What changed in this filing

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Item 1. Business

2024-03-15 compared with 2023-03-23 · 48 added, 71 removed, 136 unchanged (47% of the section changed)

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The Company serves specialty chemistry needs for both domestic and international energy markets.

The Company’s Chemistry Technologies (“CT”) segment designs, develops, manufactures, packages and distributes green, specialty chemicals that help their customers meet their environmental, social and governance (“ESG”) and operational goals, aiming to enhance the profitability of hydrocarbon producers.

The Company’s Chemistry Technologies (“CT”) segment designs, develops, manufactures, packages and distributes green, specialty chemicals that help customers improve their return on invested capital, lower operational costs and realize tangible environmental benefits aimed at enhancing the profitability of hydrocarbon producers.

The Company’s Data Analytics (“DA”) segment aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics associated with their hydrocarbon streams in seconds rather than minutes or days.

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Recent Developments

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC.

Under the Initial ProFrac Agreement, ProFrac Services, LLC was obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the Initial ProFrac Agreement.

If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year.

The Initial ProFrac Agreement has a term of 3 years from April 1, 2022.

On May 17, 2022, the Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable.

The Initial ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.

On February 1, 2023, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No.

2”) dated February 2, 2022.

The Amended ProFrac Agreement No.

2 has an effective date of January 1, 2023.

The ProFrac Agreement was amended to (1) provide a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of active hydraulic fracturing fleets to 30 fleets, (2) waive any liquidated damages payment relating to any potential order shortfall prior to January 1, 2023, (3) add additional fees to certain products, and (4) provide margin increases based on revenue percentages from non-ProFrac customers.

The Company believes the net present value of the economic benefit attributable to the Amended ProFrac Agreement No.

2 will exceed the value of the liquidated damages payments that would have been received for the period from April 1, 2022 through December 31, 2022.

On February 2, 2023, the Convertible Notes Payable and certain Contract Consideration Convertible Notes Payable previously issued on February 2, 2022 were converted upon maturity into 10,355,840 shares of common stock and 25,366,561 Pre-Funded Warrants to purchase common stock for a nominal exercise price of $0.0001 per share exercisable subject to the limitations on exercise described therein.

All of the holders elected to receive shares of common stock upon conversion except for Profrac Holdings LLC, which elected to receive the Pre-Funded Warrants.

On January 19, 2023, the Company announced the departure of John W.

from his role as Chief Executive Officer and President of the Company, effective January 19, 2023.

Gibson also stepped down from his role as Chairman of the Board of Directors (the “Board”) of the Company.

Gibson’s departure was treated as a termination without cause.

Gibson’s departure as Chairman of the Board, Chief Executive Officer and President of the Company was not due to any disagreement with the Company or any matter relating to the Company’s operations, policies or practices.

The Board has an active search process underway to select a permanent Chief Executive Officer of the Company.

During the transition period, Harsha V.

Agadi, who has served as a member of the Board since July 2020, will serve as the Company’s interim Chief Executive Officer.

The Board appointed Dr.

Ryan Ezell, the Company’s then existing President, as its Chief Executive Officer, effective as of June 6, 2023.

Ezell was also appointed to the Board, effective as of June 8, 2023.

On August 14, 2023, the Company entered into an asset-based loan (the “ABL”) providing for a 24-month term with up to $10 million of initial credit availability for eligible accounts receivable and eligible inventory.

On October 5, 2023, the maximum credit availability under the ABL was increased by $3.8 million to a total of $13.8 million.

In order to regain compliance with New York Stock Exchange rules regarding minimum share price, the Company completed a 1-for-6 reverse split of its common stock (the “Reverse Stock Split”).

The shares of common stock began trading on the split-adjusted basis under the Company’s existing trading symbol, “FTK” on September 26, 2023.

Description of Operations and Segments

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Chemistry Technologies

The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital.

The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program.

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

The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.

Customers of the CT segment include those of energy related markets, such as our related party ProFrac Services, LLC, with whom we have a long-term supply agreement, as well as consumer and industrial applications.

Customers of the CT segment include those of energy related markets, such as our related party ProFrac Services, LLC, with whom we have a long-term supply agreement, as well as industrial applications.

Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from our best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.

ProFrac Supply Agreement

On February 2, 2022, the Company entered into the Initial ProFrac Agreement, which was subsequently amended on May 17, 2022 and February 1, 2023 (collectively, the “ProFrac Agreement”).

The ProFrac Agreement contains minimum requirements for chemistry purchases.

If the minimum volumes are not achieved within the applicable measurement period, ProFrac Services, LLC is required to pay to the Company, as liquidated damages, an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during the measurement period (“Contract Shortfall Fees”).

The current measurement period for Contract Shortfall Fees is June 1, 2023 through December 31, 2023.

The minimum purchase requirements were not met during the current measurement period, and as a result, related party revenues for the year ended December 31, 2023 reflect Contract Shortfall Fees of $20.1 million, of which $10.0 million was collected through March 11, 2024, with the remainder due on or before April 8, 2024.

Data Analytics

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The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants as well as ProFrac Services, LLC, to whom twenty JP3 units are expected to be deployed in 2023.

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

We believe customers using this technology have obtained significant benefits, including additional profits, by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, allowing for the use of significantly lower cost field gas instead of diesel to generate power, lower emissions and protect equipment, and ensuring product quality while reducing giveaways, i.e., providing higher value products at the lower value products prices.

More efficient operations have the benefit of reducing their carbon footprint, e.g., less flaring and reduction in energy expenditure for compression and re-processing.

Our customers in North America include the

supermajors, some of the largest midstream companies and large gas processing plants.

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

Research & Innovation

R&I supports the acceleration of ESG solutions for both business segments through green chemistry formulation and Environmental Protection Agency (“EPA”) regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects.

R&I supports both business segments through green chemistry formulation, specialty chemical formulations and Environmental Protection Agency (“EPA”) regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects.

The purpose of R&I is to supply the Company’s business segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends.

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For the years ended December 31, 2023 and 2022, the Company incurred $ 2.5 million and $ 4.4 million, respectively, of research and development expense.

The Company expects that its 2023 research and development investment will continue to support new product development, especially in support of enhanced ESG standards, increased adoption of green chemistry and conventional customization initiatives for its clients.

The Company expects that its 2024 research and development investment will continue to support new product development, especially in support of enhanced environmental demands, increased adoption of green chemistry and conventional customization initiatives for its clients.

Overall, operations generally are not significantly affected by seasonality;

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• the severity and duration of winter temperatures in North America, which impacts natural gas storage levels, drilling activity, commodity prices and operations at the Company’s facilities;

• material deviations from normal seasonality for an extended period can impact access to operations, reduced performance at manufacturing facilities, inability to deploy required personnel, supply chain interruptions, facility damage and customer activity levels;

• the timing and impact of hurricanes upon coastal and offshore operations;

• the COVID-19 pandemic or other pandemics or similar phenomena, which may impact seasonal purchasing and selling cycles.

• material deviations from normal seasonality for an extended period, which can impact access to operations, reduced performance at manufacturing facilities, inability to deploy required personnel, supply chain interruptions, facility damage and customer activity levels;

• hurricanes upon coastal and offshore operations, which can impact access to operations, reduced performance at manufacturing facilities, inability to deploy required personnel, supply chain interruptions, facility damage and customer activity levels;

• pandemics or similar phenomena, which may impact seasonal purchasing and selling cycles.

Product Demand and Marketing

Demand for the Company’s energy-focused product s and services in both the CT and DA segments is driven by energy supply and demand, as well as operator desire to deploy improved ESG solutions.

Demand for the Company’s energy-focused product s and services in both the CT and DA segments is driven by energy supply and demand, as well as operator desire to improve profitability and returns.

Demand for the Company’s energy chemistry products and services is dependent on levels of conventional and unconventional oil and natural gas well drilling and completion activity, both domestically and internationally.

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The decision to pursue patent protection is dependent upon several factors, including whether patent protection can be obtained, cost effectiveness, and alignment with operational and commercial interests.

The Company believes its patent and trademark portfolio, combined with confidentiality agreements, EPA registrations and licensing, trade secrets, proprietary designs, and manufacturing and operational expertise, are sufficient to protect its intellectual property and provide continued strategic advantage.

The Company believes its patent and trademark

portfolio, combined with confidentiality agreements, EPA registrations and licensing, trade secrets, proprietary designs, and manufacturing and operational expertise, are sufficient to protect its intellectual property and provide continued strategic advantage.

As of December 31, 2023, the Company had 138 granted patents, including 114 patents in our CT segment and 24 patents in our DA segment.

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The patents of the DA segment cover various systems and methods of use for online determination of chemical composition and data analysis.

We believe the duration of our patents is adequate relative to the expected lives of our products.

In addition, the Company had 41 registered trademarks in the U.S.

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Our ability to compete is dependent upon the Company’s ability to differentiate its products and services by providing superior quality and service, and maintaining a competitive cost structure with sufficient and reliable access to raw material supplies.

Activity levels in the oilfield goods and services industry are impacted by current and expected oil and natural gas prices, oil and natural gas drilling activity, production levels, customer drilling and completion-designated capital spending, and customer commitment to improved ESG performance.

The unpredictability of the energy industry and commodity price fluctuations create both increased risk and opportunity for the products and services of both the Company and its competitors.

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The Company is diligent in its efforts to identify alternate suppliers in its contingency planning utilizing competitive bidding practices to proactively reduce costs and potential supply shortages.

During 2022, the Company worked to broaden the technical specifications of some products to help ensure that required molecules could be sourced from more than one supplier.

The DA segment currently sources spectrometers from a single supplier.

Due to long lead times, supply chain disruption could adversely impact the results of the segment in 2023 and the years beyond.

The Company has worked to broaden the technical specifications of some products to help ensure that required molecules can be sourced from more than one supplier.

Government Regulations

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Flotek’s vision is to create solutions to reduce the environmental impact of energy on air, water, land and people.

Our mission is to be the collaborative ESG partner of choice for sustainable chemistry technology and digital analytics solutions.

Our mission is to be the collaborative partner of choice for sustainable chemistry technology and digital analytics solutions.

We believe that green chemistry and digital transformation reduce the total cost of ownership and environmental risk of our customers and can transform business by reducing carbon footprints, energy consumption, emissions and overall environmental impact.

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In addition, our analyzers’ ability to determine the mixing of two batches of product (“transmix”) in real-time results in less time, energy and resources spent processing the transmix.

Finally, our analyzers, when used to monitor field gas for well-site power generation, allow customers to significantly reduce the use of higher emission and more expensive diesel.

Human Capital

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Eligible employees may elect to participate in the Company’s employee stock purchase plan and retirement plans, including its 401(k) plan in the U.S.

and its Registered Retirement Savings Plan in Canada.

The Company currently matches 401(k) contributions at 100 % of up to 2 % of an employee’s compensation.

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Changes often occur.

Going into 2023 we believe that we are in the early years of a tight supply cycle for oil and gas triggered by a long period of underinvestment in energy development, infrastructure and new sources of oil and gas production.

While the demand for oil and gas could fluctuate depending on the macroeconomic condition, we believe that this tight supply cycle could last and could provide support to high oil prices for multiple years.

We expect that the strongest potential growth throughout 2023 will likely come from independent, rather than large major exploration and production companies.

The demand for oil and gas and related services fluctuates due to numerous factors including weather and macroeconomic and geopolitical conditions.

Despite the near term volatility in commodity pricing, leading to the recent weakness in onshore drilling and completion activity, the fundamentals for energy related services remain strong.

The overall expansion of the global economy should continue to create substantial demand for all forms of energy which will increase service intensity.

Independent exploration and production companies operate the majority of U.S.

land rigs and react quickly to changing commodity prices.

In the current commodity price environment, we expect these companies to increase activity and the larger companies to have modest spending increases in the year ahead.

In the current commodity price environment, we expect these companies in oil-weighted basins to maintain or increase activity while companies in gas-weighted basins are expected to maintain or decrease activity over the next 12

In general, we expect the major exploration and production companies to maintain activity levels over the next 12 months.

Digital Analytics

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We believe Verax ™ analyzers have gained a foothold in North American markets for critical applications where compositional information is needed in real-time.

The technology delivers insight on valuable operational data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously.

We continue to work with our customers to identify further facilities and applications where our technology has the highest value.

The technology delivers insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API (American Petroleum Institute) gravity, viscosity, BTU (British Thermal Unit) and more, simultaneously.

We continue to collaborate with our customers to identify further facilities and applications where our technology has the highest value.

To drive recurring revenue, we continue to build on the modular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations.

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We believe this allows customers to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades.

We are also gaining traction leveraging the Verax™ in applications where operators and service companies are using field gas as a substitute for

diesel in dual fuel engines as the market moves to Tier 4 equipment and eFleets.

Analyzing this in real-time allows companies to maximize the substitution rate while lowering emissions, reducing fuel consumption/costs, and protecting the equipment from damage.

ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment.

We anticipate the Company’s products and services could offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations.

The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry.

Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals.

Additionally, we believe the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.

We believe the industry focus on maintaining a “social license to operate” provides the platform to accelerate the sale of our products and services that we believe can help the customer achieve a greener goal.

We believe the performance driven ESG focus of the Company assists in reducing environmental liabilities and improving returns for our customers.

We are also gaining traction leveraging the Verax™ in applications where operators and service companies are using field gas as a substitute for diesel in dual fuel engines as the market moves to Tier 4 equipment and eFleets.

Analyzing this in real-time allows companies to maximize the field gas for diesel substitution rate providing significant cost savings while lowering emissions, reducing fuel consumption/costs, and protecting the equipment from damage.

The principal supply issues facing our industry for the next twelve months will include:

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• Availability of raw materials;

• Delays due to port congestion;

• Labor shortages;

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All bidding will require the risk of shipping costs and delays to be factored into proposals.

Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future.

The import of raw materials from China will also incur price increases.

Accelerating tensions between China and the U.S.

could also result in supply disruption.

The impacts of COVID-19 pandemic continue to affect the U.S.

and global economy.

We believe our protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge.

The pandemic has already affected and may continue to affect the U.S.

economy, including capital expenditures of our customers.

In addition, depending upon the length and severity of the pandemic, which cannot be predicted, we may experience disruptions to business operations in the future if new COVID-19 variants emerge.

Trucking availability and pricing will impact North American opportunities while security of delivery for sea-freight could impact sales of North American manufactured goods being delivered internationally for the foreseeable future.

The overall flow of materials globally could experience price increases.

Military conflicts in the Middle East could also result in supply disruption.

Available Information and Website

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The Company filed, or furnished, as applicable, all principal executive officer and financial officer certifications as required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with this Annual Report.

Information with respect to the

Company’s executive officers and directors is incorporated herein by reference to information to be included in the definitive proxy statement for the Company’s 2023 Annual Meeting of Stockholders.

Information with respect to the Company’s executive officers and directors is incorporated herein by reference to information to be included in the definitive proxy statement for the Company’s 2024 Annual Meeting of Stockholders.

The Company has disclosed and will continue to disclose any changes or amendments to the Company’s code of business conduct and ethics as well as waivers to the code of ethics applicable to executive management by posting such changes or waivers on the Company’s website in the “Corporate Governance” section under “Investor Relations” or in filings with the SEC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business