Item 2. Management’s Discussion and Analysis
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 Analytics (“DA”), which are both supported by the Company’s continuing Research and Innovation (“R&I”) advanced laboratory capabilities.
Recent Events
On November 7, 2025, the Company entered into a series of agreements with ProFrac GDM, LLC, a subsidiary of ProFrac, in connection with the assignment of the PWRtek Note by ProFrac GDM, LLC, a subsidiary of ProFrac (“ProFrac GDM”), to PC Energy Credit I LLC (the “Note Assignment”). The PWRtek Note was originally issued as a component of the total consideration paid by the Company in connection with the PWRtek Transactions (see “Note 3 - Asset Acquisition” above).
In connection with the Note Assignment, (1) Company and ProFrac GDM have entered into that certain Consent, Acknowledgement and Amendment to Senior Secured Note Documents, dated as of November 7, 2025 (the “Assignment Consent”), (2) ProFrac and ProFrac GDM have entered into that certain Guaranty, dated as of November 7, 2025 (the “ProFrac Parent Guaranty”), and (3) the Company and ProFrac GDM have entered into that certain Amendment No. 1 to Agreement for Equipment Rental, dated as of November 7, 2025 (the “Dry Lease Amendment,” and together with the Assignment Consent and the ProFrac Parent Guaranty, the “Transaction Documents”).
Pursuant to the Transaction Documents, in consideration for the Company’s consent to the Note Assignment, the parties involved agreed to various amendments which include, among other things, (a) the provision of a guaranty by ProFrac of all of ProFrac GDM’s obligations under the Lease Agreement, (b) the elimination of all make-whole amounts and prepayment premiums applicable to the PWRtek Note, providing the Company with the unrestricted ability to prepay the PWRtek Note without premiums or penalties, (c) the removal of a “Material Adverse Effect” event of default under the PWRtek Note relating to the Company, and (d) the removal of restrictions included in the PWRtek Note on PWRtek, LLC’s, a subsidiary of the Company, ability to make distributions (as well as the corresponding removal of restrictions included in the Lease Agreement on ProFrac GDM’s ability to make distributions). In addition, in order to facilitate the Note Assignment, the parties further agreed to the removal of the mutual rights to offset Contract Shortfall Fees that are payable under the ProFrac Agreement and the Company’s right to offset amounts due pursuant to the Lease Agreement against the principal of the PWRtek Note. As a result, the full principal amount of the PWRtek Note will be payable in cash by the Company, rather than via offset against amounts payable pursuant to the Company’s other agreements with ProFrac and its affiliates. Correspondingly, any amounts due to the Company from ProFrac and its affiliates pursuant to the Company’s other agreements with ProFrac and its affiliates, including order shortfall payments, must be paid in cash, rather than via offset.
In addition, on October 28, 2025, the Company’s lender under the ABL provided its consent (the “ABL Consent”) to the Assignment (see “Item 1. Financial Statements - Note 10” above).
The foregoing description of the Assignment Consent, the ProFrac Parent Guaranty, the Dry Lease Amendment and the ABL Consent do not purport to be complete and are qualified in its entirety by reference to the complete text thereof, which are filed herewith as Exhibits 10.2, 10.3, 10.4, and 10.5 respectively, and incorporated herein by reference.
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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 seek to enable our 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 nine months ended September 30, 2024 reflect Contract Shortfall Fees of $23.8 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 nine months ended September 30, 2025 reflect Contract Shortfall Fees of $23.9 million.
The PWRtek Transactions (see “Item 1. Financial Statements - Note 3”) 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 described in “Item 1. Financial Statements - Note 3” above and either the Company or ProFrac GDM, LLC (“ProFrac GDM”) may elect, upon written notice, to offset up to 50% of any due and payable Contract Shortfall Fees against principal and accrued and unpaid interest due under the PWRtek Note described in “Item 1. Financial Statements - Note 3” above.
Data Analytics
The Company’s Data Analytics (“DA”) segment delivers real-time information and insights to its customers designed to enable optimization of operations and reduction of emissions and their carbon intensity. The Company’s technologies are founded upon an industry leading field-deployable, in-line optical near-infrared spectrometer that measures the quality, quantity and composition of hydrocarbon flows. The instrument’s response is processed with advanced chemometrics modeling, artificial intelligence and machine learning algorithms to deliver valuable insights to our customers every 15 seconds.
The DA segment generates revenues through a combination of short and long-term equipment rentals (service revenue) and capital sales (product revenue). Customers of the DA segment span across the oil and gas industry, including oil and gas supermajors, some of the largest midstream oil and gas companies, large gas processing plants, independent exploration and production companies and oil field service companies that provide hydraulic fracturing services. We believe customers using our technology may obtain significant benefits, including additional profits, by enhancing operations in crude/condensates stabilization, enhancing blending operations, reducing time impacting transmix operations and increasing efficiencies and optimization of gas plants. The DA segment has expanded its presence in providing mobile power generation solutions through the acquisition of the assets described in “Item 1. Financial Statements - Note 3” above. These assets facilitate the use of significantly lower-cost field gas, as a replacement to diesel, to generate power, lower emissions and protect equipment through the continuous measurement of gas quality.
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
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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 September 30, 2025 and 2024, the Company incurred $0.5 million and $0.5 million, respectively, of research and development expense. For the nine months ended September 30, 2025 and 2024, the Company incurred $1.4 million and $1.3 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.
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 2026.
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.
Data Analytics
The use of data and digital analytics is a growing trend in industries where technology is leveraged to analyze large operational datasets to improve performance, as well as for predictive maintenance, advanced safety measures and reduction in the environmental impact of operations. We believe our suite of measurement technologies including the VERACAL ® ,Verax™, XSPCT TM and Raman analyzers have gained a foothold in North American markets for critical applications where compositional information is needed in real-time. These technologies deliver insight on valuable operational data, including vapor pressure, boiling point, flash point, octane level, API (American Petroleum Institute) gravity, viscosity, BTU (British Thermal Unit) and more, simultaneously.
To drive recurring revenue, we continue to build on the modular nature of our sensor and analysis packages with new data processing techniques designed to further enhance the value of our installations. Automated Interface Detection Algorithm (“AIDA”) provides real-time detection of interfaces in a pipeline without the need for additional sampling or chemometric modeling. Our application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces real-time compared to traditional manual lab analysis. We believe this allows customers to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades.
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As evidenced by and in connection with the transactions with ProFrac and ProFrac GDM described above under “Item 1. Financial Statements - Note 3,” 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 electric powered drilling rigs and frack equipment. Analyzing gas quality in real-time is designed to allow companies to maximize the field gas for diesel substitution rate providing significant cost savings while lowering emissions, reducing fuel consumption/costs and protecting 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, such as grid and emergency remote power support and power needs associated with data centers.
The Lease Agreement described under “Item 1. Financial Statements - Note 3” above has had and we expect it to continue to have a significant impact on the future financial results of our DA segment. We expect full-year 2026 revenues from just the Lease Agreement to total approximately $27.0 million, as compared to $17.4 million in total DA revenues from all sources through the first nine months of 2025.
The DA segment continues to innovate and enhance its hardware, software and artificial intelligence platforms. These advancements are expected to enable complex lab-grade measurements in challenging environments, which is required for oil and gas valuation at custody transfer points. The Company’s recent deployment and GPA 2172 qualification of the XSPCT analyzers, along with its proven fleet of VERAX analyzers, will support the oil and gas industry’s digital shift while enhancing transparency in valuation, taxation and commodity forecasting. We believe that the lower-cost, rugged measurement points provided by our analyzers will help pave the way for digital measurement to become the standard for custody transfer.
Consolidated Results of Operations (in thousands)
Three months ended September 30, Nine months ended September 30,
2025 2024 2025 2024
Revenue
Revenue from external customers $ 22,941 $ 16,565 $ 72,546 $ 47,935
Revenue from related party 33,090 33,177 97,197 88,332
Total revenues 56,031 49,742 169,743 136,267
Cost of sales 38,248 40,623 125,104 109,159
Cost of sales % 68.3 % 81.7 % 73.7 % 80.1 %
Gross profit 17,783 9,119 44,639 27,108
Gross profit % 31.7 % 18.3 % 26.3 % 19.9 %
Selling general and administrative 7,384 5,714 20,462 18,079
Selling general and administrative % 13.2 % 11.5 % 12.1 % 13.3 %
Asset acquisition expenses 167 — 4,362 —
Depreciation 581 220 1,207 662
Research and development 549 462 1,359 1,349
Gain on sale of property and equipment — — (7) (34)
Income from operations 9,102 2,723 17,256 7,052
Operating margin % 16.2 % 5.5 % 10.2 % 5.2 %
Interest and other (expense) income, net (1,359) (154) (2,284) (691)
Income before income taxes 7,743 2,569 14,972 6,361
Income tax benefit (expense) 12,612 (37) 12,531 (293)
Net income $ 20,355 $ 2,532 $ 27,503 $ 6,068
Net income % 36.3 % 5.1 % 16.2 % 4.5 %
Consolidated revenue for the three months ended September 30, 2025 increased $6.3 million, or 13%, versus the same period of 2024, driven by $6.1 million in PWRtek rental revenue, increased sales volumes from external customers and an increase in accrued Contract Shortfall Fees of $1.9 million, partially offset by reduced related party activity under the ProFrac Agreement. Related party revenues in the CT segment are net of $1.3 million and $1.6 million of contract assets amortization for the three months ended September 30, 2025 and 2024, respectively.
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Consolidated revenue for the nine months ended September 30, 2025 increased $33.5 million, or 25%, versus the same period of 2024, driven by increased sales volumes from external customers and $9.3 million in PWRtek rental revenue, partially offset by a decrease in accrued Contract Shortfall Fees of $0.1 million. Related party revenues in the CT segment are net of $4.2 million and $4.3 million of contract assets amortization for the nine months ended September 30, 2025 and 2024, respectively.
Consolidated cost of sales for the three months ended September 30, 2025 decreased $2.4 million, or 6%, versus the same period of 2024, primarily due to decreased product sales. Consolidated cost of sales percentage was 68% and 82% for the three months ended September 30, 2025 and 2024, respectively.
Consolidated cost of sales for the nine months ended September 30, 2025 increased $15.9 million, or 15%, versus the same period of 2024, primarily due to increased product sales, increased freight costs and increased costs related to PWRtek activity. Consolidated cost of sales percentage was 74% and 80% for the nine months ended September 30, 2025 and 2024, respectively.
SG&A expenses for the three months ended September 30, 2025 increased $1.7 million, or 29%, versus the same period of 2024. The increase relates primarily to increased salaries, increased stock compensation expense and increased professional fees.
SG&A expenses for the nine months ended September 30, 2025 increased $2.4 million, or 13%, versus the same period of 2024. The increase relates primarily to increased salaries, increased stock compensation expense and increased professional fees.
Asset acquisition expenses were $0.2 million and $4.4 million for the three and nine months ended September 30, 2025, respectively, related to expenses associated with the April 28, 2025 PWRtek Transactions.
Income from operations increased $6.4 million for the three months ended September 30, 2025, versus the same period in 2024. The increase was primarily driven by an $8.7 million increase in gross profit partially offset by $0.2 million in asset acquisition expenses and a $1.7 million increase in SG&A expenses during the three months ended September 30, 2025 as compared to the same period of 2024.
Income from operations increased $10.2 million for the nine months ended September 30, 2025, versus the same period in 2024. The increase was primarily driven by an $17.5 million increase in gross profit partially offset by $4.4 million in asset acquisition expenses and a $2.4 million increase in SG&A expenses during the nine months ended September 30, 2025 as compared to the same period of 2024.
Interest and other expense for the three months ended September 30, 2025 increased $1.2 million driven by a $1.0 million increase in interest payments as a result of the new PWRtek Note compared to the same period of 2024. Interest and other expense for the nine months ended September 30, 2025 increased $1.6 million driven by a $1.7 million increase in interest payments as a result of the new PWRtek Note compared to the same period of 2024.
The Company had an income tax benefit of $12.6 million for the three months ended September 30, 2025 and income tax expense of $37 thousand for the same period of 2024. The Company had an income tax benefit of $12.5 million for the nine months ended September 30, 2025 and income tax expense of $0.3 million for the same period of 2024. The changes for both 2025 periods are driven by the partial release of the Company’s valuation allowance on its deferred tax assets (see “Item 1. Financial Statements - Note 12”).
Results by Segment (in thousands):
Chemistry Technologies Results of Operations:
Three months ended September 30, Nine months ended September 30,
2025 2024 2025 2024
Revenue from external customers $ 20,221 $ 14,097 $ 64,773 $ 42,143
Revenue from related party 26,956 32,977 87,562 87,732
Income from operations 8,531 5,559 25,470 17,810
CT revenue from external customers for the three months ended September 30, 2025 increased $6.1 million, or 43%, compared to the same period of 2024 driven primarily by increased activity. Revenue from related party for the three months ended September 30, 2025 decreased $6.0 million, or 18%, compared to the same period of 2024, primarily driven by decreased activity partially offset by increased accrued Contract Shortfall Fees.
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CT revenue from external customers for the nine months ended September 30, 2025 increased $22.6 million, or 54%, compared to the same period of 2024 driven primarily by increased activity. Revenue from related party for the nine months ended September 30, 2025 decreased $0.2 million compared to the same period of 2024, primarily driven by decreased activity partially offset by increased accrued Contract Shortfall Fees.
Income from operations for the CT segment for the three months ended September 30, 2025 increased $3.0 million compared to the same period of 2024. The increase was driven by increased gross profit of $3.6 million for the three months ended September 30, 2025, which was related to increased product volumes partially and a decrease in cost of sales. Income from operations for the CT segment for the nine months ended September 30, 2025 increased $7.7 million compared to the same period of 2024. The increase was driven by increased gross profit of $8.7 million for the nine months ended September 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 September 30, Nine months ended September 30,
2025 2024 2025 2024
Revenue from external customers $ 2,720 $ 2,468 $ 7,773 $ 5,792
Revenue from related party 6,134 200 9,635 600
Income (loss) from operations 4,368 130 2,325 (652)
DA revenue from external customers for the three months ended September 30, 2025 increased $0.3 million, or 10.3%, compared to the same period of 2024 primarily due to increased unit sales. Revenue from related party for the three months ended September 30, 2025 increased $5.9 million compared to the same period of 2024 primarily due to PWRtek rental income in 2025. DA revenue from external customers for the nine months ended September 30, 2025 increased $2.0 million, or 34%, compared to the same period of 2024 primarily due to increased unit sales. Revenue from related party for the nine months ended September 30, 2025 increased $9.0 million compared to the same period of 2024 primarily due to PWRtek rental income in 2025.
Income from operations for the DA segment for the three months ended September 30, 2025 increased $4.2 million compared to the same period of 2024 primarily driven by PWRtek rental income and increased activity, partially offset by increased materials costs. Income from operations for the DA segment for the nine months ended September 30, 2025 increased $3.0 million compared to the same period for 2024 primarily driven by PWRtek rental income and increased activity, partially offset by increased materials costs and $4.4 million of asset acquisition expenses related to the PWRtek Transactions.
Corporate and Other Results of Operations:
Three months ended September 30, Nine months ended September 30,
2025 2024 2025 2024
Loss from operations $ (3,797) $ (2,966) $ (10,539) $ (10,106)
Loss from operations for the three months ended September 30, 2025 increased $0.8 million, or 28.0% compared to the same period of 2024. Loss from operations for the nine months ended September 30, 2025 increased $0.4 million, or 4%, compared to the same period of 2024 attributable to increased 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 nine months ended September 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 “Item 1. Financial Statements - Note 3” 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
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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 “Item 1. Financial Statements - Note 3” 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 nine months ended September 30, 2025 reflect Contract Shortfall Fees of $23.9 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. Prior to November 7, 2025, the Company and ProFrac each had rights to offset future Contract Shortfall Fees against principal and accrued and unpaid interest due under the PWRtek Note without penalty, however those offset rights were eliminated in connection with entry into the Assignment Consent (see “Recent Events” above).
As of September 30, 2025, the Company had unrestricted cash and cash equivalents of $4.6 million compared to $4.4 million on December 31, 2024. In addition, as of November 5 , 2025 , the Company had approximately $8.5 million in available borrowings under the ABL. During the nine months ended September 30, 2025, the Company had $17.3 million of operating incom e, $1.0 million of cash provided by operating activities, $1.7 million of cash used in investing activities and $1.1 million of cash provided by 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.
As of September 30, 2025, the Company had $6.7 million outstanding under the ABL. During the nine months ended September 30, 2025, the Company incurred $0.7 million in interest and fees related to the ABL. As of September 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 9.25% as of September 30, 2025. For the nine months ended September 30, 2025, the weighted-average interest rate was 9.4%. 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. 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. On October 28, 2025, the lender provided its consent to the assignment of the PWRtek Note and various amendments to the PWRtek Note and related documents (see “Recent Events” above).
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Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
Nine months ended September 30,
2025 2024
Net cash provided by operating activities $ 957 $ 5,925
Net cash used in investing activities (1,690) (457)
Net cash provided by (used in) financing activities 1,075 (6,329)
Effect of changes in exchange rates on cash and cash equivalents (142) 6
Net change in cash and cash equivalents and restricted cash $ 200 $ (855)
Operating Activities
Net cash provided by operating activities was $1.0 million during the nine months ended September 30, 2025 compared to net cash provided by operating activities of $5.9 million for the same period of 2024. Consolidated net income for the nine months ended September 30, 2025 was $27.5 million compared to consolidated net income of $6.1 million for the nine months ended September 30, 2024.
During the nine months ended September 30, 2025, non-cash adjustments to net income totaled $3.8 million as compared to $8.7 million for the same period of 2024.
• For the nine months ended September 30, 2025, non-cash adjustments included a $12.8 million tax benefit primarily from the partial release of the valuation allowance and non-cash positive adjustments of $1.7 million of stock compensation expense, $4.2 million amortization of contract assets and $0.8 million of non-cash lease expense.
• For the nine months ended September 30, 2024, non-cash adjustments included non-cash positive adjustments of $0.9 million of stock compensation expense, $4.3 million amortization of contract assets and $1.7 million of non-cash lease expense.
During the nine months ended September 30, 2025, changes in working capital used $22.7 million of cash as compared to $8.9 million for the same period of 2024.
• For the nine months ended September 30, 2025, changes in working capital resulted primarily from an increase in related party accounts receivable of $10.0 million, increased third party accounts receivable of $9.9 million, decreased accrued liabilities and operating lease liabilities of $0.9 million and $1.2 million, respectively and decreases in accounts payable of $3.0 million, partially offset by a decrease in net inventories of $0.5 million and an increase in interest payable of $1.0 million.
• For the nine months ended September 30, 2024, changes in working capital resulted primarily from an increase in related party accounts receivable of $12.5 million, decreased third party accounts receivable of $1.3 million and net inventories of $0.5 million along with decreased accrued liabilities and operating lease liabilities of $1.7 million and $2.0 million, respectively, partially offset by increases in accounts payable of $5.7 million, and other assets of $0.8 million.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2025 and 2024 was $1.7 million and $0.5 million, respectively, primarily driven by $1.7 million and $0.5 million in capital expenditures for the nine months ended September 30, 2025 and 2024, respectively.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2025 was $1.1 million and relates primarily to $1.9 million in net proceeds from the ABL, proceeds from the issuance of stock under the Company’s Employee Stock Purchase Plan and stock option exercises, partially offset by payments for loan origination costs on the PWRtek Note, the issuance cost of the April 2025 Warrant described in “Item 1. Financial Statements - Note 3” above and payments to tax authorities for shares withheld from employees. Net cash used in financing activities was $6.3 million for the nine months ended September 30, 2024, and relates primarily to $6.1 million in net payments on the ABL.
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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.
Contract Assets
The Company’s contract assets represent consideration which was issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in Note 10, “Debt and Convertible Notes Payable” in Part II, Item 8 of the 2024 Annual Report) and other incremental costs related to obtaining the ProFrac Agreement in 2022. The contract assets are amortized over the term of the ProFrac Agreement based on forecasted revenues. As goods are transferred to ProFrac Services, LLC, the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations. The contract assets are tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the transfer of goods under the contract less the direct costs that relate to providing those goods in the future. The amount of consideration the Company expects to receive in the future for the transfer of goods under the contract and the direct costs that relate to providing those goods used in the Company’s contract assets recoverability analysis consider both historical and anticipated purchases by ProFrac over the remaining life of the ProFrac Agreement, taking into account the effect of the Contract Shortfall Fee that is payable to the Company if the annual minimum purchase obligation is not met. The Contract Shortfall Fee mitigates the impact of a failure to meet the expected annual minimum purchase obligation by providing the Company consideration to offset the gross profit lost as a result of ProFrac’s purchases not meeting the annual minimum purchase obligation. Due to the Contract Shortfall Fee, if actual purchases under the ProFrac Agreement are less than the annual minimum purchase obligation, there is negligible impact on the amount of gross profit generated by the ProFrac Agreement. As result, the Company believes there is minimal sensitivity to amounts purchased under the ProFrac Agreement to the ProFrac Agreement’s expected profitability when considering the contract assets recoverability assessment.
Income Taxes: Valuation Allowance
Accounting for income taxes involves estimates and judgments relating to the tax bases of assets and liabilities and the future recoverability of deferred tax assets. In assessing the realization of deferred tax assets, we determine whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon generating sufficient taxable income in future years when deferred tax assets are recoverable or are expected to reverse. Factors that may affect estimates of future taxable income include, but are not limited to, changes in revenue, costs or profit margins, market share, and execution of new long-term contracts with customers. In practice, positive and negative evidence is reviewed with objective evidence receiving greater weight. If, based on the weight of available evidence, it is more likely than not that all, or some portion, of the deferred tax assets will not be realized, we record a valuation allowance. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed for all, or some portion, of the deferred tax assets.
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All available positive and negative evidence is analyzed quarterly to determine the amount of the valuation allowance. A full valuation allowance against the federal and state net deferred assets, except for certain state jurisdictions, was recorded in the first quarter of 2019 because of significant losses and other negative evidence.
In the third quarter of 2025, the Company considered both positive and negative evidence and determined that, as of September 30, 2025, a full valuation allowance was no longer required for certain deferred tax assets. Positive evidence included our results of operations reaching an adjusted three-year cumulative income position on a rolling twelve-quarter basis during the quarter ended September 30, 2025, that indicates a trend of profitability; future reversals of existing taxable temporary differences; and an evaluation of currently available information about future years forecasted taxable income, specifically, the forecasted future income based on existing contracts including the ProFrac Agreement and the Lease Agreement with ProFrac. The Company’s adjusted three-year cumulative income position considered the impact of unusual and non-recurring items on historical book income or losses. However, because of the lack of objectively verifiable information in years after the expiration of the ProFrac Agreement and Lease Agreement, it was determined that forecasted future income may not be sufficient to realize all the deferred tax assets. Therefore, a partial release of valuation allowance for both federal and state deferred tax assets was recorded during the three and nine months ended September 30, 2025 totaling $31.7 million and $33.0 million, respectively, of which $17.5 million associated with the deferred tax assets related to the PWRtek acquisition was recorded to additional paid in capital in accordance with the intraperiod allocation in interim period rules.
The Company will continue to evaluate both positive and negative evidence that would require changes to the remaining federal and state valuation allowances. In assessing forecasted future income in the years after the expiration of the ProFrac Agreement and Lease Agreement when assessing if it is more likely than not that the deferred tax assets will be realized, the Company will consider the impact of sustained pre-tax income growth derived from non-related party customers; renewals or extensions to current long-term customer contracts; signing of new contracts with customers with positive margins; and macroeconomic and industry specific conditions. Refer to “Item 1A.-Risk Factors” in our 2024 Annual Report and “Item 1A.-Risk Factors” in our Q1 2025 Quarterly Report for more information. We intend to continue maintaining a valuation allowance on a substantial portion of our deferred tax assets until there is sufficient evidence to support a reversal of such allowances.