What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-09 · 108 added, 96 removed, 125 unchanged (62% of the section changed)

34 unchanged sentences

Changes often occur.

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 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.

We continue to believe we are experiencing 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.

The demand for oil and gas and related services fluctuates due to numerous factors including weather and macroeconomic and geopolitical conditions.

While we have experienced some recent weakness in onshore drilling and completion activity, we believe that the fundamental outlook for the demand for oil and gas services remains strong.

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 these companies to increase activity and the larger companies to have modest spending increases in the year ahead.

In the current commodity price environment, we expect these companies to maintain or increase activity and the larger companies to have modest spending increases over the next 12 months.

Digital Analytics

19 unchanged sentences

• Availability of raw materials;

• Delays due to port congestion;

• Labor shortages;

1 unchanged sentence

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

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

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

Accelerating tensions between China and the U.S.

could also result in supply disruption.

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

The overall flow of materials globally could experience price increases.

Accelerating tensions in the Middle East could also result in supply disruption.

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

1 unchanged sentence

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

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

On September 25, 2023, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company to effect a 1-for-6 reverse stock split (the “Reverse Stock Split”) of the Company’s common stock.

On October 2, 2023, as a result of the Reverse Stock Split, the Company received written notice from the NYSE that the Company had regained compliance with the NYSE’s continued listing criterion of a minimum share price of $1.00 per share over a 30-day trading period.

ProFrac Supply Agreement

On February 2, 2022, the Company entered into the Initial ProFrac Agreement, which was subsequently amended on May 17, 2022 and February 1, 2023 (collectively, the “ProFrac Agreement”).

The ProFrac Agreement contains minimum requirements for chemistry purchases.

If the minimum volumes are not achieved within the applicable measurement period, ProFrac Services LLC is required to 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 the measurement period (“Contract Shortfall Fees”).

The current measurement period for Contract Shortfall Fees is June 1, 2023 through December 31, 2023.

The Company does not expect that the minimum purchase requirements will be met during the current measurement period, and as a result, the revenues for the three and nine months ended September 30, 2023 reflect expected Contract Shortfall Fees payments.

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,

2023 2022 2023 2022

13 unchanged sentences

Gain on lease termination — — — (584)

Gain in fair value of Contract Consideration

Loss (gain) in fair value of Contract Consideration

Convertible Notes Payable — 4,250 (29,969) (9,016)

6 unchanged sentences

Net income (loss) % 2.7 % (41.2) % 15.5 % (26.5) %

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.

Consolidated revenue for the three months ended September 30, 2023 increased $1.6 million, or 4%, versus the same period of 2022, driven by increased revenue from external customers.

Related party revenues declined by 3% from the third quarter of 2022 as a result of reduced activity under the ProFrac Agreement.

The reduced ProFrac revenues were partially offset by accrued Contract Shortfall Fees.

Related party revenues in the CT segment are net of $1.3 million and $1.2 million of contract assets amortization for the three months ended September 30, 2023 and 2022, respectively.

Consolidated revenue for the nine months ended September 30, 2023 increased $58.0 million, or 66%, versus the same period of 2022, driven by higher related party activity under the ProFrac Agreement, which commenced during the second quarter of 2022, accrued Contract Shortfall Fees and increased revenue from external customers.

Related party revenues in the CT segment are net of $3.7 million and $2.0 million of contract assets amortization for the nine months ended September 30, 2023 and 2022, respectively.

Consolidated cost of sales for the three and nine months ended September 30, 2023 decreased $9.2 million, or 19%, and increased $38.5 million, or 42%, respectively, versus the same periods of 2022, primarily due to decreased product sales partially offset by increased tank rental and maintenance costs.

Consolidated cost of sales percentage improved 23% and 15% in the three and nine months ended September 30, 2023 as a result of our higher revenue volumes, accrued Contract Shortfall Fees and cost management.

SG&A expenses for the three months ended September 30, 2023 decreased $2.7 million, or 29%, versus the same period of 2022.

The decrease relates to decreased personnel costs, professional fees and stock compensation costs.

SG&A expenses for the nine months ended September 30, 2023 increased $0.3 million, or 2%, versus the same period of 2022.

Research and development (“R&D”) costs for the three and nine months ended September 30, 2023 decreased $0.2 million, or 23%, and decreased $1.3 million, or 37%, respectively, versus the same periods of 2022 due to lower personnel cost driven by headcount optimization.

Income from operations increased $17.9 million for the three months ended September 30, 2023, versus the same period in 2022.

The increase is primarily driven by a $9.2 million decrease in consolidated cost of sales, the loss in fair value of the Contract Consideration Convertible Notes Payable of $4.3 million for the three months ended September 30, 2022 with no corresponding fair value change in 2023, accrued Contract Shortfall Fees and decreased SG&A costs for the three months ended September 30, 2023 of $2.7 million.

Income from operations increased $39.3 million for the nine months ended September 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 $21.0 million compared to the same period of 2022, an increase in gross profit of $19.5 million driven by increased related party and external customer revenue, including accrued Contract Shortfall Fees, and a $1.3 million decrease in research and development costs.

The improvement is partially offset by an increase in SG&A costs of $0.3 million and a decrease in gains on the sale of assets and lease termination of $1.9 million and $0.6 million, respectively, reported in the nine months ended September 30, 2022.

Interest and other expense for the three months ended September 30, 2023 decreased $2.3 million, or 90%, 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 first quarter of 2023 and the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable maturing in the second quarter of 2023 (see Note 9, “Debt and Convertible Notes Payable”).

Interest and other income for the nine months ended September 30, 2023 increased $6.6 million, or 141%, driven primarily by a $4.5 million gain for the forgiveness of the Flotek PPP loan (see Note 9, “Debt and Convertible Notes Payable”) and a $2.0 million decrease in interest expense related to the Convertible Notes Payable.

The Company’s income tax expense for the three and nine months ended September 30, 2023 and 2022 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,

2023 2022 2023 2022

1 unchanged sentence

Revenue from related party 29,252 30,417 98,135 49,462

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.

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.

Income (loss) from operations 5,519 (10,603) 32,694 (1,716)

CT revenue from external customers for the three months ended September 30, 2023 increased $2.8 million, or 21%, compared to the same period of 2022 driven mainly by expansion of customer base.

Revenue from related parties decreased $1.2 million, or 4%, compared to the same period of 2022.

The decreased revenue in 2023 is driven by reduced activity under the ProFrac Agreement which was partially offset by accrued Contract Shortfall Fees.

CT revenue from external customers for the nine months ended September 30, 2023 increased $6.1 million, or 17%, compared to the same period of 2022 driven mainly by activity with new customers partially offset by decreased international activity.

Revenue from related parties for the nine months ended September 30, 2023 increased $48.7 million, or 98%, compared to the same period of 2022.

The increased revenue in 2023 is driven by increased activity and accrued Contract Shortfall Fees under the ProFrac Agreement, which commenced in the second quarter of 2022.

Income from operations for the CT segment for the three months ended September 30, 2023 increased $16.1 million compared to the same period of 2022.

The increase is primarily due to increased gross profit of $10.6 million attributable to increased activity and accrued Contract Shortfall Fees.

Additionally, the increase is attributable to a decrease in the loss in fair value of the Contract Consideration Convertible Notes Payable of $4.3 million for the three months ended September 30, 2023 compared to the same period of 2022.

Income from operations for the CT segment for the nine months ended September 30, 2023 increased $34.4 million 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 nine months ended September 30, 2023 compared to $9.0 million for the same period of 2022 and an increase in gross profit of $15.9 million attributable to increased activity and accrued Contract Shortfall Fees.

During the nine months ended September 30, 2022, 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 June 30, Six months ended June 30,

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

2023 2022 2023 2022

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Income (loss) from operations (37) (745) 550 (2,751)

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.

DA revenue from external customers for the three months ended September 30, 2023 decreased $0.2 million, or 13%, compared to the same period of 2022 driven by reduced volumes with various customers.

Revenue from related party customers for the three months ended September 30, 2023 was $0.2 million relating to services provided to ProFrac.

DA revenue from external customers for the nine months ended September 30, 2023 increased $2.8 million, or 80%, compared to the same period of 2022 primarily due to significant products revenues from increased unit sales.

Revenue from related party customers for the nine months ended September 30, 2023 was $0.5 million relating to services provided to ProFrac.

Income from operations for the DA segment for the three months ended September 30, 2023 increased $0.7 million, or 95%, compared to the same period for 2022 driven primarily by increased activity and lower personnel costs and R&D expense.

Income from operations for the DA segment for the nine months ended September 30, 2023 increased $3.3 million compared to the same period for 2022 primarily driven by increased activity and decreased R&D expense and personnel costs.

Corporate and Other Results of Operations:

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

Three months ended September 30, Nine months ended September 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.

Loss from operations $ (3,863) $ (4,931) $ (12,440) $ (14,057)

Loss from operations for the three months ended September 30, 2023 decreased $1.1 million, or 22%, compared to the same period of 2022 attributable to decreased salaries and bonus expense, decreased professional fees and decreased stock compensation expense.

Loss from operations for the nine months ended September 30, 2023 decreased $1.6 million, or 12%, compared to the same period of 2022 attributable to decreased salaries and benefits from reduced headcount, lower stock compensation costs and reduced severance 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 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.

During the nine months ended September 30, 2023, the Company funded working capital requirements with cash on hand and borrowings under the ABL (as defined below) entered into in August 2023.

As of September 30, 2023, the Company had unrestricted cash and cash equivalents of $4.5 million compared to $12.3 million on December 31, 2022.

In addition, at November 6, 2023, the Company had $6.4 million in available borrowings under its ABL.

During the nine months ended September 30, 2023, the Company had operating income of $20.8 million, $9.2 million of cash used by operating activiti es, $0.5 million of cash used in investing activities and $1.9 million o f cash provided by financing activities.

Asset Based Loan

On August 14, 2023, the Company entered into a 24-month revolving loan and security agreement in connection with an Asset Based Loan (the “ABL”).

The ABL provides up to $10 million of initial credit availability, which is limited by a borrowing base consisting of:

• 85% of eligible accounts receivable, plus

• 60% of the value of eligible inventory not to exceed 100% of the eligible accounts receivable.

Under the initial terms of the ABL, the maximum credit availability could be increased based on the lesser of (i) 50% of the appraised value of real estate collateral held by the Company and (ii) $5 million.

On October 5, 2023, the ABL was amended to increase its maximum borrowing base from $10.0 million to $13.8 million (the “Amended ABL”) subsequent to the appraisal of the real estate.

As of September 30, 2023, the Company had $3.4 million outstanding under the ABL.

During the three and nine months ended September 30, 2023, the Company paid $0.2 million in interest and fees related to the ABL, which included the annual fee of $0.1 million.

As of September 30, 2023, the Company had incurred origination costs of $0.5 million that was recorded as deferred financing costs to be amortized over the term of the ABL.

Borrowings under the ABL bear interest at the Wall Street Journal Prime Rate (subject to a floor of 5.50%) plus 2.5% per annum.

The interest rate under the ABL was 11.0% as of September 30, 2023.

The ABL contains an annual commitment fee equal to 1.0% of the ABL’s borrowing base.

Additionally, the Company will be assessed a non-usage fee of 0.25% per quarter based on the difference between the average daily outstanding balance and the borrowing base limit of the ABL.

If the ABL is terminated prior to the end of its 24-month term, the Company is required to pay an early termination fee of 2.50% of the borrowing base limit of the ABL (if terminated with more than 12 months remaining until the maturity date) or 1.50% of the borrowing base limit of the ABL (if terminated with less than 12 months remaining until the maturity date).

The ABL contains customary representations, warranties, covenants and events of default, the occurrence of which would permit the lender to accelerate the payment of any amounts borrowed.

The ABL requires the Company to maintain a minimum Tangible Net Worth (as defined in the ABL) of not less than $11 million.

In addition, the ABL provides the lender a blanket security interest on all or substantially all of the Company’s assets.

The Company was in compliance with all of the covenants under the ABL as of September 30, 2023.

Going Concern

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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 does exist.

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.

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

The Company currently funds its operations with cash on hand, availability under the ABL (see Note 9, “Debt and Convertible Notes Payable”) and other current assets.

While the Company generated $21.3 million of net income in the nine months ended September 30, 2023, the Company has a recent 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.

It is not certain that the Company’s cash, availability under the ABL and other current assets, along with the Company’s forecasted cash flows from operations, 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, 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.

During the third quarter of 2023, the Company entered into the ABL providing up to $10 million of initial credit availability, which is limited by a borrowing base.

In October 2023, the maximum credit availability under the ABL was increased by $3.8 million.

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

1 unchanged sentence

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 $ (9,248) $ (47,166)

Net cash (used in) provided by investing activities (525) 4,040

Net cash (used in) provided by financing activities (888) 39,431

Net cash provided by financing activities 1,925 38,199

Effect of changes in exchange rates on cash and cash equivalents 13 211

1 unchanged sentence

Operating Activities

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.

Net cash used in operating activities was $9.2 million during the nine months ended September 30, 2023 compared to $47.2 million for the same period of 2022.

Consolidated net income for the nine months ended September 30, 2023 was $22.6 million compared to a net loss of $23.3 million for the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, non-cash adjustments to net income totaled $25.8 million as compared to $0.3 million for the same period of 2022.

• For the nine months ended September 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, $3.7 million amortization of contract assets and $2.3 million non-cash lease expense.

• For the nine months ended September 30, 2022 non-cash adjustments included $9.0 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 $3.9 million paid-in-kind interest expense and $2.3 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.

During the nine months ended September 30, 2023, changes in working capital used $6.1 million of cash as compared to $23.6 million for the same period of 2022.

• For the nine months ended September 30, 2023 changes in working capital resulted primarily from a decrease in related party accounts receivable of $2.1 million, net inventories of $0.8 million and other assets of $0.9 million along with decreased accrued liabilities and operating lease liabilities of $3.2 million and $2.6 million, respectively partially offset by increases in third party accounts receivable of $3.5 million.

• For the nine months ended September 30, 2022, changes in working capital resulted primarily from an increase in accounts receivable and inventories of $30.4 million and $11.4 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 $22.0 million relating mainly to purchases made to support activity under the ProFrac Agreement.

Investing Activities

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.

Net cash used in investing activities for the nine months ended September 30, 2023 was $0.5 million driven by capital expenditures.

Net cash provided by 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 in April 2022.

Financing Activities

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.

Net cash provided by financing activities for the nine months ended September 30, 2023 was $1.9 million and relates primarily to $3.4 million in net proceeds from the ABL partially offset by payments for forfeited stock options, ABL origination costs and payments to tax authorities for shares withheld from employees.

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

Critical Accounting Policies and Estimates

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What changed 10-Q

Item 2. Management’s Discussion and Analysis