Team Inc: Form 10-Q for the period ended Sep 30, 2022

Overview

Unless otherwise indicated, the terms “Team, Inc.,” “Team,” “we,” “our” and “us” are used in this report to refer to Team, Inc., to one or more of its consolidated subsidiaries or to all of them taken as a whole.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this report, and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (“our Annual Report on Form 10-K”) and other documents previously filed with the SEC. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those described in more detail under the heading “Risk Factors” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. See also “Cautionary Statement Regarding Forward-Looking Statements” below.

Cautionary Note Regarding Forward-Looking Statements.

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical or current fact included in this report are forward-looking statements. Forward-looking statements include statements containing words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “will,” “could,” “should,” “may” and similar expressions. We base our forward-looking statements on beliefs and assumptions that we believe to be reasonable, and our current expectations, estimates and projections about ourselves and our industry. However, all forward-looking statements are subject to risks and uncertainties, many of which are out of our control, that may cause actual results to differ materially from those that are expected and, therefore, you should not unduly rely on such statements. The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.

There are a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Such risks include those disclosed under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the United States Securities and Exchange Commission, as well as, risks related to:

• our ability to continue as a going concern;
• our ability to manage inflationary pressures in our operating costs;
• the impact to our business, financial condition, results of operations and cash flows due to negative market conditions, including from the impact of the COVID-19 pandemic or other public health crises, the ongoing conflict in Ukraine, and future economic uncertainties, particularly in industries in which we are heavily dependent;
• delays in the commencement of major projects, whether due to the COVID-19 pandemic or other factors;
• our business may be affected by seasonal and other variations, including severe weather conditions and the nature of our clients’ industry;
• our ability to expand into new markets (including low carbon energy transition) and attract clients in new industries may be limited due to our competition’s breadth of service offerings and intellectual property;
• we have significant debt and high leverage which could have a negative impact on our financing options, liquidity position and ability to manage increases in interest rates;
• the timing of new client contracts and termination of existing contracts may result in unpredictable fluctuations in our cash flows and financial results;
• risk of non-payment and/or delays in payment of receivables from our clients;
• our ability to generate sufficient cash from operations, access our ABL Credit Facility, or maintain our compliance with our ABL Credit Agreement, Term Loan Credit Agreement, and Subordinated Term Loan Credit Agreement covenants;
• compliance with continued listing standards of the New York Stock Exchange;
• if we cannot regain compliance with the NYSE’s continued listing requirements and rules, the NYSE may delist our

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

• our financial forecasts are based upon estimates and assumptions that may materially differ from actual results;
• we may incur liabilities and suffer negative financial or reputational impacts relating to occupational health and safety matters;
• changes in laws or regulations in the local jurisdictions that we conduct our business;
• the inherently uncertain outcome of current and future litigation;
• if we fail to maintain effective internal controls, we may not be able to report our financial results accurately or timely or prevent or detect fraud, which could have a material adverse effect on our business; and
• acts of terrorism, war or political or civil unrest in the U.S. or elsewhere, including the current events involving Russia and Ukraine, changes in laws and regulations, or the imposition of economic or trade sanctions affecting international commercial transactions.

General Description of Business

On November 1, 2022, we completed the sale of all of the issued and outstanding equity interests of our wholly-owned subsidiary, TQ Acquisition, to Baker Hughes for an aggregate purchase price of approximately $279 million, reflecting certain estimated post-closing adjustments, pursuant to the Sale Agreement. TQ Acquisition and its subsidiaries constituted our Quest Integrity segment, which provided integrity and reliability management solutions for the process, pipeline and power sectors.

As of September 30, 2022, the criteria for reporting Quest Integrity as a discontinued operation were met and, as such, all periods presented in this Form 10-Q have been recast to present Quest Integrity as a discontinued operation. Unless otherwise specified, the financial information and discussion in this Form 10-Q are based on our continuing operations (IHT and MS segments) and exclude any results of our discontinued operations (Quest Integrity). Refer to Note 2 - Discontinued Operations for additional details.

We are a global leading provider of integrated, digitally-enabled asset performance assurance and optimization solutions. We deploy conventional to highly specialized inspection, condition assessment, maintenance and repair services that result in greater safety, reliability and operational efficiency for our clients’ most critical assets. We conduct operations in two segments: IHT, MS. Prior to the sale of Quest integrity, we operated Quest Integrity as our third segment. Through the capabilities and resources in these segments, we believe that we are uniquely qualified to provide integrated solutions involving: inspection 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 scaling with the client’s needs, as dictated by the severity of the damage found and the related operating conditions, from standard services to some of the most advanced services and integrated asset integrity and reliability management solutions available in the industry. We also believe that we are unique in our ability to provide services in three distinct client demand profiles: (i) turnaround or project services, (ii) call-out services and (iii) nested or run-and-maintain services.

IHT provides conventional and advanced NDT services primarily for the process, pipeline and power sectors, and pipeline integrity management services, and field heat treating and thermal services, tank management solutions, and pipeline integrity solutions, as well as associated engineering and condition assessment services. These services can be offered while facilities are running (on-stream), during facility turnarounds or during new construction or expansion activities. IHT also provides advanced digital imaging including remote digital video imaging and laser scanning services.

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.

In January 2021, we announced a strategic reorganization (the “Operating Group Reorganization”). The new streamlined structure supports our global operations with greater focus on further improving operational and financial performance through three new operating groups: Inspection and Heat Treating Group (the “IHT Group”), Mechanical & Onstream Services group (the “MOS Group”) and Asset Integrity & Digital (the “AID Group”). The IHT Group, which is included in the IHT segment, is dedicated to growing its stable nested footprint as regulatory compliance requirements increase, expanding turnaround activity, and diversifying its end markets globally, such as through increased investment in the Aerospace business line. The MOS Group, which is included in the MS segment, continues to target turnarounds and capital projects, and improve performance, efficiency, and longevity of aging critical assets. The MOS Group is primed to grow with the industry recovery led by the high demand of maintenance and call-out work. The AID Group, which was included in our Quest Integrity segment, focuses on expanding mechanical and pipeline integrity, risk-based inspection, remote visual inspection, and digital platform. The AID Group is also dedicated to optimize our research and development activities, including product and technology development. Following the sale of our Quest Integrity segment, the remaining operations of our AID group are included in our IHT segment. These changes had no effect on our reportable segments: IHT and MS.

Significant Factors Impacting Results and Recent Developments

Our revenues, gross margins and other results of operations can be influenced by a variety of factors in any given period, including those described in Cautionary Note Regarding Forward-Looking Statements above and Part 1, Item 1A of our Annual Report on Form 10-K “Risk Factors” which includes items that have caused fluctuations in our results in the past and are expected to cause fluctuations in our results in the future. Additional information with respect to certain factors are described below.

COVID-19 Pandemic and Market Conditions Update. The lingering impact of COVID-19 had less effect on our workforce and operations during the third quarter of 2022, as well as the operations of our clients, suppliers and contractors. However, the global economy, including the financial and credit markets, has recently experienced significant volatility and disruptions, including increases in inflation rates, rising interest rates, disruption to global supply chains, declines in economic growth, volatility in foreign currency exchange rates, and uncertainty about economic stability. The severity and duration of the impact of these conditions on our business cannot be predicted. See Item 1A of our Annual Report on Form 10-K “Risk Factors” for additional information.

Recent Financing Transactions. During 2022 the Company executed a number of amendments to its debt instruments, including amendments to our ABL Credit Facility, Subordinated Term Loan Credit Agreement, Term Loan Credit Agreement and entered into a new Substitute Insurance Reimbursement Facility Agreement. Refer to Note 12 - Debt to the unaudited condensed consolidated financial statements for additional details related to these amendments.

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

• On June 17, 2022, the Company was notified by the NYSE that the Company was no longer in compliance with the NYSE continued listing standards set forth in Section 802.01B of the NYSE Listed Company Manual due to the fact that the Company’s average global market capitalization over a consecutive 30 trading-day period was less than $50.0 million and, at the same time, its shareholders’ equity was less than $50.0 million. The notice has no immediate impact on the listing of the Company’s common stock, which will continue to trade on the NYSE during the applicable cure period, and does not result in a default under the Company’s material debt or other agreements.
• As required by the NYSE, the Company notified the NYSE of its intent to cure the market capitalization and/or shareholders’ equity deficiency and restore its compliance with NYSE continued listing standards. In accordance with applicable NYSE procedures, on August 1, 2022 the Company submitted a plan advising the NYSE of the definitive actions the Company has taken and is taking that would bring it into compliance with NYSE continued listing standards within 18 months of receipt of the written notice. The NYSE accepted the plan and the Company’s common stock will

continue to be listed and traded on the NYSE during the 18-month period from June 17, 2022, subject to the Company’s compliance with other NYSE continued listing standards and continued periodic review by the NYSE of the Company’s progress with respect to its plan. The Company can provide no assurances that it will be able to satisfy any of the steps outlined in the plan approved by the NYSE and maintain the listing of its shares on the NYSE.

• On July 13, 2022, the Company was notified by the NYSE that it was not in compliance with the continued listing standards set forth in Rule 802.01C of the NYSE Listed Company Manual requiring listed companies to maintain an average closing share price of at least $1.00 over a consecutive 30 trading-day period. However, on September 1, 2022, the Company was notified by the NYSE that it had regained compliance with the minimum share price requirement.
• On November 2, 2022, the Company was notified by the NYSE that it was not in compliance with the continued listing standards set forth in Rule 802.01C of the NYSE Listed Company Manual requiring listed companies to maintain an average closing share price of at least $1.00 over a consecutive 30 trading-day period. The notice has no immediate impact on the listing of the Company’s common stock, which will continue to trade on the NYSE during the applicable cure period, and does not result in a default under the Company’s material debt or other agreements.

Results of Operations

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

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

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

(unaudited)

(unaudited)

Revenues. Total revenues increased $20.5 million or 10.3% from the prior year quarter driven by increases in both operating segments of MS and IHT. Continuing operations revenues were impacted from foreign exchange negatively by $4.9 million and positively by $2.9 million during the three month period ended September 30, 2022 and 2021, respectively. IHT revenues increased by $8.8 million or 8.7% and MS revenue increased by $11.6 million or 12.1%. IHT segment’s revenue increased primarily due to higher turnaround, call out and nested activity in the United States and Canada compared to the prior year quarter. MS revenues increased primarily due to higher activity in our U.S. and Latin American operations related to leak repair, hot tapping services, and the U.S. valve business, partially offset by decreases in international revenue due to non-repeating project work in the United Kingdom.

Operating income (loss). Overall operating loss was $1.7 million in the current year quarter compared to an operating loss of $72.2 million in the prior year quarter. The overall decrease in operating loss is primarily attributable to our MS segment which experienced an increase in operating income of $60.9 million as compared to the prior year, primarily due to no impairments recorded for goodwill this quarter compared to a $55.8 million goodwill impairment that was recorded in the prior year quarter, a $0.8 million increase in the Canada business, a $0.5 million increase in the valve business, and realized efficiency gains in equipment centers, manufacturing, and engineering; partially offset by lack of COVID-19 related subsidies in the current quarter compared to the prior year quarter. IHT operating income increased by $4.3 million due to higher activity and revenue realization in the U.S. business and savings in overhead costs, partially offset by the completion of a Canadian customer contract in the current period, and COVID-19 related subsidies received in 2021 period, which were not received in 2022. Corporate operating loss decreased due to lower professional fees and legal costs in the current quarter compared to prior year quarter and lower overall costs due to the Company’s cost reduction efforts. In spite of our cost reduction efforts, we continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

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

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

1 For the three months ended September 30, 2022, includes $0.5 million related to costs associated with the debt financing. For the three months ended September 30, 2021, consists primarily of professional fees and other costs for assessment of corporate and support cost structures.

2 For the three months ended September 30, 2022, primarily relates accrued legal matters. For September 30, 2021, primarily relates to accrued legal matters and legal fees.

3 For the three months ended September 30, 2022, $0.7 million primarily related to customary severance costs associated with staff reductions. For the three months ended September 30, 2021, primarily related to the Operating Group Reorganization.

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

Excluding the impact of these identified non-core items in both periods, operating income increased by $13.0 million, consisting of higher operating income at IHT of $4.4 million, higher operating income at MS of $5.0 million, and a decrease in corporate and shared support services expenses of $3.6 million. See Operating income (loss) above for primary reasons for the changes during the period.

Interest expense, net. Interest expense increased by $16.7 million compared to the prior year quarter, primarily due to a $143.0 million increase in outstanding debt attributable to the debt financing executed during the quarter ended March 31, 2022 and accelerated amortization of deferred financing costs, debt and warrant discounts and debt issuance costs. Due to the various maturity trigger events, the amortization period for deferred financing costs, debt and warrant discounts and debt issuance costs was shortened to reflect the accelerated maturity dates. This resulted in an additional $10.6 million in amortization charges during the three months ended September 30, 2022. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion.

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

Taxes. The provision for income tax was $1.5 million on the pre-tax loss from continuing operations of $25.2 million in the current year quarter, compared to a $7.4 million income tax provision on a pre-tax loss of $83.0 million in the prior year quarter. The effective tax rate, inclusive of discrete items, was a provision of 5.8% for the three months ended September 30, 2022, compared to a provision of 8.9% for the three months ended September 30, 2021. The effective tax rate change from the prior year quarter compared to the current year quarter is due to an increase in the valuation allowance.

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

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

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

(unaudited)

(unaudited)

Revenues. Total revenues increased $37.9 million or 6.4% from the prior year period, with all segments seeing increases compared to prior year period. IHT revenues increased by $10.0 million and MS revenue increased by $27.9 million. Continuing operations revenues were impacted from foreign exchange negatively by $8.5 million and positively by $13.4 million during the nine months period ended September 30, 2022 and 2021, respectively. IHT segment year to date revenue increased 3.2%, compared to the prior year period, which was primarily driven by increases in U.S. business activity partially offset by decreases in Canada and international locations. MS segment revenue increased 9.9% compared to the prior year period, due to increases in the U.S. market activities, primarily from increases in leak repair and hot tap services as well as the domestic valve business.

Operating loss. Overall operating loss was $34.9 million in the current year period compared to an operating loss of $108.0 million in the prior year period. The overall improvement in operating loss is attributable to the 2021 period including a MS goodwill impairment charge of $55.8 million with no such charge in the 2022 period, improvement in the valve business of $2.5 million, a $2.3 million increase in Canadian business and cost improvements in machinery, engineering and equipment centers. IHT experienced an increase in operating income due to an increase in U.S. income offset by a decline in the Canadian business. Corporate operating loss decreased due to cost reductions, lower non-cash compensation cost and lower legal expense, partially offset by higher professional fees in 2022.

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

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

1 For the nine months ended September 30, 2022, includes $8.4 million related to costs associated with the debt financing and $2.1 million of corporate support costs. For the nine months ended September 30, 2021, includes $1.7 million of costs associated with the Operating Group Reorganization (exclusive of restructuring costs) and $0.3 million of costs associated with the OneTEAM program (exclusive of restructuring costs).

2 For the nine months ended September 30, 2022, primarily relates to accrued legal matters. For the nine months ended September 30, 2021, primarily relates to accrued legal matters and legal fees.

3 For the nine months ended September 30, 2022, includes $1.3 million related to customary severance costs associated with executive departures and $1.7 million associated with severance across multiple corporate departments. For the nine months ended September 30, 2021, includes $2.6 million associated with the Operating Group Reorganization and $0.2 million associated with other severances.

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

Excluding the impact of these identified non-core items in both periods, operating loss decreased by $21.6 million, consisting of higher operating income in IHT of $1.8 million, and improvements in operating income from MS and corporate and shared support services of $9.7 million, and $10.1 million, respectively. See Operating income (loss) above for primary reasons for the changes during the period.

Interest expense, net. Interest expense, net increased $34.9 million from the prior year period primarily due to higher outstanding debt, higher interest rate paid on PIK Interest, and accelerated amortization of deferred financing costs, debt and warrant discounts and debt issuance costs. Due to the various maturity trigger events, the amortization period for deferred financing costs, debt and warrant discounts and debt issuance costs was shortened to reflect the accelerated maturity dates. This resulted in an additional $15.2 million in amortization charges during the nine months ended September 30, 2022. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion. Additionally, due to the debt extinguishment of the Citi Credit Agreement on February 11, 2022, during the three months ended March 31, 2022, the Company recognized interest expense of $2.7 million related to deferred financing costs previously capitalized.

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

Taxes. The provision for income tax was $4.2 million on the pre-tax loss from continuing operations of $89.0 million in the current year-to-date compared to income tax expense of $8.4 million on the pre-tax loss of $138.5 million in the in the prior year-to-date period. The effective tax rate was a provision of 4.7% for the nine months ended September 30, 2022, compared to a provision of 6.1% for the nine months ended September 30, 2021. The effective tax rate change from the prior year quarter compared to the current year quarter is due to an increase in the valuation allowance.

Non-GAAP Financial Measures and Reconciliations

We use supplemental non-GAAP financial measures which are derived from the condensed consolidated financial information including adjusted net income (loss); adjusted net income (loss) per diluted share, earnings before interest and taxes (“EBIT”); adjusted EBIT (defined below); adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) and free cash flow to supplement financial information presented on a GAAP basis.

We define adjusted net income (loss), adjusted net income (loss) per diluted share and adjusted EBIT to exclude the following items: costs associated with our past integration and transformation program, costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill and other impairment charges and certain other items that we believe are not indicative of core operating activities. Consolidated adjusted EBIT, as defined by us, excludes the costs excluded from adjusted net income (loss) as well as income tax expense (benefit), interest charges, foreign currency (gain) loss, and items of other (income) expense. Consolidated adjusted EBITDA further excludes from consolidated adjusted EBIT depreciation, amortization and non-cash share-based compensation, and other non-cash costs. Segment adjusted EBIT is equal to segment operating income (loss) excluding costs associated with our past integration and transformation program, costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill and other impairment charges and certain other items as determined by management. Segment adjusted EBITDA further excludes from segment adjusted EBIT depreciation, amortization, and non-cash share-based compensation costs. Free cash flow is defined as net cash provided by (used in) operating activities minus capital expenditures.

Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of our financial position and results of operations. In particular, adjusted net income (loss), adjusted net income (loss) per diluted share, consolidated adjusted EBIT, and consolidated adjusted EBITDA are meaningful measures of performance which are commonly used by industry analysts, investors, lenders and rating agencies to analyze operating performance in our industry, perform analytical comparisons, benchmark performance between periods, and measure our performance against externally communicated targets. Our segment adjusted EBIT and segment adjusted EBITDA is also used as a basis for the Chief Operating Decision Maker to evaluate the performance of our reportable segments. Free cash flow is used by our management and investors to analyze our ability to service and repay debt and return value directly to stakeholders.

Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures and should be read only in conjunction with financial information presented on a GAAP basis. Further, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies who may calculate non-GAAP financial measures differently, limiting the usefulness of those measures for comparative purposes. The liquidity measure of free cash flow does not represent a precise calculation of residual cash flow available for discretionary expenditures. Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are presented below.

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

TEAM, INC. AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(unaudited, in thousands except per share data)

1 For the three and nine months ended September 30, 2022, includes $0.5 million and $10.5 million, respectively, related to costs associated with the debt financing and corporate support costs. For the three and nine months ended September 30, 2021, includes $0.2 million and $1.7 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs).

2 For the three and nine months ended September 30, 2022, primarily relates to accrued legal matters. For the three and nine months ended September 30, 2021, primarily relates to accrued legal matters and legal fees.

3 For the three months ended September 30, 2022 includes $0.7 million primarily related to customary severance costs associated with staff reductions. For the nine months ended September 30, 2022, includes $1.3 million related to customary severance costs associated with executive departures and $1.7 million associated with severance across multiple corporate departments. For the three months and nine months ended September 30, 2021, $0.4 million and $2.5 million, respectively, associated with the Operating Group Reorganization and other continuing restructuring measures.

4 Represents the tax effect of the adjustments. Beginning in Q2 2021, we use the statutory tax rate, net of valuation allowance by legal entity to determine the tax effect of the adjustments. Prior to Q2 2021, we used an assumed marginal tax rate of 21%.

5 Represents foreign currency (gains) losses.

6 Represents pension credits for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013.

TEAM, INC. AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued)

(unaudited, in thousands)

1 For the three months ended September 30, 2022 includes $0.7 million primarily related to customary severance costs associated with staff reductions. For the nine months ended September 30, 2022, includes $1.3 million related to customary severance costs associated with executive departures and $1.7 million associated with severance across multiple corporate departments. For the three months and nine months ended September 30, 2021, $0.4 million and $2.5 million, respectively, associated with the Operating Group Reorganization and other continuing restructuring measures.

2 Represents foreign currency (gains) losses.

3 Represents pension credits for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013.

4 For the three and nine months ended September 30, 2022, includes $0.5 million and $10.5 million, respectively, related to costs associated with the debt financing and corporate support costs. For the three and nine months ended September 30, 2021, includes $0.2 million and $1.7 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs).

5 For the three and nine months ended September 30, 2022, primarily relates to accrued legal matters. For the three and nine months ended September 30, 2021, primarily relates to accrued legal matters and legal fees.

Liquidity and Capital Resources

General. Financing for our operations consists primarily of our ABL Credit Facility, Term Loan and our Subordinated Term Loan, and Notes (refer to Note - 12 Debt, for additional details). Our principal uses of cash are for working capital needs, capital expenditures and operations. We have suffered recurring operating losses related to unfavorable market conditions, including the impact of the COVID-19 pandemic, cost inflation related to supply chain disruptions and an increases in interest rates. In response to the above, we evaluated the Company’s current liquidity resources within one year after the date of issuance of these condensed consolidated financial statements and determined there is substantial doubt about the Company’s ability to continue as a going concern (as further described in Note 1 - Summary of Significant Accounting Policies and Practices). Management is evaluating strategic alternatives, including potential asset sales, and potential transactions to reduce the principal amount or extend the maturity of the Notes, to address our near-term liquidity needs; and we have taken definitive actions to reduce costs, improve operations, profitability, and liquidity to position the Company for improved cash flow generation from operations.

Our ability to maintain compliance with the financial covenants contained in the ABL Credit Facility, Term Loan Credit Agreement, and Subordinated Term Loan Credit Agreement is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties. The effects of the current economic environment, including the COVID-19 pandemic, increasing interest rates, inflationary pressures, the ongoing conflict in Ukraine and related economic repercussions could have a significant adverse effect on our financial position and business condition, as well as our clients and suppliers. Additionally, these events may, among other factors, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all, and affect our future need or ability to borrow under our ABL Credit Facility. In addition to our current sources of funding our business, the effects of such events may impact our liquidity or our need to revise our allocation or sources of capital, implement further cost reduction measures and/or change our business strategy.

Consolidated cash and cash equivalents were $56.4 million at September 30, 2022, of which $25.7 million was restricted mainly as collateral for outstanding letters of credit. Additionally, we had approximately $20.5 million in undrawn availability under our various credit facilities at September 30, 2022. Our gross debt and finance obligations were $511.2 million, of which $506.4 million was classified as current at September 30, 2022, compared to gross debt of $405.9 million at December 31, 2021.

Recently Announced Sale. On November 1, 2022, we completed the sale of our Quest Integrity business for cash proceeds of approximately $279 million, reflecting certain estimated post-closing adjustments. The net proceeds to us (after payment of transaction related expenses and certain other fees) were approximately $270 million. We used approximately $238 million of the proceeds to pay down term debt and to pay certain fees associated with that repayment and related accrued interest, with the remainder reserved for general corporate purposes. As of November 4, 2022, we had consolidated cash and cash equivalents of $76.0 million, of which $6.8 million was restricted mainly as collateral for outstanding letters of credit and approximately $13.7 million of undrawn availability under its various credit facilities, resulting in total liquidity of $82.9 million. Refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Discontinued Operations for additional details regarding this transaction.

Cash and cash equivalents. Our cash and cash equivalents associated with continuing operations at September 30, 2022 and December 31, 2021 totaled $56.4 million and $55.2 million, respectively, consisting of $30.7 million of unrestricted cash on hand and $25.7 million of restricted cash, pledged as cash collateral for letters of credit and other obligations at September 30, 2022 and $51.1 million of unrestricted cash on hand and $4.1 million of restricted cash for interest due on Atlantic Park Term Loan at December 31, 2021. Additionally, $12.9 million and $14.2 million of the $56.4 million and $55.2 million, respectively, of cash and cash equivalents at September 31, 2022 and December 31, 2021 was in foreign accounts, primarily in the Europe, Canada and Australia, including $1.6 million and $2.4 million, respectively, of cash located in countries where currency restrictions exist.

Cash Flows

The following table summarizes cash flows (in thousands):

Cash flows attributable to our operating activities. For the nine months ended September 30, 2022, net cash used in operating activities was $46.4 million. Our net cash used in operating activities generally reflects the cash effects of transactions and other events used in the determination of net loss, which totaled $76.9 million. The decline in cash generated from operations was driven by the net loss for the period, $35.3 million decline in working capital, a gain on disposal of assets of $4.3 million, deferred income taxes of $0.4 million, partially offset by amortization of debt issuance costs and debt discount and write off of deferred loan costs of $25.7 million, adjustments to depreciation and amortization of $28.6 million, and PIK Interest of $15.5 million, resulted in negative operating cash flow.

For the nine months ended September 30, 2021, net cash used by operating activities was $35.9 million. Our net cash used in operating activities generally reflects the cash effects of transactions and other events used in the determination of net loss, which totaled $143.0 million for the period. Overall, the decline in cash generated from operations was driven primarily by the impacts of inclement weather and COVID-19 on our operations which generated reduced revenue and receipts during the period. Partially offsetting the net loss for the period were adjustments of $31.4 million for depreciation and amortization and $5.6 million in non-cash compensation cost.

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

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

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

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

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

Effect of exchange rate changes on cash and cash equivalents. For the nine months ended September 30, 2022 and 2021, the effect of foreign exchange rate changes on cash was a negative $1.4 million and $1.3 million, respectively. The impact of exchange rates on cash and cash equivalents is primarily attributable to fluctuations in U.S. Dollar exchange rates against the Canadian Dollar, the Euro, the British Pound, the Australian Dollar and Mexican Peso.

Capital Resources. We establish a capital budget at the beginning of each calendar year and review it during the course of the year. Our capital budgets are based upon our estimate of internally generated sources of cash including from asset sales, as well as cash on hand and the available borrowing capacity under our ABL and other Credit Facilities. We expect to finance our 2022 capital budget with cash flows from operations, cash on hand, proceeds from asset sales, and our credit facility. Actual capital expenditure levels may vary significantly due to many factors, including industry conditions; the prices and availability of goods and services; and the extent to which non-strategic assets are sold.

We continuously monitor our liquidity needs, coordinate our capital expenditure program with our expected cash flows and projected debt-repayment schedule, and evaluate our available alternative sources of liquidity, including accessing debt and equity capital markets in light of current and expected economic conditions. As discussed above, we will require additional financing to fund our operations for the next 12 months and beyond. However, we believe that our liquidity position and ability to generate cash flows from our operations will be adequate to fund 2022 operations. See Note 1 - Summary of Significant Accounting Policies and Practices for further information.

Contractual Obligations. We have various contractual obligations in the normal course of our operations. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the contractual obligation disclosure since year-end 2021, see Note 12 - Debt for additional details regarding amendments to our debt agreements that were executed during the first quarter of 2022.

Off-Balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of September 30, 2022, the material off-balance sheet arrangements and transactions that we have entered into include $8.9 million in outstanding letters of credit. See Note 12 - Debt for additional details.

Critical Accounting Policies and Estimates

A discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K. Except for the item referenced below, there were no material changes to our critical accounting policies during the nine months ended September 30, 2022.

ASU 2020-06 Adoption. In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for convertible instruments by removing certain separation models in ASC 470-20, Debt—Debt with Conversion and Other Options, for convertible instruments. On January 1, 2022, we adopted the ASU using the modified retrospective method. We recognized a cumulative effect of initially applying the ASU as an adjustment to the January 1, 2022 opening balance of accumulated deficit. The prior period condensed consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. Refer to Note 12 - Debt, for additional details.

New Accounting Principles

For information about newly adopted accounting principles as well as information about new accounting principles pending adoption, see Note 1 - Summary of Significant Accounting Policies and Practices to the condensed consolidated financial statements.

Our market risk sensitive instruments and positions have been determined to be “other than trading.” We have operations in foreign countries with functional currencies that are not the U.S. Dollar. We are exposed to market risk, primarily related to foreign currency fluctuations related to these operations. Subsidiaries with asset and liability balances denominated in currencies other than their functional currency are remeasured in the preparation of their financial statements using a combination of current and historical exchange rates, with any resulting remeasurement adjustments included in net income (loss) for the period. Net foreign currency transaction losses for the three and nine months ended September 30, 2022, were $1.9 million and $4.4 million, respectively.

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. There were no foreign currency swap contracts outstanding during the three and nine months ended September 30, 2022.

Translation adjustments for the assets and liability accounts are included as a separate component of accumulated other comprehensive loss in shareholders’ equity. Foreign currency translation gains recognized in other comprehensive loss were $7.0 million and $12.2 million for the three and nine month periods ended September 30, 2022, respectively.

We had foreign currency-based revenues and operating income of approximately $214.3 million and $6.2 million, respectively, for the nine months ended September 30, 2022. A hypothetical 10% adverse change in all applicable foreign currencies would result in a change in revenues and operating income of $21.3 million and $0.6 million, respectively.

The ABL Credit Facility, Term Loan, and Corre Delayed Draw Term Loan bear interest at variable market rates. If market interest rates increase, our interest expense and cash flows could be adversely impacted. Based on borrowings outstanding at September 30, 2022, an increase in market interest rates of 100 basis points would increase our interest expense and decrease our operating cash flows by approximately $3.9 million on an annual basis.

Our Notes bear interest at a fixed rate, but the fair value of the Notes is subject to fluctuations as market interest rates change. In addition, the fair value of the Notes is affected by changes in our stock price. As of September 30, 2022, the outstanding principal balance of the Notes was $97.4 million. The carrying value of the liability component of the Notes, net of the unamortized discount and issuance costs, was $95.1 million as of September 30, 2022, while the estimated fair value of the Notes was $90.7 million (inclusive of the fair value of the conversion option), which was determined based on the observed trading price of the Notes. See Note 12 - Debt, to the unaudited condensed consolidated financial statements for additional information regarding the Notes.

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including the Interim Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, the Interim Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded as of September 30, 2022, that our disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods.

Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal controls performed during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our operations and financial results are subject to various risks and uncertainties. Other than as noted below, there have been no material changes in our risk factors as previously disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K and in Part II, Item 1A, “Risk Factors” in the Quarterly Report on Form 10-Q for the period ended September 30, 2022.

We may not be able to meet the NYSE’s continued listing requirements and rules, and the NYSE may delist our common stock, which could negatively affect our company, the price of our common stock and our shareholders’ ability to sell our common stock and may lead to potential events of default on existing debt instruments.

On June 17, 2022, we were notified by the NYSE that we were no longer in compliance with the NYSE continued listing standards, set forth in Section 802.01B of the NYSE Listed Company Manual due to the fact that our average global market capitalization over a consecutive 30 trading-day period was less than $50.0 million and, at the same time, our shareholders’ equity was less than $50.0 million. If our average global market capitalization over a consecutive 30 trading-day period drops below $15.0 million, the NYSE will initiate delisting proceedings. As required by the NYSE, we notified the NYSE of our intent to cure the deficiency and restore our compliance with the NYSE continued listing standards. In accordance with applicable NYSE procedures on August 1, 2022 we submitted a plan advising the NYSE of the definitive actions we have taken and are taking, that would bring us into compliance with NYSE continued listing standards within 18 months of receipt of the written notice. The NYSE accepted the plan and our common stock will continue to be listed and traded on the NYSE during the 18-month period from June 17, 2022, subject to our compliance with other NYSE continued listing standards and continued periodic review by the NYSE of our progress with respect to our plan. We can provide no assurances that we will be able to satisfy any of the steps outlined in the plan approved by the NYSE and maintain the listing of our shares on the NYSE.

On July 13, 2022, we received notice by the NYSE that we were no longer in compliance with the continued listing standard set forth in Section 802.01C of the NYSE Listed Company Manual because the average closing price of our common stock was less than $1.00 per share over a consecutive 30 trading-day period. While on September 1, 2022 we were notified by the NYSE that we had regained compliance with the minimum share price continued listing standard, we received notice by the NYSE on November 2, 2022 that we were again out of compliance with such continued listing standard. The notice has no immediate impact on the listing of our common stock which will continue to trade on the NYSE during the applicable cure period, and does not result in a default under our material debt or other agreements.

We are closely monitoring the closing share price of our common stock and are considering all available options. We intend to regain compliance with the NYSE listing standards by pursuing measures that are in our best interest and the best interest of our shareholders. On November 2, 2022, our shareholders approved the proposal to authorize the Board to implement a reverse stock split. Another proposal regarding increasing the total number of authorized shares of common stock from 60,000,000 shares to 120,000,000 shares is pending shareholder approval. Although we anticipate that we will regain compliance with Section 802.01C of the NYSE Listed Company Manual within the cure period, the price of our common stock is influenced by many factors, many of which are beyond our control. There is no assurance that our efforts will be successful, nor is there any assurance that we will remain in compliance with Section 802.01C of the NYSE Listed Company Manual or other NYSE continued listing standards in the future.

A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; limiting our ability to issue additional securities or obtain additional financing in the future; decreasing the amount of news and analyst coverage of us; and causing us reputational harm with investors, our employees, and parties conducting business with us. A delisting of our common stock could constitute a “fundamental change” under the terms of the Notes, requiring us to make an offer to repurchase the Notes at par. There can be no assurance we would have sufficient funds available to us to repurchase the Notes if required to do so. Failure to repurchase the Notes also could cause a cross-default under our ABL Credit Facility and Term Loans, which would permit the holders of the indebtedness to accelerate the maturity thereof and proceed against their collateral and could have a material adverse effect on our business and financial condition.