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Item 7. Management’s Discussion and Analysis

2025-03-12 compared with 2024-03-15 · 95 added, 110 removed, 89 unchanged (70% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes thereto, which have been prepared in accordance with U.S.

You should read the following discussion and analysis of our financial condition and results of operations together with Part 1, including the matters set forth in Item 1.A.

Risk Factors, and our audited consolidated financial statements and related notes thereto, which have been prepared in accordance with U.S.

GAAP, included elsewhere in this Annual Report.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections.

As a result of many risks and uncertainties, including those factors set forth in Item 1A -Risk Factors of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

For more information, see “Forward-Looking Statements.” These forward-looking statements are made as of the date of this report, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by applicable law.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act , and is subject to the safe harbor created by those sections.

As a result of many risks and uncertainties, including those factors set forth in Item 1.A.

Risk Factors of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

For more information, see “Forward-Looking Statements.” These forward-looking statements are made as of the date of this Annual Report, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by applicable law.

All dollar amounts stated herein are in U.S.

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Flotek creates unique solutions to reduce the environmental impact of energy on air, water, land and people.

A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial and commercial markets improve their environmental performance.

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

During 2022 the Company entered into the ProFrac Agreement, (see Note 9, “Debt and Convertible Notes Payable” and Note 17, “Related Party Transactions”) which has resulted in a significant increase in revenue for the years ended December 31, 2023 and 2022.

A technology-driven, specialty chemistry and data technology company, Flotek helps customers across industrial and commercial markets improve their environmental performance.

The Company seeks to provide sustainable and optimized chemistry and data technology solutions for both domestic and international energy markets.

The Company’s two operating segments, CT and DA, are supported by the Company’s continuing Research and Innovation (“R&I”) advanced laboratory capabilities.

Company Overview

Chemistry Technologies

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’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.

The Company’s CT segment 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, 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.

The Company’s CT segment provides sustainable, optimized chemistry solutions that we believe 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 are designed to 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 industrial companies.

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 may 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 a Chemical Products Supply Agreement with ProFrac Services, LLC, 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 volume purchases 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 ProFrac Agreement provides that payment of Contract Shortfall Fees is to be made within 30 days after the applicable measurement period.

The measurement period for Contract Shortfall Fees during 2023 was June 1, 2023 through December 31, 2023.

Related party revenues for the year ended December 31, 2023 reflected Contract Shortfall Fees of $20.1 million.

The minimum purchase requirements were not met during the 2024 measurement period of January 1, 2024 through December 31, 2024 and, as a result, the Company recorded revenue related to Contract Shortfall Fees of $ 32.4 million.

Data Analytics

The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity.

Real-time composition and physical properties are delivered simultaneously on their refined fuels, natural gas liquids (“NGLs”), natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions.

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

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 lower cost field gas instead of diesel to generate power 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.

Real-time composition and physical property measurements are delivered simultaneously on refined fuels, natural gas liquids (“NGLs”), natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infrared spectrometer that generates no emissions.

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

We believe customers using this technology have obtained significant benefits, including additional profits, by enhancing operations in crude/condensates stabilization, enhancing blending operations, reducing time impacting transmix operations,

increasing efficiencies and optimization of gas plants, allowing for the use of significantly lower cost field gas instead of diesel to generate power, lowering emissions and protecting 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 carbon footprint, e.g., less flaring and reduction in energy expenditure for compression and re-processing.

Our customers in North America include oil and gas supermajors, some of the largest midstream oil and gas companies, large gas processing plants and independent exploration and production companies.

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 both segments through green chemistry formulation, specialty chemical formulations, 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 segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends.

The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.

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.

R&I supports both our business segments through green chemistry formulation, specialty chemical formulations and 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.

The R&I facilities support advances in CT and DA performance, optimization and manufacturing.

For the years ended December 31, 2024 and 2023, the Company incurred $1.7 million and $2.5 million, respectively, of research and development expense.

The Company expects that its 2025 research and development investment will continue to support new product development and customization initiatives for its clients.

Consolidated Results of Operations (in thousands)

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Cost of sales % 78.9 % 87.1 %

Gross profit (loss) 24,263 (6,700)

Gross profit (loss) % 12.9 % (4.9) %

Gross profit 39,386 24,263

Gross profit % 21.1 % 12.9 %

Selling, general and administrative 24,709 27,827

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Research and development 1,714 2,486

Severance costs (46) —

Gain on disposal of property and equipment (124) (38)

Gain on lease termination — (584)

Gain in fair value of contract consideration convertible notes payable — (29,969)

Impairment of goodwill — —

Income (loss) from operations 23,223 (35,421)

Income from operations 12,196 23,223

Operating margin % 6.5 % 12.3 %

Other income (expense)

Paycheck protection plan loan forgiveness — 4,522

Interest expense and other income, net (1,049) (2,883)

Income (loss) before income taxes 24,862 (42,327)

Income tax (expense) benefit (149) 22

Net income (loss) $ 24,713 $ (42,305)

Net income (loss) % 13.1 % (31.1) %

Consolidated revenue for the year ended December 31, 2023 increased $52.0 million, or 38%, versus the same period of 2022.

The significant increase in revenue during the year ended December 31, 2023 was driven primarily by a full year of activity under the ProFrac Agreement which commenced in the second quarter of 2022.

In addition, revenues increased due to continued increased activity with new and existing domestic customers particularly in the CT segment, partially offset by reduced international activity.

Consolidated cost of sales for the year ended December 31, 2023 increased $21.0 million, or 15%, versus the same period of 2022.

The increase is primarily driven by the activity with ProFrac Services, LLC and higher freight and equipment rental costs due to the increased volume of business.

The reduction in cost of sales as a percentage of revenue in 2023 was the result of revenue from Contract Shortfall Fees, which have no associated costs, and numerous initiatives to reduce the cost of freight and logistics and secure better pricing of materials.

Total other (expense) income (1,049) 1,639

Income before income taxes 11,147 24,862

Income tax expense (649) (149)

Net income $ 10,498 $ 24,713

Net income % 5.6 % 13.1 %

Consolidated revenue for the year ended December 31, 2024 decreased $1.0 million versus the same period of 2023.

The decrease in revenue during the year ended December 31, 2024 was driven primarily by a decrease in activity under the ProFrac Agreement, partially offset by increased Contract Shortfall Fees and higher revenue from external customers and higher DA revenues.

Consolidated cost of sales for the year ended December 31, 2024 decreased $16.2 million, or 10%, versus the same period of 2023.

The decrease is primarily driven by decreased activity with ProFrac Services, LLC and lower freight and equipment

rental costs due to the decreased volume of business, partially offset by higher costs related to increased non-related party volumes and increased salaries and wages.

The reduction in cost of sales as a percentage of revenue in 2024 was the result of higher revenue from Contract Shortfall Fees, which have no associated costs.

Selling general and administrative (“SG&A”) expenses are not directly attributable to products sold or services provided.

SG&A expenses for the year ended December 31, 2023, increased $0.7 million, or 3%, versus the same period of 2022.

SG&A expenses for the year ended December 31, 2024, decreased $3.1 million, or 11%, versus the same period of 2023 as a result of reduced legal fees in 2024, partially offset by higher stock compensation expense.

Research and development (“R&D”) costs decreased $0.8 million, or 31%, for the year ended December 31, 2024, versus the same period of 2023 driven by lower personnel costs resulting from headcount optimization.

Operating income increased by $58.6 million to $23 million for the year ended December 31, 2023, versus an operating loss of $35 million during the same period in 2022.

The improvement was driven primarily by an increased gross profit of $31.0 million resulting from increased related party and external customer revenue, including accrued Contract Shortfall Fees, the gain in fair value of the Contract Consideration Convertible Notes Payable of $30.0 million compared to the same period of 2022, and a $2.0 million decrease in research and development costs.

The improvement was partially offset by an increase in

SG&A expenses of $0.7 million and a decrease in gains on the sale of assets and lease termination of $2.9 million and $0.6 million, respectively.

Interest expense and other income for the year ended December 31, 2023 increased $8.5 million, driven primarily by a $4.5 million gain for the forgiveness of the Flotek PPP loan and a $4.2 million decrease in interest expense related to the maturity of the Contract Consideration Convertible Notes Payable in the first half of 2023.

Operating income decreased by $11.0 million to $12.2 million for the year ended December 31, 2024 versus the same period in 2023.

The decrease in 2024 is primarily due to the $30.0 million gain in fair value of the Contract Consideration Convertible Notes Payable for the year ended December 31, 2023 with no corresponding activity for the year ended December 31, 2024, partially offset by a $15.1 million increase in gross profit resulting from higher Contract Shortfall Fees, a $3.1 million decrease in SG&A expenses and a $0.8 million decrease in R&D expenses.

Total other (expense) income for the year ended December 31, 2024 decreased $2.7 million, driven primarily by a $4.5 million gain for the forgiveness of the Flotek PPP loan during 2023 with no corresponding activity in 2024, partially offset by a $1.8 million decrease in interest expense related to the maturity of the Contract Consideration Convertible Notes Payable in the first half of 2023.

Results by Segment (in thousands):

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Revenue from related party 114,947 120,903

Income (loss) from operations 39,043 (14,729)

CT revenue from external customers for the year ended December 31, 2023, increased $10.1 million, or 21%, compared to 2022 due to increased domestic sales with both new and existing customers.

Revenue from related parties, including accrued Contract Shortfall Fees, increased $39.3 million, or 48%, driven by the ProFrac Agreement which commenced in the second quarter of 2022.

Income from operations for the CT segment for the year ended December 31, 2023 increased $53.8 million, compared to 2022.

The increase was driven by an increase in gross profit of $27.7 million attributable to increased activity and accrued Contract Shortfall Fees along with an increase in the gain in fair value of the Contract Consideration Convertible Notes Payable of $30.0 million for the year ended December 31, 2023 compared to $0.1 million for the same period in 2022.

Income from operations 26,602 39,043

CT revenue from external customers for the year ended December 31, 2024, increased $4.2 million, or 7% compared to 2023 due to increased sales with both new and existing customers.

Revenue from related party for the year ended December 31, 2024, including accrued Contract Shortfall Fees, decreased $6.0 million, or 5%, primarily driven by decreased product sales under the ProFrac Agreement, partially offset by increased Contract Shortfall Fees.

Income from operations for the CT segment for the year ended December 31, 2024 decreased $12.4 million, compared to 2023.

The decrease was driven by the gain in fair value of the Contract Consideration Convertible Notes Payable of $30.0 million for the year ended December 31, 2023 without corresponding activity for the year ended December 31, 2024, partially offset by an increase in gross profit of $15.9 million attributable to higher Contract Shortfall Fees and lower freight costs.

Data Analytics Results of Operations:

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DA external customer revenue for the year ended December 31, 2024, increased $0.5 million, or 7%, compared to revenue for 2023.

The increase was driven by increased product sales.

Related party revenue increased by $0.6 million compared to 2022 relating to services provided to ProFrac Services, LLC outside of the ProFrac Agreement.

Loss from operations for the DA segment for the year ended December 31, 2023 decreased $2.8 million, or 98%, compared to 2022.

The improvement was primarily due to increased activity and decreased R&D expense and personnel costs.

The increase was driven by increased service sales primarily related to the Company’s near-infrared spectrometer measurement system, partially offset by decreased product sales.

Related party revenue increased by $0.2 million, or 28%, compared to 2023 relating to services provided to ProFrac Services, LLC outside of the ProFrac Agreement.

Loss from operations for the DA segment for the year ended December 31, 2024 increased $0.9 million compared to 2023.

The increase in losses was primarily due to increased cost of sales related to the change in contingent earnout valuations (see Note 10) and credits included in cost of sales for the year ended December 31, 2023 with no corresponding activity for the year ended December 31, 2024.

Corporate and Other Results of Operations:

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Loss from operations $ (13,467) $ (15,767)

Loss from operations for the year ended December 31, 2023 decreased by $2.0 million, or 11%, compared to the same period of 2022, due to decreased salaries and benefits from reduced headcount, including lower stock compensation costs.

Loss from operations for the year ended December 31, 2024 decreased by $2.3 million, or 15%, compared to the same period of 2023 due to decreased professional fees, partially offset by increased stock compensation expense.

Capital Resources and Liquidity

The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and funding of working capital.

During 2023, the Company funded working capital requirements with cash on hand and borrowings under the ABL (as defined below) entered into in August 2023.

As of December 31, 2023, the Company had unrestricted cash and cash equivalents of $5.9 million, as compared to $12.3 million at December 31, 2022.

I n addition , at March 11, 2024, the Company had approximately $0.5 million in borrowings outstanding under its ABL, as compared to $7.5 million at December 31, 2023.

During the year ended December 31, 2023, the Company had operating income of $23.2 million, $11.3 million of cash used in operating activities, $1.0 million of cash used in investing activities and $5.9 million of cash provided by financing activities.

The Company’s capital requirements relate to the acquisition and maintenance of equipment and funding of working capital requirements.

During the year ended December 31, 2024 , the Company funded working capital requirements with cash on hand and borrowings under the ABL (defined below).

As of December 31, 2024 , the Company had unrestricted cash and cash equivalents of $4.4 million compared to $5.9 million on December 31, 2023.

In addition, at March 10, 2025, the Company had approximately $15 million i n available borrowings under the ABL.

During the year ended December 31, 2024 , the Compan y had $12.2 million of operating income, $3.4 million of cash provided by operating activities, $1.8 million of cash used in investing activities and $3.1 million of cash used in financing activities.

While we believe our cash and cash equivalents, cash generated from operating activities, which includes the collection of the Contract Shortfall Fees as described further below, and availability under the ABL will be sufficient to fund our capital requirements and anticipated obligations as they become due, uncertainty surrounding the long-term stability and strength of the oil and gas markets, and the resulting potential impact on our customers’ ability to pay their obligations to us in a timely manner could have a negative impact on our liquidity.

In addition, the availability of capital is dependent on the Company’s operating cash flow, which is currently expected to be principally derived from the ProFrac Agreement.

The minimum purchase requirements under the ProFrac Agreement were not met during the 2024 measurement period of January 1, 2024 through December 31, 2024, and as a result, the Company recorded revenue related to Contract Shortfall Fees of $32.4 million, of which $15.0 million was collected through March 12, 2025.

Asset Based Loan

On August 14, 2023, the Company entered into a 24-month revolving loan and security agreement in connection with an Asset Based Loan (the “ABL”).

The ABL provides up to $10 million of initial credit availability, which is limited by a borrowing base consisting of (i) 85% of eligible accounts receivable, plus (ii) 60% of the value of eligible inventory not to exceed 100% of the eligible accounts receivable.

On October 5, 2023, the ABL was amended to increase its maximum borrowing base from $10.0 million to a total of $13.8 million.

In August 2023, the Company entered into a 24-month revolving loan and security agreement in connection with an Asset Based Loan, which was amended in October 2023 and again in August 2024 (as amended, the “ABL”).

The August 2024 amendment to the ABL extended the maturity to August 2026, increased the credit availability and lowered the interest rate spread.

The ABL provides up to $20.0 million of credit availability, which is limited by a borrowing base consisting of (i) 85% of eligible accounts receivable, plus (ii) 60% of the value of eligible inventory not to exceed 100% of the eligible accounts receivable, plus (iii) 60% of the value of certain real estate holdings.

As of December 31, 2024, the Company had $4.8 million outstanding under the ABL.

During the year ended December 31, 2023, the Company incurred $0.5 million in interest and fees related to the ABL, which included the annual fee of $0.1 million.

As of December 31, 2023, the Company had incurred origination costs of $0.5 million related to the ABL that was recorded as deferred financing costs to be amortized over the term of the ABL.

During the year ended December 31, 2024, the Company incurred $0.7 million in interest and fees related to the ABL.

As of December 31, 2024, the Company recorded $0.3 million of unamortized deferred financing costs related to the ABL.

Borrowings under the ABL bear interest at the Wall Street Journal Prime Rate (subject to a floor of 5.50%) plus 2.0% per annum.

The interest rate under the ABL was 11% as of December 31, 2023.

The interest rate under the ABL was 9.5% and 11.0% as of December 31, 2024 and 2023, respectively.

For the year ended December 31, 2024, the weighted-average interest rate was 10.8%.

The ABL contains an annual commitment fee equal to 1.0% of the ABL’s borrowing base.

Additionally, the Company will be assessed a non-usage fee of 0.25% per quarter based on the difference between the average daily outstanding balance and the borrowing base limit of the ABL.

If the ABL is terminated prior to the end of its 24-month term, the Company is required to pay an early termination fee of 2.50% of the borrowing base limit of the ABL (if terminated with more than 12 months remaining until the maturity date) or 1.50% of the borrowing base limit of the ABL (if terminated with less than 12 months remaining until the maturity date).

If the ABL is terminated prior to the end of its term, the Company is required to pay an early termination fee of 2.50% of the borrowing base limit of the ABL (if terminated with more than 12 months remaining until the maturity date) or 1.50% of the borrowing base limit of the ABL (if terminated with less than 12 months remaining until the maturity date).

The ABL contains customary representations, warranties, covenants and events of default, the occurrence of which would permit the lender to accelerate the payment of any amounts borrowed.

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The Company was in compliance with all of the covenants under the ABL as of December 31, 2024.

Sources and Uses of Liquidity

The Company currently funds its operations with cash on hand, availability under the ABL (see Note 9, “Debt and Convertible Notes Payable” in Part II, Item 8 of this Annual Report) and other liquid assets.

Although the Company has a history of negative cash flows from operations and losses, the Company recognized $24.3 million and $24.7 million of gross profit and net income, respectively, during the year ended December 31, 2023.

While we believe that our cash, liquid assets, and availability under the ABL will provide us with sufficient financial resources to fund operations to meet our capital requirements and anticipated obligations as they become due, uncertainty surrounding the long term stability and strength of the oil and gas markets could have a negative impact on our liquidity.

As discussed in Note 17, “Related Party Transactions” in Part II, Item 8 of this Annual Report, 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 (“Contract Shortfall Fees”), 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.

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 and receivables for the year ended and as of December 31, 2023 include $20.1 million in Contract Shortfall Fees of which $10.0 million has been collected through March 11, 2024.

The Company expects to receive the remaining $10.1 million on or before April 8, 2024.

For 2024, the measurement period will be January 1, 2024 through December 31, 2024.

If the minimum purchase requirements are not met during the year ended December 31, 2024, there will be additional Contract Shortfall Fees due during the first quarter of 2025.

Based upon the improvement in our outlook for future cash flows from operations that includes the collection of the Contract Shortfall Fees related to 2023 of $20.1 million, combined with cash on hand and availability under the ABL, the Company believes it has sufficient financial resources to fund operations and meet its capital requirements and anticipated obligations as they become due in the next twelve months.

However, the Company cannot guarantee a sufficient level of cash flows in the future.

The Company had previously disclosed in the consolidated financial statements as of and for the year ending December 31, 2022, that substantial doubt about the Company’s ability to continue as a going concern existed.

As described, the Company

has concluded that those conditions and events raising the substantial doubt no longer exist.

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

Consolidated cash flows by type of activity are noted below (in thousands):

Years ended December 31,

Net cash used in operating activities $ (11,297) $ (44,632)

Net cash (used in) provided by investing activities (1,014) 5,331

Net cash provided by financing activities 5,928 38,267

Net cash provided by (used in) operating activities $ 3,361 $ (11,297)

Net cash used in investing activities (1,816) (1,014)

Net cash (used in) provided by financing activities (3,116) 5,928

Effect of changes in exchange rates on cash and cash equivalents 124 (54)

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Operating Activities

Net cash used in operating activities was $11.3 million and $44.6 million during the years ended December 31, 2023 and 2022, respectively.

Consolidated net income for the year ended December 31, 2023 was $24.7 million compared to a net loss of $42.3 million for the same period of 2022.

During the year ended December 31, 2023, non-cash adjustments to net income totaled $22.8 million as compared to $12.8 million for the same period of December 31, 2022.

• For the year ended December 31, 2023, non-cash adjustments included a $30.0 million gain on the fair value valuation of the Contingent Convertible Notes, a gain of $4.5 million for the Flotek PPP loan forgiveness, paid-in-kind interest on the Convertible Notes Payable and Contract Consideration Convertible Notes Payable of $2.3 million, amortization of contract assets and convertible note issuance costs of $5.0 million and $0.1 million, respectively, and stock compensation expense of $0.3 million.

Net cash provided by (used in) operating activities was $3.4 million and ($11.3) million during the years ended December 31, 2024 and 2023, respectively.

Consolidated net income for the years ended December 31, 2024 and 2023 was $10.5 million and $24.9 million, respectively.

During the year ended December 31, 2024, non-cash adjustments to net income totaled $11.2 million as compared to $22.8 million for the same period of 2023.

• For the year ended December 31, 2024, non-cash adjustments included amortization of contract assets of $5.6 million, stock compensation expense of $1.4 million and non-cash lease expense of $2.1 million primarily due to ROU Asset amortization for equipment leases.

Non-cash adjustments also include $0.9 million of depreciation expense, $0.3 million of amortization of loan origination costs and the provision for excess and obsolete inventory of $0.6 million.

The non-cash adjustment for the provision for excess and obsolete inventory was $1.0 million and depreciation was $0.7 million.

Non-cash lease expense was $3.0 million primarily due to ROU Asset amortization for equipment leases which were added in 2022.

• For the year ended December 31, 2022, non-cash adjustments included paid-in-kind interest on the Convertible Notes Payable and Contract Consideration Convertible Notes Payable of $6.0 million, amortization of contract assets and convertible note issuance costs of $3.4 million and $1.0 million, respectively, and stock compensation expense of $3.3 million.

During the year ended December 31, 2023, changes in working capital used $13.2 million of cash as compared to using $15.2 million for the same period of 2022.

• For the year ended December 31, 2023, changes in working capital resulted primarily from increases in accounts receivable, including related party of $6.5 million, and a decrease in inventories of $1.9 million due to reduced ProFrac sales in late 2023.

During the year ended December 31, 2024, changes in working capital used $18.5 million of cash as compared to $13.2 million used for the same period of 2023.

• For the year ended December 31, 2024, changes in working capital resulted primarily from increases in accounts receivable, including related party, of $21.6 million, and an increase in inventories of $0.7 million.

Accrued liabilities increased $5.7 million and operating lease liabilities decreased $2.4 million primarily due to payments on equipment leases.

• For the year ended December 31, 2023, changes in working capital resulted primarily from increases in accounts receivable, including related party, of $6.5 million, and a decrease in inventories of $1.9 million due to reduced sales with ProFrac Services, LLC in late 2023.

Accounts payable and accrued liabilities decreased $1.7 million and $2.6 million, respectively.

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Operating lease liabilities decreased $3.4 million primarily due to payments on equipment leases.

• For the year ended December 31, 2022, changes in working capital resulted primarily from increases in accounts receivable and inventories of $28.7 million and $7.9 million, respectively, due to the significant increase in revenues.

Contract assets increased $3.6 million related to transaction fees paid associated with Contract Consideration Notes Payable.

This was partially offset by an increase of accounts payable of $25.8 million, attributable to the increase in activity.

Investing Activities

Net cash used by investing activities for the year ended December 31, 2023 was $1.0 million primarily due to system enhancements and capital additions.

Net cash provided by investing activities for the year ended December 31, 2022 was $5.3 million primarily related to the sale of assets.

Net cash used in investing activities for the year ended December 31, 2024 was $1.8 million primarily due to capital additions, including new equipment and sensors expected to be utilized in flare monitoring.

Net cash used in investing activities for the year ended December 31, 2023 was $1.0 million primarily due to system enhancements and capital additions.

Financing Activities

Net cash used in financing activities was $3.1 million for the year ended December 31, 2024, primarily from $2.7 million in net payments on the ABL and $0.4 million in payments for loan origination fees and shares withheld for taxes.

Net cash provided by financing activities was $5.9 million for the year ended December 31, 2023, primarily from net proceeds from the ABL.

Net cash provided was partially offset by severance payments attributed to former CEO’s forfeited vested stock options, loan origination fees, and payments for shares withheld for taxes.

Net cash provided by financing activities was $38.3 million for the year ended December 31, 2022, primarily from the proceeds of the issuance of convertible notes of $21.2 million and prefunded warrants of $19.5 million, partially offset by issuance costs of $2.3 million.

Net cash provided was partially offset by severance payments attributed to our former chief executive officer’s forfeited vested stock options, loan origination fees, and payments for shares withheld for taxes.

Critical Accounting Estimates

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Significant or unanticipated changes to our estimates and forecasts could impact the amount and timing of any additional provisions for excess and obsolete inventory.

Fair Value of Contract Consideration Convertible Notes Payable

The Company accounted for the Contract Consideration Convertible Notes Payable, which was issued related to obtaining the ProFrac Agreement, as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (see Note 9, “Debt and Convertible Notes Payable” in Part II, Item 8 of this Annual Report).

Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each reporting date with the change in fair value included in the consolidated statements of operations.

At each reporting date preceding the date of maturity, the Contract Consideration Convertible Notes Payable were remeasured by means of a Monte Carlo simulation which utilized key inputs such as the risk-free interest rate, stock price, expected volatility and term until liquidation.

Significant changes to the key inputs such as the Company’s stock price and volatility would impact the estimated fair value.

The Contract Consideration Convertible Notes matured and were converted during the year ended December 31, 2023 in accordance with their terms.

Recent Accounting Pronouncements

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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 7. Management’s Discussion and Analysis