UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
xFORM10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172021
or
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-13270
FLOTEK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)
Delaware90-0023731
(State of other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
Delaware90-0023731
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
10603 W.8846 N. Sam Houston Parkway N., Suite 300
Houston, TX
W.		77064
Houston, TX77064
(Address of principal executive offices)(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueFTKNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x☒    No  ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x☒    No  ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, 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.
Large accelerated filer☐Accelerated Filer☒
Large accelerated filer¨Accelerated filerx
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
☐		Smaller reporting company¨☒
Emerging growth 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 31, 2017,August 5, 2021, there were 56,825,81974,098,258 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.





TABLE OF CONTENTS
 
Forward-Looking Statements
3
Item 1.
34
Unaudited Condensed Consolidated Balance Sheets at September June 30, 20172021 and December 31, 20162020
34
Unaudited Condensed Consolidated Statements of Operations for the threeand ninesix months ended SeptemberJune 30, 20172021 and 20162020
45
Unaudited Condensed Consolidated Statements of Comprehensive IncomeLoss for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016
2020
56
Unaudited Condensed Consolidated Statements of Cash Flows for the nine six months ended SeptemberJune 30, 20172021 and 20162020
67
Unaudited Condensed Consolidated StatementStatements of Stockholders’ Equity for the ninethree and six months ended SeptemberJune 30, 2017
2021 and 2020
78
Notes to Unaudited Condensed Consolidated Financial Statements
810
Item 2.
2225
Item 3.
3133
Item 4.
3233
Item 1.
3335
Item 1A.
3335
Item 2.
3435
Item 3.
3435
Item 4.
3436
Item 5.
3436
Item 6.
3537
3638







2


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 of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are not historical facts, but instead represent the current assumptions and beliefs regarding future events of Flotek Industries, Inc. (“Flotek” or the “Company”), 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, financial conditions, future operating results and liquidity, including but not limited to the impact of the COVID-19 pandemic, pending litigation, commodity prices and other circumstances. These forward-looking statements generally are identified by words including but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,” “potential,” “schedule,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could,” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated, or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2020 (“Annual Report” or “2020 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 16, 2021, and periodically in subsequent reports filed with the SEC. The Company has no obligation, and we disclaim any 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.


3




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, 2021December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents$27,781 $38,660 
Restricted cash40 664 
Accounts receivable, net of allowance for doubtful accounts of $1,329 and $1,316 at June 30, 2021 and December 31, 2020, respectively9,713 11,764 
Inventories, net11,499 11,837 
Income taxes receivable71 403 
Other current assets3,255 3,127 
Assets held for sale546 0 
Total current assets52,905 66,455 
Property and equipment, net8,017 9,087 
Operating lease right-of-use assets2,162 2,320 
Goodwill8,092 8,092 
Deferred tax assets, net213 223 
Other long-term assets29 33 
TOTAL ASSETS$71,418 $86,210 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$6,587 $5,787 
Accrued liabilities17,221 18,275 
Income taxes payable39 21 
Interest payable58 34 
Current portion of operating lease liabilities589 636 
Current portion of finance lease liabilities55 60 
Current portion of long-term debt4,788 4,048 
Total current liabilities29,337 28,861 
Deferred revenue, long-term104 117 
Long-term operating lease liabilities8,011 8,348 
Long-term finance lease liabilities72 96 
Long-term debt0 1,617 
TOTAL LIABILITIES37,524 39,039 
Commitments and contingencies (See Note 13)00
Stockholders’ equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; 0 shares issued and outstanding0 0 
Common stock, $0.0001 par value, 140,000,000 shares authorized; 79,606,743 shares issued and 70,152,591 shares outstanding at June 30, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 20208 8 
Additional paid-in capital361,424 359,721 
Accumulated other comprehensive income (loss)13 (19)
Accumulated deficit(293,534)(278,688)
Treasury stock, at cost; 5,627,646 and 5,580,920 shares at June 30, 2021 and December 31, 2020, respectively(34,017)(33,851)
Total stockholders’ equity33,894 47,171 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$71,418 $86,210 
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
4
 September 30, 2017 December 31, 2016
ASSETS   
Current assets:   
Cash and cash equivalents$4,942
 $4,823
Accounts receivable, net of allowance for doubtful accounts of $1,089 and $664 at September 30, 2017 and December 31, 2016, respectively56,008
 47,152
Inventories70,716
 58,283
Income taxes receivable2,649
 12,752
Assets held for sale4,135
 43,900
Other current assets10,881
 21,708
Total current assets149,331
 188,618
Property and equipment, net73,711
 74,691
Goodwill56,660
 56,660
Deferred tax assets, net21,190
 12,894
Other intangible assets, net48,851
 50,352
TOTAL ASSETS$349,743
 $383,215
LIABILITIES AND EQUITY   
Current liabilities:   
Accounts payable$21,725
 $29,960
Accrued liabilities12,323
 12,170
Interest payable30
 24
Liabilities held for sale1,586
 4,961
Current portion of long-term debt40,589
 40,566
Total current liabilities76,253
 87,681
Long-term debt, less current portion—
 7,833
Total liabilities76,253
 95,514
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, 20166
 6
Additional paid-in capital334,490
 318,392
Accumulated other comprehensive income (loss)(822) (956)
Retained earnings (accumulated deficit)(28,736) (9,830)
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’ equity273,132
 287,343
Noncontrolling interests358
 358
Total equity273,490
 287,701
TOTAL LIABILITIES AND EQUITY$349,743
 $383,215





FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Three months ended June 30,Six months ended June 30,
 2021202020212020
Revenue$9,165 $8,880 $20,935 $28,296 
Costs and expenses:
Operating expenses (excluding depreciation and amortization)12,110 11,632 25,911 34,473 
Corporate general and administrative2,868 5,395 7,229 9,888 
Depreciation and amortization253 468 560 2,659 
Research and development1,466 1,638 3,008 4,193 
Gain on disposal of long-lived assets(71)(22)(69)(55)
Impairment of fixed, long-lived and intangible assets0 0 0 57,454 
Total costs and expenses16,626 19,111 36,639 108,612 
Loss from operations(7,461)(10,231)(15,704)(80,316)
Other (expense) income:
Payment Protection Program forgiveness881 0 881 0 
Gain on lease termination0 576 0 576 
Interest expense(17)(16)(35)(20)
Other income, net72 78 39 31 
Total other income, net936 638 885 587 
Loss before income taxes(6,525)(9,593)(14,819)(79,729)
Income tax (expense) benefit(21)32 (27)6,201 
Net loss$(6,546)$(9,561)$(14,846)$(73,528)
Loss per common share:
Basic$(0.09)$(0.14)$(0.22)$(1.17)
Diluted$(0.09)$(0.14)$(0.22)$(1.17)
Weighted average common shares:
Weighted average common shares used in computing basic loss per common share69,531 66,035 69,001 62,828 
Weighted average common shares used in computing diluted loss per common share69,531 66,035 69,001 62,828 


The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
5
 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue$79,458
 $64,337
 $244,589
 $192,227
Cost of revenue57,718
 41,983
 169,016
 124,362
Gross profit21,740
 22,354
 75,573
 67,865
Expenses:       
Corporate general and administrative10,346
 10,302
 33,773
 30,398
Segment selling and administrative9,277
 9,775
 28,972
 26,879
Depreciation and amortization2,540
 2,217
 7,464
 6,024
Research and development2,691
 2,327
 9,940
 6,323
(Gain) loss on disposal of long-lived assets(11) (14) 401
 (29)
Total expenses24,843
 24,607
 80,550
 69,595
Loss from operations(3,103) (2,253) (4,977) (1,730)
Other (expense) income:       
Interest expense(574) (518) (1,718) (1,536)
Other (expense) income, net273
 (41) 664
 (94)
Total other expense(301) (559) (1,054) (1,630)
Loss before income taxes(3,404) (2,812) (6,031) (3,360)
Income tax (expense) benefit(17) 942
 746
 1,349
Loss from continuing operations(3,421) (1,870) (5,285) (2,011)
Income (loss) from discontinued operations, net of tax319
 (876) (13,621) (33,200)
Net loss$(3,102) $(2,746) $(18,906) $(35,211)
        
Basic earnings (loss) per common share:       
Continuing operations$(0.06) $(0.03) $(0.09) $(0.04)
Discontinued operations, net of tax0.01
 (0.02) (0.24) (0.60)
Basic earnings (loss) per common share$(0.05) $(0.05) $(0.33) $(0.64)
Diluted earnings (loss) per common share:       
Continuing operations$(0.06) $(0.03) $(0.09) $(0.04)
Discontinued operations, net of tax0.01
 (0.02) (0.24) (0.60)
Diluted earnings (loss) per common share$(0.05) $(0.05) $(0.33) $(0.64)
Weighted average common shares:       
Weighted average common shares used in computing basic earnings (loss) per common share57,602
 56,899
 57,709
 55,523
Weighted average common shares used in computing diluted earnings (loss) per common share57,602
 56,899
 57,709
 55,523







FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS
(in thousands)
 Three months ended June 30,Six months ended June 30,
 2021202020212020
Net loss$(6,546)$(9,561)$(14,846)$(73,528)
Other comprehensive (loss) income:
Foreign currency translation adjustment(17)(7)32 (130)
Comprehensive loss$(6,563)$(9,568)$(14,814)$(73,658)

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
6
 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Loss from continuing operations$(3,421) $(1,870) $(5,285) $(2,011)
Income (loss) from discontinued operations, net of tax319
 (876) (13,621) (33,200)
Net loss(3,102) (2,746) (18,906) (35,211)
Other comprehensive income (loss):       
Foreign currency translation adjustment148
 (68) 134
 256
Comprehensive income (loss)$(2,954) $(2,814) $(18,772) $(34,955)






FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 Six months ended June 30,
 20212020
Cash flows from operating activities:
Net loss$(14,846)$(73,528)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of contingent consideration(302)0 
Depreciation and amortization560 2,659 
Provision for doubtful accounts(1)474 
Provision for excess and obsolete inventory580 529 
Impairment of right-of-use assets0 7,434 
Impairment of fixed assets0 30,178 
Impairment of intangible assets0 19,842 
Gain on sale of assets(69)(631)
Non-cash lease expense163 242 
Stock compensation expense1,750 1,521 
Deferred income tax provision (benefit)10 (105)
PPP loan forgiveness(881)0 
Changes in current assets and liabilities:
Accounts receivable, net1,995 7,252 
Inventories, net(222)6,418 
Income taxes receivable207 (6,351)
Other current assets(672)1,715 
Other long-term assets541 0 
Accounts payable801 (10,229)
Accrued liabilities(1,048)(16,755)
Income taxes payable168 119 
Interest payable24 0 
Net cash used in operating activities(11,242)(29,216)
Cash flows from investing activities:
Capital expenditures(31)(42)
Proceeds from sale of business0 9,844 
Proceeds from sale of assets74 66 
Purchase of JP3, net of cash acquired0 (26,284)
Abandonment of patents and other intangible assets0 (8)
Net cash provided (used in) by investing activities43 (16,424)
Cash flows from financing activities:
Proceeds from Paycheck Protection Program loan0 4,798 
Purchase of treasury stock(78)(82)
Proceeds from sale of common stock(166)358 
Payments for finance leases(29)(51)
Net cash (used in) provided by financing activities(273)5,023 
Effect of changes in exchange rates on cash and cash equivalents(31)(31)
Net change in cash, cash equivalents and restricted cash(11,503)(40,648)
Cash and cash equivalents at the beginning of period38,660 100,575 
Restricted cash at the beginning of period664 663 
Cash and cash equivalents and restricted cash at beginning of period39,324 101,238 
Cash and cash equivalents at end of period27,781 59,926 
Restricted cash at the end of period40 664 
Cash, cash equivalents and restricted cash at end of period$27,821 $60,590 
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
7
 Nine months ended September 30,
 2017 2016
Cash flows from operating activities:   
Net loss$(18,906) $(35,211)
Loss from discontinued operations, net of tax(13,621) (33,200)
Loss from continuing operations(5,285) (2,011)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:   
Depreciation and amortization9,091
 7,380
Amortization of deferred financing costs376
 308
Loss (gain) on sale of assets401
 (29)
Stock compensation expense9,679
 8,591
Deferred income tax benefit(8,290) (6,309)
Reduction in tax benefit related to share-based awards915
 883
Changes in current assets and liabilities:   
Accounts receivable, net(8,704) (7,572)
Inventories(12,213) (2,959)
Income taxes receivable9,254
 (13,687)
Other current assets12,649
 (51)
Accounts payable(8,262) 5,959
Accrued liabilities1,561
 10,434
Income taxes payable—
 (1,807)
Interest payable6
 45
Net cash provided by (used in) operating activities1,178
 (825)
Cash flows from investing activities:   
Capital expenditures(6,155) (10,618)
Proceeds from sales of businesses18,490
 —
Proceeds from sale of assets321
 38
Payments for acquisition, net of cash acquired—
 (7,863)
Purchase of patents and other intangible assets(817) (311)
Net cash provided by (used in) investing activities11,839
 (18,754)
Cash flows from financing activities:   
Repayments of indebtedness(9,833) (15,398)
Borrowings on revolving credit facility310,021
 256,738
Repayments on revolving credit facility(307,998) (249,324)
Debt issuance costs(106) (147)
Reduction in tax benefit related to share-based awards—
 (883)
Purchase of treasury stock related to share-based awards(1,500) (925)
Proceeds from sale of common stock530
 30,610
Repurchase of common stock(4,174) —
Proceeds from exercise of stock options21
 134
Net cash (used in) provided by financing activities(13,039) 20,805
Discontinued operations:   
Net cash used in operating activities(695) (82)
Net cash provided by investing activities708
 74
Net cash flows provided by (used in) discontinued operations13
 (8)
Effect of changes in exchange rates on cash and cash equivalents128
 48
Net increase in cash and cash equivalents119
 1,266
Cash and cash equivalents at the beginning of period4,823
 2,208
Cash and cash equivalents at the end of period$4,942
 $3,474






FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

Three months ended June 30, 2021
 Common StockTreasury StockAdditional
Paid-in
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Accumulated DeficitTotal Stockholders’ Equity
 Shares
Issued		Par
Value		SharesCost
Balance, March 31, 202178,276 $8 5,573 $(33,956)$360,537 $30 $(286,988)$39,631 
Net loss— — — — — — (6,546)(6,546)
Foreign currency translation adjustment— — — — — (17)— (17)
Stock issued under employee stock purchase plan— — (26)(38)(2)— — (40)
Restricted stock granted1,465 — — (7)— — (7)
Restricted stock forfeited(134)25 54 (54)— — 0 
Treasury stock purchased— — — — — — — 
Stock compensation expense— — — — 969 — — 969 
Excess tax benefit related to share-based awards— — 56 (77)(19)— — (96)
Balance, June 30, 202179,607 $8 5,628 $(34,017)$361,424 $13 $(293,534)$33,894 


Six months ended June 30, 2021
 Common StockTreasury StockAdditional
Paid-in
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Accumulated DeficitTotal Stockholders’ Equity
 Shares
Issued		Par
Value		SharesCost
Balance, December 31, 202078,669 $8 5,581 $(33,851)$359,721 $(19)$(278,688)$47,171 
Net loss— — — — — — (14,846)(14,846)
Foreign currency translation adjustment— — — — — 32 — 32 
Stock issued under employee stock purchase plan— — (84)(130)(47)— — (177)
Restricted stock granted1,684 — — — — — — — 
Restricted stock forfeited(133)— 30 64 — — — 64 
Treasury stock purchased— — — — — — — — 
Stock compensation expense— — — — 1,750 — — 1,750 
Excess tax benefit related to share-based awards— — 101 (100)— — — (100)
Other (1)(613)— — — — — — — 
Balance, June 30, 202179,607 $8 5,628 $(34,017)$361,424 $13 $(293,534)$33,894 
(1) See Note 14, “Stockholders’ Equity” for further discussion.
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
8


Three months ended June 30, 2020
Common Stock Treasury Stock 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 Retained Earnings (Accumulated Deficit) Non-controlling Interests Total Equity Common StockTreasury StockAdditional
Paid-in
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Accumulated DeficitTotal Stockholders’ Equity
Shares
Issued
 
Par
Value
 Shares Cost  Shares
Issued		Par
Value		SharesCostTotal Stockholders’ Equity
Balance, December 31, 201659,685
 $6
 2,029
 $(20,269) $318,392
 $(956) $(9,830) $358
 $287,701
Balance, March 31, 2020Balance, March 31, 202064,338 $6 4,395 $(33,529)$348,375 $58 $(206,205)$108,705 
Net loss—
 —
 —
 —
 —
 —
 (18,906) —
 (18,906)Net loss— — — — — — (9,561)(9,561)
Foreign currency translation adjustment—
 —
 —
 —
 —
 134
 —
 —
 134
Foreign currency translation adjustment— — — — — (7)— (7)
Stock issued under employee stock purchase plan—
 —
 (81) —
 530
 —
 —
 —
 530
Stock issued under employee stock purchase plan— — (12)— 9 — — 9 
Common stock issued in payment of accrued liability—
 —
 —
 —
 188
 —
 —
 —
 188
Stock options exercised663
 —
 —
 —
 5,884
 —
 —
 —
 5,884
Stock surrendered for exercise of stock options—
 —
 478
 (5,863) —
 —
 —
 —
 (5,863)
Restricted stock granted274
 —
 —
 —
 —
 —
 —
 —
 —
Restricted stock granted1,788 — — — — — — — 
Restricted stock forfeited—
 —
 97
 —
 —
 —
 —
 —
 —
Restricted stock forfeited— — 37 — — — — — 
Treasury stock purchased—
 —
 151
 (1,500) —
 —
 —
 —
 (1,500)Treasury stock purchased— — 39 (37)— — — (37)
Stock compensation expense—
 —
 —
 —
 9,496
 —
 —
 —
 9,496
Stock compensation expense— — — — 1,059 — — 1,059 
Repurchase of common stock—
 —
 680
 (4,174) —
 —
 —
 —
 (4,174)
Balance, September 30, 201760,622
 $6
 3,354
 $(31,806) $334,490
 $(822) $(28,736) $358
 $273,490
Stock issued in JP3 acquisitionStock issued in JP3 acquisition11,500 1 — — 8,537 — — 8,538 
Balance, June 30, 2020Balance, June 30, 202077,626 7 4,459 (33,566)357,980 51 (215,766)108,706 
Six months ended June 30, 2020
 Common StockTreasury StockAdditional
Paid-in
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Retained Earnings (Accumulated Deficit)Total Stockholders’ Equity
 Shares
Issued		Par
Value		SharesCost
Balance, December 31, 201963,657 $6 4,145 $(33,484)$347,564 $181 $(142,238)$172,029 
Net loss— — — — — — (73,528)(73,528)
Foreign currency translation adjustment— — — — — (130)— (130)
Stock issued under employee stock purchase plan— — (25)— 20 — — 20 
Restricted stock granted2,469 — — — 338 — — 338 
Restricted stock forfeited— — 278 — — — — — 
Treasury stock purchased— — 61 (82)— — — (82)
Stock compensation expense— — — — 1,521 — — 1,521 
Stock issued in JP3 acquisition11,500 1 — — 8,537 — — 8,538 
Balance, June 30, 202077,626 $7 4,459 $(33,566)$357,980 $51 $(215,766)$108,706 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
9

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1 — Organization and Significant Accounting Policies
Organization and Nature of Operations

Flotek Industries, Inc. (“Flotek” or the “Company”) is a global, diversified,creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, that developsFlotek helps customers across industrial, commercial, and supplies chemistriesconsumer markets improve their Environmental, Social, and services to the oil and gas industries, and high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets.Governance (ESG) performance.
The Company’s oilfield business includesChemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemistrieschemicals that enhance the profitability of hydrocarbon producers and logistics which enable its customerscleans surfaces in pursuing improved efficiencies inboth commercial and personal settings to help reduce the drillingspread of bacteria, viruses and completiongerms.
The Company’s Data Analytics (“DA”) segment enables users to maximize the value of their wells. hydrocarbon associated processes by providing analytics associated with the streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, reducing their carbon footprint, energy consumption and emissions.
The Company also provides automated bulk material handling, loading facilities,formed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”). The Company’s 2 operating segments, CT and blendingDA, are both supported by its continuing Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 18, “Business Segment, Geographic and Major Customer Information.” For further discussion of the JP3 acquisition, see Note 3, “Business Combination.”
The Company processes 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 20 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 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.
Flotek was initially incorporated under the laws of the Province of British Columbia on May 17,in 1985. OnIn October 23, 2001, Flotekthe Company changed its corporate domicile to the stateState of Delaware.
Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements and accompanying footnotes (collectively the “Financial Statements”)unaudited financial statements reflect all adjustments, in the opinion of management, necessary for fair presentationstatement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The Financial Statements,financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the Securities and Exchange Commission (“SEC”)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 Statementsfinancial 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 (“Annual Report”).Report. A copy of the 2020 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.www.flotekind.com. The resultsinformation contained on the Company’s website does not form a part of operations for the three and nine months ended September 30, 2017, are not necessarily indicative of the results to be expected for the year ending December 31, 2017.this Quarterly Report.
During the fourthfirst quarter of 2016,2021, the Company classified the Drilling Technologies and Production Technologies segmentsits warehouse facility in Monahans, Texas, as held for sale based on management’s intentionthe criteria outlined inAccounting Standard Codification (“ASC”) 360, Property, Plant and Equipment. During the first quarter, the Company committed to a plan to sell these businesses.the asset in its present condition. The Company’s historicalCompany engaged with a commercial real estate agent and is actively looking for a buyer. As such, the Company reclassified the related property, plant and equipment of $0.5 million as held for sale in the current assets of the consolidated balance sheet, as the Company expects to complete the asset sale within one year.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
The consolidated financial statements have been revisedprepared assuming that the Company will continue as a going concern.
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic. The pandemic negatively impacted the U.S. and global economy, disrupted domestic and international oil and gas markets, and increased volatility in financial markets. These effects materially and adversely affected, and may continue to presentmaterially and adversely affect, the demand for oil and natural gas as well as for our services and products. The Company’s primary markets in the U.S. are particularly subject to the impacts on the oil and gas industry. In the first quarter of 2020, the Company recorded impairments to property, plant and equipment; intangible assets; and operating right-of-use assets. In the second half of 2020 the Company recorded additional impairment charges of goodwill and intangible assets as well as an increase to the provision of excess and obsolete inventory.

10

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level. Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the Company and could result in additional impairments in the future. Future developments of the COVID-19 crisis are uncertain and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.
The Company continues to monitor the impact of COVID-19 on the business, suppliers and customers. Future developments and effects are highly uncertain and cannot be predicted, including the scope and duration of the Drilling Technologiespandemic. This uncertainty could have a material impact on accounting estimates and Production Technologies segments as discontinued operations. assumptions used in our consolidated financial statements.
Under the provisions of the CARES Act, the Company is eligible for a refundable employee retention credit subject to certain criteria. In connection with the CARES Act, the Company adopted a policy to recognize the employee retention credit when earned and to offset the credit against the related payroll tax liability. Accordingly, the Company recorded a $1.9 million employee retention credit during the three months ended June 30, 2021 in other current assets with the offset recorded in accrued liabilities. In the second quarter of 2021, the Company used $0.8 million of the total employee retention credit leaving a $1.1 million credit to be applied against future payroll tax liabilities.
Sources and Uses of Liquidity
The resultsCompany currently funds its operations and growth primarily from cash on hand. The ability of operations of Drilling Technologiesthe Company to grow and Production Technologies are presented as “Loss from discontinued operations”be competitive in the statementmarketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s operating cash flows, the monetization of excess and non-core assets, and the availability of and access to debt and equity financing. The Company has a history of losses and negative operating cash flows from operations and expects to utilize a significant amount of cash in operations in the relatedfollowing year. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.
Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows of these segments has been reclassified to discontinued operations for all periods presented. The assets and liabilities of the Drilling Technologies and Production Technologies segments have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheets for all periods presented.future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet its capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:
•Sale of non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sale of excess inventory and/or raw materials;
•Entry into a borrowing facility with one or more lenders;
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash;
•Reducing professional advisory fees and headcount; and
•Raising equity either in the public markets or via a private placement offering.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms or at all.
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 previously reported net income (loss).loss and stockholders’ equity.




11

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Recent Accounting Pronouncements
ApplicationChanges to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”). We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.
New Accounting Standards Issued But Not Adopted as of June 30, 2021
Effective January 1, 2017, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”)The FASB issued ASU No. 2015-11,2019-12, “Income Taxes (Topic 740): Simplifying the Measurement of InventoryAccounting for Income Taxes.” This standard requires managementremoves specific exceptions to measure inventory at the lower of cost or net realizable value. Net realizable valuegeneral principles in Topic 740. The pronouncement is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued. The Company has evaluated the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Implementationimpact of this standard did not have a material effectand determined that there is no impact on the consolidated financial statements and related disclosures.
Effective January 1, 2017, the Company adopted the accounting guidance in ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” This standard eliminated the requirement for organizations to present deferred tax assets 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. 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 estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.forecasts. The pronouncement is effective for smaller reporting companies 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.2022. The Company is currently evaluating the impact the pronouncement will haveof this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.
Note 3 — Business Acquisition
During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. The transaction was valued at approximately $36.6 million as of the transaction closing date, comprised of $25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $8.5 million, net of a discount for marketability due to a lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million. Additionally, the Company was subject to contingent consideration with an estimated fair value of $1.2 million at acquisition date for 2 potential earn-out provisions totaling $5.0 million based on certain stock performance targets. The first and second earn-out provisions occur if the ten-day volume-weighted average share price equals or exceeds $2 per share and $3 per share, respectively, before May 18, 2025. See Note 11, “Fair Value Measurements,” for additional information on the current estimated fair value of the contingent consideration.

The following table summarizes the fair value of JP3’s assets acquired as of the closing date of May 18, 2020 (in thousands):
Tradenames and trademarks$1,100 
Technology and know-how5,000 
Customer lists6,800 
Inventories7,100 
Cash604 
Net working capital, net of cash and inventories(1,063)
Fixed assets426 
Long-term debt assumed and other assets (liabilities)(893)
Goodwill17,522 
Net assets acquired$36,596 

Note 4 — Revenue from Contracts with Customers
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 expects to be entitled 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


12

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and 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.
In August 2016,The majority of the FASB issued ASU No. 2016-15, “Classificationproducts from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of Certain Cash Receiptsequipment at the time of sale. Revenue related to service and Cash Payments.” This standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The pronouncementsupport is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.recognized over time. The Company is currently evaluating the impact the pronouncement will havebills sales on the consolidated financial statementsa monthly basis with payment terms customarily 30-45 days for domestic and related disclosures.60 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.
In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the DefinitionDisaggregation of a Business.” This standard provides additional guidanceRevenue
The Company differentiates revenue based on whether an integrated setthe source of assets and activities constitutes a business. The pronouncementrevenue is effectiveattributable to product sales (point-in-time revenue recognition) or service revenue (over-time revenue recognition). Product sales accounted 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.” This standard eliminates Step 2 from the goodwill impairment test. An entity will now recognize an impairment chargeover 90% of total revenue for the amountthree and six months ended June 30, 2021 and 2020.
Revenue disaggregated by which the carrying amount exceeds the reporting unit’s fair value. revenue source is as follows (in thousands):
 Three months ended June 30,Six months ended June 30,
 2021202020212020
Revenue:
Products$8,444 $8,176 $19,524 $26,976 
Services721 704 1,411 1,320 
$9,165 $8,880 $20,935 $28,296 
Arrangements with Multiple Performance Obligations
The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact the pronouncement will haveCT and DA segments primarily sell chemicals and equipment recognized at a point in time based 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 changeswhen control transfers to the customer determined by agreed upon delivery terms. Additionally, both segments offer various services associated to products sold which includes field services, installation, maintenance, and other functions. Service revenue is recognized on an over time basis for CT as services are performed as the customer is simultaneously benefiting as the Company performs. For DA, services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. DA has additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, DA may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms or conditions ofand conditions. Subscription-type arrangements were not a share-basedmaterial revenue stream in the three and six months June 30, 2021 and 2020.
Contract Balances
Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point 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,unconditional. Contract liabilities associated with early adoption permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.incomplete performance obligations are not material.
Note 35 — Discontinued OperationsInventories
DuringInventories are as follows (in thousands):
June 30, 2021December 31, 2020
Raw materials$7,203 $7,190 
Finished goods16,198 15,705 
Inventories23,401 22,895 
Less reserve for excess and obsolete inventory(11,902)(11,058)
Inventories, net$11,499 $11,837 
The provision recorded in the fourth quarter 2016,three and six months ended June 30, 2021 were $0.1 million for the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistryCT segment and consumer$0.1 million for the DA segment and industrial chemistry. The Company executed a plan to sell or otherwise dispose$0.4 million for the CT segment and $0.1 million of the Drilling TechnologiesDA segment, respectively. The increase in excess and Production Technologies segments. An investment banking advisory services firm was engaged and actively marketed these segments.
The Company met all of the criteriaobsolescence is attributable 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 andcontinued product rationalization efforts, which included a note receivable of $1.0 million due in one year.reduction


13

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

in the number of materials carried within the portfolio and identification of those materials for which the Company will no longer actively market or carry quantities in excess of current and estimated future usage requirements.
The following summarized financial information has been segregated from continuing operations
Note 6 — Property and reportedEquipment
Property and equipment are as Discontinued Operationsfollows (in thousands):
June 30, 2021December 31, 2020
Land$1,986 $2,415 
Land improvements861 867 
Buildings and leasehold improvements6,367 6,364 
Machinery and equipment7,782 7,760 
Furniture and fixtures651 649 
Transportation equipment1,045 1,190 
Computer equipment and software1,304 1,296 
Property and equipment19,996 20,541 
Less accumulated depreciation(11,979)(11,454)
Property and equipment, net$8,017 $9,087 
Depreciation expense totaled $0.3 million and $0.5 million for the three months ended June 30, 2021 and 2020, and $0.3 million and $2.0 million for the six months ended June 30, 2021 and 2020, respectively.
During the first quarter of 2020, the Company recognized an impairment of property and equipment of $30.2 million. See Note 8, “Impairment of Fixed and Long-lived Assets.” NaN impairment was recognized for the three and ninesix months ended SeptemberJune 30, 20172021.
Note 7 — Leases
During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and 2016 (in thousands):moved corporate employees to the Global Research and Innovation Center (“GRIC”) during the second quarter of 2020. In addition, the lease liability and corresponding right-of-use (“ROU”) assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC. The remeasurement resulted in adjustments to lease liabilities and ROU assets totaling of $6.2 million each as of March 31, 2020. During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office and moved all employees to the GRIC facility effective June 29, 2020.
In addition, during the three months ended March 31, 2020, the Company recorded an impairment of the ROU assets totaling $7.4 million. For further discussion, refer to Note 8, “Impairment of Fixed and Long-lived Assets.” NaN impairment was recognized for the three and six months ended June 30, 2021.

14
 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 assets36
 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 businesses463
 —
 (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 benefit581
 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 businesses61
 —
 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 benefit7
 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 assetscomponents of lease expense and liabilities held for sale on the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016supplemental cash flow information are as follows (in thousands):
Three months ended June 30,Six months ended June 30,
2021202020212020
Operating lease expense$250 $283 $488 $854 
Finance lease expense:
Amortization of right-of-use assets4 4 7 9 
Interest on lease liabilities3 5 6 9 
Total finance lease expense7 9 13 18 
Short-term lease expense61 54 55 86 
Total lease expense$318 $346 $556 $958 
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$394 $1,411 $727 $1,024 
Operating cash flows from finance leases43 5 53 9 
Financing cash flows from finance leases3 14 29 51 
 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
Inventories5
 9,078
 5
 8,115
Other current assets1,585
 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 sale3,339
 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 liabilities1,419
 1,190
 142
 385
Liabilities held for sale$1,434
 $3,662
 $152
 $1,299
Maturities of lease liabilities are as follows (in thousands):
Note 4 — Impairment of Inventory and Long-Lived Assets for Discontinued Operations
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, the Company evaluated the direction 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. The Company decided to exit the business of building and repairing motors in all domestic markets. In addition, changes in drilling technique, including further escalation of the move 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, the Company recorded a pre-tax impairment of inventories as noted below.
Changes in 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 carrying value of the asset groups was based upon estimated future 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 assets as noted below.
Years ending December 31,Operating LeasesFinance Leases
2021 (excluding the six months ended June 30, 2021)$581 $35 
20221,256 47 
20231,321 39 
20241,351 25 
20251,378 0 
Thereafter6,891 0 
Total lease payments$12,778 $146 
Less: Interest(4,178)(19)
Present value of lease liabilities$8,600 $127 


15

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company recorded impairment charges during the three months ended March 31, 2016, as follows (in thousands):
Drilling Technologies: 
Inventories$12,653
Long-lived assets:

Property and equipment14,642
Intangible assets other than goodwill9,227
Production Technologies: 
Inventories3,913
Total impairment$40,435
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.
Note 5 — Acquisitions
On July 27, 2016, the Company acquired 100% of the stock and interests in International Polymerics, Inc. (“IPI”) and related entities for $7.9 million in cash consideration, net of cash acquired, and 247,764 shares of the Company’s common stock. IPI is a U.S. based manufacturer of high viscosity guar gum and guar slurry for the oil and gas industry with a wide selection of stimulation chemicals.
Note 6 — Supplemental Cash Flow Information
Supplemental cash flowbalance sheet information related to leases is as follows (in thousands):
June 30, 2021December 31, 2020
Operating Leases
Operating lease right-of-use assets$2,162 $2,320 
Current portion of operating lease liabilities$589 $636 
Long-term operating lease liabilities8,011 8,348 
Total operating lease liabilities$8,600 $8,984 
Finance Leases
Property and equipment$147 $147 
Accumulated depreciation(33)(26)
Property and equipment, net$114 $121 
Current portion of finance lease liabilities$55 $60 
Long-term finance lease liabilities72 96 
Total finance lease liabilities$127 $156 
Weighted Average Remaining Lease Term
Operating leases9.3 years9.9 years
Finance leases3.1 years3.1 years
Weighted Average Discount Rate
Operating leases4.5 %8.9 %
Finance leases8.5 %9.0 %
 Nine months ended September 30,
 2017 2016
Supplemental non-cash investing and financing activities:   
Value of common stock issued in acquisition$—
 $3,268
Value of common stock issued in payment of accrued liability188
 —
Exercise of stock options by common stock surrender5,863
 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 78 — RevenueImpairment of Fixed and Long-lived Assets

During the first quarter of 2020, the price of crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the energy industry, which began to negatively impact the Company’s results of operations. The decline of results of operations were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to COVID-19. Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020.

The Company differentiates revenueimpairment loss of fixed and costintangible assets as of revenue based on whether the source of revenue is attributable to products or services. Revenue and cost of revenue by source areMarch 31, 2020 was recorded as follows (in thousands):
March, 31, 2020
Property and equipment, net$30,178 
Operating lease right-of-use assets7,434 
Other Intangibles:
   Patents and technology9,902 
   Customer relationships9,165 
   Intangible assets in progress596 
   Trademarks and brand names179 
Total other intangibles19,842 
Total impairment of fixed, long-lived and intangible assets$57,454 


16
 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue:       
Products$77,956
 $62,562
 $240,306
 $187,122
Services1,502
 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
Services1,345
 354
 3,802
 950
Depreciation527
 512
 1,627
 1,357
 $57,718
 $41,983
 $169,016
 $124,362


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 8 — Inventories
Inventories areUsing the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as follows (in thousands):
 September 30, 2017 December 31, 2016
Raw materials$37,961
 $28,626
Work-in-process3,042
 2,918
Finished goods29,713
 26,739
Inventories$70,716
 $58,283
Note 9 — Propertyof March 31, 2020, and Equipment
Propertyan impairment loss of $57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and equipment are as follows (in thousands):
 September 30, 2017 December 31, 2016
Land$6,748
 $5,837
Buildings and leasehold improvements43,431
 42,986
Machinery and equipment38,862
 36,187
Equipment in progress5,475
 3,235
Furniture and fixtures2,029
 1,969
Transportation equipment2,307
 3,059
Computer equipment and software12,168
 11,844
Property and equipment111,020
 105,117
Less accumulated depreciation(37,309) (30,426)
Property and equipment, net$73,711
 $74,691
Depreciationthe related negative impact on oil and natural gas prices on projections of future cash flows. Prior to the impairment, the Company recognized amortization expense including expense recorded in costfor finite-lived intangible assets acquired of revenue, totaled $2.4 million and $2.1$0.5 million for the three months ended September 30, 2017March 31, 2020.

The Company concluded no triggering events during the first and 2016, respectively, and $7.0 million and $5.3 million for the nine months ended September 30, 2017 and 2016, respectively.second quarters of 2021.
During the three and nine months ended September 30, 2017 and 2016, no impairments were recognized related to property and equipment.
Note 109 — GoodwillAccrued Liabilities
Changes in the carrying value of goodwill for each reporting unitCurrent accrued liabilities are as follows (in thousands):
June 30, 2021December 31, 2020
Loss on purchase commitments (Note 13)$9,383 $9,402 
Severance costs3,419 3,558 
Payroll and benefits994 1,789 
Contingent liability for earn-out provision1,115 1,416 
Taxes other than income taxes633 544 
Due to third parties504 434 
Legal costs721 333 
Deferred revenue, current152 146 
Other300 653 
Total current accrued liabilities$17,221 $18,275 
Note 10 — Debt
 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

In April 2020, the Company received a $4.8 million loan under the Payroll Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 in April 2020. The PPP loans have a fixed interest rate of 1% and have a two-year term, maturing in 2022. No payments of principal or interest were required during the year ended December 31, 2020, or the six months ended June 30, 2021.

A portion of the loans may be eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least 60% of the eligible costs incurred are used for payroll. Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company. This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. During the threesecond quarter, the Company applied for forgiveness on the PPP loans. The receipt of these funds, and nine months ended Septemberthe forgiveness of the loans attendant to these funds, is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our past and future adherence to the forgiveness criteria. The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.

In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest was fully forgiven. During the second quarter, the Company recorded $0.9 million in other income on the consolidated statement of operations. The Company has submitted to the SBA for partial forgiveness on the Flotek PPP loan but as of the date of this filing, no conclusion has been reached. The Flotek PPP loan is classified as current portion of long term debt as of June 30, 2017 and 2016, no impairments of goodwill were recognized.2021 on the consolidated balance sheet.



17

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
 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 lists30,877
 7,745
 30,877
 6,518
Trademarks and brand names1,544
 1,105
 1,467
 1,069
Total finite-lived intangible assets acquired49,657
 14,173
 49,159
 12,124
Deferred financing costs2,230
 493
 1,804
 117
Total amortizable intangible assets51,887
 $14,666
 50,963
 $12,241
Indefinite-lived intangible assets:       
Trademarks and brand names11,630
   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 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and $2.0 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively.
Amortization of deferred financing costs was $0.1 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.4 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively.
Note 12 — Long-Term Debt and Credit Facility
Long-term debt, including current portion, is as follows (in thousands):

 September 30, 2017 December 31, 2016
Long-term debt:   
Borrowings under revolving credit facility$40,589
 $38,566
Term loan—
 9,833
Total long-term debt40,589
 48,399
Less current portion of long-term debt(40,589) (40,566)
Long-term debt, less current portion$—
 $7,833
June 30, 2021December 31, 2020
Long-term debt
    Flotek PPP loan$0 $4,788 
    JP3 PPP loan0 877 
Total0 5,665 
Less current maturities0 (4,048)
Total long-term debt, net of current portion$0 $1,617 
Credit Facility
On May 10, 2013, the Company and certain of its subsidiaries (the “Borrowers”) entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC Bank”). The Company may borrow under the Credit Facility for working capital, permitted acquisitions, capital expenditures and other corporate purposes. The Credit Facility, as amended, continues in effect until May 10, 2022. Under terms of the Credit Facility, as amended, the Company has total borrowing availability under a revolving credit facility of $75 million.
The Credit Facility is secured by substantially all of the Company’s domestic real and personal property, including accounts receivable, inventory, land, buildings, equipment and other intangible assets. The Credit Facility contains customary representations, warranties, and both affirmative and negative covenants. 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 under 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 13 — 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 months ended September 30, 2017 and 2016, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.3 million restricted stock units for the three and nine months ended September 30, 2017, and 0.7 million stock options and 0.8 million restricted stock units for the three and nine months ended September 30, 2016.

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) $(2,011)
Income (loss) from discontinued operations, net of tax319
 (876) (13,621) (33,200)
Net loss - Basic and Diluted$(3,102) $(2,746) $(18,906) $(35,211)
        
Weighted average common shares outstanding - Basic57,602
 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 - Diluted57,602
 56,899
 57,709
 55,523
        
Basic earnings (loss) per common share:       
Continuing operations$(0.06) $(0.03) $(0.09) $(0.04)
Discontinued operations, net of tax0.01
 (0.02) (0.24) (0.60)
Basic earnings (loss) per common share$(0.05) $(0.05) $(0.33) $(0.64)
Diluted earnings (loss) per common share:       
Continuing operations$(0.06) $(0.03) $(0.09) $(0.04)
Discontinued operations, net of tax0.01
 (0.02) (0.24) (0.60)
Diluted earnings (loss) per common share$(0.05) $(0.05) $(0.33) $(0.64)
Note 1411 — 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, and accounts payable and accrued expenses, approximate fair value due to the short-term nature of these accounts. The Company had no cash equivalentsPPP loan for Flotek approximate fair value due to maturity in less than fifteen months.
Liabilities Measured at SeptemberFair Value on a Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):
Balance at June 30,Balance at December 31,
Level 1Level 2Level 32021Level 1Level 2Level 32020
Contingent consideration$0 $0 $1,115 $1,115 $0 $0 $1,416 $1,416 
At June 30, 2017 or2021, and December 31, 2016.
The carrying value and2020, the estimated fair value of the Company’s long-term debt areremaining stock performance earn-out provision, with respect to the JP3 transaction, was recorded 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 facility40,589
��40,589
 38,566
 38,566
a contingent liability. The carryingestimated fair value of the term loanearn-out provision at the end of each period was valued using the Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and borrowings under the revolving credit facility approximate theirvolatility. There were no transfers in or out of either Level 1, Level 2, or Level 3 fair value becausemeasurements during the interest rates are variable.

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

periods ending June 30, 2021 and December 31, 2020.
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. No impairments of any of these assets were recognized duringDuring the three and nine months ended SeptemberMarch 31, 2020, the Company recorded an impairment of $57.5 million for impairment of long-lived assets. Management inputs used in fair value measurements were classified as Level 3.


18

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During 2020, the first stock performance target for the contingent consideration was achieved and settled. The Company estimated the fair value of the remaining stock performance earn-out provision at June 30, 20172021, and 2016.decreased the estimated fair value of the contingent liability to $1.1 million. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in operating expenses.
The following table presents the changes in contingent consideration balances classified as Level 3 balances for the three months ended June 30, 2021 and 2020 (in thousands):
Three months ended June 30,Six months ended June 30,
2021202020212020
Balance - beginning of period$1,081 $0 $1,416 $0 
Additions / issuances0 1,200 0 1,200 
Change in fair value34 0 (301)0 
Transfer out of Level 30 0 0 0 
Balance - end of period$1,115 $1,200 $1,115 $1,200 
Note 1512 — 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,
2021202020212020
U.S. federal statutory tax rate21.0 %21.0 %21.0 %21.0 %
State income taxes, net of federal benefit(0.3)0.4 (0.2)0 
Non-U.S. income taxed at different rates(0.1)0.9 0.3 0.2 
Increase (reduction) in tax benefit related to stock-based awards2.2 0.9 1.2 (0.1)
Non-deductible expenses3.6 0.7 1.1 0 
Research and development credit0 0.1 0 0 
Increase in valuation allowance(26.5)(23.7)(23.6)(16.0)
Effect of tax rate differences of NOL carryback0 0 0 2.6 
Effective income tax rate(0.1)%0.3 %(0.2)%7.7 %
 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 benefit14.3
 12.0
 6.7
 9.2
Non-U.S. income taxed at different rates8.9
 16.4
 5.4
 7.7
Reduction in tax benefit related to stock-based awards15.8
 —
 14.1
 —
Other(3.5) (26.9) (3.6) (22.0)
Effective income tax rate0.5 % (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 state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates. Changesrates, except for the NOL carryback claim discussed above.
Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. GAAP 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, the Company considers 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 reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income.
The Company continues to have a full valuation allowance against net deferred tax assets as it is not more-likely-than-not they will be utilized.

19

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — Commitments and Contingencies
Litigation
On March 26, 2021, the Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and Joshua A. Snively in state court in Harris County, Texas. The lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty by Mr. Snively. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.
Subsequent to the lawsuit described above, on April 5, 2021, ADM and FCC filed a lawsuit in the effective tax rate duringDelaware Court of Chancery seeking to enjoin the threelawsuit filed in Texas and nine months ended September 30, 2017, includedclaiming damages under the terpene supply agreement and other matters.
The Company implementing ASU No. 2016-09 which requires accounting for excess tax benefitsis subject to other routine litigation and tax deficiencies related to stock-based awards as discrete itemsother claims that arise in the period in which they occur.
In January 2017, the Internal Revenue Service notified the Companynormal course of business. Except as disclosed above, management is not aware of any pending or threatened lawsuits or proceedings that it will examine the Company’s federal tax returns for the year ended December 31, 2014. No adjustments have been asserted, and management believes that sustained adjustments, if any, would notare expected to have a material effect on the Company’s financial position, results of operations or liquidity.

Other Commitments and Contingencies
Terpene Supply Agreement
At December 31, 2020, the Company’s balance sheet included an accrued liability of $9.4 million associated with the terpene supply agreement with FCC. The Company calculated the liability based on the Company’s expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased and expected selling prices of the excess terpene as such loss was not considered recoverable.
The Company’s balance sheet at June 30, 2021 included an accrued liability of $9.4 million as it did not make any payments for, or purchases of, terpene during the first and second quarters of 2021. The Company expects that settlement of the accrued liability, if any, will be determined through the litigation disclosed in the “Litigation” section of this Note.
Indemnification
The Company agreed to provide indemnification to National Oilwell DHT, L.P. for certain intellectual property-related claims in connection with sale of its Teledrift business unit in 2017. The total expenses in this matter are estimated at a range of $0.2 million to $0.5 million as of June 30, 2021.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the surface cleaner and disinfectant industry. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. Customers within the surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment. The concentration in the oil and gas industry increases credit and business risk. See Note 18, “Business Segment, Geographic and Major Customer Information,” for concentration of segment revenue from major customers.
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 invested in three major U.S. financial institutions and balances often exceed insurable amounts.
Note 1614 — Common StockStockholders’ Equity
TheOn May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, November 9, 2009, authorizesto increase the Company to issue up to 80 millionauthorized shares of common stock from 80,000,000 to 140,000,000, par value $0.0001$0.0001 per share, and 100,000 shares of one or more series of preferred stock, par value $0.0001$0.0001 per share. The additional authorized shares are available for corporate purposes, including acquisitions.
A reconciliation of changes in commonDuring the first quarter 2021, the Company identified 0.6 million shares issued during the nine months ended September 30, 2017 is as follows:
Shares issued at December 31, 201659,684,669
Issued as restricted stock award grants273,829
Issued upon exercise of stock options663,288
Shares issued at September 30, 201760,621,786
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 madethat were improperly included in the open market or through privately negotiated transactions. During the three months ended September 30, 2017,December 31, 2020 issued share count, and the Company repurchased 630,000 shares of its outstanding common stockadjusted the issued share count presented on the open market at a coststatement of $3.7 million, inclusive of transaction costs,stockholders’ equity. This adjustment was not material to the December 31, 2020 consolidated financial statements or an average price of $5.85basic and diluted earnings 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, the Company has not repurchased any of its common stock under this authorization.


20

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 15 — Earnings (Loss) Per Share
AsBasic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of Septembercommon 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 six months ended June 30, 2017,2021 and 2020, since including them would have an anti-dilutive effect on loss per share due to the Company has $50.7 million remaining under its share repurchase programs. A covenant undernet loss incurred during 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.periods.
Note 16 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
 Six months ended June 30,
 20212020
Supplemental cash payment information:
Interest paid$11 $20 
Income taxes (received, net of payments) paid(351)149 
Supplemental non-cash activities:
Employee retention credit$1,164 $0 
JP3 PPP loan forgiveness881 0 
Supplemental non-cash investing and financing activities:
Equity issued - acquisition of JP3$0 $8,538 

Note 17 — 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 compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.
In October 2019, an amendment to the employment agreement of Mr. Chisholm was executed, giving the Company the contractual right of offset for any amounts owed to the Company, and giving the Company the right to withhold payments equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies from any amounts owed under the employment agreement. At December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $1.8 million for potential liability to the IRS. On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company. In September 2020, the Company informed Mr. Chisholm it would cease payment of future severance.
During first quarter of 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of June 30, 2021 and December 31, 2020, the receivable from Mr. Chisholm was $1.4 million, which equaled the payable to the IRS and netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.


21

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-makersdecision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into twothe following reportable segments: Energy Chemistry TechnologiesCT and Consumer and Industrial DA.

Chemistry Technologies.
Energy Chemistry TechnologiesThe CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals.The Company designs, develops, manufactures, packages, distributes, delivers and markets optimized fluid systems, including specialty and conventional chemistries, usedfor use in oil and natural gas well drilling, cementing, completion, remediation and stimulation. In addition,stimulation activities designed to maximize recovery in both new and mature fields, as well as to reduce health and environmental risk by utilization of greener chemicals. Customers of the Company’s chemistries are used in specialized enhancedCT segment include major integrated oil and improved oil recovery markets. Activities in this segment also include construction and management of automated material handling facilities and management of loading facilities and blending operations forgas companies, oilfield services companies.companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.
Consumer
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and Industrial Chemistry Technologies designs, develops,resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and manufacturessolvents for industrial, commercial and consumer use. The Company produces Food and Drug Administration and Environmental Protection Agency compliant products that are soldits ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to companiesaddress the long-term challenges in the flavorjanitorial and fragrance industrysanitization (JanSan), food service and adjacent markets.

Data Analytics. The DA segment, created in the specialty chemical industry. These technologies are usedsecond quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The real-time information on hydrocarbon composition and properties helps customers generate additional profits by beverageenhancing their operations including crude/condensates stabilization, blending, optimization of transmix, increasing efficiencies of gas processing plants, ensuring product quality while enabling automation of fluid handling and food companies, fragrance companies,reducing losses through give-aways (i.e., that portion of a product of higher value than what is specified). The customers of the DA segment span across the entire oil and companies providing householdgas market, from upstream production to midstream facilities to refineries and industrial cleaning products.distribution networks.
The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to reportable segments.
Summarized financial information of the reportable segments is as follows (in thousands):segment.

22
For the three months ended September 30,Energy Chemistry Technologies Consumer and Industrial Chemistry Technologies Corporate and Other Total
2017       
Net revenue from external customers$61,167
 $18,291
 $—
 $79,458
Gross profit18,733
 3,007
 —
 21,740
Income (loss) from operations6,867
 985
 (10,955) (3,103)
Depreciation and amortization1,863
 590
 615
 3,068
Capital expenditures324
 682
 641
 1,647
        
2016       
Net revenue from external customers$45,030
 $19,307
 $—
 $64,337
Gross profit18,180
 4,174
 —
 22,354
Income (loss) from operations6,196
 2,433
 (10,882) (2,253)
Depreciation and amortization1,582
 567
 581
 2,730
Capital expenditures2,005
 148
 227
 2,380


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Summarized financial information of the reportable segments is as follows (in thousands):
For the three months ended June 30,Chemistry Technologies
Data Analytics (1)
Corporate and OtherTotal
2021
Net revenue from external customers$7,688 $1,477 $0 $9,165 
Loss from operations, including impairment(3,819)(773)(2,869)(7,461)
Depreciation and amortization233 20 0 253 
Additions to long-lived assets13 0 0 13 
2020
Net revenue from external customers$7,962 $918 $0 $8,880 
Loss from operations, including impairment(3,596)(1,151)(5,484)(10,231)
Depreciation and amortization246 131 91 468 
Additions to long-lived assets0 0 0 0 
(1) The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3.
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 profit63,840
 11,733
 —
 75,573
Income (loss) from operations24,715
 5,906
 (35,598) (4,977)
Depreciation and amortization5,507
 1,752
 1,832
 9,091
Capital expenditures2,794
 1,580
 1,781
 6,155
        
2016       
Net revenue from external customers$133,094
 $59,133
 $—
 $192,227
Gross profit54,609
 13,256
 —
 67,865
Income (loss) from operations21,793
 8,508
 (32,031) (1,730)
Depreciation and amortization4,062
 1,685
 1,633
 7,380
Capital expenditures8,704
 494
 1,420
 10,618
For the six months ended June 30,Chemistry Technologies
Data Analytics (1)
Corporate and OtherTotal
2021
Net revenue from external customers$17,990 $2,945 $0 $20,935 
Loss from operations, including impairment(7,407)(1,067)(7,230)$(15,704)
Depreciation and amortization524 35 1 $560 
Additions to long-lived assets31 0 0 $31 
2020
Net revenue from external customers$27,378 $918 $0 $28,296 
Loss from operations, including impairment(66,257)(1,151)(12,908)(80,316)
Depreciation and amortization2,056 131 472 2,659 
Additions to long-lived assets42 0 0 42 
(1) The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3.

Assets of the Company by reportable segments are as follows (in thousands):
June 30, 2021December 31, 2020
Chemistry Technologies$41,950 $43,346 
Data Analytics5,154 13,201 
Corporate and Other24,314 29,663 
Total assets$71,418 $86,210 

23
 September 30, 2017 December 31, 2016
Energy Chemistry Technologies$187,623
 $184,328
Consumer and Industrial Chemistry Technologies113,434
 98,105
Corporate and Other44,551
 56,882
Total segments345,608
 339,315
Held for sale4,135
 43,900
Total assets$349,743
 $383,215

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Geographic Information
Revenue by country is based on the location where services are provided and products are used. No individual countrycountries other than the U.S. and the United StatesArab Emirates (“U.S.”UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
Three months ended September 30, Nine months ended September 30, Three months ended June 30,Six months ended June 30,
2017 2016 2017 2016 2021202020212020
U.S.$66,638
 $52,545
 $203,123
 $154,532
U.S.$6,869 $6,936 $16,530 $22,711 
UAEUAE1,319 847 2,422 2,308 
Other countries12,820
 11,792
 41,466
 37,695
Other countries977 1,097 1,983 3,277 
Total$79,458
 $64,337
 $244,589
 $192,227
Total revenueTotal revenue$9,165 $8,880 $20,935 $28,296 
Long-lived assets held in countries other than the U.S. areU.S.are not considered material to the consolidated financial statements.
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:follows (in thousands):
For the three months ended June 30,Chemistry Technologies% of Total RevenueData Analytics% of Total Revenue
2021
Customer C$1,038 11.3 %**
Customer D1,810 19.8 %**
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
20202020   
Customer A13.3% 12.5% 12.9% 17.9%Customer A$2,004 22.6 %
* (1)
* (1)
Customer B8.8% 14.8% 9.6% 13.5%Customer B1,246 14.0 %
* (1)
* (1)
Over 90%
For the six months ended June 30,Chemistry Technologies% of Total RevenueData Analytics% of Total Revenue
2021
Customer C$4,067 19.4 %**
Customer D4,660 22.3 %**
 2020   
Customer C$8,324 29.4 %
* (1)
* (1)
Customer A3,536 12.5 %
* (1)
* (1)
Customer D3,485 12.3 %
* (1)
* (1)
* This customer did not account for more than 10% of the revenue from these customers was for sales in the Energy Chemistry Technologies segment.

during this period.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 18 — 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 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.
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.
Other Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
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,*(1) Not applicable, as the Company doesdid not generally require collateral as support for trade receivables. In addition,form the majority ofData Analytics segment until May 2020 upon acquiring JP3.
Note 19 — Subsequent Events
On July 27, 2021, the Company entered into a long-term rental agreement with Resolute Oil to leverage capabilities and facilities to drive growth in adjacent green chemistry markets. The agreement includes options to renew until 2036.

Through the agreement, Resolute Oil will fully utilize the Company’s cash is maintained at a major financial institutionentire 15-acre campus, including the 38,000 square foot chemical blending facility, based in Waller, TX, to manufacture United States Pharmacopeia-National Formulary (USP-NF)-grade white mineral oil distributed globally to customers in the agricultural, energy, food & beverage, cosmetic, and balances often exceed insurable amounts.personal care markets.




24




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking StatementsExecutive Summary

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 (“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
Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of Presentationenergy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial, commercial, and consumer markets improve their Environmental, Social, and Governance (ESG) performance. The Company serves specialty chemistry needs that span from downstream, midstream and upstream, both domestic and international, energy markets to applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.
The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that help their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and supplying professional chemistries that cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.

The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. These real-time data and analytics prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, thereby improving ESG performance. During the fourthsecond quarter of 2016,2020, the Company classifiedacquired 100% ownership of JP3 in a cash-and-stock transaction. JP3’s real-time data platforms combine the Drillingenergy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.
The Company was impacted as a result of the outbreak of COVID-19 that spread throughout the U.S. and the world during 2020, with effects continuing into 2021. For a discussion of the impacts of COVID-19, see “COVID-19 Effects and Actions” and “Outlook” in this Quarterly Report.

Company Overview
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research & Innovation (“R&I”) advanced laboratory capabilities.
Chemistry Technologies and Production Technologies segments as held for sale based on management’s intention to sell these businesses.
The Company’s historical financial statements have been revised to present the operating results of the Drilling Technologies and Production Technologies segments as discontinued operations. The results of operations of Drilling Technologies and Production Technologies are presented as “Loss from discontinued operations” in the statement of operations and the related cash flows of these segments has been reclassified to discontinued operations for all periods presented. The assets and liabilities of the Drilling Technologies and Production Technologies segments have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheets for all periods presented.
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 each of the Drilling Technologies and Production Technologies segments.
Executive Summary
Flotek is a global, diversified, technology-driven company that develops and supplies chemistriesCT segment includes energy-focused products and services comprised of proprietary green chemistries, specialty chemistries, logistics and technology services, which enable its customers to thepursue improved efficiencies and performance throughout life cycle their wells, helping customers improve their ESG and operational goals. The Company designs, develops, manufactures, packages, distributes, delivers and markets optimized fluid systems, including specialty and conventional chemistries, for use in oil and gas industries,well drilling, cementing, completion, remediation and high value compoundsstimulation activities designed to companies that make foodmaximize recovery in both new and beverages, cleaning products, cosmetics,mature fields, as well as to reduce health and other products that are sold in consumer and industrial markets. Flotek operates in over 20 domestic and international markets.environmental risk by using greener chemicals.
The Company’s oilfield business includes specialty chemistries and logistics. Flotek’s technologies enable its customers in pursuing improved efficiencies in
Customers of the drilling and completion of their wells. CustomersCT segment include major integrated oil and gas (“O&G”) companies, oilfield services companies, independent O&G companies, pressure-pumping serviceoil and gas companies, national and state-owned oil companies and international supply chain management companies.
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and solvents for both commercial and personal use. The Company also produces non-energy-related citrusFDA and EPA compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today, the Company has a portfolio of specialty green chemical products designed to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets. The Company has made a commitment of being in this market for the long-term.

Data Analytics
The DA segment, created in conjunction with the acquisition of JP3 in May 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable real time information on the

25


composition and properties for customers' oil, natural gas and refined products. The DA segment is transitioning to a recurring revenue subscription model of selling its application packages while continuing to sell its line of Verax analyzers, deployed in the field across the oil and related products 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. gas sector.

The Company sources citrus oil domestically and internationally and is onecustomers of the largest processors of citrus oil inDA segment diversify the world. Additionally, the Company also provides automated bulk material handling, loading facilities, and blending capabilities.


Continuing Operations
The operationsrevenues of the Company are categorized into two reportable segments: Energy Chemistry Technologies (“ECT”) and Consumerspan across the entire oil and Industrial Chemistry Technologies (“CICT”).
Energy Chemistry Technologies designs, develops, manufactures, packages,gas market, including upstream, midstream, refineries and markets specialty chemistries used in O&G well drilling, cementing, completion,distribution networks. The segment helps its customers generate additional profit by enhancing their operations including crude/condensates stabilization, blending, optimization of transmix, increasing efficiencies of gas plants, and stimulation. These technologies developed by Flotek’s Researchensuring product quality while enabling automation of fluid handling and Innovation team enable customers to pursue improved efficienciesreducing losses through give-aways (i.e., that portion of a product of higher value than what is specified) . While the DA segment was focused entirely on North American markets in the drilling and completion of wells.
Consumer and Industrial Chemistry Technologies designs, develops, and manufactures products that are sold to companiespast, business development activities started in late third quarter 2020 in the flavorinternational markets. This segment began preparing the Verax analyzers for international deployment including product design modifications, certifications and fragrance industries andexport controls.

Research & Innovation
R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical industry. These technologies are used by beverageformulations, FDA and food companies, fragrance companies,EPA regulatory guidance, technical support, basin and companies providing householdreservoir studies, data analytics and industrial cleaning products.
Discontinued Operations
new technology projects. The Drilling Technologies and Production Technologiespurpose of R&I is to supply the Company’s 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,with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support natural gasadvances in chemistry performance, detection, optimization and oil production activities.manufacturing.
Market ConditionsCOVID-19 Effects and Actions
In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic that spread throughout the U.S. and the world. In late 2020, major pharmaceutical companies developed vaccines and received approval for wide-scale distribution in the U.S. and other countries. The vaccination effort is proceeding in the U.S. and the world. However, variant strains of the virus have emerged, which create additional uncertainty on the extent and the duration of the pandemic.
The Company’s success is sensitive to a number of factors, which include, but are not limited to, drillingpandemic negatively impacted the U.S. 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 operationglobal economy, disrupted global supply chains and the geographical areas of rig activity. Additional factors that influence the level of drillingdomestic and well completion activity include:
Historical, current,international oil and anticipated future O&G prices,
Federal, state,gas markets, and local governmental actions thatincreased volatility in financial markets in 2020. These effects materially and adversely affected, and 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 AThree months ended September 30, Nine months ended September 30,
 2017 2016 % Change
 2017 2016 % Change
Average North American Active Drilling Rigs           
U.S.946
 479
 97.5% 861
 482
 78.6%
Canada208
 121
 71.9% 207
 112
 84.8%
Total1,154
 600
 92.3% 1,068
 594
 79.8%
Average U.S. Active Drilling Rigs by Type           
Vertical70
 62
 12.9% 72
 58
 24.1%
Horizontal799
 372
 114.8% 720
 376
 91.5%
Directional77
 45
 71.1% 69
 48
 43.8%
Total946
 479
 97.5% 861
 482
 78.6%
Average North American Drilling Rigs by Product           
Oil874
 452
 93.4% 800
 440
 81.8%
Natural Gas280
 148
 89.2% 268
 154
 74.0%
Total1,154
 600
 92.3% 1,068
 594
 79.8%
ftk_201709xchart-50177a07.jpgftk_201709xchart-51647a07.jpg
Source: Rig counts are per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are the averages of the weekly rig count activity.
Completions are per the U.S. Energy Information Administration (https://www.eia.gov/petroleum/drilling/) as of October 16, 2017.
Average U.S. rig activity increased by 97.5% and 78.6% for the three and nine months ended September 30, 2017, respectively, when compared to the same periods of 2016, and sequentially, increased by 5.7% when compared to the second quarter of 2017.
According to data collected by the U.S. Energy Information Administration (“EIA”) as reported on October 16, 2017, completions in the seven most prolific areas in the lower 48 states increased 47.3% and 37.0% for the three and nine months ended September 30, 2017, when compared to the same periods of 2016. Sequentially, completions increased 12.2% when compared to the second quarter of 2017.


Company Outlook
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, the level of drilling and completion activity is still depressed compared to historical levels. Assuming the price for crude oil remains relatively stable and regulatory impediments are reduced, the Company expects U.S. oilfield activity to remain dependent on commodity prices.
During the third quarter of 2017, the Company continued to promote the efficacy of its Complex nano-Fluid® (“CnF®”) chemistries resulting in a 23.1% increase in CnF® sales volumes compared to the third quarter of 2016. Third quarter 2017 CnF® volumes decreased 12.9% compared to the second quarter of 2017. Although quarter to quarter performance may vary, the Company expects its Energy Chemistry Technologies sales to outperform market activity metrics over time by continuing to demonstrate the efficacy of its CnF® chemistries through comparative analysis of wells with and without CnF® chemistries, field validation results conducted by E&P companies, and the continuation of its direct-to-operator sales program known as the Flotek Store®. Whether operators purchase directly from Flotek or continue to purchase from oilfield distributionmaterially 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.
The Company’s success in promoting its patented and proprietary chemistries is supported through its industry leading research and innovation staff who provide customer responsive product innovation, as well as development of new products which are expected to expand the Company’s future product lines. During the third quarter of 2016, the Company completed its new Global Research & Innovation Center in Houston. This state-of-the-art facility allows for the development of next-generation innovative energy chemistries, as well as expanded collaboration between 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 and industrial chemistries will be driven by the availability 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 due 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.
During the fourth quarter 2016, the Company implemented a strategic restructuring of its business to enable a greater focus on 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.
Capital expenditures for continuing operations totaled $6.2 million and $10.6 million for the nine months ended September 30, 2017 and 2016, respectively. The Company expects capital spending to be between $9 million and $11 million in 2017, but anticipates to be towards the lower end of the range. The Company will remain nimble in its core capital expenditure plans, adjusting as market conditions warrant.
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 toadversely affect, the demand for oil and natural gas production,as well as for the market price forCompany’s services and products.
The Company’s CT segment is energy-focused with product lines comprised of specialty chemistries, logistics and technology services. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent exploration and production companies, national and state-owned oil companies, and international supply chain management companies. Due to customer activity levels in this industry, the Company experienced materially reduced revenues and cash flows during 2020, which continued for the first half of 2021.
Outside the oil and gas sector, the COVID-19 pandemic increased demand for certain specialty chemicals, particularly surface cleaners and disinfectants. In 2020, the Company launched a diversified line of FDA and EPA-compliant disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and consumer use. These products build on the Company’s historical expertise in chemistry and leverage its infrastructure, personnel, competencies, supply chain, research and historic consumer market experience. The continued impact of COVID-19 and subsequent modification of social behavior in regard to the heightened attention to hygiene and sanitation provide a sustainable yet challenging market to expand the Company’s portfolio.
The DA segment’s largest customer base, the oil and gas midstream market, reduced gathering and infrastructure capital spending in 2020. In addition, the pandemic impacted the DA segment due to reduced access to facilities to complete new installations for a portion of the year. As a result, spending for the DA segment’s products and services has also been impacted by lower consumer demand. As a result, sales and cash flows were below target for the DA segment.
The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level. Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the Company and could result in additional impairments in the future. Future developments of the COVID-19 crisis are uncertain and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.

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While the full impact of the COVID-19 pandemic continues to evolve and the full extent of the impact is not yet known, the Company continues to closely monitor the effects of the pandemic on commodity demands, and on its customers, operations and employees. Any future developments and effects are highly uncertain and cannot be predicted, including:
•the scope and duration of the pandemic;
•effectiveness of vaccines;
•emergence of new coronavirus variants;
•further adverse revenue and net income effects; impairments;
•disruptions to the Company’s operations;
•third-party providers’ ability to support the Company’s operations;
•limitations on domestic and international travel for sales, system installations, and support;
•customer shutdowns of oil and gas exploration and production;
•the effectiveness of work from home arrangements;
•modifications to work schedules, including manufacturing shifts;
•impacts on employees from illness, school closures and other community response measures;
•any actions taken by governmental authorities and other third parties in response to the pandemic; and
•temporary closures of the Company’s facilities or the availabilityfacilities of citrus crops, the market conditions affectingits customers and suppliers.

The pandemic caused the Company could change rapidlyto alter its business working practices, including work schedules, manufacturing shifts, employee travel, work locations, meetings and materially. Should such adverse changesparticipation in events and conferences. In addition, the Company and most of its customers continued the practice of social distancing and work-from-home procedures, which have had, and may continue to have, an impact on the ability of employees and management of the Company to communicate and work efficiently. These practices are gradually changing with increased vaccination levels in the U.S. and the world. There is no certainty that these actions will mitigate risks posed by the virus to the Company’s workforce.
In response to market conditions occur, management believesand the anticipating ongoing volatility, the Company has accessreduced its cost structure in 2020 to adequate liquiditymeet anticipated market activity and reduce the Company’s break-even level. In the second half of 2020 the Company recorded additional impairment charges of goodwill and intangible assets as well as an increase to withstandthe provision of excess and obsolete inventory.
Outlook
The COVID-19 pandemic negatively impacted the U.S. and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets. While market prices for West Texas Intermediate and Brent crude oil rebounded from lows during the initial months of the pandemic in 2020 to exceed $50 per barrel during the first quarter of 2021 and $70 per barrel during the second quarter of 2021, many major integrated oil and gas companies and independent oil and gas companies have kept their 2021 budgets generally unchanged, though such budgets may change if crude oil prices increase. Uncertainty exists about the extent and the duration of the resulting industry contraction and consolidation. In addition, the oilfield services industry remains over supplied and the timing of returns to pre-pandemic pricing levels remains uncertain. While uncertainty remains around the extent and duration of the pandemic, there are positive indicators that the U.S. economy is recovering, including improvements in oil and gas demand, rising COVID-19 vaccination levels, and resumption of travel and business activities.
ESG solutions continue to be a focus for the Company as the energy industry is seeking to accelerate their focus on cleaner energy and sustainability. The impact of the actions of the new presidential administration and Congress on the economy and financial markets is uncertain in the current year and longer term. During his first months in office, the President signed many executive orders, including ones with implications for stakeholders in the energy industry, such as canceling the Keystone XL Pipeline and another for the U.S. to rejoin the Paris Agreement on climate change. The U.S. Department of Interior (“DOI”) issued an order in January, placing a 60-day freeze on agency permit approvals and pausing federal oil and gas leasing for a review of all existing leasing and permitting practices related to fossil fuel development on public lands and waters. In March 2021, the DOI allowed the suspension to expire. In addition, the President announced proposed plans to raise the corporate tax rate to help finance his proposed infrastructure plan. These and other potential actions by the new administration could have negative and/or positive impacts on the Company’s business and customers.
Amid the current environment with increased business commitments related to ESG, the Company’s products and services offer a significant benefit to businesses seeking to improve their ESG performance, including improving the safety, reliability and

27


efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.
The Company believes that an increase in the adoption of green specialty chemicals could benefit our business and reduce the impact of such changes while continuing to make strategic capital investmentsthe slow recovery from the 2020 lows in drilling and acquisitions, if opportunities arise. In addition, management believescompletions activity. The key sales focus of the Company is well-positionedgrowing market share by improving returns for current customers, rebuilding relationships with past customers and identifying new customers that could benefit from collaborative and innovative chemistry solutions. Additionally, the Company is focused on optimizing total cost of recovery per barrel of oil, reducing both financial cost and environmental risk associated with operations.
The disinfectants and surface cleaners industry is expanding, associated with the continued impact of the COVID-19 pandemic and the need for individuals, businesses, schools and governments to take advantageminimize the spread of significant increasesthe coronavirus, as well preparing for emerging variants. Industry growth is also anticipated due to the modification of social behaviors in demandregard to the heightened attention to hygiene and sanitation. In 2020, the Company launched a diversified line of EPA and FDA-compliant disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and consumer use. The Company believes this market provides an opportunity to expand the Company’s portfolio of chemistry products to meet the growing demand. The use of data and analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as predictive maintenance, advanced safety measures and reduced environmental impact of operations. The Company believes that data and analytics is an area for growth. Hence, in 2020, the Company acquired JP3 and formed the DA segment. Prior to and throughout the majority of 2020, the DA segment focused sales solely on North American markets; however, the segment is preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands of overseas installations.
The Company continues to develop technologies to ensure its ability to provide differentiated products should market conditions improve dramaticallyand services to its customers. The Company remains focused on partnering closely with its customers to create and implement specialty chemical products and compositional analyzers. Differentiated products and services are the result of the deployment of the organization’s technical capabilities and expertise in alignment with customer success. The Company believes the near term.

pursuit of new solutions to help make its customers successful will continue to position Flotek as a leader in advanced chemicals and technology.

The Company’s emphasis in 2021 is executing the plan established by the executive team to recover from the varied impacts of COVID-19 and grow the Company’s businesses. The CT segment is focused on marketing our products and services to new and existing customers, while expanding the disinfectants, surface cleaners, degreasers and solvents product line. The DA segment is enhancing its product offerings and customer service while accelerating the business development and sales effort in both the domestic and international markets. The Company does not anticipate a material increase in our maintenance capital spending year-over-year. In 2021, the Company is enhancing its focus on ESG and the responsible management of products and services through our Quality Assurance and Quality Control Program and Chemical Spill Prevention Program, adhering to ISO 9001:2015 standards.

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Consolidated 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
 $192,227
Cost of revenue57,718
 41,983
 169,016
 124,362
Gross profit21,740
 22,354
 75,573
 67,865
    Gross margin %27.4 % 34.7 % 30.9 % 35.3 %
Corporate general and administrative10,346
 10,302
 33,773
 30,398
Corporate general and administrative %13.0 % 16.0 % 13.8 % 15.8 %
Segment selling and administrative9,277
 9,775
 28,972
 26,879
    Segment selling and administrative %11.7 % 15.2 % 11.8 % 14.0 %
Depreciation and amortization2,540
 2,217
 7,464
 6,024
Research and innovation costs2,691
 2,327
 9,940
 6,323
(Gain) loss on disposal of long-lived assets(11) (14) 401
 (29)
Loss from operations(3,103) (2,253) (4,977) (1,730)
    Operating margin %(3.9)% (3.5)% (2.0)% (0.9)%
Interest and other expense, net(301) (559) (1,054) (1,630)
Loss before income taxes(3,404) (2,812) (6,031) (3,360)
Income tax (expense) benefit(17) 942
 746
 1,349
Loss from continuing operations(3,421) (1,870) (5,285) (2,011)
Income (loss) from discontinued operations, net of tax319
 (876) (13,621) (33,200)
Net loss$(3,102) $(2,746) $(18,906) $(35,211)
ConsolidatedResults of Operations: Three and NineSix Months Ended SeptemberJune 30, 2017,2021, Compared to the Three and NineSix Months Ended SeptemberJune 30, 20162020
Three months ended June 30,Six months ended June 30,
 2021202020212020
Revenue$9,165$8,880 $20,935 $28,296 
Operating expenses (excluding depreciation and amortization)12,110 11,632 25,911 34,473 
Operating expenses %132.1 %131.0 %123.8 %121.8 %
Corporate general and administrative costs2,868 5,395 7,229 9,888 
Corporate general and administrative %31.3 %60.8 %34.5 %34.9 %
Depreciation and amortization253 468 560 2,659 
Research and development1,466 1,638 3,008 4,193 
Gain on disposal of long-lived assets(71)(22)(69)(55)
Impairment of fixed assets and long-lived assets— — — 57,454 
Loss from operations(7,461)(10,231)(15,704)(80,316)
Operating margin %(81.4)%(115.2)%(75.0)%(283.8)%
PPP forgiveness881 — 881 — 
Gain on lease termination— 576 — 576 
Interest and other income (expense), net55 62 4 11 
Loss before income taxes(6,525)(9,593)(14,819)(79,729)
Income tax (expense) benefit(21)32 (27)6,201 
Net loss$(6,546)$(9,561)$(14,846)$(73,528)
Net loss % for continuing operations(71.4)%(107.7)%(70.9)%(259.9)%

Consolidated revenue for the three and nine months ended SeptemberJune 30, 2017,2021, increased $15.1$0.3 million, or 23.5%3.2%, and $52.4primarily due to the acquisition of JP3 in mid-May of the second quarter of 2020, which was partially offset by the loss of two major energy customers that were purchased by non-customers during the second quarter of 2021. Consolidated revenue for the six months ended, June 30, 2021, decreased $7.4 million, or 27.2%26.0%, respectively, versus the same periodsperiod of 2016. These increases in2020. First half 2020 revenues experienced less COVID-19 impact than first half 2021 results. Second quarter 2021 experienced a loss of revenue were driven by increased sales within the Energy Chemistry Technologies segment due to the increased oilfield activity beginning in the latter half of 2016.CT segment associated with two major customers changing ownership during the quarter, partially offset by full-quarter revenue in the second quarter 2021 for JP3.

Consolidated gross profitoperating expenses (excluding depreciation and amortization) for the three and nine months ended SeptemberJune 30, 2017, decreased $0.62021, increased $0.5 million, or 2.7%4.1%, and increased $7.7 million, or 11.4%, respectively, compared toversus the same periodsperiod of 2016. Gross margin decreased to 27.4%2020, and 30.9% for the three and nine months ended September 30, 2017, respectively, from 34.7% and 35.3% in the same periodsas a percentage of 2016,revenue, remained flat. The increase was primarily due to increased volumesan unfavorable product mix in the second quarter of 2021 versus second quarter of 2020. Consolidated operating expenses (excluding depreciation and amortization) for the six months ended June 30, 2021 decreased $8.6 million, or 24.8% versus the same period of 2020, and 2.0% as a percentage of revenue. The decrease in operating expenses for the first half of 2021 resulted from reduced cost of sales due to lower margin product sales activity during 2021 compared to 2020 associated with COVID-19 impacts and related declines in all segments.activity. The Company’s operating expenses benefited from actions taken in 2020. Actions taken to reduce operating expenses include reducing the Company’s facility footprint and improving operational efficiencies. These reduced costs were partially offset by new operating expenses for the DA segment acquired in the second quarter of 2020.

Corporate general and administrative (“CG&A”) expenses are those expenses not directly attributable to products sold or services provided. CG&A costs remained relatively flatfor the three and six months ended June 30, 2021, decreased $2.5 million, or 46.8%, and $2.7 million, or 26.9% versus the same period of 2020.CG&A costs declined as a result of lower compensation costs following a reduction in force, a one-time employee retention credit related to the CARES Act and a reduction in professional fees.
Depreciation and amortization expense decreased $0.2 million, or 45.9% and $2.1 million, or 78.9% for the three and six months ended June 30, 2021, versus the same period of 2020, primarily due to impairments of fixed and long-lived assets recorded in the first quarter of 2020.

29


Research and development costs decreased $0.2 million, or 10.5% and $1.1 million, or 28.3% for the three and six months ended June 30, 2021, versus the same period of 2020 due to lower personnel costs as a result of our reduction in workforce during the first quarter 2020.
Impairment of fixed and long-lived assets decreased due to the first quarter 2020 write-down of $54.7 million in the CT segment and a corporate-level write-down of $2.8 million. See Note 8, “Impairment of Fixed and Long-lived Assets, in Item 1, Financial Statements, of this Quarterly Report.” No impairments of fixed and long-lived assets occurred in the first half of 2021.
Loss from operations decreased $2.8 million, or 27.1%, for the three months ended SeptemberJune 30, 2017,2021 and increased $3.4$64.6 million, or 11.1%,80.4% for the ninesix months ended SeptemberJune 30, 2017,2021, versus the same periodsperiod in 2020. The loss from operations improvement is primarily a result of 2016. As a percentagethe $57.5 million impairment of revenue, CG&A decreased 3.0%fixed and 2.0% for the three and nine months ended September 30, 2017, respectively. The increase in CG&A costs was primarily due to costs associated with executive retirement, stock compensation expense, and information technology costs, partially offset by decreased legal expenses.
Segment selling 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 headcountlong-lived assets in the Energy Chemistry Technologiesfirst quarter of 2020 and Consumer and Industrial Chemistry Technologies sales and support staff for expansion and growthno impairments in new business and related higher sales and marketing expenses.
Depreciation and amortization expense increased $0.3 million, or 14.6%, and $1.4 million, or 23.9%, for the three and nine months ended September 30, 2017, respectively, versusfirst half of 2021. Additionally, the same periods of 2016, primarilydecrease in loss from operations is attributable to the completion and equippingforgiveness of the Global Research & Innovation CenterJP3 PPP loan for $0.8 million and a one-time employee retention credit to the CARES Act of $1.9 million, both recorded in August 2016, along with other improvements to manufacturing facilities.the second quarter of 2021.


Research and Innovation (“R&I”)The Company’s income tax expense increased $0.4 million, or 15.6%, and $3.6 million, or 57.2%, for the threesecond quarter of 2021 and nine months ended September 30, 2017, respectively, compared to the same periods of 2016. These increases in R&I are primarily attributable to increased personnel for new product development and Flotek’s commitment to remaining responsive to customer needs, increased demand, continued growth and refining of existing product lines, and the development of new chemistries which are expected to expand the Company’s intellectual property portfolio.
Interest and other expense decreased $0.3 million, or 46.2%, and $0.6 million, or 35.3%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016, primarily due to the repayment of the term loan in May 2017.
2020 was minimal. 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 million, yielding an effective tax benefit rate of 12.4%, for the three and nine months ended September 30, 2017, respectively, compared to income tax benefits of $0.9 million and $1.3 million, yielding effective tax benefit rates of 33.5% and 40.1%, for the comparable periods in 2016.
As part 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, 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 through August 2017. The Company recorded a net gain from discontinued operations of $0.3$6.2 million for the three months ended September 30, 2017, andfirst quarter of 2020, primarily as a result of the extended net operating loss from discontinued operations of $13.6 million forcarryback provisions included in the nine months ended September 30, 2017.CARES Act initially recorded in the first quarter 2020.
Results by Segment (in thousands):
Energy Chemistry Technologies (“ECT”)       
(dollars in thousands)Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue$61,167
 $45,030
 $187,807
 $133,094
Gross profit18,733
 18,180
 63,840
 54,609
Gross margin %30.6% 40.4% 34.0% 41.0%
Income from operations6,867
 6,196
 24,715
 21,793
Operating margin %11.2% 13.8% 13.2% 16.4%
ECTChemistry Technologies Results of Operations: Three and NineSix Months Ended SeptemberJune 30, 2017,2021, Compared to the Three and NineSix Months Ended SeptemberJune 30, 20162020
ECT
Three months ended June 30,Six months ended June 30,
2021202020212020
Revenue$7,688 $7,962 $17,990 $27,378 
Loss from operations(3,819)(3,596)(7,407)(66,257)
CT revenue for the three and ninesix months ended SeptemberJune 30, 2017, increased $16.12021, decreased $0.3 million, or 35.8%,3.4% and $54.7$9.4 million, or 41.1%34.3%, respectively, versus the same periods of 2016. CnF® sales revenues increased 28.7% (volumes increased 23.1%),2020. The decrease in revenue during the second quarter of 2021 compared to the three months ended September 30, 2016. Increased well completionsecond quarter of 2020 was driven by impacts from both the supply and the demand side. The COVID-19 pandemic negatively impacted economic activity byand reduced global demand for oil and gas, a key sector of our customer base. The Company’s domestic and international revenue for the first half of 2021 decreased as demand from major customers leadand smaller operators has not returned to the increased CnF® chemistry sales during the thirdpre-pandemic levels of first quarter of 2017. Quarterly non-CnF revenues rose approximately 49.8%, compared to the three months ended September 30, 2016, due to increased customer demand2020. In addition, revenue from two major customers was lost as a result of oilfield market conditions.consolidation in the Permian basin. CT also granted price concessions due to maintain and obtain market share.
Sequentially, revenues decreased $4.7 million, or 7.1%, versusLoss from operations for 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%,CT segment for the three and ninesix months ended SeptemberJune 30, 2017,2021, increased $0.2 million, or 6.2%, and decreased $58.9 million, or 88.8%, respectively versus the same periodsperiod of 2016. Gross margin decreased2020. The increase in loss from operations is due to 30.6%lower revenue and 34.0% forsignificantly lower expenses, primarily the threeresult of no impairments in the first half of 2021 versus impairment charges of fixed and nine months ended September 30, 2017, respectively, from 40.4% and 41.0%long-lived assets of $57.5 million in the same periodsperiod of 2016. The gross margin decreases over2020. Additionally, unfavorable product mix contributed to the periods were primarilyincreased loss from operations as compared to 2021. Secondly, expenses decreased due to product mix and higher raw material costs. Sequentially, gross profit decreased $4.1 million, or 17.9%, versus the secondfirst quarter of 2017.2020 including a $2.3 million terpene purchase commitment loss with no comparable activity in 2021. Personnel costs declined period over period by $1.0 million, which included first quarter 2020 severance costs of $0.6 million for reduction in force actions. Office costs and equipment and facilities costs decreased a combined $0.6 million period over period from the consolidation of the Company’s physical facilities and equipment rentals to align with activity.
Income from operations for the ECT segment increased $0.7 million, or 10.8%, and $2.9 million, or 13.4%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. These increases were primarily attributable to the increase 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 profit3,007
 4,174
 11,733
 13,256
Gross margin %16.4% 21.6% 20.7% 22.4%
Income from operations985
 2,433
 5,906
 8,508
Operating margin %5.4% 12.6% 10.4% 14.4%

CICT Data Analytics Results of Operations: Three and NineSix Months Ended Septemberended June 30, 2017, Compared to2021 and May 18 -June 30, 2020
Three months ended June 30,Period May 18- June 30,Six months ended June 30,Period May 18- June 30,
2021202020212020
Revenue1,477 918 $2,945 $918 
Loss from operations(773)(1,151)(1,067)(1,151)

30


On May 18, 2020, the ThreeCompany purchased JP3 and Nine Months Ended September 30, 2016
CICTformed the DA segment. Segment 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, partially offset by higher prices. Sequentially, quarterly revenues decreased $1.0 million, or 5.2%, versus the second quarter of 2017 due to reduced volumes.
CICT gross profit for the three and nine months ended September 30, 2017, decreased $1.2 million, or 28.0%, and2021 was $1.5 million or 11.5%, respectively, versuswhich remained flat from 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, and gross margins decreased to 16.4% from 17.0% in the secondfirst quarter of 2017 due to product mix and increased raw material costs.2021.
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 $0.2 million. These decreases are primarily attributable to product mix and increased raw material and indirect costs.
Discontinued Operations
During the fourth quarter of 2016, the Company classified the Drilling Technologies and Production Technologies segments as held for sale based on management’s intention to sell these businesses. By the end of August 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments. The Company’s historical financial statements have been revised to present the operating results of the Drilling Technologies and Production Technologies segments as discontinued operations. The information below is presented for informational purposes only.
Drilling Technologies       
(dollars in thousands)Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue$—
 $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)%


Production Technologies       
(dollars in thousands)Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue$—
 $2,145
 $4,002
 $6,034
Gross profit (loss)—
 105
 813
 201
Gross margin %—% 4.9 % 20.3 % 3.3 %
Loss from operations(64) (1,118) (1,290) (7,810)
Loss from operations - excluding impairment(64) (1,118) (1,290) (3,897)
Operating margin % - excluding impairment—% (52.1)% (32.2)% (64.6)%
Off-Balance Sheet Arrangements
There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2017, the Company was not involved in any unconsolidated SPEs.
The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors.
Critical Accounting Policies and Estimates
The Company’s Financial Statementsfinancial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).America. 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 ConditionsCondition 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 estimatespolicies, including goodwill and assumptions are based on historical experience and expected changes in the business environment; however, actual results may materially differ from the estimates.other intangible assets. There have been no significant changes in the Company’s critical accounting policies and estimates during the ninesix months ended SeptemberJune 30, 2017.2021.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2, — “Recent Accounting Pronouncements”Pronouncements,” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements arise fromrelate to the Company’s need to service debt, acquire and maintain equipment and fund working capital requirements, and when the opportunities arise, to make strategic acquisitions and repurchase Company stock.requirements. During the first ninesix months of 2017,2021, the Company funded capital requirements primarily with cash on hand and debt financing.hand.
The Company’s primary source of debt financing is its Credit Facility with PNC Bank. This Credit Facility contains provisions for a 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 SeptemberJune 30, 2017, the Company had $40.6 million in outstanding borrowings under the revolving debt portion of 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 12 — “Long-Term Debt and Credit Facility” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.
The Company believes it has access to adequate liquidity to fund its ongoing operations and capital expenditures. As of September 30, 2017,2021, the Company had available borrowing capacity under its revolving line of credit of $34.3 million and available cash of $4.9 million, resulting in total liquidity of $39.2 million. For the remainder of 2017, the Company plans to spend between $2.8 million and $4.8 million for committed and planned capital expenditures. The Company may pursue external financing to increase its liquidity position and/or fund acquisitions when strategic opportunities arise.
Any excess cash generated may be used to pay down the level of debt or retained for future use.
Net Debt
Net debt represents total debt less cash and cash equivalents of $27.8 million, as compared to $38.7 million at December 31, 2020. The Company recorded an operating loss for the six months ended June 30, 2021 and combinesrecorded $11.2 million of net cash used for operating activities and $0.3 million of net cash used for financing activities. Cash used in investing activities was minimal.
Liquidity
The effects of the COVID-19 pandemic and the volatility in oil prices during 2020 and the first half of 2021 materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. While the full impact and duration of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. See “COVID-19 Effects and Actions” for developments and possible effects.
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s indebtednesscash flows and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet its capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.
Accordingly, while the Company believes that its existing cash equivalentswill enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that could be usedthe Company’s existing cash on hand is not sufficient to repay that debt. Componentsfund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:
•Sale of net debt are as follows (in thousands):non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sale of excess inventory and/or raw materials;

31


 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)
•Entry into a borrowing facility with one or more lenders;
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash;
•Reducing professional advisory fees and headcount; and
•Raising equity either in the public markets or via a private placement offering.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms. For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in the Company’s Annual Report.
The Company expects capital spending to be less than $1.0 million in 2021.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
 Nine months ended September 30,
 2017 2016
Net cash provided by (used in) operating activities$1,178
 $(825)
Net cash provided by (used in) investing activities11,839
 (18,754)
Net cash (used in) provided by financing activities(13,039) 20,805
Net cash flows provided by (used in) discontinued operations13
 (8)
Effect of changes in exchange rates on cash and cash equivalents128
 48
Net increase in cash and cash equivalents$119
 $1,266
 Six months ended June 30,
 20212020
Net cash used in operating activities$(11,242)$(29,216)
Net cash provided (used in) by investing activities43 (16,424)
Net cash (used in) provided by financing activities(273)5,023 
Effect of changes in exchange rates on cash and cash equivalents(31)(31)
Net change in cash, cash equivalents and restricted cash$(11,503)$(40,648)
Operating Activities
Net cash provided by (used in)used in operating activities was $1.2$11.2 million and $(0.8)$29.2 million during the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. Consolidated net loss for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, totaled $5.3$6.5 million and $2.0$73.5 million, respectively.
During the ninesix months ended SeptemberJune 30, 2017, net2021, non-cash contributionsadjustments to net income totaled $12.2$1.8 million as compared to $62.1 million for the same period of 2020.
•For the six months ended June 30,2021, non-cash charges included $0.6 million for depreciation, which was lower than the six months ended June 30, 2020 due to asset impairments taken in 2020, and a $0.3 million charge related to the fair value of contingent consideration, stock based compensation of $1.8 million and JP3 PPP loan forgiveness of $0.9 million. Contributory
•For the six months ended June 30, 2020, contributory non-cash itemsadjustments consisted primarily of $9.5$57.5 million of impairment charges, which included a $30.2 million impairment of fixed assets, $19.9 million impairment of intangible assets and $7.4 million of impairment of right-of-use assets. In addition, non-cash charges included $2.7 million for depreciation and amortization, $9.7 million for stock-based compensation expense, $0.9 million for recognized incremental tax benefits related to the Company’s share based awards, and $0.4 million for net loss on sale of assets, partially offset by $8.3 million for changes to deferred income taxes.amortization.
During the ninesix months ended SeptemberJune 30, 2016, net non-cash contributions to net income totaled $10.8 million. Contributory non-cash items consisted primarily of $7.7 million for depreciation and amortization, $8.6 million for stock compensation expense, and $0.9 million for recognized incremental tax benefits related to the Company’s share based awards, partially offset by $6.3 million for changes to deferred income taxes.
During the nine months ended September 30, 2017,2021, changes in working capital used $5.7provided $1.8 million inof cash as compared to using $17.8 million for the same period of 2020.
•For the six months ended June 2021, the cash provided by working capital primarily resultingresulted from increasingroutine operations, including a reduction in accounts receivable and inventory by $20.9 million and decreasing accounts payable by $8.3of $2.0 million, partially offset by decreasing income taxesa decrease in accrued liabilities of $1.0 million.
•For the six months ended June 30, 2020, the use of cash in working capital primarily resulted from a reduction in accrued liabilities and accounts payable of $26.9 million, which included two one-time payments made: one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final post-closing working capital adjustment related to the 2019 sale of the Company’s Consumer and Industrial Chemistry Technologies segment. Decreases in accounts receivable, inventories and other current assets by $21.9 million and increasing accrued liabilities and interest payable by $1.6provided cash of $15.4 million.



32

During the nine months ended September 30, 2016, changes in working capital used $9.6 million in cash, primarily resulting from increasing accounts receivable, inventory, income taxes receivable, and other current assets by $24.3 million and decreasing income taxes payable by $1.8 million, partially offset by increasing accounts payable, accrued liabilities, and interest payable by $16.4 million.
Investing Activities
Net cash provided by investing activities was $11.8 million for the ninesix months ended SeptemberJune 30, 2017. Cash provided by investing activities primarily included $18.5 million of proceeds received from the sale of the Drilling Technologies and Production Technologies segments and $0.3 million of proceeds received from the sale of fixed assets, partially offset by $6.2 million for capital expenditures and $0.8 million for the purchase of various patents and other intangible assets.
2021 was not material. Net cash used in investing activities was $18.8$16.4 million for the ninesix months ended SeptemberJune 30, 2016.2020. Cash used in investing activities primarily included $10.6$26.3 million for capital expenditures and $8.2 million for thefrom purchase of IPI and various patents.JP3 offset by cash provided of $9.8 million due to the release of escrow amounts from the sales of Florida Chemical Company.
Financing Activities
Net cash used in financing activities was $13.0$0.3 million for the ninesix months ended SeptemberJune 30, 2017,2021, primarily due to using $7.8 million for repayments of debt, net of borrowings, purchases of treasurycommon stock forrelated to tax withholding purposes related to vesting of restricted stock awards of $1.5 million, and $4.2requirements. Net cash provided by financing activities was $5.0 million for the repurchase of common stock. Cash used in financing activities was partially offset by $0.5 million in proceedssix months ended June 30, 2020, primarily from the sale of common stock.proceeds received from the Paycheck Protection Program.
Net cash generated through financing activities was $20.8 millionOff-Balance Sheet Arrangements

There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the nine months ended Septemberpurpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2016, primarily due to receiving $30.6 million in proceeds from the sale of common stock, inclusive of $29.9 million, net of issuance costs, from the private placement of 2.5 million common shares on July 27, 2016. Cash generated through financing activities was partially offset by using $8.0 million for repayments of debt, net of borrowings, reductions in tax benefit related to stock-based compensation of $0.9 million, and purchases of treasury stock for tax withholding purposes related to vesting of restricted stock awards and the exercise of non-qualified stock options of $0.9 million.
On August 1, 2017,2021, the Company filed a registration statement on Form S-3 (the “Universal Shelf”) with the SECwas not involved in any unconsolidated SPEs.

The Company has not made any guarantees 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. Althoughcustomers or vendors nor does the Company has nohave any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a 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.
Contractual Obligations
Cash flows from operations are dependent on a variety of factors, including fluctuations in operating results, accounts receivable collections, inventory management, and the timing of payments for goods and services. Correspondingly, the impact of contractual obligationsor future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, andcapital expenditures, or capital resources that would be material to investors other than the long term terpene agreement discussed in future periods is analyzedNote 13 in conjunction with such factors.Part I, Item I – Financial Statements of this Quarterly Report.
Material contractual obligations consist of repayment of amounts borrowed on the Company’s Credit Facility with PNC Bank and payment of operating lease obligations. Contractual obligations at September 30, 2017, are as follows (in thousands):
 Payments Due by Period
 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
 $—
 $—
 $—
Operating lease obligations22,415
 2,679
 4,762
 3,966
 11,008
Total$63,004
 $43,268
 $4,762
 $3,966
 $11,008
(1) The borrowing is classified as current debt. The weighted-average interest rate is 3.86% at September 30, 2017.
Item  3. Quantitative and Qualitative Disclosures About Market Risk
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 “Quantitative and Qualitative Disclosures About Market Risk” 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 identified deficiencies in its internal control over financial reporting that represented material weaknesses as of December 31, 2020. Specifically, the Company’s disclosuremanagement determined that the Company did not, as of December 31, 2020, design and maintain effective internal controls over financial reporting. The material weaknesses relate to: (1) ineffective design and procedures are designedoperation of controls over nonrecurring transactions, including recognition of items and cash flow presentation relating to provide such reasonable assurance.disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations; (2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations; and (3) the ineffective design and operating effectiveness of the assessment of going concern.
The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in this Quarterly Report present fairly, in all material respects, the consolidated financial position, results of operations, comprehensive loss, stockholders’ equity, and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.
The Company’s management, with the participation of theincluding its principal executive officer and principal financial officers,officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as of September 30, 2017, as requireddefined by Rule 13a-15(e) and 15d-15(e) of the

33


Exchange Act. Based upon that evaluation, the principal executiveAct as of June 30, 2021, and principal financial officers havehas concluded that the Company’s disclosure controls and procedures were not effective as of SeptemberJune 30, 2017.2021, due to the material weaknesses in internal control over financial reporting described above.
Remediation Plan and Status
The Company has implemented a remediation plan to address the material weaknesses identified at December 31, 2020. Key elements of this ongoing plan include:
•Implementing monitoring controls over the review and validation of both tangible and intangible assets;
•Expanding controls over impairments of goodwill and long-lived assets;
•Enhancing specificity in the design and implementation of controls around nonrecurring, complex accounting activities, with the assistance of technical subject-matter experts;
•Implementing controls for forecasting and budgeting, to include additional process documentation and precision;
•Expanding monthly management review controls; and
•Enhancing existing control procedures around the quarterly going concern analysis process.
In 2021, the Company made a strategic decision to bring internal audit in-house and hired a director of internal audit to manage internal controls and the remediation plan. Through a structured process of testing and monitoring elements of the remediation plan, we expect the identified material weaknesses to be fully remediated by the end of 2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s system of internal control over financial reporting (identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) under the Exchange Act) during the three months ended SeptemberJune 30, 2017,2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



34

PART II - OTHER INFORMATION
Item  1. Legal Proceedings
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, against26, 2021, the Company and certain of its officers. The lawsuits were previously consolidated intoFlotek Chemistry, LLC (“Flotek Chemistry”), 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 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 behalfwholly-owned subsidiary of the Company, filed a lawsuit against certain of its officersArcher-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and its current directors.Joshua A. Snively in state court in Harris County, Texas. The lawsuits allege violations of law,lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty by Mr. Snively. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.
Subsequent to the lawsuit described above, on April 5, 2021, ADM and unjust enrichment againstFCC filed a lawsuit in the defendants.Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters. The Company views this lawsuit as a strategic response to the March 26, 2021 lawsuit filed by Flotek Chemistry and the Company in Texas.
The Company believes that, notwithstanding 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 stafftermination of the SEC stating thatsupply agreement, it has sufficient terpene inventory and alternate terpene supply sources to meet its requirements for the inquiry has been concluded and that the staffforeseeable future. The Company does not intendexpect that termination of the terpene supply agreement will have a material effect on its operations or ability to recommend an enforcement action against the Company.
Other Litigationmeet customer needs.
The Company is subject to other routine litigation and other claims that arise in the normal course of business. ManagementExcept as disclosed above, 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.

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


Item  2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock. Repurchases of the Company’s equity securities during the three months ended SeptemberJune 30, 2017,2021, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
April 1, 2021 to April 30, 202156,219 $1.75 
May 1, 2021 to May 31, 2021— — 
June 1, 2021 to June 30, 2021— — 
Total56,219 
(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 and (b) to satisfy payments required for common stock upon the exercise of stock options.

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, 20171,880
 $8.94
 —
 $54,420,042
August 1, 2017 to August 31, 2017377,203
 $6.07
 350,000
 $52,288,702
September 1, 2017 to September 30, 2017286,009
 $5.55
 280,000
 $50,733,939
Total665,092
 $5.85
 630,000
 

(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 30, 2017, the Company has not repurchased any of its common stock under this authorization and $50.0 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.

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Item  4. Mine Safety Disclosures
Not applicable.

Item  5. Other Information
None.




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Item  6. Exhibits
Exhibit

Number
Description of Exhibit
3.12.1
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
2.2
Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between the Company, JP3 Measurement, LLC, the Sellers party thereto, and John A. Cardwell, as Seller Representative) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 19, 2020).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
Certificate of Amendment to the Amended and Restated Bylaws, dated December 9, 2014Certificate of Incorporation of Flotek Industries, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on December 10, 2014)May 7, 2020).
3.4
Second Amended and Restated Bylaws, dated October 11, 2017as amended (incorporated by reference to Exhibit 3.13.4 to the Company’s Form 8-K10-K filed on October 17, 2017)March 16, 2021).
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).
4.210.1
Registration Rights Agreement, dated as of July 26, 2016, by and among the Company, Donald Bramblett, and Mark KieperFlotek Industries, Inc. 2018 Long-Term Incentive Plan (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 Agreement, dated effective as of June 7, 2017.
10.2*
Ninth Amendment to Amended and Restated Revolving Credit, Term Loan 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 (incorporated by reference toin Exhibit 10.1 to the Company’s Form 8-K filed on October 3, 2017).June 7, 2021)
10.4*
Employment Agreement, dated effective April 1, 2016, between the Company and Robert Bodnar.
10.5*
Confidential Severance and Release Agreement, dated effective October 12, 2017, between the Company and Robert Bodnar.
31.1
31.1*
Rule 13a-14(a) Certification of Principal Executive Officer.
31.2*
Rule 13a-14(a) Certification of Principal Financial Officer.
32.1
32.1**
Section 1350 Certification of Principal Executive Officer.
32.2**
Section 1350 Certification of Principal Financial Officer.
101.INS+XBRL Instance Document.
101.SCH101+*XBRL Schema Document.The following financial information from Flotek Industries, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Unaudited Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020, (ii) the Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended June 30, 2021 and 2020, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020, (v) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020, and (vi) Notes to Condensed Consolidated Financial Statements.
101.CAL104+Cover Page Interactive Data File (formatted as Inline XBRL Calculation Linkbase Document.and contained in Exhibit 101)
101.LAB*+XBRL Label Linkbase Document.Filed herewith.
101.PRE**+XBRL Presentation Linkbase Document.This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
101.DEF1+XBRL Definition Linkbase Document.
*Filed herewith.
**Furnished with this Form 10-Q, not filed.
+Filed electronically with this Form 10-Q.Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC.





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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. GIBSON, JR.
John W. Gibson, Jr.
President, Chief Executive Officer and
Chairman of the Board
FLOTEK INDUSTRIES, INC.
Date:
By:/s/    JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
Date:November 8, 2017August 9, 2021
 
FLOTEK INDUSTRIES, INC.
By:/s/ MICHAEL E. BORTON
Michael E. Borton
Chief Financial Officer
FLOTEK INDUSTRIES, INC.
Date:
By:/s/    H. RICHARD WALTON
H. Richard Walton
Executive Vice President and
Chief Financial Officer
Date:November 8, 2017August 9, 2021



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