What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-10 · 121 added, 119 removed, 73 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 the fiscal ended December 31, 2021 filed with the U.S.

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Flotek,” the "Company," "we," "us" and "our" refer to Flotek Industries, Inc.

and its wholly-owned subsidiaries.

The following discussion should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“Annual Report” or “2022 Annual Report”) 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.

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 2022 Annual Report, 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

Flotek Industries, Inc.

(“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people.

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

Flotek creates unique solutions to reduce the environmental impact of energy on air, water, land and people.

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

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.

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

Company Overview

Chemistry Technologies

The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital.

We believe that the Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their environmental, social and governance (“ESG”) performance, lowering operational costs, and delivering improved return on invested capital.

The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program.

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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.

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

We have developed a 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.

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

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.

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

We believe that we are in the early years of a tight supply cycle for oil and gas triggered by an extended period of underinvestment in energy development, infrastructure and new sources of oil and gas production.

While the demand for oil and gas could fluctuate depending on the macroeconomic condition, we believe that this tight supply cycle could last and could provide support to high oil prices for multiple years.

We expect that the strongest potential growth throughout 2023 will likely come from independent, rather than large major exploration and production companies.

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

land rigs and react quickly to changing commodity prices.

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 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.

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 diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand.

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

Digital Analytics

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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.

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.

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

The technology delivers insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API (American Petroleum Institute) gravity, viscosity, BTU (British Thermal Unit) and more, simultaneously.

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

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.

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

The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces real-time versus traditional lab analysis.

We believe this allows customers to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades.

We are also gaining traction leveraging the Verax™ in applications where operators and service companies are using field gas as a substitute for diesel in dual fuel engines as the market moves to Tier 4 equipment and eFleets.

Analyzing this in real-time allows companies to maximize the substitution rate while lowering emissions, reducing fuel consumption/costs, and protecting the equipment from damage.

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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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.

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.

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.

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 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.

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:

• Fluctuating freight costs;

• Fluctuating freight costs for shipping to our customers;

• Availability of raw materials;

• Delays due to port congestion;

• Labor shortages and

• Labor shortages;

• Demand forecasting.

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could also result in supply disruption.

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

and global economy.

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.

New York Stock Exchange (“NYSE”) Continued Listing Requirements

The Company’s common stock is currently listed on the NYSE.

On April 12, 2023, the Company received written notice from the NYSE that the average closing price of the Company’s shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE.

In accordance with applicable NYSE procedures, the Company has notified the NYSE that it intends to cure the $1.00 per share deficiency.

Based on the applicable NYSE procedures, the Company has six months following the receipt of the NYSE’s notice to cure the deficiency and regain compliance.

The NYSE’s notice has no immediate impact on the listing of the Company’s common stock, which will continue to trade on the NYSE subject to the Company’s continued compliance with the other listing requirements of the NYSE.

The common stock of the Company will continue to trade under the symbol “FTK” but will have an added designation of “.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards.

The “.BC” indicator will be removed at such time as the Company is deemed to be in compliance.

The Company intends to explore available options to regain compliance, which may include, if necessary, effectuating a reverse stock split.

Consolidated Results of Operations (in thousands)

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

2022 2021 2022 2021

Three months ended March 31,

Revenue from external customers $ 11,652 $ 10,382

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Total revenues 48,007 12,879

Cost of goods sold 47,465 4,022 92,500 26,876

Cost of goods sold % 104.0 % 39.5 % 105.3 % 86.4 %

Cost of sales 46,127 13,358

Cost of sales % 96.1 % 103.7 %

Gross profit (loss) 1,880 (479)

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Selling general and administrative % 13.4 % 37.9 %

Depreciation and amortization 177 233 554 793

Depreciation 176 195

Research and development 614 1,415

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

Severance costs 2,223 (7)

Loss on sale of property and equipment — 8

Gain on lease termination — (584)

Change in fair value of contract consideration

(Gain) loss in fair value of Contract Consideration

Convertible Notes Payable (26,095) 3,892

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Income (loss) before income taxes 21,352 (10,728)

Income tax expense (7) (3) (101) (30)

Income tax (expense) benefit (9) 4

Net income (loss) $ 21,343 $ (10,724)

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 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.

Net income (loss) % 44.5 % (83.3) %

Consolidated revenue for the three months ended March 31, 2023 increased $35.1 million, or 273%, versus the same period of 2022, primarily driven by related party activity under the ProFrac Agreement which commenced in the second quarter of 2022 and continued increased activity across our customer base, particularly in the DA segment.

Related party revenues in the CT segment are partially offset by $1.3 million of contract assets amortization for the three months ended March 31, 2023.

Consolidated cost of sales for the three months ended March 31, 2023 increased $32.8 million, or 245%, versus the same period of 2022, primarily attributable to the increase in revenue.

SG&A expenses for the three months ended March 31, 2023 increased $1.6 million, or 32%, versus the same period of 2022.

The increase relates mainly to professional fees, driven by higher legal fees partially offset by a decrease in capital transaction related costs.

Severance costs of $2.2 million were recorded in the three months ended March 31, 2023 compared to a credit of $7 thousand for the same period of 2022, and were attributable to senior management changes.

Research and development (“R&D”) costs for the three months ended March 31, 2023, decreased $0.8 million or 57%, versus the same period of 2022 due to a reduction in sample testing in 2023 and lower personnel cost driven by headcount optimization.

Income from operations increased by $28.8 million or 280% for the three months ended March 31, 2023, versus the same period in 2022.

The improvement is primarily driven by the gain in fair value of the Contract Consideration Convertible Notes Payable of $26.1 million compared to a loss in fair value of $3.9 million for the same period of 2022.

The improvement is partially offset by severance costs of $2.2 million.

Interest and other income for the three months ended March 31, 2023, increased $3.3 million or 740% driven by a $4.5 million gain for the forgiveness of the Flotek PPP loan (see Note 9, “Debt and Convertible Notes Payable”).

This was partially offset by non-cash interest charges of $1.7 million in the three months ended March 31, 2023 versus $0.7 million for the same period in 2022.

The increased interest cost relates to paid- in-kind interest expense on the convertible notes payable and the Contract Consideration Convertible Notes Payable.

The Company’s income tax (expense) benefit for the three months ended March 31, 2023 and 2022 was minimal.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations:

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

2022 2021 2022 2021

Revenue $ 43,928 $ 9,376 $ 84,395 $ 27,365

Three months ended March 31,

Revenue from external customers $ 9,225 $ 9,311

Revenue from related party 36,265 2,497

Income (loss) from operations 23,379 (6,057)

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.

CT revenue from external customers for the three months ended March 31, 2023 decreased $0.1 million or 0.9%, compared to the same period of 2022.

Revenue from related parties increased $33.8 million or 1352%, compared to the same period of 2022.

The increased revenue in 2023 is driven by the ProFrac Agreement which commenced in the second quarter of 2022.

Income from operations for the CT segment for the three months ended March 31, 2023 increased $29.4 million or 486% compared to the same period of 2022.

The improvement is primarily attributable to the gain in fair value of the Contract Consideration Convertible Notes Payable of $26.1 million for the three months ended March 31, 2023 compared to a loss of $3.9 million for the same period of 2022.

The improvement is partially offset by increased cost of sales, driven by activity, with notable, significant increased freight and equipment rental costs, and severance costs of $0.6 million, driven by changes in senior management.

During the three months ended March 31, 2022, the loss from operations included a gain on lease termination of $0.6 million.

Data Analytics Results of Operations:

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

2022 2021 2022 2021

Revenue $ 1,695 $ 803 $ 3,479 $ 3,749

Three months ended March 31,

Revenue from external customers $ 2,427 $ 1,071

Revenue from related party 90 —

Income (loss) from operations 457 (808)

DA revenue from external customers for the three months ended March 31, 2023 increased $1.4 million or 127% compared to the same period of 2022 primarily due to significant products revenues from three new customers.

Revenue from related party customers was $0.1 million relating to services provided to ProFrac Services, LLC.

Income from operations for the DA segment for the three months ended March 31, 2023 increased $1.3 million or 157% compared to the same period for 2022 driven by increased activity and decreased R&D expense.

Corporate and Other Results of Operations:

Three months ended March 31,

Loss from operations $ (5,325) $ (3,419)

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.

Loss from operations for the three months ended March 31, 2023, increased $1.9 million, or 56%, compared to the same period of 2022 attributable to severance costs and increased professional fees.

Severance costs of $1.6 million were recorded in the three months ended March 31, 2023, relating to senior management changes.

The increase in professional fees relates mainly to higher legal fees partially offset by lower capital transaction related costs.

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 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.

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.

During the three months ended March 31, 2023, the Company funded working capital requirements with cash on hand.

As of March 31, 2023, the Company had unrestricted cash and cash equivalents of $12.4 million, as compared to $12.3 million on December 31, 2022.

During the three months ended March 31, 2023, the Company had an operating income of $18.5 million, $1.1 million of cash provided by operating activiti es, $0.2 million cash used in investing activities and $0.8 million o f cash used in financing activities.

Going Concern

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.

GAAP”) assuming the Company will continue as a going concern.

The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

However, substantial doubt about the Company’s ability to continue as a going concern exists.

The Company currently funds its operations from cash on hand and other current assets.

The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the unaudited condensed consolidated financial statements.

The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”).

It is not certain that the Company’s cash and other current assets and the Company’s forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as they become due in the next twelve months.

The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are filed.

The Company is evaluating strategies to obtain additional funding for future operations.

These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses.

However, the Company may be unable to access further equity or debt financing when needed.

As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.

The unaudited condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

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

Nine months ended September 30,

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

Net cash provided by investing activities 4,040 43

Net cash provided by (used in) financing activities 38,199 (451)

Three months ended March 31,

Net cash provided by (used in) operating activities $ 1,140 $ (8,474)

Net cash (used in) provided by investing activities (157) 24

Net cash (used in) provided by financing activities (818) 19,993

Effect of changes in exchange rates on cash and cash equivalents (21) 8

Net change in cash, cash equivalents and restricted cash $ (4,716) $ (18,757)

Net change in cash and cash equivalents and restricted cash $ 144 $ 11,551

Operating Activities

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.

Net cash provided by operating activities was $1.1 million during the three months ended March 31, 2023 compared to $8.5 million used in operating activities for the same period of 2022.

Consolidated net income for the three months ended March 31, 2023 was $21.3 million compared to a net loss of $10.7 million for the three months ended March 31, 2022.

During the three months ended March 31, 2023, non-cash adjustments to net income (loss) totaled $27.8 million as compared to $5.6 million for the same period of 2022.

• For the three months ended March 31, 2023 non-cash adjustments included $26.1 million for the change in fair value of Contract Consideration Convertible Notes Payable, $4.5 million for PPP loan forgiveness and $1.1 million stock compensation adjustment.

These were offset by non-cash positive adjustments of $1.6 million paid-in-kind interest expense, $1.3 million amortization of contract assets and $1.0 million non-cash lease expense.

• For the three months ended March 31, 2022 non-cash adjustments included $3.9 million for the change in fair value of Contract Consideration Convertible Notes Payable, $0.7 million stock compensation expense, $0.5 million paid-in-kind interest expense and $0.3 million provision for excess and obsolete inventory.

These were partially offset by $0.6 million for the gain on lease termination.

During the three months ended March 31, 2023, changes in working capital provided $7.6 million of cash as compared to using $3.3 million for the same period of 2022.

• For the three months ended March 31, 2023, changes in working capital resulted primarily from an increase in accounts payable of $8.6 million.

• For the three months ended March 31, 2022, changes in working capital resulted primarily from a decrease in accrued liabilities of $2.4 million partially due to payment of a legal settlement accrued in 2021 and an increase in inventories of $1.0 million.

Investing Activities

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.

Net cash used in investing activities for the three months ended March 31, 2023 was $0.2 million driven by capital additions.

Net cash provided by investing activities for the three months ended March 31, 2022 was negligible.

Financing Activities

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

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.

Net cash used in financing activities for the three months ended March 31, 2023 was $0.8 million, and relates primarily to payments for forfeited stock options and to tax authorities for shares withheld from employees.

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

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S.

generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported.

Note 2, “Summary of Significant Accounting Policies” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements.

GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported.

Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company’s 2022 Annual Report describes the critical accounting policies and estimates used in the preparation of the Company’s condensed consolidated financial statements.

Note 2, “Summary of Significant Accounting Policies” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2022 Annual Report describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements.

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