notes in effect prior to the completion of the Exchange Offer and Consent Solicitation on April 28, 2016, see Footnote 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Prior to the completion of the Exchange Offer and Consent Solicitation, the Third Lien Notes Indenture contained certain covenants that, among other things, limited or prohibited the Company’s ability and the ability of its restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Third Lien Notes, including among other things, incurring additional indebtedness, creating liens, paying dividends and making other distributions in respect of the Company’s capital stock, redeeming the Company’s capital stock, making investments or certain other restricted payments, selling certain kinds of assets, entering into transactions with affiliates, and effecting mergers or consolidations. These and other restrictive covenants contained in the Third Lien Notes Indenture are subject to certain exceptions and qualifications. After giving effect to the Exchange Offer and Consent Solicitation, the Third Lien Notes Indenture was amended to, among other things, provide for the release of the second priority security interest in the collateral securing the remaining Third Lien Notes and the grant of a third priority security interest in the collateral, subordinate to liens securing all senior and second priority indebtedness of the Company, including the Credit Facility and the Second Lien Notes, and eliminate substantially all of the restrictive covenants and certain events of default pertaining to the remaining Third Lien Notes.
As of March 31, 2016, the Company was in compliance with the covenants with respect to the Third Lien Notes.
On or after May 15, 2015, the Company may on one or more occasions redeem all or a part of the Third Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Third Lien Notes redeemed during the twelve-month period beginning on May 15th of the years indicated below:
|
|
|
|
Date
|
|
Percentage
|
2015
|
|
104.063%
|
2016
|
|
102.031%
|
2017 and thereafter
|
|
100.000%
|
The Second Lien Notes are senior secured second-priority obligations guaranteed by the Guarantors. The Second Lien Notes mature on December 15, 2021. Interest on the Second Lien Notes accrues at the rate of
9.125%
per annum and is payable semiannually in arrears on June 15 and December 15 of each year during their term, beginning June 15, 2016, except that the interest payment otherwise payable on June 15, 2021 will be payable on December 15, 2021.
The indenture dated April 28, 2016 governing the Second Lien Notes (the “Second Lien Notes Indenture”) contains certain covenants that, among other things, limits or prohibits the Company’s ability and the ability of its restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Second Lien Notes, including among other things, incurring additional indebtedness, creating liens, paying dividends and making other distributions in respect of the Company’s capital stock, redeeming the Company’s capital stock, making investments or certain other restricted payments, selling certain kinds of assets, entering into transactions with affiliates, and effecting mergers or consolidations. These and other restrictive covenants contained in the Second Lien Notes Indenture are subject to certain exceptions and qualifications. All of the Company’s subsidiaries are currently restricted subsidiaries.
On or after December 15, 2019, the Company may on one or more occasions redeem all or a part of the Second Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Second Lien Notes redeemed during the twelve-month period beginning on December 15th of the years indicated below:
|
|
|
|
Date
|
|
Percentage
|
2019
|
|
105.500%
|
2020
|
|
103.500%
|
2021 and thereafter
|
|
100.000%
|
For additional information regarding the terms and security of the Third Lien Notes and related Third Lien Notes Indenture and intercreditor agreement in effect prior to the completion of the Exchange Offer and Consent Solicitation, see the Company’s Current Report on Form 8-K filed with the SEC on May 13, 2013. For additional information regarding the terms and security of the Third Lien Notes after giving effect to the Exchange Offer and Consent Solicitation, the amendments to the Third Lien Notes Indenture, the terms and security of the Second Lien Notes, the Second Lien Notes Indenture and the related intercreditor agreement, see the Company’s Current Report on Form 8-K filed with the SEC on April 28, 2016.
Subsequent Events
Exchange Offer
On April 28, 2016, the Company successfully completed the previously announced exchange offer (the “Exchange Offer”) and consent solicitation (the “Consent Solicitation”) related to the Third Lien Notes. The Company did not receive any cash proceeds in connection with the Exchange Offer and Consent Solicitation.
Under the terms of the Exchange Offer, for each
$1,000
principal amount of Third Lien Notes validly tendered for exchange and not validly withdrawn by an eligible holder (an “Exchange Participant”) prior to 11:59 P.M., New York City time, on April 25, 2016, and accepted for exchange by the Company, the Company offered the consideration (the “Exchange Consideration”) of (i)
$1,000
principal amount of Second Lien Notes plus (ii) either (a) for Third Lien Notes tendered at or prior to 4:59 P.M., New York City time, on April 15, 2016 (the “Extended Early Tender Deadline”), ten (
10
) shares of the Company’s common stock (the “Early Stock Consideration”), or (b) for Third Lien Notes tendered after the Extended Early Tender Deadline, seven (
7
) shares of the Company’s common stock (the “Stock Consideration”) (such shares issued as the Early Stock Consideration or the Stock Consideration, together with the Second Lien Notes, the “Exchange Securities”), upon the terms and subject to the conditions set forth in the Company’s confidential Offer to Exchange and related Consent and Letter of Transmittal, each dated March 28, 2016 (the “Offer Documents”).
As part of the Exchange Offer, each Exchange Participant had the opportunity to tender all or a portion of its Third Lien Notes for a cash payment in lieu of the Exchange Consideration upon the terms and subject to the conditions set forth in the Offer Documents (the “Cash Tender Option”). The aggregate amount of cash consideration that could be paid by the Company for tendered
Third Lien Notes accepted for purchase pursuant to the Cash Tender Option was approximately
$15.0 million
plus accrued and unpaid interest to, but not including, the settlement date of the Exchange Offer (collectively, the “Cash Tender Cap”).
Concurrently with the Exchange Offer, the Company solicited consents from eligible holders to proposed amendments to the Third Lien Notes Indenture (the “Proposed Amendments”). The Proposed Amendments, among other things, provide for the release of the second priority security interest in the collateral securing the Third Lien Notes and the grant of a third priority security interest in the collateral, subordinate to liens securing all the Company’s senior and second priority indebtedness, including the Credit Facility and the Second Lien Notes, and eliminate substantially all of the restrictive covenants and certain events of default pertaining to the Third Lien Notes.
The Exchange Offer, including the Cash Tender Option, and the Consent Solicitation expired at 11:59 P.M., New York City time, on April 28, 2016. In total, the Company accepted for exchange approximately
$146.5 million
in aggregate principal amount of the Third Lien Notes, or approximately
83.72%
of the
$175 million
outstanding aggregate principal amount of the Third Lien Notes, validly tendered and not withdrawn in the Exchange Offer. The Third Lien Notes validly tendered and not withdrawn in the Exchange Offer were accepted by the Company.
Because the Company received the necessary consents to effect the Proposed Amendments, any Third Lien Notes not validly tendered pursuant to the Exchange Offer remain outstanding and the holders are subject to the terms of the supplemental indenture implementing the Proposed Amendments. No consideration was paid to holders of Third Lien Notes in connection with the Consent Solicitation. After giving effect to the Exchange Offer and Consent Solicitation, the aggregate principal amount of the Third Lien Notes remaining outstanding was approximately
$28.5 million
as of April 28, 2016, and such Third Lien Notes are secured on a third priority basis subordinated to the liens securing all senior and second priority indebtedness of the Company, including under the Credit Facility and Second Lien Notes.
In exchange for approximately
$120.6 million
in aggregate principal amount of Third Lien Notes, the Company issued approximately
$120.6 million
aggregate principal amount of Second Lien Notes and
1,205,477
shares of common stock, including
1,204,980
shares issued as Early Stock Consideration and
497
shares issued as Stock Consideration. The Company utilized
508,464
of treasury shares towards the total
1,205,477
shares issued. The securities issued in the Exchange Offer were issued in reliance on an exemption from registration set forth in Section 4(a)(2) of the Securities Act. The Company received no cash consideration in exchange for the issuance of the Exchange Securities.
The Cash Tender Option was fully subscribed. Pursuant to the terms of the Exchange Offer, the Company accepted for purchase tendered Third Lien Notes at the lowest bid prices until the Cash Tender Cap was reached, subject to proration. In exchange for aggregate cash consideration totaling approximately
$15.0 million
, the Company purchased approximately
$25.9 million
in aggregate principal amount of Third Lien Notes. The Company also paid in cash accrued and unpaid interest on Third Lien Notes accepted for purchase in the Exchange Offer from the applicable last interest payment date to, but not including, April 28, 2016.
(4)
Net Loss per Share
Basic net
loss
per common share is computed by dividing net
loss
applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted net
loss
per common share is determined based on the assumption that dilutive restricted stock and restricted stock unit awards have vested and outstanding dilutive stock options have been exercised and the aggregate proceeds were used to reacquire common stock using the average price of such common stock for the period. The total number of shares issued or reserved for future issuance under outstanding stock options
at March 31, 2016 and 2015
was
623,902
and
634,818
, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding
at March 31, 2016 and 2015
was
253,738
and
100,298
, respectively. The foregoing share numbers have been retroactively adjusted to reflect the one-for-fifteen reverse stock split completed on February 4, 2016. All outstanding stock options for the
three months ended March 31, 2016
were anti-dilutive.
The following table summarizes the computation of basic and diluted net
loss
per common share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net loss attributable to ION
|
$
|
(35,014
|
)
|
|
$
|
(55,264
|
)
|
Weighted average number of common shares outstanding
|
10,600
|
|
|
10,971
|
|
Weighted average number of diluted common shares outstanding
|
10,600
|
|
|
10,971
|
|
Basic net loss per share
|
$
|
(3.30
|
)
|
|
$
|
(5.04
|
)
|
Diluted net loss per share
|
$
|
(3.30
|
)
|
|
$
|
(5.04
|
)
|
(5)
Income Taxes
The Company maintains a valuation allowance for substantially all of its deferred tax assets. The valuation allowance is calculated in accordance with the provisions of the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 740
“Income Taxes,”
which requires that a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. In the event the Company’s expectations of future operating results change, the valuation allowance may need to be adjusted downward. As of
March 31, 2016
, the Company has
no
unreserved U.S. deferred tax assets.
The provision for the
three months ended March 31, 2016
has been calculated based on the actual tax expense incurred for those periods. Given the current uncertainty in expected income generated in various foreign jurisdictions, where tax rates can vary greatly, the Company’s actual tax rate is the best estimate of year-to-date tax expense. The Company’s effective tax rates for the
three months ended March 31, 2016
and
2015
were
(0.8)%
and
(1.8)%
, respectively. The Company’s effective tax rates for the
three months ended March 31, 2016
was impacted by the change in valuation allowance related to operating losses for which the Company cannot currently recognize a tax benefit. The Company’s income tax expense for the
three months ended March 31, 2016
of
$0.3 million
primarily relates to income from the Company’s non-U.S. businesses. This foreign tax expense has not been offset by the tax benefits on losses within the U.S. and other jurisdictions, from which the Company cannot currently benefit; therefore negatively impacting the Company’s effective tax rate.
The Company has approximately
$1.3 million
of unrecognized tax benefits and does not expect to recognize significant increases in unrecognized tax benefits during the next 12-month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.
As of
March 31, 2016
, the Company’s U.S. federal tax returns for 2012 and subsequent years remain subject to examination by tax authorities. The Company is no longer subject to U.S. Internal Revenue Service (“IRS”) examination for periods prior to 2012, although carryforward attributes that were generated prior to 2012 may still be adjusted upon examination by the IRS if they either have been or will be used in an open year. In the Company’s foreign tax jurisdictions, tax returns for 2010 and subsequent years generally remain open to examination.
(6)
Litigation
WesternGeco
In June 2009, WesternGeco L.L.C. (“WesternGeco”) filed a lawsuit against the Company in the United States District Court for the Southern District of Texas, Houston Division. In the lawsuit, styled
WesternGeco L.L.C. v. ION Geophysical Corporation
, WesternGeco alleged that the Company had infringed several method and apparatus claims contained in
four
of its United States patents regarding marine seismic streamer steering devices.
The trial began in July 2012. A verdict was returned by the jury in August 2012, finding that the Company infringed the claims contained in the
four
patents by supplying its DigiFIN
®
lateral streamer control units and the related software from the United States and awarded WesternGeco the sum of
$105.9 million
in damages, consisting of
$12.5 million
in reasonable royalty and
$93.4 million
in lost profits.
In June 2013, the presiding judge entered a Memorandum and Order, ruling that WesternGeco is entitled to be awarded supplemental damages for the additional DigiFIN units that were supplied from the United States before and after the trial that were not included in the jury verdict due to the timing of the trial. In October 2013, the judge entered another Memorandum and Order, ruling on the number of DigiFIN units that are subject to supplemental damages and also ruling that the supplemental damages applicable to the additional units should be calculated by adding together the jury’s previous reasonable royalty and lost profits damages awards per unit, resulting in supplemental damages of
$73.1 million
.
In April 2014, the judge entered another Order, ruling that lost profits should not have been included in the calculation of supplemental damages in the October 2013 Memorandum and Order and reducing the supplemental damages award in the case from
$73.1 million
to
$9.4 million
. In the Order, the judge also further reduced the damages award in the case by
$3.0 million
to reflect a settlement and license that WesternGeco entered into with a customer of the Company that had purchased and used DigiFIN units that were also included in the damage amounts awarded against the Company.
In May 2014, the judge signed and entered a Final Judgment in the amount of
$123.8 million
related to the case. The Final Judgment also included an injunction that enjoins the Company, its agents and anyone acting in concert with it, from supplying in or from the United States the DigiFIN product or any parts unique to the DigiFIN product, or any instrumentality no more than colorably different from any of these products or parts, for combination outside of the United States. The Company has conducted its business in compliance with the district court’s orders in the case, and the Company has reorganized its operations such that it no longer supplies the DigiFIN product or any parts unique to the DigiFIN product in or from the United States.
The Company and WesternGeco each appealed the Final Judgment to the United States Court of Appeals for the Federal Circuit in Washington, D.C. On July 2, 2015, the Court of Appeals reversed in part the judgment, holding the district court erred by including lost profits in the Final Judgment. Lost profits were
$93.4 million
and prejudgment interest was approximately
$10.9 million
of the
$123.8 million
Final Judgment. Pre-judgment interest on the lost profits portion will be treated in the same way as the lost profits. Post-judgment interest will likewise be treated in the same fashion. On July 29, 2015, WesternGeco filed a petition for rehearing en banc before the Court of Appeals. On October 30, 2015 the Court of Appeals denied WesternGeco’s petition for rehearing en banc. On February 26, 2016, WesternGeco filed a petition for writ of certiorari by the Supreme Court. The Company filed its response on April 27, 2016. The Supreme Court has not yet indicated whether or not it will accept WesternGeco’s petition for review.
On May 4, 2016, after referral from the district court, a Magistrate Judge issued an order and report and recommendation in the litigation. The order and report recommended entry of a final judgment against the Company on the royalty obligation plus interest, subject to final calculation upon entry of judgment, which is expected to be approximately
$22 million
and recommended the district court deny our motion to stay any obligation to pay the remaining
$22 million
that is not related to lost profits until after the Supreme Court rules on the lost profits claims in the case. The Company will pursue all available objections and appeals to the order and report and recommendation.
As previously disclosed, the Company had taken a loss contingency accrual of
$124 million
. As a result of the reversal by the Court of Appeals, as of June 30, 2015, the Company reduced the loss contingency accrual to its current amount of
$22 million
. The Company’s assessment of its potential loss contingency may change in the future due to developments in the case and other events, such as changes in applicable law, and such reassessment could lead to the determination that no loss contingency is probable or that a greater or lesser loss contingency is probable. Any such reassessment could have a material effect on the Company’s financial condition or results of operations.
Prior to the reduction in damages by the Court of Appeals, the Company arranged with sureties to post an appeal bond at the trial court. The appeal bond is uncollateralized, but the terms of the appeal bond arrangements provide the sureties the contractual right for as long as the bond is outstanding to require the Company to post cash collateral. The Company has received a request for
$11 million
in collateral and has exchanged correspondence with the sureties in connection with this request. The appeal bond will remain outstanding during the pendency of appeals.
Other
The Company has been named in various other lawsuits or threatened actions that are incidental to its ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. Management currently believes that the ultimate resolution of these matters will not have a material adverse impact on the financial condition, results of operations or liquidity of the Company.
(7)
Details of Selected Balance Sheet Accounts
Inventories
|
|
|
|
|
|
|
|
|
The following table is a summary of inventories (in thousands):
|
March 31, 2016
|
|
December 31, 2015
|
Raw materials and subassemblies
|
$
|
35,286
|
|
|
$
|
34,949
|
|
Work-in-process
|
9,352
|
|
|
8,478
|
|
Finished goods
|
12,851
|
|
|
13,769
|
|
Reserve for excess and obsolete inventories
|
(24,418
|
)
|
|
(24,475
|
)
|
Total
|
$
|
33,071
|
|
|
$
|
32,721
|
|
Other Long-term Liabilities
|
|
|
|
|
|
|
|
|
The following table is a summary of other long-term liabilities (in thousands):
|
March 31, 2016
|
|
December 31, 2015
|
Accrual for loss contingency related to legal proceedings (Footnote 6)
|
$
|
22,000
|
|
|
$
|
22,000
|
|
Deferred rents
|
13,478
|
|
|
13,394
|
|
Facility restructuring accrual
|
2,724
|
|
|
3,006
|
|
Deferred income tax liability
|
4,851
|
|
|
4,734
|
|
Other long-term liabilities
|
1,162
|
|
|
1,231
|
|
Total
|
$
|
44,215
|
|
|
$
|
44,365
|
|
(8)
Accumulated Other Comprehensive Loss
The following table is a summary of changes in accumulated other comprehensive
loss
by component (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Total
|
Accumulated other comprehensive loss at December 31, 2015
|
|
$
|
(14,781
|
)
|
|
$
|
(14,781
|
)
|
Net current-period other comprehensive loss
|
|
(1,462
|
)
|
|
(1,462
|
)
|
Accumulated other comprehensive loss at March 31, 2016
|
|
$
|
(16,243
|
)
|
|
$
|
(16,243
|
)
|
|
|
|
|
|
(9)
Supplemental Cash Flow Information and Non-cash Activity
The following table is a summary of cash paid for Interest and Income taxes and non-cash items from investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Cash paid during the period for:
|
|
|
|
Interest
|
$
|
154
|
|
|
$
|
497
|
|
Income taxes (refunds)
|
(762
|
)
|
|
5,041
|
|
Non-cash items from investing and financing activities:
|
|
|
|
Purchases of computer equipment financed through capital leases
|
—
|
|
|
1,178
|
|
Investment in multi-client data library financed through accounts payable
|
3,885
|
|
|
7,018
|
|
Purchases of property, plant, and equipment and seismic rental equipment financed through accounts payable
|
179
|
|
|
—
|
|
Transfer of inventory to property, plant, equipment and seismic rental equipment
|
—
|
|
|
8,485
|
|
(10)
Fair Value of Financial Instruments
Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value.
The carrying amounts of the Company’s long-term debt as of
March 31, 2016
and
December 31, 2015
were
$181.3 million
and
$183.0 million
, respectively, compared to its fair values of
$93.8 million
and
$104.3 million
as of
March 31, 2016
and
December 31, 2015
, respectively. The fair value of the long-term debt was calculated using an active market price, based on Level 1 inputs defined as quoted prices for identical instruments in active markets. For additional information pertaining to our long-term debt, See Item 2. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Exchange Offer
” in Part II of this Form 10-Q.
Fair Value of Other Financial Instruments.
Due to their highly liquid nature, the amount of the Company’s other financial instruments, including cash and cash equivalents, accounts and unbilled receivables, notes receivable, accounts payable, and accrued multi-client data library royalties, represent their approximate fair value.
(11)
Stockholder's Equity, Stock-based Compensation and Repurchase Plan
Stock Appreciation Rights
On March 1, 2016, the Company issued
1,210,000
S
tock Appreciation Rights (“SARs”) awards to
15
individuals with an exercise price of
$3.10
. The vesting of these SARs is achieved through both a market condition and a service condition. The market condition is achieved, in part or in full, in the event that during the
four
-year period beginning on the date of grant the
20
-day trailing volume-weighted average price of a share of common stock is (i) greater than
120%
of the exercise price for the first 1/3 of the awards, (ii) greater than
125%
of the exercise price for the second 1/3 of the awards and (iii) greater than
130%
of the exercise price for the final 1/3 of the awards. The exercise condition restricts the ability of the holders to exercise awards until certain service milestones have been reached such that (i) no more than 1/3 of the awards may be exercised, if vested, on and after the first anniversary of the date of grant, (ii) no more than 2/3 of the awards may be exercised, if vested, on and after the second anniversary of the date of grant and (iii) all of the awards may be exercised, if vested, on and after the third anniversary of the date of grant. For the
three months ended March 31, 2016
, the Company recorded
$0.1 million
of share-based compensation expense attributable to SAR awards.
Pursuant to ASC 718, “
Compensation – Stock Compensation
,” the SARs are considered liability awards and as such, these amounts are accrued in the liability section of the balance sheet. The Company calculated the fair value of each SAR award on the date of grant using a Monte Carlo simulation model. The following assumptions were used:
|
|
|
|
March 1, 2016
|
Risk-free interest rates
|
1.81%
|
Expected lives (in years)
|
4.0
|
Expected dividend yield
|
—%
|
Expected volatility
|
70.99%
|
Stock Repurchase Program
On November 4, 2015, the Company’s board of directors approved a stock repurchase program authorizing the Company to repurchase, from time to time from November 10, 2015, through November 10, 2017, up to
$25 million
in shares of the Company’s outstanding common stock. The stock repurchase program may be implemented through open market repurchases or privately negotiated transactions, at management’s discretion. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the shares of the Company’s common stock and general market and economic conditions, applicable legal requirements and compliance with the terms of the Company’s outstanding indebtedness. The repurchase program does not obligate the Company to acquire any particular amount of common stock and may be modified or suspended at any time and could be terminated prior to completion. Since the program’s inception on November 10, 2015, through March 31, 2016, the Company had repurchased
451,792
shares of its common stock under the repurchase program at an average price per share of
$6.54
, and the Company has approximately
$22.0 million
of remaining authorized capacity available pursuant to the repurchase program. The number of shares repurchased and the average price per repurchased share have been retroactively adjusted to reflect the one-for-fifteen reverse stock split completed on February 4, 2016. On March 31, 2016, the closing sale price for the Company’s common stock was
$8.08
on the NYSE.
(12)
Related Party Transactions
BGP Inc. (“BGP”) owned approximately
15.0%
of the Company’s outstanding common stock as of
March 31, 2016
. For the
three months ended March 31, 2016
and
2015
, the Company recorded revenues from BGP of
$1.0 million
and
$2.9 million
, respectively. Total receivables from BGP were
$1.1 million
at
March 31, 2016
.
(13)
Recent Accounting Pronouncements
Revenue Recognition
— In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued new accounting guidance for recognition of revenue. This new guidance replaces virtually all existing U.S. GAAP and IFRS guidance on revenue recognition.
On July 9, 2015, the FASB voted to defer the effective date for its new revenue standard for public and nonpublic entities reporting under U.S. GAAP by one year. As a result, the new guidance is now effective for fiscal years beginning after December 15, 2017. This new guidance applies to all periods presented. Therefore, when the Company issues its financial statements on Forms 10-Q and 10-K for periods included in its year ended December 31, 2018, its comparative periods that are presented from the years ended December 31, 2016 and 2017 must be retrospectively presented in compliance with this new guidance. The new guidance requires companies to make more estimates and use more judgment than under current accounting guidance. Public entities will be permitted to adopt the standard as early as the original public entity effective date (i.e., annual reporting periods beginning after December 15, 2016 and interim periods therein). Early adoption prior to that date will not be permitted.
The FASB and IASB (collectively, the “Boards”) have discussed clarifying the guidance in their new revenue standards for: (1) licenses of intellectual property, (2) identifying performance obligations, (3) noncash consideration and (4) collectability. The Boards have also discussed whether to add practical expedients for the accounting for contract modifications at transition and the presentation of sales taxes, and the FASB separately discussed several technical corrections. The FASB and the IASB did not agree on the nature and breadth of all of the changes to be proposed. The Boards are expected to issue separate exposure drafts later this year.
The Company continues to evaluate (i) the two allowed adoption methods to determine which method it plans to use for retrospective presentation of comparative periods, (ii) the impact of proposed clarifications to the guidance on timing of the recognition of revenue within the Company’s various revenue streams, (iii) the Company’s option to adopt the new guidance either as of the originally proposed effective date or the proposed deferred effective date and (iv) whether the implementation of this new guidance will have a material impact on the Company’s consolidated financial position or results of operations for the periods presented.
In March 2016, the FASB issued ASU 2016-09,
"Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,"
that will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the statement of income when the awards vest or are settled, the guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is changing and the update requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The amendments in this update will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We are evaluating the effect of ASU 2016-09 on our consolidated financial statements.
(14)
Acquisition of In-process Research and Development
In March 2016, the Company acquired Global Dynamics Incorporated, an Ontario-based company that designs and develops marine towing systems and equipment, including its proprietary SailWings technology. SailWings configurations are designed to optimize towed source arrays and augment towed streamer deployment systems, and yield significantly less drag, faster towing, improved fuel efficiency, and safer operations through their flexible and smaller footprint.
The Company acquired the SailWings technology (in-process R&D) for a one-time expenditure of
$1.0 million
, which was recorded as a research, development and engineering expense within operating expenses. The acquisition agreement also contemplates potential future earn-outs of up to
$2.3 million
for successful commercialization of this technology over the next
ten
years.
(15)
Condensed Consolidating Financial Information
The Notes were issued by ION Geophysical Corporation and are guaranteed by the Guarantors, all of which are 100-percent-owned subsidiaries. The Guarantors have fully and unconditionally guaranteed the payment obligations of ION Geophysical Corporation with respect to the Notes. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:
|
|
•
|
ION Geophysical Corporation and the Guarantors (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
|
|
|
•
|
All other subsidiaries of ION Geophysical Corporation that are not Guarantors.
|
|
|
•
|
The consolidating adjustments necessary to present ION Geophysical Corporation’s results on a consolidated basis.
|
This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and footnotes. For additional information pertaining to the Notes, See Item 2. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Exchange Offer
” in Part II of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
Balance Sheet
|
ION Geophysical Corporation
|
|
The Guarantors
|
|
All Other Subsidiaries
|
|
Consolidating Adjustments
|
|
Total Consolidated
|
|
(In thousands)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
27,097
|
|
|
$
|
—
|
|
|
$
|
49,573
|
|
|
$
|
—
|
|
|
$
|
76,670
|
|
Accounts receivable, net
|
—
|
|
|
8,766
|
|
|
6,291
|
|
|
—
|
|
|
15,057
|
|
Unbilled receivables
|
—
|
|
|
15,210
|
|
|
2,520
|
|
|
—
|
|
|
17,730
|
|
Inventories
|
—
|
|
|
11,151
|
|
|
21,920
|
|
|
—
|
|
|
33,071
|
|
Prepaid expenses and other current assets
|
4,974
|
|
|
1,358
|
|
|
7,392
|
|
|
—
|
|
|
13,724
|
|
Total current assets
|
32,071
|
|
|
36,485
|
|
|
87,696
|
|
|
—
|
|
|
156,252
|
|
Property, plant, equipment and seismic rental equipment, net
|
3,014
|
|
|
18,251
|
|
|
44,520
|
|
|
—
|
|
|
65,785
|
|
Multi-client data library, net
|
—
|
|
|
111,669
|
|
|
11,912
|
|
|
—
|
|
|
123,581
|
|
Investment in subsidiaries
|
662,527
|
|
|
234,871
|
|
|
—
|
|
|
(897,398
|
)
|
|
—
|
|
Goodwill
|
—
|
|
|
—
|
|
|
25,595
|
|
|
—
|
|
|
25,595
|
|
Intangible assets, net
|
—
|
|
|
4,144
|
|
|
237
|
|
|
—
|
|
|
4,381
|
|
Intercompany receivables
|
260,669
|
|
|
—
|
|
|
—
|
|
|
(260,669
|
)
|
|
—
|
|
Other assets
|
2,584
|
|
|
146
|
|
|
299
|
|
|
—
|
|
|
3,029
|
|
Total assets
|
$
|
960,865
|
|
|
$
|
405,566
|
|
|
$
|
170,259
|
|
|
$
|
(1,158,067
|
)
|
|
$
|
378,623
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
$
|
26,168
|
|
|
$
|
6,083
|
|
|
$
|
682
|
|
|
$
|
—
|
|
|
$
|
32,933
|
|
Accounts payable
|
1,830
|
|
|
12,738
|
|
|
6,339
|
|
|
—
|
|
|
20,907
|
|
Accrued expenses
|
12,382
|
|
|
9,635
|
|
|
6,984
|
|
|
—
|
|
|
29,001
|
|
Accrued multi-client data library royalties
|
—
|
|
|
21,738
|
|
|
52
|
|
|
—
|
|
|
21,790
|
|
Deferred revenue
|
—
|
|
|
3,660
|
|
|
2,361
|
|
|
—
|
|
|
6,021
|
|
Total current liabilities
|
40,380
|
|
|
53,854
|
|
|
16,418
|
|
|
—
|
|
|
110,652
|
|
Long-term debt, net of current maturities
|
146,090
|
|
|
2,320
|
|
|
—
|
|
|
—
|
|
|
148,410
|
|
Intercompany payables
|
698,609
|
|
|
64,775
|
|
|
195,894
|
|
|
(959,278
|
)
|
|
—
|
|
Other long-term liabilities
|
502
|
|
|
33,331
|
|
|
10,382
|
|
|
—
|
|
|
44,215
|
|
Total liabilities
|
885,581
|
|
|
154,280
|
|
|
222,694
|
|
|
(959,278
|
)
|
|
303,277
|
|
Redeemable noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
Common stock
|
106
|
|
|
290,460
|
|
|
19,138
|
|
|
(309,598
|
)
|
|
106
|
|
Additional paid-in capital
|
895,481
|
|
|
180,700
|
|
|
232,590
|
|
|
(413,290
|
)
|
|
895,481
|
|
Accumulated earnings (deficit)
|
(794,545
|
)
|
|
211,427
|
|
|
(25,084
|
)
|
|
(186,343
|
)
|
|
(794,545
|
)
|
Accumulated other comprehensive income (loss)
|
(16,243
|
)
|
|
6,056
|
|
|
(17,888
|
)
|
|
11,832
|
|
|
(16,243
|
)
|
Due from ION Geophysical Corporation
|
—
|
|
|
(437,357
|
)
|
|
(261,253
|
)
|
|
698,610
|
|
|
—
|
|
Treasury stock
|
(9,515
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,515
|
)
|
Total stockholders’ equity
|
75,284
|
|
|
251,286
|
|
|
(52,497
|
)
|
|
(198,789
|
)
|
|
75,284
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
62
|
|
|
—
|
|
|
62
|
|
Total equity
|
75,284
|
|
|
251,286
|
|
|
(52,435
|
)
|
|
(198,789
|
)
|
|
75,346
|
|
Total liabilities and equity
|
$
|
960,865
|
|
|
$
|
405,566
|
|
|
$
|
170,259
|
|
|
$
|
(1,158,067
|
)
|
|
$
|
378,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Balance Sheet
|
ION Geophysical Corporation
|
|
The Guarantors
|
|
All Other Subsidiaries
|
|
Consolidating Adjustments
|
|
Total Consolidated
|
|
(In thousands)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
33,734
|
|
|
$
|
—
|
|
|
$
|
51,199
|
|
|
$
|
—
|
|
|
$
|
84,933
|
|
Accounts receivable, net
|
—
|
|
|
35,133
|
|
|
9,232
|
|
|
—
|
|
|
44,365
|
|
Unbilled receivables
|
—
|
|
|
19,046
|
|
|
891
|
|
|
—
|
|
|
19,937
|
|
Inventories
|
—
|
|
|
10,939
|
|
|
21,782
|
|
|
—
|
|
|
32,721
|
|
Prepaid expenses and other current assets
|
5,435
|
|
|
1,458
|
|
|
7,914
|
|
|
—
|
|
|
14,807
|
|
Total current assets
|
39,169
|
|
|
66,576
|
|
|
91,018
|
|
|
—
|
|
|
196,763
|
|
Property, plant, equipment and seismic rental equipment, net
|
4,521
|
|
|
21,072
|
|
|
46,434
|
|
|
—
|
|
|
72,027
|
|
Multi-client data library, net
|
—
|
|
|
120,550
|
|
|
11,687
|
|
|
—
|
|
|
132,237
|
|
Investment in subsidiaries
|
680,508
|
|
|
243,319
|
|
|
—
|
|
|
(923,827
|
)
|
|
—
|
|
Goodwill
|
—
|
|
|
—
|
|
|
26,274
|
|
|
—
|
|
|
26,274
|
|
Intangible assets, net
|
—
|
|
|
4,523
|
|
|
287
|
|
|
—
|
|
|
4,810
|
|
Intercompany receivables
|
75,641
|
|
|
—
|
|
|
—
|
|
|
(75,641
|
)
|
|
—
|
|
Other assets
|
1,724
|
|
|
146
|
|
|
1,107
|
|
|
—
|
|
|
2,977
|
|
Total assets
|
$
|
801,563
|
|
|
$
|
456,186
|
|
|
$
|
176,807
|
|
|
$
|
(999,468
|
)
|
|
$
|
435,088
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
$
|
486
|
|
|
$
|
6,856
|
|
|
$
|
570
|
|
|
$
|
—
|
|
|
$
|
7,912
|
|
Accounts payable
|
2,086
|
|
|
19,839
|
|
|
7,874
|
|
|
—
|
|
|
29,799
|
|
Accrued expenses
|
11,199
|
|
|
16,200
|
|
|
6,888
|
|
|
—
|
|
|
34,287
|
|
Accrued multi-client data library royalties
|
—
|
|
|
25,045
|
|
|
—
|
|
|
—
|
|
|
25,045
|
|
Deferred revenue
|
—
|
|
|
5,071
|
|
|
1,489
|
|
|
—
|
|
|
6,560
|
|
Total current liabilities
|
13,771
|
|
|
73,011
|
|
|
16,821
|
|
|
—
|
|
|
103,603
|
|
Long-term debt, net of current maturities
|
171,672
|
|
|
3,408
|
|
|
—
|
|
|
—
|
|
|
175,080
|
|
Intercompany payables
|
503,621
|
|
|
68,286
|
|
|
7,355
|
|
|
(579,262
|
)
|
|
—
|
|
Other long-term liabilities
|
540
|
|
|
33,305
|
|
|
10,520
|
|
|
—
|
|
|
44,365
|
|
Total liabilities
|
689,604
|
|
|
178,010
|
|
|
34,696
|
|
|
(579,262
|
)
|
|
323,048
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
Common stock
|
107
|
|
|
290,460
|
|
|
19,138
|
|
|
(309,598
|
)
|
|
107
|
|
Additional paid-in capital
|
894,715
|
|
|
180,700
|
|
|
234,234
|
|
|
(414,934
|
)
|
|
894,715
|
|
Accumulated earnings (deficit)
|
(759,531
|
)
|
|
231,208
|
|
|
(21,729
|
)
|
|
(209,479
|
)
|
|
(759,531
|
)
|
Accumulated other comprehensive income (loss)
|
(14,781
|
)
|
|
4,420
|
|
|
(14,604
|
)
|
|
10,184
|
|
|
(14,781
|
)
|
Due from ION Geophysical Corporation
|
—
|
|
|
(428,612
|
)
|
|
(75,009
|
)
|
|
503,621
|
|
|
—
|
|
Treasury stock
|
(8,551
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,551
|
)
|
Total stockholders’ equity
|
111,959
|
|
|
278,176
|
|
|
142,030
|
|
|
(420,206
|
)
|
|
111,959
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
81
|
|
|
—
|
|
|
81
|
|
Total equity
|
111,959
|
|
|
278,176
|
|
|
142,111
|
|
|
(420,206
|
)
|
|
112,040
|
|
Total liabilities and equity
|
$
|
801,563
|
|
|
$
|
456,186
|
|
|
$
|
176,807
|
|
|
$
|
(999,468
|
)
|
|
$
|
435,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
Income Statement
|
ION Geophysical Corporation
|
|
The Guarantors
|
|
All Other Subsidiaries
|
|
Consolidating Adjustments
|
|
Total Consolidated
|
|
(In thousands)
|
Net revenues
|
$
|
—
|
|
|
$
|
11,162
|
|
|
$
|
11,501
|
|
|
$
|
2
|
|
|
$
|
22,665
|
|
Cost of sales
|
—
|
|
|
21,427
|
|
|
10,166
|
|
|
2
|
|
|
31,595
|
|
Gross profit (loss)
|
—
|
|
|
(10,265
|
)
|
|
1,335
|
|
|
—
|
|
|
(8,930
|
)
|
Total operating expenses
|
7,411
|
|
|
7,816
|
|
|
5,972
|
|
|
—
|
|
|
21,199
|
|
Loss from operations
|
(7,411
|
)
|
|
(18,081
|
)
|
|
(4,637
|
)
|
|
—
|
|
|
(30,129
|
)
|
Interest expense, net
|
(4,693
|
)
|
|
(70
|
)
|
|
29
|
|
|
—
|
|
|
(4,734
|
)
|
Intercompany interest, net
|
232
|
|
|
(1,017
|
)
|
|
785
|
|
|
—
|
|
|
—
|
|
Equity in losses of investments
|
(23,135
|
)
|
|
(1,808
|
)
|
|
—
|
|
|
24,943
|
|
|
—
|
|
Other income (expense)
|
26
|
|
|
(359
|
)
|
|
453
|
|
|
—
|
|
|
120
|
|
Net loss before income taxes
|
(34,981
|
)
|
|
(21,335
|
)
|
|
(3,370
|
)
|
|
24,943
|
|
|
(34,743
|
)
|
Income tax expense
|
33
|
|
|
253
|
|
|
7
|
|
|
—
|
|
|
293
|
|
Net loss
|
(35,014
|
)
|
|
(21,588
|
)
|
|
(3,377
|
)
|
|
24,943
|
|
|
(35,036
|
)
|
Net loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
22
|
|
Net loss attributable to ION
|
(35,014
|
)
|
|
(21,588
|
)
|
|
(3,377
|
)
|
|
24,965
|
|
|
(35,014
|
)
|
Comprehensive net loss
|
$
|
(36,498
|
)
|
|
$
|
(21,588
|
)
|
|
$
|
(4,839
|
)
|
|
$
|
26,427
|
|
|
$
|
(36,498
|
)
|
Comprehensive loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
Comprehensive net loss attributable to ION
|
$
|
(36,498
|
)
|
|
$
|
(21,588
|
)
|
|
$
|
(4,817
|
)
|
|
$
|
26,427
|
|
|
$
|
(36,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
Income Statement
|
ION Geophysical Corporation
|
|
The Guarantors
|
|
All Other Subsidiaries
|
|
Consolidating Adjustments
|
|
Total Consolidated
|
|
(In thousands)
|
Net revenues
|
$
|
—
|
|
|
$
|
18,849
|
|
|
$
|
22,135
|
|
|
$
|
(406
|
)
|
|
$
|
40,578
|
|
Cost of sales
|
—
|
|
|
24,775
|
|
|
31,997
|
|
|
(406
|
)
|
|
56,366
|
|
Gross loss
|
—
|
|
|
(5,926
|
)
|
|
(9,862
|
)
|
|
—
|
|
|
(15,788
|
)
|
Total operating expenses
|
7,916
|
|
|
13,080
|
|
|
9,905
|
|
|
—
|
|
|
30,901
|
|
Loss from operations
|
(7,916
|
)
|
|
(19,006
|
)
|
|
(19,767
|
)
|
|
—
|
|
|
(46,689
|
)
|
Interest expense, net
|
(4,551
|
)
|
|
(72
|
)
|
|
(2
|
)
|
|
—
|
|
|
(4,625
|
)
|
Intercompany interest, net
|
139
|
|
|
(657
|
)
|
|
518
|
|
|
—
|
|
|
—
|
|
Equity in losses of investments
|
(42,857
|
)
|
|
(18,922
|
)
|
|
—
|
|
|
61,779
|
|
|
—
|
|
Other income (expense)
|
(29
|
)
|
|
15
|
|
|
(3,205
|
)
|
|
—
|
|
|
(3,219
|
)
|
Net loss before income taxes
|
(55,214
|
)
|
|
(38,642
|
)
|
|
(22,456
|
)
|
|
61,779
|
|
|
(54,533
|
)
|
Income tax expense
|
50
|
|
|
51
|
|
|
882
|
|
|
—
|
|
|
983
|
|
Net loss
|
(55,264
|
)
|
|
(38,693
|
)
|
|
(23,338
|
)
|
|
61,779
|
|
|
(55,516
|
)
|
Net loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
252
|
|
|
—
|
|
|
252
|
|
Net loss attributable to ION
|
(55,264
|
)
|
|
(38,693
|
)
|
|
(23,086
|
)
|
|
61,779
|
|
|
(55,264
|
)
|
Comprehensive net loss
|
$
|
(56,609
|
)
|
|
$
|
(40,053
|
)
|
|
$
|
(24,698
|
)
|
|
$
|
64,499
|
|
|
$
|
(56,861
|
)
|
Comprehensive loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
252
|
|
|
—
|
|
|
252
|
|
Comprehensive net loss attributable to ION
|
$
|
(56,609
|
)
|
|
$
|
(40,053
|
)
|
|
$
|
(24,446
|
)
|
|
$
|
64,499
|
|
|
$
|
(56,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
Statement of Cash Flows
|
ION Geophysical Corporation
|
|
The Guarantors
|
|
All Other Subsidiaries
|
|
Total Consolidated
|
|
(In thousands)
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
$
|
(8,953
|
)
|
|
$
|
(3,804
|
)
|
|
$
|
15,236
|
|
|
$
|
2,479
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Cash invested in multi-client data library
|
—
|
|
|
(6,327
|
)
|
|
—
|
|
|
(6,327
|
)
|
Purchase of property, plant, equipment and seismic rental equipment
|
—
|
|
|
(266
|
)
|
|
—
|
|
|
(266
|
)
|
Net cash used in investing activities
|
—
|
|
|
(6,593
|
)
|
|
—
|
|
|
(6,593
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Payments under revolving line of credit
|
(964
|
)
|
|
—
|
|
|
—
|
|
|
(964
|
)
|
Payments on notes payable and long-term debt
|
(167
|
)
|
|
(1,859
|
)
|
|
(186
|
)
|
|
(2,212
|
)
|
Costs associated with issuance of debt
|
(1,315
|
)
|
|
—
|
|
|
—
|
|
|
(1,315
|
)
|
Intercompany lending
|
4,749
|
|
|
12,256
|
|
|
(17,005
|
)
|
|
—
|
|
Other financing activities
|
13
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Net cash provided by (used in) financing activities
|
2,316
|
|
|
10,397
|
|
|
(17,191
|
)
|
|
(4,478
|
)
|
Effect of change in foreign currency exchange rates on cash and cash equivalents
|
—
|
|
|
—
|
|
|
329
|
|
|
329
|
|
Net decrease in cash and cash equivalents
|
(6,637
|
)
|
|
—
|
|
|
(1,626
|
)
|
|
(8,263
|
)
|
Cash and cash equivalents at beginning of period
|
33,734
|
|
|
—
|
|
|
51,199
|
|
|
84,933
|
|
Cash and cash equivalents at end of period
|
$
|
27,097
|
|
|
$
|
—
|
|
|
$
|
49,573
|
|
|
$
|
76,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
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
|
$
|
(62,480
|
)
|
|
$
|
41,328
|
|
|
$
|
14,446
|
|
|
$
|
(6,706
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Investment in multi-client data library
|
—
|
|
|
(9,055
|
)
|
|
(33
|
)
|
|
(9,088
|
)
|
Purchase of property, plant, equipment and seismic rental equipment
|
(329
|
)
|
|
(1,133
|
)
|
|
(10,532
|
)
|
|
(11,994
|
)
|
Other investing activities
|
—
|
|
|
257
|
|
|
—
|
|
|
257
|
|
Net cash used in investing activities
|
(329
|
)
|
|
(9,931
|
)
|
|
(10,565
|
)
|
|
(20,825
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Payments on notes payable and long-term debt
|
—
|
|
|
(1,725
|
)
|
|
(341
|
)
|
|
(2,066
|
)
|
Intercompany lending
|
26,968
|
|
|
(29,672
|
)
|
|
2,704
|
|
|
—
|
|
Other financing activities
|
31
|
|
|
—
|
|
|
—
|
|
|
31
|
|
Net cash provided by (used in) financing activities
|
26,999
|
|
|
(31,397
|
)
|
|
2,363
|
|
|
(2,035
|
)
|
Effect of change in foreign currency exchange rates on cash and cash equivalents
|
—
|
|
|
—
|
|
|
396
|
|
|
396
|
|
Net increase (decrease) in cash and cash equivalents
|
(35,810
|
)
|
|
—
|
|
|
6,640
|
|
|
(29,170
|
)
|
Cash and cash equivalents at beginning of period
|
109,514
|
|
|
—
|
|
|
64,094
|
|
|
173,608
|
|
Cash and cash equivalents at end of period
|
$
|
73,704
|
|
|
$
|
—
|
|
|
$
|
70,734
|
|
|
$
|
144,438
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Our Business
In this Form 10-Q, “ION Geophysical,” “ION,” “the company” (or, “the Company”), “we,” “our,” “ours” and “us” refer to ION Geophysical Corporation and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicated.
The information contained in this Quarterly Report on Form 10-Q contains references to trademarks, service marks and registered marks of ION and our subsidiaries, as indicated. Except where stated otherwise or unless the context otherwise requires, the terms “DigiFIN,” “VectorSeis,” “Orca,” “GATOR,” “Calypso,” and “WiBand,” refer to DigiFIN
®
, VECTORSEIS
®
, ORCA
®
, GATOR
®
, Calypso
®
and WiBand
®
registered marks owned by ION or INOVA Geophysical, and the terms “VSO,” “Narwhal,” “Marlin” and “MexicoSPAN” refer to VSO™, Narwhal™, Marlin™ and MexicoSPAN™ trademarks and service marks owned by ION.
We are a global, technology-focused company that provides geoscience technology, services and solutions to the global oil and gas industry. Our offerings are designed to allow oil and gas exploration and production (“E&P”) companies to obtain higher resolution images of the Earth’s subsurface during exploration, exploitation and production operations to reduce their risk in exploration and reservoir development. We acquire and process seismic data from seismic surveys in regional data programs, which then become part of our multi-client data library. The seismic surveys for our data library business are pre-funded, or underwritten, in part by our customers, and, with the exception of our ocean bottom seismic (“OBS”) data acquisition company, OceanGeo B.V. (“OceanGeo”), we utilize an “Asset Lite” strategy by contracting with third party seismic data acquisition companies to shoot and acquire the seismic data, all of which is intended to minimize our risk exposure. We serve customers in all major energy producing regions of the world from strategically located offices across
six
continents.
Seismic imaging plays a fundamental role in hydrocarbon exploration and reservoir development by delineating structures, rock types and fluid locations in the subsurface. Our technologies, services and solutions are used by E&P companies to generate high-resolution images of the Earth’s subsurface to identify sources of hydrocarbons and pinpoint drilling locations for wells, which can be costly and involve high risk.
We provide our services and products through four business segments – Solutions, Systems, Software and Ocean Bottom Services. Our Ocean Bottom Services segment is comprised of OceanGeo, in which we increased our ownership to 100% in 2014. In addition, we have a 49% ownership interest in our INOVA Geophysical Equipment Limited joint venture (“INOVA Geophysical,” or “INOVA”). As of December 31, 2014, we wrote down our investment in INOVA Geophysical to zero, and therefore no longer record our share of losses in the joint venture. For details of our suspension of recording equity method losses, see
Footnote 2
“
Segment Information
” of
Footnotes to Consolidated Financial Statements
.
For decades, we have been engaged in providing innovative seismic data acquisition technology, such as full-wave imaging capability with VectorSeis products, the ability to record seismic data from basins that underlie ice fields in polar regions, and cableless seismic techniques. The advanced technologies we currently offer include our Orca and Gator command and control software systems, WiBand broadband data processing technology, Calypso OBS acquisition system, Narwhal ice management system, and other technologies, each of which is designed to deliver improvements in both image quality and productivity. In 2015, we introduced our new Marlin solution for optimizing simultaneous operations during marine seismic data acquisition. We have approximately 500 patents and pending patent applications in various countries around the world. Approximately
51%
of our employees are involved in technical roles and over
26%
of our employees have advanced degrees.
Solutions
.
Our Solutions business provides two distinct service activities that often work together.
Our Ventures services are designed to manage the entire seismic process, from survey planning and design to data acquisition and management, to final subsurface imaging and reservoir characterization. Our Ventures group focuses on the technologically intensive components of the image development process, such as survey planning and design, and data processing and interpretation, outsourcing the logistics components (such as field acquisition) to experienced seismic and other geophysical contractors.
Our GX Technology (“GXT”) group offers data processing and imaging services designed to help our E&P customers reduce exploration and production risk, evaluate and develop reservoirs, and increase production. GXT develops a series of subsurface images by applying its processing technology to data owned or licensed by its customers. We maintain approximately
15
petabytes of digital seismic data information storage in
4
global data centers, including two core data centers located in Houston and in the U.K.
Our Solutions business focuses on providing services for challenging environments, such as the Arctic frontier; complex and hard-to-image geologies, such as deepwater subsurface salt formations in the Gulf of Mexico and offshore West Africa and Brazil; unconventional reservoirs, such as those found in shale, tight gas and oil sands formations; and offshore basin-wide seismic data and imaging programs. Since 2002, our basin exploration seismic data programs have resulted in a substantial data library that covers significant portions of many of the frontier basins in the world, including offshore East and West Africa, India, South America, the Arctic, the deepwater Gulf of Mexico and Australia. In addition, GXT performs significant data processing and imaging services under contracts with customers in Mexico.
Our E&P Advisors group partners with E&P operators, energy industries and capital institutions to capture and monetize E&P opportunities worldwide. This group provides technical, commercial and strategic advice across the E&P value chain, working at basin, prospect and field scales.
Software.
Our Software business provides command and control software systems, related software and services for towed marine streamer and seabed operations, as well as survey design. Our Orca software is installed on towed streamer marine vessels worldwide, and our Gator software is a component of many re-deployable and permanent seabed monitoring systems.
In 2013, we introduced our Narwhal ice management system, and in 2015 we introduced our new Marlin solution. Both of these systems are part of our E&P software solutions for operations management and are designed to reduce risk and improve efficiency in seismic data acquisition and drilling operations in or near ice, such as in the Arctic, where the U.S. Geological Survey estimates that 13 percent of the remaining worldwide reserves are located.
Systems.
Our Systems business is engaged in the manufacture and repairs of (i) re-deployable ocean bottom cable seismic data acquisition systems and shipboard recorders (for OceanGeo’s use in OBS data acquisition); (ii) marine towed streamer positioning and control systems; and (iii) analog geophone sensors.
Ocean Bottom Services
. Through OceanGeo, we offer a fully integrated OBS solution that includes expert survey design, planning and optimization, to maximize seismic image quality, operational efficiency and safety; safe, efficient data acquisition by the experienced team at OceanGeo; superior imaging via OceanGeo’s exclusive use of our VSO systems; and data processing, interpretation and reservoir services, by our GXT group.
INOVA Geophysical
.
Historically, we have conducted our land seismic equipment business through INOVA Geophysical, which is a joint venture with BGP Inc. (“BGP”). BGP is a subsidiary of China National Petroleum Corporation, and is generally regarded as the world’s largest land geophysical service contractor. BGP owns a 51% equity interest in INOVA Geophysical, and we own the remaining 49% interest. INOVA manufactures cable-based and cableless seismic data acquisition systems, digital sensors, vibroseis vehicles (i.e., vibrator trucks) and source controllers for detonator and energy source business lines. As of December 31, 2014, we wrote down our investment in INOVA Geophysical to zero.
Macroeconomic Conditions
Demand for our services and products is cyclical and dependent upon activity levels in the oil and gas industry, particularly our customers’ willingness to invest capital in the exploration for oil and natural gas. Our customers’ capital spending programs are generally based on their outlook for near-term and long-term commodity prices, economic growth, commodity demand and estimates of resource production. As a result, demand for our services and products is largely sensitive to expected commodity prices, principally related to crude oil and natural gas.
In the past few years, crude oil prices have been volatile due to global economic uncertainties. Significant downward crude oil price volatility began early in the fourth quarter of 2014 and prices declined through the first quarter of 2015, followed by a partial recovery during the second quarter of 2015. Oil prices continued to decline from the third quarter of 2015 through the first quarter of 2016, before rising to its highest level since November 2015 during April 2016. The material decrease in crude oil prices can be attributed principally to significant production growth in the U.S. shale plays and increases in production by Russia and certain members of the Organization of Petroleum Exporting Countries (“OPEC”) such as Saudi Arabia, Iran and Iraq. Other factors include the strengthening of the U.S. dollar relative to other foreign currencies and ongoing resistance to an agreement to cut or freeze production, offset somewhat by modest increases in global oil demand. After a period of decline in the first quarter of 2016, oil and gas prices experienced a small rebound late in the quarter as output began to fall and Iran’s return to the world markets was less than expected. These events may indicate that oil prices may have bottomed out due to utilization of existing reserves and slowing production relative to growing demand. The average prices for West Texas Intermediate (“WTI”) and Intercontinental Exchange Brent (“Brent”) crude oil decreased to an average of $33 per barrel and $34 per barrel, respectively, in the first quarter 2016 from an average of $49 per barrel and $52 per barrel, respectively, for the full year 2015. These data points compare to an average price of $101 per barrel and $109 per barrel, respectively, in the first nine months of 2014.
Given the historical volatility of crude prices, there remains a risk that prices could remain low or continue to deteriorate due to high levels of domestic and OPEC crude oil production, slowing growth rates in various global regions and/or the potential for ongoing supply/demand imbalances. Alternatively, if the global supply of oil were to decrease due to reduced capital investment by our E&P customers or government instability in a major oil-producing nation and energy demand continues to increase in the U.S. and countries such as China and India, a recovery in WTI and Brent crude oil prices could occur. Regardless of the driver, crude oil price improvements will not occur without a rebalancing of global supply and demand, the timing of which is difficult to predict. If commodity prices do not improve or if they decline further, demand for our services and products could continue to decline.
Prices for natural gas in the U.S. averaged $1.99 per mmBtu in the first quarter of 2016 compared to $2.62 per mmBtu for the full year 2015 and $4.57 per mmBtu in the first nine months of 2014. Natural gas prices declined due to strong production and a mild winter this year as compared to last year resulting in significant increases in natural gas inventories in the U.S. during 2015. Customer spending in the natural gas shale plays has been limited due to associated gas being produced from unconventional oil wells in North America. As a result of natural gas production growth outpacing demand in the U.S., natural gas prices continue to be weak relative to prices experienced from 2006 through 2008 and are expected to remain below levels considered economical for new investments in numerous natural gas fields. For the first quarter of 2016, natural gas inventories ended this winter withdrawal season at a near record high of 2,478 Bcf, however, U.S. producers removed another 106 rigs from service in February bringing the total rig count to 76% below the peak in the fourth quarter of 2014. If natural gas production continues to surpass U.S. natural gas demand, prices could remain constrained for an extended period.
Impact to Our Business
During 2015, E&P capital expenditures remained low as budgets were approximately 25% lower than the previous year, and E&P capital expenditure budgets for 2016 are expected to decrease an additional 25% to 30% as a result of the steep oil price decline that began in the fourth quarter of 2014. These declines in capital expenditure budgets are the first back-to-back declines of this magnitude since the 1980s. Certain E&P companies are evaluating near-term oil prices, and how these prices will affect their return on new and existing projects before committing to spend substantial sums from their capital expenditure budgets. We believe E&P companies perceive projects with a longer time to payback, or profitability, as less attractive in the short-term. E&P companies have announced their intention to protect dividend payments even if that means reducing capital expenditures. Therefore, E&P companies are increasingly likely to reduce capital expenditures for projects in the early stages, or exploration phase, of the E&P lifecycle compared to prior years. In low oil price environments, oil companies tend to prioritize production-related activities and existing assets over exploration, and disproportionately cut spending on seismic services and products, which has a negative impact on the overall entire seismic industry, including our Company.
The sustained reduction in exploration spending has had a significant impact on our results of operations for the
first quarter
of
2016
in all of our segments. In our Solutions segment, we have seen continued softness in customer underwriting of our new venture programs and reductions in our data processing business. We continue to maintain high standards for underwriting new projects, and have delayed certain new venture programs accordingly. We invested
$6.3 million
in our multi-client data library during the
first quarter
of
2016
, compared to
$9.1 million
in the same period in
2015
.
Our business has traditionally been seasonal, with the strongest demand for our services and products often in the fourth quarter of our fiscal year. As of
March 31, 2016
, our Solutions segment backlog, which consists of commitments for (i) data processing work and (ii) both multi-client new venture projects and proprietary projects by our Ventures group underwritten by our customers, was
$20.9 million
, compared with backlog of
$46.7 million
at December 31,
2015
and
$49.9 million
at
March 31, 2015
. As a result of the weakness in exploration spending by E&P companies, our backlog over the last four quarters has been lower than historical levels and first quarter of 2016 backlog decreased as a result of MexicoSPAN nearing completion of the data processing phase. We anticipate that the majority of our current backlog will be recognized as revenue in the remainder of
2016
and early 2017. We now expect our full year investment in our multi-client data library to be in the range of $15 to $25 million in 2016.
In the
first quarter
of
2016
, our OBS segment continued to be affected by potential E&P customers delaying or canceling decisions to commit capital to OBS projects, causing our vessels to remain idle. As communicated previously, we have taken actions within our OBS business to minimize costs, while maintaining our ocean bottom capabilities. We have cold-stacked the chartered vessels and our crew and have taken other actions to minimize the fixed costs associated with our OBS business. Despite the extended market downturn and uncertainty, we see significant long-term potential for OceanGeo and our technologies to improve ocean bottom survey productivity, and we expect long-term demand for ocean bottom production surveys (4D) to increase. We are about to begin mobilizing our ocean bottom vessels and crew to conduct an OBS survey offshore Nigeria. A letter of commitment for the project has been issued by an international oil company, and we expect the contract to be finalized within the next few weeks. We expect to begin acquiring data in late June or early July, 2016, and to complete full demobilization by late in the third quarter 2016. We believe that our technology is well suited for additional opportunities in Nigeria and West Africa, and we continue to pursue active tenders and leads for projects in the area.
Our traditional seismic contractor customers are also experiencing weakened demand due to the reduction in seismic spending by their customers. Since early 2014, seismic contractors have taken 24 seismic vessels, or about 20% of the fleet, out of the market. As a result, our Systems segment continued to experience weak year-over-year sales as our revenues fell due to lower demand for spare parts and repairs.
The marine seismic vessel market contraction has also negatively impacted the vessel software market. Our Software segment net revenues
decreased
for the
first quarter
of
2016
compared to the same period of
2015
, primarily driven by reduced sales of Orca software licenses.
We continue to monitor the global economy, the demand for crude oil and natural gas and the resultant impact on the capital spending plans and operations of our E&P customers in order to plan our business. We remain confident that, despite current marketplace challenges that we describe above, we have positioned ourselves to take advantage of the next upturn in the energy cycle by reducing our cost structure, shifting our focus toward E&P solutions and away from equipment sales, and by diversifying our offerings across the E&P lifecycle.
It is our view that technologies that provide a competitive advantage through improved imaging, lower costs or higher productivity will continue to be valued in our marketplace. We believe that our newest technologies, such as Calypso, WiBand, Orca and Narwhal, will continue to attract customer interest, because those technologies are designed to deliver enhanced image quality, efficiency and cost savings.
Cost Reduction Initiatives
In April, 2016, we implemented additional cost saving initiatives by reducing our current workforce by over 12%. Additional reductions were needed to further streamline our organization and rightsize our company to bring it in line with our current revenue stream, while maintaining the necessary core capabilities to continue our operations and strategic initiatives. These additional reductions are expected to result in approximately $15 million of annualized savings, (an estimated $9 million in 2016), in addition to the $80 million of expected annual savings from prior cost reduction initiatives. We expect to begin realizing the vast majority of these savings in the third quarter of this year.
WesternGeco Litigation
On July 2, 2015, the United States Court of Appeals for the Federal Circuit in Washington, D.C. reversed in part the district court’s judgment, holding the district court erred by including lost profits in the Final Judgment. Lost profits were $93.4 million and prejudgment interest was approximately $10.9 million of the $123.8 million Final Judgment. Pre-judgment interest on the lost profits portion will be treated in the same way as the lost profits. Post-judgment interest will likewise be treated in the same fashion. On July 29, 2015, WesternGeco filed a petition for rehearing en banc before the Court of Appeals. On October 30, 2015 the Court of Appeals denied WesternGeco’s petition for rehearing en banc. On February 26, 2016, WesternGeco filed a petition for writ of certiorari by the Supreme Court. We filed our response on April 27, 2016. The Supreme Court has not yet indicated whether or not it will accept WesternGeco’s petition for review.
On May 4, 2016, after referral from the district court, a Magistrate Judge issued an order and report and recommendation in the litigation. The order and report recommended entry of a final judgment against us on the royalty obligation plus interest, subject to final calculation upon entry of judgment, which is expected to be approximately $22 million and recommended the district court deny our motion to stay any obligation to pay the remaining $22 million that is not related to lost profits until after the Supreme Court rules on the lost profits claims in the case. We will pursue all available objections and appeals to the order and report and recommendation.
As a result of the reversal by the Court of Appeals, as of June 30, 2015, we have reduced our prior loss contingency accrual by approximately
$102 million
, resulting in a current loss contingency accrual of
$22 million
. Prior to the reduction in damages by the Court of Appeals, we arranged with sureties to post an appeal bond at the trial court. The appeal bond is uncollateralized, but the terms of the appeal bond arrangements provide the sureties the contractual right for as long as the bond is outstanding to require us to post cash collateral. We have received a request for $11 million in collateral and have exchanged correspondence with the sureties in connection with this request. The appeal bond will remain outstanding during the pendency of appeals. See
Footnote 6
“
Litigation
” of
Footnotes to Consolidated Financial Statements
.
Exchange Offer
On April 28, 2016, we successfully completed an exchange offer (the “Exchange Offer”) and consent solicitation (the “Consent Solicitation”) related to the Third Lien Notes. The Company did not receive any cash proceeds in connection with the Exchange Offer and Consent Solicitation.
Under the terms of the Exchange Offer, for each
$1,000
principal amount of Third Lien Notes validly tendered for exchange and not validly withdrawn by an eligible holder (an “Exchange Participant”) prior to 11:59 P.M., New York City time, on April 25, 2016, and accepted for exchange by us, we offered the consideration (the “Exchange Consideration”) of (i)
$1,000
principal
amount of our new
9.125%
Senior Secured Second Priority Notes due 2021 (the “Second Lien Notes” and collectively with the Third Lien Notes, the “Notes”) plus (ii) either (a) for Third Lien Notes tendered at or prior to 4:59 P.M., New York City time, on Friday, April 15, 2016 (the “Extended Early Tender Deadline”), ten (10) shares of our common stock (the “Early Stock Consideration”), or (b) for Third Lien Notes tendered after the Extended Early Tender Deadline, seven (7) shares of our common stock (the “Stock Consideration”) (such shares issued as the Early Stock Consideration or the Stock Consideration, together with the Second Lien Notes, the “Exchange Securities”), upon the terms and subject to the conditions set forth in our confidential Offer to Exchange and related Consent and Letter of Transmittal, each dated March 28, 2016 (the “Offer Documents”).
As part of the Exchange Offer, each Exchange Participant had the opportunity to tender all or a portion of its Third Lien Notes for a cash payment in lieu of the Exchange Consideration upon the terms and subject to the conditions set forth in the Offer Documents (the “Cash Tender Option”). The aggregate amount of cash consideration that could be paid by us for tendered Third Lien Notes accepted for purchase pursuant to the Cash Tender Option was approximately
$15.0 million
plus accrued and unpaid interest to, but not including, the settlement date of the Exchange Offer (collectively, the “Cash Tender Cap”).
Concurrently with the Exchange Offer, we solicited consents from eligible holders to proposed amendments to the Third Lien Notes Indenture (the “Proposed Amendments”). The Proposed Amendments, among other things, provide for the release of the second priority security interest in the collateral securing the Third Lien Notes and the grant of a third priority security interest in the collateral, subordinate to liens securing all our senior and second priority indebtedness, including the Credit Facility (as defined below) and the Second Lien Notes, and eliminate substantially all of the restrictive covenants and certain events of default pertaining to the Third Lien Notes.
The Exchange Offer, including the Cash Tender Option, and the Consent Solicitation expired at 11:59 P.M., New York City time, on April 25, 2016. In total, we accepted for exchange approximately
$146.5 million
in aggregate principal amount of the Third Lien Notes, or approximately
83.72%
of the
$175.0 million
outstanding aggregate principal amount of the Third Lien Notes, validly tendered and not withdrawn in the Exchange Offer. The Third Lien Notes validly tendered and not withdrawn in the Exchange Offer were accepted by us.
Because we received the necessary consents to effect the Proposed Amendments, any Third Lien Notes not validly tendered pursuant to the Exchange Offer remain outstanding and the holders are subject to the terms of the supplemental indenture implementing the Proposed Amendments. No consideration was paid to holders of Third Lien Notes in connection with the Consent Solicitation. After giving effect to the Exchange Offer and Consent Solicitation, the aggregate principal amount of the Third Lien Notes remaining outstanding was approximately
$28.5 million
as of April 28, 2016, and such Third Lien Notes are secured on a third priority basis subordinated to the liens securing all senior and second priority indebtedness of the Company, including under the Credit Facility and Second Lien Notes.
In exchange for approximately
$120.6 million
in aggregate principal amount of Third Lien Notes, we issued approximately
$120.6 million
aggregate principal amount of Second Lien Notes and
1,205,477
shares of our common stock, including
1,204,980
shares issued as Early Stock Consideration and
497
shares issued as Stock Consideration. The Company utilized
508,464
of treasury shares towards the total
1,205,477
shares issued. The securities issued in the Exchange Offer were issued in reliance on an exemption from registration set forth in Section 4(a)(2) of the Securities Act. The Company received no cash consideration in exchange for the issuance of the Exchange Securities.
The Cash Tender Option was fully subscribed. Pursuant to the terms of the Exchange Offer, we accepted for purchase tendered Third Lien Notes at the lowest bid prices until the Cash Tender Cap was reached, subject to proration. In exchange for aggregate cash consideration totaling approximately
$15.0 million
, we purchased approximately
$25.9 million
in aggregate principal amount of Third Lien Notes. We also paid in cash accrued and unpaid interest on Third Lien Notes accepted for purchase in the Exchange Offer from the applicable last interest payment date to, but not including, April 28, 2016.
Key Financial Metrics
The table below provides an overview of key financial metrics for our company as a whole and our four business segments for the
three months ended March 31, 2016
, compared to the same period of
2015
(in thousands).
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net revenues:
|
|
|
|
Solutions:
|
|
|
|
New Venture
|
$
|
3,306
|
|
|
$
|
5,029
|
|
Data Library
|
4,272
|
|
|
2,137
|
|
Total multi-client revenues
|
7,578
|
|
|
7,166
|
|
Data Processing
|
5,440
|
|
|
11,833
|
|
Total
|
$
|
13,018
|
|
|
$
|
18,999
|
|
Systems:
|
|
|
|
Towed Streamer
|
$
|
2,457
|
|
|
$
|
5,165
|
|
Other
|
2,902
|
|
|
7,604
|
|
Total
|
$
|
5,359
|
|
|
$
|
12,769
|
|
Software:
|
|
|
|
Software Systems
|
$
|
4,150
|
|
|
$
|
7,729
|
|
Services
|
138
|
|
|
1,081
|
|
Total
|
$
|
4,288
|
|
|
$
|
8,810
|
|
Ocean Bottom Services
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
$
|
22,665
|
|
|
$
|
40,578
|
|
Gross profit (loss):
|
|
|
|
Solutions
|
$
|
(9,773
|
)
|
|
$
|
(10,392
|
)
|
Systems
|
1,363
|
|
|
4,559
|
|
Software
|
2,526
|
|
|
5,590
|
|
Ocean Bottom Services
|
(3,046
|
)
|
|
(15,545
|
)
|
Total
|
$
|
(8,930
|
)
|
|
$
|
(15,788
|
)
|
Gross margin:
|
|
|
|
Solutions
|
(75
|
)%
|
|
(55
|
)%
|
Systems
|
25
|
%
|
|
36
|
%
|
Software
|
59
|
%
|
|
63
|
%
|
Ocean Bottom Services
|
—
|
%
|
|
—
|
%
|
Total
|
(39
|
)%
|
|
(39
|
)%
|
Income (loss) from operations:
|
|
|
|
Solutions
|
$
|
(15,477
|
)
|
|
$
|
(21,778
|
)
|
Systems
|
(2,509
|
)
|
|
1,014
|
|
Software
|
996
|
|
|
3,335
|
|
Ocean Bottom Services
|
(4,214
|
)
|
|
(17,559
|
)
|
Corporate and other
|
(8,925
|
)
|
|
(11,701
|
)
|
Total
|
$
|
(30,129
|
)
|
|
$
|
(46,689
|
)
|
Operating margin:
|
|
|
|
Solutions
|
(119
|
)%
|
|
(115
|
)%
|
Systems
|
(47
|
)%
|
|
8
|
%
|
Software
|
23
|
%
|
|
38
|
%
|
Ocean Bottom Services
|
—
|
%
|
|
—
|
%
|
Corporate and other
|
(39
|
)%
|
|
(29
|
)%
|
Total
|
(133
|
)%
|
|
(115
|
)%
|
We intend that the following discussion of our financial condition and results of operations will provide information that will assist in understanding our 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.
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, 2015
, and (ii) Item 1A. “
Risk Factors
” in Part II of this Form 10-Q.
Results of Operations
Three Months Ended March 31, 2016
Compared to
Three Months Ended March 31, 2015
Our overall total net revenues of
$22.7 million
for the
three months ended March 31, 2016
(the “Current Quarter”)
decreased
by
$17.9 million
, or
(44)%
, compared to total net revenues for the
three months ended March 31, 2015
(the “Comparable Quarter”). Our overall gross
loss
percentage was
(39)%
, in both the Current and Comparable Quarters. For the Current Quarter, our
loss
from operations was
$30.1 million
, compared to
loss
from operations of
$46.7 million
for the Comparable Quarter.
Net
loss
for the Current Quarter was
$35.0 million
, or
$(3.30)
per share, compared to net loss of
$55.3 million
, or
$(5.04)
per share, for the Comparable Quarter. Excluding special items reported one year ago, the Company’s first quarter 2015 adjusted net loss was $51.5 million, or $(4.70) per share.
Net Revenues, Gross Profits and Gross Margins
Solutions
— Net revenues for the Current Quarter
decreased
by
$6.0 million
, or
(32)%
, to
$13.0 million
, compared to
$19.0 million
for the Comparable Quarter. The
decrease
in revenues was primarily due to lower new ventures and data processing revenues primarily related to Pemex work awarded without executed contracts required to recognize revenue partially offset by increased sales of our data libraries in South America. Gross
loss
decreased
by
$0.6 million
to
$(9.8) million
, representing a
(75)%
gross margin, compared to
$(10.4) million
, which represented a
(55)%
gross margin in the Comparable Quarter. The
decrease
in gross profit and margin was due to the decrease in revenues, as well as higher straight-line amortization and lower capitalized costs.
Systems
— Net revenues for the Current Quarter
decreased
by
$7.4 million
, or
(58)%
, to
$5.4 million
, compared to
$12.8 million
for the Comparable Quarter. The
decrease
in revenues in the Current Quarter was principally due to reduced activity by seismic contractors as they have taken vessels out of service resulting in reduced demand for repairs and spare parts. Gross
profit
decreased
by
$3.2 million
to
$1.4 million
, representing a
25%
gross margin, for the Current Quarter, compared to
$4.6 million
, representing a
36%
gross margin, for the Comparable Quarter. The decrease in gross profit and margin was the result of lower revenues and the change in the sales mix of products sold during the Current Quarter.
Software
— Net revenues for the Current Quarter
decreased
$4.5 million
, or
(51)%
, to
$4.3 million
, compared to
$8.8 million
for the Comparable Quarter. The
decrease
in revenues was due to a decrease in Orca licensing revenues as a result of a minimal run rate of vessels utilizing our command and control software and to a lesser extent the unfavorable impact of foreign currency exchange rates. Gross
profit
for the Current Quarter
decreased
$3.1 million
to
$2.5 million
, compared to
$5.6 million
, for the Comparable Quarter. Gross margin of
59%
in the Current Quarter
decreased
from the
63%
gross margin in the Comparable Quarter primarily due to the decline in revenues in the Current Quarter.
Ocean Bottom Services
— Net revenues were
zero
, for both the Current and Comparable Quarters. Gross loss for the Current Quarter was
$3.0 million
, compared to a gross loss of
$15.5 million
for the Comparable Quarter. OceanGeo did not record any revenues during the Current Quarter due to its vessels remaining idle while it attempts to secure a backlog of future orders.
Operating Expenses
Research, Development and Engineering
— Research, development and engineering expense
decreased
$2.1 million
, or
(27)%
, to
$5.6 million
, for the Current Quarter, compared to
$7.7 million
for the Comparable Quarter. During the current down-cycle in E&P exploration spending, we have been selective in spending on research and development (“R&D”) projects in order to reduce expenses without sacrificing our ability to develop our technologies, including a one-time spend of $1.0 million related to the acquisition of Sailwings (in-process R&D). As discussed above, despite the extended market downturn and uncertainty, we see significant long-term potential for OceanGeo and our technologies to improve ocean bottom survey productivity, and we expect long-term demand for ocean bottom production surveys (4D) to increase.
Marketing and Sales
— Marketing and sales expense
decreased
$3.8 million
, or
(49)%
, to
$4.0 million
, for the Current Quarter, compared to
$7.8 million
, for the Comparable Quarter. During the current down-cycle in oil and gas exploration spending, we have also reduced our payroll and marketing expenses.
General, Administrative and Other Operating Expenses
— General, administrative and other operating expenses
decreased
$3.7 million
, or
(24)%
, to
$11.6 million
, for the Current Quarter, compared to
$15.3 million
for the Comparable Quarter. This
decrease
was primarily related to reduced expenses in the Current Quarter due to restructuring actions taken in 2015.
Other Items
Interest Expense, net
— Interest expense, net, was
$4.7 million
for
the Current Quarter consistent with $4.6 million for the Comparable Quarter
. Interest expense in both quarters is primarily related to the Notes. 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
$0.3 million
compared to
$1.0 million
for the Comparable Quarter. Our effective tax rates for the Current Quarter and Comparable Quarter were
(0.8)%
and
(1.8)%
, respectively. Income tax expense for the Current Quarter primarily relates to income from our non-U.S. businesses. The effective tax rate was negatively impacted by the change in valuation allowance related to operating losses for which we cannot currently recognize a tax benefit.
Other Income (Expense), Net
— Other income for the Current Quarter was
$0.1 million
compared to other
expense
of
$(3.2) million
for the Comparable Quarter. This difference was primarily due to Facility Restructuring charges and higher foreign currency losses recorded in the Comparable Quarter.
The following table reflects the significant items of other
income (expense)
, net as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Facility restructuring charges
|
—
|
|
|
(1,913
|
)
|
Other income (expense), net
|
120
|
|
|
(1,306
|
)
|
Total other income (expense), net
|
$
|
120
|
|
|
$
|
(3,219
|
)
|
Liquidity and Capital Resources
Sources of Capital
As of
March 31, 2016
, we had
$76.7 million
of cash on hand and an undrawn borrowing base of $25.8 million under the
Credit Facility
. 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, 2016
, we had working capital of
$45.6 million
. Working capital requirements are primarily driven by our investment in our multi-client data library (
$6.3 million
in the Current
Quarter
) and, to a lesser extent, (i) our manufacture of OBS equipment to be used in our Ocean Bottom Services segment, and (ii) our inventory purchase obligations. Also, our headcount has traditionally been a significant driver of our working capital needs. Because 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 involves cash expenditures for their salaries, bonuses, payroll taxes and related compensation expenses. As previously noted, since December 2014, we have reduced our workforce by over 50%, and reduced salaries by 10% for a majority of our employees and closed selected facilities. We expect these actions to result in annualized cash savings of approximately $80.0 million starting in the fourth quarter of 2015. In April, 2016, we implemented additional cost saving initiatives by reducing our current workforce by over 12%. Additional reductions were needed to further streamline our organization and rightsize our company to bring it in line with our current revenue stream, while maintaining the necessary core capabilities to continue our operations and strategic initiatives. These additional reductions are expected to result in approximately $15 million of annualized savings, (an estimated $9 million in 2016), in addition to the $80 million of expected annual savings from prior cost reduction initiatives. We expect to begin realizing the vast majority of these savings in the third quarter of this year.
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 revolving credit facilities.
Credit Facility, including Revolving Line of Credit
-In August 2014, we and our material U.S. subsidiaries, GX Technology Corporation, ION Exploration Products (U.S.A.), Inc. and I/O Marine Systems, Inc. (collectively, the “Subsidiary Borrowers”) entered into a Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), as agent (the “Original Credit Agreement”), which was amended by the First Amendment to Revolving Credit and Security Agreement in August 2015 (the “First Amendment”) and the Second Amendment to Revolving Credit and Security Agreement in April 2016 (the “Second Amendment”; the Original Credit Agreement, as amended by the First Amendment and the Second Amendment, the “Credit Facility”).
The Credit Facility is available to provide for the Borrowers’ general corporate needs, including working capital requirements, capital expenditures, surety deposits and acquisition financing. The maximum amount of the revolving line of credit under the Credit Facility is the lesser of $40.0 million and a monthly borrowing base (which may be recalculated more frequently under certain circumstances).
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 our multi-client data library (not to exceed $15.0 million for the multi-client data library data component). As of March 31, 2016, the borrowing base under the Credit Facility was $25.8 million, and there was no outstanding indebtedness under the Credit Facility.
The
Credit Facility
requires us to maintain compliance with various covenants. At
March 31, 2016
, we were in compliance with all of the covenants under the
Credit Facility
. For further information regarding our
Credit Facility
, see
Footnote 3
“
Long-term Debt
” of
Footnotes to Consolidated Financial Statements
.
Senior Secured Notes
In May 2013, we sold $175.0 million aggregate principal amount of 8.125% Senior Secured Second-Priority Notes due 2018 (the “Third Lien Notes”) in a private offering pursuant to an indenture dated as of May 13, 2013 (the “Third Lien Notes Indenture”). Prior to the completion of the Exchange Offer and Consent Solicitation on April 28, 2016, the Third Lien Notes were our senior secured second-priority obligations. After giving effect to the Exchange Offer and Consent Solicitation, the remaining aggregate principal amount of approximately
$28.5 million
of outstanding Third Lien Notes became our senior secured third-priority obligations subordinated to the liens securing all of our senior and second priority indebtedness, including under the Credit Facility and Second Lien Notes.
Pursuant to the Exchange Offer and Consent Solicitation, we (i) issued approximately
$120.6 million
in aggregate principal amount of our new Second Lien Notes and
1,205,477
shares of common stock, (utilizing
508,464
of treasury shares) in exchange for approximately
$120.6 million
in aggregate principal amount of Third Lien Notes, and (ii) purchased approximately
$25.9 million
in aggregate principal amount of Third Lien Notes in exchange for aggregate cash consideration totaling approximately
$15.0 million
, plus accrued and unpaid interest on the Third Lien Notes from the applicable last interest payment date to, but not including, April 28, 2016.
After giving effect to the Exchange Offer and Consent Solicitation, the aggregate principal amount of the Third Lien Notes remaining outstanding was approximately
$28.5 million
and the aggregate principal amount of Second Lien Notes outstanding was approximately
$120.6 million
. See Item 2. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Exchange Offer
” in Part II of this Form 10-Q.
The Third Lien Notes are guaranteed by our material U.S. subsidiaries, GX Technology Corporation, ION Exploration Products (U.S.A.), Inc. and I/O Marine Systems, Inc. (the “Guarantors”). The Third Lien Notes mature on May 15, 2018. Interest on the Third Lien Notes accrues at the rate of 8.125% per annum and is payable semiannually in arrears on May 15 and November 15 of each year during their term. In May 2014, the holders of the Third Lien Notes exchanged their Third Lien Notes for a like principal amount of registered Third Lien Notes with the same terms. For a complete discussion of the terms and security of the Third Lien Notes in effect prior to the completion of the Exchange Offer and Consent Solicitation on April 28, 2016, see Footnote 6 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.
On or after May 15, 2015, we may on one or more occasions redeem all or a part of the Third Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Third Lien Notes redeemed during the twelve-month period beginning on May 15th of the years indicated below:
|
|
|
|
Date
|
|
Percentage
|
2015
|
|
104.063%
|
2016
|
|
102.031%
|
2017 and thereafter
|
|
100.000%
|
The Third Lien Notes Indenture requires us to maintain compliance with various covenants. At March 31, 2016, we were in compliance with all of the covenants under the Third Lien Notes Indenture. For further information regarding the Third Lien Notes, see Footnote 3 “
Long-term Debt
” of
Footnotes to Unaudited Condensed Consolidated Financial Statements
.
The Second Lien Notes are senior secured second-priority obligations guaranteed by the Guarantors. The Second Lien Notes mature on December 15, 2021. Interest on the Second Lien Notes accrues at the rate of
9.125%
per annum and is payable semiannually in arrears on June 15 and December 15 of each year during their term, beginning June 15, 2016, except that the interest payment otherwise payable on June 15, 2021 will be payable on December 15, 2021.
The indenture dated April 28, 2016 governing the Second Lien Notes (the “Second Lien Notes Indenture”) contains certain covenants that, among other things, limits or prohibits 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, 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.
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
|
|
105.500%
|
2020
|
|
103.500%
|
2021 and thereafter
|
|
100.000%
|
For additional information regarding the terms of the Third Lien Notes and related Third Lien Notes Indenture and intercreditor agreement in effect prior to the completion of the Exchange Offer, see our Current Report on Form 8-K filed with the SEC on May 13, 2013. For additional information regarding the terms and security of the Third Lien Notes after giving effect to the Exchange Offer and Consent Solicitation, the amendments to the Third Lien Notes Indenture, the terms and security of the Second Lien Notes, the Second Lien Notes Indenture and the related intercreditor agreement, see our Current Report on Form 8-K filed with the SEC on April 28, 2016.
Meeting our Liquidity Requirements
As of
March 31, 2016
, our total outstanding indebtedness (including capital lease obligations) was approximately
$181.3 million
, consisting of approximately
$175.0 million
outstanding Third Lien Notes,
$8.1 million
of equipment capital leases, and $1.2 million of other debt, partially offset ($3.0 million) of costs associated with issuance of debt. As of
March 31, 2016
, there was
no
outstanding indebtedness under our
Credit Facility
.
For the Current
Quarter
, total capital expenditures, including the investments in our multi-client data library, were
$6.6 million
. As discussed above, we began investing in MexicoSPAN early in the third quarter of 2015. This project is well funded by several of our major E&P customers. We expect investments in our multi-client data library this year to be in the range of $15.0 million to $25.0 million. Our full year investment in our multi-client data library has been significantly reduced in 2016 compared to 2015 due to the uncertainty in the E&P industry and their reduced capital expenditures budgets for 2016. In late April we completed our Exchange Offer, retiring approximately
$25.9 million
of our
$175.0 million
Third Lien Notes, using approximately
$15.0 million
of our cash. We believe that the consummation of the Exchange Offer will ultimately improve our liquidity position and give us more flexibility in how we invest cash into our businesses. See “
Executive Summary – Macroeconomic Conditions
” above.
Subject to a payment obligation in the amount of the loss contingency we have established with respect to our ongoing WesternGeco litigation (as discussed below), we believe that our existing cash balance, cash to be generated from operations through increased revenues expected in the second half of 2016 and our borrowing availability under our
Credit Facility
will be sufficient to meet our anticipated cash needs for at least the next 12 months. However as set forth below, a potential future requirement to satisfy a payment obligation with respect to the WesternGeco litigation in excess of our loss contingency accrual could have a material adverse effect on our liquidity and, as a result, our business, financial condition and results of operations.
Loss Contingency – WesternGeco Lawsuit
As of
March 31, 2016
, we have a loss contingency of
$22 million
accrued related to the legal proceedings with WesternGeco. As described at Part II, Item 1. “
Legal Proceedings,
” there are possible scenarios involving an outcome in the WesternGeco lawsuit that could materially and adversely affect our liquidity. Prior to the reduction in damages by the Court of Appeals, we arranged with sureties to post an appeal bond at the trial court. The appeal bond is uncollateralized, but the terms of the appeal bond arrangements provide the sureties the contractual right for as long as the bond is outstanding to require us to post cash collateral. We have received a request for $11 million in collateral and have exchanged correspondence with the sureties in connection with this request.
On May 4, 2016, after referral from the trial court, a Magistrate Judge issued an order and report and recommendation in the litigation. The order and report recommended entry of a final judgment against us on the royalty obligation plus interest, subject to final calculation upon entry of judgment, which is expected to be approximately $22 million and recommended the district court deny our motion to stay any obligation to pay the remaining $22 million that is not related to lost profits until after the Supreme Court rules on the lost profits claims in the case. We will pursue all available objections and appeals to the order and report and recommendation.
We may not ultimately prevail in the final appeals process and we could be required to pay damages up to the amount of the loss contingency accrual plus any additional amount ordered by the court. Our assessment of our potential loss contingency may change in the future due to developments at the appellate court and other events, such as changes in applicable law, and such reassessment could lead to the determination that no loss contingency is probable or that a greater loss contingency is probable, which could have a material effect on our business, financial condition and results of operations. Amounts of estimated loss contingency accruals as 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. Actual losses may exceed or be less than these accrual amounts.
Cash Flow from Operations
In the Current
Quarter
, we generated
$2.5 million
of cash from operating activities compared to a net consumption of
$6.7 million
in the Comparable
Quarter
. The increase in cash from operations was due to improved operating results. Although revenues declined 44% as compared to prior year, the impact of our cost reduction measures helped reduce our net loss by 37% as compared to the prior year period. In addition, cash from operations received during the Current Quarter also benefited from collections of cash from our accounts receivable generated in the fourth quarter of 2015, partially offset by payments of accounts payable.
Cash Flow from Investing Activities
Cash used in investing activities
was
$6.6 million
for the Current
Quarter
,
compared to
$20.8 million
for the Comparable
Quarter
. The principal use of cash in our investing activities during the Current
Quarter
was
$6.3 million
cash invested in our multi-client data library and
$0.3 million
of capital expenditures on property, plant, equipment and seismic rental equipment.
The principal use of cash in our investing activities during the Comparable
Quarter
was
$9.1 million
cash invested in our multi-client data library, and
$12.0 million
for capital expenditures related to property, plant and equipment.
Cash Flow from Financing Activities
Net cash used in financing activities
was
$4.5 million
for the Current
Quarter
, compared to
$2.0 million
of cash used in the Comparable
Quarter
. The primary use of cash in our financing activities during the Current
Quarter
was $2.2 million for payments on equipment capital leases, $1.3 million of debt issuance costs and $1.0 million of stock repurchases.
The net cash flow used in financing activities during the Comparable
Quarter
was primarily related to
$2.1 million
of payments of long-term debt.
Inflation and Seasonality
Inflation in recent years has not had a material effect on our costs 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 fourth quarter of our fiscal year.
Critical Accounting Policies and Estimates
Refer to our Annual Report on Form 10-K for the year ended
December 31, 2015
for a complete discussion of our significant accounting policies and estimates. There have been no material changes in the Current
Quarter
regarding our critical accounting policies and estimates. For discussion of recent accounting pronouncements, see
Footnote 13
“
Recent Accounting Pronouncements
”
of
Footnotes to Unaudited Condensed Consolidated Financial Statements.
Foreign Sales Risks
The majority of our foreign sales are denominated in United States 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 Ventures and Data Processing divisions, are allocated based upon the billing location of the customer. For the Current
Quarter
and Comparable
Quarter
, international sales comprised
77%
and
72%
, respectively, of total net revenues. The total percentage of sales from foreign countries increased in the Current
Quarter
compared to the Comparable
Quarter
due to our revenues in North America decreasing at a higher rate than the decrease in revenues that we experienced in the international markets.
|
|
|
|
|
|
|
|
|
The following table is a summary of net revenues by geographic area (in thousands):
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net revenues by geographic area:
|
|
|
|
Europe
|
$
|
7,201
|
|
|
$
|
9,548
|
|
North America
|
5,203
|
|
|
$
|
11,283
|
|
Asia Pacific
|
3,816
|
|
|
$
|
6,784
|
|
Middle East
|
3,122
|
|
|
$
|
4,258
|
|
Africa
|
1,742
|
|
|
$
|
3,862
|
|
Latin America
|
1,237
|
|
|
$
|
4,297
|
|
Other
|
344
|
|
|
$
|
546
|
|
Total
|
22,665
|
|
|
$
|
40,578
|
|
Credit Risks
At
March 31, 2016
, we had one customer,
Pemex
, with combined accounts and unbilled receivable balances greater than 10% of our total combined accounts and unbilled receivables balances. This customer’s receivable and unbilled balance represented
26%
, of our net accounts receivable and unbilled receivables at
March 31, 2016
.
The loss of this customer or deterioration in our relationship with this customer 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, 2015
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 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, 2016
. 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, 2016
.
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, 2016
, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.