NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Description of Business. Unless otherwise indicated, the terms “we”, “our” and “us” are used in this report to refer to either Team, Inc., to one or more of our consolidated subsidiaries or to all of them taken as a whole.
We are a global leading provider of integrated, digitally-enabled asset performance assurance and optimization solutions. 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 as discussed below, we conducted operations in three segments: Inspection and Heat Treating, Mechanical Services and Quest Integrity. We currently conduct operations in two segments. Through the capabilities and resources in these two segments, we believe that we are uniquely qualified to provide integrated solutions involving: inspection to assess condition; engineering assessment to determine fitness for purpose in the context of industry standards and regulatory codes; and mechanical services to repair, rerate or replace based upon the client’s election. In addition, we are capable of escalating with the client’s needs, as dictated by the severity of the damage found and the related operating conditions, from standard services to some of the most advanced services and integrated asset integrity and reliability management solutions available in the industry. We also believe that we are unique in our ability to provide services in three distinct client demand profiles: (i) turnaround or project services, (ii) call-out services, and (iii) nested or run-and-maintain services.
On November 1, 2022, we completed the sale of all of the issued and outstanding equity interests of our wholly-owned subsidiary, TQ Acquisition Inc., a Texas corporation, to Baker Hughes Holdings LLC for an aggregate purchase price of approximately $279.0 million, after certain post-closing adjustments pursuant to that certain Equity Purchase Agreement by and among us and Baker Hughes, dated as of August 14, 2022. TQ Acquisition and its subsidiaries constituted Quest Integrity, which provided integrity and reliability management solutions for the process, pipeline and power sectors. In connection with the Quest Integrity Transaction, the credit support in the form of guarantees by and liens on assets, as applicable, of TQ Acquisition and its subsidiaries in respect of our existing debt arrangements were released. We used approximately $238.0 million of the net proceeds from the Quest Integrity Transaction to pay down $225.0 million of our term loan debt, and certain fees associated with that repayment and related accrued interest, with the remainder reserved for general corporate purposes, thereby reducing our future debt service obligations and leverage, and improving our liquidity.
The criteria for reporting Quest Integrity as a discontinued operation were met as of completion of the Quest Integrity sale transaction and, as such, all periods presented in this Form 10-K have been recast to present Quest Integrity as a discontinued operation. Unless otherwise specified, the financial information and discussion in this Form 10-K 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.
IHT provides conventional and advanced non-destructive testing (“NDT”) services primarily for the process, pipeline and power sectors, 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.
MS provides solutions designed to serve clients’ unique needs during both the operational (onstream) and off-line states of their assets. Our onstream services include our range of standard to custom-engineered leak repair and composite solutions; emissions control and compliance; hot tapping and line stopping; and on-line valve insertion solutions, which are delivered while assets are in an operational condition, which maximizes client production time. Asset shutdowns can be planned, such as a turnaround maintenance event, or unplanned, such as those due to component failure or equipment breakdowns. Our specialty maintenance, turnaround and outage services are designed to minimize client downtime and are primarily delivered while assets are off-line and often through the use of cross-certified technicians, whose multi-craft capabilities deliver the production needed to achieve tight time schedules. These critical services include on-site field machining; bolted-joint integrity; vapor barrier plug testing; 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);
•Midstream and Others (valves, terminals and storage, pipeline and offshore oil and gas);
•Public Infrastructure (amusement parks, bridges, ports, construction and building, roads, dams, and railways); and
•Aerospace and Defense.
CARES Act. Under the Coronavirus Aid, Relief and Economic Security 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. We paid $7.0 million of the deferred payroll taxes in January 2022 and transferred $0.5 million of such obligation as part of the Quest Integrity sale transaction to the buyer. The remaining amount of $6.6 million, outstanding as of December 31, 2022, was paid in January 2023. Additionally, other governments in jurisdictions where we operate passed legislation to provide employers with relief programs, which include wage subsidy grants, deferral of certain payroll related expenses and tax payments and other benefits. We elected to treat qualified government subsidies from Canada and other governments as offsets to the related expenses. As these other governments review compliance with their relief programs, we may be required to return a portion of these funds. 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.
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 Board approved the Reverse Stock Split on December 9, 2022, which became effective on December 21, 2022. As of the effective date, every ten issued and outstanding shares of common stock was 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.
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.
Basis for presentation. These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results for such periods.
Consolidation. The consolidated financial statements include the accounts of our subsidiaries where we have control over operating and financial policies. All material intercompany accounts and transactions have been eliminated in consolidation.
Related Party Transactions. A related party transaction is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the Company or any of its subsidiaries is a participant, and (2) any Related Party (as defined herein) has or will have a direct or indirect material interest.
A related party is any person who is, or, at any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee.
Liquidity and Going Concern. These 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 and 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 these audited consolidated financial statements to determine if there is substantial doubt about the Company’s ability to continue as a going concern. In the preparation of this liquidity assessment, we applied judgment to estimate the projected cash flows of the Company, including the following: (i) projected cash outflows, (ii) projected cash inflows, and (iii) projected availability under the Company’s existing debt arrangements. The cash flow projections were based on known or planned cash requirements for operating and financing costs and include management’s best estimate regarding future customer activity levels, pricing for its services and for its supplies and other factors. Actual results could vary significantly from those projections. We do not believe, based on the Company’s forecast, that current working capital, cash flow from operations, expected availability under our existing credit agreements and capital expenditure financing is sufficient to fund the operations, maintain compliance with our debt covenants (as amended), and satisfy the Company’s obligations, specifically with respect to the Notes described below, as they come due within one year after the date of issuance of these consolidated financial statements.
Our Notes are due on August 1, 2023 and had a principal balance of $41.2 million as of December 31, 2022 following the exchanged transactions described in Note 12 - Debt. 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 Note 12 - Debt for additional information. Therefore, the Notes balance must be paid down to less than $10.0 million by June 17, 2023.
On October 4, 2022, we entered into Amendment No. 8 (“Corre Amendment 8”) to the Subordinated Term Loan Credit Agreement. On November 1, 2022, we completed the Quest Integrity Transaction with Baker Hughes, as discussed above, for an aggregate purchase price of approximately $279.0 million, after certain post-closing adjustments, in accordance with the Sale Agreement. On November 4, 2022, we entered into Amendment No. 9 (“Term Loan Amendment No. 9”) to the Term Loan Credit Agreement and Amendment No. 10 (“Corre Amendment 10”) to the Subordinated Term Loan Credit Agreement. Refer to Note 12 - Debt for more information on the terms, maturity dates and amendments to our debt that may affect our future liquidity.
As of December 31, 2022, we are in compliance with our debt covenants. 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 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. 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. 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. Refer to Note 12 - Debt for more information on the terms and maturity dates of our debt that may affect our future liquidity.
Our ability to maintain compliance with the financial covenants contained in the 2022 ABL Credit Agreement, the Term Loan Credit Agreement and the 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, threat of recession and resulting 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 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 and 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. As such, substantial doubt exists about our ability to continue as a going concern. 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.
Use of estimates. Our accounting policies conform to Generally Accepted Accounting Principles (“GAAP”) in the United States. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect our reported financial position and results of operations. We review significant estimates and judgments affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Estimates and judgments are based on information available at the time such estimates and judgments are made. Adjustments made with respect to the use of these estimates and judgments often relate to information not previously available. Uncertainties with respect to such estimates and judgments are inherent in the preparation of financial statements. Estimates and judgments are used in, among other things, (1) valuation of acquisition related tangible and intangible assets and assessments of all long-lived assets for possible impairment, (2) estimating various factors used to accrue liabilities for workers’ compensation, auto, medical and general liability, (3) establishing an allowance for uncollectible accounts receivable, (4) estimating the useful lives of our assets, (5) assessing future tax exposure and the realization of tax assets, (6) selecting assumptions used in the measurement of costs and liabilities associated with defined benefit pension plans, (7) assessments of fair value and (8) managing our foreign currency risk in foreign operations. Our most significant accounting policies are described below.
Fair value of financial instruments. As defined in FASB ASC 820 Fair Value Measurements and Disclosure (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best information available. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The use of unobservable inputs is intended to allow for fair value determinations in situations in which there is little, if any, market activity for the asset or liability at the measurement date. We are able to classify fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy such that “Level 1” measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, “Level 2” measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and “Level 3” measurements include those that are unobservable and of a highly subjective measure.
Our financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts payable, pension assets and debt obligations. The carrying amount of cash, cash equivalents, trade accounts receivable and trade accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. For additional information regarding our pension assets, see Note 16 - Employee Benefit plan. The fair value of our 2022 ABL Credit Facility and Term Loans are representative of the carrying value based upon the variable terms and management’s opinion that the current rates available to us with the same maturity and security structure are equivalent to that of the debt. The fair value of the Notes as of December 31, 2022 and 2021 was $37.5 million and $84.0 million, respectively, (inclusive of the fair value of the conversion option) and are a “Level 2” measurement, determined based on the observed trading price of these instruments. For additional information regarding our 2022 ABL Credit Facility, Term Loan, Subordinated Term Loan and Notes, see Note 12 - Debt.
Cash and cash equivalents. Cash and cash equivalents consist of all demand deposits and funds invested in highly liquid short-term investments with original maturities of three months or less.
Inventory. Except for certain inventories that are valued based on standard cost, we use the first-in, first-out method to value our inventory. Inventory includes material, labor, and certain fixed overhead costs. Inventory is stated at the lower of cost and net realizable value. Inventory quantities on hand are reviewed periodically and carrying value is reduced to net realizable
value for inventories for which their cost exceeds their utility. The cost of inventories consumed or products sold are included in operating expenses.
Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Leasehold improvements are amortized over the shorter of their respective useful life or the lease term. Depreciation and amortization of assets are computed by the straight-line method over the following estimated useful lives of the assets:
| | | | | | | | |
| Classification | | Useful Life |
| Buildings | | 20-40 years |
| Enterprise Resource Planning (“ERP”) System | | 15 years |
| Leasehold improvements | | 2-15 years |
| Machinery and equipment | | 2-12 years |
| Furniture and fixtures | | 2-10 years |
| Computers and computer software | | 2-5 years |
| Automobiles | | 2-5 years |
Goodwill and intangible assets. Goodwill and intangible assets acquired in a business combination determined to have an indefinite useful life are not amortized, but are instead tested for impairment, and assessed for potential triggering events, at least annually in accordance with the provisions of the ASC 350 Intangibles—Goodwill and Other (“ASC 350”). Intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with ASC 360-10 Impairment or Disposal of Long-Lived Assets (“ASC 360”).
We assess goodwill for impairment at the reporting unit level, which we have determined to be the same as our operating segments. If the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
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 part of discontinued operations.
During the year ended December 31, 2021, our assessment of qualitative indicators associated with our interim and annual goodwill impairment tests indicated a potential impairment existed. The next step of goodwill assessment determined that an impairment existed as the carrying value of the MS segment exceeded its fair value. As a result, we recorded 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. There was no goodwill impairment recorded during or as of December 31, 2022.
Impairment of Long-lived Assets. The Company reviews its property and equipment, intangible assets subject to amortization and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Indicators of potential impairment include: an adverse change in legal factors or in the business climate that could affect the value of the asset; an adverse change in the extent or manner in which the asset is used or is expected to be used, or in its physical condition; and current or forecasted operating or cash flow losses that demonstrate continuing losses associated with the use of the asset. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset. If the expected cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted cash flows. There were no impairment charges in 2022 or 2021.
Income taxes. We follow the guidance of ASC 740 Income Taxes (“ASC 740”), which requires that we use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant temporary differences. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax payable or receivable and related tax expense or benefit together with assessing temporary differences resulting from differing treatment of certain items such as depreciation for tax and accounting purposes. These differences can result in deferred tax assets and liabilities, which are included within our consolidated balance sheets.
In accordance with ASC 740, we are required to assess the likelihood that our deferred tax assets will be realized and, to the extent we believe it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized, we must establish a valuation allowance. We consider all available evidence to determine whether, based on the weight of the evidence, a valuation allowance is needed. Evidence used includes the reversal of existing taxable
temporary differences, taxable income in prior carryback years if carryback is permitted by tax law, information about our current financial position and our results of operations for the current and preceding years, as well as all currently available information about future years, including our anticipated future performance and tax planning strategies.
We regularly assess whether it is more likely than not that we will realize the deferred tax assets in the jurisdictions we operate in. Management believes future sources of taxable income, reversing temporary differences and other tax planning strategies will be sufficient to realize the deferred tax assets for which no valuation allowance has been established. Our valuation allowance primarily relates to net operating loss carryforwards. While we have considered these factors in assessing the need for additional valuation allowance, there is no assurance that additional valuation allowance would not need to be established in the future if information about future years change. Any changes in valuation allowance would impact our income tax provision and net income (loss) in the period in which such a determination is made. As of December 31, 2022, our deferred tax assets were $94.7 million, less a valuation allowance of $73.5 million. As of December 31, 2022, our deferred tax liabilities were $24.5 million.
Significant judgment is required in assessing the timing and amounts of deductible and taxable items for tax purposes. In accordance with ASC 740-10, we establish reserves for uncertain tax positions when, despite our belief that our tax return positions are supportable, we believe that it is not more likely than not that the position will be sustained upon challenge. When facts and circumstances change, we adjust these reserves through our provision for income taxes. To the extent interest and penalties may be assessed by taxing authorities on any related underpayment of income tax, such amounts have been accrued and are classified as a component of income tax expense (benefit) in our consolidated statements of operations. As of December 31, 2022, our gross unrecognized tax benefits, excluding penalties and interest related to uncertain tax positions, were $1.1 million.
Workers’ compensation, auto, medical and general liability accruals. In accordance with ASC 450 Contingencies (“ASC 450”), we record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We review our loss contingencies on an ongoing basis to ensure that we have appropriate reserves recorded on our balance sheet. These reserves are based on historical experience with claims incurred but not received, estimates and judgments made by management, applicable insurance coverage for litigation matters, and are adjusted as circumstances warrant. For workers’ compensation, our self-insured retention is $1.0 million and our automobile liability self-insured retention is currently $2.0 million per occurrence. For professional liability claims, our self-insured retention is $2.0 million. For general liability claims, we have a self-insured retention of $1.0 million and a deductible of $4.0 million per occurrence. For environmental liability claims, our self-insured retention is $1.0 million per occurrence. We maintain insurance for claims that exceed such self-retention limits. For medical claims, our self-insured retention is $350,000 per individual claimant determined on an annual basis. The insurance is subject to terms, conditions, limitations, and exclusions that may not fully compensate us for all losses. Our estimates and judgments could change based on new information, changes in laws or regulations, changes in management’s plans or intentions, or the outcome of legal proceedings, settlements, or other factors. If different estimates and judgments were applied with respect to these matters, it is likely that reserves would be recorded for different amounts.
Allowance for credit losses. In the ordinary course of business, a portion of our accounts receivable are not collected due to billing disputes, customer bankruptcies or other various reasons. We establish an allowance to account for those accounts receivable that we estimate will eventually be deemed uncollectible. The allowance for credit losses is based on a combination of our historical experience and management’s review of long outstanding accounts receivable.
Concentration of credit risk. No single customer accounted for more than 10% of consolidated revenues during the year ended December 31, 2022 or 2021.
Accounting for Warrants. The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
As of December 31, 2022 and 2021, we had equity-classified warrants that were issued in connection with our APSC Term Loan and Subordinated Term Loan Credit Agreement (see Note 12 - Debt). The warrants were accounted for as a component of additional paid-in capital and a debt warrant discount. The warrant discount was being amortized over the term of the debt. As of December 31, 2022 and 2021, an unamortized balance of warrant discount amounted to $3.3 million and $29.2 million, respectively.
Earnings (loss) per share. Basic earnings (loss) per share is computed by dividing income (loss) from continuing operations, income (loss) from discontinued operations or net income (loss) by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing income (loss) from continuing operations, income (loss) from discontinued operations or net income (loss) by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, (2) the dilutive effect of the assumed exercise of share-based compensation using the treasury stock method and (3) the dilutive effect of the assumed conversion of our Notes under the treasury stock method. Our current intent is to settle the principal amount of our Notes in cash upon conversion. If the conversion value exceeds the principal amount, we may elect to deliver shares of our common stock with respect to the remainder of our conversion obligation in excess of the aggregate principal amount (the “conversion spread”). Accordingly, the conversion spread is included in the denominator for the computation of diluted earnings per common share using the treasury stock method and the numerator is adjusted for any recorded gain or loss, net of tax, on the embedded derivative associated with the conversion feature.
For the years ended December 31, 2022, and 2021, all outstanding share-based compensation awards were excluded from the calculation of diluted loss per share because their inclusion would be antidilutive due to the loss from continuing operations in those periods. Also, the effect of our Notes was excluded from the calculation of diluted earnings (loss) per share since the conversion price exceeded the average price of our common stock during the applicable periods. For information on our Notes and our share-based compensation awards, refer to Note 12 - Debt and Note 14 - Share-Based Compensation, respectively.
Non-cash investing and financing activities. Non-cash investing and financing activities are excluded from the consolidated statements of cash flows and are as follows (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended
December 31, |
| 2022 | | 2021 |
| Assets acquired under finance lease | $ | 1,270 | | | $ | 1,011 | |
Also, we had $2.4 million, and $3.9 million, of accrued capital expenditures as of December 31, 2022, and 2021 respectively, which are excluded from the consolidated statements of cash flows until paid.
Foreign currency. For subsidiaries whose functional currency is not the U.S. dollar, assets and liabilities are translated at period ending rates of exchange and revenues and expenses are translated at period average exchange rates. Translation adjustments for the asset and liability accounts are included as a separate component of accumulated other comprehensive loss in stockholders’ equity. Foreign currency transaction gains and losses are included in our statements of operations.
We have historically executed a foreign currency hedging program to mitigate the foreign currency risk in countries where we have significant assets and liabilities denominated in currencies other than the functional currency. Our hedging program ended in October 2021. The impact from the foreign currency swap contracts was not material for the year ended December 31, 2022 or 2021.
Defined benefit pension plans. Pension benefit costs and liabilities are dependent on assumptions used in calculating such amounts. The primary assumptions include factors such as discount rates, expected investment return on plan assets, mortality rates and retirement rates. These rates are reviewed annually and adjusted to reflect current conditions. These rates are determined based on reference to yields. The expected return on plan assets is derived from detailed periodic studies, which include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks (standard deviations) and correlations of returns among the asset classes that comprise the plans’ asset mix. While the studies give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective rates of return. Mortality and retirement rates are based on actual and anticipated plan experience. In accordance with GAAP, actual results that differ from the assumptions are accumulated and are subject to amortization over future periods and, therefore, generally affect recognized expense in future periods. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the pension obligation and future expense.
Reclassifications. Certain amounts in prior periods have been reclassified to conform to the current year presentation, including the separate presentation and reporting of discontinued operations. Such reclassifications did not have any effect on our financial condition or results of operations as previously reported.
Newly Adopted Accounting Standards
ASU No. 2020-06. In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, (“ASU 2020-06”), which simplifies the accounting for convertible instruments by eliminating certain separation models and will generally be reported as a single liability at its amortized cost. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. On January 1, 2022, we adopted this ASU using the modified retrospective method. We recognized a cumulative effect of initially applying this ASU as an adjustment to the January 1, 2022 opening accumulated deficit balance. The prior period 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 impact on the adoption of this ASU as of January 1, 2022.
Accounting Standards Not Yet Adopted
ASU No. 2020-04. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, (“ASU 2020-04”). The guidance in ASU 2020-04 and ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which was issued in January 2021, provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria that reference the London Interbank Offered Rate, (“LIBOR”), or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. On December 21, 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) Deferral of the Sunset Date of Topic 848 which defers the sunset date of ASC 848, Reference Rate Reform, from December 31, 2022, to December 31, 2024. While we are currently determining whether we will elect the optional expedients, we do not expect our adoption of these ASU’s to have a significant impact on our consolidated financial position, results of operations, and cash flows.
2. DISCONTINUED OPERATIONS
On November 1, 2022, we completed the Quest Integrity Transaction with Baker Hughes for an aggregate purchase price of approximately $279.0 million, after certain post-closing adjustments, in accordance with the Sale Agreement. We used approximately $238.0 million of the net proceeds from the sale of Quest Integrity to pay down $225.0 million of our term loan debt, and to pay certain fees associated with that repayment and related accrued interest, with the remainder reserved for general corporate purposes, thereby reducing our future debt service obligations and leverage, and improving our liquidity. Quest Integrity previously represented a reportable segment. Following the completion of the Quest Integrity Transaction, we now operate in two segments, IHT and MS. Refer to Note 1 – Summary of Significant Accounting Policies and Practices for additional details regarding the Quest Integrity Transaction.
Our consolidated balance sheets and consolidated statements of operations report discontinued operations separate from continuing operations. Our consolidated statements of comprehensive income (loss), statements of shareholders’ equity and statements of cash flows combine continuing and discontinued operations. A summary of financial information related to our discontinued operations is presented in the tables below.
The table below represents major line items constituting net income (loss) from discontinued operations to the after-tax income from discontinued operations (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Major classes of line items constituting net income (loss) from discontinued operations | | | |
Revenues | $ | 101,418 | | | $ | 80,356 | |
Operating expenses | (45,044) | | | (43,616) | |
Selling, general and administrative expenses | (32,230) | | | (26,663) | |
| Goodwill impairment charge | — | | | (8,795) | |
Restructuring and other related charges, net | — | | | (381) | |
Interest expense, net | (108) | | | (230) | |
Other (expense) income | (4,390) | | | 591 | |
Income before income taxes | 19,646 | | | 1,262 | |
| Gain on sale of Quest transaction | 203,351 | | | — | |
| Income before income taxes | 222,997 | | | 1,262 | |
Provision for income taxes | (2,831) | | | (2,436) | |
Net income (loss) from discontinued operations | $ | 220,166 | | | $ | (1,174) | |
The table below represents the reconciliation of the major classes of assets and liabilities of discontinued operations to amounts presented separately in the consolidated balance sheet as of December 31, 2021 (in thousands). We completed the sale of Quest Integrity on November 1, 2022, as a result there were no assets or liabilities in discontinued operations as of December 31, 2022.
| | | | | | | | |
| | | December 31, |
| | | 2021 |
| Carrying amount of major classes of assets included as part of discontinued operations: | | |
| Cash and cash equivalents | | $ | 10,122 | |
Accounts receivable, net | | 20,499 | |
Prepaid expenses and other current assets | | 3,805 | |
Property, plant and equipment, net | | 15,879 | |
Goodwill and intangible assets, net | | 26,823 | |
Other classes of assets that are not major | | 5,968 | |
Total assets associated with discontinued operations | | $ | 83,096 | |
| | |
| Carrying amounts of major classes of liabilities included as part of discontinued operations: | | |
| Accounts payable | | $ | 2,125 | |
| Income tax payable | | 1,939 | |
| Other accrued liabilities | | 9,363 | |
| Operating lease obligations | | 2,368 | |
| Other classes of liabilities that are not major | | 601 | |
| Total liabilities associated with discontinued operations | | $ | 16,396 | |
The assets and liabilities in discontinued operations are measured at the lower of their carrying value and fair value less cost to sell. During the years ended December 31, 2022 and December 31, 2021, it was not necessary to write-down any assets or liabilities attributable to the disposal group in discontinued operations to fair value, less costs to sell.
Quest Integrity had $0.1 million of accrued capital expenditures as of December 31, 2021, which is excluded from the consolidated statements of cash flows until paid.
The following table presents the depreciation and amortization and capital expenditures of Quest Integrity (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Cash flows provided by operating activities of discontinued operations: | | | |
Depreciation and amortization | $ | 1,141 | | | $ | 2,616 | |
| | | |
| Cash flows provided by investing activities of discontinued operations: | | | |
| Capital expenditures | $ | 4,146 | | | $ | 3,500 | |
3. REVENUE
In accordance with ASC Topic 606, Revenue from Contracts with Customers, (“ASC 606”), we follow a five-step process to recognize revenue: 1) identify the contract with the customer, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations and 5) recognize revenue when the performance obligations are satisfied.
Most of our contracts with customers are short-term in nature and billed on a time and materials basis, while certain other contracts are at a fixed price. Certain contracts may contain a combination of fixed and variable elements. We act as a principal and have performance obligations to provide the service itself or oversee the services provided by any subcontractors. Revenue is measured based on consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties, such as taxes assessed by governmental authorities. Generally, in contracts where the amount of consideration is variable, the amount is determinable each period based on our right to invoice (as discussed further below) the customer for services performed to date. As most of our contracts contain only one performance obligation, the allocation of a contracts transaction price to multiple performance obligations is generally not applicable. Customers are generally billed as we satisfy our performance obligations and payment terms typically range from 30 to 90 days from the invoice date. Billings under certain fixed-price contracts may be based upon the achievement of specified milestones, while some arrangements may require advance customer payment. Our contracts do not include significant financing components since the contracts typically span less than one year.
Revenue is recognized as (or when) the performance obligations are satisfied by transferring control over a service or product to the customer. Revenue recognition guidance prescribes two recognition methods (over time or point in time). Most of our performance obligations qualify for recognition over time because we typically perform our services on customer facilities or assets and customers receive the benefits of our services as we perform. Where a performance obligation is satisfied over time, the related revenue is also recognized over time using the method deemed most appropriate to reflect the measure of progress and transfer of control. For our time and materials contracts, we are generally able to elect the right-to-invoice practical expedient, which permits us to recognize revenue in the amount to which we have a right to invoice the customer if that amount corresponds directly with the value to the customer of our performance completed to date. For our fixed price contracts, as they are short term in nature, we recognize revenue as jobs are completed or costs are incurred. For contracts where control is transferred at a point in time, revenue is recognized at the time control of the asset is transferred to the customer, which is typically upon delivery and acceptance by the customer.
Disaggregation of revenue. Essentially all of our revenues are associated with contracts with customers. A disaggregation of our revenue from contracts with customers by geographic region, by reportable operating segment and by service type is presented below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, 2022 | | | | | | |
| United States and Canada | | Other Countries | | Total | | | | | | |
| Revenue: | | | | | | | | | | | |
| IHT | $ | 412,661 | | | $ | 9,901 | | | $ | 422,562 | | | | | | | |
| MS | 296,151 | | | 121,495 | | | 417,646 | | | | | | | |
| Total | $ | 708,812 | | | $ | 131,396 | | | $ | 840,208 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, 2021 | | | | | | |
| United States and Canada | | Other Countries | | Total | | | | | | |
| Revenue: | | | | | | | | | | | |
| IHT | $ | 405,007 | | | $ | 10,364 | | | $ | 415,371 | | | | | | | |
| MS | 256,806 | | | 122,020 | | | 378,826 | | | | | | | |
| Total | $ | 661,813 | | | $ | 132,384 | | | $ | 794,197 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, 2022 |
| Non-Destructive Evaluation and Testing Services | | Repair and Maintenance Services | | Heat Treating | | Other | | Total |
| Revenue: | | | | | | | | | |
| IHT | $ | 336,821 | | | $ | 180 | | | $ | 61,526 | | | $ | 24,035 | | | $ | 422,562 | |
| MS | — | | | 413,424 | | | 276 | | | 3,946 | | | 417,646 | |
| Total | $ | 336,821 | | | $ | 413,604 | | | $ | 61,802 | | | $ | 27,981 | | | $ | 840,208 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, 2021 |
| Non-Destructive Evaluation and Testing Services | | Repair and Maintenance Services | | Heat Treating | | Other | | Total |
| Revenue: | | | | | | | | | |
| IHT | $ | 325,204 | | | $ | 467 | | | $ | 59,855 | | | $ | 29,845 | | | $ | 415,371 | |
| MS | — | | | 374,885 | | | 806 | | | 3,135 | | | 378,826 | |
| Total | $ | 325,204 | | | $ | 375,352 | | | $ | 60,661 | | | $ | 32,980 | | | $ | 794,197 | |
For additional information on our reportable operating segments and geographic information, refer to Note 18 - Segment and Geographic Disclosures.
Contract balances. The timing of revenue recognition, billings, and cash collections results in trade accounts receivable, contract assets and contract liabilities on the consolidated balance sheets. Trade accounts receivable include billed and unbilled amounts currently due from customers and represent unconditional rights to receive consideration. The amounts due are stated at their net estimated realizable value. Refer to Note 1 - Summary of Significant Accounting Policies and Practices and Note 4 - Receivables for additional information on our trade receivables and the allowance for credit losses. Contract assets include unbilled amounts when the revenue recognized exceeds the amount billed to the customer. Amounts may not exceed their net realizable value. If we receive advances or deposits from our customers, a contract liability is recorded. Additionally, a contract liability arises if items of variable consideration result in less revenue being recorded than what is billed. Contract assets and contract liabilities are generally classified as current.
The following table provides information about trade accounts receivable, contract assets and contract liabilities as of December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Trade accounts receivable, net1 | $ | 186,689 | | | $ | 168,273 | |
Contract assets2 | $ | 2 | | | $ | 2 | |
Contract liabilities3 | $ | — | | | $ | 80 | |
_________________
1 Includes billed and unbilled amounts, net of allowance for credit losses. See Note 4 - Receivables for details.
2 Included in the “Prepaid expenses and other current assets” line on the consolidated balance sheet.
3 Included in the “Other accrued liabilities” line of the consolidated balance sheet.
Due to the short-term nature of our contracts, contract liability balances as of the end of any period are generally recognized as revenue in the following quarter. Accordingly, essentially all of the contract liability balance as of December 31, 2021 was recognized as revenue during the year ended December 31, 2022.
Contract costs. We recognize the incremental costs of obtaining contracts as selling, general and administrative expenses when incurred if the amortization period of the asset that otherwise would have been recognized is one year or less. Costs to fulfill a contract are recorded as assets if they relate directly to a contract or a specific anticipated contract, the costs to generate or enhance resources that will be used in satisfying performance obligations in the future and the costs are expected to be recovered. Costs to fulfill recognized as assets primarily consist of labor and material costs and generally relate to engineering and set-up costs incurred prior to when the satisfaction of performance obligations begins. Assets recognized for costs to fulfill a contract are included in the “Prepaid expenses and other current assets” line of the consolidated balance sheets and were not material as of December 31, 2022 and 2021. Such assets are recognized as expenses as we transfer the related goods or services to the customer. All other costs to fulfill a contract are expensed as incurred.
Remaining performance obligations. As permitted by ASC 606, we have elected not to disclose information about remaining performance obligations where (i) the performance obligation is part of a contract that has an original expected duration of one year or less or (ii) when we recognize revenue from the satisfaction of the performance obligation in accordance with the right-to-invoice practical expedient. As most of our contracts with customers are short-term in nature and billed on a time and material basis, there were no material amounts of remaining performance obligations as of December 31, 2022 and 2021.
4. RECEIVABLES
A summary of accounts receivable as of December 31, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Trade accounts receivable | $ | 160,572 | | | $ | 142,975 | |
| Unbilled revenues | 31,379 | | | 33,141 | |
| Allowance for credit losses | (5,262) | | | (7,843) | |
| Accounts receivable, net | $ | 186,689 | | | $ | 168,273 | |
We measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This applies to financial assets measured at amortized cost, including trade and unbilled accounts receivable, and requires immediate recognition of lifetime expected credit losses. Significant factors that affect the expected collectability of our receivables include macroeconomic trends and forecasts in the oil and gas, refining, power, and petrochemical markets and changes in our results of operations and forecasts. For unbilled receivables, we consider them as short-term in nature as they are normally converted to trade receivables within 90 days, thus future changes in economic conditions will not have a significant effect on the credit loss estimate. We have identified the following factors that primarily impact the collectability of our receivables and therefore determine the pools utilized to calculate expected credit losses: (i) the aging of the receivable, (ii) any identification of known collectability concerns with specific receivables and (iii) variances in economic risk characteristics across geographic regions.
For trade receivables, customers typically are provided with payment due date terms of 30 days upon issuance of an invoice. We have tracked historical loss information for our trade receivables and compiled historical credit loss percentages for different aging categories. We believe that the historical loss information we have compiled is a reasonable basis on which to determine expected credit losses for trade receivables because the composition of the trade receivables is consistent with that used in developing the historical credit-loss percentages as typically our customers and payment terms do not change significantly. Generally the longer a receivable is outstanding the higher the percentage of the outstanding balance is reported as current expected credit losses. We update the historical loss information for current conditions and reasonable and supportable forecasts that affect the expected collectability of the trade receivable using a loss-rate approach. We have not seen a negative trend in the current economic environment that significantly impacts our historical credit-loss percentages; however, we will continue to monitor for changes that would indicate the historical loss information is no longer a reasonable basis for the determination of our expected credit losses. Our forecasted loss rates inherently incorporate expected macroeconomic trends. A loss-rate method for estimating expected credit losses on a pooled basis is applied for each aging category for receivables that continue to exhibit similar risk characteristics.
To measure expected credit losses for individual receivables with specific collectability risk, we identify specific factors based on customer-specific facts and circumstances that are unique to each customer. Customer accounts with different risk characteristics are separately identified and a specific reserve is determined for these accounts based on the assessed credit risk.
We have also identified the following geographic regions in which to distinguish our trade receivables: (i) the United States, (ii) Canada, (iii) the European Union, (iv) the United Kingdom, and (v) other countries. These geographic regions are considered appropriate as they each operate in different economic environments with different foreign currencies, and therefore
share similar economic risk characteristics. For each geographic region we evaluate the historical loss information and determine credit-loss percentages to apply to each aging category and individual receivable with specific risk characteristics. We estimate future expected credit losses based on forecasted changes in gross domestic product and oil demand for each region.
We consider one year from the financial statement reporting date as representing a reasonable forecast period as this period aligns with the expected collectability of our trade receivables. Financial distress experienced by our customers could have an adverse impact on us in the event our customers are unable to remit payment for the products or services we provide or otherwise fulfill their obligations to us. In determining the current expected credit losses, we review macroeconomic conditions, market specific conditions, and internal forecasts to identify potential changes in our assessment.
The following table shows a rollforward of the allowance for credit losses (in thousands):
| | | | | | | | | | | |
| | Twelve Months Ended
December 31, |
| | 2022 | | 2021 |
| Balance at beginning of period | $ | 7,843 | | | $ | 9,115 | |
| Provision for expected credit losses | 1,059 | | | 2,332 | |
| Recoveries collected | (1,114) | | | (369) | |
| Write-offs | (2,479) | | | (3,201) | |
| Foreign exchange effects | (47) | | | (34) | |
| Balance at end of period | $ | 5,262 | | | $ | 7,843 | |
5. INVENTORY
A summary of inventory as of December 31, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Raw materials | $ | 8,978 | | | $ | 7,576 | |
| Work in progress | 2,945 | | | 2,725 | |
| Finished goods | 24,408 | | | 25,074 | |
| Inventory | $ | 36,331 | | | $ | 35,375 | |
6. PREPAID AND OTHER CURRENT ASSETS
A summary of prepaid expenses and other current assets as of December 31, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
| Insurance receivable | $ | 39,000 | | | $ | 39,000 | |
| Prepaid expenses | 15,238 | | | 10,542 | |
| Other current assets | 11,441 | | | 6,521 | |
| Prepaid expenses and other current assets | $ | 65,679 | | | $ | 56,063 | |
The insurance receivable relates to the receivable from our third-party insurance providers for a legal claim that is recorded in other accrued liabilities, refer to Note 10 - Other Accrued Liabilities. These receivables will be covered by our third-party insurance providers for litigation matters that have been settled or are pending settlements and where the deductibles have been satisfied. The prepaid expenses primarily relate to prepaid insurance and other expenses that have been paid in advance of the coverage period. The other current assets primarily include items such as contract assets and other accounts receivables.
As of December 31, 2022 the other current assets include deferred financing costs of $3.1 million due to all long-term debt now being classified as current. Historically these assets were presented in “other assets, net” and comparative periods were not adjusted. Other current assets also include deferred financing fees amounting to $1.8 million in connection with that certain Substitute Insurance Reimbursement Facility Agreement dated as of September 29, 2022 (the “Substitute Insurance Reimbursement Facility Agreement”) (see Note 12 - Debt for additional details).
7. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment as of December 31, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Land | $ | 4,006 | | | $ | 5,227 | |
| Buildings and leasehold improvements | 50,833 | | | 54,597 | |
| Machinery and equipment | 277,852 | | | 278,828 | |
| Furniture and fixtures | 10,558 | | | 10,704 | |
| Capitalized ERP system development costs | 45,917 | | | 45,916 | |
| Computers and computer software | 19,457 | | | 17,993 | |
| Automobiles | 3,536 | | | 3,540 | |
| Construction in progress | 19,196 | | | 11,347 | |
| Total | 431,355 | | | 428,152 | |
| Accumulated depreciation and amortization | (293,256) | | | (282,672) | |
| Property, plant, and equipment, net | $ | 138,099 | | | $ | 145,480 | |
Included in the table above are assets under finance leases of $7.4 million and $6.7 million and accumulated amortization of $2.3 million and $1.6 million as of December 31, 2022 and 2021, respectively. Depreciation expense for the years ended December 31, 2022 and 2021 was $22.9 million, and $25.4 million respectively.
Assets sold and disposed of for the twelve months ended December 31, 2022 and the twelve months ended December 31, 2021 had a carrying value of $2.5 million and $0.8 million, respectively, resulting in a gain on sale of $4.2 million and $0 million, respectively. The assets sold for the twelve months ended December 31, 2022 primarily consisted of $1.3 million in land, $0.9 million in building and $0.3 million in machinery and equipment. The assets sold for the twelve months ended December 31, 2021 consisted of $0.8 million in machinery and equipment.
8. INTANGIBLE ASSETS
A summary of intangible assets as of December 31, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Customer relationships | $ | 165,231 | | | $ | (91,296) | | | $ | 73,935 | |
| Non-compete agreements | 4,281 | | | (4,281) | | | — | |
| Trade names | 20,563 | | | (19,830) | | | 733 | |
| Technology | 2,707 | | | (1,978) | | | 729 | |
| Licenses | 840 | | | (830) | | | 10 | |
| Other | 12,983 | | | (12,983) | | | — | |
| Intangible assets | $ | 206,605 | | | $ | (131,198) | | | $ | 75,407 | |
| | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Customer relationships | $ | 165,381 | | | $ | (79,081) | | | $ | 86,300 | |
| Non-compete agreements | 4,357 | | | (4,357) | | | — | |
| Trade names | 20,590 | | | (19,606) | | | 984 | |
| Technology | 2,731 | | | (1,773) | | | 958 | |
| Licenses | 850 | | | (774) | | | 76 | |
| Other | 12,988 | | | (12,988) | | | — | |
| Intangible assets | $ | 206,897 | | | $ | (118,579) | | | $ | 88,318 | |
Amortization expense on intangible assets for the years ended December 31, 2022 and 2021 was $12.9 million, and $12.9 million, respectively. Amortization expense for intangible assets is forecast to be approximately $12.2 million per year from 2023 through 2027.
The weighted-average amortization period for intangible assets subject to amortization was 13.7 years as of December 31, 2022. The weighted-average amortization period as of December 31, 2022 is 13.7 years for customer relationships, 13.2 years for trade names, 10.0 years for technology and 10.5 years for licenses.
9. GOODWILL AND IMPAIRMENT CHARGES
Following 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 operating 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 related to the 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.
10. OTHER ACCRUED LIABILITIES
A summary of other accrued liabilities as of December 31, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Payroll and other compensation expenses | $ | 48,507 | | | $ | 39,599 | |
| Legal and professional accruals | 46,665 | | | 46,762 | |
Insurance accruals | 7,483 | | | 7,181 | |
| Property, sales and other non-income related taxes | 7,348 | | | 6,553 | |
| | | |
| | | |
| Accrued interest | 3,963 | | | 6,469 | |
| Volume discount | 2,050 | | | 1,902 | |
| Other accruals | 3,251 | | | 3,270 | |
| Other accrued liabilities | $ | 119,267 | | | $ | 111,736 | |
Legal and professional accruals include accruals for legal and professional fees as well as accrued legal claims, refer to Note 17 - Commitments and Contingencies. Certain legal claims are covered by insurance and the related insurance receivable for these claims is recorded in prepaid expenses and other current assets, refer to Note 6 - Prepaid and Other Current Assets. Payroll and other compensation expenses include all payroll related accruals including, among others, accrued vacation, severance, and bonuses. Insurance accruals primarily relate to accrued medical and workers compensation costs. Property, sales and other non-income related taxes includes accruals for items such as sales and use tax, property tax and other related tax accruals. Accrued interest relates to the interest accrued on our long-term debt. Other accrued liabilities includes items such as contract liabilities and other accrued expenses.
11. INCOME TAXES
For the year ended December 31, 2022, our income tax provision resulted in an effective tax rate of 2.3%. For the year ended December 31, 2021, our income tax provision resulted in an effective tax rate of 5.0%. Our income tax provision for the year ended December 31, 2022 was $3.3 million, our income tax provision for December 31, 2021 was $8.8 million and includes federal, state and foreign taxes.
The substantial doubt about the Company’s ability to continue as a going concern basis casts doubt on our ability to estimate and generate future income. The lack of going concern basis applicable for our financial statements for the year ended December 31, 2022, generally requires a valuation allowance for all deferred tax assets that are not realizable through the reversal of existing timing differences or taxable income in carryback years. While several subsidiaries have historically been profitable and for which future income was a material factor in assessing the realizability of their deferred tax assets, the substantial doubt about the Company’s ability to continue on a going concern basis casts doubt on our ability to generate future income. As a result, the Company included a charge of $2.2 million in income tax expense for the valuation allowance required to offset the remaining net deferred tax assets. The $2.2 million charge is primarily attributable to our German and Canadian subsidiaries. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion.
The components of our tax provision and benefit on continuing operations were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Current | | Deferred | | Total |
| Twelve months ended December 31, 2022: | | | | | |
| U.S. Federal | $ | (211) | | | $ | — | | | $ | (211) | |
| State & local | 513 | | | — | | | 513 | |
| Foreign jurisdictions | 1,319 | | | 1,685 | | | 3,004 | |
| Tax provision | $ | 1,621 | | | $ | 1,685 | | | $ | 3,306 | |
| Twelve months ended December 31, 2021: | | | | | |
| U.S. Federal | $ | 938 | | | $ | (1,115) | | | $ | (177) | |
| State & local | 590 | | | 150 | | | 740 | |
| Foreign jurisdictions | 2,494 | | | 5,716 | | | 8,210 | |
| Tax provision | $ | 4,022 | | | $ | 4,751 | | | $ | 8,773 | |
The components of pre-tax income (loss) from continuing operations for the years ended December 31, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | |
| | Twelve Months Ended
December 31, |
| | 2022 | | 2021 |
| Domestic | $ | (156,001) | | | $ | (171,299) | |
| Foreign | 9,220 | | | (4,773) | |
| Pre-tax income (loss) from continuing operations | $ | (146,781) | | | $ | (176,072) | |
The income tax provision in 2022 and provision in 2021 attributable to the loss from continuing operations, respectively, differed from the amounts computed by applying the U.S. federal income tax rate 21% in 2022, (21% in 2021) to pre-tax loss from continuing operations as a result of the following (in thousands):
| | | | | | | | | | | |
| | Twelve Months Ended
December 31, |
| | 2022 | | 2021 |
| Pre-tax loss from continuing operations | $ | (146,781) | | | $ | (176,072) | |
| Computed income taxes at statutory rate | (30,824) | | | (36,975) | |
| State income taxes, net of federal benefit | 395 | | | 561 | |
| Foreign tax rate differential | 701 | | | 1,380 | |
| Non-cash compensation | 228 | | | 320 | |
| Deferred taxes on investment in foreign subsidiaries | — | | | (1,939) | |
| | | |
| Non-deductible expenses | 118 | | | 229 | |
| Foreign withholding | 693 | | | 1,078 | |
| Prior year tax adjustments | 7 | | | 141 | |
| | | |
| | | |
| | | |
| Goodwill impairment | — | | | 9,399 | |
| | | |
| Valuation allowance | 31,430 | | | 34,284 | |
| | | |
| Rate change | — | | | (140) | |
| Other | 558 | | | 435 | |
| Total expense (benefit) for income tax on continuing operations | $ | 3,306 | | | $ | 8,773 | |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Deferred tax assets: | | | |
| Accrued compensation and benefits | $ | 7,630 | | | $ | 7,831 | |
| Receivables | 552 | | | 1,345 | |
| Inventory | 296 | | | 316 | |
| Share based compensation | 258 | | | 271 | |
| | | |
| Other accrued liabilities | 2,940 | | | 3,467 | |
| Tax credit carry forward | 2,314 | | | 3,613 | |
| Interest expense limitation | 28,137 | | | 22,312 | |
| Goodwill and intangible costs | 10,143 | | | 9,221 | |
| Convertible debt | 1,780 | | | — | |
| Net operating loss carry forwards | 38,860 | | | 68,972 | |
| Other | 1,770 | | | 2,428 | |
| Deferred tax assets | 94,680 | | | 119,776 | |
| Less: Valuation allowance | (73,483) | | | (89,191) | |
| Deferred tax assets, net | $ | 21,197 | | | $ | 30,585 | |
| Deferred tax liabilities: | | | |
| Property, plant and equipment | (17,642) | | | (20,267) | |
| | | |
| Unremitted earnings of foreign subsidiaries | (3,581) | | | (3,944) | |
| Convertible debt | — | | | (7,359) | |
| Other | (3,260) | | | (2,408) | |
| Deferred tax liabilities | (24,483) | | | (33,978) | |
Net deferred tax asset (liability) 1 | $ | (3,286) | | | $ | (3,393) | |
________________
1 As of December 31, 2021, certain deferred tax balances associated with discontinued operations remain on the balance sheet and in the inventory of deferred taxes but are presented within current assets and current liabilities associated with discontinued operations.
Management evaluates all available evidence, both positive and negative, to determine whether sufficient future taxable income will be generated to allow for the realization of the existing deferred tax assets. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. A significant factor of negative evidence evaluated was the cumulative pre-tax loss incurred over the two-year period ended December 31, 2022. This objective evidence limits the ability to consider other subjective positive evidence, such as our projections for future pre-tax income.
On the basis of this evaluation, as of December 31, 2022, a valuation allowance of $73.5 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. This valuation allowance relates primarily to the deferred tax assets for federal, foreign and state tax net operating loss carryforwards. The amount of deferred tax asset considered realizable could be adjusted if there are changes to net operating loss carryforward periods or there is a change to the weight assessed on various sources of positive and negative evidence.
The current year increase in the valuation allowance is primarily attributable to our foreign operations. In the current quarter, we were able to release $11.5 million of valuation allowance resulting from the realization of deferred tax assets for our U.S. operations.
As of December 31, 2022, we had net operating loss carryforwards for U.S. federal income tax purposes of $104.2 million. Of this amount, $3.7 million expires in various dates through 2037, which is subject to limitations under Section 382 of the U.S. Internal Revenue Code of 1986 as a result of stock ownership changes from Quest Integrity business sale, and $100.5 million has an indefinite carryforward period. These carryforwards are available, subject to certain limitations such as mentioned above, to offset future taxable income. Further, we have state net operating loss carryforwards of $178.6 million with $156.5 million expiring on various dates through 2041 and $22.1 million with an indefinite carryforward period.
As of December 31, 2022, we had interest expense carryforward for U.S. income tax purposes of $120.6 million. The entire $120.6 million has an indefinite carryforward period. These carryforwards are available, subject to certain limitations, to offset future taxable income.
As of December 31, 2022, the Company had $2.2 million of tax credits that will expire on various dates through 2037 if not utilized.
As of December 31, 2022, we had foreign net operating loss carryforwards totaling $25.1 million. Of this amount, $1.8 million will expire in various dates through 2031 and $23.3 million has an unlimited carryforward period.
As of December 31, 2022, none of our undistributed earnings of foreign operations were considered to be permanently reinvested overseas. As of December 31, 2022, the deferred tax liability related to undistributed earnings of foreign subsidiaries was $2.6 million.
As of December 31, 2022, $1.7 million of unrecognized tax benefits would affect our effective tax rate. We estimate the uncertain tax benefits that may be recognized within the next twelve months will not be material. Our policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense.
We file income tax returns in the U.S. federal and state jurisdictions as well as various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years prior to 2016. We are currently under audit in one of the states in which we do substantial business. As of December 31, 2022, we recorded a $0.5 million tax liability in our uncertain positions related to this audit due to retroactive changes included in final regulations issued by the state. Certain Dutch entities were also under audit. We did not anticipate any material adjustments related to these examinations.
Periodic examinations of our tax filings occur by the taxing authorities for the jurisdictions in which we conduct business. These examinations review the significant positions taken on our returns, including the timing and amount of income and deductions reported, as well as the allocation of income among multiple taxing jurisdictions. We do not expect any material adjustments to result from positions taken on our income tax returns.
The following table summarizes the Company’s reconciliation of gross unrecognized tax benefits, excluding penalties and interest, for the year ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| | Twelve Months Ended
December 31, |
| | 2022 | | 2021 |
| Unrecognized tax benefits - January 1 | $ | 1,285 | | | $ | 1,610 | |
| | | |
| Additions based on current year tax positions | — | | | — | |
| Additions based on tax positions related to prior years | 350 | | | 543 | |
| Reductions based on tax positions related to prior years | — | | | — | |
| Disposition of uncertain tax positions of discontinued operations | (426) | | | — | |
| Settlements | — | | | — | |
| Reductions resulting from a lapse of the applicable statute of limitations | (112) | | | (868) | |
| Unrecognized tax benefits - December 31 | $ | 1,097 | | | $ | 1,285 | |
We have recorded the unrecognized tax benefits in other long-term liabilities in the consolidated balance sheets. As of December 31, 2022 and 2021, the total amount of accrued interest and penalties related to unrecognized tax benefits was $0.6 million and $0.6 million, respectively. There was approximately $0.0 million and $0.2 million, respectively, of interest and penalties related to unrecognized tax benefits that was recorded in income tax expense for the period ended December 31, 2022 and 2021.
12. DEBT
As of December 31, 2022 and 2021, our total long-term debt and finance lease obligations are summarized as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| 2020 ABL Facility | $ | — | | | $ | 62,000 | |
| 2022 ABL Facility | 99,916 | | | — | |
| APSC Term Loan | 31,562 | | | 214,191 | |
| Subordinated Term Loan | 107,905 | | | 36,358 | |
| | | |
| Total | 239,383 | | | 312,549 | |
Convertible Debt1 | 40,650 | | | 87,662 | |
Finance lease obligations2 | 5,902 | | | 5,640 | |
| Total debt and finance lease obligations | 285,935 | | | 405,851 | |
| Current portion of long-term debt and finance lease obligations | (280,993) | | | (667) | |
| Total long-term debt and finance lease obligations, less current portion | $ | 4,942 | | | $ | 405,184 | |
_________________
1 Comprised of principal amount outstanding, less unamortized discount and issuance costs. See Convertible Debt section below for additional information.
2 Excludes finance lease obligations associated with discontinued operations.
For information on our finance lease obligations, see Note 13 - Leases.
2020 ABL Facility
On December 18, 2020, we entered into an asset-based credit agreement (such agreement, as amended, restated, supplemented or otherwise modified from time to time, the “Citi Credit Agreement”) led by Citibank, N.A. (“Citibank”), as agent, which provided for available borrowings up to $150.0 million (the “2020 ABL Facility”). The 2020 ABL Facility’s original maturity date was December 18, 2024. The 2020 ABL Facility had a variable interest rate of either a base rate or a LIBOR rate, plus an applicable margin. The 2020 ABL Facility was fully paid off on February 11, 2022.
2022 ABL Facility
On February 11, 2022, we entered into a new credit agreement, with the lender parties thereto, and Eclipse Business Capital, LLC, a Delaware limited liability company, as agent, (“Eclipse”) (such agreement, as amended by ABL Amendment No. 1 and ABL Amendment No. 2, the “2022 ABL Credit Agreement”). Available funding commitments to us under the 2022 ABL Credit Agreement, subject to certain conditions, include a revolving credit line in an amount of up to $130.0 million to be provided by certain affiliates of Eclipse (the “Revolving Credit Loans”), with a $35.0 million sublimit for swingline borrowings and a $26.0 million sublimit for issuances of letters of credit, and an incremental delayed draw term loan of up to $35.0 million (the “Delayed Draw Term Loan”) provided by Corre Partners Management, LLC and certain of its affiliates (“Corre”) (collectively, the “2022 ABL Credit Facility”). The proceeds of the loans under the 2022 ABL Credit Facility were used to, among other things, pay off and terminate the 2020 ABL Facility. The 2022 ABL Facility matures in February 2025.
Our obligations under the 2022 ABL Credit Agreement are guaranteed by certain of our direct and certain indirect subsidiaries referenced below as the “ABL Guarantors” and, together with the Company, the “ABL Loan Parties”. Our obligations under the 2022 ABL Credit Facility are secured on a first priority basis by, among other things, accounts receivable, deposit accounts, securities accounts and inventory of the ABL Loan Parties and are secured on a second priority basis by substantially all of the other assets of the ABL Loan Parties. Availability under the revolving credit line under the 2022 ABL Credit Facility is based on a percentage of the value of accounts receivable and inventory, reduced by certain reserves.
Revolving credit loans under the 2022 ABL Credit Facility bear interest through maturity at a variable rate based upon a LIBOR Rate (or a base rate if the LIBOR Rate is unavailable for any reason), plus an applicable margin (“LIBOR Rate Loan” and “Base Rate Loan”, respectively). The “base rate” is a fluctuating interest rate equal to the greatest of (1) the federal funds rate plus 0.50%, (2) Wells Fargo Bank, National Association’s prime rate, and (3) the one-month LIBOR Rate. The “applicable margin” is defined as a rate of 3.15%, 3.40% or 3.65% for Base Rate Loans with a 2.00% base rate floor and a rate of 4.15%, 4.40% or 4.65% for LIBOR Rate Loans with a 1.00% LIBOR floor, in each case depending on the amount of EBITDA as of the most recent measurement period, as reported in a monthly compliance certificate. The Delayed Draw Term Loan bears interest through maturity at a rate of the LIBOR Rate plus 10.0%, with a 1.00% LIBOR floor. The fee for undrawn revolving amounts is 0.50% and the fee for undrawn Delayed Draw Term Loan amounts is 3.00%. Interest under the 2022 ABL Credit Facility is payable monthly. The Company will also be required to pay customary letter of credit fees, as necessary. The Company may make voluntary prepayments of the loans under the 2022 ABL Credit Facility from time to time, subject, in the case of the Delayed Draw Term Loan, to certain conditions. Mandatory prepayments are also required in certain circumstances, including with respect to the Delayed Draw Term Loan, if the ratio of aggregate value of the collateral under the 2022 ABL Credit Facility to the sum of the Delayed Draw Term Loan plus revolving facility usage outstanding is less than 130%. Amounts repaid may be re-borrowed, subject to compliance with the borrowing base and the other conditions set forth in the 2022 ABL Credit Agreement, subject, in the case of the Delayed Draw Term Loan to a maximum of four such borrowings in any 12-month period. Certain permanent repayments of the 2022 ABL Credit Facility loans are subject to the payment of a premium of 2.00% during the first year of the facility, 1.00% during the second year of the facility, and 0.50% in the last year of the facility. The 2022 ABL Credit Agreement contains customary conditions to borrowings and covenants, including covenants that restrict our ability to sell assets, make changes to the nature of our business, engage in mergers or acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay dividends, issue equity instruments, make distributions or redeem or repurchase capital stock or make other investments, engage in transactions with affiliates and make payments in respect of certain debt. The 2022 ABL Credit Agreement also requires that we will not exceed $20.0 million in unfinanced capital expenditures in any calendar year; provided that this requirement will not apply if we maintain a net leverage ratio of less than or equal to 4.00 to 1.00 as of the end of the second and fourth fiscal quarter of each calendar year. In addition, the 2022 ABL Credit Agreement includes customary events of default, the occurrence of which may require that we pay an additional 2.0% interest on the outstanding loans under the 2022 ABL Credit Facility.
The interest rate as of December 31, 2022 was 8.77% for Eclipse and 14.12% for the Delayed Draw Term Loan.
Direct and incremental costs associated with the issuance of the 2022 ABL Credit Facility were approximately $8.4 million and were capitalized as deferred financing costs. These costs are being amortized on a straight-line basis over the term of the 2022 ABL Credit Facility. Unamortized deferred financing cost amounted to $3.1 million and $2.9 million as of December 31, 2022 and December 31, 2021, respectively. Additionally, the amortization period for deferred financing costs and debt discounts and issuance cost was accelerated to reflect the revised Maturity Reserve Trigger Date (as defined in the 2022 ABL Credit Agreement) and the related reclassification of debt as current. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion.
On May 6, 2022, we entered into Amendment No.1 to the 2022 ABL Credit Agreement (“ABL Amendment No. 1”) which, among other things, modified the Maturity Reserve Trigger Date (as defined in the 2022 ABL Credit Agreement) such that the date on which a reserve must, subject to certain conditions, be put into place with respect to the outstanding principal amount of the Notes was 75 days prior to their maturity date rather than 120 days or May 18, 2023, by which date, the Notes balance must be paid down to less than $10.0 million, or the Company must have equivalent cash on hand to pay down the Notes to $10.0 million.
In connection with the Quest Integrity Transaction, on November 1, 2022, we entered into Amendment No. 2 to the 2022 ABL Credit Agreement (“ABL Amendment No. 2”) which, among other things, (i) modified the Maturity Reserve Trigger Date such that the date on which a reserve must, subject to certain conditions, be put into place with respect to the outstanding principal amount of the Notes is 45 days prior to the maturity date of the Notes rather than 75 days, or June 17, 2023, and (ii) made certain modifications to negative covenants and mandatory prepayment provisions.
As of December 31, 2022, we had $64.9 million outstanding under the Revolving Credit Loans and $35.0 million outstanding under the Delayed Draw Term Loans. There were $8.7 million outstanding in letters of credit secured by these instruments, which are off-balance sheet.
As of December 31, 2022, subject to the applicable sublimit and other terms and conditions, $52.4 million was available for loans or for issuance of new letters of credit, consisting of $42.4 million available under the Revolving Credit Loans and $10.0 million available under the Delayed Draw Term Loan.
APSC Term Loan
On December 18, 2020, we entered into that certain Term Loan Credit Agreement (as amended by Term Loan Amendment No. 1, Term Loan Amendment No. 2, Term Loan Amendment No. 3, Term Loan Amendment No. 4, Term Loan Amendment No. 5, Term Loan Amendment No. 6, Term Loan Amendment No. 7, Term Loan Amendment No. 8 and Term Loan Amendment No. 9, the “Term Loan Credit Agreement”) with Atlantic Park Strategic Capital Fund, L.P., as agent (“APSC”), pursuant to which we borrowed $250.0 million (the “Term Loan”). The Term Loan was issued with a 3% original issuance discount, such that total proceeds received were $242.5 million. The Term Loan matures, and all outstanding amounts become due and payable on December 18, 2026. However, certain conditions could result in an earlier maturity, including if, on the Maturity Trigger Date (45 days prior to the maturity date of the Notes (currently June 17, 2023)), (i) the maturity date of the Notes has not been extended past the date that is 91 days after the sixth anniversary of the closing date of the Term Loan Credit Agreement or (ii) the Notes have an aggregate principal amount outstanding of $10.0 million or more, in which case the Term Loan will terminate on the Maturity Trigger Date. As set forth in the Term Loan Credit Agreement, the Term Loan is secured by substantially all assets, other than those secured on a first lien basis by the 2022 ABL Credit Facility, and we may, subject to the terms and conditions in the Term Loan Credit Agreement, increase the Term Loan by an amount not to exceed $100.0 million.
The Term Loan bears interest through maturity at a variable rate based upon, at our option, an annual rate of either a base rate or a LIBOR rate, plus an applicable margin. The base rate is a fluctuating interest rate equal to the greater of (i) the federal funds rate plus 0.50%, (ii), the prime rate as specified in the Term Loan Credit Agreement, and (iii) one-month LIBOR rate plus 1.00%. The applicable margin is defined as a rate of 6.50% for base rate borrowings with a 2.00% base rate floor and 7.50% for LIBOR rate borrowings with a 1.00% LIBOR rate floor. Interest is payable either (i) monthly for Base rate borrowings or (ii) the last day of the interest period for LIBOR rate borrowings, as set forth in the Term Loan Credit Agreement. The Term Loan is prepayable in whole or in part, at any time and from time to time, subject to a prepayment premium (including a make whole during the first two years) specified in the Term Loan Credit Agreement (subject to certain exceptions), plus accrued and unpaid interest. The effective interest rate on the Term Loan as of December 31, 2022 and December 31, 2021 was 37.99% and 20.90%, respectively. As of December 31, 2022, the effective interest consisted of a 11.73% variable interest rate paid in cash and an additional 26.26% due to the acceleration of the amortization of the related debt issuance costs. As of December 31, 2021, the effective interest consisted of a 8.5% variable interest rate paid in cash and an additional 12.4% due to the acceleration of the amortization of the related debt issuance costs. The unamortized balances of debt discounts, warrant discount and debt issuance cost amounted to $3.9 million and $35.8 million at December 31, 2022 and December 31, 2021, respectively. Interest expense amounted to $21.8 million and $21.9 million for the years ended December 31, 2022 and 2021, respectively.
The Term Loan contains customary payment penalties, events of default and covenants, including but not limited to, covenants that restrict our ability to sell assets, make changes to the nature of our business, engage in mergers or acquisitions, incur additional indebtedness and guarantees, pay dividends, issue equity instruments and make distributions or redeem or repurchase capital stock.
On October 19, 2021, we entered into Amendment No. 1 to the Term Loan Credit Agreement (“Term Loan Amendment No. 1”) with the financial institutions party thereto from time to time (the “Lenders”) and APSC, as agent. Term Loan Amendment No. 1, among other things, (i) deferred an October 19, 2021 interest payment until October 29, 2021; (ii) required
that the Company use commercially reasonable efforts to appoint an additional independent director to our Board of Directors who is acceptable to the agent; (iii) provided the Lenders with additional information rights; and (iv) tightened certain negative covenants included in the Term Loan Credit Agreement until the deferred interest is made current.
On October 29, 2021, we entered into Amendment No. 2 to the Term Loan Credit Agreement (“Term Loan Amendment No. 2”) with the Lenders and APSC, as agent. Term Loan Amendment No. 2, among other things, (i) further deferred an October 29, 2021 interest payment until November 15, 2021; (ii) contained certain milestones; (iii) provided the Lenders with a ten-day right of first refusal regarding any refinancing of the Company’s obligations under the 2020 ABL Facility; (iv) obligated the Company to establish, pursuant to a charter to be adopted by the our Board of Directors and reasonably acceptable to the agent, a special committee that shall have exclusive responsibility and authority to make recommendations to our Board of Directors regarding certain transactions; and (v) provided that the Company will not permit a covenant trigger event under the 2020 ABL Facility to occur.
On November 8, 2021, we entered into Amendment No. 3 to the Term Loan Credit Agreement (“Term Loan Amendment No. 3”). Term Loan Amendment No. 3, among other things, (i) waived certain covenants until September 30, 2022 and modified covenants thereafter to provide us with more flexibility and (ii) required us to seek shareholder approval (or an exception therefrom) to issue additional warrants to APSC, providing for the purchase of an aggregate of 1,417,051 shares of our common stock (the “APSC Warrants”) at an exercise price of $1.50 per share, and to amend the warrants issued in December 2020 to APSC to purchase up to 3,582,949 shares of our common stock, which was initially exercisable at the holder’s option at any time, in whole or in part, until June 14, 2028, at an exercise price of $7.75 per share (the “Existing Warrant”), to provide for an exercise price of $1.50 per share. Following the Reverse Stock Split, the APSC Warrants provide for the purchase of up to 500,000 shares of our common stock at an exercise price of $15.00 per share. Term Loan Amendment No. 3 also reduced the required amount of principal outstanding on the Notes on the Maturity Trigger Date from $50.0 million to $10.0 million.
On December 2, 2021, and December 7, 2021, respectively, we entered into Amendment No. 4 to the Term Loan Credit Agreement (“Term Loan Amendment No. 4”) and Amendment No.5 to the Term Loan Credit Agreement (“Term Loan Amendment No. 5”), respectively. Term Loan Amendment No. 4 extended the date upon which the Company must issue the APSC Warrants to December 7, 2021, and Term Loan Amendment No. 5 extended the date upon which the Company must issue the APSC Warrants to December 8, 2021.
On February 11, 2022, we entered into Amendment No. 6 to the Term Loan Credit Agreement (“Term Loan Amendment No. 6”). Term Loan Amendment No. 6, among other things, (i) permitted the entry into the 2022 ABL Credit Agreement, (ii) permitted certain interest payments due under the Term Loan Credit Agreement to be paid in kind, (iii) permitted certain asset sales and required certain related mandatory prepayments, subject to an applicable prepayment premium, and (iv) amended the financial covenants such that the maximum net leverage ratio of 7.00 to 1.00 would not be tested until the fiscal quarter ending March 31, 2023, and the Company is not permitted to exceed $20.0 million in unfinanced capital expenditures in any calendar year; provided, that such unfinanced capital expenditures limitation will not apply if the Company maintains a net leverage ratio of less than or equal to 4.00 to 1.00 as of the end of the second and fourth fiscal quarter of each calendar year.
On May 6, 2022, we entered into Amendment No. 7 to the Term Loan Credit Agreement (“Term Loan Amendment No. 7”). Term Loan Amendment No. 7, among other things, (i) modified the Maturity Trigger Date (as defined in the Term Loan Credit Agreement) such that the date on which the maturity of the Term Loan Credit Agreement is triggered as a result of there being an aggregate principal amount of more than $10.0 million outstanding under the Notes is 75 days prior to the Notes maturity date instead of 120 days prior to their maturity date, and (ii) amended the financial covenants such that the maximum net leverage ratio to be tested for the fiscal quarter ending March 31, 2023 be increased from 7.00 to 1.00 to 12.00 to 1.00.
In connection with the Quest Integrity Transaction, on November 1, 2022, we, the guarantors party thereto, the lenders party thereto and APSC, as agent for the lenders and secured parties, entered into Amendment No. 8 to the Term Loan Credit Agreement (“Term Loan Amendment No. 8”) which, among other things, (i) modified mandatory prepayment requirements to allow us to retain up to $26.0 million of proceeds in connection with the Quest Integrity Transaction, subject to certain limitations, (ii) modified the Maturity Trigger Date such that the date on which the maturity of the Term Loan Credit Agreement is triggered as a result of there being an aggregate principal amount of more than $10.0 million outstanding under the Notes is 45 days prior to the maturity date of the Notes rather than 75 days, or June 17, 2023, and (iii) made certain modifications to negative covenants and mandatory prepayment provisions.
On November 2, 2022, we used the net proceeds from the sale of Quest Integrity to pay down $225.0 million of debt under the Term Loan Credit Agreement and to pay certain fees associated with such repayment and related accrued interest, which reduced the principal balance to $35.5 million, with the remaining proceeds reserved for general corporate purposes, thereby reducing our future debt service obligations and leverage and improving our liquidity. The transaction was treated as a partial debt extinguishment, and a loss in the amount of $30.1 million was recognized in the current income statement consisting of cash fees and premium paid in the amount of $12.4 million and the noncash write off of the related unamortized balance of deferred issuance cost and warrant and debt discounts in the amount of $17.7 million.
On November 4, 2022, we entered into Amendment No. 9 to the Term Loan Credit Agreement which amended the financial covenant to provide relief from the maximum net leverage ratio covenant thereunder such that it is not tested until the fiscal quarter ending June 30, 2023 and for each fiscal quarter thereafter at 7.00 to 1.00.
Subordinated Term Loan Credit Agreement
On November 9, 2021, we entered into a credit agreement (as amended by Corre Amendment 1, Corre Amendment 2, Corre Amendment 3, Corre Amendment 4, Corre Amendment 5, Corre Amendment 6, Corre Amendment 7, Corre Amendment 8, Corre Amendment 9, Corre Amendment 10 and Corre Amendment 11, and the related Springing Maturity Date (as defined below) provision (the “Subordinated Term Loan Credit Agreement”) with Corre Credit Fund, LLC (“Corre Fund”), as agent, and the lenders party thereto providing for an unsecured $50.0 million delayed draw subordinated term loan facility (the “Subordinated Term Loan”). Pursuant to the Subordinated Term Loan Credit Agreement, we borrowed $22.5 million on November 9, 2021, and an additional $27.5 million on December 8, 2021. The Subordinated Term Loan matures, and all outstanding amounts become due and payable, on the earlier of December 31, 2027 and the date that is two weeks following the maturity or full repayment of the Term Loan (the “Springing Maturity Date”). The stated interest rate on the Subordinated Term Loan is 12.00% which is payable in the form of paid-in-kind interest (“PIK Interest”). The effective interest rate as of December 31, 2022 and December 31, 2021 was 29.23% and 45.53%, respectively. As of December 31, 2022, the effective interest consisted of 12.00% stated interest and an additional 17.23% due to the acceleration of the amortization of the related debt issuance costs. At December 31, 2021, the effective interest consisted of the 12.00% stated interest and an additional 33.53% due to the acceleration of the amortization of the related debt issuance costs. The unamortized debt issuance cost amounted to $7.5 million and $13.9 million as of December 31, 2022 and December 31, 2021, respectively. Interest expense amounted to $11.4 million and $0.6 million for the years ended December 31, 2022 and 2021, respectively.
Under the Subordinated Term Loan Credit Agreement, we were required to, among other things, (i) subject to certain conditions, issue the lenders warrants (as defined below), (ii) amend our charter, bylaws, and all other necessary corporate governance documents to reduce the size of our Board of Directors to seven directors, one of whom included our Chief Executive Officer, and (iii) reconstitute our Board of Directors. The Subordinated Term Loan Credit Agreement also contained other customary prepayment provisions, events of default and covenants.
On November 30, 2021, we entered into Amendment No. 1 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 1”). Corre Amendment 1 (i) extended the payment date for interest in the form of PIK interest with respect to the Initial Term Loans (as defined in the Subordinated Term Loan Credit Agreement), (ii) extended the date upon which the Company must deliver a fully executed ABL Consent (as defined in the Subordinated Term Loan Credit Agreement) to, in each case, 11:59 P.M. on December 6, 2021 and (iii) extended the date upon which we must issue the Corre Warrants to 11:59 P.M. on December 7, 2021.
On December 6, 2021, we entered into Amendment No. 2 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 2”). Corre Amendment 2 (i) extended the payment date for interest in the form of PIK Interest with respect to the Initial Term Loans, and (ii) extended the date upon which we must deliver a fully executed ABL Consent to, in each case, 11:59 P.M. on December 7, 2021.
On December 7, 2021, we entered into Amendment No. 3 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 3”). Corre Amendment 3, among other things, (i) extended the payment date for interest in the form of PIK Interest with respect to the Initial Term Loans, (ii) extended the date upon which we must deliver a fully executed ABL Consent and (iii) extended the date upon which we must issue the Corre Warrants to, in each case, 11:59 P.M. on December 8, 2021.
On December 8, 2021, we entered into Amendment No. 4 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 4”). Corre Amendment 4 appointed Cantor Fitzgerald Securities as successor agent.
In connection with the transactions contemplated by the 2022 ABL Credit Agreement on February 11, 2022, Corre, agreed to provide the Company with incremental financing (the “Incremental Financing”), totaling approximately $55.0 million, consisting of (i) a $35.0 million Delayed Draw Term Loan under the 2022 ABL Credit Facility; (ii) $10.0 million from Corre in the form of the February 2022 Delayed Draw Term Loan (as defined in the Subordinated Term Loan Credit Agreement) on a pari passu basis with the existing loans issued pursuant to the Subordinated Term Loan Credit Agreement; and (iii) $10.0 million through the purchase of 11,904,762 PIPE Shares (the “PIPE Shares”) of our common stock to Corre
Opportunities Qualified Master Fund, LP, Corre Horizon Fund, LP and Corre Horizon II Fund, LP (collectively, the “Corre Holders”) at a price of $0.84 per share (the “Equity Issuance”). The business purpose of the Corre Amendments was to further extend the liquidity runway of the Company and support ongoing negotiations of the financing transactions completed on February 11, 2022.
On February 11, 2022, we entered into Amendment No. 5 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 5”) with the lenders from time to time party thereto (including Corre), and Cantor Fitzgerald Securities, as agent. Corre Amendment 5, which among other things, (i) provided for an additional commitment of $10.0 million in subordinated delayed draw term loans to be available for borrowing by the Company until July 1, 2022, (ii) permitted entry into the 2022 ABL Credit Facility, (iii) permitted certain asset sales and required certain related mandatory prepayments, subject to an applicable prepayment premium, and (iv) amended the financial covenants, such that the maximum net leverage ratio of 7.00 to 1.00 will not be tested until the fiscal quarter ending March 31, 2023, and the Company is not permitted to exceed $20.0 million in unfinanced capital expenditures in any calendar year; provided, that these unfinanced capital expenditures requirement will not apply if the Company maintains a net leverage ratio of less than or equal to 4.00 to 1.00 as of the end of the second and fourth fiscal quarter of each calendar year.
On May 6, 2022, we entered into Amendment No. 6 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 6”) with the lenders from time to time party thereto (including Corre), and Cantor Fitzgerald Securities, as agent. Corre Amendment 6, among other things, amended the financial covenants, such that the maximum net leverage ratio to be tested for the fiscal quarter ending March 31, 2023 will be increased from 7.00 to 1.00 to 12.00 to 1.00.
On June 28, 2022, we entered into Amendment No. 7 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 7”) with the lenders from time to time party thereto (including Corre), and Cantor Fitzgerald Securities, as agent, that, among other things, extended the availability date for the additional commitment of $10.0 million in subordinated delayed draw term loans from July 1, 2022 to October 31, 2022.
On October 4, 2022, we entered into Corre Amendment No. 8 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 8”) with the lenders from time to time party thereto (including Corre), and Cantor Fitzgerald Securities, as agent, that among other things, (i) increased the total principal amount outstanding under the Subordinated Term Loan Credit Agreement to approximately $112.7 million to give effect to the exchange of their convertible debt and (ii) extended the availability date for the additional commitment of $10.0 million in subordinated delayed draw term loans from October 31, 2022 to December 31, 2022. See Convertible Debt below for impact of the amendment to the Notes outstanding.
On November 1, 2022, we entered into Amendment No. 9 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 9”) with the guarantors party thereto, the lenders from time to time party thereto and Cantor Fitzgerald Securities, as agent. Corre Amendment 9, among other things, (i) modified the mandatory prepayment requirements to allow us to retain up to $26.0 million of proceeds in connection with the Quest Integrity Transaction, subject to certain limitations and (ii) made certain modifications to negative covenants and mandatory prepayment provisions.
On November 4, 2022, we entered into Corre Amendment No. 10 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 10”) with the lenders from time to time party thereto (including Corre), and Cantor Fitzgerald Securities, as agent, which amended the financial covenant to provide relief from the maximum net leverage ratio covenant thereunder such that it is not tested until the fiscal quarter ending June 30, 2023 and for each fiscal quarter thereafter at 7.00 to 1.00.
On November 21, 2022, we entered into Amendment No. 11 to the Subordinated Term Loan Credit Agreement (“Corre Amendment 11”) with the lenders from time to time party thereto (including Corre), and Cantor Fitzgerald Securities, as agent. Corre Amendment 11 amended the Subordinated Term Loan Credit Agreement to, inter alia, (i) extend the stated maturity date from December 31, 2026 to December 31, 2027 (subject to the Springing Maturity Date), (ii) extend the availability date for the additional commitment of $10.0 million in Subordinated delayed draw term loans to the end of March 31, 2023 rather than December 31, 2022 and (iii) create a new tranche of term loans representing the increased principal amount of unsecured term loans (which loans are not subject to the springing maturity of 14 days after payment in full of the Term Loan created in connection with the exchange of the Notes pursuant to the Exchange Agreement (as defined below) dated as of October 4, 2022, by and among the Company and certain holders of the Notes. There was no increase in the aggregate amount outstanding under the Subordinated Term Loan as a result of Corre Amendment 11.
Warrants
As of December 31, 2022 and 2021, we held the following warrants:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Original | | After Reverse Stock Split (Effective date December 22, 2023) |
| Holder | Date | Number of shares | Exercise price | Expiration date | | Number of shares | Exercise price | Total value of stock | Expiration date |
| APSC Holdco II, LP | | | | | | | | | |
| Original | 12/18/2020 | 3,582,949 | $ | 7.75 | | 6/14/2028 | | | | | |
| Amended | 11/9/2021 | 500,000 | $ | 1.50 | | 6/14/2028 | | | | | |
| Amended | 12/8/2021 | 917,051 | $ | 1.50 | | 12/8/2028 | | | | | |
| Total APSC | | 5,000,000 | $ | 1.50 | | 12/8/2028 | | 500,000 | $ | 15.00 | | $ | 7,500,000 | | 12/8/2028 |
| | | | | | | | | |
| Corre | 12/8/2021 | 5,000,000 | $ | 1.50 | | 12/8/2028 | | 500,000 | $ | 15.00 | | $ | 7,500,000 | | 12/8/2028 |
| | | | | | | | | |
| Total warrants | | 10,000,000 | | | | 1,000,000 | | $ | 15,000,000 | | |
On December 18, 2020, in connection with the execution of the Term Loan Credit Agreement, we issued to APSC warrants to purchase up to 3,582,949 shares of our common stock, which were initially exercisable at the holder’s option at any time, in whole or in part, until June 14, 2028, at an exercise price of $7.75 per share.
In connection with execution of the Subordinated Term Loan Credit Agreement and Term Loan Amendment No. 3, on November 9, 2021, we entered into an Amended and Restated Common Stock Purchase Warrant (the “A&R Warrant”) with APSC Holdco II, L.P. (“APSC Holdco”) pursuant to which the Existing Warrant was amended and restated to provide for the purchase of up to 4,082,949 shares of our common stock and to reduce the exercise price to $1.50 per share.
In connection with execution of the Subordinated Term Loan Credit Agreement and the amendments to the Term Loan Credit Agreement, on December 8, 2021 we entered into (i) the Second Amended and Restated Common Stock Purchase Warrant No. 1 (the “Second A&R Warrant”) with APSC Holdco, pursuant to which the A&R Warrant was amended and restated to provide for the purchase of up to 5,000,000 shares of our common stock (including 4,082,949 shares of Common Stock issuable pursuant to the A&R Warrant) exercisable at the holder’s option at any time, in whole or in part, until December 8, 2028, at an exercise price of $1.50 per share, and (ii) the Common Stock Purchase Warrants (collectively, the “Corre Warrants” and, together with the Second A&R Warrant, the “Warrants”) with each of Corre Opportunities Qualified Master Fund, LP, Corre Horizon Fund, LP and Corre Horizon Fund II, LP providing for the purchase of an aggregate of 5,000,000 shares of our common stock, exercisable at such holder’s option at any time, in whole or in part, until December 8, 2028, at an exercise price of $1.50 per share.
Following the Reverse Stock Split, the Warrants provide for the purchase of up to 1,000,000 shares of our common stock at an exercise price of $15.00 per share.
The exercise price and the number of shares of our common stock issuable on exercise of the Warrants are subject to certain antidilution adjustments, including for stock dividends, stock splits, reclassifications, noncash distributions, cash dividends, certain equity issuances and business combination transactions.
In connection with the Subscription Agreement (as defined below), on February 11, 2022, the Company, the Corre Holders and APSC Holdco entered into those certain Team, Inc. Waivers of Anti-Dilution Adjustments and Cash Transaction Exercise (collectively, the “Warrant Waivers”) with respect to each of the Warrants. Pursuant to the Warrant Waivers, the Corre Holders and APSC Holdco agreed with respect to such holders’ Warrant, subject to certain terms and conditions set forth therein (and for only so long as the applicable provisions remain in effect), among other things, (i) to irrevocably waive certain anti-dilution adjustments set forth in such Warrant in connection with the Proposed Equity Financing (as defined in the Warrant Waivers); (ii) to not exercise such Warrant, in whole or in part, if the Company determines that such exercise will cause an ownership change within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (assuming, among other things, that the ownership change threshold is 47% rather than 50%); and (iii) to only exercise such Warrant in a “cashless” or “net-issue” exercise.
Subscription Agreement
In connection with the Incremental Financing and Equity Issuance (referred above), on February 11, 2022, we entered into a common stock subscription agreement (the “Subscription Agreement”) with the Corre Holders, pursuant to which the Company issued and sold the PIPE Shares to the Corre Holders on February 11, 2022.
In accordance with, and subject to the terms and conditions of the Subscription Agreement, the Board was required to create a vacancy for one qualified nominee of the Corre Holders to the Board, who shall be designated by the Corre Holders and qualify as an independent director (a “Board Nominee”), and the Board is required to appoint such initial Board Nominee as a Class II director within seven business days of the date of the Subscription Agreement. This nominee has been appointed to the Board and this condition will remain active as long as the Subscription Agreement remains outstanding.
For so long as the Corre Holders and their affiliates collectively beneficially own at least 10% of the outstanding shares of our common stock, pursuant to and subject to the terms and conditions of the Subscription Agreement, we will nominate the initial Board Nominee, or a successor Board Nominee chosen by the Corre Holders, for re-election as a Class II director at the first annual meeting of the Company’s stockholders to be held after the Equity Issuance and at the end of each subsequent term of such Board Nominee. If at any time, the Corre Holders and their affiliates beneficially own less than 10% of the outstanding shares of common stock, then, if requested by the Company, the Board Nominee then on the Board will resign from his or her directorship, effective as of our next annual meeting of stockholders or such earlier date reasonably requested by the Company.
Convertible Debt
Description of the Notes
On July 31, 2017, we issued $230.0 million principal amount of senior unsecured 5.00% Convertible Senior Notes (the “Notes”) due 2023 in a private offering to qualified institutional buyers (as defined in the Securities Act of 1933) pursuant to Rule 144A under the Securities Act (the “Offering”).
The Notes bear interest at a rate of 5.0% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2018. The Notes mature on August 1, 2023 unless repurchased, redeemed or converted in accordance with their terms prior to such date. As a result of the Reverse Stock Split, the Notes are convertible at a conversion rate of 4.6083 shares of our common stock per $1,000 principal amount of the Notes, which is equivalent to a conversion price of approximately $217.00 per share. The conversion rate, and thus the conversion price, may be further adjusted under certain circumstances as described in the indenture governing the Notes. Pursuant to the Exchange Agreement, the Company agreed to exchange approximately $57.0 million of aggregate principal amount, plus accrued and unpaid PIK Interest, of the Notes beneficially owned by the Exchanging Holders (as defined below) for an equivalent increased principal amount of term loans under the Subordinated Term Loan Credit Agreement. Following the closing of the Exchange Agreement and Corre Amendment No. 8, the Company has approximately $41.2 million in aggregate principal amount of Notes outstanding, which pay interest at a rate of 5.00% per annum entirely in cash.
Holders may convert their Notes at their option prior to the close of business on the business day immediately preceding May 1, 2023, but only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on December 31, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such trading day;
•if we call any or all of the Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or;
•upon the occurrence of specified corporate events described in the indenture governing the Notes.
On or after May 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders may, at their option, convert their Notes at any time, regardless of the foregoing circumstances.
The Notes were initially convertible into 10,599,067 shares of pre-Reverse Split common shares. Previously, because the Notes could be convertible in full into more than 19.99% of our outstanding common stock, we were required by the listing
rules of the NYSE to obtain shareholder approval before the Notes could be converted. At our annual shareholders’ meeting, held on May 17, 2018, our shareholders approved the issuance of shares of common stock upon conversion of the Notes.
As a result of the redemption and extinguishment of the Notes discussed below, the execution of the Exchange Agreement described below as well as the Reverse Stock Split, the Notes are currently convertible into 189,682 shares of common stock. The Notes will be convertible into, subject to various conditions, cash or shares of our common stock or a combination of cash and shares of our common stock, in each case, at our election.
If holders elect to convert the Notes in connection with certain fundamental change transactions described in the Notes indenture, we will, under certain circumstances described in the Notes indenture increase the conversion rate for the Notes so surrendered for conversion.
The indenture governing the Notes provides that we have the option to redeem all or any portion of the Notes since August 5, 2021, if certain conditions are met (including that our common stock is trading at or above 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption) at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Net proceeds received from the Offering were approximately $222.3 million after deducting discounts, commissions and expenses and were used to repay outstanding borrowings under the previous Credit Facility.
On January 13, 2022, we entered into a supplemental indenture (the “Supplemental Indenture”) with Truist Bank, as trustee, to the indenture governing the Notes (the “Indenture”) to effect certain amendments (the “Amendments”) to the Indenture and to modify the Notes held by consenting holders (the “Consenting Holders”) of $52.0 million in aggregate principal amount of the Notes (such modified Notes, the “PIK Securities”).
The Supplemental Indenture amended the Indenture to, among other things: (i) allow for interest payable on the PIK Securities on February 1, 2022 to be paid in PIK Interest (as defined in the Supplemental Indenture) and on subsequent interest payment dates to be payable, at the Company’s option, at a rate of 5.00% per annum entirely in cash or at a rate of 8.00% per annum in PIK Interest; (ii) provide for additional changes to the Indenture to allow for the payment of PIK Interest and for the PIK Securities to be issued in denominations of $1,000 and integral multiples thereof (or if PIK Interest has been paid with respect to the PIK Securities, in minimum denominations of $1.00 and integral multiples of $1.00 in excess thereof); (iii) clarify that the unmodified Notes and PIK Securities will be treated as a single series of Notes for all purposes under the Indenture, other than the option of the Company to pay PIK Interest on the PIK Securities; and (iv) make certain conforming changes, including conforming modifications to certain definitions and cross-references as a result of such amendments. Notes held by holders other than the Consenting Holders were not modified and interest on such Notes will continue to be paid in cash at a rate of 5.00% per annum as set forth in the Indenture.
On October 4, 2022, we entered into an exchange agreement (the “Exchange Agreement”) by and among us and certain holders (collectively, the “Exchanging Holders”) of the PIK Securities.
Pursuant to the Exchange Agreement, we agreed to exchange approximately $57.0 million of aggregate principal amount, plus accrued and unpaid PIK Interest, of PIK Securities beneficially owned by the Exchanging Holders for an equivalent increased principal amount of term loans (the “New Term Loans”) under the Subordinated Term Loan Credit Agreement. Following the closing of the Exchange Agreement and Corre Amendment 8 to the Subordinated Term Loan Credit Agreement, we had approximately $41.2 million in aggregate principal amount of Notes outstanding, which pay interest at a rate of 5.00% per annum entirely in cash. The exchange of the Notes into the New Term Loans was treated as debt modification and the unamortized balance of debt issuance and discount in the amount of $1.4 million was added to the modified debt and is amortized over the term of the Term Loan using the new effective interest rate.
Accounting Treatment of the Notes
As of December 31, 2022 and 2021, the Notes were recorded in our consolidated balance sheet as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Liability component: | | | |
| Principal | $ | 41,162 | | | $ | 93,130 | |
| Unamortized issuance costs | (377) | | | (916) | |
| Unamortized discount | (135) | | | (4,552) | |
Net carrying amount of the liability component1 | $ | 40,650 | | | $ | 87,662 | |
| | | |
Equity component: | | | |
Carrying amount of the equity component, net of issuance costs2 | $ | — | | | $ | 7,969 | |
Carrying amount of the equity component, net of issuance costs3 | $ | 37,276 | | | $ | 37,276 | |
_________________
1 Included in the “Current portion of long-term debt and finance lease obligations” line of the consolidated balance sheets.
2 Relates to the portion of the Notes accounted for under ASC 470-20 (defined below) and is included in the “Additional paid-in capital” line of the consolidated balance sheets.
3 Relates to the portion of the Notes accounted for under ASC 815-15 (defined below) and is included in the “Additional paid-in capital” line of the consolidated balance sheets.
Under ASC 470-20, Debt with Conversion and Other Options, (“ASC 470-20”), an entity must separately account for the liability and equity components of convertible debt instruments that may be settled entirely or partially in cash upon conversion (such as the Notes) in a manner that reflects the issuer’s economic interest cost. However, entities must first consider the guidance in ASC 815-15, Embedded Derivatives (“ASC 815-15”), to determine if an instrument contains an embedded feature that should be separately accounted for as a derivative.
The following table sets forth interest expense information related to the Notes (dollars in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Coupon interest | $ | 5,700 | | | $ | 4,657 | |
| Amortization of debt discount and issuance costs | 2,405 | | | 3,129 | |
| Total interest expense | $ | 8,105 | | | $ | 7,786 | |
| | | |
| Effective interest rate | 7.84 | % | | 9.12 | % |
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. ASU 2020-06 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. ASU 2020-06 updates the guidance on certain embedded conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital, such that those features are no longer required to be separated from the host contract. The convertible debt instruments will be accounted for as a single liability measured at amortized cost. This will also result in the interest expense recognized for convertible debt instruments to be typically closer to the coupon interest rate when applying the guidance in Topic 835, Interest. Further, ASU 2020-06 made amendments to the EPS guidance in Topic 260 for convertible debt instruments, the most significant impact of which is requiring the use of the if-converted method for diluted EPS calculation, and no longer allowing the net share settlement method. ASU 2020-06 also made revisions to Topic 815-40, which provides guidance on how an entity must determine whether a contract qualifies for a scope exception from derivative accounting. The amendments to Topic 815-40 change the scope of contracts that are recognized as assets or liabilities. ASU 2020-06 is effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted for periods beginning after December 15, 2020. Adoption of ASU 2020-06 can either be on a modified retrospective or full retrospective basis. On January 1, 2022, we adopted ASU 2020-06 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 consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods.
Accordingly, the cumulative effect of the changes made on our January 1, 2022 consolidated balance sheet for the adoption of ASU 2020-06 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Balances as of December 31, 2021 | | Adjustments from Adoption of ASU 2020-06 | | Balances at January 1, 2022 |
| Liabilities | | | | | | |
| Long-term debt and finance lease obligations | | $ | 405,191 | | | $ | 1,827 | | | $ | 407,018 | |
| Equity | | | | | | |
| Additional paid-in capital | | $ | 453,247 | | | $ | (5,651) | | | $ | 447,596 | |
| Accumulated deficit | | $ | (375,584) | | | $ | 3,824 | | | $ | (371,760) | |
The impact of adoption on our consolidated statements of operations for the year ended December 31, 2022 was primarily to decrease net interest expense by $1.3 million. This had the effect of decreasing our basic and diluted net loss per share of common stock attributable to common stockholders for the year ended December 31, 2022 by $0.31. The change in methodology by requiring the use of the if-converted method to determine the denominator used in the calculation of diluted net income per share of common stock attributable to common stockholders did not have an impact on the diluted EPS as the shares of common stock issuable upon conversion were not included in the denominator because of the antidilutive effect.
1970 Group Substitute Insurance Reimbursement Facility
On September 29, 2022, we entered into the Substitute Insurance Reimbursement Facility Agreement with the 1970 Group (the “Substitute Insurance Reimbursement Facility Agreement”). Under this agreement, the 1970 Group extended us credit in the form of a substitute reimbursement facility (the “Substitute Reimbursement Facility”) to provide up to approximately $21.4 million of letters of credit on our behalf in support of our workers’ compensation, commercial automotive and general liability insurance carriers for workers’ compensation, commercial automotive and/or general liability policies (the “Insurance Policies”).
Under the Substitute Insurance Reimbursement Facility Agreement, 1970 Group arranged for the issuance of letters of credit from financial institutions approved by the National Association of Insurance Commissioners. Such letters of credit arranged by the 1970 Group permit the return of certain existing letters of credit for our account that are outstanding for the purpose of supporting the Insurance Policies and that are required to be collateralized, thereby providing us increased liquidity in the amount of approximately $21.3 million. Under the Substitute Insurance Reimbursement Facility Agreement, we are required to reimburse the 1970 Group for any draws made under the letters of credit within five business days of notice of any such draw. The Substitute Insurance Reimbursement Facility Agreement terminates upon the earlier of (i) the expiration or termination of our Insurance Policies or (ii) September 29, 2023. This arrangement replaced certain existing letters of credit which allowed us to release $16.3 million out of a total of $25.7 million of restricted cash previously held as collateral for the replaced letters of credit as well as reduced the outstanding letters of credit under the 2022 ABL Credit Facility by $5.0 million thereby improving our liquidity.
The Agreement contained certain affirmative covenants, including for us to keep and maintain our Insurance Policies for the compliance in all material respects with applicable requirements. The Agreement contains certain events of default, including, without limitation, our Company’s failure to reimburse 1970 Group for any draw or other financial obligation or our payment of 1970 Group’s fees. Upon an event of default, 1970 Group has the option to declare all outstanding obligations immediately due within five (5) business days after our receipt of such notice from 1970 Group. Our obligations under the Agreement are not guaranteed by any of our subsidiaries, are unsecured and are subordinated to our obligations to each of the lenders under each of (1) the Term Loan Credit Agreement, (2) the 2022 ABL Credit Agreement, and (3) the Subordinated Term Loan Credit Agreement.
According to the provisions of ASC 470 – Debt, the arrangement is a Substitute Insurance Reimbursement Facility limited to the amounts drawn under the letters of credit. Therefore, until we use or draw on the Substitute Insurance Reimbursement Facility, the letters of credit are treated as an off-balance sheet credit arrangement. The fees in the amount of $2.9 million paid by us are deferred and amortized over the term of the arrangement. As of December 31, 2022, the unamortized balance in the amount of $1.8 million is included in other current assets.
Deferred Financing Costs, Debt and Warrant Discounts and Debt Issuance Cost
As referenced above, all debt with original maturities greater than one year are classified as current as of December 31, 2022 due to the Trigger Date and the Maturity Reserve Trigger Date (as defined in the 2022 ABL Credit Agreement) provisions.
As of December 31, 2022 and December 31, 2021, capitalized deferred financing costs, inclusive of debt issuance costs and discounts, net of accumulated amortization, related to our outstanding debt were $15.1 million and $58.0 million, respectively. Due to the Trigger Date and the Maturity Reserve Trigger Date (as defined in the 2022 ABL Credit Agreement) provisions, the amortization period for deferred financing costs, debt and warrant discounts and debt issuance costs was updated to reflect the potential accelerated maturity dates. This resulted in additional amortization charges of $21.8 million during the twelve months ended December 31, 2022. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion.
Loss on Debt Extinguishment
Loss on debt extinguishment for the year ended December 31, 2022 represents a loss on partial payoff of the Term Loan in the amount of $30.1 million and consists of cash fees and premium in the amount of $12.4 million and non-cash write off of unamortized balance of deferred issuance cost and warrant and debt discounts in the amount of $17.7 million.
Liquidity
As of December 31, 2022, we had $51.1 million of unrestricted cash and cash equivalents and $7.0 million of restricted cash including $4.6 million of restricted cash held as collateral for letters of credit and commercial card programs. International cash balances as of December 31, 2022 were $16.3 million, and approximately $1.4 million of such cash is located in countries where currency restrictions exist. As of December 31, 2022, we had approximately $52.4 million of availability in additional borrowing capacity consisting of $42.4 million available under the Revolving Credit Loans and $10.0 million available under the Corre Delayed Draw Term Loan. We have $33.3 million in letters of credit issued domestically. Internationally, we have letters of credit outstanding in the amount of $0.3 million. Additionally, we have $1.6 million in surety bonds outstanding and an additional $0.5 million in miscellaneous cash deposits securing leases or other required obligations. Our cash and cash equivalents as of December 31, 2021 totaled $55.2 million, of which $4.1 million was restricted for interest due on the Term Loan. Additionally, $14.2 million of the $55.2 million of cash and cash equivalents was in foreign accounts, primarily in Europe, Canada and Australia including $2.4 million of cash located in countries where currency restrictions exist. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion.
13. LEASES
We adopted ASC 842 effective January 1, 2019 and elected the modified retrospective transition method. We determine if an arrangement is a lease at inception. Operating leases are included in “Operating lease right-of-use (‘ROU’) assets”, “operating lease liabilities” and “current portion of operating lease obligations” on our consolidated balance sheets. Finance leases are included in “property, plant and equipment, net”, “current portion of long-term debt and finance lease obligations” and “long-term debt and finance lease obligations” on our consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments and short-term lease payments (leases with initial terms less than twelve months) are expensed as incurred.
We have lease agreements with lease and non-lease components for certain equipment, office, and vehicle leases. We have elected the practical expedient to not separate lease and non-lease components and account for both as a single lease component.
We have operating and finance leases primarily for equipment, real estate, and vehicles. Our leases have remaining lease terms of 1 year to 14 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year.
The components of lease expense are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Operating lease costs | $ | 25,116 | | | $ | 27,773 | |
| Variable lease costs | 5,346 | | | 5,546 | |
| Finance lease costs: | | | |
| Amortization of right-of-use assets | 765 | | | 666 | |
| Interest on lease liabilities | 421 | | | 344 | |
| Total lease cost | $ | 31,648 | | | $ | 34,329 | |
| Lease cost - discontinued operations | $ | 841 | | | $ | 1,656 | |
| Lease cost - continuing operations | $ | 30,807 | | | $ | 32,673 | |
Other information related to leases are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Supplemental cash flow information: | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | |
| Operating cash flows from operating leases | $ | 19,032 | | | $ | 16,856 | |
| Operating cash flows from finance leases | 316 | | | 345 | |
| Financing cash flows from finance leases | 885 | | | 515 | |
| Right-of-use assets obtained in exchange for lease obligations | | | |
| Operating leases | $ | 3,455 | | | $ | 8,008 | |
| Finance leases | $ | 1,270 | | | $ | 1,011 | |
Amounts recognized in the consolidated balance sheet are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Operating Leases: | | | |
| Operating lease right-of-use assets | $ | 48,462 | | | $ | 58,495 | |
| Current portion of operating lease obligations | 13,823 | | | 15,412 | |
| Operating lease obligations (non-current) | 38,819 | | | 47,617 | |
| | | |
| Finance Leases: | | | |
| Property, plant and equipment, net | $ | 5,107 | | | $ | 5,114 | |
| Current portion of long-term debt and finance lease obligations | 960 | | | 667 | |
| Long-term debt and finance lease obligations | 4,942 | | | 4,973 | |
| | | |
| Weighted average remaining lease term | | | |
| Operating leases | 6 years | | 6 years |
| Finance leases | 9 years | | 10 years |
| Weighted average discount rate | | | |
| Operating leases | 7.5 | % | | 6.8 | % |
| Finance lease | 7.3 | % | | 6.4 | % |
As of December 31, 2022, we have no material additional operating and finance leases that have not yet commenced.
As of December 31, 2022, future minimum lease payments under non-cancellable (excluding short-term leases) are as follows (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended December 31, | Operating Leases | | Finance Leases |
| 2023 | $ | 14,228 | | | $ | 1,179 | |
| 2024 | 11,893 | | | 954 | |
| 2025 | 8,761 | | | 686 | |
| 2026 | 6,527 | | | 586 | |
| 2027 | 5,480 | | | 543 | |
| Thereafter | 11,318 | | | 3,376 | |
| Total future minimum lease payments | $ | 58,207 | | | $ | 7,324 | |
| Less: Interest | 5,565 | | | 1,422 | |
| Present value of lease liabilities | $ | 52,642 | | | $ | 5,902 | |
Total rent expense resulting from operating leases, including short-term leases, for the years ended December 31, 2022 and 2021 were $37.3 million, $39.4 million, respectively.
14. SHARE-BASED COMPENSATION
We have adopted stock incentive plans and other arrangements pursuant to which our Board of Directors may grant stock options, restricted stock, stock units, stock appreciation rights, common stock or performance awards to officers, directors and key employees. As of December 31, 2022, there were approximately 103,274 restricted stock units, performance awards and stock options outstanding to officers, directors and key employees. The exercise price, terms and other conditions applicable to each form of share-based compensation under our plans are generally determined by the Compensation Committee of our Board at the time of grant and may vary.
In May 2021, our shareholders approved the amendment and restatement to the 2018 Team, Inc. Equity Incentive Plan (the “2018 Plan”). The 2018 Plan replaced the 2016 Team, Inc. Equity Incentive Plan. The amendment and restatement to the 2018 Plan increased the shares available for issuance by 3.0 million shares of Common Stock, before the reverse stock split discussed below. Shares issued in connection with our share-based compensation are issued out of authorized but unissued common stock.
On December 21, 2022, we completed a reverse stock split of our outstanding common stock at a ratio of one-for-ten. The Reverse Stock Split effected a proportionate reduction in shares available for issuance under our 2018 Plan. We have made proportionate adjustments to the number of stock units outstanding and issuable upon exercise or vesting of our outstanding awards as well as the applicable exercise prices and weighted average fair value. No fractional shares were issued in connection with the Reverse Stock Split.
Compensation expense related to share-based compensation totaled $0.2 million and $7.0 million for the years ended December 31, 2022 and 2021, respectively. Share-based compensation expense reflects an estimate of expected forfeitures. As of December 31, 2022, $1.4 million of unrecognized compensation expense related to share-based compensation is expected to be recognized over a remaining weighted-average period of 1.4 years. The recognized income tax benefit totaled $0.0 million and $0.7 million for the years ended December 31, 2022 and 2021, respectively.
Stock units are settled with common stock upon vesting unless it is not legally feasible to issue shares, in which case the value of the award is settled in cash. We determine the fair value of each stock unit based on the market price on the date of grant. Stock units generally vest in annual installments over three or four years and the expense associated with the units is recognized over the same vesting period. We also grant common stock to our directors which typically vests immediately. Compensation expense related to stock units and director stock grants totaled $1.5 million and $4.4 million for the years ended December 31, 2022 and 2021, respectively.
Transactions involving our stock units and director stock grants for the twelve months ended December 31, 2022 are summarized below:
| | | | | | | | | | | |
| Twelve Months Ended
December 31, 2022 |
| | No. of Stock
Units | | Weighted
Average
Fair Value |
| | (in thousands) | | |
| Stock and stock units, beginning of year | 80 | | | $ | 73.06 | |
| Changes during the year: | | | |
| Granted | 79 | | | $ | 8.56 | |
| | | |
| Vested and settled | (42) | | | $ | 80.51 | |
| Cancelled | (19) | | | $ | 66.86 | |
| Stock and stock units, end of year | 98 | | | $ | 19.55 | |
The intrinsic value of stock units and director stock grants vested during the years ended December 31, 2022 and 2021 was $0.5 million and $1.2 million, respectively.
We have a performance stock unit award program whereby we grant Long-Term Performance Stock Unit (“LTPSU”) awards to our executive officers. Under this program, we communicate “target awards” to the executive officers during the first year of a performance period. LTPSU awards cliff vest with the achievement of the performance goals and completion of the required service period. Settlement occurs with common stock as soon as practicable following the vesting date. LTPSU awards granted in 2020 (the “2020 Awards”) and in 2021 (the “2021 Awards”) are subject to a two-year performance period and a concurrent two-year service period. There were no LTPSU awards granted during 2022. For the LTPSU awards, the performance goal is separated into two independent performance factors based on (i) relative shareholder return (“RTSR”) as measured against a designated peer group and (ii) results of operations over the two-year performance period, with possible payouts ranging from 0% to 200% of the target awards for each of the two performance factors. The 2020 Awards vested as of March 15, 2021 at the RTSR performance target level of 25% and the results of operations performance metric at 0% of the target level.
The RTSR and the stock price milestone factors are considered to be market conditions under GAAP. For performance units subject to market conditions, we determine the fair value of the performance units based on the results of a Monte Carlo simulation, which uses market-based inputs as of the date of grant to simulate future stock returns. Compensation expense for awards with market conditions is recognized on a straight-line basis over the longer of (i) the minimum required service period and (ii) the service period derived from the Monte Carlo simulation, separately for each vesting tranche. For performance units subject to market conditions, because the expected outcome is incorporated into the grant date fair value through the Monte Carlo simulation, compensation expense is not subsequently adjusted for changes in the expected or actual performance outcome. For performance units not subject to market conditions, we determine the fair value of each performance unit based on the market price of our common stock on the date of grant. For these awards, we recognize compensation expense over the vesting term on a straight-line basis based upon the performance target that is probable of being met, subject to adjustment for changes in the expected or actual performance outcome. For performance awards, we recorded income of $1.3 million and expense of $2.6 million for the years ended December 31, 2022 and 2021, respectively.
Transactions involving our performance awards during the twelve months ended December 31, 2022 are summarized below: | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended
December 31, 2022 |
| Performance Units Subject to Market Conditions | | Performance Units Not Subject to Market Conditions |
| | No. of Stock Units1 | | Weighted
Average
Fair Value | | No. of Stock Units1 | | Weighted
Average
Fair Value |
| | (in thousands) | | | | (in thousands) | | |
| Performance stock units, beginning of period | 68 | | | $ | 64.88 | | | 22 | | | $ | 98.65 | |
| Changes during the period: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Cancelled and forfeited | (66) | | | $ | 62.08 | | | (20) | | | $ | 96.23 | |
| Performance stock units, end of period | 2 | | | $ | 149.60 | | | 2 | | | $ | 116.90 | |
__________________________ 1 Performance units with variable payouts are shown at target level of performance.
The intrinsic value of performance stock unit awards vested during the year ended December 31, 2021 was $0.3 million. There were no performance stock units vested during the year ended December 31, 2022.
We determine the fair value of each stock option at the grant date using a Black-Scholes model and recognize the resulting expense of our stock option awards over the period during which an employee is required to provide services in exchange for the awards, usually the vesting period. There was no compensation expense related to stock options for the years ended December 31, 2022 and 2021. Our options typically vest in equal annual installments over a four-year service period. Expense related to an option grant is recognized on a straight-line basis over the specified vesting period for those options. Stock options generally have a ten-year term.
Transactions involving our stock options for the twelve months ended December 31, 2022 are summarized below:
| | | | | | | | | | | |
| Twelve Months Ended
December 31, 2022 |
| | No. of
Options | | Weighted
Average
Exercise Price |
| | (in thousands) | | |
| Shares under option, beginning of year | 2 | | | $ | 316.80 | |
| Changes during the year: | | | |
| | | |
| | | |
| | | |
| | | |
| Expired | (1) | | | $ | (277.13) | |
| Shares under option, end of year | 1 | | | $ | 356.03 | |
| Exercisable at end of year | 1 | | | $ | 356.03 | |
No stock options were granted during the years ended December 31, 2022 and 2021. Options exercisable as of December 31, 2022 had a weighted-average remaining contractual life of 0.6 years, and exercise prices ranging from $320.50 to $504.70. There were no stock option awards exercised during the years ended December 31, 2022 and 2021.
15. STOCKHOLDERS’ EQUITY
Shareholder’s Equity and Preferred Stock
On December 21, 2022, we completed a reverse stock split of our outstanding common stock at a ratio of one-for-ten. The Reverse Stock Split effected a proportionate reduction in our 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 approximately 43,429,089 shares to approximately 4,342,909 shares. We have made proportionate adjustments to the number of common shares issuable upon exercise or conversion of our outstanding warrants, equity awards and convertible securities, as well as the applicable exercise prices and weighted average fair value of the equity awards. No fractional shares were issued in connection with the Reverse Stock Split.
As of December 31, 2022 there were 4,342,909 shares of our Company common stock outstanding and 12,000,000 shares authorized at $0.30 par value per share.
As of December 31, 2022 we had 500,000 authorized shares of preferred stock, none of which had been issued.
Warrants
In connection with the Amended Term Loan Credit Agreement and the Subordinated Term Loan Credit Agreement, we entered into Warrant Agreements and Waivers related to our common stock. A detailed discussion of these transactions can be found in Note 12 - Debt.
Issuance of PIPE Shares
In connection with the 2022 ABL Credit Agreement and the Subscription Agreement, PIPE shares were issued and sold, subject to certain terms and conditions. A detailed discussion of these transactions can be found in Note 12 - Debt.
Accumulated Other Comprehensive Income (loss)
A summary of changes in accumulated other comprehensive loss included within shareholders’ equity is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended
December 31, 2022 | | Twelve Months Ended
December 31, 2021 |
| | Foreign
Currency
Translation
Adjustments | | Foreign
Currency
Hedge | | Defined benefit pension plans | | Tax
Provision | | Total | | Foreign
Currency
Translation
Adjustments | | Foreign
Currency
Hedge | | Defined benefit pension plans | | Tax
Provision | | Total |
| Balance at beginning of year | $ | (25,258) | | | $ | 2,988 | | | $ | (3,873) | | | $ | (589) | | | $ | (26,732) | | | $ | (23,045) | | | $ | 2,988 | | | $ | (8,021) | | | $ | 400 | | | $ | (27,678) | |
| Other comprehensive income (loss) | (6,589) | | | — | | | (6,601) | | | 925 | | | (12,265) | | | (2,213) | | | — | | | 4,148 | | | (989) | | | 946 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Balance at end of year | $ | (31,847) | | | $ | 2,988 | | | $ | (10,474) | | | $ | 336 | | | $ | (38,997) | | | $ | (25,258) | | | $ | 2,988 | | | $ | (3,873) | | | $ | (589) | | | $ | (26,732) | |
The following table represents the related tax effects allocated to each component of other comprehensive income (loss) (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, |
| 2022 | | 2021 | |
| | Gross
Amount | | Tax
Effect | | Net
Amount | | Gross
Amount | | Tax
Effect | | Net
Amount | |
| Foreign currency translation adjustments | $ | (6,589) | | | $ | — | | | $ | (6,589) | | | $ | (2,213) | | | $ | (1) | | | $ | (2,214) | | |
| | | | | | | | | | | | |
| Defined benefit pension plans | (6,601) | | | 925 | | | (5,676) | | | 4,148 | | | (988) | | | 3,160 | | |
| Total | $ | (13,190) | | | $ | 925 | | | $ | (12,265) | | | $ | 1,935 | | | $ | (989) | | | $ | 946 | | |
16. EMPLOYEE BENEFIT PLANS
Defined contribution plan. Under the Team, Inc. Salary Deferral Plan (the “Plan”), contributions are made to the Plan by qualified employees at their election and our matching contributions to the Plan are made at specified rates. We did not incur any contribution expense in 2021 as forfeitures were used for the company match. Our contribution for the plan year ended December 31, 2022 was approximately $3.3 million.
Defined benefit plans. In connection with our acquisition of Furmanite, we assumed liabilities associated with the defined benefit pension plans of two foreign subsidiaries, one plan covering certain United Kingdom employees (the “U.K. Plan”) and the other covering certain Norwegian employees (the “Norwegian Plan”). In connection with the sale of our Norwegian operations in 2018, all assets and liabilities associated with the Norwegian Plan were transferred to the buyer.
Benefits for the U.K. Plan are based on the average of the employee’s salary for the last three years of employment. The U.K. 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. Plan assets are primarily invested in unitized pension funds managed by U.K. registered fund managers. The most recent valuation of the U.K. Plan was performed as of December 31, 2022. Estimated defined benefit pension plan contributions for 2023 are expected to be approximately $3.7 million.
Pension benefit costs and liabilities are dependent on assumptions used in calculating such amounts. The primary assumptions include factors such as discount rates, expected investment return on plan assets, mortality rates and retirement rates. The discount rate assumption used to determine end of year benefit obligations was 5.0% as of December 31, 2022. These rates are reviewed annually and adjusted to reflect current conditions. These rates are determined appropriate based on reference to yields. The expected return on plan assets of 2.8% for 2022 is derived from detailed periodic studies, which include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks (standard deviations) and correlations of returns among the asset classes that comprise the plans’ asset mix. While the studies give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective rates of return. Mortality and retirement rates are based on actual and anticipated plan experience. In accordance with GAAP, actual results that differ from the assumptions are accumulated and are subject to amortization over future periods and, therefore, generally affect recognized expense in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the pension obligation and future expense.
Net pension cost (credit) included the following components (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended
December 31, |
| 2022 | | 2021 |
| | | |
| Interest cost | $ | 1,586 | | | $ | 1,282 | |
| Settlement cost | — | | | 70 | |
| Expected return on plan assets | (2,362) | | | (2,006) | |
| Amortization of prior service cost | 31 | | | 32 | |
| | | |
| Net pension cost (credit) | $ | (745) | | | $ | (622) | |
The weighted-average assumptions used to determine benefit obligations as of December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Discount rate | 5.0 | % | | 2.0 | % |
Rate of compensation increase1 | Not applicable | | Not applicable |
| Inflation | 3.2 | % | | 3.3 | % |
______________
1 Not applicable due to plan curtailment.
The weighted-average assumptions used to determine net periodic benefit cost (credit) for the years ended December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | |
| Twelve Months Ended
December 31, |
| 2022 | | 2021 |
| Discount rate | 2.0 | % | | 1.3 | % |
| Expected long-term return on plan assets | 2.8 | % | | 2.1 | % |
Rate of compensation increase1 | Not applicable | | Not applicable |
| Inflation | 3.3 | % | | 2.9 | % |
_______________
1 Not applicable due to plan curtailment.
The plan actuary determines the expected return on plan assets based on a combination of expected yields on equity securities and corporate bonds and considering historical returns.
The expected long-term rate of return on invested assets for 2022 is determined based on the weighted average of expected returns on asset investment categories as follows: 6.4% overall, 9.5% for equities and 5.3% for debt securities.
The following table sets forth the changes in the benefit obligation and plan assets for the years ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended
December 31, |
| 2022 | | 2021 |
| Projected benefit obligation: | | | |
| Beginning of year | $ | 91,262 | | | $ | 100,244 | |
| | | |
| Service cost | — | | | — | |
| Interest cost | 1,586 | | | 1,282 | |
| Actuarial (gain) loss | (22,444) | | | (4,237) | |
| Benefits paid | (5,028) | | | (5,137) | |
| | | |
| | | |
| Foreign currency translation adjustment and other | (9,206) | | | (890) | |
| End of year | $ | 56,170 | | | $ | 91,262 | |
| Fair value of plan assets: | | | |
| Beginning of year | 94,164 | | | 94,962 | |
| Actual gain (loss) on plan assets | (26,919) | | | 1,195 | |
| Employer contributions | 3,699 | | | 4,118 | |
| Benefits paid | (5,028) | | | (5,137) | |
| | | |
| | | |
| Foreign currency translation adjustment and other | (9,348) | | | (974) | |
| End of year | 56,568 | | | 94,164 | |
| Excess projected obligation under (over) fair value of plan assets at end of year | $ | 398 | | | $ | 2,902 | |
| Amounts recognized in accumulated other comprehensive loss: | | | |
| Net actuarial loss | $ | (10,980) | | | $ | (4,624) | |
| Prior service cost | (520) | | | (601) | |
| Total | $ | (11,500) | | | $ | (5,225) | |
The accumulated benefit obligation for the U.K. Plan was $56.2 million and $91.3 million as of December 31, 2022 and 2021, respectively. The decrease in the accumulated benefit obligation was due to the increase in discount rate driven by higher interest rate during the period.
As of December 31, 2022, expected future benefit payments are as follows for the years ended December 31, (in thousands):
| | | | | |
| 2023 | $ | 3,738 | |
| 2024 | 3,645 | |
| 2025 | 3,808 | |
| 2026 | 3,756 | |
| 2027 | 3,836 | |
| 2028-2032 | 19,388 | |
| Total | $ | 38,171 | |
The following tables summarize the plan assets of the U.K. Plan measured at fair value on a recurring basis (at least annually) as of December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Asset Category | | Total | | Quoted Prices in
Active Markets
for
Identical Assets
(Level 1) | | Significant
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Cash | | $ | 1,861 | | | $ | 1,861 | | | $ | — | | | $ | — | |
| Equity securities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Diversified growth fund (a) | | 15,285 | | | — | | | 4,848 | | | 10,437 | |
| | | | | | | | |
| Fixed income securities: | | | | | | | | |
| | | | | | | | |
| U.K. government fixed income securities (b) | | 6,471 | | | — | | | 6,471 | | | — | |
| U.K. government index-linked securities (c) | | 7,942 | | | — | | | 7,942 | | | — | |
| | | | | | | | |
| Corporate bonds (e) | | 25,009 | | | — | | | 25,009 | | | — | |
| Total | | $ | 56,568 | | | $ | 1,861 | | | $ | 44,270 | | | $ | 10,437 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Asset Category | | Total | | Quoted Prices in
Active Markets
for
Identical Assets
(Level 1) | | Significant
Observable
Inputs
(Level 2) (a) | | Significant
Unobservable
Inputs
(Level 3) |
| Cash | | $ | 2,411 | | | $ | 2,411 | | | $ | — | | | $ | — | |
| Equity securities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Diversified growth fund (a) | | 23,582 | | | — | | | 12,139 | | | 11,443 | |
| | | | | | | | |
| Fixed income securities: | | | | | | | | |
| | | | | | | | |
| U.K. government fixed income securities (b) | | 9,487 | | | — | | | 9,487 | | | — | |
| U.K. government index-linked securities (c) | | 16,393 | | | — | | | 16,393 | | | — | |
| Global absolute return bond fund (d) | | 12,111 | | | — | | | 12,111 | | | — | |
| Corporate bonds (e) | | 30,297 | | | — | | | 30,297 | | | — | |
| Total | | $ | 94,281 | | | $ | 2,411 | | | $ | 80,427 | | | $ | 11,443 | |
a)This category includes investments in a diversified portfolio of equity, alternatives and cash markets that aims to achieve capital growth returns.
b)This category includes investments in funds with the objective to provide a leveraged return to U.K. government fixed income securities (bonds) that have maturity periods ranging from 2030 to 2060.
c)This category includes investments in funds with the objective to provide a leveraged return to various U.K. government indexed-linked securities (gilts), with maturity periods ranging from 2027 to 2062. The funds invest in U.K. government bonds and derivatives.
d)This category includes investments in funds predominantly in a wide range of fixed and floating rate investment grade and below investment grade debt instruments traded on regulated markets worldwide with the objective to achieve a return of 3% above 1 month LIBOR over a 3-year basis.
e)This category includes investments in a diversified pool of debt and debt like assets to generate capital and income returns.
Investment objectives for the U.K. Plan, as of December 31, 2022, are to:
•optimize the long-term return on plan assets at an acceptable level of risk
•maintain a broad diversification across asset classes
•maintain careful control of the risk level within each asset class
The trustees of the U.K. Plan have established a long-term investment strategy comprising global investment weightings targeted at 27.5% (range of 25% to 30%) for equity securities/diversified growth funds and 72.5% (range of 70% to 75%) for debt securities. Diversified growth funds are actively managed absolute return funds that hold a combination of debt and equity securities. Selection of the targeted asset allocation was based upon a review of the expected return and risk characteristics of each asset class, as well as the correlation of returns among asset classes. Actual allocations to each asset class vary from target allocations due to periodic investment strategy changes, market value fluctuations and the timing of benefit payments and contributions.
The following table sets forth the weighted-average asset allocation and target asset allocations as of December 31, 2022 and 2021 by asset category:
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Allocations | | Target Asset Allocations |
| 2022 | | 2021 | | 2022 | | 2021 |
Equity securities and diversified growth funds1 | 27.0 | % | | 24.9 | % | | 27.5 | % | | 27.5 | % |
Debt securities2 | 69.7 | % | | 72.5 | % | | 72.5 | % | | 72.5 | % |
| Other | 3.3 | % | | 2.6 | % | | — | % | | — | % |
| Total | 100 | % | | 100 | % | | 100 | % | | 100 | % |
______________________________
1Diversified growth funds refer to actively managed absolute return funds that hold a combination of equity and debt securities.
2Includes investments in funds with the objective to provide leveraged returns to U.K. government fixed income securities, U.K. government indexed-linked securities, global bonds, and corporate bonds.
The following table summarizes the changes in the fair value measurements of Level 3 investments for the pension plans (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Balance at beginning of year | $ | 11,443 | | | $ | 9,752 | |
| Actual return on plan assets | 195 | | | 1,790 | |
| Purchases/ sales/ settlements | — | | | — | |
| Transfer in/out of level 3 | — | | | — | |
| Changes due to foreign exchange | (1,201) | | | (99) | |
| Balance at end of year | $ | 10,437 | | | $ | 11,443 | |
The following is a description of the valuation methodologies used to measure plan assets at fair value.
For equity securities and fixed income securities, fair value is based on observable inputs of comparable market transactions. The valuation of certain alternative investments, such as limited partnerships, may require significant management judgment and involves a level of uncertainty. The valuation is generally based on fair value as reported by the asset manager and adjusted for cash flows, if necessary. In making such an assessment, a variety of factors are reviewed by management, including, but are not limited to, the timeliness of fair value as reported by the asset manager and changes in general economic and market conditions subsequent to the last fair value reported by the asset manager. The use of different techniques or assumptions to estimate fair value could result in a different fair value measurement at the reporting date. Cash and cash equivalents are valued based on cost, which approximates fair value. Other than those assets that have quoted prices from an active market, investments are generally classified in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measure in its entirety.
17. COMMITMENTS AND CONTINGENCIES
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, which will only be resolved when one or more future events occur or fail to occur. Team’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, Team’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
We accrue for contingencies where the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. We may increase or decrease our legal accruals in the future, on a matter-by-matter basis, to account for developments in such matter. Because such matters are inherently unpredictable and unfavorable developments or outcomes can occur, assessing contingencies is highly subjective and requires judgments about future events. Notwithstanding the uncertainty as to the outcome and while our insurance coverage might not be available or adequate to cover these claims, based upon the information currently available, we do not believe that any uninsured losses that might arise from these lawsuits and proceedings will have a materially adverse effect on our consolidated financial statements.
California Wage and Hour Litigation - The Company was a defendant in a consolidated class and collective action, Michael Thai v. Team Industrial Services, Inc., et al, pending in the U.S. District Court for the Central District of California, originally filed by two separate plaintiffs as separate cases in the Superior Court for the County of Los Angeles, California in June 2019 and August 2020, respectively. The Company settled the consolidated class and collective action in 2022 that resulted in the Company recording a pre-tax charge of $3.0 million in the third quarter of fiscal year 2022, and the Company paid the settlement in January 2023.
Notice of Potential Environmental Violation - On April 20, 2021, Team Industrial Services, Inc. received Notices of Potential Violation from the U.S. Environmental Protection Agency alleging noncompliance with various waste determination, reporting, training, and planning obligations under the Resource Conservation and Recovery Act at seven of our facilities located in Texas and Louisiana. The allegations largely relate to spent film developing solutions generated through our mobile radiographic inspection services and that the claims relate to the characterization and quantities of those wastes and related notices, reporting, training, and planning.
On February 9, 2022, TEAM and the EPA agreed to settle all the claims related to this matter and the formal settlement agreement was finalized in April 2022 with our agreement to pay penalties totaling $0.2 million.
Kelli Most Litigation - On November 13, 2018, Kelli Most filed a lawsuit against Team Industrial Services, Inc., individually and as a personal representative of the estate of Jesse Henson, in the 268th District Court of Fort Bend County, Texas (the “Most litigation”). The complaint asserted claims against Team for negligence resulting in the wrongful death of Jesse Henson. A jury trial commenced on this matter on May 4, 2021. On June 1, 2021, the jury rendered a verdict against Team for $222.0 million in compensatory damages.
We believe that the jury verdict is not supported by the facts of the case or applicable law, is the result of significant trial error, and there are strong grounds for appeal. We will seek to overturn the verdict in post-trial motions before the District Court and, if necessary, to appeal to the Court of Appeals for the State of Texas.
On January 25, 2022, the trial court signed a final judgment in favor of the plaintiff and against Team Industrial Services, Inc. Post-judgment motions challenging the judgment were filed on February 24, 2022 and were denied by the court on April 22, 2022. A notice of appeal was filed on April 25, 2022, and this case is currently pending in the Court of Appeals for the First District of Texas, in Houston.
We believe that the likelihood that the amount of the judgment will be affirmed is not probable. We have taken into consideration the events that have occurred after the reporting period and before the financial statements were issued. We currently estimate a range of possible outcomes between $13.0 million and approximately $51.0 million, and we have accrued a liability as of December 31, 2022 which is the amount we believe is the most likely estimate for a probable loss on this matter. We have also recorded a related receivable from our third-party insurance providers in other current assets with the corresponding liability of the same amount in other accrued liabilities. Such amounts are treated as non-cash operating
activities. The Most litigation is covered by our general liability and excess insurance policies which are occurrence based and subject to an aggregate $3.0 million self-insured retention and deductible. All retentions and deductibles have been met, accordingly, we believe pending the final settlement, all further claims will be fully funded by our insurance policies. We will continue to evaluate the possible outcomes of this case in light of future developments and their potential impact on factors relevant to our assessment of any possible loss.
Accordingly, for all matters discussed above, we have accrued in the aggregate approximately $42.3 million as of December 31, 2022, of which approximately $3.3 million is not covered by our various insurance policies.
In addition to legal matters discussed above, we are subject to various lawsuits, claims and proceedings encountered in the normal conduct of business (“Other Proceedings”). Management believes that based on its current knowledge and after consultation with legal counsel that the Other Proceedings, individually or in the aggregate, will not have a material effect on our consolidated financial statements.
18. SEGMENT AND GEOGRAPHIC DISCLOSURES
On November 1, 2022, we completed the sale of Quest Integrity business. The criteria for reporting Quest Integrity as a discontinued operation were met as of the sale and, as such, all periods presented in this Form 10-K have been recast to present Quest Integrity as a discontinued operation. Unless otherwise specified, the financial information and discussion in this Form 10-K 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.
ASC 280, Segment Reporting, requires us to disclose certain information about our operating segments. Operating segments are defined as “components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.” We conduct operations in two segments: IHT and MS. Historically Quest Integrity was a separate segment, but Quest Integrity is now part of discontinued operations.
Segment data for our two operating segments are as follows (in thousands):
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| | Twelve Months Ended
December 31, |
| | 2022 | | 2021 |
| Revenues: | | | |
| IHT | $ | 422,562 | | | $ | 415,371 | |
| MS | 417,646 | | | 378,826 | |
| Total Revenues | $ | 840,208 | | | $ | 794,197 | |
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| | Twelve Months Ended
December 31, |
| | 2022 | | 2021 |
| Operating income (loss): | | | |
| IHT | $ | 17,093 | | | $ | 12,997 | |
MS1 | 20,930 | | | (47,728) | |
| Corporate and shared support services | (77,825) | | | (92,151) | |
| Total Operating income (loss) | $ | (39,802) | | | $ | (126,882) | |
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1 Includes goodwill impairment loss of $55.8 million for MS for the year ended December 31, 2021.
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| | Twelve Months Ended
December 31, |
| | 2022 | | 2021 |
Capital expenditures1: | | | |
| IHT | $ | 13,939 | | | $ | 11,742 | |
| MS | 5,013 | | | 3,692 | |
| Corporate and shared support services | 84 | | | 1,464 | |
| Total Capital expenditures | $ | 19,036 | | | $ | 16,898 | |
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1 Excludes finance leases. Totals may vary from amounts presented in the consolidated statements of cash flows due to the timing of cash payments.
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| | Twelve Months Ended
December 31, |
| | 2022 | | 2021 |
| Depreciation and amortization: | | | |
| IHT | $ | 12,391 | | | $ | 12,959 | |
| MS | 19,021 | | | 20,500 | |
| Corporate and shared support services | 5,041 | | | 5,443 | |
| Total Depreciation and amortization | $ | 36,453 | | | $ | 38,902 | |
Separate measures of our assets by operating segment are not produced or utilized by management to evaluate segment performance.
A geographic breakdown of our revenues for the years ended December 31, 2022 and 2021 and our total long-lived assets as of December 31, 2022 and 2021 are as follows (in thousands):
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| Total Revenues1 | | Total Long-lived Assets2 |
| Twelve months ended December 31, 2022 | | | |
| United States | $ | 613,021 | | | $ | 240,088 | |
| Canada | 95,790 | | | 4,708 | |
| Europe | 61,713 | | | 14,591 | |
| Other foreign countries | 69,684 | | | 2,581 | |
| Total | $ | 840,208 | | | $ | 261,968 | |
| Twelve months ended December 31, 2021 | | | |
| United States | $ | 561,416 | | | $ | 261,540 | |
| Canada | 100,397 | | | 7,290 | |
| Europe | 66,926 | | | 19,619 | |
| Other foreign countries | 65,458 | | | 3,845 | |
| Total | $ | 794,197 | | | $ | 292,294 | |
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1 Revenues attributable to individual countries/geographic areas are based on the country of domicile of the legal entity that performs the work.
2 Excludes goodwill, intangible assets not being amortized that are to be held and used, financial instruments and deferred tax assets.
19. RESTRUCTURING AND OTHER RELATED CHARGES
Our restructuring and other related charges, net for the years ended December 31, 2022 and 2021 are summarized by segment as follows (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended December 31, |
| 2022 | | 2021 |
| Operating Group Reorganization and other restructuring measures | | | |
| Severance and related costs | | | |
| IHT | $ | 16 | | | $ | 459 | |
| MS | — | | | 514 | |
| Corporate and shared support services | — | | | 1,562 | |
| Total | $ | 16 | | | $ | 2,535 | |
Operating Group Reorganization. During 2021, we completed a strategic organizational structure to better position ourselves for the recovery, continue sector diversification, and enhance client value (the “Operating Group Reorganization”). In connection with the Operating Group Reorganization, we announced certain executive leadership changes and the appointment of experienced new talent to our leadership team. For the twelve months ended December 31, 2021, we incurred severance charges of $2.5 million, which represents all costs cumulatively incurred to date as a result of the Operating Group Reorganization. For the twelve months ended December 31, 2022 and 2021, we incurred professional fees of $0 and $1.9 million, respectively, associated with the Operating Group Reorganization.
Severance Charges. As part of our ongoing cost reduction efforts, we incurred severance charges of $4.0 million for the twelve months ended December 31, 2022.
A rollforward of our accrued severance liability associated with our ongoing cost reduction efforts is presented below (in thousands):
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| Twelve Months Ended
December 31, 2022 |
| Balance, beginning of period | $ | 712 | |
| Charges | 3,961 | |
| Payments | (2,734) | |
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| Balance, end of period | $ | 1,939 | |
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20. RELATED PARTY TRANSACTIONS
Alvarez & Marsal provided certain consulting services to the Company in connection with our former Interim Chief Financial Officer position and other corporate support costs. Effective June 12, 2022 the Interim Chief Financial Officer position ended, as the Company named a permanent Chief Financial Officer. The Company paid $8.1 million and $8.0 million in consulting fees to Alvarez & Marsal for the years ended December 31, 2022 and 2021, respectively.
In connection with the Company’s debt transactions, the Company engaged in transactions with Corre and APSC to provide funding as described in Note 12 - Debt.
21. SUBSEQUENT EVENTS
As of March 14, 2023, the filing date of this Annual Report on Form 10-K, management evaluated the existence of events occurring subsequent to the end of fiscal year 2022, and determined that there were no events or transactions that would have a material impact on the Company’s results of operations or financial position.