FLOTEK INDUSTRIES INC/CN/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the 2024 Annual Report and the unaudited condensed consolidated financial statements and accompanying notes included herein. Comparative segment revenues and related financial information are discussed herein and are presented in Note 18 to our unaudited condensed consolidated financial statements. See “Forward Looking Statements” in this Quarterly Report and “Risk Factors” included in our filings with the SEC, including our Quarterly Reports on Form 10-Q and our 2024 Annual Report, for a description of important factors that could cause actual results to differ from expected results. Our historical financial information may not be indicative of our future performance. Executive Summary Flotek strives to be the collaborative partner of choice for solutions that reduce the environmental impact of energy on air, water, land and people. An advanced technology-driven, chemical and data analytics company, Flotek seeks to provide unique and innovative solutions to its customers in both the domestic and international energy markets. The Company is committed to delivering products and services that endeavor to maximize customer returns by leveraging chemistry as the common value creation platform. The Company has two operating segments, Chemistry Technologies (“CT”) and Data Analysis (“DA”), which are both supported by the Company’s continuing Research and Innovation (“R&I”) advanced laboratory capabilities. Recent Events Remote Power Generation Asset Acquisition and Related Lease Agreement The Company entered into a series of transactions in connection with an Asset Purchase Agreement, dated as of April 28, 2025 (the “Purchase Agreement”), with ProFrac GDM, LLC (“ProFrac GDM”), an indirect subsidiary of ProFrac Holding Corp. (“ProFrac”), and various subsidiaries of ProFrac, pursuant to which, among other things, the Company acquired certain mobile power generation assets, comprised of twenty-two operating units and eight units under construction, certain inventory and related intellectual property (the “Acquired Assets”). Concurrently, the Leased Equipment (as defined below) was leased back to ProFrac GDM pursuant to an Agreement for Equipment Rental, dated as of April 28, 2025, by and between PWRtek, LLC (“PWRtek”), a wholly-owned subsidiary of the Company, and ProFrac GDM (the “Lease Agreement”) (collectively, the “PWRtek Transactions”). Total consideration paid by the Company in connection with the PWRtek Transactions was $107.5 million, which consisted of the following: (1) an offset of $17.6 million against the Company’s accrued and 2024 Contract Shortfall Fee (defined below), which was the consideration for the acquisition of the Acquired Assets, (2) a warrant (the “April 2025 Warrant”) to purchase 6,000,000 shares of the Company’s common stock, (3) a secured promissory note, issued by PWRtek in the initial principal amount of $40 million (the “PWRtek Note”), and (4) offsets against potential future period Contract Shortfall Fee amounts that may become due under the ProFrac Agreement. Due to ProFrac controlling more than 50% of the Company’s outstanding shares, the acquisition of the Acquired Assets qualified as a transfer of assets between entities under common control. As such, the Acquired Assets have been recorded at ProFrac’s historical book value as of the acquisition date of approximately $15.1 million. The total consideration paid by the Company for the PWRtek Transactions in excess of ProFrac’s historical book value of the Acquired Assets was recorded to stockholders’ equity. Financial results from the Lease Agreement and operation of the Acquired Assets are reported within the Company’s DA segment. Pursuant to the terms of the Lease Agreement, ProFrac GDM agreed to lease from PWRtek, for a period of six years, twenty-two operating mobile power generation assets, comprised of fourteen digitally enhanced mobile natural gas power generation filtration units and eight gas distribution units and eight additional units, comprised of seven gas distribution units and one mobile natural gas power generation filtration unit, that were under construction (collectively, the “Leased Equipment”) as of April 28, 2025. The Lease Agreement provides for fixed rental rates for the Leased Equipment during the first five years of the Lease Agreement and then prevailing market rates during the sixth year. The Lease Agreement does not include a purchase option for the purchase of the Leased Equipment at the end of the Lease Agreement term. The Company began recognizing lease revenue associated with the twenty-two operating mobile power generation assets on April 28, 2025, the effective date of the Lease Agreement. With respect to the Leased Equipment under construction, the Company will recognize lease revenue at the earlier of the in-service date or January 1, 2026. The April 2025 Warrant has a seven-year term and can be exercised on a cashless basis for nominal consideration at any time following the date on which the Company’s stockholders have approved the issuance of the shares of the Company’s common stock underlying the April 2025 Warrant. On July 9, 2025, the Company held a special stockholders meeting where the 30 Company’s stockholders approved the issuance of the 6,000,000 shares of the Company’s common stock underlying the April 2025 Warrant. The PWRtek Note provides for a five-year term and is subject to a 10% annual interest rate, payable quarterly in cash or in-kind (i.e., added to the principal balance quarterly) at PWRtek’s option. The principal becomes due at the end of the five-year term on April 28, 2030. PWRtek’s obligations under the PWRtek Note are secured by a first priority lien on the Acquired Assets, including the Leased Equipment, as well as certain other after-acquired property of PWRtek. While the PWRtek Note includes certain prepayment restrictions, Flotek and ProFrac GDM can each elect to apply up to fifty percent cumulatively of any future Contract Shortfall Fee that becomes due and payable under the ProFrac Agreement to prepay principal and interest due under the PWRtek Note without penalty. The obligations under the PWRtek Note have been guaranteed by the Company. 2024 Contract Shortfall Fees Contract Shortfall Fees for the measurement period of January 1, 2024 through December 31, 2024 totaled approximately $32.6 million (the “2024 Contract Shortfall Fees”). The Company collected $15 million of the 2024 Contract Shortfall Fees in cash in March 2025. The remaining 2024 Contract Shortfall Fees were offset as consideration for the Acquired Assets as described above. SEC Filing Status Change Based on the Company’s aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates as of June 30, 2025, the Company expects to become an “accelerated filer” as of December 31, 2025. As a result, the Company’s independent registered public accounting firm is expected to be required to provide its attestation report on the Company’s internal control over financial reporting in the Company’s Annual Report on Form 10-K for the year ending December 31, 2025. Company Overview Chemistry Technologies 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’s proprietary chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of their desired chemical applications program. 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 energy-related companies, such as our related party ProFrac Services, LLC (“ProFrac Services”), with whom we have a long-term chemistry 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, which was subsequently amended on May 17, 2022 and February 1, 2023 (as amended, 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 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 measurement period for Contract Shortfall Fees during 2024 was January 1, 2024 through December 31, 2024. Related party revenues for the six months ended June 30, 2024 reflect Contract Shortfall Fees of $17.1 million. The current measurement period for Contract Shortfall Fees is January 1, 2025 through December 31, 2025. The Company does not expect that the minimum purchase requirements will be met during the current measurement period, and as a result, related party revenues for the six months ended June 30, 2025 reflect Contract Shortfall Fees of $15.2 million. The PWRtek Transactions described above under “Recent Events” do not impact the ProFrac Agreement; provided, however, the Company and ProFrac Services have agreed that any future Contract Shortfall Fees shall be offset by the approximately $7.2 million residual payable due under the Purchase Agreement and either the Company or ProFrac GDM may elect, upon written notice, to offset up to 50% of any due and payable Contract Shortfall Fees against the PWRtek Note principal and accrued and unpaid interest. 31 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 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 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, 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. Our ability to facilitate the use of lower cost field gas to generate remote power solutions has been significantly enhanced through the addition of the Acquired Assets described in “Recent Events” above. 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 our business segments through 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 segment performance, optimization and manufacturing. For the three months ended June 30, 2025 and 2024, the Company incurred $0.5 million and $0.5 million, respectively, of research and development expense. For the six months ended June 30, 2025 and 2024, the Company incurred $0.8 million and $0.9 million, respectively, of research and development expense. The Company expects that its 2025 research and development investments will continue to support new product development, especially in support of enhanced environmental demands and customization initiatives for its clients. Outlook Our business is subject to numerous variables that impact our outlook and expectations given the shifting conditions of the oil and gas industry. We have based our outlook on the market conditions we perceive today. The oil and gas industry is highly cyclical. Energy Industry 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, partially attributable to the ongoing discussions with respect to tariffs and potential for additional conflicts in the Middle East, we believe the fundamentals for energy-related services remain stable. 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 generally expect these companies, as well as major exploration and production companies, to maintain current activity levels over the next 12 months. Chemistry Technologies The CT segment is actively advancing integrated solutions to enhance capital efficiency for exploration and production (“E&P”) operators and service companies. Our approach combines technical leadership, exceptional service quality, reliable delivery, and a strong safety record. We believe that we have optimized service delivery across key North American basins and are well-positioned to adapt to fluctuations in activity levels. Based upon our strong results during the first quarter of 2025, and customer commitments, we anticipate stable demand for our chemistry during 2025. Our expectations are in part based upon our current outlook on oil and gas prices. As a result of the continued growth in the exportation of natural gas, as well as the increased utilization of natural gas to generate electricity, we expect the demand for natural gas to continue to increase over the next twelve to twenty-four months. Higher natural gas prices would likely increase activity in the Haynesville shale basin, an area where we expect our established presence, expertise and capabilities could provide growth. 32 Internationally, we are seeing an increase in unconventional activity in the Middle East and Argentina, where we expect demand for our chemistry to grow throughout 2025. We remain focused on driving innovation between the CT and DA segments, promoting opportunities in upstream applications designed to deliver enhanced efficiencies for E&P operators and service companies. We believe that these initiatives will lead to deeper integration between our CT and DA segments, creating a pathway for future growth. Digital Analytics The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. 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 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. Automated Interface Detection Algorithm (“AIDA”) provides real-time detection of interfaces in a liquids pipeline without the need for additional sampling or chemometric modeling. The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces real-time versus traditional lab analysis. We believe this allows customers to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades. As evidenced by and in connection with the transactions with ProFrac and ProFrac GDM described above under “Recent Events,” we are gaining traction leveraging the Verax™ in applications where operators and service companies are using lower cost field gas as a substitute for diesel in dual fuel engines as the market moves to Tier 4 equipment and eFleets. Analyzing gas quality 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. In addition, we believe the Acquired Assets can be utilized in numerous vertical markets, including areas outside of the oil and gas industry. We expect the Lease Agreement described above under “Recent Events” to have a significant impact on the future financial results of our DA segment. 33 Consolidated Results of Operations (in thousands) Three months ended June 30, Six months ended June 30, 2025 2024 2025 2024 Revenue Revenue from external customers $ 25,182 $ 18,191 $ 49,605 $ 31,371 Revenue from related party 33,168 27,961 64,107 55,155 Total revenues 58,350 46,152 113,712 86,526 Cost of sales 43,943 36,982 86,856 68,535 Cost of sales % 75.3 % 80.1 % 76.4 % 79.2 % Gross profit 14,407 9,170 26,856 17,991 Gross profit % 24.7 % 19.9 % 23.6 % 20.8 % Selling general and administrative 6,796 6,279 13,078 12,365 Selling general and administrative % 11.6 % 13.6 % 11.5 % 14.3 % Asset acquisition expenses 4,195 — 4,195 — Depreciation 374 222 626 442 Research and development 455 481 810 888 Gain on sale of property and equipment — (34) (7) (34) Income from operations 2,587 2,222 8,154 4,330 Operating margin % 4.4 % 4.8 % 7.2 % 5.0 % Interest and other (expense) income, net (802) (233) (925) (537) Income before income taxes 1,785 1,989 7,229 3,793 Income tax expense (17) (15) (81) (257) Net income $ 1,768 $ 1,974 $ 7,148 $ 3,536 Net income % 3.0 % 4.3 % 6.3 % 4.1 % Consolidated revenue for the three months ended June 30, 2025 increased $12.2 million, or 26%, versus the same period of 2024, driven by increased sales volumes from external customers as well as increased related party activity under the ProFrac Agreement and $3.2 million in PWRtek rental revenue, partially offset by a decrease in accrued Contract Shortfall Fees of $0.6 million. Related party revenues in the CT segment are net of $1.4 million and $1.5 million of contract assets amortization for the three months ended June 30, 2025 and 2024, respectively. Consolidated revenue for the six months ended June 30, 2025 increased $27.2 million, or 31%, versus the same period of 2024, driven by increased sales volumes from external customers as well as increased related party activity under the ProFrac Agreement and $3.2 million in PWRtek rental revenue, partially offset by a decrease in accrued Contract Shortfall Fees of $1.8 million. Related party revenues in the CT segment are net of $2.9 million and $2.7 million of contract assets amortization for the six months ended June 30, 2025 and 2024, respectively. Consolidated cost of sales for the three months ended June 30, 2025 increased $7.0 million, or 19%, versus the same period of 2024, primarily due to increased product sales and increased freight costs. Consolidated cost of sales percentage was 75% and 80% for the three months ended June 30, 2025 and 2024, respectively. Consolidated cost of sales for the six months ended June 30, 2025 increased $18.3 million, or 27%, versus the same period of 2024, primarily due to increased product sales and increased freight costs. Consolidated cost of sales percentage was 76% and 79% for the six months ended June 30, 2025 and 2024, respectively. SG&A expenses for the three months ended June 30, 2025 increased $0.5 million, or 8%, versus the same period of 2024. The increase relates primarily to increased salaries and stock compensation expense, partially offset by decreased professional fees. SG&A expenses for the six months ended June 30, 2025 increased $0.7 million, or 5.8%, versus the same period of 2024. The increase relates primarily to increased salaries and stock compensation expense, partially offset by decreased professional fees. 34 Asset acquisition expenses were $4.2 million for both the three and six months ended June 30, 2025 related to expenses associated with the April 28, 2025 PWRtek Transactions. Income from operations increased $0.4 million for the three months ended June 30, 2025, versus the same period in 2024. The increase was primarily driven by a $5.2 million increase in gross profit partially offset by $4.2 million in asset acquisition expenses and a $0.5 million increase in SG&A expenses during the three months ended June 30, 2025 as compared to the same period of 2024. Income from operations increased $3.8 million for the six months ended June 30, 2025, versus the same period in 2024. The increase was primarily driven by an $8.9 million increase in gross profit partially offset by $4.2 million in asset acquisition expenses and a $0.7 million increase in SG&A expenses during the six months ended June 30, 2025 as compared to the same period of 2024. Interest and other expense for the three months ended June 30, 2025 increased $0.6 million driven by a $0.7 million increase in interest payments on the new PWRtek Note compared to the same period of 2024. Interest and other expense for the six months ended June 30, 2025 increased $0.4 million driven by a $0.7 million increase in interest payments on the new PWRtek Note compared to the same period of 2024. The Company’s income tax expense for the three months ended June 30, 2025 and 2024 was $17 thousand and $15 thousand, respectively. The Company’s income tax expense for the six months ended June 30, 2025 and 2024 was $0.1 million and $0.3 million, respectively. Results by Segment (in thousands): Chemistry Technologies Results of Operations: Three months ended June 30, Six months ended June 30, 2025 2024 2025 2024 Revenue from external customers $ 22,543 $ 16,361 $ 44,552 $ 28,047 Revenue from related party 29,877 27,741 60,606 54,755 Income from operations 8,049 6,145 16,940 12,250 CT revenue from external customers for the three months ended June 30, 2025 increased $6.2 million, or 38%, compared to the same period of 2024 driven primarily by increased activity. Revenue from related party for the three months ended June 30, 2025 increased $2.1 million, or 8%, compared to the same period of 2024, primarily driven by increased activity partially offset by decreased accrued Contract Shortfall Fees. CT revenue from external customers for the six months ended June 30, 2025 increased $16.5 million, or 59%, compared to the same period of 2024 driven primarily by increased activity. Revenue from related party for the six months ended June 30, 2025 increased $5.9 million, or 11%, compared to the same period of 2024, primarily driven by increased activity partially offset by decreased accrued Contract Shortfall Fees. Income from operations for the CT segment for the three months ended June 30, 2025 increased $1.9 million compared to the same period of 2024. The increase was driven by increased gross profit of $2.1 million for the three months ended June 30, 2025, which was related to increased product volumes partially offset by a corresponding increase in cost of sales. Income from operations for the CT segment for the six months ended June 30, 2025 increased $4.7 million compared to the same period of 2024. The increase was driven by increased gross profit of $5.2 million for the six months ended June 30, 2025, which was related to increased product volumes partially offset by a corresponding increase in cost of sales. Data Analytics Results of Operations: Three months ended June 30, Six months ended June 30, 2025 2024 2025 2024 Revenue from external customers $ 2,639 $ 1,830 $ 5,053 $ 3,324 Revenue from related party 3,291 220 3,501 400 Income (loss) from operations (1,919) (358) (2,044) (782) DA revenue from external customers for the three months ended June 30, 2025 increased $0.8 million, or 44.3%, compared to the same period of 2024 primarily due to increased unit sales. Revenue from related party for three months ended June 30, 2025 increased $3.1 million compared to the same period of 2024 primarily due to PWRtek rental income. DA revenue from 35 external customers for the six months ended June 30, 2025 increased $1.7 million, or 52%, compared to the same period of 2024 primarily due to increased unit sales. Revenue from related party for the six months ended June 30, 2025 increased $3.1 million compared to the same period of 2024 primarily due to PWRtek rental income. Loss from operations for the DA segment for the three months ended June 30, 2025 increased $1.6 million compared to the same period of 2024 primarily driven by increased materials costs and $4.2 million of asset acquisition expenses related to the PWRtek Transactions, partially offset by PWRtek rental income and increased activity. Loss from operations for the DA segment for the six months ended June 30, 2025 increased $1.3 million compared to the same period for 2024 primarily driven by increased materials costs and $4.2 million of asset acquisition expenses related to the PWRtek Transactions, partially offset by PWRtek rental income and increased activity. Corporate and Other Results of Operations: Three months ended June 30, Six months ended June 30, 2025 2024 2025 2024 Loss from operations $ (3,543) $ (3,565) $ (6,742) $ (7,138) Loss from operations for the three months ended June 30, 2025 was relatively flat compared to the same period of 2024. Loss from operations for the six months ended June 30, 2025 decreased $0.4 million, or 6%, compared to the same period of 2024 attributable to decreased professional fees. Capital Resources and Liquidity Overview The Company’s working capital requirements relate to the acquisition and maintenance of equipment and funding obligations as they become due. During the six months ended June 30, 2025, the Company funded working capital requirements with cash on hand, borrowings under the ABL (defined below) and cash flow from operations. We believe our cash and cash equivalents, cash generated from operating activities, which includes the impact of the transactions described in “Recent Events” above, the collection or offset utilization of future Contract Shortfall Fees as described below, and availability under the ABL will be sufficient to fund our capital requirements and anticipated obligations as they become due over the next twelve months. However, sustained weakness in 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 and the Lease Agreement. The minimum purchase requirements under the ProFrac Agreement were not met during 2024. As a result, the Company recorded revenue related to the 2024 Contract Shortfall Fees totaling $32.6 million. The Company collected $15.0 million of 2024 Contract Shortfall Fees in cash during the first quarter of 2025. The remainder of the 2024 Contract Shortfall Fees were offset as consideration for the Acquired Assets, see “Recent Events” above. The current measurement period for Contract Shortfall Fees is January 1, 2025 through December 31, 2025. The Company does not expect that the minimum purchase requirements will be met during the current measurement period, and as a result, related party revenues for the six months ended June 30, 2025 reflect Contract Shortfall Fees of $15.2 million. As noted above under “Company Overview – ProFrac Supply Agreement,” the Company and ProFrac Services have agreed that any future Contract Shortfall Fees will be offset by the approximately $7.2 million residual payable due under the Purchase Agreement. In addition, the Company and ProFrac each have rights to offset future Contract Shortfall Fees against the PWRtek Note. As of June 30, 2025, the Company had unrestricted cash and cash equivalents of $5.0 million compared to $4.4 million on December 31, 2024. In addition, on July 31 , 2025 , the Company had approximately $7.3 million in available borrowings under the ABL. During the six months ended June 30, 2025, the Company had $8.2 million of operating incom e, $2.8 million of cash provided by operating activities, $1.3 million of cash used in investing activities and $0.7 million of cash used in financing activities. Asset Based Loan 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, August 2024 and April 2025 (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. 36 As of June 30, 2025, the Company had $5.1 million outstanding under the ABL. During the six months ended June 30, 2025, the Company incurred $0.3 million in interest and fees related to the ABL. As of June 30, 2025, the Company recorded $0.2 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 9.5% as of June 30, 2025. For the six months ended June 30, 2025, the weighted-average interest rate was 9.5%. 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 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). In connection with the Company’s entry into the Purchase Agreement, the Company entered into the Letter Agreement with the lender whereby the lender will not test compliance with respect to the Tangible Net Worth (as defined in the ABL) covenant through and including December 31, 2025. Pursuant to the Letter Agreement, the Company will be required to maintain positive trailing three-month consolidated net income on a monthly basis through and including December 31, 2025 and PWRtek is prohibited from making distributions, except as permitted pursuant to the PWRtek Note. In addition, the ABL provides the lender a blanket security interest on all or substantially all of the Company’s assets, excluding the PWRtek Assets. Cash Flows Consolidated cash flows by type of activity are noted below (in thousands): Six months ended June 30, 2025 2024 Net cash provided by operating activities $ 2,822 $ 827 Net cash used in investing activities (1,302) (195) Net cash used in financing activities (740) (1,765) Effect of changes in exchange rates on cash and cash equivalents (155) 58 Net change in cash and cash equivalents and restricted cash $ 625 $ (1,075) Operating Activities Net cash provided by operating activities was $2.8 million during the six months ended June 30, 2025 compared to net cash provided by operating activities of $0.8 million for the same period of 2024. Consolidated net income for the six months ended June 30, 2025 was $7.1 million compared to consolidated net income of $3.5 million for the six months ended June 30, 2024. During the six months ended June 30, 2025, non-cash adjustments to net income totaled $5.9 million as compared to $5.9 million for the same period of 2024. • For the six months ended June 30, 2025, non-cash adjustments included non-cash positive adjustments of $1.1 million of stock compensation expense, $2.9 million amortization of contract assets and $0.6 million of non-cash lease expense. • For the six months ended June 30, 2024, non-cash adjustments included non-cash positive adjustments of $0.6 million of stock compensation expense, $2.7 million amortization of contract assets and $1.2 million of non-cash lease expense. During the six months ended June 30, 2025, changes in working capital used $10.2 million of cash as compared to $8.6 million for the same period of 2024. • For the six months ended June 30, 2025, changes in working capital resulted primarily from an increase in related party accounts receivable of $2.5 million, increased third party accounts receivable of $5.1 million, decreased accrued liabilities and operating lease liabilities of $1.9 million and $0.9 million, respectively and decreases in accounts payable of $1.7 million, partially offset by a decrease in net inventories of $1.4 million and an increase in interest payable of $0.7 million. • For the six months ended June 30, 2024, changes in working capital resulted primarily from an increase in related party accounts receivable of $5.5 million, a decrease in third party accounts receivable of $0.3 million and net 37 inventories of $0.2 million along with decreased accrued liabilities and operating lease liabilities of $2.8 million and $1.5 million, respectively, partially offset by increases in accounts payable of $0.1 million, and other assets of $0.7 million. Investing Activities Net cash used in investing activities for the six months ended June 30, 2025 and 2024 was $1.3 million and $0.2 million, respectively, primarily driven by $1.3 million and $0.2 million in capital expenditures for the six months ended June 30, 2025 and 2024, respectively. Financing Activities Net cash used in financing activities for the six months ended June 30, 2025 was $0.7 million and relates primarily to $0.3 million in net payments on the ABL, payments for loan origination costs on the PWRtek Note, the issuance cost of the April 2025 Warrant and payments to tax authorities for shares withheld from employees, partially offset by proceeds from the issuance of stock under the Company’s Employee Stock Purchase Plan and stock option exercises. Net cash used in financing activities was $1.8 million for the six months ended June 30, 2024, and relates primarily to $1.7 million in net payments on the ABL. Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with U.S. GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 2024 Annual Report describes the critical accounting policies and estimates used in the preparation of the Company’s consolidated financial statements. Note 2, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2024 Annual Report describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. Additionally, the Company believes the following are critical accounting policies and estimates used in preparation of the Company’s consolidated financial statements due to the significant subjective and complex judgments and estimates required when preparing the Company’s consolidated financial statements. Leases — Lessor Accounting We lease equipment to customers under operating lease arrangements. At contract inception we perform an evaluation to determine if a lease arrangement conveys the right to control the use of an identified asset. To the extent such rights of control are conveyed, we further make an assessment as to the applicable lease classification. The determination of appropriate lease classification (sales-type lease or operating lease) may require the use of management judgment, including economic life of the leased equipment, the rate implicit in the lease used to determine the fair value of lease payments, and the fair value of leased equipment.