Flotek Industries Inc.

11/06/2026 | Press release | Distributed by Public on 11/06/2026 15:02

Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the 2025 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 17 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 2025 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 Industries, Inc. is a global technology-driven company that combines the synergy of proprietary technologies through near real-time data analytics and advanced chemistry to collaboratively address complex challenges for energy, industrial and infrastructure sector customers and help them optimize operations, enhance asset performance and maximize financial returns.
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 September 23, 2026, the Company entered into a credit agreement (the "Credit Agreement") with certain lenders and agents providing for initial term loans in an aggregate principal amount of $75.0 million (the "Initial Term Loans"), together with up to $15.0 million of committed initial delayed draw term loans and up to $30.0 million of uncommitted delayed draw term loans. The Company used a portion of the net proceeds of the Initial Term Loans to repay in full and terminate the PWRtek Note (as defined in Item 1. Financial Statements - Note 9, "Debt"), and expects to use the remaining net proceeds to fund capital expenditures, and for working capital and general corporate purposes. For a description of the Credit Agreement, see "Capital Resources and Liquidity - Term Loan Facility" below and Item 1. Financial Statements - Note 9, "Debt."
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 enhance asset performance and 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 2025 was January 1, 2025 through December 31, 2025. Related party revenues for the nine months ended September 30, 2025 reflect Contract Shortfall Fees of $23.9 million. The current measurement period for Contract Shortfall Fees is January 1, 2026 through December 31, 2026. 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, 2026 reflect Contract Shortfall Fees of $4.8 million.
Data Analytics
The Company's Data Analytics ("DA") segment delivers real-time information and insights to its customers designed to optimize operations, enhance asset performance and maximize financial returns. 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 5-15 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 which facilitates 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 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 each of the three months ended September 30, 2026 and 2025, the Company incurred $0.5 million of research and development expense. For the nine months ended September 30, 2026 and 2025, the Company incurred $1.4 million and $1.4 million, respectively, of research and development expense. The Company expects that its 2026 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. Revenue during the nine months ended September 30, 2026 increased 67% as compared to the 2025 period. We expect to grow revenues from the CT and DA segments through the remainder of 2026, as compared to 2025. Our outlook is based upon 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 conflicts in the Middle East and numerous supply and demand factors, 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. We are continuing to monitor developments with respect to the ongoing military conflicts in the region including the impact on global commodity prices, potential shipping and logistics disruptions as well as the impact to the cost of certain raw materials.
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. Revenues from the CT segment during the nine months ended September 30, 2026 increased 55% as compared to the nine months ended September 30, 2025. Based upon our year to date results, and customer commitments, we anticipate stable demand for our chemistry during the remainder of 2026. Our expectations are in part based upon our current outlook on oil and gas prices, as well as an assumption that the scope of the ongoing conflicts in the Middle East does not materially expand.
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 several years. 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. During the first nine months of 2026, revenue from international customers totaled $40.8 million as compared to $10.0 million during the first nine months of 2025. We expect international chemistry revenue during the fourth quarter of 2026 to remain generally consistent with the third quarter of 2026.Our outlook for growth in the Middle East could be impacted by the ongoing military conflicts.
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™, XSPCTTM 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 times 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 "Item 1. Financial Statements - Note 16," as well as the Company's six-month contract announced in March 2026 to deliver power services for utility infrastructure support ("Utility Support Contract"), we are gaining traction leveraging the Verax™ in applications where operators, service companies and power providers are using lower cost field gas as a substitute for diesel or compressed natural gas in dual fuel engines as the market moves to Tier 4 equipment and electric powered drilling rigs and frac equipment. Analyzing gas quality in real-time is designed to allow companies to maximize the field gas 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 (as described under "Item 1. Financial Statements - Note 16") and similar assets being constructed utilizing the Equipment Credit can support 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 16" 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 $27.5 million in total DA revenues from all sources for the year ended December 31, 2025. The initial term of the Utility Support Contract expired in September 2026. While we are in discussions to extend the contract beyond the initial term, we do not expect to record revenue during the fourth quarter of 2026. During the nine months ended September 30, 2026, DA segment revenue increased 173% as compared to the nine months ended September 30, 2025. We expect our DA segment revenue during the remainder of 2026 to exceed prior year results.
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 and continuously measured data 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,
2026 2025 2026 2025
Revenue
Revenue from external customers $ 56,942 $ 22,941 $ 118,332 $ 72,546
Revenue from related party 57,410 33,090 165,438 97,197
Total revenues 114,352 56,031 283,770 169,743
Cost of sales 86,957 38,248 217,051 125,104
Cost of sales % 76.0 % 68.3 % 76.5 % 73.7 %
Gross profit 27,395 17,783 66,719 44,639
Gross profit % 24.0 % 31.7 % 23.5 % 26.3 %
Selling general and administrative 8,511 7,384 23,172 20,462
Selling general and administrative % 7.4 % 13.2 % 8.2 % 12.1 %
Asset acquisition expenses - 167 - 4,362
Depreciation 666 581 1,961 1,207
Research and development 473 549 1,366 1,359
Gain on sale of property and equipment (208) - (208) (7)
Income from operations 17,953 9,102 40,428 17,256
Operating margin % 15.7 % 16.2 % 14.2 % 10.2 %
Interest and other expense, net (1,599) (1,359) (4,267) (2,284)
Income before income taxes 16,354 7,743 36,161 14,972
Income tax (expense) benefit (3,048) 12,612 (8,238) 12,531
Net income $ 13,306 $ 20,355 $ 27,923 $ 27,503
Net income % 11.6 % 36.3 % 9.8 % 16.2 %
For the three months ended September 30, 2026 and 2025
Consolidated revenue for the three months ended September 30, 2026 increased $58.3 million, or 104%, versus the same period of 2025, driven by increased external customer product sales, including international chemistry, increased sales volumes under the ProFrac Agreement, a $0.8 million increase in revenue attributable to the Lease Agreement and $5.5 million in revenue attributable to the Utility Support Contract, partially offset by a decrease in accrued Contract Shortfall Fees of $7.9 million. Related party revenues in the CT segment are net of $2.4 million and $1.3 million of contract assets amortization for the three months ended September 30, 2026 and 2025, respectively.
Consolidated cost of sales for the three months ended September 30, 2026 increased $48.7 million, or 127%, versus the same period of 2025, primarily due to increased product sales, including international chemistry, and increased costs related to the Lease Agreement and Utility Support Contract. Consolidated cost of sales as a percentage of revenue was 76% and 68% for the three months ended September 30, 2026 and 2025, respectively.
SG&A expenses for the three months ended September 30, 2026 increased $1.1 million, or 15%, versus the same period of 2025. The increase relates primarily to increased salaries and benefits, increased stock compensation expense and increased professional fees, partially offset by decreased contract and consulting fees.
Income from operations increased $8.9 million for the three months ended September 30, 2026, versus the same period in 2025. The increase was primarily driven by a $9.6 million increase in gross profit and asset acquisition expenses of $0.2 million for the three months ended September 30, 2025 with no corresponding activity for 2026. The increase in income from operations was partially offset by a $1.1 million increase in SG&A expenses and a $0.1 million increase in depreciation expenses during the three months ended September 30, 2026 as compared to the same period of 2025.
Interest and other expense for the three months ended September 30, 2026 increased $0.2 million driven by a loss on the extinguishment of the PWRtek Note.
The Company had income tax expense of $3.0 million and a benefit of $12.6 million for the three months ended September 30, 2026 and 2025, respectively. The increase in tax expense includes the impact of the partial release of the valuation allowance during the third quarter of 2025 as described under "Item 1. Financial Statements - Note 11."
For the nine months ended September 30, 2026 and 2025
Consolidated revenue for the nine months ended September 30, 2026 increased $114.0 million, or 67%, versus the same period of 2025, driven by increased sales volumes under the ProFrac Agreement, increased international chemistry, a $11.2 million increase in revenue attributable to the Lease Agreement for the nine months ended September 30, 2026 compared to the same period of 2025, and $11.6 million in revenue attributable to the Utility Support Contract. Increases in revenues for the period were partially offset by a decrease in accrued Contract Shortfall Fees of $19.2 million. Related party revenues in the CT segment are net of $7.1 million and $4.2 million of contract assets amortization for the nine months ended September 30, 2026 and 2025, respectively.
Consolidated cost of sales for the nine months ended September 30, 2026 increased $91.9 million, or 73%, versus the same period of 2025, primarily due to increased product sales, including international chemistry, and increased costs related to the Lease Agreement and Utility Support Contract. Consolidated cost of sales as a percentage of revenue was 76% and 74% for the nine months ended September 30, 2026 and 2025, respectively.
SG&A expenses for the nine months ended September 30, 2026 increased $2.7 million, or 13%, versus the same period of 2025. The increase relates primarily to increased salaries and benefits, stock compensation expense and increased professional fees. As a percentage of revenue, SG&A declined to 8.2% during the nine months ended September 30, 2026, as compared to 12.1% during the 2025 nine-month period.
Income from operations increased $23.2 million for the nine months ended September 30, 2026, versus the same period in 2025. The increase was primarily driven by a $22.1 million increase in gross profit and asset acquisition expenses of $4.4 million for the nine months ended September 30, 2025 with no corresponding activity for 2026. The increase in income from operations was partially offset by a $2.7 million increase in SG&A expenses and a $0.8 million increase in depreciation expense during the nine months ended September 30, 2026 as compared to the same period of 2025.
Interest and other expense for the nine months ended September 30, 2026 increased $2.0 million driven by an increase in interest payments as a result of the PWRtek Note compared to the same period of 2025 and a loss on the extinguishment of the PWRtek Note.
The Company had income tax expense of $8.2 million and a benefit of $12.5 million for the nine months ended September 30, 2026 and 2025, respectively. The increase in tax expense includes the impact of the partial release of the valuation allowance during the third quarter of 2025 as described under "Item 1. Financial Statements - Note 11."
Results by Segment (in thousands):
Chemistry Technologies Results of Operations:
Three months ended September 30, Nine months ended September 30,
2026 2025 2026 2025
Revenue from external customers $ 45,962 $ 20,221 $ 91,818 $ 64,773
Revenue from related party 50,335 26,956 144,347 87,562
Income from operations 11,819 8,531 25,733 25,470
CT revenue from external customers for the three months ended September 30, 2026 increased $25.7 million, or 127%, compared to the same period of 2025 driven primarily by increased product volumes, including international sales. Revenue from related party for the three months ended September 30, 2026 increased $23.4 million compared to the same period of 2025, primarily driven by increased product volumes, partially offset by decreased accrued Contract Shortfall Fees and increased contract amortization.
CT revenue from external customers for the nine months ended September 30, 2026 increased $27.0 million, or 42%, compared to the same period of 2025 driven primarily by increased product volumes. Revenue from related party for the nine months ended September 30, 2026 increased $56.8 million compared to the same period of 2025, primarily driven by increased product volumes, partially offset by decreased accrued Contract Shortfall Fees and increased contract amortization.
Income from operations for the CT segment for the three months ended September 30, 2026 increased $3.3 million compared to the same period of 2025. The increase was driven by a $3.6 million increase in gross profit for the three months ended September 30, 2026, which included a $7.9 million decrease in Contract Shortfall Fees.
Income from operations for the CT segment for the nine months ended September 30, 2026 increased $0.3 million compared to the same period of 2025. The increase was driven by a $1.1 million increase in gross profit for the nine months ended September 30, 2026, which included a $19.2 million decrease in Contract Shortfall Fees as compared to the 2025 nine-month period.
Data Analytics Results of Operations:
Three months ended September 30, Nine months ended September 30,
2026 2025 2026 2025
Revenue from external customers $ 10,980 $ 2,720 $ 26,514 $ 7,773
Revenue from related party 7,075 6,134 21,091 9,635
Income from operations 10,300 4,368 26,596 2,325
DA revenue from external customers for the three months ended September 30, 2026 increased $8.3 million, or 304%, compared to the same period of 2025 primarily due to $5.5 million in revenue attributable to the Utility Support Contract in 2026, with no corresponding contract for the same period of 2025, and increased product volumes. Revenue from related party for the three months ended September 30, 2026 increased $0.9 million compared to the same period of 2025 primarily due to the Lease Agreement.
DA revenue from external customers for the nine months ended September 30, 2026 increased $18.7 million, or 241%, compared to the same period of 2025 primarily due to increased volumes, increased service revenue and $11.6 million in revenue attributable to the Utility Support Contract in 2026 with no corresponding contract for the same period of 2025. Revenue from related party for the nine months ended September 30, 2026 increased $11.5 million compared to the same period of 2025 primarily due to the Lease Agreement. The Lease Agreement closed in late-April 2025, limiting the impact during the nine-month 2025 period.
Income from operations for the DA segment for the three months ended September 30, 2026 increased $5.9 million compared to the same period for 2025 primarily driven by the Lease Agreement, Utility Support Contract and increased activity, partially offset by increased materials costs.
Income from operations for the DA segment for the nine months ended September 30, 2026 increased $24.3 million compared to the same period for 2025 primarily driven by the Lease Agreement, Utility Support Contract and increased activity, partially offset by increased materials costs.
Corporate and Other Results of Operations:
Three months ended September 30, Nine months ended September 30,
2026 2025 2026 2025
Loss from operations $ (4,166) $ (3,797) $ (11,901) $ (10,539)
Loss from operations for the three months ended September 30, 2026 increased $0.4 million, or 10%, compared to the same period of 2025 primarily attributable to increased administrative costs. Loss from operations for the nine months ended September 30, 2026 increased $1.4 million, or 13%, compared to the same period of 2025 primarily attributable to increased administrative costs.
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, 2026, the Company funded working capital requirements with cash on hand, borrowings under the ABL (defined below), borrowings from the Initial Term Loans and cash flow from operations. We believe our cash and cash equivalents, cash generated from operating activities, the collection of future Contract Shortfall Fees as described below, availability under the ABL and under the Initial Delayed Draw Term Loans will be sufficient to fund our capital requirements and anticipated obligations as they become due over the next twelve months.
However, any 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 current measurement period for Contract Shortfall Fees is January 1, 2026 through December 31, 2026. 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, 2026 reflect Contract Shortfall Fees of $4.8 million.
As of September 30, 2026 and December 31, 2025, the Company had unrestricted cash and cash equivalents of $21.3 million and $5.7 million, respectively. In addition, as of November 4, 2026, the Company had approximately $8.5 million in available borrowings under the ABL and $15.0 million in committed borrowings available under the Initial Delayed Draw Term Loans. During the nine months ended September 30, 2026, the Company had $40.4 million of operating income, $16.8 million of cash used in operating activities, $1.7 million of cash used in investing activities and $34.0 million of cash provided by financing activities.
Senior Secured Term Loan Facility
On September 23, 2026 (the "Closing Date"), the Company entered into the Credit Agreement, and the lenders made initial term loans to the Company in an aggregate principal amount of $75.0 million (the "Initial Term Loans"). The net proceeds of the Initial Term Loans were used to refinance the PWRtek Note, and are expected to be used to fund capital expenditures, and for working capital and general corporate purposes. The Initial Term Loans may be prepaid or repaid in accordance with the terms of the Credit Agreement, but once repaid or prepaid, may not be reborrowed.
In addition to the Initial Term Loans, the Credit Agreement provides for committed initial delayed draw term loans in an aggregate principal amount not to exceed $15.0 million (the "Initial Delayed Draw Term Loans") that the Company may request one time after the Closing Date and on or prior to June 30, 2027. The Company may also, to the extent approved by the Required Lenders (as defined in the Credit Agreement), request from the Lenders delayed draw term loan commitments of the same class as the outstanding Initial Term Loans in an aggregate amount not to exceed $30.0 million (the "Delayed Draw Term Loans", and together with the Initial Term Loans and the Initial Delayed Draw Term Loans, the "Term Loans") during the period from the Closing Date until March 31, 2028. If the Required Lenders do not consent to the Delayed Draw Term Loans or any portion of the requested amount remains uncommitted and unfunded, the Company may, in lieu of such Delayed Draw Term Loans, incur other subordinated indebtedness in an amount not to exceed the portion of the $30.0 million uncommitted delayed draw amount that has not been funded as Delayed Draw Term Loans or previously incurred as other subordinated indebtedness. The funding of Initial Delayed Draw Term Loans and Delayed Draw Term Loans is subject to certain conditions, including that the Consolidated Leverage Ratio (as defined in the Credit Agreement) shall not exceed 2.00:1.00, after giving effect to such borrowings.
Interest on the Term Loans accrues at a rate per annum equal to Term SOFR (as defined in the Credit Agreement), subject to a floor of 2.50%, plus an applicable margin of 6.50%. Upon the occurrence and during the continuance of an event of default under the Credit Agreement, all overdue principal, overdue interest, overdue fees and other overdue amounts shall bear interest at a rate per annum equal to the lesser of (a) the interest rate otherwise applicable plus 2.00% and (b) the highest rate of interest that lenders may contract for under applicable law. All interest is computed on the basis of a 360-day year. Commencing after the date that is two years after the Closing Date (the "Restricted Period End Date"), the Company is required to repay each tranche of Term Loans in consecutive quarterly installments equal to 0.25% of the aggregate initial principal amount of such Term Loans, with the remainder due and payable in full on the Maturity Date (as defined below).
The Company is required to make mandatory prepayments subject to certain prepayment conditions specified in the Credit Agreement. The Company may at any time after the Restricted Period End Date also voluntarily prepay the Term Loans, in whole or in part, without premium or penalty (other than in connection with a MOIC Event (as defined in the Credit Agreement)), subject to conditions outlined in the Credit Agreement. The Term Loans mature on September 23, 2031 (the "Maturity Date"), subject to earlier acceleration pursuant to the terms of the Credit Agreement.
The Credit Agreement requires the Company to comply with certain customary affirmative covenants and also contains certain negative covenants, including limits on the ability of the Company and its subsidiaries to incur indebtedness, grant liens, make investments, engage in acquisitions, mergers or consolidations, pay dividends and other restricted payments, dispose of assets and enter into transactions with affiliates. The Company is required to maintain a Consolidated Leverage Ratio (as defined in the Credit Agreement) not exceeding 3.00:1.00 at the end of any fiscal quarter, commencing with the first full fiscal quarter ending after the Closing Date.
The obligations under the Credit Agreement are secured by security interests in substantially all of the property and assets of the Company and each Subsidiary Guarantor (as defined in the Credit Agreement), subject to certain excluded assets and permitted liens. The security interests are subject to an intercreditor agreement (the "Intercreditor Agreement") among the Company and other grantors, the lender under the ABL (as defined below) and the Collateral Agent (as defined in the Credit Agreement), which establishes a split-collateral structure. Under the Intercreditor Agreement, the ABL lender holds a first priority lien on the accounts receivable, inventory, related instruments and chattel paper, certain blocked accounts, real estate and proceeds of the foregoing of the borrowers under the ABL (the "ABL Collateral"), while the Collateral Agent holds a first priority lien on all personal property and assets of the Company and each Subsidiary Guarantor that is not ABL Collateral. Each creditor holds a second priority lien on the other creditor's priority collateral.
One of the lenders under the Credit Agreement, PC Energy Credit I LLC, an affiliate of the founders and principal stockholders of ProFrac and entities owned by or affiliated with them and a related party to ProFrac ("PC Energy Credit"), exchanged through a cashless roll, $12.5 million of the obligations under the PWRtek Note for the Initial Term Loans held by them. The transactions contemplated by the Credit Agreement were approved by the Audit Committee of the Board of Directors pursuant to its Related-Party Transactions Policy.
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, April 2025, July 2026 and September 2026 (as amended, the "ABL"). The September 2026 amendment consented to the transactions contemplated by the Credit Agreement and extended the term of the ABL for an additional twelve months to October 31, 2027.
As of September 30, 2026, the Company had $7.9 million outstanding under the ABL. During the nine months ended September 30, 2026, the Company incurred $0.8 million in interest and fees related to the ABL. As of September 30, 2026, the Company amortized $0.2 million of 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. For the nine months ended September 30, 2026, the weighted-average interest rate was 8.81%. 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 1.5% of the borrowing base limit of the ABL.
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. The ABL requires the Company to maintain a minimum Tangible Net Worth (as defined in the ABL) of not less than $11 million.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
Nine months ended September 30,
2026 2025
Net cash (used in) provided by operating activities $ (16,842) $ 957
Net cash used in investing activities (1,702) (1,690)
Net cash provided by financing activities 34,030 1,075
Effect of changes in exchange rates on cash and cash equivalents 59 (142)
Net change in cash and cash equivalents and restricted cash $ 15,545 $ 200
Operating Activities
Net cash used in operating activities was $16.8 million during the nine months ended September 30, 2026 compared to net cash provided by operating activities of $1.0 million for the same period of 2025. Consolidated net income for the nine months ended September 30, 2026 was $27.9 million compared to consolidated net income of $27.5 million for the nine months ended September 30, 2025.
During the nine months ended September 30, 2026, non-cash adjustments to net income totaled $21.3 million as compared to $3.8 million for the same period of 2025.
•For the nine months ended September 30, 2026, non-cash adjustments included an $6.8 million tax expense, $3.0 million of stock compensation expense, $7.1 million of amortization of contract assets, a $1.2 million increase in the provision for excess and obsolete inventory, $0.6 million of non-cash lease expense and a $0.2 million loss on the extinguishment of the PWRtek Note.
•For the nine months ended September 30, 2025, non-cash adjustments included a $12.8 million tax benefit 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.
During the nine months ended September 30, 2026, changes in working capital used $66.0 million of cash as compared to $22.7 million for the same period of 2025.
•For the nine months ended September 30, 2026, changes in working capital resulted primarily from increased third party accounts receivable of $47.4 million, an increase in related party accounts receivable of $21.4 million, increases in net inventories of $23.8 million, operating lease liabilities of $1.0 million and decreased accrued liabilities of $0.3 million partially offset by an increase in accounts payable of $26.2 million.
•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 along with an increase in interest payable of $1.0 million.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2026 and 2025 was $1.7 million and $1.7 million, respectively, primarily driven by $1.7 million and $1.7 million in capital expenditures for the nine months ended September 30, 2026 and 2025, respectively. Capital expenditures for the nine months ended September 30, 2026 are net of the $4.7 million of Equipment Credit used during the period.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2026 was $34.0 million and relates primarily to $57.6 million in net proceeds from the Initial Term Loans, including loan issuance costs, $4.6 million in net proceeds from the ABL, and proceeds from the issuance of stock under the Company's Employee Stock Purchase Plan and stock option exercises, partially offset by the $27.5 million payoff of the PWRtek Note, payments to tax authorities for shares withheld from employees and payments for finance leases. Net cash provided by financing activities was $1.1 million for the nine months ended September 30, 2025, and relates primarily to $1.9 million in net proceeds from the ABL and proceeds from the issuance of stock under the Company's Employee Stock Purchase Plan and stock option exercises, partially offset by payments for loan issuance costs on the PWRtek Note, the issuance cost of the April 2025 Warrant and payments to tax authorities for shares withheld from employees.
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 2025 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 2025 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 the 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 18 - "Related Party Transactions" in Part II, Item 8 of the 2025 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 a 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.
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