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 should also be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on February 27, 2023 (“2022 Annual Report”). This discussion includes forward-looking statements that involve certain risks and uncertainties. Business Overview We are an energy services and solutions company operating on six continents, focused on calcium chloride, completion fluids and associated products and services, comprehensive water management solutions, frac flowback, production well testing and offshore rig cooling. 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. Second-quarter consolidated revenue of $175.5 million reflects the highest quarterly revenue in the Company’s history, excluding discontinued operations. Our strong second-quarter results reflect our employees delivering operational and financial excellence in our core businesses while simultaneously advancing our key strategic initiatives. Completion Fluids & Products Division revenues increased 42% sequentially, resulting in a new segment record high driven by growth in international markets and the Gulf of Mexico, as well as the seasonal peak for our Northern Europe industrial chemicals business. Our strong offshore results have benefited from our recent investments to expand fluids capacity in the North Sea, Brazil and the Gulf of Mexico. Our Water & Flowback Services revenues remained stable compared to the first quarter of 2023 and improved compared to the prior year, driven primarily by the first two early production facilities in Latin America that became operational in the third quarter of 2022 and the third early production facility which became operational in May 2023. The early production facilities are longer-term, high-margin projects with stable and predictable cash flows. Our growing fleet of TETRA SandStorm TM advanced cyclone technology separators also remains at high utilization with continued market penetration and positive pricing progression. 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. In June 2023, we entered into a memorandum of understanding (“MOU”) with Saltwerx LLC (“Saltwerx”), an indirect wholly owned subsidiary of a Fortune 500 company, relating to a newly-proposed brine unit in the Smackover Formation in Southwest Arkansas and potential bromine and lithium production from brine produced from the unit. The binding provisions of the MOU provide, among other things, that: (i) we will file an amended brine unit application (the “Application”) covering approximately 6,138 acres, which expands the size of the unit area and also combines brine acreage that was previously leased by each of TETRA and Saltwerx (the “Brine Unit”), with the Arkansas Oil & Gas Commission (“AOGC”) and (ii) Saltwerx will provide a letter to us in support of the Application. We are evaluating results from the second exploratory well on our acreage in Arkansas. We expect to receive the well results during the third quarter with the intent to improve the accuracy of our lithium and bromine resource estimates. Additional steps are required before making a decision to develop the bromine assets, and include further studies to analyze the resource as well as completion of a pre-feasibility and/or feasibility study. 20 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. The analysis herein reflects the optional approach to discuss results of operations on a sequential-quarter basis, which we believe provides information that is most useful in assessing our quarterly results of operations. Three months ended June 30, 2023 compared with three months ended March 31, 2023. Consolidated Comparisons Three Months Ended Period to Period Change June 30, March 31, $ Change % Change 2023 2023 (in thousands, except percentages) Revenues $ 175,463 $ 146,209 $ 29,254 20.0 % Gross profit 49,155 36,323 12,832 35.3 % Gross profit as a percentage of revenue 28.0 % 24.8 % Exploration and pre-development costs 2,341 720 1,621 225.1 % General and administrative expense 26,225 23,191 3,034 13.1 % General and administrative expense as a percentage of revenue 14.9 % 15.9 % Interest expense, net 5,944 5,092 852 16.7 % Other income, net (6,435) (214) 6,221 NM (1) Income before taxes and discontinued operations 21,080 7,534 13,546 179.8 % Income before taxes and discontinued operations as a percentage of revenue 12.0 % 5.2 % Provision for income taxes 2,875 1,489 1,386 93.1 % Income before discontinued operations 18,205 6,045 12,160 201.2 % Discontinued operations: Loss from discontinued operations, net of taxes (8) (12) (4) (33.3) % Net income 18,197 6,033 12,164 201.6 % Loss attributable to noncontrolling interests 18 7 11 157.1 % Net income attributable to TETRA stockholders $ 18,215 $ 6,040 $ 12,175 201.6 % (1) Percent change is not meaningful Consolidated revenues increased between the current and previous quarters primarily due to an increase in overall activity for the Completion Fluids & Products division lead by increased pricing and volume sales in the Northern European industrial chemicals market. See Divisional Comparisons section below for a more detailed discussion of the change in our revenues. Consolidated gross profit as a percentage of revenue increased primarily due to our Completion Fluids & Products division benefiting from increased overall activity levels and margins. See Divisional Comparisons section below for additional discussion. Consolidated exploration and pre-development costs increased primarily due to drilling costs associated with our second exploratory brine well in Arkansas. Consolidated general and administrative expenses increased compared to the prior year, primarily due to a $2.7 million increase in wage and benefit-related expenses driven by divisional headcount additions as operational activity levels increased, as well as higher short and long-term incentive expense. General and administrative expenses also increased $0.8 million due to a higher provision for credit losses, partially offset by a $0.6 million decrease in legal expenses. Consolidated other income, net, increased in the current quarter, compared to the prior quarter primarily due to the $4.7 million cumulative credit for exploration and pre-development costs reimbursable from Saltwerx, a $0.7 million increase in unrealized gain due to the change in the unit price of the CSI Compressco common units we own, a $0.3 million increase in unrealized gain from our Standard Lithium shares received in April 2022 and 2023 21 Table of Contents and a $0.4 million increase in unrealized gain from the change in fair value of the CarbonFree convertible note embedded option. Consolidated provision for income tax was $2.9 million during the current quarter, compared to a $1.5 million provision during the prior quarter. Our consolidated effective tax rate for the three months ended June 30, 2023 was 13.6% due to income generated during the quarter, partially offset by the utilization of net operating loss carryforwards in the United States and certain other 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 and certain other non-U.S. jurisdictions. Divisional Comparisons Completion Fluids & Products Division Three Months Ended Period to Period Change June 30, March 31, $ Change % Change 2023 2023 (in thousands, except percentages) Revenues $ 98,222 $ 69,042 $ 29,180 42.3 % Gross profit 37,133 25,010 12,123 48.5 % Gross profit as a percentage of revenue 37.8 % 36.2 % Exploration and pre-development costs 2,341 720 1,621 225.1 % General and administrative expense 8,551 7,173 1,378 19.2 % General and administrative expense as a percentage of revenue 8.7 % 10.4 % Interest expense (income), net 104 (395) 499 126.3 % Other income, net (5,819) (930) 4,889 525.7 % Income before taxes and discontinued operations $ 31,956 $ 18,442 $ 13,514 73.3 % Income before taxes and discontinued operations as a percentage of revenue 32.5 % 26.7 % Revenues for our Completion Fluids & Products Division increased primarily due to increased pricing and volumes for industrial chemical sales, including higher sales volume from the seasonal uplift in Northern Europe, as well as an increase in offshore activity levels. Gross profit for our Completion Fluids & Products Division increased compared to the prior quarter period primarily due to the pricing and sales volume impact mentioned above. Our industrial calcium chloride business reflects the seasonal peak in Europe, high production volumes, and supply chain benefits that yielded higher margins. Our profitability in future periods will continue to be affected by the mix of our products and services, market demand for our products and services, drilling and completions activity, supply chain challenges and inflationary pressures. Completion Fluids & Products Division exploration and pre-development costs associated with our potential Southwest Arkansas bromine development project increased $1.6 million due to a second exploratory well drilled during the current quarter, as well as ongoing engineering and design work. General and administrative expense for the division increased $1.4 million to support higher activity levels. Interest expense (income), net increased $0.5 million due to lower interest income on deposit accounts in Brazil and Europe. Other income, net increased primarily due to the $4.7 million cumulative credit for exploration and pre-development costs from Saltwerx, a $0.4 million unrealized gain from the change in fair value of the CarbonFree convertible note embedded option and a $0.3 million increase in unrealized gain from our investment in Standard Lithium shares, partially offset by a $0.5 million increase in foreign exchange losses. 22 Table of Contents Water & Flowback Services Division Three Months Ended Period to Period Change June 30, March 31, $ Change % Change 2023 2023 (in thousands, except percentages) Revenues $ 77,241 $ 77,167 $ 74 0.1 % Gross profit 12,893 11,422 1,471 12.9 % Gross profit as a percentage of revenue 16.7 % 14.8 % General and administrative expense 5,080 4,959 121 2.4 % General and administrative expense as a percentage of revenue 6.6 % 6.4 % Interest expense, net 27 27 — — % Other (income) expense, net (228) 58 286 493.1 % Income before taxes and discontinued operations $ 8,014 $ 6,378 $ 1,636 25.7 % Income before taxes and discontinued operations as a percentage of revenue 10.4 % 8.3 % Revenues for our Water & Flowback Services Division in the current quarter remained comparable to the prior quarter as higher revenues from our early production facilities in Latin America were offset by lower customer activity in the North America onshore business. Gross profit for our Water & Flowback Services Division increased compared to the prior quarter due to a revenue shift toward higher margin service offerings, including the early production facilities in Latin America. Gross profit as a percentage of revenue increased reflecting the continued margin expansion efforts driven by investments in technology, integration, digitalization and the benefit of our early production facilities in Argentina. While we have seen some signs of softness in certain land segments in the United States, pricing has remained relatively stable for our differentiated products and service offerings. The Water & Flowback Services Division income before taxes and discontinued operations increased primarily due to an improvement in the gross profit described above, as well as a $0.3 million increase in foreign exchange gains. Corporate Overhead Three Months Ended Period to Period Change June 30, March 31, $ Change % Change 2023 2023 (in thousands, except percentages) Depreciation and amortization $ 93 $ 109 $ (16) (14.7) % Impairments and other charges 777 — 777 100.0 % General and administrative expense 12,595 11,059 1,536 13.9 % Interest expense, net 5,813 5,460 353 6.5 % Other (income) expense, net (388) 658 1,046 159.0 % Loss before taxes and discontinued operations $ (18,890) $ (17,286) $ (1,604) 9.3 % Corporate overhead loss before taxes and discontinued operations increased primarily due to a $1.6 million increase in wages and benefits related expenses driven by higher short and long-term incentive expenses, a $0.8 million impairment associated with our corporate office lease, and a $0.4 million increase in interest expense due to an increase in the interest rate on our Term Credit Agreement. These expenses are partially offset by an increase in other (income) expense, net primarily due to a $0.7 million increase in unrealized gains related to unit price changes of our investment in CSI Compressco, and a $0.3 million increase in foreign exchange gains. 23 Table of Contents Six months ended June 30, 2023 compared with six months ended June 30, 2022. Consolidated Comparisons Six Months Ended June 30, Period to Period Change 2023 2022 $ Change % Change (in thousands, except percentages) Revenues $ 321,672 $ 270,753 $ 50,919 18.8 % Gross profit 85,478 60,527 24,951 41.2 % Gross profit as a percentage of revenue 26.6 % 22.4 % Exploration and pre-development costs 3,061 2,564 497 19.4 % General and administrative expense 49,416 44,263 5,153 11.6 % General and administrative expense as a percentage of revenue 15.4 % 16.3 % Interest expense, net 11,036 6,934 4,102 59.2 % Other income, net (6,649) (3,448) 3,201 92.8 % Income before taxes and discontinued operations 28,614 10,214 18,400 180.1 % Income before taxes and discontinued operations as a percentage of revenue 8.9 % 3.8 % Provision for income taxes 4,364 721 3,643 505.3 % Income before discontinued operations 24,250 9,493 14,757 155.5 % Discontinued operations: Loss from discontinued operations, net of taxes (20) (49) (29) (59.2) % Net income 24,230 9,444 14,786 156.6 % Loss attributable to noncontrolling interests 25 21 4 19.0 % Net income attributable to TETRA stockholders $ 24,255 $ 9,465 $ 14,790 156.3 % Consolidated revenues increased in the current year primarily due to improving industry conditions compared to the prior year for both our Completion Fluids & Products and Water & Flowback Services divisions, as well as the first two early production facilities in Argentina that commenced operations in the third quarter of 2022 and a third early production facility that became operational in the second quarter of 2023. 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 Water & Flowback Services division activity levels described above. Profit margins for both divisions also improved due to stronger market conditions and a shift to higher-margin projects. Consolidated exploration and pre-development costs increased $0.5 million compared to the prior year primarily due to drilling costs associated with our second exploratory brine well in Arkansas Consolidated general and administrative expenses increased compared to the prior year, primarily due to $4.6 million of increased wage and benefit-related expenses driven by divisional headcount additions as operational activity levels increased, as well as higher short and long-term incentive expense. General and administrative expenses also increased $0.5 million due to a higher provision for credit loss allowances on trade accounts receivable. Consolidated interest expense, net, increased in the current year primarily due to an increase in the interest rate on our Term Credit Agreement and higher borrowings under our ABL Credit Agreement. Consolidated other income, net, increased in the current year, compared to the prior year primarily due to a $4.7 million cumulative credit for exploration and pre-development costs reimbursable from Saltwerx, offset by a $1.9 million increase in foreign exchange losses. Consolidated provision for income taxes was $4.4 million during the current year, compared to $0.7 million during the prior year. Our consolidated effective tax rate for the current year was 15.3%, compared to 7.1% during the prior year. The increase in our tax provision and effective tax rate compared to the prior year was primarily due 24 Table of Contents to increased income generated in certain non-U.S. jurisdictions for which a net operating loss carryforward is not available for offset. 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 Six Months Ended June 30, Period to Period Change 2023 2022 $ Change % Change (in thousands, except percentages) Revenues $ 167,264 $ 147,992 $ 19,272 13.0 % Gross profit 62,142 48,209 13,933 28.9 % Gross profit as a percentage of revenue 37.2 % 32.6 % Exploration and pre-development costs 3,061 2,564 497 19.4 % General and administrative expense 15,723 12,243 3,480 28.4 % General and administrative expense as a percentage of revenue 9.4 % 8.3 % Interest income, net (291) (606) (315) (52.0) % Other income, net (6,749) (545) 6,204 NM (1) Income before taxes and discontinued operations $ 50,398 $ 34,553 $ 15,845 45.9 % Income before taxes and discontinued operations as a percentage of revenue 30.1 % 23.3 % (1) Percent change is not meaningful Revenues for our Completion Fluids & Products Division increased compared to the prior year primarily due to higher European industrial chemical sales volumes, as well as favorable pricing and customer mix. The division also benefited from recent capacity expansions following investments in Brazil, the Gulf of Mexico and the United Kingdom. Gross profit for our Completion Fluids & Products Division increased compared to the prior year due to increase in revenues. Gross profit as a percentage of revenue for our Completion Fluids & Products division increased primarily due to favorable pricing improvements. Our profitability in future periods will continue to be affected by the mix of our products and services, market demand for our products and services, drilling and completions activity, supply chain challenges and inflationary pressures. Income before taxes and discontinued operations for our Completion Fluids & Products Division increased compared to the prior year driven by higher gross profit and the $4.7 million cumulative credit for exploration and pre-development costs reimbursable from Saltwerx, partially offset by a $3.5 million increase in general and administrative costs due to higher compensation and short-term incentive expense due to increased activity levels, increased provision for credit loss allowances on trade accounts receivable and higher research and development expenses, as well as a $0.5 million increase in costs associated with the exploratory brine project compared to the prior period. 25 Table of Contents Water & Flowback Services Division Six Months Ended June 30, Period to Period Change 2023 2022 $ Change % Change (in thousands, except percentages) Revenues $ 154,408 $ 122,761 $ 31,647 25.8 % Gross profit 24,315 12,676 11,639 91.8 % Gross profit as a percentage of revenue 15.7 % 10.3 % General and administrative expense 10,039 10,132 (93) (0.9) % General and administrative expense as a percentage of revenue 6.5 % 8.3 % Interest expense (income), net 54 (1) 55 NM (1) Other income, net (172) (1,781) (1,609) (90.3) % Income before taxes and discontinued operations $ 14,394 $ 4,326 $ 10,068 232.7 % Income before taxes and discontinued operations as a percentage of revenue 9.3 % 3.5 % (1) Percent change is not meaningful Revenues for our Water & Flowback Services Division increased significantly for both water management and production testing due to overall higher customer drilling and completion activity. Customer activity levels have continued to improve, primarily in our North America land business. Revenues have also increased in Latin America due to two early production facilities that began operations in the third quarter of 2022 and a third early production facility that came on line in the second quarter of 2023. Gross profit for our Water & Flowback Services Division improved substantially from the prior year primarily due to higher revenues resulting from the increased activity levels described above and pricing improvements as activity levels improved and continuous efforts to increase margins through streamlining operations and automation. Income before taxes and discontinued operations for our Water & Flowback Services Division increased in the current year primarily due to an improvement in the gross profit described above, partially offset by a $0.9 million decrease in foreign exchange gains, and a $0.5 million decrease in gains on asset sales. Corporate Overhead Six Months Ended June 30, Period to Period Change 2023 2022 $ Change % Change (in thousands, except percentages) Depreciation and amortization $ 202 $ 363 $ (161) (44.4) % Impairments and other charges 777 — 777 100.0 % General and administrative expense 23,654 21,888 1,766 8.1 % Interest expense, net 11,273 7,541 3,732 49.5 % Other (income) expense, net 272 (1,121) 1,393 124.3 % Loss before taxes and discontinued operations $ (36,178) $ (28,671) $ (7,507) 26.2 % Corporate overhead loss before taxes and discontinued operations increased due to a $1.8 million increase in general and administrative expense, and a $3.7 million increase in interest expense, net due to an increase in the interest rate on our Term Credit Agreement and higher borrowings under our ABL Credit Agreement, as well as a $1.4 million decrease in other (income) expense, net and a $0.8 million impairment of our corporate office lease. Corporate general and administrative expenses increased compared to the prior year, primarily due to increased wage and benefit-related expenses driven by higher short and long-term incentive expenses. Other (income) expense, net decreased primarily due to a $1.0 million decrease in unrealized gains related to unit price changes of our investment in CSI Compressco, and a $1.0 million decrease in foreign exchange gains, partially offset by a $0.6 million increase in income from investments. 26 Table of Contents Non-GAAP Financial Measures We use U.S. GAAP financial measures such as revenues, gross profit, income (loss) before taxes and discontinued operations, 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 define Adjusted EBITDA as net income (loss) before taxes and discontinued operations, excluding impairments, exploration and pre-development costs, certain special, non-recurring or other charges (or credits), interest, depreciation and amortization, income from collaborative arrangement and certain non-cash items such as equity-based compensation expense. The most directly comparable GAAP financial measure is net income (loss) before taxes and discontinued operations. Exploration and pre-development costs represent expenditures incurred to evaluate potential future development of TETRA’s lithium and bromine properties in Arkansas. Such costs include exploratory drilling and associated engineering studies. Income from collaborative arrangement represents the portion of exploration and pre-development costs that are reimbursable by our strategic partner. Exploration and pre-development costs and the associated income from collaborative arrangement are excluded from Adjusted EBITDA because they do not relate to the Company’s current business operations. Adjustments to long-term incentives represent cumulative adjustments to valuation of long-term cash incentive compensation awards that are related to prior years. These costs are excluded from Adjusted EBITDA because they do not relate to the current year and are considered to be outside of normal operations. Long-term incentives are earned over a three-year period and the costs are recorded over the three-year period they are earned. The amounts accrued or incurred are based on a cumulative of the three-year period. Equity-based compensation expense represents compensation that has been or will be paid in equity and is excluded from Adjusted EBITDA because it is a non-cash item. Adjusted EBITDA is used by management as a supplemental financial measure to assess financial performance, without regard to charges or credits that are considered by management to be outside of its normal operations and without regard to financing methods, capital structure or historical cost basis, and to assess the Company’s ability to incur and service debt and fund capital expenditures. 27 Table of Contents The following tables reconcile net income (loss) before taxes and discontinued operations to Adjusted EBITDA for the periods indicated: Three Months Ended June 30, 2023 Completion Fluids & Products Water & Flowback Services Corporate SG&A Other and Eliminations Total (in thousands, except percentages) Revenue $ 98,222 $ 77,241 $ — $ — $ 175,463 Net income (loss) before taxes and discontinued operations 31,956 8,014 (12,595) (6,295) 21,080 Insurance recoveries (5) — — — (5) Impairments and other charges — — 777 — 777 Exploration and pre-development costs 2,341 — — — 2,341 Adjustment to long-term incentives — — 322 — 322 Former CEO stock appreciation right expense — — 329 — 329 Transactions and other expenses — — 57 — 57 Income from collaborative arrangement (4,749) — — — (4,749) Interest (income) expense, net 104 27 — 5,813 5,944 Depreciation, amortization and accretion 2,193 6,172 — 93 8,458 Equity-based compensation expense — — 1,492 — 1,492 Adjusted EBITDA $ 31,840 $ 14,213 $ (9,618) $ (389) $ 36,046 Adjusted EBITDA as % of revenue 32.4 % 18.4 % 20.5 % Three Months Ended March 31, 2023 Completion Fluids & Products Water & Flowback Services Corporate SG&A Other and Eliminations Total (in thousands, except percentages) Revenue $ 69,042 $ 77,167 $ — $ — $ 146,209 Net income (loss) before taxes and discontinued operations 18,442 6,378 (11,059) (6,227) 7,534 Insurance recoveries (2,850) — — — (2,850) Exploration and pre-development costs 720 — — — 720 Adjustment to long-term incentives — — 353 — 353 Interest (income) expense, net (395) 27 — 5,460 5,092 Depreciation, amortization and accretion 2,052 6,509 — 109 8,670 Equity-based compensation expense 17 — 1,276 — 1,293 Transaction, restructuring and other expenses — — 82 — 82 Former CEO stock appreciation right expense — — (307) — (307) Adjusted EBITDA $ 17,986 $ 12,914 $ (9,655) $ (658) $ 20,587 Adjusted EBITDA as % of revenue 26.1 % 16.7 % 14.1 % 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. Our liquidity at the end of the second quarter was $99.0 million. Liquidity is defined as unrestricted cash plus availability under the ABL Credit Agreement, Argentina Credit Facility and Swedish Credit Facility. Information about the terms and covenants of our debt agreements can be found in Note 6 - Long Term Debt and Other Borrowings. 28 Table of Contents Our consolidated sources and uses of cash are as follows: Six Months Ended June 30, 2023 2022 (in thousands) Operating activities $ 37,357 $ 23,803 Investing activities (22,004) (15,919) Financing activities (1,757) (2,774) Operating Activities Consolidated cash flows provided by operating activities increased compared to the first six months of 2022 primarily due to an increase in cash profit and working capital changes. Investing Activities Total cash capital expenditures during the first six months of 2023 were $23.3 million, which reflects increased expenditures to accommodate industry-wide activity recoveries as well as traditional front-loading of expected annual expenditures. Our Water & Flowback Services Division spent $16.6 million on capital expenditures, primarily to deploy additional SandStorm units to meet increased demands and to 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 the third early production facility in Argentina. Our Completion Fluids & Products Division spent $6.5 million on capital expenditures, primarily investing in additional capacity to support higher projected activity levels in the United States, Latin America and Europe. Investing activities during the first six months of 2023 and 2022 included $2.9 million and $3.8 million, respectively, of proceeds for insurance settlements 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. 29 Table of Contents Lithium and Bromine Inferred Resources We have rights to the brine underlying our approximately 40,000 gross 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 35,000 acres of that total acreage, we granted Standard Lithium an option to acquire the 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 inferred resources is described in Part I, “Item 2. Properties” in our 2022 Annual Report . During early 2023, we completed an initial economic assessment for a bromine extraction plant. We expect an initial economic assessment to follow in late 2023 for a lithium extraction plant, subject to the progress of early engineering. In June 2023, we entered into the MOU with Saltwerx, an indirect wholly owned subsidiary of a Fortune 500 company, relating to a newly-proposed brine unit in the Smackover Formation in Southwest Arkansas and potential bromine and lithium production from brine produced from the unit. The binding provisions of the MOU provide, among other things, that (i) the Company will file the Application covering the Brine Unit with the AOGC and (ii) Saltwerx will provide a letter to the Company in support of the Application. The MOU also contains provisions effective after, and contingent on, the approval of the Brine Unit by the AOGC, including provisions relating to: (i) initial brine ownership percentages within the Brine Unit, including the bromine and lithium contained in the brine, (ii) the transfer of certain leased acres outside the proposed Brine Unit from us to Saltwerx, (iii) Saltwerx reimbursing us for certain expenses incurred by us to date regarding the development of leased acreage to be included in the Brine Unit, and (vi) an allocation of certain future costs for the drilling of a brine production test well and other development operations, including FEED studies for bromine and lithium production facilities. During the second quarter of 2023, we also contracted a third-party firm to execute a front-end engineering and design study for a lithium production facility. Only upon completion of an indicated resources study, pre-feasibility and/or feasibility study and attainment of capital commitment from either a joint venture partner, governments grants or loans, or other cost-effective sources of capital that will not over-lever the Company, in addition to confirmation of a successful recapitalization of the long-duration zinc-bromide battery storage manufacturers, would we proceed to a final investment decision. Financing Activities Our financing activities for the first six months of 2023 include $97.2 million of borrowings and $98.2 million of repayments under the ABL Credit Agreement, Argentina Credit Facility and Swedish Credit Facility, as well as $0.7 million of capital lease payments associated with equipment leased primarily 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. 30 Table of Contents Long-Term Debt 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 June 30, 2023, $163.1 million in aggregate principal amount of our Term Credit Agreement is outstanding. Asset-Based Credit Agreement . As of June 30, 2023, 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, 2023, we had no balance outstanding and $11.5 million in letters of credit and guarantees against our ABL Credit Agreement and availability of $66.6 million, subject to compliance with the covenants, borrowing base, and other provisions of the ABL Credit Agreement. Argentina Credit Facility . In January 2023, the Company entered into a revolving credit facility for certain working capital and capital expenditure needs for its subsidiary in Argentina (“Argentina Credit Facility”). As of June 30, 2023, we had $1.9 million outstanding and availability of approximately $0.1 million under the Argentina Credit Agreement. Borrowings bear interest at a rate of 2.50% per annum. The Argentina Credit Facility expires on October 19, 2023 and is backed by a letter of credit under our 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, 2023, we had no balance outstanding and availability of approximately $4.6 million under this agreement. During each year, all outstanding loans under the Swedish Credit Facility must be repaid for at least 30 consecutive days. Borrowings bear interest at a rate of 2.95% per annum. The Swedish Credit Facility expires on December 31, 2023 and the Company intends to renew it annually. Finland Credit Agreement. In January 2022, the Company also entered into a credit agreement guaranteed by certain accounts receivable and inventory in Finland (“Finland Credit Agreement”). As of June 30, 2023, there were $1.5 million of letters of credit outstanding against the Finland Credit Agreement. The Finland Credit Agreement expires on January 31, 2024 and the Company intends to renew it annually. Other Sources and Uses of Cash In addition to the aforementioned credit facilities, 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, 2023, the market value of our investments in CSI Compressco and Standard Lithium were $6.6 million and $3.6 million, respectively, with no holding restrictions on our ability to monetize our interests. In addition, we are party to agreements in which Standard Lithium has the right to explore for, 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 an additional 400,000 shares of Standard Lithium stock in April 2023 under the terms of this agreement. We also hold an investment in a convertible note issued by CarbonFree valued at $6.3 million as of June 30, 2023. 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 31 Table of Contents 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 aged receivables would also negatively affect our borrowing availability under the ABL Credit Agreement. As of June 30, 2023, 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 2022 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. 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 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. We have finance leases for certain facility storage tanks and equipment rentals. Information about the terms of our lease agreements can be found in our 2022 Annual Report . Product and Asset Purchase Obligations For information on product and asset 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”. 32 Table of Contents These forward-looking statements include statements concerning the inferred mineral resources of lithium and bromine, the potential extraction of lithium and bromine from the leased acreage, the development of the assets including construction of bromine extraction plants, the economic viability thereof, the demand for such resources, and the timing and cost of such activities; the ability to obtain an indicated or measured resources report and an initial economic assessment, indicated or measured resources report, and/or pre-feasibility or feasibility studies regarding our lithium and bromine acreage; statements regarding the Company's beliefs, expectations, plans, goals, future events and performance; and other statements that are not purely historical. With respect to the Company's disclosures of inferred mineral resources, including bromine and lithium carbonate equivalent concentrations, it is uncertain if further exploration will ever result in the estimation of a higher category of mineral resource or a mineral reserve. Inferred mineral resources are considered to have the lowest level of geological confidence of all mineral resources. Investors are cautioned that inferred mineral resources do not have demonstrated economic value. Inferred mineral resources have a high degree of uncertainty as to their existence and as to whether they can be economically or legally commercialized. A significant amount of exploration must be completed in order to determine whether an inferred mineral resource may be upgraded to a higher category. Therefore, investors are cautioned not to assume that all or any part of an inferred mineral resource exists, that it can be economically or legally commercialized, or that it will ever be upgraded to a higher category. With respect to the Company’s disclosures of the MOU with Saltwerx, it is uncertain about the ability of the parties to successfully negotiate one or more definitive agreements, the future relationship between the parties, the approval of the application and Brine Unit by the AOGC, and the ability to successfully and economically produce lithium and bromine from the Brine Unit. Management believes that these forward-looking statements are reasonable as and when made. However, investors are cautioned not to place undue reliance on any such forward-looking statements. Such statements speak only as of the date on which they are made, and the Company undertakes 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, forecasts 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 2022 Annual Report , and those described from time to time in our future reports filed with the SEC.