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,
	2022		2021		2022		2021
Revenue:
Revenue from external customers	$	12,824	$	9,165	$	23,206	$	20,935
Revenue from related party	16,549		—		19,046		—
Total revenues	29,373		9,165		42,252		20,935
Cost of goods sold	31,678		10,775		45,036		22,853
Gross loss	(2,305)		(1,610)		(2,784)		(1,918)
Operating costs and expenses:
Selling, general, and administrative	7,431		4,203		12,310		10,287
Depreciation of property and equipment	182		253		377		560
Research and development	1,115		1,466		2,530		3,008
Gain on sale of property and equipment	(1,914)		(71)		(1,906)		(69)
Gain on lease termination	—		—		(584)		—
Change in fair value of contract consideration convertible notes payable	(17,158)		—		(13,266)		—
Total operating costs and expenses	(10,344)		5,851		(539)		13,786
Income (loss) from operations	8,039		(7,461)		(2,245)		(15,704)
Other income (expense):
Paycheck protection plan loan forgiveness	—		881		—		881
Interest expense	(1,597)		(17)		(2,265)		(35)
Other income (expense)	(104)		72		120		39
Total other income (expense)	(1,701)		936		(2,145)		885
Income (loss) before income taxes	6,338		(6,525)		(4,390)		(14,819)
Income tax expense	(98)		(21)		(94)		(27)
Net income (loss)	$	6,240	$	(6,546)	$	(4,484)	$	(14,846)










Income (loss) per common share:
Basic	$	0.08	$	(0.09)	$	(0.06)	$	(0.22)
Diluted	$	(0.05)	$	(0.09)	$	(0.12)	$	(0.22)










Weighted average common shares:
Weighted average common shares used in computing basic loss per common share	74,861		69,531		73,476		69,001
Weighted average common shares used in computing diluted loss per common share	124,335		69,531		107,086		69,001

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

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Revenue $ 79,458
$ 64,337
$ 244,589
$ 192,227
Cost of revenue 57,718
41,983
169,016
124,362
Gross profit 21,740
22,354
75,573
67,865
Expenses:
Corporate general and administrative 10,346
10,302
33,773
30,398
Segment selling and administrative 9,277
9,775
28,972
26,879
Depreciation and amortization 2,540
2,217
7,464
6,024
Research and development 2,691
2,327
9,940
6,323
(Gain) loss on disposal of long-lived assets (11 ) (14 ) 401
(29 )
Total expenses 24,843
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, net 273
(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 tax 319
(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 tax 0.01
(0.02 ) (0.24 ) (0.60 )
Basic earnings (loss) per common share $ (0.05 ) $ (0.05 ) $ (0.33 ) $ (0.64 )
Diluted earnings (loss) per common share:
Continuing operations $ (0.06 ) $ (0.03 ) $ (0.09 ) $ (0.04 )
Discontinued operations, net of tax 0.01
(0.02 ) (0.24 ) (0.60 )
Diluted earnings (loss) per common share $ (0.05 ) $ (0.05 ) $ (0.33 ) $ (0.64 )
Weighted average common shares:
Weighted average common shares used in computing basic earnings (loss) per common share 57,602
56,899
57,709
55,523
Weighted average common shares used in computing diluted earnings (loss) per common share 57,602
56,899
57,709
55,523

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Net income (loss)	$	6,240	$	(6,546)	$	(4,484)	$	(14,846)


Other comprehensive income (loss):
Foreign currency translation adjustment	87		(17)		95		32

Comprehensive income (loss)	$	6,327	$	(6,563)	$	(4,389)	$	(14,814)

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

FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six months ended June 30,
	2022		2021
Cash flows from operating activities:


Net loss	$	(4,484)	$	(14,846)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of contingent consideration	(134)		(302)
Change in fair value of contract consideration convertible notes payable	(13,266)		—
Amortization of convertible note issuance cost	414		—
Paid-in-kind interest expense	1,819		—
Amortization of contract assets	737		—
Depreciation and amortization	377		560
Provision for doubtful accounts, net of recoveries	87		(1)
Provision for excess and obsolete inventory	769		580
Gain on sale of property and equipment	(1,906)		(69)
Gain on lease termination	(584)		—
Non-cash lease expense	112		163
Stock compensation expense	1,591		1,750
Deferred income tax (benefit) expense	(5)		10
Paycheck protection plan loan forgiveness	—		(881)
Changes in current assets and liabilities:



Accounts receivable	(10,141)		1,995
Inventories	(4,521)		(222)
Income taxes receivable	7		207
Other current assets	(244)		(672)
Contract asset, net	(3,600)		—
Other long-term assets	12		541
Accounts payable	12,154		801
Accrued liabilities	(2,924)		(1,048)
Operating lease liabilities	(308)		—
Income taxes payable	99		168
Interest payable	24		24

Net cash used in operating activities	(23,915)		(11,242)
Cash flows from investing activities:
Capital expenditures	(5)		(31)
Proceeds from sale of assets	4,194		74




Net cash provided by investing activities	4,189		43
Cash flows from financing activities:






Proceeds from issuance of convertible notes	21,150		—
Payment of issuance costs of convertible notes	(1,084)		—
Proceeds from issuance of warrants	19,500		—
Payments to tax authorities for shares withheld from employees	(138)		(78)
Proceeds from issuance of stock	24		—

Purchase from sale of common stock	—		(166)
Payments for finance leases	(21)		(29)

Net cash provided by (used in) financing activities	39,431		(273)




Effect of changes in exchange rates on cash and cash equivalents	95		(31)
Net change in cash, cash equivalents and restricted cash	19,800		(11,503)
Cash and cash equivalents at the beginning of period	11,534		38,660
Restricted cash at the beginning of period	1,790		664
Cash and cash equivalents and restricted cash at beginning of period	13,324		39,324
Cash and cash equivalents at end of period	33,084		27,781
Restricted cash at the end of period	40		40
Cash, cash equivalents and restricted cash at end of period	$	33,124	$	27,821

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~STOCKHOLDERS’ EQUITY

Three and Six Months Ended June 30, 2022 and 2021

(~~in thousands)~~In thousands of U.S. dollars and shares)


Three months ended June 30, 2022
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, March 31, 2022	82,564	$	8	6,073	$	(34,159)	$	367,104	$	89	$	(319,938)	$	13,104


























Net income	—	—		—	—		—		—		6,240		6,240
Foreign currency translation adjustment	—	—		—	—		—		87		—		87

Stock issued under employee stock purchase plan	—	—		(19)	—		24		—		—		24



Restricted stock granted	339	—		—	—		—		—		—		—

Restricted stock forfeited	(3)	—		12	—		—		—		—		—

Stock compensation expense	—	—		—	—		852		—		—		852
Shares withheld to cover taxes	(15)	—		45	(79)		—		—		—		(79)
Issuance of stock warrants, net of transaction fee	—	—		—	—		9,930		—		—		9,930
Equity contribution	—	—		—	—		8,400		—		—		8,400

Balance, June 30, 2022	82,885	$	8	6,111	$	(34,238)	$	386,310	$	176	$	(313,698)	$	38,558


Six months ended June 30, 2022
	Common Stock			Treasury Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Total Stockholders’ Equity
	Shares Issued	Par Value		Shares		Cost
Balance, December 31, 2021	79,484	$	8	6,022		$	(34,100)		$	363,417		$	81		$	(309,214)		$	20,192
Net loss	—	—		—		—			—			—			(4,484)			(4,484)
Foreign currency translation adjustment	—	—		—		—			—			95			—			95

Stock issued under employee stock purchase plan	—	—		(19)		—			24			—			—			24



Restricted stock granted	626	—		—		—			—			—			—			—
Restricted stock forfeited	(3)	—		20		—			—			—			—			—

Stock compensation expense	—	—		—		—			1,591			—			—			1,591
Shares withheld to cover taxes	(15)	—		88		(138)			—			—			—			(138)
Issuance of stock warrants, net of transaction fee	—	—		—		—			9,930			—			—			9,930
Equity contribution									8,400									8,400
Conversion of notes to common stock	2,793	—		—		—			2,948			—			—			2,948

Balance, June 30, 2022	82,885	$	8	6,111	—	$	(34,238)	—	$	386,310	—	$	176	—	$	(313,698)	—	$	38,558

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


Three months ended June 30, 2021
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, March 31, 2021	78,276	$	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 granted	1,465	—		—	—		(7)		—		—		(7)

Restricted stock forfeited	(134)	—		25	54		(54)		—		—		—
Stock compensation expense	—	—		—	—		969		—		—		969
Shares withheld to cover taxes	—	—		56	(77)		(19)		—		—		(96)


Balance, June 30, 2021	79,607	$	8	5,628	$	(34,017)	$	361,424	$	13	$	(293,534)	$	33,894


Six months ended June 30, 2021
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, December 31, 2020	78,669	$	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 granted	1,684	—		—	—		—		—		—		—
Restricted stock forfeited	(133)	—		30	64		—		—		—		64

Stock compensation expense	—	—		—	—		1,750		—		—		1,750
Shares withheld to cover taxes	—	—		101	(100)		—		—		—		(100)




Other (see Note 13, “Stockholders’ Equity”)	(613)	—		—	—		—		—		—		—
Balance, June 30, 2021	79,607	$	8	5,628	$	(34,017)	$	361,424	$	13	$	(293,534)	$	33,894

~~FLOTEK INDUSTRIES, INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(in thousands)~~

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

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 amortization 9,091
7,380
Amortization of deferred financing costs 376
308
Loss (gain) on sale of assets 401
(29 )
Stock compensation expense 9,679
8,591
Deferred income tax benefit (8,290 ) (6,309 )
Reduction in tax benefit related to share-based awards 915
883
Changes in current assets and liabilities:
Accounts receivable, net (8,704 ) (7,572 )
Inventories (12,213 ) (2,959 )
Income taxes receivable 9,254
(13,687 )
Other current assets 12,649
(51 )
Accounts payable (8,262 ) 5,959
Accrued liabilities 1,561
10,434
Income taxes payable —
(1,807 )
Interest payable 6
45
Net cash provided by (used in) operating activities 1,178
(825 )
Cash flows from investing activities:
Capital expenditures (6,155 ) (10,618 )
Proceeds from sales of businesses 18,490
—
Proceeds from sale of assets 321
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 activities 11,839
(18,754 )
Cash flows from financing activities:
Repayments of indebtedness (9,833 ) (15,398 )
Borrowings on revolving credit facility 310,021
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 stock 530
30,610
Repurchase of common stock (4,174 ) —
Proceeds from exercise of stock options 21
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 activities 708
74
Net cash flows provided by (used in) discontinued operations 13
(8 )
Effect of changes in exchange rates on cash and cash equivalents 128
48
Net increase in cash and cash equivalents 119
1,266
Cash and cash equivalents at the beginning of period 4,823
2,208
Cash and cash equivalents at the end of period $ 4,942
$ 3,474

~~FLOTEK INDUSTRIES, INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EQUITY~~

~~(in thousands)~~

Common Stock Treasury Stock
Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)
Retained Earnings (Accumulated Deficit) Non-controlling Interests Total Equity

Shares
Issued

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and ~~Significant Accounting Policies~~

~~Organization and~~ Nature of Operations

General

Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial, commercial, and consumer markets improve their environmental performance.

The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to enhance the profitability of hydrocarbon producers and cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.

The Company’s Data Analytics (“DA”) segment aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics associated with their hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.

The Company’s 2 operating segments, CT and DA, are both supported by its Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 17, “Business Segment, Geographic and Major Customer Information.”

Sources and Uses of Liquidity

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. The availability of adequate capital is dependent on the Company’s operating cash flow, and the availability of and access to debt and equity financing. The Company has a ~~global, diversified, technology-driven company~~history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in the twelve months subsequent to the date of filing the consolidated financial statements. While we believe that ~~develops~~our cash and ~~supplies chemistries~~liquid assets will provide us with sufficient financial resources to fund operations and ~~services to~~meet our capital requirements and anticipated obligations as they become due in the next twelve months, uncertainty surrounding the stability and strength of the oil and gas ~~industries,~~markets or reduced spending by our customers could have a further negative impact on our liquidity.

On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $19.5 million (see Note 9, “Debt and ~~high value compounds~~Convertible Notes Payable”).

Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ~~companies that make food~~ProFrac Holdings LLC (see Note 9, “Debt and ~~beverages, cleaning~~Convertible Notes Payable”). Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products ~~cosmetics,~~comprising the minimum purchase obligation and ~~other products that are sold~~(ii) the actual purchased volume during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022. These Contract Consideration Convertible Notes Payable were issued in ~~consumer and industrial markets.~~

~~The Company’s oilfield business includes specialty chemistries and logistics which enable its customers~~addition to the Convertible Notes Payable purchased in ~~pursuing improved efficiencies~~cash by ProFrac Holdings, LLC as one of the investors in the ~~drilling~~PIPE.

On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement” and ~~completion~~collectively the “ProFrac Agreements”) upon issuance of ~~their wells.~~$50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”). The ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On June 21, 2022, the “Company issued prefunded warrants (the “Prefunded Warrants”) to ProFrac Holdings II, LLC in exchange for $19.5 million in cash (see Note 13, “Stockholders’ Equity”). The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company ~~also provides automated bulk material handling, loading facilities,~~at an exercise price equal to $0.0001 per share.

On April 18, 2022, the Company sold its Waller facility for $4.3 million of gross proceeds.

Based on our cash and ~~blending capabilities. The Company processes citrus oil~~liquid assets, including the transactions during the six months ended June 30, 2022 we believe that our cash and liquid assets will provide us with sufficient financial resources to ~~produce (1) high value compounds used~~fund operations and meet our capital requirements and anticipated obligations as ~~additives by companies~~they become due in the ~~flavors and fragrances markets and (2) environmentally friendly chemistries for use~~next twelve months. However, the Company cannot guarantee a sufficient level of cash flows in ~~numerous industries around~~ the ~~world, including~~future. The consolidated financial statements have been prepared assuming that the ~~oil and gas (“O&G”) industry.~~Company will continue as a going concern.

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~~Note 2 — Summary of ~~the Province of British Columbia on May 17, 1985. On October 23, 2001, Flotek changed its corporate domicile to the state of Delaware.~~Significant Accounting Policies

Basis of Presentation

The accompanying ~~Unaudited Condensed Consolidated Financial Statements and accompanying footnotes (collectively the “Financial Statements”)~~unaudited consolidated financial statements reflect all adjustments, in the opinion of management, necessary for fair ~~presentation~~statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The ~~Financial Statements,~~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 Statements~~financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2021 Annual ~~Report on Form 10-K for the fiscal year ended December 31, 2016 (“Annual Report”).~~Report. A copy of the 2021 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 ~~results~~information contained on the Company’s website does not form a part of ~~operations~~this Quarterly Report.

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

Cash Equivalents

Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.

Restricted Cash

The Company’s restricted cash is $40 thousand and $1.8 million as of June 30, 2022 and December 31, 2021, respectively.The Company’s restricted cash as of June 30, 2022 consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution. The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $1.75 million for amounts due under the terms of the legal settlement discussed in Note 12, “Commitments and Contingencies”.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate allowance for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for doubtful accounts charged to operating expense.

The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.

Contract Assets

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s contract assets represent consideration issued in the form of convertible notes to a related party customer in connection with the ProFrac Agreement and the Amended ProFrac Agreement discussed in Note 9, “Debt and Convertible Notes Payable” and other incremental costs related to obtaining the ProFrac Agreements. The contract assets are amortized over the term of the ProFrac Agreements based on forecasted revenues as goods are transferred to the customer and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations. The contract assets will be tested for recoverability and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the ~~three~~transfer of goods under the ProFrac Agreements less the direct costs that relate to providing those goods in the future.

Inventories

Inventories consist of raw materials and ~~nine months ended September 30, 2017,~~finished goods and are ~~not necessarily indicative~~stated at the lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the ~~results~~inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be ~~expected~~less than cost. Write-downs or write-offs of inventory are charged to cost of goods sold.

Property and equipment

Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including right-of-use assets (“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows:


Buildings and leasehold improvements			2-30 years
Machinery and equipment			7-10 years
Furniture and fixtures			3 years
Land improvements			20 years
Transportation equipment			2-5 years
Computer equipment and software			3-7 years

Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the ~~year ending December 31, 2017.~~

~~During~~carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the ~~fourth quarter~~carrying amount of ~~2016,~~an asset or asset group may not be recoverable, the Company ~~classified~~first compares the ~~Drilling Technologies~~carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and ~~Production Technologies segments~~eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.

Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell and depreciation is ceased. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.

Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable

The Company accounts for the Convertible Notes Payable issued to the PIPE investors for cash proceeds, which is discussed in Note 1, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.

The Company accounts for the Contract Consideration Convertible Notes Payable issued as consideration for the ProFrac Agreement, which are discussed in Note 1, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

Fair Value Measurements

The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on ~~management’s intention~~the nature of the inputs used to ~~sell these businesses.~~ determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 10, “Fair Value Measurements.”

Revenue Recognition

The Company recognizes revenue to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.

The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.

Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.

The Company applies several practical expedients including:

•Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less.

•The majority of the Company’s services are short-term in nature with a contract term of one year or less. As a result the Company does not disclose the transaction price allocated to remaining performance obligations.

•The Company’s ~~historical financial statements have been revised~~payment terms are short-term in nature with settlements of one year or less. As a result the Company does not adjust the promised amount of consideration for the effects of a significant financing component.

•In most service contracts, the Company has the right to ~~present~~consideration from a customer in an amount that corresponds directly with the ~~operating results~~value to the customer of the ~~Drilling Technologies~~Company’s performance obligations completed to date and ~~Production Technologies segments~~ as ~~discontinued operations. The results of operations of Drilling Technologies and Production Technologies are presented as “Loss from discontinued operations”~~such the Company recognizes revenue in the amount to which it has a right to invoice.

•The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold on our consolidated statement of ~~operations~~operations.

Foreign Currency Translation

Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.

Comprehensive Income (Loss)

Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes consolidated net income (loss) and foreign currency translation adjustments.

Research and Development Costs

Expenditures for research activities relating to product development and improvement are charged to expense as incurred.

Income Taxes

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the ~~related cash flows~~tax bases of ~~these segments has been reclassified~~assets and liabilities and are measured using the tax rates expected to ~~discontinued operations~~be in effect when the differences reverse. Deferred tax assets are also recognized for ~~all periods presented.~~operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the ~~Drilling Technologies~~results of operations in the period that includes the enactment date.

A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and ~~Production Technologies segments have been reclassified~~is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company’s policy is to ~~“Assets held~~record interest and penalties related to uncertain tax positions as income tax expense.

Stock-Based Compensation

Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.

Stock Warrants

The Company evaluated the Pre-funded Warrants in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to be classified within stockholders’ equity, and recorded the proceeds received for ~~sale” and “Liabilities held for sale”, respectively,~~the Pre-funded Warrants within additional paid in capital in the consolidated balance ~~sheets for all periods presented.~~sheets.

Use of Estimates

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

Significant items subject to estimates and assumptions include the useful lives of property and equipment; long lived asset impairment assessments; stock-based compensation expense; valuation allowances for accounts receivable, inventories, and deferred tax assets; recoverability and timing of the realization of contract assets; and fair value of liability classified Contract Consideration Convertible Notes Payable and equity classified Stock Warrants.

Reclassifications

Certain prior ~~period~~year amounts in the unaudited condensed consolidated statement of operations have been reclassified to conform to the current ~~period~~year presentation. In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross loss and eliminated the reporting of operating expenses (excluding depreciation and amortization) on the consolidated statements of operations to conform to customary industry reporting practices. In connection with this change in presentation, the Company reclassified selling costs of $1.3 million and $3.1 million to selling, general and administrative expenses which were previously reported in operating expenses for the three and six months ended June 30, 2021 respectively. The reclassifications and change in presentation of the statements of operations did not impact previously recorded income (loss) from operations, net income (loss). or stockholders’ equity.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~Note 2 —~~ Recent Accounting Pronouncements

~~Application~~Changes to U.S. GAAP are established by the 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

~~Effective~~ Issued and Adopted as of January 1, ~~2017, the Company adopted the accounting guidance~~2022

The FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in ~~Accounting Standards Update (“ASU”) No. 2015-11, “Simplifying the Measurement of Inventory~~.an Entity’s Own Equity.” This standard ~~requires management~~changes the accounting for convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to ~~measure inventory at~~be classified in equity and amends diluted earnings per share calculations for certain convertible debt instruments. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, with early adoption allowed for fiscal years beginning after December 15, 2020. The Company has adopted this standard as of January 1, 2022, and the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Implementation of this standardadoption did not have a material ~~effect~~impact on the Company’s condensed consolidated financial statements and related ~~disclosures.~~

~~Effective~~disclosures as of January 1, ~~2017,~~2022 as there were no convertible debt instruments outstanding as of that date but will have an impact on the ~~Company adopted~~future issuances of convertible instruments and contracts in the ~~accounting guidance in~~Company’s equity.

The FASB issued ASU No. ~~2015-17, “Balance Sheet Classification of Deferred Taxes~~.2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance.” This standard ~~eliminated~~provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The pronouncement is effective for fiscal years beginning after December 15, 2021.The Company adopted this standard as of January 1, 2022 and 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 standardadoption did not have a material ~~effect~~impact on the Company’s condensed 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~~Standards Issued But Not Adopted as of June 30, 2022

~~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 have~~of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.

Note 3 — 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 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 and discounts offered to customers for prompt payment.

The majority of the products 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 equipment at the time of sale. Revenue related to service and support is recognized on an over time basis. The Company bills sales on a monthly basis with payment terms customarily 30-60 days for domestic and 90-120 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.

Disaggregation of Revenue

The Company differentiates revenue based on whether the source of revenue is attributable to product sales (point-in-time revenue recognition) or service revenue (over-time revenue recognition).

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revenue disaggregated by revenue source is as follows (in thousands):

~~In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.~~


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenue:
Products (1)	$	28,588	$	8,444	$	40,787	$	19,524
Services	785		721		1,465		1,411
	$	29,373	$	9,165	$	42,252	$	20,935

(1) Product revenues for 2022 include sales to a related party as described in Note 16, “Related Party Transactions.” ~~This standard addresses eight specific cash flow issues~~

Arrangements with the objective of reducing the existing diversity in practice. The pronouncement is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Multiple Performance Obligations

The Company primarily sells chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, the Company offers various services associated to products sold which includes field services, installation, maintenance, and other functions. Services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. There may be additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is ~~currently evaluating~~recognized ratably over time throughout the ~~impact~~contract period. Additionally, the ~~pronouncement will have~~Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements and revenue not yet recognizable is reported under current and long term contract liabilities on the ~~consolidated financial statements~~balance sheet. Subscription-type arrangements were not a material revenue stream in the three and ~~related disclosures.~~six months ended June 30, 2022 and 2021.

Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract assets associated with incomplete performance obligations are not material.

Note 4 - Contract Assets

Contract assets are as follows (in thousands):



	June 30, 2022		December 31, 2021
Contract assets	83,060		—
Less accumulated amortization	(737)		—
Contract assets, (net)	$	82,323	$	—

In ~~January 2017,~~connection with entering into the ~~FASB issued ASU No. 2017-01, “Clarifying~~ProFrac Agreements on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable”, we recognized contract assets of $10 million and $69.5 million, respectively, and associated fees of $3.6 million, representing the ~~Definition~~excess consideration to be given over the three and ten year terms of ~~a Business.” This standard provides additional guidance~~the contracts over the fair value of the convertible notes we issued. The value to be assigned to the contract asset was estimated based on ~~whether an integrated set~~forecasted volumes and contractual pricing in the agreements. As of June 30, 2022, $76.1 million of the contract assets ~~and activities constitutes a business. The pronouncement~~ is ~~effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted in specific instances. The Company is currently evaluating~~classified as long term based upon our estimate of 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~~forecasted revenues from the ~~goodwill impairment test. An entity~~ProFrac agreements which will ~~now recognize an impairment charge for~~not be realized within the ~~amount by which~~first twelve months of the ~~carrying amount exceeds~~ProFrac Agreements. The Company’s estimate of the ~~reporting unit’s fair value. The pronouncement~~timing of the future contract revenues 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~~evaluated on a quarterly basis throughout the ~~impact the pronouncement will have on the consolidated financial statements and related disclosures.~~

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

~~Note 3 — Discontinued Operations~~contract term.

During the ~~fourth quarter 2016,~~three and six months ended June 30, 2022. the Company ~~initiated~~recognized $0.7 million of contract assets amortization which is presented as a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. The Company executed a plan to sell or otherwise disposereduction of the ~~Drilling Technologies and Production Technologies segments. An investment banking advisory services firm was engaged and actively marketed these segments.~~

~~The Company met all of the criteria to classify the Drilling Technologies and Production Technologies segments’ assets and liabilities as held for sale~~transaction price included in the ~~fourth quarter 2016. Effective December 31, 2016,~~related party revenue in the ~~Company classified~~consolidated statement of operations. The below table reflects our estimated amortization per year (in thousands) based on our current forecasted revenues from the ~~assets, liabilities, and results of operations for these two segments as “Discontinued Operations” for all periods presented.~~

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

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

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Years ending December 31,	Amortization
2022 (excluding the six months ended June 30, 2022)	$	2,655
2023	7,922
2024	8,696
2025	8,696
2026	8,696
Thereafter through May 2032	45,658
Total contract assets	$	82,323

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

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

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

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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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

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.

~~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 equipment 14,642
Intangible assets other than goodwill 9,227
Production Technologies:
Inventories 3,913
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 flow information is as follows (in thousands):~~

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

~~Note 7 — Revenue~~

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

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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Note 8~~ — Inventories

Inventories are as follows (in thousands):



	June 30, 2022		December 31, 2021
Raw materials	$	7,807	$	5,610
Finished goods	15,124		13,985
Inventories	22,931		19,595
Less reserve for excess and obsolete inventory	(9,682)		(10,141)
Inventories, net	$	13,249	$	9,454

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

The provision recorded in the three months ended June 30, 2022 and 2021 was $0.4 million and $0.1 million for the CT segment and $49 thousand and $0.1 million for the DA segment, respectively. The provision recorded in the six months ended June 30, 2022 and 2021 was $0.7 million and $0.4 million for the CT segment and $49 thousand and $0.1 million for the DA segment, respectively.

Note 96 — Property and Equipment

Property and equipment are as follows (in thousands):



	June 30, 2022		December 31, 2021
Land	$	886	$	886
Land improvements	520		520
Buildings and leasehold improvements	5,356		5,473
Machinery and equipment	6,686		6,843
Furniture and fixtures	545		620
Transportation equipment	878		878
Computer equipment and software	1,175		1,176
Property and equipment	16,046		16,396
Less accumulated depreciation	(11,227)		(11,100)
Property and equipment, net	$	4,819	$	5,296

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

Depreciation expense ~~including expense recorded in cost of revenue,~~ totaled ~~$2.4~~$0.2 million and ~~$2.1~~$0.3 million for the three months ended ~~September~~June 30, ~~2017~~2022 and 2021, and ~~2016, respectively, and $7.0~~$0.4 million and ~~$5.3~~$0.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~ 2021, respectively.

~~During~~In the ~~three~~first quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas in its current condition and ~~nine months ended September~~as a result the associated assets in the amount of $0.5 million are classified as held for sale as of June 30, ~~2017~~2022 and ~~2016, no impairments were recognized related to property~~December 31, 2021. The company also classified $2.3 million for the Waller facility as held for sale as of December 2021, which was sold on April 18, 2022 (See Note 1, “Organization and ~~equipment.~~Nature of Operations”.

Note 107 — ~~Goodwill~~Leases

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

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $40 thousand per month for sixty-four months. Rental income recognized during the three and six months ended June 30, 2022 was nil and $121 thousand, respectively, and was included in other income in the consolidated statement of operations. As discussed in Note 1, “Organization and Nature of Operations” this facility was sold on April 18, 2022 and the lease agreement between the tenant and the Company terminated.

~~Note 11 — Other Intangible Assets~~In August 2021, the Company entered into a five-year triple net operating lease agreement to lease its warehouse facility in Monahans, Texas, for $20 thousand per month, and the tenant occupied the warehouse facility in September 2021. Rental income recognized during the three and six months ended June 30, 2022 was $66 thousand, and $131 thousand, respectively and was included in other income in the consolidated statement of operations.

~~Other intangible assets~~The components of lease expense and supplemental cash flow information are as follows (in thousands):


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Operating lease expense	$	220	$	250	$	448	$	488
Finance lease expense:
Amortization of right-of-use assets	4		4		8		7
Interest on lease liabilities	3		3		6		6
Total finance lease expense	7		7		14		13
Short-term lease expense	79		61		203		134



Total lease expense	$	306	$	318	$	665	$	635

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases	$	350	$	394	$	726	$	727
Operating cash flows from finance leases	10		43		20		53
Financing cash flows from finance leases	3		3		6		29

Maturities of lease liabilities as of June 30, 2022 are as follows (in thousands):


Years ending December 31,	Operating Leases		Finance Leases
2022 (excluding the six months ended June 30, 2022)	$	519	$	19
2023	1,221		39
2024	1,247		21
2025	1,274		—
2026	1,302		—
Thereafter	4,782		—
Total lease payments	$	10,345	$	79
Less: Interest	(3,014)		(7)
Present value of lease liabilities	$	7,331	$	72

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

~~Finite-lived intangible assets acquired are amortized on a straight-line basis over two~~Supplemental balance sheet information related 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~~leases is as follows (in thousands):


	June 30, 2022			December 31, 2021
Operating Leases
Operating lease right-of-use assets	$	1,771		$	2,041

Current portion of operating lease liabilities	636			602
Long-term operating lease liabilities	6,695			7,779
Total operating lease liabilities	$	7,331		$	8,381

Finance Leases
Property and equipment	$	147		$	147
Accumulated depreciation	(40)			(33)
Property and equipment, net	$	107		$	114

Current portion of finance lease liabilities	$	34		$	41
Long-term finance lease liabilities	38			53
Total finance lease liabilities	$	72		$	94

Weighted Average Remaining Lease Term
Operating leases	9.4 years			9.1 years
Finance leases	3.1 years			2.9 years

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

Note 8 — Accrued Liabilities

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

~~Credit Facility~~



	June 30, 2022		December 31, 2021
Severance costs	$	2,595	$	2,581
Loss on purchase commitments	—		1,750
Payroll and benefits	998		1,054
Legal costs	1,108		1,013
Contingent liability for earn-out provision	474		608
Deferred revenue, current	368		528
Taxes other than income taxes	852		241
Other	720		1,221
Total current accrued liabilities	$	7,115	$	8,996

~~On May 10, 2013,~~

Note 9 — Debt and Convertible Notes Payable

Long Term Debt

In April 2020, the Company ~~and certain of its subsidiaries~~received a $4.8 million loan (the ~~“Borrowers”~~“Flotek PPP loan”) ~~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~~Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and ~~other corporate purposes. The Credit Facility, as amended, continues~~Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in ~~effect until~~ May ~~10, 2022. Under terms of the Credit Facility, as amended,~~2020, the Company ~~has total borrowing availability under~~assumed 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~~PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek. The PPP loans had a fixed interest rate of 1% and originally a two-year term, maturing in April and May 2022, respectively. No payments of principal or interest were required 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 thethree or six months ended June 30, ~~2017,~~2022 and 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 were 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 was not ~~greater than 5.50~~significantly detrimental to ~~1.10~~the business. The forgiveness of the loans is dependent on the Company having initially qualified for the loans and ~~reduces~~qualifying for the forgiveness of such loans based on our past and future adherence to ~~not greater than 3.00~~the forgiveness criteria. The PPP loans are subject to ~~1.00 as~~any new guidance and new requirements released by the Department of ~~September 30, 2018,~~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.

During the second quarter of 2021, the Company applied for forgiveness of the JP3 PPP loan with the SBA. In June 2021, the Company received notice from the SBA that the JP3 PPP loan and ~~for each fiscal~~accrued interest were fully forgiven. Accordingly, during the second quarter ~~thereafter. The annual limit on capital expenditures~~of 2021, the Company recorded $0.9 million 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~~of principal and ~~preferred stock.~~

~~Beginning~~accrued interest forgiven associated 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~~JP3 PPP loan in other income on the ~~outstanding balance within 60 days~~consolidated statement of operations.

In October 2021, the ~~fiscal year end.~~Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025.

~~Each~~

The Company has submitted to the SBA for forgiveness 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 Flotek PPP loan but as of the date of this filing, the Company has not received a forgiveness notice. If the loan is not forgiven, monthly payments will be due over the remaining term of the loan upon notice that it will not be forgiven. Denial of the forgiveness of the Flotek PPP loan will negatively impact the Company’s ~~domestic accounts receivable~~liquidity as discussed in Note 1, “Organization and ~~inventory.~~Nature of Operations”.

~~At September 30, 2017, eligible accounts receivable~~

Long-term debt, including current portion, assuming forgiveness is not obtained, is as follows (in thousands):


	June 30, 2022		December 31, 2021
Flotek PPP loan	$	4,788	$	4,788
Less current maturities	(1,690)		(1,436)
Total long-term debt, net of current portion	$	3,098	$	3,352

Convertible Notes Payable

On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE transaction, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $19.5 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and ~~inventory securing~~ the ~~revolving credit facility provided total borrowing capacity~~D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate 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%10% per annum, onhave a maturity of one year, and are converted into common stock of Flotek (a) at the holder's option at any ~~unused amount under~~time prior to maturity, at a price of $1.088125 per share, (b) at Flotek's option, if the ~~commitment based on daily averages. At September~~volume-weighted average trading price of Flotek's common stock equals or exceeds $2.50 for 20 trading days during a 30 ~~2017, $40.6~~consecutive trading day period, or (c) at maturity, at a price of $0.8705. On March 21, 2022, $3.0 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~~Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the ~~subjective acceleration clause.~~

~~(b) Term Loan~~

~~The amount borrowed under the term loan was reset to $10~~holder’s option into approximately 2.8 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~~stock.

As of June 30, 2022, the ~~diluted loss per share calculations were 1.3~~remaining Convertible Notes Payable are recorded at carrying value of $18.3 million, ~~restricted stock units for~~including accrued paid-in-kind interest of $0.8 million, and net of unamortized issuance costs of $0.6 million The estimated fair value of the ~~three and nine months ended September~~Convertible Notes Payable at June 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.~~2022 was $21.1 million.

ProFrac Agreement Contract Consideration Convertible Notes Payable

FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE transaction.

~~Basic~~

The ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments, and ~~diluted earnings (loss) per common share~~were initially recorded at fair value of $10.0 million on the issuance date and remeasured to fair value of $11.7 million as of June 30, 2022 which includes payment-in-kind interest of $0.4 million. The fair value adjustment was a $2.4 million decrease and a $1.7 million increase in the three and six months ended June 30, 2022, respectively. See Note 10, “Fair Value Measurements”.

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable

On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”). The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable may be converted at any time prior to the maturity date, which will be one year from the date of issuance under the same stock conversion terms as the Convertible Notes Payable issued in the PIPE transaction.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as ~~follows (in thousands, except per share data):~~liability classified convertible instruments, and were initially recorded at fair value of $69.5 million on the issuance date and remeasured to fair value of $55.6 million as of June 30, 2022 which includes payment-in-kind interest of $0.6 million. The fair value adjustment was a $13.9 million decrease in the three and six months ended June 30, 2022. See Note 10, “Fair Value Measurements”.

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

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

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

Note 1410 — Fair Value Measurements

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

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

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

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

Fair Value of Other Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable ~~and accrued expenses,~~ approximate fair value due to the short-term nature of these accounts. The ~~Company had no cash equivalents at September~~carrying amount of the Flotek PPP loan approximates its fair value as of June 30, ~~2017 or~~2022 and December 31, ~~2016.~~

~~The carrying value and estimated fair value of the Company’s long-term debt are as follows (in thousands):~~2021.

September 30, 2017 December 31, 2016

Carrying
Value

Fair
Value

Carrying
Value

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

~~The carrying value of the term loan and borrowings under the revolving credit facility approximate their fair value because the interest rates are variable.~~21

FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):


							June 30,								December 31,
	Level 1		Level 2		Level 3		2022		Level 1		Level 2		Level 3		2021
Contingent earnout consideration	$	—	$	—	$	474	$	474	$	—	$	—	$	608	$	608
ProFrac Agreement contract consideration convertible notes	$	—	$	—	11,670		$	11,670	$	—	$	—	$	—	$	—
Amended ProFrac Agreement contract consideration convertible notes	$	—	$	—	55,550		$	55,550	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	67,694	$	67,694	$	—	$	—	$	608	$	608

Contingent Earnout Consideration Key Inputs

The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of June 30, 2022 and December 31, 2021. The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.

The key inputs into the Monte Carlo simulation used to estimate the fair value the earn-out provision were as follows:


	June 30, 2022	December 31, 2021
Risk-free interest rate	2.99%	1.02%
Expected volatility	90.0%	90.0%
Term until liquidation (years)	2.88	3.38
Stock price	$0.99	$1.13
Discount rate	10.77%	6.71%

ProFrac Agreement Contract Consideration Notes Payable Key Inputs

The ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $10.0 million on February 2, 2022. The ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement due to the use of a quoted price for a similar liability, and classified as Level 3 as of June 30, 2022 due to the use of unobservable inputs. The estimated value of the ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.

The key inputs into the Monte Carlo simulation used to estimate the fair value the ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of June 30, 2022 were as follows:

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


			June 30, 2022
Risk-free interest rate			2.51%
Expected volatility			90.0%
Term until liquidation (years)			0.60
Stock price			$0.99
Discount rate			10.92%

The valuation of the ProFrac Agreement Contract Consideration Convertible Notes Payable was $11.7 million as of June 30, 2022

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs

On May 17, 2022, the Company measured the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a Monte Carlo simulation at an estimated fair value of $69.5 million. The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.

The key inputs into the Monte Carlo simulation used to estimate the fair value the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, on the issuance date of May 17, 2022, and as of as of June 30, 2022 were as follows:


	May 17, 2022	June 30, 2022
Risk-free interest rate	2.16%	2.80%
Expected volatility	90.0%	90.0%
Term until liquidation (years)	1.00	0.88
Stock price	$1.29	$0.99
Discount rate	8.40%	10.97%

The value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was $55.6 million.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets, including property and equipment ~~goodwill,~~ and ~~other intangible~~operating lease right-of-use assets, are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. ~~No impairments~~

Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company estimated the fair value of ~~any~~the remaining stock performance earn-out provision as of ~~these~~June 30, 2022 and 2021 and adjusted the estimated fair value of the contingent liability to $0.5 million and $1.1 million, respectively. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in cost of goods sold.

The Company estimated the initial fair value of $10.0 million of the ProFrac Agreement Contract Consideration Convertible Notes Payable on February 2, 2022, by reference to the cash purchase price paid by third party investors for equivalent notes issued simultaneously by the Company. The Company estimated the fair value of the additional $69.5 million of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on the issuance date of May 17, 2022 using a Monte Carlo simulation. The Company adjusted the estimated fair value of the Contract Consideration Convertible Notes Payable to $55.6 million as of June 30, 2022.

The following table presents the changes in the assets ~~were recognized during the three~~ and ~~nine months ended September 30, 2017 and 2016.~~liabilities measured at fair value on a recurring basis classified as Level 3 (in thousands):

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Balance - beginning of period	$	14,752	$	1,081	$	608	$	1,416
Transfer of ProFrac Agreement contract consideration convertible notes payable from Level 2	—		—		10,000		—
Issuance of Amended ProFrac Agreement contract consideration convertible notes payable	69,460		—		69,460		—
Increase in principle of ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	257		—		415		—
Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	611		—		611		—
Change in fair value of contingent earnout consideration	(228)		34		(134)		(301)
Change in fair value of ProFrac Agreement contract consideration convertible notes payable	(2,637)		—		1,255		—
Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable	(14,521)		—		(14,521)		—


Balance - end of period	$	67,694	$	1,115	$	67,694	$	1,115

Note 1511 — 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,
	2022		2021		2022		2021
U.S. federal statutory tax rate	21	%	21	%	21	%	21	%
State income taxes, net of federal benefit	—		(0.3)		0.1		(0.2)
Non-U.S. income taxed at different rates	3.8		(0.1)		(1.9)		0.3
Increase (reduction) in tax benefit related to stock-based awards	3.1		2.2		(2.0)		1.2
Non-deductible expenses	(0.4)		3.6		0.1		1.1
Increase in valuation allowance	(27.5)		(26.5)		(17.0)		(23.6)
Tax settlement	3.8		—		(2.2)		—
Effective income tax rate	3.8	%	(0.1)	%	(1.9)	%	(0.2)	%

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 — Commitments and Contingencies

Litigation

The Company is subject to routine litigation and other claims that arise in the effective tax rate during the three and nine months ended September 30, 2017, included the Company implementing ASU No. 2016-09 which requires accounting for excess tax benefits and tax deficiencies relatednormal course of business. Except as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to ~~stock-based awards as discrete items in the period in which they occur.~~

In January 2017, the Internal Revenue Service notified the Company 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 not have a material effect on the Company’s financial position, results of operations or liquidity.

Terpene Supply Agreement

On March 26, 2021, Flotek Industries, Inc. 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 (“FCC”) and other parties in state court in Harris County, Texas. The lawsuit claimed damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty.

On April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters.

On October 29, 2021, the Company reached agreement with all parties resolving all claims between the parties (“the ADM Settlement”) that resulted in the termination of the terpene supply agreement and a settlement payment of $1.75 million due from Flotek. The one-time payment of $1.75 million from Flotek to ADM was paid on January 3, 2022 and was included as restricted cash on the consolidated balance sheet as of December 31, 2021.

Former CEO Matter

During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste. Flotek’s board engaged a third party to review the findings of the investigation. After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.

Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any outcome cannot reasonably be predicted.

Other Commitments and Contingencies

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.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1613 — ~~Common Stock~~Stockholders’ Equity

~~The Company’s Certificate of Incorporation, as amended November 9, 2009, authorizes~~On June 21, 2022, the Company issued the Prefunded Warrants to ~~issue up~~ProFrac Holdings II, LLC in exchange for $11.1 million in cash (see Note 1, “Organization and Nature of Operations”) and a cash equity contribution of $8.4 million, for a total cash infusion of $19.5 million.The Prefunded Warrants will permit ProFrac Holdings II, LLC to ~~80 million~~purchase 13,104,839 shares of common stock ~~par value~~ ~~$0.0001~~of the Company at an exercise price equal to $0.0001 per share, ~~and~~ ~~100,000~~ ~~shares of one or more series of preferred stock, par value~~ ~~$0.0001~~ ~~per share.~~

~~A reconciliation of changes in common shares issued during~~representing a 20% premium to the ~~nine months ended September 30, 2017 is as follows:~~



~~Shares issued at December 31, 2016~~	~~59,684,669~~
~~Issued as restricted stock award grants~~	~~273,829~~
~~Issued upon exercise of stock options~~	~~663,288~~
~~Shares issued at September 30, 2017~~	~~60,621,786~~

~~Stock Repurchase Program~~

~~In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million~~30-day volume average price of the Company’s common ~~stock. Repurchases~~stock at the close of business on the day prior to the date of the issuance of the Prefunded Warrants. The Prefunded Warrants, net of transaction fees of $1.1 million, and the equity contribution from ProFrac are included in additional paid-in capital as of June 30, 2022.

ProFrac Holdings and its affiliates may ~~be made~~not receive any voting or consent rights in respect of the ~~open market~~Prefunded Warrants or ~~through privately negotiated transactions. During~~ the ~~three months ended September 30, 2017,~~underlying shares unless and until (i) the Company ~~repurchased 630,000 shares~~has obtained approval from a majority of its ~~outstanding common stock on~~shareholders excluding ProFrac Holdings and its affiliates and (ii) ProFrac Holdings has paid an additional $4.5 million to the ~~open market at a cost~~Company. The additional $4.5 million will be accounted for as equity contribution when received.

On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of $3.7 million, inclusive of transaction costs, or an average price of $5.85 per share. During the nine months ended September 30, 2017, the Company repurchased 680,000 shares of its outstanding common stock on the open market at a cost of $4.2 million, inclusive of transaction costs, or an average price of $6.14 per share. During the three and nine months ended September 30, 2016, the Company did not repurchase any shares of its outstanding common stock.

~~In June 2015,~~ the Company’s ~~Board~~directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $3.0 million plus $39 thousand of ~~Directors authorized the repurchase of up to an additional $50 million~~accrued interest, were converted into 2,793,030 shares of the Company’s common stock. ~~Repurchases may be made~~

During the first quarter 2021, the Company identified 0.6 million shares that were improperly included in the ~~open market or through privately negotiated transactions. Through September 30, 2017,~~December 31, 2020 issued share count, and the Company ~~has~~adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not ~~repurchased any~~material to the June 30, 2021 consolidated financial statements or basic and diluted earnings per share.

Note 14 — Earnings (Loss) Per Share

Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of ~~its~~common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing the adjusted net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and convertible notes payable and settlement of restricted stock units. The dilutive effect of non-vested stock issued under ~~this authorization.~~share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the prefunded stock warrants are computed using the treasury stock method. The dilutive effect of the Convertible Notes is computed using the if‑converted method in accordance with ASU 2020-06, which was adopted by the Company on January 1, 2022 (see Note 2, “Summary of Significant Accounting Policies”).

The calculation of the basic and diluted EPS is as follows (in thousands):


	Three months ended June 30,		Six months ended June 30,
	2022			2022
Numerator:
Net income (loss) for basic earnings per share	$	6,240		$	(4,484)
Paid-in-Kind interest expense on convertible notes payable, net of tax	1,028			1,402
Change in fair value of contract consideration convertible notes payable , net of tax	(13,229)			(10,228)
Adjusted net (loss) for dilutive earnings per share	$	(5,961)		$	(13,310)

Denominator:
Basic weighted average shares outstanding	74,861			73,476
Dilutive effect of convertible notes payable	49,474			33,610
Diluted weighted average shares outstanding	124,335			107,086

Basic earnings (loss) per share	0.08			(0.06)
Diluted loss per share	(0.05)			(0.12)

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The adjustments to net income (loss) in the numerator are net of estimated tax at 22.9%. For the three and six months ended June 30, 2022 weighted average shares for employee stock awards of 692,494 and 662,230, respectively, and weighted average shares for the prefunded stock warrants of 976,177 and 490,785, respectively, were not included in the dilution calculation since including them would have an anti-dilutive effect.

For the three and six months ended June 30, 2021 weighted average shares for employee stock awards of 1,127,080 and 1,344,233, respectively. were not included in the calculation of diluted loss per share since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.

Note 15 — Supplemental Cash Flow Information

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


	Six months ended June 30,
	2022		2021







Supplemental cash flow information:
Interest paid	$	7	$	11
Income taxes received	—		(351)
Supplemental non-cash activities:
Employee retention credit	—		1,164
JP3 PPP loan forgiveness	—		881
Non cash financing and investing activities:
Issuance of convertible notes payable as consideration for ProFrac Agreements	79,460		—
Conversion of convertible notes payable to common stock	2,949		—
Issuance cost of stock warrants included in accrued accounts payable	1,170		—

Note 16— 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 by Mr. Chisholm to the Company for the IRS matter, and giving the Company the right to withhold payments to Mr. Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter 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 ~~September~~June 30, ~~2017,~~2022 and December 31, 2021, 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.

Mr. Ted D. Brown was a Director of the Company since November of 2013 and has ~~$50.7 million remaining under its share repurchase programs. A covenant under~~been the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company formed in 2016. As of April 15, 2022 Ted D. Brown stepped down from being a Director of the Company and Confluence will no longer be considered a related party.. For the three and six months ended June, 30, 2022, the Company’s ~~Credit Facility limits~~revenues for chemical sales to Confluence was zero and $1.4 million respectively.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 2, 2022, the ~~amount that may be used~~Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) under which ProFrac Services, LLC is obligated to ~~repurchase~~order chemicals as per the terms of the Agreement discussed in Note 1, “Organization and Nature of Operations”. On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement, (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) to increase the purchase obligation and term of the ProFrac Agreement, as discussed in Note 1, “Organization and Nature of Operations”. On June 21, 2022, the Company issued prefunded warrants (the “PreFunded Warrants”) to ProFrac Holdings II, LLC, in exchange for $19.5 million in cash as discussed in Note 13, “Stockholders’ Equity”.

During the three and six months ended June 30, 2022, the Company’s revenues from chemical sales to ProFrac Services LLC, were $16.5 million and $18.9 million respectively. These revenues were net of amortization of contract assets of $0.7 million for the three and six months ended June 30, 2022. As of June 30, 2022 and December 31, 2021, ProFrac Services, LLC owed $11.6 million and zero, respectively which is recorded in account receivables on the consolidated balance sheet.

On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $3.0 million plus $39 thousand of accrued interest, were converted into 2,793,030 shares of the Company’s common stock. ~~As of September 30, 2017, this covenant limits additional share repurchases to $10.7 million.~~

Note 17 — Business Segment, Geographic and Major Customer Information

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating ~~decision-makers~~decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into ~~two~~the following reportable segments: ~~Energy Chemistry Technologies~~CT and ~~Consumer and Industrial~~ DA.

Chemistry Technologies.

~~Energy Chemistry Technologies designs, develops, manufactures, packages, and markets~~The CT segment includes green specialty chemistries, ~~used~~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 environmental, social and governance (“ESG) and operational goals. This segment also includes a portfolio of specialty chemical products to address the long-term challenges of in the janitorial, sanitization, food services, and adjacent markets. Customers of the CT segment include major integrated oil and ~~natural~~ gas well drilling, cementing, completion, and stimulation. In addition, the Company’s chemistries are used in specialized enhanced and improved oil recovery markets. Activities in this segment also include construction and management of automated material handling facilities and management of loading facilities and blending operations forcompanies, oilfield services ~~companies.~~companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.

~~Consumer and Industrial Chemistry Technologies designs, develops, and manufactures products that are sold to companies~~

Data Analytics. The DA segment, created in the ~~flavor~~second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and ~~fragrance industry~~support of equipment and services that create and provide valuable information on the ~~specialty chemical industry. These technologies are used by beverage~~composition and ~~food companies, fragrance companies,~~properties of energy customers’ hydrocarbon fluids. The company markets products and ~~companies providing household~~services that support in-line data analysis of hydrocarbon components and ~~industrial cleaning products.~~properties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks

~~The Company evaluates performance~~

Performance based upon a variety of criteria. The primary financial measure is segment operating ~~income.~~income (loss). Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable ~~segments.~~segment.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 profit 18,733
3,007
—
21,740
Income (loss) from operations 6,867
985
(10,955 ) (3,103 )
Depreciation and amortization 1,863
590
615
3,068
Capital expenditures 324
682
641
1,647

2016
Net revenue from external customers $ 45,030
$ 19,307
$ —
$ 64,337
Gross profit 18,180
4,174
—
22,354
Income (loss) from operations 6,196
2,433
(10,882 ) (2,253 )
Depreciation and amortization 1,582
567
581
2,730
Capital expenditures 2,005
148
227
2,380


As of and for the three months ended June 30,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2022
Revenue from external customers	$	12,111	$	713	$	—	$	12,824
Revenue from related party	16,549		—		—		16,549
Change in fair value of contract consideration convertible notes	(17,158)		—		—		(17,158)
Income (loss) from operations	14,944		(1,198)		(5,707)		8,039
Depreciation and amortization	166		15		1		182
Additions to long-lived assets	5		—		—		5

2021
Revenue from external customers	$	7,688	$	1,477	$	—	$	9,165
Revenue from related party	—		—		—		—
Income (loss) from operations	(3,819)		(773)		(2,869)		(7,461)
Depreciation and amortization	233		20		—		253
Additions to long-lived assets	13		—		—		13

~~FLOTEK INDUSTRIES, INC.~~


As of and for the six months ended June 30,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2022
Revenue from external customers	$	21,422	$	1,784	$	—	$	23,206
Revenue from related party	19,046		—		—		19,046
Change in fair value of contract consideration convertible notes	(13,266)		—		—		(13,266)
Income (loss) from operations	8,887		(2,006)		(9,126)		(2,245)
Depreciation and amortization	345		31		1		377
Additions to long-lived assets	5		—		—		5

2021
Revenue from external customers	$	17,990	$	2,945	$	—	$	20,935
Revenue from related party	—		—		—		—
Income (loss) from operations	(7,407)		(1,067)		(7,230)		(15,704)
Depreciation and amortization	524		35		1		560
Additions to long-lived assets	31		—		—		31

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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



	June 30, 2022		December 31, 2021
Chemistry Technologies	$	127,398	$	34,387
Data Analytics	4,787		7,329
Corporate and Other	31,286		8,528
Total assets	$	163,471	$	50,244

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 December 31, 2016
Energy Chemistry Technologies $ 187,623
$ 184,328
Consumer and Industrial Chemistry Technologies 113,434
98,105
Corporate and Other 44,551
56,882
Total segments 345,608
339,315
Held for sale 4,135
43,900
Total assets $ 349,743
$ 383,215
The increase in Chemistry Technologies assets is primarily due to contact assets of $83.3 million.

Geographic Information

Revenue by country is based on the location where services are provided and products are ~~used.~~sold. No individual ~~country~~countries other than the U.S. and the United ~~States~~Arab 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			2022		2021		2022		2021
U.S.	$	66,638	$	52,545	$	203,123	$	154,532	U.S.	$	25,955	$	6,869	$	36,289	$	16,530
UAE									UAE	3,139		1,319		4,450		2,422
Other countries	12,820		11,792		41,466		37,695		Other countries	279		977		1,513		1,983
Total	$	79,458	$	64,337	$	244,589	$	192,227
Total revenue									Total revenue	$	29,373	$	9,165	$	42,252	$	20,935


			For the quarterly period ended June 30, 2022
¨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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	FTK	New York Stock Exchange



~~Large accelerated filer~~	¨	~~Accelerated filer~~	x

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

		~~Emerging growth company~~	¨


Forward-Looking Statements				3

PART I - FINANCIAL INFORMATION


~~PART I—FINANCIAL INFORMATION~~

Item 1.	Financial Statements		3 4
		Unaudited Condensed Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016~~ 2021		3 4
		Unaudited Condensed Consolidated Statements of Operations for thethree and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021		4 5
		Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~ 2021		5 6
		Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~ six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021		6 7
		Unaudited Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~ 2022 and 2021		7 8
		Notes to Unaudited Condensed Consolidated Financial Statements		8 10

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		22 31

Item 3.		Quantitative and Qualitative Disclosures about Market Risk		31 38

Item 4.		Controls and Procedures		32 38

PART ~~II—~~II - OTHER INFORMATION

Item 1.		~~Legal~~Legal Proceedings		33 39

Item 1A		Risk Factors		39

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

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34 39

Item 3.		Defaults Upon Senior Securities		34 39

Item 4.		Mine Safety Disclosures		34 39

Item 5.		Other Information		34 39

Item 6.		Exhibits		35 40

~~SIGNATURES~~				36
SIGNATURES				41


UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q


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



FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)


	June 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	33,084	$	11,534
Restricted cash	40		1,790
Accounts receivable, net of allowance for doubtful accounts of $514 and $659 at June 30, 2022 and December 31, 2021, respectively	11,747		13,297
Accounts receivable, related party	11,603		—
Inventories, net	13,249		9,454


Other current assets	4,000		3,762
Current contract assets	6,260		—
Assets held for sale	535		2,762
Total current assets	80,518		42,599
Property and equipment, net	4,819		5,296
Operating lease right-of-use assets	1,771		2,041

Deferred tax assets, net	283		279
Other long-term assets	17		29
Long term contract assets	76,063		—
TOTAL ASSETS	$	163,471	$	50,244

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	19,771	$	7,616
Accrued liabilities	7,115		8,996
Income taxes payable	103		4
Interest payable	106		82
Current portion of operating lease liabilities	636		602
Current portion of finance lease liabilities	34		41
Current portion of long-term debt	1,690		1,436
Convertible notes payable	18,323		—
Contract consideration convertible notes payable	67,220		—
Total current liabilities	114,998		18,777
Deferred revenue, long-term	84		91
Long-term operating lease liabilities	6,695		7,779
Long-term finance lease liabilities	38		53
Long-term debt	3,098		3,352
TOTAL LIABILITIES	124,913		30,052
Commitments and contingencies (See Note 12)	0		0
Stockholders’ equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $0.0001 par value, 140,000,000 shares authorized; 82,884,690 shares issued and 76,773,333 shares outstanding at June 30, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021	8		8
Additional paid-in capital	386,310		363,417
Accumulated other comprehensive income	176		81
Accumulated deficit	(313,698)		(309,214)
Treasury stock, at cost; 6,111,357 and 6,022,634 shares at June 30, 2022 and December 31, 2021 , respectively	(34,238)		(34,100)
Total stockholders’ equity	38,558		20,192
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	163,471	$	50,244



	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, respectively	56,008			47,152
Inventories	70,716			58,283
Income taxes receivable	2,649			12,752
Assets held for sale	4,135			43,900
Other current assets	10,881			21,708
Total current assets	149,331			188,618
Property and equipment, net	73,711			74,691
Goodwill	56,660			56,660
Deferred tax assets, net	21,190			12,894
Other intangible assets, net	48,851			50,352
TOTAL ASSETS	$	349,743		$	383,215
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	21,725		$	29,960
Accrued liabilities	12,323			12,170
Interest payable	30			24
Liabilities held for sale	1,586			4,961
Current portion of long-term debt	40,589			40,566
Total current liabilities	76,253			87,681
Long-term debt, less current portion	—			7,833
Total liabilities	76,253			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, 2016	6			6
Additional paid-in capital	334,490			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’ equity	273,132			287,343
Noncontrolling interests	358			358
Total equity	273,490			287,701
TOTAL LIABILITIES AND EQUITY	$	349,743		$	383,215



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



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



	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



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



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



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

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


Three months ended June 30,	Revenue		% of Total Revenue
2022
Customer A (Related Party)	$	16,549	52.2	%
Customer B	5,611		19.1	%

2021
Customer C	$	1,038	11.3	%
Customer D	1,810		19.8	%



TABLE A	Three 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	%
Canada	208	121	71.9	%	207	112	84.8	%
Total	1,154	600	92.3	%	1,068	594	79.8	%
Average U.S. Active Drilling Rigs by Type
Vertical	70	62	12.9	%	72	58	24.1	%
Horizontal	799	372	114.8	%	720	376	91.5	%
Directional	77	45	71.1	%	69	48	43.8	%
Total	946	479	97.5	%	861	482	78.6	%
Average North American Drilling Rigs by Product
Oil	874	452	93.4	%	800	440	81.8	%
Natural Gas	280	148	89.2	%	268	154	74.0	%
Total	1,154	600	92.3	%	1,068	594	79.8	%



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 profit	18,733			18,180			63,840			54,609
Gross margin %	30.6		%	40.4		%	34.0		%	41.0		%
Income from operations	6,867			6,196			24,715			21,793
Operating margin %	11.2		%	13.8		%	13.2		%	16.4		%



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



	Payments Due by Period
	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 obligations	22,415		2,679		4,762		3,966		11,008
Total	$	63,004	$	43,268	$	4,762	$	3,966	$	11,008


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share



April 1, 2022 to April 30, 2022	43,280	1.36
May 1, 2022 to May 31, 2022	16,344	1.19
June 1, 2022 to June 30, 2022	989	1.06
Total	60,613



Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs ^{(2) (3) (4)}
July 1, 2017 to July 31, 2017	1,880	$	8.94	—	$	54,420,042
August 1, 2017 to August 31, 2017	377,203	$	6.07	350,000	$	52,288,702
September 1, 2017 to September 30, 2017	286,009	$	5.55	280,000	$	50,733,939
Total	665,092	$	5.85	630,000


~~(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.



Exhibit Number		Description of Exhibit
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, 2014~~Certificate 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, 2017~~as amended (incorporated by reference to Exhibit ~~3.1~~3.4 to the Company’s Form ~~8-K~~10-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).
4.2		~~Registration Rights Agreement, dated as~~Form of ~~July 26, 2016, by and among the Company, Donald Bramblett, and Mark Kieper~~Convertible Note (incorporated by reference to Exhibit ~~4.6~~4.1 to the Company’s ~~Registration Statement on~~ Form ~~S-3 (File No. 333-212864)~~8-K filed on ~~August 3, 2016)~~February 4, 2022).
~~10.1~~4.3	*	~~Eighth Amendment~~Form of Pre-Funded Warrant (incorporated by reference to ~~Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated effective as of June 7, 2017.~~Exhibit 4.2 to the Company’s Form 8-K filed on February 4, 2022).
~~10.2~~4.4	*	~~Ninth Amendment~~Form of Pre-Funded Warrants (incorporated by reference to ~~Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated effective as of July 1, 2017.~~Exhibit 4.1 to the Company’s Form 8-K filed on June 23, 2022).
~~10.3~~10.1	***	~~Tenth~~ Amendment No. 1 to ~~Amended~~Chemical Products Supply Agreement between Flotek Chemistry, LLC and ~~Restated Revolving Credit, Term Loan and Security Agreement,~~ProFrac Services, LLC dated ~~effective as of September 29, 2017~~May 17, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on ~~October 3, 2017)~~May 18, 2022).
~~10.4~~	*	~~Employment Agreement, dated effective April 1, 2016, between the Company and Robert Bodnar.~~
~~10.5~~10.2	*	~~Confidential Severance~~Registration Rights Agreement, by and between Flotek Industries, Inc. and ProFrac Holdings II, LLC dated May 17, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on May 18, 2022).
10.3		10% Convertible PIK Note dated May 17, 2022 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on May 18, 2022).
10.4		Securities Purchase Agreement between Flotek Industries, Inc. and ProFrac Holdings II, LLC dated June 17, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 23, 2022).


10.5		Amendment No. 1 to Registration Rights Agreement Flotek Industries, Inc. and ProFrac Holdings II, LLC dated June 21, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on June 23, 2022).
10.6	*	Separate and Release Agreement between Michael Borton and Flotek Industries, Inc. dated ~~effective October 12, 2017, between the Company and Robert Bodnar.~~July 4, 2022.
~~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~~	+
101.INS	*	Inline XBRL Instance ~~Document.~~Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document
101.SCH	+*	Inline XBRL Schema ~~Document.~~Document
101.CAL	+*	Inline XBRL Calculation Linkbase ~~Document.~~Document
101.LAB	+*	Inline XBRL Label Linkbase ~~Document.~~Document
101.PRE	+*	Inline XBRL Presentation Linkbase ~~Document.~~Document
101.DEF	+*	Inline XBRL Definition Linkbase ~~Document.~~Document
104	*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*		Filed ~~herewith.~~with this Form 10-Q.
**		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 hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the U.S. Securities and Exchange Commission or its staff.



FLOTEK INDUSTRIES, INC.

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

~~Date:~~	~~November 8, 2017~~



~~FLOTEK INDUSTRIES, INC.~~By:		/s/ Seham Carson
		Seham Carson
~~By:~~		~~/s/ H. RICHARD WALTON~~
	~~H. Richard Walton~~
	~~Executive Vice President and~~ Interim Chief Financial Officer

~~Date:~~	~~November 8, 2017~~ (Principal Financial and Accounting Officer