UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2021~~March 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __ to __

Commission file number 001-34481

Mistras Group, Inc.

(Exact name of registrant as specified in its charter)


Delaware		22-3341267
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

195 Clarksville Road
Princeton Junction,	New Jersey	08550
(Address of principal executive offices)		(Zip Code)

(609) 716-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller

reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ý No

As of ~~October 28, 2021,~~April 29, 2022, the registrant had ~~29,458,243~~29,805,316 shares of common stock outstanding.

Table of Contents

TABLE OF CONTENTS


			PAGE
PART I—FINANCIAL INFORMATION

	ITEM 1.	Financial Statements	1

		Condensed Consolidated Balance Sheets as of ~~September 30, 2021~~March 31, 2022 (unaudited) and December 31, ~~2020~~2021	1

		Unaudited Condensed Consolidated Statements of ~~Income (Loss)~~Loss for thethree ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020~~March 31, 2021	2

		Unaudited Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020~~March 31, 2021	3

		Unaudited Condensed Consolidated Statements of Equity for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020~~March 31, 2021	4

		Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021 ~~and~~ ~~September 30, 2020~~	5

		Notes to Unaudited Condensed Consolidated Financial Statements	6

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2725

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	3734

	ITEM 4	Controls and Procedures	3734

PART II—OTHER INFORMATION

	ITEM 1.	Legal Proceedings	3835

	ITEM 1.A.	Risk Factors	3835

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3835

	ITEM 3.	Defaults Upon Senior Securities	3835

	ITEM 4.	Mine Safety Disclosures	3835

	ITEM 5.	Other Information	3835

	ITEM 6.	Exhibits	3936

SIGNATURES			4037

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

Mistras Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
ASSETS	ASSETS	(unaudited)				ASSETS	(unaudited)
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	22,597	$	25,760	Cash and cash equivalents	$	19,921	$	24,110
Accounts receivable, net	Accounts receivable, net	127,699		107,628		Accounts receivable, net	127,085		109,511
Inventories	Inventories	12,178		13,134		Inventories	12,589		12,686
Prepaid expenses and other current assets	Prepaid expenses and other current assets	17,505		16,066		Prepaid expenses and other current assets	11,709		15,031
Total current assets	Total current assets	179,979		162,588		Total current assets	171,304		161,338
Property, plant and equipment, net	Property, plant and equipment, net	90,366		92,681		Property, plant and equipment, net	83,689		86,578
Intangible assets, net	Intangible assets, net	61,695		68,642		Intangible assets, net	57,479		59,381
Goodwill	Goodwill	205,657		206,008		Goodwill	206,409		205,439
Deferred income taxes	Deferred income taxes	2,676		2,069		Deferred income taxes	2,225		2,174
Other assets	Other assets	46,855		51,325		Other assets	47,122		47,285
Total assets	Total assets	$	587,228	$	583,313	Total assets	$	568,228	$	562,195
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current Liabilities	Current Liabilities					Current Liabilities
Accounts payable	Accounts payable	$	13,343	$	14,240	Accounts payable	$	12,422	$	12,870
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	88,312		78,500		Accrued expenses and other current liabilities	87,466		83,863
Current portion of long-term debt	Current portion of long-term debt	18,988		10,678		Current portion of long-term debt	21,336		20,162
Current portion of finance lease obligations	Current portion of finance lease obligations	3,773		3,765		Current portion of finance lease obligations	3,775		3,765
Income taxes payable	Income taxes payable	1,676		2,664		Income taxes payable	1,216		755
Total current liabilities	Total current liabilities	126,092		109,847		Total current liabilities	126,215		121,415
Long-term debt, net of current portion	Long-term debt, net of current portion	196,866		209,538		Long-term debt, net of current portion	187,478		182,403
Obligations under finance leases, net of current portion	Obligations under finance leases, net of current portion	10,338		11,115		Obligations under finance leases, net of current portion	9,552		9,752
Deferred income taxes	Deferred income taxes	9,195		8,236		Deferred income taxes	8,661		8,385
Other long-term liabilities	Other long-term liabilities	43,711		47,358		Other long-term liabilities	39,237		39,328
Total liabilities	Total liabilities	386,202		386,094		Total liabilities	371,143		361,283
Commitments and contingencies	Commitments and contingencies	0		0		Commitments and contingencies	0		0
Equity	Equity					Equity
Preferred stock, 10,000,000 shares authorized	Preferred stock, 10,000,000 shares authorized	—		—		Preferred stock, 10,000,000 shares authorized	—		—
Common stock, $0.01 par value, 200,000,000 shares authorized, 29,457,605 and 29,234,143 shares issued and outstanding		294		292
Common stock, $0.01 par value, 200,000,000 shares authorized, 29,720,443 and 29,546,263 shares issued and outstanding						Common stock, $0.01 par value, 200,000,000 shares authorized, 29,720,443 and 29,546,263 shares issued and outstanding	297		295
Additional paid-in capital	Additional paid-in capital	237,577		234,638		Additional paid-in capital	239,656		238,687
Accumulated Deficit		(17,893)		(21,848)
Accumulated deficit						Accumulated deficit	(23,351)		(17,988)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(19,176)		(16,061)		Accumulated other comprehensive loss	(19,756)		(20,311)
Total Mistras Group, Inc. stockholders’ equity	Total Mistras Group, Inc. stockholders’ equity	200,802		197,021		Total Mistras Group, Inc. stockholders’ equity	196,846		200,683
Non-controlling interests	Non-controlling interests	224		198		Non-controlling interests	239		229
Total equity	Total equity	201,026		197,219		Total equity	197,085		200,912
Total liabilities and equity	Total liabilities and equity	$	587,228	$	583,313	Total liabilities and equity	$	568,228	$	562,195

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of ~~Income (Loss)~~Loss

(in thousands, except per share data)


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021

Revenue	Revenue	$	174,556	$	147,894	$	505,968	$	431,794	Revenue	$	161,662	$	153,735
Cost of revenue	Cost of revenue	116,750		94,930		341,780		286,208		Cost of revenue	115,758		108,243
Depreciation	Depreciation	5,590		5,580		16,635		16,400		Depreciation	6,012		5,491
Gross profit	Gross profit	52,216		47,384		147,553		129,186		Gross profit	39,892		40,001
Selling, general and administrative expenses	Selling, general and administrative expenses	39,221		37,473		118,579		116,638		Selling, general and administrative expenses	42,036		39,639

Impairment charges		—		—		—		106,062

Legal settlement and litigation charges, net		—		(360)		1,030		(360)

Legal settlement and insurance recoveries, net										Legal settlement and insurance recoveries, net	(841)		1,030
Research and engineering	Research and engineering	595		638		1,942		2,170		Research and engineering	551		727
Depreciation and amortization	Depreciation and amortization	2,918		3,182		9,070		10,359		Depreciation and amortization	2,795		3,074
Acquisition-related expense, net	Acquisition-related expense, net	246		709		1,068		186		Acquisition-related expense, net	49		277
Income (loss) from operations		9,236		5,742		15,864		(105,869)
Loss from operations										Loss from operations	(4,698)		(4,746)
Interest expense	Interest expense	2,326		3,645		8,694		9,410		Interest expense	1,938		3,213
Income (loss) before benefit for income taxes		6,910		2,097		7,170		(115,279)
Provision (benefit) for income taxes		3,513		544		3,187		(15,645)
Net Income (loss)		3,397		1,553		3,983		(99,634)
Loss before benefit for income taxes										Loss before benefit for income taxes	(6,636)		(7,959)
Benefit for income taxes										Benefit for income taxes	(1,283)		(2,600)
Net Loss										Net Loss	(5,353)		(5,359)
Less: net income attributable to noncontrolling interests, net of taxes	Less: net income attributable to noncontrolling interests, net of taxes	17		30		28		8		Less: net income attributable to noncontrolling interests, net of taxes	10		3
Net Income (loss) attributable to Mistras Group, Inc		$	3,380	$	1,523	$	3,955	$	(99,642)
Net Loss attributable to Mistras Group, Inc.										Net Loss attributable to Mistras Group, Inc.	$	(5,363)	$	(5,362)

Earnings (loss) per common share
Loss per common share										Loss per common share
Basic	Basic	$	0.11	$	0.05	$	0.13	$	(3.43)	Basic	$	(0.18)	$	(0.18)
Diluted	Diluted	$	0.11	$	0.05	$	0.13	$	(3.43)	Diluted	$	(0.18)	$	(0.18)
Weighted-average common shares outstanding:	Weighted-average common shares outstanding:									Weighted-average common shares outstanding:
Basic	Basic	29,619		29,177		29,550		29,086		Basic	29,634		29,425
Diluted	Diluted	30,127		29,311		30,093		29,086		Diluted	29,634		29,425

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss

(in thousands)

Three months ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Net Income (loss) $ 3,397 $ 1,553 $ 3,983 $ (99,634)
Other comprehensive income (loss):
Foreign currency translation adjustments (5,472) 5,963 (3,117) (4,924)
Comprehensive Income (Loss) (2,075) 7,516 866 (104,558)
Less: net income (loss) attributable to noncontrolling interest 17 30 28 8
Less: Foreign currency translation adjustments attributable to noncontrolling interests (3) 4 (2) (2)
Comprehensive income (loss) attributable to Mistras Group, Inc $ (2,089) $ 7,482 $ 840 $ (104,564)


	Three months ended March 31,
	2022		2021

Net Loss	$	(5,353)	$	(5,359)
Other comprehensive loss:
Foreign currency translation adjustments	$	555	$	(592)
Comprehensive Loss	(4,798)		(5,951)
Less: net income attributable to noncontrolling interest	10		3

Comprehensive loss attributable to Mistras Group, Inc.	$	(4,808)	$	(5,954)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Equity

(in thousands)
Three months ended
Common Stock Additional
paid-in capital Retained
earnings
(deficit) Accumulated
other
comprehensive income (loss) Total
Mistras Group,
Inc.
Stockholders’ Equity Noncontrolling Interest
Shares Amount Total Equity
Balance at June 30, 2021 $ 29,432 $ 294 $ 236,125 $ (21,273) $ (13,707) $ 201,439 $ 210 $ 201,649
Net income — — — 3,380 — 3,380 17 3,397
Other comprehensive gain (loss), net of tax — — — — (5,469) (5,469) (3) (5,472)
Share-based payments — — 1,452 — — 1,452 — 1,452
Net settlement of restricted stock units 26 — — — — — — —
Balance at September 30, 2021 29,458 $ 294 $ 237,577 $ (17,893) $ (19,176) $ 200,802 $ 224 $ 201,026
Balance at June 30, 2020 29,110 $ 291 $ 231,724 $ (23,552) $ (32,172) $ 176,291 $ 172 $ 176,463
Net loss — — — 1,523 — 1,523 30 1,553
Other comprehensive gain (loss), net of tax — — — — 5,963 5,963 4 5,967
Share-based payments — — 1,593 — — 1,593 — 1,593
Net settlement of options and restricted stock units 82 1 (50) — — (49) — (49)
Balance at September 30, 2020 29,192 $ 292 $ 233,267 $ (22,029) $ (26,209) $ 185,321 $ 206 $ 185,527


	Three months ended
	Common Stock			Additional paid-in capital		Accumulated deficit		Accumulated other comprehensive loss		Total Mistras Group, Inc. Stockholders’ Equity		Noncontrolling Interest
	Shares	Amount												Total Equity

Balance at December 31, 2021	29,546	$	295	$	238,687	$	(17,988)	$	(20,311)	$	200,683	$	229	$	200,912
Net income (loss)	—	—		—		(5,363)		—		(5,363)		10		(5,353)
Other comprehensive income, net of tax	—	—		—		—		555		555		—		555
Share-based payments	—	—		1,515		—		—		1,515		—		1,515
Net settlement of restricted stock units	174	2		(546)		—		—		(544)		—		(544)

Balance at March 31, 2022	29,720	$	297	$	239,656	$	(23,351)	$	(19,756)	$	196,846	$	239	$	197,085

Balance at December 31, 2020	29,234	$	292	$	234,638	$	(21,848)	$	(16,061)	$	197,021	$	198	$	197,219
Net income (loss)	—	—		—		(5,362)		—		(5,362)		3		(5,359)
Other comprehensive loss, net of tax	—	—		—		—		(592)		(592)		—		(592)
Share-based payments	—	—		1,262		—		—		1,262		—		1,262
Net settlement of restricted stock units	113	1		(487)		—		—		(486)		—		(486)

Balance at March 31, 2021	29,347	$	293	$	235,413	$	(27,210)	$	(16,653)	$	191,843	$	201	$	192,044

Nine months ended
Common Stock Additional
paid-in capital Retained
earnings
(deficit) Accumulated
other
comprehensive loss Total
Mistras Group,
Inc.
Stockholders’ Equity Noncontrolling Interest
Shares Amount Total Equity
Balance at December 31, 2020 29,234 $ 292 $ 234,638 $ (21,848) $ (16,061) $ 197,021 $ 198 $ 197,219
Net income — — — 3,955 — 3,955 28 3,983
Other comprehensive gain (loss), net of tax — — — — (3,115) (3,115) (2) (3,117)
Share-based payments — — 3,916 — — 3,916 — 3,916
Net settlement of restricted stock units 224 2 (977) — — (975) — (975)
Balance at September 30, 2021 29,458 $ 294 $ 237,577 $ (17,893) $ (19,176) $ 200,802 $ 224 $ 201,026
Balance at December 31, 2019 28,945 $ 289 $ 229,205 $ 77,613 $ (21,285) $ 285,822 $ 200 $ 286,022
Net loss — — — (99,642) — (99,642) 8 (99,634)
Other comprehensive gain (loss), net of tax — — — — (4,924) (4,924) (2) (4,926)
Share-based payments — — 4,391 — — 4,391 — 4,391
Net settlement of restricted stock units 247 3 (329) — — (326) — (326)
Balance at September 30, 2020 29,192 $ 292 $ 233,267 $ (22,029) $ (26,209) $ 185,321 $ 206 $ 185,527

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(In Thousands)

~~(in thousands~~


	Three months ended March 31,
	2022		2021

Cash flows from operating activities
Net loss	$	(5,353)	$	(5,359)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization	8,807		8,565

Deferred income taxes	196		866
Share-based compensation expense	1,515		1,262

Fair value adjustments to contingent consideration	45		243
Foreign currency loss	686		455

Other	86		(48)
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions
Accounts receivable	(17,831)		(5,417)
Inventories	(96)		(87)
Prepaid expenses and other assets	3,421		(4,944)
Accounts payable	(440)		942
Accrued expenses and other liabilities	3,605		6,881
Income taxes payable	493		(211)
Payment of contingent consideration liability in excess of acquisition-date fair value	(533)		—
Net cash provided by (used in) operating activities	(5,399)		3,148
Cash flows from investing activities
Purchase of property, plant and equipment	(3,061)		(4,003)

Purchase of intangible assets	(151)		(350)
Acquisition of business, net of cash acquired	—		(411)
Proceeds from sale of equipment	475		588

Net cash used in investing activities	(2,737)		(4,176)
Cash flows from financing activities
Repayment of finance lease obligations	(1,076)		(1,069)

Repayment of long-term debt	(4,152)		(2,323)
Proceeds from revolver	26,000		23,000
Repayment of revolver	(15,500)		(17,750)

Payment of contingent consideration for business acquisitions	(405)		(938)
Taxes paid related to net share settlement of share-based awards	(544)		(485)

Net cash provided by financing activities	4,323		435
Effect of exchange rate changes on cash and cash equivalents	(376)		(990)
Net change in cash and cash equivalents	(4,189)		(1,583)
Cash and cash equivalents at beginning of period	24,110		25,760
Cash and cash equivalents at end of period	$	19,921	$	24,177
Supplemental disclosure of cash paid (received)
Interest, net	$	1,711	$	2,916
Income taxes, net of refunds	$	(4,661)	$	2,877
Noncash investing and financing
Equipment acquired through finance lease obligations	$	848	$	643

).
Nine months ended September 30,
2021 2020
Cash flows from operating activities
Net income (loss) $ 3,983 $ (99,634)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization 25,705 26,759
Impairment charges — 106,062
Deferred income taxes 1,055 (16,831)
Share-based compensation expense 3,916 4,312
Fair value adjustments to contingent consideration 1,034 186
Foreign currency loss 366 1,965
Other 265 2,419
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions
Accounts receivable (21,907) 20,319
Inventories 868 (1,845)
Prepaid expenses and other assets (2,324) (2,305)
Accounts payable (751) (2,357)
Accrued expenses and other liabilities 11,247 3,069
Income taxes payable (988) (328)
Net cash provided by operating activities 22,469 41,791
Cash flows from investing activities
Purchase of property, plant and equipment (15,130) (10,676)
Purchase of intangible assets (887) (311)
Acquisition of business, net of cash acquired (441) —
Proceeds from sale of equipment 964 429
Net cash used in investing activities (15,494) (10,558)
Cash flows from financing activities
Repayment of finance lease obligations (3,032) (3,078)
Proceeds from borrowings of long-term debt — 2,245
Repayment of long-term debt (12,121) (4,334)
Proceeds from revolver 71,000 27,250
Repayment of revolver (62,250) (44,000)
Payment of financing costs (550) (1,497)
Payment of contingent consideration for business acquisitions (938) (1,337)
Taxes paid related to net share settlement of share-based awards (975) (326)
Net cash used in financing activities (8,866) (25,077)
Effect of exchange rate changes on cash and cash equivalents (1,272) 944
Net change in cash and cash equivalents (3,163) 7,100
Cash and cash equivalents at beginning of period 25,760 15,016
Cash and cash equivalents at end of period $ 22,597 $ 22,116
Supplemental disclosure of cash paid
Interest, net $ 8,119 $ 9,061
Income taxes, net of refunds $ 3,816 $ 1,633
Noncash investing and financing
Equipment acquired through finance lease obligations $ 2,445 $ 1,607

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

1. Description of Business and Basis of Presentation

Description of Business

Mistras Group, Inc. and subsidiaries (the Company) is a leading “one source” multinational provider of integrated technology-enabled asset protection solutions helping to maximize the safety and operational uptime for civilization's most critical industrial and civil assets.

Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, and decades-long legacy of industry leadership, the Company helps clients with asset-intensive infrastructure in the oil and gas, aerospace and defense, industrials, power generation, and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries towards achieving and maintaining operational excellence. By supporting these organizations that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and space craft; and building real-time monitoring equipment to enable safe travel across bridges, the Company helps the world at large.

The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial ~~IoT-connected~~Internet of Things ("IoT")-connected digital software and monitoring solutions, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.

The Company's core capabilities also include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies and NDT equipment, asset and mechanical integrity engineering services, and light mechanical maintenance and access services.

Recent Developments

The COVID-19 coronavirus (COVID-19) pandemic has continued to cause disruption and volatility in domestic and international markets ~~and~~although conditions continue to improve during ~~2021~~2022 as compared to ~~2020.~~2021. The Company's businesses have been classified as non-healthcare critical infrastructure as defined by the U.S. Centers for Disease Control and Prevention (CDC). Our facilities, and the Company's customers facilities as well, have remained open with staffing modifications and precautionary procedures taken as necessary.

Overall, the Company has taken actions to help ensure the health and safety of Company employees and those of its customers and suppliers; maintain business continuity and financial strength and stability; and serve customers as they provide essential products and services to the world.

The COVID-19 pandemic uncertainty, significant volatility in oil prices, and decreased traffic in the aerospace industry have adversely affected the operations of the Company's customers, suppliers and contractors beginning in the first quarter of 2020, and as a consequence, the Company's results of operations, were adversely impacted. These negative factors continue to cause volatility and uncertainty in the markets in which the Company operates, although the Company in ~~2021~~2022 has nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas where crude oil prices have exceeded pre-pandemic levels.

While the Company cannot fully assess the impact that the factors discussed above will have on its operations at this time, there were certain impacts that the Company identified resulting in impairment charges in 2020. See Note 8-~~Goodwill,~~ ~~Note 9-Intangible Assetsand Note13-Leases~~ ~~for additional information.~~

The Company is currently unable to predict with certainty the overall impact that the factors discussed above and the effect of the Russian-Ukrainian conflict may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. To date, the Company's European operations have begun to see increased costs associated with higher energy costs, among others, due in part to the on-going conflict. The Company will continue to monitor market conditions and respond accordingly.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

~~continue to monitor market conditions and respond accordingly. As of September 30, 2021, the cash balance was approximately $22.6 million.~~

Basis of Presentation

The Unaudited Condensed Consolidated Financial Statements contained in this report have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") and Securities and Exchange Commission ("SEC") guidance allowing for reduced disclosure for interim periods. In the opinion of management, the Unaudited Condensed Consolidated Financial Statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the years ending December 31, ~~2021~~2022 and December 31, ~~2020.~~2021.

Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the notes to the Audited Consolidated Financial Statements contained in the Company's ~~2020~~2021 Annual Report on Form 10-K ("~~2020~~2021 Annual Report").

Principles of Consolidation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of Mistras Group, Inc. as well as its wholly-owned subsidiaries, majority-owned subsidiaries and consolidated variable interest entities (VIE). For subsidiaries in which the Company’s ownership interest is less than 100%, the non-controlling interests are reported in stockholders’ equity in the accompanying Condensed Consolidated Balance Sheets. The non-controlling interests in net results, net of tax, is classified separately in the accompanying Unaudited Condensed Consolidated Statements of ~~Income (Loss).~~Loss. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations of companies acquired are included from the date of acquisition.

Reclassification

Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company's financial condition or results of operations as previously reported.

Customers

For each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ no customer represented 10% or more of the Company's revenue.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in Note 1–Summary of Significant Accounting Policies and Practices in the ~~2020~~2021 Annual Report. On an ongoing basis, the Company evaluates its estimates and assumptions, including among other things, those related to revenue recognition, long-lived assets, goodwill and acquisitions. Since the date of the ~~2020~~2021 Annual Report, there have been no material changes to the Company's significant accounting policies.

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Income Taxes

Income taxes are accounted for under the asset and liability method. We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards, or NOLs. A valuation allowance is provided if it is more likely than not that some or all of a deferred income tax asset will not be realized. A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current and prior years.

As of ~~September 30, 2021,~~March 31, 2022, management concluded that it is more likely than not that a substantial portion of the Company's deferred tax assets will be realized.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

The Company’s effective income tax rate was approximately ~~50.8%~~19.3% and ~~25.9%~~32.7% for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. The ~~Company’s~~ effective income tax rate ~~was approximately 44.4% and 13.6%~~benefit for the ~~nine~~three months ended ~~September 30, 2021 and 2020, respectively.~~

March 31, 2022 was lower than the statutory rate primarily due to the impact of an unfavorable discrete item related to stock compensation. The effective income tax rate for the three months ended ~~September 30,~~March 31, 2021 was higher than the statutory rate due to ~~a $1.2 million valuation allowance recorded during the period related to various state deferred tax assets and earnings in jurisdictions with higher income tax rates than the United States.~~The effective income tax rate for the three months ended September 30, 2020 approximated the statutory rate, as the favorable impact of the CARES Act was offset by the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences.

The effective income tax rate for the nine months ended September 30, 2021 was higher than the statutory rate due to a $1.2 million valuation allowance recorded during the period which was related to various state deferred tax assets offset by the capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US. The effective income tax rate for the nine months ended September 30, 2020 was lower than the statutory rate primarily due to the income tax benefits of the CARES Act, partially offset by impairments for which the Company did not realize income tax benefits.

Recent Accounting Pronouncements

On January 1, 2021, the Company adopted new guidance to simplify the accounting for income taxes by, among other things, removing certain exceptions related to intra-period tax allocations, interim calculations and the recognition of deferred tax liabilities for outside basis differences. The guidance did not have a material impact on the Company's consolidated financial statements.

In March 2020 and updated in January 2021, the FASB issued ASU 2020-04 ~~“Reference~~and 2021-01,“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference 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. The Company is currently evaluating applicable contracts and the available expedients provided by the new guidance.

2. Revenue

The Company derives the majority of its revenue by providing services on a time and material basis, and are short-term in nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

~~Table of Contents~~

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

Performance Obligations

The Company provides highly integrated and bundled inspection services to its customers. The majority of the Company's contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company's best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is a relative selling price based on price lists.

Contract modifications are not routine in the performance of the Company's contracts. Generally, when contracts are modified, the modification is to account for changes in scope to the goods and services that are provided. In most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as a separate contract.

The Company's performance obligations are satisfied over time as work progresses or at a point in time. The majority of the Company's revenue is recognized over time as work progresses for the Company's service deliverables, which includes providing testing, inspection and mechanical services to our customers. Revenue is recognized over time based on time and material incurred to date which best portrays the transfer of control to the customer. The Company also utilizes an available

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

practical expedient that provides for revenue to be recognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and overhead to be consumed on fulfillment of such services. For these arrangements, revenue is recognized on a cost-to-cost method tracked on an input basis.

The majority of our revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead.

The Company expects any significant remaining performance obligations to be satisfied within one year.

Contract Estimates

The majority of the Company's revenues are short-term in nature. The Company enters into master service agreements (MSAs) with customers that specify an overall framework and contract terms. The actual contracting to provide services or furnish products are triggered by a work order, purchase order, or some similar document issued pursuant to a MSA which sets forth the scope of services and/or identifies the products to be provided. From time-to-time, the Company may enter into longer-term contracts, which can range from several months to several years. Revenue on certain contracts is recognized as work is performed based on total costs incurred to date in relation to the total estimated costs for the performance of the contract at completion. This includes contract estimates of costs to be incurred for the performance of the contract. Cost estimation is based upon the professional knowledge and experience of the Company's project managers, engineers and financial professionals. Factors that are considered in estimating the work to be completed include the availability of materials, the effect of any delays in the Company's project performance and the recoverability of any claims. Whenever revisions of estimates, contract costs and/or contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Revenue by Category

The following series of tables present the Company's disaggregated revenue:

Revenue by industry was as follows:


Three Months Ended September 30, 2021		Services		International		Products		Corp/Elim		Total
Three Months Ended March 31, 2022												Three Months Ended March 31, 2022	Services		International		Products		Corp/Elim		Total
Oil & Gas	Oil & Gas	$	88,508	$	8,620	$	370	$	—	$	97,498	Oil & Gas	$	86,613	$	7,572	$	38	$	—	$	94,223
Aerospace & Defense	Aerospace & Defense	12,717		3,897		101		—		16,715		Aerospace & Defense	15,022		4,940		108		—		20,070
Industrials	Industrials	10,560		6,693		336		—		17,589		Industrials	9,007		5,528		502		—		15,037
Power Generation & Transmission		11,412		2,615		660		—		14,687
Power generation & Transmission												Power generation & Transmission	3,822		2,562		845		—		7,229
Other Process Industries	Other Process Industries	8,819		3,035		32		—		11,886		Other Process Industries	10,293		3,518		1		—		13,812
Infrastructure, Research & Engineering	Infrastructure, Research & Engineering	7,136		2,467		808		—		10,411		Infrastructure, Research & Engineering	2,506		2,039		897		—		5,442
Petrochemical												Petrochemical	3,045		78		—		—		3,123
Other	Other	5,824		1,773		1,001		(2,828)		5,770		Other	2,638		1,901		545		(2,358)		2,726
Total	Total	$	144,976	$	29,100	$	3,308	$	(2,828)	$	174,556	Total	$	132,946	$	28,138	$	2,936	$	(2,358)	$	161,662


Three Months Ended September 30, 2020		Services		International		Products		Corp/Elim		Total
Three Months Ended March 31, 2021												Three Months Ended March 31, 2021	Services		International		Products		Corp/Elim		Total
Oil & Gas	Oil & Gas	$	72,195	$	9,749	$	51	$	—	$	81,995	Oil & Gas	$	79,220	$	7,936	$	56	$	—	$	87,212
Aerospace & Defense	Aerospace & Defense	10,904		3,676		72		—		14,652		Aerospace & Defense	11,823		4,317		35		—		16,175
Industrials	Industrials	12,209		5,261		442		—		17,912		Industrials	8,819		4,849		327		—		13,995
Power Generation & Transmission		9,053		2,054		390		—		11,497
Power generation & Transmission												Power generation & Transmission	5,534		1,978		759		—		8,271
Other Process Industries	Other Process Industries	6,023		2,373		85		—		8,481		Other Process Industries	7,856		2,912		9		—		10,777
Infrastructure, Research & Engineering	Infrastructure, Research & Engineering	5,309		2,245		1,223		—		8,777		Infrastructure, Research & Engineering	3,169		3,756		1,144		—		8,069
Petrochemical												Petrochemical	5,464		72		—		0		5,536
Other	Other	4,028		1,119		1,669		(2,236)		4,580		Other	2,413		1,828		658		(1,199)		3,700
Total	Total	$	119,721	$	26,477	$	3,932	$	(2,236)	$	147,894	Total	$	124,298	$	27,648	$	2,988	$	(1,199)	$	153,735

Nine Months Ended September 30, 2021 Services International Products Corp/Elim Total
Oil & Gas $ 264,959 $ 26,208 $ 638 $ — $ 291,805
Aerospace & Defense 37,319 12,341 165 — 49,825
Industrials 30,621 17,736 1,081 — 49,438
Power Generation & Transmission 27,019 7,776 2,249 — 37,044
Other Process Industries 27,031 9,574 76 — 36,681
Infrastructure, Research & Engineering 15,479 9,477 2,777 — 27,733
Other 11,823 5,587 2,513 (6,481) 13,442
Total $ 414,251 $ 88,699 $ 9,499 $ (6,481) $ 505,968

Nine Months Ended September 30, 2020 Services International Products Corp/Elim Total
Oil & Gas $ 214,773 $ 26,192 $ 214 $ — $ 241,179
Aerospace & Defense 39,804 14,686 370 — 54,860
Industrials 35,374 13,997 1,349 — 50,720
Power Generation & Transmission 21,800 4,958 1,888 — 28,646
Other Process Industries 17,026 7,103 162 — 24,291
Infrastructure, Research & Engineering 12,820 6,726 3,683 — 23,229
Other 7,674 3,225 3,080 (5,110) 8,869
Total $ 349,271 $ 76,887 $ 10,746 $ (5,110) $ 431,794

Revenue per key geographic location was as follows:


Three Months Ended March 31, 2022	Services		International		Products		Corp/Elim		Total
United States	$	113,935	$	173	$	1,351	$	(655)	$	114,804
Other Americas	18,052		1,341		16		(609)		18,800
Europe	744		25,920		580		(924)		26,320
Asia-Pacific	215		704		989		(170)		1,738
Total	$	132,946	$	28,138	$	2,936	$	(2,358)	$	161,662


Three Months Ended March 31, 2021	Services		International		Products		Corp/Elim		Total
United States	$	104,546	$	208	$	1,460	$	(391)	$	105,823
Other Americas	18,878		1,177		67		(63)		20,059
Europe	294		25,894		460		(612)		26,036
Asia-Pacific	580		369		1,001		(133)		1,817
Total	$	124,298	$	27,648	$	2,988	$	(1,199)	$	153,735

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

~~Revenue per key geographic location was as follows:~~

Three Months Ended September 30, 2021 Services International Products Corp/Elim Total
United States $ 122,506 $ 221 $ 1,562 $ (1,341) $ 122,948
Other Americas 21,681 1,446 133 (610) 22,650
Europe 491 26,378 499 (748) 26,620
Asia-Pacific 298 1,055 1,114 (129) 2,338
Total $ 144,976 $ 29,100 $ 3,308 $ (2,828) $ 174,556

Three Months Ended September 30, 2020 Services International Products Corp/Elim Total
United States 100,586 $ 193 $ 1,538 $ (912) $ 101,405
Other Americas 18,767 1,100 75 (124) 19,818
Europe 350 24,790 1,002 (1,088) 25,054
Asia-Pacific 18 394 1,317 (112) 1,617
Total $ 119,721 $ 26,477 $ 3,932 $ (2,236) $ 147,894

Nine Months Ended September 30, 2021 Services International Products Corp/Elim Total
United States $ 349,814 $ 670 $ 4,690 $ (2,627) $ 352,547
Other Americas 61,847 3,772 301 (1,482) 64,438
Europe 1,381 82,356 1,462 (2,105) 83,094
Asia-Pacific 1,209 1,901 3,046 (267) 5,889
Total $ 414,251 $ 88,699 $ 9,499 $ (6,481) $ 505,968
Nine Months Ended September 30, 2020 Services International Products Corp/Elim Total
United States 298,372 $ 507 $ 5,150 $ (2,433) $ 301,596
Other Americas 49,548 3,564 425 (370) 53,167
Europe 721 71,056 1,930 (2,129) 71,578
Asia-Pacific 630 1,760 3,241 (178) 5,453
Total $ 349,271 $ 76,887 $ 10,746 $ (5,110) $ 431,794

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. Amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, generally at periodic intervals (e.g., weekly, bi-weekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the Consolidated Balance Sheets at the end of each reporting period within accounts receivable, net or accrued expenses and other current liabilities.

Revenue recognized during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ that was included in the contract liability balance at the beginning of such year was ~~$4.4~~$2.2 million and $1.9 million for each period. Changes in the contract asset and liability balances during these periods were not materially impacted by any other factors. The Company applies a practical expedient to expense incremental costs incurred related to obtaining a contract. The Company’s expenses are expected to be amortized over a period less than one year.

3. Share-Based Compensation

~~Table of Contents~~

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

The Company has share-based incentive awards outstanding to its eligible employees and non-employee directors under 2 equity incentive plans: (i) the 2009 Long-Term Incentive Plan (the "2009 Plan") and (ii) the 2016 Long-Term Incentive Plan (the "2016 Plan"). No further awards may be granted under the 2009 Plan, ~~although 1~~and the remaining stock option award granted under the 2009 Plan ~~remains outstanding in accordance with its terms.~~expired during the three months ended March 31, 2022. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units and other forms of share-based incentives, including performance restricted stock units, stock appreciation rights and deferred stock rights. At the annual shareholders meeting on May 19, 2020, the Company’s shareholders approved an amendment to increase the total number of shares that may be issued under the 2016 Plan by 2.0 million, for a total of 3.7 million shares that are authorized for issuance under the 2016 ~~Plan.~~Plan, of which 383,743 shares were available for future grants as of March 31, 2022.

Stock Options

For each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company did not recognize any share-based compensation expense related to the stock option award, as the 1 outstanding stock option award was already fully vested. No unrecognized compensation costs remained related to the stock option award as of ~~September 30, 2021.~~March 31, 2022.

The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Nine months ended September 30,							Three months ended March 31,
		2021			2020				2022			2021
		Common Stock Options	Weighted Average Exercise Price		Common Stock Options	Weighted Average Exercise Price			Common Stock Options	Weighted Average Exercise Price		Common Stock Options	Weighted Average Exercise Price
Outstanding at beginning of period:	Outstanding at beginning of period:	5	$	22.35	5	$	22.35	Outstanding at beginning of period:	5	$	22.35	5	$	22.35
Granted	Granted	—	$	—	—	$	—	Granted	—	$	—	—	$	—
Exercised	Exercised	—	$	—	—	$	—	Exercised	—	$	—	—	$	—
Expired or forfeited	Expired or forfeited	—	$	—	—	$	—	Expired or forfeited	(5)	$	22.35	—	$	—
Outstanding at end of period:	Outstanding at end of period:	5	$	22.35	5	$	22.35	Outstanding at end of period:	—	$	—	5	$	22.35

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Restricted Stock Unit Awards

For the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and September 30, 2020,~~ the Company recognized share-based compensation expense related to restricted stock unit awards of $0.9 million and $1.1 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company recognized share-based compensation expense related to restricted stock unit awards of $2.7 million and $3.2$0.9 million, respectively. As of ~~September 30, 2021,~~March 31, 2022, there was ~~$6.8~~$9.6 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which is expected to be recognized over a remaining weighted-average period of ~~2.6~~3.1 years. Upon vesting, restricted stock units are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock.

A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows:


		Nine months ended September 30,					Three months ended March 31,
		2021		2020			2022		2021
Restricted stock awards vested	Restricted stock awards vested	238		183		Restricted stock awards vested	226		111
Fair value of awards vested	Fair value of awards vested	$	2,670	$	719	Fair value of awards vested	$	1,502	$	1,189

A summary of the fully-vested common stock the Company issued to its 6 non-employee directors, in connection with its non-employee director compensation plan, is as follows:


		Nine months ended September 30,					Three months ended March 31,
		2021		2020			2022		2021
Awards issued	Awards issued	51		68		Awards issued	34		25
Grant date fair value of awards issued	Grant date fair value of awards issued	$	525	$	326	Grant date fair value of awards issued	$	225	$	258

~~Table of Contents~~

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

A summary of the Company's outstanding, non-vested restricted share units is as follows:


		Nine months ended September 30,							Three months ended March 31,
		2021			2020				2022			2021
		Units	Weighted Average Grant-Date Fair Value		Units	Weighted Average Grant-Date Fair Value			Units	Weighted Average Grant-Date Fair Value		Units	Weighted Average Grant-Date Fair Value
Outstanding at beginning of period:	Outstanding at beginning of period:	1,076	$	7.41	559	$	16.92	Outstanding at beginning of period:	1,208	$	7.96	1,076	$	7.41
Granted	Granted	528	$	10.07	557	$	3.77	Granted	675	$	7.65	519	$	10.06
Released	Released	(238)	$	10.98	(183)	$	18.44	Released	(226)	$	13.73	(111)	$	15.90
Forfeited	Forfeited	(53)	$	8.90	(32)	$	9.87	Forfeited	(7)	$	10.50	(10)	$	8.69
Outstanding at end of period:	Outstanding at end of period:	1,313	$	7.75	901	$	8.72	Outstanding at end of period:	1,650	$	7.16	1,474	$	7.70

Performance Restricted Stock Units

The Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior officers whose ultimate payout is based on the Company’s performance over a one-year period based on specific metrics approved by the Compensation Committee of the Board of Directors of the Company.

For ~~2020,~~2021, the Compensation Committee made changes to the Company’s equity incentive compensation plan for its executive officers and approved the ~~following 4 metrics:~~new target awards for 2021. For 2021, the 3 metrics were:

1.~~Revenue.~~Free Cash Flow net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee.

2.Adjusted EBITDA defined as net income attributable to the Company plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted).

3.~~Free Cash Flow~~ ~~as a percentage of revenue.~~

4.~~Return on Average Book Equity~~ ~~defined as net income divided by average book value of shareholders equity.~~

~~The free cash flow and return on average book equity criteria are relative metrics, the performance of which are based upon how the Company performs relative to a peer group.~~

For 2021, the Compensation Committee made changes to the Company’s equity incentive compensation plan for its executive officers and approved the new target awards for 2021. For 2021, the 3 metrics are:

1.~~Free Cash Flow~~ ~~net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee.~~

2.~~Adjusted EBITDA~~ ~~as defined in the 2020 metric section above.~~

3.Total Shareholder Return (TSR) measures the total return to shareholders of the Company during 2021 versus the total return to the shareholders of a predefined peer group of companies that provide inspection, testing, certification or similar industrial services. The return will be measured by the year over year percent change in share price. The share prices used to calculate the return are the average share price during the 20-trading day period ending on the initial

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

measurement date (the last 20 trading days of 2020), compared to the average share price during the 20-trading day period ending on the final measurement date (the last 20 trading days of 2021). Any cash dividends or distributions paid in 2021 will be added to calculate the return to shareholders during the year. TSR is considered a market condition for which the fair value of PRSUs with this condition is determined using a Monte Carlo valuation model. Key assumptions in the Monte Carlo valuation model included:

a.Expected Volatility. Expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate 1-year performance period.

b.Dividend Yield. The dividend yield assumption was based on historical and anticipated dividend payouts (assumed at zero).

c.Risk-Free Interest Rate. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate 1-year performance measurement period.

For 2022, the Compensation Committee retained the Company's prior year equity incentive compensation plan for its executive officers including utilizing the same metrics, as defined above, and approved the new target awards for 2022.

PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant. Compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions. Compensation cost related to the PRSUs with a market condition is not reversed if the market

~~Table of Contents~~

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

condition is not achieved, provided the employee requisite service has been rendered. PRSUs generally vest ratably on each of the first four anniversary dates upon completion of the performance period, for a total requisite service period of up to five years and have no dividend rights.

A summary of the Company's PRSU activity is as follows:
Nine months ended September 30,
2021 2020
Units Weighted
Average
Grant-Date
Fair Value Units Weighted
Average
Grant-Date
Fair Value
Outstanding at beginning of period: 333 $ 8.84 260 $ 16.77
Granted 189 $ 12.59 292 $ 3.68
Performance condition adjustments (195) $ 7.83 (145) $ 3.54
Released (22) $ 13.63 (78) $ 15.43
Forfeited — $ — — $ —
Outstanding at end of period: 305 $ 12.56 329 $ 11.09


	Three months ended March 31,
	2022			2021
	Units	Weighted Average Grant-Date Fair Value		Units	Weighted Average Grant-Date Fair Value
Outstanding at beginning of period:	388	$	10.07	333	$	8.84
Granted	341	$	6.55	189	$	12.59
Performance condition adjustments	(56)	$	10.47	(125)	$	3.68
Released	(17)	$	6.85	(22)	$	13.63
Forfeited	—	$	—	—	$	—
Outstanding at end of period:	656	$	12.18	375	$	12.18

During the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and September 30, 2020,~~ the Compensation Committee approved the final calculation of the award metrics for calendar year ~~2020~~2021 and ~~calendar year 2019,~~2020, respectively. As a result, the calendar year ~~2020~~2022 PRSUs decreased by approximately ~~125,000~~56,000 units ~~(related to not achieving~~as a result of the 2020 Return on Average Book Equity metric) and the calendar year 2019 PRSUs increased by approximately 1,000 units. Calendar year 2021 PRSUs decreased by 2,000 units during the nine months ended September 30, 2021 based on forecasted results for calendar year 2021.final calculation of award metrics.

For the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and September 30, 2020,~~ the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.3 million and $0.2 million, respectively. For the nine months ended September 30, 2021 and September 30, 2020, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.7 million and $0.8$0.1 million, respectively. At ~~September 30, 2021,~~March 31, 2022, there was ~~$1.6~~$2.6 million of total unrecognized compensation costs related to approximately ~~305,000~~656,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of ~~2.2~~2.5 years.

4. Earnings (loss) per Share

Basic earnings (loss) per share is computed by dividing net ~~income~~loss by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net ~~income~~loss by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects: (i) the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the period and (ii) the pro forma vesting of restricted stock units.

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Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

The following table sets forth the computations of basic and diluted ~~earnings~~loss per share:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021

Basic income (loss) per share
Basic loss per share										Basic loss per share
Numerator:	Numerator:									Numerator:
Net income (loss) attributable to Mistras Group, Inc.		$	3,380	$	1,523	$	3,955	$	(99,642)
Net loss attributable to Mistras Group, Inc.										Net loss attributable to Mistras Group, Inc.	$	(5,363)	$	(5,362)
Denominator:	Denominator:									Denominator:
Weighted average common shares outstanding	Weighted average common shares outstanding	29,619		29,177		29,550		29,086		Weighted average common shares outstanding	29,634		29,425
Basic income (loss) per share		$	0.11	$	0.05	$	0.13	$	(3.43)
Basic loss per share										Basic loss per share	$	(0.18)	$	(0.18)

Diluted income (loss) per share:
Diluted loss per share:										Diluted loss per share:
Numerator:	Numerator:									Numerator:
Net income (loss) attributable to Mistras Group, Inc.		$	3,380	$	1,523	$	3,955	$	(99,642)
Net loss attributable to Mistras Group, Inc.										Net loss attributable to Mistras Group, Inc.	$	(5,363)	$	(5,362)
Denominator:	Denominator:									Denominator:
Weighted average common shares outstanding	Weighted average common shares outstanding	29,619		29,177		29,550		29,086		Weighted average common shares outstanding	29,634		29,425
Dilutive effect of stock options outstanding	Dilutive effect of stock options outstanding	—		—		—		—		Dilutive effect of stock options outstanding	—		—
Dilutive effect of restricted stock units outstanding (1)	Dilutive effect of restricted stock units outstanding (1)	508		134		543		—		Dilutive effect of restricted stock units outstanding (1)	—		—
		30,127		29,311		30,093		29,086			29,634		29,425
Diluted income (loss) per share		$	0.11	$	0.05	$	0.13	$	(3.43)
Diluted loss per share										Diluted loss per share	$	(0.18)	$	(0.18)

_______________

(1) For the ~~nine~~three months ended ~~September 30, 2020, 213,000~~March 31, 2022 and 2021, 1,212,000 and 509,000 shares, respectively, related to restricted stock were excluded from the calculation of diluted EPS due to the net loss for the period.

5. Acquisitions

Acquisition-Related Expense

In the course of its acquisition activities, the Company incurs costs in connection with due diligence, such as professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are reported as Acquisition-related expense, net on the Unaudited Condensed Consolidated Statements of ~~Income (Loss)~~Loss and were as follows for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021
Due diligence, professional fees and other transaction costs	Due diligence, professional fees and other transaction costs	$	—	$	—	$	34	$	—	Due diligence, professional fees and other transaction costs	$	4	$	34
Adjustments to fair value of contingent consideration liabilities	Adjustments to fair value of contingent consideration liabilities	246		709		1,034		186		Adjustments to fair value of contingent consideration liabilities	45		243
Acquisition-related expense, net	Acquisition-related expense, net	$	246	$	709	$	1,068	$	186	Acquisition-related expense, net	$	49	$	277

The Company's contingent consideration liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets.

6. Accounts Receivable, net

Accounts receivable consisted of the following:

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Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021

Trade accounts receivable	Trade accounts receivable	$	135,644	$	115,841	Trade accounts receivable	$	130,504	$	112,739
Allowance for credit losses	Allowance for credit losses	(7,945)		(8,213)		Allowance for credit losses	(3,419)		(3,228)
Accounts receivable, net	Accounts receivable, net	$	127,699	$	107,628	Accounts receivable, net	$	127,085	$	109,511

The Company had ~~$21.0~~$23.7 million and $11.9 million of unbilled revenue accrued as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. These amounts are included in the trade accounts receivable balances above. Unbilled revenue is generally billed in the subsequent quarter to their revenue recognition. The Company considers unbilled receivables 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.

The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of December 31, 2019, approximately $1.4 million of past due receivables were outstanding from this customer. The Company received notice from the customer in December 2019, alleging that the work performed was not in compliance with the contract. The Company recorded a full reserve for this receivable during 2019 and the status of this situation has not changed since 2019. See Note 14-Commitments and Contingencies for additional details.

7. Property, Plant and Equipment, net

Property, plant and equipment consisted of the following:


		Useful Life (Years)	September 30, 2021		December 31, 2020			Useful Life (Years)	March 31, 2022		December 31, 2021

Land	Land		$	2,776	$	2,724	Land		$	2,766	$	2,762
Buildings and improvements	Buildings and improvements	30-40	25,057		25,731		Buildings and improvements	30-40	24,725		24,787
Office furniture and equipment	Office furniture and equipment	5-8	20,697		19,902		Office furniture and equipment	5-8	19,721		16,620
Machinery and equipment	Machinery and equipment	5-7	246,422		234,331		Machinery and equipment	5-7	245,003		250,166
			294,952		282,688				292,215		294,335
Accumulated depreciation and amortization	Accumulated depreciation and amortization		(204,586)		(190,007)		Accumulated depreciation and amortization		(208,526)		(207,757)
Property, plant and equipment, net	Property, plant and equipment, net		$	90,366	$	92,681	Property, plant and equipment, net		$	83,689	$	86,578

Depreciation expense for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ was approximately ~~$6.1~~$6.6 million and ~~$6.2~~$6.1 million, respectively.

~~Depreciation expense for the nine months ended September 30, 2021 and September 30, 2020 was $18.4 million and $18.3 million, respectively.~~

~~Table of Contents~~

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

8. Goodwill

Changes in the carrying amount of goodwill by segment is shown below:
Services International Products and Systems Total
Balance at December 31, 2020 $ 190,112 $ 15,896 $ — $ 206,008
Goodwill acquired during the period 280 — — 280
Adjustments to preliminary purchase price allocations — — — —
Foreign currency translation 189 (820) — (631)
Balance at September 30, 2021 $ 190,581 $ 15,076 $ — $ 205,657


	Services		International		Products and Systems		Total
Balance at December 31, 2021	$	190,656	$	14,783	$	—	$	205,439



Foreign currency translation	1,219		(249)		0		970
Balance at March 31, 2022	$	191,875	$	14,534	$	—	$	206,409

The Company reviews goodwill for impairment on a reporting unit basis on October 1 of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.

~~During the first quarter~~Table of ~~2020, the Company’s market capitalization declined significantly compared~~Contents

Mistras Group, Inc. and Subsidiaries

Notes to ~~the fourth quarter~~Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

The Company performed a quantitative annual impairment test as of ~~2019. Over the same period, the equity value of the Company’s peer group,~~October 1, 2021 and the ~~overall U.S. stock market also declined significantly amid market volatility. In addition, oil prices had dropped significantly. These declines were driven~~Company did not identify any changes in ~~large part by the uncertainty surrounding the COVID-19 pandemic and other macroeconomic events such as the geopolitical tensions between OPEC and Russia. Based on these factors, the Company concluded~~circumstances that multiple triggering events occurred and, accordingly, an interim quantitative goodwill impairment test was performed as of the testing date for each reporting unit as of March 31, 2020 (“testing date”). During the first quarter of 2020, the Company also performed an analysis to determine any impairment of long-lived assets (see Note 9-~~Intangible Assets) based on the triggering events noted above.~~

Based upon the results of the interim quantitative goodwill impairment test during the first quarter of 2020, the Company recorded an aggregate impairment charge of $77.1 million, which consisted of $57.2 million in the services reporting unit within the Services segment, and $19.3 million in the European reporting unit and $0.6 million in the Brazilian reporting unit, both within the International segment. The impairment was calculated based on the difference between the estimated fair value andwould indicate the carrying value of ~~the reporting units and are included in Impairment charges on the Unaudited Condensed Consolidated Statements of Income (Loss) for the three months ended~~goodwill may not be recoverable. Additionally, through March 31, ~~2020. Subsequent to March 31, 2020 through September 30, 2021,~~2022, the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable. Significant adverse changes in future periods could negatively affect the Company's key assumptions and may result in future goodwill impairment charges which could be material.

9. Intangible Assets

The ~~Company's cumulative goodwill impairment~~gross amount, accumulated amortization and net carrying amount of intangible assets were as ~~of September 30,~~follows:


		March 31, 2022				December 31, 2021
	Useful Life (Years)	Gross Amount		Accumulated Amortization		Net Carrying Amount		Gross Amount		Accumulated Amortization		Net Carrying Amount

Customer relationships	5-18	$	111,883	$	(81,572)	$	30,311	$	112,109	$	(80,319)	$	31,790
Software/Technology	3-15	52,895		(27,307)		25,588		52,265		(26,415)		25,850
Covenants not to compete	2-5	12,644		(12,450)		194		12,623		(12,390)		233
Other	2-12	10,599		(9,213)		1,386		10,574		(9,066)		1,508
Total		$	188,021	$	(130,542)	$	57,479	$	187,571	$	(128,190)	$	59,381

Amortization expense for the three months ended March 31, 2022 and 2021 was approximately $2.4 million and ~~December 31, 2020 was $100.2~~$2.5 million, ~~of which $57.2 million related to the Services segment, $29.8 million related to the International segment and $13.2 million related to the Products and Systems segment.~~respectively.

10. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:


	March 31, 2022		December 31, 2021

Accrued salaries, wages and related employee benefits	$	34,423	$	33,816
Contingent consideration, current portion	981		1,830
Accrued workers’ compensation and health benefits	4,314		3,994
Deferred revenue	7,578		6,202
Pension accrual	2,519		2,519
Right-of-use liability - Operating	10,278		10,040
Other accrued expenses	27,373		25,462
Total	$	87,466	$	83,863

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

~~9. Intangible Assets~~

~~The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:~~

September 30, 2021 December 31, 2020
Useful Life
(Years)
Gross
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Amount
Accumulated
Amortization
Impairment
Net
Carrying
Amount
Customer relationships 5-18 $ 112,596 $ (79,208) $ 33,388 $ 116,101 $ (75,649) $ (2,206) $ 38,246
Software/Technology 3-15 52,013 (25,726) 26,287 77,326 (23,519) (25,874) 27,933
Covenants not to compete 2-5 12,624 (12,350) 274 12,833 (12,162) (212) 459
Other 2-12 10,698 (8,952) 1,746 11,120 (8,614) (502) 2,004
Total $ 187,931 $ (126,236) $ 61,695 $ 217,380 $ (119,944) $ (28,794) $ 68,642

~~Amortization expense for the three months ended September 30, 2021 and 2020 was approximately $2.4 million and $2.6 million, respectively.~~

~~Amortization expense for the nine months ended September 30, 2021 and September 30, 2020 was $7.3 million and $8.5 million, respectively.~~

~~As described in Note 8-Goodwill~~, during the first quarter of 2020, there were negative market indicators that were determined to be triggering events indicating a potential impairment of certain long-lived assets within asset groups in the Services, International, and Products and Systems segments, as well as Corporate. The asset groups are groupings of assets and liabilities determined at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability testing indicated that certain intangible assets and right of use assets (See Note 13-~~Leases~~) were potentially impaired. For asset groups that required an impairment measurement, similar to the valuations performed to determine the goodwill impairment, the Company used income and market approaches to estimate the fair value of the long-lived assets, which requires significant judgment in evaluation of the useful lives of the assets, economic and industry trends, estimated future cash flows, discount rates, and other factors. The result of the analysis was an aggregate impairment charge of $28.8 million, which consisted of $25.9 million to software/technology, $2.2 million to customer relationships, $0.5 million to other intangibles and $0.2 million to covenants not to compete, all of which are in the Services reporting unit within the Services segment and are included in Impairment charges on the Unaudited Condensed Consolidated Statements of Income (Loss) for the nine months ended September 30, 2020.

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~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

~~10. Accrued Expenses and Other Current Liabilities~~

~~Accrued expenses and other current liabilities consisted of the following:~~

September 30, 2021 December 31, 2020
Accrued salaries, wages and related employee benefits $ 38,470 $ 30,214
Contingent consideration, current portion 1,736 1,300
Accrued workers’ compensation and health benefits 3,654 3,948
Deferred revenue 7,143 6,538
Pension accrual 2,519 2,519
Right-of-use liability - Operating 9,871 10,348
Other accrued expenses 24,919 23,633
Total $ 88,312 $ 78,500

11. Long-Term Debt

Long-term debt consisted of the following:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021

Senior credit facility	Senior credit facility	$	128,522	$	120,312	Senior credit facility	$	130,000	$	119,500
Senior secured term loan, net of unamortized debt issuance costs of $0.3 million and $0.3 million, respectively		80,388		89,745
Senior secured term loan, net of unamortized debt issuance costs of $0.2 million and $0.2 million, respectively						Senior secured term loan, net of unamortized debt issuance costs of $0.2 million and $0.2 million, respectively	72,949		76,673

Other	Other	6,944		10,159		Other	5,865		6,392
Total debt	Total debt	215,854		220,216		Total debt	208,814		202,565
Less: Current portion	Less: Current portion	(18,988)		(10,678)		Less: Current portion	(21,336)		(20,162)
Long-term debt, net of current portion	Long-term debt, net of current portion	$	196,866	$	209,538	Long-term debt, net of current portion	$	187,478	$	182,403

Senior Credit Facility

The Company has a credit agreement with its banking group (as amended, the "Credit Agreement") which provides the Company with a revolving line of credit and a $100 million senior secured term loan A facility with a balance of ~~$80.4~~$72.9 million as of ~~September 30, 2021.~~March 31, 2022. Pursuant to the Amendment described below, the revolving line of credit was reduced from ~~$165 million to~~ $155 million ~~on September 30, 2021 and will be reduced~~ to $150 million on December 31, ~~202~~1.2021. Both the revolving line of credit and the term loan A facility under the Credit Agreement have a maturity date of December 12, 2023.

On May 19, 2021, the Company entered into the Fifth Amendment (the “Amendment”) to the Credit Agreement. The Amendment made the following changes:

•Removed the LIBOR floor of 1.0%, which provided that if LIBOR is below 1.0%, the interest rate will be calculated as if LIBOR is 1.0%. Now the actual LIBOR rate is used to calculate interest, even if LIBOR is below 1.0%. The LIBOR margins and base rate margins are unchanged but are based upon the new Total Consolidated Debt Leverage Ratio (defined below); previously the margin was based upon the Funded Debt Leverage Ratio.

•Requires the Company to maintain a Total Consolidated Debt Leverage Ratio not to exceed ~~4.00~~4.0 to 1.0 as of the end of each quarter through the quarter ending March 31, 2022, and for each quarter thereafter the ratio shall not exceed ~~3.50~~3.5 to 1.0.

◦Total Consolidated Debt Leverage Ratio means the ratio of (a) Total Consolidated Debt to (b) EBITDA (as defined in the Credit Agreement) for the trailing four consecutive ~~quarters.~~quarters

◦Total Consolidated Debt means all indebtedness (including subordinated debt) of the Company on a consolidated basis (with a limited exception).

~~Table of Contents~~

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

•If the Company incurs certain subordinated debt or other permitted indebtedness, then the Company must maintain a Total Consolidated Debt Leverage Ratio not to exceed ~~4.50~~4.5 to 1.0 and maintain a ratio of Senior Debt to EBITDA not to exceed ~~3.50~~3.5 to ~~1.00,~~1.0, with Senior Debt being Total Consolidated Debt, less permitted subordinated debt.

•The Company must repay loans under the Credit Agreement with the net proceeds from certain dispositions of assets under certain circumstances and limits investments in non-guarantor subsidiaries under certain circumstances if the ~~Company’s~~Company's Total Consolidated Leverage Ratio is above 3.5 to 1.0.

•Quarterly payments on the term loan increased to $3.75 million through March 31, 2022, then to $5.0 million for each quarterly payment thereafter and a final balloon payment at maturity.

As a result of the borrowing capacity reduction on the revolving loan line of credit, the Company expensed $0.1 million in unamortized capitalized debt issuance costs during the ~~nine months~~year ended ~~September 30,~~December 31, 2021, which was included in ~~Selling,~~selling, general and administrative expenses on the ~~Unaudited Condensed~~ Consolidated Statements of ~~Income (Loss).~~Loss. The Company incurred $0.5 million in financing costs for the Amendment, of which $0.2 million of ~~third party~~third-party costs were expensed and included in ~~Selling,~~selling, general and administrative expenses on the Consolidated Statements of Loss.

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements ~~of Income (Loss).~~

(tabular dollars and shares in thousands, except per share data)

Under the Credit Agreement, the Company may borrow up to $100 million in non-U.S. Dollar currencies and use up to $20 million of the credit limit for the issuance of letters of credit.

As of ~~September 30, 2021,~~March 31, 2022, the Company had borrowings of ~~$209.2~~$203.1 million and a total of ~~$4.3~~$3.3 million of letters of credit outstanding under the Credit Agreement. The Company has capitalized costs associated with debt modifications of ~~$1.1~~$0.8 million as of ~~September 30, 2021,~~March 31, 2022, which is included in Other Assets on the Condensed Consolidated Balance Sheets and will be amortized into interest expense over the remaining term of the Credit Agreement through December 12, ~~2023.~~2023

As of ~~September 30, 2021,~~March 31, 2022, the Company was in compliance with the terms of the Credit Agreement. The Company continuously monitors compliance with the covenants contained in its Credit Agreement. The Company believes that it is probable that the Company will be able to comply with the financial covenants in the Credit Agreement and that sufficient credit remains available under the Credit Agreement to meet the Company's liquidity needs. However, due to the uncertainties being caused by the COVID-19 pandemic, the significant volatility in oil prices, and volatility in the aerospace production, such matters cannot be predicted with certainty.

Other debt

The Company's other debt includes bank financing provided at the local subsidiary level used to support working capital requirements and fund capital expenditures. At ~~September 30, 2021,~~March 31, 2022, there was an aggregate of approximately ~~$6.9~~$5.9 million outstanding, payable at various times through 2030. Monthly payments range from ~~$1.0~~$0.4 thousand to ~~$17.0~~$16 thousand and interest rates range from 0.4% to 3.5%.

12. Fair Value Measurements

The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and ~~Disclosures.~~Disclosures. ASC 820 defines fair value as 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. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value.

Financial instruments measured at fair value on a recurring basis

The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements.

~~Table of Contents~~

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

The following table represents the changes in the fair value of Level 3 contingent consideration:


		Nine months ended September 30,					Three months ended March 31,
		2021		2020			2022		2021
Beginning balance	Beginning balance	$	1,640	$	3,216	Beginning balance	$	1,831	$	1,640
Acquisitions	Acquisitions	—		200		Acquisitions	—		—
Payments	Payments	(938)		(1,337)		Payments	(938)		(938)
Accretion of liability	Accretion of liability	—		33		Accretion of liability	—		—
Revaluation	Revaluation	1,034		153		Revaluation	45		243
Foreign currency translation	Foreign currency translation	—		(23)		Foreign currency translation	—		—
Ending balance	Ending balance	$	1,736	$	2,242	Ending balance	$	938	$	945

Financial instruments not measured at fair value on a recurring basis

The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value of its long-term debt approximates fair value. The fair value of the Company’s notes payable and finance lease obligations

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issuances of debt.

13. Leases

The Company’s Condensed Consolidated Balance Sheets include the following related to right-of-use ("ROU") operating leases:


Leases	Leases	Classification	September 30, 2021		December 31, 2020		Leases	Classification	March 31, 2022		December 31, 2021
Assets	Assets						Assets
ROU assets	ROU assets	Other Assets	$	42,043	$	46,728	ROU assets	Other Assets	$	42,505	$	42,451

Liabilities	Liabilities						Liabilities
ROU - current	ROU - current	Accrued expenses and other current liabilities	$	9,871	$	10,348	ROU - current	Accrued expenses and other current liabilities	$	10,278	$	10,040
ROU liability - long-term	ROU liability - long-term	Other long-term liabilities	33,691		37,689		ROU liability - long-term	Other long-term liabilities	33,719		34,030
Total ROU liabilities	Total ROU liabilities		$	43,562	$	48,037	Total ROU liabilities		$	43,997	$	44,070

Included within the balance of operating leases is a lease for the Company’s headquarters which is with a related party. The ROU liability for this facility was approximately ~~$3.1~~$2.4 million and ~~$3.8~~$2.9 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Total rent payments for this facility were approximately $0.3 million and ~~$0.1~~$0.5 million for the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and September 30, 2020, respectively. Total rent payments for this facility were approximately $1.0 million and $0.5 million for the nine months ended September 30, 2021 and September 30, 2020,~~ respectively. An agreement was reached with the related party to reduce rental payments by ~~20% and defer payments for 90 days~~12.5% for the lease of the Company’s headquarters, ~~starting in June 2020 through December 2020~~effective February 2022 as part of ~~COVID-19 related vendor concessions.~~a voluntary reduction.

The total ROU assets attributable to finance leases were approximately $~~14.6~~$13.4 million and $~~15.8~~$13.8 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, which is included in Property, plant, and equipment, net on the Condensed Consolidated Balance Sheets.

~~As described in Note 9-~~

~~Intangible Assets, the Company performed an analysis to determine whether there was any impairment~~The components of ~~long-lived assets, which included the ROU assets, within the Services, International, and Products and Systems operating segments~~lease costs were as well as Corporate. The result of the analysis was a $0.2 million impairment of a ROU asset in an asset group within the Services segment which is included in Impairment charges on the Unaudited Condensed Consolidated Statements of Loss for the nine months ended September 30, 2020.follows:


		Three months ended March 31,
	Classification	2022		2021
Finance lease expense
Amortization of ROU assets	Depreciation and amortization	$	1,012	$	1,060
Interest on lease liabilities	Interest expense	158		192
Operating lease expense	Cost of revenue; Selling, general & administrative expenses	3,198		3,302
Short-term lease expense	Cost of revenue; Selling, general & administrative expenses	6		6
Variable lease expense	Cost of revenue; Selling, general & administrative expenses	539		867
Total		$	4,913	$	5,427

2119

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

~~The components of lease costs were as follows:~~
Three months ended September 30, Nine months ended September 30,
Classification 2021 2020 2021 2020
Finance lease expense
Amortization of ROU assets Depreciation and amortization $ 1,002 $ 1,081 $ 3,094 $ 3,495
Interest on lease liabilities Interest expense 177 207 550 650
Operating lease expense Cost of revenue; Selling, general & administrative expenses 3,239 3,341 9,808 9,970
Short-term lease expense Cost of revenue; Selling, general & administrative expenses 7 11 22 60
Variable lease expense Cost of revenue; Selling, general & administrative expenses 532 (4) 1,956 441
Total $ 4,957 $ 4,636 $ 15,430 $ 14,616

Additional information related to leases was as follows:


		Nine months ended September 30,								Three months ended March 31,
			2021			2020					2022			2021
Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases	Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases								Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases
Finance - financing cash flows	Finance - financing cash flows		$	3,032		$	3,078		Finance - financing cash flows		$	1,076		$	1,069
Finance - operating cash flows	Finance - operating cash flows		$	550		$	650		Finance - operating cash flows		158			192
Operating - operating cash flows	Operating - operating cash flows		$	9,870		$	9,819		Operating - operating cash flows		3,163			3,322
ROU assets obtained in the exchange for lease liabilities	ROU assets obtained in the exchange for lease liabilities								ROU assets obtained in the exchange for lease liabilities
Finance leases	Finance leases		$	2,445		$	1,607		Finance leases		$	848		$	643
Operating leases	Operating leases		$	4,212		$	6,919		Operating leases		2,772			1,004
Weighted-average remaining lease term (in years)	Weighted-average remaining lease term (in years)								Weighted-average remaining lease term (in years)
Finance leases	Finance leases		5.5			5.9			Finance leases		5.3			5.6
Operating leases	Operating leases		5.3			5.9			Operating leases		5.2			5.6
Weighted-average discount rate	Weighted-average discount rate								Weighted-average discount rate
Finance leases	Finance leases		5.4		%	5.8		%	Finance leases		5.2		%	5.5		%
Operating leases	Operating leases		5.8		%	5.8		%	Operating leases		5.5		%	5.7		%

Maturities of lease liabilities as of March 31, 2022 were as follows:


	Finance		Operating
Remainder of 2022	$	4,515	$	9,113
2023	3,990		11,252
2024	3,062		9,083
2025	1,471		6,763
2026	823		5,074
Thereafter	482		9,191
Total	14,343		50,476
Less: Present value discount	1,016		6,479
Lease liability	$	13,327	$	43,997

14. Commitments and Contingencies

Legal Proceedings and Government Investigations

The Company is periodically involved in lawsuits, investigations and claims that arise in the ordinary course of business. The Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it. Except for possible losses from the matters described below, the Company does not believe that any currently pending or threatened legal proceeding to which the Company is or is likely to become a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs incurred by the Company to defend lawsuits, investigations and claims and amounts the Company pays to other parties because of these matters may be covered by insurance in some circumstances.

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

~~Maturities of lease liabilities as of September 30, 2021 were as follows:~~
Finance Operating
Remainder of 2021 $ 2,023 $ 3,165
2022 4,602 11,595
2023 3,711 10,111
2024 2,778 7,843
2025 1,185 5,554
Thereafter 991 12,484
Total 15,290 50,752
Less: Present value discount 1,179 7,190
Lease liability $ 14,111 $ 43,562

~~14. Commitments and Contingencies~~

~~Legal Proceedings and Government Investigations~~

The Company is subject to periodic lawsuits, investigations and claims that arise in the ordinary course of business. The Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it. Except possible losses from the matters described below, the Company does not believe that any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs of defense and amounts that may be recovered against the Company may be covered by insurance for certain matters.

Litigation and Commercial Claims

The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of ~~December~~March 31, ~~2019,~~2022, approximately $1.4 million of past due receivables were outstanding from this customer. The customer provided the Company with notice in December 2019, alleging that the Company’s inspection of 66 welds (out of approximately 16,000 welds inspected) were not in compliance with the contract, claimed approximately $7.6 million in damages, and requested that the Company pay these damages and any other damages incurred. The Company filed a lawsuit in the District Court of Bexar County, Texas, 37th Judicial District, in an action captioned Mistras Group, Inc. v. Epic Y-Grade Pipeline LP, to recover the $1.4 million and other amounts due to the Company. The customer filed a counterclaim, alleging breach of contract and seeking recovery of its alleged damages. The Company believes that any successful claim by the customer regarding the Company’s workmanship will be covered by insurance, subject to payment of a deductible. At this time, the Company is unable to determine whether it has any liability in connection with this matter and if so, the amount or range of any such liability, and accordingly, has not established any accruals for this matter. Accordingly, the Company recorded a reserve in the amount of $1.4 million during the twelve months ended December 31, 2019 for these past due receivables.

NaN proceedings have been filed in California Superior Court for the County of Los Angeles regarding alleged violations of the California Labor Code. Both cases are captioned Justin Price v. Mistras Group, Inc., 1 being a purported class action lawsuit on behalf of current and former Mistras employees in California and the other was filed on behalf of the State of California under the California Private Attorney General Act on the basis of the same alleged violations. ~~Both~~The two cases have been consolidated and are requesting payment of all damages, including unpaid wages, and various fines and penalties available under California law. On May 4, 2021, the Company agreed to a settlement of all claims in the cases, which was more formally documented pursuant to a settlement agreement completed October 5, 2021. Pursuant to the settlement, the Company will pay $2.3 million to resolve the allegations in these proceedings and will be responsible for the employer portion of payroll taxes on the amount of the settlement allocated to wages. The settlement is subject to court approval and will cover claims for the period from June 2016 through July 31, 2021. The Company recorded expense of approximately $1.6 million during the three months ended March 31, 2021 related to this settlement, which is in addition to expense of $0.8 million the Company recorded during the three months ended December 31, 2020.

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~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

Pension Related Contingencies

Certain of Company’s subsidiaries had significant reductions in their unionized workers in 2018. The collective bargaining agreements for these employees required contributions for these employees to national multi-employer pension funds. The reduction in employees resulted in a subsidiary incurring a complete withdrawal to one of the pension funds under the Employee Retirement Income Security Act of 1974 ("ERISA"), which was fully satisfied in 2019. The Company has determined that the subsidiary is likely to incur partial or complete withdrawal liability to the other pension fund. The balance of the estimated total amount of this potential liability as of ~~September 30, 2021~~March 31, 2022 is approximately $2.5 million, ~~and the charges related to this liability~~which were incurred in 2018 and 2019.

Severance and labor disputes

During December 2019, the Company executed an agreement to sell the rights of certain customer "staff leasing" contracts related to its German subsidiary for total consideration of approximately $0.1 million, effective January 1, 2020. No other assets or liabilities other than those employee benefits related to employees working on the customer contracts were included in the sale. As of ~~September 30, 2021,~~March 31, 2022, the Company has approximately $0.1 million of accrued estimated severance payment obligations, which takes into account the Company's estimate with respect to the employees that have been or will be transitioned to the German subsidiaries' other customers. The ~~$0.1~~$0.2 million of estimated obligations is net of $0.4 million in payments made and $1.0 million in reversals due to employees being transitioned to customer contracts.

The Company was entitled to indemnification on certain labor claims from the sellers of a company acquired by its Brazilian subsidiary. The Company and the sellers entered into a settlement agreement for approximately $1.0 million, which provided for payment in 2 installments, the first for approximately 31% of the settlement and the second for the remaining 69%. The first installment in the amount of approximately $0.3 million was paid by the sellers in December 2020 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period. The remaining payment for $0.6 million was received in the first quarter of 2021 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period.

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Acquisition and disposition related contingencies

The Company is liable for contingent consideration in connection with certain of its acquisitions. As of ~~September 30, 2021,~~March 31, 2022, total potential acquisition-related contingent consideration ranged from zero to approximately ~~$2.8~~$1.9 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next ~~twelve~~six months.

During 2018, the Company sold a subsidiary in the Products and Systems segment. As part of the sale, the Company entered into a three-year agreement to purchase products from the buyer, with a cumulative commitment of $2.3 million, of which ~~$1.0~~$0.9 million is remaining as of ~~September 30, 2021.~~March 31, 2022. The agreement is based on third-party pricing and the Company's planned purchase requirements over the three-year purchase period to meet the minimum contractual purchases. On August 3, 2021, the Company entered into an agreement and extended the period by twelve ~~months~~.months. As of March 31, 2022, approximately $0.9 million is remaining on the amended purchase commitment. The agreement is based on third party pricing and the Company's planned purchase requirements over the duration of the extension to meet the minimum contractual purchases.

15. Segment Disclosure

The Company’s 3 operating segments are:

•Services. This segment provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components. Software, digital and data services are included in this segment.

•International. This segment offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.

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~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

•Products and Systems. This segment designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.

Costs incurred for general corporate services, including finance, legal, and certain other costs that are provided to the segments are reported within Corporate and eliminations. During the first quarter of 2022 the Company finalized a transfer pricing study which resulted in additional costs being allocated from Corporate to the operating segments with the majority of the costs allocated to the Services segment. These costs are reflected in operating income (loss) of each segment. Sales to the International segment from the Products and Systems segment and subsequent sales by the International segment of the same items are recorded and reflected in the operating performance of both segments. Additionally, engineering charges and royalty fees charged to the Services and International segments by the Products and Systems segment are reflected in the operating performance of each segment.

The accounting policies of the reportable segments are the same as those described in Note 1-Description of Business and Basis of Presentation. Segment income from operations is one of the primary performance measures used by the chief operating decision maker, to assess the performance of each segment and make resource allocation decisions. Certain general and administrative costs such as human resources, information technology and training are allocated to the segments. Segment income from operations excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment.

~~Selected consolidated financial information by segment for the periods shown was as follows: (with intercompany transactions eliminated in Corporate and eliminations)~~

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Revenue
Services $ 144,976 $ 119,721 $ 414,251 $ 349,271
International 29,100 26,477 88,699 76,887
Products and Systems 3,308 3,932 9,499 10,746
Corporate and eliminations (2,828) (2,236) (6,481) (5,110)
$ 174,556 $ 147,894 $ 505,968 $ 431,794

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Gross profit
Services $ 41,749 $ 37,603 $ 116,587 $ 103,780
International 9,038 8,197 26,278 21,612
Products and Systems 1,422 1,628 4,655 3,834
Corporate and eliminations 7 (44) 33 (40)
$ 52,216 $ 47,384 $ 147,553 $ 129,186

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Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Selected consolidated financial information by segment for the periods shown was as follows: (with intercompany transactions eliminated in Corporate and eliminations)


	Three months ended March 31,
	2022		2021
Revenue
Services	$	132,946	$	124,298
International	28,138		27,648
Products and Systems	2,936		2,988
Corporate and eliminations	(2,358)		(1,199)
	$	161,662	$	153,735


	Three months ended March 31,
	2022		2021
Gross profit
Services	$	30,526	$	31,076
International	8,190		7,625
Products and Systems	1,168		1,281
Corporate and eliminations	8		19
	$	39,892	$	40,001

Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations.


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021
Income (loss) from operations	Income (loss) from operations									Income (loss) from operations
Services	Services	$	16,085	$	13,599	$	38,991	$	(57,058)	Services	$	3,761	$	4,548
International	International	1,169		(66)		2,158		(22,422)		International	284		(820)
Products and Systems	Products and Systems	(281)		(160)		(653)		(1,936)		Products and Systems	(582)		(581)
Corporate and eliminations	Corporate and eliminations	(7,737)		(7,631)		(24,632)		(24,453)		Corporate and eliminations	(8,161)		(7,893)
		$	9,236	$	5,742	$	15,864	$	(105,869)		$	(4,698)	$	(4,746)


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021
Depreciation and amortization	Depreciation and amortization									Depreciation and amortization
Services	Services	$	6,192	$	6,315	$	18,517	$	19,601	Services	$	6,593	$	6,114
International	International	2,167		2,216		6,552		6,433		International	2,058		2,210
Products and Systems	Products and Systems	221		248		664		756		Products and Systems	218		228
Corporate and eliminations	Corporate and eliminations	(72)		(17)		(28)		(31)		Corporate and eliminations	(62)		13
		$	8,508	$	8,762	$	25,705	$	26,759		$	8,807	$	8,565

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Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Intangible assets, net	Intangible assets, net					Intangible assets, net
Services	Services	$	53,634	$	58,917	Services	$	50,476	$	51,862
International	International	6,911		8,664		International	5,804		6,344
Products and Systems	Products and Systems	1,095		1,012		Products and Systems	1,071		1,042
Corporate and eliminations	Corporate and eliminations	55		49		Corporate and eliminations	128		133
		$	61,695	$	68,642		$	57,479	$	59,381


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Total assets	Total assets					Total assets
Services	Services	$	429,650	$	427,636	Services	$	436,996	$	424,058
International	International	115,787		129,228		International	108,733		111,619
Products and Systems	Products and Systems	10,601		10,996		Products and Systems	10,534		10,532
Corporate and eliminations	Corporate and eliminations	31,190		15,453		Corporate and eliminations	11,965		15,986
		$	587,228	$	583,313		$	568,228	$	562,195

Refer to Note 2–Revenue, for revenue by geographic area for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

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Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. The MD&A should be read together with our Unaudited Condensed Consolidated Financial Statements and related notes included in Item 1 in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, filed with the Securities and Exchange Commission on March ~~16,~~ 14, 2022 (“2021 ~~(“2020~~ Annual Report”). Unless otherwise specified or the context otherwise requires, “Mistras,” “the Company,” “we,” “us” and “our” refer to Mistras Group, Inc. and its consolidated subsidiaries. The MD&A includes the following sections:

•Forward-Looking Statements

•Overview

•Note about Non-GAAP Measures

•Consolidated Results of Operations

•Liquidity and Capital Resources

•Critical Accounting Policies and Estimates

Forward-Looking Statements

This report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.

In some cases, you can identify forward-looking statements by terminology, such as “goals,” or “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “should,” “would,” “predicts,” “appears,” “projects,” or the negative of such terms or other similar expressions. You are urged not to place undue reliance on any such forward-looking statements, any of which may turn out to be wrong due to inaccurate assumptions, various risks, uncertainties or other factors known and unknown. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed in the “Business—Forward-Looking Statements,” and “Risk Factors” sections of our ~~2020~~2021 Annual Report as well as those discussed in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

At the time of this report, the COVID-19 pandemic is continuing to have a negative impact on us and our key markets and is causing ~~ongoing~~significant economic disruption worldwide, although the Company has nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas. Our discussion below is qualified by the unknown impact that the COVID-19 pandemic will continue to have on our business and the economy in general, including the duration of the health risk the COVID-19 pandemic will cause and the resulting economic disruption.

Overview

The Company is a leading ~~“one source”~~"one source" multinational provider of integrated technology-enabled asset protection solutions, helping to maximize the safety and operational uptime for ~~civilization's~~civilization’s most critical industrial and civil assets.

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

power generation, and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries towards achieving and maintaining operational excellence. By supporting these organizations that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and space craft; and building real-time monitoring equipment to enable safe travel across bridges, the Company helps the world at large.

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~~Mistras Group, Inc. and Subsidiaries~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

~~(tabular dollars are in thousands)~~

The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial IoT-connected digital software and monitoring solutions, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.

The ~~Company's~~Company’s core capabilities also include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies and NDT equipment, asset and mechanical integrity engineering services, and light mechanical maintenance and access services.

Our operations consist of three reportable segments: Services, International, and Products and Systems.

•Services provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components. Software, digital and data services are included in this segment.

•International offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.

•Products and Systems designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.

Given the role our solutions play in enhancing the safe and efficient operation of infrastructure, we have historically provided a majority of our solutions to our customers on a regular, recurring basis. We perform these services largely at our customers’ facilities, while primarily servicing our aerospace customers at our network of state-of-the-art, in-house laboratories. These solutions typically include NDT and inspection services, and can also include a wide range of mechanical services, including heat tracing, pre-inspection insulation stripping, coating applications, re-insulation, engineering assessments and long-term condition-monitoring. Under this business model, many customers outsource their inspection to us on a “run and maintain” basis. We have established long-term relationships as a critical solutions provider to many of the leading companies with asset-intensive infrastructure in our target markets. These markets include companies in the oil and gas, aerospace and defense, industrials, power generation and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries.

We have focused on providing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment. We have made numerous acquisitions in an effort to grow our base of experienced, certified personnel, expand our service lines and technical capabilities, increase our geographical reach, complement our existing offerings, and leverage our fixed costs. We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies. These acquisitions have provided us with additional service lines, technologies, resources and customers which we believe will enhance our advantages over our competition.

We believe long-term growth can be realized in all of our target markets. Our level of business and financial results are impacted by world-wide macro- and micro-economic conditions generally, as well as those within our target markets. Among other things, we expect the timing of our oil and gas customers inspection spend to be impacted by oil price fluctuations.

We have continued providing our customers with innovative asset protection software ecosystem through our MISTRAS OneSuite platform. The software platform offers functions of MISTRAS' popular software and services brands as integrated apps on a cloud environment. OneSuite serves as a single access portal for customers' data activities and provides access to 50 plus applications being offered on one centralized platform.

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

We have continued to develop new technologies to provide monitoring of wind blade integrity through our Sensoria™ tool. Sensoria helps provide real-time monitoring and damage detection of wind turbine blades and allows our customers to maximize uptime, performance and safety of wind turbine blades. This tool provides additional growth and expansion of our

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~~Mistras Group, Inc. and Subsidiaries~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

~~(tabular dollars are in thousands)~~

capabilities to serve both new and existing wind turbines and greatly enhances our product offerings within the renewable energy industry.

Recent Developments

Overall, we have taken actions to help ensure the health and safety of our employees and those of our customers and suppliers; maintain business continuity and financial strength and stability; and serve our customers as they provide essential products and services to the world.

The COVID-19 pandemic uncertainty, significant volatility in oil prices and decreased traffic in the aerospace industry have adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors beginning in 2020. These negative factors continue to cause volatility and uncertainty in the markets in which we operate, although we have nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas where crude oil prices have exceeded pre-pandemic levels.

While we cannot fully assess the impact that the COVID-19 pandemic or the significant volatility in oil prices will continue to have on our operations at this time, there are certain impacts that we have identified resulting in impairment charges in 2020. See Note 8-~~Goodwill,~~ ~~Note 9-Intangible Assetsand Note13-Leases~~ ~~to the Notes to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report for additional information.~~

The Company has eliminated substantially all of the cost reduction initiatives undertaken in 2020, including re-installment of the savings plan employer match and increasing wages back to pre-pandemic amounts. Our cash position and liquidity remains strong. As of ~~September 30, 2021,~~March 31, 2022, the cash balance was approximately ~~$22.6~~$19.9 million.

In April 2021, the Biden Administration announced aggressive initiatives to battle climate change, which includes a significant reduction in the use of fossil fuels and a transition to electric vehicles and increased use of alternative energy. Any legislation or regulations that may be adopted to implement these measures may negatively impact on our customers in the oil and gas market over the long-term, which presently is our largest market, although this initiative will likely benefit the alternative energy market, such as wind energy, for which we provide products and services. At this time, it is difficult to determine the magnitude and timing of the impact that climate change initiatives and legislation, if any, will have on these markets and the resulting impact on our business and operational results.

We are currently unable to predict the overall impact that the COVID-19 pandemic uncertainty, volatility in oil prices and climate change initiatives to reduce the use of fossil fuels may have on our business, results of operations, liquidity or in other ways which we cannot yet determine. We will continue to monitor market conditions and respond accordingly. Refer to Item 1A. Risk Factors in Part I of our ~~2020~~2021 Annual Report.

Note About Non-GAAP Measures

The Company prepares its consolidated financial statements in accordance with U.S. GAAP. In this MD&A under the heading "Income (loss) from Operations", the non-GAAP financial performance measure "Income (loss) before special items” is used for each of our three operating segments, the Corporate segment and the "Total Company", with tables reconciling the measure to a financial measure under GAAP. This presentation excludes from "Income (loss) from Operations" (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs, (b) the net changes in the fair value of acquisition-related contingent consideration liabilities, (c) impairment charges, (d) reorganization and other costs, which includes items such as severance, labor relations matters and asset and lease termination costs and (e) other special items. These adjustments have been excluded from the GAAP measure because these expenses and credits are not related to our or any individual segment's core business operations. The acquisition related costs and special items can be a net expense or credit in any given period. Our management uses this non-GAAP measure as a measure of operating performance and liquidity to assist in comparing performance from period to period on a consistent basis, as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. We believe investors and other users of our financial statements benefit from the presentation of this non-GAAP measure in evaluating our performance. Income (loss) before special items excludes the identified adjustments, which provides additional tools to compare our core business operating

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statements benefit from the presentation of this non-GAAP measure in evaluating our performance. Income (loss) before special items excludes the identified adjustments, which provides additional tools to compare our core business operating performance on a consistent basis and measure underlying trends and results in our business. Income (loss) before special items is not used to determine incentive compensation for executives or employees, nor is it a replacement for the reported GAAP financial performance and/or necessarily comparable to the non-GAAP financial measures of other companies.

Results of Operations

Condensed consolidated results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ were as follows:

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Revenues $ 174,556 $ 147,894 $ 505,968 $ 431,794
Gross profit 52,216 47,384 147,553 129,186
Gross profit as a % of Revenue 29.9 % 32.0 % 29.2 % 29.9 %
Income (loss) from operations 9,236 5,742 15,864 (105,869)
Income (Loss) from Operations as a % of Revenue 5.3 % 3.9 % 3.1 % (24.5) %
Income before provision (benefit) for income taxes 6,910 2,097 7,170 (115,279)
Net income (loss) 3,397 1,553 3,983 (99,634)
Net income (loss) attributable to Mistras Group, Inc. $ 3,380 $ 1,523 $ 3,955 $ (99,642)


	Three months ended March 31,
	2022			2021
Revenues	$	161,662		$	153,735
Gross profit	39,892			40,001
Gross profit as a % of Revenue	24.7		%	26.0		%


Loss from operations	(4,698)			(4,746)
Loss from Operations as a % of Revenue	(2.9)		%	(3.1)		%

Loss before benefit for income taxes	(6,636)			(7,959)

Net Loss	(5,353)			(5,359)

Net Loss attributable to Mistras Group, Inc.	$	(5,363)		$	(5,362)

Revenue

Revenue was ~~$174.6~~$161.7 million for the three months ended ~~September 30, 2021,~~March 31, 2022, an increase of ~~$26.7~~$7.9 million, or ~~18.0%~~5.2%, compared with the three months ended ~~September 30, 2020. Revenue for the nine months ended September 30, 2021 was $506.0 million, an increase of $74.2 million, or 17.2%, compared with the nine months ended September 30, 2020.~~March 31, 2021.

Revenue by segment for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020 was~~were as follows:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021

Revenue	Revenue									Revenue
Services	Services	$	144,976	$	119,721	$	414,251	$	349,271	Services	$	132,946	$	124,298
International	International	29,100		26,477		88,699		76,887		International	28,138		27,648
Products and Systems	Products and Systems	3,308		3,932		9,499		10,746		Products and Systems	2,936		2,988
Corporate and eliminations	Corporate and eliminations	(2,828)		(2,236)		(6,481)		(5,110)		Corporate and eliminations	(2,358)		(1,199)
		$	174,556	$	147,894	$	505,968	$	431,794
Total										Total	$	161,662	$	153,735

Three Months

In the three months ended ~~September 30, 2021,~~March 31, 2022, total revenue increased ~~18.0%~~5.2% versus the prior year comparable ~~prior period. The increase was~~period due predominantly to a single-digit organic ~~growth in our core business as our end markets recover from the effect of COVID-19. In addition, the Company realized low single-digit favorable revenue impact from foreign exchange rates.~~increase. Services segment revenue increased ~~21.1% and~~7.0%, driven predominantly by a single-digit organic increase, minimally offset by low single-digit unfavorable impact of foreign exchange rates. International segment revenue increased ~~9.9%~~1.8%, due predominantly to ~~recovery from the effect~~high single-digit organic growth mostly offset by high single-digit unfavorable impact of ~~COVID-19 and to single-digit favorable revenue impact from~~ foreign exchange rates. Products and Systems segment revenue decreased by 1.7%, due to reduced sales volume as compared to the prior period.

Oil and gas customer revenue comprised approximately ~~56%~~58% and ~~55%~~57% of total revenue for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. Aerospace and defense customer revenue comprised approximately ~~10%~~12% and ~~10%~~11% of total revenue for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. The Company’s top ten customers comprised approximately ~~32%~~34% of total revenue for the three months ended ~~September 30, 2021,~~March 31, 2022, as compared to ~~29%~~35% for the three months ended ~~September 30, 2020,~~March 31, 2021, with no customer accounting for 10% or more of total revenue in either three-month period. ~~For the~~

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~~three months ended September 30, 2021, revenue in all our primary end market industries increased versus the comparable prior period, except for industrials which decreased slightly.~~

~~Nine months~~

In the nine months ended September 30, 2021, total revenue increased 17.2% versus the comparable prior period. The increase was due to organic growth in our core business as our end markets recover from the effect of COVID-19. In addition, the Company realized low single-digit favorable revenue impact from foreign exchange rates. Our Services segment revenue increased 18.5% due predominantly to recovery from the effect of COVID-19. International segment revenue increased 15.3% due to mid-single digit organic growth and mid-single digit favorable revenue impact from foreign exchange rates.


	Three months ended March 31,
	2022		2021

Oil and Gas Revenue by sub-category
Upstream	$	41,665	$	33,926
Midstream	24,907		22,438
Downstream	27,651		30,848
Total	$	94,223	$	87,212

Oil and gas upstream customer revenue ~~comprised~~increased approximately ~~58%~~$7.7 million, or 23%, due primarily to market share gains and ~~56% of total revenue for~~expanded exploration operations compared to the ~~nine months ended September 30, 2021 and 2020, respectively. Aerospace and defense~~prior period. Midstream customer ~~revenue comprised~~revenues increased approximately 10% and 13% of total revenue for the nine months ended September 30, 2021 and 2020, respectively. The Company’s top ten customers comprised approximately 33% of total revenue for the nine months ended September 30, 2021,$2.5 million, or 11%, due to increased pipe inspection services performed as compared to ~~31% for~~ the ~~nine months ended September 30, 2020,~~prior year quarter. Downstream customer revenues decreased $3.2 million or, 10%, primarily due to delays in timing associated with no customer accounting for 10% or more of total revenue in either nine-month period. For the nine months ended September 30, 2021 revenue in all our primary end market industries increased versus the comparable prior period, except for aerospace and defense and industrial.turnarounds.

Gross Profit

Gross profit ~~increased~~decreased by ~~$4.8~~$0.1 million, or ~~10.2%~~0.3%, in the three months ended ~~September 30, 2021~~March 31, 2022 versus the prior year comparable period, on ana increase in revenue of ~~18.0%.~~

~~Gross profit increased by $18.4 million, or 14.2%, in the nine months ended September 30, 2021 on an increase in revenue of 17.2%~~5.2%.

Gross profit by segment for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ was as follows:


		Three months ended September 30,						Nine months ended September 30,							Three months ended March 31,
		2021			2020			2021			2020				2022			2021

Gross profit	Gross profit													Gross profit
Services	Services	$	41,749		$	37,603		$	116,587		$	103,780		Services	$	30,526		$	31,076
% of segment revenue	% of segment revenue	28.8		%	31.4		%	28.1		%	29.7		%	% of segment revenue	23.0		%	25.0		%
International	International	9,038			8,197			26,278			21,612			International	8,190			7,625
% of segment revenue	% of segment revenue	31.1		%	31.0		%	29.6		%	28.1		%	% of segment revenue	29.1		%	27.6		%
Products and Systems	Products and Systems	1,422			1,628			4,655			3,834			Products and Systems	1,168			1,281
% of segment revenue	% of segment revenue	43.0		%	41.4		%	49.0		%	35.7		%	% of segment revenue	39.8		%	42.9		%
Corporate and eliminations	Corporate and eliminations	7			(44)			33			(40)			Corporate and eliminations	8			19
		$	52,216		$	47,384		$	147,553		$	129,186			$	39,892		$	40,001
% of total revenue	% of total revenue	29.9		%	32.0		%	29.2		%	29.9		%	% of total revenue	24.7		%	26.0		%

Three Months

Gross profit margin was ~~29.9%~~24.7% and ~~32.0%~~26.0% for the three-month periods ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. ~~Gross~~Services segment realized a 2.0% reduction in gross profit margin ~~decreased~~to 23.0% during the three months ended March 31, 2022. This was primarily due to higher benefit costs in the US and the end of government wage subsidies received in Canada, both as compared to the prior year period. International segment realized a 1.5% increase in gross profit margin to 29.1% during the three months ended March 31, 2022 due primarily to continued recovery and sales within the aerospace end market. Products and Systems segment gross margin had a decrease of 310 basis points to 39.8% during the three months ended March 31, 2022 due to unfavorable sales mix, ~~and higher level~~as compared to gross margin of ~~reimbursable travel costs in the Services segment partially offset by favorable sales mix and better utilization in the International and Products and Systems segments.~~

~~Nine months~~

~~Gross profit margin was 29.2%~~and 29.9% for the nine months ended September 30, 2021 and 2020, respectively. Gross profit margin remained flat primarily due to unfavorable sales mix and higher level of reimbursable travel costs in the Services segment offset by favorable sales mix and better utilization in the International and Products and Systems segments.42.9% during 2021.

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Operating Expenses

Operating expenses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ was as follows:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021

Operating Expenses	Operating Expenses									Operating Expenses
Selling, general and administrative expenses	Selling, general and administrative expenses	$	39,221	$	37,473	$	118,579	$	116,638	Selling, general and administrative expenses	$	42,036	$	39,639

Impairment charges		—		—		—		106,062

Research and engineering	Research and engineering	595		638		1,942		2,170		Research and engineering	551		727
Depreciation and amortization	Depreciation and amortization	2,918		3,182		9,070		10,359		Depreciation and amortization	2,795		3,074

Legal settlement and litigation charges, net		—		(360)		1,030		(360)
Acquisitions-related expense		246		709		1,068		186
Legal settlement and insurance recoveries, net										Legal settlement and insurance recoveries, net	(841)		1,030
Acquisition-related expense, net										Acquisition-related expense, net	49		277

Three Months

Operating expenses ~~increased $1.3~~decreased $0.2 million, or 3%0.4%, for the three months ended ~~September 30, 2021~~March 31, 2022 compared to the three months ended ~~September 30, 2020.~~March 31, 2021. Selling, general and administrative expenses increased ~~$1.7~~$2.4 million during the three months ended ~~September 30, 2021~~March 31, 2022 compared to the three months ended ~~September 30, 2020,~~March 31, 2021, due to ~~the Company reinstating several of the temporary cost reduction initiatives undertaken during 2020 in response~~increased costs and unfavorable foreign exchange impact as compared to the ~~COVID-19 pandemic, as further detailed in the~~ ~~Recent Developments~~ ~~section above. This increase was partially offset by foreign currency exchange losses. Acquisition-related expense~~prior period. Depreciation and amortization decreased ~~$(0.5)~~$0.3 million ~~for~~during the three months ended ~~September 30, 2021~~March 31, 2022 compared to the three months ended ~~September 30, 2020 due to remeasurement of acquisition related contingent consideration.~~

~~Nine months~~

~~Operating expenses decreased $103.4 million, or 44%, for~~March 31, 2021. This was partially offset during the ~~nine~~three months ended ~~September 30, 2021 compared to~~March 31, 2022 by a $0.8 million insurance recovery during the ~~nine~~three months ended ~~September 30, 2020, due predominantly to impairment charges of $106.1 million in 2020 as more fully described in Note 8–Goodwill~~ ~~and Note 9–Intangible Assets~~ included in the Notes to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report. Excluding the 2020 impairment charges, operating expenses increased $2.7 million due to the Company reinstating several of the temporary cost reduction initiatives undertaken during 2020 in response to the COVID-19 pandemic, as further detailed in the ~~Recent Developments~~ ~~section above, as well as a $1.2 million increase in net legal settlement and litigation charges primarily related to the~~ ~~Justin Price v. Mistras Group, Inc.~~ ~~matter more fully described in Note-~~14 ~~Commitments and Contingencies~~under the "Litigation and Commercial Claims" section to the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report. These increases were partially offset by foreign currency exchange losses. Depreciation and amortization decreased $1.3 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, due to the 2020 impairment charges reducing the net book value on certain of our intangible assets. Acquisition-related expense increased $0.9 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 due to remeasurement of acquisition related contingent consideration.March 31, 2022.

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Income (loss) from Operations

The following table shows a reconciliation of the income ~~(loss)~~ from operations to income (loss) before special items for each of our three segments, Corporate and ~~Eliminations~~Elimination and for the Company in total:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021

Services:	Services:									Services:
Income (loss) from operations (GAAP)		$	16,085	$	13,599	$	38,991	$	(57,058)
Income from operations (GAAP)										Income from operations (GAAP)	$	3,761	$	4,548

Impairment charges		—		—		—		86,200

Reorganization and other costs	Reorganization and other costs	—		58		97		125		Reorganization and other costs	27		71
Legal settlement and litigation charges, net		—		(360)		1,650		(360)
Legal settlement and insurance recoveries, net										Legal settlement and insurance recoveries, net	(841)		1,650
Acquisition-related expense, net	Acquisition-related expense, net	246		709		1,034		186		Acquisition-related expense, net	44		243
Income before special items (non-GAAP)	Income before special items (non-GAAP)	$	16,331	$	14,006	$	41,772	$	29,093	Income before special items (non-GAAP)	$	2,991	$	6,512
International:	International:									International:
Income (loss) from operations (GAAP)		$	1,169	$	(66)	$	2,158	$	(22,422)
Income (Loss) from operations (GAAP)										Income (Loss) from operations (GAAP)	$	284	$	(820)

Impairment charges		—		—		—		19,862

Reorganization and other costs	Reorganization and other costs	(2)		21		124		313		Reorganization and other costs	87		96

Income (loss) before special items (non-GAAP)		$	1,167	$	(45)	$	2,282	$	(2,247)
Income (Loss) from operations before special items (non-GAAP)										Income (Loss) from operations before special items (non-GAAP)	$	371	$	(724)
Products and Systems:	Products and Systems:									Products and Systems:
Loss from operations (GAAP)	Loss from operations (GAAP)	$	(281)	$	(160)	$	(653)	$	(1,936)	Loss from operations (GAAP)	$	(582)	$	(581)

Reorganization and other costs	Reorganization and other costs	—		5		27		5		Reorganization and other costs	—		27
Loss before special items (non-GAAP)		$	(281)	$	(155)	$	(626)	$	(1,931)
Loss from operations before special items (non-GAAP)										Loss from operations before special items (non-GAAP)	$	(582)	$	(554)
Corporate and Eliminations:	Corporate and Eliminations:									Corporate and Eliminations:
Loss from operations (GAAP)	Loss from operations (GAAP)	$	(7,737)	$	(7,631)	$	(24,632)	$	(24,453)	Loss from operations (GAAP)	$	(8,161)	$	(7,893)
Loss on debt modification		—				278		645
Legal settlement and litigation charges, net		—		—		(620)		—
Reorganization and other costs		—		14		—		137

Legal settlement and insurance recoveries, net										Legal settlement and insurance recoveries, net	—		(620)

Acquisition-related expense, net	Acquisition-related expense, net	—		—		34		—		Acquisition-related expense, net	5		34
Loss before special items (non-GAAP)		$	(7,737)	$	(7,617)	$	(24,940)	$	(23,671)
Loss from operations before special items (non-GAAP)										Loss from operations before special items (non-GAAP)	$	(8,156)	$	(8,479)
Total Company:	Total Company:									Total Company:
Income (loss) from operations (GAAP)		$	9,236	$	5,742	$	15,864	$	(105,869)
Loss from operations (GAAP)										Loss from operations (GAAP)	$	(4,698)	$	(4,746)

Impairment charges		—		—		—		106,062

Reorganization and other costs	Reorganization and other costs	(2)		98		248		580		Reorganization and other costs	114		194
Loss on debt modification		—		—		278		645
Legal settlement and litigation charges, net		—		(360)		1,030		(360)

Legal settlement and insurance recoveries, net										Legal settlement and insurance recoveries, net	(841)		1,030
Acquisition-related expense, net	Acquisition-related expense, net	246		709		1,068		186		Acquisition-related expense, net	49		277
Income before special items (non-GAAP)		$	9,480	$	6,189	$	18,488	$	1,244
Loss from operations before special items (non-GAAP)										Loss from operations before special items (non-GAAP)	$	(5,376)	$	(3,245)

See section Note About Non-GAAP Measures in this report for an explanation of the use of non-GAAP measurements.

Three Months

For the three months ended March 31, 2022, the loss from operations (GAAP) decreased $0.05 million or 1.0%, compared with the three months ended March 31, 2021, while the loss before special items (non-GAAP) decreased $2.1 million, or 65.7%. As a percentage of revenue, the loss before special items decreased by 120 basis points to (3.3)% in the three months ended March 31, 2022 from (2.1)% in the three months ended March 31, 2021.

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(tabular dollars are in thousands)

~~Three Months~~

For the three months ended September 30, 2021, the income (loss) from operations (GAAP) increased $3.5 million, compared with the three months ended September 30, 2020, while income before special items (non-GAAP) increased $3.3 million. As a percentage of revenue, income before special items increased by 120 basis points to 5.4% in the three months ended September 30, 2021 from 4.2% in the three months ended September 30, 2020.

~~Nine months~~

For the nine months ended September 30, 2021, income (loss) from operations (GAAP) increased $121.7 million, compared with the nine months ended September 30, 2020, while income (loss) before special items (non-GAAP) increased $17.2 million. As a percentage of revenue, income (loss) before special items increased by 340 basis points to 3.7% in the nine months ended September 30, 2021 from 0.3% in the nine months ended September 30, 2020. During the nine months ended September 30, 2021, the Company experienced overall organic growth. Specifically, the Company has been recovering from the effect of COVID-19 which was more impactful to our financial results in 2020. During the nine months ended September 30, 2020, the COVID-19 initial outbreak and significant drop in oil prices had adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors. Refer to Item 1A. Risk Factors in Part I of our 2020 Form 10-K, and the additional risk factors included in Part II, Item 1.A. of this Form 10-Q for further discussion.

Interest Expense

Interest expense was approximately ~~$2.3~~$1.9 million and ~~$3.6~~$3.2 million for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively. Interest expense was approximately $8.7 million and $9.4 million for the nine months ended September 30, 2021 and 2020,~~ respectively. The decrease was a result of a change in the effective interest rate, due to a lower leverage ratio and the elimination of the minimum LIBOR floor.

An amendment in May 2021 to our Credit Agreement removed the LIBOR floor of 1.0%, which provided that if LIBOR is below 1.0%, the interest rate will be calculated as if LIBOR is 1.0%. Now the actual LIBOR rate is used to calculate interest, even if LIBOR is below 1.0%. This will reduce our interest rate, when LIBOR is below 1.0%.

~~The terms of our Credit Agreement are described in Note 11-~~ ~~Long-Term Debt~~ ~~of the Notes to the Unaudited Condensed Consolidated Financial Statements, under the heading "Senior Credit Facility~~".

Income Taxes

Our effective income tax rate was approximately ~~50.8%~~19.3% and ~~25.9%~~32.7% for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. ~~Our~~

The effective income tax rate ~~was approximately 44.4% and 13.6% for the nine months ended September 30, 2021 and 2020.~~

~~The Company's effective income tax rate~~benefit for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~higher~~lower than the statutory rate primarily due to ~~a $1.2 million valuation allowance recorded during~~ the ~~period which was~~impact of an unfavorable discrete item related to ~~various state deferred tax assets and earnings in jurisdictions with higher income tax rates than the United States.~~stock compensation. The effective income tax rate for the three months ended September 30, 2020 approximated the statutory rate, as the favorable impact of the CARES Act was offset by the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences.

~~The income tax rate for the nine months ended September 30,~~March 31, 2021 was higher than the statutory rate due to ~~a $1.2 million valuation allowance recorded during the year related to various state deferred tax assets offset by~~ the capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US. The effective income tax rate for the nine months ended September 30, 2020 was lower than the statutory rate primarily due to impairments for which we did not realize income tax benefits, partially offset by income tax benefits of the CARES Act.

On December 27, 2020, the United States enacted the Consolidated Appropriations Act, 2021, (the "Appropriations Act") an additional stimulus package providing financial relief for individuals and small business. The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit. We ~~are currently evaluating~~evaluated the impact of this guidance on our consolidated financial position, results of operations, and cash flows, ~~but does~~and it will not ~~expect it to~~ have a material impact.

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~~Mistras Group, Inc. and Subsidiaries~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

~~(tabular dollars are in thousands)~~

Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of meals and entertainment expense, valuation allowances, and other permanent differences. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Our effective income tax rate may fluctuate over the next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes resulting from our acquisition strategy, and increases or decreases in our permanent differences.

Liquidity and Capital Resources

Cash flows are summarized in the table below:


		Nine months ended September 30,					Three months ended March 31,
		2021		2020			2022		2021

Net cash provided by (used in):	Net cash provided by (used in):					Net cash provided by (used in):
Operating activities	Operating activities	$	22,469	$	41,791	Operating activities	$	(5,399)	$	3,148
Investing activities	Investing activities	(15,494)		(10,558)		Investing activities	(2,737)		(4,176)
Financing activities	Financing activities	(8,866)		(25,077)		Financing activities	4,323		435
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(1,272)		944		Effect of exchange rate changes on cash	(376)		(990)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	(3,163)	$	7,100	Net change in cash and cash equivalents	$	(4,189)	$	(1,583)

Cash Flows from Operating Activities

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, cash ~~provided by~~used in operating activities was ~~$22.5~~$(5.4) million, representing a year-on-year decrease of ~~$19.3~~$8.5 million, or ~~46%~~272%. The decrease was primarily attributable to ~~increased usage of~~movements in working capital. Additionally, revenue increased 17.2% versus the prior year comparable period due to organic growth. Specifically, the Company has been recovering from the effect of COVID-19 which was more impactful to our financial results in 2020. As we are increasing our work compared to the comparable prior period, our cash flows are lowercapital and an increase in the ~~current period as collections of receivables lag behind revenues.~~accounts receivable balance.

Cash Flows from Investing Activities

Table of Contents

Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

During the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, cash used in investing activities was ~~$15.5~~$2.7 million primarily attributable to a reduction in capital expenditures ~~of $16.0 million compared to $11.0 million of capital expenditures~~and no acquisitions in the ~~prior period driven by increased operating activities.~~three months ended March 31, 2022.

Cash Flows from Financing Activities

Net cash ~~used in~~provided by financing activities was ~~$8.9~~$4.3 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, compared to net cash ~~used in~~provided by financing activities of ~~$25.1~~$0.4 million for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, net borrowings of debt were approximately ~~$15.5~~$3.4 million ~~lower~~higher as compared to ~~2020~~2021 resulting in ~~less~~ debt paydown during the ~~period as cash flows~~period. In addition, $0.1 million more taxes were ~~used~~paid related to ~~support operating activities.~~net share settlement of share-based awards during the three months ended March 31, 2022.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

The effect of exchange rate changes on our cash and cash equivalents was a decrease of ~~$1.3~~$0.4 million in the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, compared to ~~an increase~~a decrease of ~~$0.9~~$1.0 million for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021.

Cash Balance and Credit Facility Borrowings

As of ~~September 30, 2021,~~March 31, 2022, we had cash and cash equivalents totaling ~~$22.6~~$19.9 million and ~~$22.2~~$11.2 million of unused commitments under our Credit Agreement with borrowings of ~~$209.2~~$203.1 million and ~~$4.3~~$3.3 million of letters of credit outstanding. We finance operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.

~~Table of Contents~~

~~Mistras Group, Inc. and Subsidiaries~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

~~(tabular dollars are in thousands)~~

As of ~~September 30, 2021,~~March 31, 2022, we were in compliance with the terms of the Credit Agreement and will continuously monitor our compliance with the covenants contained in the Credit Agreement.

The May 2021 Amendment to our Credit Agreement also reduced the borrowing capacity on our revolving loan line of credit $155 million on September 30, 2021 which will be further reduced to $150 million on December 31, 2021. Additionally, quarterlyQuarterly payments on the term loan increased to $3.75 million through March 31, 2022, and then to $5.0 million for each quarterly payment thereafter, with a final balloon payment at maturity.

The terms of our Credit Agreement (as modified) are described in Note ~~11-~~11- Long-Term Debtof the Notes to the Unaudited Condensed Consolidated Financial Statements, under the heading "Senior Credit Facility".

Contractual Obligations

There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the ~~2020~~2021 Annual Report.

Off-balance Sheet Arrangements

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the ~~2020~~2021 Annual Report.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes to our quantitative and qualitative disclosures about market risk as discussed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” included in the ~~2020~~2021 Annual Report.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Exchange Act, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls (as defined in Rule 13a-15(e) of the Exchange Act) and procedures. Based upon that evaluation, our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer concluded that, as of ~~September 30, 2021,~~March 31, 2022, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended ~~September 30, 2021~~March 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3734

Table of Contents

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

See Note 14-Commitments and Contingencies to the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report for a description of our legal proceedings. There have been no material developments with regard to any matters disclosed under Part I, Item 3 "Legal Proceedings" in our ~~2020~~2021 Annual Report, except as disclosed in such Note 14-Commitments and Contingencies.

ITEM 1.A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors discussed under the “Risk Factors” section included in our ~~2020~~2021 Annual Report. Except as described below, there have been no material changes to the risk factors previously disclosed in the ~~2020~~2021 Annual Report.

In the first risk factor in our 2020 Annual Report, we discuss that we are susceptible to prolonged negative trends in the oil and gas industry due to our dependency on customers in that industry. Oil and gas customer revenue comprised approximately 56% of total revenue for the three months ended September 30, 2021. In April 2021, the Biden Administration announced plans to aggressively combat climate change, with initiatives that would significantly reduce the use of fossil fuels. Any legislation, regulations, or significant private industry action to implement these initiatives could have a negative impact on the oil and gas industry, and as a consequence, negatively impact our business and results of operations.

ITEM 2. Unregistered Sale of Equity Securities and Use of Proceeds

(a) Sales of Unregistered Securities

None.

(b) Use of Proceeds from Public Offering of Common Stock

None.

The following table sets forth the shares of our common stock we acquired during the quarter as a result of the surrender of shares by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units.

~~Month Ending~~

Total Number of Shares (or
Units) Purchased

Average Price Paid per
Share (or Unit)

~~Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs~~

~~Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs~~

~~July 31, 2021~~

—

~~August 31, 2021~~

—

~~September 30, 2021~~

—


Month Ending	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 31, 2022	—	$	—	—	$	—
February 28, 2022	—	$	—	—	$	—
March 31, 2022	81,747	$	6.66	—	$	—

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

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Table of Contents

ITEM 6. Exhibits


Exhibit No.						Description






~~10.1~~						~~Settlement Agreement, dated October 5, 2021, regarding the settlement of the two legal proceedings captioned Price v. Mistras Group, Inc~~

31.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1						Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS						XBRL Instance Document

101.SCH						XBRL Schema Document

101.CAL						XBRL Calculation Linkbase Document

101.LAB						XBRL Labels Linkbase Document

101.PRE						XBRL Presentation Linkbase Document

101.DEF						XBRL Definition Linkbase Document

_________________

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			MISTRAS GROUP, INC.

			By:			/s/ Edward J. Prajzner
						Edward J. Prajzner
						Executive Vice President, Chief Financial Officer and Treasurer
						(Principal Financial and Accounting Officer and duly authorized officer)

Date: ~~November 3, 2021~~May 6, 2022

4037


	Nine months ended
	Common Stock			Additional paid-in capital		Retained earnings (deficit)		Accumulated other comprehensive loss		Total Mistras Group, Inc. Stockholders’ Equity		Noncontrolling Interest
	Shares	Amount												Total Equity

Balance at December 31, 2020	29,234	$	292	$	234,638	$	(21,848)	$	(16,061)	$	197,021	$	198	$	197,219
Net income	—	—		—		3,955		—		3,955		28		3,983
Other comprehensive gain (loss), net of tax	—	—		—		—		(3,115)		(3,115)		(2)		(3,117)
Share-based payments	—	—		3,916		—		—		3,916		—		3,916
Net settlement of restricted stock units	224	2		(977)		—		—		(975)		—		(975)

Balance at September 30, 2021	29,458	$	294	$	237,577	$	(17,893)	$	(19,176)	$	200,802	$	224	$	201,026

Balance at December 31, 2019	28,945	$	289	$	229,205	$	77,613	$	(21,285)	$	285,822	$	200	$	286,022
Net loss	—	—		—		(99,642)		—		(99,642)		8		(99,634)
Other comprehensive gain (loss), net of tax	—	—		—		—		(4,924)		(4,924)		(2)		(4,926)
Share-based payments	—	—		4,391		—		—		4,391		—		4,391
Net settlement of restricted stock units	247	3		(329)		—		—		(326)		—		(326)


Balance at September 30, 2020	29,192	$	292	$	233,267	$	(22,029)	$	(26,209)	$	185,321	$	206	$	185,527


Nine Months Ended September 30, 2021	Services		International		Products		Corp/Elim		Total
Oil & Gas	$	264,959	$	26,208	$	638	$	—	$	291,805
Aerospace & Defense	37,319		12,341		165		—		49,825
Industrials	30,621		17,736		1,081		—		49,438
Power Generation & Transmission	27,019		7,776		2,249		—		37,044
Other Process Industries	27,031		9,574		76		—		36,681
Infrastructure, Research & Engineering	15,479		9,477		2,777		—		27,733
Other	11,823		5,587		2,513		(6,481)		13,442
Total	$	414,251	$	88,699	$	9,499	$	(6,481)	$	505,968



Nine Months Ended September 30, 2020	Services		International		Products		Corp/Elim		Total
Oil & Gas	$	214,773	$	26,192	$	214	$	—	$	241,179
Aerospace & Defense	39,804		14,686		370		—		54,860
Industrials	35,374		13,997		1,349		—		50,720
Power Generation & Transmission	21,800		4,958		1,888		—		28,646
Other Process Industries	17,026		7,103		162		—		24,291
Infrastructure, Research & Engineering	12,820		6,726		3,683		—		23,229
Other	7,674		3,225		3,080		(5,110)		8,869
Total	$	349,271	$	76,887	$	10,746	$	(5,110)	$	431,794


	Finance		Operating
Remainder of 2021	$	2,023	$	3,165
2022	4,602		11,595
2023	3,711		10,111
2024	2,778		7,843
2025	1,185		5,554
Thereafter	991		12,484
Total	15,290		50,752
Less: Present value discount	1,179		7,190
Lease liability	$	14,111	$	43,562