TETRA TECHNOLOGIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022 (“2021 Annual Report”). This discussion includes forward-looking statements that involve certain risks and uncertainties. Business Overview We are an industrial and oil and gas products and services company operating on six continents, focused on bromine-based completion fluids, calcium chloride, water management solutions, frac flowback and production well testing services. Calcium chloride is used in the oil and gas industry, and also has broad industrial applications to the agricultural, road, food and beverage and lithium production markets. We are composed of two segments – Completion Fluids & Products Division and Water & Flowback Services Division. Customer activity levels continued to trend upward as sustained high oil prices increased to an average of approximately $109 per barrel for the second quarter of 2022, and natural gas prices averaged $7.50 per million Btu. As a result, second quarter consolidated revenue of $270.8 million is very comparable to the pre-pandemic period, but with significantly fewer operating frac crews in the United States. Completion Fluids & Products Division revenues were slightly higher sequentially, with the seasonal increase for our Northern Europe industrial chemicals business partially offset by lower Gulf of Mexico and international fluid sales as the first quarter benefited from sales pulling forward from the second quarter. However with much higher oil prices continuing to drive demand, revenues were significantly higher compared to the prior year quarter, primarily due to higher completions activity in the Gulf of Mexico and international markets. While drilling and completion activity has not returned to pre-pandemic levels, we have continued to successfully leverage opportunities to expand integrated services to completion fluids customers, resulting in Completion Fluids & Products revenues reaching near pre-pandemic levels. Our Completion Fluids & Products Division also continued to ship TETRA's high purity zinc bromine solution, TETRA PureFlow ® to Eos Energy Enterprises, Inc. ("Eos") (NASDAQ: EOSE) under our recent strategic partnership. Our sales to Eos increased materially during the second quarter compared to the first quarter of 2022 as Eos expands its production capacity to meet its growing backlog and to service its increasing number of identified opportunities We have not historically directly purchased any significant volumes of raw materials from Russia nor from Ukraine. Additionally, we have not historically sold any significant volumes of product to Russia or to Ukraine. However, one of our raw material providers sourced one of their raw materials from Russia or Ukraine. Because of the ongoing conflict between Russia and Ukraine, toward the end of the first quarter, our primary European supplier of certain raw materials advised us of supply constraints with one of their suppliers of a key raw material used in their manufacturing process. This raw material is a widely used, global commodity but the disruption to the current supply chain has caused some impact on their production which in turn has caused a reduction in delivered volumes of certain raw materials to our plant in Finland where we manufacture calcium chloride, which has decreased our calcium chloride production volumes and had some impact on second quarter margins. Our supplier has sourced their material from an alternative location and resumed supplying reduced volumes to us. We are also continuing to work with secondary and tertiary raw material providers on options to address the situation and mitigate the financial impact and we are told from our primary provider that they expect improved deliveries and a more normalized supply chain as they progress through the second half of the year. The exact financial impact remains difficult to quantify at this time and is dependent on our ability to find alternative sources of certain raw materials from suppliers not directly or indirectly impacted by the conflict or the ability of our primary supplier to source alternative raw material sources. Our Water & Flowback Services revenues improved over the first quarter and significantly compared to the second quarter of 2021 due to a combination of continued increases in customer activity levels and continued price recovery, particularly in the United States onshore land business. The second quarter revenue for our United States land business was the highest since the third quarter of 2019, despite significantly lower drilling and fracking activity compared to prior years. We continue to add TETRA SandStorm TM (“SandStorm”) units to United States onshore markets at rates approaching pre-pandemic pricing. We continue to see strong utilization for our SandStorm technology and continue to invest additional capital for new units as activity remains strong. During the quarter, we secured a patent on this unique sand filtration technology. Our focus on produced water treatment and recycling continues to generate results with four new recycling projects added during the second quarter. Revenue growth 17 Table of Contents was a result of the continued increase in the number of integrated projects and customers, high utilization of SandStorm units and market share gains with private oil and gas operators. We are committed to pursuing low-carbon energy initiatives that leverage our fluids and aqueous chemistry core competencies, our significant bromine and lithium assets and technologies, and our leading calcium chloride production capabilities. During the first quarter of 2022, we completed the drilling of our Arkansas exploration well and, during the second quarter of 2022, we secured samples for multiple Smackover formation brine zones. Ongoing bromine and lithium fluid analysis from these samples is being used to progress a resource report for both the bromine and lithium in our approximately 31,100 net acre brine leases in Arkansas. The resource report is expected to be completed in the third quarter of 2022. We are also in the process of completing an engagement agreement with an engineering firm to begin work on a Preliminary Economic Assessment (“PEA”) to determine the economics of developing 3,600 net acres under which we hold exclusive brine rights to meet the demand for bromine-based fluids for both a growing oil and gas market as well as a rapidly growing energy storage market. In addition to the bromine, we plan to ultimately extract lithium from the same brine feed, which we expect will greatly benefit the financial returns for the project. Substantially all of our former Compression Division’s operations were conducted through our partially-owned CSI Compressco subsidiary. On January 29, 2021, we closed the sale of the general partner of CSI Compressco, which included the sale of the incentive distribution rights (“IDRs”) in CSI Compressco and approximately 23.1% of the outstanding limited partner interests in CSI Compressco, referred to as the “GP Sale.” We recorded a book gain of $120.6 million during 2021 in connection with the GP Sale. This gain, most of which was non-cash, was a function of CSI Compressco having a negative carrying value within our consolidated balance sheet due to our share of cumulative losses and distributions. We have reflected the operations of our former Compression Division as discontinued operations for all periods presented. See Note 2 – “Discontinued Operations” in the Notes to Consolidated Financial Statements for further information. 18 Table of Contents Results of Operations The following information should be read in conjunction with the Consolidated Financial Statements and the associated Notes contained elsewhere in this report. In November 2020, the SEC issued a final rule to modernize and simplify Management’s Discussion and Analysis and certain financial disclosure requirements in SEC Regulation S-K. As permitted by this final rule, the analysis herein reflects the optional approach to discuss results of operations on a sequential-quarter basis, which we believe will provide information that is most useful in assessing our quarterly results of operations going forward. Three months ended June 30, 2022 compared with three months ended March 31, 2022. Consolidated Comparisons Three Months Ended Period to Period Change June 30, March 31, $ Change % Change 2022 2022 (in thousands, except percentages) Revenues $ 140,716 $ 130,037 $ 10,679 8.2 % Gross profit 28,107 32,420 (4,313) (13.3) % Gross profit as a percentage of revenue 20.0 % 24.9 % Exploration and appraisal costs 634 1,930 (1,296) (67.2) % General and administrative expense 23,620 20,643 2,977 14.4 % General and administrative expense as a percentage of revenue 16.8 % 15.9 % Interest expense, net 3,610 3,324 286 8.6 % Other income, net (1,037) (2,411) 1,374 (57.0) % Income before taxes and discontinued operations 1,280 8,934 (7,654) (85.7) % Income before taxes and discontinued operations as a percentage of revenue 0.9 % 6.9 % (Benefit) provision for income taxes (479) 1,200 (1,679) NM (1) Income before discontinued operations 1,759 7,734 (5,975) (77.3) % Discontinued operations: Loss from discontinued operations, net of taxes (34) (15) (19) 126.7 % Net income 1,725 7,719 (5,994) (77.7) % Loss attributable to noncontrolling interests 20 1 19 NM Net income attributable to TETRA stockholders $ 1,745 $ 7,720 $ (5,975) (77.4) % (1) Percent change is not meaningful Consolidated revenues increased in the current quarter primarily due to an increase in overall activity for both the Completion Fluids & Products division and Water & Flowback Services division, as sustained high commodity prices continued for both crude oil and natural gas. See Divisional Comparisons section below for a more detailed discussion of the change in our revenues. Consolidated gross profit as a percentage of revenue decreased primarily due to the $3.8 million insurance settlement received in March 2022 from prior damage to our Lake Charles facility, and $2.3 million of impairments recognized in the current quarter. See Divisional Comparisons section below for additional discussion. Consolidated exploration and appraisal costs decreased as the drilling of our exploratory brine well in Arkansas was completed during the first quarter of 2022 and sample analysis continued during the second quarter. Consolidated general and administrative expenses increased primarily due to $2.3 million of increased salary and employee expenses. Higher salary expenses were mainly due to increased short and long-term variable incentive costs driven by strong year-to-date financial and stock price performance, as well as divisional headcount additions to support increased activity levels. 19 Table of Contents Consolidated other income, net, decreased in the current quarter, compared to the prior quarter primarily due to the change in the unit price of the CSI Compressco common units we retained, from a $1.1 million gain in the prior quarter to a $0.5 million loss in the current period, and a $0.8 million unrealized loss from our investment in Standard Lithium shares received in April 2022. These decreases are partially offset by a $0.6 million unrealized gain on our investment in CarbonFree recognized during the second quarter, as well as a $0.3 million increase in gains on asset sales. Consolidated benefit for income tax was $0.5 million, during the current quarter, compared to a $1.2 million expense during the prior quarter. Our consolidated effective tax rate for the three months ended June 30, 2022 was negative 37.4% due primarily to the impact that changes in the full-year forecast had on our interim reporting under Accounting Standards Codification 740, Income Taxes. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the United States as well as in certain non-U.S. jurisdictions. Divisional Comparisons Completion Fluids & Products Division Three Months Ended Period to Period Change June 30, March 31, $ Change % Change 2022 2022 (in thousands, except percentages) Revenues $ 74,798 $ 73,194 $ 1,604 2.2 % Gross profit 22,062 26,147 (4,085) (15.6) % Gross profit as a percentage of revenue 29.5 % 35.7 % Exploration and appraisal costs 635 1,930 (1,295) (67.1) % General and administrative expense 6,184 6,059 125 2.1 % General and administrative expense as a percentage of revenue 8.3 % 8.3 % Interest income, net (283) (323) 40 (12.4) % Other (income) expense, net 265 (811) 1,076 (132.7) % Income before taxes $ 15,261 $ 19,292 $ (4,031) (20.9) % Income before taxes as a percentage of revenue 20.4 % 26.4 % Revenues for our Completion Fluids & Products Division increased slightly as the seasonal uplift from our Northern European chemicals business was partially offset by lower Gulf of Mexico and international fluid sales as the first quarter benefited from sales pulled forward from the second quarter. Gross profit for our Completion Fluids & Products Division decreased compared to the prior quarter period due to a $3.8 million insurance settlement received in March 2022 from damage to our Lake Charles facility. Completion Fluids & Products Division profitability in future periods will continue to be affected by the mix of its products and services, market demand for our products and services, drilling and completions activity, supply chain challenges and inflationary pressures. Pretax income for our Completion Fluids & Products Division decreased primarily due to the $4.1 million lower gross profit described above, a $1.1 million increase in foreign exchange losses and a $0.8 million unrealized loss from our investment in Standard Lithium shares received in April 2022. These decreases were partially offset by a $1.3 million decrease in costs associated with the conclusion of our exploratory brine well drilled during the first quarter of 2022 as well as $0.6 million unrealized gain on our investment in CarbonFree recognized during the second quarter. 20 Table of Contents Water & Flowback Services Division Three Months Ended Period to Period Change June 30, March 31, $ Change % Change 2022 2022 (in thousands, except percentages) Revenues $ 65,918 $ 56,843 $ 9,075 16.0 % Gross profit 6,214 6,462 (248) (3.8) % Gross profit as a percentage of revenue 9.4 % 11.4 % General and administrative expense 5,894 4,238 1,656 39.1 % General and administrative expense as a percentage of revenue 8.9 % 7.5 % Interest income, net (2) — (2) NM Other income, net (1,322) (458) (864) 188.6 % Income before taxes $ 1,644 $ 2,682 $ (1,038) (38.7) % Income before taxes as a percentage of revenue 2.5 % 4.7 % Revenues for our Water & Flowback Services Division increased for both water management and production testing in the current quarter compared to the prior quarter, primarily due to the continued higher overall customer activity in the North America onshore business. The higher customer activity can be attributed to sustained high commodity prices. Gross profit for our Water & Flowback Services Division decreased compared to the prior quarter due to impairment expenses for obsolete assets and inventory. Excluding the impairment, gross profit is consistent with increased activity level with similar pricing fall through. We expect the third-quarter Adjusted EBITDA margins to further improve reflecting continued better pricing for our United States onshore land business, stronger activity levels and the commencement of operations of two early production facilities in Argentina. The Water & Flowback Services Division pretax income decreased due to a decrease in gross profit and an increase in general and administrative expense. General and administrative expense increased due to higher compensation and benefits from higher salaries, additional headcount as well as a $0.5 million increase professional services from contract labor. Income for our Water & Flowback Services Division also increased due to a $0.2 million increase in gains on sales of assets and $0.7 million increase in foreign exchange gains. Corporate Overhead Three Months Ended Period to Period Change June 30, March 31, $ Change % Change 2022 2022 (in thousands, except percentages) Depreciation and amortization $ 171 $ 191 $ (20) (10.5) % General and administrative expense 11,542 10,346 1,196 11.6 % Interest expense, net 3,895 3,647 248 6.8 % Other (income) expense, net 20 (1,141) 1,161 (101.8) % Loss before taxes $ (15,628) $ (13,043) $ (2,585) 19.8 % Corporate overhead pretax loss increased due to a $1.2 million increase in general and administrative expense and a $1.2 million decrease in other (income) expense, net. General and administrative expense increased compared to the prior quarter primarily due to higher salary costs associated with the impact of higher stock price on certain long-term incentive awards and the impact of current year financial performance on accrued short-term incentives. Other (income) expense, net decreased compared to the prior quarter, from a $1.1 million gain in the prior quarter to a $0.5 million loss in the current period, due to the change in the unit price of the CSI Compressco common units we retained. These changes were partially offset by a $0.5 million increase in foreign exchange gains. 21 Table of Contents Six months ended June 30, 2022 compared with six months ended June 30, 2021. Consolidated Comparisons Six months ended June 30, Period to Period Change 2022 2021 $ Change % Change (in thousands, except percentages) Revenues $ 270,753 $ 179,650 $ 91,103 50.7 % Gross profit 60,527 24,302 36,225 149.1 % Gross profit as a percentage of revenue 22.4 % 13.5 % Exploration and appraisal costs 2,564 — 2,564 100.0 % General and administrative expense 44,263 37,363 6,900 18.5 % General and administrative expense as a percentage of revenue 16.3 % 20.8 % Interest expense, net 6,934 8,290 (1,356) (16.4) % Other income, net (3,448) (4,306) 858 (19.9) % Income (loss) before taxes and discontinued operations 10,214 (17,045) 27,259 159.9 % Income (loss) before taxes and discontinued operations as a percentage of revenue 3.8 % (9.5) % (Benefit) provision for income taxes 721 1,552 (831) (53.5) % Income (loss) before discontinued operations 9,493 (18,597) 28,090 151.0 % Discontinued operations: Income (loss) from discontinued operations, net of taxes (49) 120,864 (120,913) (100.0) % Net income 9,444 102,267 (92,823) (90.8) % Loss (income) attributable to noncontrolling interests 21 (306) 327 (106.9) % Net income attributable to TETRA stockholders $ 9,465 $ 101,961 $ (92,496) (90.7) % Consolidated revenues increased in the current year primarily due to improving industry conditions compared to the prior year for both the Completion Fluids & Products division and the Water Management & Flowback division. See Divisional Comparisons section below for a more detailed discussion of the change in our revenues. Consolidated gross profit increased in the current year primarily due to the increase in revenue, partially offset by an increase in costs associated with the higher activity levels described above. Gross profit as a percentage of revenue also increased, primarily due to the significant improvement in profitability for our Water and Flowback Services Division, as well as a $3.8 million insurance settlement received in March 2022 associated with damage to our Lake Charles facility in 2020. Consolidated exploration and appraisal costs were $2.6 million during the current year due to the exploration and sample analysis costs associated with our exploratory brine well in Arkansas. Consolidated general and administrative expenses increased compared to the prior year, primarily due to $7.6 million of increased wage and benefit related expenses driven by reinstatement of full salaries and 401K match as well as higher short and long-term incentive expenses, and divisional headcount additions as operational activity levels increased. Higher wage and benefit related expenses were partially offset by a $1.5 million decrease in professional fees primarily due to the GP Sale in the first quarter of the prior year. Consolidated interest expense, net, decreased in the current year primarily due to $50.5 million of repayments of our term credit facility during 2021. Consolidated other income, net, decreased in the current year, compared to the prior year primarily due to a $5.2 million net decrease in unrealized gains on investments in CSI Compressco, Standard Lithium and CarbonFree, partially offset by a $3.0 million warrants fair value adjustment recognized in the prior year, a $0.6 million increase in foreign exchange gains, and a $0.3 million increase in gains on sales of assets. 22 Table of Contents Consolidated provision for income taxes was $0.7 million during the current year, compared to $1.6 million during the prior year. Our consolidated effective tax rate for the current year of 7.1% was primarily due to income generated during the current year, partially offset by the utilization of net operating loss carryforwards in the United States as well as in certain non-U.S. jurisdictions for which a valuation allowance had been established. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the United States as well as in certain non-U.S. jurisdictions. Consolidated loss from discontinued operations, net of taxes, for the prior year includes a $120.6 million primarily non-cash accounting gain from the deconsolidation of CSI Compressco. This gain is net of a $0.01 million tax provision after taking into consideration utilization of net operating loss and credit carryforwards. Consolidated loss (income) attributable to noncontrolling interests included $0.3 million income from the prior year associated with CSI Compressco’s results for the month of January, prior to the GP Sale. Divisional Comparisons Completion Fluids & Products Division Six months ended June 30, Period to Period Change 2022 2021 $ Change % Change (in thousands, except percentages) Revenues $ 147,992 $ 111,128 $ 36,864 33.2 % Gross profit 48,209 30,194 18,015 59.7 % Gross profit as a percentage of revenue 32.6 % 27.2 % Exploration and appraisal costs 2,564 — 2,564 100.0 % General and administrative expense 12,243 8,904 3,339 37.5 % General and administrative expense as a percentage of revenue 8.3 % 8.0 % Interest income, net (606) (300) (306) 102.0 % Other income, net (545) (3,848) 3,303 (85.8) % Income before taxes $ 34,553 $ 25,438 $ 9,115 35.8 % Income before taxes as a percentage of revenue 23.3 % 22.9 % Revenues for our Completion Fluids & Products Division increased compared to the prior year primarily due to increased International and Gulf of Mexico completion fluids product sales as a result of increased activity following the significant improvement in commodity prices and leveraging opportunities to expand services to completion fluids customers. Gross profit for our Completion Fluids & Products Division increased compared to the prior year due to more revenues from higher-margin completion fluids services and products, as well as a $3.8 million insurance settlement received in March 2022 from damage to our Lake Charles facility in 2020. Pretax income for our Completion Fluids & Products Division increased compared to the prior year driven by higher gross profit, partially offset by $2.6 million of costs associated with the exploratory brine well drilled during the current year and a $3.3 million increase in general and administrative costs due to reinstatement of full salaries and 401K match as well as higher short and long-term incentive expenses, and divisional headcount additions to support higher activity levels. In addition, other income, net decreased due to the $3.5 million decrease in income from our Standard Lithium shares, most of which were sold during the fourth quarter of 2021, Other income, net also includes a $0.6 million unrealized gain on our investment in CarbonFree recognized during the second quarter. 23 Table of Contents Water & Flowback Services Division Six months ended June 30, Period to Period Change 2022 2021 $ Change % Change (in thousands, except percentages) Revenues $ 122,761 $ 68,522 $ 54,239 79.2 % Gross profit (loss) 12,676 (5,479) 18,155 NM Gross profit (loss) as a percentage of revenue 10.3 % (8.0) % General and administrative expense 10,132 5,895 4,237 71.9 % General and administrative expense as a percentage of revenue 8.3 % 8.6 % Interest income, net (1) (518) 517 (99.8) % Other income, net (1,781) (398) (1,383) 347.5 % Income (loss) before taxes $ 4,326 $ (10,458) $ 14,784 NM Income (loss) before taxes as a percentage of revenue 3.5 % (15.3) % Revenues for our Water & Flowback Services Division increased for both water management and production testing due to much overall higher customer drilling and completion activity. Customer activity levels have continued to improve, primarily in our North America land business as commodity prices have not only recovered but remained high for both crude oil and natural gas compared to the prior year period. Gross profit for our Water & Flowback Services Division improved substantially from a loss in the prior year to double-digit profit in the current year, primarily due to higher revenues resulting from the increased activity levels described above and pricing improvements as activity levels improved. Pretax income for our Water & Flowback Services Division increased in the current year primarily due to an improvement in the gross profit described above and a $0.9 million increase in foreign exchange gains, offset by an increase in general and administrative expense primarily due a $3.2 million increase in salary and employee expense due to reinstatement of full salaries and 401K match as well as higher short and long-term incentive expenses, and divisional headcount additions to support higher activity levels; a $0.6 million increase in general expenses primarily due to increased rent to support higher activity; and a $0.4 million increase in professional services also supporting higher activity. Corporate Overhead Six months ended June 30, Period to Period Change 2022 2021 $ Change % Change (in thousands, except percentages) Depreciation and amortization 363 418 (55) (13.2) % General and administrative expense $ 21,888 $ 22,564 $ (676) (3.0) % Interest expense, net 7,541 9,107 (1,566) (17.2) % Other income, net (1,121) (58) (1,063) NM Loss before taxes $ (28,671) $ (32,031) $ 3,360 (10.5) % Corporate overhead pretax loss decreased due to a $1.6 million decrease in interest expense, net due to lower debt levels, as well as a $1.1 million increase in other income, net. Other income, net increased primarily due to a $3.0 million warrants fair value adjustment recognized in the prior year and a $0.6 million increase in foreign exchange gains, partially offset by a $2.4 million decrease in income related to unit price changes of our investment in CSI Compressco. 24 Table of Contents Non-GAAP Financial Measures We use U.S. GAAP financial measures such as revenues, gross profit, income (loss) before taxes, and net cash provided by operating activities, as well as certain non-GAAP financial measures, including Adjusted EBITDA, as performance measures for our business. Adjusted EBITDA . We view Adjusted EBITDA as one of our primary management tools, and we track it on a monthly basis, both in dollars and as a percentage of revenues (typically compared to the prior month, prior year period, and to budget). We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, impairments, exploration and appraisal costs and certain other non-cash charges and non-recurring adjustments. Adjusted EBITDA is used as a supplemental financial measure by our management to: • evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis; and • determine our ability to incur and service debt and fund capital expenditures. The following table reconciles net income (loss) to Adjusted EBITDA for the periods indicated: Three Months Ended June 30, 2022 Completion Fluids & Products Water & Flowback Services Corporate SG&A Other and Eliminations Total (in thousands, except percentages) Revenue $ 74,798 $ 65,918 $ — $ — $ 140,716 Net income (loss) before taxes and discontinued operations 15,261 1,644 (11,542) (4,083) 1,280 Impairments 220 2,042 — — 2,262 Exploration and appraisal costs 634 — — — 634 Adjustment to long-term incentives — — 1,450 — 1,450 Transactions and other expenses — 556 — — 556 Adjusted income (loss) before taxes and discontinued operations $ 16,115 $ 4,242 $ (10,092) $ (4,083) $ 6,182 Interest expense, net (283) (2) — 3,895 3,610 Depreciation and amortization 1,873 5,705 — 168 7,746 Equity compensation expense — — 1,159 — 1,159 Adjusted EBITDA $ 17,705 $ 9,945 $ (8,933) $ (20) $ 18,697 Adjusted EBITDA as % of revenue 23.7 % 15.1 % 13.3 % Three Months Ended March 31, 2022 Completion Fluids & Products Water & Flowback Services Corporate SG&A Other and Eliminations Total (in thousands, except percentages) Revenue $ 73,194 $ 56,843 $ — $ — $ 130,037 Net income (loss) before taxes and discontinued operations 19,292 2,682 (10,346) (2,694) 8,934 Insurance settlement (3,750) — — — (3,750) Exploration and appraisal costs 1,930 — — — 1,930 Adjustment to long-term incentives — — 784 — 784 Former CEO stock appreciation right expense — — 472 — 472 Adjusted income (loss) before taxes and discontinued operations $ 17,472 $ 2,682 $ (9,090) $ (2,694) $ 8,370 Interest expense, net (323) — — 3,647 3,324 Depreciation and amortization 1,948 5,543 — 188 7,679 Equity compensation expense — — 1,104 — 1,104 Adjusted EBITDA $ 19,097 $ 8,225 $ (7,986) $ 1,141 $ 20,477 Adjusted EBITDA as % of revenue 26.1 % 14.5 % 15.7 % 25 Table of Contents Adjusted EBITDA is a financial measure that is not in accordance with U.S. GAAP and should not be considered an alternative to net income, operating income, cash provided by operating activities, or any other measure of financial performance presented in accordance with U.S. GAAP. This measure may not be comparable to similarly titled financial metrics of other companies, as other companies may not calculate Adjusted EBITDA in the same manner as we do. Management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable U.S. GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes. Liquidity and Capital Resources We believe that our capital structure allows us to meet our financial obligations despite current uncertain operating conditions and financial markets. Our liquidity at the end of the second quarter was $103.0 million. Liquidity is defined as unrestricted cash plus availability under the ABL Credit Agreement, Swedish Credit Facility and Finland Credit Agreement. Information about the terms and covenants of our debt agreements can be found in our 2021 Annual Report and in Note 6 - Long Term Debt and Other Borrowings. Our consolidated sources and uses of cash, which include cash activity from our former Compression Division for January 2021 prior to the closing of the GP sale, are as follows: Six Months Ended June 30, 2022 2021 (in thousands) Operating activities $ 23,803 $ 7,607 Investing activities (15,919) (10,451) Financing activities (2,774) (29,775) Operating Activities Consolidated cash flows provided by operating activities increased compared to the first six months of 2021 primarily due to an increase in cash profit, partially offset by the effect of working capital movements and $0.9 million of prior-year cash flows provided by operating activities generated by CSI Compressco in January prior to closing of the GP Sale. Investing Activities Total cash capital expenditures during the first six months of 2022 were $20.4 million, which reflects front-loading our expected full year expenditures to accommodate industry-wide activity recoveries. Our Water & Flowback Services Division spent $15.9 million on capital expenditures, primarily to deploy additional SandStorm units to meet increased demands and maintain, automate and upgrade its water management and flowback equipment fleet. Water and Flowback Services Division capital expenditures also included expenditures related to construction of early production facilities in Argentina, including approximately $2.0 million of costs that were reimbursed by customers. Our Completion Fluids & Products Division spent $4.4 million on capital expenditures. Investing activities during the first six months of 2022 included a $3.8 million insurance settlement received in March 2022 from damage to our Lake Charles facility in 2020. Historically, a significant majority of our planned capital expenditures have been related to identified opportunities to grow and expand our existing businesses. We are also focused on enhancing shareholder value by capitalizing on our key mineral assets, brine mineral extraction expertise, and deep chemistry competency to expand our offerings into the low carbon energy markets. However, we continue to review all capital expenditure plans carefully in an effort to conserve cash. We currently have no long-term capital expenditure commitments. If the forecasted demand for our products and services increases or decreases, the amount of planned expenditures on growth and expansion may be adjusted. 26 Table of Contents Lithium and Bromine Exploration Targets We have rights to the brine underlying our approximately 31,100 net acres of brine leases in the Smackover Formation in Southwest Arkansas, including rights to the bromine and lithium contained in the brine. With respect to approximately 27,500 acres of that total acreage, we had previously entered into an agreement granting Standard Lithium an option to acquire lithium rights. The agreements governing this option contemplate a 2.5% royalty that Standard Lithium would pay us based on gross lithium revenues. Additional information on these exploration targets is described in Part I, “Item 2. Properties” in our 2021 Annual Report . In August 2021, we announced the completion of a preliminary technical assessment by an independent geological consulting firm to assess lithium and bromine exploration targets in our approximately 31,100 net acres. During the first six months 2022, we incurred $2.6 million to complete the drilling of our Arkansas exploration well and obtain and analyze fluid samples for multiple Smackover formation brine zones. Ongoing bromine and lithium fluid analysis from these samples is being used to progress a resource report for both the bromine and lithium in our approximately 31,100 net acre brine leases in Arkansas. The resource report is expected to be completed in the third quarter of 2022. We have engaged an engineering firm to begin work on a PEA to determine the economics of developing 3,600 net acres under which we hold exclusive brine rights to meet the demand for bromine-based fluids for both a growing oil and gas market as well as a rapidly growing energy storage market. In addition to the bromine, we plan to ultimately extract lithium from the same brine feed which we expect will greatly benefit the financial returns for the project. Financing Activities As a result of TETRA’s strong cash flow from operations in 2020 and the proceeds from the GP Sale, during the first six months of 2021, we repaid $29.3 million on our term credit agreement. We repaid an additional $21.0 million on our term credit agreement during 2021 using proceeds from the sale of Standard Lithium shares and cash flows from operations. Our financing activities for the fist six months of 2022 include $1.2 million of capital lease payments associated with equipment leased for the early production facilities in Argentina. We may supplement our existing cash balances and cash flow from operating activities with short-term borrowings, long-term borrowings, issuances of equity and debt securities, and other sources of capital. We are aggressively managing our working capital and capital expenditure needs in order to maximize our liquidity in the current environment. Long-Term Debt Asset-Based Credit Agreement . As of June 30, 2022, our ABL Credit Agreement provides for a senior secured revolving credit facility of up to $80.0 million, with a $20.0 million accordion. The credit facility is subject to a borrowing base to be determined by reference to the value of inventory and accounts receivable, and includes a sublimit of $20.0 million for letters of credit, a swingline loan sublimit of $11.5 million, and a $15.0 million sub-facility subject to a borrowing base consisting of certain trade receivables and inventory in the United Kingdom. The amounts we may borrow under the ABL Credit Agreement are derived from our accounts receivable, certain accrued receivables and certain inventory. Changes in demand for our products and services have an impact on our eligible accounts receivable, accrued receivables and the value of our inventory, which could result in significant changes to our borrowing base and therefore our availability under our ABL Credit Agreement. As of June 30, 2022, we had zero outstanding and $6.0 million in letters of credit and guarantees against our ABL Credit Agreement and availability of $61.8 million, subject to compliance with the covenants, borrowing base, and other provisions of the ABL Credit Agreement. Swedish Credit Facility . In January 2022, the Company entered into a revolving credit facility for seasonal working capital needs of subsidiaries in Sweden. As of June 30, 2022, we had less than $0.1 million outstanding and availability of approximately $4.9 million United States dollars under this agreement. During each year, all outstanding loans under the Swedish Credit Facility must be repaid for at least 30 consecutive days. Borrowings 27 Table of Contents bear interest at a rate of 2.95% per annum. The Swedish Credit Facility expires on December 31, 2022 and the Company intends to renew it annually. Finland Credit Agreement. The Company also entered into a new credit agreement guaranteed by certain accounts receivable and inventory in Finland (“Finland Credit Agreement”). As of June 30, 2022, there were US$1.4 million of letters of credit outstanding against the Finland Credit Agreement. Term Credit Agreement . The Term Credit Agreement is scheduled to mature on September 10, 2025. Our Term Credit Agreement requires us to offer to prepay a percentage of Excess Cash Flow (as defined in the Term Credit Agreement) within five business days of filing our Annual Report. As of July 29, 2022, $163.1 million in aggregate principal amount of our Term Credit Agreement is outstanding. Other Sources and Uses of Cash In addition to the aforementioned credit facilities and senior notes, we fund our short-term liquidity requirements from cash generated by our operations and from short-term vendor financing. In addition, as of June 30, 2022, the market value of our investments in CSI Compressco and Standard Lithium were $6.9 million and $1.7 million, respectively, with no holding restrictions on our ability to monetize our interest. We also hold an investment in convertible notes issued by CarbonFree valued at $5.6 million as of June 30, 2022, excluding accrued interest. In addition, we are party to agreements in which Standard Lithium has the right to explore, and an option to acquire the right to produce and extract Lithium in our Arkansas leases as well as additional potential resources in the Mojave region of California. We received 400,000 shares of Standard Lithium stock during the second quarter of 2022 under the terms of this agreement. On May 5, 2022, we filed a universal shelf Registration Statement on Form S-3 with the SEC. On May 17, 2022, the Registration Statement on Form S-3 was declared effective by the SEC. Pursuant to this registration statement, we have the ability to sell debt or equity securities in one or more public offerings up to an aggregate public offering price of $400 million. This shelf registration statement currently provides us additional flexibility with regards to potential financing that we may undertake when market conditions permit or our financial condition may require. Should additional capital be required, the ability to raise such capital through the issuance of additional debt or equity securities may currently be limited. Instability or volatility in the capital markets at the times we need to access capital may affect the cost of capital and the ability to raise capital for an indeterminable length of time. If it is necessary to issue additional equity to fund our capital needs, additional dilution of our common stockholders will occur. We periodically evaluate engaging in strategic transactions and may consider divesting non-core assets where our evaluation suggests such transactions are in the best interest of our business. In challenging economic environments, we may experience increased delays and failures by customers to pay our invoices. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have an adverse effect on our liquidity. An increase of unpaid receivables would also negatively affect our borrowing availability under the ABL Credit Agreement. As of June 30, 2022, we had no “off balance sheet arrangements” that may have a current or future material effect on our consolidated financial condition or results of operations. Critical Accounting Policies and Estimates There have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed in our 2021 Annual Report . In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material. 28 Table of Contents Commitments and Contingencies Litigation For information regarding litigation, see - Note 7 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements and Part II, “Item 1. Legal Proceedings” in this report. Long-Term Debt For information on our credit agreements, see our 2021 Annual Report and Note 6 - “Long-Term Debt and Other Borrowings” in the Notes to Consolidated Financial Statements. Leases We have operating leases for some of our transportation equipment, office space, warehouse space, operating locations, and machinery and equipment. Information about the terms and covenants of our lease agreements can be found in our 2021 Annual Report . Product Purchase Obligations For information on product purchase obligations, see - Note 7 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements. Cautionary Statement for Purposes of Forward-Looking Statements This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements in this Quarterly Report are identifiable by the use of the following words, the negative of such words, and other similar words: “anticipates”, “assumes”, “believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “goal”, “intends”, “may”, “might”, “plans”, “predicts”, “projects”, “schedules”, “seeks”, “should”, “targets”, “will”, and “would”. These forward-looking statements include statements concerning the exploration targets of lithium and bromine, the potential extraction of lithium and bromine from the leased acreage and the economic viability thereof, the timing and cost of such activities, and statements regarding the Company's beliefs, expectations, plans, goals, future events and performance, and other statements that are not purely historical. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our 2021 Annual Report , and those described from time to time in our future reports filed with the SEC. 29 Table of Contents