FLOTEK INDUSTRIES INC/CN/ 10-Q

Item 1. Financial Statements FLOTEK INDUSTRIES INC, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 4,453 $ 12,290 Restricted cash 102 100 Accounts receivable, net of allowance for credit losses of $ 704 and $ 623 at September 30, 2023 and December 31, 2022, respectively 15,568 19,136 Accounts receivable, related party, net of allowance for credit losses of $ 0 at September 30, 2023 and December 31, 2022, respectively 24,765 22,683 Inventories, net 15,885 15,720 Other current assets 4,617 4,045 Current contract assets 7,816 7,113 Total current assets 73,206 81,087 Long-term contract assets 68,207 72,576 Property and equipment, net 4,844 4,826 Operating lease right-of-use assets 5,131 5,900 Deferred tax assets, net 355 404 Other long-term assets 773 17 TOTAL ASSETS $ 152,516 $ 164,810 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 33,436 $ 33,375 Accrued liabilities 5,430 8,984 Income taxes payable 43 97 Interest payable — 130 Current portion of operating lease liabilities 2,747 3,328 Current portion of finance lease liabilities 31 36 Asset-based loan 3,370 — Current portion of long-term debt 179 2,052 Convertible notes payable — 19,799 Contract Consideration Convertible Notes Payable — 83,570 Total current liabilities 45,236 151,371 Deferred revenue, long-term 35 44 Long-term operating lease liabilities 7,537 8,044 Long-term finance lease liabilities — 19 Long-term debt 104 2,736 TOTAL LIABILITIES 52,912 162,214 Stockholders’ equity: Preferred stock, $ 0.0001 par value, 100,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.0001 par value, 240,000,000 shares authorized; 30,739,820 shares issued and 29,629,902 shares outstanding at September 30, 2023; 13,985,986 shares issued and 12,964,732 shares outstanding at December 31, 2022 (As adjusted, see Note 13) 3 1 Additional paid-in capital (As adjusted, see Note 13) 462,799 388,184 Accumulated other comprehensive income 194 181 Accumulated deficit ( 328,910 ) ( 351,519 ) Treasury stock, at cost; 1,109,918 and 1,021,255 shares at September 30, 2023 and December 31, 2022, respectively (As adjusted, see Note 13) ( 34,482 ) ( 34,251 ) Total stockholders’ equity 99,604 2,596 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 152,516 $ 164,810 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 4 FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Revenue: Revenue from external customers $ 17,806 $ 15,206 $ 47,278 $ 38,412 Revenue from related party 29,462 30,417 98,592 49,462 Total revenues 47,268 45,623 145,870 87,874 Cost of sales 38,221 47,465 131,037 92,500 Gross profit (loss) 9,047 ( 1,842 ) 14,833 ( 4,626 ) Operating costs and expenses: Selling, general, and administrative 6,526 9,254 21,303 20,958 Depreciation 181 177 530 554 Research and development 757 985 2,231 3,515 Severance costs 2 ( 219 ) ( 28 ) 387 Gain on sale of property and equipment ( 38 ) ( 10 ) ( 38 ) ( 1,916 ) Gain on lease termination — — — ( 584 ) (Gain) loss in fair value of Contract Consideration Convertible Notes Payable — 4,250 ( 29,969 ) ( 9,016 ) Total operating costs and expenses 7,428 14,437 ( 5,971 ) 13,898 Income (loss) from operations 1,619 ( 16,279 ) 20,804 ( 18,524 ) Other income (expense): Paycheck protection plan loan forgiveness — — 4,522 — Interest expense ( 160 ) ( 2,321 ) ( 2,537 ) ( 4,586 ) Other expense, net ( 91 ) ( 187 ) ( 82 ) ( 67 ) Total other income (expense) ( 251 ) ( 2,508 ) 1,903 ( 4,653 ) Income (loss) before income taxes 1,368 ( 18,787 ) 22,707 ( 23,177 ) Income tax expense ( 81 ) ( 7 ) ( 98 ) ( 101 ) Net income (loss) $ 1,287 $ ( 18,794 ) $ 22,609 $ ( 23,278 ) Income (loss) per common share (As adjusted, see Note 14) : Basic $ 0.04 $ ( 1.50 ) $ 0.97 $ ( 1.89 ) Diluted $ 0.04 $ ( 1.50 ) $ ( 0.18 ) $ ( 1.89 ) Weighted average common shares (As adjusted, see Note 14) : Weighted average common shares used in computing basic income (loss) per common share 29,358 12,552 23,291 12,349 Weighted average common shares used in computing diluted income (loss) per common share 30,688 12,552 28,034 12,349 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 5 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Net income (loss) $ 1,287 $ ( 18,794 ) $ 22,609 $ ( 23,278 ) Other comprehensive income (loss): Foreign currency translation adjustment 47 116 13 211 Comprehensive income (loss) $ 1,334 $ ( 18,678 ) $ 22,622 $ ( 23,067 ) The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 6 FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) Nine months ended September 30, 2023 2022 Cash flows from operating activities: Net income (loss) $ 22,609 $ ( 23,278 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Change in fair value of contingent consideration ( 384 ) ( 106 ) Change in fair value of Contract Consideration Convertible Notes Payable ( 29,969 ) ( 9,016 ) Amortization of convertible note issuance cost 83 663 Paid-in-kind interest expense 2,284 3,861 Amortization of contract assets 3,665 1,986 Depreciation 530 554 Amortization of asset-based loan origination costs 36 — Provision for credit losses, net of recoveries 97 147 Provision for excess and obsolete inventory 626 1,702 Gain on sale of property and equipment ( 38 ) ( 1,916 ) Gain on lease termination — ( 584 ) Lease expense 2,316 168 Stock compensation expense ( 565 ) 2,262 Deferred income tax benefit 50 1 Paycheck protection plan loan forgiveness ( 4,522 ) — Changes in current assets and liabilities: Accounts receivable 3,472 ( 5,748 ) Accounts receivable, related party ( 2,082 ) ( 24,616 ) Inventories ( 776 ) ( 11,373 ) Income taxes receivable — 3 Other assets ( 863 ) ( 537 ) Contract assets — ( 3,600 ) Accounts payable 60 22,036 Accrued liabilities ( 3,179 ) 493 Operating lease liabilities ( 2,636 ) ( 404 ) Income taxes payable ( 54 ) 100 Interest payable ( 8 ) 36 Net cash used in operating activities ( 9,248 ) ( 47,166 ) Cash flows from investing activities: Capital expenditures ( 593 ) ( 175 ) Proceeds from sale of assets 68 4,215 Net cash (used in) provided by investing activities ( 525 ) 4,040 Cash flows from financing activities: Payment for forfeited stock options ( 617 ) — Payments on long term debt ( 104 ) — Proceeds from asset-based loan 27,750 — Payments on asset-based loan ( 24,380 ) — Payment of asset-based loan origination costs ( 502 ) — Proceeds from issuance of convertible notes — 21,150 Payment of issuance costs of convertible notes — ( 1,084 ) Proceeds from issuance of warrants — 19,500 Payment of issuance costs of stock warrants — ( 1,170 ) Payments to tax authorities for shares withheld from employees ( 246 ) ( 191 ) Proceeds from issuance of stock 48 24 Payments for finance leases ( 24 ) ( 30 ) Net cash provided by financing activities 1,925 38,199 Effect of changes in exchange rates on cash and cash equivalents 13 211 Net change in cash and cash equivalents and restricted cash ( 7,835 ) ( 4,716 ) Cash and cash equivalents at the beginning of period 12,290 11,534 Restricted cash at the beginning of period 100 1,790 Cash and cash equivalents and restricted cash at beginning of period 12,390 13,324 Cash and cash equivalents at end of period 4,453 8,508 Restricted cash at the end of period 102 100 Cash and cash equivalents and restricted cash at end of period $ 4,555 $ 8,608 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 7 FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Three and six months ended September 30, 2023 and 2022 (In thousands of U.S. dollars and shares) Three months ended September 30, 2023 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost (As adjusted, see Note 13) Balance, June 30, 2023 26,370 $ 3 1,113 $ ( 34,480 ) $ 462,529 $ 147 $ ( 330,197 ) $ 98,002 Net income — — — — — — 1,287 1,287 Foreign currency translation adjustment — — — — — 47 — 47 Stock issued under employee stock purchase plan — — ( 4 ) — 15 — — 15 Restricted stock granted 145 — — — — — — — Restricted stock forfeited — — 1 — — — — — Stock compensation expense — — — — 270 — — 270 Shares withheld to cover taxes ( 3 ) — — ( 2 ) ( 15 ) — — ( 17 ) Exercise of February 2023 pre-funded warrants 4,228 — — — — — — — Balance, September 30, 2023 30,740 $ 3 1,110 $ ( 34,482 ) $ 462,799 $ 194 $ ( 328,910 ) $ 99,604 Three months ended September 30, 2022 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost (As adjusted, see Note 13) Balance, June 30, 2022 13,814 $ 1 1,019 $ ( 34,238 ) $ 386,317 $ 176 $ ( 313,698 ) $ 38,558 Net loss — — — — — — ( 18,794 ) ( 18,794 ) Foreign currency translation adjustment — — — — — 116 — 116 Restricted stock granted 84 — — — — — — — Restricted stock forfeited — — 1 — — — — — Restricted stock units vested 10 — — — — — — — Stock compensation expense — — — — 671 — — 671 Shares withheld to cover taxes ( 3 ) — 4 ( 30 ) ( 23 ) — — ( 53 ) Balance, September 30, 2022 13,905 $ 1 1,024 $ ( 34,268 ) $ 386,965 $ 292 $ ( 332,492 ) $ 20,498 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 8 Nine months ended September 30, 2023 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost (As adjusted, see Note 13) Balance, December 31, 2022 13,986 $ 1 1,021 $ ( 34,251 ) $ 388,184 $ 181 $ ( 351,519 ) $ 2,596 Net income — — — — — — 22,609 22,609 Foreign currency translation adjustment — — — — — 13 — 13 Stock issued under employee stock purchase plan — — ( 12 ) — 48 — — 48 Restricted stock granted 148 — — — — — — — Restricted stock forfeited ( 7 ) — 65 — — — — — Restricted stock units vested 82 — — — — — — — Forfeited stock options purchased — — — — ( 617 ) — — ( 617 ) Stock compensation expense — — — — ( 565 ) — — ( 565 ) Shares withheld to cover taxes ( 3 ) — 36 ( 231 ) ( 15 ) — — ( 246 ) Exercise of pre-funded warrants 4,228 — — — — — — — Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable to Pre-Funded Warrants — — — — 15,092 — — 15,092 Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable to Common Stock 10,583 2 — — 40,636 — — 40,638 Conversion of convertible notes payable to Pre-Funded Warrants — — — — 11,040 — — 11,040 Conversion of convertible notes payable to Common Stock 1,723 — — — 8,996 — — 8,996 Balance, September 30, 2023 30,740 $ 3 1,110 $ ( 34,482 ) $ 462,799 $ 194 $ ( 328,910 ) $ 99,604 Nine months ended September 30, 2022 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost (As adjusted, see Note 13) Balance, December 31, 2021 13,247 $ 1 1,004 $ ( 34,100 ) $ 363,424 $ 81 $ ( 309,214 ) $ 20,192 Net loss — — — — — — ( 23,278 ) ( 23,278 ) Foreign currency translation adjustment — — — — — 211 — 211 Stock issued under employee stock purchase plan — — ( 3 ) — 24 — — 24 Restricted stock granted 189 — — — — — — — Restricted stock forfeited ( 1 ) — 4 — — — — — Restricted stock units vested 10 — — — — — — — Stock compensation expense — — — 2,262 — — 2,262 Shares withheld to cover taxes ( 6 ) — 19 ( 168 ) ( 23 ) — — ( 191 ) Issuance of stock warrants, net of transaction fee — — — — 9,930 — — 9,930 Equity contribution — — — — 8,400 — — 8,400 Conversion of notes to common stock 466 — — — 2,948 — — 2,948 Balance, September 30, 2022 13,905 $ 1 1,024 $ ( 34,268 ) $ 386,965 $ 292 $ ( 332,492 ) $ 20,498 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 9 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Organization and Nature of Operations General Flotek Industries, Inc. (“Flotek” or the “Company”) creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial and commercial markets improve their environmental performance. The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to enhance the profitability of hydrocarbon producers. The Company’s Data Analytics (“DA”) segment aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics associated with their hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability. The Company’s two operating segments, CT and DA, are both supported by its Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 17, “Business Segment, Geographic and Major Customer Information.” Going Concern These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists. The Company currently funds its operations with cash on hand, availability under the Asset Based Loan (“ABL”) (see Note 9, “Debt and Convertible Notes Payable”) and other current assets. While the Company generated $ 22.6 million of net income in the nine months ended September 30, 2023, the Company has a recent history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the unaudited condensed consolidated financial statements. The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”). It is not certain that the Company’s cash, availability under the ABL and other current assets, along with the Company’s forecasted cash flows from operations, will provide the Company with sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are filed. During the third quarter of 2023, the Company entered into the ABL providing up to $ 10.0 million of initial credit availability, which is limited by a borrowing base. In October 2023, the maximum credit availability under the ABL was increased by $ 3.8 million. However, the Company may be unable to access further equity or debt financing if needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. The unaudited condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern. Note 2 — Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements reflect all adjustments, in the opinion of management, necessary for the fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the SEC regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim financial statements should be read in conjunction with 10 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS the audited consolidated financial statements and notes included in the Company’s 2022 Annual Report. A copy of the 2022 Annual Report is available on the SEC’s website, www.sec.gov or on Flotek’s website, www.flotekind.com. The information contained on the Company’s website does not form a part of this Quarterly Report. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries. Cash Equivalents Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. Restricted Cash The Company’s restricted cash is $ 0.1 million and $ 0.1 million as of September 30, 2023 and December 31, 2022, respectively. The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution. Accounts Receivable and Allowance for Credit Losses Accounts receivable and accounts receivable, related party, arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for credit losses to reflect any loss anticipated on accounts receivable balances. The Company applies the current expected credit loss (CECL) model, which requires immediate recognition of expected credit losses over the contractual life of receivables and records the appropriate allowance for credit losses as a charge to Operating Cost and Expenses. The allowance for credit losses is based on a combination of the individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for credit losses charged to operating expense. The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables. Contract Assets The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in Note 9, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement. The contract assets are amortized over the term of the ProFrac Agreement ( 10 years) based on forecasted revenues as goods are transferred to ProFrac Services, LLC, and 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 ProFrac Agreement less the direct costs that relate to providing those goods in the future. Inventories Inventories consist of raw materials and finished goods and are stated at the lower of cost determined by using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of sales. Property and Equipment Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and 11 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS equipment, including operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or the asset’s estimated useful life as follows: Buildings and leasehold improvements 2 - 30 years Machinery and equipment 7 - 10 years Furniture and fixtures 3 years Land improvements 20 years Transportation equipment 2 - 5 years Computer equipment and software 3 - 7 years Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to s ell and depreciation is ceased. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received. Leases The Company leases certain facilities, land, vehicles, and equipment. The Company determines if an arrangement is classified as a lease at inception of the arrangement. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the related lease. Finance leases are under the current and non-current liabilities and the underlying assets are included in property and equipment on the consolidated balance sheet. As most of the Company’s leases do not provide an implicit rate of return, on a quarterly basis, the Company’s incremental borrowing rate is used, together with the lease term information available at commencement date of the lease, in determining the present value of lease payments. Operating lease liabilities include related options to extend or terminate lease terms that are reasonably certain of being exercised. Leases with an initial term of 12 months or less (“short term leases”) are not recorded on the balance sheet; and the lease expense on short-term leases is recognized on a straight-line basis over the lease term. Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable The Company accounted for the Convertible Notes Payable at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt. The Company accounted for the Contract Consideration Convertible Notes Payable issued as consideration related to a related party contract (see Note 9, “Debt and Convertible Notes Payable”), as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations. As of September 30, 2023, the Convertible Notes Payable and Contract Consideration Convertible Notes Payable were converted through a series of transactions into the Company’s common stock. See Note 13, “Stockholders’ Equity” for additional information. Fair Value Measurements The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability 12 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 10, “Fair Value Measurements.” Revenue Recognition The Company recognizes revenue when it satisfies performance obligations under the terms of the contract with a customer, and control of the promised goods are transferred to the customer or services are performed, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied. Certain sales include discounts offered to customers for prompt payment and right of return provisions, which are considered when recognizing revenue and deferred accordingly. The Company does not act as an agent in any of its revenue arrangements. In recognizing revenue for products and services, the Company determines the transaction price of contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. The majority of the CT segment revenue is chemical products that are sold at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Contracts with customers for the sale of products generally state the terms of the sale, including the quantity and price of each product purchased. Additionally, the CT segment offers various services associated to products sold which includes field services, installation, maintenance, and other functions. These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the Company has a right to invoice the customer. The DA segment recognizes revenue for sales of equipment at the time of sale based on when control transfers to the customer based on agreed upon delivery terms. Additionally, the Company offers various services associated with products sold which includes field services, installation, maintenance, and other functions. Services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. There may be additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, the Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements, and revenue not yet recognizable is reported under accrued liabilities and deferred revenue on the consolidated balance sheets. Subscription-type arrangements were not a material revenue stream in the nine months ended September 30, 2023 and September 30, 2022. Payment terms for both the CT and DA segments are customarily 30 - 60 days for domestic and 90 - 120 days f or international from invoice receipt. Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract assets associated with incomplete performance obligations are not material. The Company applies several practical expedients including: • Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less. • The Company’s payment terms are short-term in nature with settlements of one year or less. As a result, the Company does not adjust the promised amount of consideration for the effects of a significant financing component. • In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice. • The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency. 13 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in our consolidated statement of operations. Foreign Currency Translation The Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and substantially all assets and liabilities of the Company are denominated in U.S. dollars. Financial statements of foreign subsidiaries that are not U.S. dollar functional currency are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of those foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity. Comprehensive Income (Loss) Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments and distributions to stockholders. The Company’s comprehensive income loss includes consolidated net income (loss) and foreign currency translation adjustments. Research and Development Costs Expenditures for research activities relating to product development and improvement are charged to expense as incurred. Income Taxes Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to record interest and penalties related to uncertain tax positions as income tax expense. Stock-Based Compensation Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience. Stock Warrants The Company evaluated the Pre-Funded Warrants issued in June 2022 (the “June 2022 Warrants”) and the Pre-Funded Warrants issued in February 2023 (the “February 2023 Warrants”) (see Note 13, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the June 2022 Warrants and the February 2023 Warrants meet the criteria to be classified within stockholders’ equity. Accordingly, the Company recorded the proceeds received for the June 2022 Warrants within additional paid in capital. In addition, the Company reclassified the balance of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”) upon conversion for the February 2023 Warrants within additional paid in capital. 14 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates. Significant items subject to estimates and assumptions include the useful lives of property and equipment; long lived asset impairment assessments; stock-based compensation expense; allowance for credit losses for accounts receivable; valuation allowances for inventories and deferred tax assets; recoverability and timing of the realization of contract assets; and fair value of liability classified Contract Consideration Convertible Notes Payable. Recent Accounting Pronouncements Changes to U.S. GAAP are established by the FASB. We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company. New Accounting Standards Issued and Adopted as of January 1, 2023 The FASB issued ASU No. 2016-13, “ Measurement of Credit Losses on Financial Instruments .” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The Company adopted this standard prospectively as of January 1, 2023 and the adoption did not have a material impact of the Company’s consolidated financial statements and related disclosures, and there was no cumulative effect on retained earnings. New Accounting Standards Issued and Not Adopted The Company has not identified any new issued accounting standards that are expected to have a material impact on the Company’s consolidated financial statements and related disclosures. Note 3 — Revenue from Contracts with Customers Disaggregation of Revenue The Company differentiates revenue based on whether the source of revenue is attributable to product sales or service revenue. Total revenue disaggregated by revenue source is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Revenue: Products (1) $ 45,865 $ 44,574 $ 141,695 $ 85,356 Services 1,403 1,049 4,175 2,518 $ 47,268 $ 45,623 $ 145,870 $ 87,874 (1) Product revenue includes sales to related parties as described in Note 16, “Related Party Transactions.” Disaggregation of Cost of Sales The Company differentiates cost of sales based on whether the cost is attributable to tangible goods sold, cost of services sold or other costs which cannot be directly attributable to either tangible goods or services. 15 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Total cost of sales disaggregated is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Cost of sales: Tangible goods sold $ 33,350 $ 43,734 $ 116,755 $ 80,900 Services 128 126 425 179 Other 4,743 3,605 13,857 11,421 $ 38,221 $ 47,465 $ 131,037 $ 92,500 Other cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services. Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs. Cost of sales split between external and related party sales is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Cost of sales: Cost of sales for external customers $ 14,399 $ 15,820 $ 42,471 $ 58,265 Cost of sales for related parties 23,822 31,645 88,566 34,235 $ 38,221 $ 47,465 $ 131,037 $ 92,500 Note 4 - Contract Assets Contract assets are as follows (in thousands): September 30, 2023 December 31, 2022 Contract assets $ 83,060 $ 83,060 Less accumulated amortization ( 7,037 ) ( 3,371 ) Contract assets, net 76,023 79,689 Less current contract assets ( 7,816 ) ( 7,113 ) Contract assets, long term $ 68,207 $ 72,576 In connection with entering into the ProFrac Agreement on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions,” the Company recognized contract assets of $ 10.0 million and $ 69.5 million, respectively, and associated fees of $ 3.6 million. As of September 30, 2023 and December 31, 2022, $ 68.2 million and $ 72.6 million, respectively, of the contract assets are classified as long term based upon our estimate of the forecasted revenues from the ProFrac Agreement which will not be realized within the next twelve months of the ProFrac Agreement. The Company’s estimate of the timing of the future contract revenues is evaluated on a quarterly basis. During the three and nine months ended September 30, 2023, the Company recognized $ 1.3 million and $ 3.7 million, respectively, of contract assets amortization which is recorded as a reduction of the transaction price included in the related party revenue in the consolidated statement of operations. During the three and nine months ended September 30, 2022, the Company recognized $ 1.2 million and $ 2.0 million, respectively, of contract assets amortization. The below table reflects our estimated amortization per year (in thousands) based on the Company’s current forecasted revenues from the ProFrac Agreement. 16 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Years ending December 31, Amortization 2023 (excluding the nine months ended September 30, 2023) $ 1,658 2024 8,432 2025 9,094 2026 9,094 2027 9,094 Thereafter through May 2032 38,651 Total contract assets $ 76,023 Based on our tests of recoverability, we did not recognize any impairment of such contract assets as of September 30, 2023. Note 5 — Inventories Inventories are as follows (in thousands): September 30, 2023 December 31, 2022 Raw materials $ 5,603 $ 5,800 Finished goods 17,475 18,130 Inventories 23,078 23,930 Less reserve for excess and obsolete inventory ( 7,193 ) ( 8,210 ) Inventories, net $ 15,885 $ 15,720 The provision r ecorded in the three months ended September 30, 2023 and 2022 was $ 0.1 million and $ 44.8 thousand, respectively, for the CT segment and $ 16 thousand and $ 14.4 thousand, respectively, for the DA segment. The provision recorded in the nine months ended September 30, 2023 and 2022 was $ 0.5 million and $ 0.8 million, respectively, for the CT segment and $ 0.2 million and $ 0.1 million, respectively, for the DA segment. Note 6 — Property and Equipment Property and equipment are as follows (in thousands): September 30, 2023 December 31, 2022 Land $ 886 $ 886 Land improvements 520 520 Buildings and leasehold improvements 5,356 5,356 Machinery and equipment 6,687 6,758 Furniture and fixtures 520 532 Transportation equipment 784 784 Computer equipment and software 1,801 1,425 Property and equipment 16,554 16,261 Less accumulated depreciation ( 11,710 ) ( 11,435 ) Property and equipment, net $ 4,844 $ 4,826 Depreciation expense totaled $ 0.2 million and $ 0.2 million for the three months ended September 30, 2023 a nd 2022, respectively. Depreciation expense totaled $ 0.5 million and $ 0.6 million for the nine months ended September 30, 2023 a nd 2022, respectively. 17 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 — Leases The components of lease expense and supplemental cash flow information are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Operating lease expense $ 890 $ 217 $ 2,625 $ 880 Finance lease expense: Amortization of assets 3 4 11 11 Interest on lease liabilities 1 1 3 5 Total finance lease expense 4 5 14 16 Short-term lease expense 138 76 160 341 Total lease expense $ 1,032 $ 298 $ 2,799 $ 1,237 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,331 $ 461 $ 4,246 $ 1,186 Operating cash flows from finance leases 7 10 24 32 Financing cash flows from finance leases 1 1 3 5 Maturities of lease liabilities as of September 30, 2023 are as follows (in thousands): Years ending December 31, Operating Leases Finance Leases 2023 (excluding the nine months ended September 30, 2023) $ 985 $ 10 2024 2,909 22 2025 1,696 — 2026 1,732 — 2027 1,660 — Thereafter 4,334 — Total lease payments $ 13,316 $ 32 Less: Interest ( 3,032 ) ( 1 ) Present value of lease liabilities $ 10,284 $ 31 18 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Supplemental balance sheet information related to leases is as follows (in thousands): September 30, 2023 December 31, 2022 Operating Leases Operating lease right-of-use assets $ 5,131 $ 5,900 Current portion of operating lease liabilities 2,747 3,328 Long-term operating lease liabilities 7,537 8,044 Total operating lease liabilities $ 10,284 $ 11,372 Finance Leases Property and equipment $ 147 $ 147 Accumulated depreciation ( 66 ) ( 55 ) Property and equipment, net $ 81 $ 92 Current portion of finance lease liabilities $ 31 $ 36 Long-term finance lease liabilities — 19 Total finance lease liabilities $ 31 $ 55 Weighted Average Remaining Lease Term Operating leases 4.6 years 5.3 years Finance leases 0.8 years 1.6 years Weighted Average Discount Rate Operating leases 9.2 % 9.3 % Finance leases 8.5 % 8.9 % Sublease Income On April 1, 2023, the Company entered into an agreement to sublease its office and lab space in Houston, Texas beginning September 1, 2023 and continuing until October 30, 2030. The rental income from the sublease is included in the Company’s statement of operations in Other income (expense), net, and offsets the rental expense from the Company’s lease of the facility from the landlord. Sublease rental income for future years are as follows (in thousands): Years ending December 31, Rental Income 2023 (excluding the nine months ended September 30, 2023) $ 192 2024 767 2025 767 2026 767 2027 767 Thereafter 2,173 Total rental income $ 5,433 19 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 — Accrued Liabilities Current accrued liabilities are as follows (in thousands): September 30, 2023 December 31, 2022 Severance costs $ 935 $ 2,617 Payroll and benefits 1,420 684 Legal costs 237 447 Contingent liability for earn-out provision 199 583 Deferred revenue, current 754 655 Taxes other than income taxes 450 1,884 Other 1,435 2,114 Total current accrued liabilities $ 5,430 $ 8,984 Note 9 — Debt and Convertible Notes Payable Asset Based Loan On August 14, 2023, the Company entered into a 24-month revolving loan and security agreement in connection with the ABL. The ABL is classified as current debt on our consolidated balance sheet due to the nature of the payment arrangements outlined within the ABL whereby the lender is paid from customer payments received into the Company’s collections account. The ABL provides up to $ 10 million of initial credit availability, which is limited by a borrowing base consisting of: • 85 % of eligible accounts receivable, plus • 60 % of the value of eligible inventory not to exceed 100 % of the eligible accounts receivable. Under the initial terms of the ABL, the maximum credit availability could be increased based on the lesser of (i) 50 % of the appraised value of real estate collateral held by the Company and (ii) $ 5 million. On October 5, 2023, the ABL was amended to increase its maximum borrowing base from $ 10 million to $ 13.8 million (the “Amended ABL”) subsequent to the appraisal of the real estate. As of September 30, 2023, the Company had $ 3.4 million outstanding under the ABL. During the three and nine months ended September 30, 2023, the Company paid $ 0.2 million in interest and fees related to the ABL, which included the annual fee of $ 0.1 million. As of September 30, 2023, the Company had incurred origination costs of $ 0.5 million related to the ABL that was recorded as deferred financing costs to be amortized over the term of the ABL. Borrowings under the ABL bear interest at the Wall Street Journal Prime Rate (subject to a floor of 5.50 %) plus 2.5 % per annum. The interest rate under the ABL was 11.0 % as of September 30, 2023. The ABL contains an annual commitment fee equal to 1.0 % of the ABL’s borrowing base. Additionally, the Company will be assessed a non-usage fee of 0.25 % per quarter based on the difference between the average daily outstanding balance and the borrowing base limit of the ABL. If the ABL is terminated prior to the end of its 24-month term, the Company is required to pay an early termination fee of 2.50 % of the borrowing base limit of the ABL (if terminated with more than 12 months remaining until the maturity date) or 1.50 % of the borrowing base limit of the ABL (if terminated with less than 12 months remaining until the maturity date). 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 $ 11.0 million. In addition, the ABL provides the lender a blanket security interest on all or substantially all of the Company’s assets. The Company was in compliance with all of the covenants under the ABL as of September 30, 2023. Paycheck Protection Program Loan In April 2020, the Company received a $ 4.8 million loan (the “Flotek PPP loan”) under the Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025. On January 5, 2023, the Company received notice from the SBA that $ 4.4 million of the $ 4.8 million principal amount and accrued interest to that date of $ 0.1 million were forgiven. The remaining 20 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS principal amount of $ 0.4 million and accrued interest is to be repaid in monthly installments of $ 15 thousand over the remaining term of the loan through April 15, 2025, beginning on March 15, 2023. The forgiveness of the Flotek PPP loan is accounted for as an extinguishment of the debt and the Company has recorded a $ 4.5 million gain in the nine months ended September 30, 2023, comprising the principal amount forgiven of $ 4.4 million and accrued interest of $ 0.1 million. Long-term debt, including current portion, is as follows (in thousands): September 30, 2023 December 31, 2022 Flotek PPP loan $ 283 $ 4,788 Less current maturities ( 179 ) ( 2,052 ) Total long-term debt, net of current portion $ 104 $ 2,736 Loan repayments are scheduled as follows (in thousands): Years ending December 31, Repayment 2023 (excluding the nine months ended September 30, 2023) $ 45 2024 181 2025 57 Total Flotek PPP loan $ 283 Convertible Notes Payable On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE transaction, Flotek issued $ 21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $ 20.1 million (the “Convertible Notes Payable”). The investors were ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrued paid-in-kind interest at a rate of 10 % per annum, had a maturity of one year, and were convertible into common stock of Flotek or Pre-Funded Warrants to purchase common stock of Flotek, (a) at the holder's option at any time prior to maturity, at a price of $ 1.088125 per share on a pre-Reverse Stock Split basis, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $ 2.50 per share on a pre-Reverse Stock Split basis, or $ 1.741 per share on a pre-Reverse Stock Split basis, for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $ 0.8705 per share on a pre-Reverse Stock Split basis. On March 21, 2022, $ 3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately 2.8 million shares of common stock on a pre-Reverse Stock Split basis. The issuance cost of $ 1.1 million was amortized on a straight-line basis over the term of the Convertible Notes Payable and the amortization was included in interest expense in the unaudited condensed consolidated statements of operations. On February 2, 2023, the Convertible Notes Payable, excluding those held by ProFrac Holdings, LLC, with a carrying value of $ 9.0 million, including accrued paid-in-kind interest of $ 0.8 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 10,335,840 shares of common stock at a price of $ 0.8705 per share. The Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $ 11.0 million, including accrued paid-in-kind interest of $ 1.0 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,280 February 2023 Warrants with an exercise price of $ 0.0001 per share. Initial ProFrac Agreement Contract Consideration Convertible Notes Payable On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $ 10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Initial ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE transaction described above, including paid-in-kind interest at a rate of 10 % per annum and conversion features. 21 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were accounted for as liability classified convertible instruments and were initially recorded at fair value of $ 10.0 million on the issuance date with a corresponding contract asset. On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, remeasured to and carried at a fair value of $ 15.1 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,281 February 2023 Warrants with an exercise price of $ 0.0001 per share (see Note 10, “Fair Value Measurements”). Amended ProFrac Agreement Contract Consideration Convertible Notes Payable On May 17, 2022, the Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively with the Initial ProFrac Agreement, the “ProFrac Agreement”) upon issuance of $ 50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”) to ProFrac. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable accrued paid-in-kind interest at a rate of 10 % per annum. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were accounted for as liability classified convertible instruments and were initially recorded at fair value of $ 69.5 million on the issuance date with a corresponding contract asset. On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, remeasured to and carried at a fair value of $ 40.6 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 63,496,922 shares of common stock at a price of $ 0.8705 per share (see Note 10, “Fair Value Measurements”). As a result of the Reverse Stock Split, these shares were converted into 10,582,821 common shares. Note 10 — Fair Value Measurements Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement. • Level 1 — Quoted prices in active markets for identical assets or liabilities; • Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs. Fair Value of Other Financial Instruments The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities, accounts payable and ABL approximate fair value due to the short-term nature of these accounts. 22 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Liabilities Measured at Fair Value on a Recurring Basis The following table presents the Company’s liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands): September 30, December 31, Level 1 Level 2 Level 3 2023 Level 1 Level 2 Level 3 2022 Contingent earnout consideration $ — $ — $ 199 $ 199 $ — $ — $ 583 $ 583 Initial ProFrac Agreement Contract Consideration Convertible Notes — — — — — — 14,220 14,220 Amended ProFrac Agreement Contract Consideration Convertible Notes — — — — — — 69,350 69,350 Total $ — $ — $ 199 $ 199 $ — $ — $ 84,153 $ 84,153 Contingent Earnout Consideration Key Inputs The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of September 30, 2023 and December 31, 2022. The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility. September 30, 2023 December 31, 2022 Risk-free interest rate 5.19 % 4.34 % Expected volatility 90.0 % 100.0 % Term until liquidation (years) 1.63 2.38 Stock price (pre-Reverse Stock Split basis) $ 4.43 $ 1.12 Discount rate 13.31 % 9.95 % Initial ProFrac Agreement Contract Consideration Notes Payable Key Inputs The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $ 10.0 million on February 2, 2022. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement upon issuance due to the use of a quoted price for a similar liability at that date (the PIPE transaction), and subsequently classified as Level 3 due to the use of unobservable inputs. On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, upon maturity, to a fair value of $ 15.1 million based on the pre-Reverse Stock Split closing price of the shares of common stock of $ 1.19 , on the date of conversion. The fair value adjustment was a $ 0.8 million increase for the nine months ended September 30, 2023, and a $ 0.6 million increase and a $ 1.9 million increase in the three and nine months ended September 30, 2022, respectively. 23 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation. The key inputs into the Monte Carlo simulation used to estimate the fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of December 31, 2022 were as follows: December 31, 2022 Risk-free interest rate 4.12 % Expected volatility 100.0 % Term until liquidation (years) 0.09 Stock price (pre-Reverse Stock Split basis) $ 1.12 Discount rate 4.12 % Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs On May 17, 2022, the Company measured the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a Monte Carlo simulation at an estimated fair value of $ 69.5 million. The Company reduced the discount rate assumed due to the reduced likelihood of occurrence of any of the default events in the shorter term remaining on the notes. The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation. On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, at maturity, to a fair value of $ 40.6 million based on the pre-Reverse Stock Split closing price of the shares of common stock of $ 0.64 , on the date of conversion. The fair value adjustment was a decrease of $ 30.8 million in the nine months ended September 30, 2023. There was no fair value adjustment for the three months ended September 30, 2023. The fair value adjustment was an increase of $ 3.6 million and a decrease of $ 10.9 million in the three and nine months ended September 30, 2022, respectively. The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable maturing May 17, 2023, as of December 31, 2022 were as follows: December 31, 2022 Risk-free interest rate 4.59 % Expected volatility 100.0 % Term until liquidation (years) 0.38 Stock price (pre-Reverse Stock Split basis) $ 1.12 Discount rate 4.59 % Assets Measured at Fair Value on a Nonrecurring Basis The Company’s non-financial assets, including property and equipment and operating lease ROU assets, are measured at fair value on a non-recurring basis and are subject to adjustment to their fair value in certain circumstances. 24 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents the changes in balances of liabilities for the three and nine months ended September 30, 2023 and 2022 classified as Level 3 (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Balance - beginning of period $ 260 $ 67,694 $ 84,153 $ 608 Transfer of ProFrac Agreement Contract Consideration Convertible Notes Payable from Level 2 — — — 10,000 Issuance of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable — — — 69,460 Increase in principal of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest — 266 85 681 Increase in principal of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest 1,293 2,043 1,905 Change in fair value of contingent earnout consideration ( 61 ) 28 ( 384 ) ( 106 ) Change in fair value of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable — 634 786 1,889 Change in fair value of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable — 3,617 ( 30,754 ) ( 10,905 ) Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity — — ( 15,092 ) — Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity — ( 40,638 ) — Balance - end of period $ 199 $ 73,532 $ 199 $ 73,532 Note 11 — Income Taxes The income tax provision (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 21% to income (loss) before income tax for the reasons set forth below: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 U.S. federal statutory tax rate 21.0 % 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 6.1 — 0.4 — Non-U.S. income taxed at different rates 7.3 0.2 0.5 ( 0.3 ) Increase (reduction) in tax benefit related to stock-based awards 0.7 — 0.7 ( 0.4 ) Increase in valuation allowance ( 5.6 ) ( 21.7 ) ( 19.0 ) ( 20.7 ) Permanent differences ( 16.7 ) — ( 3.0 ) — Non-deductible expenses ( 6.6 ) 0.5 ( 0.2 ) 0.4 2018 IRS exam assessment — — — ( 0.4 ) Effective income tax rate 6.2 % — % 0.4 % ( 0.4 ) % Internal Revenue Code (“IRC”) section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. During 2023, the Company converted various debt instruments into Company stock and warrants causing an ownership change within the meaning of IRC section 382 that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC section 382 limitation. 25 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of September 30, 2023, the Company has an estimated $ 196.6 million in U.S. federal NOL carryforwards, $ 119.8 million in certain state NOL carryforwards, $ 7.2 million in section 163(j) interest limitation carryforwards and $ 3.8 million in tax credit carryforwards. As a result of the change of control experienced in 2023, the Company’s ability to use NOLs to reduce taxable income is generally limited to an amount currently estimated to be $ 3.5 million a year as a result of the section 382 limitation which may be revised based on further detailed analysis. NOLs that exceed the section 382 limitation in any year continue to be allowed as carryforwards until they expire and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. The Company’s use of new NOLs arising after the date of the change of control would not be impacted by the 382 limitation. Federal NOLs incurred prior to 2018 generally have a 20-year life until they expire in varying amounts between 2029 and 2037. Federal NOLs generated in 2018 and after are carried forward indefinitely. State NOLs have various carryforward periods depending on the legislation in the respective state jurisdiction. If the Company does not generate a sufficient level of taxable income prior to the expiration of the pre-2018 NOL carryforward periods, then the ability to apply those NOLs as offsets to future taxable income is lost. Based on the preliminary section 382 limitation, the Company estimates that $ 41.9 million of the state NOL carryforwards and $ 3.8 million of the tax credit carryforwards will expire unutilized. The tax effected amount of the estimated expirations is included in the Company’s valuation allowance. Note 12 — Commitments and Contingencies Litigation The Company is subject to routine litigation and other claims that arise in the normal course of business. Except as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity. Former CEO (John Chisholm) Matter On May 23, 2023, the Company entered into an agreement with John Chisholm (a former CEO of the Company) to resolve a claim made by Mr. Chisholm in arbitration for payment of outstanding severance and claims made by the Company against Mr. Chisholm. The settlement resulted in the reversal of $ 2.3 million of accrued severance costs during the nine months ended September 30, 2023 and is included in severance costs in our consolidated statements of operation. The Company had withheld payment of outstanding severance to Mr. Chisholm subsequent to an investigation conducted during the year ended December 31, 2021 into corporate practices when Mr. Chisholm was CEO during the years from 2014 to 2018. The Company concluded upon completion of that investigation that its historical financial statements could be relied upon, that proper action had been taken, and that no members of current management were implicated in any improper corporate practices. The Company subsequently commenced arbitration and other legal proceedings against Mr. Chisholm, Casey Doherty/ Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP and its predecessor, Hein & Associates LLP (Flotek’s former independent public audit firm) to recover damages. Mr. Chisholm filed a counterclaim against the Company in the arbitration proceeding for his remaining severance, and that dispute has been resolved as previously stated. During June 2023, the Company entered into a settlement with Moss Adams LLP and its predecessor, Hein & Associates LLP. During October 2023, the Company entered into a settlement with Mr. Casey Doherty and Doherty & Doherty LLP. Other Commitments and Contingencies The Company is subject to concentrations of credit risk within trade accounts receivable, and related party accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts. Note 13 — Stockholders’ Equity Reverse stock split The Company’s common stock is currently listed on the NYSE. On April 12, 2023, the Company received written notice from the NYSE that the average closing price of the Company’s shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, the Company notified the NYSE that it intended to cure the $1.00 per share deficiency. On September 14, 2023, the Company announced that the Board of Directors approved a reverse stock split of its common stock at a ratio of 1-to-6 (“Reverse Stock Split”). The Reverse Stock Split was completed on September 25, 2023 and resulted in 184,438,695 issued and outstanding shares of common stock being converted into 30,739,820 shares of common stock. 26 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Reverse Stock Split had no effect on the par value or on the number of authorized shares of common stock. The Company issued one whole share of common stock to any shareholder that would have received a fractional share as a result of the Reverse Stock Split. Therefore, no fractional shares were issued in connection with the Reverse Stock Split and no cash or other consideration was paid in connection with any fractional shares that resulted from the Reverse Stock Split. As the par value per share of common stock was not changed in connection with the Reverse Stock Split, we recorded a decrease of $ 15 thousand and $ 7 thousand to common stock on our consolidated balance sheet with a corresponding increase in additional paid-in capital as of September 30, 2023 and December 31, 2022, respectively. We also adjusted the number of outstanding shares of common stock and treasury stock on the consolidated balance sheet and in the statement of changes in stockholders’ equity for all periods presented to reflect the impacts of the Reverse Stock Split. Where we disclose the number of shares of common stock within the footnotes to the consolidated financial statements we have presented both the pre-Reverse Stock Split and post-Reverse Stock Split amount as denoted. Unless otherwise noted, all references in the consolidated financial statements and notes to consolidated financial statements to the number of shares, per share data, restricted stock and stock option data have been retroactively adjusted to give effect to the Reverse Stock Split. Conversion of Convertible Notes Payable On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable”, were converted on a pre-Reverse Stock Split basis, upon maturity, into 63,496,922 shares of common stock at a price of $ 0.8705 per share ( 10,582,821 shares of common stock on a post-Reverse Stock Split basis). The Contract Consideration Convertible Notes Payable converted into common stock shares, remeasured to a fair value of $ 40.6 million upon maturity, were recorded as additional paid-in-capital as of September 30, 2023. On February 2, 2023, the Convertible Notes Payable pursuant to the PIPE transaction discussed in Note 9, “Debt and Convertible Notes Payable”, excluding those held by ProFrac Holdings, LLC, were converted on a pre-Reverse Stock Split basis, upon maturity, into 10,335,840 shares of common stock at a price of $ 0.8705 per share. The Convertible Notes Payable converted into common stock shares had a carrying value of $ 9.0 million, including accrued paid-in-kind interest of $ 0.8 million and were recorded as additional paid-in-capital upon conversion. The Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $ 11.0 million, including accrued interest of $ 1.0 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,280 February 2023 Warrants with an exercise price of $ 0.0001 per share and were recorded as additional paid-in-capital upon conversion. On September 6, 2023, the February 2023 Warrants issued upon the conversion of the Convertible Notes Payable held by ProFrac Holding, LLC were exercised and the Company issued, on a pre-Reverse Stock Split basis, 12,683,280 shares of the Company’s common stock ( 2,113,880 shares of the Company’s common stock on a post-Reverse Stock Split basis). On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable”, remeasured to a fair value of $ 15.1 million upon maturity, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,281 February 2023 Warrants and were recorded as additional paid-in-capital upon conversion. On September 6, 2023, the February 2023 Warrants issued upon the conversion of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were exercised and the Company issued on a pre-Reverse Stock Split basis, 12,683,281 shares of the Company’s common stock ( 2,113,881 shares of the Company’s common stock on a post-Reverse Stock Split basis). Pre-Funded Warrants On June 21, 2022, ProFrac Holdings II, LLC paid $ 19.5 million for Pre-Funded Warrants (the “June 2022 Warrants”) of the Company. The June 2022 Warrants were recorded in equity at their fair value of $ 11.1 million, estimated using a Black-Scholes Option Pricing model, less $ 1.2 million of transaction costs paid. The remaining cash received of $ 8.4 million was recognized as an equity contribution. The June 2022 Warrants permit ProFrac Holdings II, LLC to purchase on a pre-Reverse Stock Split basis 13,104,839 shares of common stock of the Company ( 2,184,140 shares of the Company’s common stock on a post-Reverse Stock Split basis) at an exercise price equal to $ 0.0001 per share, and a $ 4.5 million exercise fee. The June 2022 Warrants, net of transaction fees of $ 1.1 million, and the equity contribution of $ 8.4 million from ProFrac Holdings II, LLC were recorded as additional paid-in capital. 27 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The key inputs into the Black-Scholes Option Pricing Model used to estimate the fair value of the June 2022 Warrants as of the issuance on June 21, 2022 were as follows: Risk-free interest rate 3.21 % Expected volatility 90.0 % Term until liquidation (years) 2.00 Stock price (pre-Reverse Stock Split basis) $ 1.11 Strike price (exercise fee) $ 4.5 million ProFrac Holdings II, LLC and its affiliates may not receive any voting or consent rights in respect of the June 2022 Warrants or the underlying shares of common stock unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings II, LLC and its affiliates and (ii) ProFrac Holdings II, LLC has paid an additional $ 4.5 million to the Company; provided, however, that ProFrac Holdings II may exercise the June 2022 Warrants immediately prior to the sale of the shares of common stock subject to such exercise to a non-affiliate of ProFrac Holdings II. The additional $ 4.5 million will be accounted for as an equity contribution if received. Note 14 — Earnings (Loss) Per Share Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period, which includes the February 2023 Warrants (See Note 9, “Debt and Convertible Notes Payable”, and Note 13, “Stockholders’ Equity”). Diluted earnings (loss) per common share is calculated by dividing the adjusted net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon conversion of convertible notes payable, exercise of stock warrants and vesting and settlement of stock awards. The dilutive effect of non-vested stock issued under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the Pre-Funded stock warrants are computed using the treasury stock method. The dilutive effect of the Convertible Notes is computed using the if‑converted method in accordance with ASU 2020-06, which was adopted by the Company on January 1, 2022. 28 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For all periods presented, weighted average shares and earnings (loss) per share reflect the effects of the Reverse Stock Split. The calculation of the basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022 is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Numerator: Net income (loss) for basic earnings per share $ 1,287 $ ( 18,794 ) $ 22,609 $ ( 23,278 ) Adjustments to net income available to shareholders Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable — — 2,284 — Valuation (gain)/loss on Contract Consideration Convertible Notes Payable carried at FV — — ( 29,969 ) — Adjusted net loss for diluted earnings per share $ 1,287 $ ( 18,794 ) $ ( 5,076 ) $ ( 23,278 ) Denominator: Basic weighted average shares outstanding 29,358 12,552 23,291 12,349 Dilutive effect of convertible notes payable — — 4,743 — Dilutive effect of warrants outstanding 1,238 — — — Dilutive effect of stock options and restricted shares 92 — — — Diluted weighted average shares outstanding 30,688 12,552 28,034 12,349 Basic earnings (loss) per share $ 0.04 $ ( 1.50 ) $ 0.97 $ ( 1.89 ) Diluted earnings (loss) per share $ 0.04 $ ( 1.50 ) $ ( 0.18 ) $ ( 1.89 ) Anti-dilutive incremental shares excluded from denominator for diluted earnings computation Average number of diluted shares for convertible notes payable (1) — 12,399 — 7,892 Average number of diluted shares for June 2022 stock warrants (1) — 1,483 1,308 554 Average number of diluted shares for options and restricted stock (1) — 113 111 110 (1) These items were not included in the dilution calculation for their respective periods due to their anti-dilutive effect as it would reduce the loss per share. 29 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15 — Supplemental Cash Flow Information Supplemental cash flow information is as follows (in thousands): Nine months ended September 30, 2023 2022 Supplemental cash flow information: Interest paid $ 36 $ 25 Supplemental non cash financing and investing activities: Conversion of convertible notes payable to common stock 8,996 3,038 Conversion of convertible notes payable to February 2023 Warrants 11,040 — Conversion of Initial Contract Consideration Convertible Notes Payable to February 2023 Warrants 15,092 — Conversion of Amended Contract Consideration Convertible Notes Payable to common stock 40,638 — Issuance of convertible notes payable as consideration for ProFrac Agreements — 79,460 Note 16 — Related Party Transactions On February 2, 2022, the Company entered into the Initial ProFrac Agreement, upon issuance of $ 10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the Initial ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33 % of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the Initial ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall 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 such calendar year (“Contract Shortfall Fees”). On May 17, 2022, the Company entered into the Amended ProFrac Agreement upon issuance of $ 50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”). The Initial ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70 % of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services, LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years. On February 2, 2023, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No. 2”). The Amended ProFrac Agreement No. 2 has an effective date of January 1, 2023. The ProFrac Agreement was amended to (1) provide a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of active hydraulic fracturing fleets to 30 fleets, (2) waive any Contract Shortfall Fee payment relating to any potential order shortfall prior to January 1, 2023, (3) add additional fees to certain products, and (4) provide margin increases based on margins with non-ProFrac customers. The current measurement period for Contract Shortfall Fees is June 1, 2023 through December 31, 2023. The Company does not expect that the minimum purchase requirements will be met during the current measurement period, and as a result, the revenues for the three and nine months ended September 30, 2023 reflect expected Contract Shortfall Fee payments. On February 2, 2023, the Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $ 11.0 million, including accrued paid-in-kind interest of $ 1.0 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,280 February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”) and subsequently exercised on September 6, 2023. On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, with a carrying value of $ 11.0 million, including accrued interest of $ 1 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,281 February 2023 Warrants and subsequently exercised on September 6, 2023 (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”). The fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, as of February 2, 2023, was $ 15.1 million (see Note 10, “Fair Value Measurements”). 30 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, with a carrying value of $ 55.3 million, including accrued interest of $ 5.3 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 63,496,922 shares of common stock at a price of $ 0.8705 per share (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”). The fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, as of May 17, 2023 was $ 40.6 million (see Note 10, “Fair Value Measurements”). As a result of the Reverse Stock Split, these shares were converted into 10,582,821 common shares. During the three months ended September 30, 2023 and 2022, the Company’s revenues from ProFrac Services, LLC were $ 29.5 million and $ 30.4 million , respectively. During the nine months ended September 30, 2023 and 2022, the Company’s revenues from ProFrac Services LLC were $ 98.6 million and $ 48.1 million, respectively. For the three months ended September 30, 2023 and 2022, these revenues were net of amortization of contract assets of $ 1.3 million and $ 1.2 million . For the nine months ended September 30, 2023 and 2022, the revenues were net of amortization of contract assets of $ 3.7 million and $ 2.0 million, respectively. Cost of sales attributable to these revenues were $ 23.8 million and $ 31.6 million, respectively for the three months ended September 30, 2023 and 2022 and $ 88.6 million and $ 32.8 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023 and December 31, 2022 our accounts receivable from ProFrac Services, LLC was $ 24.8 million and $ 22.7 million, respectively which is recorded in accounts receivable, related party on the consolidated balance sheet. Also, during 2023 and 2022, we had the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC: • PIPE Transaction (see Note 9, “Debt and Convertible Notes Payable”) • June 2022 Warrants (see Note 13, “Stockholders’ Equity) On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $ 3.0 million plus $ 39 thousand of accrued interest and amortization of issuance costs of $ 90 thousand, were converted on a pre-Reverse Stock Split basis into 2,793,030 shares of the Company’s common stock ( 465,505 common shares on a post-Reverse Stock Split basis). Mr. Ted D. Brown was a Director of the Company beginning in November of 2013 and is the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company. The Company’s revenues and related cost of sales for product sold to Confluence were $ 1.4 million and $ 1.4 million, respectively, for the nine months ended September 30, 2022. As of June 9, 2022 Mr. Brown stepped down from being a Director of the Company and Confluence is no longer considered a related party as of June 9, 2022. Note 17 — Business Segment, Geographic and Major Customer Information Segment Information Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: Chemistry Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, and also helping customers improve their ESG and operational goals. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies . Data Analytics. The DA segment includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The company markets products and services that support in-line data analysis of hydrocarbon components and properties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks. Performance is based upon a variety of criteria. The primary financial measure is segment operating income (loss). Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segments. 31 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summarized financial information of the reportable segments is as follows (in thousands): As of and for the three months ended September 30, Chemistry Technologies Data Analytics Corporate and Other Total 2023 Revenue from external customers Products $ 15,764 $ 1,025 $ — $ 16,789 Services 562 455 — 1,017 Total revenue from external customers 16,326 1,480 — 17,806 Revenue from related party Products 29,076 — — 29,076 Services 176 210 — 386 Total revenue from related parties 29,252 210 — 29,462 Gross profit 8,240 807 — 9,047 Income (loss) from operations 5,519 ( 37 ) ( 3,863 ) 1,619 Depreciation 149 26 6 181 Additions to long-lived assets — 135 — 135 2022 Revenue from external customers Products $ 12,855 $ 1,302 $ — $ 14,157 Services 656 393 — 1,049 Total revenue from external customers 13,511 1,695 — 15,206 Revenue from related party Products 30,417 — — 30,417 Total revenue from related parties 30,417 — — 30,417 Gross profit (loss) ( 2,406 ) 564 — ( 1,842 ) Change in fair value of Contract Consideration Convertible Notes Payable 4,250 — — 4,250 Loss from operations ( 10,603 ) ( 745 ) ( 4,931 ) ( 16,279 ) Paid-in-kind interest on convertible notes payable — — 483 483 Depreciation 162 14 1 177 Additions to long-lived assets 25 33 112 170 32 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine months ended September 30, Chemistry Technologies Data Analytics Corporate and Other Total 2023 Revenue from external customers Products $ 39,150 $ 4,586 $ — $ 43,736 Services 1,870 1,672 — 3,542 Total revenue from external customers 41,020 6,258 — 47,278 Revenue from related party Products 97,956 2 — 97,958 Services 179 455 — 634 Total revenue from related parties 98,135 457 — 98,592 Gross profit 11,279 3,554 — 14,833 Change in fair value of Contract Consideration Convertible Notes Payable ( 29,969 ) — — ( 29,969 ) Income (loss) from operations 32,694 550 ( 12,440 ) 20,804 Paid-in-kind interest on Contract Consideration Convertible Notes Payable 2,129 — — 2,129 Paid-in-kind interest on convertible notes payable — — 155 155 Depreciation 462 61 7 530 Additions to long-lived assets 30 230 32 292 2022 Revenue from external customers Products $ 33,501 $ 2,393 $ — $ 35,894 Services 1,432 1,086 — 2,518 Total revenue from external customers 34,933 3,479 — 38,412 Revenue from related party Products 49,462 — — 49,462 Total revenue from related parties 49,462 — — 49,462 Gross profit (loss) ( 4,637 ) 11 — ( 4,626 ) Change in fair value of Contract Consideration Convertible Notes Payable ( 9,016 ) — — ( 9,016 ) Loss from operations ( 1,716 ) ( 2,751 ) ( 14,057 ) ( 18,524 ) Paid-in-kind interest on Contract Consideration Convertible Notes Payable 2,586 — — 2,586 Paid-in-kind interest on convertible notes payable — — 1,276 1,276 Depreciation 507 45 2 554 Additions to long-lived assets 30 33 112 175 33 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets of the Company by reportable segments are as follows (in thousands): September 30, 2023 December 31, 2022 Chemistry Technologies $ 134,489 $ 146,542 Data Analytics 7,124 5,645 Corporate and Other 10,903 12,623 Total assets $ 152,516 $ 164,810 Geographic Information Revenue by country is based on the location where services are provided and products are sold. For the three and nine months ended September 30, 2023 and 2022 no individual countries other than the U.S. accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 U.S. (1) $ 46,401 $ 42,670 $ 141,251 $ 78,959 Other countries 867 2,953 4,619 8,915 Total revenue $ 47,268 $ 45,623 $ 145,870 $ 87,874 (1) Includes revenue from related party Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements. Major Customers Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands): Three months ended September 30, Revenue % of Total Revenue 2023 Customer A (Related Party) $ 29,462 62.3 % 2022 Customer A (Related Party) $ 30,417 66.7 % Nine months ended September 30, Revenue % of Total Revenue 2023 Customer A (Related Party) $ 98,592 67.6 % 2022 Customer A (Related Party) $ 48,074 54.7 % Customer B 10,905 12.4 % The concentration with ProFrac Services, LLC and in the oil and gas industry increases credit, commodity and business risk . 34 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Major Suppliers Expenditure with major suppliers, as a percentage of consolidated supplier expenditure, is as follows (in thousands): Three months ended September 30, Expenditure % of Total Expenditure 2023 Supplier A $ 6,094 25.3 % Supplier B 5,581 23.2 % Supplier C 4,197 17.4 % 2022 Supplier A $ 10,882 32.7 % Supplier B 6,147 18.5 % Supplier C 5,552 16.7 % Nine months ended September 30, Expenditure % of Total Expenditure 2023 Supplier A $ 36,318 32.5 % Supplier B 21,752 19.5 % Supplier C 13,151 11.8 % 2022 Supplier A $ 18,505 28.5 % Supplier B 11,706 18.0 % Supplier C 8,826 13.6 % Note 18 — Subsequent Events We have evaluated the effects of events that have occurred subsequent to September 30, 2023, and there have been no material events that would require recognition in the September 30, 2023 interim financial statements or disclosure in the notes to the consolidated financial statements. 35