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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-11 · 84 added, 87 removed, 108 unchanged (61% 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.

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

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

Comparative segment revenues and related financial information are discussed herein and are presented in Note 17 to our unaudited consolidated financial statements.

See “Forward Looking Statements” in this report and “Risk Factors” included in our filings with the SEC, including our Quarterly Reports on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, for a description of important factors that could cause actual results to differ from expected results.

Our historical financial information may not be indicative of our future performance.

Executive Summary

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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 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 serves specialty chemistry needs for both domestic and international energy markets.

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

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The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.

Customers of the CT segment include those of energy related markets as well as consumer and industrial applications.

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.

Customers of the CT segment include those of energy related markets, such as our related party ProFrac Services, LLC, as well as consumer and industrial applications.

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 our best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.

Data Analytics

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

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.

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

Research & Innovation

R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, FDA and EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects.

technology projects.

The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends.

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Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry and weather volatility.

We have based our outlook on the market and weather conditions we perceive today.

We have based our outlook on the market conditions we perceive today.

Changes often occur.

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

We expect North American and International onshore energy, exploration and production activity to continue to improve throughout 2022 from third quarter levels.

Going into 2023 we believe that we are in the early years of a tight supply cycle triggered by underinvestment in infrastructure and new sources of oil and gas production.

While shorter demand cycles will come and go depending on the fluctuating macroeconomic backdrop, the tight supply cycle is durable and will provide underlying support to oil prices for multiple years.

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

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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 2022.

Additionally, we have reestablished our ability to sell product through other oilfield service companies and believe sales through indirect channels to the exploration and production companies and oilfield service companies could accelerate in 2023.

The Company has 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.

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

We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states.

We will be training and educating their representatives during the next two quarters.

The leverage sales effort is anticipated to accelerate sales in the second half of 2022.

Digital Analytics

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.

We believe Verax analyzers have 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.

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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 transmix and minimize off-spec product that requires downgrades.

We believe 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.

The Company’s products and services

offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations.

We anticipate the Company’s products and services could offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations.

The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry.

Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals.

Further, the Company’s patented line of Complex nano-Fluid®

(also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals.

Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil.

Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.

The Company believes the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of our greener practices and chemistries.

Additionally, we believe the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.

The Company believes the industry focus on maintaining a “social license to operate” provides the platform to accelerate the sale of our products and services that we believe can help the customer achieve a greener goal.

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 are continuing throughout 2022 according to Secretary of Transportation Peter Buttigieg.

The anticipated activity increases will strain supply chains generally.

We expect the anticipated supply chain activity increases will strain supply chains generally.

The principal supply issues facing our industry for the next twelve months will include:

• Rising freight costs;

• Fluctuating freight costs;

• Delays due to port congestion;

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could also result in supply disruption.

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

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

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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 in person customer visits began in earnest during the first quarter of 2022, continued through-out the second quarter of 2022, will likely continue to accelerate.

Consolidated Results of Operations (in thousands)

Three months ended June 30, Six months ended June 30,

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

2022 2021 2022 2021

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Research and development 985 1,186 3,515 4,194

Gain on sale of property and equipment (1,914) (71) (1,906) (69)

(Gain) loss on sale of property and equipment (10) 14 (1,916) (55)

Gain on lease termination — — (584) —

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Net income (loss) $ (18,794) $ 509 $ (23,278) $ (14,337)

Consolidated revenue for the three and six months ended June 30, 2022 increased $20.2 million, or 220.5%, and $21.3 million or 101.8%, respectively, versus the same period of 2021 driven by activity with ProFrac starting in the second quarter.

Consolidated cost of goods sold for the three and six months ended June 30, 2022, increased $20.9 million or 194.0%, and $22.2 million or 97.1%, respectively, versus the same periods of 2021, primarily attributable to the increase in revenues.

Cost of goods sold were also impacted by one- time expenses incurred due to the ramp up of ProFrac activity.

Consolidated revenue for the three and nine months ended September 30, 2022, increased $35.4 million, or 348%, and $56.8 million or 182%, respectively, versus the same period of 2021, primarily driven by activity under the ProFrac contract which commenced in the second quarter of 2022 and continued increased activity across our customer base, particularly in the Chemistry Technologies segment.

Consolidated cost of goods sold for the three and nine months ended September 30, 2022, increased $43.4 million or 1080%, and $65.6 million or 244%, respectively, versus the same periods of 2021, primarily attributable to the increase in revenues.

Cost of goods sold in 2022 were negatively impacted by one- time expenses incurred due to the ramp up of ProFrac activity and the write down of inventory of $1.0 million in the three months ended September 30, 2022, relating to the decision to cease the manufacture and sale of hand sanitizers.

Cost of goods sold in three months ended September 30, 2021, benefited from the release of accrued costs of $7.6 million subsequent to the agreement of a settlement with ADM, see Note 12, “Commitments and Contingencies”.

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

SG&A expenses for the three and six months ended June 30, 2022, increased $3.2 million or 76.8%, and $2.0 million or 19.7%, respectively, versus the same period of 2021.

SG&A expenses increased as a result of higher professional fees relating to the ProFrac and PIPE transactions, higher employee costs due to an ERC credit reported in 2021 and decreased legal fees due to large expense incurred on two significant matters in 2021.

Depreciation of property and equipment decreased $0.1 million or 28.2%, for the three months ended June 30, 2022, versus the same period of 2021.

Depreciation of property and equipment decreased $0.2 million or 32.7% for the six months ended June 30, 2022.

Research and development (“R&D”) costs for the three and six months ended June 30, 2022 decreased $0.4 million or 23.9% and $0.5 million or 15.9%, respectively, versus the same period of 2021 due to lower personnel costs as a result of a reduction in workforce and lower non-labor cost.

Income from operations increased by $15.5 million or 207.7% for the three months ended June 30, 2022, versus the same period in 2021.

The income from operations increase is a result of the revaluation of the contract consideration convertible notes payable and the gain on sale of property and equipment partially offset by higher SG&A expenses.

For the six months ended June 30, 2022, loss from operations decreased by $13.5 million or 85.7% attributable mainly to the revaluation of the

contract consideration convertible notes payable and gain on sale of property and equipment and partially offset by increased SG&A expenses.

Income before income taxes for the three months ended June 30, 2022, was impacted by interest charges of $1.6 million versus $17 thousand for the same period in 2021.

For the six months ended June 30, 2022 and 2021 interest charges were $2.3 million and $35 thousand respectively.

The increased interest costs relate to payment in kind interest expense on the Contract Consideration Convertible Notes Payable.

The Company’s income tax expense for the three and six months ended June 30, 2022 and 2021 was minimal.

SG&A expenses for the three months ended September 30, 2022, increased $4.9 million or 121% versus the same period of 2021.

$1.9 million of the increase related to bonus accruals.

No bonus amounts had been accrued previously during 2022 and nil was accrued as of the same period in the prior year.

The remainder of the increase was largely driven by increased professional fees.

SG&A expenses for the nine months ended September 30, 2022, increased $7.0 million or 48%, versus the same period of 2021 as a result of increased personnel costs mainly attributable to higher year on year bonus costs and 2021 benefiting from an Employee Retention Credit, (“ERC”).

Professional fees for the nine months ended September 30, 2022 were higher due to costs associated with potential financing transactions, partially offset by lower legal fees.

Depreciation of property and equipment decreased $0.1 million or 24%, for the three months ended September 30, 2022, versus the same period of 2021.

Depreciation of property and equipment decreased $0.2 million or 30% for the nine months ended September 30, 2022.

Research and development (“R&D”) costs for the three and nine months ended September 30, 2022, decreased $0.2 million or 17% and $0.7 million or 16%, respectively, versus the same period of 2021 due to lower personnel costs as a result of a reduction in workforce and lower non-labor cost.

Loss from operations decreased by $16.9 million or 2676% for the three months ended September 30, 2022, versus the same period in 2021.

The increased loss from operations is partly attributable to the negative gross margin, increased SG&A costs and the loss on fair value of Contract Consideration Convertible Notes Payable.

For the nine months ended September 30, 2022, the loss from operations increased by $3.5 million or 23% attributable mainly to the negative gross margin and increased SG&A costs.

This was partially offset by the gain on sale of property and equipment and lease termination and a credit relating to the change in fair value of Contract Consideration Convertible Notes Payable.

Loss before taxes for the three months ended September 30, 2022, was impacted by interest charges of $2.3 million versus $18 thousand for the same period in 2021.

For the nine months ended September 30, 2022 and 2021 interest charges were $4.6 million and $53 thousand respectively.

The increased interest cost relates to payment in kind interest expense on the Convertible Notes Payable and the Contract Consideration Convertible Notes Payable.

The Company’s income tax expense for the three and nine months ended September 30, 2022 and 2021 was minimal.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations:

Three months ended June 30, Six months ended June 30,

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

2022 2021 2022 2021

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Income (loss) from operations (10,603) 4,399 (1,716) (3,009)

CT revenue for the three and six months ended June 30, 2022 increased $21.0 million, and $22.5 million, respectively, compared to the same periods of 2021.

The increased revenue in 2022 is driven mainly by the ProFrac contract commencing in the second quarter, of which $16.5 million relates to the ProFrac Agreements along with a significant increase in revenue with two other major customers.

Income from operations for the CT segment for the three months ended June 30, 2022 improved by $18.8 million or 491% compared to the same period of 2021.

The improvement is primarily as a result of the favourable revaluation of the Contract Consideration Convertible Notes Payable of $17.2 million.

Excluding the revaluation there was an overall improvement in income from operations of $1.6 million for the three months ended June 30, 2022, attributable mainly to the gain on sale of property and equipment.

Income from operations for the six months ended June 30, 2022 improved by $16.3 million or $220% compared to the same period of 2021.

The improvement relates mainly to the revaluation of the Contract Consideration Convertible Notes Payable of $13.3 million and the gain on sale of property and equipment and lease termination.

CT revenue for the three and nine months ended September 30, 2022 increased $34.6 million, and $57.0 million, respectively, compared to the same periods of 2021.

The increased revenue in 2022 is driven primarily by the ProFrac Agreements which commenced in the second quarter of 2022, of which the Company recognized $30.4 million and $48.1 million, for the three and nine months ended September 30, 2022, respectively.

Income (loss) from operations for the CT segment for the three months ended September 30, 2022 decreased by $15.0 million or 341% compared to the same period of 2021.

The decline is attributable to the loss on revaluation of the Contract Consideration Convertible Notes Payable of $4.3 million, increased costs primarily due to bonus accruals and the gross margin decrease driven by the inventory write down of $1.0 million and cost of goods sold for the three months ended September 30, 2021 benefiting from the release of accrued costs relating to the ADM settlement of $7.6 million.

The loss from operations for the nine months ended September 30, 2022 decreased by $1.3 million or 43% compared to the same period of 2021.

The improvement relates mainly to the revaluation of the Contract Consideration Convertible Notes Payable of $9.0 million and the gain on sale of property and equipment and lease termination, partially offset by the lower gross margin and increased costs primarily due to bonus accruals.

Data Analytics Results of Operations:

Three months ended June 30, Six months ended June 30,

Three months ended September 30, 2022 Nine months ended September 30, 2022

2022 2021 2022 2021

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Loss from operations (745) (1,071) (2,751) (2,138)

DA revenue for the three and six months ended June 30, 2022 decreased $0.8 million, and $1.2 million, respectively, compared to the same periods of 2021 due to less orders in 2022 and some projects being delayed to later in the year.

Loss from operations for the DA segment for the three and six months ended June 30, 2022 worsened by $0.4 million or 55%, and $0.9 million or 88%, respectively, compared to the same period of 2021.

The worsening loss from operations is primarily as a result of the decrease in revenues.

DA revenue for the three months ended September 30, 2022 increased $0.9 million or 111% compared to the same period of 2021 due to significant revenues from three new customers and several existing customers.

DA revenue for the nine months ended September 30, 2022 decreased $0.3 million or 7% compared to the same period of 2021.

Loss from operations for the DA segment for the three months ended September 30, 2022 decreased by $0.3 million or 30% compared to the same period for 2021 due to increased revenues and improved margins partially offset by an increase in costs driven primarily by bonus accruals.

Loss from operations for the DA segment for the nine months ended September 30, 2022

worsened by $0.6 million or 29%, compared to the same period of 2021.

The worsening loss from operations is primarily as a result of increased R&D expense and decreased revenues partially offset by lower personnel cost.

Capital Resources and Liquidity

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

During the six months ended June 30, 2022, the Company funded working capital requirements with proceeds from warrants issued for $19.5 million and cash on hand.

As of June 30, 2022, the Company had available cash and cash equivalents of $33.1 million, as compared to $11.5 million at December 31, 2021.

During the six months ended June 30, 2022, the Company had an operating loss of $2.2 million, $23.9 million of cash used in operating activities, $4.2 million cash provided by investing activities and $39.4 million of cash provided by financing activities.

The Company currently funds its operations and growth primarily from cash on hand which includes the proceeds from the convertible notes and warrants received in the second quarter.

During the nine months ended September 30, 2022, the Company funded working capital requirements with net cash proceeds from the issuance of Convertible Notes Payable for $20.1 million, prefunded warrants issued for $18.3 million and cash on hand.

As of September 30, 2022, the Company had available cash and cash equivalents of $8.5 million, as compared to $11.5 million at December 31, 2021.

During the nine months ended September 30, 2022, the Company had an operating loss of $18.5 million, $47.2 million of cash used in operating activities, $4.0 million cash provided by investing activities and $38.2 million of cash provided by financing activities.

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

The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital.

Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to debt and equity financing.

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.

Uncertainty surrounding the 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 related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $19.5 million (see Note 9, “Debt and Convertible Notes Payable”).

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 the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”).

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 ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement.

If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (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.

These Contract Consideration Convertible Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.

On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”).

The ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.

On June 21, 2022, the “Company issued prefunded warrants (the “Prefunded Warrants”) to ProFrac Holdings II, LLC in exchange for $19.5 million in cash, net of issuance costs, (see Note 13, “Stockholders’ Equity”).

The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $0.0001 per share.

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

The sale closed on April 18,2022 with $4.3 million of gross proceeds.

Based on our cash and liquid assets, 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.

The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in the twelve months subsequent to the date of filing the consolidated financial statements.

The availability of capital is dependent on the Company’s operating cash flow principally derived from its long-term supply agreement with ProFrac Services, LLC (see Note 16, Related Party Transactions).

We believe that our cash and other liquid assets and our forecasted operating cash flows expected to be generated from the ongoing execution of the long-term supply agreement with ProFrac Services, LLC 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 twelve months.

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

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

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

Six months ended June 30,

Nine months ended September 30,

Net cash used in operating activities $ (47,166) $ (18,279)

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Operating Activities

Net cash used in operating activities was $23.9 million and $11.2 million during the six months ended June 30, 2022 and 2021, respectively.

Consolidated net loss for the six months ended June 30, 2022 and 2021, were $4.5 million and $14.8 million, respectively.

During the six months ended June 30, 2022, non-cash adjustments to net income (loss) totaled $10.0 million as compared to $1.8 million for the same period of 2021.

During the six months ended June 30, 2022, changes in working capital used $9.4 million of cash as compared to providing $1.8 million for the same period of 2021.

• For the six months ended June 30, 2022, changes in working capital resulted primarily from an increase in accounts receivable and inventories of $10.1 million and $4.5 million, respectively, due to increased revenue, change in contract asset of $3.6 million attributable to fees associated with the Contract Consideration Convertible Notes Payable and decreased accrued liabilities due mainly to payment of the ADM Settlement (Note 12, “Commitments and Contingencies”).

This is partially offset by an increase in accounts payable of $12.2 million relating mainly to purchases made to support our contract with ProFrac.

• For the six months ended June 30, 2021 the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable of $2.0 million, partially offset by a decrease in accrued liabilities of $1.0 million.

Net cash used in operating activities was $47.2 million and $18.3 million during the nine months ended September 30, 2022 and 2021, respectively.

Consolidated net loss for the nine months ended September 30, 2022 and 2021 were $23.3 million and $14.3 million, respectively.

During the nine months ended September 30, 2022, non-cash adjustments to net income (loss) totaled $0.3 million as compared to $4.9 million for the same period of 2021.

During the nine months ended September 30, 2022, changes in working capital used $23.6 million of cash as compared to providing $0.9 million for the same period of 2021.

• For the nine months ended September 30, 2022, changes in working capital resulted primarily from an increase in accounts receivable, accounts receivable related party and inventories of $5.7 million, $24.6 million and $11.4 million, respectively, due to the significant revenue increase.

Contract assets increased $3.6 million relating to transaction fees

paid, associated with Contract Consideration Convertible Notes Payable.

This is partially offset by an increase in accounts payable of $22.0 million relating primarily to purchases made to support our contract with ProFrac.

• 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 other assets of $1.7 million.

Investing Activities

Net cash from investing activities for the six months ended June 30, 2022 was $4.2 million from the sale of the manufacturing facility in Waller, Texas which closed on April 18, 2022.

Net cash from investing activities for the six months ended June 30, 2021 was negligible.

Net cash from investing activities for the nine months ended September 30, 2022 was $4.0 million from the sale of the manufacturing facility in Waller, Texas which closed on April 18, 2022 partially offset by capital additions.

Net cash from investing activities for the nine months ended September 30, 2021 was negligible.

Financing Activities

Net cash provided by financing activities was $39.4 million for the six months ended June 30, 2022, primarily from the proceeds of the issuance of convertible notes and warrants partially offset by issuance costs relating to the convertible notes.

Net cash used in financing activities was $0.3 million for the six months ended June 30, 2021, primarily for purchases of common stock related to tax withholding requirements.

Net cash provided by financing activities was $38.2 million for the nine months ended September 30, 2022, primarily from the proceeds of the issuance of convertible notes and prefunded warrants partially offset by issuance costs.

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.

Off-Balance Sheet Arrangements

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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