What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-11 · 85 added, 58 removed, 136 unchanged (51% of the section changed)

14 unchanged sentences

Chemistry Technologies

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.

We believe that the Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customers’ 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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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.

While the demand for oil and gas could fluctuate depending on macroeconomic conditions, we believe that this tight supply cycle could persist 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.

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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.

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

Consolidated Results of Operations (in thousands)

Three months ended March 31,

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

2023 2022 2023 2022

Revenue from external customers $ 17,820 $ 12,824 $ 29,472 $ 23,206

10 unchanged sentences

Severance costs (2,279) 610 (56) 603

Loss on sale of property and equipment — 8

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

Gain on lease termination — — — (584)

(Gain) loss in fair value of Contract Consideration

Gain in fair value of Contract Consideration

Convertible Notes Payable (3,874) (17,158) (29,969) (13,266)

1 unchanged sentence

Operating margin % 1.3 % 27.4 % 19.5 % (5.3) %

Interest and other income, net 2,841 (444)

Interest and other income (expense), net (686) (1,701) 2,154 (2,145)

Income (loss) before income taxes (14) 6,338 21,338 (4,390)

2 unchanged sentences

Net income (loss) % — % 21.2 % 21.6 % (10.6) %

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.

Consolidated revenue for the three months ended June 30, 2023 increased $21.2 million, or 72%, 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 by continued increased activity across our customer base, particularly in the CT segment.

Related party revenues in the CT segment are net of $1.1 million and $0.7 million of contract assets amortization for the three months ended June 30, 2023 and 2022, respectively.

Consolidated revenue for the six months ended June 30, 2023 increased $56.4 million, or 133%, 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 CT segment.

Related party revenues in the CT segment are net of $2.4 million and $0.7 million of contract assets amortization for the six months ended June 30, 2023 and 2022, respectively.

Consolidated cost of sales for the three and six months ended June 30, 2023 increased $15.0 million, or 47%, and increased $47.8 million, or 106%, respectively, versus the same period of 2022, primarily attributable to the increase in revenue.

Cost of sales for the three months ended June 30, 2022 included temporarily high freight and equipment rental costs incurred at the commencement of the ProFrac Agreement.

Consolidated cost of sales percentage improved 15.6% and 12.5% in the three and six months ended June 30, 2023 as a result of our higher revenue volumes and cost management.

SG&A expenses for the three months ended June 30, 2023 increased $1.5 million, or 22%, versus the same period of 2022.

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

SG&A expenses for the six months ended June 30, 2023 increased $3.1 million, or 26%, versus the same period of 2022.

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

Professional fees are expected to decline going forward.

Research and development (“R&D”) costs for the three and six months ended June 30, 2023 decreased $0.3 million, or 23%, and decreased $1.1 million, or 42%, respectively, versus the same periods of 2022 due to a reduction in sample testing in 2023 and lower personnel cost driven by headcount optimization.

Severance costs decreased $2.9 million, or 474% for the three months ended June 30, 2023 versus the same period of 2022, driven by the reversal of $2.3 million of severance costs in the three months ended June 30, 2023 previously accrued with respect to a lawsuit filed against our former CEO, John Chisholm, upon the resolution of all legal claims on this matter (see Note 12, “Commitments and Contingencies”).

Severance costs decreased $0.7 million, or 109%, for the six months ended June 30, 2023, versus the same period of 2022, driven by the reversal of severance costs with respect to a lawsuit filed against our former CEO, John Chisholm, partially offset by costs attributable to changes in senior management.

Income from operations decreased $7.4 million, or 92%, for the three months ended June 30, 2023, versus the same period in 2022.

The decrease is primarily driven by a decrease in the gain in fair value of the Contract Consideration Convertible Notes Payable of $13.3 million compared to the same period of 2022, a gain on sale of assets for the three months ended June 30, 2022 of $1.9 million and increased SG&A costs for the three months ended June 30, 2023 of $1.5 million.

The decrease is partially offset by an increase in gross profit of $6.2 million relating to increased activity and a reversal of severance costs in the three months ended June 30, 2023 of $2.3 million.

Income from operations increased $21.4 million, or 954%, for the six months ended June 30, 2023, versus the same period of 2022.

The improvement is primarily driven by an increase in the gain in fair value of the Contract Consideration Convertible Notes Payable of $16.7 million compared to the same period of 2022 and an increase in gross profit of $8.6 million driven by activity.

The improvement is partially offset by an increase in SG&A costs of $3.1 million and gains on the sale of assets and lease termination of $1.9 million and $0.6 million, respectively, reported in the six months ended June 30, 2022.

Interest and other expense for the three months ended June 30, 2023 decreased $1.0 million, or 60%, driven by a reduction in interest expense as a result of the Convertible Notes Payable and the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable maturing in the three months ended March 31, 2023 and the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable maturing in the three months ended June 30, 2023 (see Note 9, “Debt and Convertible Notes Payable”).

Interest and other income for the six months ended June 30, 2023 increased $4.3 million, or 200%, driven primarily by a $4.5 million gain for the forgiveness of the Flotek PPP loan (see Note 9, “Debt and Convertible Notes Payable”).

The Company’s income tax (expense) benefit for the three and six months ended June 30, 2023 and 2022 was minimal.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations:

Three months ended March 31,

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

2023 2022 2023 2022

Revenue from external customers $ 15,469 $ 12,111 $ 24,693 $ 21,422

Revenue from related party 32,617 16,549 68,883 19,046

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

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.

Income from operations 3,795 14,944 27,174 8,887

CT revenue from external customers for the three months ended June 30, 2023 increased $3.4 million, or 28%, compared to the same period of 2022 driven mainly by expansion of customer base.

Revenue from related parties increased $16.1 million, or 97%, 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.

CT revenue from external customers for the six months ended June 30, 2023 increased $3.3 million, or 15% , compared to the same period of 2022 driven mainly by activity with four new customers partially offset by a decrease in activity with other customers.

Revenue from related parties increased $49.8 million, or 262%, 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 June 30, 2023 decreased $11.1 million, or 75%, compared to the same period of 2022.

The decline is primarily attributable to a decrease in the gain in fair value of the Contract Consideration Convertible Notes Payable of $13.3 million for the three months ended June 30, 2023 compared to the same

period of 2022 and a gain on sale of assets of $1.9 million reported in the three months ended June 30, 2022.

The decline is partially offset by increased gross profit of $4.2 million attributable to increased activity.

Income from operations for the CT segment for the six months ended June 30, 2023 increased $18.3 million, or 206%, 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 $30.0 million for the six months ended June 30, 2023 compared to $13.3 million for the same period of 2022 and an increase in gross profit of $5.3 million attributable to increased activity.

During the six months ended June 30, 2022, the income from operations included gains on sale of assets and lease termination of $1.9 million and $0.6 million, respectively.

Data Analytics Results of Operations:

Three months ended March 31,

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

2023 2022 2023 2022

Revenue from external customers $ 2,351 $ 713 $ 4,779 $ 1,784

1 unchanged sentence

Income (loss) from operations 129 (1,198) 587 (2,006)

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.

DA revenue from external customers for the three months ended June 30, 2023 increased $1.6 million, or 230%, compared to the same period of 2022 driven by revenue increases with various customers.

Revenue from related party customers for the three months ended June 30, 2023 was $0.1 million relating to services provided to ProFrac Services, LLC.

DA revenue from external customers for the six months ended June 30, 2023 increased $3.0 million, or 168%, compared to the same period of 2022 primarily due to significant products revenues from three customers.

Revenue from related party customers for the six months ended June 30, 2023 was $0.2 million relating to services provided to ProFrac Services, LLC.

Income from operations for the DA segment for the three months ended June 30, 2023 increased $1.3 million, or 111%, compared to the same period for 2022 driven primarily by increased activity and partially offset by higher personnel costs and R&D expense.

Income from operations for the DA segment for the six months ended June 30, 2023 increased $2.6 million, or 129%, compared to the same period for 2022 primarily driven by increased activity and decreased R&D expense, and partially offset by increased personnel costs.

Corporate and Other Results of Operations:

Three months ended March 31,

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

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.

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

2023 2022 2023 2022

Income (loss) from operations $ (3,252) $ (5,707) $ (8,577) $ (9,126)

Loss from operations for the three months ended June 30, 2023 decreased $2.5 million, or 43%, compared to the same period of 2022 attributable to a $2.3 million reversal of severance costs reported in the three months ended June 30, 2023.

Loss from operations for the six months ended June 30, 2023 decreased $0.5 million, or 6%, compared to the same period of 2022 attributable to lower stock compensation costs, partially offset by increased professional fees driven by higher legal fees.

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 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.

During the six months ended June 30, 2023, the Company funded working capital requirements with cash on hand.

As of June 30, 2023, the Company had unrestricted cash and cash equivalents of $8.8 million compared to $12.3 million on December 31, 2022.

During the six months ended June 30, 2023, the Company had operating income of $19.2 million, $2.2 million of cash used by operating activiti es, $0.3 million of cash used in investing activities and $0.9 million o f cash used in financing activities.

The Company has received credit approval from a prospective lender with respect to a proposed asset-based loan (“ABL”).

The proposed ABL would provide credit availability based upon eligible accounts receivable, eligible inventory and real estate values.

The Company expects to provide an update on this process before the end of August 2023, and can provide no assurance that it will be able to successfully close the ABL.

Going Concern

2 unchanged sentences

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.

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

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

4 unchanged sentences

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.

These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, such as the ABL discussed above, 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.

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

Three months ended March 31,

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

Six months ended June 30,

Net cash used in operating activities $ (2,234) $ (23,915)

Net cash (used in) provided by investing activities (292) 4,189

3 unchanged sentences

Operating Activities

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.

Net cash used in operating activities was $2.2 million during the six months ended June 30, 2023 compared to $23.9 million for the same period of 2022.

Consolidated net income for the six months ended June 30, 2023 was $21.3 million compared to a net loss of $4.5 million for the six months ended June 30, 2022.

During the six months ended June 30, 2023, non-cash adjustments to net income (loss) totaled $28.4 million as compared to $10.0 million for the same period of 2022.

• For the six months ended June 30, 2023 non-cash adjustments included $30.0 million for the change in fair value of Contract Consideration Convertible Notes Payable and $4.5 million for PPP loan forgiveness.

These were offset by

non-cash positive adjustments of $2.3 million paid-in-kind interest expense, $2.4 million amortization of contract assets and $1.6 million non-cash lease expense.

• For the six months ended June 30, 2022 non-cash adjustments included $13.3 million for the change in fair value of Contract Consideration Convertible Notes Payable, $1.9 million gain on sale of property and equipment and $0.6 million gain on lease termination.

These were offset by $1.8 million paid-in-kind interest expense and $1.6 million stock compensation expense.

During the six months ended June 30, 2023, changes in working capital provided $4.8 million of cash as compared to using $9.4 million for the same period of 2022.

• For the six months ended June 30, 2023 changes in working capital resulted primarily from an increase in accounts payable of $11.6 million and a decrease in third party accounts receivable of $2.2 million, partially offset by an increase in inventory of $3.2 million along with decreased accrued liabilities and operating lease liabilities of $3.5 million and $1.9 million, respectively.

• For the six months ended June 30, 2023 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 partially due to payment of a legal settlement accrued in 2021.

This is partially offset by an increase in accounts payable of $12.2 million relating mainly to purchases made to support activity under the ProFrac Agreement.

Investing Activities

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.

Net cash used in investing activities for the six months ended June 30, 2023 was $0.3 million driven by capital expenditures.

Net cash provided by 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 in April 2022.

Financing Activities

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.

Net cash used in financing activities for the six months ended June 30, 2023 was $0.9 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 $39.4 million for the six months ended June 30, 2022, and relates primarily to the proceeds from the issuance of convertible notes and warrants partially offset by issuance costs relating to the convertible notes.

Critical Accounting Policies and Estimates

4 unchanged sentences

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