TEAM INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of our financial condition, changes in financial condition, and results of operations. The following should be read in conjunction with Item 1 “Business,” Item 1A “Risk Factors,” Item 2 “Properties,” and Item 8 “Consolidated Financial Statements and Supplementary Data,” included in this Annual Report on Form 10-K. Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future developments and/or otherwise are not statements of historical fact. See Item 1 at the beginning of this Annual Report. Overview of Business We are a global, leading provider of specialty industrial services offering clients access to a full suite of conventional, specialized, and proprietary mechanical, heat-treating, and inspection services. We deploy conventional to highly specialized inspection, condition assessment, maintenance and repair services that result in greater safety, reliability and operational efficiency for our clients’ most critical assets. Prior to the sale of our Quest Integrity segment (“Quest Integrity”) as discussed below, we conducted operations in three segments: Inspection and Heat Treating (“IHT”), Mechanical Services (“MS”) and Quest Integrity. We currently conduct operations in two segments. Through the capabilities and resources in these two segments, we believe that we are uniquely qualified to provide integrated solutions involving: inspection to assess condition; engineering assessment to determine fitness for purpose in the context of industry standards and regulatory codes; and mechanical services to repair, rerate or replace based upon the client’s election. In addition, we are capable of escalating with the client’s needs, as dictated by the severity of the damage found and the related operating conditions, from standard services to some of the most advanced services and integrated asset integrity and reliability management solutions available in the industry. We also believe that we are unique in our ability to provide these services in three distinct client demand profiles: (i) turnaround or project services, (ii) call-out services, and (iii) nested or run-and-maintain services. Significant Factors Impacting Results and Recent Developments Our revenues, gross margins and other results of operations can be influenced by a variety of factors in any given period, including those described in Cautionary Note Regarding Forward-Looking Statements above and Part 1, Item 1A. “Risk Factors” included in this report and have caused fluctuations in our results in the past and are expected to cause fluctuations in our results in the future. Additional information with respect to certain factors are described below. Reverse Stock Split . On November 2, 2022, the Company’s shareholders approved a proposal to authorize the Board to implement a reverse stock split of the outstanding shares of the Company’s common stock at a ratio of one-for-ten (the “Reverse Stock Split”). The Board approved the Reverse Stock Split on December 9, 2022, which became effective on December 21, 2022. At the effective time, every ten issued and outstanding shares of common stock were converted into one share of common stock. The common stock began trading on a reverse split-adjusted basis on the NYSE at the opening of trading on December 22, 2022. The Reverse Stock Split also effected a proportionate reduction in the Company’s authorized shares of common stock from 120,000,000 shares to 12,000,000 shares, and reduced the number of shares of common stock outstanding from 43,429,089 shares to 4,342,909 shares. All issued and outstanding common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. In addition, a proportionate adjustment was made to the per share exercise price and the number of shares issuable upon the exercise and/or vesting of all outstanding stock options, restricted stock units and warrants to purchase shares of common stock. A proportionate adjustment was also made to the number of shares reserved for issuance pursuant to the Company’s equity incentive compensation plans to reflect the Reverse Stock Split. Any fraction of a share of common stock that was created as a result of the Reverse Stock Split was rounded up to the next whole share. The common stock par value and additional paid-in-capital line items contained in the financial statements were adjusted to account for the Reverse Stock Split for all periods presented. 24 Table of Content Market Conditions Update . During the fourth quarter of 2022, the lingering impact of COVID-19 had less effect on our workforce and operations, as well as the operations of our clients, suppliers and contractors. However, the global economy, including the financial and credit markets, has recently experienced significant volatility and disruptions, including increases in inflation rates, rising interest rates, disruption to global supply chains, declines in economic growth, volatility in foreign currency exchange rates, and uncertainty about economic stability. The severity and duration of the impact of these conditions on our business cannot be predicted. See Item 1A of our Annual Report on Form 10-K “Risk Factors” for additional information. Under the CARES Act we qualified to defer the employer portion of social security taxes incurred through the end of calendar year 2020. We deferred total employer payroll taxes of $14.1 million and paid $7.0 million of the deferred payroll taxes in January 2022, transferred $0.5 million of such obligation as part of the Quest Integrity sale transaction to the buyer in November 2022, and paid the remaining amount of $6.6 million, outstanding as of December 31, 2022, in January 2023. Additionally, other governments in jurisdictions where we operate passed legislation to provide employers with relief programs, which included wage subsidy grants, deferral of certain payroll related expenses and tax payments and other benefits. As these other governments review compliance with their relief programs, we may be required to return a portion of these funds. We elected to treat qualified government subsidies from Canada and other governments as offsets to the related expenses. As a result, we recognized $0.6 million and $0.1 million as a reduction to operating expenses and selling, general and administrative expenses, respectively, during the twelve months ended December 31, 2022. We recognized $6.2 million and $1.5 million as a reduction to operating expenses and selling, general and administrative expenses, respectively, during the twelve months ended December 31, 2021. We also deferred certain payroll related expenses and tax payments under other foreign government programs. We had $2.1 million and $3.2 million as of December 31, 2022 and 2021, respectively, related to these foreign deferrals. Goodwill Impairment . With the sale of Quest Integrity, as discussed above, as of December 31, 2022 and December 31, 2021, there was no goodwill on the Company’s balance sheets related to continuing operations. The only segment with goodwill was Quest Integrity, which is included in discontinued operations. There was no goodwill impairment charge during the twelve months ended December 31, 2022, however, during the twelve months ended December 31, 2021, we recognized a non-cash goodwill impairment charge of $55.8 million in our MS operating segment and a non-cash goodwill impairment charge of $8.8 million in the discontinued operations of the Quest Integrity segment. These charges were a result of a goodwill impairment test that was triggered as a result of certain impairment indicators present during the twelve months ended December 31, 2021, primarily due to the impact of COVID-19 and the related continued curtailment of operations, decline in our forecast, continued declines in our stock price, reporting unit operating losses, and continued declines in the reporting units’ net sales compared to forecast. Recent Financing Transactions. During 2022 the Company executed a number of amendments to its debt instruments, including amendments to our 2022 ABL Credit Facility, Subordinated Term Loan Credit Agreement and Term Loan Credit Agreement and entered into a new Substitute Insurance Reimbursement Facility Agreement. See Note 12 - Debt to the consolidated financial statements for additional details related to these amendments. 25 Table of Content Results of Operations The following is a comparison of our results of operations for the twelve months ended December 31, 2022 and December 31, 2021. Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 The following table sets forth the components of revenue and operating income (loss) from our operations for the twelve months ended December 31, 2022 and 2021 (in thousands): Twelve Months Ended December 31, Increase (Decrease) 2022 2021 $ % Revenues by business segment: IHT $ 422,562 $ 415,371 $ 7,191 1.7 % MS 417,646 378,826 38,820 10.2 % Total revenues $ 840,208 $ 794,197 $ 46,011 5.8 % Operating income (loss): IHT 17,093 12,997 4,096 31.5 % MS 1 20,930 (47,728) 68,658 NM 2 Corporate and shared support services (77,825) (92,151) 14,326 15.5 % Total operating loss $ (39,802) $ (126,882) $ 87,080 68.6 % Interest expense, net 85,052 46,079 38,973 84.6 % Loss on debt extinguishment 30,083 — 30,083 NM 2 Loss on warrants — 59 (59) NM 2 Other expense (income), net (8,156) 3,052 (11,208) NM 2 Loss before income taxes $ (146,781) $ (176,072) $ 29,291 16.6 % Provision for income taxes 3,306 8,773 (5,467) (62.3) % Net loss $ (150,087) $ (184,845) $ 34,758 18.8 % _________________ 1 Includes goodwill impairment charge of $55.8 million for the twelve months ended December 31, 2021. 2 NM - Not meaningful. Revenues. Total revenues increased $46.0 million or 5.8% from the same period in the prior year. Total revenue was negatively impacted by $15.0 million in unfavorable foreign exchange rates during 2022. IHT revenues increased by $7.2 million or 1.7% and MS revenue increased by $38.8 million or 10.2%. IHT segment’s revenue increased primarily due to higher turnaround and nested activity in the United States compared to prior year, partially offset by a decrease in revenue in Canada. MS revenues increased primarily due to higher activity in our U.S. and Latin American operations related to leak repair, hot tapping services, and the U.S. valve business, partially offset by decreases in international revenue due to non-repeating project work in the United Kingdom in 2021. Operating income (loss) . Overall operating loss was $39.8 million, compared to an operating loss of $126.9 million in the prior year. The overall decrease in operating loss is mainly attributable to the MS segment which recorded a $55.8 million goodwill impairment charge in the prior year. Additionally, there was a $2.5 million improvement in the Canadian MS business, a $3.2 million improvement in the valve business, and efficiency gains realized in the equipment centers, manufacturing, and engineering. This was partially offset by $1.4 million decrease in COVID-19 related subsidies in the current year compared to prior year. IHT operating income increased by $4.1 million driven primarily by a $9.3 million improvement in the U.S. due to higher activity and related revenue realization and savings in overhead costs, partially offset by the completion of a significant Canadian customer contract in the first quarter of 2022 and COVID-19 related subsidies received in 2021, which were not received in 2022. Corporate operating loss decreased by $14.3 million due to lower professional fees and legal fees in the current year compared to prior year and lower overall costs due to the Company’s cost reduction efforts. The impact of our cost reduction efforts have been partially offset by continued cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs. 26 Table of Content Operating loss for the current year includes net expenses totaling $20.4 million that we do not believe are indicative of our core operating activities, while the same period in the prior year included $74.7 million of such items. The detail of non-core expenses reflected in operating income (loss) are as follows (unaudited) (in thousands): IHT MS Corporate and shared support services Total Twelve Months Ended December 31, 2022 Professional fees and other 1 $ — $ — $ 13,915 $ 13,915 Legal costs 2 — — 2,571 2,571 Severance charges,net 3 286 685 2,990 3,961 Total $ 286 $ 685 $ 19,476 $ 20,447 Twelve Months Ended December 31, 2021 Professional fees and other 1 $ — $ — $ 8,882 $ 8,882 Legal costs 2 — — 7,243 7,243 Severance charges,net 3 661 524 1,564 2,749 Goodwill impairment charge — 55,837 — 55,837 Total $ 661 $ 56,361 $ 17,689 $ 74,711 ______________________ 1 The twelve months ended December 31, 2022, includes $10.2 million debt financing costs, $1.0 million of corporate support costs with the remaining amount related to other project costs. The twelve months ended December 31, 2021, includes $1.9 million Operating Group Reorganization costs (exclusive of restructuring costs), $3.9 million debt financing costs and $2.8 million of corporate support costs. 2 Primarily relates to accrued legal matters and other legal fees related to debt restructuring and other non-routine maters.. 3 2022 severance charges represent costs associated with executive departures and our ongoing cost reduction efforts across multiple segments. 2021 severance charges represent costs associated with the Operating Group Reorganization and other continuing restructuring measures. The detail of operating income (loss) excluding non-core expenses is as follow (unaudited) (in thousands): Twelve Months Ended December 31, Increase (Decrease) 2022 2021 $ % Operating income (loss), excluding non-core expenses: IHT $ 17,379 $ 13,658 $ 3,721 27.2 % MS 21,615 8,633 12,982 NM 1 Corporate and shared support services (58,349) (74,462) 16,113 21.6 % Total operating loss, excluding non-core expenses $ (19,355) $ (52,171) $ 32,816 62.9 % ______________________ 1 NM - Not meaningful. Excluding the impact of non-core expenses, the increase in our segment operating income is primarily attributable to our MS segment, which experienced an increase in operating income of $13.0 million. The operating income increase in MS was largely attributable to a $2.5 million improvement in the Canada business, a $5.7 million improvement in the valve business, and efficiency gains realized in the equipment centers, manufacturing, and engineering; partially offset by lack of COVID-19 related subsidies in the current year compared to the prior year. Corporate and shared support service expense decreased by $16.1 million, primarily due to the Company’s ongoing cost reduction efforts. Interest expense, net . Interest expense increased by $39.0 million compared to the prior year, primarily due to $21.8 million in increased amortization of deferred financing costs during the twelve months ended December 31, 2022. As a result of the various maturity triggering events related to the August 1, 2023 maturity of our Convertible Notes and the related uncertainty around our ability to repay the Notes when due, the amortization period for deferred financing costs, debt and warrant discounts, and debt issuance costs was shortened to reflect the accelerated maturity dates. Even though the outstanding principal amount of debt reduced as of December 31, 2022 compared to December 31, 2021 due to the pay down on the APSC Term Loan on November 2, 2022, there was an increase in the outstanding debt during most of the year primarily attributable to the debt financing executed in the first quarter of 2022, resulting in an increase in interest expense. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion. Loss on debt extinguishmen t. Loss on debt extinguishment for the year ended December 31, 2022 represented a $30.1 million loss due to partial payoff of the Term Loan which consisted of $12.4 million of cash fees and early payment 27 Table of Content premium and $17.7 million of noncash write off of the unamortized balance of the related deferred insurance cost, and debt and warrant discounts. Other expense (income), net . Other expense, net increased $11.2 million, from the same period in the prior year, primarily due to foreign currency transaction gains and gains on disposal of fixed assets in the current year compared to the prior year. Foreign currency transaction gains in the current year period reflect the effects of fluctuations in the U.S. dollar relative to the foreign currencies to which we have exposure. Taxes. The provision for income tax was $3.3 million on the pre-tax loss from continuing operations of $146.8 million in the current year compared to the provision for income tax of $8.8 million on pre-tax loss from continuing operations of $176.1 million in the prior year. The effective tax rate was a provision of 2.3% for the year ended December 31, 2022 and 5.0% for the year ended December 31, 2021. The higher effective rate in 2021 is primarily attributable to the goodwill impairment loss taken during the year, a portion of which is not deductible for tax purposes and an increase in the valuation allowance. Non-GAAP Financial Measures and Reconciliations We use supplemental non-GAAP financial measures which are derived from the consolidated financial information including adjusted net income (loss); adjusted net income (loss) per diluted share, earnings before interest and taxes (“EBIT”); adjusted EBIT (defined below); adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) and free cash flow to supplement financial information presented on a GAAP basis. We define adjusted net income (loss), adjusted net income (loss) per diluted share and adjusted EBIT to exclude the following items: costs associated with the Operating Group Reorganization (as defined in Note 19 to the consolidated financial statements), non-routine legal costs and settlements, non-routine professional fees, restructuring charges, certain severance charges, goodwill impairment charges and certain other items that we believe are not indicative of core operating activities. Consolidated adjusted EBIT, as defined by us, excludes the costs excluded from adjusted net income (loss) as well as income tax expense (benefit), interest charges, foreign currency (gain) loss, and items of other (income) expense. Consolidated adjusted EBITDA further excludes from consolidated adjusted EBIT depreciation, amortization and non-cash share-based compensation costs. Segment adjusted EBIT is equal to segment operating income (loss) excluding costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, non-routine professional fees, restructuring charges, certain severance charges, goodwill impairment charges and certain other items as determined by management. Segment adjusted EBITDA further excludes from segment adjusted EBIT depreciation, amortization, and non-cash share-based compensation costs. Free cash flow is defined as net cash provided by (used in) operating activities minus capital expenditures. Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of our financial position and results of operations. In particular, adjusted net income (loss), adjusted net income (loss) per diluted share, consolidated adjusted EBIT, and consolidated adjusted EBITDA are meaningful measures of performance which are commonly used by industry analysts, investors, lenders and rating agencies to analyze operating performance in our industry, perform analytical comparisons, benchmark performance between periods, and measure our performance against externally communicated targets. Our segment adjusted EBIT and segment adjusted EBITDA is also used as a basis for the Chief Operating Decision Maker to evaluate the performance of our reportable segments. Free cash flow is used by our management and investors to analyze our ability to service and repay debt and return value directly to stakeholders. Non-GAAP measures have important limitations as analytical tools because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures and should be read only in conjunction with financial information presented on a GAAP basis. Further, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies who may calculate non-GAAP financial measures differently, limiting the usefulness of those measures for comparative purposes. The liquidity measure of free cash flow does not represent a precise calculation of residual cash flow available for discretionary expenditures. Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are presented below. The following tables set forth the reconciliation of Adjusted Net Income (Loss), EBIT and EBITDA to their most comparable GAAP financial measurements: 28 Table of Content TEAM, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (unaudited, in thousands except per share data) Three Months Ended December 31, Twelve Months Ended December 31, 2022 2021 2022 2021 Adjusted Net Income (Loss): Net loss $ (56,932) $ (37,899) $ (150,087) $ (184,845) Professional fees and other 1 3,339 5,775 13,915 8,882 Legal costs (credit) 2 (700) 398 2,571 7,243 Severance charges, net 3 933 219 3,961 2,749 Natural disaster insurance recovery 4 (324) — (1,196) — Loss on debt extinguishment 7 30,083 — 30,083 — Loss on warrants — 59 — 59 Goodwill impairment charge — — — 55,837 Tax impact of adjustments and other net tax items 5 (48) (18) (79) (386) Adjusted net loss $ (23,649) $ (31,466) $ (100,832) $ (110,461) Adjusted net loss per common share: Basic and diluted $ (5.46) $ (10.12) $ (24.08) $ (35.66) Consolidated Adjusted EBIT and Adjusted EBITDA: Net loss $ (56,932) $ (37,899) $ (150,087) $ (184,845) Provision for income taxes (876) 353 3,306 8,773 Interest expense, net 21,344 17,315 85,052 46,079 Foreign currency loss (gain) 1,263 990 (2,692) 3,299 Pension credit 6 (178) (102) (749) (622) Loss (gain) on equipment sale 69 375 (4,200) 375 Loss on debt extinguishment 7 30,083 — 30,083 — Loss on warrants — 59 — 59 Professional fees and other 1 3,339 5,775 13,915 8,882 Legal costs (credit) 2 (700) 398 2,571 7,243 Severance charges, net 3 933 219 3,961 2,749 Natural disaster insurance recovery 4 (324) — (1,196) — Goodwill impairment charge — — — 55,837 Consolidated Adjusted EBIT (1,979) (12,517) (20,036) (52,171) Depreciation and amortization Amount included in operating expenses 3,757 4,391 15,600 18,342 Amount included in SG&A expenses 5,246 5,110 20,853 20,560 Total depreciation and amortization 9,003 9,501 36,453 38,902 Non-cash share-based compensation costs (323) 1,437 247 7,013 Consolidated Adjusted EBITDA $ 6,701 $ (1,579) $ 16,664 $ (6,256) Free Cash Flow: Cash used in operating activities $ (1,152) $ (2,866) $ (51,725) $ (41,674) Capital expenditures (3,245) (4,094) (20,544) (14,105) Free Cash Flow $ (4,397) $ (6,960) $ (72,269) $ (55,779) ____________________________________ 1 The three and twelve months ended December 31, 2022 , includes $1.8 million and $10.2 million, respectively, related to costs associated with debt financing, $1.0 million of corporate support costs for the year ended December 31, 2022 and other project costs. T he three and twelve months ended December 31, 2021, includes $0.2 million and $1.9 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs). Additionally, for the twelve months ended December 31, 2021, $3.9 million was related to costs associated with debt financing and $2.8 million of corporate support costs. 2 Primarily relates to accrued legal matters, adjustments to legal reserves and other legal fees related to debt restructuring and other non-routine matters. 3 2022 severance charges represent costs associated with executive departures and our ongoing cost reduction efforts across multiple segments. 2021 severance charges represent costs associated with the Operating Group Reorganization and other continuing restructuring measures. 29 Table of Content 4 Amount represent the insurance recovery received during the year for hurricane damage incurred in prior year. 5 Represents the tax effect of the adjustments. Beginning in Q2 2021, we began using the statutory tax rate, net of valuation allowance by legal entity to determine the tax effect of the adjustments. Prior to Q2 2021, we used an assumed marginal tax rate of 21%. We have updated the 2021 prior period tax impact to use the statutory tax rate by legal entity, net of valuation allowance. 6 Represents pension credit for the U.K. pension plan based on the difference between the expected return on plan assets and the amount of the discounted pension liability. The pension plan was frozen in 1994 and no new participants have been added since that date. Accruals for future benefits ceased in connection with a plan curtailment in 2013. 7 Represents loss on partial payoff of the APSC Term Loan consisting $12.4 million of cash fees and premium and the noncash write off of the unamortized balance of deferred issuance cost and warrant and debt discounts in the amount of $17.7 million. TEAM, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued) (unaudited, in thousands) Three Months Ended December 31, Twelve Months Ended December 31, 2022 2021 2022 2021 IHT Operating income $ 4,055 $ 2,173 $ 17,093 $ 12,997 Severance charges, net 1 94 86 286 661 Adjusted EBIT 4,149 2,259 17,379 13,658 Depreciation and amortization 3,019 3,071 12,391 12,959 Adjusted EBITDA $ 7,168 $ 5,330 $ 29,770 $ 26,617 MS Operating income (loss) $ 5,778 $ 3,071 $ 20,930 (47,728) Severance charges, net 1 596 30 685 524 Goodwill impairment loss — — — 55,837 Adjusted EBIT 6,374 3,101 21,615 8,633 Depreciation and amortization 4,799 5,068 19,021 20,500 Adjusted EBITDA $ 11,173 $ 8,169 $ 40,636 $ 29,133 Corporate and shared support services Net loss $ (66,765) $ (43,143) $ (188,110) $ (150,114) Provision for income taxes (876) 353 3,306 8,773 Loss (gain) on equipment sale 69 375 (4,200) 375 Interest expense, net 21,344 17,315 85,052 46,079 Loss on debt extinguishment 3 30,083 — 30,083 — Foreign currency loss (gain) 1,263 990 (2,692) 3,299 Pension expense (credit) 4 (178) (102) (749) (622) Loss on warrants — 59 — 59 Professional fees and other 5 3,339 5,775 13,915 8,882 Legal costs 6 (700) 398 2,571 7,243 Severance charges, net 1 243 103 2,990 1,564 Natural disaster insurance recovery 2 (324) — (1,196) — Adjusted EBIT (12,502) (17,877) (59,030) (74,462) Depreciation and amortization 1,185 1,362 5,041 5,443 Non-cash share-based compensation costs (323) 1,437 247 7,013 Adjusted EBITDA $ (11,640) $ (15,078) $ (53,742) $ (62,006) _________________ 1 2022 severance charges represent costs associated with executive departures and ongoing cost reduction efforts across multiple segments. 2021 severance charges represent costs associated with the Operating Group Reorganization and other continuing restructuring measures. 2 Amount represents the insurance recovery for hurricane damage incurred in prior year. 3 Represents loss on partial payoff of the APSC Term Loan consisting $12.4 million of cash fees and premium and the noncash write off of the unamortized balance of deferred issuance cost and warrant and debt discounts in the amount of $17.7 million. 4 Represents pension credit for the U.K. pension plan based on the difference between the expected return on plan assets and the amount of the discounted pension liability. The pension plan was frozen in 1994 and no new participants have been added since that date. Accruals for future benefits ceased in connection with a plan curtailment in 2013. 5 For the three and twelve months ended December 31, 2022 , includes $1.8 million and $10.2 million, respectively, related to costs associated with debt financing, $1.0 million of corporate support costs for the year ended December 31, 2022 and other project costs. For the three and twelve months ended December 31, 2021, includes $0.2 30 Table of Content million and $1.9 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs). $3.9 million associated with debt financing and $2.8 million of corporate support costs. 6 Primarily relates to accrued legal matters, adjustments to legal reserves and other legal fees related to debt restructuring and other non-routine matters. Liquidity, Capital Resources and Going Concern. The accompanying consolidated financial statements have been prepared in accordance with GAAP and assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the issue date of these consolidated financial statements. Our ability to continue as a going concern is dependent on many factors, including among other things, our ability to comply with the covenants in our debt agreements, our ability to cure any defaults that occur under our debt agreements, or forbearances with respect to any such defaults, and our ability to pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and principal payments come due. Liquidity risk is the risk that we will be unable to meet our financial obligations as they become due. Our liquidity may be affected by improvements or declines in commodity prices, our segments’ operational performance, and our ability to access capital and credit markets. We evaluated our liquidity within one year after the date of issuance of the accompanying audited consolidated financial statements to determine if there is substantial doubt about the Company’s ability to continue as a going concern. In the preparation of this liquidity assessment, we applied judgment to estimate the projected cash flows of the Company, including the following: (i) projected cash outflows, (ii) projected cash inflows, and (iii) projected availability under the Company’s existing debt arrangements. The cash flow projections were based on known or planned cash requirements for operating and financing costs and include management’s best estimate regarding future customer activity levels, pricing for its services and for its supplies and other factors. Actual results could vary significantly from those projections. We do not believe, based on the Company’s forecast, that current working capital, cash flow from operations, expected availability under our existing credit agreements and capital expenditure financing is sufficient to fund the operations, maintain compliance with our debt covenants (as amended), and satisfy the Company’s obligations, specifically with respect to the Notes described below, as they come due within one year after the date of issuance of these consolidated financial statements. We are exploring alternatives to reduce or refinance the Notes outstanding balance, including extending their maturity as well as other alternatives. There is no assurance that we will be able to execute a reduction, extension, or refinancing of the Notes or that the terms of any replacement financing would be as favorable as the terms of the Notes prior to the maturity date. Under the terms of our amended financing arrangements that were entered into during 2022, the Maturity Reserve Trigger Date (as defined in the 2022 ABL Credit Agreement), and the Maturity Trigger Date (as defined in the Term Loan Credit Agreement), collectively referred to as the “Trigger Date” is June 17, 2023, see to Note 12 - Debt for additional information. Therefore, the Notes balance must be paid down to less than $10.0 million by June 17, 2023. The failure to pay down the Notes to less than $10.0 million would (i) trigger the early maturity of our Term Loan Credit Agreement pursuant to the Trigger Date concept, and (ii) permit the administrative agent under the 2022 ABL Credit Agreement to implement a borrowing base reserve in an amount equal to the outstanding principal amount of the Notes on such date. A required repayment of the Term Loan Credit Agreement in accordance with the Trigger Date concept would in turn trigger a requirement to repay the Subordinated Term Loans pursuant to the Subordinated Term Loan Credit Agreement 14 days after repayment in full of the Term Loan Credit Agreement. Refer to Note 12 - Debt for more information on the terms and maturity dates of our debt that may affect our future liquidity. There is no assurance that we would be able to make such payments, and failure to make such payments would result in events of default under the applicable credit facility and associated cross defaults under the Company’s other debt instruments. Without the execution of a refinancing transaction, an agreement to extend the Notes maturity date, and/or amendments to our existing debt agreements there is a risk that the Company could be, among other things, unable to make principal payments on the Notes when they become due on August 1, 2023. Failure to pay the Notes off at the maturity date on August 1, 2023 will result in an event of default under the Notes and the associated cross defaults noted above under the Company’s other debt instruments. As of December 31, 2022 we are in compliance with our debt covenants. Our ability to maintain compliance with the financial covenants contained in the 2022 ABL Credit Facility, Term Loan Credit Agreement, and Subordinated Term Loan Credit Agreement is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties. The lingering effects of COVID-19, the threat of recession and related economic repercussions could have a significant adverse effect on our financial position and business condition, as well as our clients and suppliers. Additionally, these events may, among other factors, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all, and affect our future need or ability to borrow under our 2022 ABL Credit Facility. In addition to our current sources of funding our business, the effects of such events may impact our liquidity or 31 Table of Content our need to revise our allocation or sources of capital, implement further cost reduction measures and/or change our business strategy. Political economic repercussions could have a broad range of effects on our liquidity sources and will depend on future developments and cannot be predicted at this time. As a result of our current liquidity condition, the potential inability to negotiate an extension or amend the financial covenants, substantial doubt about the Company’s ability to continue as a going concern is raised. We are evaluating and will continue to explore strategic alternatives to a refinancing transaction or the reduction of the debt, including negotiating amendments to our credit facilities and the financial covenants contained therein, the sale of assets, or other alternative financing transactions. While our lenders agreed on an extension and amended the financial covenants in prior periods, there can be no assurance that our lenders will provide additional extensions, waivers or amendments in the event of future non-compliance with our debt covenants, or other possible events of default. The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern. Financing for our operations consists primarily of our 2022 ABL Credit Facility, Term Loan, Subordinated Term Loan (as defined herein) and cash flows attributable to our operations. As of December 31, 2022, we had approximately $52.4 million of borrowing capacity consisting of $42.4 million available under the 2022 ABL Credit Facility and $10.0 million available under the Corre Delayed Draw Term Loan. Our principal uses of cash are for working capital needs and operations. We have entered into the recent financing transactions (as further described in Note 1 – Summary of Significant Accounting Policies and Practices and Note 12 – Debt ) and certain amendments thereto to address our near-term liquidity needs, and we have taken definitive actions to reduce costs, improve operations, profitability, and liquidity, and position the Company for future growth; however, we have suffered recurring operating losses and subsequent to year-end, we had reduced borrowing capacity to fund our increasing working capital needs. As of March 13, 2023, we had consolidated cash and cash equivalents of $31.3 million, excluding $6.7 million restricted mainly as collateral for outstanding letters of credit and our purchasing card programs, and approximately $35.7 million of undrawn availability under our various credit facilities, resulting in total liquidity of $67.0 million. Refer to Note 12 - Debt for information on our debt instruments. Cash and cash equivalents . Our cash and cash equivalents as of December 31, 2022 totaled $58.1 million. $16.3 million of the $58.1 million of cash and cash equivalents was in foreign accounts, primarily in Europe, Canada and Australia, including $1.4 million of cash located in countries where currency restrictions exist. Our cash and cash equivalents as of December 31, 2021 totaled $65.3 million ($55.2 million related to continuing operations), of which $4.1 million was restricted for interest due on the Term Loan. Additionally, $23.8 million of the $65.3 million ($14.2 million of the $55.2 million related to continuing operations) of cash and cash equivalents was in foreign accounts, primarily in Europe, Canada and Australia, including $4.0 million ($2.4 million related to continuing operations) of cash located in countries where currency restrictions exist. Cash flows attributable to our operating activities. For the year ended December 31, 2022, net cash used in operating activities was $57.9 million. We had net income of $70.1 million, adjusting for the gain on sale of Quest Integrity of $203.4 million and a decrease in working capital of $30.2 million, partially offset by the effect of depreciation and amortization of $37.6 million, loss on debt extinguishment of $17.7 million, amortization of debt issuance costs and debt discount of $35.5 million and paid in kind interest of $18.2 million resulted in negative operating cash flow. For the year ended December 31, 2021, net cash used in operating activities was $35.5 million. We incurred a net loss of $186.0 million, and the goodwill impairment of $64.6 million, the effect of depreciation and amortization of $41.5 million, non-cash compensation cost of $7.0 million, amortization of debt issuance costs and debt discount of $13.8 million and deferred income taxes of $4.5 million primarily due to net tax refunds, resulted in negative operating cash flow. Cash flows attributable to our investing activities . For the year ended December 31, 2022, net cash provided by investing activities was $243.4 million, consisting primarily of net proceeds from sale of Quest Integrity of $260.8 million and net proceeds from asset disposals of $7.2 million, partially offset by $24.7 million of capital expenditures. For the year ended December 31, 2021, net cash used in investing activities was $14.1 million, consisting primarily of $17.6 million of capital expenditures. Capital expenditures can vary depending upon specific client needs that may arise. 32 Table of Content Cash flows attributable to our financing activities. For the year ended December 31, 2022, net cash used in financing activities was $192.0 million, consisting primarily of $224.9 million payoff on the APSC term loan, $62.0 million of net payments under the 2020 ABL Credit Facility and $13.7 million of term loan debt issuance costs, partially offset by net borrowings on our 2022 ABL Credit Facility of $64.9 million and borrowings of $35.0 million under the Corre Delayed Draw Term Loan. For the year ended December 31, 2021, net cash provided by financing activities was $91.9 million, consisting primarily of $10.5 million of term loan debt issuance costs, and $0.2 million in withholding tax payments related to share-based compensation, offset by net borrowings on our 2020 ABL Facility of $53.0 million and borrowings of $50.0 million under the Subordinated Term Loan Facility. Effect of exchange rate changes on cash . For the year ended December 31, 2022, the effect of foreign exchange rate changes on cash was a negative impact of $0.7 million. The negative impact in the current year is primarily attributable to unfavorable fluctuations in U.S. dollar exchange rates with the Canadian dollar, the Euro, the British pound, the Australian dollar and Mexican peso. For the year ended December 31, 2021, the effect of foreign exchange rate changes on cash was a negative impact of $1.6 million. The negative impact in 2021 is primarily attributable to unfavorable fluctuations in U.S. dollar exchange rates with the Canadian dollar, the euro, the British pound, the Australian dollar and Mexican peso. 33 Table of Content Critical Accounting Policies The process of preparing financial statements in accordance with GAAP requires our management to make estimates and judgments. It is possible that materially different amounts could be recorded if these estimates and judgments change or if actual results differ from these estimates and judgments. We believe that the following critical accounting policies comprise the more significant estimates and assumptions used in the preparation of our consolidated financial statements. Goodwill. As of December 31, 2022, and December 31, 2021, there was no goodwill on the Company’s balance sheets related to continuing operations. The only reporting unit with goodwill was Quest Integrity, which is included in discontinued operations. Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. We test goodwill each year on December 1 for impairment at a reporting unit level, however, due to the sale of Quest Integrity, as discussed above, there was no goodwill remaining on the Company’s balance sheet that required an annual recoverability assessment. In addition, Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the year ended December 31, 2021, our assessment of qualitative indicators associated with our interim and annual goodwill impairment tests indicated an impairment existed as the carrying value of the MS reporting unit exceeded its fair value. As a result, we recorded a goodwill impairment of $55.8 million during the year ended December 31, 2021. We also recorded goodwill impairment of $8.8 million on our discontinued operations during the year ended December 31, 2021. Income taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted rates in effect for the year in which the differences are expected to reverse. The effect of the change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be unable to realize our deferred tax assets, we would make an adjustment to the deferred tax asset valuation allowance. We establish reserves for uncertain tax positions when it is not more likely than not that the position will be sustained upon challenge. When facts and circumstances change, we adjust these reserves through our provision for income taxes. To the extent interest and penalties may be assessed by taxing authorities on any related underpayment of income tax, such amounts have been accrued and are classified as a component of income tax expense. New Accounting Principles For information about newly adopted accounting principles as well as information about new accounting principles pending adoption, see Note 1 Summary of Significant Accounting Policies and practices to the consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this Item 7A. 34 Table of Content