Flotek(FTK) - 2023 Q3 - Quarterly Report

Forward-Looking Statements This section outlines the inherent uncertainties and risks associated with the Company's forward-looking statements, which are based on current beliefs and subject to material differences in actual results - The report contains forward-looking statements, which are not historical facts but represent current assumptions and beliefs about future events, inherently uncertain and outside the Company's control. These statements include estimates, projections, and business plan objectives[9] - Forward-looking statements are identified by words like 'anticipate,' 'believe,' 'estimate,' 'expect,' 'plan,' 'will,' 'may,' 'should,' and similar expressions. They are based on current expectations and assumptions subject to risks and uncertainties that could cause actual results to differ materially[10] - Potential risks and uncertainties are discussed in Part I, Item 1A — 'Risk Factors' of the Annual Report on Form 10-K for the year ended December 31, 2022, and subsequent SEC filings. The Company disclaims any obligation to publicly update or revise these statements, except as required by law[11] PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Flotek Industries, Inc., including balance sheets, statements of operations, comprehensive income (loss), cash flows, and stockholders' equity, along with detailed notes explaining accounting policies, segment information, debt, equity, and related party transactions for the periods ended September 30, 2023, and December 31, 2022 Unaudited Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | ASSETS | | | | Total current assets | $73,206 | $81,087 | | Total assets | $152,516 | $164,810 | | LIABILITIES & EQUITY | | | | Total current liabilities | $45,236 | $151,371 | | Total liabilities | $52,912 | $162,214 | | Total stockholders' equity | $99,604 | $2,596 | - Total current liabilities significantly decreased from $151.4 million at December 31, 2022, to $45.2 million at September 30, 2023, primarily due to the conversion of Convertible Notes Payable and Contract Consideration Convertible Notes Payable into common stock[16][58][150] - Total stockholders' equity increased substantially from $2.6 million at December 31, 2022, to $99.6 million at September 30, 2023, largely driven by the conversion of convertible notes and related transactions[16][150][151][153] Unaudited Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $47,268 | $45,623 | $145,870 | $87,874 | | Gross profit (loss) | $9,047 | $(1,842) | $14,833 | $(4,626) | | Income (loss) from operations | $1,619 | $(16,279) | $20,804 | $(18,524) | | Net income (loss) | $1,287 | $(18,794) | $22,609 | $(23,278) | | Basic income (loss) per common share | $0.04 | $(1.50) | $0.97 | $(1.89) | | Diluted income (loss) per common share | $0.04 | $(1.50) | $(0.18) | $(1.89) | - Total revenues increased by 4% for the three months ended September 30, 2023, and by 66% for the nine months ended September 30, 2023, compared to the respective prior year periods, driven by higher related party activity and external customer revenue[209][210] - The Company achieved a significant turnaround, reporting net income of $1.3 million for the three months and $22.6 million for the nine months ended September 30, 2023, compared to net losses of $18.8 million and $23.3 million in the prior year periods, respectively[17] Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $1,287 | $(18,794) | $22,609 | $(23,278) | | Foreign currency translation adjustment | $47 | $116 | $13 | $211 | | Comprehensive income (loss) | $1,334 | $(18,678) | $22,622 | $(23,067) | - Comprehensive income (loss) significantly improved, moving from a loss of $18.7 million in Q3 2022 to an income of $1.3 million in Q3 2023, and from a loss of $23.1 million in the nine months ended September 30, 2022, to an income of $22.6 million in the same period of 2023[19] Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(9,248) | $(47,166) | | Net cash (used in) provided by investing activities | $(525) | $4,040 | | Net cash provided by financing activities | $1,925 | $38,199 | | Net change in cash and cash equivalents and restricted cash | $(7,835) | $(4,716) | | Cash and cash equivalents and restricted cash at end of period | $4,555 | $8,608 | - Net cash used in operating activities significantly decreased from $47.2 million in the nine months ended September 30, 2022, to $9.2 million in the same period of 2023, reflecting improved operational performance despite continued cash usage[21][238] - Net cash provided by financing activities decreased substantially from $38.2 million in 2022 to $1.9 million in 2023, primarily due to lower proceeds from the issuance of convertible notes and warrants in 2023 compared to 2022[21][242] Unaudited Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Metric | Balance, Dec 31, 2022 | Net Income (Loss) | Conversions/Issuances | Balance, Sep 30, 2023 | | :-------------------------------- | :-------------------- | :------------------ | :-------------------- | :-------------------- | | Common Stock (Par Value) | $1 | $0 | $2 | $3 | | Additional Paid-in Capital | $388,184 | $0 | $74,615 | $462,799 | | Accumulated Deficit | $(351,519) | $22,609 | $0 | $(328,910) | | Total Stockholders' Equity | $2,596 | $22,609 | $74,399 | $99,604 | - Total stockholders' equity increased significantly from $2.6 million at December 31, 2022, to $99.6 million at September 30, 2023, primarily driven by net income of $22.6 million and conversions of convertible notes and warrants totaling approximately $74.4 million[28][150][151][153] - The Company completed a 1-for-6 reverse stock split on September 25, 2023, reducing issued and outstanding shares from 184.4 million to 30.7 million, without affecting par value or authorized shares[145][147] Notes to Unaudited Condensed Consolidated Financial Statements Note 1 — Organization and Nature of Operations - Flotek Industries, Inc. (Flotek) is a technology-driven specialty green chemistry and data company focused on reducing the environmental impact of energy and improving customer environmental performance[31] - The Company operates two segments: Chemistry Technologies (CT), which develops and markets green specialty chemicals for hydrocarbon producers, and Data Analytics (DA), which provides real-time analytics for hydrocarbon streams[32][33] - Substantial doubt exists about the Company's ability to continue as a going concern within the next twelve months, as funding operations relies on cash on hand, ABL availability, and forecasted cash flows, primarily from the ProFrac Agreement, which may not be sufficient[35] Note 2 — Summary of Significant Accounting Policies - The financial statements are prepared in accordance with U.S. GAAP and SEC interim reporting rules, and all significant intercompany accounts and transactions are eliminated in consolidation[38][40] - Key accounting policies include recognizing revenue when performance obligations are satisfied, valuing inventories at the lower of cost or net realizable value, and depreciating property and equipment using the straight-line method[47][49][60] - The Company adopted ASU No. 2016-13, 'Measurement of Credit Losses on Financial Instruments,' on January 1, 2023, which did not have a material impact on its financial statements[80] Note 3 — Revenue from Contracts with Customers Revenue Disaggregation by Source (in thousands) | Revenue Source | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Products | $45,865 | $44,574 | $141,695 | $85,356 | | Services | $1,403 | $1,049 | $4,175 | $2,518 | | Total Revenue | $47,268 | $45,623 | $145,870 | $87,874 | Cost of Sales Disaggregation (in thousands) | Cost of Sales Source | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Tangible goods sold | $33,350 | $43,734 | $116,755 | $80,900 | | Services | $128 | $126 | $425 | $179 | | Other | $4,743 | $3,605 | $13,857 | $11,421 | | Total Cost of Sales | $38,221 | $47,465 | $131,037 | $92,500 | - Product revenue increased by 3% for the three months and 66% for the nine months ended September 30, 2023, compared to the prior year periods, while service revenue also saw increases[82] Note 4 - Contract Assets Contract Assets (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :---------------------- | :----------- | :----------- | | Contract assets, net | $76,023 | $79,689 | | Current contract assets | $(7,816) | $(7,113) | | Long-term contract assets | $68,207 | $72,576 | - Contract assets, primarily related to the ProFrac Agreement, decreased from $79.7 million at December 31, 2022, to $76.0 million at September 30, 2023, due to amortization[87] - The Company recognized $1.3 million and $3.7 million of contract assets amortization for the three and nine months ended September 30, 2023, respectively, recorded as a reduction of related party revenue[88] Note 5 — Inventories Inventories (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Raw materials | $5,603 | $5,800 | | Finished goods | $17,475 | $18,130 | | Inventories, net | $15,885 | $15,720 | | Less reserve for excess and obsolete inventory | $(7,193) | $(8,210) | - Net inventories remained relatively stable at $15.9 million at September 30, 2023, compared to $15.7 million at December 31, 2022[90] - The reserve for excess and obsolete inventory decreased from $8.2 million at December 31, 2022, to $7.2 million at September 30, 2023[90] Note 6 — Property and Equipment Property and Equipment, Net (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Property and equipment | $16,554 | $16,261 | | Less accumulated depreciation | $(11,710) | $(11,435) | | Property and equipment, net | $4,844 | $4,826 | - Net property and equipment remained stable at $4.8 million at September 30, 2023, compared to December 31, 2022[91] - Depreciation expense was $0.2 million for both the three months ended September 30, 2023 and 2022, and $0.5 million and $0.6 million for the nine months ended September 30, 2023 and 2022, respectively[91] Note 7 — Leases Total Lease Expense (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Operating lease expense | $890 | $217 | $2,625 | $880 | | Total lease expense | $1,032 | $298 | $2,799 | $1,237 | - Total lease expense significantly increased to $1.0 million for the three months and $2.8 million for the nine months ended September 30, 2023, compared to $0.3 million and $1.2 million in the prior year periods, respectively, primarily due to higher operating lease expenses[94] - The Company entered into a sublease agreement for its Houston office and lab space, generating future rental income of $5.4 million through October 2030[97] Note 8 — Accrued Liabilities Current Accrued Liabilities (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Severance costs | $935 | $2,617 | | Payroll and benefits | $1,420 | $684 | | Contingent liability for earn-out provision | $199 | $583 | | Total current accrued liabilities | $5,430 | $8,984 | - Total current accrued liabilities decreased from $9.0 million at December 31, 2022, to $5.4 million at September 30, 2023, primarily due to reductions in severance costs and contingent earn-out provisions[100] - Severance costs decreased significantly from $2.6 million to $0.9 million, and contingent earn-out liability decreased from $0.6 million to $0.2 million[100] Note 9 — Debt and Convertible Notes Payable - The Company entered into a 24-month Asset Based Loan (ABL) on August 14, 2023, providing up to $10 million in initial credit, increased to $13.8 million in October 2023. As of September 30, 2023, $3.4 million was outstanding[101][102][228] - The Flotek PPP loan saw $4.5 million forgiven in January 2023, resulting in a gain. The remaining $0.4 million is being repaid in monthly installments through April 2025[105][107] - All Convertible Notes Payable and Contract Consideration Convertible Notes Payable were converted into common stock or warrants by May 2023, significantly reducing debt liabilities[110][111][115][118] Note 10 — Fair Value Measurements Liabilities Measured at Fair Value (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------------------ | :----------- | :----------- | | Contingent earnout consideration (Level 3) | $199 | $583 | | Initial ProFrac Agreement Contract Consideration Convertible Notes (Level 3) | $0 | $14,220 | | Amended ProFrac Agreement Contract Consideration Convertible Notes (Level 3) | $0 | $69,350 | | Total | $199 | $84,153 | - Liabilities measured at fair value on a recurring basis decreased significantly from $84.2 million at December 31, 2022, to $0.2 million at September 30, 2023, primarily due to the conversion of the ProFrac Agreement Contract Consideration Convertible Notes Payable[123][136] - The fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable decreased by $30.8 million in the nine months ended September 30, 2023, prior to its conversion[131] Note 11 — Income Taxes Effective Income Tax Rate Reconciliation | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | U.S. federal statutory tax rate | 21.0 % | 21.0 % | 21.0 % | 21.0 % | | Increase in valuation allowance | (5.6) % | (21.7) % | (19.0) % | (20.7) % | | Effective income tax rate | 6.2 % | — % | 0.4 % | (0.4) % | - The Company's income tax expense was minimal for both the three and nine months ended September 30, 2023 and 2022[216] - A change of control in 2023 subjected the Company's Net Operating Losses (NOLs) to an IRC section 382 limitation, restricting their annual utilization to an estimated $3.5 million[137][140] Note 12 — Commitments and Contingencies - The Company resolved a claim with its former CEO, John Chisholm, resulting in a $2.3 million reversal of accrued severance costs during the nine months ended September 30, 2023[142] - Settlements were also reached with Moss Adams LLP and its predecessor, Hein & Associates LLP (June 2023), and Mr. Casey Doherty and Doherty & Doherty LLP (October 2023) regarding legal proceedings[142] - The Company faces concentrations of credit risk in trade accounts receivable, particularly with customers in the energy industry, and related party accounts receivable, without generally requiring collateral[143] Note 13 — Stockholders' Equity - On September 25, 2023, the Company completed a 1-for-6 reverse stock split to regain compliance with NYSE listing requirements, converting 184.4 million shares into 30.7 million shares[145] - In May 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, valued at $40.6 million, were converted into 10,582,821 common shares (post-Reverse Stock Split)[150][169] - In February 2023, Convertible Notes Payable (excluding ProFrac's) were converted into 10,335,840 common shares, and ProFrac's Convertible Notes Payable and Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were converted into February 2023 Warrants, which were subsequently exercised in September 2023[151][152][153] Note 14 — Earnings (Loss) Per Share Earnings (Loss) Per Share (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) for basic EPS | $1,287 | $(18,794) | $22,609 | $(23,278) | | Basic weighted average shares outstanding | 29,358 | 12,552 | 23,291 | 12,349 | | Basic earnings (loss) per share | $0.04 | $(1.50) | $0.97 | $(1.89) | | Diluted earnings (loss) per share | $0.04 | $(1.50) | $(0.18) | $(1.89) | - Basic EPS improved significantly to $0.04 for the three months and $0.97 for the nine months ended September 30, 2023, compared to losses of $(1.50) and $(1.89) in the prior year periods, respectively[158] - Diluted EPS for the nine months ended September 30, 2023, was $(0.18), impacted by adjustments for paid-in-kind interest expense and the change in fair value of Contract Consideration Convertible Notes Payable[158] Note 15 — Supplemental Cash Flow Information Supplemental Non-Cash Financing Activities (in thousands) | Non-Cash Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------------------------------------------------- | :-------------------------- | :-------------------------- | | Conversion of convertible notes payable to common stock | $8,996 | $3,038 | | Conversion of convertible notes payable to February 2023 Warrants | $11,040 | $0 | | Conversion of Initial Contract Consideration Convertible Notes Payable to February 2023 Warrants | $15,092 | $0 | | Conversion of Amended Contract Consideration Convertible Notes Payable to common stock | $40,638 | $0 | | Issuance of convertible notes payable as consideration for ProFrac Agreements | $0 | $79,460 | - Significant non-cash financing activities in the nine months ended September 30, 2023, included the conversion of various convertible notes and contract consideration convertible notes into common stock and warrants, totaling over $75 million[161] Note 16— Related Party Transactions - The Company's revenues from ProFrac Services, LLC (a related party) were $29.5 million for the three months ended September 30, 2023 (down 3% YoY) and $98.6 million for the nine months ended September 30, 2023 (up 98% YoY)[170] - The ProFrac Agreement was amended in February 2023 to include a ramp-up period, waive prior Contract Shortfall Fees, add product fees, and provide margin increases, with current revenues reflecting expected Contract Shortfall Fee payments[164][165] - All Convertible Notes Payable and Contract Consideration Convertible Notes Payable held by ProFrac and related entities were converted into common stock or warrants by May 2023[166][167][169] Note 17 — Business Segment, Geographic and Major Customer Information Revenue by Segment (in thousands) | Segment | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Chemistry Technologies | $45,578 | $43,928 | $139,155 | $84,395 | | Data Analytics | $1,690 | $1,695 | $6,715 | $3,479 | | Total Revenue | $47,268 | $45,623 | $145,870 | $87,874 | - Chemistry Technologies (CT) segment revenue increased by 4% for the three months and 65% for the nine months ended September 30, 2023, driven by increased external customer base and related party activity[217][218] - Data Analytics (DA) segment revenue decreased by 13% for the three months but increased by 80% for the nine months ended September 30, 2023, primarily due to significant product revenues from increased unit sales[221][222] Revenue from Major Customers (% of Total Revenue) | Customer | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Customer A (Related Party) | 62.3 % | 66.7 % | 67.6 % | 54.7 % | | Customer B | — | — | — | 12.4 % | Note 18 — Subsequent Events - No material events requiring recognition or disclosure in the financial statements have occurred subsequent to September 30, 2023[187] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Flotek's financial condition and operational results, highlighting the Company's business segments, market outlook, supply chain challenges, and the impact of the ProFrac Agreement. It details the significant improvements in revenue, gross profit, and net income for the three and nine months ended September 30, 2023, compared to the prior year, driven by increased activity and strategic cost management, while also addressing the going concern uncertainty and capital resources Executive Summary - Flotek Industries, Inc. is a technology-driven specialty green chemistry and data technology company focused on reducing the environmental impact of energy and improving environmental performance for industrial and commercial markets[191] - The Company operates two segments: Chemistry Technologies (CT) and Data Analytics (DA), both supported by Research and Innovation (R&I) advanced laboratory capabilities[192] Company Overview - The CT segment provides sustainable, optimized chemistry solutions, including proprietary green chemistries and logistics, to maximize customer value by enhancing ESG performance, lowering operational costs, and improving return on invested capital[193] - The DA segment delivers real-time information and insights through field-deployable, in-line optical near-infra-red spectrometers, processed with AI and machine learning, to optimize operations, reduce emissions, and improve profitability in hydrocarbon streams[195] Outlook - The Company anticipates a tight supply cycle for oil and gas due to underinvestment, expecting independent exploration and production companies to maintain or increase activity, with larger companies showing modest spending increases over the next 12 months[199] - The Data Analytics segment's Verax™ analyzers are gaining traction in North American markets for real-time compositional information, with new data processing techniques like AIDA (Automated Interface Detection Algorithm) enhancing value and driving recurring revenue[200] - ESG-focused solutions remain a Company emphasis, with products like Complex nano-Fluid® (CnF®) offering plant-based, sustainable alternatives to toxic chemicals, and real-time sensor technology aiding process efficiencies and emission reduction[201] Supply Chain - Principal supply issues for the next twelve months include fluctuating freight costs, raw material availability, labor shortages, and demand forecasting[203][208] - All bidding will require factoring in the risk of shipping costs and delays, with trucking availability impacting North American opportunities and sea-freight security affecting international sales[203] New York Stock Exchange ("NYSE") Continued Listing Requirements - The Company received a NYSE notice on April 12, 2023, for failing to meet the minimum $1.00 per share closing price requirement over 30 consecutive days[204] - To cure the deficiency, a 1-for-6 reverse stock split was effected on September 25, 2023, and the Company regained compliance with NYSE listing criteria on October 2, 2023[205] ProFrac Supply Agreement - The ProFrac Agreement, amended multiple times, includes minimum chemistry purchase requirements, with Contract Shortfall Fees payable if minimum volumes are not met[206][207] - The Company does not expect to meet the minimum purchase requirements for the current measurement period (June 1, 2023, through December 31, 2023), and revenues reflect expected Contract Shortfall Fee payments[207] Consolidated Results of Operations Consolidated Results of Operations (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $47,268 | $45,623 | $145,870 | $87,874 | | Gross profit (loss) | $9,047 | $(1,842) | $14,833 | $(4,626) | | Income (loss) from operations | $1,619 | $(16,279) | $20,804 | $(18,524) | | Net income (loss) | $1,287 | $(18,794) | $22,609 | $(23,278) | - Consolidated revenue increased by 4% for the three months and 66% for the nine months ended September 30, 2023, driven by higher related party activity under the ProFrac Agreement and increased external customer revenue[209][210] - Gross profit significantly improved, moving from a loss of $1.8 million in Q3 2022 to a profit of $9.0 million in Q3 2023, and from a loss of $4.6 million to a profit of $14.8 million for the nine-month period, due to higher revenue volumes and cost management[209][211] - Net income for the nine months ended September 30, 2023, was $22.6 million, a substantial improvement from a $23.3 million net loss in the prior year, primarily due to increased gross profit and a $21.0 million gain in fair value of Contract Consideration Convertible Notes Payable[209][214] Results by Segment Chemistry Technologies (CT) Segment Performance (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue from external customers | $16,326 | $13,511 | $41,020 | $34,933 | | Revenue from related party | $29,252 | $30,417 | $98,135 | $49,462 | | Income (loss) from operations | $5,519 | $(10,603) | $32,694 | $(1,716) | Data Analytics (DA) Segment Performance (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue from external customers | $1,480 | $1,695 | $6,258 | $3,479 | | Revenue from related party | $210 | $0 | $457 | $0 | | Income (loss) from operations | $(37) | $(745) | $550 | $(2,751) | - CT segment income from operations increased by $16.1 million for the three months and $34.4 million for the nine months ended September 30, 2023, primarily due to increased gross profit and a decrease in fair value loss of convertible notes[219][220] - DA segment income from operations increased by $0.7 million for the three months and $3.3 million for the nine months ended September 30, 2023, driven by increased activity and lower personnel and R&D costs[223] Capital Resources and Liquidity - As of September 30, 2023, the Company had $4.5 million in unrestricted cash and cash equivalents, down from $12.3 million at December 31, 2022[226] - The Company entered into a 24-month Asset Based Loan (ABL) in August 2023, providing up to $10 million in initial credit, which was increased to $13.8 million in October 2023. $3.4 million was outstanding as of September 30, 2023[227][228][229] - Substantial doubt exists about the Company's ability to continue as a going concern within one year, as current resources and forecasted operating cash flow (primarily from the ProFrac Agreement) may not be sufficient to fund operations and meet obligations[232][233] Cash Flows Consolidated Cash Flows (in thousands) | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(9,248) | $(47,166) | | Net cash (used in) provided by investing activities | $(525) | $4,040 | | Net cash provided by financing activities | $1,925 | $38,199 | | Net change in cash and cash equivalents and restricted cash | $(7,835) | $(4,716) | - Net cash used in operating activities decreased significantly to $9.2 million for the nine months ended September 30, 2023, from $47.2 million in the prior year, reflecting improved net income and reduced working capital usage[238][240] - Net cash provided by financing activities decreased to $1.9 million in 2023, primarily from ABL proceeds, compared to $38.2 million in 2022, which included significant proceeds from convertible notes and warrants[242] Critical Accounting Policies and Estimates - The preparation of financial statements requires management to make judgments, assumptions, and estimates that affect reported amounts, including useful lives of assets, impairment assessments, stock-based compensation, and valuation allowances[77][78][243] Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risks from changes in interest rates, commodity prices, and foreign currency exchange rates. There have been no material changes to these disclosures since the 2022 Annual Report - The Company is exposed to market risk from changes in interest rates, commodity prices, and foreign currency exchange rates[244] - There have been no material changes to the quantitative or qualitative disclosures about market risk from those set forth in the Company's 2022 Annual Report[244] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2023, due to a material weakness in internal control over financial reporting. This weakness stems from insufficient resources, inadequate continuous risk assessment, and ineffective information and communication processes, leading to control deficiencies in lease modifications, prepaid asset accuracy, and related party revenue accruals. Remediation efforts are ongoing, including implementing a revised risk assessment and enhancing communication processes - As of September 30, 2023, the Company's disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting[246] - The material weakness is attributed to insufficient resources with appropriate training, inadequate continuous risk assessment, and ineffective information and communication processes[250] - Remediation efforts include implementing a revised financial control risk assessment process and enhancing information and communication processes to ensure timely and accurate financial reporting[253][256] PART II - OTHER INFORMATION Item 1. Legal Proceedings There have been no material changes to the Company's legal proceedings as described in its 2022 Annual Report, except for the settlements related to the former CEO matter, Moss Adams LLP, and Casey Doherty/Doherty & Doherty LLP, as detailed in Note 12 - No material changes in legal proceedings from the 2022 Annual Report, except as described in Note 12, 'Commitments and Contingencies'[258] - Note 12 details the resolution of claims with former CEO John Chisholm, Moss Adams LLP, and Casey Doherty/Doherty & Doherty LLP[142][258] Item 1A. Risk Factors As of September 30, 2023, there have been no material changes to the risk factors previously disclosed in the Company's 2022 Annual Report. The Company advises careful consideration of these risks, as well as other unknown or immaterial risks, which could adversely affect its business and financial results - No material changes in risk factors from those set forth in the 2022 Annual Report as of September 30, 2023[259] - Additional risks and uncertainties not currently known or deemed immaterial could also materially adversely affect the Company's business, financial condition, and future results[259] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not have any unregistered sales of equity securities during the period. It repurchased a total of 3,494 shares of common stock during the three months ended September 30, 2023, at an average price of $4.84 per share, primarily to satisfy tax withholding requirements and payment obligations related to employee stock compensation plans - No unregistered sales of equity securities occurred during the period[260] Issuer Repurchases of Equity Securities (3 Months Ended Sep 30, 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------------- | :------------------------------- | :--------------------------- | | July 1, 2023 to July 31, 2023 | 247 | $4.95 | | August 1, 2023 to August 31, 2023 | 3,247 | $4.74 | | September 1, 2023 to September 30, 2023 | — | $— | | Total | 3,494 | $4.84 (weighted average) | - Shares were repurchased to satisfy tax withholding requirements and payment remittance obligations related to restricted shares and stock options[260] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities[262] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[263] Item 5. Other Information Effective November 6, 2023, the Company's Board of Directors approved amendments to the Second Amended and Restated Bylaws to clarify that the Chairman of the Board is not an officer of the Company - On November 6, 2023, the Board of Directors amended the Bylaws to clarify that the Chairman of the Board is not an officer of the Company[264] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various agreements, certificates of incorporation, bylaws, forms of notes and warrants, and certifications - The exhibits include the Second Amended and Restated Bylaws, as amended, and various certifications (Rule 13a-14(a) and Section 1350) from the Principal Executive Officer and Principal Financial Officer[265] - Other exhibits include the Revolving Loan and Security Agreement, forms of Convertible Notes and Pre-Funded Warrants, and amendments to the Certificate of Incorporation[265] SIGNATURES - The report was signed on November 8, 2023, by Ryan Ezell, Chief Executive Officer, and Bond Clement, Chief Financial Officer (Principal Financial and Accounting Officer)[268]