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Item 8. Financial Statements and Supplementary Data

2024-03-15 compared with 2023-03-23 · 448 added, 307 removed, 789 unchanged (49% of the section changed)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors Flotek Industries, Inc.:

To the Stockholders and the Board of Directors

Flotek Industries, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc.

and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, cash flows, and stockholders’ equity for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholders’ equity for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with U.S.

generally accepted accounting principles.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring operating losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern.

Management’s plans in regard to these matters are also described in Note 1.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for convertible instruments as of January 1, 2022 due to the adoption of ASU No.

2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or

disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Recoverability of contract assets

As described in Note 2 to the Company’s consolidated financial statements, the Company’s contract assets represent consideration issued in the form of convertible notes and other incremental costs related to obtaining a contract with ProFrac Services, LLC, a related party customer.

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 revenue the Company expects to receive in the future for the transfer of goods under the long-term supply agreement and the amendment to that agreement (collectively, the ProFrac Agreement) less the direct costs that relate to providing those goods in the future.

As described in Note 2 to the Company’s consolidated financial statements, the Company’s contract assets represent consideration issued in the form of convertible notes and other incremental costs related to obtaining the ProFrac Agreement, during the year ended December 31, 2023.

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.

As described in Note 4, the Company had recorded contract assets, net of $74.7 million as of December 31, 2023.

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We assessed the reasonableness of forecasted revenue and costs by considering whether such amounts were consistent with evidence obtained in other areas of the audit.

Going concern

As discussed in Note 1 to the Company’s consolidated financial statements, the Company currently funds its operations with cash on hand, availability under the Asset Based Loan (ABL) and other liquid assets.

Although the Company has a history of negative cash flows from operations and losses, the Company recognized $24.3 million and $24.7 million of gross profit and net income, respectively, during the year ended December 31, 2023.

The ProFrac Agreement contains minimum requirements for chemistry purchases.

If the minimum volumes are not achieved within the applicable measurement period, ProFrac Services, LLC is required to pay to the Company, as liquidated damages (contract shortfall fees), an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during the measurement period.

The current measurement period for contract shortfall fees is June 1, 2023 through December 31, 2023.

The minimum purchase requirements were not met during the current measurement period, and as a result, related party revenues and receivables for the year ended and as of December 31, 2023 include $20.1 million in contract shortfall fees of which $10.0 million has been collected through March 11, 2024.

The Company expects to receive the remaining $10.1 million on or before April 8, 2024.

For 2024, the measurement period will be January 1, 2024 through December 31, 2024.

If the minimum purchase requirements are not met during the year ended December 31, 2024, there will be additional contract shortfall fees due during the first quarter of 2025.

Based upon the improvement in the Company’s outlook for future cash flows from operations that includes the collection of the contract shortfall fees related to 2023 of $20.1 million, combined with cash on hand and availability under the ABL, the Company believes it has sufficient financial resources to fund operations and meet its capital requirements and anticipated obligations as they become due in the next twelve months.

Uncertainty surrounding the long term stability and strength of oil and gas markets could have a negative impact on the Company’s liquidity.

We identified the evaluation of the Company’s assessment of its ability to continue as a going concern and related disclosures as a critical audit matter.

There was significant auditor judgment required in evaluating forecasted revenue, including the contract shortfall fees, and direct and indirect product expenses used in the Company’s forecasted cash flows analysis for the twelve-month period subsequent to issuance of the consolidated financial statements.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design of a control related to the Company’s assessment of its ability to continue as a going concern, including the development of the forecasted revenue, including the contract shortfall fees, and direct and indirect product expenses over the twelve-month period following the date the consolidated financial statements are issued.

To assess the Company’s ability to forecast revenue, including the contract shortfall fees, and direct and indirect product expenses, we compared historical revenue, including the contract shortfall fees, and direct and indirect product expense forecasts to actual results.

We assessed the reasonableness of the Company’s assumptions related to forecasted revenue, including contract shortfall fees, and direct and indirect product expenses by considering whether the assumptions were consistent with evidence obtained in other areas of the audit.

We assessed the Company’s disclosures related to its going concern assessment by comparing the disclosures to the audit evidence obtained.

We have served as the Company’s auditor since 2021.

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Restricted cash 102 100

Accounts receivable, net of allowance for doubtful accounts of $ 623 and $ 659 at December 31, 2022 and December 31, 2021, respectively

Accounts receivable, net of allowance for credit losses of $ 745 and $ 623 at December 31, 2023 and December 31, 2022, respectively

13,687 19,136

Accounts receivable, related party 22,683 1,300

Accounts receivable, related party, net of allowance for credit losses of $ 0 at December 31, 2023 and 2022, respectively

34,569 22,683

Inventories, net 12,838 15,720

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Current contract assets 5,836 7,113

Assets held for sale — 2,762

Total current assets 76,447 80,074

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Current portion of finance lease liabilities 22 36

Asset-based loan 7,492 —

Current portion of long-term debt 179 2,052

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30,772,837 shares issued and 29,664,130 shares outstanding at December 31, 2023;

79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021

Additional paid-in capital 388,177 363,417

13,985,986 shares issued and 12,964,732 shares outstanding at December 31, 2022 (As adjusted, see Note 13)

Additional paid-in capital (As adjusted, see Note 13) 463,140 388,184

Accumulated other comprehensive income 127 181

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Treasury stock, at cost;

6,127,527 and 6,022,634 shares at December 31, 2022 and December 31, 2021, respectively

1,108,707 and 1,021,255 shares at December 31, 2023 and December 31, 2022, respectively (As adjusted, see Note 13)

( 34,504 ) ( 34,251 )

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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 157,513 $ 164,810

The accompanying Notes are an integral part of these Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

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Research and development 2,486 4,438

Severance costs ( 46 ) —

Gain on disposal of property and equipment ( 38 ) ( 2,916 )

Gain on lease termination — ( 584 )

Gain on fair value of contract consideration convertible notes payable ( 75 ) —

Impairment of goodwill — 8,092

Gain in fair value of Contract Consideration Convertible Notes Payable ( 29,969 ) ( 75 )

Total operating costs and expenses 1,040 28,721

Loss from operations ( 35,421 ) ( 31,456 )

Income (loss) from operations 23,223 ( 35,421 )

Other income (expense):

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Total other income (expense) 1,639 ( 6,906 )

Loss before income taxes ( 42,327 ) ( 30,566 )

Income tax benefit 22 40

Net loss $ ( 42,305 ) $ ( 30,526 )

Loss per common share:

Income (loss) before income taxes 24,862 ( 42,327 )

Income tax (expense) benefit ( 149 ) 22

Net income (loss) $ 24,713 $ ( 42,305 )

Income (loss) per common share (As adjusted, see Notes 13 and 15):

Basic $ 1.00 $ ( 3.41 )

Diluted $ ( 0.10 ) $ ( 3.41 )

Weighted average common shares:

Weighted average common shares used in computing basic loss per common share 74,425 73,361

Weighted average common shares used in computing diluted loss per common share 74,425 73,361

Weighted average common shares (As adjusted see Notes 13 and 15):

Weighted average common shares used in computing basic income (loss) per common share 24,830 12,404

Weighted average common shares used in computing diluted income (loss) per common share 28,377 12,404

The accompanying Notes are an integral part of these Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

Years ended December 31,

Net loss $ ( 42,305 ) $ ( 30,526 )

Net income (loss) $ 24,713 $ ( 42,305 )

Other comprehensive income:

Foreign currency translation adjustment ( 54 ) 100

Comprehensive Loss $ ( 42,205 ) $ ( 30,426 )

Comprehensive income (loss) $ 24,659 $ ( 42,205 )

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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Cash flows from operating activities:

Net loss $ ( 42,305 ) $ ( 30,526 )

Adjustments to reconcile net loss to net cash used in operating activities:

Net income (loss) $ 24,713 $ ( 42,305 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Change in fair value of contingent consideration ( 527 ) ( 25 )

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Depreciation 734 734

Provision for doubtful accounts, net of recoveries 203 ( 127 )

Inventory purchase commitment settlement — ( 7,633 )

Amortization of asset-based loan origination costs 121 —

Provision for credit losses 138 203

Provision for excess and obsolete inventory 959 1,734

Impairment of goodwill — 8,092

Gain on sale of property and equipment ( 38 ) ( 2,916 )

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Stock compensation expense ( 254 ) 3,325

Deferred income tax benefit ( 125 ) ( 56 )

Deferred income tax expense (benefit) 104 ( 125 )

Paycheck protection plan loan forgiveness ( 4,522 ) —

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Proceeds from sale of assets 67 5,752

Net cash provided by investing activities 5,331 112

Net cash (used in) provided by investing activities ( 1,014 ) 5,331

Cash flows from financing activities:

Payment for forfeited stock options ( 617 ) —

Payments on long-term debt ( 149 ) —

Proceeds from asset-based loan 68,716 —

Payments on asset-based loan ( 61,224 ) —

Payment of asset-based loan origination costs ( 574 ) —

Proceeds from issuance of convertible notes — 21,150

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Payments for finance leases ( 33 ) ( 38 )

Net cash provided by (used in) financing activities 38,267 ( 372 )

Net cash provided by financing activities 5,928 38,267

Effect of changes in exchange rates on cash and cash equivalents ( 54 ) 100

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13,986 $ 1 1,021 $ ( 34,251 ) $ 388,184 $ 181 $ ( 351,519 ) $ 2,596

Net loss — — — — — — ( 42,305 ) ( 42,305 )

Net income — — — — — — 24,713 24,713

Foreign currency translation adjustment — — — — — ( 54 ) — ( 54 )

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Restricted stock units vested 82 — — — — — — —

Forfeited stock options purchased — — — — ( 617 ) — — ( 617 )

Stock compensation expense — — — — ( 254 ) — — ( 254 )

Shares withheld to cover taxes ( 3 ) — 42 ( 253 ) ( 15 ) — — ( 268 )

Issuance of stock warrants, net of transaction fee — — — — 9,930 — — 9,930

Equity contribution — — — — 8,400 — — 8,400

Conversion of notes to common stock 2,793 — — — 3,038 — — 3,038

Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable to February 2023 Warrants — — — — 15,092 — — 15,092

Conversion of convertible notes payable to February 2023 Warrants — — — — 11,040 — — 11,040

Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable to common stock 10,583 1 — — 40,637 — — 40,638

Conversion of convertible notes payable to common stock 1,723 1 — — 8,996 — — 8,997

Other 35 — — — — — — —

Exercise of February 2023 warrants 4,228 — — — — — — —

Balance, December 31, 2023

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Restricted stock forfeited ( 1 ) — 5 — — — — —

Restricted units vested 86 — — — — — — —

Restricted stock units vested 24 — — — ( 31 ) — — ( 31 )

Stock compensation expense — — — — 3,325 — — 3,325

Shares withheld to cover taxes ( 6 ) — 19 ( 151 ) ( 42 ) — — ( 193 )

Other (1) ( 613 ) — — 24 9 — — 33

Issuance of stock warrants, net of transaction fee — — — — 9,930 — — 9,930

Equity contribution — — — — 8,400 — — 8,400

Conversion of notes to common stock 467 — — — 3,038 — — 3,038

Balance, December 31, 2022

13,986 $ 1 1,021 $ ( 34,251 ) $ 388,184 $ 181 $ ( 351,519 ) $ 2,596

(1) See Note 14, “Stockholders’ Equity” for further discussion.

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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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.

The Company’s two operating segments, CT and DA, are supported by its Research & Innovation advanced laboratory capabilities.

For further discussion of our operations and segments, see Note 18, “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 from cash on hand and other current assets.

The Company has a 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 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 18, “Related Party Transactions”).

It is not certain that the Company’s cash and other current assets and our forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet our 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 consolidated financial statements are issued.

The Company is evaluating strategies to obtain additional funding for future operations.

These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses.

However, the Company may be unable to access further equity or debt financing when 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 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.

The Company currently funds its operations with cash on hand, availability under the ABL (see Note 9, “Debt and Convertible Notes Payable”) and other liquid assets.

Although the Company has a history of negative cash flows from operations and losses, the Company recognized $ 24.3 million and $ 24.7 million of gross profit and net income, respectively, during the year ended December 31, 2023.

While we believe that our cash, liquid assets, and availability under the ABL will provide us with sufficient financial resources to fund operations to meet our capital requirements and anticipated obligations as they become due, uncertainty surrounding the long term stability and strength of the oil and gas markets could have a negative impact on our liquidity.

As defined and discussed in Note 9, “Debt and Convertible Notes Payable” and Note 17, “Related Party Transactions”, the ProFrac Agreement contains minimum requirements for chemistry purchases.

If the minimum volumes are not achieved within the applicable measurement period, ProFrac Services LLC is required to pay to the Company, as liquidated damages (“Contract Shortfall Fees”), an amount equal to twenty-five percent ( 25 %) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during the measurement period.

The current measurement period for Contract Shortfall Fees is June 1, 2023 through December 31, 2023.

The minimum purchase requirements were not met during the current measurement period, and as a result, related party revenues and receivables for the year ended and as of December 31, 2023 include $ 20.1 million in Contract Shortfall Fees of which $ 10.0 million has been collected through March 11, 2024.

The Company expects to receive the remaining $ 10.1 million on or before April 8, 2024.

For 2024, the measurement period will be January 1, 2024 through December 31, 2024.

If the minimum purchase requirements are not met during the year ended December 31, 2024, there will be additional Contract Shortfall Fees due during the first quarter of 2025.

Based upon the improvement in our outlook for future cash flows from operations that includes the collection of the Contract Shortfall Fees related to 2023 of $ 20.1 million, combined with cash on hand and availability under the ABL, the Company believes it has sufficient financial resources to fund operations and meet its capital requirements and anticipated obligations as they become due in the next twelve months.

However, the Company cannot guarantee a sufficient level of cash flows in the future.

The Company had previously disclosed in the consolidated financial statements as of and for the year ending December 31, 2022, that substantial doubt about the Company’s ability to continue as a going concern existed.

As described, the Company has concluded that those conditions and events raising the substantial doubt no longer exist.

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

Note 2 — Summary of Significant Accounting Policies

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The Company’s consolidated financial statements have been prepared in accordance with U.S.

The consolidated financial statements include the accounts of Flotek Industries, Inc.

The accompanying consolidated financial statements include the accounts of Flotek Industries, Inc.

and subsidiaries it controls.

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Restricted Cash

The Company’s restricted cash is $ 0.1 million and $ 1.8 million as of December 31, 2022 and December 31, 2021, respectively.

The Company’s restricted cash as of December 31, 2022 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.

The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $ 1.75 million for amounts due under the terms of the legal settlement discussed in Note 13, “Commitments and Contingencies”.

Accounts Receivable and Allowance for Doubtful Accounts

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 doubtful accounts to reflect any loss anticipated on accounts receivable balances.

The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate allowance for doubtful accounts as a charge to operating expenses.

The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections.

The Company’s restricted cash is $ 0.1 million and $ 0.1 million as of December 31, 2023 and 2022, respectively.

The Company’s restricted cash as of December 31, 2023 and 2022 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

On January 1, 2023, the Company adopted Financial Accounting Standards Board (“FASB”) ASC Topic 326, Financial Instruments – Credit Losses (“ASC 326”), which requires the measurement of expected credit losses.

The adoption of ASC 326 using a modified retrospective approach did not have a material impact on the consolidated financial statements.

ASC 326 requires estimated credit losses to be determined for the expected life of the asset compared to an incurred model which was in effect for periods prior to January 1, 2023.

Accounts receivable and accounts receivable, related party, arise from product sales and services and are recorded at the invoiced amount, net of an allowance for credit losses.

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 doubtful accounts charged to operating expense.

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.

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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.

Changes in the allowance for doubtful accounts are as follows (in thousands):

Changes in the allowance for credit losses are as follows (in thousands):

Years ended December 31,

Balance, beginning of year $ 623 $ 659

Charges to provision for doubtful accounts, net of recoveries 203 ( 127 )

Charges to provision for credit losses, net of recoveries 138 203

Write-offs ( 16 ) ( 239 )

Balance, end of year $ 745 $ 623

As of December 31, 2022 and 2021 the Company has not recorded an allowance for doubtful accounts for the related party accounts receivable, including ProFrac Services, LLC.

As of December 31, 2023 and 2022 the Company has not recorded an allowance for credit losses for the related party accounts receivable, including ProFrac Services, LLC (see Note 17, “Related Party Transactions”).

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 10, “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 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 (see Note 17, “Related Party Transactions”) during the year ended December 31, 2022.

The contract assets are amortized over the term of the ProFrac Agreement (originally 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.

Based on our tests of recoverability, we did not identify an impairment of the contract assets during the year ended December 31, 2022.

Inventories consist of raw materials and finished goods and are stated at the lower of cost determined 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

Based on our tests of recoverability, we did not identify an impairment of the contract assets during the years ended December 31, 2023 and 2022 .

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly.

Inventories consist of raw materials and finished goods and are stated at the lower of cost determined 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.

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Property and equipment are stated at cost.

Plant and equipment under finance leases are stated at the present value of the lease payments.

The Company capitalizes costs associated with the acquisition of major software for internal use.

The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized.

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Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.

There were no impairments of property and equipment and ROU assets during the years ended December 31, 2022 and 2021.

There were no impairments of property and equipment, including ROU assets, during the years ended December 31, 2023 and 2022 .

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.

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The Company determines if an arrangement is classified as a lease at inception of the arrangement.

The Company recognizes a ROU asset and a lease liability at the lease commencement date.

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.

For operating and finance leases, the lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date.

The lease liability is subsequently measured at amortized cost using the effective-interest method.

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.

Operating lease liabilities include the noncancellable period of the lease plus related options to extend or terminate lease terms that are reasonably certain of being exercised.

Lease payments included in the measurement of the lease liability comprise fixed payments owed over the lease term.

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 accounts for the Convertible Notes Payable at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.

The Company accounts for the Contract Consideration Convertible Notes Payable issued as consideration related to a related party contract (see Note 10, “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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

measured at fair value at the grant date and at each reporting date (see Note 11, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

The Company entered into a sublease for its former headquarters, which is being accounted for under lessor accounting.

The nature of the sublease did not relieve the Company of its obligations under the original lease.

The lease for the prior headquarters was an operating lease and, as such, the Company continues to account for the original lease as it did prior to entering the sublease.

Since the former facility is not a component of the Company’s central operations, the income from the sublease and the expenses under the original lease are recorded in Other income, net on our Consolidated Statement of Operations.

Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable

The Company accounts for the Convertible Notes Payable at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt (“ASC 470”).

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.

The Contract Consideration Notes Payable matured and were converted during the year ended December 31, 2023 in accordance with their terms (see Note 9, “Debt and Convertible Notes Payable”).

Fair Value Measurements

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Products and services are sold with fixed or determinable prices.

Variable consideration is estimated for the Contract Shortfall Fees from the ProFrac Agreement (see Note 17, “Related Party Transactions”) using the most likely amount and the Company includes an estimated amount of variable consideration in the transaction price only if it is probable that a subsequent change in the estimate of the amount of variable consideration would not result in a significant revenue reversal.

A significant revenue reversal would occur if a subsequent change in the estimate of the variable consideration would result in a significant downward adjustment to the amount of cumulative revenue recognized from that contract when the change in estimate occurs.

Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly, and discounts offered to customers for prompt payment.

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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 timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivable included in accounts receivable, net and accounts receivable, related party on our Consolidated Balance Sheet.

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.

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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 to products sold which includes field services, installation, maintenance, and other functions.

Additionally, the Company offers various services associated to products sold which

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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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.

Additionally, the Company provides 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.

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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.

Contract assets and liabilities associated with incomplete performance obligations are not material.

The Company applies several practical expedients including:

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As a result, the Company does not adjust the promised amount of consideration for the effects of a significant financing component.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• 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.

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Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.

Comprehensive Loss

Comprehensive loss encompasses all changes in stockholders’ equity, except those arising from investments and distributions to stockholders.

The Company’s comprehensive loss includes consolidated net loss and foreign currency translation adjustments.

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 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 are accounted for under the asset and liability method.

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.

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The establishment of a valuation allowance requires significant judgment and is impacted by various estimates.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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Stock Warrants

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluated the Prefunded Warrants issued in June 2022 (see Note 14, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to be classified within stockholders’ equity and recorded the proceeds received for the Prefunded Warrants within additional paid in capital in the consolidated balance sheets.

The Company evaluated the Pre-Funded Warrants issued in June 2022 (the “Pre-Funded Warrants”) (see Note 13, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to be classified within stockholders’ equity and recorded the proceeds received for the Pre-Funded Warrants within additional paid in capital in the consolidated balance sheets.

The Company evaluated the Pre-Funded Warrants issued in February 2023 (the “February 2023 Warrants”) (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity") to ProFrac Services, LLC upon conversion of the Convertible Notes Payable and Initial ProFrac Agreement Contract Consideration Convertible Notes Payable and determined the February 2023 Warrants meet the criteria to be classified within stockholders’ equity.

The February 2023 Warrants were exercised during the year ended December 31, 2023.

Use of Estimates

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Actual results could differ from these estimates.

Significant items subject to estimates and assumptions include the useful lives of property and equipment;

Significant items subject to estimates and assumptions include estimated variable consideration included in contract transaction price;

the useful lives of property and equipment;

long lived asset impairment assessments;

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recoverability and timing of the realization of contract assets;

and fair value of liability classified Contract Consideration Convertible Notes Payable and equity classified stock warrants.

and the fair value of liability classified Contract Consideration Convertible Notes Payable until they were converted and equity classified Pre-Funded Warrants.

Reclassification

Certain items have been reclassified from prior periods to conform to the current period presentation.

These reclassifications had no effect on the previously reported financial condition, results of operations or cash flows.

Recent Accounting Pronouncements

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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, 2022

The FASB issued ASU No.

2020-06, “ Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

” This standard changes the accounting for convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to be classified in equity and amends diluted earnings per share calculations for certain convertible debt instruments.

The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, with earl y adoption allowed for fiscal years beginning after December 15, 2020.

The Company adopted this standard as of January 1, 2022, and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.

The FASB issued ASU No.

2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.

The pronouncement is effective for fiscal years beginning after December 15, 2021.The Company adopted this standard as of January 1, 2022 and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.

New Accounting Standards Issued But Not Adopted as of December 31, 2023

The FASB issued Accounting Standards Update (“ASU”) No.

2023-07, “Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures.” This standard improves reportable segment disclosure requirements through enhanced disclosures around significant segment expenses.

The amendments require interim and annual disclosures of significant segment expenses regularly provided to the chief operating decision maker (“CODM”).

In addition, public entities are required to disclose the amount of “other segment items” by segment and their composition;

annual disclosures about a reportable segment’s profit/loss and assets;

clarify if the CODM uses more than one measure of a segment’s profit or loss in assessing performance and resource allocation and disclose the name and title of the CODM.

This ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted and the amendments are applied retrospectively to all prior periods presented.

The Company is currently evaluating the impact of the adoption of the ASU on the related disclosures.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022.

The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate allowance for doubtful accounts as a charge to operating expenses therefore the Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements and related disclosures.

2023-09, “ Improvements to Income Tax Disclosures” (“ASU 2023-09”).

This amendment was created as a response to requests from investors, lenders, creditors and other parties to enhance transparency and effectiveness of tax disclosures to help them better assess how an entity’s operations and related tax risks affect an entity’s tax rate and potential future cash flows.

ASU 2023-09 requires that entities annually disclose the amount of taxes paid (net of refunds received) disaggregated by federal, state and foreign jurisdictions and that those amounts are also disaggregated by individual jurisdictions equal to or greater than 5% of total income taxes paid (net of funds received).

ASU 2023-09 adds a requirement that entities disaggregate income (loss) from continuing operations before income tax expense (benefit) between domestic and foreign.

The amendments also require entities to disaggregate income tax expense (benefit) by federal, state and foreign jurisdictions.

The amendments under ASU 2023-09 also remove certain prior requirements.

Public business entities are no longer required to disclose the nature and estimate of change in the unrecognized tax benefits balance in the next 12 months or make a statement that an estimate cannot be determined.

In addition public business entities are no longer required to disclose the cumulative amount of each type of temporary difference for which a deferred tax liability has not been recognized due to the exception to recognizing deferred taxes related to subsidiaries and corporate joint ventures.

ASU 2023-09 goes into effect for annual periods beginning after December 15, 2024 and early adoption is permitted for annual financial statements not yet issued or made available for issuance.

Adoption of the ASU is on a prospective basis, with the option to apply retrospectively.

The Company is currently evaluating the impact of the adoption of the ASU on the related disclosures.

Note 3 — Revenue from Contracts with Customers

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The Company differentiates revenue based on whether the source of revenue is attributable to product sales or service revenue.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total revenue disaggregated by revenue source is as follows (in thousands):

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Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs.

Cost of sales for the year ended December 31, 2021 included a one time credit of $ 7.6 million (shown in Other and below in cost of sales for external customers), related to the release of accrued costs subsequent to the ADM settlement (see Note 13, “Commitments and Contingencies”).

Cost of sales split between external and related party sales is as follows (in thousands):

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cost of sales disaggregated between external and related party sales is as follows (in thousands):

Years ended December 31,

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Contract assets, long term $ 68,820 $ 72,576

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with entering into the ProFrac Agreement on February 2, 2022 and May 17, 2022 as discussed in Note 10, “Debt and Convertible Notes Payable” and Note 18, “Related Party Transactions”, the Company recognized contract assets of $ 10.0 million and $ 69.5 million, respectively, and associated fees of $ 3.6 million.

In connection with entering into the ProFrac Agreement in 2022 as discussed in Note 9, “Debt and Convertible Notes Payable” and Note 17, “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 December 31, 2023, $ 68.8 million 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.

During the year ended December 31, 2022 the Company recognized $ 3.4 million 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 years ended December 31, 2023 and 2022 the Company recognized $ 5.0 million and $ 3.4 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.

The below table reflects our estimated amortization per year (in thousands) based on the Company’s current forecasted revenues from the ProFrac Agreement.

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Inventories, net $ 12,838 $ 15,720

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the reserve for excess and obsolete inventory are as follows (in thousands):

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$ 6,121 $ 8,210

The provisions recorded in the year ended December 31, 2022 w ere $ 1.6 million for the CT segment an d $ 0.1 million for the DA segment.

The CT segment provision includes $ 1.0 million for the exit of the hand sanitizers business line.

The provisions recorded in the year ended December 31, 2021 wer e $ 0.6 million for the CT segment and nil for the DA segment.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The provisions recorded in the years ended December 31, 2023 and 2022 w ere $ 0.8 million and $ 1.6 million, respectively, for the CT segment an d $ 0.2 million and $ 0.1 million, respectively, for the DA segment.

The CT segment provision includes $ 1.0 million for the year ended December 31, 2022 for the exit of the hand sanitizers business line.

Note 6 — Property and Equipment

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Depreciation expense totaled $ 0.7 million and $ 0.7 million for the years ended December 31, 2023 and 2022 , respectively.

During 2022, the Company sold its two facilities that were classified as held for sale as of December 31, 2021 for proceeds of $ 5.8 million resulting in a net gain of $ 2.9 million.

During 2022, the Company sold two facilities for aggregate proceeds of $ 5.8 million resulting in a net gain of $ 2.9 million.

Note 7 — Leases

Rental income recognized from leasing manufacturing facilities was $ 375 thousand and $ 197 thousand for the years ended December 31, 2022 and December 31, 2021, respectively, and is included in other income in the consolidated statement of operations.

Rental income recognized from leasing manufacturing facilities was $ 0.4 million for the year ended December 31, 2022 and is included in other, net in the consolidated statement of operations.

As discussed in Note 6, “Property and Equipment” these facilities were sold in 2022 and the lease agreements between the tenants and the Company terminated.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of lease expense and supplemental cash flow information are as follows (in thousands):

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Financing cash flows from finance leases 3 6

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturities of lease liabilities as of December 31, 2023 are as follows (in thousands):

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2024 $ 3,215 $ 22

2024 2,676 20

Thereafter 2,815 —

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Present value of lease liabilities $ 10,125 $ 22

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental balance sheet information related to leases is as follows (in thousands):

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Finance leases 8.5 % 8.9 %

Note 8 - Goodwill

Based upon the results of our annual quantitative impairment test for the year ended December 31, 2021, the Company concluded that the carrying value of the DA reporting unit exceeded its estimated fair value as of the testing date, which resulted in goodwill impairment charges of $ 8.1 million and reduced the goodwill balance to $ 0 as of December 31, 2021.

The goodwill impairment was calculated as the amount that the carrying value of the DA reporting unit, including any goodwill, exceeded its fair value.

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 31, 2030.

The rental income of $ 0.3 million for the year ended December 31, 2023 from the sublease is included in the Company’s statement of operations in Other income, 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

Thereafter 1,406

Total rental income $ 5,241

FLOTEK INDUSTRIES, INC.

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Severance costs (see Note 12, “Commitments and Contingencies”) $ 648 $ 2,617

Loss on purchase commitments (Note 13, “Commitments and Contingencies”) — 1,750

Payroll and benefits 2,138 684

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Total current accrued liabilities $ 5,890 $ 8,984

As of December 31, 2023, we accrued for bonus compensation to be paid in early 2024.

We did not recognize or accrue for bonus compensation as of December 31, 2022.

Note 9 — Debt and Convertible Notes Payable

Long Term Debt

Asset Based Loan

On August 14, 2023, the Company entered into a 24-month revolving loan and security agreement in connection with an asset-based loan (the “ABL”).

The ABL is classified, under ASC 470, as current debt on our consolidated balance sheet due to the nature of the payment arrangements where the lender is paid from customer payments received into the Company’s collections account.

The ABL provides up to $ 13.8 million of credit availability, which is limited by a borrowing base consisting of:

(i) 85 % of eligible accounts receivable, plus (ii) 60 % of the value of eligible inventory not to exceed 100 % of the eligible accounts receivable.

As of December 31, 2023, the Company had $ 7.5 million outstanding under the ABL.

During the year ended December 31, 2023, the Company incurred $ 0.5 million in interest and fees related to the ABL, which included the annual fee of $ 0.1 million, that is included in interest expense in the Company’s statement of operations.

As of December 31, 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 5.5 %) plus 2.5 % per annum.

The interest rate under the ABL was 11.0 % as of December 31, 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 2.5 % of the borrowing base limit of the ABL if terminated with more than 12 months remaining until the maturity date or 1.5 % 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 the covenants under the ABL as of December 31, 2023.

Paycheck Protection Program Loans

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The remaining principal amount of $ 0.4 million and accrued interest, will be repaid over the remaining term of the loan through April 15, 2025 beginning on March 15, 2023.

The forgiveness of the Flotek PPP loan will be accounted for as an extinguishment of the debt and will result in the Company recording a $ 4.5 million gain in the first quarter of 2023 comprising the principal amount forgiven of $ 4.4 million and accrued interest of $ 0.1 million.

In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $ 0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek.

In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest were fully forgiven.

Accordingly, during the year ended December 31, 2021, the Company recorded $ 0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other income on the consolidated statements of operations.

The forgiveness of the Flotek PPP loan was accounted for as an extinguishment of the debt and resulted in the Company recording a $ 4.5 million gain in the first quarter of 2023 comprising the principal amount forgiven of $ 4.4 million and accrued interest of $ 0.1 million.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-term debt, including current portion, is as follows (in thousands):

2 unchanged sentences

Total long-term debt, net of current portion $ 60 $ 2,736

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loan repayments are scheduled as follows (in thousands):

Years ending December 31,

Total Flotek PPP loan $ 239

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 investors are 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 accrue paid-in-kind interest at a rate of 10 % per annum, have a maturity of one year, and are converted 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, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $ 2.50 for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $ 0.8705 .

The issuance cost of $ 1.1 million is amortized on a straight line basis over the term of the Convertible Notes Payable and the amortization is included in interest expense in the consolidated statements of operations.

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 resulting in a 3.0 million credit to additional paid-in-capital in stockholders’ equity.

As of December 31, 2022, the remaining Convertible Notes Payable are recorded at carrying value of $ 19.8 million, including accrued paid-in-kind interest of $ 1.8 million, and net of unamortized issuance costs of $ 0.1 million.

The estimated fair value of the Convertible Notes Payable at December 31, 2022 was $ 25.8 million.

Interest expense for the year ended December 31, 2022 includes $ 1.8 million of accrued paid-in-kind interest and $ 1.0 million of issuance cost amortization related to these Convertible Notes Payable.

Interest expense relating to the Convertible Notes Payable held by ProFrac Holdings, LLC (related party) is $ 1.0 million for the year ended December 31, 2022.

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 (as defined in Note 13, “Stockholders’ Equity”) 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 2,793,030 shares of common stock on a pre-Reverse Stock Split basis ( 465,505 on a post-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 consolidated statements of operations.

Interest expense for the years ended December 31, 2023 and 2022 included $ 0.2 million and $ 1.8 million, respectively, of accrued paid-in-kind interest and $ 83 thousand and $ 1.0 million, respectively, of issuance cost amortization related to these Convertible Notes Payable.

Interest expense relating to the Convertible Notes Payable held by ProFrac Holdings, LLC (related party) was $ 85 thousand and $ 1.0 million for the years ended December 31, 2023 and 2022.

Upon maturity 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 into 10,335,840 shares of common stock ( 1,722,640 shares of the Company’s common stock on a post-Reverse Stock Split basis) 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 (see Note 13, “Stockholders’ Equity”).

On September 6, 2023, the February 2023 Warrants 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).

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 the paid-in-kind interest at a rate of 10 % per annum and conversion features.

Interest expense for the years ended December 31, 2023 and 2022 included $ 85 thousand and $ 1.0 million, respectively, of accrued paid-in-kind interest related to the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable.

The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable are 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.

The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured to fair value of $ 14.2 million as of December 31, 2022 which includes paid-in-kind interest of $ 1.0 million.

The fair value adjustment increased the carrying amount of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable by $ 3.3 million during the year ended December 31, 2022 and is recognized in gain on fair value of contract consideration convertible notes payable, net on our consolidated statements of operations.

See Note 11, “Fair Value Measurements”.

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”).

On September 6, 2023, the February 2023 Warrants 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).

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 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 Holdings LLC.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable accrue paid-in-kind interest at a rate of 10 % per annum and may be converted at any time prior to the maturity date, which is one year from the date of issuance under the same conversion terms as the Convertible Notes Payable issued in the PIPE Transaction described above.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable are 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.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured to fair value of $ 69.4 million as of December 31, 2022 which includes paid-in-kind interest of $ 3.2 million The fair value adjustment resulted in a $ 3.3 million decrease during the year ended December 31, 2022 and is recognized in gain on fair value of contract consideration convertible notes payable, net on our consolidated statement of operations.

See Note 11, “Fair Value Measurements”.

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.

Interest expense for the years ended December 31, 2023 and 2022 included $ 2.0 million and $ 3.2 million, respectively, of accrued paid-in-kind interest related to the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable.

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.

Upon maturity 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 (see Note 10, “Fair Value Measurements”), were converted on a pre-Reverse Stock Split basis, upon maturity, into 63,496,922 shares of common stock at a pre-Reverse Stock price of $ 0.8705 per share ( 10,582,821 common shares on a pre-Reverse Stock Split basis).

Note 10 — Fair Value Measurements

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Fair Value of Other Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts.

The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, ABL, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Liabilities Measured at Fair Value on a Recurring Basis

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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 December 31, 2023 and 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.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The estimated fair value of $ 56 thousand and $ 0.6 million 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.

Risk-free interest rate 4.58 % 4.34 %

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Term until liquidation (years) 1.38 2.38

Stock price $ 1.12 $ 1.13

Stock price (pre-Reverse Stock Split basis for 2022) $ 3.92 $ 1.12

Discount rate 11.86 % 9.95 %

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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:

The key inputs into the Monte Carlo simulation used to estimate the fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable that matured on February 2, 2023, as of December 31, 2022 were as follows:

December 31, 2022

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Term until liquidation (years) 0.09

Stock price $ 1.12

Stock price (pre-Reverse Stock Split basis)

Discount rate 4.12 %

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 and $ 3.3 million increase for the years ended December 31, 2023 and 2022, respectively.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs

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The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as at 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 Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, on the issuance date of May 17, 2022, and as of December 31, 2022 were as follows:

May 17, 2022 December 31, 2022

The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, that matured on May 17, 2023, as of December 31, 2022 were as follows:

December 31, 2022

Risk-free interest rate 4.59 %

1 unchanged sentence

Term until liquidation (years) 0.38

Stock price $ 1.29 $ 1.12

Stock price (pre-Reverse Stock Split basis) $ 1.12

Discount rate 4.59 %

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 for the twelve months ended December 31, 2023.

The fair value adjustment was a decrease of $ 3.3 million for the twelve months ended December 31, 2022.

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.

Impairment of goodwill of $ 8.1 million was recorded during the year ended December 31, 2021.

See Note 8, “Goodwill”.

Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis

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Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable ( 30,755 ) ( 3,341 )

Conversion of Initial ProFrac Agreement contract consideration convertible notes on maturity ( 15,092 ) —

Conversion of Amended ProFrac Agreement contract consideration convertible notes on maturity ( 40,638 ) —

Balance - end of period $ 56 $ 84,153

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — Income Taxes

Components of the income tax benefit are as follows (in thousands):

Components of the income tax expense (benefit) are as follows (in thousands):

Years ended December 31,

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State 104 ( 125 )

Total deferred benefit ( 125 ) ( 56 )

Income tax benefit $ ( 22 ) $ ( 40 )

The components of loss before income taxes are as follows (in thousands):

Total deferred expense (benefit) 104 ( 125 )

Income tax expense (benefit) $ 149 $ ( 22 )

The components of income (loss) before income taxes are as follows (in thousands):

Years ended December 31,

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Foreign ( 453 ) ( 85 )

Loss before income taxes $ ( 42,327 ) $ ( 30,566 )

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The income tax benefit differed from the amounts computed by applying the U.S.

federal income tax rate of 21% respectively, to loss before income tax for the reasons set forth below:

Income (loss) before income taxes $ 24,862 $ ( 42,327 )

The income tax expense (benefit) differed from the amounts computed by applying the U.S.

federal income tax rate of 21% respectively, to income (loss) before income tax for the reasons set forth below:

Years ended December 31,

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income taxed at different rates 0.3 ( 0.1 )

Increase in tax benefit related to stock-based awards ( 0.4 ) 0.1

Increase in valuation allowance ( 21.8 ) ( 24.9 )

Tax benefit related to stock-based awards 0.7 ( 0.4 )

Change in valuation allowance ( 20.9 ) ( 21.8 )

Permanent differences related to CARES Act ( 3.6 ) —

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Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse.

The movement in the temporary differences for the year ended December 31, 2022 does not affect the estimated annual effective tax rate as it is offset by a corresponding change in the valuation allowance.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The component of deferred tax assets and liabilities are as follows (in thousands):

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Interest limitation 137 1,616

Other 230 291

Total gross deferred tax assets 66,788 67,134

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ROU asset ( 1,203 ) ( 1,377 )

Contract asset ( 5,813 ) —

Prepaid insurance and other ( 406 ) ( 393 )

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As of December 31, 2023, the Company had U.S.

net operating loss carryforwards of $ 176 million, including $ 46.4 million expiring in various amounts from 2029 through 2037 which can offset 100 % of taxable income and $ 129.6 million that has an indefinite carryforward period which can offset 80 % of taxable income per year.

The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo a change in control as defined for purposes of Section 382 of the Internal Revenue Code of 1986, as amended.

The Company performed a study in which it determined that no ownership change has occurred as of December 31, 2022.

However, the Company anticipates that a change in control will occur in the near term when certain convertible notes are converted during the year ended 2023.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

change in control will significantly limit the ability of the Company to utilize the pre-change net operating losses and credits, the Company does not expect a significant impact to their financial statements given the valuation allowance that is recorded to estimate the realizability of the deferred tax assets.

The Company’s cumulative recent losses (before permanent items) of $ 215.5 million in the recent thirty-six months are negative evidence that it will not likely generate sufficient future income to utilize its deferred tax assets.

Therefore, the Company believes that it is not more likely than not that it will realize its deferred tax assets in all taxing jurisdictions with the exception of a portion of Louisiana and Texas.

net operating loss carryforwards (“NOLs”) of $ 192.9 million, including $ 46.4 million expiring in various amounts from 2029 through 2037 which can offset 100 % of taxable income and $ 146.5 million that has an indefinite carryforward period which can offset 80 % of taxable income per year.

Additionally, the Company has an estimated $ 94.2 million in certain state NOL carryforwards, $ 0.2 million in Section 163(j) interest limitation carryforwards and $ 3.8 million in tax credit carryforwards.

As a result of the ownership change experienced in 2023, the Company’s ability to use NOLs to reduce taxable income is generally limited by Section 382 of the Internal Revenue Code of 1986 to an annual amount, of $ 3.5 million plus an uplift of $ 24.5 million.

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 ownership change would not be impacted by the Section 382 limitation.

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 an analysis of the Section 382 limitation, the Company estimates that $ 31.3 million of the state NOL carryforwards (subject to additional state-by-state analysis) and $ 3.8 million of the tax credit carryforwards will expire unutilized.

Although the ownership change will significantly limit the ability of the Company to utilize the pre-change net operating losses and credits, the Company does not expect a significant impact to its financial statements given the valuation allowance that is recorded to estimate the realizability of the deferred tax assets.

The Company’s cumulative losses (before permanent items) of $ 48.0 million in the recent three years ended December 31, 2023 are negative evidence that it will not likely generate sufficient future income to utilize its deferred tax assets.

Therefore, the Company believes that it is not more likely than not that it will realize its deferred tax assets in all taxing jurisdictions with the exception of a portion related to the states of Louisiana and Texas.

Therefore, the Company recorded a valuation allowance for the years ended December 31, 2023 and December 31, 2022 to reflect the estimated amount of deferred tax asset realizability.

The Company intends to reinvest the unremitted earnings of its non-U.S.

The change in valuation allowance was $ 5.2 million and $ 9.2 million during the years ended December 31, 2023 and 2022, respectively.

The Company does not have documented plans to reinvest the unremitted earnings of its non-U.S.

subsidiaries.

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although they have not been repatriated.

However, certain withholding taxes may need to be paid upon repatriation depending on the US treaty with the applicable country.

It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.

The Company has performed an analysis of its tax positions for the year ended December 31, 2022, concluding all tax positions taken were highly certain.

However, certain withholding taxes may need to be paid upon repatriation depending

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

on the US treaty with the applicable country.

Because all of the Company’s foreign earnings have been previously taxed, the requirement to record a deferred tax liability on such unremitted earnings is not applicable.

The Company has performed an analysis of its tax positions for the years ended December 31, 2023 and 2022, concluding all tax positions taken were highly certain.

As of December 31, 2023, the Company is not under examination in any federal/national jurisdictions.

However, the 2016 and 2017 report years with respect to research and development credits are under review by the Texas Comptroller’s office.

The tax returns for the years ended 2020 through 2022 remain subject to examination in the US, and the tax returns for the years ended 2019 through 2022 remain subject to examination in various state jurisdictions.

Note 12 — Commitments and Contingencies

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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 (J Chisholm) Matter

During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (a previous CEO of Flotek) due to irregularities in expenses and transactions during the years from 2014 to 2018.

The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste.

Flotek’s Board engaged a third party to review the findings of the investigation.

After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.

Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration and other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages.

John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended).

Although Flotek believes its claims are supported by the available evidence, the timing and amount of any outcome cannot reasonably be predicted.

Terpene Supply Agreement

On October 29, 2021, the Company reached agreement (“the ADM Settlement) with Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company (“FCC”) and other parties to pay $ 1.75 million and resolve all claims between the parties in relation to lawsuit claiming damages relating to the terpene supply agreement between Flotek Chemistry, LCC (“Flotek Chemistry”), a wholly owned subsidiary of the Company and FCC.

The one-time payment of $ 1.75 million from Flotek to ADM was paid on January 3, 2022 and was included as restricted cash on the consolidated balance sheet as of December 31, 2021.

A credit of $ 7.6 million was recorded in cost of sales in the consolidated statements operations for the year ended December 31, 2021 relating to the release of excess costs accrued for this 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.

The settlement resulted in the reversal of $ 2.3 million of accrued severance costs during the twelve months ended December 31, 2023 and is included as a reduction to severance costs in our consolidated statements of operations.

In connection with the matter related to Mr.

Chisholm, the Company commenced arbitration and other legal proceedings against 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.

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.

As a result of the various settlements during 2023, the Company considers this matter closed.

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.

In addition, the majority of the Company’s cash is invested in major U.S.

financial institutions and balances often exceed insurable amounts.

Note 13 — Stockholders’ Equity

Reverse stock split

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.

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 to common stock on our consolidated balance sheet with a corresponding increase in additional paid-in capital as of December 31, 2022.

The Company 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 for each period presented.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Stockholders’ Equity

On March 21, 2022, Convertible Notes Payable pursuant to the PIPE Transaction discussed in Note 10, “Debt and 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, were converted into 2,793,030 shares of the Company’s common stock.

On June 21, 2022, ProFrac Holdings II, LLC paid $ 19.5 million for PreFunded Warrants of the Company.

Conversion of Convertible Notes Payable

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 ( 1,722,640 shares of the Company’s common stock on a post-Reverse Stock Split basis).

The Convertible Notes Payable converted into common stock had a carrying value of $ 9.0 million, including accrued paid-in-kind interest of $ 0.8 million, that was recorded as additional paid-in-capital upon conversion.

The Convertible Notes Payable held by ProFrac Holding, LLC pursuant to the PIPE transaction had 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.

The February 2023 Warrants met the criteria for equity accounting 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 with an exercise price of $ 0.0001 per share.

The February 2023 Warrants met the criteria for equity accounting 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).

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, remeasured to a fair value of $ 40.6 million upon maturity, were recorded as additional paid-in-capital as of December 31, 2023.

Pre-Funded Warrants

On June 21, 2022, ProFrac Holdings II, LLC paid $ 19.5 million for Pre-Funded Warrants of the Company, representing a 20 % premium to the 30-day volume average price of the Company’s common stock at the close of business on the day prior to the date of the issuance of the Prefunded Warrants.

The PreFunded Warrants were recorded in equity at their fair value of $ 11.1 million, estimated using a Black-Scholes Option Pricing model, le ss $ 1.2 million of transaction costs paid.

The remaining cash received of $ 8.4 million was recognized as an equity contribution.

Th e Prefunded Warrants permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $ 0.0001 per share, representing a 20 % premium to the 30-day volume average price of the Company’s common stock at the close of business on the day prior to the date of the issuance of the Prefunded Warrants.

The Prefunded Warrants, net of transaction fees of $ 1.1 million, and the equity contribution of $ 8.4 million from ProFrac Holdings, II, LLC are included in additional paid-in capital as of December 31, 2022.

Th e Prefunded 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.

The Prefunded Warrants, net of transaction fees of $ 1.1 million, and the equity contribution of $ 8.4 million from ProFrac Holdings, II, LLC are included in additional paid-in capital.

The key inputs into the Black-Scholes Option Pricing Model used to estimate the fair value of the Pre-Funded Warrants as of the issuance on June 21, 2022 were as follows:

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Term until liquidation (years) 2.00

Stock price $ 1.11

Stock price (pre-Reverse Stock Split) $ 1.11

Strike price (exercise fee) $ 4.5 million

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ProFrac Holdings II, LLC and its affiliates may not receive any voting or consent rights in respect of the Prefunded Warrants or the underlying shares 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 Prefunded 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 Company obtained approval from a majority of its shareholders excluding ProFrac Holdings II, LLC and its affiliates, with respect to the exercise of the PreFunded Warrants in connection with a special meeting of shareholders held on September 5, 2023.

As of December 31, 2023, the PreFunded Warrants have not been exercised.

The additional $ 4.5 million will be accounted for as an equity contribution if received.

During the first quarter of 2021, the Company identified 613,000 shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity.

This adjustment was not material to the December 31, 2020 consolidated financial statements or basic and diluted earnings per share.

Treasury Stock

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Stock-Based Incentive Plans

Stockholders approved long-term incentive plans in 2020, 2019 and 2018 (the “2020 Plan”, the “2019 Plan,” and the “2018 Plan,”, respectively) under which the Company may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, restricted stock units, and certain other incentive awards.

The maximum number of shares that may be issued under the 2020 Plan, 2019 Plan and 2018 Plan are 3 million, 1.0 million, and 8.5 million, respectively.

At December 31, 2022 and 2021, the Company had a total o f 2.8 million and 4.2 million shares remaining, respectively, to be granted under the 2020 Plan, 2019 Plan and 2018 Plan.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stockholders approved an increase in shares during its 2023 Annual meeting to long-term incentive plans created in 2018 (the “2018 Plan”) under which the Company may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, restricted stock units, and certain other incentive awards.

The maximum number of shares that may be issued under long-term incentive plans created in 2020 and 2019 (the “2020 Plan” and “2019 Plan,” respectively) and 2018 Plan are 0.5 million, 0.2 million, and 1.9 million, respectively.

At December 31, 2023 and 2022, the Company had an aggregate o f 0.6 million and 0.7 million shares remaining, respectively, to be granted under the 2020 Plan, 2019 Plan and 2018 Plan.

Stock Options

All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant.

During the year ended December 31, 2022 no market-based stock options were granted compared to 1.4 million during the year ended December 31, 2021.

The market-based options are restricted until criteria defined in the agreements are met.

During the year ended December 31, 2023, 0.1 million market-based stock options and 0.1 million performance-based stock options were granted compared to none during the year ended December 31, 2022.

The market-based and performance-based options are restricted until criteria defined in the stock option agreements are met.

Proceeds received from stock option exercises are credited to common stock and additional paid-in capital, as appropriate.

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Stock-based compensation expense is recorded for all equity awards expected to vest.

During the years ended December 31, 2022 and 2021, 0.5 million and 0.2 million stock options vested, respectively.

During the year ended December 31, 2022, no stock options were forfeited compared to 0.8 million for the year ended December 31, 2021.

The total fair value of the stock options that vested was $ 0.3 million and $ 0.2 million for the years ended December 31, 2022 and 2021, respectively.

During the year ended December 31, 2023 no stock options vested compared to 0.1 million for the year ended December 31, 2022.

The total fair value of the stock options that vested was $ 0.3 million for the year ended December 31, 2022.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock option activity for the years ended December 31, 2023 and 2022, are as follows:

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Granted — $ — $ —

Exercised — — —

Forfeited — — —

1 unchanged sentence

Outstanding as of December 31, 2022

Granted 190,728 3.42 2.57

Exercised — — —

Forfeited ( 457,815 ) 7.10 7.28

Expired ( 130,000 ) $ 7.97 $ 5.94

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Weighted-average remaining contractual term in years 8.7 1.59 8.55

The following table sets forth significant assumptions used in the Monte Carlo model for market-based options to determine the fair value of the option s at the date of grant for the year ended December 31, 2021.

There were no options granted during the year ended December 31, 2022.

Year Ended December 31, 2021

The following table sets forth significant assumptions used in the Monte Carlo model for performance-based options to determine the fair value of the options awarded in June 2023 at the date of grant for the year ended December 31, 2023.

June 7, 2023 Awards

Risk-free interest rate 3.79 %

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth significant assumptions used in the Black-Scholes model for market-based options to determine the fair value of the options awarded in December 2023 at the date of grant for the year ended December 31, 2023.

December 5, 2023 Awards

Risk-free interest rate 4.13 %

Expected volatility of common stock 90.60 %

Expected life of options in years 6.5

Dividend yield — %

At December 31, 2023 and 2022 , the unrecognized compensation cost related to stock options was $ 0.6 million and $ 2.1 million, respectively.

Upon the departure of the Company’s Chief Executive Officer and President effective January 19, 2023, 3,000,000 of the outstanding stock options were forfeited (see Note 20, “Subsequent Events”).

The unrecognized compensation expense related to these forfeited options was $ 1.8 million.

There were no options granted during the year ended December 31, 2022.

Restricted Stock

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Non-vested at December 31, 2022

1,768,363 1.61

Granted 146,204 4.52

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The total fair value of restricted stock that vested during the years ended December 31, 2023 and 2022 was $ 0.9 million and $ 1.3 million, respectively.

The grant-date fair value is the market price of the shares on the date of grant.

At December 31, 2023 and 2022 , unrecognized compensation expense related to non-vested restricted stock was $ 0.9 million and $ 2.0 million, respectively.

The unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.3 years.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

No RSU’s were granted during the years ended December 31, 2022 and 2021.

The Company grants time-vesting restricted share units in accordance with terms specified in the Restricted Stock Unit Agreements.

Restricted stock units activity for the years ended December 31, 2023 and 2022 , are as follows:

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RSUs at December 31, 2022

102,481 11.42

Granted 230,816 3.82

Vested ( 82,730 ) 10.64

2 unchanged sentences

212,567 $ 3.44

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

T he total fair value of restricted stock that vested during the years ended December 31, 2023 and 2022 was $ 0.5 million and $ 0.1 million, respectively.

The grant-date fair value is the market price of the shares on the date of grant.

At December 31, 2023 and 2022 , unrecognized compensation expense related to restricted stock units was $ 0.7 million and $ 0.4 million.

Upon the departure of the Company’s Chief Executive Officer and President effective January 19, 2023, all the unvested restricted stock units outstanding as of December 31, 2022 were forfeited (see Note 20, “Subsequent Events”).

The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.7 years.

RSUs outstanding at December 31, 2023 consist of only time-vesting awards.

Employee Stoc k Purchase Plan

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The ESPP allows participants to purchase common stock at a purchase price equal to 85 % of the fair market value of the common stock on the last business day of a three-month offering period which coincides with calendar quarters.

Payroll deductions may not exceed 10 % of an employee’s compensation and participants may not purchase more than 1,000 shares in any one offering period.

Payroll deductions may not exceed 10 % of an employee’s compensation.

In addition, for each calendar year, an employee may not be granted purchase rights valued over $ 25,000 , as determined at the time such purchase right is granted.

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Stock-Based Compensation Expense

Non-cash stock-based compensation expense related to stock options, restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP was $ 3.3 million and $ 3.8 million during the years ended December 31, 2022 and 2021, respectively.

Stock-based compensation expense related to stock options, restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP was $( 0.3 ) million and $ 3.3 million during the years ended December 31, 2023 and 2022, respectively.

Stock based compensation expense for the year ended December 31, 2023 included an adjustment for actual forfeitures of $ 1.6 million that reduced the total stock-compensation expense.

During 2023, the Company settled vested equity awards of a terminated officer through a cash payment.

The cash payment was made to the employee in lieu of the equity awards, which were previously granted and vested.

The settlement amount was determined based on the fair value of the equity awards at the time of termination.

The Company used the Black-Scholes Model to value the vested equity awards.

This transaction resulted in a reduction of the Company's equity awards liability and a corresponding outflow of cash for $ 617 thousand.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The key inputs to the Black-Scholes Model used to estimate the fair value of the vested equity awards, as of the date of the termination were as follows:

January 19, 2023

Risk-free interest rate 3.79 %

Expected volatility of common stock 90.00 %

Expected life of options in years 6.92

Stock price (pre-Reverse Stock Split basis) $ 1.37

Strike Price $ 1.93

401(k) Retirement Plan

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During the years ended December 31, 2023 and 2022 , compensation expense included $ 0.3 million and $ 0.3 million, respectively, related to the Company’s 401(k) match.

Note 16 — Loss Per Share

Basic loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period.

Diluted loss per common share is calculated by dividing the adjusted net loss by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.

Note 15 — 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.

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 prefunded 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 (see Note 2, “Summary of Significant Accounting Policies”).

The calculation of the basic and diluted loss per share for the years ended December 31, 2022 and 2021 is as follows (in thousands):

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.

The calculation of the basic and diluted earnings (loss) per share for the years ended December 31, 2023 and 2022 is as follows (in thousands):

Year ended December 31,

Net income (loss) for basic earnings per share $ 24,713 $ ( 42,305 )

Adjustments to net income (loss) available to shareholders for diluted earnings

Paid-in-Kind interest expense on convertible notes payable and contract consideration convertible notes payable, net of tax 2,284 —

Valuation gain on convertible notes carried at fair value, net of tax ( 29,969 ) —

Net loss for fully dilutive earnings per share $ ( 2,972 ) $ ( 42,305 )

Basic weighted average shares outstanding 24,830 12,404

Dilutive effect of convertible notes payable 3,547 —

Diluted weighted average shares outstanding 28,377 12,404

Basic earnings (loss) per share $ 1.00 $ ( 3.41 )

Diluted loss per share $ ( 0.10 ) $ ( 3.41 )

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the year ended December 31, 2023, weighted average shares for employee stock awards and weighted average shares for the Pre-Funded Warrants were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the adjusted net loss incurred during the period.

For the year ended December 31, 2022, paid-in-kind interest expense, net of tax, on Convertible Notes Payable and the change in fair value related to the Contract Consideration Convertible Notes Payable, net of tax, were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the period.

For the year ended December 31, 2022 weighted average shares for convertible notes payable, weighted average shares for stock warrants and weighted average shares for employee stock awards were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the period.

The table below summarizes net income items that were excluded from the numerator for the diluted earnings calculation and shares that were excluded from the denominator for the diluted earnings calculation due to their anti-dilutive effects on earnings (loss) per share (in thousands):

Year ended December 31,

Net loss for basic earnings per share $ ( 42,305 ) $ ( 30,526 )

Anti-dilutive adjustment to net income available to shareholders excluded from numerator for diluted earnings computation

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Total numerator adjustment excluded from diluted earnings computation $ — $ 5,881

Basic and diluted weighted average shares outstanding 74,425 73,361

Anti-dilutive incremental shares excluded from denominator for diluted earnings computation

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Average number of diluted shares for stock options and restricted stock 94 128

Basic and diluted loss per share $ ( 0.57 ) $ ( 0.42 )

For the year ended December 31, 2022 paid-in-kind interest expense, net of tax, on Convertible Notes Payable and the change in fair value related to the Contract Consideration Convertible Notes Payable, net of tax, were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.

For the year ended December 31, 2021, potentially dilutive securities were excluded from the calculation of diluted loss per share, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the year.

Total incremental shares excluded from denominator for diluted earnings computation 1,345 10,038

Note 16 — Supplemental Cash Flow Information

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Interest paid $ 434 $ 45

Income taxes received — ( 351 )

Supplemental non-cash financing and investing activities:

Issuance of convertible notes payable as consideration for ProFrac Agreement $ 79,460 $ —

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 —

Transfer from fixed assets to inventory 15 —

Issuance of convertible notes payable as consideration for ProFrac Agreements — 79,460

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest for the year ended December 31, 2023 includes $ 0.4 million in interest paid related to the ABL, which was entered into during the third quarter of 2023.

Interest for the year ended December 31, 2022 was related to interest payments on capitalized leases.

Note 17 — Related Party Transaction

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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.

During the years ended December 31, 2022 and 2021, the Company’s revenues from ProFrac Services LLC were $ 80.4 million and zero , respectively.

For the year ended December 31, 2022, these revenues were net of amortization of contract assets of $ 3.4 million .

Cost of sales attributable to these revenues were $ 84.5 million and nil , respectively, for the years ended December 31, 2022 and 2021.

As of December 31, 2022 and 2021 our accounts receivable from ProFrac Services, LLC was $ 22.7 million and zero , respectively which is recorded in accounts receivable, related party on the consolidated balance sheet.

Also during 2022, we entered into the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC:

On February 2, 2023, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No.

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 Services, LLC customers.

The current measurement period for Contract Shortfall Fees is June 1, 2023 through December 31, 2023.

The minimum purchase requirements were not met during the current measurement period, and as a result, related party revenues for the year ended December 31, 2023 and related party receivables as of December 31, 2023 include $ 20.1 million of Contract Shortfall Fees, of which 10.0 was collected through March 11, 2024 with the remainder due on or before April 8, 2024.

During the years ended December 31, 2023 and 2022 , the Company’s revenues from ProFrac Services, LLC were $ 121.5 million and $ 80.4 million , respectively.

For the years ended December 31, 2023 and 2022, these revenues were net of amortization of contract assets of $ 5.0 million and $ 3.4 million, respectively .

Cost of sales attributable to these revenues were $ 99.3 million and $ 84.5 million, respectively, for the years ended December 31, 2023 and 2022.

As of December 31, 2023 and 2022 our accounts receivable from ProFrac Services, LLC was $ 34.6 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 entered into the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC:

• PIPE Transaction (see Note 9, “Debt and Convertible Notes Payable”)

• Conversion of Contract Consideration Notes Payable (see Note 9, “Debt and Convertible Notes Payable”)

• Exercise of February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”)

• PreFunded 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 into 2,793,030 shares of the Company’s common stock.

As a result of the above related party transactions, ProFrac Holdings, LLC or its affiliates owns approximately 51 % of the Company’s common stock as of December 31, 2023.

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 into 2,793,030 shares (pre-Reverse Stock Split) of the Company’s common stock.

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.

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Brown stepped down from being a Director of the Company and Confluence is no longer be considered a related party as of April 15,

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s revenues and related cost of sales for product sales to Confluence were $1.4 million and $ 1.4 million, respectively, through April 15, 2022.

The accounts receivable balance from Confluence as at December 31, 2021 was $ 1.3 million.

The Company’s revenues and related cost of sales from chemical sales to Confluence for the year ended December 31, 2021 were $ 3.6 million and $ 3.4 million, respectively.

Note 18 — Business Segment, Geographic and Major Customer and Supplier Information

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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, 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 .

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Data Analytics.

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Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized financial information of the reportable segments is as follows (in thousands):

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Total revenue from related parties 120,903 637 — 121,540

Gross profit (loss) ( 7,317 ) 617 — ( 6,700 )

Gross profit 20,345 3,918 — 24,263

Change in fair value of contract consideration convertible notes ( 29,969 ) — — ( 29,969 )

Loss from operations ( 14,729 ) ( 2,877 ) ( 17,815 ) ( 35,421 )

Income (loss) from operations 39,043 ( 53 ) ( 15,767 ) 23,223

Paid-in-kind interest on contract consideration convertible notes payable 2,129 — — 2,129

Paid-in-kind interest on convertible notes payable — — 238 238

Interest on ABL — — 453 453

Other interest — — 37 37

Depreciation 613 95 26 734

Additions to long-lived assets 180 466 435 1,081

Income tax expense — — ( 149 ) ( 149 )

Revenue from external customers

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Gross profit (loss) ( 7,317 ) 617 — ( 6,700 )

Change in fair value of contract consideration convertible notes ( 75 ) — — ( 75 )

Loss from operations ( 14,729 ) ( 2,877 ) ( 17,815 ) ( 35,421 )

Paid-in-kind interest on contract consideration convertible notes payable 4,185 — — 4,185

Paid-in-kind interest on convertible notes payable — — 1,771 1,771

Accrued issuance costs on convertible notes payable — — 912 912

Depreciation 668 63 3 734

Additions to long-lived assets 56 134 231 421

(1) CT loss from operations includes a credit of $ 7.6 million from the release of accrued costs relating to the ADM settlement, see Note 13, “Commitments and Contingencies”.

Income tax benefit — — 22 22

FLOTEK INDUSTRIES, INC.

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Total assets $ 157,513 $ 164,810

The increase in Chemistry Technologies assets is primarily due to contract asset of $ 79.7 million

Geographic Information

Revenue by country is based on the location where services are provided and products are sold.

For the year ended December 31, 2022 no individual countries other than the U.S accounted for more than 10% of revenue.

For the year ended December 31, 2021 no individual countries other than the U.S and United Arab Emirates (“UAE”) accounted for more than 10% of revenue.

For the years ended December 31, 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):

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are not considered material to the consolidated financial statements.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Major Customers

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Customer A (related party - ProFrac Services, LLC) $ 121,540 64.6 %

Customer B 14,395 10.6 %

Year ended December 31, 2022

Customer A (related party - ProFrac Services, LLC) $ 80,359 59.0 %

Customer B $ 14,395 10.6 %

8 unchanged sentences

Year ended December 31, 2022

Supplier A $ 25,057 27.7 %

Supplier B 15,302 16.9 %

Supplier C 15,255 16.8 %

Supplier D 4,562 21.3 %

FLOTEK INDUSTRIES, INC.

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Note 19 — Subsequent Events

We have evaluated the effects of events that have occurred subsequent to December 31, 2022, and there have been no material events that would require recognition in the 2022 consolidated financial statements or disclosure in the notes to the consolidated financial statements, except as disclosed below.

On January 19, 2023, the Company announced the departure of John W.

from his role as Chief Executive Officer and President of the Company, effective January 19, 2023.

Gibson also stepped down from his role as Chairman of the Board of Directors (the “Board”) of the Company.

In connection with his separation, the Company and Mr.

Gibson have entered into a Separation Agreement and General Release (the “Separation Agreement”) pursuant to which Mr.

Gibson will receive $ 1,500,000 payable in four installments and being fully paid by April 2023.

As part of the Separation Agreement, Mr.

Gibson has agreed to forfeit all of his outstanding options and unvested restricted stock units.

In addition, Mr.

Gibson has agreed to a 6 -month lock up period with respect to 250,000 shares of common stock owned by Mr.

Gibson, which will prohibit Mr.

Gibson from selling those shares during the lock up period.

On February 1, 2023, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No.

2”) between Flotek Chemistry and ProFrac Services, LLC dated February 2, 2022.

The Amended ProFrac Agreement No.

2 has an effective date of January 1, 2023.

Pursuant to the Amended ProFrac Agreement No.

2, the Parties agree (1) to a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of active fleets to 30 fleets, (2) that the potential liquidated damages payment relating to order shortfall, prior to January 1, 2023 is waived for that period, (3) to add additional fees to certain products, and (4) to provide margin increases based on revenue percentages from non-ProFrac customers.

On February 2, 2023, the Convertible Notes Payable and certain Contract Consideration Convertible Notes previously issued on February 2, 2022 were converted upon maturity into 10,355,840 shares of common stock and 25,366,561 Pre-Funded Warrants to purchase common stock for a nominal exercise price of $ 0.0001 per share exercisable subject to the limitations on exercise described therein.

All of the holders elected to receive shares of common stock upon conversion except for ProFrac Holdings LLC, which elected to receive the Pre-Funded Warrants.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We have evaluated the effects of events that have occurred subsequent to December 31, 2023, and there have been no material events that would require recognition in the 2023 consolidated financial statements or disclosure in the notes to the consolidated financial statements.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data