| Basis of Presentation and Significant Accounting Policies | 2 Basis
of Presentation and Significant Accounting Policies Basis
of Presentation The
accompanying Consolidated Financial Statements include our accounts and those of our controlled subsidiaries. All intercompany transactions
and account balances have been eliminated in consolidation. Investments over which we exercise significant influence, but do not control,
are accounted for using the equity method of accounting. The
accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) for consolidated financial information and in accordance with the rules and regulations of the Securities
and Exchange Commission. The Consolidated Financial Statements include all adjustments considered necessary for a fair presentation of
the financial position and results of operations for the periods presented. Certain previously-reported amounts have been reclassified
to conform to the current presentation. Use
of Estimates in the Preparation of Financial Statements The
preparation of our Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. The
COVID-19 pandemic, the recent invasion of Ukraine by Russia and the sanctions imposed on Russia by various companies in response, and
the volatility in the price of crude oil have created and may continue to create significant uncertainty in macroeconomic conditions,
which may continue to cause fluctuations in demand for our services that impact our results of operations. In addition, limitations on
the availability of borrowing capacity under our current credit facility and any future credit facilities may lead us to sell assets
and/or discontinue certain service lines. We consider these changing economic conditions as we develop accounting estimates, such as
our annual effective tax rate, allowance for bad debts, and long-lived asset impairment assessments. We expect our accounting estimates
to continue to evolve as new events and circumstances arise. Discontinued Operations In
September 2021, we discontinued the operations of Cypress Brown Integrity, LLC (“CBI”), which previously represented our
Pipeline & Process Services segment. CBI provided customers with hydrotesting, chemical cleaning, drying, water treatment, nitrogen
and other related services. CBI was located in Giddings, Texas and a plan of termination impacted approximately 18 In
2021, we recorded a loss of $ 1.9
million 1 0.3
million 0.1
million The
assets and liabilities of discontinued operations on the Consolidated Balance Sheets are summarized below
December
31, December
31,
ASSETS
OF DISCONTINUED OPERATIONS (in
thousands)
Current
assets of discontinued operations:
Cash
and cash equivalents $ 2,334 $ 5,755
Trade
accounts receivable, net — 2,396
Prepaid
expenses and other 177 31
Property
and equipment, net 665 —
Total
current assets of discontinued operations 3,176 8,182
Property
and equipment, net — 1,069
Intangible
assets, net — 2,243
Finance
lease right-of-use assets, net — 495
Total
assets of discontinued operations $ 3,176 $ 11,989
LIABILITIES
OF DISCONTINUED OPERATIONS
Current
liabilities of discontinued operations:
Accounts
payable $ 25 $ 1,215
Accrued
payroll and other 10 108
Income
taxes payable 1 60
Finance
lease obligations — 199
Total
current liabilities of discontinued operations 36 1,582
Finance
lease obligations — 245
Total
liabilities of discontinued operations $ 36 $ 1,827 The
revenues and expenses of discontinued operations in the Consolidated Statements of Operations are summarized below
Year
Ended December 31
2021 2020 2019
(in
thousands)
Revenue $ 2,285 $ 18,716 $ 19,337
Costs
of services 2,595 13,743 13,397
Gross
margin (310 ) 4,973 5,940
Operating
costs and expense:
General
and administrative 1,061 1,858 2,155
Depreciation,
amortization and accretion 363 558 574
Loss
(gain) on asset disposals, net 858 (32 ) (26 )
Operating
(loss) income (2,592 ) 2,589 3,237
Other
(expense) income:
Interest
expense (63 ) (69 ) (81 )
Other,
net 14 11 15
Net
(loss) income before income tax expense (2,641 ) 2,531 3,171
Income
tax expense 1 60 72
Net
(loss) income from discontinued operations, net of tax (2,642 ) 2,471 3,099
Net (loss) income attributable to noncontrolling interests - discontinued operations (1,510 ) 1,030 1,382
Net (loss) income attributable to common unitholders - discontinued operations $ (1,132 ) $ 1,441 $ 1,717 General
and administrative expenses that are directly attributable to CBI are reported within net (loss) income from discontinued
operations, net of tax net (loss)
income from discontinued operations, net of tax. Interest expense associated with $ 1 net (loss) income from discontinued operations, net of tax, 1 As of March 31, 2022, CBI had $ 3.3 million Fair
Value Measurement We
utilize fair value measurements to measure assets in a business combination or assess impairment of property and equipment, intangible
assets, and goodwill. Fair value is the amount received from the sale of an asset or the amount paid to transfer a liability in an orderly
transaction between market participants (an exit price) at the measurement date. Fair value is a market-based measurement considered
from the perspective of a market participant. We use market data or assumptions that we believe market participants would use in pricing
the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation. These inputs can be readily
observable, market corroborated, or unobservable. We apply both market and income approaches for fair value measurements using the best
available information while utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable
inputs. The
fair value hierarchy in GAAP prioritizes the inputs used to measure fair value, giving the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The Partnership classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy
are as follows:
● Level
1
● Level
2
● Level
3 Cash
and Cash Equivalents We
consider all investments purchased with initial maturities of three months or less to be cash equivalents. Cash equivalents consist primarily
of investments in highly- liquid securities. As
of December 31, 2021, U.S. cash balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $ 250,000 100,000 Restricted
Cash We have
various obligations that are secured with security deposits totaling $ 1.1
million 0.7 million prepaid expenses and other Accounts
Receivable, Allowance for Bad Debts and Concentration of Credit Risk We
grant unsecured credit to customers under normal industry standards and terms, and we have established policies and procedures that
allow for an evaluation of our customers’ creditworthiness. We typically receive payment from our customers 45 to 90 days
after the services have been performed. We determine allowances for bad debts based on our assessment of the creditworthiness of our
customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables
previously written off are recorded when cash is received. We do not typically charge interest on past due trade receivables and we
do not typically require collateral on our trade receivables. We recorded no 0.4
million 0.2
million 0.1
million 0.5
million 0.5
million 0.1
million 0.1 million 0.1
million general
and administrative A
former customer of our Inspection Services segment, Sanchez Energy Corporation and certain of its affiliates (collectively, “Sanchez”),
filed for bankruptcy protection in 2019. At the time of the bankruptcy filing, we had $ 0.5 million PG&E
Corporation and its wholly-owned subsidiary Pacific Gas and Electric Company (collectively, “PG&E”), a customer, filed
for bankruptcy protection in January 2019. We had accounts receivable from PG&E of $ 12.1 million 10.4 million 9.8 million 0.5 million Other, net 1.7 million We
had two customers, Pacific Gas & Electric Company and NiSource, Inc., that represented more than 10% of
total accounts receivable as of December 31, 2021. The
majority of our revenues are generated in the United States. In 2021, 2020, and 2019, we generated no
revenues, less than $ 0.1
million , and $ 0.2
million , respectively, from
services performed in Canada. Property
and Equipment Property
and equipment consists of land, land and leasehold improvements, buildings, facilities, wells and related equipment, field equipment,
computer and office equipment, and vehicles. We record property and equipment at cost. Costs of renewals and improvements that substantially
extend the useful lives of the assets are capitalized. Maintenance and repairs are expensed as incurred. We depreciate property and equipment
on a straight-line basis over the estimated useful lives of the assets. Upon retirement, disposition, or impairment of an asset, we remove
the cost and related accumulated depreciation from the balance sheet and report the resulting gain or loss, if any, in the Consolidated
Statement of Operations. Debt
Issuance Costs Debt
issuance costs represent fees and expenses associated with securing our Credit Agreement (see Note 6). Amortization of the capitalized
debt issuance costs is recorded on a straight-line basis over the term of the Credit Agreement. Income
Taxes As
a limited partnership, we generally are not subject to federal, state or local income taxes. The tax on our net income is generally borne
by the individual partners. Net income (loss) for financial statement purposes may differ significantly from taxable income (loss) of
the partners as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable
income allocation requirements under our partnership agreement. The aggregated difference in the basis of our net assets for financial
and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes is not available
to us. The
income of Tulsa Inspection Resources – Canada, ULC, our Canadian subsidiary, is taxable in Canada. Tulsa Inspection Resources
– PUC, LLC (“TIR-PUC”), a subsidiary of our Inspection Services segment that performs inspection services for
utility customers, and Cypress Brown Integrity - PUC, LLC, a 51 As
a publicly-traded partnership, we are subject to a statutory requirement that at least 90 We
evaluate uncertain tax positions for recognition and measurement in the Consolidated Financial Statements. To recognize a tax position,
we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related
appeals or litigation, based on the technical merits of the position. A tax position that meets the more likely than not threshold is
measured to determine the amount of benefit to be recognized in the Consolidated Financial Statements. The amount of tax benefit recognized
with respect to any tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon
settlement. We had no uncertain tax positions that required recognition in the financial statements at December 31, 2021 or 2020. Any
interest or penalties would be recognized as a component of income tax expense. Revenue
Recognition Under
Accounting Standards Codification (“ASC”) 606 - Revenue from Contracts with Customers,
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. Based on this accounting guidance, our revenue is
earned and recognized through the service offerings of our reportable business segments. Our sales contracts have terms of less than
one year. As such, we have used the practical expedient contained within the accounting guidance, which exempts us from the requirement
to disclose the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract
with an original expected duration of one year or less. We apply judgment in determining whether we are the principal or the agent in
instances where we utilize subcontractors to perform all or a portion of the work under our contracts. Based on the criteria in
ASC 606, we have determined we are principal in all such circumstances, with the exception of $ 0.2 million 0.2 million In
2021, 2020, and 2019, we recognized $ 0.2 million 0.3 million 0.2 million 0.2 million 0.8 million 0.8 million Accrued
Payroll and Other Accrued
payroll and other
December
31, 2021 December
31, 2020
(in
thousands)
Accrued
payroll $ 2,082 $ 1,703
Customer deposits and accruals 1,304 1,909
Litigation
settlements (Note 13) 985 424
Accrued interest 440 43
Other 539 689
$ 5,350 $ 4,768 Fair
Value of Financial Instruments The
carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, trade accounts receivable, prepaid expenses
and other, accounts payable, accounts payable – affiliates, accrued payroll and other, and income taxes payable approximate their
fair values. Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis Certain
assets and liabilities are reported at fair value on a nonrecurring basis in our Consolidated Balance Sheets. The following methods and
assumptions were used to estimate the fair values: Property and equipment We assess property and
equipment for possible impairment whenever events or changes in circumstances indicate, in the judgment of management, that the
carrying value of the assets may not be recoverable. Such indicators include, among others, the nature of the asset, the projected
future economic benefit of the asset, changes in regulatory and political environments, and historical and future cash flow and
profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset,
we recognize an impairment charge for the excess of carrying value of the asset over its estimated fair value. Determination as
to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity
prices and the outlook for national or regional market supply and demand for the services we provide. In the Environmental Services
segment, property and equipment is grouped for impairment testing purposes at each water treatment facility, as these asset groups
represent the lowest level at which cash flows are separately identifiable. In the fourth quarter of 2021,
the near-term outlook for one of our water treatment facilities declined, due primarily to the fact that its primary customer built
a competing facility, and a planned new customer did not deliver the volume of water that we expected. We considered these developments
to be potential indicators of impairment and therefore performed a property and equipment impairment analysis for this water treatment
facility as of December 31, 2021. We estimated the fair value of this water treatment facility utilizing the income approach (discounted
cash flows) valuation method, which is a Level 3 measurement as defined in ASC 820, Fair Value Measurement. Significant inputs
in the valuation included projections of future revenues, anticipated operating costs, and appropriate discount rates. Based on
the results of this property and equipment impairment analysis, we recorded an impairment of $ 0.9 million Goodwill We
have $ 50.4 million 40.3 million 10.1 million To
perform a goodwill impairment assessment, we first evaluate qualitative factors to determine whether it is more likely than not that
the fair value of a reporting unit exceeds its carrying value. If this assessment reveals that it is more likely than not that the carrying
value of a reporting unit exceeds its fair value, we then determine the estimated fair value of the reporting unit. If the carrying amount
exceeds the reporting unit’s fair value, we record a goodwill impairment charge for the excess (not exceeding the carrying value
of the reporting unit’s goodwill). Crude
oil prices decreased significantly during 2020, due in part to decreased demand as a result of the worldwide COVID-19 pandemic. This
decline in oil prices led many of our customers to change their budgets and plans, which decreased their spending on drilling, completions,
and exploration. This had an adverse effect on construction of new pipelines, gathering systems, and related energy infrastructure. Lower
exploration and production activity also affected the midstream industry and led to delays and cancellations of projects. Such developments
reduced our opportunities to generate revenues. It is impossible at this time to determine what may occur in the future, as customer
plans will evolve over time. It is possible that the cumulative nature of these events could have a material adverse effect on our results
of operations and financial position. Inspection
Services We
completed our annual goodwill impairment assessment as of November 1, 2021 and concluded the $ 40.3 million Between
November 1, 2021 and December 31, 2021, our near-term outlook for the Inspection Services segment declined for the following reasons:
● We began to implement significant changes to our inspector remuneration programs to address longstanding industry practices whereby (i) inspectors are provided with fixed reimbursements based on estimates of their out-of-pocket expenditures and (ii) many inspectors are paid on day rates. We completed our process of converting all inspectors from day rates to hourly rates. We also significantly reduced fixed expense reimbursements to our inspectors and added a variety of new benefits, including increased hourly wages, a 401(k) match, retention bonuses, and subsidized health, dental, vision, and life insurance. These changes were designed to give each inspector the same or greater remuneration as he or she was previously receiving. While some inspectors welcomed these changes, other inspectors preferred the old pay practices, and approximately 20%
● We
operate in a large market with many potential future customers that we do not currently serve,
and we have invested heavily in business development efforts. These efforts did not lead
to any significant new customer wins during November or December 2021. We
considered these developments to be potential indicators of impairment and therefore performed a quantitative goodwill impairment analysis
as of December 31, 2021. We estimated the fair value of the reporting unit utilizing the income approach (discounted cash flows) valuation
method, which is a Level 3 measurement as defined in ASC 820, Fair Value Measurement. Significant inputs in the valuation included projections
of future revenues, anticipated operating costs, and appropriate discount rates. We estimated revenues and costs for a period of 9
years and estimated a terminal
value calculated as a multiple of the cash flows in the preceding year. We assumed that a hypothetical buyer would expect to benefit
from revenue growth opportunities, both from new customers as a result of business development efforts and from existing customers as
a result of an assumed recovery in market activity. We discounted these estimated future cash flows at a rate of 15% .
We assumed that a hypothetical buyer would be a private company that would be subject to income taxes but that could obtain savings in
general and administrative expenses from the elimination of certain expenses associated with being a publicly traded entity. Based on
this quantitative analysis, we concluded that the goodwill of the Inspection Services segment was not impaired at December 31, 2021.
Our analysis indicated that the fair value of the reporting unit of the Inspection Services segment exceeded its book value by 4%
at December 31, 2021. The use of
different assumptions and estimates from those we used in our analysis could have resulted in the need to record a goodwill impairment. Our
estimates of fair value are sensitive to changes in a number of variables, many of which relate to broader macroeconomic conditions outside
of our control. As a result, actual performance could be different from our expectations and assumptions. Estimates and assumptions used
in determining fair value of the reporting units that are outside the control of management include, but are not limited to, an increase
or decrease in new construction projects, commodity prices, operating costs, interest rates, and cost of capital. While we believe we
have made reasonable estimates and assumptions to estimate the fair value of the Inspection Services segment based on information available
as of December 31, 2021, it is reasonably possible that changes could occur that would require a goodwill impairment charge in the future. Subsequent
to December 31, 2021, the following events occurred:
● We
learned in March 2022 that we did not win our bid to provide inspection services on a large
project in a new service line with an existing customer. We previously believed we had a
good chance of winning this bid.
● Our
nondestructive examination service line did not win any significant new revenue in the first
three months of 2022 and its activity remains below the level estimated in our December 31,
2021 goodwill impairment analysis.
● We
did not win any significant new bids for services to new customers in the first three months
of 2022.
● Our
competitors continue to pursue recruitment of our inspectors, using aggressive non-taxable
pay packages. Due
to these recent developments, it is likely that we will need to perform an interim goodwill impairment assessment for the Inspection
Services segment as of March 31, 2022 and it is reasonably possible that we will conclude that the goodwill of the Inspection Services
segment is impaired as of March 31, 2022. Environmental
Services We
completed our annual goodwill impairment assessment as of November 1, 2021 and concluded that the $ 10.1 million 71 84 57.49 10 13.5 13 Our
estimates of fair value are sensitive to changes in a number of variables, many of which relate to broader macroeconomic conditions outside
of our control. As a result, actual performance could be different from our expectations and assumptions. Estimates and assumptions used
in determining fair value of the reporting units that are outside the control of management include, but are not limited to, commodity
prices, operating costs, interest rates, and cost of capital. Our water treatment facilities are concentrated in one basin, and changes
in oil and gas production in that basin could have a significant impact on the profitability of the Environmental Services segment. While
we believe we have made reasonable estimates and assumptions to estimate the fair values of the Environmental Services segment, it is
reasonably possible that changes could occur that would require a goodwill impairment charge in the future. Such changes could include,
among others, a slower recovery in demand for petroleum products than assumed in our projections, an increase in supply from other areas
(or other factors) that result in reduced production in North Dakota, and increased pessimism among market participants, which could
increase the discount rate on (and therefore decrease the value of) estimated future cash flows. Identifiable
Intangible Assets Our
intangible assets consist primarily of customer relationships, trade names, and our database of inspectors. We recorded these intangible
assets as part of our accounting for the acquisitions of businesses and we amortize these assets on a straight-line basis over their
estimated useful lives, which typically range from 5 20 We
review our intangible assets for impairment whenever events or circumstances indicate that the asset group to which they relate may be
impaired. To perform an impairment assessment, we first determine whether the cash flows expected to be generated from the asset group
exceed the carrying value of the asset group. If such estimated cash flows do not exceed the carrying value of the asset group, we reduce
the carrying value of the assets to their fair values and record a corresponding impairment loss. Depending
on future events, it is reasonably possible that we could incur impairment charges associated with our property, plant, and equipment, goodwill,
or intangible assets. Noncontrolling
Interests We
own a 51 49 net income attributable to noncontrolling interests - continuing operations net (loss) income attributable
to controlling interests - discontinued operations noncontrolling interests CBI’s
company agreement generally requires CBI to make an annual distribution to its members equal to or greater than the amount of CBI’s
taxable income multiplied by the maximum federal income tax rate. As of March 31, 2022, CBI had $ 3.3 million Foreign
Currency Translation Our
Consolidated Financial Statements are reported in U.S. dollars. We translate our Canadian-dollar-denominated assets and liabilities into
U.S. dollars at the exchange rate in effect at the balance sheet date. We translate our Canadian-dollar-denominated revenues and expenses
into U.S. dollars at the average exchange rate in effect during the period. Our
Consolidated Balance Sheet at December 31, 2021 includes $ 2.6 million accumulated other comprehensive loss accumulated other comprehensive
loss partners’ capital Our
Canadian subsidiary has certain payables to our U.S.-based subsidiaries. These intercompany payables and receivables among our consolidated
subsidiaries are eliminated in our Consolidated Balance Sheets. We report currency translation adjustments on these intercompany payables
and receivables within foreign currency gains (losses) accumulated other comprehensive loss New
Accounting Standards Accounting
guidance proposed by the Financial Accounting Standards Board (“FASB”) that may impact our Consolidated Financial Statements,
which we have not yet adopted, includes: The
FASB issued Accounting Standards Update (“ASU”) 2016-13 – Financial Instruments – Credit Losses in September
2016, which replaces the current “incurred loss” methodology for recognizing credit losses with an “expected loss”
methodology. This guidance affects trade receivables, financial assets and certain other instruments that are not measured at fair value
through net income. In November 2019, the FASB issued final guidance to delay the implementation of this new guidance for smaller reporting
companies until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently
evaluating the impact this ASU will have on our Consolidated Financial Statements. The
FASB issued ASU 2020-06 – Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity’s Own Equity
in August 2020. The ASU simplifies accounting for convertible instruments by removing major separation models required under current
GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for
embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the
derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income
per share calculation in certain areas. The new guidance is effective for annual and interim periods for smaller reporting companies
beginning after December 15, 2023, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods
within those fiscal years. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements. In
2020, we adopted the following new accounting standard issued by the Financial Accounting Standards Board (“FASB”): The
FASB issued ASU 2020-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract in August 2020 |
