Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated balance sheet of ION Geophysical Corporation and its subsidiaries (collectively referred to as the “Company” or “ION,” unless the context otherwise requires) at December 31, 2019, has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at March 31, 2020, and the condensed consolidated statements of operations, comprehensive loss, condensed consolidated statements of stockholders' deficit, and cash flows for the three months ended March 31, 2020 and 2019, are unaudited. In the opinion of management, all adjustments of a normal recurring nature that are necessary for a fair presentation of the results of the interim period have been included. Interim results are not necessarily indicative of the operating results for a full year or of future operations. Intercompany transactions and balances have been eliminated.

The Company’s condensed consolidated financial statements reflect a non-redeemable noncontrolling interest in a majority-owned affiliate which is reported as a separate component of equity in “Noncontrolling interest” in the condensed consolidated balance sheets. Net income attributable to noncontrolling interest is stated separately in the condensed consolidated statements of operations. The activity for this noncontrolling interest relates to proprietary processing projects in Brazil.

These condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with GAAP have been omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Overview

The COVID-19 pandemic caused the global economy to enter a recessionary period, which may be prolonged and severe, and significantly reduced the availability of capital and liquidity from banks and other providers of credit. The E&P industry is facing the double impact of demand destruction from COVID-19 and market oversupply from increased production, which caused oil and natural gas prices to decline significantly since the start of the year. While Organization of the Petroleum Exporting Countries (“OPEC”) and other oil producing countries agreed to a production cut in April 2020, oil prices nonetheless declined further to record low levels during the month. While commodity prices can be volatile, this sharp decline triggered E&P companies to reduce budgets and will likely curtail demand for some of the Company’s products and services. Spending on exploration tends to be among the most discretionary and is expected to bear some of the deepest cuts in percentage terms, although spending reductions in the offshore basins where the Company operates are projected to be less severe than onshore in the United States.

While the duration and extent of COVID-19 is difficult to predict, the Company recorded its highest first quarter revenues since 2014. A number of large multi-client contracts were closed in the first quarter 2020, some of which were delayed from the fourth quarter 2019, even after E&P market dynamics changed. The Company worked closely with clients to assess the effect of E&P budget reductions to its business and took decisive action to proactively manage its business. To mitigate the impact of COVID-19 and oil price volatility, management implemented a plan to preserve cash and manage liquidity as follows:

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Scaling down personnel costs and operating expenses by another $18.0 million during the remaining nine months of 2020, building on the over $20.0 million (net of severance expense of $3.1 million) of cuts made in January 2020. These further reductions are primarily through a variety of furlough programs and reduced compensation arrangements across the Company’s worldwide workforce. The Company executives have taken a 20% base salary reduction and a tiered reduction scheme has been cascaded to the rest of the worldwide workforce. The Company’s Board of Directors has taken a 20% reduction in directors’ fees. In addition, the Company has curtailed use of external contractors, decreased travel and event costs and implemented new systems and processes that more efficiently support its business.

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Reducing capital expenditures to an estimated $20.0 million to $35.0 million (a portion of which will be pre-funded or underwritten by the customers), down from $35.0 million to $50.0 million, to reflect both reduced seismic demand and travel/border restrictions impacting new data acquisition offshore. This provides flexibility to aggressively reduce cash outflows while shifting to much lower cost reimaging programs.


•	Applied for various government assistance programs of which $6.9 million has been received in April 2020. Receipt of this $6.9 million allowed the Company to avoid further staff reductions while supporting its ongoing operations. Additional global government relief of between $2.0 million to $7.0 million may be possible.


•	Announced the sale of its interest in INOVA Geophysical for $12.0 million that is expected to close during the second half of the year, subject to regulatory approvals and other closing conditions.


•	Entered into a settlement agreement with WesternGeco ending the uncertainty surrounding the decade-long patent litigation. See Note 8 “Litigation” for further details.


•	In addition, the Company reviewed its debt covenants and expects that it will remain in compliance for the next twelve months.

The Company believes that the above management plan, including actions already taken, gives the Company the ability to operate for at least the next twelve months from the date the condensed consolidated financial statements are issued.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in Note 1 “Summary of Significant Accounting Policies.” of the Annual Report on Form 10-K for the year ended December 31, 2019. There have been no changes in such policies or the application of such policies during the three months ended March 31, 2020 except as discussed in Note 2 “Recent Accounting Pronouncements.”

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions by management that affects the reported amounts in the condensed consolidated financial statements and accompanying notes. Areas involving significant estimates include, but are not limited to, accounts and unbilled receivables, inventory valuation, sales forecast related to multi-client data library, impairment of property, plant and equipment and goodwill and deferred taxes. Actual results could materially differ from those estimates.