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, 2020, has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at March 31, 2021, and the condensed consolidated statements of operations, condensed consolidated statements of comprehensive loss, condensed consolidated statements of stockholders' deficit for the three months ended March 31, 2021 and 2020 and the condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020, 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) loss 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.
Certain reclassifications were made to previously reported amounts in the condensed consolidated financial statements and notes thereto; particularly, the presentation of revenue by geographic area to make previously reported amounts consistent with current period presentation.
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, 2020.
Going Concern and Old Notes Restructuring
On April 20, 2021, the Company completed the Restructuring Transactions (as further discussed below) that extended the maturity of the notes by four years to December 2025 and provided additional liquidity to help meet its anticipated cash needs. As a result of the Restructuring Transactions, $113.5 million in aggregate principal amount outstanding of the Company's 9.125% Senior Secured Second Priority Notes due 2021 (the "Old Notes") has been reclassified from short-term debt to long-term debt in the Condensed Consolidated Balance Sheets. While the Company may continue to explore additional funding through private or public equity transactions, debt financing or other capital sources to meet its ongoing cash needs, management believes the completion of its Restructuring Transactions removes the substantial doubt raised in December 31, 2020 about the Company’s ability to continue as a going concern as of March 31, 2021.
On April 20, 2021, the Company successfully completed its previously announced offer to exchange (the “Exchange Offer”) the Old Notes for newly issued 8.00% Senior Secured Second Priority Notes due 2025 (the “New Notes”) and other consideration in the form of cash and ION common stock, as described in the Company's Prospectus dated March 10, 2021 and its previously announced rights offering (the "Rights Offering") to its holders of the Company's common stock, par value $0.01 per share (the "Common Stock") to purchase for (i) $2.78 principal amount of the New Notes per right, at a purchase price of 100% of the principal amount thereof or (ii) 1.08 shares of common stock per right, at a purchase price of $2.57 per whole share of common stock. The Exchange Offer and the Rights Offering are sometimes referred to herein as the Restructuring Transactions.
In the Exchange Offer, approximately $113.5 million, or approximately 94.1%, of the $120.6 million outstanding Old Notes were accepted and exchanged for (1) $84.7 million aggregate principal amount of its New Notes, (ii) 6.1 million shares of Common Stock, including 1.5 million shares issued as the early participation payment and 4.6 million shares issued as stock consideration in lieu of the New Notes and (iii) $20.7 million paid in cash, including $3.6 million of accrued and unpaid interest that became due on the Old Notes as part of the exchange. The Company has accepted for exchange all such Old Notes validly tendered and not validly withdrawn in the Exchange Offer as of the expiration time on April 12, 2021. Pursuant to the Exchange Offer, the Company will make an offer to participants to repurchase New Notes at par for up to 50% of the proceeds raised in excess of $35.0 million from the Rights Offering valued at $3.4 million.
In the concurrent Rights Offering, an aggregate amount of $41.8 million of rights (including over-subscription) was validly exercised by the holders of the Company's Common Stock, apportioned as $30.1 million in New Notes and $11.8 million in Common Stock allocated in 4.6 million shares. All over-subscription rights were exercised without proration as the $50.0 million limit on proceeds was not exceeded. Backstop parties were paid 5% backstop fees, in kind, resulting in the issuance of an additional $1.5 aggregate principal amount of New Notes and 0.2 million shares of Common Stock.
In total, $116.2 million in aggregate principal amount of New Notes and 10.9 million shares of Common Stock were issued. The Company received approximately $14 million in net proceeds from the transactions after deducting noteholder obligations, estimated transaction fees and accrued and unpaid interest paid on the Old Notes. After the Restructuring Transactions, $7.1 million of Old Notes remain outstanding and a total of 28.8 million shares of Common Stock are outstanding as of April 20, 2021.
The amendment to the Old Notes Indenture (as defined in Footnote 4, "Long-term Debt") is effective as of April 20, 2021. The Old Notes have been modified to, among other things, provide for the release of the second priority security interest in the collateral securing the Old Notes, and deletes in their entirety substantially all of the restrictive covenants and certain events of default pertaining to the Old Notes. For further details, refer to Footnote 4 "Long-term Debt - Old Notes."
COVID-19 Business Impact and Response
The COVID-
19 pandemic caused the global economy to enter a recessionary period, which
may be prolonged and severe. During
2020, the exploration and production (“E&P”) industry faced the dual impact of demand deterioration from COVID-
19 and market oversupply from increased production, which caused oil and natural gas prices to decline significantly for most of
2020. Brent crude prices, which are most relevant to ION’s internationally focused business, have rebounded to pre-pandemic levels, increasing to approximately
$66 per barrel during
April 2021. This reflects the continued expectation of rising oil demand as both the global economic activity and COVID-
19 vaccination rates increase, combined with ongoing crude oil production limits from members of OPEC and partner countries.
The level and consistency of crude prices play an integral role in the trajectory of customers' offshore capital spending programs. While commodity prices can be volatile, the sharp decline throughout
2020 triggered E&P companies to reduce budgets by approximately
25%. Exploration offerings and data purchases are often discretionary and, therefore, receive disproportionately higher reductions than overall budget cuts. Consequently, there has been a material slowdown in offshore seismic spending since the
second quarter of
2020.
While management expects the E&P market to remain challenging in the near-term, there have been a number of positive developments that point to improving market conditions. Analyst projections and client activity continue to suggest increasing E&P spend and demand for seismic data in the second half of the year. Spurred by increasing global demand and on-going production limits, Brent crude oil pricing, which is most relevant to ION’s internationally-focused business, has rebounded to pre-pandemic levels. In addition, there has been positive momentum across a number of leading indicators for ION's business, such as license rounds, tender activity, services engagements and backlog. Therefore, the Company remains cautiously optimistic market conditions will improve through the second half of 2021. The market backdrop serves as a catalyst to drive necessary cost restructuring and digital transformation of the E&P industry.
In
January 2021, the Biden Administration ordered an indefinite moratorium on new U.S. oil and gas leasing and drilling permits on federal lands onshore and offshore waters. Management believes this will have a negligible impact on its business given the Company's diversified global footprint and international offshore focus. Should the moratorium result in longer-term change, this could drive large scale E&P company portfolio investment more towards international offshore, which would be well aligned with the Company's offerings.
The Company expects continued portfolio rationalization and high grading as E&P companies seek to find the best return on investment opportunities to meet oil and gas demand in the next decade. Near-term, due to the impact of the COVID-
19 pandemic, project high grading will likely be more acute due to budget reductions. Over the last several years, the Company had strategically shifted its portfolio closer to the reservoir, where revenue tends to be higher and more consistent. New Venture data acquisition offshore and Software and related personnel-based offshore services are expected to continue to be most impacted by COVID-
19 travel restrictions. While offshore operations have been temporarily impacted by travel restrictions, the Company believes the demand for digitalization technologies will remain strong. In some cases, ION technology is expected to be more relevant and valuable in the current environment, such as offerings that facilitate remote working.
ION continues to work closely with its clients to understand their budgets and spending priorities and to scale its business appropriately. The Company partially mitigated the impact of the current macroeconomic environment by fully benefiting from the structural changes and associated cost reductions totaling approximately
$40 million through salary cuts, reduced capital expenditures, renegotiation of our current leases and application for various government assistance programs, among others. The management plan reflects the Company’s continued focus on preserving cash and managing liquidity in the current uncertain macroeconomic environment. In the event the Company’s customers experience more extensive capital constraint and budget reductions, further reducing demand for ION's services and products, resulting in deterioration of its revenues below its current forecasted levels, management
may be required to update its plan by implementing further cost reductions and delaying capital investments. Refer to the Company's Annual Report on Form
10-K for the year ended
December 31, 2020 for further details.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in Footnote 1 “Summary of Significant Accounting Policies” of the Annual Report on Form 10-K for the year ended December 31, 2020. There have been no changes in such policies or the application of such policies during the three months ended March 31, 2021.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are made at discrete points in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Areas involving significant estimates include, but are not limited to, collectability of accounts and unbilled receivables, inventory valuation reserves, sales forecasts related to multi-client data library, impairment of property, plant and equipment and goodwill and deferred taxes. Actual results could materially differ from those estimates.
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.
A summary of segment information follows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
E&P Technology & Services:
|
|
|
|
|
|
|
|
|
|
New Venture
|
|
$
|
1,087
|
|
|
$
|
1,441
|
|
|
Data Library
|
|
|
2,484
|
|
|
|
40,131
|
|
|
Total multi-client revenues
|
|
|
3,571
|
|
|
|
41,572
|
|
|
Imaging and Reservoir Services
|
|
|
3,665
|
|
|
|
4,942
|
|
|
Total
|
|
$
|
7,236
|
|
|
$
|
46,514
|
|
|
Operations Optimization:
|
|
|
|
|
|
|
|
|
|
Optimization Software & Services
|
|
$
|
2,844
|
|
|
$
|
4,427
|
|
|
Devices
|
|
|
3,956
|
|
|
|
5,473
|
|
|
Total
|
|
$
|
6,800
|
|
|
$
|
9,900
|
|
|
Total net revenues
|
|
$
|
14,036
|
|
|
$
|
56,414
|
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
|
E&P Technology & Services
|
|
$
|
(1,607
|
)
|
|
$
|
23,730
|
|
(a)
|
Operations Optimization
|
|
|
2,466
|
|
|
|
4,614
|
|
|
Total gross profit
|
|
$
|
859
|
|
|
$
|
28,344
|
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
E&P Technology & Services
|
|
|
(22
|
)%
|
|
|
51
|
%
|
|
Operations Optimization
|
|
|
36
|
%
|
|
|
47
|
%
|
|
Total
|
|
|
6
|
%
|
|
|
50
|
%
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
E&P Technology & Services
|
|
$
|
(4,853
|
)
|
|
$
|
17,952
|
|
(a)
|
Operations Optimization
|
|
|
(820
|
)
|
|
|
(3,259
|
)
|
(b)
|
Support and other
|
|
|
(4,561
|
)
|
|
|
(8,367
|
)
|
|
Income (loss) from operations
|
|
|
(10,234
|
)
|
|
|
6,326
|
|
|
Interest expense, net
|
|
|
(3,262
|
)
|
|
|
(3,221
|
)
|
|
Other income (expense), net
|
|
|
(607
|
)
|
|
|
429
|
|
|
Income (loss) before income taxes
|
|
$
|
(14,103
|
)
|
|
$
|
3,534
|
|
|
(a)
|
Includes impairment of multi-client data library of $1.2 million for the three months ended March 31, 2020.
|
(b)
|
Includes impairment of goodwill of $4.2 million for the three months ended March 31, 2020.
|
Intersegment sales are insignificant for all periods presented.
(3)
|
Revenue from Contracts with Customers
|
The Company derives revenue from the (i) sale or license of multi-client and proprietary data, imaging and reservoir services within its E&P Technologies & Services segment; (ii) sale, license and repair of seismic data acquisition systems and other equipment; and (iii) sale or license of seismic command and control software systems and software solutions for operations management within its Operations Optimization segment. All E&P Technology & Services’ revenues and the services component of Optimization Software & Services’ revenues under Operations Optimization segment are classified as service revenues. All other revenues are classified as product revenues.
The Company uses a five-step model to determine proper revenue recognition from customer contracts. Revenue is recognized when (i) a contract is approved by all parties; (ii) the goods or services promised in the contract are identified; (iii) the consideration the Company expects to receive in exchange for the goods or services promised is determined; (iv) the consideration is allocated to the goods and services in the contract; and (v) control of the promised goods or services is transferred to the customer. The Company is not required to disclose information about remaining contractual future performance obligations with an original term of one year or less. The Company does not have any contractual future performance obligations with an original term of over one year.
Revenue by Geographic Area
The following table is a summary of net revenues by geographic area (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Europe
|
|
$
|
4,366
|
|
|
$
|
7,472
|
|
Latin America
|
|
|
3,503
|
|
|
|
20,062
|
|
Asia Pacific
|
|
|
2,201
|
|
|
|
7,763
|
|
Africa
|
|
|
1,772
|
|
|
|
12,240
|
|
North America
|
|
|
1,208
|
|
|
|
3,888
|
|
Middle East
|
|
|
727
|
|
|
|
954
|
|
Other
|
|
|
259
|
|
|
|
4,035
|
|
Total
|
|
$
|
14,036
|
|
|
$
|
56,414
|
|
Product revenues are allocated to geographic 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 geographic location of initial shipment. Service revenues, which primarily relate to our E&P Technology & Services segment, are allocated based upon the billing location of the customer and the geographic location of the data.
See Footnote 2“Segment Information” for total net revenue by segment for the three months ended March 31, 2021 and 2020.
Unbilled Receivables
Unbilled receivables balances relate to revenues recognized on multi-client surveys, imaging and reservoir services and devices equipment repairs on a proportionate basis, and on licensing of multi-client data for which invoices have not yet been presented to the customer. The following table is a summary of unbilled receivables (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
New Venture
|
|
$
|
1,212
|
|
|
$
|
9,158
|
|
Imaging and Reservoir Services
|
|
|
1,287
|
|
|
|
680
|
|
Devices
|
|
|
1,586
|
|
|
|
1,424
|
|
Total
|
|
$
|
4,085
|
|
|
$
|
11,262
|
|
The changes in unbilled receivables are as follows (in thousands):
Unbilled receivables at December 31, 2020
|
|
$
|
11,262
|
|
Recognition of unbilled receivables (a)
|
|
|
13,612
|
|
Revenues billed to customers (a)
|
|
|
(20,789
|
)
|
Unbilled receivables at March 31, 2021
|
|
$
|
4,085
|
|
(a) Includes all gross revenue recognition and related billing activity of the Company. As a matter of process, all net revenue recognized is initially reflected as an unbilled receivable and subsequently billed to customers, as applicable, including net revenue for all of software and a portion of devices within the Operations Optimization segment, although they are billed at the time of recognition.
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 not yet recognized as of the reporting period but that will be recognized in future periods. The following table is a summary of deferred revenues (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
New Venture
|
|
$
|
2,158
|
|
|
$
|
2,169
|
|
Imaging and Reservoir Services
|
|
|
672
|
|
|
|
665
|
|
Devices
|
|
|
622
|
|
|
|
48
|
|
Optimization Software & Services
|
|
|
1,002
|
|
|
|
766
|
|
Total
|
|
$
|
4,454
|
|
|
$
|
3,648
|
|
The changes in deferred revenues were as follows (in thousands):
Deferred revenue at December 31, 2020
|
|
$
|
3,648
|
|
Cash collected in excess of revenue recognized
|
|
|
1,230
|
|
Recognition of deferred revenue
|
|
|
(424
|
)
|
Deferred revenue at March 31, 2021
|
|
$
|
4,454
|
|
The Company expects to recognize a majority of deferred revenue within the next twelve months.
Credit Risks
For each of the three months ended March 31, 2021 and 2020, the Company had two customers with sales that each exceeded 10% of the Company’s consolidated net revenues. Revenues related to each of these customers are included within the E&P Technology & Services segment.
At March 31, 2021, the Company had one customer with balances that accounted for 12% of the Company’s total combined accounts receivable and unbilled receivable balances. At March 31, 2020, the Company had one customer with a balance that accounted for 51% of the Company’s total combined accounts receivable and unbilled receivable balances.
The Company routinely evaluates the financial stability and creditworthiness of its customers. The Company has a corporate credit policy that is intended to minimize the risk of financial loss due to a customer’s inability to pay. Credit coverage decisions for customers are based on references, payment histories, financial and other data. The Company utilizes a third party trade credit insurance policy. The Company has historically not extended long-term credit to its customers.
Concentration of Foreign Sales Risk
The majority of the Company’s foreign sales are denominated in U.S. dollars. For the three months ended March 31, 2021 and 2020, international sales comprised 91% and 97%, respectively, of total net revenues. To the extent that world events or economic conditions negatively affect the Company’s future sales to customers in many regions of the world, as well as the collectability of the Company’s existing receivables, the Company’s future results of operations, liquidity and financial condition would be adversely affected.
The following table is a summary of long-term debt (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Senior secured second-priority lien notes (maturing December 15, 2021)
|
|
$
|
120,569
|
|
|
$
|
120,569
|
|
Revolving credit facility (maturing August 16, 2023)
|
|
|
21,250
|
|
|
|
22,500
|
|
Equipment finance leases (see Footnote 11)
|
|
|
435
|
|
|
|
734
|
|
Other debt
|
|
|
451
|
|
|
|
905
|
|
Costs associated with issuances of debt
|
|
|
(735
|
)
|
|
|
(977
|
)
|
Total
|
|
|
141,970
|
|
|
|
143,731
|
|
Current maturities of long-term debt
|
|
|
(29,233
|
)
|
|
|
(143,731
|
)
|
Long-term debt, net of current maturities
|
|
$
|
112,737
|
|
|
$
|
—
|
|
Old Notes
At March 31, 2021, ION Geophysical Corporation’s $120.6 million of Old Notes, prior to the Restructuring Transactions completed in April 2021 as discussed in further details of Footnote 1 "Summary of Significant Accounting Policies – Going Concern and Old Notes Restructuring and discussed below, were 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 Old Notes, the “Guarantors”). As a result of the Restructuring Transactions, $113.5 million in aggregate principal amount outstanding of Old Notes has been reclassified from short-term debt to long-term debt in the Condensed Consolidated Balance Sheets. Also, $7.1 million of Old Notes remain outstanding and are due along with unpaid interest on December 15, 2021.
The April 2016 indenture governing the Old Notes (the "Old Notes Indenture") contained certain covenants that, among other things, limited or prohibited ION Geophysical Corporation’s and of its restricted subsidiaries from taking certain actions or permitting certain conditions to exist during the term of the Old 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 Old Notes Indenture are subject to certain exceptions and qualifications. All of ION Geophysical Corporation’s subsidiaries are currently restricted subsidiaries.
At March 31, 2021, the Company was in compliance with all of the covenants under the Old Notes.
On April 20, 2021, the Company, the Guarantors, Wilmington Savings Fund Society, FSB, as trustee, and collateral agent, entered into a supplemental indenture (the “Supplemental Indenture”) to the Old Notes Indenture, dated as of April 28, 2016, among the Company, the Guarantors, Wilmington Savings Fund Society, FSB (as successor to Wilmington Trust, National Association), as trustee, and U.S. Bank National Association, as collateral agent, governing the Old Notes Indenture. The Supplemental Indenture, among other things, provides for the release of the second priority security interest in the collateral securing the Old Notes, and deletes in their entirety substantially all of the restrictive covenants and certain events of default pertaining to the Old Notes. The Old Notes Indenture, as modified by the Supplemental Indenture, is materially less restrictive and affords significantly reduced protection to holders of such securities as compared to the restrictive covenants, events of default and other provisions previously contained in the Old Notes Indenture.
New Notes
The New Notes are governed by the Indenture (the "New Notes Indenture") dated as of
April 20, 2021, among the Company, certain of the Company’s subsidiaries, as guarantors (as defined under
Old Notes above), and UMB Bank, National Association, as trustee and collateral agent (the “New Notes Trustee”). The New Notes are senior secured
second-priority debt obligations of the Company and will mature on
December 15, 2025. The New Notes will bear interest at a rate of
8.00% per annum. Interest on the New Notes will be payable on each
June 15 and
December 15, commencing on
June 15, 2021. The New Notes will initially be guaranteed by each of ION’s material domestic subsidiaries and
one subsidiary organized under the laws of Mexico (provided that certain matters with respect to such Mexico subsidiary will be finalized within
60 days of settlement) (“Guarantors”). For further details, refer to Footnote
1
"Summary of Significant Accounting Policy - Going Concern and Old Notes Restructuring."
The New Notes will be senior obligations of ION; will be secured on a
second-priority basis, equally and ratably with all obligations of ION under any future Parity Lien Debt (as defined in the New Notes Indenture), by Liens on all of the assets of ION other than the Excluded Assets, subject to the Liens securing ION’s obligations under the Credit Agreement and any other Priority Lien Debt and other Permitted Prior Liens (as defined in the New Notes Indenture); will be effectively junior to any Permitted Prior Liens, to the extent of the value of the assets of ION subject to those Permitted Prior Liens; will be senior in right of payment to any future subordinated Indebtedness of ION, if any; will be unconditionally guaranteed by the Guarantors; and will be structurally subordinated to all existing and future Indebtedness (as defined in the New Notes Indenture), claims of holders of preferred stock and other liabilities of subsidiaries of ION that do
not guarantee the New Notes.
Each guarantee of the New Notes will be senior obligations of each Guarantor; will be secured on a second-priority basis, equally and ratably with all obligations of that Guarantor under any other future Parity Lien Debt, by Liens on all of the assets of that Guarantor other than the Excluded Assets, subject to the Liens securing that Guarantor’s guarantee of the Credit Agreement obligations and any other Priority Lien Debt and other Permitted Prior Liens; will be effectively junior, to the extent of the value of the Collateral (as defined in the New Notes Indenture), to that Guarantor’s guarantee of the Credit Agreement and any other Priority Lien Debt, which will be secured on a first-priority basis by the same assets of that Guarantor that secure the New Notes; will be effectively junior to any Permitted Prior Liens, to the extent of the value of the assets of that Guarantor subject to those Permitted Prior Liens; and will be senior in right of payment to any future subordinated Indebtedness of that Guarantor, if any.
The New Notes Indenture contains covenants that, among other things, limit our ability, and the ability of our restricted subsidiaries, to incur additional debt or issue certain preferred stock; make certain investments or pay dividends or distributions on our capital stock, purchase or redeem or retire capital stock, or make other restricted payments; sell assets, including capital stock of our restricted subsidiaries; restrict dividends or other payments by restricted subsidiaries; create liens; create unrestricted subsidiaries; enter into transactions with affiliates; and merge or consolidate with another company. These covenants are subject to a number of important limitations and exceptions that are described in the New Notes Indenture.
Holders of New Notes may convert all or any portion of their New Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date. The conversion rate will initially be 333 shares of Common Stock per $1,000 principal amount of New Notes (equivalent to an initial conversion price of approximately $3.00 per share of Common Stock) and is subject to adjustment as described in the New Notes Indenture. Upon conversion of a New Note, ION will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of its Common Stock or a combination of cash and Common Stock, at ION’s election. If ION satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of its Common Stock, the amount of cash and shares of Common Stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 30 trading day observation period. The total number of shares of Common Stock that may be issued upon conversion of the New Notes is 38.7 million shares, which excludes an additional 6.5 million shares that may be issued upon a conversion upon a make-whole change of control.
On or after the day that is the eighteen (18) month anniversary of the issue date of the New Notes (the “Issue Date”), ION may require the conversion of all or part of the New Notes, at its option, if Common Stock, as determined by ION, has a 20-day volume weighted average price of at least 175% of the conversion price then in effect ending on, and including, the trading day immediately preceding the date on which ION provides notice of conversion (an “Optional Conversion”). If ION undergoes an Optional Conversion prior to the third anniversary of the Issue Date, holders of New Notes will be entitled to a “make-whole” premium payment in cash equal to the applicable premium amount.
The New Notes will be redeemable, in whole or in part, at our option at any time prior to December 15, 2023, at a cash redemption price equal to 100.0% of the principal amount of New Notes to be redeemed plus a make-whole premium and accrued and unpaid interest. The New Notes will also be redeemable, in whole or in part, at our option at any time on or after December 15, 2023, at a cash redemption price equal to 100.0% of the principal amount of New Notes to be redeemed plus accrued and unpaid interest.
If a Change of Control (as described in the New Notes Indenture) occurs, holders of the New Notes may require the Company to repurchase their New Notes at a cash repurchase price equal to 101% of the principal amount of the New Notes to be repurchased, plus accrued and unpaid interest.
Upon certain asset sales, the Company may be required to use the net proceeds therefrom to purchase New Notes at an offer price in cash equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest.
The Company issued one (1) shares of Series A Preferred Stock (the “Series A Preferred Stock”) to the New Notes Trustee to (i) provide certain rights and protections to holders of the New Notes and (ii) allow, under certain circumstances, the holders of New Notes to vote on an “as-converted” basis. The New Notes Trustee shall take direction from holders of 50.1% of the New Notes for any action requiring the consent of the holder of the Series A Preferred Stock or each act on which the holder of the Series A Preferred Stock is entitled to vote.
Following a default or event of default under the New Notes Indenture, the Series A Preferred Stock will be entitled to vote with the Common Stock of the Company as a single class and having voting power equal to the number of shares of Common Stock issuable upon the conversion of the New Notes. In addition, at all times when the Common Stock is entitled to vote, the Series A Preferred Stock will be entitled to vote with the Common Stock as a single class and having voting powers equal to the number of shares of Common Stock issuable upon the conversion of the New Notes for any transaction (a) modifying, amending, supplementing, or waiving any provision of ION’s organizational documents or (b) entering into any merger, consolidation, sale of all or substantially all of ION’s assets, or other business combination transactions. The holder of the Series A Preferred Stock will have the right to appoint two (2) directors to ION’s board of directors, both of whom must be independent.
The one share of Series A Preferred Stock will (i) rank pari passu in respect of voting rights with respect to Common Stock, (ii) have a liquidation preference equal to $1.00, (iii) not produce preferred dividends or ordinary dividends, (iv) not be transferable, except to a successor New Notes Trustee under the terms of the New Notes Indenture, (v) not be convertible into any other class of equity of ION, and (vi) not be granted registration rights. The Series A Preferred Stock may be redeemed by the Company upon the conversion into Common Stock, in the aggregate, of 75% or more of the New Notes. The redemption price will be $1.00.
On April 20, 2021, the Company and the Guarantors acknowledged and agreed to an intercreditor agreement (the “Intercreditor Agreement”) by and among PNC Bank, National Association ("PNC"), as first lien representative and collateral agent for the first lien secured parties, and UMB Bank, National Association, as second lien representative and collateral agent for the second lien secured parties. The Intercreditor Agreement, among other things, defines the relative priorities of the respective security interests in the collateral securing the New Notes and the obligations under the Company’s senior secured credit facility and certain other matters relating to the administration of security interests, exercise of remedies, certain bankruptcy-related provisions and other intercreditor matters.
The Intercreditor Agreement supersedes and replaces the second lien intercreditor agreement, dated as of April 28, 2016, by and among PNC Bank, National Association, as first lien representative for the first lien secured parties and collateral agent for the first lien secured parties, and Wilmington Savings Fund Society, FSB, as second lien representative and collateral agent for the second lien secured parties and third lien representative for the third lien secured parties and U.S. Bank National Association, as collateral agent for the third lien secured parties.
Revolving Credit Facility
On August 16, 2018, ION and its material U.S. subsidiaries — GX Technology Corporation, ION Exploration Products (U.S.A.) Inc. and I/O Marine Systems Inc. (the “Material U.S. Subsidiaries”) — along with GX Geoscience Corporation, S. de R.L. de C.V., a limited liability company (Sociedad de Responsibilidad Limitada de Capital Variable) organized under the laws of Mexico, and a subsidiary of the Company (the “Mexican Subsidiary”), (the Material U.S. Subsidiaries and the Mexican Subsidiary are collectively, the “Subsidiary Borrowers”, together with ION Geophysical Corporation are the “Borrowers”) — the financial institutions party thereto, as lenders, and PNC, 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.
On April 20, 2021, the Company and the Guarantors, as co-borrowers, the financial institutions party thereto, as lenders, and PNC, as agent for the lenders, entered into a fourth amendment (the “Fourth Amendment”) to the Credit Facility. The Credit Facility, as amended by the Fourth Amendment, among other things, permitted the consummation of the Restructuring Transactions, including the issuance of the New Notes and certain cash payments to the Company's noteholders in connection with the Exchange Offer and the Rights Offering, and made certain other changes to the Credit Facility’s definitions and other provisions, including with respect to LIBOR, where the successor LIBOR rate index will be the benchmark replacement determined by PNC.
The maximum interest rate in the Credit Facility is 3% per annum for domestic rate loans and 4% per annum for LIBOR rate loans with a minimum interest rate of 2% for domestic rate loans and 3% for LIBOR rate loans based on a leverage ratio for the preceding four-quarter period. The terms include 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), 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.
The maximum amount available 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 data library (not to exceed $28.5 million for the multi-client data library component). The borrowing base calculation includes the eligible billed receivables of the Mexican Subsidiary up to a maximum of $5.0 million. At March 31, 2021, there was $21.3 million outstanding indebtedness under the Credit Facility and the undrawn remaining borrowing base capacity was $5.3 million. During April 2021, the Company repaid $1.5 million of the outstanding indebtedness under the Credit Facility to bring the excess borrowing availability above $6.25 million.
The obligations of Borrowers under the Credit Facility are secured by a first-priority security interest in 100% of the stock of the Subsidiary Borrowers and 65% of the equity interest in ION International Holdings L.P., and by substantially all other assets of the Borrowers. However, the first-priority security interest in the other assets of the Mexican Subsidiary is capped to a maximum exposure of $5.0 million.
The Credit Facility contains covenants that, among other things, limit or prohibit the Borrowers, subject to certain exceptions and qualifications, from incurring additional indebtedness in excess of permitted indebtedness (including finance lease obligations), repurchasing equity, paying dividends or distributions, granting or incurring additional liens on the Borrowers’ properties, pledging shares of the Borrowers’ subsidiaries, entering into certain merger transactions, entering into transactions with the Company’s affiliates, making certain sales or other dispositions of the Borrowers’ assets, making certain investments, acquiring other businesses and entering into sale-leaseback transactions with respect to the Borrowers’ property. The Credit Facility 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 the Company's obligations under the Credit Facility.
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’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 business days or $5.0 million on any given business day), and (ii) the Borrowers’ unencumbered cash maintained in a PNC deposit account is less than the Borrowers’ then outstanding obligations.
At March 31, 2021, the Company was in compliance with all of the covenants under the Credit Facility.
(5)
|
Government Relief Funding
|
Paycheck Protection Program
On April 11, 2020, the Company entered into a Note Agreement (“Note”) with PNC amounting to $6.9 million pursuant to the Coronavirus Aid, Relief, and Economic Security Act’s (“CARES Act”) Paycheck Protection Program (“PPP”). Amounts outstanding under this Note will bear interest at 1% per annum as of the date of disbursement. Interest will be calculated based on the actual number of days that principal is outstanding over a year of 365 days. The Note matures in two years after the receipt of the loan proceeds.
During fourth quarter 2020, the Company applied to PNC for forgiveness of the amount due on this Note in an amount based on the sum of the following costs incurred by the Company’s US operations during the 24-week period beginning on the date of first disbursement (for payroll costs, it is beginning on the date of the first pay period following disbursement; for non-payroll costs, it is beginning on the date of first disbursement.) of this Note: (a) payroll costs; (b) any payment on a covered rent obligation; and (c) any covered utility payment. The amount of forgiveness shall be calculated (and may be reduced) in accordance with the requirements of the PPP, including the provisions of Section 1106 of the CARES Act. The forgiveness amount will be subject to the Small Business Administration’s review. Any outstanding principal amount under this Note that is not forgiven under the PPP shall convert to an amortizing term loan.
The Company recognized the Note following the government grant accounting by analogy to International Accounting Standards (“IAS”) 20, “Accounting for Government Grants and Disclosure of Government Assistance” (“IAS 20”). In accordance with IAS 20, a deferred income liability is recognized for the principal amount estimated to be forgiven and is amortized to other income on a systematic and rational basis. Any outstanding principal amount not expected to be forgiven is recognized as other debt. As the Company expects that the full amount of the Note will be forgiven, the entire $6.9 million was recognized as a deferred income liability during 2020 and fully amortized to other income in the condensed consolidated income statements for the six months ended June 30, 2020, as the related expenses it was intended to offset were incurred from April 2020 to June 2020. If, despite the Company’s good-faith belief that given its circumstances the Company satisfied all eligible requirements for the Note, the Company is later determined to have not been in compliance with these requirements or it is otherwise determined that it was ineligible to receive the Note, the Company may be required to repay the Note in its entirety and/or be subject to additional penalties.
Employee Retention Credit
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to the employee retention tax credits previously made available under the CARES Act, including modifying and extending the Employee Retention Credit ("ERC") through December 31, 2021. As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020 through December 31, 2021. This resulted in an ERC of $1.6 million for the three months ended March 31, 2021 and expected to be refunded during the second quarter 2021. Further, the Company expects that it will qualify for the ERC during the second quarter 2021 with the refund expected to be received during third quarter 2021.
(6)
|
Net Loss per Common Share
|
Basic net loss per share is computed by dividing net loss attributable to ION by the weighted average number of common shares outstanding during the period. In computing diluted net income per share, basic net income per share is adjusted based on the assumption that dilutive restricted stock and restricted stock unit awards have vested and outstanding dilutive stock options have been exercised and the aggregate proceeds were used to reacquire common stock using the average price of such common stock for the period. The total number of shares issuable pursuant to outstanding stock options at March 31, 2021 and 2020 of 481,786 and 669,209, respectively, were excluded as their inclusion would have an anti-dilutive effect. The total number of shares issuable pursuant to restricted stock unit awards outstanding at March 31, 2021 and 2020 of 689,931 and 903,204, respectively, were excluded as their inclusion would have an anti-dilutive effect.
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. As of March 31, 2021, the significant doubt about the Company's going concern has been alleviated which the Company believes is sufficient evidence to warrant reversal of $7.7 million of valuation allowance on its net deferred tax assets of certain foreign subsidiaries. The Company will continue to record a valuation allowance for the substantial majority of its deferred tax assets until there is sufficient evidence to warrant reversal.
The tax provision for the three months ended March 31, 2021 has been calculated using the Company’s overall estimated annual effective tax rate based on projected 2021 full year results. The Company’s effective tax rates for the three months ended March 31, 2021 and 2020 were negatively impacted by the change in valuation allowance related to U.S. operating losses for which the Company cannot currently recognize a tax benefit. The Company’s effective tax rates for the three months ended March 31, 2021 was positively impacted by the reversal of valuation allowance related to certain foreign subsidiaries as further described below. Due to the impact of the valuation allowances on tax expense, the Company’s effective tax rates are not meaningful for all periods presented. The Company’s income tax benefit for the three months ended March 31, 2021 of $6.8 million primarily relates to the reversal of valuation allowance of $7.7 million on its net deferred tax assets of certain foreign subsidiaries resulting from the removal of the substantial doubt that the Company will continue as a going concern. The Company’s income tax expense for the three months ended March 31, 2020 of $5.9 million primarily relates to results from the Company’s non-U.S. businesses, including $2.2 million of valuation allowance. The valuation allowance was established as a result of a change in the expectation of future revenues after entering into the settlement agreement with WesternGeco described in Footnote 9 “Litigations” to the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
In response to the global pandemic related to COVID-19, the President of the United States signed into law the CARES Act on March 27, 2020. The CARES Act provides numerous relief provisions for corporate taxpayers, including modifications of the utilization limitations on net operating losses, favorable expansions of the deduction for business interest expense under Internal Revenue Code Section 163(j), and the ability to accelerate timing of refundable AMT credits. For the three months ended March 31, 2021 and 2020, there were no material tax impacts to our condensed consolidated financial statements as it relates to COVID-19 measures. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Services ("IRS") and others.
At March 31, 2021, the Company has approximately $0.4 million of unrecognized tax benefits and does not expect to recognize significant increases in unrecognized tax benefits during the next twelve-month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.
At March 31, 2021, the Company’s U.S. federal tax returns for 2017 and subsequent years remain subject to examination by tax authorities. In the Company’s foreign tax jurisdictions, tax returns for 2016 and subsequent years generally remain open to examination.
In July 2018, the Company prevailed in an arbitration that it initiated against the Indian Directorate General of Hydrocarbons (“DGH”) relating to the Company’s ability to continue to license data under the Company’s IndiaSPAN program. The DGH filed a lawsuit in court in India to vacate the arbitration award; in connection with that lawsuit, the Company was ordered to escrow approximately $4.5 million in sales proceeds that it had received in respect of sales from the IndiaSPAN program, pending the outcome of the DGH’s challenge to the arbitration award. The Company challenged the escrow order, but on December 9, 2019, the Supreme Court of India ordered the Company to comply with it. The Company prepared a petition to file with the court to request that a March 2020 deadline to deposit approximately $4.5 million in escrow in early 2020 be extended due to the changes to the Company’s business, and to the markets, that have been spurred by the COVID-19 pandemic. The Company was unable to file the application because the courts in India were closed due to the pandemic (other than for emergencies), and were not accepting filings at that time. The Company served a copy of its draft petition on the DGH’s counsel and intends to file it in advance of the next hearing, which has been repeatedly delayed due to the COVID-19 pandemic. The Company prevailed on the merits in the arbitration and expects to have that award upheld in Indian court, which would result in release of the portion of any money escrowed by the Company. The DGH’s request to vacate the arbitration award is currently scheduled to be heard by the court in India on July 14, 2021. The Company has not escrowed the money as of March 31, 2021.
The Company has been named in various other lawsuits or threatened actions that are incidental to its ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. The Company currently believes that the ultimate resolution of these matters will not have a material adverse effect on its financial condition or results of operations.
(9)
|
Details of Selected Balance Sheet Accounts
|
Accounts Receivable
A summary of accounts receivable follows (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts receivable, principally trade
|
|
$
|
11,186
|
|
|
$
|
10,458
|
|
Less: allowance for expected credit losses
|
|
|
(2,729
|
)
|
|
|
(2,413
|
)
|
Accounts receivable, net
|
|
$
|
8,457
|
|
|
$
|
8,045
|
|
Inventories
A summary of inventories follows (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Raw materials and purchased subassemblies
|
|
$
|
18,215
|
|
|
$
|
18,638
|
|
Work-in-process
|
|
|
1,363
|
|
|
|
1,218
|
|
Finished goods
|
|
|
4,372
|
|
|
|
4,417
|
|
Less: reserve for excess and obsolete inventories
|
|
|
(12,919
|
)
|
|
|
(13,006
|
)
|
Inventories, net
|
|
$
|
11,031
|
|
|
$
|
11,267
|
|
The Company's inventories relate to its Operations Optimization segment. No additional provision for excess and obsolete inventories was recognized during the three months ended March 31, 2021 and 2020.
Property, Plant and Equipment
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Buildings
|
|
$
|
15,675
|
|
|
$
|
15,675
|
|
Machinery and equipment
|
|
|
120,979
|
|
|
|
120,949
|
|
Seismic rental equipment
|
|
|
2,030
|
|
|
|
2,003
|
|
Furniture and fixtures
|
|
|
3,172
|
|
|
|
3,172
|
|
Other (a)
|
|
|
30,666
|
|
|
|
30,287
|
|
Total
|
|
|
172,522
|
|
|
|
172,086
|
|
Less: accumulated depreciation
|
|
|
(126,906
|
)
|
|
|
(126,022
|
)
|
Less: impairment of long-lived assets
|
|
|
(36,553
|
)
|
|
|
(36,553
|
)
|
Property, plant, equipment and seismic rental equipment, net
|
|
$
|
9,063
|
|
|
$
|
9,511
|
|
(a) Consists primarily of cable-based ocean bottom acquisition technologies that were fully impaired.
Total depreciation expense, including amortization of assets recorded under equipment finance leases, for the three months ended March 31, 2021 and 2020 was $0.9 million and $0.8 million, respectively. No impairment charge was recognized during the three months ended March 31, 2021 and 2020.
Multi-client Data Library
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Gross costs of multi-client data creation
|
|
$
|
1,024,429
|
|
|
$
|
1,021,758
|
|
Less: accumulated amortization
|
|
|
(841,985
|
)
|
|
|
(838,700
|
)
|
Less: impairments to multi-client data library
|
|
|
(132,144
|
)
|
|
|
(132,144
|
)
|
Multi-client data library, net
|
|
$
|
50,300
|
|
|
$
|
50,914
|
|
Total amortization expense for the three months ended March 31, 2021 and 2020 was $3.3 million and $8.0 million, respectively. The decrease in total amortization expense is primarily due to higher revenue-based amortization of the multi-client data library in the prior quarter related to the increased sales of the Company's 2D global data library. For the three months ended March 31, 2021 and 2020, the Company recognized an impairment to multi-client data library of zero and $1.2 million, respectively, for programs with capitalized costs exceeding the remaining sales forecasts.
Goodwill
|
|
E&P Technology & Services
|
|
|
Optimization Software & Services
|
|
|
Total
|
|
Balance at January 1, 2020
|
|
$
|
2,943
|
|
|
$
|
20,642
|
|
|
$
|
23,585
|
|
Impairment of goodwill
|
|
|
—
|
|
|
|
(4,150
|
)
|
|
|
(4,150
|
)
|
Impact of foreign currency translation adjustments
|
|
|
—
|
|
|
|
130
|
|
|
|
130
|
|
Balance at December 31, 2020
|
|
|
2,943
|
|
|
|
16,622
|
|
|
|
19,565
|
|
Impact of foreign currency translation adjustments
|
|
|
—
|
|
|
|
208
|
|
|
|
208
|
|
Balance at March 31, 2021
|
|
$
|
2,943
|
|
|
$
|
16,830
|
|
|
$
|
19,773
|
|
The Company, following the qualitative consideration, assessed the relevant events and circumstances in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. During the first quarter 2020, markets for oil and gas, as well as other commodities and equities, experienced significant volatility and price declines amid concerns over the economic effects of the COVID-19 pandemic. As a result, the Company’s stock price experienced a significant decline. Based on these facts, the Company performed a goodwill impairment test at March 31, 2020 to determine if it was more likely than not that the fair value of certain reporting units was less than their carrying value.
The Company, following the quantitative consideration, compared the fair value of each reporting unit against its carrying value. If the carrying value of the reporting unit exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. The fair value of each reporting unit at March 31, 2020 was determined using a discounted cash flow model. The Company utilized a discount rate of 19% for both reporting units. The Company used reasonable assumptions based on historical data supplemented by anticipated market conditions and estimated growth rates. However, given the uncertainty in determining the assumptions underlying a discounted cash flow analysis, actual results may differ which could result in additional impairment charges in the future.
As a result of this assessment, the Company recorded an impairment charge of $4.2 million for the three months ended March 31, 2020 related to its Optimization Software & Services reporting unit, which is included within the Operations Optimization segment. No impairment charge was recognized for the Optimization Software & Services reporting unit for the three months ended March 31, 2021. No impairment charge was recognized for the E&P Technology Services reporting unit for the three months ended March 31, 2021 and 2020.
(10)
|
Stockholders' Equity and Stock-based Compensation
|
Registered Direct Offering
On February 16, 2021, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) which provided for the sale and issuance by the Company of an aggregate of 2,990,001 shares (the “Shares”) of the Company’s common stock, $0.01 par value per share (the “Common Stock”) at an offering price of $3.50 per share for gross proceeds of approximately $10.5 million before deducting the placement agent’s fees and related offering expenses. The Securities Purchase Agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company, other obligations of the parties and termination provisions. The Company used the net proceeds for working capital and general corporate purposes.
The Registered Direct Offering was made pursuant to a Registration Statement (No. 333-234606) on Form S-3, which was filed by the Company with the SEC on November 8, 2019, as amended on December 19, 2019, and declared effective on December 23, 2019.
Stock-Based Compensation
The total number of shares issued or reserved for future issuance under outstanding stock options at March 31, 2021 and 2020 was 481,786 and 669,209, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at March 31, 2021 and 2020 was 689,931 and 903,204, respectively. The total number of stock appreciation rights (“SARs”) awards outstanding at March 31, 2021 and 2020 was 662,591 and 937,597, respectively. The following table presents a summary of the activity related to stock options, restricted stock, restricted stock unit awards and SARs awards for the three months ended March 31, 2021:
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Restricted Stock
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Stock Appreciation
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Stock Options
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and Units Awards
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Rights
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Outstanding at January 1, 2020
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533,320
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732,707
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754,582
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Increase in shares authorized
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—
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23,533
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—
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Granted
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—
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—
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—
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Stock options and SARs exercised/restricted stock and unit awards vested
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—
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(24,365
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)
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(5,000
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)
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Cancelled/forfeited
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(51,534
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)
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(41,944
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)
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(86,991
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)
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Outstanding at March 31, 2021
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481,786
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689,931
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662,591
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Stock-based compensation expense recognized for the three months ended March 31, 2021 and 2020, totaled $0.3 million and $0.6 million, respectively. SARs expense (credit) recognized for the three months ended March 31, 2021 and 2020, totaled zero and $(1.1) 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 at March 31, 2021 and December 31, 2020 using a Monte Carlo simulation model. The following assumptions were used:
Risk-free interest rates
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0.7
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%
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Expected lives (in years)
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5.31
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Expected dividend yield
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—
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%
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Expected volatility
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94.7
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%
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At-The-Market Equity Offering Program
On April 26, 2021, the Company filed a prospectus supplement under which it may sell up to $10.0 million of its common stock through an "at-the-market" equity offering program (the "ATM Program"). The Company intends to use the net proceeds from sales under the ATM Program for working capital and general corporate purposes. The timing of any sales will depend on a variety of factors to be determined by the Company.
The Company leases offices, processing centers, warehouse spaces and, to a lesser extent, certain equipment. These leases have remaining terms of 1 year to 10 years, some of which have options to extend for up to 10 years and/or options to terminate within 1 year. The options to renew are not recognized as part of the Company’s right-of-use assets and operating lease liabilities as the Company is not reasonably certain that it will exercise these options.
In January 2020, the Company amended its existing Houston, Texas headquarters lease agreement by extending the lease term from September 30, 2023 to June 30, 2029 and surrendering back to the landlord floors for which the Company had previously vacated. In July 2020, the Company re-negotiated the above-mentioned lease agreement to modify the rent abatement period from October 2023 through February 2024 to July 2020 through March 2021.
In May 2020, the Company amended its Houston data center lease agreement to reflect changes in the monthly base rent throughout the term of the lease and extend the lease term three months to December 2025. The execution of this amendment and the amendment to the Houston, Texas headquarters lease resulted in the Company obtaining rent relief of approximately $4.0 million.
Total operating lease expense, including short-term lease expense was $2.6 million and $2.5 million for the three months ended March 31, 2021 and 2020, respectively.
Equipment Finance Leases
The Company has entered into equipment finance leases that are due in installments for the purpose of financing the purchase of computer equipment through August 2021. Interest accrues under these leases at a rate of 8.7% per annum, and the leases are collateralized by liens on the computer equipment. The assets are amortized over the lesser of their related lease terms or their estimated productive lives and such charges are reflected within depreciation expense.
(12)
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Supplemental Cash Flow Information and Non-Cash Activity
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Supplemental disclosure of cash flow information follows (in thousands):
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Three Months Ended March 31,
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2021
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2020
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Cash paid during the period for:
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Interest
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$
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541
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$
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160
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Income taxes
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722
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4,304
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The following table is a reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets:
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March 31,
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2021
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2020
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(In thousands)
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Cash and cash equivalents
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$
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34,228
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$
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42,663
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Restricted cash included in prepaid expenses and other current assets
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2,327
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(a)
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—
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Restricted cash included in other long-term assets
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—
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25
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Total cash, cash equivalents, and restricted cash shown in consolidated statements of cash flows
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$
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36,555
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$
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42,688
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(a) Relates to letters of credit issued during third quarter 2020, primarily in connection with the Houston office lease deposit.
(13)
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Fair Value of Financial Instruments
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Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, under which the fair value hierarchy prioritizes the inputs used to measure fair value. The three-tiered hierarchy is summarized as follows:
Level 1—Quoted prices in active markets for identical assets and liabilities.
Level 2—Other significant observable inputs including quoted prices or other market data for similar assets and liabilities in active markets or quoted prices for identical or similar assets and liabilities in less active markets.
Level 3—Significant unobservable inputs that require significant judgment for which there is little or no market data.
Due to their highly liquid nature, the amount of the Company’s other financial instruments, including cash and cash equivalents, restricted cash, accounts and unbilled receivables, accounts payable and accrued multi-client data library royalties, represent their approximate fair value.
The carrying amounts of the Company’s Old Notes at March 31, 2021 and December 31, 2020 were $120.6 million and $120.6 million, respectively, compared to its fair values of $114.9 million and $106.3 million at March 31, 2021 and December 31, 2020, respectively. Market conditions could cause an instrument to be reclassified from Level 1 to Level 2, or Level 2 to Level 3. The fair value of the Old Notes was calculated using Level 2 inputs using significant observable data points for similar liabilities where estimated values are determined from observable transactions.
The carrying amount of any borrowings outstanding under the Credit Facility approximate fair value, as the interest rate is variable and reflective of market rates.
Fair value measurements are applied with respect to non-financial assets and liabilities on a non-recurring basis (e.g. when possible indicators of impairment exist), which would consist of measurements of goodwill, multi-client data library and property, plant and equipment. The fair value of these assets is determined based on valuation techniques using the best information available and may include market comparables and discounted cash flow projections.