What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-09 · 168 added, 328 removed, 172 unchanged (74% of the section changed)

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Cautionary Note Regarding Forward-Looking Statements.

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical or current fact included in this report are forward-looking statements.

Forward-looking statements include statements containing words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “will,” “could,” “should,” “may” and similar expressions.

We base our forward-looking statements on beliefs and assumptions that we believe to be reasonable, and our current expectations, estimates and projections about ourselves and our industry.

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf in other materials we release to the public including all statements, other than statements of historical facts included or incorporated by reference in this Quarterly Report on Form 10-Q, that address activities, events or developments which we expect or anticipate will or may occur in the future.

You can generally identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “will,” “could,” “should,” “may” and similar expressions.

We based our forward-looking statements on beliefs and assumptions that we believe to be reasonable, and our current expectations, estimates and projections about ourselves and our industry.

However, all forward-looking statements are subject to risks and uncertainties, many of which are out of our control, that may cause actual results to differ materially from those that are expected and, therefore, you should not unduly rely on such statements.

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We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.

There are a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements.

Such risks include those disclosed under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the United States Securities and Exchange Commission, as well as, risks related to:

New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Additionally, t here are a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements.

Such risks include those disclosed under the heading “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 and in Part II, Item 1A of this Quarterly Report on Form 10-Q, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the United States Securities and Exchange Commission, as well as, risks related to:

• our ability to continue as a going concern;

• we do not have sufficient available cash forecasted to fund our Notes due in August 2023 and we may not be able to restructure our debt prior to their maturity;

• our ability to generate sufficient cash from operations, access our 2022 ABL Credit Facility, or maintain our compliance with our 2022 ABL Credit Agreement, Term Loan Credit Agreement, and Subordinated Term Loan Credit Agreement covenants;

• our ability to manage inflationary pressures in our operating costs;

• the impact to our business, financial condition, results of operations and cash flows due to negative market conditions, including from the impact of the COVID-19 pandemic or other public health crises, the ongoing conflict in Ukraine, and future economic uncertainties, particularly in industries in which we are heavily dependent;

• delays in the commencement of major projects, whether due to the COVID-19 pandemic or other factors;

• our business may be affected by seasonal and other variations, including severe weather conditions and the nature of our client s’ industry;

• the impact to our business, financial condition, results of operations and cash flows due to negative market conditions, including from the lingering impact of widespread public health crises, epidemics and pandemics, threats of domestic and global economic recession and future economic uncertainties, particularly in industries in which we are heavily dependent;

• delays in the commencement of major projects;

• our business may be affected by seasonal and other variation, such as severe weather conditions (including conditions influenced by climate change) and the nature of our client s’ industry;

• our ability to expand into new markets (including low carbon energy transition) and attract clients in new industries may be limited due to our competition’s breadth of service offerings and intellectual property;

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• risk of non-payment and/or delays in payment of receivables from our clients;

• our ability to generate sufficient cash from operations, access our ABL Credit Facility, or maintain our compliance with our ABL Credit Agreement, Term Loan Credit Agreement, and Subordinated Term Loan Credit Agreement covenants;

• compliance with continued listing standards of the New York Stock Exchange;

• if we cannot regain compliance with the NYSE’s continued listing requirements and rules, the NYSE may delist our

• we may not be able to meet the NYSE’s continued listing requirements and rules, and the NYSE may delist our

common stock, which could negatively affect our company, the price of our common stock and our shareholders’ ability to sell our common stock and may lead to potential events of default on existing debt instruments;

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General Description of Business

On November 1, 2022, we completed the sale of all of the issued and outstanding equity interests of our wholly-owned subsidiary, TQ Acquisition, to Baker Hughes for an aggregate purchase price of approximately $279 million, reflecting certain estimated post-closing adjustments, pursuant to the Sale Agreement.

TQ Acquisition and its subsidiaries constituted our Quest Integrity segment, which provided integrity and reliability management solutions for the process, pipeline and power sectors.

As of September 30, 2022, the criteria for reporting Quest Integrity as a discontinued operation were met and, as such, all periods presented in this Form 10-Q have been recast to present Quest Integrity as a discontinued operation.

Unless otherwise specified, the financial information and discussion in this Form 10-Q are based on our continuing operations (IHT and MS segments) and exclude any results of our discontinued operations (Quest Integrity).

Refer to Note 2 - Discontinued Operations for additional details.

We are a global leading provider of integrated, digitally-enabled asset performance assurance and optimization solutions.

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.

We conduct operations in two segments:

Prior to the sale of Quest integrity, we operated Quest Integrity as our third segment.

Through the capabilities and resources in these segments, we believe that we are uniquely qualified to provide integrated solutions involving:

Inspection and Heat Treating (“IHT”) and Mechanical Services (“MS”).

Through the capabilities and resources in these two segments, we believe that we are uniquely qualified to provide integrated solutions:

inspection to assess condition;

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and mechanical services to repair, rerate or replace based upon the client’s election.

In addition, we are capable of scaling 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.

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 services in three distinct client demand profiles:

(i) turnaround or project services, (ii) call-out services and (iii) nested or run-and-maintain services.

IHT provides conventional and advanced NDT services primarily for the process, pipeline and power sectors, and pipeline integrity management services, and field heat treating and thermal services, tank management solutions, and pipeline integrity solutions, as well as associated engineering and condition assessment services.

IHT provides conventional and advanced non-destructive testing services primarily for the process, pipeline and power sectors, and pipeline integrity management services, and field heat treating services, as well as associated engineering and condition assessment services.

These services can be offered while facilities are running (on-stream), during facility turnarounds or during new construction or expansion activities.

IHT also provides advanced digital imaging including remote digital video imaging and laser scanning services.

IHT also provides advanced digital imaging including remote digital video imaging.

MS provides solutions designed to serve clients’ unique needs during both the operational (onstream) and off-line states of their assets.

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and valve management solutions.

Prior to its sale, Quest Integrity provided integrity and reliability management solutions for the process, pipeline and power sectors.

These solutions encompass two broadly-defined disciplines:

(1) highly specialized in-line inspection services for historically unpiggable process piping and pipelines using proprietary in-line inspection tools and analytical software;

and (2) advanced engineering and condition assessment services through a multi-disciplined engineering team and related lab support.

As referenced previously, Quest Integrity is now reported as discontinued operations.

We market our services to companies in a diverse array of heavy industries which include:

• Energy (refining, power, renewables, nuclear and liquefied natural gas);

• Manufacturing and Process (chemical, petrochemical, pulp and paper industries, manufacturing, automotive and mining);

• Manufacturing and Process (chemical, petrochemical, pulp and paper industries, automotive and mining);

• Midstream and Others (valves, terminals and storage, pipeline and offshore oil and gas);

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• Aerospace and Defense.

In January 2021, we announced a strategic reorganization (the “Operating Group Reorganization”).

The new streamlined structure supports our global operations with greater focus on further improving operational and financial performance through three new operating groups:

Inspection and Heat Treating Group (the “IHT Group”), Mechanical & Onstream Services group (the “MOS Group”) and Asset Integrity & Digital (the “AID Group”).

The IHT Group, which is included in the IHT segment, is dedicated to growing its stable nested footprint as regulatory compliance requirements increase, expanding turnaround activity, and diversifying its end markets globally, such as through increased investment in the Aerospace business line.

The MOS Group, which is included in the MS segment, continues to target turnarounds and capital projects, and improve performance, efficiency, and longevity of aging critical assets.

The MOS Group is primed to grow with the industry recovery led by the high demand of maintenance and call-out work.

The AID Group, which was included in our Quest Integrity segment, focuses on expanding mechanical and pipeline integrity, risk-based inspection, remote visual inspection, and digital platform.

The AID Group is also dedicated to optimize our research and development activities, including product and technology development.

Following the sale of our Quest Integrity segment, the remaining operations of our AID group are included in our IHT segment.

These changes had no effect on our reportable segments:

Significant Factors Impacting Results and Recent Developments

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Additional information with respect to certain factors are described below.

COVID-19 Pandemic and Market Conditions Update.

The lingering impact of COVID-19 had less effect on our workforce and operations during the third quarter of 2022, as well as the operations of our clients, suppliers and contractors.

Market Conditions Update.

The lingering impact of widespread public health crises, epidemics and pandemics had less effect on our workforce and operations during the first quarter of 2023, 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.

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See Item 1A of our Annual Report on Form 10-K “Risk Factors” for additional information.

Recent Financing Transactions.

During 2022 the Company executed a number of amendments to its debt instruments, including amendments to our ABL Credit Facility, Subordinated Term Loan Credit Agreement, Term Loan Credit Agreement and entered into a new Substitute Insurance Reimbursement Facility Agreement.

Refer to Note 12 - Debt to the unaudited condensed consolidated financial statements for additional details related to these amendments.

Recent Financing Transaction.

During the first quarter of 2023, the Company executed an additional amendment to our Subordinated Term Loan Credit Agreement.

Refer to Note 11 - Debt to the unaudited condensed consolidated financial statements for additional details related to this amendment.

Listing Notices from NYSE.

The Company’s share price and total market capitalization have fallen below NYSE listing standard thresholds and therefore the Company received the following notices of non-compliance from the NYSE .

• On June 17, 2022, the Company was notified by the NYSE that the Company was no longer in compliance with the NYSE continued listing standards set forth in Section 802.01B of the NYSE Listed Company Manual due to the fact that the Company’s average global market capitalization over a consecutive 30 trading-day period was less than $50.0 million and, at the same time, its shareholders’ equity was less than $50.0 million.

The notice has no immediate impact on the listing of the Company’s common stock, which will continue to trade on the NYSE during the applicable cure period, and does not result in a default under the Company’s material debt or other agreements.

• As required by the NYSE, the Company notified the NYSE of its intent to cure the market capitalization and/or shareholders’ equity deficiency and restore its compliance with NYSE continued listing standards.

In accordance with applicable NYSE procedures, on August 1, 2022 the Company submitted a plan advising the NYSE of the definitive actions the Company has taken and is taking that would bring it into compliance with NYSE continued listing standards within 18 months of receipt of the written notice.

The NYSE accepted the plan and the Company’s common stock will

continue to be listed and traded on the NYSE during the 18-month period from June 17, 2022, subject to the Company’s compliance with other NYSE continued listing standards and continued periodic review by the NYSE of the Company’s progress with respect to its plan.

The Company can provide no assurances that it will be able to satisfy any of the steps outlined in the plan approved by the NYSE and maintain the listing of its shares on the NYSE.

• On July 13, 2022, the Company was notified by the NYSE that it was not in compliance with the continued listing standards set forth in Rule 802.01C of the NYSE Listed Company Manual requiring listed companies to maintain an average closing share price of at least $1.00 over a consecutive 30 trading-day period.

However, on September 1, 2022, the Company was notified by the NYSE that it had regained compliance with the minimum share price requirement.

• On November 2, 2022, the Company was notified by the NYSE that it was not in compliance with the continued listing standards set forth in Rule 802.01C of the NYSE Listed Company Manual requiring listed companies to maintain an average closing share price of at least $1.00 over a consecutive 30 trading-day period.

During 2022, the Company’s share price and total market capitalization and Shareholders equity had fallen below NYSE listing standard thresholds and therefore the Company received notices of non-compliance from the NYSE.

The following are the communications with the NYSE in connection with these notices:

• On June 17, 2022, we were notified by the NYSE that we were no longer in compliance with the NYSE continued listing standards set forth in Section 802.01B of the NYSE Listed Company Manual due to the fact that our average global market capitalization over a consecutive 30 trading-day period was less than $50.0 million and, at the same time, our shareholders’ equity was less than $50.0 million.

NYSE notified us that if our average global market capitalization over a consecutive 30 trading-day period drops below $15.0 million, it would initiate delisting proceedings.

As required by the NYSE, we notified the NYSE of our intent to cure the deficiency and restore our compliance with the NYSE continued listing standards.

In accordance with applicable NYSE procedures, on August 1, 2022 we submitted a plan advising the NYSE of the definitive actions we have taken and are taking that would bring us into compliance with NYSE continued listing standards within 18 months of receipt of the written notice.

The NYSE accepted the plan and as a result our common stock may continue to be listed and traded on the NYSE during the 18-month period commencing on June 17, 2022, subject to our compliance with other NYSE continued listing standards and continued periodic review by the NYSE of our progress with respect to our plan.

• On November 2, 2022, we were notified by the NYSE that the average closing price of our common stock, over a prior consecutive 30 trading-day period was below $1.00 per share.

We had a period of six months following the receipt of the notice to regain compliance with the minimum share price requirement, with the possibility of extension at the discretion of the NYSE.

• On November 2, 2022 our shareholders approved a proposal to authorize the Board to implement the Reverse Stock Split, which became effective on December 21, 2022.

• On January 3, 2023, we were notified by the NYSE that we had regained compliance with the minimum share price continued listing standard.

• On January 30, 2023 and March 21, 2023, we sent progress updates and updated financial information to the NYSE pursuant to the plan.

Although we have regained compliance with the NYSE’s minimum share price requirement within the cure period, there

is no assurance that we will remain in compliance with such requirement or other NYSE continued listing standards in the

Results of Operations

The following is a comparison of our results of operations from continuing operations for the three months ended September 30, 2022 compared to September 30, 2021.

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

The following table sets forth the components of revenue and operating loss from our continuing operations for the three month period ended September 30, 2022 and 2021 (in thousands):

Three Months Ended September 30, Increase

The following is a comparison of our results of operations for the three months ended March 31, 2023 compared to March 31, 2022.

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

The following table sets forth the components of revenue and operating loss from our operations for the three month period ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31, Increase

2023 2022 $ %

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Total operating loss $ (7,746) $ (22,407) $ 14,661 65.4 %

Interest expense, net (26,653) (9,913) (16,740) NM

Other income (expense), net 3,227 (904) 4,131 NM

Interest expense, net $ (16,741) $ (18,579) 1,838 9.9 %

Other income, net 635 3,179 (2,544) (80.0) %

Loss before income taxes $ (23,852) $ (37,807) $ 13,955 36.9 %

Provision for income taxes (859) (526) (333) (63.3) %

Net loss from continuing operations $ (26,620) $ (90,446) $ 63,826 70.6 %

Net loss $ (24,711) $ (38,333) $ 13,622 35.5 %

NM = Not meaningful

Total revenues increased $20.5 million or 10.3% from the prior year quarter driven by increases in both operating segments of MS and IHT.

Continuing operations revenues were impacted from foreign exchange negatively by $4.9 million and positively by $2.9 million during the three month period ended September 30, 2022 and 2021, respectively.

IHT revenues increased by $8.8 million or 8.7% and MS revenue increased by $11.6 million or 12.1%.

IHT segment’s revenue increased primarily due to higher turnaround, call out and nested activity in the United States and Canada compared to the prior year quarter.

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.

Total revenues increased $13.2 million or 7.0% from the prior year quarter and were impacted negatively from adverse foreign exchange movement by $3.2 million.

IHT revenues increased by $6.2 million or 6.5% and benefited from an $8.8 million or 11% increase in IHT U.S.

revenue due to higher callout and turnaround activity in all regions, a $1.1 million increase in IHT international revenue, and a $0.3 million increase in aerospace revenue.

This increase was partially offset by, a $4.1 million decrease in Canada due to a customer contract completion.

MS revenue increased by $7.0 million or 7.5% attributable to a $4.0 million or 8% increase in U.S.

revenue due to higher activity in leak repair and hot tapping services, a $2.8 million revenue increase in MS Canada, and a $1.3 million increase in our valves business, partially offset by a $1.0 million decrease in other international regions.

Operating income (loss).

Overall operating loss was $1.7 million in the current year quarter compared to an operating loss of $72.2 million in the prior year quarter.

The overall decrease in operating loss is primarily attributable to our MS segment which experienced an increase in operating income of $60.9 million as compared to the prior year, primarily due to no impairments recorded for goodwill this quarter compared to a $55.8 million goodwill impairment that was recorded in the prior year quarter, a $0.8 million increase in the Canada business, a $0.5 million increase in the valve business, and realized efficiency gains in equipment centers, manufacturing, and engineering;

partially offset by lack of COVID-19 related subsidies in the current quarter compared to the prior year quarter.

IHT operating income increased by $4.3 million due to higher activity and revenue realization in the U.S.

business and savings in overhead costs, partially offset by the completion of a Canadian customer contract in the current period, and COVID-19 related subsidies received in 2021 period, which were not received in 2022.

Corporate operating loss decreased due to lower professional fees and legal costs in the current quarter compared to prior year quarter and lower overall costs due to the Company’s cost reduction efforts.

Overall operating loss was $7.7 million in the current year quarter, a $14.7 million or 65% improvement compared to an operating loss of $22.4 million in the prior year quarter.

IHT operating income increased by $4.6 million due to higher activity in the U.S.

and lower overhead costs, partially offset by lower revenue in Canada related to the completion of a customer contract in the current period.

MS operating income increased by $2.7 million as compared to the prior year quarter, primarily from our U.S.

and Canada operations as well as lower overhead costs and realized efficiency gains in equipment centers during the current quarter compared to prior year quarter.

Operating income from U.S.

operations increased by $1.4 million and operating income from Canada operations increased by $1.2 million.

Corporate operating loss decreased by $7.4 million due to lower professional fees in the current quarter compared to the prior year quarter and lower overall costs due to the Company’s ongoing cost reduction efforts.

In spite of our cost reduction efforts, we continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the three months ended September 30, 2022 and 2021, operating loss includes net expenses totaling $2.8 million and $60.3 million, respectively, that we do not believe are indicative of our core operating activities, as detailed by segment in the table below (in thousands):

Expenses reflected in operating loss that are not indicative of our core operating activities (unaudited) (in thousands):

IHT MS Corporate and shared support services Total

Three Months Ended September 30, 2022

Professional fees and other 1

$ — $ — $ 539 $ 539

Legal costs 2

— — 1,543 1,543

Severance charges, net 3

150 35 485 670

Total $ 150 $ 35 $ 2,567 $ 2,752

Three Months Ended September 30, 2021

Professional fees and other 1

$ — $ — $ 1,273 $ 1,273

Legal costs 2

— — 2,736 2,736

Severance charges, net 3

90 139 204 433

Goodwill impairment charge — $ 55,837 — $ 55,837

Total $ 90 $ 55,976 $ 4,213 $ 60,279

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1 For the three months ended September 30, 2022, includes $0.5 million related to costs associated with the debt financing.

For the three months ended September 30, 2021, consists primarily of professional fees and other costs for assessment of corporate and support cost structures.

2 For the three months ended September 30, 2022, primarily relates accrued legal matters.

For September 30, 2021, primarily relates to accrued legal matters and legal fees.

3 For the three months ended September 30, 2022, $0.7 million primarily related to customary severance costs associated with staff reductions.

For the three months ended September 30, 2021, primarily related to the Operating Group Reorganization.

The detail of operating income (loss) excluding non-core expenses are as follows (unaudited) (in thousands):

Three Months Ended September 30, Increase

2022 2021 $ %

Operating income (loss), excluding non-core expenses:

IHT $ 7,540 $ 3,155 $ 4,385 NM

MS 7,690 2,734 4,956 NM

Corporate and shared support services (14,207) (17,838) 3,631 20.4 %

Total operating income (loss), excluding non-core expenses $ 1,023 $ (11,949) $ 12,972 NM

Excluding the impact of these identified non-core items in both periods, operating income increased by $13.0 million, consisting of higher operating income at IHT of $4.4 million, higher operating income at MS of $5.0 million, and a decrease in corporate and shared support services expenses of $3.6 million.

See Operating income (loss) above for primary reasons for the changes during the period.

Interest expense, net.

Interest expense increased by $16.7 million compared to the prior year quarter, primarily due to a $143.0 million increase in outstanding debt attributable to the debt financing executed during the quarter ended March 31, 2022 and accelerated amortization of deferred financing costs, debt and warrant discounts and debt issuance costs.

Due to the various maturity trigger events, the amortization period for deferred financing costs, debt and warrant discounts and debt issuance costs was shortened to reflect the accelerated maturity dates.

This resulted in an additional $10.6 million in amortization charges during the three months ended September 30, 2022.

Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion.

Other income (expense), net.

Other income (expense), net improved $4.1 million from the prior year quarter expense of $0.9 million to a net gain of $3.2 million primarily due to foreign currency fluctuations and gain on disposal of assets in the current quarter.

The provision for income tax was $1.5 million on the pre-tax loss from continuing operations of $25.2 million in the current year quarter, compared to a $7.4 million income tax provision on a pre-tax loss of $83.0 million in the prior year quarter.

The effective tax rate, inclusive of discrete items, was a provision of 5.8% for the three months ended September 30, 2022, compared to a provision of 8.9% for the three months ended September 30, 2021.

The effective tax rate change from the prior year quarter compared to the current year quarter is due to an increase in the valuation allowance.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

The following is a comparison of our results of operations for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The components of revenue and operating income (loss) from our continuing operations consisted of the following (in thousands):

Nine Months Ended September 30, Increase

2022 2021 $ %

(unaudited) (unaudited)

Revenues by business segment:

IHT $ 320,033 $ 310,077 $ 9,956 3.2 %

MS 308,884 280,966 27,918 9.9 %

Total revenues $ 628,917 $ 591,043 $ 37,874 6.4 %

Operating income (loss):

IHT $ 13,038 $ 10,824 $ 2,214 20.5 %

MS 15,152 (50,799) 65,951 NM

Corporate and shared support services (63,119) (67,997) 4,878 7.2 %

Total operating loss $ (34,929) $ (107,972) $ 73,043 67.6 %

Interest expense, net (63,708) (28,764) (34,944) NM

Other income (expense), net 9,664 (1,790) 11,454 NM

Loss before income taxes $ (88,973) $ (138,526) $ 49,553 35.8 %

Provision for income taxes (4,182) (8,420) 4,238 50.3 %

Net loss from continuing operations $ (93,155) $ (146,946) $ 53,791 36.6 %

Total revenues increased $37.9 million or 6.4% from the prior year period, with all segments seeing increases compared to prior year period.

IHT revenues increased by $10.0 million and MS revenue increased by $27.9 million.

Continuing operations revenues were impacted from foreign exchange negatively by $8.5 million and positively by $13.4 million during the nine months period ended September 30, 2022 and 2021, respectively.

IHT segment year to date revenue increased 3.2%, compared to the prior year period, which was primarily driven by increases in U.S.

business activity partially offset by decreases in Canada and international locations.

MS segment revenue increased 9.9% compared to the prior year

period, due to increases in the U.S.

market activities, primarily from increases in leak repair and hot tap services as well as the domestic valve business.

For the three months ended March 31, 2023 and 2022, operating loss includes net expenses totaling $2.0 million and $7.2 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Three Months Ended March 31,

Operating loss (7,746) (22,407)

Overall operating loss was $34.9 million in the current year period compared to an operating loss of $108.0 million in the prior year period.

The overall improvement in operating loss is attributable to the 2021 period including a MS goodwill impairment charge of $55.8 million with no such charge in the 2022 period, improvement in the valve business of $2.5 million, a $2.3 million increase in Canadian business and cost improvements in machinery, engineering and equipment centers.

IHT experienced an increase in operating income due to an increase in U.S.

income offset by a decline in the Canadian business.

Corporate operating loss decreased due to cost reductions, lower non-cash compensation cost and lower legal expense, partially offset by higher professional fees in 2022.

For the nine months ended September 30, 2022 and 2021, operating loss includes net expenses totaling $16.9 million and $68.3 million, respectively, that we do not believe are indicative of our core operating activities as they relate to one time or non-reoccurring items, as detailed by segment in the table below (in thousands):

Expenses reflected in operating loss that are not indicative of our core operating activities (unaudited) (in thousands):

IHT MS Corporate and shared support services Total

Nine Months Ended September 30, 2022

Professional fees and other 1,721 5,344

$ — $ — $ 10,576 $ 10,576

Legal costs — 528

— — 3,271 3,271

Severance charges, net 305 1,350

192 89 2,747 3,028

Total $ 192 $ 89 $ 16,594 $ 16,875

Nine Months Ended September 30, 2021

Professional fees and other 1

$ — $ — $ 3,107 $ 3,107

Legal costs 2

— — 6,845 6,845

Severance charges, net 3

575 494 1,461 2,530

Goodwill impairment charge $ — $ 55,837 $ — $ 55,837

Total $ 575 $ 56,331 $ 11,413 $ 68,319

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1 For the nine months ended September 30, 2022, includes $8.4 million related to costs associated with the debt financing and $2.1 million of corporate support costs.

For the nine months ended September 30, 2021, includes $1.7 million of costs associated with the Operating Group Reorganization (exclusive of restructuring costs) and $0.3 million of costs associated with the OneTEAM program (exclusive of restructuring costs).

2 For the nine months ended September 30, 2022, primarily relates to accrued legal matters.

For the nine months ended September 30, 2021, primarily relates to accrued legal matters and legal fees.

3 For the nine months ended September 30, 2022, includes $1.3 million related to customary severance costs associated with executive departures and $1.7 million associated with severance across multiple corporate departments.

For the nine months ended September 30, 2021, includes $2.6 million associated with the Operating Group Reorganization and $0.2 million associated with other severances.

The detail of operating income (loss) excluding non-core expenses are as follows (unaudited) (in thousands):

Nine Months Ended September 30, Increase

2022 2021 $ %

Operating income (loss), excluding non-core expenses:

IHT $ 13,230 $ 11,399 $ 1,831 16.1 %

MS 15,241 5,532 9,709 NM

Corporate and shared support services (46,525) (56,584) 10,059 17.8 %

Total operating loss, excluding non-core expenses $ (18,054) $ (39,653) $ 21,599 54.5 %

NM = Not meaningful

Excluding the impact of these identified non-core items in both periods, operating loss decreased by $21.6 million, consisting of higher operating income in IHT of $1.8 million, and improvements in operating income from MS and corporate and shared support services of $9.7 million, and $10.1 million, respectively.

See Operating income (loss) above for primary reasons for the changes during the period.

Total non-core expenses 2,026 $ 7,222

Operating loss, excluding non-core expenses $ (5,720) $ (15,185)

Excluding the impact of these identified non-core items in both periods, operating income increased by $9.5 million.

See our non-GAAP reconciliation for additional details of our non-core expenses.

Interest expense, net.

Interest expense, net increased $34.9 million from the prior year period primarily due to higher outstanding debt, higher interest rate paid on PIK Interest, and accelerated amortization of deferred financing costs, debt and

warrant discounts and debt issuance costs.

This resulted in an additional $15.2 million in amortization charges during the nine months ended September 30, 2022.

Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion.

Additionally, due to the debt extinguishment of the Citi Credit Agreement on February 11, 2022, during the three months ended March 31, 2022, the Company recognized interest expense of $2.7 million related to deferred financing costs previously capitalized.

Other income (expense), net .

Other income (expense) improved net $11.5 million from the prior year period primarily due to foreign currency fluctuations, gains on disposal of assets, and insurance proceeds received from a natural disaster claim.

T he provision for income tax was $4.2 million on the pre-tax loss from continuing operations of $89.0 million in the current year-to-date compared to income tax expense o f $8.4 million o n the pre-tax loss of $138.5 million in the in the prior year-to-date period.

The effective tax rate was a provision of 4.7% for the nine months ended September 30, 2022, compared to a provision of 6.1% for the nine months ended September 30, 2021.

The effective tax rate change from the prior year quarter compared to the current year quarter is due to an increase in the valuation allowance.

Interest expense decreased by $1.8 million compared to the prior year quarter.

The decrease was primarily attributable to lower outstanding debt during the 2023 period due to the $225.0 million paydown of our term debt in November 2022 and the 2022 period write off of deferred financing costs related to our Citi ABL facility that was refinanced in February 2022.

These effects were partially offset by a year over year increase in cash interest rates and the acceleration of the amortization of debt related deferred costs to reflect the revised Trigger Date impact on the maturity date.

Cash interest paid during the quarter ended March 31, 2023 and 2022 was $5.2 million and $6.8 million, respectively.

Other income, net.

Other income (expense), net decreased by $2.5 million from $3.2 million to $0.6 million, primarily due to foreign currency fluctuations and lower gains on asset disposals in the 2023 quarter.

The provision for income tax was $0.9 million on the pre-tax loss from continuing operations of $23.9 million in the current year quarter, compared to a $0.5 million income tax provision on a pre-tax loss of $37.8 million in the prior year quarter.

The effective tax rate, inclusive of discrete items, was a provision of 3.6% for the three months ended March 31, 2023, compared to a provision of 1.4% for the three months ended March 31, 2022.

The effective tax rate change from the prior year quarter compared to the current year quarter is due to changes in the valuation allowance.

Non-GAAP Financial Measures and Reconciliations

We use supplemental non-GAAP financial measures which are derived from the condensed consolidated financial information including adjusted net income (loss);

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”);

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We define adjusted net income (loss), adjusted net income (loss) per diluted share and adjusted EBIT to exclude the following items:

costs associated with our past integration and transformation program, costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill and other impairment charges and certain other items that we believe are not indicative of core operating activities.

non-routine legal costs and settlements, non-routine professional fees, restructuring charges, certain severance 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, and other non-cash costs.

Segment adjusted EBIT is equal to segment operating income (loss) excluding costs associated with our past integration and transformation program, costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill and other impairment charges and certain other items as determined by management.

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 non-routine legal costs and settlements, non-routine professional fees, restructuring charges, certain severance 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.

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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 from our continuing operations to their most comparable GAAP financial measurements:

The following tables set forth the reconciliation of Adjusted Net Income (Loss), EBIT and EBITDA to their most comparable GAAP financial measurements:

AND SUBSIDIARIES

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(unaudited, in thousands except per share data)

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Adjusted Net Loss from continuing operations:

Net loss from continuing operations $ (26,620) $ (90,446) $ (93,155) $ (146,946)

Three Months Ended March 31,

Adjusted Net Loss:

Net loss $ (24,711) $ (38,333)

Professional fees and other 1

539 1,273 10,576 3,107

Legal costs 2

1,543 2,736 3,271 6,845

Severance charges, net 3

670 433 3,028 2,530

Natural disaster insurance recovery — — (872) —

Goodwill impairment charges — 55,837 — 55,837

Tax impact of adjustments and other net tax items 4

(24) (305) (31) (368)

Adjusted net loss from continuing operations $ (23,892) $ (30,472) $ (77,183) $ (78,995)

Adjusted net loss $ (22,763) $ (31,115)

Adjusted net loss per common share:

Basic and diluted $ (5.24) $ (8.25)

Consolidated Adjusted EBIT and Adjusted EBITDA from continuing operations:

Net loss from continuing operations $ (26,620) $ (90,446) $ (93,155) $ (146,946)

Consolidated Adjusted EBIT and Adjusted EBITDA:

Net loss $ (24,711) $ (38,333)

Provision for income taxes 859 526

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Professional fees and other 1

539 1,273 10,576 3,107

Legal costs 2

1,543 2,736 3,271 6,845

Severance charges, net 3

670 433 3,028 2,530

Foreign currency (gain) loss 5

(2,264) 1,077 (3,955) 2,309

Foreign currency gain (177) (662)

Pension credit 5

(178) (173) (571) (520)

Natural disaster insurance recovery — — (872) —

Goodwill impairment charges 55,837 55,837

Consolidated Adjusted EBIT - continuing operations 1,022 (11,949) (18,057) (39,654)

Consolidated Adjusted EBIT (5,721) (15,185)

Depreciation and amortization

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Non-cash share-based compensation costs 382 (624)

Consolidated Adjusted EBITDA from continuing operations $ 10,638 $ (1,325) $ 9,963 $ (4,677)

Free Cash Flow from continuing operations:

Cash provided by (used in) operating activities $ 5,913 $ (2,628) $ (50,573) $ (38,808)

Consolidated Adjusted EBITDA $ 4,207 $ (6,355)

Free Cash Flow:

Cash used in operating activities $ (17,763) $ (55,975)

Capital expenditures (2,692) (6,137)

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____________________________________

1 For the three and nine months ended September 30, 2022, includes $0.5 million and $10.5 million, respectively, related to costs associated with the debt financing and corporate support costs.

For the three and nine months ended September 30, 2021, includes $0.2 million and $1.7 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs).

2 For the three and nine months ended September 30, 2022, primarily relates to accrued legal matters.

For the three and nine months ended September 30, 2021, primarily relates to accrued legal matters and legal fees.

3 For the three months ended September 30, 2022 includes $0.7 million primarily related to customary severance costs associated with staff reductions.

For the nine months ended September 30, 2022, includes $1.3 million related to customary severance costs associated with executive departures and $1.7 million associated with severance across multiple corporate departments.

For the three months and nine months ended September 30, 2021, $0.4 million and $2.5 million, respectively, associated with the Operating Group Reorganization and other continuing restructuring measures.

1 For the three months ended March 31, 2023, includes $1.7 million related to costs associated with corporate support costs.

For the three months ended March 31, 2022, includes $4.7 million related to costs associated with the debt financing and $0.6 million of corporate support costs.

2 For the three months ended March 31, 2022, primarily relates to accrued legal matters and legal fees.

3 For the three months ended March 31, 2023, includes $0.3 million primarily related to customary severance costs associated with staff reductions.

For the three months ended March 31, 2022, includes $1.3 million related to customary severance costs associated with executive departures.

4 Represents the tax effect of the adjustments.

Beginning in Q2 2021, we use 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%.

5 Represents foreign currency (gains) losses.

5 Represents pension credits for the U.K.

pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability.

The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013.

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.

AND SUBSIDIARIES

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(unaudited, in thousands)

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Segment Adjusted EBIT and Adjusted EBITDA from continuing operations:

Three Months Ended March 31,

Segment Adjusted EBIT and Adjusted EBITDA:

Operating income $ 4,723 $ 134

Severance charges, net 1

150 90 192 575

Adjusted EBIT 4,763 150

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Severance charges, net 1

35 139 89 494

Goodwill impairment charges — 55,837 — 55,837

Other project costs 20 —

Adjusted EBIT 3,469 513

6 unchanged sentences

Interest expense, net 16,741 18,579

Foreign currency (gain) losses 2

(2,264) 1,077 (3,955) 2,309

Foreign currency gain (177) (662)

Pension credit 2

(178) (173) (571) (520)

Professional fees and other 3

539 1,273 10,576 3,107

Legal costs 4

1,543 2,736 3,271 6,845

Severance charges, net 1

485 204 2,747 1,461

Natural disaster insurance recovery — — (872) —

Adjusted EBIT (13,953) (15,848)

3 unchanged sentences

___________________

1 For the three months ended September 30, 2022 includes $0.7 million primarily related to customary severance costs associated with staff reductions.

2 Represents foreign currency (gains) losses.

1 For the three months ended March 31, 2023, includes $0.3 million primarily related to customary severance costs associated with staff reductions.

For the three months ended March 31, 2022, includes $1.3 million related to customary severance costs associated with executive departures.

2 Represents pension credits for the U.K.

pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability.

The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013.

4 For the three and nine months ended September 30, 2022, includes $0.5 million and $10.5 million, respectively, related to costs associated with the debt financing and corporate support costs.

5 For the three and nine months ended September 30, 2022, primarily relates to accrued legal matters.

For the three and nine months ended September 30, 2021, primarily relates to accrued legal matters and legal fees.

Liquidity and Capital Resources

Financing for our operations consists primarily of our ABL Credit Facility, Term Loan and our Subordinated Term Loan, and Notes (refer to Note - 12 Debt , for additional details).

Our principal uses of cash are for working capital needs, capital expenditures and operations.

We have suffered recurring operating losses related to unfavorable market conditions, including the impact of the COVID-19 pandemic, cost inflation related to supply chain disruptions and an increases in interest rates.

In response to the above, we evaluated the Company’s current liquidity resources within one year after the date of issuance of these condensed consolidated financial statements and determined there is substantial doubt about the Company’s ability to continue as a going concern (as further described in Note 1 - Summary of Significant Accounting Policies and Practices ).

Management is evaluating strategic alternatives, including potential asset sales, and potential transactions to reduce the principal amount or extend the maturity of the Notes, to address our near-term liquidity needs;

and we have taken definitive actions to reduce costs, improve operations, profitability, and liquidity to position the Company for improved cash flow generation from operations.

Our ability to maintain compliance with the financial covenants contained in the 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 effects of the current economic environment, including the COVID-19 pandemic, increasing interest rates, inflationary pressures, the ongoing conflict in Ukraine 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 ABL Credit Facility.

In addition to our current sources of funding our business, the effects of such events may impact our liquidity or our need to revise our allocation or sources of capital, implement further cost reduction measures and/or change our business strategy.

Consolidated cash and cash equivalents were $56.4 million at September 30, 2022, of which $25.7 million was restricted mainly as collateral for outstanding letters of credit.

Additionally, we had approximately $20.5 million in undrawn availability under our various credit facilities at September 30, 2022.

Our gross debt and finance obligations were $511.2 million, of which $506.4 million was classified as current at September 30, 2022, compared to gross debt of $405.9 million at December 31, 2021.

Recently Announced Sale.

On November 1, 2022, we completed the sale of our Quest Integrity business for cash proceeds of approximately $279 million, reflecting certain estimated post-closing adjustments.

The net proceeds to us (after payment of transaction related expenses and certain other fees) were approximately $270 million.

We used approximately $238 million of the proceeds to pay down term debt and to pay certain fees associated with that repayment and related accrued interest, with the remainder reserved for general corporate purposes.

As of November 4, 2022, we had consolidated cash and cash equivalents of $76.0 million, of which $6.8 million was restricted mainly as collateral for outstanding letters of credit and approximately $13.7 million of undrawn availability under its various credit facilities, resulting in total liquidity of $82.9 million.

Refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Discontinued Operations for additional details regarding this transaction.

Cash and cash equivalents .

Our cash and cash equivalents associated with continuing operations at September 30, 2022 and December 31, 2021 totaled $56.4 million and $55.2 million, respectively, consisting of $30.7 million of unrestricted cash on hand and $25.7 million of restricted cash, pledged as cash collateral for letters of credit and other obligations at September 30, 2022 and $51.1 million of unrestricted cash on hand and $4.1 million of restricted cash for interest due on Atlantic Park Term Loan at December 31, 2021.

Additionally, $12.9 million a nd $14.2 million o f the $56.4 million and $55.2 million, respectively, of cash and cash equivalents at September 31, 2022 and December 31, 2021 was in foreign accounts, primarily in the Europe, Canada and Australia, including $1.6 million a nd $2.4 millio n, respectively, of cash located in countries where currency restrictions exist.

The following table summarizes cash flows (in thousands):

Nine Months Ended September 30,

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.

3 For the three months ended March 31, 2023, includes $1.7 million related to costs associated with corporate support costs.

For the three months ended March 31, 2022, includes $4.7 million related to costs associated with the debt financing and $0.6 million of corporate support costs.

4 For the three months ended March 31, 2022, primarily relates to accrued legal matters and legal fees.

Liquidity, Capital Resources and Going Concern

The accompanying condensed 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 condensed 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 unaudited condensed 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 condensed consolidated financial statements.

Our Notes are due on August 1, 2023 and had a principal balance of $41.2 million as of March 31, 2023 .

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) and collectively referred to as the “Trigger Date”, is June 17, 2023, see Note 11 - Debt for additional information.

The Trigger Date requires that the Notes balance be reduced to less than $10.0 million by June 17, 2023.

As of March 31, 2023, we are in compliance with our debt covenants.

However, 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 to satisfy the Trigger Date provision or will be unable to pay off the Notes when they become due on August 1, 2023.

The failure to pay down the Notes to less than $10.0 million by the Trigger Date will result in an acceleration of the Term Loan Credit Agreement and failure to pay would result in an event of default and associated cross defaults under the Company’s other debt instruments.

Refer to Note 11 - Debt for more information on the terms, cross default provisions and maturity dates of our debt that may affect our future liquidity.

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 exploring alternatives to reduce or refinance the Notes outstanding balance, including extending their maturity as well as other alternatives.

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 or 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.

The condensed 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 and cash flows attributable to our operations.

As of March 31, 2023, we had approximately $37.3 million of borrowing capacity consisting of $27.3 million available under the 2022 ABL Credit Facility and $10.0 million available under the Subordinated Term Loan Credit Agreement.

Our principal uses of cash are for working capital needs and operations.

We have entered into recent financing transactions as further described in Note 11 – Debt and certain amendments 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.

Our cash and cash equivalents as of March 31, 2023 totaled $31.9 million, consisting of $26.4 million of unrestricted cash on hand, $4.5 million restricted as collateral for outstanding letters of credit and card programs and $1.0 million restricted due to foreign currency regulations.

As of December 31, 2022, our cash and cash equivalents were $58.1 million, including $51.1 million of unrestricted cash on hand, $5.5 million restricted as collateral for outstanding letters of credit and card programs and $1.4 million restricted due to foreign currency regulations.

$13.7 million a nd $16.3 million o f the cash and cash equivalents as of March 31, 2023 and December 31, 2022, respectively, were in foreign accounts, primarily in Europe, Canada and Australia.

Additionally, we had approximately $37.3 million in undrawn availability under our various credit facilities at March 31, 2023.

Our gross debt and finance obligations were $288.9 million, of which $284.1 million was classified as current at March 31, 2023, compared to gross debt of $285.9 million at December 31, 2022.

As of May 9, 2023, we had consolidated cash and cash equivalents of $21.9 million, excluding $5.2 million of restricted cash held mainly as collateral for outstanding letters of credit and our purchasing card programs, and approximately $27.4 million of undrawn availability under our various credit facilities, resulting in total liquidity of $49.3 million.

Refer to Note 11 - Debt for information on our debt instruments.

Capital Resources.

We establish a capital budget at the beginning of each calendar year and review it during the course of the year.

Our capital budgets are based upon our estimate of internally generated sources of cash including from asset sales, as well as cash on hand and the available borrowing capacity under our ABL and other Credit Facilities.

We expect to finance our 2023 capital budget with cash flows from operations, cash on hand, proceeds from asset sales, and our credit facility.

Actual capital expenditure levels may vary significantly due to many factors, including industry conditions;

the prices and availability of goods and services;

the extent to which non-strategic assets are sold and our liquidity outlook.

The following table summarizes cash flows from Operating, Investing and Financing activities (in thousands):

Three Months Ended March 31,

Cash flows provided by (used in):

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Investing activities (2,360) (4,042) 42 %

Financing activities 63,288 41,743 (52) %

Financing activities (6,236) 41,966 NM

Effect of exchange rate changes on cash 153 465 67 %

Net change in cash and cash equivalents $ (26,206) $ (11,617) NM

1 unchanged sentence

Cash flows attributable to our operating activities.

For the nine months ended September 30, 2022, net cash used in operating activities was $46.4 million.

Our net cash used in operating activities generally reflects the cash effects of transactions and other events used in the determination of net loss, which totaled $76.9 million .

The decline in cash generated from operations was driven by the net loss for the period, $35.3 million decline in working capital, a gain on disposal of assets of $4.3 million, deferred income taxes of $0.4 million, partially offset by amortization of debt issuance costs and debt discount and write off of deferred loan costs of $25.7 million, adjustments to depreciation and amortization of $28.6 million, and PIK Interest of $15.5 million, resulted in negative operating cash flow.

For the nine months ended September 30, 2021, net cash used by operating activities was $35.9 million.

Our net cash used in operating activities generally reflects the cash effects of transactions and other events used in the determination of net loss, which totaled $143.0 million for the period.

Overall, the decline in cash generated from operations was driven primarily by the impacts of inclement weather and COVID-19 on our operations which generated reduced revenue and receipts during the period.

Partially offsetting the net loss for the period were adjustments of $31.4 million for depreciation and amortization and $5.6 million in non-cash compensation cost.

For the three months ended March 31, 2023, net cash used in operating activities was $17.8 million.

Our net cash used in operating activities was driven by our net loss for the period, which totaled $24.7 million and negative working capital of $13.3 million, offset by amortization of debt issuance costs and debt discount of $8.5 million, depreciation and amortization of $9.5 million, and PIK Interest of $3.5 million.

For the three months ended March 31, 2022, net cash used in operating activities was $50.0 million.

Overall, the decline in cash used in operations was driven primarily by the impacts of inclement weather and COVID-19 on our operations which generated reduced revenue and receipts during the period, partially offset by $10.0 million for depreciation and amortization, and $0.6 million in non-cash compensation cost.

Cash flows attributable to our investing activities.

For the nine months ended September 30, 2022, net cash used in investing activities was $13.8 million, consisting primarily of capital expenditures, partially offset by $7.2 million of cash proceeds from asset sales.

For the nine months ended September 30, 2021, net cash used in investing activities was $12.2 million, primarily for capital expenditures.

For the three months ended March 31, 2023, net cash used in investing activities was $2.4 million, consisting primarily of capital expenditures, partially offset by $0.3 million of cash proceeds from asset sales.

For the three months ended March 31, 2022, net cash used in investing activities was $4.0 million, primarily for capital expenditures, partially offset by $3.0 million of cash proceeds from asset sales.

Cash flows attributable to our financing activities.

For the nine months ended September 30, 2022, net cash provided by financing activities was $63.3 million consisting primarily of net borrowings under our ABL Credit Facility of $67.8 million and issuance of common stock amounting to $9.7 million cash proceeds from the Equity Issuance partially offset by $13.6 million in payments of debt issuance costs.

On February 11, 2022 we completed a capital structure refinancing, including the ABL Credit Facility which is a new $165.0 million credit facility, consisting of a $130.0 million revolving facility and a $35.0 million delayed draw term loan, plus an incremental $10.0 million of unsecured funding, and an additional $10.0 million equity investment.

For the nine months ended September 30, 2021, net cash provided by financing activities was $41.7 million consisting primarily of net borrowings under our Citi Credit Agreement of $46.3 million partially offset by $2.3 million in payments of debt issuance costs.

For the three months ended March 31, 2023, net cash used in financing activities was $6.2 million consisting primarily of net repayments under our ABL Credit Facility of $6.0 million.

For the three months ended March 31, 2022, net cash provided by financing activities was $42.0 million consisting primarily of net borrowings under our ABL Credit Facility of $42.7 million and proceeds from issuance of common stock amounting to $9.8 million, partially offset by $10.3 million in payments for debt issuance costs.

Effect of exchange rate changes on cash and cash equivalents.

For the nine months ended September 30, 2022 and 2021, the effect of foreign exchange rate changes on cash was a negative $1.4 million and $1.3 million, respectively.

For the three months ended March 31, 2023 and 2022, the effect of foreign exchange rate changes on cash was $0.2 million and $0.5 million, respectively.

The impact of exchange rates on cash and cash equivalents is primarily attributable to fluctuations in U.S.

Dollar exchange rates against the Canadian Dollar, the Euro, the British Pound, the Australian Dollar and Mexican Peso.

Capital Resources.

We establish a capital budget at the beginning of each calendar year and review it during the course of the year.

We expect to finance our 2022 capital budget with cash flows from operations, cash on hand, proceeds from asset sales, and our credit facility.

Actual capital expenditure levels may vary significantly due to many factors, including industry conditions;

the prices and availability of goods and services;

and the extent to which non-strategic assets are sold.

We continuously monitor our liquidity needs, coordinate our capital expenditure program with our expected cash flows and projected debt-repayment schedule, and evaluate our available alternative sources of liquidity, including accessing debt and equity capital markets in light of current and expected economic conditions.

As discussed above, we will require additional financing to fund our operations for the next 12 months and beyond.

However, we believe that our liquidity position and ability to generate cash flows from our operations will be adequate to fund 2022 operations.

See Note 1 - Summary of Significant Accounting Policies and Practices for further information.

Contractual Obligations.

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From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations.

As of September 30, 2022, the material off-balance sheet arrangements and transactions that we have entered into include $8.9 million in outstanding letters of credit.

As of March 31, 2023, the material off-balance sheet arrangements and transactions that we have entered into include $8.9 million in outstanding letters of credit under the ABL Facility.

See Note 11 - Debt for additional details.

Critical Accounting Policies and Estimates

A discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K.

Except for the item referenced below, there were no material changes to our critical accounting policies during the nine months ended September 30, 2022.

ASU 2020-06 Adoption.

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity .

The ASU simplifies the accounting for convertible instruments by removing certain separation models in ASC 470-20, Debt—Debt with Conversion and Other Options, for convertible instruments.

On January 1, 2022, we adopted the ASU using the modified retrospective method.

We recognized a cumulative effect of initially applying the ASU as an adjustment to the January 1, 2022 opening balance of accumulated deficit.

The prior period condensed consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods.

Refer to Note 12 - Debt , for additional details.

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 condensed consolidated financial statements.

A discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2022.

There were no material changes to our critical accounting policies during the three months ended March 31, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information required by this item 3.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis