What changed in this filing

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Item 1A. Risk Factors

2024-03-15 compared with 2023-03-23 · 74 added, 122 removed, 334 unchanged (37% of the section changed)

The Company’s business, financial condition, results of operations, cash flows, liquidity and prospects are subject to various risks and uncertainties.

Readers of this Annual Report should not consider any descriptions of these risk factors to be a complete set of all potential risks that could affect the Company.

Readers of this Annual Report should not consider any descriptions of these risk factors to be a

complete set of all potential risks that could affect the Company.

These factors should be carefully considered together with the other information contained in this Annual Report and the other reports and materials filed by the Company with the SEC.

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global economic conditions;

lingering sentiment surrounding the pandemic;

the availability of credit;

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• global demand for energy as a result of population growth, economic development, and general economic and business conditions;

• the timing and rate of economic recovery from the effects of the pandemic;

• political and economic uncertainty, and sociopolitical unrest including the current military conflicts in Ukraine and Middle East and ongoing sanctions imposed on Russia;

• the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and the impact of non-OPEC producers on global supply;

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• pipeline capacity to critical markets and out of producing regions;

• political and economic uncertainty, sociopolitical unrest including the current conflict in Ukraine and ongoing sanctions imposed on Russia;

• cost of exploration, production and transport of oil and natural gas;

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• interest rates;

• the timing and rate of economic recovery from the effects of the pandemic;

• weather conditions;

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It is difficult to predict the pace of industry growth, the direction of oil and natural gas prices, the direction and magnitude of economic activity, the demand for professional chemistry products, and to what extent these conditions could affect the Company.

However, reduced cash flow and capital availability could adversely impact the financial condition of the

Company’s customers, which could result in customer project modifications, delays or cancellations, general business disruptions, and delay in, or nonpayment of, amounts that are owed to the Company.

However, reduced cash flow and capital availability could adversely impact the financial condition of the Company’s customers, which could result in customer project modifications, delays or cancellations, general business disruptions, and delay in, or nonpayment of, amounts that are owed to the Company.

This could cause a negative impact on the Company’s results of operations and cash flows.

Furthermore, if key suppliers were to experience significant cash flow constraints or become insolvent as a result of such conditions, a reduction or interruption in supplies or a significant increase in the price of supplies could occur, adversely impacting the Company’s results of operations and cash flows.

The Company’s reliance on the ProFrac Agreement could adversely impact our financial condition, results of operations and cash flows.

The ProFrac Agreement is a major source of the Company’s liquidity and we expect it to remain so over the term of the contract.

Revenues attributable to the ProFrac Agreement represented 65% of our total revenues during 2023.

If the Company became unable to execute the requirements of the agreement financially and operationally, from procuring inventory to meet the needs of ProFrac Services, LLC under the ProFrac Agreement and executing timely billing and collection, the Company’s

liquidity could be adversely impacted.

Further, our relationship with ProFrac Services, LLC may impact their competitors willingness to purchase products from the Company or to seek price concessions.

We are also dependent on ProFrac Services, LLC’s compliance in meeting their committed activity levels and paying for products provided, including any Contract Shortfall Fees, in a timely basis, in accordance with the terms of the ProFrac Agreement.

Our financial condition, results of operations and cash flows may be adversely impacted if ProFrac Services, LLC’s financial condition or its spending level under the ProFrac Agreement is negatively impacted and they are unable to pay their outstanding obligations to the Company, including those payments related to Contract Shortfall Fees.

As of March 11, 2024, approximately $10.0 million of Contract Shortfall Fees from 2023 have been collected with the remaining $10.1 million due on or before April 8, 2024.

ProFrac Services, LLC has the right to terminate the ProFrac Agreement by providing written notice to the Company after the occurrence of any of the following events:

(i) the Company’s bankruptcy;

(ii) the Company’s failure to produce and deliver the product in accordance with the specifications, or failure to timely deliver product, and the Company has been unable to cure such failure within a commercially reasonable period determined by ProFrac Services, LLC;

(iii) the Company fails to meet pricing requirements set forth in the ProFrac Agreement;

or (iv) the Company is affected by a force majeure event, and such force majeure event has not been remedied within 30 days of the initial occurrence of such event.

ProFrac Services, LLC also has the right to terminate the ProFrac Agreement for any other material breach of the ProFrac Agreement by the Company if the breach is capable of being cured, but is not cured within 30 days after written notice.

Termination of the ProFrac Agreement would have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

The Company’s inability to develop and/or introduce new products or differentiate existing products could have an adverse effect on its ability to be responsive to customers’ needs and could result in a loss of customers, as well as adversely affecting the Company’s future success and profitability.

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If the Company fails to successfully develop and introduce innovative products and services that appeal to customers, or if existing or new market competitors develop superior products and services, the Company’s revenue and profitability could deteriorate.

The Company’s inability to develop green alternatives to existing conventional products could result in loss of customers, as well as adversely affecting the Company’s future success and profitability.

The Company develops, markets and produces certain green alternatives to many existing products.

If these green alternatives do not perform as well as existing conventional products, or if existing or new market competitors develop superior products, the Company’s revenue and profitability could be adversely affected.

Reduced unconventional oil and gas drilling could lessen the positive effects of a general recovery of the oil and gas industry.

The majority of the Company’s product offerings in its CT segment, other than professional chemistry products, are used in unconventional oil and gas operations.

The Company has a small exposure to conventional oil and gas operations through activity in the Middle East and little or no exposure to the offshore sector.

In the event that an industry recovery is disproportionately driven by conventional and offshore oil and gas operations, the Company may not have a resulting increase in its operational results.

The Company’s business, financial condition, operating results and ability to grow and compete may be affected adversely if adequate capital is not available.

The Company’s existing resources including cash on hand, may not be sufficient to finance operations and strategies.

The Company’s existing resources including cash on hand and availability under its ABL, may not be sufficient to finance operations and strategies.

The Company may therefore need to rely on external financing sources, including commercial borrowings and issuances of debt and equity securities.

The Company’s ability to procure debt financing, is dependent on, among other things, the willingness of banks and other financial institutions to lend into the Company’s industry and on their evaluation of the Company’s credit risk.

There is no guarantee that the Company will be able to procure debt financing or, in the event that it is able to procure debt financing, that the financing will be on favorable terms and conditions or at favorable rates of interest.

If the Company cannot access debt and equity financing on acceptable terms when required, the Company’s business, financial conditions and operating results may be adversely affected.

Further the ability of the Company to grow and be competitive in the market place may be adversely impacted as the Company may not be able to finance strategic growth plans, take advantage of business opportunities, or respond to competitive pressures.

There is no guarantee that the Company will be able to procure additional debt financing or, in the event that it is able to procure additional debt financing, that the financing will be on favorable terms and conditions or at favorable rates of interest.

If the Company cannot access capital on acceptable terms when required, the Company’s business, financial conditions and operating results may be adversely affected.

Further the ability of the Company to grow and be competitive in the marketplace may be adversely impacted as the Company may not be able to finance strategic growth plans, take advantage of business opportunities, or respond to competitive pressures.

Increased competition could exert downward pressure on prices charged for the Company’s products and services.

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The Company operates in an environment with relatively low barriers to entry;

employees of the Company may leave and compete directly with the

employees of the Company may leave and compete directly with the Company.

This may require the Company to lower its prices, resulting in an adverse impact on revenues, margins, and operating results.

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The Company relies on a combination of patents, trademarks, copyrights, trade secrets, non-disclosure agreements and other methods to access markets and create a competitive advantage.

Although the Company believes that existing measures are reasonably adequate to protect intellectual property rights, there is no assurance that the measures taken will prevent misappropriation of proprietary information or dissuade others from independent development of similar products or services.

Although the Company believes that existing measures are

reasonably adequate to protect intellectual property rights, there is no assurance that the measures taken will prevent misappropriation of proprietary information or dissuade others from independent development of similar products or services.

Moreover, there is no assurance that the Company will be able to prevent competitors from copying, reverse engineering, modifying or otherwise obtaining, infringing and/or using the Company’s technology, intellectual property or proprietary rights to create competitive products or services.

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In the event that the Company cannot maintain its registrations or licenses or is unable to procure new licenses or registrations for new products or in response to changes to regulatory requirements, the ability of the Company to sell its products and obtain revenue may be adversely affected.

The Company’s reliance on the ProFrac Agreement could adversely impact our financial condition, results of operations and cash flows.

The ProFrac Agreement, still in its first year, is a major source of the Company’s liquidity and we expect it to remain so over the term of the contract.

Further, our relationship with ProFrac Services, LLC may impact their competitors willingness to purchase products from the Company or to seek price concessions.

We are also dependent on ProFrac Services, LLC’s compliance in meeting their committed activity levels and paying for products provided in a timely basis, in accordance with the terms of the ProFrac Agreement.

ProFrac Services, LLC has the right to terminate the ProFrac Agreement, by providing written notice to the Company, after the occurrence of any of the following events:

(i) the Company’s bankruptcy;

(ii) the Company’s failure to produce and deliver the product in accordance with the specifications, or failure to timely deliver product, and the Company has been unable to cure

such failure within a commercially reasonable period determined by ProFrac;

(iii) the Company fails to meet pricing requirements set forth in the ProFrac Agreement;

or (iv) the Company is affected by a force majeure event, and such force majeure event has not been remedied within 30 days of the initial occurrence of such event.

ProFrac also has the right to terminate the ProFrac Agreement for any other material breach of the ProFrac Agreement by the Company, if capable of being cured, is not cured within 30 days after written notice.

Termination of the ProFrac Agreement would have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

The loss of key customers could have an adverse impact on the Company’s results of operations and could result in a decline in the Company’s revenue.

In the CT segment in aggregate, revenue derived from the Company’s three largest customers as a percentage of consolidated revenue for the years ended December 31, 2023 and 2022, totaled 73% and 44%, respectively.

The Company has seen customer concentration risk increase due to the recent entry int o the long-term supply agreement with ProFrac Services LLC.

Outside the ProFrac Agreement customer relationships are substantially governed by purchase orders or other short-term contractual obligations as opposed to long-term contracts.

The Company has seen customer concentration risk increase due to the entry int o the ProFrac Agreement.

Unlike the ProFrac Agreement, customer relationships are substantially governed by purchase orders or other short-term contractual obligations as opposed to long-term contracts.

Losses of customers also may occur due to product, service or pricing issues, as well as industry consolidation.

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The Company may be unable to pass along price increases to its customers, which could result in a materially adverse impact on margins and operating profits.

The Company currently does not hedge commodity prices, but may consider such strategies in the future, and there is no guarantee that the Company’s purchasing strategies will prevent cost increases from resulting in materially adverse impacts on margins and operating profits.

The Company currently does not hedge commodity prices, but may consider such strategies in

the future, and there is no guarantee that the Company’s purchasing strategies will prevent cost increases from resulting in materially adverse impacts on margins and operating profits.

The Company’s DA segment is dependent on its ability to source appropriate technical components for its Verax™ measurement system, certain of which are specialty products that are sole-sourced and are not easily replaceable with other sources.

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the operations, governance, strategies or management of the Company, which may significantly reduce the Company’s ability to manage operations effectively and implement strategic business initiatives.

Failure to maintain effective disclosure controls and procedures and internal controls over financial reporting could have an adverse effect on the Company’s operations and the trading price of the Company’s common stock.

Failure to maintain effective disclosure controls and procedures and internal control over financial reporting could have an adverse effect on the Company’s operations and the trading price of the Company’s common stock.

Effective internal controls are necessary for the Company to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company.

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The Company’s sales revenues are concentrated among customers operating in the oil and gas industry.

Furthermore, the Company has seen an increase in concentration risk in 2022 which it anticipates to increase in 2023 and beyond as a result of the Company’s entry into the ProFrac Agreement.

If one or more major customers are unwilling or unable to pay their debts to the Company, it could have an adverse effect of the Company’s financial results, liquidity and cash flows.

Furthermore, the Company has seen an increase in concentration risk in 2022 and 2023, which it anticipates will continue in 2024 and beyond as a result of the Company’s entry into the ProFrac Agreement.

If one or more major customers, including ProFrac Services, LLC, are unwilling or unable to pay their obligations to the Company, it could have an adverse effect on the Company’s financial results, liquidity and cash flows.

Failure to adapt to changing buying habits of the Company’s potential and existing customers could have a negative effect on the Company’s ability to attract and retain business.

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While the Company does carry cybersecurity insurance, the coverage and amount of such insurance may not be sufficient to adequately compensate the Company for cybersecurity loss.

See “Item 1C.

Cybersecurity” within this Part I.

Unforeseen contingencies such as litigation could adversely affect the Company’s financial condition.

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The Company’s operations are subject to risks inherent in the specialty chemical industry, such as, but not limited to, accidents, explosions, fires, severe weather, oil and chemical spills, and other hazards.

These conditions can result in personal injury or

loss of life, damage to property, equipment and the environment, as well as suspension of customers’ oil and gas operations.

These conditions can result in personal injury or loss of life, damage to property, equipment and the environment, as well as suspension of customers’ oil and gas operations.

These events could result in damages requiring costly repairs, the interruption of Company business, including the loss of revenue and profits, and/or the Company being named as a defendant in lawsuits asserting large claims.

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• failure to effectively integrate acquisitions, joint ventures or strategic alliances;

• failure to effectively integrate and perform on the ProFrac Agreement;

• failure to effectively execute on the ProFrac Agreement;

• failure to effectively plan for risks associated with expansion into areas in which management lacks prior experience;

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Divestitures could result in the loss of future earnings without adequate compensation and the loss of unrealized strategic opportunities.

The Company’s ability to use net operating losses and tax attribute carryforwards to offset future taxable income may be limited.

The Company’s ability to use net operating losses and tax attribute carryforwards to offset future taxable income has become limited due to an “ownership change” in 2023.

Under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on the Company’s ability to utilize pre-change net operating losses (“NOLs”), and certain other tax attributes to offset future taxable income.

In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years).

An ownership change could limit the Company’s ability to utilize existing NOLs and tax attribute carryforwards for taxable years including or following an identified “ownership change.” Transactions involving the Company’s common stock, even those outside the Company’s control, such as purchases or sales by investors, within the testing period could result in an “ownership change.” Moreover, we believe the convertible notes and warrants transactions with ProFrac Holdings, LLC may substantially impact our ability to use NOLs.

During 2023, the conversion of various debt instruments into the Company’s common stock and warrants to purchase the Company’s common stock resulted in an ownership change limiting the Company’s ability

to utilize existing NOLs and tax attribute carryforwards.

Additional information about these limitations is provided in Note 11, “Income Taxes” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.

In addition, under the 2017 Tax Act, the ability to carry back NOLs to prior taxable years is generally eliminated, and while NOLs arising in tax years beginning after 2017 may be carried forward indefinitely, these post-2017 NOLs may only reduce 80% of the Company’s taxable income in a tax year.

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government could also change these laws or enact new laws that could restrict or prohibit the Company from doing business in identified foreign countries.

The Company conducts, and will continue to conduct, business in currencies other than the U.S.

The Company conducts, and will continue to

conduct, business in currencies other than the U.S.

Historically, the Company has not hedged against foreign currency fluctuations.

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Changes in laws and regulations relating to hydraulic fracturing may have a negative effect on the Company’s operations.

Much of the Company’s revenue in its CT segment is derived from customers engaged in hydraulic fracturing services.

The majority of the Company’s revenue in its CT segment is derived from customers engaged in hydraulic fracturing services.

Some states have adopted regulations which require operators to publicly disclose certain non-proprietary information.

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Demand for the Company’s products and services is particularly sensitive to levels of activity in the upstream, downstream and midstream sectors, and the corresponding capital spending by oil and natural gas companies, including national oil companies.

While capital spending programs for domestic producers appear to be improving, uncertainties around the potential for longer-term weakness in oil and natural gas prices could reduce or defer major expenditures given the long-term nature of many large-scale development projects.

While capital spending programs for domestic producers appear stable, uncertainties around the potential for weakness in oil and natural gas prices could reduce or defer major expenditures given the long-term nature of many large-scale development projects.

Lower levels of activity could result in a corresponding decline in the demand for the Company’s oil and natural gas related products and services, which could have a material adverse effect on the Company’s revenue and profitability.

Events in global credit markets can significantly impact the availability of credit and associated financing costs for many of the Company’s customers.

Many of the Company’s upstream customers finance their drilling and completion programs through third-party lenders or public debt offerings.

Many of the Company’s upstream customers finance a portion of their drilling and completion programs through third-party lenders or public debt offerings.

Lack of available credit or increased costs of borrowing may cause customers to reduce spending on drilling programs, thereby reducing demand and potentially resulting in lower prices for the Company’s products and services.

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The Company presently does not hedge oil and natural gas prices.

New and existing competitors within the Company’s industries could have an adverse effect on results of operations.

The industries in which the Company competes are highly competitive.

The Company’s principal competitors include numerous small companies capable of competing effectively in the Company’s markets on a local basis, as well as a number of large companies that possess substantially greater financial and other resources.

Larger competitors may be able to devote greater resources to developing, promoting, and selling products and services.

The Company may also face increased competition due to the entry of new competitors including current suppliers that decide to sell their products and services directly to the Company’s customers.

As a result of this competition, the Company could experience lower sales or greater operating costs, which could have an adverse effect on the Company’s margins and results of operations.

The Company’s industry has a high rate of employee turnover.

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The demand for our equipment and services offerings in our DA segment could be materially affected by additional regulations on the upstream, midstream, and downstream portions of the oil and gas sectors.

Additional regulation on oil and gas production, transportation, or processing of hydrocarbons may result in significantly reduced demand for our offerings, either individually or as a result of a decline in the overall oil and gas markets in the United States and abroad.

Additional regulation on oil and gas

production, transportation, or processing of hydrocarbons may result in significantly reduced demand for our offerings, either individually or as a result of a decline in the overall oil and gas markets in the United States and abroad.

In addition, our products are subject to export control laws and regulations, and changes to those laws and regulations may negatively impact our ability to pursue international opportunities.

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Adjustments to our DA segment’s commercial strategy, with a shift towards subscription revenue and away from equipment sales, and the market’s response to that strategy, may materially and adversely affect revenues in the near term, even if the strategic shift is successful, due to longer payback periods on subscription models.

Investor sentiment and public perception related to the oil and natural gas industry and to ESG initiatives could increase costs of capital and reporting requirements and impact operations.

There are increasing financial risks for oil and natural gas producers, as stockholders and bondholders currently invested in oil and natural gas companies and concerned about the potential effects of climate change, ESG and other sustainability-related issues may elect in the future to shift some or all of their investments into non-fossil fuel energy related sectors, or into competitors who are perceived to have stronger ESG practices and disclosures.

The Company’s ESG practices and disclosures may not satisfy investor requirements or their requirements may not be made known to the Company.

The Company may continue to face increasing pressure regarding our ESG practices and disclosures, which pressures have intensified recently in connection with significant societal events and worldwide efforts to mitigate climate change.

The Company has developed, and will continue to develop, goals and other objectives related to ESG and sustainability matters.

Statements related to these goals and objectives reflect the Company’s current plans and do not constitute a guarantee that they will be achieved.

The Company’s ability to achieve any stated goal or objective is subject to numerous factors and conditions, some of which are outside of the Company’s control.

The Company’s efforts to accurately report on ESG and sustainability matters, including our efforts to research, establish, accomplish and accurately report on goals and objectives, expose us to numerous operational, reputational, financial, legal, and other risks.

Standards for tracking and reporting on ESG and sustainability matters, including climate-related matters, have not been harmonized and continue to evolve.

The Company’s processes and controls for reporting on ESG and sustainability matters, including our goals and objectives, may not always comply with evolving and disparate standards for identifying, measuring, and reporting such metrics, including any climate change and sustainability-related public company disclosure requirements adopted by the SEC, and such standards may change over time, which could result in significant revisions to the Company’s current ESG practices and disclosures.

The lending and investment practices of institutional lenders and investors have been the subject of intensive lobbying efforts in recent years, oftentimes public in nature, not to provide funding for oil and natural gas producers, and some lenders and insurers have announced that they will not lend to or provide insurance for oil and natural gas companies.

Limitation of investments in and financings for oil and natural gas could result in the restriction, delay, or cancellation of drilling and completion programs or development of production activities.

An increasing number of the Company’s customers consider sustainability factors in awarding work.

If the Company is unable to meet the ESG standards or investment criteria set by our customers, investors and other parties, which continue to evolve, if we are unable to successfully continue our sustainability enhancement efforts, or if,

notwithstanding our own efforts, our industry becomes the focus of increasing ESG and sustainability related pressures, the Company may lose customers and investors and/or the Company’s cost of capital may increase.

Severe weather could have an adverse impact on the Company’s business.

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Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect the Company’s results of operations, impair the ability to raise capital, or otherwise adversely impact the Company’s ability to realize certain business strategies.

The armed conflict in Ukraine could affect regions in which the Company does business directly or indirectly and could harm the Company’s ability to sell its good and services in those regions.

The armed conflicts in Ukraine and the Middle East could affect regions in which the Company does business directly or indirectly and could harm the Company’s ability to sell its good and services in those regions.

Risks Related to the Company’s Securities

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• additions or departures of key personnel;

• inability to perform the ProFrac Agreement

• inability to execute the ProFrac Agreement

• announcements by the Company or the Company’s competitors of new business, acquisitions, or joint ventures;

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This could be expensive and divert management’s attention and Company resources, as well as have an adverse effect on the Company’s business, operating results, cash flows, financial condition or securities.

The Company’s relationship with ProFrac Services, LLC and certain of its affiliates may create a conflict of interest.

The Company derived 65% and 60% of its revenue for the years ended December 31, 2023 and 2022, respectively, from ProFrac Services LLC.

In addition to being the Company’s largest customer, certain affiliates of ProFrac Services LLC, entered into various convertible debt transactions with the Company during 2022, which were subsequently converted into shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock in 2023 (see Note 9, “Debt and Convertible Notes Payable” and Note 17, “Related Party Transactions,” in Part II, Item 8 - “Financial Statements and

Supplementary Data” of this Annual Report).

As a result, ProFrac Holdings, LLC or its affiliates owns approximately 51% of the Company’s common stock as of December 31, 2023 making them the Company’s largest shareholder.

In addition, ProFrac Holdings, LLC also has the right to elect four out of seven Board members and currently consolidates Flotek in their financial results.

Pursuant to this right, Matt Wilks was nominated and elected to serve on the Board at the Company’s 2022 annual meeting of shareholders and Evan Farber was appointed to the Board on October 11, 2022.

As a result of the operational and financial relationship with ProFrac Services LLC and its affiliates, as both the largest customer and a majority shareholder, certain conflicts of interest may occur.

An active market for the Company’s common stock may not continue to exist or may not continue to exist at current trading levels.

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The Company’s common stock is currently listed on the NYSE.

In the future, if it is not able to meet the continued listing requirements of the NYSE, which require, among other things, that the average closing price of our common stock be above $1.00 over 30 consecutive trading days, the Company’s common stock may be delisted.

In the future, if the Company is not able to meet the continued listing requirements of the NYSE, the Company’s common stock may be delisted.

If the Company is unable to satisfy the NYSE criteria for continued listing, its common stock would be subject to delisting.

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In addition, delisting from the NYSE might negatively impact the Company’s reputation and, as a consequence, its business, operating results, cash flows, financial condition or securities.

As of the date of filing our consolidated financial statements, the Company’s common stock price is less than $1.00.

The Company’s relationship with ProFrac Services LLC and certain of its affiliates may create a conflict of interest.

The Company derived 59% of its revenue for the year ended December 31, 2022 from ProFrac Services LLC.

In addition to being the Company’s largest customer, certain affiliates of ProFrac Services LLC, entered into various convertible debt transactions with the Company during 2022 (see Note 10, “Debt and Convertible Notes Payable” and Note 18, “Related Party Transactions,” in Part II, Item 8 - “Financial Statements and Supplementary Data” of this Annual Report).

During 2023, the convertible debt instruments are expected to be converted into the Company’s common shares and pre-funded warrants.

ProFrac Holdings, LLC also has the right to elect four out of seven Board members and currently consolidates Flotek in their financial results.

In connection with the conversion of the convertible debt, ProFrac Holdings, LLC or its affiliates are expected to become the Company’s largest shareholder during 2023.

As a result of the operational and financial relationship with ProFrac Services LLC and its affiliates, as both a significant customer and a majority shareholder, certain conflicts of interest may occur.

Future issuance of additional shares of common stock could cause dilution of ownership interests and adversely affect the Company’s common stock price.

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The Company may, in the future, issue previously authorized and unissued shares of common stock, which would result in the dilution of current stockholders’ ownership interests.

Additional shares are subject to issuance through various convertible debt securities, equity compensation plans or through the exercise of currently outstanding equity awards.

Additional shares are subject to issuance through unexercised warrants, equity compensation plans or through the exercise of currently outstanding equity awards.

The potential issuance of additional shares of common stock may create downward pressure on the trading price of the Company’s common stock.

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Any preferred stock that is issued may rank senior to common stock in terms of dividends, priority and liquidation premiums, and may have greater voting rights than holders of common stock.

If securities or industry analysts do not publish research or reports about the Company’s business or publish negative reports, the Company’s securities prices and trading volumes could decline and affect the price at which investors could sell securities.

The trading market for the Company’s securities may be affected by the research and reports that industry or securities analysts publish about the Company or its business.

The Company does not have any control over these analysts.

If analysts do not cover the Company on a regular basis or if one or more analysts cease coverage of the Company or fail to regularly publish reports about the Company, the Company could lose visibility in the financial markets, which in turn could cause the Company’s securities prices or trading volumes to decline.

If one or more of such analysts publish negative reports about the Company, the Company’s securities prices would likely decline.

These occurrences could have an effect on the price investors could receive from the sale of the Company’s securities.

Certain anti-takeover provisions of the Company’s certificate of incorporation and applicable Delaware law could discourage or prevent others from acquiring the Company, which may adversely affect the market price of the Company’s common stock.

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The lack of plans for dividends may make the common stock of the Company an unattractive investment for investors who are seeking dividends.

We identified a material weakness in our internal control over financial reporting.

If we are unable to remediate this material weakness, or if we experience additional material weaknesses or other deficiencies in the future, or otherwise fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately or timely report our financial results, which could result in loss of investor confidence and adversely impact our stock price.

We identified a material weakness in our internal control over financial reporting in 2022, which has been remediated as of December 31, 2023.

If we experience material weaknesses or other deficiencies in the future, or otherwise fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately or timely report our financial results, which could result in loss of investor confidence and adversely impact our stock price.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act and other applicable securities rules and regulations.

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As disclosed in Part II, Item 9A, during the fourth quarter of 2022, management identified a material weakness in the design and operation of internal controls related to accounting for leases, prepaid assets and related-party revenues.

We have begun designing and implementing measures to improve our internal controls over financial reporting and to remediate this material weakness.

Our ability to comply with the annual internal control report requirements will depend on the effectiveness of our financial reporting controls across our company.

We expect these systems and controls to involve significant expenditures and to may become more complex as our business grows.

To effectively manage this complexity, we will need to continue to improve our operational, financial, and management controls, and our reporting systems and procedures.

Our inability to successfully remediate our existing or any future material weaknesses or other deficiencies in our internal control over financial reporting or any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results and cause us to fail to meet our financial reporting obligations or result in material misstatements in our financial statements, which could limit our liquidity and access to capital markets, adversely affect our business and investor confidence in our financial statements, and adversely impact our stock price.

During the year ended December 31, 2023, we implemented measures to improve our internal control over financial reporting to remediate this material weakness.

Such measures included ensuring sufficient and appropriate resources in our finance and accounting department, enhancing required training specific to internal control over financial reporting and revenue recognition and other measures to enhance our risk control assessment process and communication processes.

After testing the design, implementation and operating effectiveness of the enhanced controls, management concluded that the material weakness was remediated as of December 31, 2023.

Our ability to comply with the annual internal control report requirements will depend on the continual effectiveness of our financial reporting controls across our company.

We expect these systems and controls to involve significant expenditures and to become more complex as our business grows.

To effectively manage this complexity, we will continue to monitor the execution of our controls to ensure their effectiveness and make enhancements when and where necessary.

Our inability to successfully avoid or remediate any future material weaknesses or other deficiencies in our internal control over financial reporting or any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results and cause us to fail to meet our financial reporting obligations or

result in material misstatements in our financial statements.

These events could limit our liquidity and access to capital markets, adversely affect our business and investor confidence in our financial statements, and adversely impact our stock price.

General Risk Factors

If the Company loses the services of key members of management, the Company may not be able to manage operations and implement growth strategies.

The Board is currently searching for the Company’s next Chief Executive Officer and the length of time taken to select and appoint the appropriate person could adversely impact our operations and strategic business initiatives.

The Company depends on the continued service of the President, and Chief Financial Officer and other key members of the executive management team, who possess significant expertise and knowledge of the Company’s business and industry.

The Company depends on the continued service of its Chief Executive Officer and Chief Financial Officer and other key members of the executive management team, who possess significant expertise and knowledge of the Company’s business and industry.

The Company has entered into employment agreements with certain of these key members.

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tax reforms that have not been identified and that could have an adverse effect on the Company’s business, results of operations, financial condition and cash flows.

The Company maintains cash in excess of Federal Deposit Insurance Corporation (“FDIC”) protections therefore we may be at risk of losing cash on hand as a result of financial institution insolvency, which may be exacerbated by the recent unstable market and economic conditions and adverse developments with respect to the financial institutions.

The closures of Silicon Valley Bank (“SVB”) and Signature Bank and their placement into receivership with the FDIC created bank-specific and broader financial institution liquidity risk and concerns.

The Department of the Treasury, the Federal

Reserve, and the FDIC jointly released a statement that depositors at SVB and Signature Bank would have access to their funds, even those in excess of the standard FDIC insurance limits.

As of the date of this Annual Report on Form 10-K, our exposure to SVB and Signature Bank is immaterial, however, we maintain cash balances at third-party financial institutions in excess of FDIC insurance protections.

If the financial institution with which we deposit our cash were to become insolvent or were to be placed into receivership, we may be unable to access our capital or adequately fund our business for a prolonged period of time, or at all.

If the equity and credit markets deteriorate, or if adverse developments are experienced by financial institutions, it may cause short-term liquidity risk and also make any necessary debt or equity financing more difficult, more costly and more dilutive.

Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price.

The consolidated financial statements included in this Annual Report have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.

GAAP”) assuming the Company will continue as a going concern.

The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

However, substantial doubt about the Company’s ability to continue as a going concern exists.

The Company currently funds its operations from cash on hand and other current assets.

The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the consolidated financial statements included in this Annual Report.

The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 18, “Related Party Transactions” in Part II, Item 8 - “Financial Statements and Supplementary Data” of this Annual Report).

It is not certain that the Company’s cash and other current assets and forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months.

The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements contained in this Annual Report are issued.

Our independent registered public accounting firm has included an explanatory paragraph in its opinion on the Company’s consolidated financial statements with respect to the substantial doubt about the Company’s ability to continue as a going concern.

The Company is evaluating strategies to obtain additional funding for future operations.

These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses.

However, the Company may be unable to access further equity or debt financing when needed.

As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.

The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

Disclaimer of Obligation to Update

Except as required by applicable law or regulation, the Company assumes no obligation (and specifically disclaims any such obligation) to update these risk factors or any other forward-looking statement contained in this Annual Report to reflect actual results, changes in assumptions, or other factors affecting such forward-looking statements.

Unresolved Staff Comments .

Not applicable.

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 1A. Risk Factors