Flotek Industries Inc/Cn/ Q3 FY2022 Earnings Call

Greetings and welcome to Flotek Industries Third Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Mr. Bernie Colson, Senior Vice President of Corporate Development & Sustainability for Flotek. Thank you. You may begin.

Thank you and good morning, everyone. We appreciate your participation. Joining me today and participating on the call are John Gibson, Chairman, Chief Executive Officer and President; Ryan Ezell, Chief Operating Officer; Seham Carson, Interim Chief Financial Officer; James Silas, Senior Vice President of Research and Innovation; and Nick Bigney, Senior Vice President, General Counsel and Chief Compliance Officer. On today's call, we will first provide prepared remarks concerning our business and results for the quarter. Following that, we will answer any questions you have. We have now released our earnings announcement for the third quarter of 2022 which is available on our website. In addition, we posted an updated investor presentation that you are welcome to download and refer to during this call. As a reminder, today's call is being webcast and a replay will be available on our website. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Also, please refer to our reconciliations provided in our earnings press release as management may discuss non-GAAP metrics on this call. I will now turn it over to John.

Thank you and good morning, everyone. Thank you for joining the discussion of our third quarter results for 2022. We've been looking forward to reporting our results today as well as providing some insight into what has transpired since the quarter's end. The third quarter of 2022 marks the second full quarter that Flotek has operated with the ProFrac supply agreement, which we have described in detail in the past quarter. We're happy to report another quarter of strong revenue growth with 55% sequential revenue growth, which is up 4.5x year-over-year. To echo what other large energy companies have been saying in their recent earnings press releases and conference calls, we believe strongly that we are in the early years of a tight supply cycle triggered by underinvestment in infrastructure and new sources of oil and gas production. While shorter demand cycles will come and go depending on the fluctuating macroeconomic backdrop, we believe the tight supply cycle is durable and will provide underlying support for oil prices for multiple years. To my knowledge, in the absence of significant demand destruction, there's only one way to solve for supply-driven price increases: that is to increase investment across the entire value chain in order to increase production. However, complicating the fundamental laws of supply and demand is that operators are displaying a level of capital discipline that we've rarely seen. And there is significant tightness across the supply chain. Despite healthy oil prices, exploration and production companies are still focused on growing production rather than on maintaining production with the least amount of capital investment by developing only the highest return wells. This return-focused strategy has resulted in record cash flow generation from oil and gas producers, with much of the excess cash being returned to shareholders in the form of dividends and share repurchases. We believe the industry's returns focus and capital discipline play well to our strategy of being the collaborative partner of choice for producers as our chemical solutions are sold to maximize well value, not simply minimize cost. Our customers report achieving better well performance with Flotek chemistry, all else being equal. Now let me walk you through the adjusted EBITDA number we reported in the quarter. Included is a $1.9 million bonus accrual. While we hadn't previously accrued for bonus payments in the first half of 2022, it is critical that we pay competitive compensation to retain our highly talented and motivated colleagues so we're able to achieve the full scope of our business model. We've had a fantastic year, and our employees need to be recognized. We are pleased that Q3 adjusted EBITDA as a percentage of revenue significantly improved again, growing to negative 18% from negative 25% in Q2 and negative 42% in Q1. Q3 was the fifth consecutive quarter of improving adjusted EBITDA margin, providing evidence that our business transformation is truly taking hold. Ryan will provide greater detail on revenue and expense drivers in his commentary. But in summary, we are confident in our ability to continue to increase fall-through to the bottom line going forward. In the investor deck that we posted to our website yesterday, we included a slide illustrating the steady improvement in adjusted EBITDA margin that has taken place over the previous five quarters. We expect this trend to continue through the end of '22 and into 2023. Lastly, I'd like to address the cash balance before Seham goes into details in her remarks. I want to stress that we believe we have the necessary cash to execute our business model. The revenue we reported in Q3 exceeded what we reported for the entire year in 2021. Growing a business at this pace requires working capital. As a result, we continue to use all the resources at our disposal to ensure adequate liquidity in order to achieve the full scope of our business. We are optimizing for all sources of cash. We recently engaged a third party to help us improve the order-to-cash collection process, and we're starting to see benefits from that effort, which we expect to continue into Q4 and beyond into 2023. In addition, we continue to explore options to raise capital. We had an opportunity to secure an asset-based lending facility during Q3 but decided to pass as the terms of the facility weren't acceptable. We're being disciplined in the face of a lower cash balance because we're confident that the terms we can secure after the company processes into positive adjusted EBITDA territory will be significantly better than the offers we were given during Q3. Therefore, waiting is a more prudent option, considering how close we are to crossing that line. Lastly, I want to emphasize that we're focused on the asset-based lending markets rather than equity markets to prevent further dilution for our current shareholders. Our future success hinges on our ability to support the success of our customers' customers versus the oil and gas producers that rely on our products to maximize production while minimizing cost and environmental impact. With such a change in the market, customers focused exclusively on costs are starting to yield to customers more concerned about maximizing the value of each well. They intend to get the best initial production rates. They want to enhance their total ultimate recovery and are trying to avoid reservoir damage caused by careless chemistry, all of which are at the top of their minds. This trend strongly favors our core capabilities and market position, and we're excited to see how much market share we can gain in the coming years as a result. With that, I'd like to turn the call over to Ryan. Ryan?

Thank you, John, and good morning. This quarter represents another positive step for Flotek as revenue growth continues to rapidly expand, further exemplifying that our strategy to be the collaborative partner of choice for sustainable, optimized chemistry and data solutions is gaining momentum. Let's get right to the operational highlights. As John mentioned, total company revenue increased by 55% sequentially and more than 4.5 times over the same period in 2021. We doubled the average number of ProFrac fleets serviced in Q3 with further growth continuing into Q4 2022. Our transactional chemistry technology's revenue grew over 10% sequentially, outpacing the hydraulic fracturing fleet market growth for the fifth straight quarter, further indicating that we are gaining market share with our customized chemistry solutions. All in all, Flotek served approximately 8.4% of active U.S. frac fleets in the third quarter, representing an order of magnitude increase over 2021. Our data analytics segment revenue grew 138% versus the prior quarter as our focus on core applications continues to gain traction, coupled with the momentum gained from the successful monitoring of field gas quality by our Verax analyzers. We recently announced an agreement with ProFrac to supply them with 20 of JP3's Verax analyzers to be utilized in the field to enable the displacement of diesel fuel with field gas. Our Verax analyzers have been deployed on six ProFrac fleets thus far, and the initial feedback is positive. Our industry research shows that maximizing the use of field gas can result in the reduction of diesel fuel consumption and greenhouse gas emissions by over 50%. Most importantly, the growth milestones presented above were achieved with zero recordable incidents and lost time in field operations. I'm pleased with the solid performance Flotek delivered in the third quarter of this year, and I want to thank all Flotek employees for their hard work, contribution to these outstanding results, and dedication to collaboration, safety, and service quality. Transitioning into a few of the key details for the quarter, I'd like to discuss the status of our mutually beneficial partnership with ProFrac. As a reminder, our contract with ProFrac was effective April 1, spans 10 years, and covers an equivalent volume of our full suite of downhole chemistries to serve 30 of their frac fleets or 70% of their total frac fleets, whichever is greater. As of Q3, we have passed the halfway mark of the original ramp, serving an average of 16 fleets, and we remain confident that we will achieve the full contract scope over the coming quarters. We also have no reason to expect that our relationship is bounded by the 30 fleets or 70% numbers. As we continue to provide exemplary service, ProFrac has the incentive to maximize chemical deliveries from Flotek due to the structure of our arrangement. In Q2, ProFrac announced the acquisition of U.S. Well Services, which closed last week. As a result, they expect to be operating 44 active frac fleets by the end of the year. We fully expect that we can secure that incremental business as the goal is for ProFrac to desire to purchase chemistry from us for its entire fleet. As we have been saying, this agreement has proven to be transformational for Flotek and the industry. As a result of this agreement, exploration and production companies now have a comprehensive, vertically integrated completion solution that reduces emissions and delivers greener chemistries, thereby protecting air, water, land, and people. Over the next decade, we anticipate the agreement should create a backlog of more than $2 billion in revenue for Flotek, including anticipated revenues in excess of $200 million in 2023 for the ProFrac contract alone. This number does not include any of the impact from ProFrac's announced acquisition of U.S. Well Services. I will continue to stress that the contract is non-exclusive, allowing us to add new customers and continue to grow sales volumes to the rest of our energy chemistry customers, which we've successfully done for five consecutive quarters. We are laser-focused on growing this higher margin, higher value-added portion of our business. Now looking at the quarterly performance, we continue to make steady progress in growing market share and outpacing industry activity levels. I'm particularly pleased that we are experiencing customer portfolio expansion with both domestic and international exploration and production operators as well as service companies as we deliver on our continued commitment to diversify our revenue stack and minimize the risk of customer concentration. We previously stated that we have the ability to double our manufacturing capacity utilization levels without significant capital investment. We are confident in our ability to satisfy further significant growth without needing to build additional facilities, which will conserve cash and minimize direct costs. In the spirit of reducing costs and improving margins, we are also achieving operational efficiencies and economies of scale while rapidly increasing revenue each quarter. As a result, our improved leverage from increased volumes has not only aided in the securitization of material allocation volumes with our top product lines but has also provided the realization of tiered volume pricing structures and raw material cost savings. Additionally, the challenging logistics environment experienced in Q2 has shown improvement in Q3, with freight spend as a percentage of revenue declining as the journey toward improving cost trends and more efficient operations continues. We are actively executing direct actions to minimize freight-related inefficiencies and drive a world-class delivery network for products to our in-basin customers. Finally, we made a strategic decision to discontinue the FDA-regulated hand sanitizer product line within our professional chemistries portfolio. This resulted in a $1 million write-down of related raw materials and packaging. However, our professional chemistries portfolio, which includes specialty chemical products to address the long-term challenges of the janitorial sanitation and food services in adjacent markets, will continue to be a central part of our growth portfolio as it shares similar raw materials and capabilities of our EPA-regulated chemistries in the energy sector. This allows more focus on core business activities and reduces overall regulatory costs going forward. In summary, I continue to be optimistic about the future. I'm excited about our mission to provide differentiated solutions that maximize value to our customers. Simply speaking, we are focused on protecting water quality, minimizing formation damage, and improving the estimated ultimate recovery of every completion while maintaining our commitment to corporate responsibility, market share growth, and discipline in selling, general and administrative expenses. Now, I will turn the call over to Seham to provide key financial highlights.

Thank you, Ryan. I would like to begin by reminding everyone of several accounting considerations related to our convertible notes and supply agreement with ProFrac, which proved to be meaningful again in the third quarter. First, there will be quarterly noncash entries to account for mark-to-market adjustments to the value of the convertible notes over the one-year life of the note. In Q3 2022, we swung back to a noncash loss of $4.25 million compared to last quarter's noncash gain of $17.2 million. Let me elaborate a bit as these numbers are significant and will continue to add quarterly volatility to our financial results. The Q2 2022 noncash gain of $17.2 million resulted primarily from a significantly lower stock price on June 30, 2022, compared to March 31, 2022. In contrast, the Q3 noncash loss of $4.25 million reflected a similar stock price on September 30, 2022, compared to June 30, 2022. However, we experienced a change in discount rate assumption methodology that resulted in a lower discount rate, a higher note fair value, and therefore, a noncash loss to Flotek. Just as a reminder, we will only book these fair value adjustments through Q2 2023 at the latest, which is the one-year anniversary of the issuance of the second tranche of convertible notes. All our convertible notes have a one-year mandatory conversion feature. Secondly, during the third quarter, there was a $1.2 million noncash reduction to revenue recorded related to the amortization of our ProFrac contract asset, which compares to the $737,000 revenue reduction recorded in Q2. Our contract asset represents the value of the convertible notes issued as consideration for the initial ProFrac supply agreement in Q1 and the amendment in Q2. The cumulative fair value of these notes as of the closing date of the two tranches was approximately $83 million and recorded as a contract asset, which will be amortized over the ten-year life of the ProFrac supply agreement and be reflected as a noncash reduction to revenue in our financial statements prepared in accordance with U.S. GAAP. Again, I want to emphasize that these are noncash adjustments and that we can expect to see additional noncash adjustments each quarter, but the magnitude is difficult to predict as it is based on the share price and other variables. If you're interested in getting into the detail of how the convertible notes are valued, please refer to our SEC filings for the methodology and underlying assumptions. Now, moving on to the income statement for Q3. Consolidated revenue of $45.6 million for the quarter was up 55% compared to Q2 2022 and up 347% compared to the third quarter of last year. Revenue included a $1.2 million noncash reduction associated with the ProFrac contract assets. Consolidated cost of goods sold of $47.5 million was up 50% compared to last year. The increase was primarily attributable to ramp-up expenses associated with the ProFrac supply agreement. In addition, we booked a $1 million write-down of inventory related to our decision to discontinue our FDA-regulated hand sanitizer products. Gross margin during Q3 2022 was negative $1.8 million, up from negative $2.3 million in Q2 and positive $6.2 million in Q3 2021. However, this gross margin number included the $1.2 million noncash reduction associated with the ProFrac contract asset and the $1 million write-down of inventory. Third quarter selling, general, and administrative expenses of $9 million were up 22% compared to Q2 2022 of $7.4 million and up 121% compared to Q3 of 2021. However, this number included a total bonus accrual of $1.9 million. Our non-GAAP adjusted EBITDA for the second quarter was a loss of $8.4 million, which declined $1.2 million compared to last quarter's loss of $7.2 million. Adjusted EBITDA included the 1.9% bonus accrual just discussed. Let's move on to the balance sheet. At the end of the third quarter, we had cash and cash equivalents of $8.6 million versus $33.1 million at the end of the second quarter and $24.9 million at the end of the first quarter. The decrease in cash was due to increases in inventory and accounts receivable necessary to grow the top line at 55% sequentially in operating losses. Today, we have $11.1 million of cash on hand. Also, we had a strong finish in billing in October as a result of processes and system improvements recently implemented, which will continue to accelerate the time it takes to bill our customers, resulting in reduced collection periods, including some early payment incentives. As we look forward to the fourth quarter of 2022 and 2023, our goal is to leverage our liquidity to continue significant revenue growth as we drive towards getting positive adjusted EBITDA and an organically growing cash balance. In addition, we continue to evaluate options for our Monahans, Texas facility and expect to provide an update in the coming quarters. At this point, I will pass the call back to John for his final remarks.

Thank you. I would like to again thank our shareholders for helping us unlock an incredible opportunity and secure the future of our business. This is the first time in my career I've been with a company with such a robust backlog. And I am optimistic about our ability to convert revenue growth into earnings going forward. I also wish to thank our employees, as, in the presence of this incredible growth rate and ramp-up, they have done an outstanding job helping us flawlessly execute and ensure that our customers are receiving the products they need on time, safely, with a focus on the environment as well. I just want to thank all of our employees for the great job they've done. I appreciate you joining the call and your continued support. Thank you. Back to you, operator, for questions.

We will now begin the question-and-answer session. Looks like our first question here comes from Don Crist of Johnson Rice.

I wanted to start on the chemicals business. Obviously, we're going into the fourth quarter. There could be some weather impacts and such that normally hit in the fourth quarter and the first quarter. Is there anything that you can see right now that would slow the ramp-up in supplied ProFrac fleets out there from maybe a weather perspective or any other kind of supply chain issue?

Ryan, go ahead.

Hi, good morning. At this point in time, we always have to be cognizant of potential weather impacts in Q4 and potential changes in activity. When we look at our forecast, we have taken those considerations into account. I believe that when I look at ProFrac specifically and we consider the locations where the fleets are growing, which is particularly in West Texas, South Texas, and East Texas areas, I feel like we have less exposure to weather than we would, say, if we were in the Williston or further up into the Northeast. We always take those potential accounts into consideration. I don't expect any major disruptions in our ability to deliver chemicals or updates in activity. What's been unique is that, I would say, in this quarter, at this period in the fourth quarter, considering the typical seasonality, there's still quite a bit of momentum as we get ready to finish up the year.

So we should still expect a ramp-up of seven or eight fleets or so on that same path that you've been on for the past couple of quarters?

Yes. We're expecting an average of five to seven, not including any potential benefits from the recent U.S. Wells acquisition that was finalized last week.

We are anticipating low to mid-20s for ProFrac. That's a relevant question regarding activity. Typically, seasonality slows down activity in Q4, but we are not observing that at the moment. In the past, during COVID, people would leave for Thanksgiving and return in January. Currently, it seems that due to equipment availability, they will continue operations right through to the New Year.

Switching over to JP3. You're supplying six fleets right now, the ProFrac fleets, under that contract for 20. What is the ramp-up schedule there? And I know you were a little bit hesitant last quarter to give any kind of revenue or profitability metrics around that. But are you willing to share anything now that you've got several systems deployed?

Well, we're still rolling them out. I think we've had six deployed already on ProFrac fleets. We've got a ramp-up of another 14. We're continuing to work with them to get the installs and get them out to the field. I'm very excited about that. The great part about that one is it's a proof of concept. It demonstrates the robustness of it on a trailer. The ruggedization of it is outstanding, so this works, not just like a sensor that you bolt on to a stationary site. So working with ProFrac has been outstanding to really prove the technology. I'm still reluctant to give out the growth rate on it; though it's picking up. I would say we had the best quarter we've had in a long time in Q3, and I don't anticipate that backing off for a while. I mean we've got a really strong pipeline and we're beginning to get the traction that we need there. As we go forward, it's just not a large enough revenue that I would have you modeling in the margins from that yet. I am looking forward to the point where I have to be more forthcoming on that because the margins are a big contributor, but not yet, Don.

Just sticking with JP3, when we were in your offices a couple of months ago, you had talked about third-party potential. How are those conversations going? And how is that marketing effort going to bring JP3 to the more chemical industries or industries outside of the oil field in general?

Well, oil field related, I mean it has a big opportunity in the midstream side, but we're also in the power generation side where people are using gas, and the quality of gas is important. We're seeing some big ramp-ups in power generation and using field gas, and the people in that sector are pretty excited about it. So it's still gas-related. And whenever I look at it, I see it's still sort of oil in the gas industry because it's connected directly to natural gas and field gas. So the power industry, the compression industry, the midstream industry, and downstream, all of those are really core to JP3, and we have good conversations going on in all four.

Our next question comes from Jeff Robertson of Water Tower Research.

You talked about increasing market share in Flotek's chemistry improving well performance. Are there certain reservoirs that chemistry has a more significant impact than others and give you an opportunity in certain basins to increase market share?

That's a great question. And I think that is what I consider to be the million-dollar question on the advancement of how we're targeting to increase our value-added sales and improve margin as we roll into 2023. Typically, what we see in a strengthening market, like what we have now and one that will be sustainable, is that the focus on the maximum ultimate recovery that they can achieve from the reservoir really comes into play. If you were to take the chemistry that we have, particularly for our prescriptive chemistry management service, which examines cuttings, produced water, the types of crude formation impacts, and the whole chemical system that's applied with customers, particularly exploration and production operators that we work directly with, we see as high as a 15% to 25% improvement in the initial flowback and what we observe on the overall type curves. These are the types of customers, and we say we want to help the customers' customer; when we work with our service companies and the exploration and production operators, choosing the proper chemistry does overall improve the well performance when we analyze the completions that we view. It doesn't matter for us; we see positive results in Mid-Con, the Permian Basin, and East Texas. Therefore, I definitely think that the choice of proper chemistry contributes to a better return on investment when approached this way.

Ryan, does that give you an opportunity to sell higher-margin products when you work with producers on the prescriptive chemistry aspect of their completions?

That's 100% correct. When we look at part of our strategy to be able to generate volume through working with service companies and delivering flawless execution while minimizing any impact on safety and the overall non-productive time at the wellsite. This provides us with indirect contact with the asset owners, the exploration and production operators, allowing us a pathway to utilize our laboratory capabilities and differentiated chemistries to improve the overall completion. That is 100% of the pathway we'll be executing on as we finish this year and roll into 2023.

Jeff, if you think about it, we have radically grown our core chemistry business, which allows us to do value selling with each of those producers. That is where I think we'll see margin expansion as we move from core chemistry to value-added chemistry. But to be present, you have to have the core chemistry in place; it gives you the opportunity to sit in their office and explain how you're going to improve production, enhance recovery, and improve the day rates on those wells. We now have that opportunity, and we'll work closely with them because that's part of our margin expansion story.

John, on the cost side, are there certain levers that you can address that are more impactful on your progress to getting to a positive EBITDA situation than others?

There are simple measures we can take, like reducing our facility costs, and we are working on that. Hopefully, we'll have an announcement here in the next quarter or so as we look at changing office space, etc. We're always trying to lower costs, but there are a lot of dynamic approaches we could take associated with products and how we deliver. I'll let Ryan jump in.

Yes. When we evaluate the overall cost base, there are two significant factors that play a considerable role in our delivery and margin enhancement. One is our overall raw material cost and what we do with freight delivery. If we examine the numbers where we observe improvements in material costs, we have established our ability to achieve economies of scale that moved into full delivery in Q3. We've been able to transition into tiered pricing structures and realize cost savings related to raw materials. If you evaluate our days' inventory outstanding, we've seen a significant improvement from Q2 to Q3, which means we are moving products faster. However, we did experience about a 70-day delay in the potential improvement. The full material pricing impact has not yet manifested until the start of Q4, and we anticipate it will show up in 2023 because they are significant as they're beginning to materialize, leading to margin improvement on overall material costs. The second big factor for us is we are moving millions of pounds of chemistry every month. Maximizing efficiency on freight is a significant concern demonstrating impact as. We exited Q2 with freight costs as a percentage of revenue at almost 11%, and we finished Q3 at almost 8%. Our target is to get that down to the 6% range as we emerge from Q4 into 2023. These factors represent significant drivers that offer direct profitability to the bottom line. We are executing this as we achieve economies of scale and efficiency while the ramp-up stabilizes.

Ryan, some of those freight savings from some of the things you've talked about in the past, such as in-basin delivery and reduced returns of chemistry?

It's a synergy of three major impacts. First, because we have a massive volume moving, we have been able to return to tender our inbound, outbound, and in-basin delivery services, which gave us better spot prices and more favorable contracted freight rates. Secondly, our efficiency has increased. We track on a weekly basis what we label as non-value-add moves, which do not relate directly to revenue generation. We also have key performance indicators that drive our goal to improve week on week until we reach a steady state. Lastly, handling returns; our ability to perform well-to-well transfers in-basin rather than returning to the main facility in Marlow, Oklahoma, is a substantial cost saving since you're looking at multiple expensive moves over long distances that do not generate any revenue. Those three driving factors contribute positively to our freight efficiency. I am very satisfied with the progress we are witnessing in this domain.

Lastly, following up on JP3, it sounds like that's moved more from proof of concept in terms of the impact that your analyzers are having with Flotek to adoption, at least with them. Are you seeing inquiries from other potential customers for deployment of those analyzers? Is there a capacity limitation on your ability to build them and put them out into the field?

Yes, those are all excellent questions. I'm a little reticent to talk about customers where we haven't closed yet, but we're getting closer because I don't want to give our competitors insight into where they should look for approaching opportunities. On the supply chain, that's a great question; much like any other industry, when you deal with chips and electronics technology, challenges do arise. However, we are working closely with our suppliers, and currently, we have sufficient sensors queued up coming in to cover off all of next year unless demand is overwhelmingly positive. With the available sensors, any potential high demand would not necessitate additional supply. We've also prepared a plan for 2024 that adequately meets our needs, and we're exploring the price point of that as well. So, whenever you're in the tech business, it’s essential to continually chase the cost curve and reduce the costs of devices to maintain competitiveness, and we are committed to both areas of focus. We've also brought on a leader named Ron Holsey, who is outstanding. His contacts in this sector and relationships with big customers have been yielding some great opportunities for our pipeline. As we secure these, we will announce them as we proceed. I anticipate Q4 will yield one or two, and I think early next year, multiple clients are nearing closure as pilots are underway.

Our next question comes from Eric Swergold of Firestorm Capital.

Ryan, perhaps you could talk a little bit about pricing. Your Oilfield Services customers have been actively raising prices in the field given their constraints. Given the amount that they've raised prices, does that leave some room for you to raise prices to them?

Eric, that's a great question, and I would say it’s 100% of our focus. John and I have discussed this at length, particularly following the overall oilfield services versus the chemistry component of oilfield services. Typically, when we observe a strengthening market like the one we are currently experiencing, where capital is tight in terms of the availability of hydraulic fracturing fleets and hydraulic horsepower, they end up taking a predominant position in pricing dynamics, and have been able to push spot pricing and contracted pricing up significantly from what it would have been at the end of last year. We see chemistry beginning to be able to flex pricing as well. For E&Ps, we've started to see pricing releases also increase. However, these trends do not move in exact synchronization with historical figures, where we anticipate our ability to raise prices as we enter Q4 and throughout 2023. This pattern aligns with prior cycles I've encountered over the last 20 years where the chemicals or chemistry component usually lags the momentum of pricing. Therefore, we are actively pursuing aggressive pricing moves across all accounts.

And then my next question is, this looks like it's the first bonus accrual in some time. Can you provide us with a little more context on that?

I'd certainly be happy to address that. As we evaluated the year, in Q1, we truly did not have an opportunity to earn a bonus. In fact, I would say that year would have ended up at zero had it not been for the contract with ProFrac. While we were growing, we wouldn't have met the targets needed to issue bonuses. Therefore, we did not accrue any in Q1. In Q2, with the contract start with ProFrac, it was somewhat challenging to interpret how quickly we would ramp up, hence we chose not to accrue in Q2. As we reached Q3, we realized we needed to accrue for Q1, Q2, and Q3, and accounting principles stipulated that we should review and possibly include for Q3 and Q4 individually if we plan to do so based on projected payouts. Thus, we made the decision to move forward with the accrual. One key point about Q3 is we needed to normalize our figures in 2023 and avoid large fluctuations. This is not a cash item since until we complete the year and achieve success we desire, the board will still discretion over the payout portion of the bonuses. Expect to gain deeper insights in February or March regarding the proportion of that $1.9 million payout. I'm hopeful a large percentage will be fulfilled. Market retention is critical, and we are fortunate to have an exceptional team here. This team has demonstrated impressive growth with significantly fewer personnel than in previous years. Consequently, I am genuinely pleased with our employees. Everything about Q3 has been about setting up for 2023, addressing write-offs, adjusting bonus accruals, and ensuring proper alignment for our upcoming year.

My final question is regarding the related party receivable that increased significantly this quarter. I presume that's ProFrac, and this is just a timing issue concerning it becoming a related party receivable out of cash?

That's right. Regarding the increase in accounts receivable, with the increase in activity and the ramp-up, we've really evaluated processes aimed at speeding this up. I believe we'll witness some benefits from the enhancements we've made in our systems and manual processes at the end of this year.

Any updates for us on new U.S. customers, Middle East customers, or even regarding the recovery in deepwater? Any updates on deepwater?

Overall, we're observing growth in our business in the Middle East. In comparative terms, when assessing the total revenue volume increases in the U.S. hydraulic fracturing business, it may not equate to that magnitude, but we are witnessing significant value-add sales, particularly in our complex nano-fluids stimulation services, among others. We are judicious about selecting our customer base, particularly focusing on returns and cash flow speed due to challenging payment terms in some areas, yet we see continued growth in the Middle East. We are excited about the market share gains in the double-digit range within our stimulation business in North America. As for deepwater, we are still processing activity through our plant in Raceland, Louisiana, heavily involved in trans-mix and loading operations for deepwater activities related to cement and profit movements. However, I would not quantify that as enough to cause a material difference in comparison to our robust growth in the North American stimulation sector.

It appears we have no further questions at this point. I'll now transition back to John Gibson for any final commentary.

Well, thank you very much. I appreciate everybody staying on the call. I just want to cover two points in closing. First, consider cash and the second, margins; these are the two most important aspects we examine here. With respect to cash, you can be confident that our decision to forego the asset-based lending facility in Q3 while we searched for more favorable opportunities with lower rates and restrictions demonstrates our confidence in the current cash position. While it may appear low, we do not expect any issues regarding our working capital as we progress through Q4. This reassures you about our cash position being stable, and we are confident in our ability to manage the growth necessary for margins to maintain our profitability. Bear in mind, we are only five months into the contract with ProFrac. The challenge of growing revenue is substantial. Subsequently, refining revenue into profits requires diligent execution. We are now firmly positioned in the execution phase, and there is substantial work ahead. However, Ryan, Seham, Nick, James, Bernie, and the entire team are well-equipped to handle that. We're optimistic about Flotek, and we're excited about what the future holds. We truly appreciate your interest, and we look forward to reconnecting soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.