Quarterly Report (10-q)

Date : 10/31/2019 @ 8:08PM
Source : Edgar (US Regulatory)
Stock : ION Geophysical Corporation New (IO)
Quote : 8.39  -0.1 (-1.18%) @ 12:59AM
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Quarterly Report (10-q)

    

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-12691
ION GEOPHYSICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
 
22-2286646
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
2105 CityWest Blvd. Suite 100
 
 
Houston, Texas
 
77042-2839
(Address of principal executive offices)
 
(Zip Code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 933-3339

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
IO
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
o
 
Accelerated filer
ý
 
 
 
 
 
 
Non-accelerated filer
 
o  
 
Smaller reporting company
o
 
 
 
 
 
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨    No  ý
At October 28, 2019, there were 14,201,650 shares of common stock, par value $0.01 per share, outstanding.

1

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS FOR FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
 
 
PAGE
PART I. Financial Information
 
Item 1. Financial Statements (Unaudited)
 
Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
3
Condensed Consolidated Statements of Operations for the three- and nine-months ended September 30, 2019 and 2018
4
Condensed Consolidated Statements of Comprehensive Loss for the three- and nine-months ended September 30, 2019 and 2018
5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018
6
Condensed Consolidated Statements of Stockholders' (Deficit) Equity for the three- and nine-months ended September 30, 2019 and 2018
7
Footnotes to Condensed Consolidated Financial Statements
9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3. Quantitative and Qualitative Disclosures about Market Risk
37
Item 4. Controls and Procedures
37
 
 
PART II. Other Information
 
Item 1. Legal Proceedings
38
Item 1A. Risk Factors
39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
40
Item 5. Other Information
40
Item 6. Exhibits
41

2

    

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 30, 2019
 
December 31, 2018
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
27,894

 
$
33,551

Accounts receivable, net
23,832

 
26,128

Unbilled receivables
30,990

 
44,032

Inventories, net
12,934

 
14,130

Prepaid expenses and other current assets
6,626

 
7,782

Total current assets
102,276

 
125,623

Deferred income tax asset, net
8,435

 
7,191

Property, plant and equipment, net
12,903

 
13,041

Multi-client data library, net
69,723

 
73,544

Goodwill
22,276

 
22,915

Right-of-use assets
37,155

 
47,803

Other assets
2,222

 
2,435

Total assets
$
254,990

 
$
292,552

LIABILITIES AND (DEFICIT) EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
1,110

 
$
2,228

Accounts payable
43,565

 
34,913

Accrued expenses
42,807

 
31,411

Accrued multi-client data library royalties
17,514

 
29,256

Deferred revenue
5,310

 
7,710

Current maturities of operating lease liabilities
11,648

 
12,214

Total current liabilities
121,954

 
117,732

Long-term debt, net of current maturities
119,402

 
119,513

Operating lease liabilities, net of current maturities
35,214

 
45,592

Other long-term liabilities
1,526

 
1,891

Total liabilities
278,096

 
284,728

(Deficit) Equity:
 
 
 
Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 14,201,650 and 14,015,615 shares at September 30, 2019 and December 31, 2018, respectively.
142

 
140

Additional paid-in capital
955,705

 
952,626

Accumulated deficit
(959,797
)
 
(926,092
)
Accumulated other comprehensive loss
(21,440
)
 
(20,442
)
Total stockholders’ (deficit) equity
(25,390
)
 
6,232

Noncontrolling interest
2,284

 
1,592

Total (deficit) equity
(23,106
)
 
7,824

Total liabilities and (deficit) equity
$
254,990

 
$
292,552

See accompanying Footnotes to Condensed Consolidated Financial Statements.

3

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share data)
Service revenues
$
41,990

 
$
37,105

 
$
100,525

 
$
77,943

Product revenues
11,249

 
10,095

 
31,445

 
27,508

Total net revenues
53,239

 
47,200

 
131,970

 
105,451

Cost of services
22,690

 
25,924

 
61,931

 
70,286

Cost of products
5,261

 
4,801

 
15,256

 
13,354

Gross profit
25,288

 
16,475

 
54,783

 
21,811

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
4,878

 
5,030

 
15,421

 
13,544

Marketing and sales
5,591

 
5,209

 
17,444

 
16,314

General, administrative and other operating expenses
10,961

 
8,688

 
36,550

 
29,564

Total operating expenses
21,430

 
18,927

 
69,415

 
59,422

Income (loss) from operations
3,858

 
(2,452
)
 
(14,632
)
 
(37,611
)
Interest expense, net
(3,155
)
 
(3,022
)
 
(9,378
)
 
(9,769
)
Other income (expense), net
(242
)
 
91

 
(938
)
 
(616
)
Income (loss) before income taxes
461

 
(5,383
)
 
(24,948
)
 
(47,996
)
Income tax expense
3,790

 
2,079

 
7,916

 
3,305

Net loss
(3,329
)
 
(7,462
)
 
(32,864
)
 
(51,301
)
Less: Net income attributable to noncontrolling interest
(394
)
 
(74
)
 
(841
)
 
(527
)
Net loss attributable to ION
$
(3,723
)
 
$
(7,536
)
 
$
(33,705
)
 
$
(51,828
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.26
)
 
$
(0.54
)
 
$
(2.39
)
 
$
(3.81
)
Diluted
$
(0.26
)
 
$
(0.54
)
 
$
(2.39
)
 
$
(3.81
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
14,181

 
14,003

 
14,104

 
13,586

Diluted
14,181

 
14,003

 
14,104

 
13,586

See accompanying Footnotes to Condensed Consolidated Financial Statements.



4

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Net loss
$
(3,329
)
 
$
(7,462
)
 
$
(32,864
)
 
$
(51,301
)
Other comprehensive loss, net of taxes, as appropriate:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,028
)
 
43

 
(998
)
 
(712
)
Comprehensive net loss
(4,357
)
 
(7,419
)
 
(33,862
)
 
(52,013
)
Comprehensive income attributable to noncontrolling interest
(394
)
 
(74
)
 
(841
)
 
(527
)
Comprehensive net loss attributable to ION
$
(4,751
)
 
$
(7,493
)
 
$
(34,703
)
 
$
(52,540
)
See accompanying Footnotes to Condensed Consolidated Financial Statements.


5

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended September 30,
 
2019
 
2018
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(32,864
)
 
$
(51,301
)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization (other than multi-client data library)
2,903

 
6,902

Amortization of multi-client data library
29,787

 
32,544

Stock-based compensation expense
3,736

 
2,508

Deferred income taxes
(1,248
)
 
(2,310
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,115

 
(4,383
)
Unbilled receivables
12,772

 
13,156

Inventories
729

 
(646
)
Accounts payable, accrued expenses and accrued royalties
1,528

 
(9,567
)
Deferred revenue
(2,398
)
 
1,479

Other assets and liabilities
2,244

 
4,294

Net cash provided by (used in) operating activities
19,304

 
(7,324
)
Cash flows from investing activities:
 
 
 
Investment in multi-client data library
(21,225
)
 
(19,911
)
Purchase of property, plant and equipment
(1,272
)
 
(313
)
Net cash used in investing activities
(22,497
)
 
(20,224
)
Cash flows from financing activities:
 
 
 
Payments under revolving line of credit
(15,000
)
 
(10,000
)
Borrowings under revolving line of credit
15,000

 

Payments on notes payable and long-term debt
(1,960
)
 
(30,071
)
Net proceeds from issuance of stock

 
46,999

Dividend payment to noncontrolling interest

 
(200
)
Other financing activities
(655
)
 
(1,489
)
Net cash (used in) provided by financing activities
(2,615
)
 
5,239

Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash
151

 
296

Net decrease in cash, cash equivalents and restricted cash
(5,657
)
 
(22,013
)
Cash, cash equivalents and restricted cash at beginning of period
33,854

 
52,419

Cash, cash equivalents and restricted cash at end of period
$
28,197

 
$
30,406

The following table is a reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets:
 
September 30,
 
2019
 
2018
 
(In thousands)
 Cash and cash equivalents
$
27,894

 
$
30,043

 Restricted cash included in prepaid expenses and other current assets
303

 
60

 Restricted cash included in other long-term assets

 
303

 Total cash, cash equivalents, and restricted cash shown in statements of cash flows
$
28,197

 
$
30,406

See accompanying Footnotes to Condensed Consolidated Financial Statements.

6

    

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(UNAUDITED)
 
Three Months Ended September 30, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interests
 
Total Equity
(Deficit)
 (In thousands, except shares)
Shares
 
Amount
 
Balance at July 1, 2019
14,171,561

 
$
142

 
$
954,904

 
$
(956,074
)
 
$
(20,412
)
 
$
2,059

 
$
(19,381
)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 


Net (loss) income

 

 

 
(3,723
)
 


 
394

 
(3,329
)
Translation adjustments

 

 

 


 
(1,028
)
 
(169
)
 
(1,197
)
Stock-based compensation expense

 

 
905

 

 

 

 
905

Exercise of stock options
58,400

 

 
26

 

 

 

 
26

Vesting of restricted stock units/awards
1,066

 

 

 

 

 

 

Vested restricted stock cancelled for employee minimum income taxes
(29,377
)
 

 
(130
)
 

 

 

 
(130
)
Balance at September 30, 2019
14,201,650

 
$
142

 
$
955,705

 
$
(959,797
)
 
$
(21,440
)
 
$
2,284

 
$
(23,106
)
 
Nine Months Ended September 30, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interests
 
Total Equity
(Deficit)
 (In thousands, except shares)
Shares
 
Amount
 
Balance at January 1, 2019
14,015,615

 
$
140

 
$
952,626

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

 
$
7,824

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income

 

 

 
(33,705
)
 

 
841

 
(32,864
)
Translation adjustments

 

 

 

 
(998
)
 
(149
)
 
(1,147
)
Stock-based compensation expense

 

 
3,736

 

 

 

 
3,736

Exercise of stock options
82,900

 
1

 
102

 

 

 

 
103

Vesting of restricted stock units/awards
202,697

 
2

 
(2
)
 

 

 

 

Vested restricted stock cancelled for employee minimum income taxes
(99,562
)
 
(1
)
 
(757
)
 

 

 

 
(758
)
Balance at September 30, 2019
14,201,650

 
$
142

 
$
955,705

 
$
(959,797
)
 
$
(21,440
)
 
$
2,284

 
$
(23,106
)
 
Three Months Ended September 30, 2018
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interests
 
Total Equity
 (In thousands, except shares)
Shares
 
Amount
 
Balance at July 1, 2018
14,002,999

 
$
140

 
$
951,349

 
$
(899,213
)
 
$
(19,634
)
 
$
1,279

 
$
33,921

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 


Net (loss) income

 

 

 
(7,536
)
 

 
74

 
(7,462
)
Translation adjustment

 

 

 

 
43

 
(50
)
 
(7
)
Stock-based compensation expense

 

 
465

 

 

 

 
465

Exercise of stock options

 

 
(3
)
 

 

 

 
(3
)
Balance at September 30, 2018
14,002,999

 
$
140

 
$
951,811

 
$
(906,749
)
 
$
(19,591
)
 
$
1,303

 
$
26,914


7

    

 
Nine Months Ended September 30, 2018
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interests
 
Total Equity
 (In thousands, except shares)
Shares
 
Amount
 
Balance at January 1, 2018
12,019,701

 
$
120

 
$
903,247

 
$
(854,921
)
 
$
(18,879
)
 
$
1,239

 
$
30,806

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income

 

 

 
(51,828
)
 

 
527

 
(51,301
)
Translation adjustment

 

 

 

 
(712
)
 
(263
)
 
(975
)
Dividend payment to noncontrolling interest

 

 

 

 

 
(200
)
 
(200
)
Stock-based compensation expense

 

 
2,508

 

 

 

 
2,508

Exercise of stock options
70,086

 

 
214

 

 

 

 
214

Vesting of restricted stock units/awards
137,844

 
2

 
(2
)
 

 

 

 

Vested restricted stock cancelled for employee minimum income taxes
(22,176
)
 

 
(527
)
 

 

 

 
(527
)
Public equity offering
1,820,000

 
18

 
46,981

 

 

 

 
46,999

Employee purchases of unregistered shares of common stock
(22,456
)
 

 
(610
)
 

 

 

 
(610
)
Balance at September 30, 2018
14,002,999

 
$
140

 
$
951,811

 
$
(906,749
)
 
$
(19,591
)
 
$
1,303

 
$
26,914

See accompanying Footnotes to Condensed Consolidated Financial Statements.


8

    


ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1)    Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated balance sheet of ION Geophysical Corporation and its subsidiaries (collectively referred to as the “Company” or “ION,” unless the context otherwise requires) at December 31, 2018, has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at September 30, 2019, and the condensed consolidated statements of operations, comprehensive loss and condensed consolidated statements of stockholders' (deficit) equity for the three and nine months ended September 30, 2019 and 2018 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, are unaudited. In the opinion of management, all adjustments of a normal recurring nature that are necessary for a fair presentation of the results of the interim period have been included. Interim results are not necessarily indicative of the operating results for a full year or of future operations. Intercompany transactions and balances have been eliminated.
The Company’s condensed consolidated financial statements reflect a non-redeemable noncontrolling interest in a majority-owned affiliate which is reported as a separate component of equity in “Noncontrolling interest” in the condensed consolidated balance sheets. Net income attributable to noncontrolling interest is stated separately in the condensed consolidated statements of operations. The activity for this noncontrolling interest relates to proprietary processing projects in Brazil.
These condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with GAAP have been omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Certain prior period amounts have been reclassified to conform to the current period presentation, including the change in reportable segments presentation which had no impact on the condensed consolidated financial statements and the recognition of right-of-use (“ROU”) assets and operating lease liabilities on the condensed consolidated balance sheets as a result of the adoption of the new lease standard. See Note 2 “Recent Accounting Pronouncements.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in Note 1 “Summary of Significant Accounting Policies.” of the Annual Report on Form 10-K for the year ended December 31, 2018. There have been no changes in such policies or the application of such policies during the nine months ended September 30, 2019 except as discussed in Note 2 “Recent Accounting Pronouncements.” and Note 11 “Lease Obligations.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions by management that affects the reported amounts in the condensed consolidated financial statements and accompanying notes. Areas involving significant estimates include, but not limited to, accounts and unbilled receivables, inventory valuation, sales forecast related to multi-client data libraries, impairment of property, plant and equipment and goodwill and deferred taxes. Actual results could materially differ from those estimates.
(2)    Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-2, “Leases (Topic 842)” using the modified retrospective method. This ASU requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the previous guidance. The Company used January 1, 2018, the beginning of the earliest comparative period presented in its condensed consolidated financial statements, as the date of initial application. The Company elected the practical expedients upon transition which will retain the lease classification for leases and any unamortized initial direct costs that existed prior to the adoption of the standard.
The adoption of the standard resulted in ROU assets of $59.5 million and operating lease liabilities of $70.6 million on the condensed consolidated balance sheets as of January 1, 2018. The difference between the ROU assets and operating lease liabilities is due to the derecognition of $11.1 million in deferred rent recorded within other long-term liabilities. There was no

9

    

impact on the condensed consolidated statements of operations and cash flows. The adoption of the standard had no impact on the debt covenant compliance under existing agreements. The Company elected the practical expedient related to short-term leases, which are leases with a duration of twelve months or less, as such, they have not been recorded in the condensed consolidated balance sheets. See Note 11Lease Obligations.” for further discussion.
Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.” The guidance will replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. The Company is in the initial stages of evaluating the impact of this standard on the condensed consolidated financial statements. The Company does not currently expect the adoption of this standard to have a material impact on the condensed consolidated financial statements.
(3)    Segment Information
During the first quarter of 2019, the Company consolidated its operating segments from three into two, eliminating the separate presentation of its Ocean Bottom Integrated Technologies segment. This consolidation aligns with the Company’s asset light business model and evolved strategy to commercialize components of the Company’s next generation ocean bottom nodal system, 4Sea™, instead of operating a crew. The Company is offering 4Sea components more broadly to the growing number of Ocean Bottom Seismic (“OBS”) service providers under recurring revenue commercial strategies. The Company may also license the right to manufacture and use the 4Sea nodal technology to a service provider on a value-based pricing model, such as a royalty stream. Revenues from 4Sea are being recognized through the relevant segments, either E&P Technology & Services or Operations Optimization.
Accordingly, as of first quarter 2019, the Company evaluates and reviews its results of operations based on two reporting segments: E&P Technology & Services and Operations Optimization. Refer to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information about each business segment’s business, products and services.
The segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Operating Decision Maker in determining how to allocate resources and evaluate performance. The Company measures segment operating results based on income (loss) from operations.
Previously reported segment information has been retrospectively revised throughout the condensed consolidated financial statements, as applicable, for all periods presented to reflect the changes in the Company’s reporting segments. These changes did not have an impact on the Company’s condensed consolidated financial statements. These changes did not affect the Company’s reporting units used for allocating and testing goodwill for impairment.

10

    

The following table is a summary of segment information (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
Net revenues:
 
 
 
 
 
 
 
 
E&P Technology & Services:
 
 
 
 
 
 
 
 
New Venture
$
5,905

 
$
18,218

 
$
24,394

 
$
40,069

 
Data Library
27,288

 
13,956

 
55,030

 
21,629

 
Total multi-client revenues
33,193

 
32,174

 
79,424

 
61,698

 
Imaging Services
7,048

 
4,147

 
16,443

 
14,379

 
Total
40,241

 
36,321

 
95,867

 
76,077

 
Operations Optimization:
 
 
 
 
 
 
 
 
Devices
6,103

 
5,356

 
18,455

 
14,275

 
Optimization Software & Services
6,895

 
5,523

 
17,648

 
15,099

 
Total
12,998

 
10,879

 
36,103

 
29,374

 
Total net revenues
$
53,239

 
$
47,200

 
$
131,970

 
$
105,451

 
Gross profit (loss):






 
 
E&P Technology & Services
$
18,316

 
$
12,139

 
$
36,113

 
$
11,626

 
Operations Optimization
6,972

 
5,736

 
18,670

 
14,980

 
Segment gross profit
25,288

 
17,875

 
54,783

 
26,606

 
Other

 
(1,400
)
(a)

 
(4,795
)
(a)
Total gross profit
$
25,288

 
$
16,475

 
$
54,783

 
$
21,811

 
Gross margin:
 
 
 
 
 
 
 
 
E&P Technology & Services
46
%
 
33
 %
 
38
%
 
15
 %
 
Operations Optimization
54
%
 
53
 %
 
52
%
 
51
 %
 
Segment gross margin
47
%
 
38
 %
 
42
%
 
25
 %
 
Other
%
 
(3
)%
 
%
 
(5
)%
 
Total gross margin
47
%
 
35
 %
 
42
%
 
21
 %
 
Income (loss) from operations:
 
 
 
 
 
 
 
 
E&P Technology & Services
$
11,878

 
$
6,578

 
$
15,500

 
$
(4,422
)
 
Operations Optimization
2,994

 
1,963

 
5,808

 
3,992

 
Support and other
(11,014
)
(b)
(10,993
)
(b)
(35,940
)
(c)
(37,181
)
(c)
Income (loss) from operations
3,858

 
(2,452
)
 
(14,632
)
 
(37,611
)
 
Interest expense, net
(3,155
)
 
(3,022
)
 
(9,378
)
 
(9,769
)
 
Other income (expense), net
(242
)
 
91

 
(938
)
 
(616
)
 
Income (loss) before income taxes
$
461

 
$
(5,383
)
 
$
(24,948
)
 
$
(47,996
)
 
(a) Relates to gross loss primarily related to depreciation expense of previously reported Ocean Bottom Integrated Technologies segment.
(b) Includes loss from operations of previously reported Ocean Bottom Integrated Technologies segment of $0.7 million and $2.8 million for the three months ended September 30, 2019 and 2018, respectively, which consists of item (a) above and operating expenses of $0.7 million and $1.4 million for the three months ended September 30, 2019 and 2018, respectively.
(c) Includes loss from operations of previously reported Ocean Bottom Integrated Technologies segment of $2.3 million and $8.6 million for the nine months ended September 30, 2019 and 2018, respectively, which consists of item (a) above and operating expenses of $2.3 million and $3.8 million for the nine months ended September 30, 2019 and 2018, respectively.
(4)     Revenue From Contracts With Customers
The Company derives revenue from the (i) sale or license of multi-client and proprietary data, imaging services and E&P Advisors consulting services within its E&P Technologies & Services segment; (ii) sale, license and repair of seismic data acquisition systems and other equipment; and (iii) sale or license of seismic command and control software systems and software solutions for operations management within its Operations Optimization segment. All E&P Technology & Services’ revenues and the services component of Optimization Software & Services’ revenues under Operations Optimization segment are classified as service revenues. All other revenues are classified as product revenues.

11

    

The Company uses a five-step model to determine proper revenue recognition from customer contracts in accordance with Accounting Standards Codification Topic 606 (“ASC 606”). Revenue is recognized when (i) a contract is approved by all parties; (ii) the goods or services promised in the contract are identified; (iii) the consideration we expect to receive in exchange for the goods or services promised is determined; (iv) the consideration is allocated to the goods and services in the contract; and (v) control of the promised goods or services is transferred to the customer. The Company applies the practical expedient in ASC 606 and does not disclose information about remaining contractual future performance obligations with an original term of one year or less within the footnotes. The Company does not have any contractual future performance obligations with an original term of over one year.
Revenue by Geographic Area
The following table is a summary of net revenues by geographic area (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Latin America
$
22,720

 
$
19,910

 
$
50,572

 
$
37,356

North America
12,182

 
13,095

 
32,984

 
25,452

Europe
8,335

 
8,202

 
24,850

 
19,811

Asia Pacific
2,744

 
3,718

 
8,287

 
11,581

Africa
2,874

 
1,121

 
7,541

 
8,362

Middle East
3,899

 
717

 
6,364

 
1,907

Commonwealth of Independent States
485

 
437

 
1,372

 
982

Total
$
53,239

 
$
47,200

 
$
131,970

 
$
105,451

See Note 3“Segment Information” for revenue by segment for the three and nine months ended September 30, 2019 and 2018.
Unbilled Receivables
Unbilled receivables relate to revenues recognized on multi-client surveys, imaging services and devices equipment repairs on a proportionate basis, and on licensing of multi-client data libraries for which invoices have not yet been presented to the customer. The following table is a summary of unbilled receivables (in thousands):
 
September 30, 2019
 
December 31, 2018
New Venture
$
22,373

 
$
38,430

Imaging Services
7,016

 
5,075

Devices
1,601

 
527

Total
$
30,990

 
$
44,032

The changes in unbilled receivables are as follows (in thousands):
 Unbilled receivables at December 31, 2018
$
44,032

 Recognition of unbilled receivables
125,586

 Revenues billed to customers
(138,628
)
Unbilled receivables at September 30, 2019
$
30,990


12

    

Deferred Revenue
Billing practices are governed by the terms of each contract based upon achievement of milestones or pre-agreed schedules. Billing does not necessarily correlate with revenue recognized on a proportionate basis as work is performed and control is transferred to the customer. Deferred revenue represents cash received in excess of revenue recognized as of the reporting period, but will be recognized in future periods. The following table is a summary of deferred revenues (in thousands):
 
September 30, 2019
 
December 31, 2018
New Venture
$
1,973

 
$
5,797

Imaging Services
1,219

 
307

Devices
1,018

 
626

Optimization Software & Services
1,100

 
980

Total
$
5,310

 
$
7,710

The changes in deferred revenues are as follows (in thousands):
Deferred revenue at December 31, 2018
$
7,710

Cash collected in excess of revenue recognized
3,984

Recognition of deferred revenue (a)
(6,384
)
Deferred revenue at September 30, 2019
$
5,310

(a) The majority of deferred revenue recognized relates to Company’s Ventures group.
The Company expects to recognize all deferred revenue within the next 12 months.
Credit Risks
For the nine months ended September 30, 2019 and 2018, the Company had one customer with sales that exceeded 10% of the Company’s consolidated net revenues. Revenues related to each of these customers are included within the E&P Technology & Services segment.
At September 30, 2019, the Company had two customers with balances that, combined, accounted for 40% of the Company’s total combined accounts receivable and unbilled receivable balances. At September 30, 2018, the Company had one customer with a balance that accounted for 29% of the Company’s total combined accounts receivable and unbilled receivable balances.
(5)    Long-term Debt

The following table is a summary of long-term debt (in thousands):    
 
 
September 30, 2019
 
December 31, 2018
Senior secured second-priority lien notes (maturing December 15, 2021)
 
$
120,569

 
$
120,569

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

 

Equipment finance leases (Note 11)
 
2,138

 
2,938

Other debt
 

 
1,159

Costs associated with issuances of debt
 
(2,195
)
 
(2,925
)
Total
 
120,512

 
121,741

Current maturities of long-term debt
 
(1,110
)
 
(2,228
)
Long-term debt, net of current maturities
 
$
119,402

 
$
119,513

(a) The maturity of the Credit Facility will accelerate to October 31, 2021 if the Company is unable to repay or extend the maturity of the Second Lien Notes.
Revolving Credit Facility
On August 16, 2018, ION Geophysical Corporation and its material U.S. subsidiaries — GX Technology Corporation, ION Exploration Products (U.S.A), Inc. and I/O Marine Systems Inc. (the “Material U.S. Subsidiaries”) — along with GX Geoscience Corporation, S. de R.L. de C.V., a limited liability company (Sociedad de Responsibilidad Limitada de Capital Variable) organized under the laws of Mexico, and a subsidiary of the Company (the “Mexican Subsidiary”) (the Material U.S. Subsidiaries and the

13

    

Mexican Subsidiary are collectively, the “Subsidiary Borrowers”, together with ION Geophysical Corporation are the “Borrowers”) — the financial institutions party thereto, as lenders, and PNC Bank, National Association (“PNC”), as agent for the lenders, entered into that certain Third Amendment and Joinder to Revolving Credit and Security Agreement (the “Third Amendment”), amending the Revolving Credit and Security Agreement, dated as of August 22, 2014 (as previously amended by the First Amendment to Revolving Credit and Security Agreement, dated as of August 4, 2015 and the Second Amendment to Revolving Credit and Security Agreement, dated as of April 28, 2016, the “Credit Agreement”). The Credit Agreement, as amended by the First Amendment, the Second Amendment and the Third Amendment is herein called the “Credit Facility”).
The Credit Facility is available to provide for the Borrowers’ general corporate needs, including working capital requirements, capital expenditures, surety deposits and acquisition financing.
The Third Amendment amended the Credit Agreement to, among other things:
extend the maturity date of the Credit Facility by approximately four years (from August 22, 2019 to August 16, 2023), subject to the Company’s retirement or extension of the maturity date of its Second Lien Notes, as defined below, which mature on December 15, 2021;
increase the maximum revolver amount by $10.0 million (from $40.0 million to $50.0 million);
increase the borrowing base percentage of the net orderly liquidation value as it relates to the multi-client data library (not to exceed $28.5 million, up from the previous maximum of $15.0 million for the multi-client data library component);
include the eligible billed receivables of the Mexican Subsidiary up to a maximum of $5.0 million in the borrowing base calculation and joins the Mexican Subsidiary as a borrower thereunder (with a maximum exposure of $5.0 million) and require the equity and assets of the Mexican Subsidiary to be pledged to secure obligations under the facility;
modify the interest rate such that the maximum interest rate remains consistent with the fixed interest rate prior to the Third Amendment (that is, 3.00% per annum for domestic rate loans and 4.00% per annum for LIBOR rate loans), but now lowers the range down to a minimum interest rate of 2.00% for domestic rate loans and 3.00% for LIBOR rate loans based on a leverage ratio for the preceding four-quarter period;
decrease the minimum excess borrowing availability threshold which (if the Borrowers have minimum excess borrowing availability below any such threshold) triggers the agent’s right to exercise dominion over cash and deposit accounts; and
modify the trigger required to test for compliance with the fixed charges coverage ratio, which is further described below.
The maximum amount under the Credit Facility is the lesser of $50.0 million or a monthly borrowing base. The borrowing base under the Credit Facility will increase or decrease monthly using a formula based on certain eligible receivables, eligible inventory and other amounts, including a percentage of the net orderly liquidation value of the Borrowers’ multi-client library.  As of September 30, 2019, the undrawn borrowing base availability under the Credit Facility was $37.6 million, and there was no outstanding indebtedness under the Credit Facility.
The obligations of Borrowers under the Credit Facility are secured by a first-priority security interest in 100% of the stock of the Subsidiary Borrowers and 65% of the equity interest in ION International Holdings L.P., and by substantially all other assets of the Borrowers. However, the first-priority security interest in the other assets of the Mexican Subsidiary is capped to a maximum exposure of $5.0 million.
The Credit Facility contains covenants that, among other things, limit or prohibit the Borrowers, subject to certain exceptions and qualifications, from incurring additional indebtedness in excess of permitted indebtedness (including finance lease obligations), repurchasing equity, paying dividends or distributions, granting or incurring additional liens on the Borrowers’ properties, pledging shares of the Borrowers’ subsidiaries, entering into certain merger transactions, entering into transactions with the Company’s affiliates, making certain sales or other dispositions of the Borrowers’ assets, making certain investments, acquiring other businesses and entering into sale-leaseback transactions with respect to the Borrowers’ property.
The Credit Facility requires that the Borrowers maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 as of the end of each fiscal quarter during the existence of a covenant testing trigger event. The fixed charge coverage ratio is defined as the ratio of (i) ION Geophysical Corporation’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), minus unfunded capital expenditures made during the relevant period, minus distributions (including tax distributions) and dividends made during the relevant period, minus cash taxes paid during the relevant period, to (ii) certain debt payments made during the relevant period. A covenant testing trigger event occurs upon (a) the occurrence and continuance of an event of default under the Credit Facility or (b) by a two-step process based on (i) a minimum excess borrowing availability threshold (excess borrowing availability less than $6.25 million for five consecutive days or $5.0 million on any given day), and (ii) the Borrowers’ unencumbered cash maintained in a PNC deposit account is less than the Borrowers’ then outstanding obligations.
At September 30, 2019, the Company was in compliance with all of the covenants under the Credit Facility.
The Credit Facility contains customary event of default provisions (including a “change of control” event affecting ION Geophysical Corporation), the occurrence of which could lead to an acceleration of ION Geophysical Corporation’s obligations under the Credit Facility.

14

    

Senior Secured Notes
ION Geophysical Corporation’s 9.125% Senior Secured Second Priority Notes due December 2021 (the “Second Lien Notes”) are senior secured second-priority obligations guaranteed by the Material U.S. Subsidiaries and the Mexican Subsidiary (each as defined above and herein below, with the reference to the Second Lien Notes, the “Guarantors”). Interest on the Second Lien Notes is payable semiannually in arrears on June 15 and December 15 of each year during their term, except that the interest payment otherwise payable on June 15, 2021 will be payable on December 15, 2021.
The April 2016 indenture governing the Second Lien Notes contains certain covenants that, among other things, limits or prohibits ION Geophysical Corporation’s ability and the ability of its restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Second Lien Notes, including among other things, incurring additional indebtedness in excess of permitted indebtedness, creating liens, paying dividends and making other distributions in respect of ION Geophysical Corporation’s capital stock, redeeming ION Geophysical Corporation’s capital stock, making investments or certain other restricted payments, selling certain kinds of assets, entering into transactions with affiliates, and effecting mergers or consolidations. These and other restrictive covenants contained in the Second Lien Notes Indenture are subject to certain exceptions and qualifications. All of ION Geophysical Corporation’s subsidiaries are currently restricted subsidiaries.
At September 30, 2019, the Company was in compliance with all of the covenants under the Second Lien Notes.
On or after December 15, 2019, the Company may, on one or more occasions, redeem all or a part of the Second Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Second Lien Notes redeemed during the twelve-month period beginning on December 15th of the years indicated below:
Date
 
Percentage
2019
 
105.50%
2020
 
103.50%
2021 and thereafter
 
100.00%
(6)    Net Loss Per Share
Basic net loss per share is computed by dividing net loss applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is determined based on the assumption that dilutive restricted stock and restricted stock unit awards have vested and outstanding dilutive stock options have been exercised and the aggregate proceeds were used to reacquire common stock using the average price of such common stock for the period. The total number of shares issuable pursuant to outstanding stock options at September 30, 2019 and 2018 of 700,759 and 804,936, respectively, were excluded as their inclusion would have an anti-dilutive effect. The total number of shares issuable pursuant to restricted stock units awards outstanding at September 30, 2019 and 2018 of 926,917 and 128,131, respectively, were excluded as their inclusion would have an anti-dilutive effect.
(7)    Income Taxes
The Company maintains a valuation allowance for substantially all of its deferred tax assets. A valuation allowance is established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. The Company will continue to record a valuation allowance for the substantial majority of its deferred tax assets until there is sufficient evidence to warrant reversal.
The tax provision for the nine months ended September 30, 2019 has been calculated using the Company’s overall estimated annual effective tax rate based on projected 2019 full year results. The Company’s effective tax rates for the three months ended September 30, 2019 and 2018 were 822.1% and (38.6)%, respectively. The Company’s effective tax rates for the nine months ended September 30, 2019 and 2018 were (31.7)% and (6.9)%, respectively. The Company’s effective tax rates for the three and nine months ended September 30, 2019 and 2018 were negatively impacted by the change in valuation allowance related to U.S. operating losses for which the Company cannot currently recognize a tax benefit. The Company’s income tax expense for the nine months ended September 30, 2019 of $7.9 million primarily relates to results from the Company’s non-U.S. businesses.
As of September 30, 2019, the Company has approximately $0.4 million of unrecognized tax benefits and does not expect to recognize significant increases in unrecognized tax benefits during the next twelve-month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.

15

    

As of September 30, 2019, the Company’s U.S. federal tax returns for 2016 and subsequent years remain subject to examination by tax authorities. In the Company’s foreign tax jurisdictions, tax returns for 2012 and subsequent years generally remain open to examination.

(8) Litigation
WesternGeco
In June 2009, WesternGeco L.L.C. (“WesternGeco”) filed a lawsuit against the Company in the United States District Court for the Southern District of Texas (the “District Court”). In the lawsuit, styled WesternGeco L.L.C. v. ION Geophysical Corporation, WesternGeco alleged that the Company had infringed four of their patents concerning marine seismic surveys.
Trial began in July 2012, and the jury returned a verdict in August 2012. The jury found that the Company infringed the six “claims” contained in four of WesternGeco’s patents by supplying the Company’s DigiFIN® lateral streamer control units from the United States. (In patent law, a “claim” is a technical legal term; an infringer infringes on one or more “claims” of a given patent.)
In May 2014, the District Court entered a Final Judgment against the Company in the amount of $123.8 million. The Final Judgment also enjoined the Company from supplying DigiFINs or any parts unique to DigiFINs in or from the United States. The Company has conducted its business in compliance with the District Court’s orders, and has reorganized its operations such that it no longer supplies DigiFINs or any parts unique to DigiFINs in or from the United States.
As of 2018, the Company has paid WesternGeco the $25.8 million of the Final Judgment (the portion of the judgment representing reasonable royalty damages and enhanced damages, plus interest).
However, as further described below, the balance of the judgment against the Company ($98.0 million, representing lost profits from surveys performed by the Company’s customers outside of the United State, plus interest) has been vacated, and a new trial ordered, to determine what lost profit damages, if any, WesternGeco is entitled to.
The Final Judgment was vacated after it was appealed to the United States Court of Appeals for the Federal Circuit in Washington, D.C. (the “Court of Appeals”), then to the Supreme Court of the United States, which remanded the case, again, to the Court of Appeals.
On January 11, 2019, the Court of Appeals refused to disturb the award of reasonable royalties to WesternGeco (which the Company paid in 2016), but did not reinstate the lost profits award; rather, the Court of Appeals remanded the case back to the District Court to determine whether to hold a new trial as to lost profits.
On August 30, 2019, the District Court refused WesternGeco’s request to reinstate the lost profits awards against the Company, and instead ordered a new trial to determine what lost profits, if any, WesternGeco is entitled to from surveys performed by the Company’s customers outside of the United States.
The District Court’s basis for granting the new trial as to lost profits was that, subsequent to the jury verdict that awarded lost profits, the Patent Trial and Appeal Board (“PTAB”) of the Patent and Trademark Office, in an administrative proceeding, invalidated four of the five patent claims that formed the basis for the lost profits judgment against the Company (that is, the PTAB held that those four patent claims should never have been granted), and the Court of Appeals and the Supreme Court both subsequently refused to overturn that finding. A trial date for the new trial has not yet been set.
The Company may not ultimately prevail in the litigation and it could be required to pay lost profits if and when a new judgment issues in the new trial. The Company’s assessment that it does not have a loss contingency may change in the future due to developments at the District Court, and other events, such as changes in applicable law, and such reassessment could lead to the determination that a significant loss contingency is probable, which could have a material effect on the Company’s business, financial condition and results of operations. The Company’s assessments disclosed in this Quarterly Report on Form 10-Q or elsewhere are based on currently available information and involve elements of judgment and significant uncertainties.
Other Litigation
The Company has been named in various other lawsuits or threatened actions that are incidental to its ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. The Company currently believes that the ultimate resolution of these matters will not have a material adverse effect on its financial condition or results of operations.

16

    

(9)    Details of Selected Balance Sheet Accounts
Inventories
A summary of inventories follows (in thousands):
September 30, 2019
 
December 31, 2018
Raw materials and subassemblies
$
18,269

 
$
20,011

Work-in-process
2,460

 
1,032

Finished goods
5,166

 
8,111

Reserve for excess and obsolete inventories
(12,961
)
 
(15,024
)
Inventories, net
$
12,934

 
$
14,130

Property, Plant and Equipment
A summary of property, plant and equipment follows (in thousands):
September 30, 2019
 
December 31, 2018
Buildings
$
15,714

 
$
15,707

Machinery and equipment
133,257

 
132,135

Seismic rental equipment
1,572

 
1,423

Furniture and fixtures
3,867

 
3,859

Other
30,560

 
30,104

Total
184,970

 
183,228

Less accumulated depreciation
(135,514
)
 
(133,634
)
Less impairment of long-lived assets
(36,553
)
 
(36,553
)
Property, plant and equipment, net
$
12,903

 
$
13,041

Total depreciation expense, including amortization of assets recorded under equipment finance leases, for the nine months ended September 30, 2019 and 2018 was $2.4 million and $6.0 million, respectively.
Multi-Client Data Library
The change in multi-client data library are as follows (in thousands):
September 30, 2019
 
December 31, 2018
Gross costs of multi-client data creation
$
998,275

 
$
972,309

Less accumulated amortization
(806,647
)
 
(776,860
)
Less impairments to multi-client data library
(121,905
)
 
(121,905
)
Multi-client data library, net
$
69,723

 
$
73,544


Total amortization expense for the nine months ended September 30, 2019 and 2018 was $29.8 million and $32.5 million, respectively.
(10)    Stockholder's Equity and Stock-Based Compensation Expense
Public Equity Offering
On February 21, 2018, the Company completed a public equity offering (“Offering”) of its 1,820,000 shares of common stock at a public offering price of $27.50 per share, and warrants to purchase an additional 1,820,000 shares of the Company’s common stock pursuant to the Registration Statement on Form S-3 (No. 33-213769) filed with the Securities and Exchange Commission under the Securities Act of 1933 and declared effective on December 2, 2016.  The net proceeds from this offering were $47.0 million, including transaction expenses. A portion of the net proceeds were used to retire the Company’s $28.5 million Third Lien Notes in March 2018. The warrants have an exercise price of $33.60 per share, are immediately exercisable and were to expire on March 21, 2019. On February 4, 2019, the Company extended expiration of the warrants to March 21, 2020.

17

    

Stock-Based Compensation
The total number of shares issued or reserved for future issuance under outstanding stock options at September 30, 2019 and 2018 was 700,759 and 804,936, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at September 30, 2019 and 2018 was 926,917 and 128,131, respectively. The total number of stock appreciation rights (“SARs”) awards outstanding at September 30, 2019 and 2018 was 963,013 and 530,865, respectively. The following table presents a summary of the activity related to stock options, restricted stock, restricted stock unit awards and SARs awards for the nine months ended September 30, 2019:
 
Stock Options
 
Restricted Stock and Unit Awards
 
Stock Appreciation Rights
 
Number of Shares
Outstanding at December 31, 2018
785,890

 
1,044,125

 
1,481,541

Granted
10,000

 
152,155

 

Stock options and SARs exercised/restricted stock and unit awards vested
(82,900
)
 
(202,697
)
 
(150,000
)
Cancelled/forfeited
(12,231
)
 
(66,666
)
 
(368,528
)
Outstanding at September 30, 2019
700,759

 
926,917

 
963,013

Cancelled/forfeited SARs relates to the 2015 issuance of 176,528 awards that expired during the current period and also 192,000 forfeited awards of the former Chief Executive Officer. On September 1, 2019, the Company granted 130,000 shares of restricted stock to the new Chief Executive Officer. The vesting of the 65,000 shares is achieved through a time based condition and the vesting of the remaining 65,000 shares is achieved through both a time based condition and performance based condition.
Stock-based compensation expense recognized for the nine months ended September 30, 2019 and 2018, totaled $3.7 million and $2.5 million, respectively. SARs expense recognized for the nine months ended September 30, 2019 and 2018, totaled $2.7 million and $2.8 million, respectively.
SARs awards are considered liability awards as they are ultimately settled in cash. As such, these amounts are incrementally accrued in the liability section of the condensed consolidated balance sheets over the service period. All of the Company’s currently outstanding SARs awards achieve vesting through both a market condition and a service condition. SARs awards that are fully vested under both conditions are measured at intrinsic value (i.e. the difference between the market price on the last day of the quarter and the strike price of the awards times the number of awards vested and outstanding) and marked to market each quarter until settled. SARs awards that are not fully vested are incrementally accrued over the service period and adjusted to their fair value each quarter until settled based on a valuation model. The Company calculated the fair value of each award as of September 30, 2019 and December 31, 2018 using a Monte Carlo simulation model. The following assumptions were used:
 
September 30, 2019
 
December 31, 2018
Risk-free interest rates
1.97
%
 
3.0
%
Expected lives (in years)
5.31

 
5.31

Expected dividend yield
%
 
%
Expected volatility
86.1
%
 
82.9
%
(11)    Lease Obligations
The Company determines if an arrangement is a lease at inception by considering whether (1) explicitly or implicitly identified assets have been deployed in the agreement and (2) the Company obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the agreement. Amounts related to operating leases are included in “Right-of-use assets”, “Current maturities of operating lease liabilities” and “Operating lease liabilities, net of current maturities” in the condensed consolidated balance sheets. Amounts related to finance leases are included in “Property, plant and equipment, net”, “Current maturities of long-term debt”, and “Long-term debt, net of current maturities” in the condensed consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are recognized at the commencement date and consist of the present value of remaining lease payments over the lease term, initial direct costs, prepaid lease payments less

18

    

any lease incentives. Operating lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. The Company uses the implicit rate, when readily determinable or the incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. The lease terms may include options to extend or terminate the lease which are recorded in the financial statements if it is reasonably certain that the Company will exercise such options. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease agreements with lease and non-lease components are accounted for separately. The Company does not recognize leases with terms of less than twelve months in the condensed consolidated balance sheets and will recognize those lease payments in the condensed consolidated statements of operations on a straight-line basis over the lease term.
The Company leases offices, processing centers, warehouse spaces and, to a lesser extent, certain equipment. These leases have remaining terms of 1 year to 7 years, some of which have options to extend for up to 10 years and/or options to terminate within 1 year. The options to renew are not recognized as part of the Company’s ROU assets and operating lease liabilities as the Company is not reasonably certain that it will exercise these options.
Total operating lease expense, including short-term lease expense was $8.9 million and $12.3 million for the nine months ended September 30, 2019 and 2018, respectively.
Future maturities of lease obligations follows (in thousands):
For the year ending September 30,
Operating Leases
 
Finance Leases
 
Total
2020
$
13,193

 
$
1,254

 
$
14,447

2021
11,975

 
1,070

 
13,045

2022
11,404

 

 
11,404

2023
11,389

 

 
11,389

2024
5,257

 

 
5,257

Thereafter
5,242

 

 
5,242

Total lease payments
58,460

 
2,324

 
60,784

Less imputed interest
(11,598
)
 
(186
)
 
(11,784
)
Total
$
46,862

 
$
2,138

 
$
49,000

The weighted average remaining lease term as of September 30, 2019 and December 31, 2018 was 5.00 years and 5.26 years, respectively. The weighted average discount rate used to determine the operating lease liability as of September 30, 2019 and December 31, 2018 was 6.53% and 6.25%, respectively.
Equipment Finance Leases
The Company has entered into equipment finance leases that are due in installments for the purpose of financing the purchase of computer equipment through August 2021. Interest accrues under these leases at rates from 4.3% to 8.7% per annum, and the leases are collateralized by liens on the computer equipment. The assets are amortized over the lesser of their related lease terms or their estimated useful lives and such charges are reflected within depreciation expense.
(12)    Supplemental Cash Flow Information and Non-cash Activity
Supplemental disclosure of cash flow information are as follows (in thousands):
 
Nine Months Ended September 30,
 
2019
 
2018
Cash paid during the period for:
 
 
 
Interest
$
6,085

 
$
6,733

Income taxes
7,607

 
2,257

Non-cash items from investing and financing activities:
 
 
 
Purchases of computer equipment financed through capital leases

 
3,298

Investment in multi-client data library in accounts payable and accrued expenses
4,741

 
6,657


19

    

(13)    Fair Value of Financial Instruments
Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, under which the fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels, moving from quoted prices in active markets in (Level 1) to unobservable inputs in (Level 3).
Due to their highly liquid nature, the amount of the Company’s other financial instruments, including cash and cash equivalents, restricted cash, accounts and unbilled receivables, short term investments, accounts payable and accrued multi-client data library royalties, represent their approximate fair value.
The carrying amounts of the Company’s long-term debt as of September 30, 2019 and December 31, 2018 were $122.7 million and $124.7 million, respectively, compared to its fair values of $118.8 million and $120.7 million as of September 30, 2019 and December 31, 2018, respectively. The fair value of the Second Lien Notes was calculated using Level 1 inputs, including an active market price.
Fair value measurements are applied with respect to non-financial assets and liabilities on a non-recurring basis, which would consist primarily of goodwill, multi-client data library and property, plant and equipment.

(14)    Condensed Consolidating Financial Information
The Second Lien Notes were issued by ION Geophysical Corporation and are guaranteed by Guarantors, all of which are wholly-owned subsidiaries. The Guarantors have fully and unconditionally guaranteed the payment obligations of ION Geophysical Corporation with respect to the Second Lien Notes. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:
ION Geophysical Corporation and the Guarantors (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
All other subsidiaries of ION Geophysical Corporation that are not Guarantors.
The consolidating adjustments necessary to present ION Geophysical Corporation’s results on a consolidated basis.
This condensed consolidating financial information should be read in conjunction with the accompanying condensed consolidated financial statements and footnotes. For additional information pertaining to the Second Lien Notes, See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of this Form 10-Q.

20

    

 
September 30, 2019
Balance Sheet
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
7,153

 
$
45

 
$
20,696

 
$

 
$
27,894

Accounts receivable, net
8

 
11,338

 
12,486

 

 
23,832

Unbilled receivables

 
10,758

 
20,232

 

 
30,990

Inventories, net

 
7,192

 
5,742

 

 
12,934

Prepaid expenses and other current assets
3,160

 
986

 
2,480

 

 
6,626

Total current assets
10,321

 
30,319

 
61,636

 

 
102,276

Deferred income tax asset
805

 
7,510

 
120

 

 
8,435

Property, plant and equipment, net
754

 
7,931

 
4,218

 

 
12,903

Multi-client data library, net

 
65,790

 
3,933

 

 
69,723

Investment in subsidiaries
847,183

 
268,398

 

 
(1,115,581
)
 

Goodwill

 

 
22,276

 

 
22,276

Intercompany receivables

 
91,534

 
80,264

 
(171,798
)
 

Right-of-use assets
15,206

 
16,897

 
5,052

 

 
37,155

Other assets
1,223

 
945

 
54

 

 
2,222

Total assets
$
875,492

 
$
489,324

 
$
177,553

 
$
(1,287,379
)
 
$
254,990

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

 
$
1,110

 
$

 
$

 
$
1,110

Accounts payable
2,460

 
37,508

 
3,597

 

 
43,565

Accrued expenses
15,338

 
15,840

 
11,629

 

 
42,807

Accrued multi-client data library royalties

 
17,299

 
215

 

 
17,514

Deferred revenue

 
3,802

 
1,508

 

 
5,310

Current maturities of operating lease liabilities
5,026

 
5,422

 
1,200

 

 
11,648

Total current liabilities
22,824

 
80,981

 
18,149

 

 
121,954

Long-term debt, net of current maturities
118,375

 
1,027

 

 

 
119,402

Operating lease liabilities, net of current maturities
14,090

 
16,647

 
4,477

 

 
35,214

Intercompany payables
744,102

 

 

 
(744,102
)
 

Other long-term liabilities
1,491

 
35

 

 

 
1,526

Total liabilities
900,882

 
98,690

 
22,626

 
(744,102
)
 
278,096

(Deficit) Equity:
 
 
 
 
 
 
 
 
 
Common stock
142

 
290,460

 
47,776

 
(338,236
)
 
142

Additional paid-in capital
955,705

 
180,700

 
203,909

 
(384,609
)
 
955,705

Accumulated earnings (deficit)
(959,797
)
 
401,351

 
10,981

 
(412,332
)
 
(959,797
)
Accumulated other comprehensive income (loss)
(21,440
)
 
4,281

 
(23,877
)
 
19,596

 
(21,440
)
Due from ION Geophysical Corporation

 
(486,158
)
 
(86,146
)
 
572,304

 

Total stockholders’ (deficit) equity
(25,390
)
 
390,634

 
152,643

 
(543,277
)
 
(25,390
)
Noncontrolling interest

 

 
2,284

 

 
2,284

Total (deficit) equity
(25,390
)
 
390,634

 
154,927

 
(543,277
)
 
(23,106
)
Total liabilities and (deficit) equity
$
875,492

 
$
489,324

 
$
177,553

 
$
(1,287,379
)
 
$
254,990


21

    

 
December 31, 2018
Balance Sheet
ION Geophysical Corporation
 
The Guarantors
 
All Other Subsidiaries
 
Consolidating Adjustments
 
Total Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
13,782

 
$
47

 
$
19,722

 
$

 
$
33,551

Accounts receivable, net
8

 
17,349

 
8,771

 

 
26,128

Unbilled receivables

 
12,697

 
31,335

 

 
44,032

Inventories, net

 
8,721

 
5,409

 

 
14,130

Prepaid expenses and other current assets
3,891

 
1,325

 
2,566

 

 
7,782

Total current assets
17,681

 
40,139

 
67,803

 

 
125,623

Deferred income tax asset
805

 
6,261

 
125

 

 
7,191

Property, plant and equipment, net
489

 
8,922

 
3,630

 

 
13,041

Multi-client data library, net

 
70,380

 
3,164

 

 
73,544

Investment in subsidiaries
836,002