FLOTEK INDUSTRIES INC/CN/ 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors Flotek Industries, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive income, cash flow, and stockholders’ equity for each of the years in the two-year period ended December 31, 2024, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Recoverability of contract assets As described in Note 2 to the Company’s consolidated financial statements, the Company’s contract assets represent consideration issued in the form of convertible notes and other incremental costs related to obtaining the ProFrac Agreement. The contract assets are tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the transfer of goods under the ProFrac Agreement less the direct costs that relate to providing those goods in the future. As described in Note 4, the Company had recorded contract assets, net of $69.0 million as of December 31, 2024. We identified the evaluation of the recoverability of contract assets as a critical audit matter. There was subjective auditor judgement in evaluating the key assumptions used in the Company’s contract asset recoverability assessment, specifically the forecasted product revenue and related forecasted costs to provide products over the term of the ProFrac Agreement. 30 The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls related to the Company’s contract assets recoverability assessment, including controls over the development of forecasted revenue and costs over the term of the ProFrac Agreement. To assess the Company’s ability to forecast revenue and costs, we compared revenue and cost forecasts for the current year to actual results. We performed sensitivity analyses over the Company’s contract asset recoverability assessment by evaluating the effect of changes in the forecasted revenue and costs over the term of the ProFrac Agreement. /s/ KPMG LLP We have served as the Company’s auditor since 2021. Houston, Texas March 12, 2025 31 FLOTEK INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 4,404 $ 5,851 Restricted cash 102 102 Accounts receivable, net of allowance for credit losses of $ 447 and $ 745 at December 31, 2024 and December 31, 2023, respectively 17,386 13,687 Accounts receivable, related party, net of allowance for credit losses of $ 0 at December 31, 2024 and December 31, 2023, respectively 52,370 34,569 Inventories, net 13,303 12,838 Other current assets 2,952 3,564 Current contract asset 5,939 5,836 Total current assets 96,456 76,447 Long-term contract asset 63,105 68,820 Property and equipment, net 6,178 5,129 Operating lease right-of-use assets 3,326 5,030 Deferred tax assets, net 51 300 Other long-term assets 1,680 1,787 TOTAL ASSETS $ 170,796 $ 157,513 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 38,073 $ 31,705 Accrued liabilities 5,912 5,890 Income taxes payable 48 45 Current portion of operating lease liabilities 1,486 2,449 Current portion of finance lease liabilities — 22 Asset-based loan 4,789 7,492 Current portion of long-term debt 60 179 Total current liabilities 50,368 47,782 Deferred revenue, long-term 14 35 Long-term operating lease liabilities 6,514 7,676 Long-term debt — 60 TOTAL LIABILITIES 56,896 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; 30,938,073 shares issued and 29,826,508 shares outstanding at December 31, 2024; 30,772,837 shares issued and 29,664,130 shares outstanding at December 31, 2023 3 3 Additional paid-in capital 464,620 463,140 Accumulated other comprehensive income 251 127 Accumulated deficit ( 316,308 ) ( 326,806 ) Treasury stock, at cost; 1,111,565 and 1,108,707 shares at December 31, 2024 and December 31, 2023, respectively ( 34,666 ) ( 34,504 ) Total stockholders’ equity 113,900 101,960 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 170,796 $ 157,513 The accompanying Notes are an integral part of these Consolidated Financial Statements. 32 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Years ended December 31, 2024 2023 Revenue: Revenue from external customers $ 71,263 $ 66,518 Revenue from related party 115,762 121,540 Total revenues 187,025 188,058 Cost of sales 147,639 163,795 Gross profit 39,386 24,263 Operating costs and expenses: Selling, general, and administrative 24,709 27,827 Depreciation 891 734 Research and development 1,714 2,486 Gain on sale of property and equipment ( 124 ) ( 38 ) Gain in fair value of Contract Consideration Convertible Notes Payable — ( 29,969 ) Total operating costs and expenses 27,190 1,040 Income from operations 12,196 23,223 Other income (expense): Paycheck protection plan loan forgiveness — 4,522 Interest expense ( 1,095 ) ( 2,857 ) Other income (expense), net 46 ( 26 ) Total other (expense) income ( 1,049 ) 1,639 Income before income taxes 11,147 24,862 Income tax expense ( 649 ) ( 149 ) Net income $ 10,498 $ 24,713 Income (loss) per common share: Basic $ 0.36 $ 1.00 Diluted $ 0.34 $ ( 0.10 ) Weighted average common shares: Weighted average common shares used in computing basic income (loss) per common share 29,534 24,830 Weighted average common shares used in computing diluted income (loss) per common share 30,889 28,377 The accompanying Notes are an integral part of these Consolidated Financial Statements. 33 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Years ended December 31, 2024 2023 Net income $ 10,498 $ 24,713 Other comprehensive income: Foreign currency translation adjustment 124 ( 54 ) Comprehensive income $ 10,622 $ 24,659 The accompanying Notes are an integral part of these Consolidated Financial Statements. 34 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) Years ended December 31, 2024 2023 Cash flows from operating activities: Net income $ 10,498 $ 24,713 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Change in fair value of contingent consideration 71 ( 527 ) Change in fair value of Contract Consideration Convertible Notes Payable — ( 29,969 ) Amortization of convertible note issuance costs — 83 Paid-in-kind interest expense — 2,284 Amortization of contract assets 5,612 5,033 Depreciation 891 734 Amortization of asset-based loan origination costs 314 121 Provision for credit losses, net of recoveries 181 138 Provision for excess and obsolete inventory 645 959 Gain on sale of property and equipment ( 124 ) ( 38 ) Non-cash lease expense 2,094 3,014 Stock compensation expense 1,366 ( 254 ) Deferred income tax expense 249 104 Paycheck protection plan loan forgiveness — ( 4,522 ) Changes in current assets and liabilities: Accounts receivable ( 3,880 ) 5,311 Accounts receivable, related party ( 17,801 ) ( 11,886 ) Inventories ( 1,110 ) 1,938 Income tax receivable 8 — Other assets 561 ( 836 ) Accounts payable 6,368 ( 1,670 ) Accrued liabilities ( 70 ) ( 2,575 ) Operating lease liabilities ( 2,515 ) ( 3,391 ) Income taxes payable 3 ( 53 ) Interest payable — ( 8 ) Net cash provided by (used in) operating activities 3,361 ( 11,297 ) Cash flows from investing activities: Capital expenditures ( 1,940 ) ( 1,081 ) Proceeds from sale of assets 124 67 Net cash used in investing activities ( 1,816 ) ( 1,014 ) Cash flows from financing activities: Payment for forfeited stock options — ( 617 ) Payments on long term debt ( 179 ) ( 149 ) Proceeds from asset-based loan 166,950 68,716 Payments on asset-based loan ( 169,653 ) ( 61,224 ) Payment of asset-based loan origination costs ( 164 ) ( 574 ) Payments to tax authorities for shares withheld from employees ( 162 ) ( 268 ) Proceeds from issuance of stock under Employee Stock Purchase Plan 114 77 Payments for finance leases ( 22 ) ( 33 ) Net cash (used in) provided by financing activities ( 3,116 ) 5,928 Effect of changes in exchange rates on cash and cash equivalents 124 ( 54 ) Net change in cash and cash equivalents and restricted cash ( 1,447 ) ( 6,437 ) 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 4,404 5,851 Restricted cash at the end of period 102 102 Cash and cash equivalents and restricted cash at end of period $ 4,506 $ 5,953 The accompanying Notes are an integral part of these Consolidated Financial Statements. 35 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Year Ended December 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 — — — — — — 10,498 10,498 Foreign currency translation adjustment — — — — — 124 — 124 Stock issued under employee stock purchase plan — — ( 31 ) — 114 — — 114 Restricted stock granted 94 — — — — — — — Restricted stock forfeited — — 11 — — — — — Restricted stock units vested 71 — — — — — — — Stock compensation expense — — — — 1,366 — — 1,366 Shares withheld to cover taxes — — 23 ( 162 ) — — — ( 162 ) Balance, December 31, 2024 30,938 $ 3 1,112 $ ( 34,666 ) $ 464,620 $ 251 $ ( 316,308 ) $ 113,900 Year Ended December 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 — — — — — — 24,713 24,713 Foreign currency translation adjustment — — — — — ( 54 ) — ( 54 ) Stock issued under employee stock purchase plan — — ( 20 ) — 77 — — 77 Restricted stock granted 146 — — — — — — — Restricted stock forfeited ( 7 ) — 66 — — — — — Restricted stock units vested 82 — — — — — — — Forfeited stock options purchased — — — — ( 617 ) — — ( 617 ) Stock compensation expense — — — ( 254 ) — — ( 254 ) Shares withheld to cover taxes ( 3 ) 42 ( 253 ) ( 15 ) — — ( 268 ) Exercise of pre-funded warrants 4,228 — — — — — — — Issuance of stock warrants, net of transaction fee — — — — 15,092 — — 15,092 Conversion of convertible notes payable to Pre-Funded Warrants — — — — 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 Other 35 — — — — — — — Balance, December 31, 2023 30,773 $ 3 1,109 $ ( 34,504 ) $ 463,140 $ 127 $ ( 326,806 ) $ 101,960 The accompanying Notes are an integral part of these Consolidated Financial Statements. 36 FLOTEK INDUSTRIES, INC. NOTES TO 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 chemistry and data company, Flotek helps customers across industrial and commercial markets improve their environmental performance. The Company seeks to provide sustainable and optimized chemistry and data technology solutions for both domestic and international energy markets. The Company’s Chemistry Technologies (“CT”) segment designs, develops, manufactures, packages and distributes 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 provides innovative analytical measurement solutions. The DA segment seeks to deliver real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. The Company’s operating segments, CT and DA, are supported by its Research & Innovation (“R&I”) 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. Note 2 — Summary of Significant Accounting Policies Basis of Presentation The Company’s consolidated financial statements have been prepared in accordance with U.S. GAAP. The accompanying consolidated financial statements include the accounts of Flotek Industries, Inc. and subsidiaries it controls. 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 December 31, 2024 and 2023, respectively. The Company’s restricted cash as of December 31, 2024 and 2023 consisted 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 recorded at the invoiced amount, net of an allowance for credit losses. This value incorporates an allowance for credit losses to reflect any loss anticipated on accounts receivable balances. The Company applies the current expected credit loss (CECL) model, which requires immediate recognition of expected credit losses over the contractual life of receivables and records the appropriate allowance for credit losses as a charge to Operating Cost and Expenses. The allowance for credit losses is based on a combination of the individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for 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. 37 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in the allowance for credit losses are as follows (in thousands): December 31, 2024 December 31, 2023 Balance, beginning of year $ 745 $ 623 Charges to provision for credit losses, net of recoveries 181 138 Write-offs ( 479 ) ( 16 ) Balance, end of year $ 447 $ 745 As of December 31, 2024 and December 31, 2023, the Company had not recorded an allowance for credit losses for the related party accounts receivable from ProFrac Services, LLC (see Note 17, “Related Party Transactions”). Contract Assets The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in Note 9, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement (see Note 17, “Related Party Transactions”) during the year ended December 31, 2022. The contract assets are amortized over the term of the ProFrac Agreement (originally 10 years) based on forecasted revenues as goods are transferred to ProFrac Services, LLC and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations. The contract assets are tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the transfer of goods under the ProFrac Agreement less the direct costs that relate to providing those goods in the future. Based on our tests of recoverability, we did not identify an impairment of the contract assets during the years ended December 31, 2024 and 2023 . Inventories Inventories consist of raw materials and finished goods and are stated at the lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceeds 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- 38 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS party independent appraisals, as considered necessary. There were no impairments of property and equipment, including ROU assets, during the years ended December 31, 2024 and 2023 . 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 an 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. 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. 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 17, “Related Party Transactions”) using the most likely amount and the Company includes an estimated amount of variable consideration in the transaction price only if it is probable that a subsequent change in the estimate of the amount of variable consideration would not result in a significant revenue reversal. A significant revenue reversal would occur if a subsequent change in the estimate of the variable consideration would result in a significant downward adjustment to the amount of cumulative revenue recognized from that contract when the change in estimate occurs. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly, and discounts offered to customers for prompt payment. 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 39 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The DA segment recognizes revenue for sales of equipment at the time of sale based on when control transfers to the customer based on agreed upon delivery terms. Additionally, the Company offers various services associated to products sold which includes field services, installation, maintenance, and other functions. 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 provides subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements and revenue not yet recognizable is reported under accrued liabilities and deferred revenue on the consolidated balance sheets. Subscription-type arrangements were not a material revenue stream in the years ended December 31, 2024 and 2023. Payment terms for both the CT and DA segments are customarily 30 - 60 days for domestic and 90 - 120 days f or international from invoice receipt. Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract assets and liabilities 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 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 includes consolidated net income and foreign currency translation adjustments. 40 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to record interest and penalties related to uncertain tax positions as income tax expense. Stock-Based Compensation Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience. Stock Warrants The Company evaluated the Pre-Funded Warrants issued in June 2022 (the “Pre-Funded Warrants”) (see Note 13, “Stockholders’ Equity”) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to be classified within stockholders’ equity and recorded the proceeds received for the Pre-Funded Warrants within additional paid in capital in the consolidated balance sheets. 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; valuation allowances for accounts receivable, inventories, and deferred tax assets; recoverability and timing of the realization of contract assets; and the fair value of liability classified Contract Consideration Convertible Notes Payable until they were converted. 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, have no material effect on the Company’s financial statements or are already adopted by the Company. New Accounting Standards Issued and Adopted as of December 31, 2024 The Company has adopted ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"), effective retrospectively for the year ended December 31, 2024. ASU 2023-07 enhances the disclosures required for operating segments in the Company's annual and interim consolidated financial statements. As a result of this adoption, the Company's segment disclosure now includes significant expense categories. See "Note 18, “Business Segment, Geographic and Major Customer Information" for the enhanced disclosures associated with the adoption of ASU 2023-07. 41 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS New Accounting Standards Issued and Not Adopted as of December 31, 2024 In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"), which is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 provide for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for the Company prospectively to all annual periods beginning after December 15, 2024. The Company continues to evaluate the impact of this standard on its disclosures. The FASB issued ASU 2024-03, "Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures" ("ASU 2024-03"), which enhances the disclosures required for certain expense captions in the Company's annual and interim consolidated financial statements. ASU 2024-03 is effective prospectively or retrospectively for fiscal years beginning after December 15, 2026 and for interim periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its 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. Product and service revenues include sales to related parties as described in Note 17, “Related Party Transactions.” Total revenue disaggregated by revenue source is as follows (in thousands): Years ended December 31, 2024 2023 Revenue: Products $ 180,470 $ 182,695 Services 6,555 5,363 $ 187,025 $ 188,058 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): Years ended December 31, 2024 2023 Cost of sales: Tangible goods sold $ 128,816 $ 144,720 Services 547 528 Other 18,276 18,547 $ 147,639 $ 163,795 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 customers and related party, is as follows (in thousands): Years ended December 31, 2024 2023 Cost of sales: Cost of sales for external customers $ 67,205 $ 64,498 Cost of sales for related party 80,434 99,297 $ 147,639 $ 163,795 42 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Contract Assets Contract assets are as follows (in thousands): December 31, 2024 December 31, 2023 Contract assets $ 83,060 $ 83,060 Less accumulated amortization ( 14,016 ) ( 8,404 ) Contract assets, net 69,044 74,656 Less current contract assets ( 5,939 ) ( 5,836 ) Contract assets, long term $ 63,105 $ 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 17, “Related Party Transactions,” the Company recognized contract assets of $ 10.0 million and $ 69.5 million, respectively, and associated fees of $ 3.6 million. As of December 31, 2024 and December 31, 2023, $ 63.1 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 that 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 years ended December 31, 2024 and 2023, the Company recognized $ 5.6 million and $ 5.0 million, respectively, of contract assets amortization that 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 2025 $ 5,939 2026 8,729 2027 10,358 2028 10,358 2029 10,358 Thereafter through May 2032 23,302 Total contract assets $ 69,044 Note 5 — Inventories Inventories are as follows (in thousands): December 31, 2024 December 31, 2023 Raw materials $ 4,945 $ 5,299 Finished goods 13,581 13,660 Inventories 18,526 18,959 Less reserve for excess and obsolete inventory ( 5,223 ) ( 6,121 ) Inventories, net $ 13,303 $ 12,838 During the years ended December 31, 2024 and 2023, additional reserves recorded were $ 0.6 million and $ 0.8 million, respectively, for the CT segment and $ 13 thousand and $ 0.2 million, respectively, for the DA segment. 43 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 — Property and Equipment Property and equipment are as follows (in thousands): December 31, 2024 December 31, 2023 Land $ 886 $ 886 Land improvements 520 520 Buildings and leasehold improvements 5,722 5,483 Machinery and equipment 8,524 6,993 Furniture and fixtures 520 520 Transportation equipment 790 945 Computer equipment and software 1,531 1,696 Property and equipment 18,493 17,043 Less accumulated depreciation ( 12,315 ) ( 11,914 ) Property and equipment, net $ 6,178 $ 5,129 Depreciation expense totaled $ 0.9 million and $ 0.7 million for the years ended December 31, 2024 a nd 2023, respectively. Note 7 — Leases The components of lease expense and supplemental cash flow information are as follows (in thousands): Years ended December 31, 2024 2023 Operating lease expense $ 2,703 $ 3,552 Finance lease expense: Amortization of assets 15 15 Interest on lease liabilities 1 3 Total finance lease expense 16 18 Short-term lease expense 1,383 300 Total lease expense $ 4,102 $ 3,870 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 5,399 $ 5,508 Operating cash flows from finance leases 30 34 Financing cash flows from finance leases 1 3 Maturities of lease liabilities as of December 31, 2024 are as follows (in thousands): Years ending December 31, Operating Leases 2025 $ 2,121 2026 1,693 2027 1,741 2028 1,602 2029 1,641 Thereafter 1,407 Total lease payments $ 10,205 Less: Interest ( 2,205 ) Present value of lease liabilities $ 8,000 44 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Supplemental balance sheet information related to leases is as follows (in thousands): December 31, 2024 December 31, 2023 Operating Leases Operating lease right-of-use assets $ 3,326 $ 5,030 Current portion of operating lease liabilities 1,486 2,449 Long-term operating lease liabilities 6,514 7,676 Total operating lease liabilities $ 8,000 $ 10,125 Finance Leases Property and equipment $ — $ 147 Accumulated depreciation — ( 70 ) Property and equipment, net $ — $ 77 Current portion of finance lease liabilities $ — $ 22 Total finance lease liabilities $ — $ 22 Weighted Average Remaining Lease Term Operating leases 5.4 years 5.5 years Finance leases — 0.6 years Weighted Average Discount Rate Operating leases 9.4 % 9.5 % Finance leases — % 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 through October 30, 2030. The Company recorded rental income from the sublease of $ 0.7 million and $ 0.3 million for the years ended December 31, 2024 and 2023, respectively, which is included in the Company’s statement of operations in Other income (expense), net. Rental income from the sublease offsets the monthly rental expense 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 2025 $ 767 2026 767 2027 767 2028 767 2029 767 Thereafter 639 Total rental income $ 4,474 45 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 — Accrued Liabilities Current accrued liabilities are as follows (in thousands): December 31, 2024 December 31, 2023 Severance costs $ 380 $ 648 Payroll and benefits 2,901 2,138 Legal costs 99 37 Contingent liability for earn-out provision 127 56 Deferred revenue 808 550 Financed insurance 1,074 1,573 Other 523 888 Total current accrued liabilities $ 5,912 $ 5,890 Note 9 — Debt and Convertible Notes Payable Asset Based Loan In August 2023, the Company entered into a 24-month revolving loan and security agreement in connection with an Asset Based Loan, which was amended in October 2023 and August 2024 (as amended the “ABL”). The August 2024 amendment to the ABL extended the maturity to August 2026, increased the credit availability and lowered the interest rate spread. The ABL provides up to $ 20.0 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, plus (iii) 60 % of the value of certain real estate holdings. As of December 31, 2024 and 2023, the Company had $ 4.8 million and $ 7.5 million, respectively, outstanding under the ABL. As of December 31, 2024, the Company had approximately $ 8.9 million of available borrowings under the ABL. During the years ended December 31, 2024 and 2023, the Company incurred $ 0.7 million and $ 0.5 million, respectively, in interest and fees related to the ABL. As of December 31, 2024 and 2023, the Company recorded $ 0.3 million and $ 0.5 million, respectively, of unamortized 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 5.50 %) plus 2.0 % per annum. The interest rate under the ABL was 9.5 % and 11.0 % as of December 31, 2024 and 2023, respectively. For the year ended December 31, 2024, the weighted-average interest rate was 10.8 %. 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 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 December 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. The forgiveness of the Flotek PPP loan was accounted for as an 46 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS extinguishment of the debt and the Company recorded a $ 4.5 million gain in the year ended December 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): December 31, 2024 December 31, 2023 Flotek PPP loan $ 60 $ 239 Less current maturities ( 60 ) ( 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 former 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. 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 consolidated statements of operations. 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. 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 into 1,722,640 shares of the Company’s common stock. 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, upon maturity, into 2,113,880 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 2,113,880 shares of the Company’s common stock. 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. 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, upon maturity, into 2,113,881 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 2,113,881 shares of the Company’s common stock. 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, upon maturity, into 10,582,821 shares of common stock. 47 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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): December 31, December 31, Level 1 Level 2 Level 3 2024 Level 1 Level 2 Level 3 2023 Contingent earnout consideration $ — $ — $ 127 $ 127 $ — $ — $ 56 $ 56 Total $ — $ — $ 127 $ 127 $ — $ — $ 56 $ 56 Contingent Earnout Consideration Key Inputs In connection with the acquisition of one of the Company’s wholly owned subsidiaries, JP3 Measurement, LLC, the Company entered into a stock performance earn-out provision with the sellers. The estimated fair value of the remaining stock performance earn-out provision, with respect to this transaction, is included in accrued liabilities as of December 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. December 31, 2024 December 31, 2023 Risk-free interest rate 4.30 % 4.58 % Expected volatility 65.0 % 70.0 % Term until liquidation (years) 0.38 1.38 Stock price $ 9.53 $ 3.92 Discount rate 8.00 % 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. 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 closing price of the shares of common stock on the date of conversion. The fair value adjustment was a $ 0.8 million increase for the year ended December 31, 2023. 48 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $ 69.5 million on May 17,2022. 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 closing price of the shares of common stock on the date of conversion resulting in a gain in fair value of Amended ProFrac Agreement Contract Consideration Convertible Note Payable of $ 30.8 million for the year ended December 31, 2023. 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 years ended December 31, 2024 and 2023 classified as Level 3 (in thousands): Years ended December 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 — 2,043 Change in fair value of contingent earnout consideration 71 ( 527 ) 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 — ( 30,754 ) Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity — ( 15,092 ) Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity — ( 40,638 ) Balance - end of period $ 127 $ 56 Note 11 — Income Taxes Components of the income tax expense are as follows (in thousands): Years ended December 31, 2024 2023 Current: Federal $ — $ — State 400 45 Foreign — — Total current expense 400 45 Deferred: Federal — — State 249 104 Foreign — — Total deferred expense 249 104 Income tax expense $ 649 $ 149 49 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Current state income tax expense during the year ended December 31, 2024 related to the resolution of certain state tax audits for the years ended December 31, 2016 and 2017. The components of income before income taxes are as follows (in thousands): Years ended December 31, 2024 2023 United States $ 11,000 $ 25,315 Foreign 147 ( 453 ) Income before income taxes $ 11,147 $ 24,862 The income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 21% respectively, to income before income tax for the reasons set forth below: Years ended December 31, 2024 2023 U.S. federal statutory tax rate 21.0 % 21.0 % State income taxes, net of federal benefit 4.6 0.5 Non-U.S. income taxed at different rates ( 0.5 ) 0.3 Tax benefit related to stock-based awards ( 0.2 ) 0.7 Change in valuation allowance ( 21.4 ) ( 20.9 ) Permanent differences related to CARES Act — ( 3.6 ) Other 2.3 2.6 Effective income tax rate 5.8 % 0.6 % Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. 50 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The component of deferred tax assets and liabilities are as follows (in thousands): December 31, 2024 2023 Deferred tax assets: Net operating loss carryforwards $ 43,818 $ 45,314 Intangible assets 3,252 3,501 Tax credit carryforwards 3,861 3,923 Goodwill 4,008 4,513 Property and equipment 3,096 3,314 Lease liability 2,008 2,507 Inventory valuation reserves 1,102 1,359 Allowance for doubtful accounts 1,164 1,196 Accrued liabilities 279 383 Accrued compensation 599 485 Equity compensation 148 132 Interest limitation — 137 Other — 24 Total gross deferred tax assets 63,335 66,788 Valuation allowance ( 56,333 ) ( 59,066 ) Total deferred tax assets, net 7,002 7,722 Deferred tax liabilities: ROU asset ( 818 ) ( 1,203 ) Contract asset ( 5,753 ) ( 5,813 ) Prepaid insurance and other ( 380 ) ( 406 ) Total gross deferred tax liabilities ( 6,951 ) ( 7,422 ) Net deferred tax assets $ 51 $ 300 As of December 31, 2024, the Company had U.S. net operating loss carryforwards (“NOLs”) of $ 187.0 million, including $ 40.6 million expiring in various amounts from 2029 through 2037 which can offset 100 % of taxable income and $ 146.4 million that has an indefinite carryforward period which can offset 80 % of taxable income per year. Additionally, the Company has an estimated $ 75.7 million in certain state NOL carryforwards and $ 3.8 million in tax credit carryforwards. As a result of the ownership change experienced in 2023 (see Note 17, “Related Party Transaction”), the Company’s ability to use NOLs to reduce taxable income is generally limited by Section 382 of the Internal Revenue Code of 1986 to an annual amount, of $ 3.5 million plus an uplift of $ 24.5 million. NOLs that exceed the Section 382 limitation in any year continue to be allowed as carryforwards until they expire and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. The Company’s use of new NOLs arising after the date of the ownership change would not be impacted by the Section 382 limitation. If the Company does not generate a sufficient level of taxable income prior to the expiration of the pre-2018 NOL carryforward periods, then the ability to apply those NOLs as offsets to future taxable income is lost. Based on an analysis of the Section 382 limitation, the Company estimates that $ 0.9 million of the state NOL carryforwards and $ 3.8 million of the tax credit carryforwards will expire unutilized. Although the ownership change will significantly limit the ability of the Company to utilize the pre-change net operating losses and credits, the Company does not expect a significant impact to its financial statements given the valuation allowance that is recorded to estimate the realizability of the deferred tax assets. The Company’s cumulative losses (before permanent items) of $ 6.3 million in the three years ended December 31, 2024 are negative evidence that it will not likely generate sufficient future taxable income to utilize its deferred tax assets. Therefore, the Company believes that it is not more likely than not that it will realize its deferred tax assets in all taxing jurisdictions with the exception of a portion related to the State of Texas. Therefore, the Company recorded a valuation allowance as of December 31, 2024 and December 31, 2023 to reflect the estimated amount of deferred tax asset realizability. The change in valuation allowance was ($ 2.7 ) million and ($ 5.2 ) million during the years ended December 31, 2024 and 2023, respectively. The Company does not have documented plans to reinvest the unremitted earnings of its non-U.S. subsidiaries. As of December 31, 2024 and 2023, the Company had approximately $ 6.4 million and $ 6.3 million, respectively, in unremitted earnings from its 51 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS foreign jurisdictions. As a result of the 2017 Tax Act these earnings have been previously taxed in the U.S. although they have not been repatriated. However, certain withholding taxes may need to be paid upon repatriation depending on the US treaty with the applicable country. Because all of the Company’s foreign earnings have been previously taxed, the requirement to record a deferred tax liability on such unremitted earnings is not applicable. The Company has performed an analysis of its tax positions for the years ended December 31, 2024 and 2023, concluding all tax positions taken were highly certain. As of December 31, 2024, the Company is not under examination in any federal/national jurisdictions. The tax returns for the years ended 2021 through 2023 remain subject to examination in the US, and the tax returns for the years ended December 31, 2020 through 2023 remain subject to examination in various state jurisdictions. Note 12 — Commitments and Contingencies Litigation From time to time, the Company is subject to litigation and other claims that arise in the normal course of business. As of December 31, 2024, the Company was not party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, the results of current or future matters cannot be predicted with certainty; an unfavorable resolution of one or more of such matters could have a material adverse effect on the Company’s results of operations, financial condition or cash flows. 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 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, upon maturity, into 1,722,640 shares of common stock. The Convertible Notes Payable converted into common stock had a carrying value of $ 9.0 million, including accrued paid-in-kind interest of $ 0.8 million 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, upon maturity, into 2,113,880 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 2,113,880 shares of the Company’s common stock. 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 into 2,113,881 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 2,113,881 shares of the Company’s common stock. On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable”, were converted, upon maturity, into 10,582,821 shares of common stock. The Contract Consideration Convertible Notes Payable, remeasured to a fair value of $ 40.6 million upon maturity, were recorded as additional paid-in-capital upon conversion. 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 2,184,140 shares of the Company’s common stock at an exercise price equal to $ 0.0001 per share, subject to a $ 4.5 million exercise fee. 52 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ProFrac Holdings II, LLC and its affiliates may not receive any voting or consent rights in respect of the 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. Treasury Stock The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. During the years ended December 31, 2024 and 2023, the Company withheld 23 thousand shares and 42 thousand shares, respectively, of the Company’s common stock at fair market value for payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options. Shares issued as restricted stock awards to employees under the 2018 long-term incentive plan are accounted for as treasury stock when forfeited. During the years ended December 31, 2024 and 2023, forfeited stock awards returned to treasury stock were 11 thousand shares and 66 thousand shares, respectively. Note 14 — Stock-Based Compensation and Other Benefit Plans Stock-Based Incentive Plans In June 2024, Company stockholders approved an amendment to the Flotek Industries, Inc. 2018 Long-Term Incentive Plan (the “2018 Plan”) to increase the number of shares of Company common stock eligible for issuance under the 2018 Plan. The 2018 Plan permits the Company to grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, restricted stock units, and certain other incentive awards. In addition, the Company has two other long-term incentive plans, which were created in 2020 and 2019 (the “2020 Plan” and “2019 Plan,” respectively). The maximum number of shares that may be issued under the 2020 Plan, the 2019 Plan and 2018 Plan are 0.5 million, 0.2 million, and 2.4 million, respectively. At December 31, 2024 and 2023, the Company had 0.6 million and 0.6 million shares remaining, respectively, to be granted under the 2020 Plan, 2019 Plan and 2018 Plan in the aggregate. Stock Options All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant. During the year ended December 31, 2024, there were no grants of market-based or performance-based stock options compared to 0.1 million market-based stock options and 0.1 million performance-based stock options that were granted during the year ended December 31, 2023. The market-based and performance-based options are restricted until criteria defined in the stock option agreements are met. Proceeds received from stock option exercises are credited to common stock and additional paid-in capital, as appropriate. The Company uses historical data to estimate pre-vesting option forfeitures. Estimates are adjusted when actual forfeitures differ from the estimate. Stock-based compensation expense is recorded for all equity awards expected to vest. During the year ended December 31, 2024, 24 thousand stock options vested compared to none for the year ended December 31, 2023. The total fair value of the stock options that vested was $ 0.1 million for the year ended December 31, 2024 . 53 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock option activity for the years ended December 31, 2024 and 2023 , was as follows: Shares Weighted-Average Exercise Price Weighted-Average Fair Value Outstanding as of December 31, 2022 693,650 Granted 190,728 $ 3.42 $ 2.57 Exercised — $ — $ — Forfeited ( 457,815 ) $ 7.10 $ 7.28 Expired ( 130,000 ) $ 7.97 $ 5.94 Outstanding as of December 31, 2023 296,563 Granted — $ — $ — Exercised — $ — $ — Forfeited ( 29,367 ) $ 6.58 $ 4.49 Expired ( 47,918 ) $ 5.46 $ 5.47 Outstanding as of December 31, 2024 219,278 Vested or expected to vest at December 31, 2024 185,489 The below table shows the aggregate intrinsic value and weighted average remaining contractual term of share options outstanding, currently exercisable and vested or expected to vest. Share Options Outstanding Share Options Currently Exercisable Share Options Vested or Expected to Vest Number 219,278 34,306 185,489 Weighted-average exercise price $ 3.91 $ 6.49 $ 3.97 Aggregate intrinsic value ($000’s) $ 1,230 $ 102 $ 1,029 Weighted-average remaining contractual term in years 8.12 4.64 8.03 The following table sets forth significant assumptions used in the Monte Carlo model for market-based options to determine the fair value of the 61,984 options awarded in June 2023 at the date of grant. June 7, 2023 Awards Risk-free interest rate 3.79 % Expected volatility of common stock 110.00 % Expected life of options in years 10.0 Dividend yield — % The following table sets forth significant assumptions used in the Black-Scholes model for performance options to determine the fair value of the 128,744 options awarded in December 2023 at the date of grant. December 5, 2023 Awards Risk-free interest rate 4.13 % Expected volatility of common stock 90.60 % Expected life of options in years 6.5 Dividend yield — % At December 31, 2024 and 2023, the unrecognized compensation cost related to stock options was $ 0.4 million and $ 0.6 million, respectively. There were no options granted during the year ended December 31, 2024 . 54 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted Stock The Company grants employees and directors either time-vesting or performance-based restricted shares of common stock (“RSAs”) in accordance with terms specified in the applicable RSA Agreements. During the years ended December 31, 2024 and 2023, all of the RSAs granted were time-vested. Grantees of RSAs retain voting rights for the granted restricted shares. • Time-vesting RSAs vest after a stipulated period has elapsed after the date of grant, generally three years . Certain time-vested RSAs have also been issued with a portion of the shares granted vesting immediately. • Performance-based RSAs are issued with criteria defined over a designated period and vest only when, and if, the outlined criteria are met. RSA activity for the years ended December 31, 2024 and 2023 , are as follows: Restricted Stock Shares Shares Weighted- Average Fair Value at Date of Grant Non-vested RSAs at December 31, 2022 384,534 $ 8.23 Granted 146,204 $ 4.52 Vested ( 186,058 ) $ 7.81 Forfeited ( 95,667 ) $ 9.25 Non-vested RSAs at December 31, 2023 249,013 $ 5.97 Granted 93,760 $ 4.43 Vested ( 182,319 ) $ 5.47 Forfeited ( 11,528 ) $ 7.77 Non-vested RSAs at December 31, 2024 148,926 $ 5.46 The total fair value of RSAs that vested during the years ended December 31, 2024 and 2023 was $ 0.9 million and $ 0.9 million, respectively. The grant-date fair value is the market price of the RSAs on the date of grant. At December 31, 2024 and 2023, unrecognized compensation expense related to non-vested RSAs was $ 0.4 million and $ 0.9 million, respectively. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.5 years. Restricted Stock Units The Company grants either time-vesting or performance-based restricted share units (“RSUs”) in accordance with terms specified in the applicable RSU Agreements. Grantees of RSUs do not have voting rights for the granted RSUs until such time as the applicable RSUs vests and shares of common stock are issued. • Time-vesting RSUs vest after a stipulated period has elapsed after the date of grant, generally three years. • Performance-based RSUs are issued with criteria defined over a designated period and vest only when, and if, the outlined criteria are met. 55 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RSU activity for the years ended December 31, 2024 and 2023, was as follows: Restricted Stock Units Units Weighted- Average Fair Value at Date of Grant Non-vested RSUs at December 31, 2022 102,481 $ 11.42 Granted 230,816 $ 3.82 Vested ( 82,730 ) $ 10.64 Forfeited ( 38,000 ) $ 11.58 Non-vested RSUs at December 31, 2023 212,567 $ 3.44 Granted 459,054 $ 4.81 Vested ( 71,476 ) $ 3.75 Forfeited ( 48,098 ) $ 3.28 Non-vested RSUs at December 31, 2024 552,047 $ 4.55 T he total fair value of RSUs that vested during the years ended December 31, 2024 and 2023 was $ 0.5 million and $ 0.5 million, respectively. The grant-date fair value is the market price of the shares on the date of grant. The RSUs granted in 2024 included 147,050 performance-based RSUs, half of which will vest upon achievement of a market-based criteria and half of which will vest upon achievement of a non-market-based criteria. The units with a market-based vesting criteria were valued using a Monte Carlo valuation model to determine the fair value of the awards as of the date of the grant. The following table sets forth significant assumptions used in the Monte Carlo model to determine the grant date fair value of the 73,525 performance-based RSUs with a market-based vesting criteria awarded in 2024. October 30, 2024 Awards Risk-free interest rate 4.20 % Expected volatility of common stock 53.10 % Expected life of RSU in years 1.2 Dividend yield — % At December 31, 2024 and 2023, unrecognized compensation expense related to RSUs was $ 2.3 million and $ 0.7 million, respectively. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.3 years. Non-vested RSUs at December 31, 2024 consist of both time-vesting and performance-based awards. Employee Stock Purchase Plan The Company’s Employee Stock Purchase Plan (“ESPP”) was approved by stockholders in 2012. The Company registered 500,000 shares of its common stock, currently held as treasury shares, for issuance under the ESPP. The purpose of the ESPP is to provide employees with an opportunity to purchase shares of the Company’s common stock through accumulated payroll deductions. The ESPP allows participants to purchase common stock at a purchase price equal to 85 % of the fair market value of the common stock on the last business day of a three-month offering period which coincides with calendar quarters. Payroll deductions may not exceed 10 % of an employee’s compensation. In addition, for each calendar year, an employee may not be granted purchase rights valued over $ 25,000 , as determined at the time such purchase right is granted. The fair v alue of the discount associated with shares purchased under the plan is recognized as stock-based compensation expense and wa s $ 20 thousand and $ 14 thousand for the years ended December 31, 2024 and 2023 , respectively. The total fair value of the shares purchased under the plan during the years ended December 31, 2024 and 2023 was $ 0.1 million and $ 0.1 million , respectively . The employee payment associated with participation in the plan occurs through payroll deductions. Stock-Based Compensation Expense Stock-based compensation expense related to stock options, restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP was $ 1.4 million and $( 0.3 ) million during the years ended December 31, 2024 and 2023 , respectively. Stock based compensation expense for the year ended December 31, 2023 included an adjustment for actual forfeitures of $ 1.6 million that reduced the total stock-compensation expense. 56 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 2023, the Company settled vested equity awards of a terminated officer through a cash payment. The cash payment was made to the employee in lieu of the equity awards, which were previously granted and vested. The settlement amount was determined based on the fair value of the equity awards at the time of termination. The Company used the Black-Scholes Model to value the vested equity awards. This transaction resulted in a reduction of the Company's equity awards liability and a corresponding outflow of cash for $ 0.6 million. The key inputs to the Black-Scholes Model used to estimate the fair value of the vested equity awards, as of the date of the termination were as follows: January 19, 2023 Risk-free interest rate 3.79 % Expected volatility of common stock 90.00 % Expected life of options in years 6.92 Stock price (1) $ 1.37 Strike Price $ 1.93 (1) Stock price is based on the price of common shares prior to the Company’s 1-for-6 reverse stock split in September 2023. 401(k) Retirement Plan The Company maintains a 401(k) retirement plan for the benefit of eligible employees in the U.S. All U.S. based employees are eligible to participate in the plan upon employment. The Company currently matches contributions at 100 % of up to 2 % of an employee’s contributions . During the years ended December 31, 2024 and 2023, compensation expense included $ 0.3 million and $ 0.3 million, respectively, related to the Company’s 401(k) match. Note 15 — Earnings (Loss) Per Share Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period (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. 57 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The calculation of the basic and diluted earnings (loss) per share for the years ended December 31, 2024 and 2023 is as follows (in thousands): Years ended December 31, 2024 2023 Numerator: Net income for basic earnings per share $ 10,498 $ 24,713 Adjustments to net income available to shareholders Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable — 2,284 Valuation gain on Contract Consideration Convertible Notes Payable carried at fair value — ( 29,969 ) Adjusted net income (loss) for diluted earnings per share $ 10,498 $ ( 2,972 ) Denominator: Basic weighted average shares outstanding 29,534 24,830 Dilutive effect of convertible notes payable — 3,547 Dilutive effect of the June 2022 warrants 1,210 — Dilutive effect of stock options and restricted shares 145 — Diluted weighted average shares outstanding 30,889 28,377 Basic earnings per share $ 0.36 $ 1.00 Diluted earnings (loss) per share $ 0.34 $ ( 0.10 ) Anti-dilutive incremental shares excluded from denominator for diluted earnings computation Average number of diluted shares for June 2022 warrants (1) — 1,251 Average number of diluted shares for options and restricted stock (1) — 94 (1) These items were not included in the dilution calculation for the year ended December 31, 2023 due to their anti-dilutive effect as it would reduce the loss per share. Note 16 — Supplemental Cash Flow Information Supplemental cash flow information is as follows (in thousands): Years ended December 31, 2024 2023 Supplemental cash flow information: Interest paid $ 846 $ 434 Income taxes 50 — Supplemental non cash financing and investing activities: Conversion of convertible notes payable to common stock — 8,997 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 58 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 — 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 was 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 is required to 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 another 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. During the measurement period for Contract Shortfall Fees of January 1, 2024 through December 31, 2024, the minimum purchase requirements were not met and, as a result, related party revenues for the year ended December 31, 2024 reflect variable consideration for Contract Shortfall Fees of $ 32.4 million. The measurement period for 2023 was June 1, 2023 through December 31, 2023. Related party revenues for the year ended December 31, 2023 included $ 20.1 million of Contract Shortfall Fees. During the years ended December 31, 2024 and 2023, the Company’s revenues from ProFrac Services, LLC were $ 115.8 million and $ 121.5 million, respectively. For the years ended December 31, 2024 and 2023, these revenues were net of amortization of contract assets of $ 5.6 million and $ 5.0 million, respectively. Cost of sales attributable to these revenues were $ 80.4 million and $ 99.3 million, respectively, for the years ended December 31, 2024 and 2023. As of December 31, 2024 and December 31, 2023 our accounts receivable from ProFrac Services, LLC was $ 52.4 million and $ 34.6 million, respectively, which is recorded in accounts receivable, related party on the consolidated balance sheets. Also during 2023, we entered into the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC: • Conversion of Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”) • Conversion of Contract Consideration Notes Payable (see Note 9, “Debt and Convertible Notes Payable”) • Exercise of February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”) • Pre-Funded Warrants (see Note 13, “Stockholders’ Equity) As a result of the above related party transactions, ProFrac Holdings, LLC or its affiliates owns approximately 51 % of the Company’s common stock as of December 31, 2024. Note 18 — Business Segment, Geographic and Major Customer Information Segment Information The Company's segments are determined as those components whose results are reviewed regularly by the chief operating decision maker ("CODM"), who is the Company's Chief Executive Officer, in deciding how to allocate resources and assess performance. Each segment is organized and managed based upon the nature of the Company's markets and customers and consists of similar products and services. Gross profit and income (loss) from operations for each segment are used by the CODM to assess the performance of each segment in a financial period. The CODM uses segment gross profit and income (loss) from operations as the measure to make resource (including financial or capital resources) allocation decisions for each 59 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS segment. Accounting policies have been applied consistently by each segment for all reporting periods. Intercompany revenue and expense amounts, if any, have been eliminated within each segment to report on the basis that management uses internally for evaluating segment performance. 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. The operations of the Company are categorized into the following reportable segments: Chemistry Technologies. The CT segment includes specialty chemistries, logistics and technology services, which we believe enables our customers to pursue improved efficiencies and performance throughout the life cycle of their wells, and also helps our 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 provides innovative analytical measurement solutions. The DA segment seeks to deliver real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks. 60 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summarized financial information of the reportable segments is as follows (in thousands): As of and for the years ended December 31, Chemistry Technologies Data Analytics Corporate and Other Total 2024 Revenue from external customers Products $ 60,847 $ 4,740 $ — $ 65,587 Services 2,367 3,309 — 5,676 Total revenue from external customers 63,214 8,049 — 71,263 Revenue from related party Products 114,879 5 — 114,884 Services 68 810 — 878 Total revenue from related parties 114,947 815 — 115,762 Cost of sales 141,948 5,691 — 147,639 Gross profit 36,213 3,173 — 39,386 Selling, general and administrative 7,861 3,489 13,359 24,709 Other segment items 1,750 623 108 2,481 Income (loss) from operations $ 26,602 $ ( 939 ) $ ( 13,467 ) $ 12,196 Reconciliation of profit to income before income taxes: Interest expense $ ( 1,095 ) $ ( 1,095 ) Other income, net 46 46 Income before income taxes $ 11,147 2023 Revenue from external customers Products $ 56,721 $ 5,275 $ — $ 61,996 Services 2,295 2,227 — 4,522 Total revenue from external customers 59,016 7,502 — 66,518 Revenue from related party Products 120,698 2 — 120,700 Services 205 635 — 840 Total revenue from related parties 120,903 637 — 121,540 Cost of sales 159,574 4,221 — 163,795 Gross profit 20,345 3,918 — 24,263 Selling, general and administrative 8,815 3,272 15,740 27,827 Other segment items ( 27,513 ) 699 27 ( 26,787 ) Income (loss) from operations $ 39,043 $ ( 53 ) $ ( 15,767 ) $ 23,223 Reconciliation of profit to income before income taxes: Paycheck protection plan loan forgiveness $ 4,522 $ 4,522 Interest expense ( 2,857 ) ( 2,857 ) Other income, net ( 26 ) ( 26 ) Income before income taxes $ 24,862 Other segment items for the year ending December 31, 2024 includes depreciation of $ 0.6 million and $ 0.2 million in the CT and DA segments, respectively; R&D of $ 1.2 million and $ 0.5 million in the CT and DA segments, respectively; and gain on sale of property and equipment in the CT and DA segments of $ 0.1 million and $ 15 thousand, respectively. Other segment items for the year ended December 31, 2023 includes $ 30.0 million gain related to the change in fair value of Contract Consideration Convertible Notes Payable in the CT segment and depreciation of $ 0.6 million and $ 0.1 million in the CT and DA segments, respectively; R&D of $ 1.9 million and $ 0.6 million in the CT and DA segments, respectively; and gain on sale of property and equipment in the CT and DA segments of $ 21 thousand and $ 17 thousands, respectively. 61 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets of the Company by reportable segments and corporate and other are as follows (in thousands): December 31, 2024 December 31, 2023 Chemistry Technologies $ 152,161 $ 138,559 Data Analytics 8,632 6,604 Corporate and Other 10,003 12,350 Total assets $ 170,796 $ 157,513 Additions to long-lived assets by reportable segments and corporate and other are as follows (in thousands): As of and for the years ended December 31, Chemistry Technologies Data Analytics Corporate and Other Total 2024 Additions to long-lived assets $ 360 $ 1,492 $ 88 $ 1,940 2023 Additions to long-lived assets $ 180 $ 466 $ 435 $ 1,081 Geographic Information Revenue by country is based on the location where services are provided and products are sold. For the years ended December 31, 2024 and 2023 no country other than the U.S. accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands): Years ended December 31, 2024 2023 U.S. (1) $ 177,825 $ 180,300 UAE 7,392 6,549 Other countries 1,808 1,209 Total revenue $ 187,025 $ 188,058 (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 Year ended December 31, 2024 ProFrac Services, LLC $ 115,762 61.9 % Year ended December 31, 2023 ProFrac Services, LLC $ 121,540 64.6 % The concentration with ProFrac Services, LLC and in the oil and gas industry increases credit, commodity and business risk . 62 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Major Suppliers Expenditure with major suppliers, as a percentage of consolidated supplier expenditure, is as follows (in thousands): Years ended December 31, Expenditure % of Total Expenditure 2024 Supplier A $ 24,064 18.9 % Supplier B 21,410 16.9 % Supplier C 20,333 16.0 % 2023 Supplier C $ 42,684 30.1 % Supplier D 28,222 19.9 % Supplier E 16,447 11.6 % Note 19 — Subsequent Event The Company has evaluated the effects of events that have occurred subsequent to December 31, 2024 and there have been no material events that would require recognition in the 2024 consolidated financial statements or disclosure in the notes to the consolidated financial statements. 63 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.