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Significant Accounting Policies
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Significant Accounting Policies (Policies)
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Significant Accounting Policies (Tables)
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock
iTTI
iNew
York Stock Exchange
iPreferred Share Purchase Right
iN/A
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. iYes☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
iAccelerated
filer
☒
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐
No ☒
As ofApril 28, 2023, there werei129,399,384 shares outstanding of the Company’s Common Stock, $0.01 par value per share.
(1) Equity-based
compensation for the three months ended March 31, 2023 includes $i2.3 million for a portion of short-term incentive compensation that was settled through grants of restricted stock units rather than cash.
NOTE 1 – iORGANIZATION,
BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES
i
Organization
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. We were incorporated in Delaware in 1981 and are composed of itwo
segments – Completion Fluids & Products Division and Water & Flowback Services Division. Unless the context requires otherwise, when we refer to “we,”“us,” and “our,” we are describing TETRA Technologies, Inc. and its subsidiaries on a consolidated basis.
/
i
Presentation
Our
unaudited consolidated financial statements include the accounts of our wholly owned or controlled subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The information furnished reflects all normal recurring adjustments, which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods. Operating results for the period ended March 31, 2023 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2023.
We have reflected the operations of our former Compression Division and Offshore Division as discontinued operations for all periods presented. See Note 2 - “Discontinued
Operations” for further information. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate solely to continuing operations and exclude all discontinued operations.
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the U.S. Securities and Exchange Commission (“SEC”) and do not include all information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 2022 and notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission on February 27, 2023 (the “2022 Annual Report”).
i
Tax Benefits Preservation Plan
On February 28, 2023, the Board of Directors adopted a Tax Benefits Preservation Plan (the “Tax
Plan”) designed to protect the availability of the Company’s net operating loss carryforwards and other tax attributes (collectively, the “Tax Attributes”), which may be utilized in certain circumstances to reduce the Company’s future income tax obligations. The Tax Plan is intended to reduce the likelihood that any changes in the Company’s investor base would limit the Company’s future use of its Tax Attributes as a result of the Company experiencing an “ownership change” under Section 382 (“Section 382”) of the Internal Revenue
Code of 1986, as amended (the “Code”). If a corporation experiences an “ownership change,” any NOLs, losses or deductions attributable to a “net unrealized built-in loss” and other Tax Attributes could be substantially limited, and timing of the usage of such Tax Attributes could be substantially delayed. A corporation generally will experience an ownership change if one or more stockholders (or group of stockholders) who are each deemed to own at least 5% of the corporation’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a testing period (generally, a rolling three-year period).
In adopting the Tax Plan, the Board of Directors declared a dividend of ione
Series A Junior Participating Preferred Stock purchase right (the “Rights”) for each outstanding share of Common Stock pursuant to the terms of the Tax Plan. Initially, each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $i0.01 per share, of the Company (the “Preferred Stock”) at a price
of $i20.00 per one one-thousandth of a share of Preferred Stock (the “Purchase Price”), subject to adjustment. The Rights will cause substantial dilution to a person or group that acquires i4.99% or more of the Common Stock (or to
a person or group that already owns i4.99% or more of the Company’s Common Stock if
such person or group acquires additional
shares representing i2% of the Company’s then outstanding shares of Common Stock) without prior approval from the Board of Directors.
The Rights will expire at the earliest of: (i) the close of business on February 28, 2026 (the “Final Expiration Date”); (ii) the time at which the Rights are redeemed pursuant to the Tax Plan, (iii) the time at which the Rights are exchanged pursuant to the Tax Plan; (iv) the closing
of any merger or other acquisition transaction involving the Company pursuant to an agreement as described in the penultimate paragraph of Section 1.3 of the Tax Plan; (v) the close of business on the effective date of the repeal of Section 382 of the Code if the Board determines that the Tax Plan is no longer necessary or desirable for the preservation of the Tax Attributes; or (vi) the close of business on the first day of a taxable year of the Company following a Board determination that no Tax Attributes may be carried forward or otherwise utilized.
The Tax Plan adopted by the Board of Directors is similar to plans adopted by other publicly held companies with significant NOLs or other substantial tax benefits and is not designed
to prevent any action that the Board of Directors determines to be in the best interest of the Company and its stockholders. As discussed further in the Company’s definitive proxy statement for the annual meeting of stockholders, which is anticipated to be held on May 24, 2023, the Company intends to submit the Tax Plan to our stockholders for ratification at such meeting.
The Rights are in all respects subject to and governed by the provisions of the Tax Plan. The foregoing summary provides only a general description of the Tax Plan and does not purport to be complete. The Tax Plan, which specifies the terms of the Rights and includes
as Exhibit A the Form of Certificate of Designation of Series A Junior Participating Preferred Stock of the Company and as Exhibit B the Form of Right Certificate, is attached to the Company’s Current Report on Form 8-K, which was filed with the SEC on March 1, 2023, as Exhibit 4.1 and is incorporated herein by reference. The foregoing summary should be read together with the entire Tax Plan and is qualified in its entirety by reference to the Tax Plan.
Significant Accounting Policies
Our significant accounting policies are described in the notes to our consolidated financial
statements for the year ended December 31, 2022 included in our 2022 Annual Report. There have been no significant changes in our accounting policies or the application thereof during the first quarter of 2023.
i
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and impairments during the reporting period. Actual results could differ from those estimates, and such differences could bematerial.
i
Reclassifications
Certain previously reported financial information has
been reclassified to conform to the current year's presentation. The impact of reclassifications was not significant to the prior year's overall presentation.
i
Foreign Currency Translation
We have designated the Euro, the British pound, the Canadian dollar, theBrazilian real, and theMexican peso as the functional currencies for our operations in Finland and
Sweden, the United Kingdom, Canada, Brazil,and certain of our operations in Mexico, respectively. The United States dollar is the designated functional currency for all of our other non-U.S. operations. The cumulative translation effects of translating the applicable accounts from the functional currencies into the United States dollar at current exchange rates are included as a separate component ofequity. Foreign currency exchange (gains) and losses are included in other (income) expense, net and totaled $i0.2 million
and $(i0.8) million during the three months ended March 31, 2023 and 2022, respectively.
/
i
Fair
Value Measurements
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized on a recurring basis in the determination of the carrying values of certain investments. See Note 8 - “Fair Value Measurements” for further discussion. Fair
value measurements are also utilized on a nonrecurring basis in certain circumstances, including the impairment of long-lived assets (a Level 3 fair value measurement).
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the previously-used incurred loss methodology, which will result in the more timely recognition of losses on financial instruments not accounted for at fair value through net income. The provisions require credit impairments to be measured over the contractual life of an asset and developed with consideration for past events, current conditions, and forecasts of future economic information. Credit impairment will be accounted for as an allowance for credit losses deducted from the amortized cost basis at each reporting date. Updates at
each reporting date after initial adoption will be recorded through selling, general, and administrative expense. On January 1, 2023, we adopted ASU 2016-13. The adoption of this standard did not have a material impact on our consolidated financial statements.
Standard not yet adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. In December 2022, the FASB issued ASU 2022-06,
“Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” Entities may elect to apply the amendments for contract modifications made on or before December 31, 2024. During the three months ended September 30, 2021, our asset-based credit agreement and term credit agreement were amended to allow replacement of LIBOR with another benchmark rate, such as the secured overnight financing rate (“SOFR”) in the event that LIBOR cannot be determined or does not fairly reflect the cost to our lenders of funding our loans. If LIBOR is not available, we cannot predict what alternative index would be negotiated with our lenders. We will assess the impact of adopting ASU 2020-04, as extended by ASU 2022-06, on our consolidated financial statements when our contracts
are modified to eliminate references to LIBOR.
NOTE 2 – iDISCONTINUED OPERATIONS
On March 1, 2018, we closed a series of related transactions that resulted in the disposition of our Offshore Division, consisting of our Offshore
Services and Maritech segments. Our former Offshore Division is reported as discontinued operations for all periods presented. Our consolidated balance sheets and consolidated statements of operations report discontinued operations separate from continuing operations. Our consolidated statements of comprehensive income, statements of equity and statements of cash flows combine continuing and discontinued operations. Our loss from discontinued operations for the three months ended March 31, 2023 and 2022 consist of general and administrative expense associated with ongoing litigation for our former Offshore Division. iA
summary of additional financial information related to our discontinued operations is as follows:
Reconciliation of Major Classes of Assets and Liabilities of the Discontinued Operations to Amounts Presented Separately in the Statement of Financial Position
Our contract asset balances, primarily associated with contractual invoicing milestones and/or customer documentation requirements, were $i28.8 million
and $i33.1 million as of March 31, 2023 and December 31, 2022, respectively. Contract assets, along with billed trade accounts receivable, are included in trade accounts receivable in our consolidated balance sheets.
Unearned income includes amounts in which the
Company was contractually allowed to invoice prior to satisfying the associated performance obligations. We are also party to agreements in which Standard Lithium Ltd. (NYSE: SLI) (“Standard Lithium”) has the right to explore, and an option to acquire the rights to produce and extract lithium in our Arkansas leases as well as other potential resources in the Mojave region of California. The Company receives cash and stock of Standard Lithium under the terms of the arrangements. The cash and stock component of consideration received is initially recorded as unearned income based on the quoted market price at the time the stock is received, then recognized in income over the contract term. Unearned income balances were $i4.2
million and $i3.7 million as of March 31, 2023 and December 31, 2022, respectively, and vary based on the timing of invoicing and performance obligations being met and the timing of the receipt of stock and cash from Standard Lithium. Unearned income is included in accrued liabilities and other in our consolidated balance sheets. During the three-month periods ended March 31, 2023 and March 31,
2022, contract costs were not significant.
During the three-month periods ended March 31, 2023 and March 31, 2022, we recognized approximately $i0.7 million and $i0.3 million
of revenue, respectively, deferred in unearned income as of the beginning of the period. We also recognized approximately $i0.9 million and $i0.6 million
of income during the three-month periods ended March 31, 2023 and March 31, 2022, respectively, related to the Standard Lithium arrangements. These amounts are included in other income, net in our consolidated statements of operations.
We disaggregate revenue from contracts with customers into Product Sales and Services within each segment, as noted in our itwo
reportable segments in Note 10 - “Industry Segments.”iIn addition, we disaggregate revenue from contracts with customers by geography based on the following table below.
Finished
goods inventories include newly manufactured clear brine fluids as well as used brines that are repurchased from certain customers for recycling.
Following
the January 2021 sale of the general partner of CSI Compressco LP (“CSI Compressco”), we continue to own approximately i3.7% of the outstanding CSI Compressco common units (NASDAQ: CCLP) as of March 31, 2023.
We
have an intellectual property joint development agreement in place with CarbonFree to evaluate potential new technologies. CarbonFree is a carbon capture company with patented technologies that capture CO2 and mineralize emissions to make commercial, carbon-negative chemicals. In December 2021, we invested $i5.0 million in a convertible note issued by CarbonFree. Our exposure to potential losses by CarbonFree is limited to our investment in the convertible note and associated capitalized
and accrued interest.
In addition, we are party to agreements in which Standard Lithium has the right to explore, and an option to acquire the rights to produce and extract lithium in our Arkansas leases as well as additional potential resources in the Mojave region of California. The Company receives cash and stock of Standard Lithium under the terms of the arrangements. The cash and stock component of consideration received is initially recorded as unearned income based on the quoted market price at the time the stock is received, then recognized in income over the contract term.
See Note 8 - “Fair Value Measurements” for further information.
(1)
Net of unamortized discount of $i3.1 million and $i3.4 million as of March 31,
2023 and December 31, 2022, respectively, and net of unamortized deferred financing costs of $i4.7 million and $i5.1
million as of March 31, 2023 and December 31, 2022, respectively.
(2) Net of unamortized deferred financing costs of $i1.0 million and $i1.1 million
as of March 31, 2023 and December 31, 2022, respectively.
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Term Credit Agreement
As of March 31, 2023, we had $i155.3 million outstanding, net of unamortized discounts and unamortized deferred
financing costs under our term credit agreement (“Term Credit Agreement”). The 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 March 31, 2023, the interest rate per annum on borrowings under the Term Credit Agreement is i10.88%. For additional information on our Term Credit agreement, see our 2022
Annual Report.
ABL Credit Agreement
As of March 31, 2023, our asset-based credit agreement (“ABL Credit Agreement”) provides for a senior secured revolving credit facility of up to $i80.0 million, with a $i20.0 million
accordion. The credit facility is subject to a borrowing base determined monthly by reference to the value of inventory and accounts receivable, and includes a sublimit of $i20.0 million for letters of credit, a swingline loan sublimit of $i11.5 million,
and a $i15.0 million sub-facility subject to a borrowing base consisting of certain trade receivables and inventory in the United Kingdom.
As of March 31, 2023, we had $i6.2
million outstanding and $i8.3 million in letters of credit and guaranteesunder our ABL Credit Agreement, respectively. Subject to compliance with the covenants, borrowing base, and other provisions of the ABL Credit Agreement that may limit borrowings, we had availability of $65.4 million under this agreement.
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 March 31, 2023, we had $i1.7 million outstanding and availability of approximately $i0.3
million under the Argentina Credit Agreement. Borrowings bear interest at a rate of i2.50% 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 (“Swedish Credit Facility”). As of March 31, 2023, we had $i0.5 million outstanding and availability of approximately $i4.4 million
under the Swedish Credit Facility. 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 i2.95% 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 an agreement guaranteed by certain accounts receivable and inventory in Finland (“Finland Credit Agreement”). As of March 31, 2023, there were $i1.5 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.
Covenants
Our credit agreements contain certain affirmative and negative covenants, including covenants that restrict the ability to pay dividends or other restricted payments. As of March 31, 2023, we are in compliance with all covenants under the credit agreements.
NOTE 7 – iCOMMITMENTS
AND CONTINGENCIES
Litigation
We are named defendants in several lawsuits and respondents in certain governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or other proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse impact on our financial condition, results of operations, or liquidity.
We have a Bromine Requirements Sales Agreement (“Sales Agreement”) to purchase a certain volume of elemental bromine from LANXESS Corporation (formerly Chemtura Corporation) (“LANXESS”), included
in Product Purchase Obligations below. LANXESS notified us of a proposed non-ordinary course increase to the price of bromine, which we believe is not justified nor appropriate under the Sales Agreement. After lengthy discussions, we and LANXESS were unable to reach an agreement regarding the validity of the proposed price increase; therefore, we filed for arbitration in May 2022 seeking declaratory relief, among other relief, declaring that the proposed price increase is invalid. In September 2022, LANXESS filed a counterclaim with the American Arbitration Association seeking declaratory relief, among other relief, declaring that the proposed price increase was valid and seeking damages in the amount of the price increase from July 1, 2022 forward. In October 2022, we filed a reply to LANXESS’ counterclaim disputing the counterclaim and amending our original demand. The arbitration is currently pending, and the final
hearing is set to begin on March 4, 2024. Discussions with LANXESS regarding this arbitration are ongoing. We are unable to predict the duration, scope, or impact of this proceeding on our consolidated financial statements.
There have been no other material developments in our legal proceedings during the quarter ended March 31, 2023. For additional discussionofourlegalproceedings, please see our 2022 Annual Report.
In the normal course of our Completion Fluids & Products Division operations, we enter into supply agreements with certain manufacturers of various raw materials and finished products. Some of these agreements have terms and conditions that specify a minimum or maximum level of purchases over the term of the agreement. Other agreements require us to purchase the entire output of the raw material or finished product produced by the manufacturer. Our purchase obligations under these agreements apply only with regard to raw materials and finished products that meet specifications set forth in the agreements. We recognize a liability for the purchase of such products at the time we receive them. As of March 31, 2023, the aggregate amount of the fixed and determinable
portion of the purchase obligation pursuant to our Completion Fluids & Products Division’s supply agreements wasapproximately $i113.9 million, including $i11.4 million
for the remainder of 2023, an average of $iiii17.9/// million
per year from 2024 to 2027 and $i30.8 million thereafter, extending through 2029.
Asset Purchase Obligation
In March 2023, we signed a purchase and sale agreement to acquire a chemical plant in Brazil to expand our completion fluids operational capacity. The new facility is adjacent to our existing facility. and the purchase price is $i3.2 million,
consisting of $i0.6 million due at closing and two payments of $ii1.3/ million
due on each of the first and second anniversary of closing. The acquisition is expected to close during the second quarter of 2023, subject to government approval. This investment, in addition to the Gulf of Mexico and North Sea investments during the fourth quarter of 2022, complete our planned expansions in three of our key offshore markets.
We retained an interest in CSI Compressco representing approximately i3.7% of CSI Compressco’s outstanding common units as of March 31, 2023 and in December 2021, we invested in a $i5.0 million
convertible note issued by CarbonFree. In addition, we receive cash and stock of Standard Lithium under the terms of our arrangements as noted in Note 5 - “Investments.”
Our investments in CSI Compressco and Standard Lithium are recorded in investments on our consolidated balance sheets based on the quoted market stock price (Level 1 fair value measurements). The stock component of consideration received from Standard Lithium is initially recorded as unearned income based on the quoted market price at the time the stock is received, then recognized in income over the contract term. Changes in the value of stock are recorded in other (income) expense, net in our consolidated statements of operations.
Our investment
in CarbonFree is recorded in our consolidated financial statements based on an internal valuation with assistance from a third-party valuation specialist (a Level 3 fair value measurement). The valuation is impacted by key assumptions, including the assumed probability and timing of potential debt or equity offerings. The convertible note includes an option to convert the note into equity interests issued by CarbonFree. The change in the fair value of the embedded option is included in other (income) expense, net in our consolidated statements of operations. The change in the fair value of the convertible note, excluding the embedded option, is included in other comprehensive income (loss) in our consolidated statements of comprehensive income. iThe
change in our investment in CarbonFree for the three-month period ended March 31, 2023 is as follows:
The
fair values of cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and long-term debt pursuant to our Term Credit Agreement, ABL Credit Agreement, Argentina Credit Agreement, and Swedish Credit Agreement approximate their carrying amounts. See Note 6 - “Long-Term Debt and Other Borrowings” for further discussion.
NOTE 9 – iNET INCOME PER SHARE
i
The
following is a reconciliation of the weighted average number of common shares outstanding with the number of shares used in the computations of net income per common and common equivalent share:
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 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.
First-quarter consolidated revenue of $146.2 million was comparable to fourth-quarter levels and greater than pre-pandemic levels, although with significantly fewer operating frac crews in the United States.
Completion Fluids & Products Division revenues increased 4% sequentially despite significant projects that had previously
moved up from the first quarter of 2023 into the fourth quarter of 2022. The stronger performance was also driven by improved pricing and volumes in the industrial chemicals business where capacity is almost back to levels experienced prior to the Russia/Ukraine conflict. Results for the first quarter of 2023 also reflect a full-quarter contribution from the fluids acquisition late last year in the North Sea, which performed above expectations. The outlook for international and offshore markets activity growth remains strong. With the planned expansion of our Brazil completion fluids blending and storage facility in the second quarter of 2023, we have now completed or committed to three strategic investments to grow our market position and add capacity in key offshore markets.
Our Water & Flowback Services revenues increased significantly compared to the first quarter of the prior year, driven
primarily by growth in our domestic TETRA SandStormTM business, as well as from the first two early production facilities in Latin America that became operational in the third quarter of 2022. The early production facilities are longer-term, high-margin projects with stable and predictable cash flows and we anticipate commencing operation on a third early production facility in the second quarter of 2023. Our fleet of TETRA SandStormTM advanced cyclone technology separators remains at high utilization with continued market penetration and positive pricing progression. Water & Flowback Services revenues decreased slightly compared to the fourth quarter due to the timing of certain customer completion schedules.
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 2022, we completed the maiden inferred bromine and lithium brine resource estimation report for our leased acreage in the Smackover Formation in Southwest Arkansas, as well as a front-end engineering and design study for the design of a brine-to-bromine processing plant, pipeline and related assets. Additional steps are required before making a decision to develop the bromine assets, including further studies to analyze the resource and completion of a pre-feasibility and/or feasibility study. A second exploratory well on our acreage in Arkansas is in progress as of April 28, 2023 with the intent to improve the accuracy of our lithium and bromine resource estimates.
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.
Income (loss) before taxes and discontinued operations
7,534
(1,163)
8,697
NM(1)
Income
(loss) before taxes and discontinued operations as a percentage of revenue
5.2
%
(0.8)
%
Provision for income taxes
1,489
666
823
123.6
%
Income
(loss) before discontinued operations
6,045
(1,829)
7,874
(430.5)
%
Discontinued operations:
Loss from discontinued operations, net of taxes
(12)
(75)
63
(84.0)
%
Net
income (loss)
6,033
(1,904)
7,937
(416.9)
%
Loss attributable to noncontrolling interests
7
—
7
100.0
%
Net
income (loss) attributable to TETRA stockholders
$
6,040
$
(1,904)
$
7,944
(417.2)
%
(1) Percent change is not meaningful
Consolidated revenues are comparable between the current and previous quarters, with the decrease in revenues from the Water & Flowback Services
division mostly offset by an increase in overall activity for the Completion Fluids & Products division. 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, as well as a $2.9 million insurance settlement received in March 2023, which was related to damage to our Lake Charles facility during Hurricane Laura in 2020. See Divisional Comparisons section below for additional discussion.
Consolidated exploration and pre-development costs decreased primarily due to completion of the front-end engineering and design study for our potential brine to bromine processing plant in Southwest Arkansas
during the prior quarter.
Consolidated other (income) expense, net, increased in the current quarter, compared to the prior quarter primarily due to a $0.9 million increase in unrealized gain from our Standard Lithium shares received in April 2022 and a $1.5 million decrease in foreign exchange losses compared to the previous quarter. These changes are partially offset by a $1.4 million increase in unrealized loss due to the change in the unit price of the CSI Compressco common units we own and a $0.4 million increase in unrealized loss from the change in fair value of the CarbonFree convertible note embedded option.
Consolidated provision for income tax was $1.5 million during the current quarter, compared to a $0.7 million provision during the prior quarter. Our consolidated effective tax rate for the three months ended March 31, 2023 was 19.8% 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
March 31,
December
31,
$ Change
% Change
2023
2022
(in thousands, except percentages)
Revenues
$
69,042
$
66,219
$
2,823
4.3
%
Gross
profit
25,010
19,993
5,017
25.1
%
Gross profit as a percentage of revenue
36.2
%
30.2
%
Exploration
and pre-development costs
720
3,135
(2,415)
(77.0)
%
General and administrative expense
7,173
6,730
443
6.6
%
General
and administrative expense as a percentage of revenue
10.4
%
10.2
%
Interest income, net
(395)
(304)
(91)
29.9
%
Other
income, net
(930)
(24)
(906)
NM(1)
Income before taxes and discontinued operations
$
18,442
$
10,456
$
7,986
76.4
%
Income
before taxes and discontinued operations as a percentage of revenue
26.7
%
15.8
%
(1) Percent change is not meaningful
Revenues for our Completion Fluids & Products Division increased primarily due to increased pricing for industrial chemical sales, as well as higher sales volume in Europe.
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, as well as a $2.9 million insurance settlement received in March 2023 related to damage to our Lake Charles facility during Hurricane Laura in 2020. Gross profit as a percentage of revenue improved compared to the prior quarter due to the insurance settlement related to our Lake Charles facility and the shift to a higher margin mix of products. 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 primarily due to the $5.0 million higher gross profit described above, a $2.4 million decrease in exploration
and pre-development costs associated with front-end engineering design for our potential Southwest Arkansas bromine development, a $0.4 million decrease in foreign exchange losses and a $0.9 million increase in unrealized gain from our investment in Standard Lithium shares received in April 2022. These changes were partially offset by the $0.4 million unrealized loss from the change in fair value of the CarbonFree convertible note embedded option.
General and administrative expense as a percentage of revenue
6.4
%
7.3
%
Interest
income, net
27
140
(113)
(80.7)
%
Other income, net
58
322
(264)
(82.0)
%
Income
before taxes and discontinued operations
$
6,378
$
4,924
$
1,454
29.5
%
Income before taxes and discontinued operations as a percentage of revenue
8.3
%
6.1
%
Revenues
for our Water & Flowback Services Division decreased in the current quarter compared to the prior quarter, primarily in our Production Testing business due to the lower overall customer activity in the North America onshore business impacted by the timing of customer completion schedules.
Gross profit for our Water & Flowback Services Division remained flat compared to the prior quarter as the effect of lower revenue was offset by a more profitable sales mix. 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. Our SandStorm fleet remains at high utilization with continued market penetration and positive pricing progression.
The Water
& Flowback Services Division income before taxes and discontinued operations increased due to a decrease in general and administrative expenses, including a $0.4 million decrease in wages and benefits, a $0.3 million decrease in general expenses and a $0.3 million decrease in professional fees, as well as a $0.3 million decrease in foreign exchange losses.
Corporate Overhead
Three
Months Ended
Period to Period Change
March 31,
December 31,
$ Change
% Change
2023
2022
(in thousands, except percentages)
Depreciation
and amortization
$
109
$
163
$
(54)
(33.1)
%
General and administrative expense
11,059
11,221
(162)
(1.4)
%
Interest
expense, net
5,460
5,064
396
7.8
%
Other expense, net
658
95
563
592.6
%
Loss
before taxes and discontinued operations
$
(17,286)
$
(16,543)
$
(743)
4.5
%
Corporate overhead loss before taxes and discontinued operations increased primarily due to a $0.4 million increase in interest expense due to an increase in the interest rate on our Term Credit Agreement and higher borrowings under our ABL Credit Agreement. Other expense, net increased
primarily due to a $1.4 million decrease in unrealized gains related to unit price changes of our investment in CSI Compressco, partially offset by a $0.8 million decrease in foreign exchange losses.
General
and administrative expense as a percentage of revenue
15.9
%
15.9
%
Interest expense, net
5,092
3,324
1,768
53.2
%
Other
income, net
(214)
(2,411)
2,197
(91.1)
%
Income before taxes and discontinued operations
7,534
8,934
(1,400)
15.7
%
Income
before taxes and discontinued operations as a percentage of revenue
5.2
%
6.9
%
Provision for income taxes
1,489
1,200
289
24.1
%
Income
before discontinued operations
6,045
7,734
(1,689)
21.8
%
Discontinued operations:
Loss from discontinued operations, net of taxes
(12)
(15)
3
(20.0)
%
Net
income
6,033
7,719
(1,686)
(21.8)
%
Loss attributable to noncontrolling interests
7
1
6
600.0
%
Net
income attributable to TETRA stockholders
$
6,040
$
7,720
$
(1,680)
(21.8)
%
Consolidated revenues increased in the current year primarily due to improving industry conditions compared to the prior year for our Water & Flowback Services division, as well as the first
two early production facilities in Argentina that commenced operations in the third quarter of 2022, partially offset by lower revenues from our Completion Fluids & Products 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 Water & Flowback Services division activity levels described above. Gross profit as a percentage of revenue decreased slightly due to a $2.9 million insurance settlement received in March 2023 associated with damage to our Lake Charles facility in 2020, compared to the $3.8 million insurance settlement received in March 2022.
Consolidated exploration
and pre-development costs decreased $1.2 million compared to the prior year following completion of the front-end engineering and design study during the fourth quarter of 2022 associated with our exploratory brine well in Arkansas.
Consolidated general and administrative expenses increased compared to the prior year, primarily due to $2.1 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 and higher travel expenses, partially offset by lower stock-based compensation expense. In addition, professional fees increased $0.5 million compared to the prior year.
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, decreased in the current year, compared to the prior year primarily due to a $1.6 million net decrease in unrealized gains on investments in CSI Compressco, Standard Lithium and CarbonFree, and a $1.0 million decrease in foreign exchange gains.
Consolidated provision for income taxes was $1.5 million during the current year, compared to $1.2 million during
the prior year. Our consolidated effective tax rate for the current year was 19.8% during the current year, compared to 13.4% during the prior year. The increase in our tax provision and effective tax rate compared to the prior year was primarily due to 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
Three
Months Ended
March 31,
Period to Period Change
2023
2022
$ Change
% Change
(in thousands, except percentages)
Revenues
$
69,042
$
73,194
$
(4,152)
(5.7)
%
Gross
profit
25,010
26,147
(1,137)
(4.3)
%
Gross profit as a percentage of revenue
36.2
%
35.7
%
Exploration
and pre-development costs
720
1,930
(1,210)
(62.7)
%
General and administrative expense
7,173
6,059
1,114
18.4
%
General
and administrative expense as a percentage of revenue
10.4
%
8.3
%
Interest income, net
(395)
(323)
(72)
22.3
%
Other
income, net
(930)
(811)
(119)
14.7
%
Income before taxes and discontinued operations
$
18,442
$
19,292
$
(850)
(4.4)
%
Income
before taxes and discontinued operations as a percentage of revenue
26.7
%
26.4
%
Revenues for our Completion Fluids & Products Division decreased compared to the prior year primarily due to lower activity in the Gulf of Mexico due to the timing of projects, partially offset by higher sales volumes in Latin America and onshore in the United States.
Gross profit for our Completion Fluids & Products Division decreased
compared to the prior year due to decrease in revenues, as well as a $0.9 million decrease in insurance settlements received in 2023 compared to 2022 from damage to our Lake Charles facility in 2020.
Income before taxes and discontinued operations for our Completion Fluids & Products Division decreased compared to the prior year driven by lower gross profit, a $1.1 million increase in general and administrative costs due to higher short-term incentive expenses, and divisional headcount additions during 2022 to support higher activity levels, partially offset by a $1.2 million decrease in costs associated with the exploratory brine project compared to the prior period.
General and administrative expense as a percentage of revenue
6.4
%
7.5
%
Interest
expense, net
27
—
27
100.0
%
Other (income) expense, net
58
(458)
516
(112.7)
%
Income
before taxes and discontinued operations
$
6,378
$
2,682
$
3,696
(137.8)
%
Income before taxes and discontinued operations as a percentage of revenue
8.3
%
4.7
%
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, as commodity prices recovered during 2022 and remained strong. Revenues have also increased in Latin America due to two early production facilities that began operations in the third quarter of 2022.
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 new higher-margin projects commenced.
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 $0.7 million increase in salary and employee expense from higher short and long-term incentive expenses, and divisional headcount additions to support higher activity levels, partially offset by a $0.3 million decrease in foreign exchange gains.
Corporate Overhead
Three
Months Ended
March 31,
Period to Period Change
2023
2022
$ Change
% Change
(in thousands, except percentages)
Depreciation and amortization
$
109
$
191
$
(82)
(42.9)
%
General
and administrative expense
11,059
10,346
713
6.9
%
Interest expense, net
5,460
3,647
1,813
49.7
%
Other
(income) expense, net
658
(1,141)
1,799
(157.7)
%
Loss before taxes and discontinued operations
$
(17,286)
$
(13,043)
$
(4,243)
32.5
%
Corporate
overhead loss before taxes and discontinued operations increased due to a $0.7 million increase in general and administrative expense, as well as a $1.8 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, and a $1.8 million decrease in other income, net. 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, net decreased primarily due to a $1.6 million decrease in unrealized gains related to unit price changes of our investment in CSI Compressco, and a $0.4 million decrease in foreign exchange gains.
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 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 and 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.
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 pre-development costs
1,930
—
—
—
1,930
Adjustment to long-term incentives
—
—
784
—
784
Former
CEO stock appreciation right expense
—
—
472
—
472
Interest
(income) expense, net
(323)
—
—
3,647
3,324
Depreciation, amortization and accretion
1,948
5,543
—
188
7,679
Equity-based
compensation expense
—
—
1,104
—
1,104
Adjusted EBITDA
$
19,097
$
8,225
$
(7,986)
$
1,141
$
20,477
Adjusted
EBITDA as a % of revenue
26.1
%
14.5
%
15.7
%
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 aswe 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 first quarter was $86.7 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 our 2022 Annual Report and in Note 6 - Long Term Debt and Other Borrowings.
Our consolidated sources and uses of cash are as follows:
Consolidated cash flows provided by operating activities increased compared to the first three months of 2022 primarily due to an increase in cash profit and working capital changes.
Total cash capital expenditures during the first three months of 2023 were $12.8 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 $10.3 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 the third early production facility in Argentina. Our Completion Fluids & Products Division spent $2.4 million on capital expenditures, primarily supporting higher activity levels in the United States and Europe.
Investing activities during the first three months of 2023 and 2022 included $2.9 million and $3.8 million, respectively, 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, other than the asset purchase obligation described in Note 7 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements. If the forecasted demand for our products and services increases or decreases, the amount of planned expenditures on growth and expansion may be adjusted.
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. 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 TETRA, 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 three months of 2023 include $52.8 million of borrowings and $47.4 million of repayments under the ABL Credit Agreement, Argentina Credit Facility and Swedish Credit Facility, as well as $0.3 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.
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 March 31, 2023, $163.1 million in aggregate principal amount of our Term Credit Agreement is outstanding.
Asset-Based Credit Agreement. As of March 31, 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 March 31, 2023, we had $6.2 million outstanding and $8.3 million in letters of credit and guaranteesagainst our ABL Credit Agreement and availability of $65.4 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 March 31, 2023, we had $1.7 million outstanding and availability of approximately $0.3 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 March 31, 2023, we had $0.5 million outstanding and availability of approximately $4.4 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 March 31, 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 March 31, 2023,
the market value of our investments in CSI Compressco and Standard Lithium were $6.4 million and $1.5 million, respectively, with no holding restrictions on our ability to monetize our interests. We also hold an investment in a convertible note issued by CarbonFree valued at $5.9 million as of March 31, 2023. 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.
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 March 31, 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 our 2022 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. 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”.
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. Investors should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the
Company undertakes no obligation to update or revise any forward-looking statements, except as may be required by law.
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 on which they are 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, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk
The interest on our borrowings is subject to market risk exposure related to changes in applicable interest rates. Borrowings under the Term Credit Agreement bear interest at a rate per annum equal to, at the option of TETRA, either (i) LIBOR (subject to a 1% floor) plus a margin
of 6.25% per annum or (ii) a base rate plus a margin of 5.25% per annum. Borrowings under our ABL Credit Agreement bear interest at an agreed-upon percentage rate spread above LIBOR. Borrowings under our Argentina Credit Facility and Swedish Credit Facility bear interest at fixed rates of 2.50% and 2.95%, respectively. The following table sets forth as of March 31, 2023, the principal amount due under our long-term debt obligations and their respective weighted average interest rates. We are not a party to an interest rate swap contract or other derivative instrument designed to hedge our exposure to interest rate fluctuation risk.
We have currency exchange rate risk exposure related to revenues, expenses, operating receivables, and payables denominated in foreign currencies. We may enter into short-term foreign-currency forward derivative
contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected
transactions of certain foreign subsidiaries. Although contracts pursuant to this program will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they are not expected to be formally designated as hedge contracts
or qualify for hedge accounting treatment. Accordingly, any change in the fair value of these derivative instruments during a period will be included in the determination of earnings for that period. As of March 31, 2023, we did not have any foreign currency exchange contracts outstanding.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2023, the end of the period covered by this quarterly report.
There were no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
On May 31, 2022, TETRA filed a demand for arbitration with the American Arbitration Association (“AAA”) under a certain Bromine Requirements Sales Agreement between TETRA and LANXESS Corporation (formerly Chemtura Corporation, “LANXESS”) (the “Sales Agreement”).
Under the Sales Agreement, TETRA agreed to purchase a certain volume of elemental bromine. LANXESS notified TETRA of a proposed non-ordinary course increase
to the price of bromine, which TETRA believes is not justified nor appropriate under the Sales Agreement. After lengthy discussions, TETRA and LANXESS were unable to reach an agreement regarding the validity of the proposed price increase; therefore, TETRA filed for arbitration seeking declaratory relief, among other relief, declaring that the proposed price increase is invalid.
On September 19, 2022, LANXESS filed a counterclaim with the AAA seeking declaratory relief, among other relief, declaring that the proposed price increase was valid and seeking damages in the amount of the price increase from July 1, 2022 forward.
On October 4, 2022, TETRA filed
a reply to LANXESS’ counterclaim disputing the counterclaim and amending its original demand.
The arbitration is currently pending, and the final hearing is set to begin on March 4, 2024. TETRA is presently unable to predict the duration, scope, or result of this proceeding. Discussions with LANXESS regarding this arbitration are ongoing.
For more information regarding litigation, see “Item 1. Legal Proceedings” in our 2022 Annual Report and Note 7 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements.
Item
1A. Risk Factors.
As of the date of this filing, TETRA and its operations continue to be subject to the risk factors previously disclosed in the “Risk Factors” sections contained in our 2022 Annual Report. In addition, we are subject to the following supplemental risk factor.
We may not be able to utilize all or a portion of our net operating loss carryforwards or other tax benefits to offset future taxable income for U.S. federal, state or foreign tax purposes, which could adversely affect our financial position, results of operations and cash flows. We have adopted a Tax Benefits Preservation Plan that is designed to protect our Tax Attributes.
As
of December 31, 2022, we had United States. federal, state, and foreign deferred tax assets associated with net operating loss carryforwards (“NOLs”) equal to approximately $86.2 million, $11.1 million, and $7.8 million, respectively. In those countries and states in which NOLs are subject to an expiration period, our NOLs, if not utilized, will expire at various dates from 2023 through 2042.
We may be limited in the portion of our NOLs that we can use in the future to offset taxable income for United States, federal, state, and foreign income tax purposes. Utilization of these NOLs depends on many factors, including our future taxable income, which cannot be assured.
Under Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended (the “Code”),
if a corporation experiences an “ownership change,” any NOLs, losses or deductions attributable to a “net unrealized built-in loss” and other tax attributes (“Tax Attributes”) could be substantially limited, and timing of the usage of such Tax Attributes could be substantially delayed. A corporation generally will experience an ownership change if one or more stockholders (or group of stockholders) who are each deemed to own at least 5% of the corporation’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a testing period (generally, a rolling three-year period). Utilization of our Tax Attributes may be subject to a significant annual limitation as a result of prior or future “ownership changes.” Determining the limitations under Section 382 is
technical and highly complex, and no assurance can be given that upon further analysis our ability to take advantage of our NOLs or other Tax Attributes may be limited to a greater extent than we currently anticipate.
The Board of Directors has adopted the Tax Plan to protect the availability of the Company’s Tax Attributes. The Tax Plan is designed to reduce the likelihood that we experience an ownership change by deterring certain acquisitions of our common stock. There can be no assurances, however, that the deterrent mechanism will be effective, and, therefore, such acquisitions may still occur. In addition, the Tax Plan could adversely affect the marketability of our common stock by discouraging existing or potential investors from acquiring our common stock or additional shares of our common
stock. If the Company is unable to use the Tax Attributes in years in which it has taxable income, the Company will pay significantly more in cash tax than if it were able to utilize the Tax Attributes, and those tax costs would negatively impact the Company’s financial position, results of operations and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline XBRL documents
* Filed with this report.
** Furnished with this report.
++ Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three-month periods ended March 31, 2023 and 2022; (ii) Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2023 and 2022; (iii) Consolidated Balance Sheets as of March 31, 2023 and December 31,
2022; (iv) Consolidated Statements of Equity for the three-month periods ended March 31, 2023 and 2022 ; (v) Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2023 and 2022; and (vi) Notes to Consolidated Financial Statements for the three months ended March 31, 2023.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
