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Item 1. Financial Statements

2024-05-09 compared with 2023-11-08 · 244 added, 402 removed, 635 unchanged (50% of the section changed)

Financial Statements

FLOTEK INDUSTRIES INC, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

FLOTEK INDUSTRIES INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Current assets:

1 unchanged sentence

Restricted cash 100 102

Accounts receivable, net of allowance for credit losses of $ 704 and $ 623 at September 30, 2023 and December 31, 2022, respectively

Accounts receivable, net of allowance for credit losses of $ 374 and $ 745 at March 31, 2024 and December 31, 2023, respectively

10,718 13,687

Accounts receivable, related party, net of allowance for credit losses of $ 0 at September 30, 2023 and December 31, 2022, respectively

Accounts receivable, related party, net of allowance for credit losses of $ 0 at each of March 31, 2024 and December 31, 2023

38,655 34,569

14 unchanged sentences

Income taxes payable 78 45

Interest payable — 130

Current portion of operating lease liabilities 2,083 2,449

2 unchanged sentences

Current portion of long-term debt 179 179

Convertible notes payable — 19,799

Contract Consideration Convertible Notes Payable — 83,570

Total current liabilities 44,781 47,782

1 unchanged sentence

Long-term operating lease liabilities 7,121 7,676

Long-term finance lease liabilities — 19

Long-term debt 15 60

4 unchanged sentences

Common stock, $ 0.0001 par value, 240,000,000 shares authorized;

30,739,820 shares issued and 29,629,902 shares outstanding at September 30, 2023;

30,772,837 shares issued and 29,661,130 shares outstanding at March 31, 2024;

30,772,837 shares issued and 29,664,130 shares outstanding at December 31, 2023 (As adjusted, see Note 13)

3 unchanged sentences

Treasury stock, at cost;

1,109,918 and 1,021,255 shares at September 30, 2023 and December 31, 2022, respectively (As adjusted, see Note 13)

1,111,707 and 1,108,707 shares at March 31, 2024 and December 31, 2023, respectively (As adjusted, see Note 13)

( 34,514 ) ( 34,504 )

5 unchanged sentences

(in thousands, except per share data)

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Three months ended March 31,

Revenue from external customers $ 13,180 $ 11,652

2 unchanged sentences

Cost of sales 31,553 46,127

Gross profit (loss) 9,047 ( 1,842 ) 14,833 ( 4,626 )

Gross profit 8,821 1,880

Operating costs and expenses:

3 unchanged sentences

Severance costs 3 2,223

Gain on sale of property and equipment ( 38 ) ( 10 ) ( 38 ) ( 1,916 )

Gain on lease termination — — — ( 584 )

(Gain) loss in fair value of Contract Consideration Convertible Notes Payable — 4,250 ( 29,969 ) ( 9,016 )

Gain in fair value of Contract Consideration Convertible Notes Payable — ( 26,095 )

Total operating costs and expenses 6,713 ( 16,631 )

Income (loss) from operations 1,619 ( 16,279 ) 20,804 ( 18,524 )

Income from operations 2,108 18,511

Other income (expense):

3 unchanged sentences

Total other income (expense) ( 304 ) 2,841

Income (loss) before income taxes 1,368 ( 18,787 ) 22,707 ( 23,177 )

Income before income taxes 1,804 21,352

Income tax expense ( 242 ) ( 9 )

Net income (loss) $ 1,287 $ ( 18,794 ) $ 22,609 $ ( 23,278 )

Net income $ 1,562 $ 21,343

Income (loss) per common share (As adjusted, see Note 14) :

6 unchanged sentences

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Net income (loss) $ 1,287 $ ( 18,794 ) $ 22,609 $ ( 23,278 )

Other comprehensive income (loss):

Three months ended March 31,

Net income $ 1,562 $ 21,343

Other comprehensive income:

Foreign currency translation adjustment 42 ( 21 )

Comprehensive income (loss) $ 1,334 $ ( 18,678 ) $ 22,622 $ ( 23,067 )

Comprehensive income $ 1,604 $ 21,322

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

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands)

Nine months ended September 30,

Three months ended March 31,

Cash flows from operating activities:

Net income (loss) $ 22,609 $ ( 23,278 )

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

Net income $ 1,562 $ 21,343

Adjustments to reconcile net income to net cash provided by operating activities:

Change in fair value of contingent consideration ( 26 ) ( 359 )

7 unchanged sentences

Provision for excess and obsolete inventory 285 258

Gain on sale of property and equipment ( 38 ) ( 1,916 )

Gain on lease termination — ( 584 )

Lease expense 694 977

Stock compensation expense 311 ( 1,112 )

Deferred income tax benefit 50 1

Deferred income tax expense (benefit) 209 ( 6 )

Paycheck protection plan loan forgiveness — ( 4,522 )

3 unchanged sentences

Inventories ( 1,318 ) ( 441 )

Income taxes receivable — 3

Other assets 856 ( 470 )

Contract assets — ( 3,600 )

Accounts payable 4,246 8,554

3 unchanged sentences

Interest payable — ( 8 )

Net cash used in operating activities ( 9,248 ) ( 47,166 )

Net cash provided by operating activities 3,887 1,140

Cash flows from investing activities:

Capital expenditures ( 152 ) ( 157 )

Proceeds from sale of assets 68 4,215

Net cash (used in) provided by investing activities ( 525 ) 4,040

Net cash used in investing activities ( 152 ) ( 157 )

Cash flows from financing activities:

3 unchanged sentences

Payments on asset-based loan ( 43,181 ) —

Payment of asset-based loan origination costs ( 502 ) —

Proceeds from issuance of convertible notes — 21,150

Payment of issuance costs of convertible notes — ( 1,084 )

Proceeds from issuance of warrants — 19,500

Payment of issuance costs of stock warrants — ( 1,170 )

Payments to tax authorities for shares withheld from employees ( 9 ) ( 200 )

1 unchanged sentence

Payments for finance leases ( 9 ) ( 6 )

Net cash provided by financing activities 1,925 38,199

Net cash used in financing activities ( 4,411 ) ( 818 )

Effect of changes in exchange rates on cash and cash equivalents 42 ( 21 )

9 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and six months ended September 30, 2023 and 2022

(In thousands of U.S.

dollars and shares)

Three months ended September 30, 2023

(in thousands)

Three months ended March 31, 2024

Common Stock Treasury Stock Additional

3 unchanged sentences

Value Shares Cost

(As adjusted, see Note 13)

Balance, June 30, 2023 26,370 $ 3 1,113 $ ( 34,480 ) $ 462,529 $ 147 $ ( 330,197 ) $ 98,002

Balance, December 31, 2023 30,773 $ 3 1,109 $ ( 34,504 ) $ 463,140 $ 127 $ ( 326,806 ) $ 101,960

Net income — — — — — — 1,562 1,562

1 unchanged sentence

Stock issued under employee stock purchase plan — — ( 10 ) — 33 — — 33

Restricted stock granted 145 — — — — — — —

Restricted stock forfeited — — 11 — — — — —

1 unchanged sentence

Shares withheld to cover taxes — — 2 ( 10 ) — — — ( 10 )

Exercise of February 2023 pre-funded warrants 4,228 — — — — — — —

Balance, September 30, 2023

30,740 $ 3 1,110 $ ( 34,482 ) $ 462,799 $ 194 $ ( 328,910 ) $ 99,604

Three months ended September 30, 2022

Common Stock Treasury Stock Additional

Capital Accumulated

Comprehensive

Income (Loss) Accumulated Deficit Total Stockholders’ Equity

Value Shares Cost

(As adjusted, see Note 13)

Balance, June 30, 2022 13,814 $ 1 1,019 $ ( 34,238 ) $ 386,317 $ 176 $ ( 313,698 ) $ 38,558

Net loss — — — — — — ( 18,794 ) ( 18,794 )

Foreign currency translation adjustment — — — — — 116 — 116

Restricted stock granted 84 — — — — — — —

Restricted stock forfeited — — 1 — — — — —

Restricted stock units vested 10 — — — — — — —

Stock compensation expense — — — — 671 — — 671

Shares withheld to cover taxes ( 3 ) — 4 ( 30 ) ( 23 ) — — ( 53 )

Balance, September 30, 2022

Balance, March 31, 2024

30,773 $ 3 1,112 $ ( 34,514 ) $ 463,484 $ 169 $ ( 325,244 ) $ 103,898

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

Nine months ended September 30, 2023

Three months ended March 31, 2023

Common Stock Treasury Stock Additional

14 unchanged sentences

Shares withheld to cover taxes — — 29 ( 200 ) — — — ( 200 )

Exercise of pre-funded warrants 4,228 — — — — — — —

Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable to Pre-Funded Warrants — — — — 15,092 — — 15,092

Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable to Common Stock 10,583 2 — — 40,636 — — 40,638

Conversion of convertible notes payable to Pre-Funded Warrants — — — — 11,040 — — 11,040

Conversion of convertible notes payable to Common Stock 1,723 — — — 8,996 — — 8,996

Balance, September 30, 2023

30,740 $ 3 1,110 $ ( 34,482 ) $ 462,799 $ 194 $ ( 328,910 ) $ 99,604

Nine months ended September 30, 2022

Common Stock Treasury Stock Additional

Capital Accumulated

Comprehensive

Income Accumulated Deficit Total Stockholders’ Equity

Value Shares Cost

(As adjusted, see Note 13)

Balance, December 31, 2021 13,247 $ 1 1,004 $ ( 34,100 ) $ 363,424 $ 81 $ ( 309,214 ) $ 20,192

Net loss — — — — — — ( 23,278 ) ( 23,278 )

Foreign currency translation adjustment — — — — — 211 — 211

Stock issued under employee stock purchase plan — — ( 3 ) — 24 — — 24

Restricted stock granted 189 — — — — — — —

Restricted stock forfeited ( 1 ) — 4 — — — — —

Restricted stock units vested 10 — — — — — — —

Stock compensation expense — — — 2,262 — — 2,262

Shares withheld to cover taxes ( 6 ) — 19 ( 168 ) ( 23 ) — — ( 191 )

Issuance of stock warrants, net of transaction fee — — — — 15,092 — — 15,092

1 unchanged sentence

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

Balance, September 30, 2022

Balance, March 31, 2023

15,768 $ 2 1,074 $ ( 34,451 ) $ 421,603 $ 160 $ ( 330,176 ) $ 57,138

3 unchanged sentences

Note 1 — Organization and Nature of Operations

Flotek Industries, Inc.

(“Flotek” or the “Company”) creates unique solutions to reduce the environmental impact of energy on air, water, land and people.

Flotek creates unique solutions to reduce the environmental impact of energy on air, water, land and people.

A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial and commercial markets improve their environmental performance.

The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to enhance the profitability of hydrocarbon producers.

The Company serves specialty chemistry needs for both domestic and international energy markets.

The Company’s Chemistry Technologies (“CT”) segment designs, develops, manufactures, packages and distributes green specialty chemicals that help customers improve their return on invested capital, lower operational costs and realize tangible environmental benefits aimed at enhancing the profitability of hydrocarbon producers.

The Company’s Data Analytics (“DA”) segment aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics associated with their hydrocarbon streams in seconds rather than minutes or days.

The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.

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

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 17, “Business Segment, Geographic and Major Customer Information.”

Going Concern

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.

As used herein, “Flotek,” the “Company,” “we,” “our” and “us” refers to Flotek Industries, Inc.

and/or the Company’s wholly-owned subsidiaries.

The use of these terms is not intended to connote any particular corporate status or relationship.

Sources and Uses of Liquidity

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.

GAAP”) assuming the Company will continue as a going concern.

The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

However, substantial doubt about the Company’s ability to continue as a going concern exists.

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

While the Company generated $ 22.6 million of net income in the nine months ended September 30, 2023, the Company has a recent history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the unaudited condensed consolidated financial statements.

The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”).

It is not certain that the Company’s cash, availability under the ABL and other current assets, along with the Company’s forecasted cash flows from operations, will provide the Company with sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as they become due in the next twelve months.

The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are filed.

During the third quarter of 2023, the Company entered into the ABL providing up to $ 10.0 million of initial credit availability, which is limited by a borrowing base.

In October 2023, the maximum credit availability under the ABL was increased by $ 3.8 million.

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

As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.

The unaudited condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

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.

The Company recognized $ 8.8 million and $ 1.6 million of gross profit and net income, respectively, during the three months ended March 31, 2024.

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.

The availability of capital is dependent on the Company’s operating cash flow, which is currently expected to be principally derived from the ProFrac Agreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”).

Related party revenues for the three months ended March 31, 2024 included Contract Shortfall Fees of $ 8.7 million.

Related party receivables as of March 31, 2024 included accrued Contract Shortfall Fees of $ 13.7 million comprised of the remaining 2023 Contract Shortfall Fees payment of $ 5.0 million, which was collected in April 2024, and $ 8.7 million of accrued 2024 Contract Shortfall Fees, which will be due in the first quarter of 2025 under the terms of the ProFrac Agreement.

Based upon our outlook for future cash flows from operations, which includes the collection of the Contract Shortfall Fees, 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.

While the Company cannot guarantee a sufficient level of cash flows in the future, the unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

Note 2 — Summary of Significant Accounting Policies

8 unchanged sentences

the audited consolidated financial statements and notes included in the Company’s 2023 Annual Report.

A copy of the 2022 Annual Report is available on the SEC’s website, www.sec.gov or on Flotek’s website, www.flotekind.com.

The information contained on the Company’s website does not form a part of this Quarterly Report.

A copy of the 2023 Annual Report is available on the SEC’s website, www.sec.gov or on the Company’s website, www.flotekind.com.

The information contained on the SEC’s website and the Company’s website does not form a part of this Quarterly Report.

All significant intercompany accounts and transactions have been eliminated in consolidation.

3 unchanged sentences

Restricted Cash

The Company’s restricted cash is $ 0.1 million and $ 0.1 million as of September 30, 2023 and December 31, 2022, respectively.

The Company’s restricted cash was $ 0.1 million and $ 0.1 million as of March 31, 2024 and December 31, 2023, respectively.

The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution.

9 unchanged sentences

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 credit losses are as follows (in thousands):

March 31, 2024 December 31, 2023

Balance, beginning of year $ 745 $ 623

Charges to provision for credit losses, net of recoveries 32 138

Write-offs ( 405 ) ( 16 )

Balance, end of period $ 372 $ 745

As of March 31, 2024 and December 31, 2023 the Company had not recorded an allowance for credit losses for the related party accounts receivable, including ProFrac Services, LLC (see Note 16, “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 9, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement.

The contract assets are amortized over the term of the ProFrac Agreement ( 10 years) based on forecasted revenues as goods are transferred to ProFrac Services, LLC, and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations.

The contract assets are 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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inventories consist of raw materials and finished goods and are stated at the lower of cost determined by using the weighted-average cost method, or net realizable value.

5 unchanged sentences

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.

Depreciation or amortization of property and

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

equipment, including operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or the asset’s estimated useful life as follows:

Depreciation or amortization of property and equipment, including operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or the asset’s estimated useful life as follows:

Buildings and leasehold improvements 2 - 30 years

13 unchanged sentences

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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

2 unchanged sentences

Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

As of September 30, 2023, the Convertible Notes Payable and Contract Consideration Convertible Notes Payable were converted through a series of transactions into the Company’s common stock.

The Convertible Notes Payable and Contract Consideration Convertible Notes Payable were converted during 2023 through a series of transactions into the Company’s common stock.

See Note 13, “Stockholders’ Equity” for additional information.

1 unchanged sentence

The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value.

Inputs refer broadly to assumptions that market participants would use to value an asset or liability

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

and may be observable or unobservable.

Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable.

When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available.

4 unchanged sentences

(i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.

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

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 16, “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 are offered to customers for prompt payment.

The Company does not act as an agent in any of its revenue arrangements.

1 unchanged sentence

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.

2 unchanged sentences

These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the Company has a right to invoice the customer.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

5 unchanged sentences

Customers may be invoiced for such maintenance and subscription-type arrangements, and revenue not yet recognizable is reported under accrued liabilities and deferred revenue on the consolidated balance sheets.

Subscription-type arrangements were not a material revenue stream in the nine months ended September 30, 2023 and September 30, 2022.

Payment terms for both the CT and DA segments are customarily 30 - 60 days for domestic and 90 - 120 days f or international from invoice receipt.

Payment terms for both the CT and DA segments are customarily 30 - 60 days for domestic products or services and 60 - 90 days f or international products and services from invoice receipt.

Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional.

7 unchanged sentences

Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in our consolidated statement of operations.

8 unchanged sentences

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

Comprehensive Income (Loss)

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

Comprehensive Income

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

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

1 unchanged sentence

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.

1 unchanged sentence

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

10 unchanged sentences

Stock Warrants

The Company evaluated the Pre-Funded Warrants issued in June 2022 (the “June 2022 Warrants”) and the Pre-Funded Warrants issued in February 2023 (the “February 2023 Warrants”) (see Note 13, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the June 2022 Warrants and the February 2023 Warrants meet the criteria to be classified within stockholders’ equity.

Accordingly, the Company recorded the proceeds received for the June 2022 Warrants within additional paid in capital.

In addition, the Company reclassified the balance of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”) upon conversion for the February 2023 Warrants within additional paid in capital.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluated the Pre-Funded Warrants issued in February 2023 (the “February 2023 Warrants”) (see Note 13, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined the February 2023 Warrants meet the criteria to be classified within stockholders’ equity.

Accordingly, the Company reclassified the balance of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”) upon conversion for the February 2023 Warrants within additional paid in capital.

Use of Estimates

2 unchanged sentences

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;

3 unchanged sentences

recoverability and timing of the realization of contract assets;

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

and, in 2023, the fair value of liability classified Contract Consideration Convertible Notes Payable.

Recent Accounting Pronouncements

3 unchanged sentences

Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.

New Accounting Standards Issued and Adopted as of January 1, 2023

New Accounting Standards Issued and Not Adopted as of March 31, 2024

The FASB issued ASU No.

2016-13, “ Measurement of Credit Losses on Financial Instruments .” This standard replaces the incurred loss impairment methodology in current U.S.

GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts.

The Company adopted this standard prospectively as of January 1, 2023 and the adoption did not have a material impact of the Company’s consolidated financial statements and related disclosures, and there was no cumulative effect on retained earnings.

New Accounting Standards Issued and Not Adopted

The Company has not identified any new issued accounting standards that are expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

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

The amendments under ASU 2023-09 were 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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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 under this standard 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;

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

and 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.

Note 3 — Revenue from Contracts with Customers

2 unchanged sentences

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

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Three months ended March 31,

$ 39,106 $ 46,767

4 unchanged sentences

The Company differentiates cost of sales based on whether the cost is attributable to tangible goods sold, cost of services sold or other costs which cannot be directly attributable to either tangible goods or services.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Total cost of sales disaggregated is as follows (in thousands):

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Three months ended March 31,

Cost of sales:

5 unchanged sentences

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Three months ended March 31,

Cost of sales:

4 unchanged sentences

Contract assets are as follows (in thousands):

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Contract assets $ 83,060 $ 83,060

3 unchanged sentences

Contract assets, long term $ 66,369 $ 68,820

In connection with entering into the ProFrac Agreement on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions,” the Company recognized contract assets of $ 10.0 million and $ 69.5 million, respectively, and associated fees of $ 3.6 million.

As of September 30, 2023 and December 31, 2022, $ 68.2 million and $ 72.6 million, respectively, of the contract assets are classified as long term based upon our estimate of the forecasted revenues from the ProFrac Agreement which will not be realized within the next twelve months of the ProFrac Agreement.

In connection with entering into the Initial ProFrac Agreement and Amended ProFrac Agreement on February 2, 2022 and May 17, 2022, respectively, as discussed in Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions,” the Company recognized contract assets of $ 10.0 million and $ 69.5 million, respectively, and associated fees of $ 3.6 million.

As of March 31, 2024 and December 31, 2023, $ 66.4 million and $ 68.8 million, respectively, of the contract assets were classified as long term based upon our estimate of the forecasted revenues from the ProFrac Agreement which will not be realized within the next twelve months of the ProFrac Agreement.

The Company’s estimate of the timing of the future contract revenues is evaluated on a quarterly basis.

During the three and nine months ended September 30, 2023, the Company recognized $ 1.3 million and $ 3.7 million, respectively, of contract assets amortization which is recorded as a reduction of the transaction price included in the related party revenue in the consolidated statement of operations.

During the three and nine months ended September 30, 2022, the Company recognized $ 1.2 million and $ 2.0 million, respectively, of contract assets amortization.

During the three months ended March 31, 2024 and 2023, the Company recognized $ 1.3 million and $ 1.3 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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Years ending December 31, Amortization

2023 (excluding the nine months ended September 30, 2023)

2024 (excluding the three months ended March 31, 2024)

Thereafter through May 2032 30,996

Total contract assets $ 73,388

Based on our tests of recoverability, we did not recognize any impairment of such contract assets as of September 30, 2023.

Based on our tests of recoverability, we did not recognize any impairment of such contract assets as of March 31, 2024.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Inventories

Inventories are as follows (in thousands):

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Raw materials $ 5,618 $ 5,299

3 unchanged sentences

Inventories, net $ 13,871 $ 12,838

The provision r ecorded in the three months ended September 30, 2023 and 2022 was $ 0.1 million and $ 44.8 thousand, respectively, for the CT segment and $ 16 thousand and $ 14.4 thousand, respectively, for the DA segment.

The provision recorded in the nine months ended September 30, 2023 and 2022 was $ 0.5 million and $ 0.8 million, respectively, for the CT segment and $ 0.2 million and $ 0.1 million, respectively, for the DA segment.

The additional reserves recorded during the three months ended March 31, 2024 and 2023 were $ 0.3 million and $ 0.1 million, respectively, for the CT segment and $ 13 thousand and $ 0.1 million, respectively, for the DA segment.

Note 6 — Property and Equipment

Property and equipment are as follows (in thousands):

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Land $ 886 $ 886

8 unchanged sentences

Property and equipment, net $ 5,061 $ 5,129

Depreciation expense totaled $ 0.2 million and $ 0.2 million for the three months ended September 30, 2023 a nd 2022, respectively.

Depreciation expense totaled $ 0.5 million and $ 0.6 million for the nine months ended September 30, 2023 a nd 2022, respectively.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Depreciation expense totaled $ 0.2 million and $ 0.2 million for the three months ended March 31, 2024 a nd 2023, respectively.

Note 7 — Leases

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

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Three months ended March 31,

Operating lease expense $ 784 $ 869

9 unchanged sentences

Financing cash flows from finance leases — 1

Maturities of lease liabilities as of September 30, 2023 are as follows (in thousands):

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Maturities of lease liabilities as of March 31, 2024 are as follows (in thousands):

Years ending December 31, Operating Leases Finance Leases

2023 (excluding the nine months ended September 30, 2023)

2024 2,909 22

2024 (excluding the three months ended March 31, 2024)

Thereafter 2,815 —

2 unchanged sentences

Present value of lease liabilities $ 9,204 $ 13

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Operating Leases

16 unchanged sentences

Finance leases 8.5 % 8.5 %

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Sublease Income

On April 1, 2023, the Company entered into an agreement to sublease its office and lab space in Houston, Texas beginning September 1, 2023 and continuing until October 30, 2030.

The rental income from the sublease is included in the Company’s statement of operations in Other income (expense), net, and offsets the rental expense from the Company’s lease of the facility from the landlord.

The rental income from the sublease is included in the Company’s statement of operations in Other income (expense), net, and offsets the monthly rental expense of $ 86 thousand from the Company’s lease of the facility from the landlord.

Sublease rental income for future years are as follows (in thousands):

Years ending December 31, Rental Income

2023 (excluding the nine months ended September 30, 2023)

2024 (excluding the three months ended March 31, 2024)

Thereafter 1,406

Total rental income $ 5,049

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 — Accrued Liabilities

Current accrued liabilities are as follows (in thousands):

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Severance costs $ 417 $ 648

8 unchanged sentences

Asset Based Loan

On August 14, 2023, the Company entered into a 24-month revolving loan and security agreement in connection with the ABL.

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

The ABL provides up to $ 10 million of initial credit availability, which is limited by a borrowing base consisting of:

• 85 % of eligible accounts receivable, plus

• 60 % of the value of eligible inventory not to exceed 100 % of the eligible accounts receivable.

Under the initial terms of the ABL, the maximum credit availability could be increased based on the lesser of (i) 50 % of the appraised value of real estate collateral held by the Company and (ii) $ 5 million.

On October 5, 2023, the ABL was amended to increase its maximum borrowing base from $ 10 million to $ 13.8 million (the “Amended ABL”) subsequent to the appraisal of the real estate.

As of September 30, 2023, the Company had $ 3.4 million outstanding under the ABL.

During the three and nine months ended September 30, 2023, the Company paid $ 0.2 million in interest and fees related to the ABL, which included the annual fee of $ 0.1 million.

As of September 30, 2023, the Company had incurred origination costs of $ 0.5 million related to the ABL that was recorded as deferred financing costs to be amortized over the term of the ABL.

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 March 31, 2024, the Company had $ 3.1 million outstanding with approximately $ 6.0 million of available borrowings under the ABL.

During the three months ended March 31, 2024, the Company incurred $ 0.2 million in interest and fees related to the ABL.

As of March 31, 2024, the Company recorded $ 0.1 million of amortized deferred financing costs related to the ABL.

Borrowings under the ABL bear interest at the Wall Street Journal Prime Rate (subject to a floor of 5.5 %) plus 2.5 % per annum.

The interest rate under the ABL was 11.0 % as of September 30, 2023.

The interest rate under the ABL was 11.0 % as of March 31, 2024.

The ABL contains an annual commitment fee equal to 1.0 % of the ABL’s borrowing base.

1 unchanged sentence

If the ABL is terminated prior to the end of its 24-month term, the Company is required to pay an early termination fee of 2.50 % of the borrowing base limit of the ABL (if terminated with more than 12 months remaining until the maturity date) or 1.50 % of the borrowing base limit of the ABL (if terminated with less than 12 months remaining until the maturity date).

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

1 unchanged sentence

In addition, the ABL provides the lender a blanket security interest on all or substantially all of the Company’s assets.

The Company was in compliance with all of the covenants under the ABL as of September 30, 2023.

The Company was in compliance with all of the covenants under the ABL as of March 31, 2024.

Paycheck Protection Program Loan

3 unchanged sentences

On January 5, 2023, the Company received notice from the SBA that $ 4.4 million of the $ 4.8 million principal amount and accrued interest to that date of $ 0.1 million were forgiven.

The remaining

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

principal amount of $ 0.4 million and accrued interest is to be repaid in monthly installments of $ 15 thousand over the remaining term of the loan through April 15, 2025, beginning on March 15, 2023.

The forgiveness of the Flotek PPP loan is accounted for as an extinguishment of the debt and the Company has recorded a $ 4.5 million gain in the nine months ended September 30, 2023, comprising the principal amount forgiven of $ 4.4 million and accrued interest of $ 0.1 million.

The remaining principal amount of $ 0.4 million and accrued interest is to be repaid in monthly installments of $ 15 thousand over the remaining term of the loan through April 15, 2025, beginning on March 15, 2023.

The forgiveness of the Flotek PPP loan is accounted for as an extinguishment of the debt and the Company recorded a $ 4.5 million gain in the three months ended March 31, 2023, comprising the principal amount forgiven of $ 4.4 million and accrued interest of $ 0.1 million.

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Flotek PPP loan

$ 283 $ 4,788

Less current maturities

1 unchanged sentence

Total long-term debt, net of current portion

$ 104 $ 2,736

Loan repayments are scheduled as follows (in thousands):

Years ending December 31, Repayment

2023 (excluding the nine months ended September 30, 2023)

2024 (excluding the three months ended March 31, 2024)

Total Flotek PPP loan $ 194

4 unchanged sentences

The Convertible Notes Payable accrued paid-in-kind interest at a rate of 10 % per annum, had a maturity of one year , and were convertible into common stock of Flotek or Pre-Funded Warrants to purchase common stock of Flotek, (a) at the holder's option at any time prior to maturity, at a price of $ 1.088125 per share on a pre-Reverse Stock Split basis, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $ 2.50 per share on a pre-Reverse Stock Split basis, or $ 1.741 per share on a pre-Reverse Stock Split basis, for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $ 0.8705 per share on a pre-Reverse Stock Split basis.

On March 21, 2022, $ 3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately 2.8 million shares of common stock on a pre-Reverse Stock Split basis.

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

On February 2, 2023, the Convertible Notes Payable, excluding those held by ProFrac Holdings, LLC, with a carrying value of $ 9.0 million, including accrued paid-in-kind interest of $ 0.8 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 10,335,840 shares of common stock at a price of $ 0.8705 per share.

The Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $ 11.0 million, including accrued paid-in-kind interest of $ 1.0 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,280 February 2023 Warrants with an exercise price of $ 0.0001 per share.

On March 21, 2022, a portion of of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into shares of common stock.

The issuance cost was amortized on a straight-line basis over the term of the Convertible Notes Payable and the amortization was included in interest expense in the unaudited condensed consolidated statements of operations.

The carrying value was recorded as additional paid in capital.

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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED 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 paid-in-kind interest at a rate of 10 % per annum and conversion features.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were accounted for as liability classified convertible instruments and were initially recorded at fair value of $ 10.0 million on the issuance date with a corresponding contract asset.

On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, remeasured to and carried at a fair value of $ 15.1 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,281 February 2023 Warrants with an exercise price of $ 0.0001 per share (see Note 10, “Fair Value Measurements”).

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable

14 unchanged sentences

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):

September 30, December 31,

March 31, December 31,

Level 1 Level 2 Level 3 2024 Level 1 Level 2 Level 3 2023

Contingent earnout consideration $ — $ — $ 30 $ 30 $ — $ — $ 56 $ 56

Initial ProFrac Agreement Contract Consideration Convertible Notes — — — — — — 14,220 14,220

Amended ProFrac Agreement Contract Consideration Convertible Notes — — — — — — 69,350 69,350

Total $ — $ — $ 30 $ 30 $ — $ — $ 56 $ 56

Contingent Earnout Consideration Key Inputs

The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of September 30, 2023 and December 31, 2022.

The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of March 31, 2024 and December 31, 2023.

The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Risk-free interest rate 4.97 % 4.58 %

8 unchanged sentences

On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, upon maturity, to a fair value of $ 15.1 million based on the pre-Reverse Stock Split closing price of the shares of common stock of $ 1.19 , on the date of conversion.

The fair value adjustment was a $ 0.8 million increase for the nine months ended September 30, 2023, and a $ 0.6 million increase and a $ 1.9 million increase in the three and nine months ended September 30, 2022, respectively.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The estimated value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation.

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

December 31, 2022

Risk-free interest rate 4.12 %

Expected volatility 100.0 %

Term until liquidation (years) 0.09

Stock price (pre-Reverse Stock Split basis)

Discount rate 4.12 %

The fair value adjustment was a $ 0.8 million increase for the three months ended March 31, 2023.

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs

1 unchanged sentence

The Company reduced the discount rate assumed due to the reduced likelihood of occurrence of any of the default events in the shorter term remaining on the notes.

The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation.

The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of March 31, 2023 was remeasured using a Monte Carlo simulation resulting in a gain in fair value of Contract Consideration Convertible Notes Payable of $ 26.9 million for the three months ended March 31, 2023.

On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, at maturity, to a fair value of $ 40.6 million based on the pre-Reverse Stock Split closing price of the shares of common stock of $ 0.64 , on the date of conversion.

The fair value adjustment was a decrease of $ 30.8 million in the nine months ended September 30, 2023.

There was no fair value adjustment for the three months ended September 30, 2023.

The fair value adjustment was an increase of $ 3.6 million and a decrease of $ 10.9 million in the three and nine months ended September 30, 2022, respectively.

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

December 31, 2022

Risk-free interest rate 4.59 %

Expected volatility 100.0 %

Term until liquidation (years) 0.38

Stock price (pre-Reverse Stock Split basis)

Discount rate 4.59 %

Assets Measured at Fair Value on a Nonrecurring Basis

1 unchanged sentence

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents the changes in balances of liabilities for the three and nine months ended September 30, 2023 and 2022 classified as Level 3 (in thousands):

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

The following table presents the changes in balances of liabilities for the three months ended March 31, 2024 and 2023 classified as Level 3 (in thousands):

Three months ended March 31,

Balance - beginning of period $ 56 $ 84,153

Transfer of ProFrac Agreement Contract Consideration Convertible Notes Payable from Level 2 — — — 10,000

Issuance of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable — — — 69,460

Increase in principal of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest — 85

4 unchanged sentences

Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity — ( 15,092 )

Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity — ( 40,638 ) —

Balance - end of period $ 30 $ 44,024

2 unchanged sentences

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

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Three months ended March 31,

federal statutory tax rate

2 unchanged sentences

income taxed at different rates

7.3 0.2 0.5 ( 0.3 )

Increase (reduction) in tax benefit related to stock-based awards 1.2 0.4

Increase in valuation allowance

( 5.6 ) ( 21.7 ) ( 19.0 ) ( 20.7 )

Permanent differences

Change in valuation allowance

( 18.8 ) ( 20.5 )

Permanent differences related to CARES Act

Non-deductible expenses 1.8 0.1

2018 IRS exam assessment — — — ( 0.4 )

Effective income tax rate

6.2 % — % 0.4 % ( 0.4 ) %

Internal Revenue Code (“IRC”) section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change.

During 2023, the Company converted various debt instruments into Company stock and warrants causing an ownership change within the meaning of IRC section 382 that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC section 382 limitation.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2023, the Company has an estimated $ 196.6 million in U.S.

federal NOL carryforwards, $ 119.8 million in certain state NOL carryforwards, $ 7.2 million in section 163(j) interest limitation carryforwards and $ 3.8 million in tax credit carryforwards.

As a result of the change of control experienced in 2023, the Company’s ability to use NOLs to reduce taxable income is generally limited to an amount currently estimated to be $ 3.5 million a year as a result of the section 382 limitation which may be revised based on further detailed analysis.

As of March 31, 2024, the Company had U.S.

net operating loss carryforwards (“NOLs”) of $ 194.8 million, including $ 46.4 million expiring in various amounts from 2029 through 2037 which can offset 100 % of taxable income and $ 148.4 million that has an indefinite carryforward period which can offset 80 % of taxable income per year.

Additionally, the Company has an estimated $ 96.1 million in certain state NOL carryforwards, $ 0.7 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 change of control would not be impacted by the 382 limitation.

Federal NOLs incurred prior to 2018 generally have a 20-year life until they expire in varying amounts between 2029 and 2037.

Federal NOLs generated in 2018 and after are carried forward indefinitely.

State NOLs have various carryforward periods depending on the legislation in the respective state jurisdiction.

The Company’s use of NOLs arising after the date of the ownership change are not 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 the preliminary section 382 limitation, the Company estimates that $ 41.9 million of the state NOL carryforwards and $ 3.8 million of the tax credit carryforwards will expire unutilized.

The tax effected amount of the estimated expirations is included in the Company’s valuation allowance.

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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 12 — Commitments and Contingencies

The Company is subject to routine litigation and other claims that arise in the normal course of business.

Except as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

Former CEO (John Chisholm) Matter

On May 23, 2023, the Company entered into an agreement with John Chisholm (a former CEO of the Company) to resolve a claim made by Mr.

Chisholm in arbitration for payment of outstanding severance and claims made by the Company against Mr.

The settlement resulted in the reversal of $ 2.3 million of accrued severance costs during the nine months ended September 30, 2023 and is included in severance costs in our consolidated statements of operation.

The Company had withheld payment of outstanding severance to Mr.

Chisholm subsequent to an investigation conducted during the year ended December 31, 2021 into corporate practices when Mr.

Chisholm was CEO during the years from 2014 to 2018.

The Company concluded upon completion of that investigation that its historical financial statements could be relied upon, that proper action had been taken, and that no members of current management were implicated in any improper corporate practices.

The Company subsequently commenced arbitration and other legal proceedings against Mr.

Chisholm, Casey Doherty/ Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP and its predecessor, Hein & Associates LLP (Flotek’s former independent public audit firm) to recover damages.

Chisholm filed a counterclaim against the Company in the arbitration proceeding for his remaining severance, and that dispute has been resolved as previously stated.

During June 2023, the Company entered into a settlement with Moss Adams LLP and its predecessor, Hein & Associates LLP.

During October 2023, the Company entered into a settlement with Mr.

Casey Doherty and Doherty & Doherty LLP.

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.

Other Commitments and Contingencies

4 unchanged sentences

Reverse stock split

The Company’s common stock is currently listed on the NYSE.

On April 12, 2023, the Company received written notice from the NYSE that the average closing price of the Company’s shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE.

In accordance with applicable NYSE procedures, the Company notified the NYSE that it intended to cure the $1.00 per share deficiency.

On September 14, 2023, the Company announced that the Board of Directors approved a reverse stock split of its common stock at a ratio of 1-to-6 (“Reverse Stock Split”).

The Reverse Stock Split was completed on September 25, 2023 and resulted in 184,438,695 issued and outstanding shares of common stock being converted into 30,772,837 shares of common stock.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Reverse Stock Split had no effect on the par value or on the number of authorized shares of common stock.

1 unchanged sentence

Therefore, no fractional shares were issued in connection with the Reverse Stock Split and no cash or other consideration was paid in connection with any fractional shares that resulted from the Reverse Stock Split.

As the par value per share of common stock was not changed in connection with the Reverse Stock Split, we recorded a decrease of $ 15 thousand and $ 7 thousand to common stock on our consolidated balance sheet with a corresponding increase in additional paid-in capital as of September 30, 2023 and December 31, 2022, respectively.

We also adjusted the number of outstanding shares of common stock and treasury stock on the consolidated balance sheet and in the statement of changes in stockholders’ equity for all periods presented to reflect the impacts of the Reverse Stock Split.

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.

Unless otherwise noted, all references in the consolidated financial statements and notes to condensed consolidated financial statements to the number of shares, per share data, restricted stock and stock option data have been retroactively adjusted to give effect to the Reverse Stock Split.

Conversion of Convertible Notes Payable

On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable”, were converted on a pre-Reverse Stock Split basis, upon maturity, into 63,496,922 shares of common stock at a price of $ 0.8705 per share ( 10,582,821 shares of common stock on a post-Reverse Stock Split basis).

The Contract Consideration Convertible Notes Payable converted into common stock shares, remeasured to a fair value of $ 40.6 million upon maturity, were recorded as additional paid-in-capital as of September 30, 2023.

On February 2, 2023, the Convertible Notes Payable pursuant to the PIPE transaction discussed in Note 9, “Debt and Convertible Notes Payable”, excluding those held by ProFrac Holdings, LLC, were converted on a pre-Reverse Stock Split basis, upon maturity, into 10,335,840 shares of common stock at a price of $ 0.8705 per share.

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

1 unchanged sentence

On September 6, 2023, the February 2023 Warrants issued upon the conversion of the Convertible Notes Payable held by ProFrac Holding, LLC were exercised and the Company issued, on a pre-Reverse Stock Split basis, 12,683,280 shares of the Company’s common stock ( 2,113,880 shares of the Company’s common stock on a post-Reverse Stock Split basis).

On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable”, remeasured to a fair value of $ 15.1 million upon maturity, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,281 February 2023 Warrants and were recorded as additional paid-in-capital upon conversion.

On 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, into 12,683,281 February 2023 Warrants and were recorded as additional paid-in-capital upon conversion.

On September 6, 2023, the February 2023 Warrants issued upon the conversion of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were exercised and the Company issued on a pre-Reverse Stock Split basis, 12,683,281 shares of the Company’s common stock ( 2,113,881 shares of the Company’s common stock on a post-Reverse Stock Split basis).

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable” were converted on a pre-Reverse Stock Split basis, upon maturity, into 63,496,922 shares of common stock at a price of $ 0.8705 per share ( 10,582,821 shares of common stock on a post-Reverse Stock Split basis).

The Contract Consideration Convertible Notes Payable converted into common stock shares, remeasured to a fair value of $ 40.6 million upon maturity, were recorded as additional paid-in-capital.

Pre-Funded Warrants

On June 21, 2022, ProFrac Holdings II, LLC paid $ 19.5 million for Pre-Funded Warrants (the “June 2022 Warrants”) of the Company.

The June 2022 Warrants were recorded in equity at their fair value of $ 11.1 million, estimated using a Black-Scholes Option Pricing model, less $ 1.2 million of transaction costs paid.

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

The June 2022 Warrants permit ProFrac Holdings II, LLC to purchase on a pre-Reverse Stock Split basis 13,104,839 shares of common stock of the Company ( 2,184,140 shares of the Company’s common stock on a post-Reverse Stock Split basis) at an exercise price equal to $ 0.0001 per share, and a $ 4.5 million exercise fee.

The June 2022 Warrants, net of transaction fees of $ 1.1 million, and the equity contribution of $ 8.4 million from ProFrac Holdings II, LLC were recorded as additional paid-in capital.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Risk-free interest rate 3.21 %

Expected volatility 90.0 %

Term until liquidation (years) 2.00

Stock price (pre-Reverse Stock Split basis)

Strike price (exercise fee) $ 4.5 million

ProFrac Holdings II, LLC and its affiliates may not receive any voting or consent rights in respect of the June 2022 Warrants or the underlying shares of common stock unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings II, LLC and its affiliates and (ii) ProFrac Holdings II, LLC has paid an additional $ 4.5 million to the Company;

provided, however, that ProFrac Holdings II may exercise the June 2022 Warrants immediately prior to the sale of the shares of common stock subject to such exercise to a non-affiliate of ProFrac Holdings II.

5 unchanged sentences

The dilutive effect of non-vested stock issued under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the Pre-Funded stock warrants are computed using the treasury stock method.

The dilutive effect of the Convertible Notes is computed using the if‑converted method in accordance with ASU 2020-06, which was adopted by the Company on January 1, 2022.

The dilutive effect of the Convertible Notes is computed using the if‑converted method.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For all periods presented, weighted average shares and earnings (loss) per share reflect the effects of the Reverse Stock Split.

The calculation of the basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022 is as follows (in thousands):

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Net income (loss) for basic earnings per share $ 1,287 $ ( 18,794 ) $ 22,609 $ ( 23,278 )

For all periods presented in the table below, weighted average shares and earnings (loss) per share reflect the effects of the Reverse Stock Split.

The calculation of the basic and diluted earnings (loss) per share for the three months ended March 31, 2024 and 2023 is as follows (in thousands):

Three months ended March 31,

Net income for basic earnings per share $ 1,562 $ 21,343

Adjustments to net income available to shareholders

Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable — 1,571

Valuation (gain)/loss on Contract Consideration Convertible Notes Payable carried at FV — — ( 29,969 ) —

Adjusted net loss for diluted earnings per share $ 1,287 $ ( 18,794 ) $ ( 5,076 ) $ ( 23,278 )

Valuation gain on Contract Consideration Convertible Notes Payable carried at fair value — ( 26,095 )

Adjusted net income (loss) for diluted earnings per share $ 1,562 $ ( 3,181 )

Basic weighted average shares outstanding 29,431 16,468

3 unchanged sentences

Diluted weighted average shares outstanding 30,316 26,462

Basic earnings (loss) per share $ 0.04 $ ( 1.50 ) $ 0.97 $ ( 1.89 )

Basic earnings per share $ 0.05 $ 1.30

Diluted earnings (loss) per share $ 0.05 $ ( 0.12 )

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

Average number of diluted shares for convertible notes payable (1)

— 12,399 — 7,892

Average number of diluted shares for June 2022 stock warrants (1)

— 1,483 1,308 554

Average number of diluted shares for options and restricted stock (1)

— 113 111 110

(1) These items were not included in the dilution calculation for their respective periods due to their anti-dilutive effect as it would reduce the loss per share.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) These items were not included in the dilution calculation for the three months ended March 31, 2023 due to their anti-dilutive effect as it would reduce the loss per share.

Note 15 — Supplemental Cash Flow Information

Supplemental cash flow information is as follows (in thousands):

Nine months ended September 30,

Three months ended March 31,

Supplemental cash flow information:

4 unchanged sentences

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

Conversion of Amended Contract Consideration Convertible Notes Payable to common stock 40,638 —

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 16 — Related Party Transactions

8 unchanged sentences

The ProFrac Agreement was amended to (1) provide a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of active hydraulic fracturing fleets to 30 fleets, (2) waive any Contract Shortfall Fee payment relating to any potential order shortfall prior to January 1, 2023, (3) add additional fees to certain products, and (4) provide margin increases based on margins with non-ProFrac customers.

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

The Company does not expect that the minimum purchase requirements will be met during the current measurement period, and as a result, the revenues for the three and nine months ended September 30, 2023 reflect expected Contract Shortfall Fee payments.

The current measurement period for Contract Shortfall Fees is January 1, 2024 through December 31, 2024.

The Company does not expect that the minimum purchase requirements will be met during the current measurement period, and as a result, the revenues for three months ended March 31, 2024 reflect variable consideration for Contract Shortfall Fees of $ 8.7 million, which will be due in the first quarter of 2025 under the terms of the ProFrac Agreement.

Because the measurement period for 2023 was June 1, 2023 through December 31, 2023, there are no Contract Shortfall Fees reflected in revenues for the first quarter of 2023.

On February 2, 2023, the Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $ 11.0 million, including accrued paid-in-kind interest of $ 1.0 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,280 February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”) and subsequently exercised on September 6, 2023.

1 unchanged sentence

The fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, as of February 2, 2023, was $ 15.1 million (see Note 10, “Fair Value Measurements”).

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, with a carrying value of $ 55.3 million, including accrued interest of $ 5.3 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 63,496,922 shares of common stock at a price of $ 0.8705 per share (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”).

On May 17, 2023, the Amended ProFrac Agreement Contract Consideration 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 (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”).

The fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, as of May 17, 2023 was $ 40.6 million (see Note 10, “Fair Value Measurements”).

As a result of the Reverse Stock Split, these shares were converted into 10,582,821 common shares.

During the three months ended September 30, 2023 and 2022, the Company’s revenues from ProFrac Services, LLC were $ 29.5 million and $ 30.4 million , respectively.

During the nine months ended September 30, 2023 and 2022, the Company’s revenues from ProFrac Services LLC were $ 98.6 million and $ 48.1 million, respectively.

For the three months ended September 30, 2023 and 2022, these revenues were net of amortization of contract assets of $ 1.3 million and $ 1.2 million .

For the nine months ended September 30, 2023 and 2022, the revenues were net of amortization of contract assets of $ 3.7 million and $ 2.0 million, respectively.

Cost of sales attributable to these revenues were $ 23.8 million and $ 31.6 million, respectively for the three months ended September 30, 2023 and 2022 and $ 88.6 million and $ 32.8 million for the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023 and December 31, 2022 our accounts receivable from ProFrac Services, LLC was $ 24.8 million and $ 22.7 million, respectively which is recorded in accounts receivable, related party on the consolidated balance sheet.

Also, during 2023 and 2022, we had the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC:

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

• June 2022 Warrants (see Note 13, “Stockholders’ Equity)

On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $ 3.0 million plus $ 39 thousand of accrued interest and amortization of issuance costs of $ 90 thousand, were converted on a pre-Reverse Stock Split basis into 2,793,030 shares of the Company’s common stock ( 465,505 common shares on a post-Reverse Stock Split basis).

Brown was a Director of the Company beginning in November of 2013 and is the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company.

The Company’s revenues and related cost of sales for product sold to Confluence were $ 1.4 million and $ 1.4 million, respectively, for the nine months ended September 30, 2022.

As of June 9, 2022 Mr.

Brown stepped down from being a Director of the Company and Confluence is no longer considered a related party as of June 9, 2022.

During the three months ended March 31, 2024 and 2023, the Company’s revenues from ProFrac Services, LLC were $ 27.2 million and $ 36.4 million , respectively.

For the three months ended March 31, 2024 and 2023, these revenues were net of amortization of contract assets of $ 1.3 million and $ 1.3 million , respectively .

Cost of sales attributable to these revenues were $ 18.6 million and $ 34.9 million , respectively for the three months ended March 31, 2024 and 2023.

As of March 31, 2024 and December 31, 2023 our accounts receivable from ProFrac Services, LLC was $ 38.7 million and $ 34.6 million , respectively which is recorded in accounts receivable, related party on the consolidated balance sheet.

During the three months ended March 31, 2024, the Company collected $ 15.1 million of variable consideration of the $ 20.1 million related to the 2023 Contract Shortfall Fees which were included in accounts receivable, related party as of December 31, 2023.

The remaining total of $ 5.0 million was collected subsequent to March 31, 2024.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 17 — Business Segment, Geographic and Major Customer Information

14 unchanged sentences

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

As of and for the three months ended September 30,

As of and for the three months ended March 31,

Chemistry Technologies Data Analytics

11 unchanged sentences

Depreciation 159 35 26 220

Additions to long-lived assets — 135 — 135

Revenue from external customers

Products $ 12,855 $ 1,302 $ — $ 14,157

Services 656 393 — 1,049

Total revenue from external customers 13,511 1,695 — 15,206

Revenue from related party

Products 30,417 — — 30,417

Total revenue from related parties 30,417 — — 30,417

Gross profit (loss) ( 2,406 ) 564 — ( 1,842 )

Change in fair value of Contract Consideration Convertible Notes Payable 4,250 — — 4,250

Loss from operations ( 10,603 ) ( 745 ) ( 4,931 ) ( 16,279 )

Paid-in-kind interest on convertible notes payable — — 483 483

Depreciation 162 14 1 177

Interest on ABL — — 181 181

Other interest — — 97 97

Income tax — — 242 242

Additions to long-lived assets 147 — 5 152

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the nine months ended September 30,

Chemistry Technologies Data Analytics

Corporate and Other Total

Revenue from external customers

12 unchanged sentences

Depreciation 157 18 1 176

Additions to long-lived assets 30 230 32 292

Revenue from external customers

Products $ 33,501 $ 2,393 $ — $ 35,894

Services 1,432 1,086 — 2,518

Total revenue from external customers 34,933 3,479 — 38,412

Revenue from related party

Products 49,462 — — 49,462

Total revenue from related parties 49,462 — — 49,462

Gross profit (loss) ( 4,637 ) 11 — ( 4,626 )

Change in fair value of Contract Consideration Convertible Notes Payable ( 9,016 ) — — ( 9,016 )

Loss from operations ( 1,716 ) ( 2,751 ) ( 14,057 ) ( 18,524 )

Paid-in-kind interest on Contract Consideration Convertible Notes Payable 2,586 — — 2,586

Paid-in-kind interest on convertible notes payable — — 1,276 1,276

Depreciation 507 45 2 554

Income tax — — 9 9

Additions to long-lived assets 30 95 32 157

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Assets of the Company by reportable segments are as follows (in thousands):

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Chemistry Technologies $ 139,551 $ 138,559

4 unchanged sentences

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

For the three and nine months ended September 30, 2023 and 2022 no individual countries other than the U.S.

For the three months ended March 31, 2024 and 2023 no individual countries other than the U.S.

accounted for more than 10% of revenue.

Revenue by geographic location is as follows (in thousands):

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Three months ended March 31,

(1) $ 39,259 $ 46,126

UAE 741 1,403

Other countries 374 478

5 unchanged sentences

Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands):

Three months ended September 30, Revenue % of Total Revenue

Customer A (Related Party) $ 29,462 62.3 %

Customer A (Related Party) $ 30,417 66.7 %

Nine months ended September 30, Revenue % of Total Revenue

Revenue % of Total Revenue

Three months ended March 31, 2024

Customer A (Related Party) $ 27,194 67.4 %

Three months ended March 31, 2023

Customer A (Related Party) $ 36,355 75.7 %

Customer B 10,905 12.4 %

The concentration with ProFrac Services, LLC and in the oil and gas industry increases credit, commodity and business risk .

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Major Suppliers

Expenditure with major suppliers, as a percentage of consolidated supplier expenditure, is as follows (in thousands):

Three months ended September 30, Expenditure % of Total Expenditure

Supplier A $ 6,094 25.3 %

Supplier B 5,581 23.2 %

Supplier C 4,197 17.4 %

Supplier A $ 10,882 32.7 %

Supplier B 6,147 18.5 %

Supplier C 5,552 16.7 %

Nine months ended September 30, Expenditure % of Total Expenditure

Three months ended March 31, Expenditure % of Total Expenditure

Supplier A $ 7,747 29.7 %

Supplier B 5,020 19.2 %

Supplier C 13,151 11.8 %

Supplier A $ 16,954 40.1 %

1 unchanged sentence

Supplier C 4,504 10.6 %

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 18 — Subsequent Events

We have evaluated the effects of events that have occurred subsequent to September 30, 2023, and there have been no material events that would require recognition in the September 30, 2023 interim financial statements or disclosure in the notes to the consolidated financial statements.

We have evaluated the effects of events that have occurred subsequent to March 31, 2024 through May 9, 2024, and there have been no material events that would require recognition in the March 31, 2024 interim financial statements or disclosure in the notes to the unaudited condensed consolidated financial statements.

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-Q

Item 1. Financial Statements