FLOTEK INDUSTRIES INC/CN/ 10-Q

Item 1. Financial Statements FLOTEK INDUSTRIES INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) June 30, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 4,777 $ 5,851 Restricted cash 101 102 Accounts receivable, net of allowance for credit losses of $ 410 and $ 745 at June 30, 2024 and December 31, 2023, respectively 13,316 13,687 Accounts receivable, related party, net of allowance for credit losses of $ 0 at each of June 30, 2024 and December 31, 2023, respectively 40,049 34,569 Inventories, net 12,142 12,838 Other current assets 2,834 3,564 Current contract assets 5,786 5,836 Total current assets 79,005 76,447 Long-term contract assets 66,121 68,820 Property and equipment, net 4,987 5,129 Operating lease right-of-use assets 4,184 5,030 Deferred tax assets, net 84 300 Other long-term assets 1,659 1,787 TOTAL ASSETS $ 156,040 $ 157,513 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 31,755 $ 31,705 Accrued liabilities 3,026 5,890 Income taxes payable 35 45 Current portion of operating lease liabilities 1,866 2,449 Current portion of finance lease liabilities 3 22 Asset-based loan 5,798 7,492 Current portion of long-term debt 149 179 Total current liabilities 42,632 47,782 Deferred revenue, long-term 35 35 Long-term operating lease liabilities 7,139 7,676 Long-term debt — 60 TOTAL LIABILITIES 49,806 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; 30,866,597 shares issued and 29,759,154 shares outstanding at June 30, 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) 463,844 463,140 Accumulated other comprehensive income 185 127 Accumulated deficit ( 323,270 ) ( 326,806 ) Treasury stock, at cost; 1,107,442 and 1,108,707 shares at June 30, 2024 and December 31, 2023, respectively (As adjusted, see Note 13) ( 34,528 ) ( 34,504 ) Total stockholders’ equity 106,234 101,960 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 156,040 $ 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 June 30, Six months ended June 30, 2024 2023 2024 2023 Revenue: Revenue from external customers $ 18,191 $ 17,820 $ 31,371 $ 29,472 Revenue from related party 27,961 32,774 55,155 69,130 Total revenues 46,152 50,594 86,526 98,602 Cost of sales 36,982 46,690 68,535 92,817 Gross profit 9,170 3,904 17,991 5,785 Operating costs and expenses: Selling, general, and administrative 6,259 8,351 12,342 14,803 Depreciation 222 174 442 349 Research and development 481 860 888 1,474 Severance costs 20 ( 2,279 ) 23 ( 56 ) Gain on sale of property and equipment ( 34 ) — ( 34 ) — Gain in fair value of Contract Consideration Convertible Notes Payable — ( 3,874 ) — ( 29,969 ) Total operating costs and expenses 6,948 3,232 13,661 ( 13,399 ) Income from operations 2,222 672 4,330 19,184 Other income (expense): Paycheck protection plan loan forgiveness — — — 4,522 Interest expense ( 308 ) ( 705 ) ( 586 ) ( 2,377 ) Other income, net 75 19 49 9 Total other income (expense) ( 233 ) ( 686 ) ( 537 ) 2,154 Income (loss) before income taxes 1,989 ( 14 ) 3,793 21,338 Income tax expense ( 15 ) ( 7 ) ( 257 ) ( 16 ) Net income (loss) $ 1,974 $ ( 21 ) $ 3,536 $ 21,322 Income (loss) per common share (As adjusted, see Note 14): Basic $ 0.07 $ — $ 0.12 $ 1.06 Diluted $ 0.06 $ ( 0.11 ) $ 0.12 $ ( 0.23 ) Weighted average common shares (As adjusted, see Note 14): Weighted average common shares used in computing basic income (loss) per common share 29,449 23,906 29,440 20,207 Weighted average common shares used in computing diluted income (loss) per common share 30,668 28,250 30,512 27,361 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 5 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Net income (loss) $ 1,974 $ ( 21 ) $ 3,536 $ 21,322 Other comprehensive income (loss): Foreign currency translation adjustment 16 ( 13 ) 58 ( 34 ) Comprehensive income (loss) $ 1,990 $ ( 34 ) $ 3,594 $ 21,288 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) Six months ended June 30, 2024 2023 Cash flows from operating activities: Net income $ 3,536 $ 21,322 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Change in fair value of contingent consideration ( 27 ) ( 324 ) Change in fair value of Contract Consideration Convertible Notes Payable — ( 29,969 ) Amortization of convertible note issuance cost — 83 Paid-in-kind interest expense — 2,284 Amortization of contract assets 2,749 2,390 Depreciation 442 349 Amortization of asset-based loan origination costs 170 — Provision for credit losses, net of recoveries 79 63 Provision for excess and obsolete inventory 433 497 Gain on sale of property and equipment ( 34 ) — Non-cash lease expense 1,236 1,621 Stock compensation expense 642 ( 836 ) Deferred income tax expense 216 — Paycheck protection plan loan forgiveness — ( 4,522 ) Changes in current assets and liabilities: Accounts receivable 292 2,218 Accounts receivable, related party ( 5,480 ) ( 350 ) Inventories 192 ( 3,158 ) Other assets 688 ( 6 ) Accounts payable 50 11,574 Accrued liabilities ( 2,837 ) ( 3,491 ) Operating lease liabilities ( 1,510 ) ( 1,886 ) Income taxes payable ( 10 ) ( 85 ) Interest payable — ( 8 ) Net cash provided by (used in) operating activities 827 ( 2,234 ) Cash flows from investing activities: Capital expenditures ( 229 ) ( 292 ) Proceeds from sale of assets 34 — Net cash used in investing activities ( 195 ) ( 292 ) Cash flows from financing activities: Payment for forfeited stock options — ( 617 ) Payments on long term debt ( 90 ) ( 60 ) Proceeds from asset-based loan 83,300 — Payments on asset-based loan ( 84,994 ) — Payments to tax authorities for shares withheld from employees ( 24 ) ( 229 ) Proceeds from issuance of stock 62 33 Payments for finance leases ( 19 ) ( 15 ) Net cash used in financing activities ( 1,765 ) ( 888 ) Effect of changes in exchange rates on cash and cash equivalents 58 ( 34 ) Net change in cash and cash equivalents and restricted cash ( 1,075 ) ( 3,448 ) 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 4,777 8,841 Restricted cash at the end of period 101 101 Cash and cash equivalents and restricted cash at end of period $ 4,878 $ 8,942 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 June 30, 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, March 31, 2024 30,773 $ 3 1,112 $ ( 34,514 ) $ 463,484 $ 169 $ ( 325,244 ) $ 103,898 Net income — — — — — — 1,974 1,974 Foreign currency translation adjustment — — — — — 16 — 16 Stock issued under employee stock purchase plan — — ( 9 ) — 28 — — 28 Restricted stock granted 94 — — — — — — — Stock compensation expense — — — — 332 — — 332 Shares withheld to cover taxes — — 4 ( 14 ) — — — ( 14 ) Balance, June 30, 2024 30,867 $ 3 1,107 $ ( 34,528 ) $ 463,844 $ 185 $ ( 323,270 ) $ 106,234 Three months ended June 30, 2023 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost (As adjusted, see Note 13) Balance, March 31, 2023 15,768 $ 2 1,074 $ ( 34,451 ) $ 421,603 $ 160 $ ( 330,176 ) $ 57,138 Net loss — — — — — — ( 21 ) ( 21 ) Foreign currency translation adjustment — — — — — ( 13 ) — ( 13 ) Stock issued under employee stock purchase plan — — ( 4 ) — 13 — — 13 Restricted stock forfeited — — 36 — — — — — Restricted stock units vested 18 — — — — — — — Stock compensation expense — — — — 276 — — 276 Shares withheld to cover taxes — — 7 ( 29 ) — — — ( 29 ) Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable to Common Stock 10,583 1 — — 40,637 — — 40,638 Balance, June 30, 2023 26,369 $ 3 1,113 $ ( 34,480 ) $ 462,529 $ 147 $ ( 330,197 ) $ 98,002 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 8 FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued) (in thousands) Six months ended June 30, 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 — — — — — — 3,536 3,536 Foreign currency translation adjustment — — — — — 58 — 58 Stock issued under employee stock purchase plan — — ( 19 ) — 62 — — 62 Restricted stock granted 94 — — — — — — — Restricted stock forfeited — — 11 — — — — — Stock compensation expense — — — — 642 — — 642 Shares withheld to cover taxes — — 6 ( 24 ) — — — ( 24 ) Balance, June 30, 2024 30,867 $ 3 1,107 $ ( 34,528 ) $ 463,844 $ 185 $ ( 323,270 ) $ 106,234 Six months ended June 30, 2023 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost (As adjusted, see Note 13) Balance, December 31, 2022 13,986 $ 1 1,021 $ ( 34,251 ) $ 388,184 $ 181 $ ( 351,519 ) $ 2,596 Net income — — — — — — 21,322 21,322 Foreign currency translation adjustment — — — — — ( 34 ) — ( 34 ) Stock issued under employee stock purchase plan — — ( 8 ) — 33 — — 33 Restricted stock granted 2 — — — — — — — Restricted stock forfeited ( 7 ) — 64 — — — — — Restricted stock units vested 82 — — — — — — — Forfeited stock options purchased — — — — ( 617 ) — — ( 617 ) Stock compensation expense — — — ( 836 ) — — ( 836 ) Shares withheld to cover taxes — — 36 ( 229 ) — — — ( 229 ) Issuance of stock warrants, net of transaction fee — — — — 15,092 — — 15,092 Equity contribution — — — — 11,040 — — 11,040 Conversion of convertible notes payable to Common Stock 1,723 1 — — 8,996 — — 8,997 Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable to Common Stock 10,583 1 — — 40,637 — — 40,638 Balance, June 30, 2023 26,369 $ 3 1,113 $ ( 34,480 ) $ 462,529 $ 147 $ ( 330,197 ) $ 98,002 The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 9 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Organization and Nature of Operations General Flotek 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 customer 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 can prevent waste, reduce reprocessing and allow 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. 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 Securities and Exchange Commission (“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 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. Sources and Uses of Liquidity These unaudited condensed consolidated financial statements have been prepared in accordance with 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 (defined below, see Note 9, “Debt and Convertible Notes Payable” and Note 18, “Subsequent Event”) and other liquid assets. The Company recognized $ 9.2 million and $ 2.0 million of gross profit and net income, respectively, during the three months ended June 30, 2024 and recognized $ 18.0 million and $ 3.5 million of gross profit and net income, respectively, during the six months ended June 30, 2024. Further, the Company recognized net cash provided by operating activities of $ 0.8 million during the six months ended June 30, 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, and the resulting potential impact on our customers’ ability to pay their obligations to us in a timely manner, 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 16, “Related Party Transactions”). Related party revenues for the three and six months ended June 30, 2024 included Contract Shortfall Fees (defined below) of $ 8.4 million and $ 17.1 million, respectively (see Note 16, “Related Party Transactions”). Related party receivables as of June 30, 2024 included accrued Contract Shortfall Fees of $ 17.1 million, which will be due in the first quarter of 2025 under the terms of the ProFrac Agreement. 10 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Based upon our outlook for future cash flows from operations, which includes the collection of the Contract Shortfall Fees in the first quarter of 2025, 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 Apart from those matters described in this note, there have been no updates to our significant accounting policies since those reported under Note 2 of the 2023 Annual Report. Accounts Receivable and Allowance for Credit Losses Changes in the allowance for credit losses are as follows (in thousands): June 30, 2024 December 31, 2023 Balance, beginning of year $ 745 $ 623 Charges to provision for credit losses, net of recoveries 79 138 Write-offs ( 414 ) ( 16 ) Balance, end of period $ 410 $ 745 As of June 30, 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”). Recent Accounting Pronouncements Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“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 June 30, 2024 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. 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 11 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. 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 June 30, Six months ended June 30, 2024 2023 2024 2023 Revenue: Products (1) $ 44,694 $ 49,062 $ 83,809 $ 95,829 Services 1,458 1,532 2,717 2,773 $ 46,152 $ 50,594 $ 86,526 $ 98,602 (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 June 30, Six months ended June 30, 2024 2023 2024 2023 Cost of sales: Tangible goods sold $ 32,215 $ 41,878 $ 59,240 $ 83,407 Services 88 156 182 296 Other 4,679 4,656 9,113 9,114 $ 36,982 $ 46,690 $ 68,535 $ 92,817 Other cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services. Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs. Cost of sales, between external and related party, is as follows (in thousands): Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Cost of sales: Cost of sales for external customers $ 17,486 $ 16,445 $ 30,439 $ 27,743 Cost of sales for related parties 19,496 30,245 38,096 65,074 $ 36,982 $ 46,690 $ 68,535 $ 92,817 12 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Contract Assets Contract assets are as follows (in thousands): June 30, 2024 December 31, 2023 Contract assets $ 83,060 $ 83,060 Less accumulated amortization ( 11,153 ) ( 8,404 ) Contract assets, net 71,907 74,656 Less current contract assets ( 5,786 ) ( 5,836 ) Contract assets, long term $ 66,121 $ 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 June 30, 2024 and December 31, 2023, $ 66.1 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 June 30, 2024 and 2023, the Company recognized $ 1.5 million and $ 1.1 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 six months ended June 30, 2024 and 2023, the Company recognized $ 2.7 million and $ 2.4 million, respectively, of contract assets amortization. The below table reflects our estimated amortization per year (in thousands) based on the Company’s current forecasted revenues from the ProFrac Agreement. Years ending December 31, Amortization 2024 (excluding the six months ended June 30, 2024) $ 2,738 2025 6,332 2026 8,990 2027 10,256 2028 10,256 Thereafter through May 2032 33,335 Total contract assets $ 71,907 Based on our tests of recoverability, we did not recognize any impairment of such contract assets as of June 30, 2024. Note 5 — Inventories Inventories are as follows (in thousands): June 30, 2024 December 31, 2023 Raw materials $ 5,163 $ 5,299 Finished goods 12,690 13,660 Inventories 17,853 18,959 Less reserve for excess and obsolete inventory ( 5,711 ) ( 6,121 ) Inventories, net $ 12,142 $ 12,838 The additional reserves recorded during the three months ended June 30, 2024 and 2023 were $ 0.1 million and $ 0.2 million, respectively, for the CT segment. The Company recorded $ 6 thousand for the three months ended June 30, 2023 for the DA segment. There were no additional reserves recorded for the three months ended June 30, 2024 for the DA segment. During the six months ended June 30, 2024 and 2023, additional reserves recorded were $ 0.4 million and $ 0.4 million, respectively, for the CT segment and $ 13 thousand and $ 0.1 million, respectively, for the DA segment. 13 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 6 — Property and Equipment Property and equipment are as follows (in thousands): June 30, 2024 December 31, 2023 Land $ 886 $ 886 Land improvements 520 520 Buildings and leasehold improvements 5,487 5,483 Machinery and equipment 7,216 6,993 Furniture and fixtures 520 520 Transportation equipment 830 945 Computer equipment and software 1,768 1,696 Property and equipment 17,227 17,043 Less accumulated depreciation ( 12,240 ) ( 11,914 ) Property and equipment, net $ 4,987 $ 5,129 Depreciation expense totaled $ 0.2 million and $ 0.2 million for the three months ended June 30, 2024 a nd 2023, respectively, and $ 0.4 million and $ 0.3 million for the six months ended June 30, 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 June 30, Six months ended June 30, 2024 2023 2024 2023 Operating lease expense $ 752 $ 866 $ 1,536 $ 1,735 Finance lease expense: Amortization of assets 4 4 7 7 Interest on lease liabilities — 1 1 2 Total finance lease expense 4 5 8 9 Short-term lease expense 312 41 571 81 Total lease expense $ 1,068 $ 912 $ 2,115 $ 1,825 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,334 $ 1,550 $ 2,988 $ 2,915 Operating cash flows from finance leases 10 7 23 17 Financing cash flows from finance leases — 1 — 2 Maturities of lease liabilities as of June 30, 2024 are as follows (in thousands): Years ending December 31, Operating Leases Finance Leases 2024 (excluding the six months ended June 30, 2024) $ 1,301 $ 3 2025 2,121 — 2026 1,810 — 2027 1,741 — 2028 1,602 — Thereafter 3,048 — Total lease payments $ 11,623 $ 3 Less: Interest ( 2,618 ) — Present value of lease liabilities $ 9,005 $ 3 14 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Supplemental balance sheet information related to leases is as follows (in thousands): June 30, 2024 December 31, 2023 Operating Leases Operating lease right-of-use assets $ 4,184 $ 5,030 Current portion of operating lease liabilities 1,866 2,449 Long-term operating lease liabilities 7,139 7,676 Total operating lease liabilities $ 9,005 $ 10,125 Finance Leases Property and equipment $ 147 $ 147 Accumulated depreciation ( 77 ) ( 70 ) Property and equipment, net $ 70 $ 77 Current portion of finance lease liabilities $ 3 $ 22 Long-term finance lease liabilities — — Total finance lease liabilities $ 3 $ 22 Weighted Average Remaining Lease Term Operating leases 5.6 years 5.5 years Finance leases 0.1 years 0.6 years Weighted Average Discount Rate Operating leases 9.5 % 9.5 % Finance leases 8.5 % 8.5 % 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. Sublease rental income for future years are as follows (in thousands): Years ending December 31, Rental Income 2024 (excluding the six months ended June 30, 2024) $ 383 2025 767 2026 767 2027 767 2028 767 Thereafter 1,406 Total rental income $ 4,857 15 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 8 — Accrued Liabilities Current accrued liabilities are as follows (in thousands): June 30, 2024 December 31, 2023 Severance costs $ 364 $ 648 Payroll and benefits 1,172 2,138 Legal costs 30 37 Contingent liability for earn-out provision 30 56 Deferred revenue, current 530 550 Financed insurance 606 1,573 Other 294 888 Total current accrued liabilities $ 3,026 $ 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 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. As of June 30, 2024, the ABL provided up to $ 13.8 million of credit availability, which was 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, plus (iii) 50 % of the value of certain real estate holdings. Effective August 5, 2024, the Company entered into a second amendment to the ABL (see Note 18, “Subsequent Event” for additional information), which among other modifications, increased the loan commitment to $ 20.0 million. As of June 30, 2024, the Company had $ 5.8 million outstanding with approximately $ 8.0 million of available borrowings under the ABL. During the three and six months ended June 30, 2024, the Company incurred $ 0.2 million and $ 0.4 million, respectively, in interest and fees related to the ABL. As of June 30, 2024, the Company recorded $ 0.2 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 June 30, 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). 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 June 30, 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 was 16 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS accounted for as an extinguishment of the debt and the Company recorded a $ 4.5 million gain in the six months ended June 30, 2023, comprising the principal amount forgiven of $ 4.4 million and accrued interest of $ 0.1 million. Long-term debt, including current portion, is as follows (in thousands): June 30, 2024 December 31, 2023 Flotek PPP loan $ 149 $ 239 Less current maturities ( 149 ) ( 179 ) Total long-term debt, net of current portion $ — $ 60 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 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. 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. On September 6, 2023, the February 2023 Warrants were exercised and the Company issued, on a pre-Reverse Stock Split basis, 12,683,280 shares of the Company’s common stock ( 2,113,880 shares of the Company’s common stock on a post-Reverse Stock Split basis). 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. 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 (see Note 10, “Fair Value Measurements”), 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 and were recorded as additional paid in capital upon conversion. On September 6, 2023, the February 2023 Warrants were exercised and the Company issued, on a pre-Reverse Stock Split basis, 12,683,281 shares of the Company’s common stock ( 2,113,881 shares of the Company’s common stock on a post-Reverse Stock Split basis). 17 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, remeasured to and carried at a fair value of $ 40.6 million (see Note 10, “Fair Value Measurements”), were converted on a pre-Reverse Stock Split basis, upon maturity, into 63,496,922 shares of common stock at a price of $ 0.8705 per share. 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. 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): June 30, 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 June 30, 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. June 30, 2024 December 31, 2023 Risk-free interest rate 5.15 % 4.58 % Expected volatility 65.0 % 70.0 % Term until liquidation (years) 0.88 1.38 Stock price $ 4.91 $ 3.92 Discount rate 14.66 % 11.86 % 18 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. 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 six months ended June 30, 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. On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, at maturity using a Monte Carlo simulation, 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 resulting in a gain in fair value of Amended ProFrac Agreement Contract Consideration Convertible Note Payable of $ 3.9 million and $ 30.8 million for the three and six months ended June 30, 2023, respectively. 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. 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 six months ended June 30, 2024 and 2023 classified as Level 3 (in thousands): Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Balance - beginning of period $ 30 $ 44,025 $ 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 — 712 — 2,043 Change in fair value of contingent earnout consideration — 35 ( 26 ) ( 323 ) 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 — ( 3,874 ) — ( 30,755 ) Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity — — — ( 15,091 ) Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity ( 40,638 ) — ( 40,638 ) Balance - end of period $ 30 $ 260 $ 30 $ 260 19 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 June 30, Six months ended June 30, 2024 2023 2024 2023 U.S. federal statutory tax rate 21.00 % 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 0.7 120.4 6.8 % 0.1 Non-U.S. income taxed at different rates ( 3.1 ) ( 96.7 ) ( 4.1 ) % — Increase (reduction) in tax benefit related to stock-based awards 0.8 1,291.8 1.0 % 0.7 Change in valuation allowance ( 19.4 ) 2,284.5 ( 19.1 ) % ( 19.8 ) Permanent differences related to CARES Act — ( 3,779.4 ) — % ( 2.1 ) Non-deductible expenses 0.6 278.8 1.1 % 0.2 Effective income tax rate 0.6 % 120.4 % 6.7 % 0.1 % As of June 30, 2024, the Company had U.S. net operating loss carryforwards (“NOLs”) of $ 191.6 million, including $ 45.1 million expiring in various amounts from 2029 through 2037 which can offset 100 % of taxable income and $ 146.6 million that has an indefinite carryforward period which can offset 80 % of taxable income per year. Additionally, the Company has an estimated $ 92.8 million in certain state NOL carryforwards, $ 0.6 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 net unrealized built in gain $ 24.5 million. The Company’s use of NOLs arising after the date of the ownership change are not impacted by the Section 382 limitation. 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. 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 all carryforwards with the exception of $ 1.0 million of the state NOL carryforwards and $ 3.8 million of the tax credit carryforwards will be available for utilization if there is sufficient taxable income in subsequent periods. 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. 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. During the second quarter of 2023, the Company settled certain litigation resulting in the reversal of $ 2.3 million of accrued severance costs during the three and six months ended June 30, 2023. 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. 20 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 30,866,597 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). 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. 21 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. 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 and six months ended June 30, 2024 and 2023 is as follows (in thousands): Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Numerator: Net income (loss) for basic earnings per share $ 1,974 $ ( 21 ) $ 3,536 $ 21,322 Adjustments to net income available to shareholders Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable — 712 — 2,284 Valuation gain on Contract Consideration Convertible Notes Payable carried at fair value — ( 3,874 ) — ( 29,969 ) Adjusted net income (loss) for diluted earnings per share $ 1,974 $ ( 3,183 ) $ 3,536 $ ( 6,363 ) Denominator: Basic weighted average shares outstanding 29,449 23,906 29,440 20,207 Dilutive effect of convertible notes payable — 4,344 — 7,154 Dilutive effect of warrants outstanding 1,041 — 925 — Dilutive effect of stock options and restricted shares 178 — 147 — Diluted weighted average shares outstanding 30,668 28,250 30,512 27,361 Basic earnings per share $ 0.07 $ — $ 0.12 $ 1.06 Diluted earnings (loss) per share $ 0.06 $ ( 0.11 ) $ 0.12 $ ( 0.23 ) Anti-dilutive incremental shares excluded from denominator for diluted earnings computation Average number of diluted shares for June 2022 stock warrants (1) — 1,083 — 1,340 Average number of diluted shares for options and restricted stock (1) — 91 — 120 (1) These items were not included in the dilution calculation for the three and six months ended June 30, 2023 due to their anti-dilutive effect as it would reduce the loss per share. 22 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 15 — Supplemental Cash Flow Information Supplemental cash flow information is as follows (in thousands): Six months ended June 30, 2024 2023 Supplemental cash flow information: Interest paid $ 452 $ 23 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 Conversion of Amended Contract Consideration Convertible Notes Payable to common stock — 40,638 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 six months ended June 30, 2024 reflect variable consideration for Contract Shortfall Fees of $ 17.1 million, which will be due in the first quarter of 2025 under the terms of the ProFrac Agreement. The measurement period for 2023 was June 1, 2023 through December 31, 2023. Revenues for the six months ended June 30, 2023 included $ 2.0 million of Contract Shortfall Fees. 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. 23 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 $ 1.0 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 June 30, 2024 and 2023, the Company’s revenues from ProFrac Services, LLC were $ 28.0 million and $ 32.8 million , respectively. For the three months ended June 30, 2024 and 2023, these revenues were net of amortization of contract assets of $ 1.5 million and $ 1.1 million , respectively . Cost of sales attributable to these revenues were $ 19.5 million and $ 30.2 million, respectively, for the three months ended June 30, 2024 and 2023. During the six months ended June 30, 2024 and 2023, the Company’s revenues from ProFrac Services, LLC were $ 55.2 million and $ 69.1 million, respectively. For the six months ended June 30, 2024 and 2023, these revenues were net of amortization of contract assets of $ 2.7 million and $ 2.4 million , respectively . Cost of sales attributable to these revenues were $ 38.1 million and $ 65.1 million, respectively, for the six months ended June 30, 2024 and 2023. As of June 30, 2024 and December 31, 2023 our accounts receivable from ProFrac Services, LLC was $ 40.0 million and $ 34.6 million , respectively, which is recorded in accounts receivable, related party on the consolidated balance sheet. During the six months ended June 30, 2024, the Company collected variable consideration of $ 20.1 million related to the 2023 Contract Shortfall Fees, which were included in accounts receivable, related party as of December 31, 2023. 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. 24 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 June 30, Chemistry Technologies Data Analytics Corporate and Other Total 2024 Revenue from external customers Products $ 15,647 $ 1,306 $ — $ 16,953 Services 714 524 — 1,238 Total revenue from external customers 16,361 1,830 — 18,191 Revenue from related party Products 27,741 — — 27,741 Services — 220 — 220 Total revenue from related parties 27,741 220 — 27,961 Gross profit 8,546 624 — 9,170 Income (loss) from operations 6,145 ( 358 ) ( 3,565 ) 2,222 Depreciation 161 35 26 222 Interest expense — — 308 308 Income tax — — 15 15 Additions to long-lived assets 27 35 15 77 2023 Revenue from external customers Products $ 15,095 $ 1,620 $ — $ 16,715 Services 374 731 — 1,105 Total revenue from external customers 15,469 2,351 — 17,820 Revenue from related party Products 32,345 2 — 32,347 Services 272 155 427 Total revenue from related parties 32,617 157 — 32,774 Gross profit 2,603 1,301 — 3,904 Change in fair value of Contract Consideration Convertible Notes Payable ( 3,874 ) — — ( 3,874 ) Income (loss) from operations 3,795 129 ( 3,252 ) 672 Paid-in-kind interest on Contract Consideration Convertible Notes Payable — — 712 712 Paid-in-kind interest on convertible notes payable — — 155 155 Depreciation 155 18 1 174 Interest expense — — 705 705 Income tax — — 7 7 Additions to long-lived assets — 135 — 135 25 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS As of and for the six months ended June 30, Chemistry Technologies Data Analytics Corporate and Other Total 2024 Revenue from external customers Products $ 26,816 $ 2,238 $ — $ 29,054 Services 1,231 1,086 — 2,317 Total revenue from external customers 28,047 3,324 — 31,371 Revenue from related party Products 54,755 — — 54,755 Services — 400 — 400 Total revenue from related parties 54,755 400 — 55,155 Gross profit 16,947 1,044 — 17,991 Income (loss) from operations 12,250 ( 782 ) ( 7,138 ) 4,330 Depreciation 320 70 52 442 Interest expense — — 586 586 Income tax — — 257 257 Additions to long-lived assets 104 105 20 229 2023 Revenue from external customers Products $ 23,654 $ 3,562 $ — $ 27,216 Services 1,039 1,217 — 2,256 Total revenue from external customers 24,693 4,779 — 29,472 Revenue from related party Products 68,611 2 — 68,613 Services 272 245 — 517 Total revenue from related parties 68,883 247 — 69,130 Gross profit 3,038 2,747 — 5,785 Change in fair value of Contract Consideration Convertible Notes Payable ( 29,969 ) — — ( 29,969 ) Income (loss) from operations 27,174 587 ( 8,577 ) 19,184 Paid-in-kind interest on Contract Consideration Convertible Notes Payable 2,129 — — 2,129 Paid-in-kind interest on convertible notes payable — — 155 155 Depreciation 312 36 1 349 Interest expense — — 2,377 2,377 Income tax — — 16 16 Additions to long-lived assets 30 230 32 292 Assets of the Company by reportable segments are as follows (in thousands): June 30, 2024 December 31, 2023 Chemistry Technologies $ 138,649 $ 138,559 Data Analytics 7,839 6,604 Corporate and Other 9,552 12,350 Total assets $ 156,040 $ 157,513 26 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Geographic Information Revenue by country is based on the location where services are provided and products are sold. For the six months ended June 30, 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 June 30, Six months ended June 30, 2024 2023 2024 2023 U.S. (1) $ 44,008 $ 48,725 $ 83,266 $ 94,851 UAE 1,803 1,509 2,545 2,912 Other countries 341 360 715 839 Total revenue $ 46,152 $ 50,594 $ 86,526 $ 98,602 (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 June 30, 2024 ProFrac Services, LLC $ 27,961 60.6 % Three months ended June 30, 2023 ProFrac Services, LLC $ 32,774 64.8 % Revenue % of Total Revenue Six months ended June 30, 2024 ProFrac Services, LLC $ 55,155 63.7 % Six months ended June 30, 2023 ProFrac Services, LLC $ 69,130 70.1 % The concentration with ProFrac Services, LLC and in the oil and gas industry increases credit, commodity and business risk . 27 FLOTEK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Major Suppliers Expenditure with major suppliers, as a percentage of consolidated supplier expenditure, is as follows (in thousands): Three months ended June 30, Expenditure % of Total Expenditure 2024 Supplier A $ 5,975 23.0 % Supplier B 4,383 16.9 % Supplier C 4,103 15.8 % 2023 Supplier A $ 13,155 32.6 % Supplier B 8,049 20.0 % Supplier C 4,489 11.1 % Six months ended June 30, Expenditure % of Total Expenditure 2024 Supplier B $ 12,120 23.3 % Supplier A 10,543 20.3 % Supplier C 4,103 7.9 % 2023 Supplier A $ 30,109 36.4 % Supplier B 15,194 18.4 % Supplier C 8,993 10.9 % Note 18 — Subsequent Event The Company has evaluated the effects of events that have occurred subsequent to June 30, 2024 through August 8, 2024, the date at which the Company’s interim financial statements are available to be issued, and has determined that the following subsequent event required disclosure: Entry into material definitive agreement Effective August 5, 2024, the Company entered into a second amendment to the ABL (the “Second Amendment”). Among other matters, the Second Amendment amends the ABL as follows: (i) the total commitment of the loan is increased to $ 20,000,000 , (ii) the stated maturity date is extended for an additional 12 months, (iii) the applicable margin is decreased by 0.50 %, and (iv) various modifications are made to the borrowing base and criteria for eligible receivables and eligible pledged real estate. 28