UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
For the quarterly period ended March 31, 2023

¨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
For the transition period from                      to                     
Commission File Number 1-13270
FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Delaware90-0023731
(State of other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
Delaware90-0023731
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
10603 W.8846 N. Sam Houston Parkway N., Suite 300
W. Houston,TX
77064
(Address of principal executive offices)(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueFTKNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filer ☐Non-accelerated filer ☒
Large accelerated filer¨Accelerated filerx
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company¨
Emerging growth company¨
Smaller reporting company ☒Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
As of October 31, 2017,At May 9, 2023, there were 56,825,81988,002,029 outstanding shares of Flotek Industries, Inc.the registrant’s common stock, $0.0001 par value.





TABLE OF CONTENTS
 
Forward-Looking Statements
3
PART I - FINANCIAL INFORMATION
PART I—FINANCIAL INFORMATION
Item 1.
34
Unaudited Condensed Consolidated Balance Sheets at September 30, 2017March 31, 2023 and December 31, 2016
2022
34
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2023 and 20162022
45
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017March 31, 2023 and 2016
2022
56
Unaudited Condensed Consolidated Statements of Cash Flows for the nine three months ended September 30, 2017March 31, 2023 and 20162022
67
Unaudited Condensed Consolidated StatementStatements of Stockholders’ Equity for the ninethree months ended September 30, 2017
March 31, 2023 and 2022
78
Notes to Unaudited Condensed Consolidated Financial Statements
89
Item 2.
2232
Item 3.
3138
Item 4.
3240
PART II—II - OTHER INFORMATION
Item 1.
LegalLegal Proceedings
3341
Item 1ARisk Factors
41
Item 1A.
Risk Factors
33
Item 2.
3441
Item 3.
3442
Item 4.
3442
Item 5.
3442
Item 6.
3543
SIGNATURES
3644






2

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”), and in particular, Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent the current assumptions and beliefs regarding future events of Flotek Industries, Inc. (“Flotek” or the “Company”), many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to the Company’s business plan, objectives, expected operating results, and assumptions upon which those statements are based. The forward-looking statements contained in this Quarterly Report are based on information available as of the date of this Quarterly Report.
The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words including but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,” “potential,” “schedule,” “continue,” “intend,” “expect,” “plan,” “forecast,” “target”, “think”, “likely”, “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or revenue thereafter. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2022 (“Annual Report” or “2022 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 23, 2023, and periodically in subsequent reports filed with the SEC. The Company has no obligation, and we disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
In certain places in this Quarterly Report on Form 10-Q, we may refer to statements provided by third parties that purport to describe trends or developments in supply chain or energy exploration and production and activity and we specifically disclaim any responsibility for the accuracy and completeness of such information and have undertaken no steps to update or independently verify such information.

The following information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and related disclosures and our 2022 Annual Report.

3

PART I —- FINANCIAL INFORMATION
Item 1. Financial Statements
FLOTEK INDUSTRIES INC.
INC, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in (in thousands, except share data)
March 31, 2023December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents$12,433 $12,290 
Restricted cash101 100 
Accounts receivable, net of allowance for credit losses of $645 and $623 at March 31, 2023 and December 31, 2022, respectively15,609 19,136 
Accounts receivable, related party26,230 22,683 
Inventories, net15,904 15,720 
Other current assets4,516 4,045 
Current contract assets7,066 7,113 
Total current assets81,859 81,087 
Long-term contract assets71,372 72,576 
Property and equipment, net4,807 4,826 
Operating lease right-of-use assets4,923 5,900 
Deferred tax assets, net410 404 
Other long-term assets17 17 
TOTAL ASSETS$163,388 $164,810 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$41,929 $33,375 
Accrued liabilities9,870 8,984 
Income taxes payable11 97 
Interest payable— 130 
Current portion of operating lease liabilities3,050 3,328 
Current portion of finance lease liabilities36 36 
Current portion of long-term debt179 2,052 
Convertible notes payable— 19,799 
Contract Consideration Convertible Notes Payable43,800 83,570 
Total current liabilities98,875 151,371 
Deferred revenue, long-term35 44 
Long-term operating lease liabilities7,133 8,044 
Long-term finance lease liabilities13 19 
Long-term debt194 2,736 
TOTAL LIABILITIES106,250 162,214 
Stockholders’ equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding— — 
Common stock, $0.0001 par value, 240,000,000 shares authorized; 94,613,664 shares issued and 88,170,936 shares outstanding at March 31, 2023 ; 83,915,918 shares issued and 77,788,391 shares outstanding at December 31, 20229 8 
Additional paid-in capital421,596 388,177 
Accumulated other comprehensive income160 181 
Accumulated deficit(330,176)(351,519)
Treasury stock, at cost; 6,442,728 and 6,127,527 shares at March 31, 2023 and December 31, 2022 , respectively(34,451)(34,251)
Total stockholders’ equity57,138 2,596 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$163,388 $164,810 
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
4
 September 30, 2017 December 31, 2016
ASSETS   
Current assets:   
Cash and cash equivalents$4,942
 $4,823
Accounts receivable, net of allowance for doubtful accounts of $1,089 and $664 at September 30, 2017 and December 31, 2016, respectively56,008
 47,152
Inventories70,716
 58,283
Income taxes receivable2,649
 12,752
Assets held for sale4,135
 43,900
Other current assets10,881
 21,708
Total current assets149,331
 188,618
Property and equipment, net73,711
 74,691
Goodwill56,660
 56,660
Deferred tax assets, net21,190
 12,894
Other intangible assets, net48,851
 50,352
TOTAL ASSETS$349,743
 $383,215
LIABILITIES AND EQUITY   
Current liabilities:   
Accounts payable$21,725
 $29,960
Accrued liabilities12,323
 12,170
Interest payable30
 24
Liabilities held for sale1,586
 4,961
Current portion of long-term debt40,589
 40,566
Total current liabilities76,253
 87,681
Long-term debt, less current portion—
 7,833
Total liabilities76,253
 95,514
Commitments and contingencies
 
Equity:   
Cumulative convertible preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding—
 —
Common stock, $0.0001 par value, 80,000,000 shares authorized; 60,621,786 shares issued and 56,802,456 shares outstanding at September 30, 2017; 59,684,669 shares issued and 56,972,580 shares outstanding at December 31, 20166
 6
Additional paid-in capital334,490
 318,392
Accumulated other comprehensive income (loss)(822) (956)
Retained earnings (accumulated deficit)(28,736) (9,830)
Treasury stock, at cost; 3,354,344 and 2,028,847 shares at September 30, 2017 and December 31, 2016, respectively(31,806) (20,269)
Flotek Industries, Inc. stockholders’ equity273,132
 287,343
Noncontrolling interests358
 358
Total equity273,490
 287,701
TOTAL LIABILITIES AND EQUITY$349,743
 $383,215




FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Three months ended March 31,
 20232022
Revenue:
Revenue from external customers$11,652 $10,382 
Revenue from related party36,355 2,497 
Total revenues48,007 12,879 
Cost of sales46,127 13,358 
Gross profit (loss)1,880 (479)
Operating costs and expenses:
Selling, general, and administrative6,451 4,886 
Depreciation176 195 
Research and development614 1,415 
Severance costs2,223 (7)
Loss on sale of property and equipment— 8 
Gain on lease termination— (584)
(Gain) loss in fair value of Contract Consideration
 Convertible Notes Payable		(26,095)3,892 
Total operating costs and expenses(16,631)9,805 
Income (loss) from operations18,511 (10,284)
Other income (expense):
Payment protection plan loan forgiveness4,522 — 
Interest expense(1,672)(668)
Other income (expense), net(9)224 
Total other income (expense)2,841 (444)
Income (loss) before income taxes21,352 (10,728)
Income tax (expense) benefit(9)4 
Net income (loss)$21,343 $(10,724)
Income (loss) per common share:
Basic$0.22 $(0.15)
Diluted (see Note 14, “Earnings (Loss) Per Share”)$(0.02)$(0.15)
Weighted average common shares:
Weighted average common shares used in computing basic income (loss) per common share98,808 73,858 
Weighted average common shares used in computing diluted loss per common share158,441 73,858 

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





FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 Three months ended March 31,
 20232022
Net income (loss)$21,343 $(10,724)
Other comprehensive income (loss):
Foreign currency translation adjustment(21)8 
Comprehensive income (loss)$21,322 $(10,716)










































The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
6

FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands)
Three months ended March 31,
 20232022
Cash flows from operating activities:
Net income (loss)$21,343 $(10,724)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Change in fair value of contingent consideration(359)94 
Change in fair value of Contract Consideration Convertible Notes Payable(26,095)3,892 
Amortization of convertible note issuance cost83 166 
Paid-in-kind interest expense1,571 485 
Amortization of contract assets1,251 — 
Depreciation176 195 
Provision for credit losses, net of recoveries23 238 
Provision for excess and obsolete inventory258 310 
Gain on sale of property and equipment— 8 
Gain on lease termination— (584)
Non-cash lease expense977 56 
Stock compensation expense(1,112)739 
Deferred income tax benefit(6)(4)
Paycheck protection plan loan forgiveness(4,522)— 
Changes in current assets and liabilities:
Accounts receivable3,504 (194)
Accounts receivable, related party(3,546)14 
Inventories(441)(999)
Income taxes receivable— (10)
Other assets(470)(220)
Accounts payable8,554 616 
Accrued liabilities1,236 (2,350)
Operating lease liabilities(1,190)(214)
Income taxes payable(87)— 
Interest payable(8)12 
Net cash provided by (used in) operating activities1,140 (8,474)
Cash flows from investing activities:
Capital expenditures(157)— 
Proceeds from sale of assets— 24 
Net cash (used in) provided by investing activities(157)24 
Cash flows from financing activities:
Payment for forfeited stock options(617)— 
Payments on long term debt(15)— 
Proceeds from issuance of convertible notes— 21,150 
Payment of issuance costs of convertible notes— (1,084)
Payments to tax authorities for shares withheld from employees(200)(59)
Proceeds from issuance of stock20 — 
Payments for finance leases(6)(14)
Net cash (used in) provided by financing activities(818)19,993 
Effect of changes in exchange rates on cash and cash equivalents(21)8 
Net change in cash and cash equivalents and restricted cash144 11,551 
Cash and cash equivalents at the beginning of period12,290 11,534 
Restricted cash at the beginning of period100 1,790 
Cash and cash equivalents and restricted cash at beginning of period12,390 13,324 
Cash and cash equivalents at end of period12,433 24,835 
Restricted cash at the end of period101 40 
Cash and cash equivalents and restricted cash at end of period$12,534 $24,875 
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
7


FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMESTOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2023 and 2022
(in thousands)In thousands of U.S. dollars and shares)

Three months ended March 31, 2023
 Common StockTreasury StockAdditional
Paid-in
Capital		Accumulated
Other
Comprehensive
Income		Accumulated DeficitTotal Stockholders’ Equity
 Shares
Issued		Par
Value		SharesCost
Balance, December 31, 202283,916 $8 6,127 $(34,251)$388,177 $181 $(351,519)$2,596 
Net income— — — — — — 21,343 21,343 
Foreign currency translation adjustment— — — — — (21)— (21)
Stock issued under employee stock purchase plan— — (21)— 20 — — 20 
Restricted stock granted15 — — — — — — 
Restricted stock forfeited(40)— 165 — — — — — 
Restricted stock units vested387 — — — — — — 
Forfeited stock options purchased— — — — (617)— — (617)
Stock compensation expense— — (1,112)— — (1,112)
Shares withheld to cover taxes— — 171 (200)— — — (200)
Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable to Pre-Funded Warrants— — — — 15,092 — — 15,092 
Conversion of convertible notes payable to Pre-Funded Warrants— — — — 11,040 — — 11,040 
Conversion of convertible notes payable to Common Stock10,336 1 — — 8,996 — — 8,997 
Balance, March 31, 202394,614 $9 6,442 $(34,451)$421,596 $160 $(330,176)$57,138 



Three months ended March 31, 2022
 Common StockTreasury StockAdditional
Paid-in
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Accumulated DeficitTotal Stockholders’ Equity
 Shares
Issued		Par
Value		SharesCost
Balance, December 31, 202179,484 $8 6,022 $(34,100)$363,417 $81 $(309,214)$20,192 
Net loss— — — — — — (10,724)(10,724)
Foreign currency translation adjustment— — — — — 8 — 8 
Restricted stock granted287 — — — — — — — 
Restricted stock forfeited— — 8 — — — — — 
Stock compensation expense— — — — 739 — — 739 
Shares withheld to cover taxes— 43 (59)— — — (59)
Conversion of convertible notes payable notes to common stock2,793 — — — 2,948 — — 2,948 
Balance, March 31, 202282,564 $8 6,073 $(34,159)$367,104 $89 $(319,938)$13,104 




The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
8
 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Loss from continuing operations$(3,421) $(1,870) $(5,285) $(2,011)
Income (loss) from discontinued operations, net of tax319
 (876) (13,621) (33,200)
Net loss(3,102) (2,746) (18,906) (35,211)
Other comprehensive income (loss):       
Foreign currency translation adjustment148
 (68) 134
 256
Comprehensive income (loss)$(2,954) $(2,814) $(18,772) $(34,955)



FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine months ended September 30,
 2017 2016
Cash flows from operating activities:   
Net loss$(18,906) $(35,211)
Loss from discontinued operations, net of tax(13,621) (33,200)
Loss from continuing operations(5,285) (2,011)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:   
Depreciation and amortization9,091
 7,380
Amortization of deferred financing costs376
 308
Loss (gain) on sale of assets401
 (29)
Stock compensation expense9,679
 8,591
Deferred income tax benefit(8,290) (6,309)
Reduction in tax benefit related to share-based awards915
 883
Changes in current assets and liabilities:   
Accounts receivable, net(8,704) (7,572)
Inventories(12,213) (2,959)
Income taxes receivable9,254
 (13,687)
Other current assets12,649
 (51)
Accounts payable(8,262) 5,959
Accrued liabilities1,561
 10,434
Income taxes payable—
 (1,807)
Interest payable6
 45
Net cash provided by (used in) operating activities1,178
 (825)
Cash flows from investing activities:   
Capital expenditures(6,155) (10,618)
Proceeds from sales of businesses18,490
 —
Proceeds from sale of assets321
 38
Payments for acquisition, net of cash acquired—
 (7,863)
Purchase of patents and other intangible assets(817) (311)
Net cash provided by (used in) investing activities11,839
 (18,754)
Cash flows from financing activities:   
Repayments of indebtedness(9,833) (15,398)
Borrowings on revolving credit facility310,021
 256,738
Repayments on revolving credit facility(307,998) (249,324)
Debt issuance costs(106) (147)
Reduction in tax benefit related to share-based awards—
 (883)
Purchase of treasury stock related to share-based awards(1,500) (925)
Proceeds from sale of common stock530
 30,610
Repurchase of common stock(4,174) —
Proceeds from exercise of stock options21
 134
Net cash (used in) provided by financing activities(13,039) 20,805
Discontinued operations:   
Net cash used in operating activities(695) (82)
Net cash provided by investing activities708
 74
Net cash flows provided by (used in) discontinued operations13
 (8)
Effect of changes in exchange rates on cash and cash equivalents128
 48
Net increase in cash and cash equivalents119
 1,266
Cash and cash equivalents at the beginning of period4,823
 2,208
Cash and cash equivalents at the end of period$4,942
 $3,474


FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED 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, 201659,685
 $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 exercised663
 —
 —
 —
 5,884
 —
 —
 —
 5,884
Stock surrendered for exercise of stock options—
 —
 478
 (5,863) —
 —
 —
 —
 (5,863)
Restricted stock granted274
 —
 —
 —
 —
 —
 —
 —
 —
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, 201760,622
 $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”) is a global, diversified,creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, that developsFlotek helps customers across industrial and supplies chemistries and services to the oil and gas industries, and high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets.commercial markets improve their environmental performance.
The Company’s oilfield business includesChemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemistrieschemicals that aim to enhance the profitability of hydrocarbon producers.
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 logistics which enableallows users to pursue automation of their hydrocarbon streams to maximize their profitability.
The Company’s two operating segments, CT and DA, are both supported by its customersResearch & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 17, “Business Segment, Geographic and Major Customer Information.”
Going Concern
These consolidated financial statements have been prepared in pursuing improved efficienciesaccordance with accounting principles generally accepted in the drillingUnited States (“U.S. GAAP”) assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and completionsatisfaction of their wells. liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.

The Company also provides automated bulk material handling, loading facilities,currently funds its operations from cash on hand and blending capabilities.other current assets. The Company processes citrus oilhas a history of losses and negative cash flows from operations and expects to produce (1) high value compounds usedutilize a significant amount of cash within one year after the date of filing the unaudited condensed consolidated financial statements. The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”). It is not certain that the Company’s cash and other current assets and the Company’s forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as additives by companiesthey become due in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous industries around the world, including the oil and gas (“O&G”) industry.
Flotek operates in over 20 domestic and international markets. Customers include major integrated O&G companies, oilfield services companies, independent O&G companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies.next twelve months. The Company also serves customers who purchase non-energy-related citrus oilmay require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and relatedevents noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are filed.

The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products including household and commercial cleaning product companies, fragranceservices, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and cosmetic companies, and food manufacturing companies.reducing expenses. However, the Company may be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.
Flotek was initially incorporated under the laws of the Province of British Columbia on May 17, 1985. On October 23, 2001, Flotek changed its corporate domicile
The unaudited condensed consolidated financial statements do not include any adjustments to the statecarrying amounts and classification of Delaware.assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements and accompanying footnotes (collectively the “Financial Statements”)unaudited condensed consolidated financial statements reflect all adjustments, in the opinion of management, necessary for the fair presentationstatement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The Financial Statements,financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the Securities and Exchange Commission (“SEC”)SEC regarding interim financial reporting and do not include all

9

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim Financial Statementsfinancial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2022 Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“Annual Report”).Report. A copy of the 2022 Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com.www.flotekind.com. The resultsinformation contained on the Company’s website does not form a part of operationsthis 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 $0.1 million and $0.1 million as of March 31, 2023 and December 31, 2022, respectively.The Company’s restricted cash 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.

Accounts Receivable and Allowance for Credit Losses
Accounts receivable and accounts receivable, related party, arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for credit losses to reflect any loss anticipated on accounts receivable balances. The Company applies the current expected credit loss (CECL) model, which requires immediate recognition of expected credit losses over the contractual life of receivables and records the appropriate allowance for credit losses as a charge to operating expenses. The allowance for credit losses is based on a combination of the individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for credit losses charged to operating expense.

The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.
Contract Assets
The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in Note 9, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement. The contract assets are amortized over the term of the ProFrac Agreement (10 years) based on forecasted revenues as goods are transferred to ProFrac Services, LLC, and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations.

The contract assets are tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the threetransfer of goods under the ProFrac Agreement 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 indicativestated at the lower of cost determined by 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 resultsinventory 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 expectedless than cost. Write-downs or write-offs of inventory are charged to cost of sales.

Property and equipment

10

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or the asset’s estimated useful life as follows:
Buildings and leasehold improvements2-30 years
Machinery and equipment7-10 years
Furniture and fixtures3 years
Land improvements20 years
Transportation equipment2-5 years
Computer equipment and software3-7 years
Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the year ending December 31, 2017.
Duringcarrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the fourth quartercarrying amount of 2016,an asset or asset group may not be recoverable, the Company classifiedfirst compares the Drilling Technologiescarrying 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 segmentseventual 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.
Leases
The Company leases certain facilities, land, vehicles, and equipment. The Company determines if an arrangement is classified as a lease at inception of the arrangement.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the related lease. Finance leases are under the current and non-current liabilities and the underlying assets are included in property and equipment on the consolidated balance sheet.

As most of the Company’s leases do not provide an implicit rate of return, on a quarterly basis, the Company’s incremental borrowing rate is used, together with the lease term information available at commencement date of the lease, in determining the present value of lease payments.Operating lease liabilities include related options to extend or terminate lease terms that are reasonably certain of being exercised.

Leases with an initial term of 12 months or less (“short term leases”) are not recorded on the balance sheet; and the lease expense on short-term leases is recognized on a straight-line basis over the lease term.

Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable
The Company accounts for the 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 related to a related party contract (see 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 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 intentionthe nature of the inputs used to selldetermine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability

11

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 10, “Fair Value Measurements.”
Revenue Recognition
The Company recognizes revenue when it satisfies performance obligations under the terms of the contract with a customer, and control of the promised goods are transferred to the customer or services are performed, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services.
The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include discounts offered to customers for prompt payment and right of return provisions, which are considered when recognizing revenue and deferred accordingly. The Company does not act as an agent in any of its revenue arrangements.
In recognizing revenue for products and services, the Company determines the transaction price of contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract.

The majority of the CT segment revenue is chemical products that are sold at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Contracts with customers for the sale of products generally state the terms of the sale, including the quantity and price of each product purchased. Additionally, the CT segment offers various services associated to products sold which includes field services, installation, maintenance, and other functions. These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the Company has a right to invoice the customer.

The DA segment recognizes revenue for sales of equipment at the time of sale based on when control transfers to the customer based on agreed upon delivery terms. Additionally, the Company offers various services associated with 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 businesses. types of arrangements is recognized ratably over time throughout the contract period. Additionally, the 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 accrued liabilities and deferred revenue on the consolidated balance sheets. Subscription-type arrangements were not a material revenue stream in the three months ended March 31, 2023 and March 31, 2022.

Payment terms for both the CT and DA segments are customarily 30-60 days for domestic and 90-120 days for international from invoice receipt. Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract assets associated with incomplete performance obligations are not material.

The Company applies several practical expedients including:

•Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less.
•The Company’s historical financial statements have been revisedpayment 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 presentconsideration from a customer in an amount that corresponds directly with the operating resultsvalue to the customer of the Drilling TechnologiesCompany’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.


12

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in our consolidated statement of operationsoperations.
Foreign Currency Translation
The Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and the related cash flows of these segments has been reclassified to discontinued operations forsubstantially all periods presented. The assets and liabilities of the Drilling TechnologiesCompany are denominated in U.S. dollars. Financial statements of foreign subsidiaries that are not U.S. dollar functional currency are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and Production Technologies segments have been reclassifiedliabilities of those foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments and distributions to “Assets heldstockholders. The Company’s comprehensive income loss includes consolidated net income (loss) and foreign currency translation adjustments.
Research and Development Costs
Expenditures for sale”research activities relating to product development and “Liabilities heldimprovement are charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for sale”, respectively,temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.
A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

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

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

The Company evaluated the Pre-Funded Warrants issued in June 2022 (the “June 2022 Warrants”) and the Pre-Funded Warrants issued in February 2023 (the “February 2023 Warrants”) (see Note 13, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the June 2022 Warrants and the February 2023 Warrants meet the criteria to be classified within stockholders’ equity and recorded the proceeds received for the June 2022 Warrants and the February 2023 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.
Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications did not impact net income (loss).13


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

Significant items subject to estimates and assumptions include the useful lives of property and equipment; long lived asset impairment assessments; stock-based compensation expense; allowance for credit losses for accounts receivable; valuation allowances for 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.
Note 2 — Recent Accounting Pronouncements
ApplicationChanges to U.S. GAAP are established by the FASB. We evaluate the applicability and impact of New Accounting Standards
Effective January 1, 2017,all authoritative guidance issued by the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2015-11, “Simplifying the Measurement of Inventory.” This standard requires management to measure inventory at 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,FASB. Guidance not listed below was assessed and transportation. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2017, the Company adopted the accounting guidance in ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” This standard eliminated the requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. Instead, organizations are now required to classify all deferred tax assets and liabilities as noncurrent. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard retrospectively and, therefore, prior periods presented were adjusted.
Effective January 1, 2017, the Company adopted the accounting guidance in ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance requires excess tax benefits and deficienciesdetermined to be recognized ineither not applicable, clarifications of items listed below, immaterial or already adopted by 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.Company.
New Accounting RequirementsStandards Issued and DisclosuresAdopted as of January 1, 2023
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. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.forecasts. The Company is currently evaluatingadopted this standard prospectively as of January 1, 2023 and the adoption did not have a material impact of the pronouncement will have on theCompany’s consolidated financial statements and related disclosures.disclosures, and there was no cumulative effect on retained earnings.

Note 3 — Revenue from Contracts with Customers
Disaggregation of Revenue
The Company differentiates revenue based on whether the source of revenue is attributable to product sales or service revenue.
Total revenue disaggregated by revenue source is as follows (in thousands):
 Three months ended March 31,
 20232022
Revenue:
Products (1)
$46,767 $12,199 
Services1,240 680 
$48,007 $12,879 
(1) Product revenue includes sales to related parties as described in Note 16, “Related Party Transactions.”
Disaggregation of Cost of Sales
The Company differentiates cost of sales based on whether the cost is attributable to tangible goods sold, cost of services sold or other costs which cannot be directly attributable to either tangible goods or services.
Total cost of sales disaggregated is as follows (in thousands):
 Three months ended March 31,
 20232022
Cost of sales:
Tangible goods sold$41,529 $9,788 
Services141 (53)
Other4,457 3,623 
$46,127 $13,358 
Other cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services. Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs.
Cost of sales split between external and related party sales is as follows (in thousands):


14

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

 Three months ended March 31,
 20232022
Cost of sales:
Cost of sales for external customers$11,196 $10,768 
Cost of sales for related parties34,931 2,590 
$46,127 $13,358 


Note 4 - Contract Assets
Contract assets are as follows (in thousands):
March 31, 2023December 31, 2022
Contract assets$83,060 $83,060 
Less accumulated amortization(4,622)(3,371)
Contract assets, net78,438 79,689 
Less current contract assets(7,066)(7,113)
Contract assets, long term$71,372 $72,576 
In August 2016,connection with entering into the FASB issued ASU No. 2016-15, “ClassificationProFrac Agreement on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”, the Company recognized contract assets of Certain Cash Receipts$10.0 million and Cash Payments.” This standard addresses eight specific cash flow issues with$69.5 million, respectively, and associated fees of $3.6 million. As of March 31, 2023 and December 31, 2022, $71.4 million and $72.6 million, respectively, of the objectivecontract assets are classified as long term based upon our estimate 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. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business.” This standard provides additional guidance on whether an integrated set of assets and activities constitutes a business. The pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted in specific instances. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard eliminates Step 2forecasted revenues from the goodwill impairment test. An entityProFrac Agreement which will now recognize an impairment charge fornot be realized within the amount by whichnext twelve months of the carrying amount exceedsProFrac Agreement. The Company’s estimate of the reporting unit’s fair value. The pronouncementtiming 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 the impact the pronouncement will haveevaluated 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 Operationsquarterly basis.
During the fourth quarter 2016,three months ended March 31, 2023 the Company initiatedrecognized $1.3 million of contract assets amortization which is recorded 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 saletransaction price included in the fourth quarter 2016. Effective December 31, 2016,related party revenue in the Company classified the assets, liabilities, and resultsconsolidated statement 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 effectoperations. The below table reflects our estimated amortization per year (in thousands) based on the Company’s operations and financial results. Management expectscurrent forecasted revenues from the sale or disposalProFrac Agreement.
Years ending December 31,Amortization
2023 (excluding the three months ended March 31, 2023)$4,924 
20248,565 
20258,961 
20268,961 
20278,961 
Thereafter through May 203238,066 
Total contract assets$78,438 
Based on our tests of therecoverability, we did not identify impairment of such contract assets as 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.March 31, 2023.


15

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

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 assets36
 77
 97
 92
Impairment of inventory and long-lived assets—
 —
 —
 (36,522)
Loss from operations(755) (924) (2,196) (43,493)
Other income (expense)26
 (77) (91) (320)
Gain (loss) on sales of businesses463
 —
 (902) —
Loss on write-down of assets held for sale—
 —
 (6,831) —
Loss before income taxes(266) (1,001) (10,020) (43,813)
Income tax benefit581
 592
 3,473
 15,673
Net income (loss) from discontinued operations$315
 $(409) $(6,547) $(28,140)
        
Production Technologies       
Revenue$—
 $2,145
 $4,002
 $6,034
Cost of revenue—
 (2,040) (3,189) (5,833)
Selling, general and administrative(64) (878) (1,739) (2,929)
Depreciation and amortization—
 (149) —
 (447)
Research and development—
 (204) (364) (671)
Gain (loss) on disposal of long-lived assets—
 8
 —
 (51)
Impairment of inventory—
 —
 —
 (3,913)
Loss from operations(64) (1,118) (1,290) (7,810)
Other expense—
 (24) (52) (68)
Gain on sale of businesses61
 —
 233
 —
Loss on write-down of assets held for sale—
 —
 (9,718) —
Loss before income taxes(3) (1,142) (10,827) (7,878)
Income tax benefit7
 675
 3,753
 2,818
Net income (loss) from discontinued operations$4
 $(467) $(7,074) $(5,060)
        
Drilling Technologies and Production Technologies       
Income (loss) from discontinued operations, net of tax$319
 $(876) $(13,621) $(33,200)


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

The 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
Inventories5
 9,078
 5
 8,115
Other current assets1,585
 278
 699
 370
Long-term receivable—
 —
 —
 4,179
Property and equipment, net—
 11,277
 —
 3,978
Goodwill—
 15,333
 —
 1,689
Other intangible assets, net—
 7,395
 —
 484
Assets held for sale3,339
 48,433
 905
 20,599
Valuation allowance(109) (18,971) —
 (6,161)
Assets held for sale, net$3,230
 $29,462
 $905
 $14,438
Liabilities:       
Accounts payable$15
 $2,472
 $10
 $914
Accrued liabilities1,419
 1,190
 142
 385
Liabilities held for sale$1,434
 $3,662
 $152
 $1,299
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 equipment14,642
Intangible assets other than goodwill9,227
Production Technologies: 
Inventories3,913
Total impairment$40,435
Based on the changes in the business climate discussed above and continuing operating losses experienced during the three months ended March 31, 2016, June 30, 2016, and September 30, 2016, goodwill within the Teledrift and Production Technologies reporting units was tested for impairment during these periods. However, no impairments of goodwill were recorded based upon this testing.
Note 5 — Acquisitions
On July 27, 2016, the Company acquired 100% of the stock and interests in International Polymerics, Inc. (“IPI”) and related entities for $7.9 million in cash consideration, net of cash acquired, and 247,764 shares of the Company’s common stock. IPI is a U.S. based manufacturer of high viscosity guar gum and guar slurry for the oil and gas industry with a wide selection of stimulation chemicals.
Note 6 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
 Nine months ended September 30,
 2017 2016
Supplemental non-cash investing and financing activities:   
Value of common stock issued in acquisition$—
 $3,268
Value of common stock issued in payment of accrued liability188
 —
Exercise of stock options by common stock surrender5,863
 50
Supplemental cash payment information:   
Interest paid$1,511
 $1,459
Income taxes received, net of payments (paid, net of refunds)10,081
 (1,663)
Note 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
Services1,502
 1,775
 4,283
 5,105
 $79,458
 $64,337
 $244,589
 $192,227
Cost of revenue:       
Products$55,846
 $41,117
 $163,587
 $122,055
Services1,345
 354
 3,802
 950
Depreciation527
 512
 1,627
 1,357
 $57,718
 $41,983
 $169,016
 $124,362

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

Note 8 — Inventories
Inventories are as follows (in thousands):
March 31, 2023December 31, 2022
Raw materials$6,503 $5,800 
Finished goods17,196 18,130 
Inventories23,699 23,930 
Less reserve for excess and obsolete inventory(7,795)(8,210)
Inventories, net$15,904 $15,720 
 September 30, 2017 December 31, 2016
Raw materials$37,961
 $28,626
Work-in-process3,042
 2,918
Finished goods29,713
 26,739
Inventories$70,716
 $58,283

The provision recorded in the three months ended March 31, 2023 and 2022 was $0.1 million and $0.3 million for the CT segment and $0.2 million and zero for the DA segment, respectively.
Note 96 — Property and Equipment
Property and equipment are as follows (in thousands):
March 31, 2023December 31, 2022
Land$886 $886 
Land improvements520 520 
Buildings and leasehold improvements5,356 5,356 
Machinery and equipment6,758 6,758 
Furniture and fixtures532 532 
Transportation equipment784 784 
Computer equipment and software1,582 1,425 
   Property and equipment16,418 16,261 
Less accumulated depreciation(11,611)(11,435)
Property and equipment, net$4,807 $4,826 
 September 30, 2017 December 31, 2016
Land$6,748
 $5,837
Buildings and leasehold improvements43,431
 42,986
Machinery and equipment38,862
 36,187
Equipment in progress5,475
 3,235
Furniture and fixtures2,029
 1,969
Transportation equipment2,307
 3,059
Computer equipment and software12,168
 11,844
Property and equipment111,020
 105,117
Less accumulated depreciation(37,309) (30,426)
Property and equipment, net$73,711
 $74,691
Depreciation expense including expense recorded in cost of revenue, totaled $2.4$0.2 million and $2.1$0.2 million for the three months ended March 31, 2023 and 2022.
Note 7 — Leases
Prior to their sale in 2022, the Company leased its facilities in Waller, Texas and Monahans, Texas and during the three months ended September 30, 2017March 31, 2022 recognized rental income of $121 thousand and 2016,$185 thousand, respectively, which is included in other income on the unaudited condensed consolidated statement of operations. The lease agreements between the tenants and $7.0 millionthe Company were terminated on the sale of the facilities.
The components of lease expense and $5.3 million for the nine months ended September 30, 2017 and 2016, respectively.
During the three and nine months ended September 30, 2017 and 2016, no impairments were recognized related to property and equipment.
Note 10 — Goodwill
Changes in the carrying value of goodwill for each reporting unitsupplemental cash flow information are as follows (in thousands):

16
 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

Three months ended March 31,
20232022
Operating lease expense$240 $228 
Finance lease expense:
Amortization of assets4 4 
Interest on lease liabilities1 3 
Total finance lease expense5 7 
Short-term lease expense41 124 
Total lease expense$286 $359 
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases$1,365 $375 
Operating cash flows from finance leases10 10 
Financing cash flows from finance leases1 3 
Note 11 — Other Intangible Assets
Other intangible assetsMaturities of lease liabilities as of March 31, 2023 are as follows (in thousands):
Years ending December 31,Operating LeasesFinance Leases
2023 (excluding the three months ended March 31, 2023)$2,992 $29 
20242,394 23 
20251,391 — 
20261,418 — 
20271,339 — 
Thereafter3,443 — 
Total lease payments$12,977 $52 
Less: Interest(2,794)(3)
Present value of lease liabilities$10,183 $49 


17

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 lists30,877
 7,745
 30,877
 6,518
Trademarks and brand names1,544
 1,105
 1,467
 1,069
Total finite-lived intangible assets acquired49,657
 14,173
 49,159
 12,124
Deferred financing costs2,230
 493
 1,804
 117
Total amortizable intangible assets51,887
 $14,666
 50,963
 $12,241
Indefinite-lived intangible assets:       
Trademarks and brand names11,630
   11,630
  
Total other intangible assets$63,517
   $62,593
  
        
Carrying value:       
Other intangible assets, net$48,851
   $50,352
  

Finite-lived intangible assets acquiredSupplemental balance sheet information related to leases is as follows (in thousands):
March 31, 2023December 31, 2022
Operating Leases
Operating lease right-of-use assets$4,923 $5,900 
Current portion of operating lease liabilities3,050 3,328 
Long-term operating lease liabilities7,133 8,044 
Total operating lease liabilities$10,183 $11,372 
Finance Leases
Property and equipment$147 $147 
Accumulated depreciation(59)(55)
Property and equipment, net$88 $92 
Current portion of finance lease liabilities$36 $36 
Long-term finance lease liabilities13 19 
Total finance lease liabilities$49 $55 
Weighted Average Remaining Lease Term
Operating leases5.3 years5.3 years
Finance leases1.3 years1.6 years
Weighted Average Discount Rate
Operating leases9.3 %9.3 %
Finance leases8.9 %8.9 %

Note 8 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):
 March 31, 2023December 31, 2022
Severance costs$4,375 $2,617 
Payroll and benefits919 684 
Legal costs1,312 447 
Contingent liability for earn-out provision225 583 
Deferred revenue, current502 655 
Taxes other than income taxes1,545 1,884 
Other992 2,114 
Total current accrued liabilities$9,870 $8,984 

18

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Debt and Convertible Notes Payable
Long Term Debt
Paycheck Protection Program Loans

In April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025. On January 5, 2023 the Company received notice from the SBA that $4.4 million of the $4.8 million principal amount and accrued interest to that date of $0.1 million, was forgiven. The remaining principal amount of $0.4 million and accrued interest, is to be repaid in monthly installments of $15 thousand over the remaining term of the loan through April 15, 2025, beginning on March 15, 2023. The forgiveness of the Flotek PPP loan is accounted for as an extinguishment of the debt and the Company has recorded a $4.5 million gain in the three months ended March 31, 2023, comprising the principal amount forgiven of $4.4 million and accrued interest of $0.1 million.

Long-term debt, including current portion, is as follows (in thousands):

March 31, 2023December 31, 2022
Flotek PPP loan$373 $4,788 
Less current maturities(179)(2,052)
Total long-term debt, net of current portion$194 $2,736 

Convertible Notes Payable

On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE transaction, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $20.1 million (the “Convertible Notes Payable”). The investors 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 the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum, had a maturity of one year, and were convertible into common stock of Flotek or Pre-Funded Warrants to purchase common stock of Flotek, (a) at the holder's option at any time prior to maturity, at a price of $1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $2.50 per share, or $1.741 per share, for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $0.8705. On March 21, 2022, $3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately 2.8 million shares of common stock. The issuance cost of $1.1 million was amortized on a straight-line basis over two to 20 years. Amortizationthe term of finite-lived intangible assets acquired totaled $0.7 millionthe Convertible Notes Payable and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and $2.0 million and $2.1 million foramortization was included in interest expense in the nine months ended September 30, 2017 and 2016, respectively.unaudited condensed consolidated statements of operations.
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 is as follows (in thousands):
 September 30, 2017 December 31, 2016
Long-term debt:   
Borrowings under revolving credit facility$40,589
 $38,566
Term loan—
 9,833
Total long-term debt40,589
 48,399
Less current portion of long-term debt(40,589) (40,566)
Long-term debt, less current portion$—
 $7,833
Credit Facility
On May 10, 2013,February 2, 2023, the Convertible Notes Payable, excluding those held by ProFrac Holdings, LLC, with a carrying value of $9.0 million, including accrued paid-in-kind interest of $0.8 million, were converted, upon maturity, into 10,335,840 shares of common stock at a price of $0.8705 per share. The Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $11.0 million, including accrued paid-in-kind interest of $1.0 million, were converted, upon maturity, into 12,683,280 February 2023 Warrants with an exercise price of $0.0001 per share.

Initial ProFrac Agreement Contract Consideration Convertible Notes Payable

On February 2, 2022, the Company and certain of its subsidiaries (the “Borrowers”) entered into an Amended and Restated Revolving Credit, Term Loan and Securitya long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Initial ProFrac Agreement (the “Credit Facility”Contract Consideration Convertible Notes Payable”) with PNC Bank, National Association (“PNC Bank”). The Company may borrow, under the Credit Facility for working capital, permitted acquisitions, capital expendituressame terms as the Convertible Notes Payable issued in the PIPE transaction described above, including paid-in-kind interest at a rate of 10% per annum and other corporate purposes. The Credit Facility, as amended, continues in effect until May 10, 2022. Under terms of the Credit Facility, as amended, the Company has total borrowing availability under a revolving credit facility of $75 million.conversion features.

The Credit Facility is secured by substantially allInitial ProFrac Agreement Contract Consideration Convertible Notes Payable were accounted for as liability classified convertible instruments and were initially recorded at fair value of $10.0 million on 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 complianceissuance date 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, lesscorresponding contract asset.


19

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


cash paidOn February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, remeasured to and carried at a fair value of $15.1 million, were converted, upon maturity, into 12,683,281 February 2023 Warrants with an exercise price of $0.0001 per share (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 Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively with the Initial ProFrac Agreement, the “ProFrac Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”) to ProFrac. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum and may be converted at any time prior to the maturity date, which is one year from the date of issuance under the same conversion terms as the Convertible Notes Payable issued in the PIPE transaction described above.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for taxes duringas liability classified convertible instruments and were initially recorded at fair value of $69.5 million on the periodissuance date with a corresponding contract asset. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured to (b) all debt payments duringfair value of $43.8 million as of March 31, 2023 which includes paid-in-kind interest of $4.6 million. The fair value adjustment resulted in an a $26.9 million decrease in the period. The fixed charge coverage ratio requirement began for the quarterthree months ended March 31, 2017 at 1.00 to 1.002023 and increases to 1.10 to 1.00 for the year ending December 31, 2017, and for each fiscal quarter thereafter. The leverage ratio (funded debt to adjusted EBITDA) requirement began for the six months ended June 30, 2017, at not greater than 5.50 to 1.10 and reduces to not greater than 3.00 to 1.00is recognized as of September 30, 2018, and for each fiscal quarter thereafter. The annual limit on capital expenditures for 2017 is $20 million. The annual limit on capital expenditures for 2018 and each fiscal year thereafter is $26 million. The annual limit on capital expenditures is reduced if the undrawn availability under the revolving credit facility falls below $15 million at any month-end.
The Credit Facility restricts the payment of cash dividends on common stock and limits the amount that may be used to repurchase common stock and preferred stock.
Beginning with fiscal year 2017, the Credit Facility includes a provision that 25% of EBITDA minus cash paid for taxes, dividends, debt payments, and unfunded capital expenditures, not to exceed $3.0 million for any year, be paidgain in fair value Contract Consideration Convertible Notes Payable, net on the outstanding balance within 60 daysunaudited condensed consolidated statement of the fiscal year end.
Each of the Company’s domestic subsidiaries is fully obligated for Credit Facility indebtedness as a borrower or as a guarantor.
(a) Revolving Credit Facility
Under the revolving credit facility, the Company may borrow up to $75 million through Mayoperations. See Note 10, 2022. This includes a sublimit of $10 million that may be used for letters of credit. The revolving credit facility is secured by substantially all of the Company’s domestic accounts receivable and inventory.
At September 30, 2017, eligible accounts receivable and inventory securing the revolving credit facility provided total borrowing capacity of $74.9 million under the revolving credit facility. Available borrowing capacity, net of outstanding borrowings, was $34.3 million at September 30, 2017.
The interest rate on advances under the revolving credit facility varies based on the fixed charge coverage ratio. Rates range (a) between PNC Bank’s base lending rate plus 1.5% to 2.0% or (b) between the London Interbank Offered Rate (LIBOR) plus 2.5% to 3.0%. PNC Bank’s base lending rate was 4.25% at September 30, 2017. The Company is required to pay a monthly facility fee of 0.25% per annum, on any unused amount under the commitment based on daily averages. At September 30, 2017, $40.6 million was outstanding under the revolving credit facility, with $2.6 million borrowed as base rate loans at an interest rate of 5.75% and $38.0 million borrowed as LIBOR loans at an interest rate of 3.74%“Fair Value Measurements”.
Borrowing under the revolving credit agreement is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause.
(b) Term Loan
The amount borrowed under the term loan was reset to $10 million effective as of September 30, 2016. Monthly principal payments of $0.2 million were required. On May 22, 2017, the Company repaid the outstanding balance of the term loan.
Note 13 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and nine months ended September 30, 2017 and 2016, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.3 million restricted stock units for the three and nine months ended September 30, 2017, and 0.7 million stock options and 0.8 million restricted stock units for the three and nine months ended September 30, 2016.

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

Basic and diluted earnings (loss) per common share are as follows (in thousands, except per share data):
 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Loss from continuing operations$(3,421) $(1,870) $(5,285) $(2,011)
Income (loss) from discontinued operations, net of tax319
 (876) (13,621) (33,200)
Net loss - Basic and Diluted$(3,102) $(2,746) $(18,906) $(35,211)
        
Weighted average common shares outstanding - Basic57,602
 56,899
 57,709
 55,523
Assumed conversions:       
Incremental common shares from stock options—
 —
 —
 —
Incremental common shares from restricted stock units—
 —
 —
 —
Weighted average common shares outstanding - Diluted57,602
 56,899
 57,709
 55,523
        
Basic earnings (loss) per common share:       
Continuing operations$(0.06) $(0.03) $(0.09) $(0.04)
Discontinued operations, net of tax0.01
 (0.02) (0.24) (0.60)
Basic earnings (loss) per common share$(0.05) $(0.05) $(0.33) $(0.64)
Diluted earnings (loss) per common share:       
Continuing operations$(0.06) $(0.03) $(0.09) $(0.04)
Discontinued operations, net of tax0.01
 (0.02) (0.24) (0.60)
Diluted earnings (loss) per common share$(0.05) $(0.05) $(0.33) $(0.64)
Note 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 30, 2017 or December 31, 2016.
The carrying value and estimated fair value of the Company’s long-term debt are as follows (in thousands):
 September 30, 2017 December 31, 2016
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Term loan$—
 $—
 $9,833
 $9,833
Borrowings under revolving credit facility40,589
��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.20


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):
March 31,December 31,
Level 1Level 2Level 32023Level 1Level 2Level 32022
Contingent earnout consideration$— $— $225 $225 $— $— $583 $583 
Initial ProFrac Agreement Contract Consideration Convertible Notes— — — — — — 14,220 14,220 
Amended ProFrac Agreement Contract Consideration Convertible Notes— — 43,800 43,800 — — 69,350 69,350 
Total$— $— $44,025 $44,025 $— $— $84,153 $84,153 
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 March 31, 2023 and December 31, 2022. 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.
March 31, 2023December 31, 2022
Risk-free interest rate4.03 %4.34%
Expected volatility90 %100.0%
Term until liquidation (years)2.132.38
Stock price$0.69$1.12
Discount rate10.92 %9.95%
Initial ProFrac Agreement Contract Consideration Notes Payable Key Inputs
The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $10.0 million on February 2, 2022. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement upon issuance due to the use of a quoted price for a similar liability at that date (the PIPE transaction), and subsequently classified as Level 3 due to the use of unobservable inputs.
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, at maturity, to a fair value of $15.1 million based on the closing price of the shares of common stock of $1.19, on the date of conversion. The fair value adjustment was a $0.8 million increase and a $3.9 million decrease in the three months ended March 31, 2023 and 2022, respectively.
The estimated value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation. The key inputs into the Monte Carlo simulation used to estimate the fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of December 31, 2022 were as follows:

21

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Risk-free interest rate4.12%
Expected volatility100.0%
Term until liquidation (years)0.09
Stock price$1.12
Discount rate4.12%

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 Company reduced the discount rate assumed due to the reduced likelihood of occurrence of any of the default events in the shorter term remaining on the notes. The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as at March 31, 2023 and December 31, 2022 was valued using a Monte Carlo simulation.
The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, as of March 31, 2023 and December 31, 2022 were as follows:
March 31, 2023December 31, 2022
Risk-free interest rate4.77%4.59%
Expected volatility90.0%100.0%
Term until liquidation (years)0.130.38
Stock price$0.69$1.12
Discount rate4.77%4.59%
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment goodwill, and other intangibleoperating lease ROU assets, are measured at fair value on a non-recurring basis and are subject to adjustment to their fair value adjustment in certain circumstances. No impairments
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the changes in balances of any of these assets were recognized duringliabilities for the three and nine months ended September 30, 2017March 31, 2023 and 2016.2022 classified as Level 3 (in thousands):


22

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31,
20232022
Balance - beginning of period$84,153 $608 
Transfer of ProFrac Agreement Contract Consideration Convertible Notes Payable from Level 2— 10,000 
Increase in principal of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest85 158 
Increase in principal of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest1,331 — 
Change in fair value of contingent earnout consideration(358)94 
Change in fair value of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable786 3,892 
Change in fair value of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable(26,881)— 
Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity(15,091)— 
Balance - end of period$44,025 $14,752 
Note 1511 — Income Taxes
A reconciliation ofThe income tax benefit differed from the amounts computed by applying the U.S. federal statutory tax rate to the Company’s effective income tax rate of 21% respectively, to loss before income tax for the reasons set forth below:
Three months ended March 31,
20232022
U.S. federal statutory tax rate21.0 %21.0 %
State income taxes, net of federal benefit— 0.1 
Non-U.S. income taxed at different rates0.1 0.2 
Increase (reduction) in tax benefit related to stock-based awards0.4 (0.1)
Increase in valuation allowance(20.4)(20.8)
Permanent differences(1.1)(0.4)
Non-deductible expenses0.1 — 
Effective income tax rate— %— %

Internal Revenue Code (“IRC”) section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. During 2023, the Company converted various debt instruments into Company stock and warrants causing an ownership change within the meaning of IRC section 382 that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC section 382 limitation.

As of March 31, 2023, the Company has an estimated $181.6 million in U.S. federal NOL carryforwards, $104.9 million in certain state NOL carryforwards, $7.5 million in section 163(j) interest limitation carryforwards and $3.8 million in tax credit carryforwards. As a result of the change of control experienced in 2023, the Company’s ability to use NOLs to reduce taxable income is generally limited to an annual amount which is currently estimated to be $3.5 million a year as follows:
 Three months ended September 30,
Nine months ended September 30,
 2017 2016 2017 2016
U.S. federal statutory tax rate(35.0)% (35.0)% (35.0)% (35.0)%
State income taxes, net of federal benefit14.3
 12.0
 6.7
 9.2
Non-U.S. income taxed at different rates8.9
 16.4
 5.4
 7.7
Reduction in tax benefit related to stock-based awards15.8
 —
 14.1
 —
Other(3.5) (26.9) (3.6) (22.0)
Effective income tax rate0.5 % (33.5)% (12.4)% (40.1)%
Fluctuationsa result of the section 382 limitation which may be revised based on further detailed analysis. NOLs that exceed the section 382 limitation in effective tax ratesany year continue to be allowed as carryforwards until they expire and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. Federal NOLs incurred prior to 2018 generally have historically beena 20-year life until they expire in varying amounts between 2029 and 2037. Federal NOLs generated in 2018 and after are carried forward indefinitely. State NOLs have various carryforward periods depending on the legislation in the respective state jurisdiction. The Company’s use of new NOLs arising after the date of an ownership change would not be impacted by permanentthe 382 limitation. If the

23

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company does not generate a sufficient level of taxable income prior to the expiration of the pre-2018 NOL carryforward periods, then the ability to apply those NOLs as offsets to future taxable income is lost. Based on the preliminary section 382 limitation, the Company estimates that $41.9 million of the state NOL carryforwards and $3.8 million of the tax differences with no associated incomecredit carryforwards will expire unutilized. The tax impact, changes in state apportionment factors, includingeffected amount of the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates. Changesestimated expirations is included in the effective tax rate during the threeCompany’s valuation allowance.

Note 12 — Commitments and nine months ended September 30, 2017, included theContingencies
Litigation
The Company implementing ASU No. 2016-09 which requires accounting for excess tax benefitsis subject to routine litigation and tax deficiencies related to stock-based awards as discrete itemsother claims that arise in the period in which they occur.
In January 2017, the Internal Revenue Service notified the Companynormal course of business. Except as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that it will examine the Company’s federal tax returns for the year ended December 31, 2014. No adjustments have been asserted, and management believes that sustained adjustments, if any, would notare expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Former CEO (J Chisholm) 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, and related party accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.
Note 1613 — Common StockStockholders’ Equity
The Company’s Certificate of Incorporation, as amended NovemberOn February 2, 2023, the Convertible Notes Payable pursuant to the PIPE transaction discussed in Note 9, 2009, authorizes the Company to issue up to 80 million“Debt and Convertible Notes Payable”, excluding those held by ProFrac Holdings, LLC, were converted, upon maturity, into 10,335,840 shares of common stock parat a price of $0.8705 per share. The Convertible Notes Payable converted into common stock shares had a carrying value $0.0001of $9.0 million, including accrued paid-in-kind interest of $0.8 million and were recorded as additional paid-in-capital as of March 31, 2023.
The Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $11.0 million, including accrued interest of $1.0 million, were converted, upon maturity, into 12,683,280 February 2023 Warrants with an exercise price of $0.0001 per share and 100,000were recorded as additional paid-in-capital.
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable”, remeasured to and carried at a fair value of $15.1 million, were converted, upon maturity, into 12,683,281 February 2023 Warrants and were recorded as additional paid-in-capital.
The February 2023 Warrants permit ProFrac Holdings II, LLC to purchase 25,366,561 shares of one or more seriescommon stock of preferredthe Company at an exercise price equal to $0.0001 per share and may be exercised at any time. Since there are no contingent conditions to be satisfied prior to exercise, the February 2023 Warrants are included in calculation of basic earnings (loss) per share. (See Note 14, “Earnings (Loss) Per Share”).

24

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 21, 2022, ProFrac Holdings II, LLC paid $19.5 million for Pre-Funded Warrants (the “June 2022 Warrants”) of the Company. The June 2022 Warrants were recorded in equity at their fair value of $11.1 million, estimated using a Black-Scholes Option Pricing model, less $1.2 million of transaction costs paid. The remaining cash received of $8.4 million was recognized as an equity contribution. The June 2022 Warrants permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock parof the Company at an exercise price equal to $0.0001 per share, and a $4.5 million exercise fee representing a 20% premium to the 30-day volume average price of the Company’s common stock at the close of business on the day prior to the date of the issuance of the June 2022 Warrants. The June 2022 Warrants, net of transaction fees of $1.1 million, and the equity contribution of $8.4 million from ProFrac Holdings II, LLC were recorded as additional paid-in capital.
The key inputs into the Black-Scholes Option Pricing Model used to estimate the fair value $0.0001 per share.
A reconciliation of changes in common shares issued during the nine months ended September 30, 2017 isJune 2022 Warrants as of the issuance on June 21, 2022 were as follows:
Shares issued at December 31, 2016Risk-free interest rate59,684,669
3.21%
Issued as restricted stock award grantsExpected volatility273,829
90.0%
Issued upon exercise of stock optionsTerm until liquidation (years)663,288
2.00
Shares issued at September 30, 2017Stock price60,621,786$1.11
Strike price (exercise fee)
$4.5 million
Stock Repurchase ProgramProFrac Holdings II, LLC and its affiliates may not receive any voting or consent rights in respect of the June 2022 Warrants or the underlying shares of common stock unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings II, LLC and its affiliates and (ii) ProFrac Holdings II, LLC has paid an additional $4.5 million to the Company. The additional $4.5 million will be accounted for as an equity contribution if received.
In November 2012,On March 21, 2022, the Convertible Notes Payable issued pursuant to the PIPE transaction discussed in Note 9, “Debt and Convertible Notes Payable”, which had been purchased by certain funds associated with one of the Company’s Boarddirectors 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 $25 millionaccrued interest, were converted into 2,793,030 shares of the Company’s common stock. Repurchases may be made
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 common shares outstanding for the period, which includes the February 2023 Warrants (See Note 9, “Debt and Convertible Notes Payable”, and Note 13, “Stockholders’ Equity”). Diluted earnings (loss) per common share is calculated by dividing the adjusted net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon conversion of convertible notes payable, exercise of stock warrants and vesting and settlement of stock awards. The dilutive effect of non-vested stock issued under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the Pre-Funded stock warrants are computed using the treasury stock method. The dilutive effect of the Convertible Notes is computed using the if‑converted method in accordance with ASU 2020-06, which was adopted by the open market or through privately negotiated transactions. DuringCompany on January 1, 2022 (see Note 2, “Summary of Significant Accounting Policies”).

The calculation of the basic and diluted earnings (loss) per share for the three months ended September 30, 2017, the Company repurchased 630,000 shares of its outstanding common stock on the open market at a cost of $3.7 million, inclusive of transaction costs, or an average price of $5.85 per share. During the nine months ended September 30, 2017, the Company repurchased 680,000 shares of its outstanding common stock on the open market at a cost of $4.2 million, inclusive of transaction costs, or an average price of $6.14 per share. During the threeMarch 31, 2023 and nine months ended September 30, 2016, the Company did not repurchase any shares of its outstanding common stock.2022 is as follows (in thousands):
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through September 30, 2017, the Company has not repurchased any of its common stock under this authorization.


25

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

 Three months ended March 31,
 20232022
Numerator:
Net income (loss) for basic earnings per share$21,343 $(10,724)
Adjustments to net income available to shareholders
Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable1,571 — 
Valuation (gain)/loss on Contract Consideration Convertible Notes Payable carried at FV(26,095)— 
Adjusted net income (loss) for diluted earnings per share$(3,181)$(10,724)
Anti-dilutive adjustments to net income available to shareholders excluded from Numerator for Diluted Earnings calculation
Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable— 485 
Valuation (gain)/loss on Contract Consideration Convertible Notes Payable carried at FV— 3,892 
Total numerator adjustment excluded from diluted earnings computation$— $4,377 
Denominator:
Basic weighted average shares outstanding98,808 73,858 
Average number of diluted shares for convertible notes payable and Contract Consideration Convertible Notes Payable59,633 — 
Diluted weighted average shares outstanding158,441 73,858 
Basic earnings (loss) per share$0.22 $(0.15)
Diluted loss per share$(0.02)$(0.15)
Anti-dilutive incremental shares excluded from denominator for diluted earnings computation
Average number of diluted shares for June 2022 stock warrants8,997 — 
Average number of diluted shares for options and restricted stock1,023 609 

For the three months ended March 31, 2023 weighted average shares for the June 2022 stock warrants and weighted average shares for employee stock awards were not included in the dilution calculation since including them would have an anti-dilutive effect as it would reduce the loss per share.
For the three months ended March 31, 2022, paid-in-kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable and the change in fair value related to the Contract Consideration Convertible Notes Payable, were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the period. For the three months ended March 31, 2022 weighted average shares for convertible notes payable and Contract Consideration Convertible Notes Payable and weighted average shares for employee stock awards were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.


26

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
 Three months ended March 31,
 20232022
Supplemental cash flow information:
Interest paid$18 $5 
Supplemental non cash financing and investing activities:
Issuance of convertible notes payable as consideration for ProFrac Agreements— 10,000 
Conversion of convertible notes payable to common stock8,996 2,948 
Conversion of convertible notes payable to February 2023 Warrants11,040 — 
Conversion of initial Contract Consideration Convertible Notes Payable to February 2023 Warrants15,092 — 
Note 16— Related Party Transactions
On February 2, 2022, the Company entered into the Initial ProFrac Agreement, upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the Initial ProFrac Agreement, ProFrac Services, LLC 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 Initial 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 comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year.

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

On February 1, 2023, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No. 2”) dated February 2, 2022. The Amended ProFrac Agreement No. 2 has an effective date of January 1, 2023. The ProFrac Agreement was amended to (1) provide a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of active hydraulic fracturing fleets to 30 fleets, (2) waive any liquidated damages payment relating to any potential order shortfall prior to January 1, 2023, (3) add additional fees to certain products, and (4) provide margin increases based on revenue percentages from non-ProFrac customers. The Company believes the net present value of the economic benefit attributable to the Amended ProFrac Agreement No. 2 will exceed the value of the liquidated damages payments that would have been received for the period from April 1, 2022 through December 31, 2022.

On February 2, 2023, the Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $11.0 million, including accrued paid-in-kind interest of $1.0 million, were converted, upon maturity, into 12,683,280 February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”).

On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, with a carrying value of $11.0 million, including accrued interest of $1.0 million, were converted, upon maturity, into 12,683,281 February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”). The fair value of the Initial ProFrac Agreement Contact Consideration Convertible Notes Payable, as of February 2, 2023, was $15.1 million (see Note 10, “Fair Value Measurements”).
During the three months ended March 31, 2023 and 2022, the Company’s revenues from ProFrac Services LLC were $36.4 million and $1.1 million, respectively. For the three months ended March 31, 2023 and 2022, these revenues were net of amortization of contract assets of $1.3 million and nil. Cost of sales attributable to these revenues were $34.9 million and

27

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1.1 million, respectively for the three months ended March 31, 2023 and 2022. As of September 30, 2017,March 31, 2023 and December 31, 2022 our accounts receivable from ProFrac Services, LLC was $26.2 million and $22.7 million, respectively which is recorded in accounts receivable, related party on the Company has $50.7 million remaining under its share repurchase programs. A covenant underconsolidated balance sheet.
Also, during 2023 and 2022, we had the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC:

•PIPE Transaction (see Note 9, “Debt and Convertible Notes Payable”)
•June 2022 Warrants (see Note 13, “Stockholders’ Equity)
On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s Credit Facility limitsdirectors including the amount that may be used to repurchaseD3 Family Fund and the D3 Bulldog Fund, which aggregated $3.0 million plus $39 thousand of accrued interest and amortization of issuance costs of $90 thousand, were converted into 2,793,030 shares of the Company’s common stock.
Mr. Ted D. Brown was a Director of the Company beginning in November of 2013 and is the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company. The Company’s revenues and related cost of sales for product sales to Confluence were $1.4 million and $1.4 million, for the three months ended March 31, 2022. As of September 30, 2017, this covenant limits additional share repurchases to $10.7 million.June 9, 2022 Mr. Brown stepped down from being a Director of the Company and Confluence is no longer considered a related party as of June 9, 2022.
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-makersdecision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into twothe following reportable segments: Energy Chemistry Technologies and Consumer and Industrial
Chemistry Technologies.
Energy Chemistry Technologies designs, develops, manufactures, packages, and marketsThe CT segment includes green specialty chemistries, used inlogistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals.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.
Consumercompanies, independent oil and Industrial Chemistry Technologies designs, develops,gas companies, national and manufactures products that are sold to companies in the flavor and fragrance industry and the specialty chemical industry. These technologies are used by beverage and food companies, fragrancestate-owned oil companies, and international supply chain management companies providing household.

Data Analytics. The DA segment includes the design, development, production, sale and industrial cleaning products.support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The company markets products and services that support in-line data analysis of hydrocarbon components and 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 is 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.

28

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 profit18,733
 3,007
 —
 21,740
Income (loss) from operations6,867
 985
 (10,955) (3,103)
Depreciation and amortization1,863
 590
 615
 3,068
Capital expenditures324
 682
 641
 1,647
        
2016       
Net revenue from external customers$45,030
 $19,307
 $—
 $64,337
Gross profit18,180
 4,174
 —
 22,354
Income (loss) from operations6,196
 2,433
 (10,882) (2,253)
Depreciation and amortization1,582
 567
 581
 2,730
Capital expenditures2,005
 148
 227
 2,380
As of and for the three months ended March 31,Chemistry Technologies
Data Analytics
Corporate and OtherTotal
2023
Revenue from external customers
Products$8,561 $1,941 $— $10,502 
Services664 486 — 1,150 
Total revenue from external customers9,225 2,427 — 11,652 
Revenue from related party— 
Products36,265 — — 36,265 
Services— 90 — 90 
Total revenue from related parties36,265 90 — 36,355 
Gross profit434 1,446 — 1,880 
Change in fair value of Contract Consideration Convertible Notes Payable(26,095)— — (26,095)
Income (loss) from operations23,379 457 (5,325)18,511 
Paid-in-kind interest on Contract Consideration Convertible Notes Payable1,416 — — 1,416 
Paid-in-kind interest on convertible notes payable— — 155 155 
Depreciation157 18 1 176 
Additions to long-lived assets30 95 32 157 
2022
Revenue from external customers
Products$8,909 $793 $— $9,702 
Services402 278 — 680 
Total revenue from external customers9,311 1,071 — 10,382 
Revenue from related party
Products2,497 — — 2,497 
Services— — — — 
Total revenue from related parties2,497 — — 2,497 
Gross profit (loss)(662)183 — (479)
Change in fair value of Contract Consideration Convertible Notes Payable3,892 — — 3,892 
Loss from operations(6,057)(808)(3,419)(10,284)
Paid-in-kind interest on Contract Consideration Convertible Notes Payable158 — — 158 
Paid-in-kind interest on convertible notes payable— — 327 327 
Depreciation178 16 1 195 
Additions to long-lived assets— — — — 











29

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

For the nine months ended September 30,Energy Chemistry Technologies Consumer and Industrial Chemistry Technologies Corporate and Other Total
2017       
Net revenue from external customers$187,807
 $56,782
 $—
 $244,589
Gross profit63,840
 11,733
 —
 75,573
Income (loss) from operations24,715
 5,906
 (35,598) (4,977)
Depreciation and amortization5,507
 1,752
 1,832
 9,091
Capital expenditures2,794
 1,580
 1,781
 6,155
        
2016       
Net revenue from external customers$133,094
 $59,133
 $—
 $192,227
Gross profit54,609
 13,256
 —
 67,865
Income (loss) from operations21,793
 8,508
 (32,031) (1,730)
Depreciation and amortization4,062
 1,685
 1,633
 7,380
Capital expenditures8,704
 494
 1,420
 10,618
Assets of the Company by reportable segments are as follows (in thousands):
March 31, 2023December 31, 2022
Chemistry Technologies$142,033 $146,542 
Data Analytics7,308 5,645 
Corporate and Other14,047 12,623 
Total assets$163,388 $164,810 
 September 30, 2017 December 31, 2016
Energy Chemistry Technologies$187,623
 $184,328
Consumer and Industrial Chemistry Technologies113,434
 98,105
Corporate and Other44,551
 56,882
Total segments345,608
 339,315
Held for sale4,135
 43,900
Total assets$349,743
 $383,215

Geographic Information
Revenue by country is based on the location where services are provided and products are used. Nosold. For the three months ended March 31, 2023 no individual countrycountries other than the U.S. accounted for more than 10% of revenue. For the three months ended March 31, 2022 no individual countries other than the U.S. and the United StatesArab Emirates (“U.S.”UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
U.S.$66,638
 $52,545
 $203,123
 $154,532
Other countries12,820
 11,792
 41,466
 37,695
Total$79,458
 $64,337
 $244,589
 $192,227
 Three months ended March 31,
 20232022
U.S. (1)$46,126 $10,334 
UAE1,403 1,311 
Other countries478 1,234 
Total revenue$48,007 $12,879 
(1) Includes revenue from related party
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:follows (in thousands):
Three months ended March 31,Revenue% of Total Revenue
2023
Customer A (Related Party)$36,355 75.7 %
2022
Customer B$2,607 20.2 %
Customer C (Related Party)1,389 10.8 %

30
 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Customer A13.3% 12.5% 12.9% 17.9%
Customer B8.8% 14.8% 9.6% 13.5%
Over 90% of the revenue from these customers was for sales in the Energy Chemistry Technologies segment.


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


 The concentration with ProFrac Services, LLC and in the oil and gas industry increases credit, commodity and business risk.

Major Suppliers
Expenditure with major suppliers, as a percentage of consolidated supplier expenditure, is as follows (in thousands):
Expenditure% of Total Expenditure
Three months ended March 31,
2023
Supplier A$16,954 40.1 %
Supplier B7,145 16.9 %
Supplier C4,504 10.6 %
2022
Supplier B2,117 27.0 %
Supplier D933 11.9 %

Note 18 — CommitmentsSubsequent Events

We have evaluated the effects of events that have occurred subsequent to March 31, 2023, and Contingenciesthere have been no material events that would require recognition in the March 31, 2023 interim financial statements or disclosure in the notes to the consolidated financial statements, except as disclosed below.
Class Action Litigation
Sublease of Corporate Headquarters

On March 30, 2017,April 1, 2023, the U.S. District Court forCompany entered into an agreement to sublease the Southern District offacility in Houston, Texas, grantedwhich is currently the Company’s motioncorporate headquarters, beginning September 1, 2023, or earlier, and ending October 30, 2030. The Company plans to dismisslease a smaller facility to relocate the four consolidated putative securities class action lawsuits that were filed in November 2015, againstheadquarters before September 1, 2023.

New York Stock Exchange (“NYSE”) Continued Listing Requirements

The Company’s common stock is currently listed on the NYSE. On April 12, 2023, the Company and certain of its officers. The lawsuits were previously consolidated into a single case, and a consolidated amended complaint had been filed. The consolidated amended complaint assertedreceived written notice from the NYSE that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts aboutaverage closing price of the Company’s business, operations,shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, the Company has notified the NYSE that it intends to cure the $1.00 per share deficiency. Based on the applicable NYSE procedures, the Company has six months following the receipt of the NYSE’s notice to cure the deficiency and prospects.regain compliance. The complaint sought an awardNYSE’s notice has no immediate impact on the listing of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock, between October 23, 2014 and November 9, 2015, inclusive.which will continue to trade on the NYSE subject to the Company’s continued compliance with the other listing requirements of the NYSE. The lead plaintiff appealed the District Court’s decision granting the motion to dismiss.
In January 2016, three derivative lawsuits were filed, two in the District Court of Harris County, Texas (which have since been consolidated into one case) and one in the United States District Court for the Southern District of Texas, on behalfcommon stock of the Company against certainwill continue to trade under the symbol “FTK” but will have an added designation of its officers and its current directors.“.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. The lawsuits allege violations of law, breaches of fiduciary duty, and unjust enrichment against the defendants.
The Company believes the lawsuits are without merit and intends to vigorously defend against all claims asserted. Discovery has not yet commenced. At this“.BC” indicator will be removed at such time as the Company is unabledeemed to reasonably estimate the outcome of this litigation.
In addition, as previously disclosed, the U.S. Securities and Exchange Commission had opened an inquiry related to similar issues to those raisedbe in the above-described litigation. On August 21, 2017, the Company received a letter from the staff of the SEC stating that the inquiry has been concluded and that the staff does not intend to recommend an enforcement action against the Company.
Other Litigation
compliance. The Company is subjectintends to routine litigation and other claims that arise in the normal course of business. Management is not aware of any pending or threatened lawsuits or proceedings that are expectedexplore available options to haveregain compliance, which may include, if necessary, effectuating a material effect on the Company’s financial position, results of operations or liquidity.reverse stock split.
Concentrations and Credit Risk

The majority of the Company’s revenue is derived from the oil and gas industry. Customers include major oilfield services companies, major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies, and state-owned national oil companies. This concentration of customers in one industry increases credit and business risks.31
The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is maintained at a major financial institution and balances often exceed insurable amounts.





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

The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words including, but not limited to, “anticipate,” “believe,” “estimate,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project,” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could,” etc. The Company cautions that these statements are merely predictions and are not tofollowing discussion should be considered guarantees of future performance. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated, or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements is includedread in Part I, Item 1A — “Risk Factors” ofconjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 20162022 (“Annual Report” or “2022 Annual Report”) and periodically in subsequent reports filed with the U.S. Securities and Exchange Commission (“SEC”(the “SEC”). The Company has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes included herein. Comparative segment revenues and related financial information are discussed herein and are presented in Note 17 to our unaudited consolidated financial statements. See “Forward Looking Statements” in this report and “Risk Factors” included in our filings with the SEC, including our Quarterly Reports on Form 10-Q and our 2022 Annual Report, for a description of important factors that could cause actual results to differ from expected results. Our historical financial information may not be indicative of our future performance.
Executive Summary

Flotek creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial and commercial markets improve their environmental performance. The Company serves specialty chemistry needs for both domestic and international energy markets.
The Company has two operating segments, Chemistry Technologies (“CT”) and Data Analytics (“DA”), which are both supported by the Company’s continuing Research and Innovation (“R&I”) advanced laboratory capabilities.
Company Overview

Chemistry Technologies
We believe that the Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their environmental, social and governance (“ESG”) performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.

Customers of the CT segment include those of energy related notes thereto of this Quarterly Report,markets, such as our related party ProFrac Services, LLC, as well as the Annual Report. Phrases such as “Company,” “we,” “our,” and “us” refer to Flotek Industries, Inc. and its subsidiaries.
Basis of Presentation
During the fourth quarter of 2016, the Company classified the Drilling Technologies and Production Technologies segments as held for sale based on management’s intention to sell these businesses. The Company’s historical financial statements have been revised to present the operating results of the Drilling Technologies and Production Technologies segments as discontinued operations. The results of operations of Drilling Technologies and Production Technologies are presented as “Loss from discontinued operations” in the statement of operations and the related cash flows of these segments has been reclassified to discontinued operations for all periods presented. The assets and liabilities of the Drilling Technologies and Production Technologies segments have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheets for all periods presented.
By the end of August 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.
Executive Summary
Flotek is a global, diversified, technology-driven company that develops and supplies chemistries and services to the oil and gas industries, and high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets. Flotek operates in over 20 domestic and international markets.
The Company’s oilfield business includes specialty chemistries and logistics. Flotek’s technologies enable its customers in pursuing improved efficiencies in the drilling and completion of their wells. Customers include majorapplications. Major integrated oil and gas (“O&G”) companies, oilfield services companies, independent O&G companies, pressure-pumping serviceoil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and international supply chain management companies. advanced alternative energy companies benefit from our best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.

Data Analytics

The Company also produces non-energy-related citrusDA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, natural gas liquids (“NGLs”), natural gas, crude oil, and relatedcondensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

We believe customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products including (1) highat the lower value compounds used as additives by companiesproducts prices. More efficient operations have the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous industries around the world, including the O&G industry. The Company sources citrus oil domestically and internationally and is onesupermajors, some of the largest processorsmidstream companies and large gas processing plants. We have developed a line of citrus oilVerax™ analyzers for deployment internationally which was certified for compliance in hazardous locations and harsh weather conditions.

32


Research & Innovation
R&I supports the world. Additionally, the Company also provides automated bulk material handling, loading facilities, and blending capabilities.


Continuing Operations
The operationsacceleration of the Company are categorized into two reportable segments: Energy Chemistry Technologies (“ECT”) and Consumer and Industrial Chemistry Technologies (“CICT”).
Energy Chemistry Technologies designs, develops, manufactures, packages, and markets specialty chemistries used in O&G well drilling, cementing, completion, and stimulation. These technologies developed by Flotek’s Research and Innovation team enable customers to pursue improved efficiencies in the drilling and completion of wells.
Consumer and Industrial Chemistry Technologies designs, develops, and manufactures products that are sold to companies in the flavor and fragrance industries andESG solutions for both segments through green chemistry formulation, specialty chemical industry. These technologies are used by beverageformulations, EPA regulatory guidance, technical support, basin and food companies, fragrance companies,reservoir studies, data analytics and companies providing household and industrial cleaning products.
Discontinued Operations
new technology projects. The Drilling Technologies and Production Technologiespurpose of R&I is to supply the Company’s segments are classified as discontinued operations.
Drilling Technologies assembles, rents, sells, inspects, and markets downhole drilling equipment used in energy, mining, and industrial drilling activities.
Production Technologies assembles and markets production-related equipment, including pumping system components, electric submersible pumps (“ESP”), gas separators, valves,with enhanced products and services that support natural gas and oil production activities.
Market Conditions
The Company’s success is sensitive to a number of factors, which include, but are not limited to, drilling and well completion activity, customer demand for its advanced technology products, market prices for raw materials, and governmental actions.
Drilling and well completion activity levels are influenced by a number of factors, including the number of rigs in operation and the geographical areas of rig activity. Additional factors that influence the level of drilling and well completion activity include:
Historical,generate current and anticipated future O&G prices,revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.
Federal, state,Outlook
Our business is subject to numerous variables which impact our outlook and local governmental actions that may encourage or discourage drilling activity,
Customers’ strategies relative to capital funds allocations,
Weatherexpectations given the shifting conditions and
Technological changes to drillingof the industry and completion methods and economics.
Historical North American drilling activity is reflected in “TABLE A”weather volatility. We have based our outlook on the following page.market conditions we perceive today. Changes often occur.
Customers’ demand for advanced technology products and services provided by the CompanyEnergy
We believe that we are dependent on their recognition of the value of:
Chemistries that improve the economics of their O&G operations,
Chemistries that meet the need of consumer product markets, and
Chemistries that are economically viable, socially responsible, and ecologically sound.
Market prices for commodities, including citrus oils and guar, can be influenced by:
Historical, current, and anticipated future production levels of the global citrus (primarily orange) and guar crops,
Weather related risks,
Health and condition of citrus trees and guar plants (e.g., disease and pests), and
International competition and pricing pressures resulting from natural and artificial pricing influences.
Governmental actions may restrict the future use of hazardous chemicals, including, but not limited to, the following industrial applications:
O&G drilling and completion operations,
O&G production operations, and
Non-O&G industrial solvents.


TABLE AThree months ended September 30, Nine months ended September 30,
 2017 2016 % Change
 2017 2016 % Change
Average North American Active Drilling Rigs           
U.S.946
 479
 97.5% 861
 482
 78.6%
Canada208
 121
 71.9% 207
 112
 84.8%
Total1,154
 600
 92.3% 1,068
 594
 79.8%
Average U.S. Active Drilling Rigs by Type           
Vertical70
 62
 12.9% 72
 58
 24.1%
Horizontal799
 372
 114.8% 720
 376
 91.5%
Directional77
 45
 71.1% 69
 48
 43.8%
Total946
 479
 97.5% 861
 482
 78.6%
Average North American Drilling Rigs by Product           
Oil874
 452
 93.4% 800
 440
 81.8%
Natural Gas280
 148
 89.2% 268
 154
 74.0%
Total1,154
 600
 92.3% 1,068
 594
 79.8%
ftk_201709xchart-50177a07.jpgftk_201709xchart-51647a07.jpg
Source: Rig counts are per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are the averages of the weekly rig count activity.
Completions are per the U.S. Energy Information Administration (https://www.eia.gov/petroleum/drilling/) as of October 16, 2017.
Average U.S. rig activity increased by 97.5% and 78.6% for the three and nine months ended September 30, 2017, respectively, when compared to the same periods of 2016, and sequentially, increased by 5.7% when compared to the second quarter of 2017.
According to data collected by the U.S. Energy Information Administration (“EIA”) as reported on October 16, 2017, completions in the seven most prolific areas in the lower 48 states increased 47.3%early years of a tight supply cycle for oil and 37.0% for the three and nine months ended September 30, 2017, when compared to the same periodsgas triggered by an extended period of 2016. Sequentially, completions increased 12.2% when compared to the second quarter of 2017.


Company Outlook
After a continuous decline in U.S. drilling rig activity beginning in mid-2014, the market began to gradually recover in the second quarter of 2016. Although a continuing recovery appears to be underway, the level of drilling and completion activity is still depressed compared to historical levels. Assuming the price for crude oil remains relatively stable and regulatory impediments are reduced, the Company expects U.S. oilfield activity to remain dependent on commodity prices.
During the third quarter of 2017, the Company continued to promote the efficacy of its Complex nano-Fluid® (“CnF®”) chemistries resulting in a 23.1% increase in CnF® sales volumes compared to the third quarter of 2016. Third quarter 2017 CnF® volumes decreased 12.9% compared to the second quarter of 2017. Although quarter to quarter performance may vary, the Company expects its Energy Chemistry Technologies sales to outperform market activity metrics over time by continuing to demonstrate the efficacy of its CnF® chemistries through comparative analysis of wells with and without CnF® chemistries, field validation results conducted by E&P companies, and the continuation of its direct-to-operator sales program known as the Flotek Store®. Whether operators purchase directly from Flotek or continue to purchase from oilfield distribution and service companies, E&P operators are benefiting from increased transparency in pricing and a more direct relationship with Flotek’s technical expertise and supply chain.
The Company’s success in promoting its patented and proprietary chemistries is supported through its industry leading research and innovation staff who provide customer responsive product innovation, as well as development of new products which are expected to expand the Company’s future product lines. During the third quarter of 2016, the Company completed its new Global Research & Innovation Center in Houston. This state-of-the-art facility allows for the development of next-generation innovative energy chemistries, as well as expanded collaboration between clients, leaders from academia, and Company scientists. These collaborative opportunities are an important and distinguishing capability within the industry.
The outlook for the Company’s consumer and industrial chemistries will be driven by the availability and demand for citrus oils, industrial solvents, and flavor and fragrance ingredients. Although current inventory and crop expectations are sufficient to meet the Company’s needs to supply its flavor and fragrance business, as well as both internal and external industrial markets, the market supply of citrus oils has declined in recent years due to the reduction in citrus crops caused by the citrus greening disease. This reduced supply has resulted in higher citrus oil prices and increased price volatility. However, the Company expects its strong market position to enable it to maintain a stable supply of citrus oils for internal use and external sales. The Company expects to manage the impact of volatile terpene costs through the development of new product formulations and pricing strategies.
During the fourth quarter 2016, the Company implemented a strategic restructuring of its business to enable a greater focus on its core businessesunderinvestment in energy chemistrydevelopment, infrastructure and consumernew sources of oil and industrial chemistry and initiated a process to identify potential buyers for its Drilling Technologies and Production Technologies segments. By the end of August 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments.
Capital expenditures for continuing operations totaled $6.2 million and $10.6 million for the nine months ended September 30, 2017 and 2016, respectively. The Company expects capital spending to be between $9 million and $11 million in 2017, but anticipates to be towards the lower end of the range. The Company will remain nimble in its core capital expenditure plans, adjusting as market conditions warrant.
Changes to geopolitical, global economic, and industry trends could have an impact, either positive or negative, on the Company’s business. In the event of significant adverse changes togas production. While the demand for oil and gas could fluctuate depending on the macroeconomic condition, we believe that this tight supply cycle could last and could provide support to high oil prices for multiple years. We expect that the strongest potential growth throughout 2023 will likely come from independent, rather than large major exploration and production companies. Independent exploration and production companies operate the majority of U.S. land rigs and react quickly to changing commodity prices. In the current commodity price environment, we expect these companies to increase activity and the larger companies to have modest spending increases in the year ahead.
Digital Analytics

The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. We believe Verax™analyzers have gained a foothold in North American markets for critical applications where compositional information is needed in real-time. The technology delivers insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API (American Petroleum Institute) gravity, viscosity, BTU (British Thermal Unit) and more, simultaneously. We continue to collaborate with our customers to identify further facilities and applications where our technology has the highest value. To drive recurring revenue, we continue to build on the modular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations. AIDA (Automated Interface Detection Algorithm) provides real-time detection of interfaces in a liquids pipeline without the need for additional sampling or chemometric modeling. The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces real-time versus traditional lab analysis. We believe this allows customers to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades. We are also gaining traction leveraging the Verax™ in applications where operators and service companies are using field gas as a substitute for diesel in dual fuel engines as the market pricemoves to Tier 4 equipment and eFleets. Analyzing this in real-time allows companies to maximize the substitution rate while lowering emissions, reducing fuel consumption/costs, and protecting the equipment from damage.

ESG

ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment. We anticipate the Company’s products and services could offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas and/orindustry. Further, the availabilityCompany’s patented line of citrus crops,Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Additionally, we believe the market conditions affectingCompany’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.

We believe the industry focus on maintaining a “social license to operate” provides the platform to accelerate the sale of our products and services that we believe can help the customer achieve a greener goal. We believe the performance driven ESG focus of the Company assists in reducing environmental liabilities and improving returns for our customers.

33


Supply Chain

The principal supply issues facing our industry for the next twelve months will include:
•Fluctuating freight costs for shipping to our customers;
•Availability of raw materials;
•Delays due to port congestion;
•Labor shortages; and
•Demand forecasting.

All bidding will require the risk of shipping costs and delays to be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could change rapidly and materially. Should such adverse changes to market conditions occur, management believesalso result in supply disruption.

New York Stock Exchange (“NYSE”) Continued Listing Requirements

The Company’s common stock is currently listed on the NYSE. On April 12, 2023, the Company received written notice from the NYSE that the average closing price of the Company’s shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, the Company has accessnotified the NYSE that it intends to adequate liquiditycure the $1.00 per share deficiency. Based on the applicable NYSE procedures, the Company has six months following the receipt of the NYSE’s notice to withstandcure the deficiency and regain compliance. The NYSE’s notice has no immediate impact on the listing of the Company’s common stock, which will continue to trade on the NYSE subject to the Company’s continued compliance with the other listing requirements of the NYSE. The common stock of the Company will continue to trade under the symbol “FTK” but will have an added designation of “.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such changes while continuing to make strategic capital investments and acquisitions, if opportunities arise. In addition, management believestime as the Company is well-positioneddeemed to take advantage of significant increasesbe in demand for its products should market conditions improve dramatically in the near term.

compliance. The Company intends to explore available options to regain compliance, which may include, if necessary, effectuating a reverse stock split.



34
Consolidated Results of Continuing Operations (in thousands):
Three months ended March 31,
 20232022
Revenue
   Revenue from external customers$11,652 $10,382 
   Revenue from related party36,355 2,497 
     Total revenues48,007 12,879 
Cost of sales46,127 13,358 
Cost of sales %96.1 %103.7 %
Gross profit (loss)1,880 (479)
Gross profit (loss) %3.9 %(3.7)%
Selling general and administrative6,451 4,886 
Selling general and administrative %13.4 %37.9 %
Depreciation176 195 
Research and development614 1,415 
Severance costs2,223 (7)
Loss on sale of property and equipment— 8 
Gain on lease termination— (584)
(Gain) loss in fair value of Contract Consideration
 Convertible Notes Payable		(26,095)3,892 
Income (loss) from operations18,511 (10,284)
Operating margin %38.6 %(79.9)%
Interest and other income, net2,841 (444)
Income (loss) before income taxes21,352 (10,728)
Income tax (expense) benefit(9)4 
Net income (loss)$21,343 $(10,724)
Net income (loss) %44.5 %(83.3)%
 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue$79,458
 $64,337
 $244,589
 $192,227
Cost of revenue57,718
 41,983
 169,016
 124,362
Gross profit21,740
 22,354
 75,573
 67,865
    Gross margin %27.4 % 34.7 % 30.9 % 35.3 %
Corporate general and administrative10,346
 10,302
 33,773
 30,398
Corporate general and administrative %13.0 % 16.0 % 13.8 % 15.8 %
Segment selling and administrative9,277
 9,775
 28,972
 26,879
    Segment selling and administrative %11.7 % 15.2 % 11.8 % 14.0 %
Depreciation and amortization2,540
 2,217
 7,464
 6,024
Research and innovation costs2,691
 2,327
 9,940
 6,323
(Gain) loss on disposal of long-lived assets(11) (14) 401
 (29)
Loss from operations(3,103) (2,253) (4,977) (1,730)
    Operating margin %(3.9)% (3.5)% (2.0)% (0.9)%
Interest and other expense, net(301) (559) (1,054) (1,630)
Loss before income taxes(3,404) (2,812) (6,031) (3,360)
Income tax (expense) benefit(17) 942
 746
 1,349
Loss from continuing operations(3,421) (1,870) (5,285) (2,011)
Income (loss) from discontinued operations, net of tax319
 (876) (13,621) (33,200)
Net loss$(3,102) $(2,746) $(18,906) $(35,211)
Consolidated Results of Operations: Three and Nine Months Ended September 30, 2017, Compared to the Three and Nine Months Ended September 30, 2016
Consolidated revenue for the three and nine months ended September 30, 2017,March 31, 2023 increased $15.1$35.1 million, or 23.5%273%, and $52.4 million, or 27.2%, respectively, versus the same periodsperiod of 2016. These increases in revenue were2022, primarily driven by increased sales withinrelated party activity under the Energy Chemistry Technologies segment due to the increased oilfield activity beginningProFrac Agreement which commenced in the latter halfsecond quarter of 2016.
Consolidated gross profit for the three2022 and nine months ended September 30, 2017, decreased $0.6 million, or 2.7%, andcontinued increased $7.7 million, or 11.4%, respectively, compared to the same periods of 2016. Gross margin decreased to 27.4% and 30.9% for the three and nine months ended September 30, 2017, respectively, from 34.7% and 35.3%activity across our customer base, particularly in the same periodsDA segment. Related party revenues in the CT segment are partially offset by $1.3 million of 2016, primarily due to increased volumes of lower margin product sales in all segments.
Corporate general and administrative (“CG&A”) expenses are not directly attributable to products sold or services provided. CG&A costs remained relatively flatcontract assets amortization for the three months ended September 30, 2017, and increased $3.4 million, or 11.1%, for the nine months ended September 30, 2017, versus the same periodsMarch 31, 2023.

Consolidated cost of 2016. As a percentage of revenue, CG&A decreased 3.0% and 2.0% for the three and nine months ended September 30, 2017, respectively. The increase in CG&A costs was primarily due to costs associated with executive retirement, stock compensation expense, and information technology costs, partially offset by decreased legal expenses.
Segment selling and administrative (“SS&A”) expenses are not directly attributable to products sold or services provided. SS&A costs remained relatively flatsales for the three months ended September 30, 2017, andMarch 31, 2023 increased $2.1$32.8 million, or 7.8%245%, for the nine months ended September 30, 2017, versus the same periodsperiod of 2016. As a percentage of revenue, SS&A decreased 3.5% and 2.2% for the three and nine months ended September 30, 2017, respectively. The increase in SS&A costs was primarily due to increased headcount in the Energy Chemistry Technologies and Consumer and Industrial Chemistry Technologies sales and support staff for expansion and growth in new business and related higher sales and marketing expenses.
Depreciation and amortization expense increased $0.3 million, or 14.6%, and $1.4 million, or 23.9%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016,2022, primarily attributable to the completionincrease in revenue.

SG&A expenses for the three months ended March 31, 2023 increased $1.6 million, or 32%, versus the same period of 2022. The increase relates mainly to professional fees, driven by higher legal fees partially offset by a decrease in capital transaction related costs.

Severance costs of $2.2 million were recorded in the three months ended March 31, 2023 compared to a credit of $7 thousand for the same period of 2022, and equipping of the Global Research & Innovation Center in August 2016, along with other improvementswere attributable to manufacturing facilities.


senior management changes.
Research and Innovationdevelopment (“R&I”&D”) expense increased $0.4 million, or 15.6%, and $3.6 million, or 57.2%,costs for the three and nine months ended September 30, 2017, respectively,March 31, 2023, decreased $0.8 million or 57%, versus the same period of 2022 due to a reduction in sample testing in 2023 and lower personnel cost driven by headcount optimization.
Income from operations increased by $28.8 million or 280% for the three months ended March 31, 2023, versus the same period in 2022. The improvement is primarily driven by the gain in fair value of the Contract Consideration Convertible Notes Payable of $26.1 million compared to a loss in fair value of $3.9 million for the same period of 2022. The improvement is partially offset by severance costs of $2.2 million.

35
Interest and other income for the three months ended March 31, 2023, increased $3.3 million or 740% driven by a $4.5 million gain for the forgiveness of the Flotek PPP loan (see Note 9, “Debt and Convertible Notes Payable”). This was partially offset by non-cash interest charges of $1.7 million in the three months ended March 31, 2023 versus $0.7 million for the same period in 2022. The increased interest cost relates to paid- in-kind interest expense on the convertible notes payable and the Contract Consideration Convertible Notes Payable.
The Company’s income tax (expense) benefit for the three months ended March 31, 2023 and 2022 was minimal.
Results by Segment (in thousands):
Chemistry Technologies Results of Operations:
Three months ended March 31,
20232022
Revenue from external customers$9,225 $9,311 
Revenue from related party36,265 2,497 
Income (loss) from operations23,379 (6,057)
CT revenue from external customers for the three months ended March 31, 2023 decreased $0.1 million or 0.9%, compared to the same periodsperiod of 2016. These increases2022. Revenue from related parties increased $33.8 million or 1352%, compared to the same period of 2022. The increased revenue in R&I are2023 is driven by the ProFrac Agreement which commenced in the second quarter of 2022.
Income from operations for the CT segment for the three months ended March 31, 2023 increased $29.4 million or 486% compared to the same period of 2022. The improvement is primarily attributable to increased personnel for new product development and Flotek’s commitment to remaining responsive to customer needs, increased demand, continued growth and refining of existing product lines, and the development of new chemistries which are expected to expand the Company’s intellectual property portfolio.
Interest and other expense decreased $0.3 million, or 46.2%, and $0.6 million, or 35.3%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016, primarily due to the repaymentgain in fair value of the term loan in May 2017.
The Company recorded an income tax provisionContract Consideration Convertible Notes Payable of less than $0.1 million, yielding an effective tax rate of (0.5)%, and an income tax benefit of $0.7 million, yielding an effective tax benefit rate of 12.4%, for the three and nine months ended September 30, 2017, respectively, compared to income tax benefits of $0.9 million and $1.3 million, yielding effective tax benefit rates of 33.5% and 40.1%, for the comparable periods in 2016.
As part of the Company’s strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments through August 2017. The Company recorded a net gain from discontinued operations of $0.3$26.1 million for the three months ended September 30, 2017, andMarch 31, 2023 compared to a net loss from discontinued operations of $13.6$3.9 million for the nine months ended September 30, 2017.
Resultssame period of 2022. The improvement is partially offset by Segment
Energy Chemistry Technologies (“ECT”)       
(dollars in thousands)Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue$61,167
 $45,030
 $187,807
 $133,094
Gross profit18,733
 18,180
 63,840
 54,609
Gross margin %30.6% 40.4% 34.0% 41.0%
Income from operations6,867
 6,196
 24,715
 21,793
Operating margin %11.2% 13.8% 13.2% 16.4%
ECTResultsincreased cost of Operations: Threesales, driven by activity, with notable, significant increased freight and Nine Months Ended September 30, 2017, Compared to the Threeequipment rental costs, and Nine Months Ended September 30, 2016
ECT revenue for the three and nine months ended September 30, 2017, increased $16.1severance costs of $0.6 million, or 35.8%, and $54.7 million, or 41.1%, respectively, versus the same periods of 2016. CnF® sales revenues increased 28.7% (volumes increased 23.1%), compared todriven by changes in senior management. During the three months ended September 30, 2016. Increased well completion activity byMarch 31, 2022, the loss from operations included a gain on lease termination of $0.6 million.
Data Analytics Results of Operations:
Three months ended March 31,
20232022
Revenue from external customers$2,427 $1,071 
Revenue from related party90 — 
Income (loss) from operations457 (808)

DA revenue from external customers lead to the increased CnF® chemistry sales during the third quarter of 2017. Quarterly non-CnF revenues rose approximately 49.8%, compared tofor the three months ended September 30, 2016, due toMarch 31, 2023 increased customer demand as a result of oilfield market conditions.
Sequentially, revenues decreased $4.7$1.4 million or 7.1%, versus the second quarter of 2017. CnF® sales revenues decreased 11.2% (volumes decreased 12.9%) on a sequential basis. Impacts related127% compared to Hurricane Harvey and certain customer delays affected the quarter.
ECT gross profit increased $0.6 million, or 3.0%, and $9.2 million, or 16.9%, for the three and nine months ended September 30, 2017, respectively, versus the same periodsperiod of 2016. Gross margin decreased to 30.6% and 34.0% for the three and nine months ended September 30, 2017, respectively, from 40.4% and 41.0% in the same periods of 2016. The gross margin decreases over the periods were2022 primarily due to product mix and higher raw material costs. Sequentially, gross profit decreased $4.1significant products revenues from three new customers. Revenue from related party customers was $0.1 million or 17.9%, versus the second quarter of 2017.relating to services provided to ProFrac Services, LLC.
Income from operations for the ECT segment increased $0.7 million, or 10.8%, and $2.9 million, or 13.4%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. These increases were primarily attributable to the increase in CnF® sales.


Consumer and Industrial Chemistry Technologies (“CICT”)      
(dollars in thousands)Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue$18,291
 $19,307
 $56,782
 $59,133
Gross profit3,007
 4,174
 11,733
 13,256
Gross margin %16.4% 21.6% 20.7% 22.4%
Income from operations985
 2,433
 5,906
 8,508
Operating margin %5.4% 12.6% 10.4% 14.4%

CICT Results of Operations: Three and Nine Months Ended September 30, 2017, Compared to the Three and Nine Months Ended September 30, 2016
CICT revenue decreased $1.0 million, or 5.3%, and $2.4 million, or 4.0%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. These decreases were due to reduced volumes, partially offset by higher prices. Sequentially, quarterly revenues decreased $1.0 million, or 5.2%, versus the second quarter of 2017 due to reduced volumes.
CICT gross profit for the three and nine months ended September 30, 2017, decreased $1.2 million, or 28.0%, and $1.5 million, or 11.5%, respectively, versus the same periods of 2016. Gross margin decreased to 16.4% and 20.7% for the three and nine months ended September 30, 2017, respectively, from 21.6% and 22.4% in the same periods of 2016. These decreases were a result of lower margins caused by higher material costs and product mix. Sequentially, gross profits decreased by $0.3 million, and gross margins decreased to 16.4% from 17.0% in the second quarter of 2017 due to product mix and increased raw material costs.
Income from operations for the CICTDA segment decreased $1.4 million, or 59.5%, and $2.6 million, or 30.6%, for the three and nine months ended September 30, 2017, respectively, versusMarch 31, 2023 increased $1.3 million or 157% compared to the same periodsperiod for 2022 driven by increased activity and decreased R&D expense.

Corporate and Other Results of 2016. Sequentially, quarterly operating profits decreased by $0.2 million. These decreases are primarilyOperations:

Three months ended March 31,
20232022
Loss from operations$(5,325)$(3,419)

Loss from operations for the three months ended March 31, 2023, increased $1.9 million, or 56%, compared to the same period of 2022 attributable to product mixseverance costs and increased raw materialprofessional fees. Severance costs of $1.6 million were recorded in the three months ended March 31, 2023, relating to senior management changes. The increase in professional fees relates mainly to higher legal fees partially offset by lower capital transaction related costs.

36

Capital Resources and indirect costs.Liquidity
Discontinued Operations
During the fourth quarter of 2016, the Company classified the Drilling Technologies and Production Technologies segments as held for sale based on management’s intention to sell these businesses. By the end of August 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments. The Company’s historical financial statements have been revised to present the operating results of the Drilling Technologies and Production Technologies segments as discontinued operations. The information below is presented for informational purposes only.
Drilling Technologies       
(dollars in thousands)Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue$—
 $7,197
 $11,534
 $20,026
Gross profit (loss)—
 2,907
 4,275
 6,150
Gross margin %—% 40.4 % 37.1 % 30.7 %
Loss from operations(755) (924) (2,196) (43,493)
Loss from operations - excluding impairment(755) (924) (2,196) (6,971)
Operating margin % - excluding impairment—% (12.8)% (19.0)% (34.8)%


Production Technologies       
(dollars in thousands)Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
Revenue$—
 $2,145
 $4,002
 $6,034
Gross profit (loss)—
 105
 813
 201
Gross margin %—% 4.9 % 20.3 % 3.3 %
Loss from operations(64) (1,118) (1,290) (7,810)
Loss from operations - excluding impairment(64) (1,118) (1,290) (3,897)
Operating margin % - excluding impairment—% (52.1)% (32.2)% (64.6)%
Off-Balance Sheet Arrangements
There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2017, the Company was not involved in any unconsolidated SPEs.
The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors.
Critical Accounting Policies and EstimatesOverview
The Company’s Financial Statementsongoing capital requirements relate to the acquisition and maintenance of equipment and funding working capital requirements. During the three months ended March 31, 2023, the Company funded working capital requirements with cash on hand.
As of March 31, 2023, the Company had unrestricted cash and cash equivalents of $12.4 million, as compared to $12.3 million on December 31, 2022. During the three months ended March 31, 2023, the Company had an operating income of $18.5 million, $1.1 million of cash provided by operating activities, $0.2 million cash used in investing activities and $0.8 million of cash used in financing activities.
Going Concern
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparation assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of these statements requires management to make judgments, estimates,assets and assumptions that affect the amounts reportedsatisfaction of liabilities in the financial statements and accompanying footnotes. Part II, Item 8 — Financial Statements and Supplementary Data, Note 2normal course of “Notes to Consolidated Financial Statements” and Part II, Item 7 — Management’s Discussion and Analysis of Financial Conditions and Results of Operations, “Critical Accounting Policies and Estimates” ofbusiness. However, substantial doubt about the Company’s Annual Report, and the “Notesability to Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report describe the significant accounting policies and critical accounting estimates used to prepare the consolidated financial statements. Critical accounting policies and estimates are definedcontinue as those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most subjective judgments. a going concern exists.

The Company regularly reviews and challenges judgments, assumptions, and estimates related to critical accounting policies. The Company’s estimates and assumptions are based on historical experience and expected changes in the business environment; however, actual results may materially differcurrently funds its operations from the estimates. There have been no significant changes in the Company’s critical accounting estimates during the nine months ended September 30, 2017.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2 — “Recent Accounting Pronouncements” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements arise from the Company’s need to service debt, acquire and maintain equipment, fund working capital requirements, and when the opportunities arise, to make strategic acquisitions and repurchase Company stock. During the first nine months of 2017, the Company funded capital requirements primarily with cash on hand and debt financing.
other current assets. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the unaudited condensed consolidated financial statements. The availability of capital is dependent on the Company’s primary source of debt financingoperating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”). It is its Credit Facility with PNC Bank. This Credit Facility contains provisions for a revolving credit facility secured by substantially allnot certain that the Company’s cash and other current assets and the Company’s forecasted operating cash flows currently expected to be generated from the ongoing execution of the Company’s domestic real and personal property, including accounts receivable, inventory, land, buildings, equipment, and other intangible assets. As of September 30, 2017,ProFrac Agreement will provide the Company had $40.6 millionwith sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as they become due in outstanding borrowings under the revolving debt portion ofnext twelve months. The Company may require additional liquidity to continue its operations over the Credit Facility. At September 30, 2017,next twelve months to sufficiently alleviate or mitigate the Companyconditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are filed.


was in compliance with all debt covenants. Significant terms of the Credit Facility are discussed in Note 12 — “Long-Term Debt and Credit Facility” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.
The Company believes it has accessis evaluating strategies to adequate liquidityobtain additional funding for future operations. These strategies may include, but are not limited to, fundobtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its ongoing operationsproducts and capital expenditures. Asservices, increasing the percentage of September 30, 2017,its sales from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company had available borrowing capacity under its revolving line of credit of $34.3 million and available cash of $4.9 million, resulting in total liquidity of $39.2 million. For the remainder of 2017,may be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company planswill be able to spend between $2.8 millionobtain additional liquidity when needed or under acceptable terms, if at all.

The unaudited condensed consolidated financial statements do not include any adjustments to the carrying amounts and $4.8 million for committedclassification of assets, liabilities, and planned capital expenditures. The Company may pursue external financing to increase its liquidity position and/or fund acquisitions when strategic opportunities arise.
Any excess cash generatedreported expenses that may be usednecessary if the Company were unable to pay down the level of debt or retained for future use.
Net Debt
Net debt represents total debt less cash and cash equivalents and combines the Company’s indebtedness and the cash and cash equivalents that could be used to repay that debt. Components of net debt arecontinue as follows (in thousands):
 September 30, 2017 September 30, 2016
Cash and cash equivalents$4,942
 $3,474
Current portion of long-term debt(40,589) (34,562)
Long-term debt, less current portion—
 (8,000)
Net debt$(35,647) $(39,088)
a going concern.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
 Three months ended March 31,
 20232022
Net cash provided by (used in) operating activities$1,140 $(8,474)
Net cash (used in) provided by investing activities(157)24 
Net cash (used in) provided by financing activities(818)19,993 
Effect of changes in exchange rates on cash and cash equivalents(21)8 
Net change in cash and cash equivalents and restricted cash$144 $11,551 

37
 Nine months ended September 30,
 2017 2016
Net cash provided by (used in) operating activities$1,178
 $(825)
Net cash provided by (used in) investing activities11,839
 (18,754)
Net cash (used in) provided by financing activities(13,039) 20,805
Net cash flows provided by (used in) discontinued operations13
 (8)
Effect of changes in exchange rates on cash and cash equivalents128
 48
Net increase in cash and cash equivalents$119
 $1,266

Operating Activities
Net cash provided by (used in) operating activities was $1.2 million and $(0.8)$1.1 million during the ninethree months ended September 30, 2017 and 2016, respectively.March 31, 2023 compared to $8.5 million used in operating activities for the same period of 2022. Consolidated net lossincome for the ninethree months ended September 30, 2017 and 2016, totaled $5.3March 31, 2023 was $21.3 million and $2.0compared to a net loss of $10.7 million respectively.for the three months ended March 31, 2022.
During the ninethree months ended September 30, 2017, netMarch 31, 2023, non-cash contributionsadjustments to net income (loss) totaled $12.2 million. Contributory non-cash items consisted primarily of $9.5$27.8 million as compared to $5.6 million for depreciation and amortization, $9.7the same period of 2022.
•For the three months ended March 31, 2023 non-cash adjustments included $26.1 million for stock-basedthe change in fair value of Contract Consideration Convertible Notes Payable, $4.5 million for PPP loan forgiveness and $1.1 million stock compensation adjustment. These were offset by non-cash positive adjustments of $1.6 million paid-in-kind interest expense, $1.3 million amortization of contract assets and $1.0 million non-cash lease expense.
•For the three months ended March 31, 2022 non-cash adjustments included $3.9 million for the change in fair value of Contract Consideration Convertible Notes Payable, $0.7 million stock compensation expense, $0.9$0.5 million paid-in-kind interest expense and $0.3 million provision for recognized incremental tax benefits related to the Company’s share based awards,excess and $0.4 million for net loss on sale of assets,obsolete inventory. These were partially offset by $8.3$0.6 million for changes to deferred income taxes.the gain on lease termination.
During the ninethree months ended September 30, 2016, net non-cash contributions to net income totaled $10.8 million. Contributory non-cash items consisted primarily of $7.7 million for depreciation and amortization, $8.6 million for stock compensation expense, and $0.9 million for recognized incremental tax benefits related to the Company’s share based awards, partially offset by $6.3 million for changes to deferred income taxes.
During the nine months ended September 30, 2017,March 31, 2023, changes in working capital used $5.7provided $7.6 million inof cash primarily resulting from increasing accounts receivable and inventory by $20.9as compared to using $3.3 million and decreasing accounts payable by $8.3 million, partially offset by decreasing income taxes receivable and other current assets by $21.9 million and increasing accrued liabilities and interest payable by $1.6 million.for the same period of 2022.


During•For the ninethree months ended September 30, 2016,March 31, 2023, changes in working capital used $9.6 millionresulted primarily from an increase in cash,accounts payable of $8.6 million.
•For the three months ended March 31, 2022, changes in working capital resulted primarily resulting from increasing accounts receivable, inventory, income taxes receivable, and other current assets by $24.3 million and decreasing income taxes payable by $1.8a decrease in accrued liabilities of $2.4 million partially offset by increasing accounts payable,due to payment of a legal settlement accrued liabilities,in 2021 and interest payable by $16.4an increase in inventories of $1.0 million.
Investing Activities
Net cash provided by investing activities was $11.8 million for the nine months ended September 30, 2017. Cash provided by investing activities primarily included $18.5 million of proceeds received from the sale of the Drilling Technologies and Production Technologies segments and $0.3 million of proceeds received from the sale of fixed assets, partially offset by $6.2 million for capital expenditures and $0.8 million for the purchase of various patents and other intangible assets.
Net cash used in investing activities was $18.8 million for the ninethree months ended September 30, 2016. Cash used inMarch 31, 2023 was $0.2 million driven by capital additions. Net cash provided by investing activities primarily included $10.6 million for capital expenditures and $8.2 million for the purchase of IPI and various patents.three months ended March 31, 2022 was negligible.
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2023 was $13.0$0.8 million, and relates primarily to payments for forfeited stock options and to tax authorities for shares withheld from employees. Net cash provided by financing activities was $20.0 million for the ninethree months ended September 30, 2017,March 31, 2022, primarily due to using $7.8 million for repayments of debt, net of borrowings, purchases of treasury stock for tax withholding purposes related to vesting of restricted stock awards of $1.5 million, and $4.2 million forfrom the repurchase of common stock. Cash used in financing activities was partially offset by $0.5 million in proceeds from the saleissuance of common stock.convertible notes.
Net cash generated through financing activities was $20.8 million for the nine months ended September 30, 2016, primarily due to receiving $30.6 millionCritical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in proceeds from the sale of common stock, inclusive of $29.9 million, net of issuance costs, from the private placement of 2.5 million common shares on July 27, 2016. Cash generated through financing activities was partially offset by using $8.0 million for repayments of debt, net of borrowings, reductions in tax benefit related to stock-based compensation of $0.9 million, and purchases of treasury stock for tax withholding purposes related to vesting of restricted stock awardsconformity with U.S. GAAP and the exerciseCompany’s discussion and analysis of non-qualified stock options of $0.9 million.
On August 1, 2017, the Company filed a registration statement on Form S-3 (the “Universal Shelf”) with the SEC to register for sale from time to time up to $350 million of common stock, preferred stock, seniorits financial condition and subordinated debt securities, warrants, units and guarantees. The Universal Shelf was declared effective by the SEC on October 11, 2017 and will remain effective for three years. Although the Company has no current plans to issue any securities under the Universal Shelf, it will remain available for use by the Company, subject to market conditions, to quickly access the capital markets should the need arise.
Contractual Obligations
Cash flows from operations are dependent on a variety of factors, including fluctuations in operating results accounts receivable collections, inventory management, and the timing of payments for goods and services. Correspondingly, the impact of contractual obligations onrequire the Company’s liquiditymanagement to make judgments, assumptions, and capital resourcesestimates that affect the amounts reported. Management’s Discussion and Analysis of Financial Condition and Results of Operations in future periods is analyzed in conjunction with such factors.
Material contractual obligations consistPart II, Item 7 of repayment of amounts borrowed on the Company’s Credit Facility with PNC Bank2022 Annual Report describes the critical accounting policies and paymentestimates used in the preparation of operating lease obligations. Contractual obligations at September 30, 2017, are as follows (in thousands):the Company’s condensed consolidated financial statements. Note 2, “Summary of Significant Accounting Policies” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2022 Annual Report describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements.

 Payments Due by Period
 Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years
Borrowings under revolving credit facility (1)
$40,589
 $40,589
 $—
 $—
 $—
Operating lease obligations22,415
 2,679
 4,762
 3,966
 11,008
Total$63,004
 $43,268
 $4,762
 $3,966
 $11,008
(1) The borrowing is classified as current debt. The weighted-average interest rate is 3.86% at September 30, 2017.
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
The Company is exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates. There have been no material changes to the quantitative or qualitative disclosures about market risk set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of the Company’s Annual Report.



Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures

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

In accordance with Exchange Act Rules 13a–15(e) and procedures are designed to provide such reasonable assurance.
The Company’s management,15d–15(e), we carried out an evaluation under the supervision and with the participation of our management, including the principal executiveInterim Chief Executive Officer and principal financial officers, evaluatedthe Chief Financial Officer, of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures as of September 30, 2017, as required by Rule 13a-15(e) of the Exchange Act.March 31, 2023. Based upon thatthis evaluation, the principal executiveour interim Chief Executive Officer and principal financial officersChief Financial Officer have concluded that, the Company’sas of March 31, 2023, our disclosure controls and procedures were not effective because of a material weakness in our internal control over financial reporting described below.

Material Weakness in Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, as amended.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In connection with the preparation of the Company’s 2022 Annual Report, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of September 30, 2017.December 31, 2022, and identified the material weakness described below that continues to exist as of March 31, 2023.

Specifically, (i) the Company did not have sufficient resources in place throughout the reporting period with the appropriate training and knowledge of internal controls over financial reporting in order to establish the Company’s financial reporting processes to design, implement and operate an effective system of internal control over financial reporting; (ii) the Company did not conduct an adequate continuous risk assessment over financial reporting to identify and analyze risks of financial misstatement due to error and/or fraud and to identify and assess necessary changes in financial reporting processes and internal controls impacted by significant changes in the business and increase in transactions; and (iii) the Company did not have an effective information and communication process that ensured appropriate and accurate information was available to financial reporting personnel on a timely basis in order that they could fulfill their roles and responsibilities.

Accordingly, the Company did not establish appropriate control activities through policies and procedures to mitigate risk to the achievement of the Company’s financial reporting objectives, as follows:

•The Company did not design effective controls over the identification and subsequent accounting for modifications to lease agreements;
•The Company did not design effective controls over the accuracy of prepaid asset accounts;
•The Company did not design effective controls over the completeness and accuracy of the related party revenue accrual at period end to ensure all sales are properly accounted for.

These control deficiencies resulted in several material and immaterial misstatements that were corrected prior to the issuance of the consolidated financial statements included in the 2022 Annual Report.

The Company believes that, notwithstanding the material weakness mentioned above, the unaudited condensed consolidated financial statements contained in this Form 10-Q fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company in conformity with generally accepted accounting principles in the United States as of the dates and for the periods presented in this Form 10-Q.

Remediation Plan and Status

The Company has implemented and continues to implement certain remediation actions and continues to evaluate the elements of the remediation plan. These elements include:


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•Implementing a revised FY2023 financial control risk assessment process based on changes in process that have impacted the Company as well as a regularly recurring assessment process focused on identifying and analyzing risks of financial misstatements due to changes in our business or the nature of transactions; and
•Enhancing the information and communication processes to ensure the organization communicates information internally in a timely manner, including information regarding objectives, responsibilities and the functioning of internal controls over financial reporting. Changes will include more frequent discussion of significant business transactions and the impact of these transactions on the Company’s financial reporting, and improving communication to employees regarding their responsibilities for ensuring that effective internal controls are maintained.

The Company believes that the actions listed above will provide appropriate remediation of the material weakness; however, the testing of the effectiveness of the controls has not been completed by the Company. Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate and test the design and effectiveness of the controls, no assurance can be given as to the timing for completion of remediation. The material weakness will be fully remediated when the Company concludes that the controls have been operating for sufficient time and independently validated by management.

Changes in Internal Control OverControls over Financial Reporting
There
Except as described above in “Remediation Plan and Status”, there have been no changes in the Company’s system of internal control over financial reporting (identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) under the Exchange Act) during the three months ended September 30, 2017,March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




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PART II - OTHER INFORMATION

Item 1. Legal Proceedings
Class Action Litigation
On March 30, 2017,Except as described in Note 12, “Commitments and Contingencies” of the U.S. District Court forNotes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1, there have been no material changes in the Southern District of Texas grantedlegal proceedings as described in “Item3. - Legal Proceedings” in the Company’s motion to dismiss the four consolidated putative securities class action lawsuits that wereAnnual Report on Form 10-K filed in November 2015, against the Company and certain of its officers. The lawsuits were previously consolidated into a single case, and a consolidated amended complaint had been filed. The consolidated amended complaint asserted that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint sought an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between October 23, 2014 and November 9, 2015, inclusive. The lead plaintiff appealed the District Court’s decision granting the motion to dismiss.
In January 2016, three derivative lawsuits were filed, two in the District Court of Harris County, Texas (which have since been consolidated into one case) and one in the United States District Court for the Southern District of Texas, on behalf of the Company against certain of its officers and its current directors. The lawsuits allege violations of law, breaches of fiduciary duty, and unjust enrichment against the defendants.
The Company believes the lawsuits are without merit and intends to vigorously defend against all claims asserted. Discovery has not yet commenced. At this time, the Company is unable to reasonably estimate the outcome of this litigation.
In addition, as previously disclosed, the U.S. Securities and Exchange Commission had opened an inquiry related to similar issues to those raised in the above-described litigation. On August 21, 2017, the Company received a letter from the staff ofwith the SEC stating that the inquiry has been concluded and that the staff does not intend to recommend an enforcement action against the Company.on March 23, 2023.
Other Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Item 1A. Risk Factors
ThereIn addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors contained in “Item 1A.-Risk Factors” in our 2022 Annual Report, which could materially affect our business, financial condition and/or future results. As of March 31, 2023, except as set forth below, there have been no material changes to thein our risk factors from those set forth in Part I, Item 1Athe Annual Report. The risks described in the Annual Report and below are not the only risks facing our company. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.
If we cannot regain compliance with the NYSE’s continued listing requirements and rules, the NYSE may delist our common stock, which could negatively affect our company, the price of our common stock and our stockholders’ ability to sell our common stock.

On April 12, 2023, we received written notice from the NYSE that the average closing price of our shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, we have notified the NYSE that we intend to cure the $1.00 per share deficiency. Based on the applicable NYSE procedures, we have six months following the receipt of the Company’s Annual Report.

NYSE’s notice to cure the deficiency and regain compliance. The NYSE’s notice has no immediate impact on the listing of our common stock, which will continue to trade on the NYSE subject to our continued compliance with the other listing requirements of the NYSE. Our shares of common stock will continue to trade under the symbol “FTK” but will have an added designation of “.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such time as we are deemed to be in compliance. We intend to explore available options to regain compliance, which may include, if necessary, effectuating a reverse stock split.


If our common stock ultimately were to be delisted for any reason, it could negatively impact us by (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets; and (iv) impairing our ability to provide equity incentives to our employees.

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

Issuer Repurchases of Equity Securities

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting or exercise of the award. Repurchases of the Company’s equity securities during the three months ended September 30, 2017,March 31, 2023, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:

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Period
Total Number of Shares Purchased (1)
 Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 
Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (2) (3) (4)
July 1, 2017 to July 31, 20171,880
 $8.94
 —
 $54,420,042
August 1, 2017 to August 31, 2017377,203
 $6.07
 350,000
 $52,288,702
September 1, 2017 to September 30, 2017286,009
 $5.55
 280,000
 $50,733,939
Total665,092
 $5.85
 630,000
 

Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
January 1, 2023 to January 31, 20234,407 $1.07 
February 1, 2023 to February 28, 20232,472 $1.18 
March 1, 2023 to March 31, 2023163,882 $1.17 
Total170,761 
(1) The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting of restricted shares and exercise of non-qualified stock options and (b) to satisfy payments required for common stock upon the exercise of stock options.
(1)The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting of restricted shares and exercise of non-qualified stock options, (b) to satisfy payments required for common stock upon the exercise of stock options, and (c) as part of a publicly announced repurchase program on the open market.
(2)In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common stock. Repurchases may be made in open market or privately negotiated transactions. Through September 30, 2017, the Company has repurchased $24.3 million of its common stock and $0.7 million may yet be used to purchase shares.
(3)In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases may be made in open market or privately negotiated transactions. Through September 30, 2017, the Company has not repurchased any of its common stock under this authorization and $50.0 million may yet be used to purchase shares.
(4)A covenant under the Company’s Credit Facility limits the amount that may be used to repurchase the Company’s common stock. At September 30, 2017, this covenant limits additional share repurchases to $10.7 million.
Item 3. Defaults Upon Senior Securities
None.
Item  4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.



On May 5, 2023, the Board approved a form of director and officer indemnification agreement (the “D&O Indemnification Agreement”) to be used by the Company to provide contractual indemnification, expense advancement, and other related rights to the members of the Board and the Company’s executive officers who are a party thereto in accordance with the Delaware General Corporation Law, and authorized the Company to enter into the D&O Indemnification Agreement with each of the Company’s directors and executive officers. The foregoing description of the D&O Indemnification Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the D&O Indemnification Agreement, a copy of which is attached hereto as Exhibit 10.6 and incorporated herein by reference.

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Item  6. Exhibits
Exhibit

Number
Description of Exhibit
3.12.1***
Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between the Company, JP3 Measurement, LLC, the Sellers party thereto, and John A. Cardwell, as Seller Representative) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 19, 2020).
3.1
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2007).
3.2
Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009).
3.3
Certificate of Amendment to the Amended and Restated Bylaws, dated December 9, 2014Certificate of Incorporation of Flotek Industries, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on December 10, 2014)May 7, 2020).
3.4
Certificate of Amendment to the Amended and Restated Certificate of Incorporation (form of which is incorporated by reference to Appendix B to the Company’s Proxy Statement filed on April 5, 2022).
3.5
Second Amended and Restated Bylaws, dated October 11, 2017as amended (incorporated by reference to Exhibit 3.13.4 to the Company’s Form 8-K10-K filed on October 17, 2017)March 16, 2021).
4.1
Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s Definitive Proxy Statement filed on September 27, 2001).
4.2
Registration Rights Agreement, dated asForm of July 26, 2016, by and among the Company, Donald Bramblett, and Mark KieperConvertible Note (incorporated by reference to Exhibit 4.64.1 to the Company’s Registration Statement on Form S-3 (File No. 333-212864)8-K filed on August 3, 2016)February 4, 2022).
10.14.3*
4.4
4.5
10.1
Separation Agreement and Restated Revolving Credit, Term Loan and SecurityGeneral Release, dated January 19, 2023, between the Company ad John Gibson (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K file on January 19, 2023
10.2
Employment Agreement, dated effective as of June 7, 2017.January 19, 2023, between the Company and Harsha Agadi (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on January 19, 2023
10.210.3*
10.4
10.3
Tenth Amendment to Amended2023 between Flotek Chemistry, LLC and Restated Revolving Credit, Term Loan and Security Agreement, dated effective as of September 29, 2017ProFrac Services, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 3, 2017).February 6, 2023)
10.410.5*
10.510.6*
31.1*
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.




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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 10, 2023
FLOTEK INDUSTRIES, INC.
By:/s/    JOHN W. CHISHOLM  /s/    Harsha V. Agadi
John W. ChisholmHarsha V. Agadi
President,Interim Chief Executive Officer and
Chairman of the Board
Date:November 8, 2017
Director (Principal Executive Officer)
FLOTEK INDUSTRIES, INC.By:/s/    Bond Clement
Bond Clement
By:/s/    H. RICHARD WALTON
H. Richard Walton
Executive Vice President and
Chief Financial Officer
Date:November 8, 2017 (Principal Financial and Accounting Officer)






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