SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(State orof other jurisdiction of

incorporation or organization)

10603 W. Sam Houston Parkway N.,

~~(713)~~ (713) 849-9911

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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. Yesx☒ 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). Yesx☒ 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

¨ ~~(Do not check if a smaller reporting company)~~

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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~~July 31, ~~2017,~~2019, there were ~~56,825,819~~57,697,905 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.

TABLE OF CONTENTS




PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018	3
	Unaudited Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	6
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~ 2019	7
	Notes to Unaudited Condensed Consolidated Financial Statements	89

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	30

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 4.1A.	~~Controls~~Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and ~~Procedures~~Use of Proceeds	32

~~PART II—OTHER INFORMATION~~Item 3.	Defaults Upon Senior Securities	32

Item 1.4.	~~Legal Proceedings~~Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	33

~~Item 1A.~~		~~Risk Factors~~	33

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~SIGNATURES	34

~~Item 3.~~	~~Defaults Upon Senior Securities~~	34

~~Item 4.~~	~~Mine Safety Disclosures~~	34

~~Item 5.~~	~~Other Information~~	34

~~Item 6.~~	~~Exhibits~~	35

~~SIGNATURES~~		36

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2017			December 31, 2016			June 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	4,942		$	4,823		$	97,509		$	3,044
Accounts receivable, net of allowance for doubtful accounts of $1,089 and $664 at September 30, 2017 and December 31, 2016, respectively	56,008			47,152
Inventories	70,716			58,283
Restricted cash							661			—
Accounts receivable, net of allowance for doubtful accounts of $1,676 and $1,190 at June 30, 2019 and December 31, 2018, respectively							30,694			37,047
Inventories, net							26,442			27,289
Income taxes receivable	2,649			12,752			3,467			3,161
Assets held for sale	4,135			43,900			—			118,470
Other current assets	10,881			21,708			20,406			5,771
Total current assets	149,331			188,618			179,179			194,782
Property and equipment, net	73,711			74,691			41,760			45,485
Goodwill	56,660			56,660
Operating lease right-of-use assets							17,982			—
Deferred tax assets, net	21,190			12,894			605			18,663
Other intangible assets, net	48,851			50,352			24,290			26,827
Other long-term assets							—			126
TOTAL ASSETS	$	349,743		$	383,215		$	263,816		$	285,883
LIABILITIES AND EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	21,725		$	29,960		$	10,858		$	15,011
Accrued liabilities	12,323			12,170			11,141			10,335
Income taxes payable							862			—
Interest payable	30			24			—			8
Liabilities held for sale	1,586			4,961			—			9,174
Current portion of long-term debt	40,589			40,566
Current portion of lease liabilities							714			—
Long-term debt, classified as current							—			49,731
Total current liabilities	76,253			87,681			23,575			84,259
Long-term debt, less current portion	—			7,833
Long-term operating lease liabilities							18,256			—
Long-term finance lease liabilities							193			—
Deferred tax liabilities, net							116			—
Total liabilities	76,253			95,514			42,140			84,259
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; 60,621,786 shares issued and 56,802,456 shares outstanding at September 30, 2017; 59,684,669 shares issued and 56,972,580 shares outstanding at December 31, 2016	6			6
Stockholders’ equity:
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; 62,955,872 shares issued and 57,688,578 shares outstanding at June 30, 2019; 62,162,875 shares issued and 57,342,279 shares outstanding at December 31, 2018							6			6
Additional paid-in capital	334,490			318,392			345,217			343,536
Accumulated other comprehensive income (loss)	(822		)	(956		)
Accumulated other comprehensive loss							(998		)	(1,116		)
Retained earnings (accumulated deficit)	(28,736		)	(9,830		)	(89,171		)	(107,565		)
Treasury stock, at cost; 3,354,344 and 2,028,847 shares at September 30, 2017 and December 31, 2016, respectively	(31,806		)	(20,269		)
Flotek Industries, Inc. stockholders’ equity	273,132			287,343
Noncontrolling interests	358			358
Total equity	273,490			287,701
TOTAL LIABILITIES AND EQUITY	$	349,743		$	383,215
Treasury stock, at cost; 3,947,982 and 3,770,224 shares at June 30, 2019 and December 31, 2018, respectively							(33,378		)	(33,237		)
Total stockholders’ equity							221,676			201,624
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY							$	263,816		$	285,883

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Revenue	$	79,458		$	64,337		$	244,589		$	192,227		$	34,692		$	39,546		$	77,949		$	80,615
Cost of revenue	57,718			41,983			169,016			124,362
Gross profit	21,740			22,354			75,573			67,865
Expenses:
Costs and expenses:
Operating expenses (excluding depreciation and amortization)													38,306			35,544			82,904			72,199
Corporate general and administrative	10,346			10,302			33,773			30,398			6,054			8,665			13,335			17,158
Segment selling and administrative	9,277			9,775			28,972			26,879
Depreciation and amortization	2,540			2,217			7,464			6,024			2,119			2,343			4,379			4,676
Research and development	2,691			2,327			9,940			6,323			2,076			2,949			4,360			5,704
(Gain) loss on disposal of long-lived assets	(11		)	(14		)	401			(29		)
Total expenses	24,843			24,607			80,550			69,595
(Gain)/loss on disposal of long-lived assets													(4		)	5			1,093			62
Impairment of goodwill													—			37,180			—			37,180
Total costs and expenses													48,551			86,686			106,071			136,979
Loss from operations	(3,103		)	(2,253		)	(4,977		)	(1,730		)	(13,859		)	(47,140		)	(28,122		)	(56,364		)
Other (expense) income:
Interest expense	(574		)	(518		)	(1,718		)	(1,536		)	(16		)	(640		)	(2,014		)	(1,156		)
Other (expense) income, net	273			(41		)	664			(94		)
Total other expense	(301		)	(559		)	(1,054		)	(1,630		)
Loss on write-down of assets held for sale													—			(2,580		)	—			(2,580		)
Other income (expense), net													693			(2,499		)	800			(2,609		)
Total other income (expense)													677			(5,719		)	(1,214		)	(6,345		)
Loss before income taxes	(3,404		)	(2,812		)	(6,031		)	(3,360		)	(13,182		)	(52,859		)	(29,336		)	(62,709		)
Income tax (expense) benefit	(17		)	942			746			1,349
Income tax benefit (expense)													192			(16,128		)	966			(15,807		)
Loss from continuing operations	(3,421		)	(1,870		)	(5,285		)	(2,011		)	(12,990		)	(68,987		)	(28,370		)	(78,516		)
Income (loss) from discontinued operations, net of tax	319			(876		)	(13,621		)	(33,200		)	(1,608		)	(6,404		)	46,764			3,192
Net loss	$	(3,102	)	$	(2,746	)	$	(18,906	)	$	(35,211	)
Net income (loss)													$	(14,598	)	$	(75,391	)	18,394			(75,324		)
Net income attributable to noncontrolling interests													—			357			—			357
Net income (loss) attributable to Flotek Industries, Inc. (Flotek)													$	(14,598	)	$	(75,034	)	$	18,394		$	(74,967	)

Amounts attributable to Flotek shareholders:
Loss from continuing operations													$	(12,990	)	$	(68,630	)	$	(28,370	)	$	(78,159	)
Income (loss) from discontinued operations, net of tax													(1,608		)	(6,404		)	46,764			3,192
Net income (loss) attributable to Flotek													$	(14,598	)	$	(75,034	)	$	18,394		$	(74,967	)

Basic earnings (loss) per common share:													Basic earnings (loss) per common share:
Continuing operations	$	(0.06	)	$	(0.03	)	$	(0.09	)	$	(0.04	)	$	(0.22	)	$	(1.19	)	$	(0.49	)	$	(1.36	)
Discontinued operations, net of tax	0.01			(0.02		)	(0.24		)	(0.60		)	(0.03		)	(0.11		)	0.80			0.06
Basic earnings (loss) per common share	$	(0.05	)	$	(0.05	)	$	(0.33	)	$	(0.64	)	$	(0.25	)	$	(1.30	)	$	0.31		$	(1.30	)

Diluted earnings (loss) per common share:													Diluted earnings (loss) per common share:
Continuing operations	$	(0.06	)	$	(0.03	)	$	(0.09	)	$	(0.04	)	$	(0.22	)	$	(1.19	)	$	(0.49	)	$	(1.36	)
Discontinued operations, net of tax	0.01			(0.02		)	(0.24		)	(0.60		)	(0.03		)	(0.11		)	0.80			0.06
Diluted earnings (loss) per common share	$	(0.05	)	$	(0.05	)	$	(0.33	)	$	(0.64	)	$	(0.25	)	$	(1.30	)	$	0.31		$	(1.30	)

Weighted average common shares:
Weighted average common shares used in computing basic earnings (loss) per common share	57,602			56,899			57,709			55,523			58,608			57,869			58,491			57,566
Weighted average common shares used in computing diluted earnings (loss) per common share	57,602			56,899			57,709			55,523			58,608			57,869			58,491			57,566

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Loss from continuing operations	$	(3,421	)	$	(1,870	)	$	(5,285	)	$	(2,011	)	$	(12,990	)	$	(68,987	)	$	(28,370	)	$	(78,516	)
Income (loss) from discontinued operations, net of tax	319			(876		)	(13,621		)	(33,200		)	(1,608		)	(6,404		)	46,764			3,192
Net loss	(3,102		)	(2,746		)	(18,906		)	(35,211		)
Net income (loss)													(14,598		)	(75,391		)	18,394			(75,324		)
Other comprehensive income (loss):
Foreign currency translation adjustment	148			(68		)	134			256			24			18			118			(161		)
Comprehensive income (loss)	$	(2,954	)	$	(2,814	)	$	(18,772	)	$	(34,955	)	$	(14,574	)	$	(75,373	)	18,512			(75,485		)
Net loss attributable to noncontrolling interests													—			357			—			357
Comprehensive income (loss) attributable to Flotek													$	(14,574	)	$	(75,016	)	$	18,512		$	(75,128	)

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine months ended September 30,						Six months ended June 30,
	2017			2016			2019			2018
Cash flows from operating activities:
Net loss	$	(18,906	)	$	(35,211	)
Loss from discontinued operations, net of tax	(13,621		)	(33,200		)
Net income (loss) attributable to Flotek Industries, Inc. (Flotek)							$	18,394		$	(74,967	)
Income from discontinued operations, net of tax							46,764			3,192
Loss from continuing operations	(5,285		)	(2,011		)	(28,370		)	(78,159		)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
Depreciation and amortization	9,091			7,380			4,379			4,676
Amortization of deferred financing costs	376			308			1,428			192
Loss (gain) on sale of assets	401			(29		)
Provision for doubtful accounts							102			(471		)
Provision for excess and obsolete inventory							—			1,942
Impairment of goodwill							—			37,180
Loss on write-down of assets held for sale							—			2,580
Loss on disposal of long-lived assets							1,093			62
Non-cash lease expense							464			—
Stock compensation expense	9,679			8,591			1,669			4,385
Deferred income tax benefit	(8,290		)	(6,309		)
Deferred income tax provision							17,855			15,459
Reduction in tax benefit related to share-based awards	915			883			24			72
Changes in current assets and liabilities:
Restricted cash							(661		)	—
Accounts receivable, net	(8,704		)	(7,572		)	6,289			5,881
Inventories	(12,213		)	(2,959		)
Inventories, net							907			(2,080		)
Income taxes receivable	9,254			(13,687		)	(281		)	63
Other current assets	12,649			(51		)	(16,209		)	1,151
Accounts payable	(8,262		)	5,959			(4,157		)	4,325
Accrued liabilities	1,561			10,434			(10,216		)	(16,889		)
Income taxes payable	—			(1,807		)	1,182			—
Interest payable	6			45			(8		)	(19		)
Net cash provided by (used in) operating activities	1,178			(825		)
Net cash used in operating activities							(24,510		)	(19,650		)
Cash flows from investing activities:
Capital expenditures	(6,155		)	(10,618		)	(767		)	(2,631		)
Proceeds from sales of businesses	18,490			—
Proceeds from sales of business							169,722			—
Proceeds from sale of assets	321			38			140			90
Payments for acquisition, net of cash acquired	—			(7,863		)
Purchase of patents and other intangible assets	(817		)	(311		)	(227		)	(181		)
Net cash provided by (used in) investing activities	11,839			(18,754		)	168,868			(2,722		)
Cash flows from financing activities:
Repayments of indebtedness	(9,833		)	(15,398		)
Borrowings on revolving credit facility	310,021			256,738			42,984			146,038
Repayments on revolving credit facility	(307,998		)	(249,324		)	(92,715		)	(124,862		)
Debt issuance costs	(106		)	(147		)	—			(98		)
Reduction in tax benefit related to share-based awards	—			(883		)
Purchase of treasury stock related to share-based awards	(1,500		)	(925		)	(142		)	(24		)
Proceeds from sale of common stock	530			30,610			—			247
Repurchase of common stock	(4,174		)	—
Proceeds from exercise of stock options	21			134
Payments for finance leases							(38		)	—
Loss from noncontrolling interest							—			(357		)
Net cash (used in) provided by financing activities	(13,039		)	20,805			(49,911		)	20,944
Discontinued operations:
Net cash used in operating activities	(695		)	(82		)
Net cash provided by investing activities	708			74
Net cash flows provided by (used in) discontinued operations	13			(8		)
Net cash (used in) provided by operating activities							(321		)	644
Net cash provided by (used in) investing activities							337			(630		)
Net cash flows provided by discontinued operations							16			14
Effect of changes in exchange rates on cash and cash equivalents	128			48			2			(74		)
Net increase in cash and cash equivalents	119			1,266
Net increase (decrease) in cash and cash equivalents							94,465			(1,488		)
Cash and cash equivalents at the beginning of period	4,823			2,208			3,044			4,584
Cash and cash equivalents at the end of period	$	4,942		$	3,474		$	97,509		$	3,096

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF STOCKHOLDERS’ 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, 2016 59,685
$ 6
2,029
$ (20,269 ) $ 318,392
$ (956 ) $ (9,830 ) $ 358
$ 287,701
Net loss —
—
—
—
—
—
(18,906 ) —
(18,906 )
Foreign currency translation adjustment —
—
—
—
—
134
—
—
134
Stock issued under employee stock purchase plan —
—
(81 ) —
530
—
—
—
530
Common stock issued in payment of accrued liability —
—
—
—
188
—
—
—
188
Stock options exercised 663
—
—
—
5,884
—
—
—
5,884
Stock surrendered for exercise of stock options —
—
478
(5,863 ) —
—
—
—
(5,863 )
Restricted stock granted 274
—
—
—
—
—
—
—
—
Restricted stock forfeited —
—
97
—
—
—
—
—
—
Treasury stock purchased —
—
151
(1,500 ) —
—
—
—
(1,500 )
Stock compensation expense —
—
—
—
9,496
—
—
—
9,496
Repurchase of common stock —
—
680
(4,174 ) —
—
—
—
(4,174 )
Balance, September 30, 2017 60,622
$ 6
3,354
$ (31,806 ) $ 334,490
$ (822 ) $ (28,736 ) $ 358
$ 273,490



	Three months ended June 30, 2019
	Common Stock			Treasury Stock				Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests		Total Stockholders’ Equity
Balance, March 31, 2019	62,199	$	6	3,845	$	(33,368	)	$	344,004	$	(1,022	)	$	(74,573	)	$	—	$	235,047
Net income	—	—		—	—			—		—			(14,598		)	—		(14,598		)
Foreign currency translation adjustment	—	—		—	—			—		24			—			—		24
Restricted stock granted	757	—		—	—			—		—			—			—		—
Restricted stock forfeited	—	—		99	—			—		—			—			—		—
Treasury stock purchased	—	—		4	(10		)	—		—			—			—		(10		)
Stock compensation expense	—	—		—	—			1,213		—			—			—		1,213
Balance, June 30, 2019	62,956	$	6	3,948	$	(33,378	)	$	345,217	$	(998	)	$	(89,171	)	$	—	$	221,676



	Three months ended June 30, 2018
	Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests			Total Stockholders’ Equity
	Shares Issued	Par Value		Shares		Cost			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests			Total Stockholders’ Equity
Balance, March 31, 2018	61,161	$	6	3,599		$	(33,067	)	$	338,137	$	(1,063	)	$	(37,158	)	$	358		$	267,213
Net loss	—	—		—		—			—		—			(75,034		)	(357		)	(75,391		)
Foreign currency translation adjustment	—	—		—		—			—		18			—			—			18
Stock issued under employee stock purchase plan	—	—		(36	)	—			100		—			—			—			100
Restricted stock granted	481	—		—		—			—		—			—			—			—
Restricted stock forfeited	—	—		39		—			—		—			—			—			—
Treasury stock purchased	—	—		5		(21		)	—		—			—			—			(21		)
Stock compensation expense	—	—		—		—			2,381		—			—			—			2,381
Balance, June 30, 2018	61,642	$	6	3,607		$	(33,088	)	$	340,618	$	(1,045	)	$	(112,192	)	$	1		$	194,300

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(in thousands)



	Six months ended June 30, 2019
	Common Stock			Treasury Stock				Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests		Total Stockholders’ Equity
Balance, December 31, 2018	62,163	$	6	3,770	$	(33,237	)	$	343,536	$	(1,116	)	$	(107,565	)	$	—	$	201,624
Net income	—	—		—	—			—		—			18,394			—		18,394
Foreign currency translation adjustment	—	—		—	—			—		118			—			—		118
Restricted stock granted	793	—		—	—			—		—			—			—		—
Restricted stock forfeited	—	—		133	—			—		—			—			—		—
Treasury stock purchased	—	—		45	(141		)	—		—			—			—		(141		)
Stock compensation expense	—	—		—	—			1,681		—			—			—		1,681
Balance, June 30, 2019	62,956	$	6	3,948	$	(33,378	)	$	345,217	$	(998	)	$	(89,171	)	$	—	$	221,676



	Six months ended June 30, 2018
	Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests			Total Stockholders’ Equity
	Shares Issued	Par Value		Shares		Cost			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests			Total Stockholders’ Equity
Balance, December 31, 2017	60,623	$	6	3,621		$	(33,064	)	$	336,067	$	(884	)	$	(37,225	)	$	358		$	265,258
Net loss	—	—		—		—			—		—			(74,967		)	(357		)	(75,324		)
Foreign currency translation adjustment	—	—		—		—			—		(161		)	—			—			(161		)
Stock issued under employee stock purchase plan	—	—		(65	)	—			247		—			—			—			247
Restricted stock granted	1,019	—		—		—			—		—			—			—			—
Restricted stock forfeited	—	—		45		—			—		—			—			—			—
Treasury stock purchased	—	—		6		(24		)	—		—			—			—			(24		)
Stock compensation expense	—	—		—		—			4,304		—			—			—			4,304
Balance, June 30, 2018	61,642	$	6	3,607		$	(33,088	)	$	340,618	$	(1,045	)	$	(112,192	)	$	1		$	194,300

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED 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,~~an international energy chemistry technology-driven company that develops and supplies ~~chemistries~~chemistry and services to the oil and gas ~~industries, and~~industry. Flotek also supplied high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial ~~markets.~~markets, classified as discontinued operations at December 31, 2018.

The Company’s oilfield business includes specialty chemistries and logistics which enable its customers ~~in pursuing~~to pursue improved efficiencies in the drilling and completion of their wells. The Company also provides automated bulk material handling, loading facilities, and blending capabilities. ~~The~~In the segment reported as discontinued operations at December 31, 2018, the Company ~~processes~~processed citrus oil to produce (1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous industries around the world, including the oil and gas (“O&G”) industry.

Flotek operates in over 2015 domestic and international markets. 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 also ~~serves~~served 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.~~companies, reported as discontinued operations at December 31, 2018.

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 Condensed 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 (“SEC”) regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim Financial Statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2018 (“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~~six months ended ~~September~~June 30, ~~2017,~~2019 are not necessarily indicative of the results to be expected for the year ~~ending~~ended December 31, ~~2017.~~2019.

During the fourth quarter of ~~2016,~~2018, the Company classified the ~~Drilling~~Consumer and Industrial Chemistry Technologies ~~and Production Technologies segments~~segment as held for sale based on management’s intention to sell ~~these businesses.~~this business. The Company’s historical financial statements have been revised to present the operating results of the ~~Drilling~~Consumer and Industrial Chemistry Technologies ~~and Production Technologies segments~~segment as discontinued operations. The results of operations of ~~Drilling Technologies and Production Technologies~~this segment are presented as ~~“Loss~~“Income (loss) from discontinued operations” in the statement of operations and the related cash flows of ~~these segments has~~this segment have been reclassified to discontinued operations for all periods presented. The assets and liabilities of the ~~Drilling~~Consumer and Industrial Chemistry Technologies ~~and Production Technologies segments~~segment have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance ~~sheets~~sheet for all periods presented.

All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of lease liabilities, and operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current portion of lease liabilities, and finance lease liabilities in the consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

commencement date based on the present value of lease payments over the lease term. As the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The lease term is modified to reflect options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has some lease agreements that contain both lease and non-lease components. The Company has elected to account for such leases as having a single lease component.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates.

Reclassifications

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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 2 — Recent Accounting Pronouncements

Application of New Accounting Standards

Effective January 1, ~~2017,~~2019, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. ~~2015-11,~~2016-02, “~~Simplifying the Measurement of Inventory~~Leases.” This standard (ASC 842) requires ~~management~~the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP (ASC 840). The Company adopted ASC 842 using the optional transition method. Consequently, the Company’s reporting for the comparative periods presented prior to ~~measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices~~2019 in the ~~ordinary course~~financial statements will continue to be in accordance with ASC 840. Upon adoption, the Company recorded operating lease ROU assets and corresponding operating lease liabilities, net of ~~business, less reasonably predictable costs~~deferred rent, of ~~completion, disposal,~~approximately $18.4 million, representing the present value of future lease payments under operating leases with terms of greater than twelve months. The adoption of this standard did not have a material impact on the consolidated statements of operations or cash flows. Refer to Note 4 — “Leases” for further information surrounding adoption of this new standard.

Effective January 1, 2019, the Company adopted ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and ~~transportation.~~Jobs Act. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.

Effective January 1, ~~2017,~~2019, the Company adopted ~~the accounting guidance in~~ ASU No. ~~2015-17,~~2018-07, “~~Balance Sheet Classification of Deferred Taxes~~Improvements to Nonemployee Share-Based Payment Accounting.” This standard ~~eliminated~~expands the ~~requirement~~scope of Topic 718 to include share-based payment transactions for ~~organizations to present deferred tax assets~~acquiring goods and ~~liabilities as current and noncurrent in a classified balance sheet. Instead, organizations are now required to classify all deferred tax assets and liabilities as noncurrent.~~services from nonemployees. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. ~~The Company applied this standard retrospectively and, therefore, prior periods presented were adjusted.~~

~~Effective January 1, 2017, the Company adopted the accounting guidance in ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting~~.” This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance requires excess tax benefits and deficiencies to be recognized in the income statement rather than in additional paid-in capital. As a result of applying this change, the Company recognized a $0.9 million reduction in tax benefit in the provision for incomes taxes during the nine months ended September 30, 2017. The Company applied this standard prospectively, where applicable, and, therefore, prior periods presented were not adjusted.

New Accounting Requirements and Disclosures

~~In May 2014, the 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 nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, which improves the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, which clarifies identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-11, which rescinds certain SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, effective upon adoption of ASU 2014-09, and ASU No. 2016-12, which reduces the potential for diversity in practice at initial application and reduces the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. In December 2016, the FASB issued ASU No. 2016-20, which provides technical corrections and improvements to the original guidance issued. The Company intends to adopt the new standard in the first quarter of 2018 and is still evaluating which method to implement based on continued review of past and anticipated revenue streams given the change in strategic focus of the business during 2017. The Company has identified key contract types representative of its business for comparing historical accounting policies and practices to the new standard and is continuing to evaluate the impact these pronouncements will have on the consolidated financial statements and related disclosures.

~~In February 2016, the FASB issued ASU No. 2016-02, “Leases~~.” This standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. The pronouncement is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and should be applied using a modified retrospective transition approach, with early application permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

In August ~~2016,~~2018, the FASB issued ASU No. ~~2016-15,~~2018-13, “~~Classification of Certain Cash Receipts and Cash Payments.” This standard addresses eight specific cash flow issues with~~Disclosure Framework — Changes to the ~~objective of reducing the existing diversity in practice. The pronouncement is effective~~Disclosure Requirements for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

~~In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business.~~” This standard provides additional guidance on whether an integrated set of assets and activities constitutes a business. The pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted in specific instances. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

~~In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment~~Fair Value Measurement.” This standard ~~eliminates Step 2 from the goodwill impairment test. An entity will now recognize an impairment charge~~removes, modifies, and adds additional requirements for ~~the amount by which the carrying amount exceeds the reporting unit’s~~disclosures related to fair ~~value.~~value measurement in ASC 820. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption ~~permitted.~~permitted in any interim period. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

~~In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting~~.” This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. The pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

~~Note 3 — Discontinued Operations~~

During the fourth quarter 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. The Company executed a plan to sell or otherwise dispose of the Drilling Technologies and Production Technologies segments. An investment banking advisory services firm was engaged and actively marketed these segments.

The Company met all of the criteria to classify the Drilling Technologies and Production Technologies segments’ assets and liabilities as held for sale in the fourth quarter 2016. Effective December 31, 2016, the Company classified the assets, liabilities, and results of operations for these two segments as “Discontinued Operations” for all periods presented.

Disposal of the Drilling Technologies and Production Technologies reporting segments represented a strategic shift that would have a major effect on the Company’s operations and financial results. Management expects the sale or disposal of the assets of these segments to be completed by the end of 2017.

On May 22, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Drilling Technologies segment to National Oilwell Varco, L.P. (“NOV”) for $17.0 million in cash consideration, subject to normal working capital adjustments, with $1.5 million held back by NOV for up to 18 months to satisfy potential indemnification claims.

On May 23, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Production Technologies segment to Raptor Lift Solutions, LLC (“Raptor Lift”) for $2.9 million in cash consideration, with $0.4 million held back by Raptor Lift to satisfy potential indemnification claims.

On August 16, 2017, the Company completed the sale of substantially all of the remaining assets of the Company’s Drilling Technologies segment to Galleon Mining Tools, Inc. for $1.0 million in cash consideration and a note receivable of $1.0 million due in one year.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 3 — Discontinued Operations

During the fourth quarter of 2018, the Company initiated and began executing a strategic plan to sell its Consumer and Industrial Chemistry Technologies (“CICT”) segment. An investment banking advisory services firm was engaged and actively marketed this segment.

The Company met all of the criteria to classify the CICT segment’s assets and liabilities as held for sale in the fourth quarter 2018. The Company has classified the assets, liabilities, and results of operations for this segment as “Discontinued Operations” for all periods presented.

Disposal of the CICT reporting segment represented a strategic shift that will have a major effect on the Company’s operations and financial results.

On January 10, 2019, the Company entered into a Share Purchase Agreement with Archer-Daniels-Midland Company (“ADM”) for the sale of all of the shares representing membership interests in its wholly owned subsidiary, Florida Chemical Company, LLC, which represented the CICT segment.

Effective February 28, 2019, the Company completed the sale of the CICT segment to ADM for $175.0 million in cash consideration, with $4.4 million temporarily held in escrow by ADM for post-closing working capital adjustments for up to 90 days and $13.1 million temporarily held in escrow to satisfy potential indemnification claims by ADM with anticipated releases at 6 months, 12 months, and 15 months.

As of June 30, 2019, the Company and ADM had not reached an agreement on the post-closing working capital adjustment. As of this filing, the Company is in process of engaging a third party to assist with reaching a conclusion.

Concurrent with the closing of the sale of the CICT segment, the Company retained $11.1 million of historical inventory previously held by the CICT segment. In addition, the Company executed a long-term supply agreement for terpene product, which serves as a feedstock to some of the Company’s key value-added products. The term of the agreement runs through September 2023, with an option to extend for an additional year. This agreement secures the Company’s access to a sufficient supply of terpene and includes a minimum annual purchase requirement at variable prices during the term of the agreement.

The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (in thousands):



	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Consumer and Industrial Chemistry Technologies
Revenue	$	—		$	19,540		$	11,031		$	38,987
Operating expenses	—			(18,066		)	(11,572		)	(34,236		)
Depreciation and amortization	—			(682		)	—			(1,351		)
Research and development	—			(153		)	(69		)	(322		)
(Loss) income from operations	—			639			(610		)	3,078
Other income	—			366			35			192
Gain (Loss) on sale of business	(2,100		)	—			67,694			—
(Loss) income before income taxes	(2,100		)	1,005			67,119			3,270
Income tax benefit (expense)	492			(7,409		)	(20,355		)	(78		)
Net income (loss) from discontinued operations	$	(1,608	)	$	(6,404	)	$	46,764		$	3,192

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Drilling Technologies
Revenue $ —
$ 7,197
$ 11,534
$ 20,026
Cost of revenue —
(4,290 ) (7,259 ) (13,876 )
Selling, general and administrative (791 ) (3,568 ) (6,562 ) (11,723 )
Depreciation and amortization —
(340 ) —
(1,425 )
Research and development —
—
(6 ) (65 )
Gain on disposal of long-lived assets 36
77
97
92
Impairment of inventory and long-lived assets —
—
—
(36,522 )
Loss from operations (755 ) (924 ) (2,196 ) (43,493 )
Other income (expense) 26
(77 ) (91 ) (320 )
Gain (loss) on sales of businesses 463
—
(902 ) —
Loss on write-down of assets held for sale —
—
(6,831 ) —
Loss before income taxes (266 ) (1,001 ) (10,020 ) (43,813 )
Income tax benefit 581
592
3,473
15,673
Net income (loss) from discontinued operations $ 315
$ (409 ) $ (6,547 ) $ (28,140 )

Production Technologies
Revenue $ —
$ 2,145
$ 4,002
$ 6,034
Cost of revenue —
(2,040 ) (3,189 ) (5,833 )
Selling, general and administrative (64 ) (878 ) (1,739 ) (2,929 )
Depreciation and amortization —
(149 ) —
(447 )
Research and development —
(204 ) (364 ) (671 )
Gain (loss) on disposal of long-lived assets —
8
—
(51 )
Impairment of inventory —
—
—
(3,913 )
Loss from operations (64 ) (1,118 ) (1,290 ) (7,810 )
Other expense —
(24 ) (52 ) (68 )
Gain on sale of businesses 61
—
233
—
Loss on write-down of assets held for sale —
—
(9,718 ) —
Loss before income taxes (3 ) (1,142 ) (10,827 ) (7,878 )
Income tax benefit 7
675
3,753
2,818
Net income (loss) from discontinued operations $ 4
$ (467 ) $ (7,074 ) $ (5,060 )

Drilling Technologies and Production Technologies
Income (loss) from discontinued operations, net of tax $ 319
$ (876 ) $ (13,621 ) $ (33,200 )

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The assets and liabilities held for sale on the Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, are as follows (in thousands):



	Consumer and Industrial Chemistry Technologies
	June 30, 2019		December 31, 2018
Assets:
Accounts receivable, net	$	—	$	10,547
Inventories, net	—		52,069
Other current assets	—		446
Property and equipment, net	—		15,899
Goodwill	—		19,480
Other intangible assets, net	—		20,029
Assets held for sale	—		118,470
Valuation allowance	—		—
Assets held for sale, net	$	—	$	118,470
Liabilities:
Accounts payable	$	—	$	8,883
Accrued liabilities	—		291
Liabilities held for sale	$	—	$	9,174

Drilling Technologies Production Technologies
September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
Assets:
Accounts receivable, net $ 1,749
$ 5,072
$ 201
$ 1,784
Inventories 5
9,078
5
8,115
Other current assets 1,585
278
699
370
Long-term receivable —
—
—
4,179
Property and equipment, net —
11,277
—
3,978
Goodwill —
15,333
—
1,689
Other intangible assets, net —
7,395
—
484
Assets held for sale 3,339
48,433
905
20,599
Valuation allowance (109 ) (18,971 ) —
(6,161 )
Assets held for sale, net $ 3,230
$ 29,462
$ 905
$ 14,438
Liabilities:
Accounts payable $ 15
$ 2,472
$ 10
$ 914
Accrued liabilities 1,419
1,190
142
385
Liabilities held for sale $ 1,434
$ 3,662
$ 152
$ 1,299

Note 4 — ~~Impairment of Inventory and Long-Lived Assets for Discontinued Operations~~Leases

During the three months ended March 31, 2016, as a result of changes in the oil and gas industry that occurred since the beginning of 2016 and the corresponding impact on the Company’s business outlook,Effective January 1, 2019, the Company ~~evaluated~~adopted ASC 842 using the ~~direction~~prospective method applied to those leases which were not completed as of its business activities. Crude oil prices, which appeared to have stabilized during the fourth quarter of 2015, fell further during the first quarter of 2016, decreasing approximately 21% from average prices seen in the fourth quarter of 2015. The U.S. drilling rig count declined from 698 at December 31, ~~2015 to 450 at April 1, 2016, a decline of 35.5%.~~

~~Due to the decreased rig activity and its impact on management’s expectations for future market activity, the Company further refocused operations of its Drilling Technologies segment.~~2018. The Company ~~decided~~has leases for corporate offices, research and development facilities, warehouses, sales offices and equipment. The leases have remaining lease terms of 1 year to ~~exit~~19 years, some of which include options to extend the ~~business of building and repairing motors in all domestic markets. In addition, changes in drilling technique, including further escalation of the move~~leases for up to a dominance of pad drilling, reduced the marketability of certain other inventory items. The focus of the Production Technologies segment was shifted to its new technologies for electric submersible pumps for the oil and gas industry and for hydraulic pumping units. Inventory associated with older technologies for these items has been evaluated for impairment. As a result of these changes in focus and projected declines in asset utilization,10 years.

Upon adoption, the Company recorded ~~a pre-tax impairment~~operating lease ROU assets and corresponding operating lease liabilities, net of ~~inventories as noted below.~~

~~Changes in~~deferred rent, of approximately $18.4 million, representing the business climate noted above and increasing operating losses experienced within the Drilling Technologies and Production Technologies segments during the three months ended March 31, 2016, caused the Company to test asset groups within these two segments for recoverability. Recoverability of the carryingpresent value of future lease payments under operating leases with terms of greater than twelve months. Leases with an initial expected term of 12 months or less are not recorded on the ~~asset groups was based upon estimated future~~balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the expected lease term.

The components of lease expense and supplemental cash flows while taking into consideration various assumptions and estimates, including future use of the assets, remaining useful life of the assets, and eventual disposition of the assets. Undiscounted estimated cash flows of two asset groups associated with domestic operations in the Drilling Technologies segment did not exceed the carrying value of the respective asset groups. Therefore, the Company performed an analysis of discounted future cash flows to determine the fair value of each of these two asset groups. As a result of this testing, the Company recorded a pre-tax impairment of long-lived assetsflow information are as ~~noted below.~~follows (in thousands):



	Three months ended June 30, 2019		Six months ended June 30, 2019
Operating lease expense	$	653	$	1,306
Finance lease expense:
Amortization of right-of-use assets	220		220
Interest on lease liabilities	3		3
Total finance lease expense	223		223
Short-term lease expense	32		75
Total lease expense	$	908	$	1,604

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	583	$	1,165
Operating cash flows from finance leases	3		3
Financing cash flows from finance leases	38		38

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~The Company recorded impairment charges during the three months ended March 31, 2016,~~Maturities of lease liabilities are as follows (in thousands):



Year ending December 31,	Operating Leases			Finance Leases
2019 (excluding the three months ended June 30, 2019)	$	1,174		$	20
2020	2,348			71
2021	2,307			71
2022	2,270			39
2023	2,180			39
Thereafter	25,877			23
Total lease payments	$	36,156		$	263
Less: Interest	(17,213		)	(43		)
Present value of lease liabilities	$	18,943		$	220

Drilling Technologies:
Inventories $ 12,653
Long-lived assets:

Property and equipment 14,642
Intangible assets other than goodwill 9,227
Production Technologies:
Inventories 3,913
Total impairment $ 40,435
Supplemental balance sheet information related to leases is as follows (in thousands):

Based on the changes in the business climate discussed above and continuing operating losses experienced during the three months ended March 31, 2016, June 30, 2016, and September 30, 2016, goodwill within the Teledrift and Production Technologies reporting units was tested for impairment during these periods. However, no impairments of goodwill were recorded based upon this testing.



	June 30, 2019
Operating Leases
Operating lease right-of-use assets	$	17,982

Current portion of lease liabilities	$	687
Long-term operating lease liabilities	18,256
Total operating lease liabilities	$	18,943

Finance Leases
Property and equipment	$	297
Accumulated depreciation	(10		)
Property and equipment, net	$	287

Current portion of lease liabilities	$	27
Long-term finance lease liabilities	193
Total finance lease liabilities	$	220

Weighted Average Remaining Lease Term
Operating leases	15.8 years
Finance leases	5.1 years

Weighted Average Discount Rate
Operating leases	8.9		%
Finance leases	8.5		%

Note 5 — ~~Acquisitions~~Revenue from Contracts with Customers

~~On July 27, 2016,~~Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company ~~acquired 100%~~expects to be entitled to in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services are distinct within the context of the ~~stock~~contract. Variable consideration typically consists of product returns and ~~interests~~is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an ongoing basis to reflect updated variable consideration information.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For certain contracts, the Company recognizes revenue under the percentage-of-completion method of accounting, measured by the percentage of “costs incurred to date” to the “total estimated costs of completion.” This percentage is applied to the “total estimated revenue at completion” to calculate proportionate revenue earned to date. For the three and six months ended June 30, 2019 and 2018, the percentage-of-completion revenue accounted for less than 0.1% of total revenue during the respective time periods. This resulted in ~~International Polymerics, Inc. (“IPI”)~~immaterial unfulfilled performance obligations and ~~related entities~~immaterial contract assets and/or liabilities, for ~~$7.9 million in cash consideration, net~~which the Company did not record adjustments to opening retained earnings as of ~~cash acquired, and 247,764 shares~~December 31, 2015 or for any periods previously presented.

The vast majority of the Company’s ~~common stock. IPI is~~products are sold at a ~~U.S. based manufacturer~~point in time and service contracts are short-term in nature. Sales are billed on a monthly basis with payment terms customarily 30 days from invoice receipt. In addition, sales taxes are excluded from revenues.

Disaggregation of ~~high viscosity guar gum~~Revenue

The Company has disaggregated revenues by product sales (point-in-time revenue recognition) and ~~guar slurry~~service revenue (over-time revenue recognition), where product sales accounted for over 95% of total revenue for the ~~oil~~three and ~~gas industry~~six months ended June 30, 2019 and 2018.

The Company differentiates revenue and operating expenses (excluding depreciation and amortization) based on whether the source of revenue is attributable to products or services. Revenue and operating expenses (excluding depreciation and amortization) disaggregated by revenue source are as follows (in thousands):



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Revenue:
Products	$	33,632	$	38,213	$	75,703	$	78,142
Services	1,060		1,333		2,246		2,473
	$	34,692	$	39,546	$	77,949	$	80,615
Operating expenses (excluding depreciation and amortization):
Products	$	37,798	$	34,062	$	81,877	$	69,247
Services	508		1,482		1,027		2,952
	$	38,306	$	35,544	$	82,904	$	72,199

Arrangements with Multiple Performance Obligations

The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Standalone selling prices are generally determined based on the prices charged to customers (“observable standalone price”) or an expected cost plus a ~~wide selection~~margin approach. For combined products and services within a contract, the Company accounts for individual products and services separately if they are distinct (i.e. if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration is allocated between separate products and services within a contract based on the prices at the observable standalone price. For items that are not sold separately, the expected cost plus a margin approach is used to estimate the standalone selling price of ~~stimulation chemicals.~~each performance obligation.

Contract Balances

Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, no revenue contracts give rise to contract assets or liabilities under ASC 606.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Supplemental Cash Flow Information

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



	Six months ended June 30,
	2019		2018
Supplemental cash payment information:
Interest paid	$	594	$	983
Income taxes paid, net of refunds	627		327

Nine months ended September 30,
2017 2016
Supplemental non-cash investing and financing activities:
Value of common stock issued in acquisition $ —
$ 3,268
Value of common stock issued in payment of accrued liability 188
—
Exercise of stock options by common stock surrender 5,863
50
Supplemental cash payment information:
Interest paid $ 1,511
$ 1,459
Income taxes received, net of payments (paid, net of refunds) 10,081
(1,663 )

Note 7 — ~~Revenue~~Inventories

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



	June 30, 2019			December 31, 2018
Raw materials	$	11,076		$	10,608
Finished goods	16,284			18,798
Inventories	27,360			29,406
Less reserve for excess and obsolete inventory	(918		)	(2,117		)
Inventories, net	$	26,442		$	27,289

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Revenue:
Products $ 77,956
$ 62,562
$ 240,306
$ 187,122
Services 1,502
1,775
4,283
5,105
$ 79,458
$ 64,337
$ 244,589
$ 192,227
Cost of revenue:
Products $ 55,846
$ 41,117
$ 163,587
$ 122,055
Services 1,345
354
3,802
950
Depreciation 527
512
1,627
1,357
$ 57,718
$ 41,983
$ 169,016
$ 124,362

Note 8 — Property and Equipment

Property and equipment are as follows (in thousands):



	June 30, 2019			December 31, 2018
Land	$	4,372		$	4,372
Buildings and leasehold improvements	37,787			37,719
Machinery and equipment	26,802			26,995
Fixed assets in progress	639			581
Furniture and fixtures	1,733			1,573
Transportation equipment	1,700			1,852
Computer equipment and software	5,543			9,370
Property and equipment	78,576			82,462
Less accumulated depreciation	(36,816		)	(36,977		)
Property and equipment, net	$	41,760		$	45,485

Depreciation expense totaled $1.6 million and $2.0 million for the three months ended June 30, 2019 and 2018, respectively, and $3.4 million and $4.0 million for the six months ended June 30, 2019 and 2018, respectively.

During the three and six months ended June 30, 2019 and 2018, no impairments were recognized related to property and equipment.

Note 9 — Goodwill

During the second quarter of 2018, the Company recognized a goodwill impairment charge of $37.2 million in the Energy Chemistry Technologies (“ECT”) reporting unit, which resulted from sustained under-performance and lower expectations related to the reporting unit. As a result of these factors, a qualitative analysis, and additional risks associated with the business, the Company concluded that sufficient indicators existed to require an interim quantitative assessment of goodwill for that reporting unit as of June 30, 2018. The fair value of the reporting unit was estimated based on an analysis of the present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The assumptions were based on the actual historical performance of the reporting unit and took into account a recent weakening of operating results in an improving market environment. The excess of the reporting unit’s carrying value over the estimated fair value was recorded as the goodwill impairment charge in the second quarter 2018 and represented all of the ECT reporting unit’s goodwill.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~Note 8 — Inventories~~

~~Inventories are as follows (in thousands):~~

September 30, 2017 December 31, 2016
Raw materials $ 37,961
$ 28,626
Work-in-process 3,042
2,918
Finished goods 29,713
26,739
Inventories $ 70,716
$ 58,283

~~Note 9 — Property~~The Company has no reporting units which had a goodwill balance at December 31, 2018, and ~~Equipment~~

~~Property and equipment are as follows (in thousands):~~

September 30, 2017 December 31, 2016
Land $ 6,748
$ 5,837
Buildings and leasehold improvements 43,431
42,986
Machinery and equipment 38,862
36,187
Equipment in progress 5,475
3,235
Furniture and fixtures 2,029
1,969
Transportation equipment 2,307
3,059
Computer equipment and software 12,168
11,844
Property and equipment 111,020
105,117
Less accumulated depreciation (37,309 ) (30,426 )
Property and equipment, net $ 73,711
$ 74,691

Depreciation expense, including expense recorded in cost of revenue, totaled $2.4 million and $2.1 million for the three months ended September 30, 2017 and 2016, respectively, and $7.0 million and $5.3 million for the nine months ended September 30, 2017 and 2016, respectively.

~~During~~there were no acquisitions during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016, no impairments were recognized related to property and equipment.~~2019.

Note 10 ~~— Goodwill~~

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

Energy Chemistry Technologies Consumer and Industrial Chemistry Technologies Total
Balance at December 31, 2016 $ 37,180
$ 19,480
$ 56,660
Goodwill impairment recognized —
—
—
Balance at September 30, 2017 $ 37,180
$ 19,480
$ 56,660

~~During the three and nine months ended September 30, 2017 and 2016, no impairments of goodwill were recognized.~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Note 11~~ — Other Intangible Assets

Other intangible assets are as follows (in thousands):



	June 30, 2019				December 31, 2018
	Cost		Accumulated Amortization		Cost		Accumulated Amortization
Finite-lived intangible assets:
Patents and technology	$	18,851	$	7,270	$	18,884	$	6,689
Customer lists	15,367		5,636		15,367		5,259
Trademarks and brand names	1,358		1,140		1,485		1,149
Total finite-lived intangible assets acquired	35,576		14,046		35,736		13,097
Deferred financing costs	—		—		1,924		496
Total amortizable intangible assets	35,576		$	14,046	37,660		$	13,593
Indefinite-lived intangible assets:
Trademarks and brand names	2,760				2,760
Total other intangible assets	$	38,336			$	40,420

Carrying value:
Other intangible assets, net	$	24,290			$	26,827

September 30, 2017 December 31, 2016
Cost Accumulated Amortization Cost Accumulated Amortization
Finite-lived intangible assets:
Patents and technology $ 17,236
$ 5,323
$ 16,815
$ 4,537
Customer lists 30,877
7,745
30,877
6,518
Trademarks and brand names 1,544
1,105
1,467
1,069
Total finite-lived intangible assets acquired 49,657
14,173
49,159
12,124
Deferred financing costs 2,230
493
1,804
117
Total amortizable intangible assets 51,887
$ 14,666
50,963
$ 12,241
Indefinite-lived intangible assets:
Trademarks and brand names 11,630
11,630

Total other intangible assets $ 63,517
$ 62,593

Carrying value:
Other intangible assets, net $ 48,851
$ 50,352

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 ~~$0.7~~$0.5 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively, and $1.0 million and $0.7 million for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016, respectively, and $2.0 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively.~~2018.

Amortization of deferred financing costs ~~was $0.1 million~~totaled zero and $0.1 million for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$0.4~~$1.4 million and ~~$0.3~~0.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016, respectively.~~2018.

Note 1211 — Long-Term Debt and Credit Facility

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



	June 30, 2019		December 31, 2018
Long-term debt, classified as current:
Borrowings under revolving credit facility	$	—	$	49,731

September 30, 2017 December 31, 2016
Long-term debt:
Borrowings under revolving credit facility $ 40,589
$ 38,566
Term loan —
9,833
Total long-term debt 40,589
48,399
Less current portion of long-term debt (40,589 ) (40,566 )
Long-term debt, less current portion $ —
$ 7,833
Borrowing under the revolving credit agreement at December 31, 2018 was classified as current debt.

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~~(as amended, the “Credit Facility”) with PNC Bank, National Association (“PNC Bank”). The Company ~~may~~could borrow under the Credit Facility for working capital, permitted acquisitions, capital expenditures and other corporate purposes. The Credit Facility ~~as amended, continues~~was to continue in effect until May 10, 2022. Under terms of the Credit Facility, ~~as amended,~~ the Company ~~has~~had total borrowing availability of $75 million under a revolving credit facility, including a sublimit of ~~$75 million.~~

~~The Credit Facility is secured by substantially all~~$10 million that could be used for letters of credit. On March 1, 2019, the ~~Company’s domestic real~~Company repaid the outstanding balance, interest, and ~~personal property, including accounts receivable, inventory, land, buildings, equipment~~fees related to the revolving credit facility, and other intangible assets. The Credit Facility contains customary representations, warranties, and both affirmative and negative covenants. The Company was in compliance with all debt covenants at September 30, 2017. In the event of default, PNC Bank may accelerate the maturity date of any outstanding amounts borrowed undersimultaneously terminated the Credit Facility.

The Credit Facility contains financial covenants to maintain a fixed charge coverage ratio and a leverage ratio, as well as establishes an annual limit on capital expenditures. The fixed charge coverage ratio is the ratio of (a) earnings before interest, taxes, depreciation, and amortization (“EBITDA”), adjusted for non-cash stock-based compensation and the loss from discontinued operations, less

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

cash paid for taxes during the period to (b) all debt payments during the period. The fixed charge coverage ratio requirement began for the quarter ended March 31, 2017 at 1.00 to 1.00 and increases to 1.10 to 1.00 for the year ending December 31, 2017, and for each fiscal quarter thereafter. The leverage ratio (funded debt to adjusted EBITDA) requirement began for the six months ended June 30, 2017, at not greater than 5.50 to 1.10 and reduces to not greater than 3.00 to 1.00 as of September 30, 2018, and for each fiscal quarter thereafter. The annual limit on capital expenditures for 2017 is $20 million. The annual limit on capital expenditures for 2018 and each fiscal year thereafter is $26 million. The annual limit on capital expenditures is reduced if the undrawn availability under the revolving credit facility falls below $15 million at any month-end.

~~The Credit Facility restricts the payment of cash dividends on common stock and limits the amount that may be used to repurchase common stock and preferred stock.~~

Beginning with fiscal year 2017, 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 on the outstanding balance within 60 days of the fiscal year end.

~~Each of the Company’s domestic subsidiaries is fully obligated for Credit Facility indebtedness as a 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, 2022. 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 domestic accounts receivable and inventory.

At September 30, 2017, eligible accounts receivable and inventory securing the revolving credit facility provided total borrowing capacity of $74.9 million under the revolving credit facility. Available borrowing capacity, net of outstanding borrowings, was $34.3 million at September 30, 2017.

The interest rate on advances under the revolving credit facility varies based on the fixed charge coverage ratio. Rates range (a) between PNC Bank’s base lending rate plus 1.5% to 2.0% or (b) between the London Interbank Offered Rate (LIBOR) plus 2.5% to 3.0%. PNC Bank’s base lending rate was 4.25% at September 30, 2017. 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, 2017, $40.6 million was outstanding under the revolving credit facility, with $2.6 million borrowed as base rate loans at an interest rate of 5.75% and $38.0 million borrowed as LIBOR loans at an interest rate of 3.74%.

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

~~(b) Term Loan~~

The amount borrowed under the term loan was reset to $10 million effective as of September 30, 2016. Monthly principal payments of $0.2 million were required. On May 22, 2017, the Company repaid the outstanding balance of the term loan.

Note 1312 — 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 (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.

Potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the ~~period.~~periods. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were ~~1.3~~0.7 million restricted stock units for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, and ~~0.7 million stock options and 0.8~~0.9 million restricted stock units for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Loss from continuing operations $ (3,421 ) $ (1,870 ) $ (5,285 ) $ (2,011 )
Income (loss) from discontinued operations, net of tax 319
(876 ) (13,621 ) (33,200 )
Net loss - Basic and Diluted $ (3,102 ) $ (2,746 ) $ (18,906 ) $ (35,211 )

Weighted average common shares outstanding - Basic 57,602
56,899
57,709
55,523
Assumed conversions:
Incremental common shares from stock options —
—
—
—
Incremental common shares from restricted stock units —
—
—
—
Weighted average common shares outstanding - Diluted 57,602
56,899
57,709
55,523

Basic earnings (loss) per common share:
Continuing operations $ (0.06 ) $ (0.03 ) $ (0.09 ) $ (0.04 )
Discontinued operations, net of tax 0.01
(0.02 ) (0.24 ) (0.60 )
Basic earnings (loss) per common share $ (0.05 ) $ (0.05 ) $ (0.33 ) $ (0.64 )
Diluted earnings (loss) per common share:
Continuing operations $ (0.06 ) $ (0.03 ) $ (0.09 ) $ (0.04 )
Discontinued operations, net of tax 0.01
(0.02 ) (0.24 ) (0.60 )
Diluted earnings (loss) per common share $ (0.05 ) $ (0.05 ) $ (0.33 ) $ (0.64 )

Note 1413 — Fair Value Measurements

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.

Level 1 — Quoted prices in active markets for identical assets or liabilities;

Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.

Fair Value of Other Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, approximate fair value due to the short-term nature of these accounts. The Company had total cash of $97.5 million, which consisted of cash equivalents of $46.6 million in a government money market account and cash deposits of $45.2 million in an interest bearing demand deposit account and $5.7 million in operating cash accounts, at June 30, 2019, and $3.0 million, which consisted of no cash equivalents and cash deposits of $3.0 million in operating cash accounts, at ~~September 30, 2017 or~~ December 31, ~~2016.~~2018.

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

September 30, 2017 December 31, 2016

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value
Term loan $ —
$ —
$ 9,833
$ 9,833
Borrowings under revolving credit facility 40,589
�� 40,589
38,566
38,566



	June 30, 2019		December 31, 2018
	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Borrowings under Credit Facility	—	—	49,731	49,731

The carrying ~~value~~amount of ~~the term loan and~~ borrowings under the ~~revolving credit facility approximate their~~Credit Facility approximates its fair value because the interest rates are variable.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Assets Measured at Fair Value on a Nonrecurring Basis

The 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. During the three months ended June 30, 2018, the Company recorded an impairment of $37.2 million for goodwill in the Energy Chemistry Technologies reporting unit. No impairments of any of these assets were recognized during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016.~~2019.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1514 — Income Taxes

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



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
U.S. federal statutory tax rate	21.0	%	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	1.7		1.0		1.0		(0.3	)
Non-U.S. income taxed at different rates	0.7		(3.5	)	1.0		0.3
Reduction in tax benefit related to stock-based awards	(1.1	)	6.5		(1.8	)	(1.5	)
Non-deductible expenses	—		(9.5	)	(0.3	)	(9.3	)
Research and development credit	0.4		(3.9	)	0.6		0.6
Increase in valuation allowance	(20.7	)	(42.2	)	(17.9	)	(36.0	)
Other	(0.4	)	—		(0.3	)	—
Effective income tax rate	1.6	%	(30.6	)%	3.3	%	(25.2	)%

Three months ended September 30,
Nine months ended September 30,
2017 2016 2017 2016
U.S. federal statutory tax rate (35.0 )% (35.0 )% (35.0 )% (35.0 )%
State income taxes, net of federal benefit 14.3
12.0
6.7
9.2
Non-U.S. income taxed at different rates 8.9
16.4
5.4
7.7
Reduction in tax benefit related to stock-based awards 15.8
—
14.1
—
Other (3.5 ) (26.9 ) (3.6 ) (22.0 )
Effective income tax rate 0.5 % (33.5 )% (12.4 )% (40.1 )%

Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in the valuation allowance, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates. ~~Changes~~

Net deferred tax assets arise due to the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes. ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance in the ~~effective~~second quarter of 2018, the Company considered all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax ~~rate~~reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income. As a result of this analysis, the Company determined that it was more likely than not that it would not realize the benefits of certain deferred tax assets and, therefore, recorded a $15.5 million valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to non-amortizable intangible assets and certain state jurisdictions. As all available evidence should be taken into consideration when assessing the need for a valuation allowance, the sale of the CICT segment provided a source of income to support the release of $11.5 million of the valuation allowance which resulted in a deferred tax asset of $18.7 million. As such, the Company reversed this portion of the valuation allowance during the fourth quarter of 2018. The increase in the valuation allowance during the three ~~and nine~~ months ended ~~September~~June 30, ~~2017, included~~2019, reflects management’s evaluation of deferred tax assets more-likely-than-not to be used after giving consideration to the ~~Company implementing ASU No. 2016-09 which requires accounting for excess tax benefits~~gain from the sale of the CICT segment and ~~tax deficiencies related to stock-based awards as discrete items in the period in which they occur.~~anticipated results of operations.

In January 2017, the Internal Revenue Service notified the Company that it ~~will~~would examine the Company’s federal tax returns for the year ended December 31, 2014. ~~No adjustments have~~The examination included (1) the corporate returns and (2) employment tax matters. The IRS fieldwork has been ~~asserted, and management believes that sustained adjustments, if any, would not have a material effect on~~completed in relation to the ~~Company’s financial position, results~~corporate returns with no adverse findings. Further discussion of ~~operations, or liquidity.~~the employment tax matter can be found in Note 18 — “Related Party Transaction.”

Note 1615 — Common Stock

The Company’s Certificate of Incorporation, as amended November 9, 2009, authorizes the Company to issue up to 80 million shares of common stock, par value $0.0001 per share, and 100,000 shares of one or more series of preferred stock, par value $0.0001 per share.

A reconciliation of changes in common shares issued during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 is as follows:



Shares issued at December 31, ~~2016~~2018	~~59,684,669~~62,162,875
Issued as restricted stock award grants	~~273,829~~792,997
~~Issued upon exercise of stock options~~	~~663,288~~
Shares issued at ~~September~~June 30, ~~2017~~2019	~~60,621,786~~62,955,872

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 September 30, 2017, the Company repurchased 630,000 shares of its outstanding common stock on the open market at a cost of $3.7 million, inclusive of transaction costs, or an average price of $5.85 per share. During the nine months ended September 30, 2017, the Company repurchased 680,000 shares of its outstanding common stock on the open market at a cost of $4.2 million, inclusive of transaction costs, or an average price of $6.14 per share. During the three and nine months ended September 30, 2016, the Company did not repurchase any shares of its outstanding common stock.

In June 2015, the Company’s Board of Directors authorized the repurchase of up to ~~an additional~~ $50 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through ~~September 30, 2017,~~December 31, 2018, the ~~Company has not repurchased any of its common stock under this authorization.~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AsCompany had repurchased $0.3 million of ~~September~~its common stock under this authorization. During the three and six months ended June 30, ~~2017,~~2019 and 2018, the Company did not repurchase any shares of its outstanding common stock under this authorization.

At June 30, 2019, the Company has ~~$50.7~~$49.7 million remaining under its share repurchase programs. A covenant under the Company’s Credit Facility limits the amount that may be used to repurchase the Company’s common stock. As of September 30, 2017, this covenant limits additional share repurchases to $10.7 million.program.

Note 1716 — Business Segment, Geographic and Major Customer 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 ~~two~~one reportable ~~segments:~~segment: Energy Chemistry ~~Technologies and Consumer and Industrial Chemistry~~ Technologies.

Energy Chemistry Technologies designs, develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty and conventional chemistries, ~~used~~for use in oil and ~~natural~~ gas (“O&G”) well drilling, cementing, completion, remediation, and ~~stimulation. In addition, the Company’s chemistries are used~~stimulation activities designed to maximize recovery in ~~specialized enhanced~~both new and ~~improved oil recovery markets.~~mature fields. 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.

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 the reportable ~~segments.~~segment.

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



For the six months ended June 30,	Energy Chemistry Technologies			Corporate and Other			Total
2019
Net revenue from external customers	$	77,949		$	—		$	77,949
Income (loss) from operations	(12,984		)	(15,138		)	(28,122		)
Depreciation and amortization	3,718			661			4,379
Capital expenditures	767			—			767

2018
Net revenue from external customers	$	80,615		$	—		$	80,615
Income (loss) from operations	(38,095		)	(18,269		)	(56,364		)
Depreciation and amortization	3,566			1,110			4,676
Capital expenditures	2,178			453			2,631

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the nine months ended September 30, Energy Chemistry Technologies Consumer and Industrial Chemistry Technologies Corporate and Other Total
2017
Net revenue from external customers $ 187,807
$ 56,782
$ —
$ 244,589
Gross profit 63,840
11,733
—
75,573
Income (loss) from operations 24,715
5,906
(35,598 ) (4,977 )
Depreciation and amortization 5,507
1,752
1,832
9,091
Capital expenditures 2,794
1,580
1,781
6,155

2016
Net revenue from external customers $ 133,094
$ 59,133
$ —
$ 192,227
Gross profit 54,609
13,256
—
67,865
Income (loss) from operations 21,793
8,508
(32,031 ) (1,730 )
Depreciation and amortization 4,062
1,685
1,633
7,380
Capital expenditures 8,704
494
1,420
10,618

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



	June 30, 2019		December 31, 2018
Energy Chemistry Technologies	$	144,106	$	139,205
Corporate and Other	119,710		28,208
Total segments	263,816		167,413
Held for sale	—		118,470
Total assets	$	263,816	$	285,883

September 30, 2017 December 31, 2016
Energy Chemistry Technologies $ 187,623
$ 184,328
Consumer and Industrial Chemistry Technologies 113,434
98,105
Corporate and Other 44,551
56,882
Total segments 345,608
339,315
Held for sale 4,135
43,900
Total assets $ 349,743
$ 383,215

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, except as noted below. Revenue by geographic location is as follows (in thousands):

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

Revenue from major customers, as a percentage of consolidated revenue, is as follows:



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Customer A	17.6	%	*		15.4	%	*
Customer B	11.0	%	18.2	%	11.3	%	*
Customer C	*		*		10.7	%	*

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Customer A 13.3 % 12.5 % 12.9 % 17.9 %
Customer B 8.8 % 14.8 % 9.6 % 13.5 %
* This customer did not account for more than 10% of revenue.

~~Over 90% of the revenue from these customers was for sales in the Energy Chemistry Technologies segment.~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 1817 — Commitments and Contingencies

Class Action Litigation

On March 30, 2017, the U.S. District Court for the Southern District of Texas granted the Company’s motion to dismiss the four consolidated putative securities class action lawsuits that were filed in November 2015, against the Company and certain of its officers. The lawsuits were previously consolidated into a single case, and a consolidated amended complaint had been filed. The consolidated amended complaint asserted that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint sought an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between October 23, 2014 and November 9, 2015, inclusive. The lead plaintiff appealed the District Court’s decision granting the motion to dismiss.

~~In January 2016, three derivative lawsuits were filed, two in the District Court~~ On February 7, 2019, a three-judge panel of ~~Harris County, Texas (which have since been consolidated into one case) and one in~~ the United States ~~District~~ Court of Appeals for the ~~Southern~~Fifth Circuit issued a unanimous opinion affirming the District Court’s judgment of ~~Texas, on behalf of the Company against certain of~~dismissal in its ~~officers and its current directors. The lawsuits allege violations of law, breaches of fiduciary duty, and unjust enrichment against the defendants.~~

The Company believes the lawsuits are without merit and intends to vigorously defend against all claims asserted. Discovery has not yet commenced. At this time, the Company is unable to reasonably estimate the outcome of this litigation.

In addition, as previously disclosed, the U.S. Securities and Exchange Commission had opened an inquiry related to similar issues to those raised in the above-described litigation. On August 21, 2017, the Company received a letter from the staff of the SEC stating that the inquiry has been concluded and that the staff does not intend to recommend an enforcement action against the Company.entirety.

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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED 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 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 a~~invested in accounts in two major financial ~~institution~~institutions and balances often exceed insurable amounts.

Note 18 — Related Party Transaction

In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019 that certain employment taxes related to the CEO’s compensation were not properly withheld in 2014 and proposed an adjustment. As the Company has a statutory obligation to collect and withhold employment taxes, management reviewed the CEO’s compensation for tax year 2014, as well as tax years 2015 through 2018, in order to estimate the Company’s potential outstanding employment tax liability in connection with this matter. Upon completion of this review, management believes the Company’s total potential exposure in this matter for 2014 through 2018 is approximately $2.4 million. The CEO’s affiliated companies through which he provided his services have agreed to indemnify the Company for such taxes, and the CEO has executed a personal guaranty in favor of Flotek, supporting this indemnification. As such, the Company recorded an accrued liability for the potential exposure to the IRS in the amount of $2.4 million, with a corresponding receivable, recorded in other current assets, from the CEO’s affiliated companies for the same amount relating to such indemnification obligation.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“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 (“Reform Act”). Forward-looking statements are not historical facts, but instead represent Flotek Industries, Inc.’s (“Flotek” or “Company”) 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 the Company’s 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,” etc. 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, ~~2016~~2018 (“Annual Report”) and periodically in subsequent reports filed with the Securities and Exchange Commission (“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 condensed consolidated financial statements and the related notes thereto of this Quarterly Report, as well as the Annual Report. Phrases such as “Company,” “we,” “our,” and “us” refer to Flotek Industries, Inc. and its subsidiaries.

Basis of Presentation

During the fourth quarter of ~~2016,~~2018, the Company classified the ~~Drilling~~Consumer and Industrial Chemistry Technologies ~~and Production Technologies segments~~segment as held for sale based on management’s intention to sell ~~these businesses.~~this business. The Company’s historical financial statements have been revised to present the operating results of the ~~Drilling~~Consumer and Industrial Chemistry Technologies ~~and Production Technologies segments~~segment as discontinued operations. The results of operations of ~~Drilling Technologies and Production Technologies~~this segment are presented as ~~“Loss~~“Income from discontinued operations” in the statement of operations and the related cash flows of ~~these segments has~~this segment have been reclassified to discontinued operations for all periods presented. The assets and liabilities of the ~~Drilling~~Consumer and Industrial Chemistry Technologies ~~and Production Technologies segments~~segment have been reclassified to “Assets held for sale” and “Liabilities held for ~~sale”,~~sale,” respectively, in the consolidated balance sheets for all periods presented.

By During the ~~end~~first quarter of ~~August 2017,~~2019, the Company completed the sale of ~~substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.~~this segment.

Executive Summary

Flotek is ~~a global, diversified,~~an international energy chemistry technology-driven company that develops and supplies chemistries and services to the oil and gas ~~industries, and~~industry. Through February 28, 2019, Flotek also provided high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets. Flotek operates in over 2015 domestic and international markets.

The Company’s oilfield business includes specialty chemistries and ~~logistics. Flotek’s technologies~~logistics which enable its customers ~~in pursuing~~to pursue improved efficiencies in the drilling and completion of their wells. Customers include major integrated oil and gas (“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~~Through February 28, 2019, the Company also ~~produces~~produced non-energy-related citrus oil and related products, classified as discontinued operations, including (1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous industries around the world, including the O&G industry. ~~The Company sources citrus oil domestically and internationally and is one of the largest processors of citrus oil in the world.~~ Additionally, the Company also provides automated bulk material handling, loading facilities, and blending capabilities.

Continuing Operations

The operations of the Company are categorized into ~~two~~one reportable ~~segments:~~segment: Energy Chemistry Technologies (“ECT”~~) and Consumer and Industrial Chemistry Technologies (“CICT”~~).

Energy Chemistry Technologies designs, develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty and conventional chemistries, ~~used~~for use in oil and gas (“O&G&G”) well drilling, cementing, completion, remediation, and ~~stimulation. These technologies developed by~~stimulation activities designed to maximize recovery in both new and mature fields. Flotek’s ~~Research~~specialty chemistries possess enhanced performance characteristics and ~~Innovation team enable customers~~are manufactured to ~~pursue improved efficiencies~~perform in a broad range of basins and reservoirs with varying downhole pressures, temperatures and other well-specific conditions customized to customer specifications. This segment has technical services laboratories and a research and innovation laboratory that focus on design improvements, development and viability testing of new chemistry formulations, and continued enhancement of existing products.

Discontinued Operations

In the ~~drilling~~first quarter of 2019, the Consumer and ~~completion of wells.~~Industrial Chemistry Technologies segment was sold and is classified as discontinued operations.

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

~~Discontinued Operations~~

~~The Drilling Technologies and Production Technologies segments are classified as discontinued operations.~~

~~Drilling Technologies assembles, rents, sells, inspects, and markets downhole drilling equipment used in energy, mining, and industrial drilling activities.~~

Production Technologies assembles and markets production-related equipment, including pumping system components, electric submersible pumps (“ESP”), 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 and well completion activity, customer demand for its advanced technology products, market prices for raw materials, and governmental actions.

Drilling and well completion activity levels are influenced by a number of factors, including the number of rigs in operation and the geographical areas of rig activity. Additional factors that influence the level of drilling and well completion 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 and completion 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,

Chemistries that meet the need of consumer product markets, and

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

Market prices for commodities, including citrus oils, ~~and guar,~~ can be influenced by:

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

Weather related risks,

Health and condition of citrus trees ~~and guar plants~~ (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.


TABLE A	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2017	2016	% Change		2017	2016	% Change		2019	2018	% Change		2019	2018	% Change
Average North American Active Drilling Rigs
U.S.	946	479	97.5	%	861	482	78.6	%	989	1,039	(4.8	)%	1,016	1,003	1.3	%
Canada	208	121	71.9	%	207	112	84.8	%	82	108	(24.1	)%	132	188	(29.8	)%
Total	1,154	600	92.3	%	1,068	594	79.8	%	1,071	1,147	(6.6	)%	1,148	1,191	(3.6	)%
Average U.S. Active Drilling Rigs by Type
Vertical	70	62	12.9	%	72	58	24.1	%	50	58	(13.8	)%	56	61	(8.2	)%
Horizontal	799	372	114.8	%	720	376	91.5	%	868	914	(5.0	)%	893	874	2.2	%
Directional	77	45	71.1	%	69	48	43.8	%	71	67	6.0	%	67	68	(1.5	)%
Total	946	479	97.5	%	861	482	78.6	%	989	1,039	(4.8	)%	1,016	1,003	1.3	%
Average North American Drilling Rigs by Product
Oil	874	452	93.4	%	800	440	81.8	%	844	899	(6.1	)%	903	929	(2.8	)%
Natural Gas	280	148	89.2	%	268	154	74.0	%	227	248	(8.5	)%	247	262	(5.7	)%
Total	1,154	600	92.3	%	1,068	594	79.8	%	1,071	1,147	(6.6	)%	1,150	1,191	(3.4	)%

After a continuous decline in U.S. drilling ~~rig~~ activity beginning in mid-2014, the market began to gradually recover in the second quarter of 2016. Although ~~a continuing recovery appears to be underway,~~oil and gas markets have improved, the level of drilling and completion activity ~~is still depressed compared to historical levels.~~remains lower than previous levels experienced before the downturn in 2014. Assuming the price for crude oil remains relatively ~~stable~~soft and regulatory impediments are ~~reduced,~~limited, the Company expects ~~U.S.~~continued volatility in global oilfield activity ~~to remain dependent on commodity prices.~~for the remainder of 2019.

During the ~~third~~second quarter of ~~2017,~~2019, the Company continued to analyze and promote the efficacy of its Complex nano-Fluid^® (“CnF^®”) chemistries ~~resulting in a 23.1% increase in CnF~~and its Prescriptive Chemistry Management^® ~~sales volumes compared to the third quarter of 2016. Third quarter 2017 CnF~~ (“PCM^® ~~volumes decreased 12.9% compared to the second quarter of 2017.~~”) offering. Although ~~quarter to quarter~~quarter-to-quarter performance

may vary, the Company expects ~~its Energy Chemistry Technologies sales~~ to ~~outperform~~continue to penetrate the market ~~activity metrics~~ over time by ~~continuing to demonstrate~~demonstrating the efficacy of its CnF^® chemistries and reservoir-centric full fluid systems via PCM^®. The Company will continue to demonstrate the value and benefit of Flotek chemistries through comparative analysis of wells with and without ~~CnF~~^®Flotek chemistries and field validation results conducted byin partnership with exploration and production (“E&P”) companies. Flotek is experiencing a notable shift in purchasing behaviors in which E&P companies are seeking greater transparency, control and efficacy in their fluid systems, as they see diminishing returns on mechanical factors in their completion designs, such as proppant loading, fluid loading, and lateral length in their completions. As a result, they are focusing more on sourcing consumables, including chemistry, directly from manufacturers and other providers of these products. This trend has created significant changes in Flotek’s customer base, product portfolio, and sales efforts and continues to influence changes in inventory and distribution strategies, capital allocation, and the ~~continuation of~~business model for the Company. While these challenges are expected to persist in the near-term, the Company believes it can grow its ~~direct-to-operator sales program known as the Flotek Store~~^®~~. Whether operators purchase directly from Flotek or continue to purchase from oilfield distribution~~client base and ~~service companies, E&P operators are benefiting from increased transparency in pricing and a more direct relationship with Flotek’s technical expertise and supply chain.~~revenue opportunities over time.

The ~~Company’s success in promoting~~Company continues to enhance and improve its patented and ~~proprietary~~proven chemistries ~~is supported~~ through its industry leading research and innovation staff who ~~provide customer~~develop innovative and customer- responsive ~~product innovation,~~products, as well as ~~development of~~create new ~~products~~chemistry technologies, which are expected to address oilfield challenges of the future and expand the Company’s ~~future~~ product lines. ~~During the third quarter of~~Completed in 2016, the ~~Company completed its new~~Company’s Global Research & Innovation Center in ~~Houston. This state-of-the-art facility allows for~~Houston houses scientists, chemists, geologists, and reservoir, petroleum and geomechanical engineers who advance the development of next-generation innovative energy chemistries, as well as expanded collaboration ~~between~~among clients, leaders from academia, and Company scientists. These collaborative opportunities are an important and distinguishing capability within the ~~industry.~~

~~The outlook for the Company’s consumer~~industry and ~~industrial chemistries will be driven by the availability~~provide real-time product and demand for citrus oils, industrial solvents, and flavor and fragrance ingredients. Although current inventory and crop expectations are sufficient to meet the Company’s needs to supply its flavor and fragrance business, as well as both internal and external industrial markets, the market supply of citrus oils has declined in recent years duefluid system development direct to the reduction in citrus crops caused by the citrus greening disease. This reduced supply has resulted in higher citrus oil prices and increased price volatility. However, the Company expects its strong market position to enable it to maintain a stable supply of citrus oils for internal use and external sales. The Company expects to manage the impact of volatile terpene costs through the development of new product formulations and pricing strategies.consumer.

During the fourth quarter ~~2016,~~of 2018, the Company ~~implemented~~initiated a strategic ~~restructuring~~plan to sell its Consumer and Industrial Chemistry Technologies segment, which was completed in the first quarter of 2019. The Company continues to focus on maximizing the profitability of its product and business ~~to enable a greater focus on~~portfolio, and may exit or enter new product lines or businesses which complement its core businesses in energy chemistry and consumer and industrial chemistry and initiated a process to identify potential buyers for its Drilling Technologies and Production Technologies segments. By the end of August 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments.current operations.

Capital expenditures for continuing operations totaled ~~$6.2~~$0.8 million and ~~$10.6~~$2.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. ~~The~~For the remainder of 2019, the Company expects ~~capital spending to be between $9~~approximately $2.9 million and ~~$11 million in 2017, but anticipates to be towards~~does not have any specific growth capital projects currently planned or committed. During the ~~lower end~~first quarter of 2019, the ~~range.~~Company formed a Strategic Capital Committee that will consider these possible growth capital projects going forward. The Company will remain nimble in its core capital expenditure plans, adjusting as market conditions ~~warrant.~~warrant, and will focus any growth capital spending program on uses that generate positive returns and to areas that pose a strategic long-term benefit.

During the first quarter and into the beginning of the second quarter of 2019, the Company lost several key sales personnel. In April 2019, the Company hired a new Senior Vice President of Global Sales & Business Development who now leads the Company’s domestic and international sales and business development strategies. The Company has commenced a process to rebuild and develop a more technically oriented sales organization. As a result of the transition, revenue for the remainder of 2019 may be negatively impacted relative to the first half of the year, as the new sales organization is fully integrated into the organization. The Company believes the opportunity it has taken to enhance the technical background of its sales personnel together with relationships built with its customers, and the demonstrated value and benefit of Flotek’s chemistries will help to mitigate potential revenue declines.

Changes to geopolitical, global economic, and 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 oil and gas production, the market price for oil and gas, weather patterns, and/or the availability of citrus crops, the market conditions affecting the Company could change rapidly and materially. Should such adverse changes to market conditions occur, management believes the Company has ~~access to~~ adequate liquidity to withstand the impact of such changes while continuing to make strategic capital investments and acquisitions, if 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.

Results of Continuing Operations (in thousands):

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Revenue $ 79,458
$ 64,337
$ 244,589
$ 192,227
Cost of revenue 57,718
41,983
169,016
124,362
Gross profit 21,740
22,354
75,573
67,865
    Gross margin % 27.4 % 34.7 % 30.9 % 35.3 %
Corporate general and administrative 10,346
10,302
33,773
30,398
Corporate general and administrative % 13.0 % 16.0 % 13.8 % 15.8 %
Segment selling and administrative 9,277
9,775
28,972
26,879
    Segment selling and administrative % 11.7 % 15.2 % 11.8 % 14.0 %
Depreciation and amortization 2,540
2,217
7,464
6,024
Research and innovation costs 2,691
2,327
9,940
6,323
(Gain) loss on disposal of long-lived assets (11 ) (14 ) 401
(29 )
Loss from operations (3,103 ) (2,253 ) (4,977 ) (1,730 )
    Operating margin % (3.9 )% (3.5 )% (2.0 )% (0.9 )%
Interest and other expense, net (301 ) (559 ) (1,054 ) (1,630 )
Loss before income taxes (3,404 ) (2,812 ) (6,031 ) (3,360 )
Income tax (expense) benefit (17 ) 942
746
1,349
Loss from continuing operations (3,421 ) (1,870 ) (5,285 ) (2,011 )
Income (loss) from discontinued operations, net of tax 319
(876 ) (13,621 ) (33,200 )
Net loss $ (3,102 ) $ (2,746 ) $ (18,906 ) $ (35,211 )



	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Revenue	$	34,692		$	39,546		$	77,949		$	80,615
Operating expenses (excluding depreciation and amortization)	38,306			35,544			82,904			72,199
Operating expenses %	110.4		%	89.9		%	106.4		%	89.6		%
Corporate general and administrative	6,054			8,665			13,335			17,158
Corporate general and administrative %	17.5		%	21.9		%	17.1		%	21.3		%
Depreciation and amortization	2,119			2,343			4,379			4,676
Research and development costs	2,076			2,949			4,360			5,704
(Gain)/loss on disposal of long-lived assets	(4		)	5			1,093			62
Impairment of goodwill	—			37,180			—			37,180
Loss from operations	(13,859		)	(47,140		)	(28,122		)	(56,364		)
Operating margin %	(39.9		)%	(119.2		)%	(36.1		)%	(69.9		)%
Loss on write-down of assets held for sale	—			(2,580		)	—			(2,580		)
Interest and other income (expense), net	677			(3,139		)	(1,214		)	(3,765		)
Loss before income taxes	(13,182		)	(52,859		)	(29,336		)	(62,709		)
Income tax benefit (expense)	192			(16,128		)	966			(15,807		)
Loss from continuing operations	(12,990		)	(68,987		)	(28,370		)	(78,516		)
Income (loss) from discontinued operations, net of tax	(1,608		)	(6,404		)	46,764			3,192
Net income (loss)	$	(14,598	)	$	(75,391	)	$	18,394		$	(75,324	)

Consolidated Results of Operations: Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019, Compared to the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2018

Consolidated revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, increased $15.1~~2019, decreased $4.9 million, or ~~23.5%~~12.3%, and ~~$52.4~~$2.7 million, or ~~27.2%~~3.3%, respectively, versus the same periods of ~~2016. These increases~~2018. The decrease in revenue ~~were driven by increased sales within~~was a result of continued volatile macro-environment for U.S. onshore drilling and completion activity, as well as the ~~Energy Chemistry Technologies segment due to the increased oilfield activity beginning~~transition of personnel in the ~~latter half~~Company’s sales organization, the deferral of ~~2016.~~completion activity into the third quarter by certain clients, and the utilization of performance-driven pricing programs for a limited number of strategic clients.

~~Consolidated gross profit~~Operating expenses (excluding depreciation and amortization) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, decreased $0.6~~2019, increased $2.8 million, or ~~2.7%~~7.8%, and ~~increased $7.7~~$10.7 million, or ~~11.4%~~14.8%, respectively, compared to the same periods of ~~2016. Gross margin decreased~~2018, and, as a percentage of revenue, increased to ~~27.4%~~110.4% and ~~30.9%~~106.4%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively from ~~34.7%~~89.9% and ~~35.3%~~89.6% in the same periods of ~~2016,~~2018. The increase is primarily due to increased ~~volumes~~material and direct labor costs, higher equipment and logistics expenditures, lower plant utilization, and a one-time charge related to the termination of ~~lower margin product~~an operations related contract, partially offset by reduced expenses related to the transition in the Company’s sales ~~in all segments.~~organization.

Corporate general and administrative (“CG&A”) expenses are not directly attributable to products sold or services provided. CG&A costs ~~remained relatively flat~~decreased $2.6 million, or 30.1%, and $3.8 million, or 22.3%, respectively, for the three and six months ended ~~September~~June 30, ~~2017, and increased $3.4 million, or 11.1%, for the nine months ended September 30, 2017,~~2019, versus the same periods of ~~2016.~~2018. As a percentage of revenue, CG&A decreased ~~3.0%~~4.4% and ~~2.0%~~4.2% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively. The ~~increase~~decrease in CG&A costs ~~was~~were primarily due to ~~costs~~continuing the aggressive cost reduction measures which began in the last quarter of 2017, decreased consulting expenses associated with ~~executive retirement,~~the ERP upgrade in 2018, and lower payroll related costs and stock compensation expense ~~and information technology costs,~~associated with reductions in headcount, partially offset by ~~decreased legal expenses.~~

~~Segment selling~~expenses associated with severance and administrative (“SS&A”) expenses are not directly attributable to products sold or services provided. SS&A costs remained relatively flat for the three months ended September 30, 2017, and increased $2.1 million, or 7.8%, for the nine months ended September 30, 2017, versus the same periods of 2016. As a percentage of revenue, SS&A decreased 3.5% and 2.2% for the three and nine months ended September 30, 2017, respectively. The increase in SS&A costs was primarily due to increased headcountcertain shareholder-related activities in the ~~Energy Chemistry Technologies and Consumer and Industrial Chemistry Technologies sales and support staff for expansion and growth in new business and related higher sales and marketing expenses.~~first six months of 2019.

Depreciation and amortization expense ~~increased~~decreased $0.2 million, or 9.6%, and $0.3 million, or ~~14.6%, and $1.4 million, or 23.9%~~6.4%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively versus the same periods of ~~2016, primarily attributable to the completion and equipping of the Global Research & Innovation Center in August 2016, along with other improvements to manufacturing facilities.~~

2018.

Research and Innovation (“R&I”) expense ~~increased $0.4~~decreased $0.9 million, or ~~15.6%~~29.6%, and ~~$3.6~~$1.3 million, or ~~57.2%~~23.6%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, compared to the same periods of ~~2016. These increases~~2018. The decrease is primarily due to lower personnel costs related to the reductions in ~~R&I are~~headcount associated costs savings initiatives.

Loss on disposal of long-lived assets remained flat for the three months ended June 30, 2019 but increased $1.0 million for the six months ended June 30, 2019, compared to the same periods of 2018, primarily ~~attributable~~due to ~~increased personnel for new product development and Flotek’s commitment to remaining responsive to customer needs, increased demand, continued growth and refining~~the disposal of ~~existing product lines, and~~certain corporate software in the ~~development~~first quarter of ~~new chemistries which are expected to expand the Company’s intellectual property portfolio.~~2019.

Interest and other expense decreased ~~$0.3~~$3.8 million ~~or 46.2%,~~ and ~~$0.6~~$2.6 million ~~or 35.3%,~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, versus the same periods of ~~2016,~~2018, primarily due to a $1.2 million write-off associated with the ~~repayment~~discontinuation of certain corporate projects during the second quarter 2018 and $1.3 million related to moving from an interest expense position to an interest income position as a result of the ~~term loan~~sale of the CICT segment and subsequent termination of the Amended and Restated Revolving Credit, Term Loan and Security Agreement (as amended, the “Credit Facility”) with PNC Bank in ~~May 2017.~~the first quarter 2019. The decrease is partially offset by the acceleration of $1.4 million of unamortized debt issuance costs associated with the termination of the Credit Facility in the first quarter 2019.

The Company recorded an income tax ~~provision of less than $0.1 million, yielding an effective tax rate of (0.5)%, and an income tax~~ benefit of ~~$0.7~~$0.2 million and $1.0 million, yielding an effective tax benefit rate of ~~12.4%~~1.5% and 3.3%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, compared to an income tax ~~benefits~~provision of ~~$0.9~~$16.1 million and ~~$1.3~~$15.8 million, yielding an effective tax ~~benefit rates~~provision rate of ~~33.5%~~30.5% and ~~40.1%~~25.2%, for the comparable periods in ~~2016.~~2018.

~~As part~~During the fourth quarter of ~~the Company’s strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry,~~2018, the Company initiated a strategic plan to sell its Consumer and Industrial Chemistry Technologies segment, which was completed in the ~~sale~~first quarter of ~~substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments through August 2017.~~2019. The Company recorded ~~a net gain from discontinued operations of $0.3 million for the three months ended September 30, 2017, and a~~ net loss from discontinued operations of ~~$13.6~~$1.6 million and net income from discontinued operations of $46.8 million for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017.~~2019, respectively.

Results by Segment


Energy Chemistry Technologies (“ECT”)
(dollars in thousands)	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Revenue	$	61,167		$	45,030		$	187,807		$	133,094		$	34,692		$	39,546		$	77,949		$	80,615
Gross profit	18,733			18,180			63,840			54,609
Gross margin %	30.6		%	40.4		%	34.0		%	41.0		%
Income from operations	6,867			6,196			24,715			21,793
Loss from operations													(7,651		)	(37,929		)	(12,984		)	(38,095		)
Loss from operations - excluding impairment													(7,651		)	(749		)	(12,984		)	(915		)
Operating margin %	11.2		%	13.8		%	13.2		%	16.4		%	(22.1		)%	(95.9		)%	(16.7		)%	(47.3		)%

ECTResults of Operations: Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019, Compared to the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2018

ECT revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, increased $16.1~~2019, decreased $4.9 million, or ~~35.8%~~12.3%, and ~~$54.7~~$2.7 million, or ~~41.1%~~3.3%, respectively, and versus the same ~~periods~~period of ~~2016. CnF~~^® ~~sales revenues increased 28.7% (volumes increased 23.1%), compared to~~2018. The decrease is primarily a result of the ~~three months ended September 30, 2016. Increased well~~continued volatile macro-environment for U.S. onshore drilling and completion activity, ~~by customers lead to~~as well as the ~~increased CnF~~^® ~~chemistry~~transition of personnel in the Company’s sales ~~during~~organization, the deferral of completion activity into the third quarter by certain clients, and utilization of ~~2017. Quarterly non-CnF revenues rose approximately 49.8%, compared to the three months ended September 30, 2016, due to increased customer demand as~~performance-driven pricing programs for a ~~result~~limited number of ~~oilfield market conditions.~~strategic clients.

~~Sequentially, revenues decreased $4.7 million, or 7.1%, versus the second quarter of 2017. CnF~~^® ~~sales revenues decreased 11.2% (volumes decreased 12.9%) on a sequential basis. Impacts related to Hurricane Harvey and certain customer delays affected the quarter.~~

ECT gross profit increased $0.6 million, or 3.0%, and $9.2 million, or 16.9%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. Gross margin decreased to 30.6% and 34.0% for the three and nine months ended September 30, 2017, respectively, from 40.4% and 41.0% in the same periods of 2016. The gross margin decreases over the periods were primarily due to product mix and higher raw material costs. Sequentially, gross profit decreased $4.1 million, or 17.9%, versus the second quarter of 2017.

~~Income~~Loss from operations for the ECT segment ~~increased $0.7~~improved $30.3 million ~~or 10.8%,~~ and ~~$2.9~~$25.1 million ~~or 13.4%,~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, versus the same ~~periods~~period of ~~2016. These increases were primarily attributable~~2018, which was a result of 2018 including a non-recurring impairment of goodwill of $37.2 million as well as lower inventory adjustments and reduced expenses related to the ~~increase~~transition in ~~CnF~~^® ~~sales.~~

Consumer and Industrial Chemistry Technologies (“CICT”)
(dollars in thousands) Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Revenue $ 18,291
$ 19,307
$ 56,782
$ 59,133
Gross profit 3,007
4,174
11,733
13,256
Gross margin % 16.4 % 21.6 % 20.7 % 22.4 %
Income from operations 985
2,433
5,906
8,508
Operating margin % 5.4 % 12.6 % 10.4 % 14.4 %

~~CICT Results of Operations: Three and Nine Months Ended September 30, 2017, Compared to~~ the ~~Three and Nine Months Ended September 30, 2016~~

CICT revenue decreased $1.0 million, or 5.3%, and $2.4 million, or 4.0%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. These decreases were due to reduced volumes,Company’s sales organization. The improvement was partially offset by ~~higher prices. Sequentially, quarterly revenues decreased $1.0 million, or 5.2%, versus the second quarter of 2017~~lower gross margin due to ~~reduced volumes.~~

CICT gross profit for the three and nine months ended September 30, 2017, decreased $1.2 million, or 28.0%, and $1.5 million, or 11.5%, respectively, versus the same periods of 2016. Gross margin decreased to 16.4% and 20.7% for the three and nine months ended September 30, 2017, respectively, from 21.6% and 22.4% in the same periods of 2016. These decreases were a result of lower ~~margins caused by higher material costs and product mix. Sequentially, gross profits decreased by $0.3 million,~~revenue and gross ~~margins decreased to 16.4% from 17.0% in the second quarter of 2017~~margin compression due to ~~product mix and~~ increased ~~raw material costs.~~

Income from operations for the CICT segment decreased $1.4 million, or 59.5%, and $2.6 million, or 30.6%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. Sequentially, quarterly operating profits decreased by $0.2 million. These decreases are primarily attributable to product mix and increased raw material and ~~indirect costs.~~direct labor costs, higher equipment and logistics expenditures, lower plant utilization, and a one-time charge related to the termination of an operations related contract.

During the fourth quarter of ~~2016,~~2018, the Company classified the ~~Drilling~~Consumer and Industrial Chemistry Technologies ~~and Production Technologies segments~~segment as held for sale based on management’s intention to sell ~~these businesses. By~~ the ~~end~~business. During the first quarter of ~~August 2017,~~2019, the Company completed the sale of ~~substantially all of~~ the ~~assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments.~~segment. The Company’s historical financial statements have been revised to present the operating results of the ~~Drilling~~Consumer and Industrial Chemistry Technologies ~~and Production Technologies segments~~segment as discontinued operations. The information below is presented for informational purposes only.

Drilling Technologies
(dollars in thousands) Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Revenue $ —
$ 7,197
$ 11,534
$ 20,026
Gross profit (loss) —
2,907
4,275
6,150
Gross margin % — % 40.4 % 37.1 % 30.7 %
Loss from operations (755 ) (924 ) (2,196 ) (43,493 )
Loss from operations - excluding impairment (755 ) (924 ) (2,196 ) (6,971 )
Operating margin % - excluding impairment — % (12.8 )% (19.0 )% (34.8 )%

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~~June 30, ~~2017~~2019, 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.

The Company’s Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. 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 Consolidated Financial Statements” and Part II, Item 7 — Management’s Discussion and Analysis of Financial ~~Conditions~~Condition and Results of Operations, “Critical Accounting Policies and Estimates” of the Company’s Annual Report, and the “Notes to Unaudited Condensed 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. There have been no significant changes in the Company’s critical accounting estimates during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019.

Recent accounting pronouncements which may impact the Company are described in Note 2 — “Recent Accounting Pronouncements” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.

The Company’s ongoing capital requirements arise from the Company’s need to ~~service debt,~~ acquire and maintain equipment, fund working capital requirements, and when the opportunities arise, to make strategic acquisitions and repurchase Company stock. During the first ~~nine~~six months of ~~2017,~~2019, the Company funded capital requirements primarily with cash on hand, including proceeds from the sale of the CICT segment, and debt financing.

The Company’s primary source of debt financing iswas its $75 million Credit Facility with PNC Bank. ~~This Credit Facility contains provisions for a~~Upon closing of the sale of the CICT segment, on March 1, 2019, the Company repaid the outstanding balance, interest, and fees related to the revolving credit facility, ~~secured by substantially all of the Company’s domestic real~~ and personal property, including accounts receivable, inventory, land, buildings, equipment, and other intangible assets. As of September 30, 2017, the Company had $40.6 million in outstanding borrowings under the revolving debt portion ofsubsequently terminated the Credit Facility. ~~At September 30, 2017, the Company~~

~~was in compliance with all debt covenants.~~ Significant terms of the Credit Facility are discussed in Note 1213 — “Long-Term Debt and Credit Facility” in Part I,II, Item 18 — “Financial ~~Statements”~~Statements and Supplementary Data” of ~~this Quarterly~~the Company’s Annual Report.

The Company believes it has ~~access to~~ adequate liquidity to fund its ongoing operations and capital expenditures. As of ~~September~~June 30, ~~2017,~~2019, the Company had available ~~borrowing capacity under its revolving line~~cash and cash equivalents of ~~credit of $34.3 million and available cash of $4.9 million, resulting in total liquidity of $39.2~~$97.5 million. For the remainder of ~~2017,~~2019, the Company expects maintenance capital spending of approximately $2.9 million and does not have any specific growth capital projects currently planned or committed. During the remainder of 2019, the Company plans to ~~spend between $2.8 million~~use internally generated funds and ~~$4.8 million for committed~~ cash on hand to fund operations

and ~~planned~~ capital expenditures. ~~The~~With the proceeds from the sale of the CICT segment, the Company ~~may pursue external financing~~paid off its Credit Facility balance and formed a Strategic Capital Committee to ~~increase~~evaluate and make recommendations to the board of directors regarding the manner in which the remaining net proceeds from the sale will be deployed. Subject to Board approval of any recommendations by the Strategic Capital Committee, the Company will continue to invest capital in what it believes to be economically attractive opportunities for its ~~liquidity position and/or fund acquisitions when strategic opportunities arise.~~shareholders. This includes the potential for share repurchases included under our share repurchase program approved by the board of directors in June 2015.

Any excess cash generated may be used ~~to pay down the level of debt~~for outside growth opportunities or retained for future use.

Net debt represents total debt less cash and cash equivalents and combines the Company’s indebtedness and the cash and cash equivalents that could be used to repay that debt. Components of net debt are as follows (in thousands):

September 30, 2017 September 30, 2016
Cash and cash equivalents $ 4,942
$ 3,474
Current portion of long-term debt (40,589 ) (34,562 )
Long-term debt, less current portion —
(8,000 )
Net debt $ (35,647 ) $ (39,088 )

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

Operating Activities

Net cash used in investing activities was $18.8 million for the nine months ended September 30, 2016. Cash used in investing activities primarily included $10.6 million for capital expenditures and $8.2 million for the purchase of IPI and various patents.

On August 1, 2017, the Company filed a registration statement on Form S-3 (the “Universal Shelf”) with the SEC to register for sale from time to time up to $350 million of common stock, preferred stock, senior and subordinated debt securities, warrants, units and guarantees. The Universal Shelf was declared effective by the SEC on October 11, 2017 and will remain effective for three years. Although the Company has no current plans to issue any securities under the Universal Shelf, it will remain available for use by the Company, subject to market conditions, to quickly access the capital markets should the need arise.

Borrowings under revolving credit facility⁽¹⁾

~~(1)~~In addition, the Company executed a long-term supply agreement for terpene product, which serves as a feedstock to some of the Company’s key value-added products. The ~~borrowing is classified as current debt. The weighted-average interest rate is 3.86%~~term of the agreement runs through September 2023, with an option to extend for an additional year. This agreement secures the Company’s access to a sufficient supply of terpene and includes a minimum annual purchase requirement at ~~September 30, 2017.~~variable prices during the term of the agreement.

The Company is exposed to market risk from changes in interest rates, 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 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 rules and forms. The 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 disclosure controls and procedures are designed to provide such reasonable assurance.

The 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 disclosure controls and procedures as of ~~September~~June 30, ~~2017,~~2019, 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~~June 30, ~~2017.~~2019.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s system of internal control over financial reporting during the three months ended ~~September~~June 30, ~~2017,~~2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

~~Class Action Litigation~~

In January 2016, three derivative lawsuits were filed, two in the District Court of Harris County, Texas (which have since been consolidated into one case) and one in the United States District Court for the Southern District of Texas, on behalf of the Company against certain of its officers and its current directors. The lawsuits allege violations of law, breaches of fiduciary duty, and unjust enrichment against the defendants.

Other Litigation

Item 1A. Risk Factors

See Part I, Item 1A — “Risk Factors" of the Company’s 2018 Annual Report on Form 10-K and Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 for a detailed discussion of the Company’s risk factors. There have been no material changes to ~~the~~these risk ~~factors set forth in Part I, Item 1A of the Company’s Annual Report.~~factors.

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

Issuer Purchases of Equity Securities

Repurchases of the Company’s equity securities during the three months ended ~~September~~June 30, ~~2017,~~2019, 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) (3) (4)}
July 1, 2017 to July 31, 2017 1,880
$ 8.94
—
$ 54,420,042
August 1, 2017 to August 31, 2017 377,203
$ 6.07
350,000
$ 52,288,702
September 1, 2017 to September 30, 2017 286,009
$ 5.55
280,000
$ 50,733,939
Total 665,092
$ 5.85
630,000



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⁾
April 1, 2019 to April 30, 2019	562	$	3.30	—	$	49,704,947
May 1, 2019 to May 31, 2019	—	$	—	—	$	49,704,947
June 1, 2019 to June 30, 2019	3,247	$	3.04	—	$	49,704,947
Total	3,809	$	3.08	—


(1)	The Company purchases 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, (b) to satisfy payments required for common stock upon the exercise of stock options, and (c) as part of a publicly announced repurchase program on the open market.


(2)	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 open market or privately negotiated transactions. Through September 30, 2017, the Company has repurchased $24.3 million of its common stock and $0.7 million may yet be used to purchase shares.

~~(3)~~

In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases may be made in open market or privately negotiated transactions. Through ~~September~~June 30, ~~2017,~~2019, the Company has ~~not~~ repurchased ~~any~~$0.3 million of its common stock under this authorization and ~~$50.0~~$49.7 million may yet be used to purchase shares.


~~(4)~~	A covenant under the Company’s Credit Facility limits the amount that may be used to repurchase the Company’s common stock. At September 30, 2017, this covenant limits additional share repurchases to $10.7 million.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit Number		Description of Exhibit
2.1		Share Purchase Agreement, dated as of January 10, 2019, by and between the Company and ADM (portions of this exhibit have been omitted pursuant to a confidential treatment request, which has been granted) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on March 4, 2019).¹
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2007).
3.2		Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009).
3.3		~~Amended and Restated Bylaws, dated December 9, 2014 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on December 10, 2014).~~
~~3.4~~		Second Amended and Restated Bylaws, dated October 11, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on October 17, 2017).
4.1		Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s Definitive Proxy Statement filed on September 27, 2001).
4.2		Registration Rights Agreement, dated as of July 26, 2016, by and among the Company, Donald Bramblett, and Mark Kieper (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-3 (File No. 333-212864) filed on August 3, 2016).
10.1	*	~~Eighth Amendment to Amended and Restated Revolving Credit, Term Loan and Security~~Employment Agreement, dated effective as of ~~June 7, 2017.~~
~~10.2~~	*	~~Ninth Amendment to Amended~~April 1, 2019, by and ~~Restated Revolving Credit, Term Loan~~between the Company and ~~Security Agreement, dated effective as of July 1, 2017.~~
~~10.3~~		~~Tenth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated effective as of September 29, 2017~~John W. Chisholm (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on ~~October 3, 2017).~~May 24, 2019
10.2		First Amended and Restated Employment Agreement, dated effective as of April 1, 2019, by and between the Company and Elizabeth Wilkinson (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on May 24, 2019)
10.3		Termination and Release Agreement, dated as of May 20, 2019, by and among the Company, John W. Chisholm, Protechnics II, Inc. and Chisholm Management, Inc.
10.4	*	~~Employment~~Stand-Alone Cash-Settled Restricted Stock Unit Agreement, dated ~~effective April 1, 2016,~~as of May 20, 2019, by and between the Company and ~~Robert Bodnar.~~John W. Chisholm
10.5	*	~~Confidential Severance and Release~~Restricted Stock Agreement, dated ~~effective October 12, 2017,~~as of May 24, 2019, by and between the Company and ~~Robert Bodnar.~~John W. Chisholm
10.6		Form of Restricted Stock Agreement pursuant to the Company’s 2018 Long-Term Incentive Plan.
10.7		Form of Restricted Stock Agreement pursuant to the Company’s 2019 Non-Employee Director Incentive Plan
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.
+1		~~Filed electronically with~~Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC.
2		Portions of this ~~Form 10-Q.~~exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K in order for them to remain confidential.

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 and Chief Executive Officer ~~and~~ ~~Chairman of the Board~~

Date:		~~November 8, 2017~~August 7, 2019



FLOTEK INDUSTRIES, INC.

By:		/s/ ~~H. RICHARD WALTON~~ELIZABETH T. WILKINSON
		~~H. Richard Walton~~Elizabeth T. Wilkinson
		~~Executive Vice President and~~ Chief Financial Officer

Date:		~~November 8, 2017~~August 7, 2019

3634



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

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



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	FTK	New York Stock Exchange



Large accelerated filer	¨☐	Accelerated ~~filer~~Filer	x☒

Non-accelerated filer	¨ ~~(Do not check if a smaller reporting company)~~ ☐	Smaller reporting company	¨☒

		Emerging growth company	¨☐



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



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



	Drilling Technologies						Production Technologies
	September 30, 2017			December 31, 2016			September 30, 2017		December 31, 2016
Assets:
Accounts receivable, net	$	1,749		$	5,072		$	201	$	1,784
Inventories	5			9,078			5		8,115
Other current assets	1,585			278			699		370
Long-term receivable	—			—			—		4,179
Property and equipment, net	—			11,277			—		3,978
Goodwill	—			15,333			—		1,689
Other intangible assets, net	—			7,395			—		484
Assets held for sale	3,339			48,433			905		20,599
Valuation allowance	(109		)	(18,971		)	—		(6,161		)
Assets held for sale, net	$	3,230		$	29,462		$	905	$	14,438
Liabilities:
Accounts payable	$	15		$	2,472		$	10	$	914
Accrued liabilities	1,419			1,190			142		385
Liabilities held for sale	$	1,434		$	3,662		$	152	$	1,299



Drilling Technologies:
Inventories	$	12,653
Long-lived assets:
Property and equipment	14,642
Intangible assets other than goodwill	9,227
Production Technologies:
Inventories	3,913
Total impairment	$	40,435



	September 30, 2017			December 31, 2016
Long-term debt:
Borrowings under revolving credit facility	$	40,589		$	38,566
Term loan	—			9,833
Total long-term debt	40,589			48,399
Less current portion of long-term debt	(40,589		)	(40,566		)
Long-term debt, less current portion	$	—		$	7,833



	September 30, 2017					December 31, 2016
	Carrying Value			Fair Value		Carrying Value		Fair Value
Term loan	$	—		$	—	$	9,833	$	9,833
Borrowings under revolving credit facility	40,589		��	40,589		38,566		38,566


For the three months ended September 30,	Energy Chemistry Technologies		Consumer and Industrial Chemistry Technologies		Corporate and Other			Total
2017
For the three months ended June 30,											Energy Chemistry Technologies			Corporate and Other			Total
2019
Net revenue from external customers	$	61,167	$	18,291	$	—		$	79,458		$	34,692		$	—		$	34,692
Gross profit	18,733		3,007		—			21,740
Income (loss) from operations	6,867		985		(10,955		)	(3,103		)	(7,651		)	(6,208		)	(13,859		)
Depreciation and amortization	1,863		590		615			3,068			1,933			186			2,119
Capital expenditures	324		682		641			1,647			306			—			306

2016
2018
Net revenue from external customers	$	45,030	$	19,307	$	—		$	64,337		$	39,546		$	—		$	39,546
Gross profit	18,180		4,174		—			22,354
Income (loss) from operations	6,196		2,433		(10,882		)	(2,253		)	(37,929		)	(9,211		)	(47,140		)
Depreciation and amortization	1,582		567		581			2,730			1,797			546			2,343
Capital expenditures	2,005		148		227			2,380			1,167			87			1,254



For the nine months ended September 30,	Energy Chemistry Technologies		Consumer and Industrial Chemistry Technologies		Corporate and Other			Total
2017
Net revenue from external customers	$	187,807	$	56,782	$	—		$	244,589
Gross profit	63,840		11,733		—			75,573
Income (loss) from operations	24,715		5,906		(35,598		)	(4,977		)
Depreciation and amortization	5,507		1,752		1,832			9,091
Capital expenditures	2,794		1,580		1,781			6,155

2016
Net revenue from external customers	$	133,094	$	59,133	$	—		$	192,227
Gross profit	54,609		13,256		—			67,865
Income (loss) from operations	21,793		8,508		(32,031		)	(1,730		)
Depreciation and amortization	4,062		1,685		1,633			7,380
Capital expenditures	8,704		494		1,420			10,618



	September 30, 2017			September 30, 2016
Cash and cash equivalents	$	4,942		$	3,474
Current portion of long-term debt	(40,589		)	(34,562		)
Long-term debt, less current portion	—			(8,000		)
Net debt	$	(35,647	)	$	(39,088	)


	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
Borrowings under revolving credit facility⁽¹⁾	$	40,589	$	40,589	$	—	$	—	$	—
Finance lease obligations											260		70		109		78		3
Operating lease obligations	22,415		2,679		4,762		3,966		11,008		36,261		2,450		4,615		4,331		24,865
Total	$	63,004	$	43,268	$	4,762	$	3,966	$	11,008	$	36,521	$	2,520	$	4,724	$	4,409	$	24,868



FORM	10-Q