FLOTEK INDUSTRIES INC/CN/ 10-Q

Item 1. Financial Statements FLOTEK INDUSTRIES INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) March 31, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 5,219 $ 5,851 Restricted cash 100 102 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 each of March 31, 2024 and December 31, 2023 38,655 34,569 Inventories, net 13,871 12,838 Other current assets 2,686 3,564 Current contract assets 7,019 5,836 Total current assets 78,268 76,447 Long-term contract assets 66,369 68,820 Property and equipment, net 5,061 5,129 Operating lease right-of-use assets 4,336 5,030 Deferred tax assets, net 91 300 Other long-term assets 1,725 1,787 TOTAL ASSETS $ 155,850 $ 157,513 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 35,952 $ 31,705 Accrued liabilities 3,365 5,890 Income taxes payable 78 45 Current portion of operating lease liabilities 2,083 2,449 Current portion of finance lease liabilities 13 22 Asset-based loan 3,111 7,492 Current portion of long-term debt 179 179 Total current liabilities 44,781 47,782 Deferred revenue, long-term 35 35 Long-term operating lease liabilities 7,121 7,676 Long-term debt 15 60 TOTAL LIABILITIES 51,952 55,553 Stockholders’ equity: Preferred stock, $ 0.0001 par value, 100,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.0001 par value, 240,000,000 shares authorized; 30,772,837 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 3 Additional paid-in capital (As adjusted, see Note 13) 463,484 463,140 Accumulated other comprehensive income 169 127 Accumulated deficit ( 325,244 ) ( 326,806 ) Treasury stock, at cost; 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 ) Total stockholders’ equity 103,898 101,960 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 155,850 $ 157,513 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 4 FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Three months ended March 31, 2024 2023 Revenue: Revenue from external customers $ 13,180 $ 11,652 Revenue from related party 27,194 36,355 Total revenues 40,374 48,007 Cost of sales 31,553 46,127 Gross profit 8,821 1,880 Operating costs and expenses: Selling, general, and administrative 6,084 6,451 Depreciation 220 176 Research and development 406 614 Severance costs 3 2,223 Gain in fair value of Contract Consideration Convertible Notes Payable — ( 26,095 ) Total operating costs and expenses 6,713 ( 16,631 ) Income from operations 2,108 18,511 Other income (expense): Paycheck protection plan loan forgiveness — 4,522 Interest expense ( 278 ) ( 1,672 ) Other expense, net ( 26 ) ( 9 ) Total other income (expense) ( 304 ) 2,841 Income before income taxes 1,804 21,352 Income tax expense ( 242 ) ( 9 ) Net income $ 1,562 $ 21,343 Income (loss) per common share (As adjusted, see Note 14) : Basic $ 0.05 $ 1.30 Diluted $ 0.05 $ ( 0.12 ) Weighted average common shares (As adjusted, see Note 14) : Weighted average common shares used in computing basic income (loss) per common share 29,431 16,468 Weighted average common shares used in computing diluted income (loss) per common share 30,316 26,462 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 5 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Three months ended March 31, 2024 2023 Net income $ 1,562 $ 21,343 Other comprehensive income: Foreign currency translation adjustment 42 ( 21 ) Comprehensive income $ 1,604 $ 21,322 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 6 FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) Three months ended March 31, 2024 2023 Cash flows from 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 ) Change in fair value of Contract Consideration Convertible Notes Payable — ( 26,095 ) Amortization of convertible note issuance cost — 83 Paid-in-kind interest expense — 1,571 Amortization of contract assets 1,267 1,251 Depreciation 220 176 Amortization of asset-based loan origination costs 85 — Provision for credit losses, net of recoveries 32 23 Provision for excess and obsolete inventory 285 258 Lease expense 694 977 Stock compensation expense 311 ( 1,112 ) Deferred income tax expense (benefit) 209 ( 6 ) Paycheck protection plan loan forgiveness — ( 4,522 ) Changes in current assets and liabilities: Accounts receivable 2,937 3,504 Accounts receivable, related party ( 4,086 ) ( 3,546 ) Inventories ( 1,318 ) ( 441 ) Other assets 856 ( 470 ) Accounts payable 4,246 8,554 Accrued liabilities ( 2,499 ) 1,236 Operating lease liabilities ( 921 ) ( 1,190 ) Income taxes payable 33 ( 87 ) Interest payable — ( 8 ) Net cash provided by operating activities 3,887 1,140 Cash flows from investing activities: Capital expenditures ( 152 ) ( 157 ) Net cash used in investing activities ( 152 ) ( 157 ) Cash flows from financing activities: Payment for forfeited stock options — ( 617 ) Payments on long term debt ( 45 ) ( 15 ) Proceeds from asset-based loan 38,800 — Payments on asset-based loan ( 43,181 ) — Payments to tax authorities for shares withheld from employees ( 9 ) ( 200 ) Proceeds from issuance of stock 33 20 Payments for finance leases ( 9 ) ( 6 ) Net cash used in financing activities ( 4,411 ) ( 818 ) Effect of changes in exchange rates on cash and cash equivalents 42 ( 21 ) Net change in cash and cash equivalents and restricted cash ( 634 ) 144 Cash and cash equivalents at the beginning of period 5,851 12,290 Restricted cash at the beginning of period 102 100 Cash and cash equivalents and restricted cash at beginning of period 5,953 12,390 Cash and cash equivalents at end of period 5,219 12,433 Restricted cash at the end of period 100 101 Cash and cash equivalents and restricted cash at end of period $ 5,319 $ 12,534 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 7 FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Three months ended March 31, 2024 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost Balance, December 31, 2023 30,773 $ 3 1,109 $ ( 34,504 ) $ 463,140 $ 127 $ ( 326,806 ) $ 101,960 Net income — — — — — — 1,562 1,562 Foreign currency translation adjustment — — — — — 42 — 42 Stock issued under employee stock purchase plan — — ( 10 ) — 33 — — 33 Restricted stock forfeited — — 11 — — — — — Stock compensation expense — — — — 311 — — 311 Shares withheld to cover taxes — — 2 ( 10 ) — — — ( 10 ) Balance, March 31, 2024 30,773 $ 3 1,112 $ ( 34,514 ) $ 463,484 $ 169 $ ( 325,244 ) $ 103,898 Three months ended March 31, 2023 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost (As adjusted, see Note 13) Balance, December 31, 2022 13,986 $ 1 1,021 $ ( 34,251 ) $ 388,184 $ 181 $ ( 351,519 ) $ 2,596 Net income — — — — — — 21,343 21,343 Foreign currency translation adjustment — — — — — ( 21 ) — ( 21 ) Stock issued under employee stock purchase plan — — ( 4 ) — 20 — — 20 Restricted stock granted 2 — — — — — — — Restricted stock forfeited ( 7 ) — 28 — — — — — Restricted stock units vested 64 — — — — — — — Forfeited stock options purchased — — — — ( 617 ) — — ( 617 ) Stock compensation expense — — — ( 1,112 ) — — ( 1,112 ) Shares withheld to cover taxes — — 29 ( 200 ) — — — ( 200 ) Issuance of stock warrants, net of transaction fee — — — — 15,092 — — 15,092 Equity contribution — — — — 11,040 — — 11,040 Conversion of notes to common stock 1,723 1 — — 8,996 — — 8,997 Balance, March 31, 2023 15,768 $ 2 1,074 $ ( 34,451 ) $ 421,603 $ 160 $ ( 330,176 ) $ 57,138 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 8 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Organization and Nature of Operations General 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 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 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.” 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. 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 Basis of Presentation The accompanying unaudited condensed consolidated financial statements reflect all adjustments, in the opinion of management, necessary for the fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the SEC regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim financial statements should be read in conjunction with 9 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS the audited consolidated financial statements and notes included in the Company’s 2023 Annual 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. The Company does not have investments in any unconsolidated subsidiaries. Cash Equivalents Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. Restricted Cash The Company’s restricted cash 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. Accounts Receivable and Allowance for Credit Losses Accounts receivable and accounts receivable, related party, arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for credit losses to reflect any loss anticipated on accounts receivable balances. The Company applies the current expected credit loss (CECL) model, which requires immediate recognition of expected credit losses over the contractual life of receivables and records the appropriate allowance for credit losses as a charge to Operating Cost and Expenses. The allowance for credit losses is based on a combination of the individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for credit losses charged to operating expense. The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables. 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 (see Note 16, “Related Party Transactions”). 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. 10 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Inventories Inventories consist of raw materials and finished goods and are stated at the lower of cost determined by using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of sales. Property and Equipment Property and equipment are stated at cost. 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 equipment, including operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or the asset’s estimated useful life as follows: Buildings and leasehold improvements 2 - 30 years Machinery and equipment 7 - 10 years Furniture and fixtures 3 years Land improvements 20 years Transportation equipment 2 - 5 years Computer equipment and software 3 - 7 years Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to s ell and depreciation is ceased. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received. Leases The Company leases certain facilities, land, vehicles, and equipment. The Company determines if an arrangement is classified as a lease at inception of the arrangement. 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 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. 11 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 The Company accounted for the Convertible Notes Payable at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt. The Company accounted for the Contract Consideration Convertible Notes Payable issued as consideration related to a related party contract (see Note 9, “Debt and Convertible Notes Payable”), as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations. 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. Fair Value Measurements The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 10, “Fair Value Measurements.” Revenue Recognition The Company recognizes revenue when it satisfies performance obligations under the terms of the contract with a customer, and control of the promised goods are transferred to the customer or services are performed, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied. 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. In recognizing revenue for products and services, the Company determines the transaction price of contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. The 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. Contracts with customers for the sale of products generally state the terms of the sale, including the quantity and price of each product purchased. Additionally, the CT segment offers various services associated to products sold, which includes field services, installation, maintenance, and other functions. These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the Company has a right to invoice the customer. 12 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. Additionally, the Company offers various services associated with products sold, which includes field services, installation, maintenance, and other functions. Services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. There may be additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, the Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements, and revenue not yet recognizable is reported under accrued liabilities and deferred revenue on the consolidated balance sheets. 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. Contract assets associated with incomplete performance obligations are not material. The Company applies several practical expedients including: • Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less. • The Company’s payment terms are short-term in nature with settlements of one year or less. As a result, the Company does not adjust the promised amount of consideration for the effects of a significant financing component. • In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice. • The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in our consolidated statement of operations. Foreign Currency Translation The Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and substantially all assets and liabilities of the Company are denominated in U.S. dollars. Financial statements of foreign subsidiaries that are not U.S. dollar functional currency are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of those foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity. Comprehensive Income 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. Research and Development Costs Expenditures for research activities relating to product development and improvement are charged to expense as incurred. Income Taxes 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. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. 13 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. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to record interest and penalties related to uncertain tax positions as income tax expense. Stock-Based Compensation Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience. Stock Warrants The Company evaluated the Pre-Funded Warrants issued in 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 The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates. Significant items subject to estimates and assumptions include estimated variable consideration included in contract transaction price; the useful lives of property and equipment; long lived asset impairment assessments; stock-based compensation expense; allowance for credit losses for accounts receivable; valuation allowances for inventories and deferred tax assets; recoverability and timing of the realization of contract assets; and, in 2023, the fair value of liability classified Contract Consideration Convertible Notes Payable. Recent Accounting Pronouncements Changes to U.S. GAAP are established by the FASB. We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company. New Accounting Standards Issued and Not Adopted as of March 31, 2024 The FASB issued ASU No. 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 14 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 Disaggregation of Revenue The Company differentiates revenue based on whether the source of revenue is attributable to product sales or service revenue. Total revenue disaggregated by revenue source is as follows (in thousands): Three months ended March 31, 2024 2023 Revenue: Products (1) $ 39,106 $ 46,767 Services 1,268 1,240 $ 40,374 $ 48,007 (1) Product revenue includes sales to related parties as described in Note 16, “Related Party Transactions.” Disaggregation of Cost of Sales The Company differentiates cost of sales based on whether the cost is attributable to tangible goods sold, cost of services sold or other costs which cannot be directly attributable to either tangible goods or services. Total cost of sales disaggregated is as follows (in thousands): Three months ended March 31, 2024 2023 Cost of sales: Tangible goods sold $ 27,025 $ 41,529 Services 94 141 Other 4,434 4,457 $ 31,553 $ 46,127 Other cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services. Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs. 15 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 March 31, 2024 2023 Cost of sales: Cost of sales for external customers $ 12,952 $ 11,196 Cost of sales for related parties 18,601 34,931 $ 31,553 $ 46,127 Note 4 - Contract Assets Contract assets are as follows (in thousands): March 31, 2024 December 31, 2023 Contract assets $ 83,060 $ 83,060 Less accumulated amortization ( 9,672 ) ( 8,405 ) Contract assets, net 73,388 74,655 Less current contract assets ( 7,019 ) ( 5,836 ) Contract assets, long term $ 66,369 $ 68,820 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 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. Years ending December 31, Amortization 2024 (excluding the three months ended March 31, 2024) $ 5,029 2025 8,749 2026 9,538 2027 9,538 2028 9,538 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 March 31, 2024. 16 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 5 — Inventories Inventories are as follows (in thousands): March 31, 2024 December 31, 2023 Raw materials $ 5,618 $ 5,299 Finished goods 14,281 13,660 Inventories 19,899 18,959 Less reserve for excess and obsolete inventory ( 6,028 ) ( 6,121 ) Inventories, net $ 13,871 $ 12,838 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): March 31, 2024 December 31, 2023 Land $ 886 $ 886 Land improvements 520 520 Buildings and leasehold improvements 5,487 5,483 Machinery and equipment 7,065 6,993 Furniture and fixtures 520 520 Transportation equipment 945 945 Computer equipment and software 1,772 1,696 Property and equipment 17,195 17,043 Less accumulated depreciation ( 12,134 ) ( 11,914 ) Property and equipment, net $ 5,061 $ 5,129 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 March 31, 2024 2023 Operating lease expense $ 784 $ 869 Finance lease expense: Amortization of assets 4 4 Interest on lease liabilities — 1 Total finance lease expense 4 5 Short-term lease expense 259 41 Total lease expense $ 1,047 $ 915 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,654 $ 1,365 Operating cash flows from finance leases 13 10 Financing cash flows from finance leases — 1 17 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 2024 (excluding the three months ended March 31, 2024) $ 2,073 $ 13 2025 2,046 — 2026 1,732 — 2027 1,660 — 2028 1,518 — Thereafter 2,815 — Total lease payments $ 11,844 $ 13 Less: Interest ( 2,640 ) — Present value of lease liabilities $ 9,204 $ 13 Supplemental balance sheet information related to leases is as follows (in thousands): March 31, 2024 December 31, 2023 Operating Leases Operating lease right-of-use assets $ 4,336 $ 5,030 Current portion of operating lease liabilities 2,083 2,449 Long-term operating lease liabilities 7,121 7,676 Total operating lease liabilities $ 9,204 $ 10,125 Finance Leases Property and equipment $ 147 $ 147 Accumulated depreciation ( 74 ) ( 70 ) Property and equipment, net $ 73 $ 77 Current portion of finance lease liabilities $ 13 $ 22 Long-term finance lease liabilities — — Total finance lease liabilities $ 13 $ 22 Weighted Average Remaining Lease Term Operating leases 5.6 years 5.5 years Finance leases 0.3 years 0.6 years Weighted Average Discount Rate Operating leases 9.4 % 9.5 % Finance leases 8.5 % 8.5 % 18 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 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 2024 (excluding the three months ended March 31, 2024) $ 575 2025 767 2026 767 2027 767 2028 767 Thereafter 1,406 Total rental income $ 5,049 Note 8 — Accrued Liabilities Current accrued liabilities are as follows (in thousands): March 31, 2024 December 31, 2023 Severance costs $ 417 $ 648 Payroll and benefits 937 2,138 Legal costs 201 37 Contingent liability for earn-out provision 30 56 Deferred revenue, current 303 550 Taxes other than income taxes 182 656 Other 1,295 1,805 Total current accrued liabilities $ 3,365 $ 5,890 Note 9 — Debt and Convertible Notes Payable Asset Based Loan On August 14, 2023, the Company entered into a 24-month revolving loan and security agreement in connection with 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 March 31, 2024. The ABL contains an annual commitment fee equal to 1.0 % of the ABL’s borrowing base. Additionally, the Company will be assessed a non-usage fee of 0.25 % per quarter based on the difference between the average daily outstanding balance and the borrowing base limit of the ABL. If the ABL is terminated prior to the end of its 24-month term, the Company is required to pay an early termination fee of 2.50 % of the borrowing base limit of the ABL (if terminated with more than 12 months remaining until the maturity date) or 1.50 % of the borrowing base limit of the ABL (if terminated with less than 12 months remaining until the maturity date). 19 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. The ABL requires the Company to maintain a minimum Tangible Net Worth (as defined in the ABL) of not less than $ 11 million. In addition, the ABL provides the lender a blanket security interest on all or substantially all of the Company’s assets. The Company was in compliance with all of the covenants under the ABL as of March 31, 2024. Paycheck Protection Program Loan In April 2020, the Company received a $ 4.8 million loan (the “Flotek PPP loan”) under the Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025. On January 5, 2023, the Company received notice from the SBA that $ 4.4 million of the $ 4.8 million principal amount and accrued interest to that date of $ 0.1 million were forgiven. The remaining 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): March 31, 2024 December 31, 2023 Flotek PPP loan $ 194 $ 239 Less current maturities ( 179 ) ( 179 ) Total long-term debt, net of current portion $ 15 $ 60 Loan repayments are scheduled as follows (in thousands): Years ending December 31, Repayment 2024 (excluding the three months ended March 31, 2024) $ 134 2025 60 Total Flotek PPP loan $ 194 Convertible Notes Payable On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE transaction, Flotek issued $ 21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $ 20.1 million (the “Convertible Notes Payable”). The investors were ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrued paid-in-kind interest at a rate of 10 % per annum, had a maturity of one year , and were convertible into common stock of Flotek or Pre-Funded Warrants to purchase common stock of Flotek, (a) at the holder's option at any time prior to maturity, at a price of $ 1.088125 per share on a pre-Reverse Stock Split basis, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $ 2.50 per share on a pre-Reverse Stock Split basis, or $ 1.741 per share on a pre-Reverse Stock Split basis, for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $ 0.8705 per share on a pre-Reverse Stock Split basis. On March 21, 2022, 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. 20 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 and were recorded as additional paid in capital upon conversion. 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. 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”) and were recorded as additional paid in capital upon conversion. Amended ProFrac Agreement Contract Consideration Convertible Notes Payable On May 17, 2022, the Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively with the Initial ProFrac Agreement, the “ProFrac Agreement”) upon issuance of $ 50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”) to ProFrac. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable accrued paid-in-kind interest at a rate of 10 % per annum. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were accounted for as liability classified convertible instruments and were initially recorded at fair value of $ 69.5 million on the issuance date with a corresponding contract asset. On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, remeasured to and carried at a fair value of $ 40.6 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 63,496,922 shares of common stock at a price of $ 0.8705 per share (see Note 10, “Fair Value Measurements”). As a result of the Reverse Stock Split, these shares were converted into 10,582,821 common shares. Note 10 — Fair Value Measurements Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement. • Level 1 — Quoted prices in active markets for identical assets or liabilities; • Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs. Fair Value of Other Financial Instruments The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities, accounts payable and ABL approximate fair value due to the short-term nature of these accounts. 21 FLOTEK INDUSTRIES, INC. 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): 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 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 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. March 31, 2024 December 31, 2023 Risk-free interest rate 4.97 % 4.58 % Expected volatility 70.0 % 70.0 % Term until liquidation (years) 1.13 1.38 Stock price (pre-Reverse Stock Split basis) $ 3.74 $ 3.92 Discount rate 13.67 % 11.86 % Initial ProFrac Agreement Contract Consideration Notes Payable Key Inputs The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $ 10.0 million on February 2, 2022. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement upon issuance due to the use of a quoted price for a similar liability at that date (the PIPE transaction), and subsequently classified as Level 3 due to the use of unobservable inputs. On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, upon maturity, to a fair value of $ 15.1 million based on the pre-Reverse Stock Split closing price of the shares of common stock of $ 1.19 , on the date of conversion. The fair value adjustment was a $ 0.8 million increase for the three months ended March 31, 2023. Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs On May 17, 2022, the Company measured the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a Monte Carlo simulation at an estimated fair value of $ 69.5 million. The Company reduced the discount rate assumed due to the reduced likelihood of occurrence of any of the default events in the shorter term remaining on the notes. The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of 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. Assets Measured at Fair Value on a Nonrecurring Basis The Company’s non-financial assets, including property and equipment and operating lease ROU assets, are measured at fair value on a non-recurring basis and are subject to adjustment to their fair value in certain circumstances. 22 FLOTEK INDUSTRIES, INC. 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 months ended March 31, 2024 and 2023 classified as Level 3 (in thousands): Three months ended March 31, 2024 2023 Balance - beginning of period $ 56 $ 84,153 Increase in principal of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest — 85 Increase in principal of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest — 1,331 Change in fair value of contingent earnout consideration ( 26 ) ( 358 ) Change in fair value of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable — 786 Change in fair value of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable — ( 26,881 ) Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity — ( 15,092 ) Balance - end of period $ 30 $ 44,024 Note 11 — Income Taxes The income tax provision (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 21% to income (loss) before income tax for the reasons set forth below: Three months ended March 31, 2024 2023 U.S. federal statutory tax rate 21.0 % 21.0 % State income taxes, net of federal benefit 13.5 — Non-U.S. income taxed at different rates ( 5.2 ) 0.1 Increase (reduction) in tax benefit related to stock-based awards 1.2 0.4 Change in valuation allowance ( 18.8 ) ( 20.5 ) Permanent differences related to CARES Act — ( 1.1 ) Non-deductible expenses 1.8 0.1 Effective income tax rate 13.5 % — % 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 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 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. 23 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 12 — Commitments and Contingencies Litigation The Company is subject to routine litigation and other claims that arise in the normal course of business. 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 The Company is subject to concentrations of credit risk within trade accounts receivable, and related party accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts. Note 13 — Stockholders’ Equity Reverse stock split 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. The Reverse Stock Split had no effect on the par value or on the number of authorized shares of common stock. The Company issued one whole share of common stock to any shareholder that would have received a fractional share as a result of the Reverse Stock Split. Therefore, no fractional shares were issued in connection with the Reverse Stock Split and no cash or other consideration was paid in connection with any fractional shares that resulted from the Reverse Stock Split. 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 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 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 ( 1,722,640 shares of common stock on a post-Reverse Stock Split basis) at a price of $ 0.8705 per share. The Convertible Notes Payable converted into common stock shares had a carrying value of $ 9.0 million, including accrued paid-in-kind interest of $ 0.8 million and were recorded as additional paid-in-capital upon conversion. The Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $ 11.0 million, including accrued interest of $ 1.0 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,280 February 2023 Warrants with an exercise price of $ 0.0001 per share and were recorded as additional paid-in-capital upon conversion. On September 6, 2023, the February 2023 Warrants issued upon the conversion of the Convertible Notes Payable held by ProFrac Holding, LLC were exercised and the Company issued, on a pre-Reverse Stock Split basis, 12,683,280 shares of the Company’s common stock ( 2,113,880 shares of the Company’s common stock on a post-Reverse Stock Split basis). On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable”, remeasured to a fair value of $ 15.1 million upon maturity, were converted on a pre-Reverse Stock Split basis, 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). 24 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 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, subject to a $ 4.5 million exercise fee. 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 ProFrac Holdings II, LLC has paid an additional $ 4.5 million to the Company; provided, however, that ProFrac Holdings II may exercise the June 2022 Warrants immediately prior to the sale of the shares of common stock subject to such exercise to a non-affiliate of ProFrac Holdings II. The additional $ 4.5 million will be accounted for as an equity contribution if received. Note 14 — Earnings (Loss) Per Share Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period, which includes the February 2023 Warrants (See Note 9, “Debt and Convertible Notes Payable”, and Note 13, “Stockholders’ Equity”). Diluted earnings (loss) per common share is calculated by dividing the adjusted net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon conversion of convertible notes payable, exercise of stock warrants and vesting and settlement of stock awards. The dilutive effect of non-vested stock issued under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the Pre-Funded stock warrants are computed using the treasury stock method. The dilutive effect of the Convertible Notes is computed using the if‑converted method. 25 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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, 2024 2023 Numerator: 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 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 ) Denominator: Basic weighted average shares outstanding 29,431 16,468 Dilutive effect of convertible notes payable — 9,994 Dilutive effect of warrants outstanding 779 — Dilutive effect of stock options and restricted shares 106 — Diluted weighted average shares outstanding 30,316 26,462 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 June 2022 stock warrants (1) — 1,500 Average number of diluted shares for options and restricted stock (1) — 170 (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): Three months ended March 31, 2024 2023 Supplemental cash flow information: Interest paid $ 210 $ 18 Supplemental non cash financing and investing activities: Conversion of convertible notes payable to common stock — 8,996 Conversion of convertible notes payable to February 2023 Warrants — 11,040 Conversion of Initial Contract Consideration Convertible Notes Payable to February 2023 Warrants — 15,092 26 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 16 — Related Party Transactions On February 2, 2022, the Company entered into the Initial ProFrac Agreement, upon issuance of $ 10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the Initial ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33 % of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the Initial ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent ( 25 %) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year (“Contract Shortfall Fees”). On May 17, 2022, the Company entered into the Amended ProFrac Agreement upon issuance of $ 50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”). The Initial ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70 % of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services, LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years. On February 2, 2023, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No. 2”). The Amended ProFrac Agreement No. 2 has an effective date of January 1, 2023. The ProFrac Agreement was amended to (1) provide a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of active hydraulic fracturing fleets to 30 fleets, (2) waive any Contract Shortfall Fee payment relating to any potential order shortfall prior to January 1, 2023, (3) add additional fees to certain products, and (4) provide margin increases based on margins with non-ProFrac customers. The current measurement period for Contract Shortfall Fees is 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. On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, with a carrying value of $ 11.0 million, including accrued interest of $ 1 million, were converted on a pre-Reverse Stock Split basis, upon maturity, into 12,683,281 February 2023 Warrants and subsequently exercised on September 6, 2023 (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”). The fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, as of February 2, 2023, was $ 15.1 million (see Note 10, “Fair Value Measurements”). 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 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. 27 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 17 — Business Segment, Geographic and Major Customer Information Segment Information Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: Chemistry Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, and also helping customers improve their ESG and operational goals. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies . Data Analytics. The DA segment includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The company markets products and services that support in-line data analysis of hydrocarbon components and properties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks. Performance is based upon a variety of criteria. The primary financial measure is segment operating income (loss). Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segments. 28 FLOTEK INDUSTRIES, INC. 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 March 31, Chemistry Technologies Data Analytics Corporate and Other Total 2024 Revenue from external customers Products $ 11,159 $ 933 $ — $ 12,092 Services 526 562 — 1,088 Total revenue from external customers 11,685 1,495 — 13,180 Revenue from related party Products 27,014 — — 27,014 Services — 180 — 180 Total revenue from related parties 27,014 180 — 27,194 Gross profit 8,401 420 — 8,821 Income (loss) from operations 6,106 ( 424 ) ( 3,574 ) 2,108 Depreciation 159 35 26 220 Interest on ABL — — 181 181 Other interest — — 97 97 Income tax — — 242 242 Additions to long-lived assets 147 — 5 152 2023 Revenue from external customers Products $ 8,561 $ 1,941 $ — $ 10,502 Services 664 486 — 1,150 Total revenue from external customers 9,225 2,427 — 11,652 Revenue from related party Products 36,265 — — 36,265 Services — 90 90 Total revenue from related parties 36,265 90 — 36,355 Gross profit 434 1,446 — 1,880 Change in fair value of Contract Consideration Convertible Notes Payable ( 26,095 ) — — ( 26,095 ) Income (loss) from operations 23,379 457 ( 5,325 ) 18,511 Paid-in-kind interest on Contract Consideration Convertible Notes Payable 1,416 — — 1,416 Paid-in-kind interest on convertible notes payable — — 155 155 Depreciation 157 18 1 176 Income tax — — 9 9 Additions to long-lived assets 30 95 32 157 29 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Assets of the Company by reportable segments are as follows (in thousands): March 31, 2024 December 31, 2023 Chemistry Technologies $ 139,551 $ 138,559 Data Analytics 6,253 6,604 Corporate and Other 10,046 12,350 Total assets $ 155,850 $ 157,513 Geographic Information Revenue by country is based on the location where services are provided and products are sold. 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 March 31, 2024 2023 U.S. (1) $ 39,259 $ 46,126 UAE 741 1,403 Other countries 374 478 Total revenue $ 40,374 $ 48,007 (1) Includes revenue from related party Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements. Major Customers Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands): 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 % The concentration with ProFrac Services, LLC and in the oil and gas industry increases credit, commodity and business risk . Major Suppliers Expenditure with major suppliers, as a percentage of consolidated supplier expenditure, is as follows (in thousands): Three months ended March 31, Expenditure % of Total Expenditure 2024 Supplier A $ 7,747 29.7 % Supplier B 5,020 19.2 % 2023 Supplier A $ 16,954 40.1 % Supplier B 7,145 16.9 % Supplier C 4,504 10.6 % 30 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 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. 31