What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-08 · 101 added, 142 removed, 91 unchanged (73% of the section changed)

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.

The following discussion should be read in conjunction with the 2023 Annual Report 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.

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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.

The Company has two operating segments, CT and 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.

We believe that the Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customers value by improving return on invested capital, lowering operational costs, and providing tangible environmental benefits.

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.

Customers of the CT segment include those of energy related markets, such as our related party ProFrac Services, LLC, with whom we have a long-term supply agreement, as well as 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.

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 January 1, 2024 through December 31, 2024.

The Company does not expect that the minimum purchase requirements will be met during the current measurement period, and as a result, revenues for the three months ended March 31, 2024 reflect Contract Shortfall Fees of $8.7 million.

Because the measurement period for 2023 was June 1, 2023 through December 31, 2023, there are no Contract Shortfall Fees reflected in revenues for the first quarter of 2023.

Data Analytics

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The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

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.

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, allowing for the use of significantly lower cost field gas instead of diesel to generate power, lower

emissions and protect equipment, 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.

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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.

R&I supports both business segments through green chemistry formulation, specialty chemical formulations and Environmental Protection Agency (“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 business 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.

For the three months ended March 31, 2024 and 2023, the Company incurred $0.4 million and $0.6 million, respectively, of research and development expense.

The Company expects that its 2024 research and development investment will continue to support new product development, especially in support of enhanced environmental demands, increased adoption of green chemistry and conventional customization initiatives for its clients.

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

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Changes often occur.

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.

Despite the near term volatility in commodity pricing, leading to the recent weakness in onshore drilling and completion activity, the fundamentals for energy related services remain strong.

The overall expansion of the global economy should continue to create substantial demand for all forms of energy which will increase service intensity.

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.

In the current commodity price environment, we expect these companies operating in oil-weighted basins to maintain or increase activity while companies operating in gas-weighted basins are expected to maintain or decrease activity over the next 12 months.

In general, we expect the major exploration and production companies to maintain activity levels over the next 12 months.

Digital Analytics

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

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

ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment.

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.

Analyzing this in real-time allows companies to maximize the field gas for diesel substitution rate providing significant cost savings while lowering emissions, reducing fuel consumption/costs, and protecting the equipment from damage.

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

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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.

Military conflicts in the Middle East could also result in supply disruption.

Consolidated Results of Operations (in thousands)

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

2023 2022 2023 2022

Three months ended March 31,

Revenue from external customers $ 13,180 $ 11,652

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Cost of sales % 78.2 % 96.1 %

Gross profit (loss) 9,047 (1,842) 14,833 (4,626)

Gross profit (loss) % 19.1 % (4.0) % 10.2 % (5.3) %

Gross profit 8,821 1,880

Gross profit % 21.8 % 3.9 %

Selling general and administrative 6,084 6,451

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Severance costs 3 2,223

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

Gain in fair value of Contract Consideration

Convertible Notes Payable — (26,095)

Income (loss) from operations 1,619 (16,279) 20,804 (18,524)

Income from operations 2,108 18,511

Operating margin % 5.2 % 38.6 %

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)

Interest and other (expense) income, net (304) 2,840

Income before income taxes 1,804 21,351

Income tax (expense) benefit (242) (9)

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.

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.

Net income $ 1,562 $ 21,342

Net income % 3.9 % 44.5 %

Consolidated revenue for the three months ended March 31, 2024 decreased $7.6 million, or 16%, versus the same period of 2023, driven by lower related party activity under the ProFrac Agreement, partially offset by accrued Contract Shortfall Fees and increased revenue from external customers.

Related party revenues in the CT segment are net of $1.3 million and $1.3 million of contract assets amortization for the three months ended March 31, 2024 and 2023, respectively.

Consolidated cost of sales for the three months ended March 31, 2024 decreased $14.6 million, or 32%, versus the same period of 2023, primarily due to decreased product sales and lower freight costs, partially offset by increased tank rental and maintenance costs.

Consolidated cost of sales percentage improved to 78.2% for the three months ended March 31, 2024 from 96.1% in the same period in 2023 as a result of accrued Contract Shortfall Fees, which have no associated costs, and cost management initiatives.

SG&A expenses for the three months ended March 31, 2024 decreased $0.4 million, or 6%, versus the same period of 2023.

The decrease relates primarily to decreased professional fees.

Severance costs for the three months ended March 31, 2024 decreased $2.2 million versus the same period of 2023.

Severance costs during the 2023 period related to senior management changes.

Research and development (“R&D”) costs for the three months ended March 31, 2024 decreased $0.2 million, or 34%, versus the same period of 2023 due to lower personnel cost driven by headcount optimization.

Income from operations decreased $16.4 million for the three months ended March 31, 2024, versus the same period in 2023.

The decrease is primarily driven by the gain in fair value of the Contract Consideration Convertible Notes Payable of $26.1 million for the three months ended March 31, 2023 with no corresponding fair value change in the same period of 2024.

This gain was partially offset by a $6.9 million increase in gross profit for the three months ended March 31, 2024 as compared to the same period of 2023.

Interest and other expense for the three months ended March 31, 2024 increased $3.1 million, or 111%, driven by the $4.5 million gain for the three months ended March 31, 2023 related to the partial forgiveness of the Flotek PPP loan with no corresponding activity in 2024.

The increase in interest and other expense was partially offset by a $1.4 million decrease in interest payments, which related primarily to interest on the Contract Consideration Convertible Notes Payable, which matured and converted in 2023.

The Company’s income tax expense for the three months ended March 31, 2024 and 2023 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

Three months ended March 31,

Revenue from external customers $ 11,685 $ 9,225

Revenue from related party 27,014 36,265

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.

Income from operations 6,106 23,379

CT revenue from external customers for the three months ended March 31, 2024 increased $2.5 million, or 27%, compared to the same period of 2023 driven primarily by domestic activity partially offset by decreased international activity.

Revenue from related parties for the three months ended March 31, 2024 decreased $9.3 million, or 26%, compared to the same period of 2023 primarily driven by decreased activity partially offset by $8.7 million of accrued Contract Shortfall Fees.

There were no corresponding Contract Shortfall Fees for the same period of 2023.

Income from operations for the CT segment for the three months ended March 31, 2024 decreased $17.3 million compared to the same period of 2023.

The decrease is primarily due 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 with no corresponding valuation changes in the same period of 2024.

The decrease was partially offset by increased gross profit of $8.0 million, which was related to accrued Contract Shortfall Fees and improved cost measures, and severance costs of $0.6 million for the three months ended March 31, 2023.

Data Analytics Results of Operations:

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

2023 2022 2023 2022

Three months ended March 31,

Revenue from external customers $ 1,495 $ 2,427

Revenue from related party 180 90

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.

(Loss) income from operations (424) 457

DA revenue from external customers for the three months ended March 31, 2024 decreased $0.9 million, or 38%, compared to the same period of 2023 primarily due to reduced unit sales.

Revenue from related party customers for the three months ended March 31, 2024 was $0.2 million relating to services provided to ProFrac compared to $0.1 million for the same period in 2023.

Income from operations for the DA segment for the three months ended March 31, 2024 decreased $0.9 million compared to the same period for 2023 primarily driven by decreased activity.

Corporate and Other Results of Operations:

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

2023 2022 2023 2022

Three months ended March 31,

Loss from operations $ (3,574) $ (5,325)

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.

Loss from operations for the three months ended March 31, 2024 decreased $1.4 million, or 28%, compared to the same period of 2023 attributable to decreased professional fees and 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 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.

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

During the three months ended March 31, 2024, the Company funded working capital requirements with cash on hand and borrowings under the ABL (as defined below).

As of March 31, 2024, the Company had unrestricted cash and cash equivalents of $5.2 million compared to $5.9 million on December 31, 2023.

In addition, at May 7, 2024 , the Company had approximately $8.0 million in available borrowings under its ABL.

During the three months ended March 31, 2024, the Company had $2.1 million of operating income, $3.9 million of cash provided by operating activiti es, $0.2 million of cash used in investing activities and $4.4 million o f cash used in 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.

The ABL provides up to $13.8 million of credit availability, which is limited by a borrowing base consisting of (i) 85% of eligible accounts receivable, plus (ii) 60% of the value of eligible inventory not to exceed 100% of the eligible accounts receivable.

As of March 31, 2024, the Company had $3.1 million outstanding under the ABL.

During the three months ended March 31, 2024, the Company incurred $0.2 million in interest and fees related to the ABL.

As of March 31, 2024, the Company recorded $0.1 million of amortized deferred financing costs related to 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 interest rate under the ABL was 11.0% as of March 31, 2024.

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

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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.

The Company was in compliance with all of the covenants under the ABL as of March 31, 2024.

Sources and Uses of Liquidity

These unaudited condensed 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.

The Company currently funds its operations with cash on hand, availability under the ABL (see Note 9, “Debt and Convertible Notes Payable” in Part I, Item 1 of this Quarterly Report) and other liquid assets.

The Company recognized $8.8 million and $1.6 million of gross profit and net income, respectively, during the three months ended March 31, 2024.

While we believe that our cash, liquid assets, and availability under the ABL will provide us with sufficient financial resources to fund operations to meet our capital requirements and anticipated obligations as they become due, uncertainty surrounding the long-term stability and strength of the oil and gas markets could have a negative impact on our liquidity.

The availability of capital is dependent

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

During April 2024, the Company collected the final payment related to the $20.1 million in 2023 Contract Shortfall Fees under the ProFrac Agreement.

Related party revenues for the three months ended March 31, 2024 included Contract Shortfall Fees of $8.7 million.

Related party receivables as of March 31, 2024 included accrued Contract Shortfall Fees of $13.7 million comprised of the remaining 2023 Contract Shortfall Fees payment of $5.0 million, which was collected in April 2024, and $8.7 million of accrued 2024 Contract Shortfall Fees, which will be due in the first quarter of 2025 under the terms of the ProFrac Agreement.

Based upon our outlook for future cash flows from operations, which includes the collection of the Contract Shortfall Fees, combined with cash on hand and availability under the ABL, the Company believes it has sufficient financial resources to fund operations and meet its capital requirements and anticipated obligations as they become due in the next twelve months.

The Company cannot guarantee a sufficient level of cash flows in the future, the unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

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

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 provided by financing activities 1,925 38,199

Three months ended March 31,

Net cash provided by operating activities $ 3,887 $ 1,140

Net cash used in investing activities (152) (157)

Net cash used in financing activities (4,411) (818)

Effect of changes in exchange rates on cash and cash equivalents 42 (21)

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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.

Net cash provided by operating activities was $3.9 million during the three months ended March 31, 2024 compared to $1.1 million for the same period of 2023.

Consolidated net income for the three months ended March 31, 2024 was $1.6 million compared to net income of $21.3 million for the three months ended March 31, 2023.

During the three months ended March 31, 2024, non-cash adjustments to net income totaled $3.1 million as compared to $27.8 million for the same period of 2023.

• For the three months ended March 31, 2024 non-cash adjustments included non-cash positive adjustments of $0.3 million of stock compensation expense, $1.3 million amortization of contract assets and $0.7 million non-cash lease expense.

• 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 and $4.5 million related to the partial forgiveness of the PPP loan, partially offset by $1.6 million paid-in-kind interest expense and $(1.1) million of stock compensation expense.

During the three months ended March 31, 2024, changes in working capital used $0.8 million of cash as compared to $7.6 million for the same period of 2023.

• For the three months ended March 31, 2024, changes in working capital resulted primarily from an increase in related party accounts receivable of $4.1 million and net inventories of $1.3 million along with decreased accrued liabilities and operating lease liabilities of $2.5 million and $0.9 million, respectively, partially offset by increases in accounts payable of $4.2 million, third party accounts receivable of $2.9 million and other assets of $0.9 million.

• For the three months ended March 31, 2023, changes in working capital resulted primarily from an increase in accounts payable and accrued liabilities of $9 million and $1.2 million, respectively, partially offset by a decrease in operating lease liabilities of $1.2 million.

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.

Net cash used in investing activities for the three months ended March 31, 2024 and 2023 was $0.2 million and $0.2 million, respectively, driven by capital expenditures in both periods.

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.

Net cash used in financing activities for the three months ended March 31, 2024 was $4.4 million and relates primarily to $4.4 million in net payments on the ABL, payments for forfeited stock options, payments to tax authorities for shares withheld from employees and payments for finance leases, partially offset by proceeds from the issuance of stock.

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

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis