What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-07 compared with 2023-03-14 · 154 added, 208 removed, 197 unchanged (65% of the section changed)

9 unchanged sentences

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.

We conduct operations in two segments:

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 involving:

9 unchanged sentences

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.

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Financing Transactions.

During 2023, we entered into an amendment and restatement of that certain subordinated term loan credit agreement dated as of November 9, 2021 (as amended and restated, the “A&R Term Loan Credit Agreement”) among us, as borrower, the guarantors party thereto, the lenders from time to time party thereto and Cantor Fitzgerald Security, as agent;

we entered into ABL Amendment No.

we paid off the remaining balance on the APSC Term Loan (defined below) and our 5.00% Convertible Senior Notes due 2023 (the “Notes”);

and entered into an amendment of the Substitute Insurance Reimbursement Facility Agreement.

See Note 11 - Debt to the consolidated financial statements for additional details related to these transactions.

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.

Fluctuations in oil and gas prices continued during 2023 with an overall decline in prices as compared to 2022.

Oil and gas price volatility may impact the current and future spending on our services by our clients.

Although oil and gas prices are expected to be relatively stable in 2024 given the current balance between oil and gas supply and demand, the future impacts to our business from potentially higher interest rates, persistent global and domestic inflation, geopolitical unrest especially in the Middle East, and volatility in global supply chains cannot be predicted.

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

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11 unchanged sentences

IHT 24,220 17,093 7,127 41.7 %

20,930 (47,728) 68,658 NM 2

MS 27,759 20,930 6,829 32.6 %

Corporate and shared support services (65,255) (77,825) 12,570 16.2 %

1 unchanged sentence

Interest expense, net 55,181 85,052 (29,871) (35.1) %

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 on debt extinguishment 1,585 30,083 (28,498) (94.7) %

Other expense (income), net 1,102 (8,156) 9,258 (113.5) %

Loss before income taxes $ (71,144) $ (146,781) $ 75,637 51.5 %

Provision for income taxes 4,578 3,306 1,272 38.5 %

Net loss $ (150,087) $ (184,845) $ 34,758 18.8 %

Net loss from continuing operations

$ (75,722) $ (150,087) $ 74,365 49.5 %

1 Includes goodwill impairment charge of $55.8 million for the twelve months ended December 31, 2021.

2 NM - Not meaningful.

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.

Total revenues increased $22.4 million or 2.7% from the prior year.

Total revenue was negatively impacted by $2.3 million of unfavorable foreign exchange rate movements during 2023.

IHT revenues increased by $7.0 million or 1.7%, driven by a $10.3 million increase in the U.S., primarily due to higher callout and turnaround activities in various districts due to higher demand for our non-destructive testing services, a $5.1 million increase in Europe due to higher turnaround activity primarily in the Netherlands, and a $1.5 million increase in our aerospace business as our new facility in Cincinnati experienced increased client interest.

These increases were partially offset by a $9.9 million decrease in Canada due to reduced scope in certain client turnaround projects.

MS revenues increased by $15.4 million or 3.7%, over prior year, driven by a $16.7 million increase across our international regions other than Canada due to higher activity related to leak repair, machining and bolting services, and hot tapping services primarily in the United Kingdom and Europe.

MS revenue in the U.S.

increased by $1.1 million, these increases were offset by decreases in valve sales and non-repeating turnaround work in Canada of $1.4 million, and $1.0 million, respectively.

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.

Overall operating loss decreased by $26.5 million to a loss of $13.3 million in 2023 as compared to a loss of $39.8 million in the prior year.

IHT’s operating income increased by $7.1 million, primarily driven by higher activity as described above.

MS operating income increased by $6.8 million year over year to $27.8 million for 2023, mainly due to increased activity levels from U.S.

and international operations;

partially offset by a decrease in operating income from our valve business.

Corporate operating loss decreased by $12.6 million year over year, mainly due to lower personnel and professional costs in the current year as compared to prior year and lower overall costs due to our ongoing cost reduction efforts.

The impact of our cost reduction efforts has been partially offset by continued cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

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Operating loss for the current year includes net expenses totaling $16.3 million that we do not believe are indicative of our core operating activities, while the same period in the prior year included $20.4 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

The detail of operating income (loss) excluding non-core expenses is below (unaudited) (in thousands):

Twelve Months Ended December 31, Increase

2023 2022 $ %

Total $ 286 $ 685 $ 19,476 $ 20,447

Twelve Months Ended December 31, 2021

Operating loss $ (13,276) $ (39,802) $ 26,526 66.6 %

Professional fees and other 9,121 13,915 (4,794) (34.5) %

$ — $ — $ 8,882 $ 8,882

Legal costs 5,635 2,571 3,064 119.2 %

— — 7,243 7,243

Severance charges, net 1,564 3,961 (2,397) (60.5) %

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

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.

Total non-core expenses 16,320 20,447 (4,127) (20.2) %

Total operating income (loss), excluding non-core expenses $ 3,044 $ (19,355) $ 22,399 115.7 %

Excluding the impact of these identified non-core expenses in both periods, operating loss decreased by $22.4 million from a loss of $19.4 million to income of $3.0 million.

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

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

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premium and $17.7 million of noncash write off of the unamortized balance of the related deferred insurance cost, and debt and warrant discounts.

Interest expense for 2023 was $55.2 million, a decrease of $29.9 million compared to the prior year.

The decrease was primarily attributable to lower interest expense and amortization of debt issuance costs on our APSC Term Loan in 2023 due to the pay down of $225.0 million of the balance in November 2022, full payoff of the remaining balance in June 2023, payoff of the Notes in August 2023, as well as decrease in accelerated amortization due to the “Maturity Reserve Trigger Date” provision that was previously applicable.

These effects were partially offset by a year over year increase in cash interest on the 2022 ABL Credit Facility due to higher balances outstanding related to the June 2023 Refinancing and an increase in the Secured Overnight Financing Rate (“SOFR”) rate, and the increase in amounts outstanding and paid-in-kind (noncash) (“PIK”) interest on the Uptiered Loan / Subordinated Term Loan and the Incremental Term Loan.

Cash interest paid for the years ended December 31, 2023 and 2022 amounted to $19.5 million and $29.2 million, respectively.

Loss on debt extinguishment .

Loss on debt extinguishment for the year ended December 31, 2023 was $1.6 million compared to $30.1 million in the prior year.

Loss on debt extinguishment during 2023 was due to the payoff of the remaining balance of the APSC Term Loan in June 2023 and consisted mainly of an early payment premium.

The prior year loss on debt extinguishment was due to the $225.0 million paydown of the APSC Term Loan in November 2022 and consisted of $12.4 million of cash fees and early payment premium and $17.7 million of noncash expense related to the write off of the related unamortized balance of deferred issuance costs 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.

Other expense (income), net decreased by $9.3 million, from income of $8.2 million in the prior year to expense of $1.1 million for 2023.

The decrease was primarily driven by a $4.6 million gain on disposal of assets and impairment in prior year as compared to current year, and $3.4 million foreign currency transaction gain in the prior year.

Foreign currency transaction losses in the current year period reflect the effects of negative fluctuations in the value of the U.S.

dollar relative to the foreign currencies to which we have exposure.

The provision for income tax was $4.6 million on the pre-tax loss from continuing operations of $71.1 million in the current year compared to the provision for income tax of $3.3 million on pre-tax loss from continuing operations of $146.8 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.

The effective tax rate was a provision of 6.4% and 2.3% for years ended December 31, 2023 and 2022, respectively.

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 net income (loss) per share;

earnings before interest and taxes (“EBIT”);

adjusted EBIT;

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.

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

non-routine legal costs and settlements, non-routine professional fees, loss on debt extinguishment, certain severance charges, non-routine

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write off of assets 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 EBIT is equal to segment operating income (loss) excluding costs associated with non-routine legal costs and settlements, non-routine professional fees, certain severance charges, and certain other items as determined by us.

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.

We believe 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 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 are also used as a basis for the Chief Operating Decision Maker (Chief Executive Officer) 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.

5 unchanged sentences

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:

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

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6 unchanged sentences

Adjusted Net Income (Loss):

Net loss $ (56,932) $ (37,899) $ (150,087) $ (184,845)

Net loss from continuing operations

$ (23,124) $ (56,932) $ (75,722) $ (150,087)

Professional fees and other 1

3,301 3,339 9,121 13,915

Legal costs (credit) 2

Legal costs (credit) and other 2

4,785 (700) 5,635 2,571

5 unchanged sentences

— 30,083 1,585 30,083

Loss on warrants — 59 — 59

Goodwill impairment charge — — — 55,837

Write-off of other assets 6

666 — 1,295 —

Tax impact of adjustments and other net tax items 7

2 unchanged sentences

Adjusted net loss per common share:

Basic and diluted $ (5.46) $ (10.12) $ (24.08) $ (35.66)

Basic $ (3.18) $ (5.46) $ (12.97) $ (24.08)

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

Net loss from continuing operations

$ (23,124) $ (56,932) $ (75,722) $ (150,087)

Provision (benefit) for income taxes

558 (876) 4,578 3,306

Interest expense, net 11,682 21,344 55,181 85,052

5 unchanged sentences

— 30,083 1,585 30,083

Loss on warrants — 59 — 59

Professional fees and other 1

3,301 3,339 9,121 13,915

Legal costs (credit) 2

Legal costs (credit) and other 2

4,785 (700) 5,635 2,571

3 unchanged sentences

— (324) — (1,196)

Goodwill impairment charge — — — 55,837

Write-off of other assets 6

666 — 1,295 —

Consolidated Adjusted EBIT (399) (1,979) 3,040 (20,036)

6 unchanged sentences

Free Cash Flow:

Cash used in operating activities $ (1,152) $ (2,866) $ (51,725) $ (41,674)

Cash provided by (used in) operating activities

$ 11,083 $ (1,152) $ (10,986) $ (51,725)

Capital expenditures (2,997) (3,245) (10,430) (20,544)

1 unchanged sentence

____________________________________

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.

1 The three and twelve months ended December 31, 2023, includes $2.2 million and $6.7 million, respectively, related to costs associated with debt financing, and $1.1 million and $2.4 million, respectively, for lease extinguishment charges, support and other costs.

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, and $1.5 million and $3.7 million of corporate support and other 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.

These amounts include $3.9 million for 2023 and $1.6 million for 2022 related to accruals for repayment of pandemic related subsidies in foreign jurisdiction.

3 For 2023, represents customary severance costs associated with staff reductions across multiple departments.

For 2022, severance charges represent costs associated with executive departures and our ongoing cost reduction efforts across multiple segments .

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4 Amount represent the insurance recovery received during the year for hurricane damage incurred in prior year.

4 Represents the insurance recovery received during the year for hurricane damage incurred in 2021.

5 Represents loss on payoff of remaining APSC Term Loan in June 2023 and loss on payoff of $225.0 million of the APSC Term Loan in November 2022.

The 2022 loss consists of $12.4 million of cash fees and premium, and $17.7 million of noncash expense related to the write off of the related unamortized balance of deferred issuance cost and warrant and debt discounts.

6 Includes $0.7 million for the loss on settlement of a note receivable and, for the full year 2023, an additional $0.6 million for the write-off of software related costs.

7 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.

8 Represents pension credit for the U.K.

1 unchanged sentence

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.

AND SUBSIDIARIES

5 unchanged sentences

Operating income $ 6,537 $ 4,055 $ 24,220 $ 17,093

Professional fees and other 113 — 941 —

Severance charges, net 1

4 unchanged sentences

Operating income (loss) $ 5,364 $ 5,778 $ 27,759 $ 20,930

Professional fees and other 80 — 147 —

Severance charges, net 1

197 596 792 685

Goodwill impairment loss — — — 55,837

Adjusted EBIT 5,641 6,374 28,698 21,615

3 unchanged sentences

Net loss $ (35,025) $ (66,765) $ (127,701) $ (188,110)

Provision for income taxes (876) 353 3,306 8,773

Provision (benefit) for income taxes

558 (876) 4,578 3,306

Loss (gain) on equipment sale (5) 69 (291) (4,200)

3 unchanged sentences

Foreign currency loss (gain) 1,510 1,263 734 (2,692)

Pension expense (credit) 4

Pension credit 3

(159) (178) (640) (749)

Loss on warrants — 59 — 59

Write-off of other assets 4

666 — 1,295 —

Professional fees and other 5

3,108 3,339 8,033 13,915

Legal costs 6

Legal costs (credit) and other 6

4,785 (700) 5,635 2,571

8 unchanged sentences

_________________

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.

1 For 2023, represents customary severance costs associated with staff reductions across multiple departments.

For 2022, severance charges represent costs associated with executive departures and our ongoing cost reduction efforts across multiple segments .

2 Represents loss on payoff of remaining APSC Term Loan in June 2023 and loss on payoff of $225.0 million of the APSC Term Loan in November 2022.

3 Represents pension credit for the U.K.

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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

4 Includes $0.7 million for the loss on settlement of a note receivable and, for the full year 2023, an additional $0.6 million for the write-off of software related costs.

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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.

5 The three and twelve months ended December 31, 2023, includes $2.2 million and $6.7 million, respectively, related to costs associated with debt financing, and $1.1 million and $2.4 million, respectively, for lease extinguishment charges, support and other 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.

These amounts include $3.9 million for 2023 and $1.6 million for 2022 related to accruals for repayment of pandemic related subsidies in foreign jurisdiction.

7 Represents the insurance recovery received during the year for hurricane damage incurred in 2021.

Liquidity and Capital Resources.

We have evaluated our liquidity within one year after the date of issuance of the accompanying audited consolidated financial statements to assess the Company’s ability to fund its operations.

In the preparation of this liquidity assessment, we applied judgment to estimate the projected cash flows of the Company, including the following:

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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

Based upon such liquidity assessment, we believe that the Company’s current working capital, forecasted cash flows from operations, expected availability under our existing debt arrangements and capital expenditure financing is sufficient to fund our operations, service our indebtedness, and maintain compliance with our debt covenants.

We based this assessment on assumptions that may prove to be inaccurate, and we could exhaust our available capital resources sooner than we expect in the event that we fail to meet our current projections.

See Note 11 - Debt to the consolidated financial statements for a further discussion of our liquidity.

We closely monitor the amounts and timing of our sources and uses of funds.

Our ability to maintain a sufficient level of liquidity to fund our operations and meet our financial obligations will be dependent upon our future performance, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control.

For example, the threat of recession and related economic repercussions could have a significant adverse effect on our financial position and business condition, as well as that of 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, service our indebtedness, maintain compliance with the financial covenants contained in our various credit agreements and affect our future need or ability to borrow under our 2022 ABL Credit Facility and our A&R Term Loan Credit Agreement.

Our ability to access the capital markets will depend on financial, economic and market conditions, many of which are outside of our control, and we may be unable to raise financing when needed, or on terms favorable to us, or at all.

In addition, we may seek to engage in one or more of the following, such as refinancing and/or extending the maturities of all or part of our existing indebtedness, seeking covenant relief from our lenders, entering into a strategic partnership with one or more parties, or the sale or divestiture of assets, but there can be no assurance that we would be able to enter into such a transaction or transactions on a timely basis or on terms favorable to us, or at all.

Our failure to raise capital through our operations, refinancings or strategic alternatives as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

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

Political economic repercussions could also have a broad range of effects on our liquidity sources and will depend on future developments that cannot be predicted at this time.

Our ability to generate operating cash flow, sell assets, access capital markets or take any other action to improve our liquidity and manage our debt is subject to the risks discussed herein and other risks and uncertainties that exist in our industry, some of which we may not be able to anticipate at this time or control.

Such risks include the following:

• loss of customers or other unforeseen deterioration in demand for our services;

• seasonal fluctuations, such as severe weather and other variations in our clients’ industries that may impede or delay the timing of client orders and the delivery of our services;

• rapid increases in raw materials and labor costs that may hinder our ability to meet our forecasted operating expenses;

• persisting or increasing levels of inflation domestically and internationally and the impact of such inflation on our ability to meet our current forecast;

• changes in regulations governing our operations and unplanned costs to comply with such regulatory changes;

• counterparty credit risk related to our ability to collect our receivables;

• unexpected or prolonged fluctuations in interest rates and their impact on our forecasted costs of raising additional capital.

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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.

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

On June 19, 2023, we announced the successful closing of a series of refinancing transactions (the “June 2023 Refinancing”) that raised $87.4 million of new funding (approximately $82.0 million following deductions for transaction related fees, expenses and original issue discounts) which consisted of the following:

• A new $57.5 million, 12% senior secured first lien term loan provided by funds managed by Corre that matures in December 2026, and is comprised of a $37.5 million term loan tranche and a $20.0 million delayed draw term loan tranche (the “Incremental Term Loan”), and

• A new $27.4 million term loan secured by certain real estate and machinery and equipment of the Company provided by Eclipse Business Capital LLC (the “ME/RE Loans”), that matures in August 2025.

Our 2022 ABL Credit Facility was also amended to extend the maturity date to August 2025, and to increase availability under that facility by an additional $2.5 million.

We used the proceeds from the ME/RE Loan, together with advances under the 2022 ABL Facility, to repay in full our existing senior secured term loan with Atlantic Park Strategic Capital Fund, L.P.

We used the proceeds from the Incremental Term Loan to repay in full our remaining $41.0 million of the Notes and for general corporate purposes.

Subsequent to the June 2023 Refinancing, financing for our operations consists primarily of our 2022 ABL Credit Agreement, which includes our 2022 ABL Credit Facility and the ME/RE Loans;

the A&R Term Loan Credit Agreement, which includes the Uptiered Loan and the Incremental Term Loan;

and cash flows from our operations.

As of December 31, 2023, we had approximately $31.3 million of available borrowing capacity under our various credit facilities, consisting of $21.3 million available under the 2022 ABL Credit Facility and $10.0 million available under the A&R Term Loan Credit Agreement.

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

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

Our ability to maintain compliance with the financial covenants contained in the 2022 ABL Credit Agreement and A&R 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.

As of March 5, 2024, we had consolidated cash and cash equivalents of $24.0 million, excluding $4.9 million restricted mainly as collateral for outstanding letters of credit, and approximately $12.1 million of undrawn availability under our various credit facilities, resulting in total liquidity of $36.1 million.

Refer to Note 11 - 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.

Our cash and cash equivalents as of December 31, 2023 totaled $35.4 million, of which $12.0 million was in foreign accounts, primarily in Europe, Canada and Australia, including $0.6 million of cash located in countries where currency restrictions exist.

Our cash and cash equivalents as of December 31, 2022 totaled $58.1 million of which $16.3 million was in foreign accounts, primarily in Europe, Canada and Australia, including $1.4 million of cash located in countries where currency restrictions exist.

Cash flows attributable to our operating activities.

For the year ended December 31, 2023, net cash used in operating activities was $11.0 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.

We incurred a net loss of $75.7 million, further adjusted for a decrease in net working capital of $7.5 million, partially offset by the effect of depreciation and amortization of $37.9 million, non-cash amortization of debt issuance costs and debt discount of $18.7 million and paid-in-kind interest of $14.5 million.

For the year ended December 31, 2022, net cash used in operating activities was $57.9 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.

We had net income of $70.1 million, further adjusted for the gain on sale of our Quest Integrity segment (“Quest Integrity”) of $203.4 million and a decrease in net 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 non-cash debt issuance costs and debt discount of $35.5 million and paid- in-kind interest of $18.2 million.

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Cash flows attributable to our investing activities .

For the year ended December 31, 2023, net cash used in investing activities was $10.0 million, consisting of $10.4 million of capital expenditures offset by net proceeds from asset disposals of $0.4 million.

For the year ended December 31, 2022, net cash provided by investing activities was $243.4 million, consisting primarily of net proceeds from the 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.

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.

For the year ended December 31, 2023, net cash used in financing activities was $1.9 million, consisting primarily of the $37.1 million payoff of the APSC Term Loan, $41.2 million payoff of the Notes, and $9.1 million of term loan debt issuance costs, partially offset by $47.2 million of borrowings under the Corre Incremental Term Loan, $27.4 million of borrowings under the ME/RE loans and net borrowings on our 2022 ABL Credit Facility of $13.5 million.

For the year ended December 31, 2022, net cash used in financing activities was $192.0 million, consisting primarily of the $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.

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, 2023, the effect of foreign exchange rate changes on cash was a positive impact of $0.3 million.

For the year ended December 31, 2022, the effect of foreign exchange rate changes on cash was a negative impact of $0.7 million.

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dollar exchange rates with the Canadian dollar, the euro, the British pound, the Australian dollar and Mexican peso.

Off-Balance Sheet Arrangements

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

See Note 11 - Debt for additional details on our off-balance sheet arrangements.

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Critical Accounting Policies

The process of preparing financial statements in accordance with GAAP requires our management to make estimates and judgments.

The process of preparing financial statements in accordance with GAAP requires us 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.

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.

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Item 7. Management’s Discussion and Analysis