What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-16 compared with 2021-11-09 · 107 added, 165 removed, 81 unchanged (77% of the section changed)

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

The following discussion should be read in conjunction with the Annual Report on Form 10-K for year-end December 31, 2021 filed with the U.S.

Securities and Exchange Commission (the “SEC”) and the consolidated financial statements and accompanying notes included herein.

Executive Summary

This Management’s Discussion and Analysis of Financial Condition, Results of Operations (“MD&A”) and risks associated with the outbreak of COVID-19 should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto of this Quarterly Report, as well as the Annual Report.

Phrases such as “Company,” “we,” “our,” and “us” refer to Flotek Industries, Inc.

and its subsidiaries.

Flotek Industries, Inc.

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A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial, commercial, and consumer markets improve their ESG performance.

The Company serves specialty chemistry needs that span from downstream, midstream and upstream, both domestic and international, energy markets to applications of U.S.

The Company serves specialty chemistry needs for both domestic and international energy markets as well as applications of U.S.

manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.

The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that help their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and supplying professional chemistries that clean surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs .

The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days.

These real-time data and analytics prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, thereby improving ESG performance.

During the second quarter of 2020, the Company acquired 100% ownership of JP3 in a cash-and-stock transaction.

JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, delivers increased profitability for its customers.

In conjunction with the acquisition of JP3, the Company created the DA segment.

The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research and Innovation advanced laboratory capabilities.

Company Overview

The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research & Innovation (“R&I”) advanced laboratory capabilities.

Chemistry Technologies

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Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.

In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and solvents for both commercial and personal use.

The Company produces FDA and EPA compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma.

Today, the Company has a portfolio of specialty green chemical products designed to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets.

The Company has made a commitment of being in this market for the long-term.

Data Analytics

The DA segment provides game-changing technology that delivers real-time information and insights to our customers on their refined fuels, NGLs, natural gas, crude oil, and condensates.

This valuable information includes compositions and physical properties, delivered simultaneously and in real time, transforming customers’ business and helping them optimize their operations while reducing their carbon footprint and emissions.

Real-time data is acquired using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions.

The instrument's response is processed with

advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

Customers who utilize this highly differentiated technology have obtained significant benefits including generating additional profits by enhancing their operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices.

Many customers have enjoyed the added benefits of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing.

The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity.

Real-time composition and physical properties are delivered simultaneously on their refined fuels, NGLs, natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions.

The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

Customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices.

More efficient operations have the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing.

Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants.

We began business development activities in the international markets in late third quarter 2020.

We have developed a new line of Verax analyzers for deployment internationally which was recently certified for compliance in hazardous locations and harsh weather conditions.

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Changes often occur.

We expect North American and International onshore activity to continue to improve from third quarter 2021 levels for the next twelve months provided that commodity prices remain at or above current levels.

The strongest potential growth in the fourth quarter and throughout 2022 likely comes from private, rather than publicly traded exploration and production companies.

We expect North American and International onshore activity to continue to improve throughout 2022 from first quarter levels for the next nine months provided that commodity prices remain at or above current levels.

The strongest potential growth throughout 2022 will likely comes from private, rather than publicly traded exploration and production companies.

Private exploration and production companies operate the majority of U.S.

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In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead.

Additionally, we have reestablished our ability to sell product through other service companies and believe sales through indirect channels should accelerate in the fourth quarter.

Additionally, we have reestablished our ability to sell product through other service companies and believe sales through indirect channels should accelerate in 2022.

In 2020, the Company launched a diversified line of EPA and FDA compliant products that target industrial, agricultural and consumer markets with particular focus on customers that are seeking to accelerate their focus on sustainability and minimized impact on the environment.

The company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers, solvents and a multitude of proprietary chemistries for industrial, commercial and consumer use.

The Company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers,

solvents and a multitude of proprietary chemistries for industrial, commercial and consumer use.

The Company believes these adjacent markets provide an opportunity to diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand.

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Digital Analytics

The use of data and digital analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations.

The DA segment has historically focused sales solely on North American markets.

Our recent press release dated October 27, announced the release of a new generation of international certified online analyzers.

The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations.

Verax has gained a foothold in North American markets for critical applications where compositional information is needed in real-time.

The technology delivers real-time insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously.

We continue to work with our customers to identify further facilities and applications where our technology has the highest value.

We expect to open and establish our international customer base with our new generation of internationally certified online analyzers.

The new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments.

The technology delivers real-time insight on valuable composition and physical properties data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously.

We anticipate international sales to increase over the next twelve months because of the newly certified equipment.

To further enhance the value of the sensors, we announced the release of a new patent pending application to enhance the value of our line of near infrared real-time analyzers.

AIDA (Automated Interface Detection

Algorithm) provides real-time detection of interfaces in a liquids pipeline.

AIDA can be utilized immediately on our installed analyzers without the need for additional sampling or chemometric modeling.

To drive recurring revenue, we continue to build on the modular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations.

AIDA (Automated Interface Detection Algorithm) provides real-time detection of interfaces in a liquids pipeline without the need for additional sampling or chemometric modeling.

The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces within 60 seconds.

This allows operators to cut batches quickly and accurately, reduce the inadvertent mixing of two separate products (known as “transmix”) and minimize off-spec product that requires downgrades.

We anticipate additional sales resulting from the detection capabilities of our new patent pending application.

This allows operators to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades.

ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment.

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We believe the performance-driven ESG focus of the Company assists in reducing environmental liabilities and improving returns for our customers.

During 2020 and 2021 challenging supply chain issues emerged that “will continue into 2022” according to Secretary of Transportation Peter Buttigieg.

During 2020 and 2021 challenging supply chain issues emerged that “are already continuing into 2022” according to Secretary of Transportation Peter Buttigieg.

The anticipated activity increases will strain supply chains generally.

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• Delays due to Port Congestion;

▪ Labor Shortages

• Labor Shortages and

• Demand Forecasting.

All bidding will require the risk of shipping costs and delays be factored into proposals.

Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future.

Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being

delivered internationally for the foreseeable future.

The import of raw materials from China will also incur price increases.

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could also result in supply disruption.

While Hurricane Ida occurred during the third quarter, on October 31, 2021, there were no tropical cyclones in the Atlantic.

Water temperatures need to exceed 79 degrees Fahrenheit or either hurricanes will not form or will weaken rapidly.

Water temperature two meters below the surface at Station 42002, 207 nautical miles east of Brownsville, Texas was 81.3 degrees Fahrenheit on October 30, 2021, and temperatures decreased moving to the north.

Consequently, disruption of business due to a severe cyclone in fourth quarter is unlikely.

The National Weather Service temperature outlook for November-December-January 2021-2022 indicates “elevated odds for above-normal seasonal mean temperatures along the southern half of the U.S.”

We currently do not anticipate inclement weather in the Middle East or the Onshore U.S.

to impact fourth quarter results.

During the first three months of 2022 there were no major weather events that had a material impact on first quarter results.

The impacts of COVID-19 continue to affect the U.S.

and global economy.

The protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge.

The resumption of travel while often onerous has begun to accelerate and in person customer visits that began in earnest during the third quarter will continue to accelerate.

We believe our protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge.

The resumption of travel has begun to accelerate and we estimate that in person customer visits that began in earnest during the first quarter of 2022 will continue to accelerate.

Consolidated Results of Operations (in thousands)

Consolidated Results of Operations:

Three and Nine Months Ended September 30, 2021, Compared to the Three and Nine Months Ended September 30, 2020

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Three months ended March 31,

Revenue from external customers $ 10,382 $ 11,770

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Total revenues 12,879 11,770

Operating expenses (excluding depreciation and amortization) 5,418 29,466 31,330 63,939

Operating expenses % 53.2 % 231.3 % 100.7 % 155.8 %

Corporate general and administrative costs 2,696 2,679 9,925 12,568

Corporate general and administrative % 26.5 % 21.0 % 31.9 % 30.6 %

Cost of goods sold 13,358 12,080

Cost of good sold % 103.7 % 102.6 %

Gross profit (loss) (479) (310)

Gross profit (loss) % (3.7) % (2.6) %

Selling general and administrative 4,879 6,082

Selling general and administrative % 37.9 % 51.7 %

Depreciation and amortization 195 307

Research and development 1,415 1,542

Loss (Gain) on disposal of long-lived assets 14 (37) (55) (92)

Impairment of goodwill — 11,706 — 11,706

Impairment of fixed assets and long-lived assets — 12,521 — 69,975

Income (loss) from operations 632 (45,594) (15,073) (125,911)

Operating margin % 6.2 % (357.9) % (48.4) % (306.8) %

PPP loan forgiveness — — 881 —

Loss on sale of property and equipment 8 2

Gain on lease termination (584) —

Interest and other (expense) income, net (120) 272 (115) 282

Income (loss) before income taxes 512 (45,322) (14,307) (125,053)

Income tax (expense) benefit (3) 81 (30) 6,282

Net income (loss) $ 509 $ (45,241) $ (14,337) $ (118,771)

Net loss % for continuing operations 5.0 % (355.1) % (46.1) % (289.4) %

Consolidated revenue for the three months ended September 30, 2021, decreased $2.6 million, or 20.1%, versus the same period of 2020.

The decrease was primarily due to the loss of two major energy customers that were purchased by non-customers during the second quarter of 2021, and nominal decreases in international sales, offset by certain CT customer revenue increases during the current quarter that did not have prior year comparable activities.

Consolidated revenue for the nine months ended, September 30, 2021, decreased $9.9 million, or 24.2%, versus the same period of 2020.

Revenue during the nine months ended September 31, 2021 reflected a loss of revenue in the CT segment associated with two major customers changing ownership during 2021, losses related to the normalization and decline of market demand for sanitizers and non-recurring citrus terpenes sales.

Current year revenue decreases were partially offset by the incremental post acquisition JP3 revenues generated in the second and third quarter of 2021.

Consolidated operating expenses (excluding depreciation and amortization) for the three months ended September 30, 2021, decreased $24.0 million, or 81.6%, versus the same period of 2020.

The decrease was primarily due to an unfavorable product mix in the third quarter of 2021 versus third quarter of 2020 and the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event.

Consolidated operating expenses (excluding depreciation and amortization) for the nine months ended September 30, 2021 decreased $32.6 million, or 51.0% versus the same period of 2020.

The year to date decrease in operating expenses was primarily due to reduced cost of sales due to lower sales during 2021 and the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event.

The Company’s 2021 operating expenses benefited from the decision to reduce operating expenses, including reducing the Company’s facility footprint and improving operational efficiencies.

These reduced costs were partially offset by new operating expenses for the DA segment acquired in May of 2020.

Corporate general and administrative (“CG&A”) expenses are expenses not directly attributable to products sold or services provided.

CG&A costs for the three months ended September 30, 2021 was consistent with the same comparable period last

CG&A for the nine months ended September 30, 2021, CG&A $2.6 million, or 21.0% versus the same period of 2020.

CG&A costs declined as a result of lower compensation costs following a reduction in force, a one-time employee retention credit related to the CARES Act and a reduction in professional fees .

Depreciation and amortization expense decreased $0.3 million, or 55.0% and $2.4 million, or 75.0% for the three and nine months ended September 30, 2021, versus the same period of 2020, primarily due to impairments of fixed and long-lived assets recorded in the first quarter of 2020.

Research and development costs decreased $0.3 million, or 19.9% and $1.5 million, or 26.1% for the three and nine months ended September 30, 2021, versus the same period of 2020 due to lower personnel costs as a result of our reduction in workforce during the first quarter 2020.

Income from operations increased $46.2 million, or 101.4%, for the three months ended September 30, 2021, while the year to date loss from operations improved by $110.8 million, or 88.0% for the nine months ended September 30, 2021, versus the same periods in 2020.

The income from operations improvement is primarily a result of no impairment during 2021 compared to the $24.2 million and $81.7 million in the three and nine months ended September 30, 2020.

Additionally, the decrease in loss from operations is attributable to the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event, the forgiveness of the JP3 PPP loan for $0.8 million and a one-time employee retention credit to the CARES Act of $2.9 million recorded during 2021.

The Company’s income tax expense for the second and third quarter of 2021 and 2020 was minimal.

The Company recorded an income tax benefit of $6.2 million for the first quarter of 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act initially recorded in the first quarter 2020.

Change in fair value of convertible notes payable 3,892

Loss from operations (10,284) (8,243)

Operating margin % (79.9) % (70.0) %

Interest and other income, net (444) (51)

Loss before income taxes (10,728) (8,294)

Income tax benefit/ (expense) 4 (6)

Net Loss $ (10,724) $ (8,300)

Net loss % (83.3) % (70.5) %

Consolidated revenue for the three months ended March 31, 2022, increased $1.1 million, or 9.4%, versus the same period of 2021.

Revenue during the three months ended March 31, 2022 reflected an increase of revenue in the CT segment of $1.5 million driven by the impacts of industry consolidation of customers and increased related party activity, see further discussion in Note 15, “Related Party Transaction”.

This increase was partially offset by a decrease in revenue in the DA segment of $0.4 million due to one-time orders from customers in the three months ended March 31, 2021 not repeated in 2022.

Consolidated cost of goods sold for the three months ended March 31, 2022, increased $1.3 million, or 10.6% versus the same period of 2021 primarily attributable to the increase in revenue with the change in margin being due to sales mix.

Selling general and administrative (“SG&A”) expenses are not directly attributable to products sold or services provided.

SG&A expenses for the three months ended March 31, 2022 , decreased $1.2 million, or 19.8%, versus the same period of 2021.

S G&A expenses decreased as a result of a reduction in professional fees due to a decrease in contract labor and consulting and, legal fees partially offset by increased advisor fees relating to work around the ProFrac/PIPE deal and other items.

Corporate marketing costs also decreased primarily due to nonrecurring marketing fees and other initiatives.

Depreciation and amortization expense decreased $0.1 million, or 36.4% for the three months ended March 31, 2022, versus the same period of 2021 The decrease is as a result of asset disposals and the reclassification of assets relating to the Monahans, Texas and Waller, Texas facilities to assets held for sale in 2021.

Research and development (“R&D”) costs decreased $0.1 million, or 8.2% for the three months ended March 31, 2022, versus the same period of 2021 due to lower personnel costs as a result of our reduction in workforce and lower non-labor cost primarily from the re-negotiation of a contract which resulted in a credit for past expenses taken.

Loss from operations worsened by $2.0 million, or 24.8% for the three months ended March 31, 2022 , versus the same period in 2021.

The loss from operations increase is primarily a result of the revaluation of the convertible note payable partly offset by a gain from lease termination of $0.6 million, increased revenue and the reduction in expenses for SG&A, depreciation and amortization and R&D described above.

Loss before income taxes for the three months ended March 31, 2022 , was impacted by interest charges of $0.4 million versus $0.05 million for the same period in 2021.

The Company’s income tax benefit for the three months ended March 31, 2022 and expense for the same period in 2021 was minimal.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations:

Three and Nine Months Ended September 30, 2021, Compared to the Three and Nine Months Ended September 30, 2020

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Three months ended March 31,

Revenue $ 11,808 $ 10,302

Income (loss) from operations 4,399 (8,880) (3,009) (75,137)

CT revenue for the three and nine months ended September 30, 2021, decreased $2.7 million, or 22.4% and $12.1 million, or 30.7%, respectively, versus the same periods of 2020.

The decrease in revenue during the third quarter of 2021 compared to the third quarter of 2020 was driven by impacts from both the supply and the demand side.

The COVID-19 pandemic negatively impacted economic activity and reduced global demand for oil and gas during 2020, a key sector of our customer base.

The Company’s domestic and international revenue for the nine months ended September 30, 2021 decreased as demand from the company’s major customers and smaller operators has not returned to the pre-pandemic levels.

In addition, revenue from two major customers was lost temporarily as a result of market consolidation in the Permian basin.

CT also granted price concessions in our effort to maintain and obtain market share.

Income (loss) from operations for the CT segment for the three and nine months ended September 30, 2021, decreased $13.3 million, or 149.5%, and decreased $72.1 million, or 96.0%, respectively versus the same period of 2020.

The decrease in loss from operations is due to lower revenue and significantly lower expenses, primarily the result of no impairments in 2021 versus impairment charges of fixed and long-lived assets of $70.0 million in the same period of 2020.

Secondly, expenses decreased versus the first quarter of 2020 including a $2.3 million terpene purchase commitment loss with no comparable activity in 2021.

Certain cost reduction initiatives to right size our cost structure contributed to the current decrease in operating losses by reducing personnel, office costs, equipment and facilities costs as the Company continues to consolidate its physical facilities and equipment rentals to align with activity.

Loss from operations (6,057) (3,589)

CT revenue for the three months ended March 31, 2022, increased $1.5 million compared to 2021.

The increase in revenue during 2022 compared to 2021 was driven by impacts from industry consolidation and increased related party activity, see further discussion in Note 15, “Related Party Transaction”.

W hile the pandemic continued to weigh on economic activity in 2021, global supply and demand has steadily normalized through the second half of 2021 and into 2022.

Loss from operations for the CT segment for the three months ended March 31, 2022, worsened $2.4 million, or (68.8)% compared to 2021.

The reduction is a result of the revaluation of the convertible note of $3.9 million.

Excluding the revaluation of the note there was an overall improvement.

The improvement in loss from operations is due to increased revenues, lower personnel costs due to reduced headcount and lower rental fees for International Organization for Standardization (ISO) tanks.

The improvement in loss from operations was partially offset by an increase in the bad debt provision.

Data Analytics Results of Operations:

Three and Nine Months ended September 30, 2021

Three months ended September 30, Nine months ended September 30, Period May 18- September 30,

2021 2020 2021 2020

$ 803 $ 656 $ 3,749 $ 1,573

Three months ended March 31,

Revenue $ 1,071 $ 1,468

Loss from operations (808) (292)

(1,071) (34,035) (2,138) (35,190)

(1) On May 18, 2020, the Company purchased JP3 and formed the DA segment.

The year to date JP3 revenues represents the post-acquisition partial period revenues between May 18, 2020 to September 30, 2021.

Segment revenue for the third quarter of 2021 was $0.8 million , which remained flat from the same quarter in 2020.

Also note that the DA segment losses include the impact related to the estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction.

Critical Accounting Policies and Estimates

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Preparation of these statements requires management to make judgments, estimates, and assumptions that affect the amounts reported in the financial statements and accompanying footnotes.

Part II, Item 8 — Financial Statements and Supplementary Data, Note 2 of “Notes to Consolidated Financial Statements” and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates” of the Company’s Annual Report, and the “Notes to Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report describe the significant accounting policies and critical accounting estimates used to prepare the consolidated financial statements.

Critical accounting policies and estimates are defined as those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most subjective judgments.

The Company regularly reviews and challenges judgments, assumptions and estimates related to critical accounting policies, including goodwill, other intangibles and valuation of fixed long-lived assets.

There have been no significant changes in the Company’s critical accounting policies and estimates during the nine months ended September 30, 2021.

Recent Accounting Pronouncements

Recent accounting pronouncements which may impact the Company are described in Note 2, “Recent Accounting Pronouncements,” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.

DA revenue for the three months ended March 31, 2022 , decreased $0.4 million compared to the same period in 2021 due to one time orders not repeated in 2022.

Loss from operations for the DA segment for the three months ended March 31, 2022 worsened by $0.5 million or 176.7% compared to the same period in 2021.

The worsening loss from operations is primarily the result of the decrease in revenues and the fair value adjustment of the JP3 earnout.

Capital Resources and Liquidity

The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and fund working capital requirements.

During the first nine months of 2021, the Company funded capital requirements primarily with cash on hand.

As of September 30, 2021, the Company had available cash and cash equivalents of $20.5 million, as compared to $38.7 million at December 31, 2020.

The Company recorded an operating loss for the nine months ended September 30, 2021 and recorded $18.3 million of net cash used for operating activities and $0.5 million of net cash used for financing activities.

Cash used in investing activities was minimal.

The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and funding working capital requirements.

During the first three months of 2022, the Company funded working capital requirements with proceeds from convertible notes of $20.0 million and cash on hand.

As of March 31, 2022, the Company had available cash and cash equivalents of $24.8 million, as compared to $11.5 million at December 31, 2021.

During the three months ended March 31, 2022, the Company had an operating loss of $10.7 million, $8.5 million of cash used in operating activities and $20.0 million of cash provided by financing activities.

Cash provided by investing activities was minimal.

The Company currently funds its operations and growth primarily from cash on hand.

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The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year.

While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as they become due, uncertainty surrounding the long term stability, strength and duration of the recovery of oil and gas markets, or reduced spending by our customers could, have a negative impact on our liquidity.

Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future.

In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position.

Such actions may include, but are not limited to:

• Raising equity either in the public markets or via a private placement offering;

• Seeking PPP loan forgiveness from the Small Business Administration;

• Entry into a borrowing facility with one or more lenders;

• Sale of excess inventory and/or raw materials;

• Operating lease transaction of facilities;

• Sale of non-core real estate properties;

• Sale-leaseback transactions of facilities;

• Sub-leasing certain facilities;

• Renegotiating current lease facility terms and conditions;

• Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash;

• Reducing professional advisory fees and headcount.

However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms.

For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in the Company’s Annual Report.

The Company expects capital spending to be less than $1.0 million in 2021.

Uncertainty surrounding the long- term stability and strength of the oil and gas markets, or reduced spending by our customers could have a further negative impact on our liquidity

On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including with related parties, through the issuance of $21.2 million in aggregate principal amount of convertible notes that resulted in net cash proceeds of approximately $19.5 million.

Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of convertible notes.

Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC.

If minimum volumes are not achieved in any given year, the Company receives liquidated damages equal to 25% of the difference between (i) the aggregate Purchase Price of the quantity of Products comprising the Minimum Purchase Obligation and (ii) the actual purchased volume during such calendar year.

The term of the ProFrac Agreement is three years starting on April 1, 2022.

The Company also sold and its manufacturing facility in Waller, Texas.

These facilities were classified as held for sale as of March 31, 2022.

Subsequent to March 31, 2022, the Company executed a contract to sell its Waller facility for $4.3 million of gross proceeds.

The sale closed in April 2022.

Based on our cash and liquid assets, including the transactions subsequent to March 31, 2022 described above and in Note 17 - “Subsequent Events”, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next 12 months.

However the Company cannot guarantee a sufficient level of cash flows in the future.

Consolidated cash flows by type of activity are noted below (in thousands):

Nine months ended September 30,

Three months ended March 31,

Net cash used in operating activities $ (8,474) $ (5,265)

Net cash provided by (used in) investing activities 24 (17)

Net cash (used in) provided by financing activities (451) 4,929

Net cash provided by (used in) financing activities 19,993 (81)

Effect of changes in exchange rates on cash and cash equivalents 8 23

1 unchanged sentence

Operating Activities

Net cash used in operating activities was $18.3 million and $39.1 million during the nine months ended September 30, 2021 and 2020, respectively.

Consolidated net loss for the nine months ended September 30, 2021 and 2020, totaled $14.3 million and $118.8 million, respectively.

During the nine months ended September 30, 2021, non-cash adjustments to net income totaled $4.9 million as compared to $100.7 million for the same period of 2020.

• For the nine months ended September 30,2021, non-cash adjustments included $7.6 million benefit related to the ADM settlement, $0.8 million for depreciation, which was lower than the nine months ended September 30, 2020 due to asset impairments taken in 2020, stock based compensation of $2.7 million, JP3 PPP loan forgiveness of $0.9 million and a $0.7 million charge related to the fair value of contingent consideration.

• For the nine months ended September 30, 2020, contributory non-cash adjustments consisted primarily of $70.0 million of impairment charges and $3.2 million for depreciation and amortization.

During the nine months ended September 30, 2021, changes in working capital provided $0.9 million of cash as compared to using $21.0 million for the same period of 2020.

• For the nine months ended September 30, 2021, the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable and inventory of $2.4 million, offset by an increase of current assets of $2.8 million.

• For the nine months ended September 30, 2020, working capital used $21.0 million in cash, primarily resulting from a decrease in accrued liabilities and accounts payable of $29.6 million, which included two one-time payments made in 2020:

one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final

post-closing working capital adjustment related to the 2019 sale of the CICT segment.

Accounts receivable, inventories and other current assets decreased $8.7 million.

Net cash used in operating activities was $8.5 million and $5.3 million during the three months ended March 31, 2022 and 2021, respectively.

Consolidated net loss for the three months ended March 31, 2022 and 2021, were $10.7 million and $8.3 million, respectively.

During the three months ended March 31, 2022, non-cash adjustments to net income totaled $5.6 million as compared to $1.2 million for the same period of 2021.

• For the three months ended March 31, 2022, non-cash adjustments included $3.9 million for the change in fair value of convertible notes, $0.7 million stock compensation expense, $0.5 million PIK interest expense, $0.2 million provision for doubtful accounts and $0.2 million for depreciation.

A benefit of $0.6 million was included for the gain on lease termination.

• For the three months ended March 31, 2021, non-cash charges included $0.3 million for depreciation, and a $0.3 million decrease in the fair value of contingent consideration.

During the three months ended March 31, 2022, changes in working capital used $3.3 million of cash as compared to providing $1.9 million for the same period of 2021.

• For the three months ended March 31, 2022, changes in working capital resulted primarily from a decrease in accrued liabilities of $2.6 million partially due to payment of the ADM Settlement (Note 11) and an increase in inventories of $1.0 million.

• For the three months ended March 31, 2021 the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable and other current assets totaling $0.5 million combined with an increase of accounts payable of $0.7 million, partially offset by a decrease in accrued liabilities of $0.3million.

Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2021 was not material.

Net cash used in investing activities was $17.1 million for the nine months ended September 30, 2020.

Cash used in investing activities included $26.3 million from purchase of JP3 offset by cash provided of $9.8 million due to the release of escrow amounts from the sales of Florida Chemical Company.

Net cash from investing activities for the three months ended March 31, 2022 and 2021 was negligible.

Financing Activities

Net cash used in financing activities was $0.5 million for the nine months ended September 30, 2021, primarily for purchases of common stock related to tax withholding requirements.

Net cash provided by financing activities was $4.9 million for the nine months ended September 30, 2020, primarily from the proceeds received from the PPP.

Net cash provided by financing activities was $20.0 million for the three months ended March 31, 2022, primarily from the proceed from the issuance of convertible notes.

Net cash used in financing activities was $0.1 million for the three months ended March 31, 2021, primarily from purchases of common stock related to tax withholding requirements.

Off-Balance Sheet Arrangements

There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes.

As of September 30, 2021, the Company was not involved in any unconsolidated SPEs.

The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors other than the long term terpene agreement discussed in Note 13 in Part I, Item I – Financial Statements of this Quarterly Report.

As of March 31, 2022, the Company was not involved in any unconsolidated SPEs.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis