FLOTEK INDUSTRIES INC/CN/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 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 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, 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 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. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people. Customers of the CT segment include those of energy related markets, such as our related party ProFrac Services, LLC, as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from our best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices. Data Analytics The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, natural gas liquids (“NGLs”), natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds. 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 line of Verax™ analyzers for deployment internationally which was certified for compliance in hazardous locations and harsh weather conditions. 36 Research & Innovation 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. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing. Outlook Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry and weather volatility. We have based our outlook on the market conditions we perceive today. Changes often occur. Energy 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 maintain or increase activity and the larger companies to have modest spending increases over the next 12 months. Digital Analytics The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. 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 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 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 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. We anticipate the Company’s products and services could offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Additionally, we believe the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions. 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. 37 Supply Chain The principal supply issues facing our industry for the next twelve months will include: • Fluctuating freight costs for shipping to our customers; • Availability of raw materials; • Labor shortages; and • Demand forecasting. 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 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 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 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. 38 Consolidated Results of Operations (in thousands) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Revenue Revenue from external customers $ 17,806 $ 15,206 $ 47,278 $ 38,412 Revenue from related party 29,462 30,417 98,592 49,462 Total revenues 47,268 45,623 145,870 87,874 Cost of sales 38,221 47,465 131,037 92,500 Cost of sales % 80.9 % 104.0 % 89.8 % 105.3 % Gross profit (loss) 9,047 (1,842) 14,833 (4,626) Gross profit (loss) % 19.1 % (4.0) % 10.2 % (5.3) % Selling general and administrative 6,526 9,254 21,303 20,958 Selling general and administrative % 13.8 % 20.3 % 14.6 % 23.9 % Depreciation 181 177 530 554 Research and development 757 985 2,231 3,515 Severance costs 2 (219) (28) 387 Gain on sale of property and equipment (38) (10) (38) (1,916) Gain on lease termination — — — (584) Loss (gain) in fair value of Contract Consideration Convertible Notes Payable — 4,250 (29,969) (9,016) Income (loss) from operations 1,619 (16,279) 20,804 (18,524) Operating margin % 3.4 % (35.7) % 14.3 % (21.1) % Interest and other income (expense), net (251) (2,508) 1,903 (4,653) Income (loss) before income taxes 1,368 (18,787) 22,707 (23,177) Income tax (expense) benefit (81) (7) (98) (101) Net income (loss) $ 1,287 $ (18,794) $ 22,609 $ (23,278) Net income (loss) % 2.7 % (41.2) % 15.5 % (26.5) % 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. 39 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 September 30, Nine months ended September 30, 2023 2022 2023 2022 Revenue from external customers $ 16,326 $ 13,511 $ 41,020 $ 34,933 Revenue from related party 29,252 30,417 98,135 49,462 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. 40 Data Analytics Results of Operations: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Revenue from external customers $ 1,480 $ 1,695 $ 6,258 $ 3,479 Revenue from related party 210 — 457 — Income (loss) from operations (37) (745) 550 (2,751) 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 September 30, Nine months ended September 30, 2023 2022 2023 2022 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 Overview 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, 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. 41 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 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 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, 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. 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. 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. 42 Cash Flows Consolidated cash flows by type of activity are noted below (in thousands): Nine months ended September 30, 2023 2022 Net cash used in operating activities $ (9,248) $ (47,166) Net cash (used in) provided by investing activities (525) 4,040 Net cash provided by financing activities 1,925 38,199 Effect of changes in exchange rates on cash and cash equivalents 13 211 Net change in cash and cash equivalents and restricted cash $ (7,835) $ (4,716) Operating Activities 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 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 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 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. 43 Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with U.S. 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.