UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2014~~March 31, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from �� to

Commission File Number 1-13270

FLOTEK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



Delaware		90-0023731
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10603 W. Sam Houston Parkway N., Suite 300 Houston, TX		77064
(Address of principal executive offices)		(Zip Code)

(713) 849-9911

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of ~~October~~April 16, ~~2014,~~2015, there were ~~53,938,945~~53,486,963 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.

~~Table of contents~~

TABLE OF CONTENTS




	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014	3
	Unaudited Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March, 2015 and 2014 ~~and 2013~~	4
	Unaudited Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~	5
	Unaudited Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~	6
	Unaudited Consolidated Statement of Equity for the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2018
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3130
Item 4.	Controls and Procedures	3130

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	3231
Item 1A.	Risk Factors	3231
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3231
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33

	SIGNATURES	34

~~Table of contents~~

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FLOTEK INDUSTRIES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2014			December 31, 2013			March 31, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	5,257		$	2,730		$	2,499		$	1,266
Restricted cash	801			—
Accounts receivable, net of allowance for doubtful accounts of $645 and $872 at September 30, 2014 and December 31, 2013, respectively	69,253			65,016
Inventories, net	81,439			63,132
Accounts receivable, net of allowance for doubtful accounts of $851 and $847 at March 31, 2015 and December 31, 2014, respectively							56,011			78,624
Inventories							98,162			85,958
Deferred tax assets, net	2,840			2,522			1,799			2,696
Other current assets	9,622			4,261			9,275			11,055
Total current assets	169,212			137,661			167,746			179,599
Property and equipment, net	83,270			79,114			88,239			86,111
Goodwill	71,131			66,271			72,820			71,131
Deferred tax assets, net	14,090			15,012			13,486			12,907
Other intangible assets, net	74,715			77,523			72,716			73,528
TOTAL ASSETS	$	412,418		$	375,581		$	415,007		$	423,276
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	32,656		$	19,899		$	28,427		$	33,185
Accrued liabilities	13,468			12,778			7,651			12,314
Income taxes payable	1,018			3,361			1,755			1,307
Interest payable	76			111			106			93
Current portion of long-term debt	11,367			26,415			24,417			18,643
Total current liabilities	58,585			62,564			62,356			65,542
Long-term debt, less current portion	30,184			35,690			23,613			25,398
Deferred tax liabilities, net	26,048			27,575			23,297			25,982
Total liabilities	114,817			125,829			109,266			116,922
Commitments and contingencies
Equity:
Cumulative convertible preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding	—			—			—			—
Common stock, $0.0001 par value, 80,000,000 shares authorized; 60,487,085 shares issued and 53,938,945 shares outstanding at September 30, 2014; 58,265,911 shares issued and 51,804,078 shares outstanding at December 31, 2013	6			6
Common stock, $0.0001 par value, 80,000,000 shares authorized; 55,154,224 shares issued and 53,429,599 shares outstanding at March 31, 2015; 54,633,726 shares issued and 53,357,811 shares outstanding at December 31, 2014							6			5
Additional paid-in capital	283,571			266,122			259,139			254,233
Accumulated other comprehensive income (loss)	(397		)	(359		)	(742		)	(502		)
Retained earnings (accumulated deficit)	36,489			(841		)
Treasury stock, at cost; 5,699,845 and 5,394,178 shares at September 30, 2014 and December 31, 2013, respectively	(22,419		)	(15,176		)
Flotek Industries, Inc. stockholders' equity	297,250			249,752
Retained earnings							51,247			52,762
Treasury stock, at cost; 704,350 and 449,397 shares at March 31, 2015 and December 31, 2014, respectively							(4,267		)	(495		)
Flotek Industries, Inc. stockholders’ equity							305,383			306,003
Noncontrolling interests	351			—			358			351
Total equity	297,601			249,752			305,741			306,354
TOTAL LIABILITIES AND EQUITY	$	412,418		$	375,581		$	415,007		$	423,276

See accompanying Notes to Unaudited Consolidated Financial Statements.

~~Table of contents~~

FLOTEK INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2014			2013			2014			2013			2015			2014
Revenue	$	116,761		$	98,388		$	324,653		$	270,217		$	82,373		$	102,575
Cost of revenue	70,683			60,886			192,585			162,491			55,846			58,894
Gross margin	46,078			37,502			132,068			107,726			26,527			43,681
Expenses:
Selling, general and administrative	21,499			19,542			63,924			58,640			23,888			21,572
Depreciation and amortization	2,439			2,038			7,225			5,231			2,676			2,285
Research and development	1,293			835			3,599			2,689			1,252			1,026
Total expenses	25,231			22,415			74,748			66,560			27,816			24,883
Income from operations	20,847			15,087			57,320			41,166
Income (loss) from operations													(1,289		)	18,798
Other income (expense):
Interest expense	(424		)	(530		)	(1,259		)	(1,495		)	(407		)	(454		)
Other income (expense), net	(87		)	59			(306		)	117			(225		)	54
Total other income (expense)	(511		)	(471		)	(1,565		)	(1,378		)	(632		)	(400		)
Income before income taxes	20,336			14,616			55,755			39,788
Income tax expense	(6,064		)	(5,648		)	(18,425		)	(14,615		)
Net income	$	14,272		$	8,968		$	37,330		$	25,173
Income (loss) before income taxes													(1,921		)	18,398
Income tax benefit (expense)													406			(6,380		)
Net income (loss)													$	(1,515	)	$	12,018

Earnings per common share:
Basic earnings per common share	$	0.26		$	0.17		$	0.69		$	0.50
Diluted earnings per common share	$	0.26		$	0.16		$	0.67		$	0.47
Earnings (loss) per common share:
Basic earnings (loss) per common share													$	(0.03	)	$	0.22
Diluted earnings (loss) per common share													$	(0.03	)	$	0.22
Weighted average common shares:
Weighted average common shares used in computing basic earnings per common share	54,789			52,742			54,464			50,819
Weighted average common shares used in computing diluted earnings per common share	55,690			55,317			55,536			53,407
Weighted average common shares used in computing basic earnings (loss) per common share													54,448			53,948
Weighted average common shares used in computing diluted earnings (loss) per common share													54,448			55,398

See accompanying Notes to Unaudited Consolidated Financial Statements.

~~Table of contents~~

FLOTEK INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Three months ended September 30, Nine months ended September 30,
2014 2013 2014 2013
Net income $ 14,272
$ 8,968
$ 37,330
$ 25,173
Other comprehensive income (loss):
Foreign currency translation adjustment (67 ) (22 ) (38 ) (179 )
Unrealized gain on investments available for sale —
5
—
18
Comprehensive income $ 14,205
$ 8,951
$ 37,292
$ 25,012



	Three months ended March 31,
	2015			2014
Net income (loss)	$	(1,515	)	$	12,018
Other comprehensive income (loss):
Foreign currency translation adjustment	(240		)	(149		)
Comprehensive income (loss)	$	(1,755	)	$	11,869

See accompanying Notes to Unaudited Consolidated Financial Statements.

~~Table of contents~~

FLOTEK INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine months ended September 30,						Three months ended March 31,
	2014			2013			2015			2014
Cash flows from operating activities:
Net income	$	37,330		$	25,173
Adjustments to reconcile net income to net cash provided by operating activities:
Net income (loss)							$	(1,515	)	$	12,018
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	13,276			10,948			4,570			4,219
Amortization of deferred financing costs	257			65			86			106
Accretion of debt discount	—			55
Gain on sale of assets	(2,552		)	(3,452		)	(1,223		)	(558		)
Stock compensation expense	7,429			8,697			3,462			2,334
Deferred income tax provision (benefit)	237			(315		)
Deferred income tax benefit							(2,367		)	(290		)
Excess tax benefit related to share-based awards	(3,425		)	(835		)	(87		)	(1,300		)
Changes in current assets and liabilities:
Restricted cash	(450		)	150
Changes in current assets and liabilities, net of acquisitions:
Accounts receivable, net	(3,896		)	(6,521		)	22,613			(525		)
Inventories	(18,035		)	(2,055		)	(11,990		)	(9,863		)
Other current assets	(4,957		)	259			1,782			885
Accounts payable	12,617			(17,341		)	(4,758		)	6,700
Accrued liabilities	1,019			4,931			(4,663		)	(2,531		)
Income taxes payable	1,082			1,585			535			4,322
Interest payable	(35		)	16			13			(12		)
Net cash provided by operating activities	39,897			21,360			6,458			15,505
Cash flows from investing activities:
Capital expenditures	(13,494		)	(9,985		)	(5,590		)	(4,115		)
Proceeds from sale of assets	3,322			4,595			1,315			832
Payments for acquisitions, net of cash acquired	(5,704		)	(53,396		)	(1,250		)	(5,286		)
Purchase of patents and other intangible assets	(780		)	—			(115		)	(135		)
Net cash used in investing activities	(16,656		)	(58,786		)	(5,640		)	(8,704		)
Cash flows from financing activities:
Repayments of indebtedness	(8,506		)	(9,777		)	(4,786		)	(4,786		)
Proceeds of borrowings	—			26,190
Borrowings on revolving credit facility	305,750			231,696			112,151			96,750
Repayments on revolving credit facility	(317,798		)	(204,319		)	(103,376		)	(99,097		)
Debt issuance costs	(256		)	(1,207		)	—			(59		)
Issuance costs of preferred stock and detachable warrants	—			(200		)
Excess tax benefit related to share-based awards	3,425			835			87			1,300
Acquisition of treasury stock related to share-based awards	(6,060		)	(5,325		)
Purchase of treasury stock related to share-based awards							(1,055		)	(4,045		)
Proceeds from sale of common stock	763			567			256			231
Repurchase of common stock							(2,651		)	—
Proceeds from exercise of stock options	461			491			22			443
Proceeds from exercise of stock warrants	1,545			323			—			1,545
Net cash (used in) provided by financing activities	(20,676		)	39,274
Proceeds from noncontrolling interest							7			—
Net cash provided by (used in) financing activities							655			(7,718		)
Effect of changes in exchange rates on cash and cash equivalents	(38		)	(179		)	(240		)	(149		)
Net increase in cash and cash equivalents	2,527			1,669
Net increase (decrease) in cash and cash equivalents							1,233			(1,066		)
Cash and cash equivalents at the beginning of period	2,730			2,700			1,266			2,730
Cash and cash equivalents at the end of period	$	5,257		$	4,369		$	2,499		$	1,664

See accompanying Notes to Unaudited Consolidated Financial Statements.

~~Table of contents~~

FLOTEK INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENT OF EQUITY

(in thousands)

Common Stock Treasury Stock
Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Retained Earnings(Accumulated
Deficit)
Non-controlling Interests Total Equity

Shares
Issued

Par
Value
Shares Cost
Balance, December 31, 2013 58,266
$ 6
5,394
$ (15,176 ) $ 266,122
$ (359 ) $ (841 ) $ —
$ 249,752
Net income —
—
—
—
—
—
37,330
—
37,330
Other comprehensive income —
—
—
—
—
(38 ) —
—
(38 )
Common stock issued under
employee stock purchase plan —
—
(27 ) —
763
—
—
—
763
Common stock issued in payment of
     accrued liability
27
—
—
—
600
—
—
—
600
Stock warrants exercised 1,277
—
—
—
1,545
—
—
—
1,545
Stock options exercised 302
—
—
—
1,644
—
—
—
1,644
Stock surrendered for exercise of
     stock options
—
—
46
(1,183 ) —
—
—
—
(1,183 )
Restricted stock granted 516
—
—
—
—
—
—
—
—
Restricted stock forfeited —
—
55
—
—
—
—
—
—
Treasury stock acquired related to
     tax withholding for share-based
     awards
—
—
232
(6,060 ) —
—
—
—
(6,060 )
Excess tax benefit related to share-
     based awards
—
—
—
—
3,425
—
—
—
3,425
Stock compensation expense —
—
—
—
7,429
—
—
—
7,429
Investment in Flotek Gulf, LLC and
Flotek Gulf Research, LLC —
—
—
—
—
—
—
351
351
Stock issued in EOGA acquisition 94
—
—
—
1,894
—
—
—
1,894
Stock issued in SiteLark acquisition 5
—
—
—
149
—
—
—
149
Balance, September 30, 2014 60,487
$ 6
5,700
$ (22,419 ) $ 283,571
$ (397 ) $ 36,489
$ 351
$ 297,601



	Common Stock			Treasury Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Non-controlling Interests		Total Equity
	Shares Issued	Par Value		Shares		Cost			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Non-controlling Interests		Total Equity
Balance, December 31, 2014	54,634	$	5	449		$	(495	)	$	254,233		$	(502	)	$	52,762		$	351	$	306,354
Net income (loss)	—	—		—		—			—			—			(1,515		)	—		(1,515		)
Foreign currency translation adjustment	—	—		—		—			—			(240		)	—			—		(240		)
Stock issued under employee stock purchase plan	—	—		(18	)	—			256			—			—			—		256
Stock options exercised	35	—		—		—			88			—			—			—		88
Stock surrendered for exercise of stock options	—	—		4		(66		)	—			—			—			—		(66		)
Restricted stock granted	425	1		—		—			(1		)	—			—			—		—
Restricted stock forfeited	—	—		7		—			—			—			—			—		—
Treasury stock purchased	—	—		82		(1,055		)	—			—			—			—		(1,055		)
Stock compensation expense	—	—		—		—			3,462			—			—			—		3,462
Excess tax benefit related to share-based awards	—	—		—		—			87			—			—			—		87
Investment in Flotek Gulf, LLC and Flotek Gulf Research, LLC	—	—		—		—			—			—			—			7		7
Stock issued in IAL acquisition	60	—		—		—			1,014			—			—			—		1,014
Repurchase of common stock	—	—		180		(2,651		)	—			—			—			—		(2,651		)
Balance, March 31, 2015	55,154	$	6	704		$	(4,267	)	$	259,139		$	(742	)	$	51,247		$	358	$	305,741

See accompanying Notes to Unaudited Consolidated Financial Statements.

~~Table of contents~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and Significant Accounting Policies

Organization and Nature of Operations

Flotek Industries, Inc. (“Flotek” or the “Company”) is a global, diversified, technology-driven supplier of energy ~~chemicals~~chemistries and consumer and industrial ~~chemicals~~chemistries and is a global developer and supplier of drilling, completion and production technologies and related services.

~~Flotek's~~Flotek’s strategic focus, and that of its diversified ~~wholly-owned~~ subsidiaries (collectively referred to as the “Company”), includes ~~energy-related chemical~~energy related chemistry technologies, drilling ~~technologies,~~and production technologies, ~~(previously referred to as artificial lift technologies),~~ and consumer and industrial ~~chemical~~chemistry technologies. Within energy technologies, the Company provides oilfield specialty ~~chemicals~~chemistries and logistics, ~~down-hole~~downhole drilling tools and ~~production-related~~production related tools used in the energy and mining industries. ~~Flotek's~~Flotek’s products and services enable customers to drill wells more efficiently, to realize increased production from both new and existing wells and to decrease future well operating costs. Major customers include leading oilfield service providers, pressure-pumping service companies, onshore and offshore drilling contractors, and major and independent oil and gas exploration and production companies. Within consumer and industrial ~~chemical~~chemistry technologies, the Company provides products for the flavor and fragrance industry and the industrial chemical industry. Major customers include food and beverage companies, fragrance companies, and companies providing household and industrial cleaning products.

The Company is headquartered in Houston, Texas, with operating locations in Colorado, Florida, Louisiana, New Mexico, North Dakota, Oklahoma, ~~Colorado,~~ Pennsylvania, Texas, Utah, Wyoming, Canada, the Netherlands and the Middle East. Flotek’s products are marketed both domestically and internationally, with international presence and/or ~~representation~~initiatives in over 20 countries.

Flotek was initially incorporated under the laws of the Province of British Columbia on May 17, 1985. On October 23, 2001, Flotek changed its corporate domicile to the state of Delaware.

Basis of Presentation

The accompanying Unaudited Consolidated Financial Statements and accompanying footnotes (collectively the “Financial Statements”) reflect all adjustments, in the opinion of management, necessary for fair presentation of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The Financial Statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for comprehensive financial statement reporting. These interim Financial Statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2013~~2014 (the “Annual Report”). A copy of the Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, ~~2014.~~

~~Omani Entities~~

In November 2013, the Company signed shareholder agreements with Tasneea Oil and Gas Technologies, LLC (“Tasneea”), an Omani Limited Liability Company, to form Omani based Flotek Gulf, LLC (“Flotek Gulf”) and Flotek Gulf Research, LLC (“Flotek Gulf Research”). Flotek will own 55% of the outstanding shares and Tasneea will own 45% of the outstanding shares of both Flotek Gulf and Flotek Gulf Research. During September 2014, Flotek and Tasneea transferred initial capital of $0.4 million to form Flotek Gulf and $0.4 million to form Flotek Gulf Research. At ~~September 30, 2014, the total initial capital transfers of $0.8 million are reported as restricted cash.~~2015.

Use of Estimates

The preparation of financial statements in conformity with 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.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications did not impact net income.

~~Table of contents~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Recent Accounting Pronouncements

(a) Application of New Accounting Standards

Effective January 1, ~~2014,~~2015, the Company adopted the accounting guidance in Accounting Standards Update ~~("ASU"~~(“ASU”) No. ~~2013-11,~~ 2014-08, “"Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an ~~Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,"~~Entity,” which ~~provides guidance~~amends the definition of a discontinued operation by raising the threshold for ~~reporting unrecognized tax benefits when~~ a ~~net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at~~disposal to qualify as discontinued operations. The ASU will also require entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the reporting date. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and ce~~rtain criteria are met.~~discontinued operations criteria. Implementation of this standard did not have a material effect on the consolidated financial statements.

~~(b) New Accounting Requirements and Disclosures~~

~~In June 2014,~~Effective January 1, 2015, the ~~Financial Accounting Standards Board (“FASB”) issued~~Company adopted the accounting guidance in ASU No. 2014-12, “ ~~"Accounting~~Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period."” The ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ~~The ASU is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is evaluating~~Implementation of this standard did not have a material effect on the ~~potential impacts of~~consolidated financial statements or the ~~new standard on~~Company's current awards under its existing stock-based compensation plans.

(b) New Accounting Requirements and Disclosures

In May 2014, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, "“Revenue from Contracts with Customers."” The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an ~~entity's~~entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

In ~~April 2014,~~January 2015, the FASB issued ASU No. ~~2014-08,~~ 2015-01, “"Simplifying Income Statement Presentation by Eliminating the Concept of ~~Financial Statements~~Extraordinary Items.” This ASU eliminates from generally accepted accounting principles (“GAAP”) the concept of extraordinary items and ~~Property, Plant,~~the need for an entity to separately classify, present, and ~~Equipment - Reporting Discontinued Operations~~disclose extraordinary events and ~~Disclosures of Disposals of Components of an Entity,"~~ ~~which amends the definition of a discontinued operation by raising the threshold~~transactions, while retaining certain presentation and disclosure guidance for ~~a disposal to qualify as discontinued operations. The ASU will also require entities to provide additional disclosures about discontinued operations as well as disposal transactions~~items that ~~do not meet the discontinued operations criteria.~~are unusual in nature or occur infrequently. The pronouncement is effective ~~prospectively~~ for ~~all disposals (except disposals classified as held for sale before the adoption date) of components initially classified as held for sale in~~annual reporting periods beginning ~~on or~~ after December 15, ~~2014. Early adoption is~~2015, including interim periods within that reporting period and may be applied retrospectively, with early application permitted. The Company is currently evaluating ~~this guidance and does not expect that adoption~~the impact the pronouncement will have ~~a material effect~~ on the consolidated financial ~~statements.~~statements and related disclosures.

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” The amendment eliminates the deferral of certain consolidation standards for entities considered to be investment companies and modifies the consolidation analysis performed on certain types of legal entities. The pronouncement is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period and may be applied retrospectively, with early application permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” The accounting guidance requires that debt issuance costs related to a recognized debt liability be reported on the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of that debt liability. The pronouncement is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period with early application permitted for financial statements that have not been previously issued. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 3 — Acquisitions

On January ~~1, 2014,~~27, 2015, the Company acquired 100% of the ~~membership interests in Eclipse IOR Services,~~assets of International Artificial Lift, LLC ~~("EOGA"), a leading Enhanced Oil Recovery ("EOR"~~(“IAL”) ~~design and injection firm,~~ for ~~$6.4~~$1.3 million in cash consideration and ~~94,354~~60,024 shares of the ~~Company's Common Stock. EOGA’s enhanced~~Company’s common stock. IAL is a development-stage company that specializes in the design, manufacturing and service of next-generation hydraulic pumping units that serve to increase and maximize production for oil ~~recovery processes~~ and ~~its use of polymers to improve the performance of EOR projects has been combined with the Company’s existing EOR products and services.~~natural gas wells.

On April 1, 2014, the Company acquired 100% of the membership interests in SiteLark, LLC ~~("SiteLark"~~(“SiteLark”) for $0.4 million in cash and 5,327 shares of the ~~Company's~~Company’s common stock. SiteLark provides reservoir engineering and modeling services for a variety of hydrocarbon applications. Its services include proprietary software which assists engineers with reservoir simulation, reservoir engineering and waterflood optimization.

~~As discussed in more detail in the Company's 2013 Annual Report,~~On January 1, 2014, the Company acquired ~~Florida Chemical Company, Inc. ("Florida Chemical") on May 10, 2013 for a total purchase price of $106.4 million. Florida Chemical is one~~100% of the ~~world's largest processors~~membership interests in Eclipse IOR Services, LLC (“EOGA”), a leading Enhanced Oil Recovery (“EOR”) design and injection firm, for $5.3 million in cash consideration, net of ~~citrus oils~~cash received, and ~~a pioneer in solvent, chemical synthesis,~~94,354 shares of the Company’s Common Stock. EOGA’s enhanced oil recovery processes and ~~flavor and fragrance applications from citrus oils. Florida Chemical~~its use of polymers to improve the performance of EOR projects has been ~~an innovator in creating high performance, bio-based~~combined with the Company’s existing EOR products ~~for a variety of industries, including applications in the oil~~ and gas industry. This acquisition brings a portfolio of high performance renewable and sustainable chemistries that perform well in the oil and gas industry as well as non-energy related markets. This acquisition expands the Company's business into consumer and industrial chemical technologies which provide products for the flavor and fragrance industry and the specialty chemical industry. These technologies are used by food and beverage companies, fragrance companies, and companies providing household and industrial cleaning products.

~~Table of contents~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

During the three months ended September 30, 2014, the Company identified and recorded a final adjustment related to the acquisition of Florida Chemical. Current deferred tax assets were increased by $1.2 million with a corresponding decrease to goodwill within the consumer and industrial chemical technologies reporting unit. This final adjustment was not significant relative to the total consideration paid for Florida Chemical and, therefore, the final adjustment has not been retrospectively applied to the Company's balance sheet as of December 31, 2013. This adjustment, if recorded in 2013, would have had no impact on the 2013 consolidated statements of operations and cash flows.services.

Note 4 — Supplemental Cash Flow Information

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


	Nine months ended September 30,				Three months ended March 31,
	2014		2013		2015		2014
Supplemental non-cash investing and financing activities:
Value of common stock issued in acquisitions	$	2,043	$	52,711	$	1,014	$	1,750
Final Florida Chemical acquisition adjustment	1,162		—
Value of common stock issued in payment of accrued liability	600		—		—		600
Equipment acquired through capital leases	—		866
Exercise of stock options by common stock surrender	1,183		2,979		66		1,005
Supplemental cash payment information:
Interest paid	$	1,038	$	1,410	$	309	$	360
Income taxes paid	18,393		13,343		1,911		2,039

Note 5 — Revenue

The Company differentiates revenue and cost of revenue based on whether the source of revenue is attributable to products, rentals or services. Revenue and cost of revenue by source are as follows (in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2014		2013		2014		2013		2015		2014
Revenue:
Products	$	92,708	$	76,376	$	257,415	$	204,229	$	66,160	$	82,406
Rentals	16,966		15,375		45,954		46,794		11,824		13,923
Services	7,087		6,637		21,284		19,194		4,389		6,246
	$	116,761	$	98,388	$	324,653	$	270,217	$	82,373	$	102,575
Cost of revenue:
Products	$	57,315	$	50,367	$	155,048	$	131,875	$	45,624	$	47,732
Rentals	8,272		6,868		22,444		17,666		6,285		6,513
Services	3,074		1,610		9,042		7,179		2,042		2,715
Depreciation	2,022		2,041		6,051		5,771		1,895		1,934
	$	70,683	$	60,886	$	192,585	$	162,491	$	55,846	$	58,894

~~Table of contents~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Inventories

Inventories are as follows (in thousands):


	September 30, 2014			December 31, 2013			March 31, 2015		December 31, 2014
Raw materials	$	29,681		$	13,953		$	55,492	$	31,581
Work-in-process	2,880			1,904			3,211		3,129
Finished goods	51,026			50,019			39,459		51,248
Inventories	83,587			65,876			$	98,162	$	85,958
Less reserve for excess and obsolete inventory	(2,148		)	(2,744		)
Inventories, net	$	81,439		$	63,132

Note 7 — Property and Equipment

Property and equipment are as follows (in thousands):


	September 30, 2014			December 31, 2013			March 31, 2015			December 31, 2014
Land	$	5,852		$	5,088		$	7,122		$	6,780
Buildings and leasehold improvements	32,695			32,269			33,933			33,765
Machinery, equipment and rental tools	78,839			71,073			85,108			80,731
Equipment in progress	6,771			4,601			4,429			7,299
Furniture and fixtures	2,499			2,400			2,619			2,528
Transportation equipment	6,168			6,340			6,959			6,566
Computer equipment and software	7,513			7,617			10,322			7,605
Property and equipment	140,337			129,388			150,492			145,274
Less accumulated depreciation	(57,067		)	(50,274		)	(62,253		)	(59,163		)
Property and equipment, net	$	83,270		$	79,114		$	88,239		$	86,111

Depreciation expense, including expense recorded in cost of revenue, totaled ~~$3.3~~$3.4 million and $3.0 million for the three months ended ~~September 30,~~March 31, 2015 and 2014, ~~and 2013, respectively, and $9.7 million and $8.4 million for the nine months ended September 30, 2014 and 2013,~~ respectively.

Note 8 — Goodwill and Other Intangible Assets

During the ~~nine~~three months ended ~~September 30, 2014,~~March 31, 2015, the Company recognized ~~$6.0~~$1.7 million of goodwill within the ~~Energy Chemical~~Production Technologies reporting unit in connection with the ~~acquisitions of EOGA and SiteLark. During the three months ended September 30, 2014, the Company recorded a final adjustment related to the~~ acquisition of ~~Florida Chemical (see Note 3).~~IAL. There were no impairments of goodwill recognized during the three ~~and nine~~ months ended ~~September 30, 2014 and 2013.~~March 31, 2015.

Changes in the carrying value of goodwill for each reporting unit are as follows (in thousands):

Energy Chemical Technologies Consumer and Industrial Chemical Technologies Teledrift® Total
Balance at December 31, 2013 $ 30,296
$ 20,642
$ 15,333
$ 66,271
Final Florida Chemical acquisition
adjustment
—
(1,162 ) —
(1,162 )
Addition upon acquisition of EOGA 5,455
—
—
5,455
Addition upon acquisition of SiteLark 567
—
—
567
Balance at September 30, 2014 $ 36,318
$ 19,480
$ 15,333
$ 71,131



	Energy Chemistry Technologies		Consumer and Industrial Chemistry Technologies		Teledrift^®		Production Technologies		Total
Balance at December 31, 2014	$	36,318	$	19,480	$	15,333	$	—	$	71,131
Addition upon acquisition of IAL	—		—		—		1,689		1,689
Balance at March 31, 2015	$	36,318	$	19,480	$	15,333	$	1,689	$	72,820

Finite lived intangible assets acquired are amortized on a straight-line basis over two to 20 years. Amortization of finite lived intangible assets acquired totaled $1.2 million and ~~$1.3~~$1.2 million for the three months ended ~~September 30,~~March 31, 2015 and 2014, ~~and 2013, respectively, and $3.6~~respectively.

Amortization of deferred financing costs was $0.1 million and ~~$2.7~~$0.1 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2015 and 2014, ~~and 2013,~~ respectively.

~~Table of contents~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Amortization of deferred financing costs was $0.1 million and $0.3 million for the three and nine months ended September 30, 2014, respectively. Amortization of deferred financing costs was not significant for the three and nine months ended September 30, 2013.

Note 9 — Long-Term Debt and Credit Facility

Long-term debt is as follows (in thousands):


	September 30, 2014			December 31, 2013			March 31, 2015			December 31, 2014
Long-term debt:
Borrowings under revolving credit facility							$	17,274		$	8,500
Term loan	$	37,327		$	45,833		30,756			35,541
Borrowings under revolving credit facility	4,224			16,272
Total long-term debt	41,551			62,105			48,030			44,041
Less current portion of long-term debt	(11,367		)	(26,415		)	(24,417		)	(18,643		)
Long-term debt, less current portion	$	30,184		$	35,690		$	23,613		$	25,398

Credit Facility

On May 10, 2013, the Company and certain of its subsidiaries (the “Borrowers”) entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC Bank”). The Company may borrow under the Credit Facility for working capital, permitted acquisitions, capital expenditures and other corporate purposes. Under terms of the Credit Facility, as amended, ~~on December 31, 2013,~~ the Company (a) may borrow up to $75 million under a revolving credit facility and (b) has borrowed $50 million under a term loan.

The Credit Facility is secured by substantially all of the ~~Company's~~Company’s domestic real and personal property, including accounts receivable, inventory, land, buildings, equipment and other intangible assets. The Credit Facility contains customary representations, warranties, and both affirmative and negative covenants, including a financial covenant to maintain a consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to debt ratio of 1.10 to 1.00, a financial covenant to maintain a ratio of funded debt to adjusted EBITDA of not greater than 4.0 to 1.0, and an annual limit on capital expenditures of approximately ~~$36~~$34 million. The Credit Facility restricts the payment of cash dividends on common stock. In the event of default, PNC Bank may accelerate the maturity date of any outstanding amounts borrowed under the Credit Facility.

The Credit Facility includes a provision that 25% of EBITDA minus cash paid for taxes, dividends, debt payments and unfunded capital expenditures, not to exceed $3.0 million for any year, be paid within 60 days of the fiscal year end. For the year ended December 31, ~~2013,~~2014, the excess cash flow exceeded $3.0 million. Consequently, the Company paid $3.0 million on its term loan balance to PNC Bank on March ~~3, 2014.~~2, 2015. This amount is classified as current debt at December 31, ~~2013.~~2014.

Each of the Company’s domestic subsidiaries is fully obligated for Credit Facility indebtedness as a ~~Borrower~~borrower or as a guarantor.

(a) Revolving Credit Facility

Under the revolving credit facility, the Company may borrow up to $75 million through May 10, 2018. This includes a sublimit of $10 million that may be used for letters of credit. The revolving credit facility is secured by substantially all of the ~~Company's~~Company’s domestic accounts receivable and inventory.

At ~~September 30, 2014~~March 31, 2015, eligible accounts receivable and inventory securing the revolving credit facility provided availability of $74.8 million under the revolving credit facility. Available borrowing capacity, net of outstanding borrowings, was ~~$70.6~~$57.5 million at ~~September 30, 2014~~March 31, 2015.

The interest rate on advances under the revolving credit facility varies based on the level of ~~borrowing.~~borrowing under the Credit Facility. Rates range (a) between PNC ~~Bank's~~Bank’s base lending rate plus 0.5% to 1.0% or (b) between the London Interbank Offered Rate (LIBOR) plus 1.5% to 2.0%. PNC ~~Bank's~~Bank’s base lending rate was 3.25% at ~~September 30, 2014~~March 31, 2015. The Company is required to pay a monthly facility fee of 0.25% per annum, on any unused amount under the commitment based on daily averages. At ~~September 30, 2014~~March 31, 2015, ~~$4.2~~$17.3 million was outstanding under the revolving credit facility, with ~~$0.2~~$6.3 million borrowed as base rate loans at an interest rate of 3.75% and ~~$4.0~~$11.0 million borrowed as LIBOR loans at an interest rate of ~~1.66%~~1.68%.

Borrowing under the revolving credit ~~agreement~~facility is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause.

~~Table of contents~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

(b) Term Loan

The Company increased borrowing to $50 million under the term loan on May 10, 2013. Monthly principal payments of $0.6 million are required. The unpaid balance of the term loan is due May 10, 2018. Prepayments are permitted, and may be required

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

in certain circumstances. Amounts repaid under the term loan may not be reborrowed. The term loan is secured by substantially all of the ~~Company's~~Company’s domestic land, buildings, equipment and other intangible assets.

The interest rate on the term loan varies based on the level of borrowing under the ~~revolving credit facility.~~Credit Facility. Rates range (a) between PNC ~~Bank's~~Bank’s base lending rate plus 1.25% to 1.75% or (b) between LIBOR plus 2.25% to 2.75%. At ~~September 30, 2014~~March 31, 2015, ~~$37.3~~$30.8 million was outstanding under the term loan, with ~~$0.3~~$0.8 million borrowed as base rate loans at an interest rate of 4.50% and ~~$37.0~~$30.0 million borrowed as LIBOR loans at an interest rate of ~~2.41%~~2.43%.

~~Convertible Notes~~

The Company’s convertible notes have consisted of Convertible Senior Unsecured Notes (“2008 Notes”) and Convertible Senior Secured Notes (“2010 Notes”). On February 15, 2013, the Company repurchased the remaining ~~$5.2 million~~ of outstanding 2008 Notes for cash equal to the original principal amount, plus accrued and unpaid interest. These 2008 Notes were either tendered by the holder pursuant to the Company's tender offer or were redeemed by the Company pursuant to provisions of the indenture for the 2008 Notes. Following this repurchase, the Company no longer has any outstanding convertible senior notes.

~~Share Lending Agreement~~

Concurrent with the offering of the 2008 Notes, the Company entered into a share lending agreement (the “Share Lending Agreement”) with Bear, Stearns International Limited which was subsequently acquired and became an indirect, wholly owned subsidiary of JPMorgan Chase & Company (the “Borrower”). In accordance with the Share Lending Agreement, the Company loaned ~~3.8 million~~ shares of its common stock (the “Borrowed Shares”) to the Borrower for a period commencing February 11, 2008 and ending on the earlier of February 15, 2028 or the date the 2008 Notes were paid. The Borrower was permitted to use the Borrowed Shares only for the purpose of directly or indirectly facilitating the sale of the 2008 Notes and for the establishment of hedge positions by holders of the 2008 Notes. The Company did not require collateral to mitigate any inherent or associated risk of the Share Lending Agreement.

~~The Company did not receive any proceeds for the Borrowed Shares, but did receive a nominal loan fee of~~ ~~$0.0001~~ for each share loaned. The Borrower retained all proceeds from sales of Borrowed Shares pursuant to the Share Lending Agreement. Upon conversion or replacement of the 2008 Notes, the number of Borrowed Shares proportionate to the converted or repaid notes were to be returned to the Company. The Borrowed Shares were issued and outstanding for corporate law purposes. Accordingly, holders of Borrowed Shares possessed all of the rights of a holder of the Company’s outstanding shares, including the right to vote the shares on all matters submitted to a vote of stockholders and the right to receive any dividends or other distributions declared or paid on outstanding shares of common stock. Under the Share Lending Agreement, the Borrower agreed to pay to the Company, within one business day after a payment date, an amount equal to any cash dividends that the Company paid on the Borrowed Shares, and to pay or deliver to the Company, upon termination of the loan of Borrowed Shares, any other distribution, in liquidation or otherwise, that the Company made on the Borrowed Shares.

To the extent the Borrowed Shares loaned under the Share Lending Agreement were not sold or returned to the Company, the Borrower agreed to not vote any borrowed shares of which the Borrower was the owner of record. The Borrower also agreed, under the Share Lending Agreement, to not transfer or dispose of any borrowed shares unless such transfer or disposition was pursuant to a registration statement that was effective under the Securities Act of 1933, as amended. Investors that purchased shares from the Borrower, and all subsequent transferees of such purchasers, were entitled to the same voting rights, with respect to owned shares, as any other holder of common stock.

~~During 2011 and 2012, the Borrower returned~~ ~~1,360,442~~ ~~shares of the Company’s borrowed common stock. On January 22, 2013, the remaining~~ ~~2,439,558~~ shares of the Company's common stock held by J.P. Morgan Markets Limited were returned to the Company. No consideration was paid by the Company for the return of the Borrowed Shares. The Share Lending Agreement has been terminated.

~~Shares that had been loaned under the Share Lending Agreement were not considered outstanding for the purpose of computing and reporting earnings per share.~~

~~Table of contents~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 10 — Earnings (Loss) Per Share

Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income ~~adjusted for the effect of assumed conversion of convertible notes,~~(loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.

~~In connection with the sale of the 2008 Notes, the Company entered into a Share Lending Agreement for~~ ~~3.8 million~~ shares of the Company’s common stock (see Note 9). Contractual undertakings of the Borrower had the effect of substantially eliminating the economic dilution that otherwise would result from the issuance of the Borrowed Shares, and all shares outstanding under the Share Lending Agreement were contractually obligated to be returned to the Company. As a result, shares loaned under the Share Lending Agreement were not considered outstanding for the purpose of computing and reporting earnings per share. The Share Lending Agreement was terminated on January 22, 2013 upon the return of all Borrowed Shares to the Company.

On February 15, 2013, the Company repurchased the remaining $5.2 million of outstanding 2008 Notes for cash. Following this repurchase, the Company no longer has any outstanding convertible senior notes. For the nine months ended September 30, 2013, the Company’s convertible notesPotentially dilutive securities were excluded from the calculation of diluted ~~earnings~~earning (loss) per ~~common~~ share ~~as inclusion was anti-dilutive. In addition,~~ for the three ~~and nine~~ months ended ~~September 30, 2013, approximately~~ ~~0.1~~March 31, 2015, since including them would have an anti-dilutive effect on earnings (loss) per share due to the net loss incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted earnings (loss) per share calculation were 1.5 million stock options ~~with an exercise price in excess of the average market price of the Company’s common~~and 0.4 million restricted stock ~~were excluded from the calculation of diluted earnings per common share.~~units.

Basic and diluted earnings per common share are as follows (in thousands, except per share data):


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2014		2013		2014		2013		2015			2014
Net income - Basic and Diluted	$	14,272	$	8,968	$	37,330	$	25,173
Net income (loss) - Basic and Diluted									$	(1,515	)	$	12,018

Weighted average common shares outstanding - Basic	54,789		52,742		54,464		50,819		54,448			53,948
Assumed conversions:
Incremental common shares from warrants	—		1,365		162		1,404
Incremental common shares from stock warrants									—			486
Incremental common shares from stock options	867		1,134		901		1,143		—			949
Incremental common shares from restricted stock units	34		76		9		41		—			15
Weighted average common shares outstanding - Diluted	55,690		55,317		55,536		53,407		54,448			55,398

Basic earnings per common share	$	0.26	$	0.17	$	0.69	$	0.50
Diluted earnings per common share	$	0.26	$	0.16	$	0.67	$	0.47
Basic earnings (loss) per common share									$	(0.03	)	$	0.22
Diluted earnings (loss) per common share									$	(0.03	)	$	0.22

Note 11 — 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.

~~Table of contents~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Fair Value of Other Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair value due to the short-term nature of these accounts. The Company had no cash equivalents at ~~September 30, 2014~~March 31, 2015 or December 31, ~~2013.~~2014.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The carrying value and estimated fair value of the Company’s long-term debt are as follows (in thousands):


	September 30, 2014				December 31, 2013				March 31, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Term loan	$	37,327	$	37,327	$	45,833	$	45,833	$	30,756	$	30,756	$	35,541	$	35,541
Borrowings under revolving credit facility	4,224		4,224		16,272		16,272		17,274		17,274		8,500		8,500

The carrying value of the term loan and borrowings under the revolving credit facility approximate their fair value because the interest rates are variable.

Assets Measured at Fair Value on a Nonrecurring Basis

The ~~Company's~~Company’s non-financial assets, including property and equipment, goodwill and other intangible assets are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. No impairment of any of these assets was recognized during the ~~nine~~three months ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~.

~~Liabilities Measured at Fair Value on a Recurring Basis~~

At September 30, 2014 and December 31, 2013, no liabilities were required to be measured at fair value on a recurring basis. There were no transfers in or out of either Level 1 or Level 2 fair value measurements during the ~~nine months ended September 30, 2014 and 2013~~ ~~and the year ended~~ ~~December 31, 2013. During the~~ ~~nine months ended September 30, 2014 and 2013~~ ~~and the year ended~~ ~~December 31, 2013, there were no transfers in or out of the Level 3 hierarchy.~~

Note 12 — Income Taxes

The Company’s corporate organizational structure requires the filing of two separate consolidated U.S. Federal income tax returns. Taxable income of one group cannot be offset by tax attributes, including net operating losses, of the other group.

A reconciliation of the effective tax rate to the U.S. federal statutory tax rate is as follows:


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2014		2013		2014		2013		2015		2014
Federal statutory tax rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.8		3.6		2.1		3.2		5.4		2.3
Return to accrual adjustments	(4.9	)	1.1		(1.8	)	0.4
Non-US income taxed at different rates									(23.6	)	—
Non-deductible expenses									5.4		0.1
Domestic production activities deduction	(1.9	)	(2.3	)	(2.4	)	(2.4	)	(1.1	)	(2.7	)
Other	(0.2	)	1.2		0.1		0.5
Effective income tax rate	29.8	%	38.6	%	33.0	%	36.7	%	21.1	%	34.7	%

~~Fluctuations~~The decline in the effective tax ~~rates were historically impacted by permanent tax differences with no associated income tax impact and existing deferred tax asset valuation allowances. The return to accrual adjustments~~rate for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2015, compared to the three months ended March 31, 2014, ~~include~~was primarily due to the ~~effect~~mix of ~~a decrease in deferred tax liabilities related~~pre-tax profit and loss between domestic and international taxing jurisdictions. The Company plans to ~~a change in state tax apportionment.~~permanently reinvest profits from international operations into opportunities to expand the Company’s international presence.

~~Table of contents~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Deferred taxes are presented in the balance sheets as follows (in thousands):

September 30, 2014 December 31, 2013
Current deferred tax assets $ 2,840
$ 2,522
Non-current deferred tax assets 14,090
15,012
Non-current deferred tax liabilities (26,048 ) (27,575 )
Net deferred tax assets (liabilities) $ (9,118 ) $ (10,041 )

During the three months ended September 30, 2014, the Company recorded a final adjustment related to the acquisition of Florida Chemical that increased current deferred tax assets by $1.2 million (see Note 3).



	March 31, 2015			December 31, 2014
Current deferred tax assets	$	1,799		$	2,696
Non-current deferred tax assets	13,486			12,907
Non-current deferred tax liabilities	(23,297		)	(25,982		)
Net deferred tax assets (liabilities)	$	(8,012	)	$	(10,379	)

Note 13 — Convertible Preferred Stock and Stock Warrants

In August 2009, the Company sold ~~16,000~~ ~~units (the “Units”), consisting of preferred stock and warrants for~~ ~~$1,000~~ ~~per Unit. Each Unit consisted of one share of Series A cumulative~~ convertible preferred stock ~~(“Convertible Preferred Stock”),~~with detachable warrants to purchase ~~up to~~ ~~155~~ ~~shares of the Company's common stock at an exercise price of~~ ~~$2.31~~ ~~per share (“Exercisable Warrants”) and detachable contingent warrants to purchase up to~~ ~~500~~ ~~shares of the Company's common stock at an exercise price of~~ ~~$2.45~~ ~~per share (“Contingent Warrants”).~~

~~Preferred Stock~~

~~Each share of Convertible Preferred Stock was convertible at any time, at the holder’s option, into~~ ~~434.782~~ shares of the Company’s common stock. ~~The conversion rate represented an equivalent conversion price of approximately~~ ~~$2.30~~ ~~per share of common stock.~~

~~Each share of Convertible Preferred Stock had a liquidation preference of~~ ~~$1,000. Dividends accrued at a rate of~~ ~~15%~~ of the liquidation preference per year and accumulated, if not paid quarterly. Subsequent to February 11, 2010, the Company had the ability to convert the preferred shares into common shares if the closing price of the common stock met certain price criteria. In the event any Convertible Preferred Stock was converted, the Company was obligated to pay an amount, in cash or common stock, equal to ~~eight~~ ~~quarterly dividend payments less any dividends previously paid.~~

In February 2011, the Company exercised its contractual right to mandatorily convert all outstanding shares of ~~Convertible Preferred Stock~~convertible preferred stock into shares of common ~~stock at the prevailing conversion rate of~~ ~~434.782~~ ~~shares of common stock for each share of preferred~~ stock. Currently, the Company has no issued or outstanding shares of preferred stock.

~~Stock Warrants~~

~~Exercisable Warrants were exercisable upon issuance and expire~~ ~~August 12, 2014, if not exercised. Contingent Warrants became exercisable on November 9, 2009, and expire~~ ~~November 9, 2014~~, if not exercised. Prior to June 14, 2012, the warrants contained anti-dilution price protection in the event the Company issued shares of common stock or securities exercisable for, or convertible into, common stock at a price per share less than the warrants’ exercise price. In accordance with these contractual anti-dilution price adjustment provisions, the warrants were re-priced as a result of a payment of a portion of the initial and deferred commitment fees related to the Company’s term loan with common stock on March 31, 2010 and September 30, 2010.

Due to the anti-dilution price adjustment provisions established at the issuance date, the warrants were deemed to be a liability and were recorded at fair value at the date of issuance. The warrant liability was adjusted to fair value at the end of each reporting period through the statement of operations during the period the anti-dilution price adjustment provisions were in effect. On June 14, 2012, contractual provisions within the Company’s Exercisable and Contingent Warrant agreements were modified to eliminate the anti-dilution price adjustment provisions of the warrants and remove the cash settlement provisions in the event of a change of control. The amended warrants then qualified to be classified as equity. Accordingly, the Company revalued the warrants as of June 14, 2012, the date of contractual amendment. The change in fair value of the warrant liability compared to the fair value on December 31, 2011, ~~$2.6 million, was recognized in income during 2012. The revalued warrant liability of~~ ~~$14.0 million~~ ~~was reclassified to additional-paid-in-capital on June 14, 2012. There were no longer fair value adjustments because the warrants continued to meet the criteria for equity classification.~~

The Company used the Black-Scholes option-pricing model to estimate the fair value of the warrant liability for each reporting period. On June 14, 2012, the date the warrants were amended, inputs into the fair value calculation included the actual remaining term of the warrants, a volatility rate of ~~58.1%, a risk-free rate of return of~~ ~~0.36%, and an assumed dividend rate of~~ ~~zero~~.

~~Table of contents~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

On February 7, 2014, warrants were exercised to purchase 1,277,250 shares of the Company's common stock at $1.21 per share. The Company received cash proceeds of $1.5 million in connection with the warrants exercised. Following the exercise, the Company no longer ~~had~~has any outstanding ~~warrants from~~warrants.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Stock Repurchase Program

In November 2012, the Company's Board of Directors authorized the repurchase of up to $25 million of the Company's common stock. Repurchases may be made in the open market or through privately negotiated transactions. During the three months ended March 31, 2015, the Company repurchased 180,190 shares of its ~~sale~~outstanding common stock on the open market at a cost of ~~preferred stock and warrants in August 2009.~~$2.7 million, inclusive of transaction costs, or an average price of $14.71 per share.

As of March 31, 2015, the Company has $12.0 million remaining under its share repurchase program.

Note 1415 — Business Segment, Geographic and Major Customer Information

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by chief operating decision-makers in deciding how to allocate resources and assess performance. The operations of the Company are categorized into four reportable segments: Energy Chemistry Technologies (previously referred to as Energy Chemical Technologies), Consumer and Industrial Chemistry Technologies (previously referred to as Consumer and Industrial Chemical ~~Technologies,~~Technologies), Drilling Technologies and Production Technologies.

Energy ~~Chemical~~Chemistry Technologies designs, develops, manufactures, packages and markets specialty ~~chemicals~~chemistries used in oil and natural gas well drilling, cementing, completion, stimulation and production. In addition, the Company's chemistries are used in specialized enhanced and improved oil recovery markets. Activities in this segment also include construction and management of automated material handling facilities and management of loading facilities and blending operations for oilfield services companies.

Consumer and Industrial ~~Chemical~~Chemistry Technologies designs, develops and manufactures products that are sold to companies in the flavor and fragrance industries and the specialty chemical industry. These technologies are used by beverage and food companies, fragrance companies, and companies providing household and industrial cleaning products.

Drilling Technologies rents, sells, inspects, manufactures and markets ~~down-hole~~downhole drilling equipment used in energy, mining, water well and industrial drilling activities.


•	Production Technologies assembles and markets production-related equipment, including the Petrovalve^TM product line of rod pump components, electric submersible pumps, gas separators, valves and services that support natural gas and oil production activities.

The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. 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 reportable segments.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

As of and for the three months ended September 30, Energy Chemical Technologies Consumer and Industrial Chemical Technologies Drilling Technologies Production Technologies
Corporate and
Other
Total
2014
Net revenue from external customers $ 68,181
$ 13,713
$ 29,920
$ 4,947
$ —
$ 116,761
Gross margin 28,424
3,310
11,928
2,416
—
46,078
Income (loss) from operations 19,903
1,758
5,557
1,583
(7,954 ) 20,847
Depreciation and amortization 1,103
547
2,433
81
298
4,462
Total assets 144,738
89,574
142,774
18,252
17,080
412,418
Capital expenditures 2,580
7
818
141
703
4,249

2013
Net revenue from external customers $ 51,670
$ 15,292
$ 27,569
$ 3,857
$ —
$ 98,388
Gross margin 21,849
3,588
10,821
1,244
—
37,502
Income (loss) from operations 16,247
2,301
4,309
769
(8,539 ) 15,087
Depreciation and amortization 932
382
2,438
60
213
4,025
Total assets 121,876
97,129
136,832
16,542
8,600
380,979
Capital expenditures 161
165
1,596
225
328
2,475

~~Table of contents~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~


As of and for the nine months ended September 30,	Energy Chemical Technologies		Consumer and Industrial Chemical Technologies		Drilling Technologies		Production Technologies		Corporate and Other			Total
As of and for the three months ended March 31,														Energy Chemistry Technologies		Consumer and Industrial Chemistry Technologies		Drilling Technologies			Production Technologies			Corporate and Other			Total
2015
Net revenue from external customers														$	46,643	$	13,463	$	18,694		$	3,573		$	—		$	82,373
Gross margin														16,100		3,706		5,991			730			—			26,527
Income (loss) from operations														6,821		2,381		(637		)	(539		)	(9,315		)	(1,289		)
Depreciation and amortization														1,204		552		2,319			125			370			4,570
Total assets														152,423		92,438		141,229			25,176			3,741			415,007
Capital expenditures														2,361		22		2,124			638			445			5,590

2014
Net revenue from external customers	$	193,148	$	39,351	$	82,061	$	10,093	$	—		$	324,653	$	62,377	$	13,030	$	24,901		$	2,267		$	—		$	102,575
Gross margin	85,074		10,237		32,477		4,280		—			132,068		29,220		4,033		9,788			640			—			43,681
Income (loss) from operations	60,690		5,064		13,073		1,925		(23,432		)	57,320		21,623		2,335		3,317			(79		)	(8,398		)	18,798
Depreciation and amortization	3,264		1,529		7,363		244		876			13,276		1,067		433		2,437			70			212			4,219
Total assets	144,738		89,574		142,774		18,252		17,080			412,418		137,638		93,217		136,141			14,864			8,656			390,516
Capital expenditures	5,383		37		6,139		252		1,683			13,494		1,386		14		3,296			61			233			4,990

2013
Net revenue from external customers	$	144,029	$	27,967	$	86,268	$	11,953	$	—		$	270,217
Gross margin	61,548		7,281		34,622		4,275		—			107,726
Income (loss) from operations	45,300		4,648		15,510		2,712		(27,004		)	41,166
Depreciation and amortization	2,201		634		7,215		181		717			10,948
Total assets	121,876		97,129		136,832		16,542		8,600			380,979
Capital expenditures	3,077		165		4,066		1,669		1,008			9,985

Geographic Information

Revenue by country is based on the location where services are provided and products are used. No individual country other than the United States (“U.S.”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2014		2013		2014		2013		2015		2014
U.S.	$	92,643	$	84,640	$	271,663	$	234,151	$	64,195	$	87,331
Other countries	24,118		13,748		52,990		36,066		18,178		15,244
Total	$	116,761	$	98,388	$	324,653	$	270,217	$	82,373	$	102,575

Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.

Major Customers

~~One customer accounted for 12.7% and 15.5%~~Revenue from major customers, as a percentage of consolidated revenue, is as follows:

* This customer did not account for more than 10% of revenue during the ~~three months ended September 30, 2014 and 2013, respectively, and 17.0% and 16.6% of consolidated revenue for the nine months ended September 30, 2014 and 2013, respectively.~~ period.

Over 93% of the revenue from ~~this customer~~these customers was for sales in the Energy ~~Chemical~~Chemistry Technologies segment.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1516 — Commitments and Contingencies

Litigation

The Company is subject to routine litigation and other claims that arise in the normal course of business. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

~~Representation Agreements~~EPA Environmental Proceeding

~~In February 2011,~~On January 9, 2015, FC Pro, LLC (“FC Pro”), a wholly-owned subsidiary of the Company, ~~entered into~~ ~~two~~ ~~separate representation agreements with Basin Supply Corporation~~received a letter and proposed consent agreement and final order from the United States Environmental Protection Agency (“~~Basin Supply”~~EPA”)~~, a multinational, energy industry-focused supply chain management company, to market certain~~ concerning alleged violations of the ~~Company’s~~federal hazardous waste regulations at FC Pro’s specialty ~~chemicals~~chemical blending facility in Waller, Texas. Specifically, EPA alleged that FC Pro failed to comply with certain notification, operating, and ~~down-hole drilling products~~reporting requirements applicable to generators or large quantity generators of hazardous waste. FC Pro has resolved the alleged violations pursuant to a consent agreement and ~~services within various international markets, including~~final order under which it did not admit or deny the ~~Middle East, Africa, Latin America~~allegations and agreed to pay an administrative penalty of $410,868, obtain an EPA identification number, and develop certain specified operating procedures. The consent agreement and final order has been signed by EPA and will become final upon being ratified by the ~~former Soviet Union. Both agreements are effective through December 31, 2015. Under each agreement, Basin Supply is eligible~~regional judicial officer. Since this enforcement case was initiated, FC Pro has made changes to ~~receive warrants to purchase Flotek common stock (at an exercise price of 125%~~its operating practices at its Waller facility that it believes has resulted in it no longer generating hazardous waste at that facility.

The amount of the ~~price of Flotek's common stock on~~civil penalty has been recorded as selling, general and administrative expense during the ~~grant date) upon exceeding contractually defined annual base and “stretch” sales targets. The number of warrants that could be issued under the terms of each of the agreements is~~ ~~100,000~~ ~~during 2014.~~three months ended March 31, 2015.

~~Table of contents~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Concentrations and Credit Risk

The majority of the Company’s revenue is derived from the oil and gas industry. Customers include major oilfield services companies, major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies and state-owned national oil companies. This concentration of customers in one industry increases credit and business risks.

The Company is subject to significant concentrations of credit risk within trade 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 maintained at ~~one~~a major financial institution and balances often exceed insurable amounts.

1917

~~Table of contents~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Quarterly Report”), and in particular, Part I, Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Forward-looking statements are not historical facts, but instead represent the Company’s current assumptions and beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to Flotek Industries, Inc.’s (“Flotek” or the “Company”) business plan, objectives, expected operating results and assumptions upon which those statements are based. The forward-looking statements contained in this Quarterly Report are based on information available as of the date of this Quarterly Report.

The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words including, but not limited to, “anticipate,” “believe,” “estimate,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,~~��~~” “should,” ~~“could,~~“could” and “would,” ~~etc.~~or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions, and are not to be considered guarantees of future performance. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.

A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements is included in Part I, Item 1A - “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, ~~2013~~2014, (the “Annual Report”) and periodically in subsequent reports filed with the Securities and Exchange Commission (the “SEC”). The Company has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the unaudited consolidated financial statements and the related notes thereto, as well as the Annual Report. Phrases such as “Company,” “we,” “our” and “us” refer to Flotek Industries, Inc. and its subsidiaries.

Executive Summary

Flotek is a global, diversified, technology-driven company that develops and supplies oilfield products, services and equipment to the oil, gas and mining industries, and high value compounds to companies that make cleaning products, cosmetics, food and beverages, and other products that are sold in the consumer and industrial markets.

The Company’s oilfield businesses include specialty ~~chemicals~~chemistries and logistics, ~~down-hole~~downhole drilling tools and production-related tools. Flotek’s technologies enable customers to drill wells more efficiently, increase well production and decrease well operating costs. The Company also provides automated bulk material handling, loading facilities and blending capabilities. The Company sources citrus oil domestically and internationally and is one of the largest processors of citrus oil in the world. Products produced from processed citrus oil include (1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly ~~chemicals~~chemistries for use in numerous industries around the world, specifically the oil and gas (“O&G”) industry.

Flotek operates in over 20 domestic and international markets, including the Gulf Coast, Southwest, West Coast, Rocky Mountains, Northeastern and Mid-Continental regions of the United States (the “U.S.”), Canada, Mexico, Central America, South America, Europe, Africa, Middle East, Australia and Asia-Pacific. Customers include major integrated O&G companies, oilfield services companies, independent O&G companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies. The ~~Company's Consumer and Industrial Chemical Technologies (“CICT”) segment~~Company also serves customers who purchase non-energy-related citrus oil and related products, including household and commercial cleaning product companies, fragrance and cosmetic companies, and food manufacturing companies.

2018

~~Table of contents~~

The operations of the Company are categorized into four reportable segments: Energy ~~Chemical Technologies, Consumer and Industrial Chemical Technologies, Drilling Technologies and Production~~Chemistry Technologies (previously referred to as ~~Artificial Lift~~Energy Chemical Technologies)., Consumer and Industrial Chemistry Technologies (previously referred to as Consumer and Industrial Chemical Technologies), Drilling Technologies and Production Technologies.

Energy ~~Chemical~~Chemistry Technologies designs, develops, manufactures, packages and markets specialty ~~chemicals~~chemistries used in O&G well drilling, cementing, completion, stimulation and production. In addition, the Company's chemistries are used in specialized enhanced and improved oil recovery markets ("EOR" or "IOR"). Activities in this segment also include construction and management of automated material handling facilities and management of loading facilities and blending operations for oilfield services companies.

Consumer and Industrial ~~Chemical~~Chemistry Technologies designs, develops and manufactures products that are sold to companies in the flavor and fragrance industries and the specialty ~~chemical~~chemistry industry. These technologies are used by beverage and food companies, fragrance companies, and companies providing household and industrial cleaning products.

Drilling Technologies rents, sells, inspects, manufactures and markets ~~down-hole~~downhole drilling equipment used in energy, mining, water well and industrial drilling activities.

Production Technologies assembles and markets production-related equipment, including the Petrovalve product line of rod pump components, electric submersible pumps, gas separators, valves and services that support natural gas and oil production activities.


•	Production Technologies assembles and markets production-related equipment, including the Petrovalve^TM product line of rod pump components, electric submersible pumps, gas separators, valves and services that support natural gas and oil production activities.

Market Conditions

The Company’s success is sensitive to a number of factors, which include, but are not limited to, drilling activity, customer demand for its advanced technology products, market prices for raw materials and governmental actions.

Drilling activity levels are influenced by a number of factors, including the number of rigs in operation, the geographical areas of rig activity, and drill rig efficiency (rig days required per well). Additional factors that influence the level of drilling activity include:

Historical, current, and anticipated future O&G prices,

Federal, State and local governmental actions that may encourage or discourage drilling activity,

Customers’ strategies relative to capital funds allocations,

Weather conditions, and

Technological changes to drilling methods and economics.

Historical North American drilling activity is reflected in “TABLE A” on the following page.

Customers’ demand for advanced technology products and services provided by the Company are dependent on their recognition of the value of:

Chemistries that improve the economics of their O&G operations,

Drilling products that improve drilling operations and efficiencies, ~~and~~

Chemistries that are economically viable, socially responsible and ecologically ~~sound.~~sound, and

Production technologies that improve production and production efficiencies in maturing wells.

Market prices for citrus oils can be influenced by:

Historical, current, and anticipated future production levels of the global citrus (primarily orange) crop,

Weather related risks, ~~and~~

Health and condition of citrus trees (e.g., disease and pests)., and

International competition and pricing pressures resulting from natural and artificial pricing influences.

Governmental actions may restrict the future use of hazardous chemicals, including but not limited to, the following industrial applications:

O&G drilling and completion operations,

O&G production operations, and

Non-O&G industrial solvents.

2119

~~Table of contents~~


TABLE A
	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2014	2013	% Change		2014	2013	% Change		2015	2014	% Change
North American Average Active Drilling Rigs
U.S.	1,903	1,770	7.5	%	1,845	1,763	4.7	%	1,403	1,779	(21.1	)%
Canada	386	350	10.3	%	370	349	6.0	%	313	525	(40.4	)%
Total Average North American Drilling Rigs	2,289	2,120	8.0	%	2,215	2,112	4.9	%	1,716	2,304	(25.5	)%
U.S. Average Active Drilling Rigs by Type
Vertical	372	436	(14.7	)%	385	443	(13.1	)%	217	387	(43.9	)%
Horizontal	1,314	1,073	22.5	%	1,246	1,096	13.7	%	1,055	1,182	(10.7	)%
Directional	217	261	(16.9	)%	214	224	(4.5	)%	131	210	(37.6	)%
Total Average U.S. Drilling Rigs by Type	1,903	1,770	7.5	%	1,845	1,763	4.7	%	1,403	1,779	(21.1	)%
Oil vs. Natural Gas Average North American Drilling Rigs
Oil	1,797	1,609	11.7	%	1,731	1,610	7.5	%	1,257	1,766	(28.8	)%
Natural Gas	492	511	(3.7	)%	484	502	(3.6	)%	459	538	(14.7	)%
Total North America	2,289	2,120	8.0	%	2,215	2,112	4.9	%	1,716	2,304	(25.5	)%
U.S. Average Wells Drilled per Quarter per Rig	5.19	5.31	(2.3	)%	5.22	5.20	0.4	%

Source: Rig ~~and well counts are~~count is per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are the averages of the weekly rig count activity. ~~Average wells drilled per quarter per~~

As crude oil prices peaked at approximately $106/barrel in June 2014 and began the descent to the current levels hovering around $50/barrel, total US rig iscount decreased from 1,929 rigs on November 21, 2014, to 1,048 rigs as of March 27, 2015, representing a 45.6% drop. Additionally, as the ~~number~~total US rig count dropped, the horizontal rig count declined 40.8%, the directional rig count decreased by 55.1%, and the vertical rig count fell by 59.1%. Horizontal rigs now represent 77.5% of ~~wells drilled~~the total working US rig count, versus 71.1% at the peak US drilling activity level in November 2014.

The Canadian rig count has had a similar response. Canadian rigs failed to reach the ~~reporting period divided by~~600 - 700 rig range normally achieved from mid-January through early March before the ~~average weekly~~spring thaw resulted in significantly reduced drilling activity. The Canadian rig ~~count. Current quarter well~~ count ~~data from Baker Hughes, Inc. is preliminary~~peaked on January 16, 2015, at 440 rigs and ~~is subject~~has fallen continuously through March 27, 2015, to ~~revision.~~120 rigs.

During the three ~~and nine~~ months ended ~~September 30, 2014,~~March 31, 2015, the total North American active drilling rig count ~~saw an increase~~decreased 25.5% when compared to the ~~comparable periods~~same period of ~~2013, primarily in oil drilling rigs. Average~~2014. The average North American oil drilling rig ~~activity increased~~count decreased by ~~11.7% and 7.5%~~28.8% for the three ~~and nine~~ months ended ~~September 30, 2014, respectively,~~March 31, 2015, when compared to the same ~~periods~~period of ~~2013.~~2014. The average North American natural gas drilling rig count decreased ~~by 3.7% and 3.6%~~14.7% for the three ~~and nine~~ months ended ~~September 30, 2014, respectively,~~March 31, 2015, compared to the same ~~periods~~period of ~~2013.~~2014.

Overall U.S. rig activity increased 7.5% and 4.7% for the three and nine months ended September 30, 2014 compared to the same periods in 2013, and the number of wells drilled per rig per quarter held relatively constant for the nine months ended September 30, 2014 at 5.22 compared to 5.20 for the same period in 2013. For the three and nine months ended September 30, 2014, U.S. drilling rigs by type continued to show a shift toward horizontal wells and away from vertical and directional wells.

Company Outlook

Future economic conditions are expected to remain consistent with recent market conditions. Increases in drilling rig operating efficiencies noted above are resulting in pricing pressure on rig-based operations. To some extent, those pressures impact drilling suppliers such as Flotek, especially in our Drilling Technologies segment. Our tools are being leased for a smaller amount of time per well drilled, which is partially offset by the expansionBeginning in the ~~number~~second half of ~~wells being drilled per~~2014 and continuing through the first quarter ~~per rig.~~

The Company is expanding its Energy Chemical Technologies and Drilling Technologies businesses by expanding its production capacity, developing innovative new products and pursuing and developing new market opportunities. The Company continues to repositionof 2015, the ~~Production Technologies segment to focus on niche technologies in the~~price of crude oil ~~and natural gas markets.~~declined dramatically. As a result, most North American exploration and production companies - many of ~~this repositioning,~~which are Flotek clients - are significantly reducing their exploration and drilling activity in 2015. The reduction in activity creates a more challenging environment in which to market the Company's broad range of energy technologies, from chemistry to drilling and production technologies. Although the Company expects demand for its oil and gas related products and services in North America to be impacted by these industry conditions, the Company plans to ~~increase capital allocated~~continue aggressive marketing of its oil and gas based products and services including its Complex nano-Fluid^® chemistries, Teledrift^® product line, recently introduced Stemulator^® product line and the growing line of production technologies. While international markets may react differently than North American markets to ~~this segment.~~the decline in crude prices, the Company expects similar market challenges around the globe. However, the Company believes there will continue to be new market opportunities available in the current price environment.

In response to the current market environment, the Company has been proactive in reducing costs to reflect current market conditions while, at the same time, remaining focused on preserving appropriate functions and capacity, which allows the Company to be opportunistic when market conditions improve. Cost reductions to date include the consolidation of certain operating bases, reducing lease and personnel expense; other headcount reductions and hiring restrictions that have not impacted customer service or production output; vendor price reductions that have partially mitigated gross margin erosion; and other cost controls that have reduced overall operating costs of our business. Capital spending has largely been limited to completion of existing projects with a focus on revenue-generating expenditures. The Company regularly evaluates its cost structure based on market conditions with a focus on continuous efficiency improvements.

Capital expenditures, exclusive of acquisitions, totaled ~~$13.5~~$5.6 million and ~~$10.0~~$5.0 million for the nine months ended September 30, 2014 and 2013, respectively. The Company continues to pursue selected strategic acquisitions and relationships, both domestically and internationally, when opportunities arise.

In November 2013, the Company signed a shareholder agreement with Tasneea Oil and Gas Technologies, LLC (“Tasneea”) an Omani Limited Liability Company, to form Omani based Flotek Gulf, LLC (“Flotek Gulf”) and Flotek Gulf Research, LLC (“Flotek Gulf Research”). During the three months ended ~~September 30,~~March 31, 2015 and 2014, ~~Flotek and Tasneea transferred initial capital into Flotek Gulf and Flotek Gulf Research. Flotek Gulf and Flotek Gulf Research will develop and market specialty chemistries~~respectively. Of the $5.6 million spent to date in 2015, 89% has been for the ~~oil and gas industry throughout the Middle East and North Africa. In the coming year, Flotek Gulf~~completion of projects started in 2014. The Company expects capital spending to ~~construct a manufacturing facility designed to produce Flotek's patented and proprietary products~~be approximately $21 million in 2015, inclusive of approximately $8 million for ~~distribution throughout the region.~~

~~Table~~construction of ~~contents~~

Effective January 1, 2014, the Company acquired Eclipse IOR Services, LLC (“EOGA”), a leading enhanced oil recovery (EOR) design and injection firm. EOGA’s expertise in enhanced oil recovery processes and the use of polymers to improve the performance of EOR projects has been combined withmajor facilities, including the Company’s ~~existing EOR products~~previously announced Global Research & Innovation Headquarters in Houston. The Company believes construction of this facility should generate substantial value in 2016 and ~~services.~~beyond. The ~~combined product~~Company will remain nimble in its core capital expenditure plans, adjusting as market conditions warrant.

The Company’s planned Global Research & Innovation Headquarters in Houston will allow for the development of new energy chemistries as well as expand collaboration between clients, leaders from academia and ~~service offerings are well positioned~~Company scientists. The Company believes these collaborative opportunities will become an important and distinguishing capability within the industry. The Company also plans to ~~serve~~continue to expand the ~~growing market for EOR products~~capabilities and ~~services.~~

~~On April 1, 2014, the Company acquired 100%~~use of the membership interests in SiteLark, LLC (“SiteLark”) for $0.4 million and 5,327 shares of the Company's common stock. SiteLark provides reservoir engineering and modeling services for a variety of hydrocarbon applications. Its services include proprietary software which assists engineers with reservoir simulation, reservoir engineering and waterflood optimization.

~~In May 2014, the Company launched~~ its patent pending ~~FracMax™~~FracMax^TM software ~~technology.~~ which should continue to enhance the Company’s sales and marketing efforts by validating the production and economic benefits of the Company’s core Complex nano-Fluid^® chemistries.

The FracMax™ ~~application~~analytical platform is an innovative software technology that allows the Company to quantitatively demonstrate the benefits associated with the use of the Company’s patented and proprietary Complex ~~nano-Fluid®~~nano-Fluid^® chemistries. The FracMax™ application has been integrated into the Company’s sales and marketing process leading to new sales opportunities. In October 2014, the Company announced the formation of FracMax Analytics, LLC, a wholly owned subsidiary that will use the FracMax™ ~~software~~analytical platform to provide customized data analysis to oil and gas operators, investors and other companies.

The Company ~~believes governmental reaction~~continues to ~~constituents’ environmental concerns regarding~~pursue selected strategic relationships, both domestically and internationally, to expand its business:

In March 2015, the Company entered into agreements with Solazyme, Inc (“Solazyme”) to globally commercialize Flocapso™, an innovative, advanced drilling fluid additive that combines Flotek’s patented Complex nano-Fluid^® chemistries with Solazyme’s proprietary Encapso^TM technology. Flocapso^TM will allow the use of water-based fluids in wells that previously required more expensive and invasive oil-based products, providing an environmentally superior, more efficient solution to drilling challenges. In addition, Flotek will market Solazyme’s Encapso™ lubricant - the first commercially available, biodegradable encapsulated lubricant for drilling fluids - in certain Middle Eastern markets.

In January 2015, the Company acquired 100% of the assets from International Artificial Lift, LLC (“IAL”), a development-stage company that specializes in the design, manufacturing and service of next-generation hydraulic ~~fracturing process~~pumping units that serve to increase and maximize production for oil and natural gas wells.

In April 2014, the Company acquired 100% of the membership interests in SiteLark, LLC (“SiteLark”). SiteLark provides reservoir engineering and modeling services for a variety of hydrocarbon applications. Its service assists engineers with reservoir simulation, reservoir engineering and waterflood optimization.

In January 2014, the Company acquired Eclipse IOR Services, LLC (“EOGA”), a leading enhanced oil recovery design and injection firm. EOGA’s expertise in enhanced oil recovery processes and the use of ~~hazardous chemicals in O&G operations could work~~polymers to ~~its advantage. These environmental concerns favor~~improve the ~~Company's chemistries as economical replacements for more hazardous chemicals currently in use in many drilling~~performance of EOR projects have been combined with the Company’s previously existing EOR products and producing operations. Several states and countries have grass-roots, citizen movements that are aimed specifically at “greening” the hydraulic fracturing process, and management believes it is likely these environmental concerns/reactions will broaden to other states in the quarters to come.

services.

The outlook for the Company’s consumer and industrial chemistries will be driven by availability and demand for citrus oils and other bio-based raw materials. Current inventory and crop expectations ~~for 2014 and into 2015~~ are sufficient to meet the Company’s needs to supply its flavor and fragrance business as well as the industrial markets. However, market price volatility ~~will likely~~may result in revenue and margin fluctuations from ~~quarter to quarter.~~

The Company works to maintain a portfolio of products which are adaptable to meet our customers’ demands for customized products for the various drilling and producing environments in which they operate. The Company's commitment to research and innovation permits the Company to remain responsive to increased demand and continued growth. The Company remains committed to continued development of its product technologies to better serve its customers' needs. The Company believes that it is well-positioned to respond to increased demand for the Company's suite of hydrocarbon stimulation and completion products, particularly the Company's patented Complex nano-Fluid™ chemistries. In addition, the Company anticipates continued strong demand for its Teledrift® Pro-series tool product lines and its recently introduced Stemulator® tool.quarter-to-quarter.

Changes to geopolitical, global ~~geo-political~~economic and ~~economic events~~industry trends could have an impact, either positive or negative, on the Company’s business. In the event of significant adverse changes to the demand for ~~O&G~~oil and gas production and/or the market price for oil and gas, the market conditions affecting the Company could change ~~quickly~~rapidly and materially. Should such adverse changes to market conditions occur, management believes the Company has adequate liquidity to withstand the impact of such ~~changes.~~changes while continuing to make strategic capital investments and acquisitions if and when opportunities arise. In addition, management believes the Company is well-positioned to take advantage of significant increases in demand for its products should market conditions improve dramatically in the near term.

The Company expects that competition for contracts and margins will remain intense ~~in the future~~ but ~~believes~~ that product innovation, service improvements and ~~quantitative~~ data from its FracMax™ ~~technology~~analytical platform will enable the Company to realize relative market share gains during the remainder of ~~2014~~2015 and into ~~2015.~~2016.

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Consolidated Results of Operations (in thousands):


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2014			2013			2014			2013			2015			2014
Revenue	$	116,761		$	98,388		$	324,653		$	270,217		$	82,373		$	102,575
Cost of revenue	70,683			60,886			192,585			162,491			55,846			58,894
Gross margin	46,078			37,502			132,068			107,726			26,527			43,681
Gross margin %	39.5		%	38.1		%	40.7		%	39.9		%	32.2		%	42.6		%
Selling, general and administrative costs	21,499			19,542			63,924			58,640			23,888			21,572
Selling, general and administrative costs %	18.4		%	19.9		%	19.7		%	21.7		%	29.0		%	21.0		%
Depreciation and amortization	2,439			2,038			7,225			5,231			2,676			2,285
Research and development	1,293			835			3,599			2,689
Income from operations	20,847			15,087			57,320			41,166
Income from operations %	17.9		%	15.3		%	17.7		%	15.2		%
Research and innovation costs													1,252			1,026
Income (loss) from operations													(1,289		)	18,798
Income (loss) from operations %													(1.6		)%	18.3		%
Interest and other expense, net	(511		)	(471		)	(1,565		)	(1,378		)	(632		)	(400		)
Income before income taxes	20,336			14,616			55,755			39,788
Income tax expense	(6,064		)	(5,648		)	(18,425		)	(14,615		)
Net income	$	14,272		$	8,968		$	37,330		$	25,173
Net income %	12.2		%	9.1		%	11.5		%	9.3		%
Income (loss) before income taxes													(1,921		)	18,398
Income tax benefit (expense)													406			(6,380		)
Net income (loss)													$	(1,515	)	$	12,018
Net income (loss) %													(1.8		)%	11.7		%

Consolidated Results of Operations: Three ~~and Nine~~ Months Ended ~~September 30, 2014~~March 31, 2015, Compared to the Three ~~and Nine~~ Months Ended ~~September 30, 2013~~March 31, 2014

Consolidated revenue for the three ~~and nine~~ months ended ~~September 30, 2014 increased $18.4~~March 31, 2015, decreased $20.2 million, or ~~18.7%~~19.7%, ~~and $54.4 million, or 20.1%, respectively,~~ relative to the comparable ~~periods~~period of ~~2013.~~2014. The ~~increase~~decrease in revenue ~~for~~was driven by the ~~three months ended September 30, 2014 compared to~~decline in drilling activity as indicated by the ~~same period of 2013 was primarily due to increased sales of stimulation chemical additives~~25.5% decline in ~~our~~North American rig count which affected the Energy Chemical Technologies segment, increased actuated tool and Teledrift® tool rentals in our Drilling Technologies segment, and increased international valve and valve equipment sales in our Production Technologies segment. The increase in revenue for the nine months ended September 30, 2014 compared to the same period of 2013 was primarily due to increased sales of stimulation chemical additives in our Energy Chemical Technologies segment, the acquisition of Florida Chemical in the second quarter of 2013, and incremental revenue from the 2014 acquisitions of EOGA and SiteLark. These increases were partially offset by revenue declines in the DrillingChemistry Technologies and ~~Production~~Drilling Technologies segments.

Consolidated gross margin for the three ~~and nine~~ months ended ~~September 30, 2014 increased $8.6~~March 31, 2015, decreased $17.2 million, or ~~22.9%~~39.3%, ~~and $24.3 million, or 22.6%, respectively,~~ relative to the comparable ~~periods~~period of ~~2013. The increase in gross margin was primarily due to the increase in revenue.~~2014. Gross margin as a percentage of revenue ~~increased~~decreased to ~~39.5%~~32.2% for the three months ended ~~September 30, 2014~~March 31, 2015, from ~~38.1%~~42.6% in the same period of ~~2013,~~2014, primarily due to ~~increased international sales in our Production Technologies segment. Gross margin as a percentage of revenue increased to 40.7%~~new incentive pricing structures for the nine months ended September 30, 2014 from 39.9% in the same period of 2013, primarily attributable to supply chain benefits from the Florida Chemical acquisition, partially offset by the change in portfoliostrategic relationships, product mix ~~resulting from the inclusion of Florida Chemical in the consolidated results for the nine months ended September 30, 2014.~~and price concessions.

Selling, general and administrative (“SG&A”) expenses are not directly attributable to products sold or services provided. SG&A ~~costs as a percentage of revenue declined from 19.9% to 18.4%~~expenses for the three months ended ~~September 30, 2014 and from 21.7% to 19.7% for the nine months ended September 30, 2014 as compared~~March 31, 2015, increased $2.3 million, or 10.7%, relative to the ~~same periods of 2013, as revenues grew faster than SG&A costs. SG&A costs increased $2.0 million, or 10.0%, for the three months ended September 30, 2014 as compared to the same~~comparable period of ~~2013,~~2014. The increase was primarily due to ~~costs for additional headcount~~higher stock compensation expense, increased head count in the Energy Chemistry sales and R&I staff during 2014, and a civil penalty related to ~~support~~an environmental matter assessed in 2015, partially offset by cost reduction actions taken throughout the ~~Company's growth and costs attributable to~~organization during the ~~companies we acquired.~~first quarter of 2015. The company regularly evaluates its SG&A ~~costs increased $5.3 million, or 9.0%, for the nine months ended September 30, 2014, compared to the same period of 2013 primarily due to SG&A costs for the acquired companies discussed above.~~cost structure as market conditions warrant.

Depreciation and amortization expense for the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015, increased by $0.4 million, or ~~19.7%~~17.1%, ~~and $2.0 million, or 38.1%, respectively,~~ relative to the comparable periods of ~~2013.~~2014. The increase ~~for the nine months~~

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~~ended September 30, 2014~~ was primarily attributable to the depreciation and amortization of ~~assets recognized as part of~~improvements to facilities and equipment that were added during the ~~acquisition of Florida Chemical in the second quarter of 2013 and the acquisition of EOGA in the first quarter~~later portion of 2014.

Research and ~~Development ("~~Innovation (“R~~&D"~~&I”) expense increased ~~$0.5~~$0.2 million, or ~~54.9%, and $0.9 million, or 33.8%~~22.0%, for the three ~~and nine~~ months ended ~~September 30, 2014, respectively,~~March 31, 2015, as compared to the same ~~periods~~period in ~~2013.~~2014. The increase in R&D&I is primarily attributable to new product development and ~~Flotek's~~Flotek’s commitment to remaining responsive to customer needs, increased demand and continued growth of our existing product lines.

Interest and other expense ~~remained relatively flat~~increased $0.2 million for the three ~~and nine~~ months ended ~~September 30, 2014 as~~March 31, 2015, compared to the same ~~periods~~period of ~~2013.~~2014.

The Company recorded income tax ~~provisions~~benefit of ~~$6.1 million and $18.4~~$0.4 million, yielding an effective tax ~~rates~~rate of ~~29.8% and 33.0%~~21.1% for the three ~~and nine~~ months ended ~~September 30, 2014, respectively,~~March 31, 2015, compared to the income tax ~~provisions~~provision of ~~$5.6 million and $14.6~~$6.4 million reflecting an effective tax ~~rates~~rate of ~~38.6% and 36.7%~~34.7% for the comparable ~~periods~~period in ~~2013.~~2014. The reduction in the effective tax rate is primarily attributable to the mix of pre-tax profit and loss between domestic and international taxing jurisdictions.

Results by Segment


Energy Chemical Technologies (dollars in thousands)
Energy Chemistry Technologies (previously referred to as Energy Chemical Technologies) (dollars in thousands)
	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2014			2013			2014			2013			2015			2014
Revenue	$	68,181		$	51,670		$	193,148		$	144,029		$	46,643		$	62,377
Gross margin	28,424			21,849			85,074			61,548			16,100			29,220
Gross margin %	41.7		%	42.3		%	44.0		%	42.7		%	34.5		%	46.8		%
Income from operations	19,903			16,247			60,690			45,300			6,821			21,623
Income from operations %	29.2		%	31.4		%	31.4		%	31.5		%	14.6		%	34.7		%

Energy ~~Chemical~~Chemistry Technologies Results of Operations: Three ~~and Nine~~ Months Ended ~~September 30, 2014~~March 31, 2015, Compared to the Three ~~and Nine~~ Months Ended ~~September 30, 2013~~March 31, 2014

Energy ~~Chemical~~Chemistry Technologies revenue for the three months ended ~~September 30, 2014~~March 31, 2015 ~~increased $16.5~~, decreased $15.7 million, or ~~32.0%~~25.2%, relative to the comparable period of ~~2013. Excluding~~2014. This reduction in revenue virtually mirrored the ~~incremental revenue impact~~decrease in the North American active drilling rig count of 25.5% over the comparable periods. While eroding market conditions are the primary driver of the ~~EOGA~~revenue decrease, Flotek has aggressively pursued strategic relationships with existing customers and ~~SiteLark acquisitions~~has continued to promote the benefits of ~~$1.5 million, revenue increased $15.0~~CnF^® in completions and restimulation efforts by leveraging the quantitative evidence validated through the FracMax™ analytical platform. These strategic sales and marketing efforts are ensuring that Flotek remains a leader in the energy chemistry industry and is poised to take advantage of any market recovery.

Energy Chemistry Technologies gross margin decreased $13.1 million, or ~~29.1%~~44.9%, for the three months ended ~~September 30, 2014~~March 31, 2015 ~~compared to the same period of 2013. Increased sales of stimulation chemical additives accounted for the majority of the revenue increase. Revenue for the nine months ended~~ ~~September 30, 2014~~ increased $49.1 million, or 34.1%, relative to the comparable period of 2013. Excluding the incremental revenue impact of the Florida Chemical, EOGA and SiteLark acquisitions of $9.4 million, revenue increased $39.7 million, or 28.6%, compared to the same period of ~~2013, primarily due to the increased sales of stimulation chemical additives mentioned above.~~

~~Energy Chemical Technologies gross margin increased $6.6 million, or 30.1%, and $23.5 million, or 38.2%, for the three and nine months ended~~ ~~September 30, 2014, respectively, compared to the same periods of 2013 primarily due to the increase in product sales revenue.~~2014. Gross margin as a percentage of revenue decreased to ~~41.7%~~34.5% for the three months ended ~~September 30, 2014~~March 31, 2015, from ~~42.3%~~46.8% in the same period of ~~2013,~~2014, primarily due to a new incentive pricing ~~structure, increased logistics costs~~structures associated with new strategic relationships and inventory adjustments during 2014, partially offset by improved margins for xylene replacement products, expanded markets for CnF® and productivity improvements in the manufacturing process. Gross margin as a percentage of revenue increased to 44.0% for the nine months ended ~~September 30, 2014~~ ~~from 42.7% in the same period of 2013, primarily due to the supply chain benefits of the Florida Chemical acquisition.~~product mix.

Income from operations for the Energy ~~Chemical~~Chemistry Technologies segment ~~increased $3.7~~decreased $14.8 million, or ~~22.5%~~68.5%, for the three months ended ~~September 30, 2014~~March 31, 2015, ~~and increased $15.4 million, or 34.0%, for the nine months ended~~ ~~September 30, 2014~~ relative to the comparable periods of ~~2013.~~2014. The ~~increase~~decrease in income from operations ~~for both periods~~ is primarily attributable to ~~an increase~~the decrease in gross margin, ~~partially offset by~~ increased headcount ~~travel and associated costs related to~~during 2014 in the sales organization, in pursuit of growth ~~opportunities.~~opportunities, and in R&I, related to new product development and increased demand for existing product support, and a civil penalty related to an environmental matter. During the three months ended March 31, 2015, the Energy Chemistry Technologies segment implemented cost control measures including a 10% decrease in compensation and benefits associated with headcount reductions to more closely align the segment staffing with current market conditions.

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Consumer and Industrial Chemical Technologies (dollars in thousands)
Consumer and Industrial Chemistry Technologies (previously referred to as Consumer and Industrial Chemical Technologies) (dollars in thousands)
	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2014			2013			2014			2013			2015			2014
Revenue	$	13,713		$	15,292		$	39,351		$	27,967		$	13,463		$	13,030
Gross margin	3,310			3,588			10,237			7,281			3,706			4,033
Gross margin %	24.1		%	23.5		%	26.0		%	26.0		%	27.5		%	31.0		%
Income from operations	1,758			2,301			5,064			4,648			2,381			2,335
Income from operations %	12.8		%	15.0		%	12.9		%	16.6		%	17.7		%	17.9		%

~~CICT~~Consumer and Industrial Chemistry Technologies (CICT) Results of Operations: Three ~~and Nine~~ Months Ended ~~September 30, 2014~~March 31, 2015, Compared to the Three ~~and Nine~~ Months Ended ~~September 30, 2013~~March 31, 2014

CICT revenue for the three months ended ~~September 30, 2014~~March 31, 2015 ~~decreased $1.6~~, increased $0.4 million, or ~~10.3%~~3.3%, compared to the same period in ~~2013,~~2014, primarily due to ~~decreased~~increased terpene ~~sales~~prices between the two periods. ~~Revenue for the nine months ended~~ ~~September 30, 2014~~ ~~increased $11.4 million, or 40.7%, from the comparable period of 2013, as the segment was created in the second quarter of 2013 upon the acquisition of Florida Chemical.~~

CICT gross margin for the three months ended ~~September 30, 2014~~March 31, 2015, decreased $0.3 million, or ~~7.7%~~8.1%, from the comparable period of ~~2013,~~2014, primarily due to the ~~lower~~higher terpene ~~sales mentioned above. Gross margin for the nine months ended~~ ~~September 30, 2014~~costs partially offset by increased ~~$3.0 million, or 40.6%, from the comparable period of 2013, primarily due to the segment being created in the second quarter of 2013 upon the acquisition of Florida Chemical.~~prices. Gross margin as a percentage of revenue ~~increased~~decreased to ~~24.1%~~27.5% for the three months ended ~~September 30, 2014~~March 31, 2015, from ~~23.5%~~31.0% in the same period of ~~2013,~~2014, primarily due to increased ~~sales of higher margin flavor and fragrance products. Gross margin as a percentage of revenue remained flat at 26.0% for the nine months ended~~ ~~September 30, 2014~~ ~~as compared to the same period of 2013.~~terpene costs.

Income from operations for the CICT segment ~~decreased $0.5 million, or 23.6%,~~remained relatively flat for the three months ended ~~September 30, 2014~~March 31, 2015 compared to the same period of ~~2013, primarily due to~~2014, as reductions in compensation and benefits associated with headcount reductions offset the ~~revenue and~~ gross margin factors described above. ~~Income from operations increased $0.4 million, or 9.0%, for the nine months ended~~ ~~September 30, 2014~~ ~~compared to the same period of 2013, primarily due to the increased revenue between the two periods.~~


Drilling Technologies (dollars in thousands)
	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2014			2013			2014			2013			2015			2014
Revenue	$	29,920		$	27,569		$	82,061		$	86,268		$	18,694		$	24,901
Gross margin	11,928			10,821			32,477			34,622			5,991			9,788
Gross margin %	39.9		%	39.3		%	39.6		%	40.1		%	32.0		%	39.3		%
Income from operations	5,557			4,309			13,073			15,510
Income from operations %	18.6		%	15.6		%	15.9		%	18.0		%
Income (loss) from operations													(637		)	3,317
Income (loss) from operations %													(3.4		)%	13.3		%

Drilling Technologies Results of Operations: Three ~~and Nine~~ Months Ended ~~September 30, 2014~~March 31, 2015, Compared to the Three ~~and Nine~~ Months Ended ~~September 30, 2013~~March 31, 2014

Drilling Technologies revenue for the three months ended ~~September 30, 2014 increased $2.4~~March 31, 2015, decreased $6.2 million, or ~~8.5%~~24.9%, relative to the same period in ~~2013, primarily due to an increase in actuated tool rentals, Teledrift® tool rentals, and increases in float equipment product sales. Revenue for the nine months ended September 30,~~ 2014, ~~decreased $4.2 million, or 4.9%, relative to the same period in 2013,~~ primarily due to a decrease in ~~Teledrift® domestic rental revenue, decreased international drill pipe sales,~~actuated tool rentals, Teledrift^® tool rentals, and ~~decreased non-actuated tool rentals.~~decreases in float and motor equipment product sales.

Rental revenue for the three months ended September 30, 2014 increased $1.7 million, or 10.9%, compared to the same period of 2013. This increase can be attributed to an 45.2% increase in actuated tool rental revenue in the Bakken and a 22.9% increase in international Teledrift® tool rentals. Rental revenue for the nine months ended September 30, 2014 decreased by $0.9 million, or 1.9%, compared to the same period of 2013. This decline is due to a 5.1% decrease in Teledrift® domestic tool rental revenue attributed to competitive pricing pressure and decreasing vertical rig counts,

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~~partially offset by an increase of 11.8% in actuated tool and Stemulator® tool rentals for the nine months ended September 30, 2014 as compared to the same period of 2013.~~

•

Rental revenue for the three months ended March 31, 2015, decreased by $2.0 million, or 14.6%, compared to the same period of 2014. The decrease can be attributed to a decline in actuated tool rental orders and a reduction in Teledrift^® tool rental jobs which was due to the drop in the U.S. rig count in the first quarter. Pricing pressure in the market also caused decreased average revenues per job.

Product sales revenue for the three months ended ~~September 30, 2014~~March 31, 2015, compared to the same period of ~~2013 increased~~2014, decreased by ~~$0.9~~$2.7 million, or ~~9.9%~~35.7%, due to ~~increased~~decreased float equipment, centralizers and ~~centralizer equipment~~motor part sales. Product revenue for the nine months ended September 30, 2014 decreased by $2.8 million, or 9.8%, relative to the same period in 2013, primarily due to decreased international drill pipe sales for the mining industry and decreased domestic motor sales.


•	Service revenue for the three months ended March 31, 2015, decreased $1.5 million, or 42.8%, compared to the same period of 2014. The decrease in service revenue was primarily related to decreased Teledrift^® service charges and fees.

Service revenue for the three and nine months ended September 30, 2014 decreased $0.2 million, or 4.7%, and $0.5 million, or 4.6%, respectively, relative to comparable periods of 2013. The decrease in service revenue was primarily related to decreased rig service jobs and inspections.

Drilling Technologies gross margin for the three months ended ~~September 30, 2014 increased $1.1~~March 31, 2015, decreased $3.8 million, or ~~10.2%~~38.8%, from the comparable period of ~~2013,~~2014. This is primarily due to the ~~revenue factors mentioned above and a 5.4%~~volume decrease in ~~direct~~the quarter, motor rental fixed costs, ~~due to lower employee-related compensation costs. Drilling Technologies gross margin~~and reductions in pricing for ~~the nine months ended September 30, 2014 decreased $2.1 million, or 6.2%, due to the reduction in revenue~~actuated tools and ~~increased Teledrift® repair expenses. Gross margin as a percentage of revenue remained relatively flat for the three and nine months ended September 30, 2014.~~

Teledrift^® tools.

Drilling Technologies income from operations for the three months ended ~~September 30, 2014 increased~~March 31, 2015, declined by ~~$1.2~~$4.0 million, ~~or 29.0%, as~~ compared to the same period of 2013. Income from operations as a percentage of revenue increased to 18.6% for the three months ended September 30, 2014, up from 15.6% for the same period of 2013. These increases are primarily due to reductions in direct costs, increased rental activity, and increased product sales. Drilling Technologies income from operations for the nine months ended September 30, 2014 decreased by $2.4 million, or 15.7%, over the same period of 2013.2014. Income from operations as a percentage of revenue decreased ~~to 15.9%~~16.7% for the ~~nine~~three months ended ~~September 30, 2014, down from 18.0% for~~March 31, 2015, compared to the same period of ~~2013. These decreases are primarily due to~~2014. Reduced revenue from lower volumes and pricing, plus fixed depreciation and amortization costs negatively impacted operating income which was partially offset by cost control measures put in place during the ~~decreased revenue explained above~~first quarter including a 16% reduction in headcount, consolidation of select locations and ~~increased Teledrift® repair expenses.~~other direct expense controls.


Production Technologies (dollars in thousands)
	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2014			2013			2014			2013			2015			2014
Revenue	$	4,947		$	3,857		$	10,093		$	11,953		$	3,573		$	2,267
Gross margin	2,416			1,244			4,280			4,275			730			640
Gross margin %	48.8		%	32.3		%	42.4		%	35.8		%	20.4		%	28.2		%
Income from operations	1,583			769			1,925			2,712
Income from operations %	32.0		%	19.9		%	19.1		%	22.7		%
Income (loss) from operations													(539		)	(79		)
Income (loss) from operations %													(15.1		)%	(3.5		)%

Production Technologies Results of Operations: Three ~~and Nine~~ Months Ended ~~September 30, 2014~~March 31, 2015, Compared to the Three ~~and Nine~~ Months Ended ~~September 30, 2013~~March 31, 2014

Revenue for the Production Technologies segment for the three months ended ~~September 30, 2014~~March 31, 2015, increased by ~~$1.1~~$1.3 million, or ~~28.3%~~57.6%, from the same period in ~~2013~~2014 due to increased sales of international valves, valve equipment, and domestic hydraulic lifting units. For the nine months ended September 30, 2014, revenue decreased by $1.9 million, or 15.6%, relative to the same period in 2013 as sales of pumps androd pump equipment ~~declined.~~from a new location opened in the third quarter of 2014.

Production Technologies gross margin increased by ~~$1.2~~$0.1 million, or ~~94.2%~~14.1%, for the three months ended ~~September 30, 2014 as~~March 31, 2015, compared to the same period in ~~2013, and~~2014, while gross margin as a percentage of revenue declined from 28.2% to 20.4%. The decline was due to product mix and increased direct costs, including salaries and supplies, related to ~~48.8%~~the expansion of locations and product lines.

Production Technologies income from operations decreased by $0.5 million, for the three months ended September 30, 2014 from 32.3% for the same period in 2013. These increases are due to product mix from increased international Petrovalve sales and decreased domestic rod pump component sales. Gross margin was flat for the nine months ended September 30, 2014, but gross margin as a percentage of revenue increased to 42.4%, compared to 35.8% for the same period in 2013, primarily due to the higher margins associated with the international valve sales and improving margins on pump equipment.

~~Income from operations increased by $0.8 million, or 105.9%, for the three months ended September 30, 2014~~March 31, 2015, compared to the same period in ~~2013,~~2014. The decline was due to ~~product mix. Income from operations decreased by $0.8 million, or 29.0%, for the nine months ended September 30, 2014 compared to the same period in 2013, primarily due to decreases in sales~~expense associated with selling and ~~increases in SG&A costs attributable to employee-related expenses~~R & I activities as the segment continues to ~~refocus and reposition~~position itself for growth opportunities in the market. These activities include preparing new product and service offerings to be introduced in 2015, including those associated with the IAL acquisition in January 2015 which are in the process of being introduced commercially.

~~Table of contents~~

Off-Balance Sheet Arrangements

There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of ~~September 30, 2014~~March 31, 2015, the Company was not involved in any unconsolidated SPEs.

The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

Critical Accounting Policies and Estimates

The Company’s Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Preparation of these statements requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Part II, Item 8, Financial Statements and Supplementary Data, Note 2 of "Notes to Unaudited Consolidated Financial Statements" and Part II, Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations, “Critical Accounting Policies and Estimates” of the Company’s Annual Report, and the “Notes to Unaudited Consolidated Financial Statements” of this Quarterly Report describe the significant accounting policies and critical accounting estimates used to prepare the consolidated financial statements. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most subjective judgments. The Company regularly reviews and challenges judgments, assumptions and estimates related to critical accounting policies. The Company’s estimates and assumptions are based on historical experience and expected changes in the business environment; however, actual results may materially differ from the estimates.

As part of ~~the~~any acquisition process, the Company ~~reaffirmed~~reaffirms policies and estimates surrounding business ~~combination~~combinations in accordance with GAAP, specifically utilizing the guidance of Accounting Standards Codification ~~("ASC"~~(“ASC”) Topic 805, ~~formerly Statement of Financial Accounting Standards ("SFAS") No. 141R, as amended by FSP SAFAS No. 141(R)-1 which became effective on January 1, 2009.~~“Business Combinations.” ASC Topic 805 requires an acquiring entity in a transaction to recognize all of the identifiable assets acquired and liabilities assumed ~~at fair value at the acquisition date~~ at their estimated fair values on the acquisition date, to recognize and measure pre-acquisition contingencies, including contingent consideration, at fair value (if possible), to remeasure liabilities related to contingent consideration at fair value in each subsequent reporting period and to expense all acquisition relates costs. Though the Company has ~~implemented~~followed business combination accounting guidance, there have been no significant changes in the Company’s critical accounting estimates during the ~~nine~~three months ended ~~September 30, 2014.~~March 31, 2015.

Application of New Accounting Standards

~~New Accounting Requirements and Disclosures~~

New Accounting Requirements and Disclosures

~~Table of contents~~

pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

Capital Resources and Liquidity

Overview

Ongoing capital requirements arise from the Company’s need to service debt, acquire and maintain equipment, ~~and~~ fund working capital ~~requirements.~~requirements, and when the opportunities arise, to make strategic acquisitions. During the first ~~nine~~three months of ~~2014~~2015, the Company funded its operating, capital and acquisition requirements ~~primarily with~~through operating cash ~~flows.~~flows and debt financing.

The ~~Company's~~Company’s primary source of debt financing is its ~~Revolving~~ Credit Facility with PNC Bank. This ~~credit facility~~Credit Facility contains provisions for a revolving ~~debt~~credit facility of up to ~~$75.0~~$75 million~~, based on a borrowing base supported by accounts receivable and inventory,~~ and a term loan secured by substantially all of ~~$50.0 million~~.the Company’s domestic real and personal property, including accounts receivable, inventory, land, buildings, equipment and other intangible assets. As of ~~September 30, 2014~~March 31, 2015, the Company had $~~4.2~~17.3 million in outstanding borrowings under the revolving debt portion of the credit facility and $~~37.3~~30.8 million outstanding under the term loan. At ~~September 30, 2014~~March 31, 2015, the Company was in compliance with all debt covenants. Significant terms of the Company’s credit facility are discussed in Part I, Item 1 — ~~"Financial Statements"~~“Financial Statements” in Note 9 of ~~"Notes~~“Notes to Unaudited Consolidated Financial ~~Statements"~~Statements” in this Quarterly Report.

~~Cash~~The Company expects to generate sufficient cash from operations to fund its capital expenditures and make required payments on the term loan. If necessary, the Company will utilize its available capacity under the revolving credit facility to fulfill its liquidity needs. As of March 31, 2015, the Company had available borrowing capacity under its revolving line of credit of $57.5 million and available cash of $2.5 million resulting in total liquidity of $60.0 million. For the remainder of 2015, the Company plans to spend approximately $15 million for committed and planned capital expenditures, inclusive of approximately $8 million for a new R&I facility.

Any excess cash generated may be used to pay down the level of debt, repurchase company stock or be retained for future use. The Company may pursue acquisitions when strategic opportunities arise and may access external financing to fund those acquisitions, if needed.

Net Debt

Net debt represents total debt less cash and cash equivalents ~~totaled $5.3 million at~~ ~~September 30, 2014. During~~and combines the ~~first nine months of 2014,~~Company’s indebtedness and the ~~Company generated~~ ~~$39.9 million~~ of cash ~~inflows from operations, net of~~ ~~$12.7 million~~ ~~expended in working capital. The Company~~and cash equivalents the could be used ~~$16.7 million~~to repay that debt. Components of net ~~cash in investing activities, including~~ ~~$13.5 million~~ ~~for capital expenditures and~~ ~~$5.7 million, net of cash acquired, for the purchase of EOGA and SiteLark, partially offset by proceeds of~~ ~~$3.3 million~~ from the sale of assets. Net cash used in financing activities totaled $20.7 million. The Company repaid net draws and term loans on the amended Credit Facility of $12.0 million and $8.5 million, respectively. Additionally, the Company paid $6.1 million in purchases of treasury stock for tax withholding purposes related to vesting of restricted stock awards.debt are as follows (in thousands):



	March 31, 2015			March 31, 2014
Cash and cash equivalents	$	2,499		$	1,664
Current Portion of long-term debt	(24,417		)	(24,068		)
Long-term debt, less current portion	(23,613		)	(30,905		)
Net Debt	$	(45,531	)	$	(53,309	)

Cash Flows

Consolidated cash flows by type of activity are noted below (in thousands):


	Nine months ended September 30,						Three months ended March 31,
	2014			2013			2015			2014
Net cash provided by operating activities	$	39,897		$	21,360		$	6,458		$	15,505
Net cash used in investing activities	(16,656		)	(58,786		)	(5,640		)	(8,704		)
Net cash provided by financing activities	(20,676		)	39,274
Net cash provided by (used in) financing activities							655			(7,718		)
Effect of changes in exchange rates on cash and cash equivalents	(38		)	(179		)	(240		)	(149		)
Net increase (decrease) in cash and cash equivalents	$	2,527		$	1,669		$	1,233		$	(1,066	)

Operating Activities

Net cash provided by operating activities was $~~39.9~~6.5 million and $~~21.4~~15.5 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~, respectively. Consolidated net ~~income~~loss for the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015, totaled ~~$37.3~~$1.5 million,, compared to consolidated net income of $~~25.2~~12.0 million for the ~~nine~~three months ended ~~September 30, 2013.~~March 31, 2014.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2015, net non-cash contributions to net income totaled $4.4 million. Contributory non-cash items consisted of $4.6 million for depreciation and amortization and $3.5 million for stock-based compensation expense. Non-cash reductions to net income included $2.4 million for deferred income taxes, $1.2 million for net gains on asset disposals, $0.1 million for recognized incremental tax benefits related to the Company’s share based awards.

During the three months ended March 31, 2014, net non-cash contributions to net income totaled $~~15.2 million. Contributory non-cash items consisted of~~ ~~$13.5 million~~ ~~for depreciation and amortization,~~ ~~$7.4 million~~ ~~for stock-based compensation expense and~~ ~~$0.2 million~~ ~~for net decreases in deferred income taxes. Non-cash reductions to net income included~~ ~~$2.6 million~~ ~~for net gains on asset disposals, $3.4 million for recognized incremental tax benefits related to the Company's share based awards.~~

~~Table of contents~~

~~During the nine months ended September 30, 2013, net non-cash contributions to net income totaled~~ ~~$15.2~~4.5 million, primarily consisting of $~~8.7~~2.3 million for stock compensation expense and ~~$11.0~~$4.2 million for depreciation and amortization, partially offset by $~~3.5~~0.6 million for net gain on sale of assets, $0.3 million for deferred income taxes, and $~~0.8~~1.3 million recognized incremental tax benefits related to the Company’s share based awards.

During the ~~nine~~three months ended ~~September 30, 2014,~~March 31, 2015, net working capital ~~was reduced~~increased by ~~$12.7 million~~.$3.5 million. Working capital ~~was used to increase inventory~~grew by ~~$18.0~~decreasing accounts receivable by $22.6 million,~~, increase~~ decreasing other current assets by ~~$5.0~~$1.8 million,, and ~~increase accounts receivable~~increasing income taxes payable by ~~$3.9 million~~.$0.5 million. The ~~reductions~~additions to working capital were partially offset by increased inventory of $12.0 million, decreased accounts payable of ~~$12.6~~$4.8 million, ~~increased income taxes payable of~~ ~~$1.1 million~~, and ~~increased~~decreased accrued liabilities ~~by $1.0~~of $4.7 million.

During the ~~nine~~three months ended ~~September 30, 2013,~~March 31, 2014, net working capital ~~was reduced~~decreased by $~~19.0~~1.0 million. Working capital was primarily used to decrease ~~accounts payable~~accrued liabilities by ~~$17.3~~$2.5 million, increase ~~inventories~~inventory by ~~$2.1~~$9.9 million and increase accounts receivable by ~~$6.5 million, partially offset by a decrease in other current assets of $0.3 million, increase~~$0.5 million. Offsetting the reductions to working capital were increased income taxes payable of ~~$1.6~~$4.3 million, increased accounts payable of $6.7 million and ~~an increase in accrued liabilities~~decreased current assets of ~~$4.9~~$0.9 million.

Investing Activities

Net cash used in investing activities was $~~16.7~~5.6 million for the ~~nine~~three months ended ~~September 30, 2014.~~March 31, 2015. Cash used by investing activities in ~~2014~~2015 were for capital expenditures of $~~13.5~~5.6 million, and net cash payments for the acquisitions of ~~EOGA, SiteLark,~~IAL and various patents of ~~$6.5~~$1.4 million, partially offset by $~~3.3~~1.3 million ~~for~~of proceeds received from the sale of fixed assets.

Net cash used in investing activities was $~~58.8~~8.7 million for the ~~nine~~three months ended ~~September 30, 2013.~~March 31, 2014. Cash used by investing activities in ~~2013~~2014 were for the acquisition of ~~Florida Chemical in the second quarter~~EOGA, net of ~~2013~~cash received, for ~~$53.4~~$5.3 million and capital expenditures of $~~10.0~~4.1 million, partially offset by $~~4.6~~0.8 million ~~for~~of proceeds received from the sale of fixed assets.

Financing Activities

Net cash ~~used~~generated by financing activities was $~~20.7~~0.7 million for the ~~nine~~three months ended ~~September 30, 2014.~~March 31, 2015, and was primarily due to net proceeds from borrowings, net of repayments of debt, of $4.0 million, proceeds from the sale of common stock of $0.3 million and proceeds from the excess tax benefit related to stock-based compensation of $0.1 million. Cash ~~used~~provided by financing activities was ~~primarily due to $20.6~~partially offset by $2.7 million for ~~repayments~~the repurchase of ~~debt, net of borrowings,~~common stock and $~~6.1~~1.1 million for purchases of treasury stock for tax withholding purposes related to vesting of restricted stock ~~awards, and debt issuance costs~~awards.

During the three months ended March 31, 2014, financing activities used net cash of $~~0.3~~7.7 million. Cash used by financing activities included repayment of debt, net of borrowings, of $7.1 million and the purchase of treasury stock for tax withholding purposes related to vesting of restricted stocks awards of $4.0 million. Cash used by financing activities was partially offset by proceeds from the exercise of stock warrants of $1.5 million, proceeds from the excess tax benefit related to stock-based compensation of ~~$3.4 million, proceeds from the sale of common stock of~~ ~~$0.8 million~~ ~~and proceeds from the exercise of stock options of~~ ~~$0.5 million~~.

~~During the nine months ended September 30, 2013, financing activities provided net cash of~~ ~~$39.3 million~~. Financing activities included proceeds from borrowings, net of repayments of debt, of $43.8 million, proceeds from the excess tax benefit related to stock-based compensation of $0.8 million, proceeds from the sale of common stock of $0.6$1.3 million and proceeds from the exercise of stock options of ~~$0.5 million. Cash provided by financing activities was partially offset by purchases of treasury stock of $5.3 million and debt issuance costs of $1.2~~$0.4 million.

Although the Company has no immediate intention to access the capital markets, the Company intends to file a ~~"universal"~~“universal” shelf registration with the Securities and Exchange Commission in the future. This shelf registration statement will register the issuance and sale from time to time of various securities by the Company, including but not limited to senior notes, subordinated notes, preferred stock, common stock, and warrants. Once this shelf registration statement is filed with the Securities and Exchange Commission and becomes effective, the Company will have the financial flexibility to access the capital markets quickly and efficiently from time to time as the need may arise.

Contractual Obligations

Cash flows from operations are dependent on a variety of factors, including fluctuations in operating results, accounts receivable collections, inventory management, and the timing of payments for goods and services. Correspondingly, the impact of contractual obligations on the Company’s liquidity and capital resources in future periods is analyzed in conjunction with such factors.

~~Table of contents~~

Material contractual obligations consist of repayment of amounts borrowed on the ~~Company's~~Company’s Credit Facility with PNC Bank and payment of operating lease obligations. Contractual obligations at ~~September 30, 2014~~March 31, 2015, are as follows (in thousands):


	Payments Due by Period										Payments Due by Period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years		Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Term loan	$	37,327	$	7,143	$	14,286	$	15,898	$	—	$	30,756	$	7,143	$	14,286	$	9,327	$	—
Interest expense on term loan ⁽¹⁾	3,887		1,330		2,101		456		—		2,869		1,258		1,532		79		—
Borrowings under revolving credit facility⁽²⁾	4,224		4,224		—		—		—		17,274		17,274		—		—		—
Operating lease obligations	25,247		2,123		4,962		3,843		14,319		24,787		2,621		4,828		3,841		13,497
Total	$	70,685	$	14,820	$	21,349	$	20,197	$	14,319	$	75,686	$	28,296	$	20,646	$	13,247	$	13,497

(1) Interest expense amounts assume interest rates on this variable rate obligation remain unchanged from ~~September 30, 2014~~March 31, 2015 rates. The weighted-average interest rate is ~~2.43%~~2.46% at ~~September 30, 2014.~~March 31, 2015.

(2) The borrowing is classified as current debt. The weighted-average interest rate is ~~1.77%~~2.43% at ~~September 30, 2014~~March 31, 2015.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates and, to a limited extent, commodity prices and foreign currency exchange rates. There have been no material changes to the quantitative or qualitative disclosures about market risk set forth in Part II, Item 7A of the Company’s Annual Report.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The ~~Company's~~Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the ~~SEC's~~SEC’s rules and forms. The ~~Company's~~Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The ~~Company's~~Company’s disclosure controls and procedures are designed to provide such reasonable assurance.

The ~~Company's~~Company’s management, with the participation of the principal executive and principal financial officers, evaluated the effectiveness of the design and operation of the ~~Company's~~Company’s disclosure controls and procedures as of ~~September 30, 2014,~~March 31, 2015, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and principal financial officers have concluded that the Company’s disclosure controls and procedures were effective as of ~~September 30, 2014.~~March 31, 2015.

Changes in Internal Control Over Financial Reporting

There have been no changes in the ~~Company's~~Company’s system of internal control over financial reporting during the three months ended ~~September 30, 2014~~March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the ~~Company's~~Company’s internal control over financial reporting.

3130

~~Table of Contents~~

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

EPA Environmental Proceeding

On January 9, 2015, FC Pro LLC (“FC Pro”), a wholly-owned subsidiary of the Company, received a letter and proposed consent agreement and final order from the United States Environmental Protection Agency (“EPA”) concerning alleged violations of the federal hazardous waste regulations at FC Pro’s specialty chemical blending facility in Waller, Texas. Specifically, EPA alleged that FC Pro failed to comply with certain notification, operating, and reporting requirements applicable to generators or large quantity generators of hazardous waste. FC Pro has resolved the alleged violations pursuant to a consent agreement and final order under which it did not admit or deny the allegations and agreed to pay an administrative penalty of $410,868, obtain an EPA identification number, and develop certain specified operating procedures. The consent agreement and final order has been signed by EPA and will become final upon being ratified by the regional judicial officer. Since this enforcement case was initiated, FC Pro has made changes to its operating practices at its Waller facility that it believes has resulted in it no longer generating hazardous waste at that facility.

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A of the Company’s Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuance of Shares of Common Stock

On January 27, 2015, the Company issued shares of its common stock pursuant to the Asset Purchase Agreement dated as of January 27, 2015, by and among the Company and International Artificial Lift, LLC as follows:



	Number of Shares
Larry Best	18,457
Ronnie Brown	18,457
Clayton Brown	6,002
Rudolph J. Renda	9,004
Tiburon Oil & Gas, Inc.	1,501
Scott Briggs	3,602
Jim Shaw	3,001
Total	60,024

The issuance of shares was exempt from registration pursuant to Regulation D or Section 4(2) under the Securities Act of 1933, as amended, as such issuances were made in transactions not involving a public offering. The shares of common stock were issued at an effective price of $16.89 per share.

Issuer Purchases of Equity Securities

Repurchases of the ~~Company's~~Company’s equity securities during the three months ended ~~September 30, 2014~~March 31, 2015 are as follows:

Period
Total
Number of
Shares
Purchased (1)

Average
Price Paid
per Share

Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs

Maximum
Dollar Value of
Shares that
May Yet be
Purchased
Under the
Plans or
Programs (2)
July 1, 2014 to July 31, 2014 1,777
$ 33.44
—
$ 25,000,000
August 1, 2014 to August 31, 2014 7,051
$ 27.91
—
$ 25,000,000
September 1, 2014 to September 30, 2014 326
$ 27.20
—
$ 25,000,000
Total 9,154
$ —
—



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (2)
January 1, 2015 to January 31, 2015	20,188	$	16.55	—	$	14,604,569
February 1, 2015 to February 28, 2015	36,852	$	17.30	—	$	14,604,569
March 1, 2015 to March 31, 2015	209,075	$	14.79	180,190	$	11,953,728
Total	266,115	$	15.27	180,190

(1) The Company purchased shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting of restricted shares and exercise of non-qualified stock options, ~~and~~ (b) to satisfy payments required for common stock upon the exercise of stock ~~options.~~options, and (c) as part of a publicly announce repurchase program.

(2) In November 2012, the ~~Company's~~Company’s Board of Directors authorized the repurchase of up to $25 million of the ~~Company's~~Company’s common stock. Repurchases may be made in open market or privately negotiated transactions. Through ~~September 30, 2014~~March 31, 2015, the Company has ~~not~~ repurchased ~~any~~$13.0 million of its common stock under this repurchase program and ~~$25~~$12.0 million may yet be used to purchase shares.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

~~Table of contents~~

Item 6. Exhibits



Exhibit Number		Description of Exhibit
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the ~~Company's~~Company’s Form 10-Q for the quarter ended September 30, 2007).
3.2		Certificate of Designations for Series A Cumulative Convertible Preferred Stock dated August 11, 2009 (incorporated by reference to Exhibit 3.1 to the ~~Company's~~Company’s Form 8-K filed on August 17, 2009).
3.3		Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the ~~Company's~~Company’s Form 10-Q for the quarter ended September 30, 2009).
3.4		Amended and Restated Bylaws, dated December 9, 2014 (incorporated by reference to ~~Appendix F~~Exhibit 3.1 to the ~~Company's Definitive Proxy Statement~~Company’s Form 8-K filed on ~~September 27, 2001)~~December 10, 2014).
4.1		Form of Certificate of Common Stock (incorporated by reference to Appendix E to the ~~Company's~~Company’s Definitive Proxy Statement filed on September 27, 2001).
4.2		Form of Certificate of Series A Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit A to the Certificate of Designations for Series A Cumulative Convertible Preferred Stock filed as Exhibit 3.1 to the ~~Company's~~Company’s Form 8-K filed on August 17, 2009).
4.3		Form of Warrant to Purchase Common Stock of the Company, dated August 31, 2000 (incorporated by reference to Exhibit 4.3 to the ~~Company's~~Company’s Registration Statement on Form SB-2 (File No. 333-129308) filed on October 28, 2005).
4.4		Form of Exercisable Warrant, dated August 11, 2009 (incorporated by reference to Exhibit 4.1 to the ~~Company's~~Company’s Form 8-K filed on August 17, 2009).
4.5		Form of Contingent Warrant, dated August 11, 2009 (incorporated by reference to Exhibit 4.2 to the ~~Company's~~Company’s Form 8-K filed on August 17, 2009).
4.6		Amendment to Warrant to Purchase Common Stock, dated ~~as of~~ June 14, 2012, by and among the Company and each of the holders party thereto (incorporated by reference to Exhibit 10.1 to the ~~Company's~~Company’s Form 8-K filed on June 18, 2012).
4.7		Amendment to Amended and Restated Warrant to Purchase Common Stock, dated as of February 5, 2014 (incorporated by reference to Exhibit 10.1 to the ~~Company's~~Company’s Form 8-K filed on February 11, 2014).
10.1		Employment Agreement, dated effective December 31, 2014 between the Company and Steve Reeves (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 7, 2015).
31.1	*	Rule 13a-14(a) Certification of Principal Executive Officer.
31.2	*	Rule 13a-14(a) Certification of Principal Financial Officer.
32.1	*	Section 1350 Certification of Principal Executive Officer.
32.2	*	Section 1350 Certification of Principal Financial Officer.
101.INS	**	XBRL Instance Document.
101.SCH	**	XBRL Schema Document.
101.CAL	**	XBRL Calculation Linkbase Document.
101.LAB	**	XBRL Label Linkbase Document.
101.PRE	**	XBRL Presentation Linkbase Document.
101.DEF	**	XBRL Definition Linkbase Document.

*		Filed herewith.
**		Furnished with this Form 10-Q, not filed.

~~Table of contents~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



FLOTEK INDUSTRIES, INC.

By:		/s/ JOHN W. CHISHOLM
		John W. Chisholm
		President, Chief Executive Officer and Chairman of the Board

Date: ~~October~~April 22, ~~2014~~2015



FLOTEK INDUSTRIES, INC.

By:		/s/ H. RICHARD WALTON
		H. Richard Walton
		Executive Vice President and Chief Financial Officer

Date: ~~October~~April 22, ~~2014~~2015



	Energy Chemical Technologies		Consumer and Industrial Chemical Technologies			Teledrift®		Total
Balance at December 31, 2013	$	30,296	$	20,642		$	15,333	$	66,271
Final Florida Chemical acquisition adjustment	—		(1,162		)	—		(1,162		)
Addition upon acquisition of EOGA	5,455		—			—		5,455
Addition upon acquisition of SiteLark	567		—			—		567
Balance at September 30, 2014	$	36,318	$	19,480		$	15,333	$	71,131

Large accelerated filer

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Non-accelerated filer

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Smaller reporting company