What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 82 added, 89 removed, 132 unchanged (56% of the section changed)

11 unchanged sentences

Chemistry Technologies

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

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 their desired chemical applications program.

7 unchanged sentences

The measurement period for Contract Shortfall Fees during 2023 was June 1, 2023 through December 31, 2023.

Revenues for both the three and six months ended June 30, 2023 reflect Contract Shortfall Fees of $2.0 million.

Related party revenues for the three and nine months ended September 30, 2023 reflected Contract Shortfall Fees of $8.0 million and $10.0 million, respectively.

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 and six months ended June 30, 2024 reflect Contract Shortfall Fees of $8.4 million and $17.1 million, respectively.

The Company does not expect that the minimum purchase requirements will be met during the current measurement period, and as a result, related party revenues for the three and nine months ended September 30, 2024 reflect Contract Shortfall Fees of $6.8 million and $23.8 million, respectively.

Data Analytics

7 unchanged sentences

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

During the second quarter of 2024, the Environmental Protection Agency (“EPA”) designated the Company’s JP3 measurement system as an approved measurement technology with respect to recently enacted flare regulations.

The optical measurement system, designed for precise measurement of net heating values in flare gases, is the first to be approved as an alternative method under the new NPS OOOOb regulations.

4 unchanged sentences

The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.

For the three months ended June 30, 2024 and 2023, the Company incurred $0.5 million and $0.9 million, respectively, of research and development expense.

For the six months ended June 30, 2024 and 2023, the Company incurred $0.9 million and $1.5 million, respectively, of research and development expense.

For the three months ended September 30, 2024 and 2023, the Company incurred $0.5 million and $0.8 million, respectively, of research and development expense.

For the nine months ended September 30, 2024 and 2023, the Company incurred $1.3 million and $2.2 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 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.

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

We have based our outlook on the market conditions we perceive today.

28 unchanged sentences

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,

2024 2023 2024 2023

18 unchanged sentences

Income before income taxes 2,569 1,368 6,361 22,707

Income tax (expense) benefit (15) (7) (257) (16)

Net income (loss) $ 1,974 $ (21) $ 3,536 $ 21,322

Income tax expense (37) (81) (293) (98)

Net income $ 2,532 $ 1,287 $ 6,068 $ 22,609

Consolidated revenue for the three months ended June 30, 2024 decreased $4.4 million, or 9%, versus the same period of 2023, driven by lower related party activity under the ProFrac Agreement, partially offset by accrued Contract Shortfall Fees of $8.4 million and increased revenue from external customers.

Related party revenues in the CT segment are net of $1.5 million and $1.1 million of contract assets amortization for the three months ended June 30, 2024 and 2023, respectively.

Consolidated revenue for the six months ended June 30, 2024 decreased $12.1 million, or 12%, versus the same period of 2023, driven by lower related party activity under the ProFrac Agreement, partially offset by accrued Contract Shortfall Fees of $17.1

million and increased revenue from external customers.

Related party revenues in the CT segment are net of $2.7 million and $2.4 million of contract assets amortization for the six months ended June 30, 2024 and 2023, respectively.

Consolidated cost of sales for the three and six months ended June 30, 2024 decreased $9.7 million, or 21%, and decreased $24.3 million, or 26%, versus the respective periods 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 80% for the three months ended June 30, 2024 from 92% in the same period of 2023 and improved to 79% for the six months ended June 30, 2024 from 94% in the same period of 2023 as a result of higher accrued Contract Shortfall Fees during the 2024 periods, which have no associated costs, and cost management initiatives.

SG&A expenses for the three months ended June 30, 2024 decreased $2.1 million, or 25%, versus the same period of 2023.

SG&A expenses for the six months ended June 30, 2024 decreased $2.5 million, or 16.6%, versus the same period of 2023.

Net income % 5.1 % 2.7 % 4.5 % 15.5 %

Consolidated revenue for the three months ended September 30, 2024 increased $2.5 million, or 5%, versus the same period of 2023, driven by higher related party activity under the ProFrac Agreement and increased activity in the DA segment, partially offset by decreased accrued Contract Shortfall Fees of $1.2 million and decreased revenue from external customers.

Related party revenues in the CT segment are net of $1.6 million and $1.3 million of contract assets amortization for the three months ended September 30, 2024 and 2023, respectively.

Consolidated revenue for the nine months ended September 30, 2024 decreased $9.6 million, or 7%, versus the same period of 2023, driven by lower related party activity under the ProFrac Agreement, partially offset by an increase in accrued Contract Shortfall Fees of $13.8 million.

Related party revenues in the CT segment are net of $4.3 million and $3.7 million of contract assets amortization for the nine months ended September 30, 2024 and 2023, respectively.

Consolidated cost of sales for the three months ended September 30, 2024 increased $2.4 million, or 6%, versus the respective period of 2023, primarily due to increased product sales, partially offset by lower freight costs.

Gross profit margin during the third quarter of 2024 was lower than the corresponding 2023 period as a result of a shift in product mix and lower Contract Shortfall Fees during the 2024 period.

Consolidated cost of sales for the nine months ended September 30, 2024 decreased $21.9 million, or 17%, versus the respective period of 2023, primarily due to decreased product sales under the ProFrac Agreement and lower freight costs.

Consolidated cost of sales percentage totaled 82% for the three months ended September 30, 2024 versus 81% in the same period of 2023 and improved to 80% for the nine months ended September 30, 2024 from 90% in the same period of 2023 as a result of higher accrued Contract Shortfall Fees during the nine-month 2024 period, which have no associated costs.

SG&A expenses for the three months ended September 30, 2024 decreased $0.8 million, or 12%, versus the same period of 2023.

SG&A expenses for the nine months ended September 30, 2024 decreased $3.2 million, or 15.2%, versus the same period of 2023.

The decreases relate primarily to decreased professional fees and salaries partially offset by increased stock compensation expense.

Severance costs during the second quarter of 2023 included a $2.3 million credit associated with the settlement of a lawsuit and the reversal of the related accrual.

Research and development (“R&D”) costs for the three and six months ended June 30, 2024 decreased $0.4 million, or 44%, and $0.6 million, or 40%, respectively, versus the same periods of 2023 due to lower personnel costs driven by headcount optimization and reduced development costs.

Income from operations increased $1.6 million for the three months ended June 30, 2024, versus the same period in 2023.

The increase is primarily driven by a $5.3 million increase in gross profit and $2.1 million decrease in SG&A expenses for the three months ended June 30, 2024 as compared to the same period of 2023.

These improvements were offset by the gain in fair value of the Contract Consideration Convertible Notes Payable of $3.9 million and a $2.3 million expense reversal in severance costs for the three months ended June 30, 2023 with no corresponding activities in the same period of 2024.

Income from operations decreased $14.9 million for the six months ended June 30, 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 $30.0 million for the six months ended June 30, 2023 with no corresponding fair value change in the same period of 2024.

This gain was partially offset by a $12.2 million increase in gross profit and a $2.5 million decrease in SG&A expenses during the six months ended June 30, 2023 as compared to the same period of 2023.

Interest and other expense for the three months ended June 30, 2024 decreased $0.5 million, or 66%, driven by decreases in interest related primarily to the Contract Consideration Convertible Notes Payable, which matured and converted in 2023.

Interest and other expense for the six months ended June 30, 2024 increased $2.7 million driven by the $4.5 million gain for the six months ended June 30, 2023 related to the partial forgiveness of the Flotek PPP loan with no corresponding activity in 2024.

Research and development (“R&D”) costs for the three and nine months ended September 30, 2024 decreased $0.3 million, or 39%, and $0.9 million, or 40%, respectively, versus the same periods of 2023 due to reduced occupancy costs, reduced development costs and reduced legal expenses partially offset by increased third-party testing costs.

Income from operations increased $1.1 million for the three months ended September 30, 2024, versus the same period in 2023.

The increase is primarily driven by a $0.8 million decrease in SG&A expenses and $0.3 million decrease in R&D costs for the three months ended September 30, 2024 as compared to the same period of 2023.

Income from operations decreased $13.8 million for the nine months ended September 30, 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 $30.0 million for the nine months ended September 30, 2023 with no corresponding fair value change in the same period of 2024.

This gain was partially offset by a $12.3 million increase in gross profit, a $3.2 million decrease in SG&A expenses and a $0.9 decrease in R&D costs during the nine months ended September 30, 2024 as compared to the same period of 2023.

Interest and other expense for the three months ended September 30, 2024 decreased $0.1 million, driven by decreases in interest related primarily to the Contract Consideration Convertible Notes Payable, which matured and converted in 2023.

Interest and other expense for the nine months ended September 30, 2024 decreased $2.6 million driven by the $4.5 million gain for the nine months ended September 30, 2023 related to the partial forgiveness of the Flotek PPP loan with no corresponding activity in 2024.

The increase was partially offset by a $1.7 million decrease in interest payments, which related primarily to the Contract Consideration Convertible Notes Payable, which matured and converted in 2023.

The Company’s income tax expense for the six months ended June 30, 2024 and 2023 was minimal.

The Company’s income tax expense for the nine months ended September 30, 2024 and 2023 was $0.3 million and $0.1 million, respectively.

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,

2024 2023 2024 2023

2 unchanged sentences

Income from operations 5,559 5,519 17,810 32,694

CT revenue from external customers for the three months ended June 30, 2024 increased $0.9 million, or 6%, compared to the same period of 2023 driven primarily by domestic activity partially offset by decreased international activity.

Revenue from related party for the three months ended June 30, 2024 decreased $4.9 million, or 14.9%, compared to the same period of 2023 primarily driven by decreased activity partially offset by increased accrued Contract Shortfall Fees.

CT revenue from external customers for the six months ended June 30, 2024 increased $3.4 million, or 14%, compared to the same period of 2023 driven primarily by domestic activity partially offset by decreased international activity.

related party for the six months ended June 30, 2024 decreased $14.1 million, or 21%, compared to the same period of 2023 primarily driven by decreased activity partially offset by increased accrued Contract Shortfall Fees.

Income from operations for the CT segment for the three months ended June 30, 2024 increased $2.4 million compared to the same period of 2023.

The increase is primarily due to increased gross profit of $5.9 million, which was related to accrued Contract Shortfall Fees and cost management initiatives.

The increase was partially offset due to the gain in fair value of the Contract Consideration Convertible Notes Payable of $3.9 million for the three months ended June 30, 2023 with no corresponding valuation changes in the same period of 2024 and a reversal of severance expense related to a legal settlement during the second quarter of 2023.

Income from operations for the CT segment for the six months ended June 30, 2024 decreased $14.9 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 $30.0 million for the six months ended June 30, 2023 with no corresponding valuation changes in the same period of 2024.

The decrease was partially offset by increased gross profit of $13.9 million, which was related to accrued Contract Shortfall Fees and cost management initiatives.

CT revenue from external customers for the three months ended September 30, 2024 decreased $2.2 million, or 14%, compared to the same period of 2023 driven primarily by decreased domestic activity.

Revenue from related party for the three months ended September 30, 2024 increased $3.7 million, or 12.7%, compared to the same period of 2023 primarily driven by increased activity under the ProFrac Agreement partially offset by decreased accrued Contract Shortfall Fees.

CT revenue from external customers for the nine months ended September 30, 2024 increased $1.1 million, or 3%, compared to the same period of 2023 driven primarily by domestic activity partially offset by decreased international activity.

Revenue from related party for the nine months ended September 30, 2024 decreased $10.4 million, or 11%, compared to the same period of 2023 primarily driven by decreased activity partially offset by increased accrued Contract Shortfall Fees.

Income from operations for the CT segment for the three months ended September 30, 2024 was $5.6 million compared to $5.5 million the same period of 2023.

Income from operations for the CT segment for the nine months ended September 30, 2024 decreased $14.9 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 $30.0 million for the nine months ended September 30, 2023 with no corresponding valuation changes in the same period of 2024.

The decrease was partially offset by increased gross profit of $13.6 million for the nine months ended September 30, 2024 which was related to accrued Contract Shortfall Fees and cost management initiatives.

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,

2024 2023 2024 2023

1 unchanged sentence

Revenue from related party 200 210 600 457

(Loss) income from operations (358) 129 (782) 587

DA revenue from external customers for the three months ended June 30, 2024 decreased $0.5 million, or 22%, compared to the same period of 2023 primarily due to reduced unit sales.

Revenue from related party for the three months ended June 30, 2024 was $0.2 million relating to services provided to ProFrac compared to $0.2 million for the same period in 2023.

DA revenue from external customers for the six months ended June 30, 2024 decreased $1.5 million, or 30%, compared to the same period of 2023 primarily due to reduced unit sales.

Revenue from related party for the six months ended June 30, 2024 was $0.4 million relating to services provided to ProFrac compared to $0.2 million for the same period in 2023.

Income from operations for the DA segment for the three months ended June 30, 2024 decreased $0.5 million compared to the same period for 2023 primarily driven by decreased activity.

Income from operations for the DA segment for the six months ended June 30, 2024 decreased $1.4 million compared to the same period for 2023 primarily driven by decreased activity.

Income (loss) from operations 130 (37) (652) 550

DA revenue from external customers for the three months ended September 30, 2024 increased $1.0 million, or 67%, compared to the same period of 2023 primarily due to increased unit sales.

Revenue from related party for the three months ended September 30, 2024 was $0.2 million relating to services provided to ProFrac compared to $0.2 million for the same period in 2023.

DA revenue from external customers for the nine months ended September 30, 2024 decreased $0.5 million, or 7%, compared to the same period of 2023 primarily due to reduced unit sales.

Revenue from related party for the nine months ended September 30, 2024 was $0.6 million relating to services provided to ProFrac compared to $0.5 million for the same period in 2023.

Income from operations for the DA segment for the three months ended September 30, 2024 increased $0.2 million compared to the same period for 2023 primarily driven by increased activity and cost management initiatives.

Income from operations for the DA segment for the nine months ended September 30, 2024 decreased $1.2 million compared to the same period for 2023 primarily driven by decreased activity and increased materials 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,

2024 2023 2024 2023

Loss from operations $ (2,966) $ (3,863) $ (10,106) $ (12,440)

Loss from operations for the three months ended June 30, 2024 increased $0.3 million, or 10%, compared to the same period of 2023 attributable to increased personnel costs, including severance costs.

Loss from operations for the six months ended June 30, 2024 decreased $1.4 million, or 17%, compared to the same period of 2023 attributable to decreased professional fees.

Loss from operations for the three months ended September 30, 2024 decreased $0.9 million, or 23%, compared to the same period of 2023 attributable to decreased personnel costs.

Loss from operations for the nine months ended September 30, 2024 decreased $2.3 million, or 19%, compared to the same period of 2023 attributable to decreased professional fees.

Capital Resources and Liquidity

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

During the six months ended June 30, 2024, the Company funded working capital requirements with cash on hand and borrowings under the ABL (as amended effective August 5, 2024, defined below).

As of June 30, 2024, the Company had unrestricted cash and cash equivalents of $4.8 million compared to $5.9 million on December 31, 2023.

In addition, at August 5, 2024 , the Company had approximately $11.0 million in available borrowings under its amended ABL.

During the six months ended June 30, 2024, the Company had $4.3 million of operating income, $0.8 million of cash provided by operating activiti es, $0.2 million of cash used in investing activities and $1.8 million o f cash used in financing activities.

During the nine months ended September 30, 2024, the Company funded working capital requirements with cash on hand and borrowings under the ABL (defined below).

As of September 30, 2024, the Company had unrestricted cash and cash equivalents of $5.0 million compared to $5.9 million on December 31, 2023.

In addition, at November 5, 2024 , the Company had approximately $14.0 million in available borrowings under its amended ABL.

During the nine months ended September 30, 2024, the Company had $7.1 million of operating income, $5.9 million of cash provided by operating activiti es, $0.5 million of cash used in investing activities and $6.3 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”).

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

During August 2024, the Company entered into a second amendment to the ABL extending the maturity to August 2026, increasing the credit availability and lowering the interest rate spread.

The ABL provides up to $20.0 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, plus (iii) 60% of the value of certain real estate holdings.

As of June 30, 2024, the Company had $5.8 million outstanding under the ABL.

During the six months ended June 30, 2024, the Company incurred $0.4 million in interest and fees related to the ABL.

As of June 30, 2024, the Company recorded $0.2 million of amortized deferred financing costs related to the ABL.

Effective August 5, 2024, the Company entered into a second amendment to the ABL (the “Second Amendment”).

Among other matters, the Second Amendment amends the ABL as follows:

(i) the total commitment of the loan is increased to $20,000,000, (ii) the stated maturity date is extended for an additional 12 months to August 2026, (iii) the applicable margin is decreased by 0.50%, and (iv) various modifications are made to the borrowing base and criteria for eligible receivables and eligible pledged real estate, including increasing the borrowing base calculation to include 60% of the value of certain real estate holdings.

Borrowings under the ABL bear interest at the Wall Street Journal Prime Rate (subject to a floor of 5.50%) plus 2.5% (2.0% effective August 5, 2024) per annum.

The interest rate under the ABL was 11.0% as of June 30, 2024.

As of September 30, 2024, the Company had $1.4 million outstanding under the ABL.

During the nine months ended September 30, 2024, the Company incurred $0.7 million in interest and fees related to the ABL.

As of September 30, 2024, the Company recorded $0.2 million of unamortized 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 2.0% per annum.

The interest rate under the ABL was 10.0% as of September 30, 2024.

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).

If the ABL is terminated prior to the end of its 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.

1 unchanged sentence

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 June 30, 2024.

The Company was in compliance with all of the covenants under the ABL as of September 30, 2024.

Sources and Uses of Liquidity

3 unchanged sentences

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.

Effective August 5, 2024, the loan commitment under the ABL was increased from $13.8 million to $20.0 million.

The Company recognized $9.2 million and $2.0 million of gross profit and net income, respectively, during the three months ended June 30, 2024 and recognized $18.0 million and $3.5 million of gross profit and net income, respectively, during the six months ended June 30, 2024.

Further, the Company recognized net cash provided by operating activities of $0.8 million during the six months ended June 30, 2024.

While we believe that our cash, liquid assets, and availability under the recently increased 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, and the resulting potential impact on our customers’ ability to pay their obligations to us in a timely manner, could have a negative impact on our liquidity.

The Company recognized $9.1 million and $2.5 million of gross profit and net income, respectively, during the three months ended September 30, 2024 and recognized $27.1 million and $6.1 million of gross profit and net income, respectively, during the nine months ended September 30, 2024.

Further, the Company recognized net cash provided by operating activities of $5.9 million during the nine months ended September 30, 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, and the resulting potential impact on our customers’ ability to pay their obligations to us in a timely manner, 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 16, “Related Party Transactions” in Part I, Item 1 of this Quarterly Report).

Related party revenues for the three and six months ended June 30, 2024 included Contract Shortfall Fees of $8.4 million and $17.1 million, respectively (see Note 16, “Related Party Transactions” in Part I, Item 1 of this Quarterly Report).

Related party receivables as of June 30, 2024 included accrued Contract Shortfall Fees of $17.1 million, which will be due in the first quarter of 2025 under the terms of the ProFrac Agreement.

Related party revenues for the three and nine months ended September 30, 2024 included Contract Shortfall Fees of $6.8 million and $23.8 million, respectively (see Note 16, “Related Party Transactions” in Part I, Item 1 of this Quarterly Report).

Related party receivables as of September 30, 2024 included accrued Contract Shortfall Fees of $23.8 million, 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 in the first quarter of 2025, 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.

While 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):

Six months ended June 30,

Nine months ended September 30,

Net cash provided by (used in) operating activities $ 5,925 $ (9,248)

Net cash used in investing activities (457) (525)

Net cash used in financing activities (1,765) (888)

Net cash (used in) provided by financing activities (6,329) 1,925

Effect of changes in exchange rates on cash and cash equivalents 6 13

1 unchanged sentence

Operating Activities

Net cash provided by operating activities was $0.8 million during the six months ended June 30, 2024 compared to net cash used in operating activities of $2.2 million for the same period of 2023.

Consolidated net income for the six months ended June 30, 2024 was $3.5 million compared to net income of $21.3 million for the six months ended June 30, 2023.

During the six months ended June 30, 2024, non-cash adjustments to net income totaled $5.9 million as compared to $28.4 million for the same period of 2023.

• For the six months ended June 30, 2024 non-cash adjustments included non-cash positive adjustments of $0.6 million of stock compensation expense, $2.7 million amortization of contract assets and $1.2 million non-cash lease expense.

• 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 related to the partial forgiveness of the PPP loan, partially offset by $2.3 million paid-in-kind interest expense and non-cash negative adjustments of $0.8 million of stock compensation expense.

During the six months ended June 30, 2024, changes in working capital used $8.6 million of cash as compared to $4.8 million for the same period of 2023.

• For the six months ended June 30, 2024, changes in working capital resulted primarily from an increase in related party accounts receivable of $5.5 million, an increase third party accounts receivable of $0.3 million and net inventories of $0.2 million along with decreased accrued liabilities and operating lease liabilities of $2.8 million and $1.5 million, respectively, partially offset by increases in accounts payable of $0.1 million, and other assets of $0.7 million.

• For the six months ended June 30, 2023, changes in working capital resulted primarily from an increase in accounts receivable and accounts payable of $2.2 million and $12 million, respectively, partially offset by a decrease in accrued liabilities of $3.5 million and a decrease in operating lease liabilities of $1.9 million.

Net cash provided by operating activities was $5.9 million during the nine months ended September 30, 2024 compared to net cash used in operating activities of $9.2 million for the same period of 2023.

Consolidated net income for the nine months ended September 30, 2024 was $6.1 million compared to net income of $22.6 million for the nine months ended September 30, 2023.

During the nine months ended September 30, 2024, non-cash adjustments to net income totaled $8.7 million as compared to $25.8 million for the same period of 2023.

• For the nine months ended September 30, 2024 non-cash adjustments included non-cash positive adjustments of $0.9 million of stock compensation expense, $4.3 million amortization of contract assets and $1.7 million non-cash lease expense.

• 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 related to the partial forgiveness of the PPP loan, partially offset by $2.3 million paid-in-kind interest expense and non-cash negative adjustments of $0.6 million of stock compensation expense.

During the nine months ended September 30, 2024, changes in working capital used $8.9 million of cash as compared to $6.1 million for the same period of 2023.

• For the nine months ended September 30, 2024, changes in working capital resulted primarily from an increase in related party accounts receivable of $12.5 million, decreased third party accounts receivable of $1.3 million and net inventories of $0.5 million along with decreased accrued liabilities and operating lease liabilities of $1.7 million and $2.0 million, respectively, partially offset by increases in accounts payable of $5.7 million, and other assets of $0.8 million.

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

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2024 and 2023 was $0.2 million and $0.3 million, respectively, driven by capital expenditures in both periods.

Net cash used in investing activities for the nine months ended September 30, 2024 and 2023 was $0.5 million and $0.5 million, respectively, driven by capital expenditures in both periods.

Financing Activities

Net cash used in financing activities for the six months ended June 30, 2024 was $1.8 million and relates primarily to $1.7 million in net payments on the ABL, 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 $0.9 million for the six months ended June 30, 2023, and relates primarily to payments for forfeited options, payments to tax authorities for shares withheld from employees and payments on finance leases, partially offset by proceeds from stock issuances.

Net cash used in financing activities for the nine months ended September 30, 2024 was $6.3 million and relates primarily to $6.1 million in net payments on the ABL, payments for loan origination costs, 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 provided by financing activities was $1.9 million for the nine months ended September 30, 2023, and relates primarily to payments for forfeited options, payments for loan origination costs, payments to tax authorities for shares withheld from employees and payments on finance leases, offset by $3.4 million in net proceeds from the ABL.

Critical Accounting Policies and Estimates

1 unchanged sentence

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 2023 Annual Report describes the critical accounting policies and estimates used in the preparation of the Company’s condensed consolidated financial statements.

Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company’s 2023 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 2023 Annual Report describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis