~~UNITED STATES~~

~~SECURITIES AND EXCHANGE COMMISSION~~

~~Washington, D.C. 20549~~


~~FORM~~			~~10-Q~~


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

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

~~For the quarterly period ended March 31, 2021~~

For the quarterly period ended March 31, 2022

☐

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

~~For the transition period from to~~

For the transition period from toCommission File Number 1-13270


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

Delaware

90-0023731

(State of other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

8846 N. Sam Houston Parkway W. Houston, TX

77064

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

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☒

Smaller reporting company ☒Emerging growth company ☐

☐

~~Accelerated Filer~~

☒

~~Non-accelerated filer~~

☐

~~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 ☒

~~As of~~At May ~~3, 2021,~~13, 2022, there were ~~72,730,854~~ 76,611,103 outstanding shares of ~~Flotek Industries, Inc.~~the registrant’s common stock, $0.0001 par value.

TABLE OF CONTENTS



Forward-Looking Statements		3

PART I—I - FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets at March 31, ~~2021~~2022 and December 31, ~~2020~~ 2021	4
	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021	5
	Unaudited Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021	7
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2322

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3129

Item 4.	Controls and Procedures	3129

PART ~~II—~~II - OTHER INFORMATION

Item 1.	Legal Proceedings	3331

Item 1A.	Risk Factors	3331

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3331

Item 3.	Defaults Upon Senior Securities	3331

Item 4.	Mine Safety Disclosures	3431

Item 5.	Other Information	3432

Item 6.	Exhibits	3533

~~SIGNATURES~~
SIGNATURES		3634

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q ~~(“Quarterly~~(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, as amended.~~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, ~~financial conditions,~~ future operating results and ~~liquidity, including but not limited to the impact of the COVID-19 pandemic, pending litigation, commodity prices and other circumstances.~~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,” “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” ~~“could,”~~“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, ~~2020~~2021 (“Annual Report” or “2021 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March ~~16, 2021,~~31, 2022, 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.

PART I —- FINANCIAL INFORMATION

Item 1. Financial Statements

FLOTEK INDUSTRIES ~~INC.~~

INC, UNAUDITED CONDENSED CONSOLIDATED BALANCE ~~SHEETS~~

(SHEETS(in thousands, except share data)


		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	33,945	$	38,660	Cash and cash equivalents	$	24,835	$	11,534
Restricted cash	Restricted cash	40		664		Restricted cash	40		1,790
Accounts receivable, net of allowance for doubtful accounts of $1,320 and $1,316 at March 31, 2021 and December 31, 2020, respectively		11,522		11,764
Accounts receivable, net of allowance for doubtful accounts of $684 and $659 at March 31, 2022 and December 31, 2021, respectively						Accounts receivable, net of allowance for doubtful accounts of $684 and $659 at March 31, 2022 and December 31, 2021, respectively	13,239		13,297
Inventories, net	Inventories, net	11,616		11,837		Inventories, net	10,143		9,454

Income taxes receivable	Income taxes receivable	53		403		Income taxes receivable	32		22

Other current assets	Other current assets	2,179		3,127		Other current assets	3,372		3,740
Current contract assets						Current contract assets	3,533		—
Assets held for sale	Assets held for sale	546		0		Assets held for sale	2,752		2,762
Total current assets	Total current assets	59,901		66,455		Total current assets	57,946		42,599
Property and equipment, net	Property and equipment, net	8,258		9,087		Property and equipment, net	5,079		5,296
Operating lease right-of-use assets	Operating lease right-of-use assets	2,217		2,320		Operating lease right-of-use assets	1,827		2,041
Goodwill		8,092		8,092

Deferred tax assets, net	Deferred tax assets, net	220		223		Deferred tax assets, net	282		279

Other long-term assets	Other long-term assets	29		33		Other long-term assets	17		—

Long term contract assets						Long term contract assets	7,067		29
TOTAL ASSETS	TOTAL ASSETS	$	78,717	$	86,210	TOTAL ASSETS	$	72,218	$	50,244

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	6,483	$	5,787	Accounts payable	$	8,233	$	7,616
Accrued liabilities	Accrued liabilities	17,931		18,275		Accrued liabilities	6,747		8,996
Income taxes payable	Income taxes payable	20		21		Income taxes payable	4		4
Interest payable	Interest payable	46		34		Interest payable	94		82

Current portion of operating lease liabilities	Current portion of operating lease liabilities	597		636		Current portion of operating lease liabilities	619		602
Current portion of finance lease liabilities	Current portion of finance lease liabilities	61		60		Current portion of finance lease liabilities	33		41
Current portion of long-term debt	Current portion of long-term debt	5,023		4,048		Current portion of long-term debt	1,553		1,436
Convertible notes payable						Convertible notes payable	17,609		—
Contingent convertible notes payable						Contingent convertible notes payable	14,050		—

Total current liabilities	Total current liabilities	30,161		28,861		Total current liabilities	48,942		18,777
Deferred revenue, long-term	Deferred revenue, long-term	104		117		Deferred revenue, long-term	84		91
Long-term operating lease liabilities	Long-term operating lease liabilities	8,099		8,348		Long-term operating lease liabilities	6,806		7,779
Long-term finance lease liabilities	Long-term finance lease liabilities	80		96		Long-term finance lease liabilities	47		53
Long-term debt	Long-term debt	642		1,617		Long-term debt	3,235		3,352

TOTAL LIABILITIES	TOTAL LIABILITIES	39,086		39,039		TOTAL LIABILITIES	59,114		30,052
Commitments and contingencies (See Note 13)		0		0
Commitments and contingencies (See Note 15)						Commitments and contingencies (See Note 15)	0		0
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; 0 shares issued and outstanding		0		0
Common stock, $0.0001 par value, 140,000,000 shares authorized; 78,275,814 shares issued and 72,702,298 shares outstanding at March 31, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020		8		8
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding						Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $0.0001 par value, 140,000,000 shares authorized; 82,563,610 shares issued and 76,490,522 shares outstanding at March 31, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021						Common stock, $0.0001 par value, 140,000,000 shares authorized; 82,563,610 shares issued and 76,490,522 shares outstanding at March 31, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021	8		8
Additional paid-in capital	Additional paid-in capital	360,537		359,721		Additional paid-in capital	367,104		363,417
Accumulated other comprehensive income (loss)		30		(19)
Accumulated other comprehensive income						Accumulated other comprehensive income	89		81
Accumulated deficit	Accumulated deficit	(286,988)		(278,688)		Accumulated deficit	(319,938)		(309,214)
Treasury stock, at cost; 5,573,516 and 5,580,920 shares at March 31, 2021 and December 31, 2020, respectively		(33,956)		(33,851)

Treasury stock, at cost; 6,073,088 and 6,022,634 shares at March 31, 2022 and December 31, 2021 , respectively						Treasury stock, at cost; 6,073,088 and 6,022,634 shares at March 31, 2022 and December 31, 2021 , respectively	(34,159)		(34,100)
Total stockholders’ equity	Total stockholders’ equity	39,631		47,171		Total stockholders’ equity	13,104		20,192
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	78,717	$	86,210	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	72,218	$	50,244

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	Three months ended March 31,
	2022		2021
Revenue:
Revenue from external customers	$	10,382	$	11,770
Revenue from related party	2,497		—
Total revenues	12,879		11,770
Cost of goods sold	13,358		12,080
Gross loss	(479)		(310)
Operating costs and expenses:

Selling, general, and administrative	4,879		6,082

Depreciation and amortization	195		307
Research and development	1,415		1,542
Loss on sale of property and equipment	8		2
Gain on lease termination	(584)		—
Change in fair value of contingent convertible notes payable	3,892		—
Total operating costs and expenses	9,805		7,933
Loss from operations	(10,284)		(8,243)
Other income (expense):



Interest expense	(668)		(18)
Other income (expense)	224		(33)
Total other expense	(444)		(51)
Loss before income taxes	(10,728)		(8,294)
Income tax benefit (expense)	4		(6)
Net Loss	$	(10,724)	$	(8,300)










Loss per common share:
Basic	$	(0.15)	$	(0.12)
Diluted	$	(0.15)	$	(0.12)










Weighted average common shares:
Weighted average common shares used in computing basic loss per common share	73,858		68,447
Weighted average common shares used in computing diluted loss per common share	73,858		68,447

Three months ended March 31,
2021 2020
Revenue $ 11,770 $ 19,416
Costs and expenses:
Operating expenses (excluding depreciation and amortization) 13,801 22,841
Corporate general and administrative 4,361 4,493
Depreciation and amortization 307 2,191
Research and development 1,542 2,555
Loss (gain) on disposal of long-lived assets 2 (33)
Impairment of fixed, long-lived and intangible assets 0 57,454
Total costs and expenses 20,013 89,501
Loss from operations (8,243) (70,085)
Other (expense) income:
Interest expense (18) (4)
Other expense, net (33) (47)
Total other (expense) income, net (51) (51)
Loss before income taxes (8,294) (70,136)
Income tax (expense) benefit (6) 6,169
Net loss $ (8,300) $ (63,967)
Loss per common share:
Basic $ (0.12) $ (1.07)
Diluted $ (0.12) $ (1.07)
Weighted average common shares:
Weighted average common shares used in computing basic loss per common share 68,447 59,836
Weighted average common shares used in computing diluted loss per common share 68,447 59,836

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

FLOTEK INDUSTRIES, INC.

~~UNAUDITED CONDENSED~~ CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

Three months ended March 31,
2021 2020
Net loss $ (8,300) $ (63,967)
Other comprehensive (loss) income:
Foreign currency translation adjustment 49 (123)
Comprehensive loss $ (8,251) $ (64,090)



	Three months ended March 31,
	2022		2021
Net Loss	$	(10,724)	$	(8,300)


Other comprehensive income:
Foreign currency translation adjustment	8		49

Comprehensive Loss	$	(10,716)	$	(8,251)

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Three months ended March 31,
2021 2020
Cash flows from operating activities:
Net loss $ (8,300) $ (63,967)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of contingent consideration (335) 0
Depreciation and amortization 307 2,191
Provision for doubtful accounts 0 597
Provision for excess and obsolete inventory 307 529
Impairment of right-of-use assets 0 7,434
Impairment of fixed assets 0 30,178
Impairment of intangible assets 0 19,842
Loss (gain) on sale of assets 2 (33)
Non-cash lease expense 105 184
Stock compensation expense 778 462
Deferred income tax provision (benefit) 2 (133)
Changes in current assets and liabilities:
Accounts receivable, net 255 1,675
Inventories, net (78) 4,793
Income taxes receivable 267 (6,212)
Other current assets 405 3,645
Other long-term assets 541 0
Accounts payable 695 (7,666)
Accrued liabilities (317) (17,522)
Income taxes payable 89 226
Interest payable 12 0
Net cash used in operating activities (5,265) (23,777)
Cash flows from investing activities:
Capital expenditures (19) (42)
Proceeds from sale of business 0 3,281
Proceeds from sale of assets 2 34
Abandonment of patents and other intangible assets 0 49
Net cash (used in) provided by investing activities (17) 3,322
Cash flows from financing activities:
Purchase of treasury stock (105) (45)
Proceeds from sale of common stock 38 349
Payments for finance leases (14) (51)
Net cash (used in) provided by financing activities (81) 253
Effect of changes in exchange rates on cash and cash equivalents 23 (109)
Net change in cash, cash equivalents and restricted cash (5,340) (20,311)
Cash and cash equivalents at the beginning of period 38,660 100,575
Restricted cash at the beginning of period 664 663
Cash and cash equivalents and restricted cash at beginning of period 39,324 101,238
Cash and cash equivalents at end of period 33,945 80,263
Restricted cash at the end of period 40 664
Cash, cash equivalents and restricted cash at end of period $ 33,985 $ 80,927


	Three months ended March 31,
	2022		2021
Cash flows from operating activities:


Net loss	$	(10,724)	$	(8,300)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of contingent consideration	94		(335)
Change in fair value of contingent convertible notes payable	3,892		—
Amortization of convertible note issuance cost	166		—
Payment in kind interest expense	485		—
Depreciation and amortization	195		307
Provision for doubtful accounts, net of recoveries	238		—
Provision for excess and obsolete inventory	310		307
Loss on sale of property and equipment	8		2
Gain on lease termination	(584)		—
Non-cash lease expense	56		105
Stock compensation expense	739		778
Deferred income tax (benefit) expense	(4)		2

Changes in current assets and liabilities:



Accounts receivable	(180)		255
Inventories	(999)		(78)
Income taxes receivable	(10)		267
Other current assets	168		405
Other long-term assets	(388)		541
Accounts payable	616		695
Accrued liabilities	(2,564)		(317)
Income taxes payable	—		89
Interest payable	12		12

Net cash used in operating activities	(8,474)		(5,265)
Cash flows from investing activities:
Capital expenditures	—		(19)
Proceeds from sale of assets	24		2




Net cash provided by (used in) investing activities	24		(17)
Cash flows from financing activities:






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	(59)		(105)
Proceeds from issuance of stock	—		38
Payments for finance leases	(14)		(14)

Net cash provided by (used in) financing activities	19,993		(81)




Effect of changes in exchange rates on cash and cash equivalents	8		23
Net change in cash, cash equivalents and restricted cash	11,551		(5,340)
Cash and cash equivalents at the beginning of period	11,534		38,660
Restricted cash at the beginning of period	1,790		664
Cash and cash equivalents and restricted cash at beginning of period	13,324		39,324
Cash and cash equivalents at end of period	24,835		33,945
Restricted cash at the end of period	40		40
Cash, cash equivalents and restricted cash at end of period	$	24,875	$	33,985

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2022 and 2021

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


		Three months ended March 31, 2021
		Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit				Total Stockholders’ Equity			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit				Total Stockholders’ Equity
		Shares Issued	Par Value		Shares	Cost								Total Stockholders’ Equity	Shares Issued				Par Value	Shares		Cost	Additional Paid-in Capital
Balance, December 31, 2020		78,669	$	8	5,581	$	(33,851)	$	359,721	$	(19)	$	(278,688)			$	47,171
Balance, December 31, 2021																		Balance, December 31, 2021	79,484	$	8	6,022			$	(34,100)	$	363,417	$	81	$	(309,214)			$	20,192

Net loss	Net loss	—	—		—	—		—		—		(8,300)				(8,300)		Net loss	—	—		—	—		—		—		(10,724)				(10,724)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—	—		—		49		—				49		Foreign currency translation adjustment	—	—		—	—		—		8		—				8

Stock issued under employee stock purchase plan		—	—		(58)	—		38		—		—				38

Restricted stock granted	Restricted stock granted	220	—		—	—		—		—		—				—		Restricted stock granted	287	—		—	—		—		—		—				—

Restricted stock forfeited	Restricted stock forfeited	—	—		5	—		—		—		—				—		Restricted stock forfeited	—	—		8	—		—		—		—				—
Treasury stock purchased		—	—		45	(105)		—		—		—				(105)
Stock compensation expense	Stock compensation expense	—	—		—	—		778		—		—				778		Stock compensation expense	—	—		—	—		739		—		—				739
Shares withheld to cover taxes																		Shares withheld to cover taxes	—	—		43	(59)		—		—		—				(59)
Conversion of notes to common stock																		Conversion of notes to common stock	2,793	—		—	—		2,948		—		—				2,948

Other (1)		(613)	—		—	—		—		—		—				—

Balance, March 31, 2021		78,276	$	8	5,573	$	(33,956)	$	360,537	$	30	$	(286,988)			$	39,631
Balance, March 31, 2022																		Balance, March 31, 2022	82,564	$	8	6,073	$	(34,159)	$	367,104	$	89	$	(319,938)			$	13,104

~~(1)~~ ~~See Note 14, “Stockholders’ Equity” for further discussion.~~

Three months ended March 31, 2020
Common Stock Treasury Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated Deficit Total Stockholders’ Equity
Shares
Issued Par
Value Shares Cost
Balance, December 31, 2019 63,657 $ 6 4,145 $ (33,484) $ 347,564 $ 181 $ (142,238) $ 172,029
Net loss — — — — — — (63,967) (63,967)
Foreign currency translation adjustment — — — — — (123) — (123)
Stock issued under employee stock purchase plan — — (13) — 11 — — 11
Restricted stock granted 681 — — — 338 — — 338
Restricted stock forfeited — — 241 — — — — —
Treasury stock purchased — — 22 (45) — — — (45)
Stock compensation expense — — — — 462 — — 462
Balance, March 31, 2020 64,338 $ 6 4,395 $ (33,529) $ 348,375 $ 58 $ (206,205) $ 108,705


	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, December 31, 2020	78,669	$	8	5,581	$	(33,851)	$	359,721	$	(19)	$	(278,688)	$	47,171
Net loss	—	—		—	—		—		—		(8,300)		(8,300)
Foreign currency translation adjustment	—	—		—	—		—		49		—		49

Stock issued under employee stock purchase plan	—	—		(58)	—		38		—		—		38



Restricted stock granted	220	—		—	—		—		—		—		—
Restricted stock forfeited	—	—		5	—		—		—		—		—

Stock compensation expense	—	—		—	—		778		—		—		778
Shares withheld to cover taxes	—	—		45	(105)		—		—		—		(105)




Other (see Note 12, “Stockholders’ Equity”)	(613)	—		—	—		—		—		—		—
Balance, March 31, 2021	78,276	$	8	5,573	$	(33,956)	$	360,537	$	30	$	(286,988)	$	39,631

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

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~~creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry ~~equipment~~ and data company, ~~that serves~~Flotek helps customers inacross industrial, commercial, and consumer ~~markets.~~markets improve their environmental performance.

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

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

~~The Company formed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”).~~ The Company’s 2 operating segments, CT and DA, are both supported by its ~~continuing~~ Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note ~~18,~~16, “Business Segment, Geographic and Major Customer Information.” ~~For further discussion~~

Sources and Uses of ~~the JP3 acquisition, see Note 3, “Business Combination.”~~Liquidity

The Company ~~was initially incorporated under the laws~~currently funds its operations and growth primarily from cash on hand. The ability of the ~~Province~~Company to grow and be competitive in the marketplace is dependent on the availability of ~~British Columbia~~adequate capital. Access to capital is dependent on the Company’s operating cash flows, the monetization of non-core assets, and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in ~~1985. In October 2001,~~the twelve months subsequent to the date of filing the consolidated financial statements.. While we believe that our cash and liquid assets, including the actions taken subsequent to March 31, 2022 discussed below and in Note 17, “Subsequent Events”, will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months, uncertainty surrounding the long-term stability and strength of the oil and gas markets or reduced spending by our customers could have a further negative impact on our liquidity.

On February 2, 2022, the Company ~~changed its corporate domicile~~completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $19.5 million. Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contingent Convertible Notes Payable”) to ProFrac Holdings LLC. Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the ~~State~~greater of ~~Delaware.~~(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 druing the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) thh actual purchased volume during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022 (see Note 3, “Revenue from Contracts with Customers” and Note 8, “Debt and Convertible Notes Payable”). These $10 million Contingent Convertible Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.

During 2021, the Company also entered into plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas. These facilities were classified as held for sale as of March 31, 2022 and December 31, 2022. Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $4.3 million of gross proceeds and the sale closed on April 18 2022.

Based on our cash and liquid assets, including the transactions during the three months ended March 31, 2022 and subsequent to March 31, 2022 described above and in Note 17, “Subsequent Events”, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

as they become due in the next twelve months. However, the Company cannot guarantee a sufficient level of cash flows in the future. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited financial statements reflect all adjustments, in the opinion of management, necessary for fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the SEC regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report. A copy of the ~~2020~~2021 Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. The information contained on the Company’s website does not form a part of this Quarterly Report.

~~During the first quarter of 2021, the Company classified its warehouse facility in Monahans, Texas, as held for sale based on the criteria outlined inAccounting Standard Codification (“ASC”) 360, Property, Plant and Equipment~~. During the first quarter, the Company committed to a plan to sell the asset in its present condition. The Company engaged with a commercial real estate agent and is actively looking for a buyer. As such, the Company reclassified the related property, plant and equipment of $0.5 million as held for sale in the current assets of the consolidated balance sheet as of March 31, 2021, as the Company expects to complete the asset sale within one year.

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

~~Impact~~Cash Equivalents

Cash equivalents consist of ~~COVID-19~~highly liquid investments with maturities of three months or less at the date of purchase.

InRestricted Cash

The Company’s restricted cash is $40 thousand and $1.8 million as of March ~~2020,~~31, 2022 and December 31, 2021, respectively.The Company’s restricted cash as of March 31, 2022 consists of cash that the ~~World Health Organization declared~~Company is contractually obligated to maintain in accordance with the ~~outbreak~~terms of its credit card program with a financial institution. The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $1.75 million for amounts due under the terms of the ~~novel coronavirus (“COVID-19”) a global pandemic. The pandemic negatively impacted the U.S.~~legal settlement discussed in Note 11, “Commitments and ~~global economy, disrupted domestic~~Contingencies”.

Accounts Receivable and ~~international oil~~Allowance for Doubtful Accounts

Accounts receivable arise from product sales and gas markets, and increased volatility in financial markets. These effects materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and ~~products.~~are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The ~~Company’s primary markets in~~Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the ~~U.S.~~appropriate provision for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are ~~particularly subject~~determined to ~~the impacts on the oil and gas industry. In the first quarter~~be uncollectible. The recovery of ~~2020, the Company~~accounts receivable previously written off is recorded impairments to property, plant and equipment; intangible assets; and operating right-of-use assets. In the second half of 2020 the Company recorded additional impairment charges of goodwill and intangible assets as ~~well as an increase~~a reduction to the provision ~~of excess and obsolete inventory.~~for doubtful accounts charged to operating expense.

The ~~Company expects~~majority of the ~~current economic situation to negatively~~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 ~~energy sector for an extended period~~Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of ~~time, with oil demand recovering during 2021 but not returning~~economic, political, and civil instability, which can impact the collectability of receivables.

Inventories

Inventories consist of raw materials and finished goods and are stated at the lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the ~~pre-COVID-19 level. Any further material COVID-19~~cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of goods sold.

910

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~disruption~~Property and equipment

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


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

Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in ~~oil and gas demand arising from a slower economic recovery could negatively impact~~circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company ~~and could result in additional impairments in~~first compares the ~~future. Future developments~~carrying amount of an asset or asset group to the sum of the ~~COVID-19 crisis~~undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.

Assets to be disposed of are ~~uncertain~~reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell and ~~related implications could materially~~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 ~~adversely affect~~ the ~~Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.~~net proceeds received.

Liability Classified Convertible Notes Payable and Contingent Convertible Notes Payable

The Company ~~continues~~accounts for the Convertible Notes Payable issued to ~~monitor~~ the ~~impact of COVID-19 on the business, suppliers~~PIPE investors for cash proceeds, which is discussed in Note 1 and customers. Future developments and effects are highly uncertain and cannot be predicted, including the scope and duration of the pandemic. This uncertainty could have a material impact on accounting estimates and assumptions used in our consolidated financial statements.

~~Sources and Uses of Liquidity~~Note 8, at amortized cost pursuant to FASB ASC Topic 470, Debt.

The Company ~~currently funds its operations~~accounts for the Contingent Convertible Notes Payable issued as consideration for the ProFrac Agreement, which is discussed in Note 8, “Debt and ~~growth primarily from cash~~Convertible Notes Payable”, as liability classified convertible instruments in accordance with Financial Accounting Standards Board 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 9, “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 ~~hand. The ability~~the nature of the ~~Company~~inputs used to ~~grow~~determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be ~~competitive in~~observable or unobservable. When determining the ~~marketplace is dependent on the availability~~fair value of ~~adequate capital. Access to capital is dependent, in large part, on the Company’s operating cash flows, the monetization of excess and non-core~~ assets and liabilities, the ~~availability of and access to debt and equity financing.~~ Company uses the most reliable measurement available. See Note 9, “Fair Value Measurements.”

Revenue Recognition

The Company ~~has a history~~recognizes revenue to depict the transfer of ~~losses and negative operating cash flows from operations and~~control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to ~~utilize~~be entitled in exchange for those goods or services.

The Company recognizes revenue based on a ~~significant amount~~five-step model when all of ~~cash in operations in~~ the following ~~year. While we believe that our cash~~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 ~~liquid assets will provide us~~(v) performance obligations are satisfied.

Products and services are sold with ~~sufficient financial resources to fund operations~~fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and ~~meet our capital requirements~~deferred accordingly. Deposits and ~~anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery~~other funds received in advance of ~~oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.~~delivery are deferred until the transfer of control is complete.

~~Accordingly, while the~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet its capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:applies several practical expedients including:

•~~Sale of non-core real estate properties;~~Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less.

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

•~~Sale~~The Company’s payment terms are short-term in nature with settlements of ~~excess inventory and/~~one year or ~~raw materials;~~less. As a result the Company does not adjust the promised amount of consideration for the effects of a significant financing component.

•~~Entry into~~In most service contracts, the Company has the right to consideration from a ~~borrowing facility~~customer in an amount that corresponds directly with ~~one or more lenders;~~the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.

•~~Reducing executive salaries and/or board~~The Company excludes from the measurement of ~~directors’ fees, or making~~the transaction price all taxes assessed by a ~~portion of those fees or salaries~~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 ~~equity instead of cash; and~~accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.

•
~~Reducing professional advisory fees~~

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

•~~Raising~~Foreign Currency Translation

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

Comprehensive Loss

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

Research and Development Costs

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

Income Taxes

Deferred tax assets and liabilities are recognized for 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 ~~public markets~~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 ~~via~~all of the deferred tax assets will not be realized. The establishment of a ~~private placement offering;~~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.

~~However, with respect~~The Company’s policy is to ~~anticipated transactions, there can be no assurance that such matters can be implemented~~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 ~~acceptable terms or at all.~~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.

Use of Estimates

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Significant items subject to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible assets; property and equipment and intangible asset impairment assessments; stock-based compensation expense; valuation allowances for accounts receivable, inventories, and deferred tax assets; recoverability and timing of the realization of contract assets; and fair value of liability classified contingent convertible notes payable.

Reclassifications

Certain prior ~~period~~year amounts in the unaudited condensed consolidated statement of operations have been reclassified to conform to the current ~~period~~year presentation. In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross profit (loss) and eliminated the reporting of operating expenses (excluding depreciation and amortization) on the consolidated statements of operations to conform to customary industry reporting practices. In connection with this change in presentation, the Company reclassified selling costs of $1.7 million to selling, general and administrative expenses which were previously reported in operating expenses for the three months ended March 31, 2021. The reclassifications and change in presentation of the statements of operations did not impact previously ~~reported~~recorded loss from operations, net loss ~~and~~or stockholders’ equity.

~~Note 2 —~~ Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”). We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.

New Accounting Standards Issued and Adopted as of March 31, 2022

The FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This standard changes the accounting for convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to be classified in equity and amends diluted earnings per share calculations for certain convertible debt instruments. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, with early adoption allowed for fiscal years beginning after December 15, 2020. The Company has adopted this standard as of January 1, 2022, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures but will have an impact on the future issuances of convertible instruments and contracts in the Company’s equity.

The FASB issued ASU No. 2021-10, “Government Assistance (Topic 832); Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The pronouncement is effective for fiscals years beginning after December 15, 2021.The Company adopted this standard as of January 1, 2022 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

New Accounting Standards Issued But Not Adopted as of March 31, ~~2021~~2022

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~The FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard removes specific exceptions to the general principles in~~ ~~Topic 740.~~ The pronouncement is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued. The Company is currently evaluating the impact of this standard on the consolidated financial statements and related disclosures.

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 reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.

Note 3 ~~— Business Combination~~

During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. The transaction was valued at approximately $36.6 million as of the transaction closing date, comprised of $25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $8.5 million, net of a discount for marketability due to a lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million. Additionally, the Company was subject to contingent consideration with an estimated fair value of $1.2 million for 2 potential earn-out provisions totaling $5.0 million based on certain stock performance targets. The first and second earn-out provisions occur if the ten-day volume-weighted average share price equals or exceeds $2 per share and $3 per share, respectively, before May 18, 2025. See Note 11, “Fair Value Measurements,” for additional information on the estimated fair value of the contingent consideration.

~~The following table summarizes the fair value of JP3’s assets acquired as of the closing date of May 18, 2020 (in thousands):~~


~~Tradenames and trademarks~~	$	~~1,100~~
~~Technology and know-how~~	~~5,000~~
~~Customer lists~~	~~6,800~~
~~Inventories~~	~~7,100~~
~~Cash~~	~~604~~
~~Net working capital, net of cash and inventories~~	~~(1,063)~~
~~Fixed assets~~	~~426~~
~~Long-term debt assumed and other assets (liabilities)~~	~~(893)~~
~~Goodwill~~	~~17,522~~
~~Net assets acquired~~	$	~~36,596~~

~~Note 4~~ — Revenue from Contracts with Customers

Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by 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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an ongoing basis to reflect updated variable consideration information.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

The majority of the products from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized over time. The Company bills sales on a monthly basis with payment terms customarily ~~30-45~~30-60 days for domestic and 6090-120 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.

Disaggregation of Revenue

The Company differentiates revenue based on whether the source of revenue is attributable to product sales (point-in-time revenue recognition) or service revenue (over-time revenue recognition). ~~Product sales accounted for over~~ ~~90%~~ ~~of total revenue for the three months ended March 31, 2021 and 2020.~~

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


		Three months ended March 31,					Three months ended March 31,
		2021		2020				2022		2021
Revenue:	Revenue:					Revenue:
Products(1)	Products(1)	$	11,082	$	18,800	Products(1)		$	12,199	$	11,082

Services	Services	688		616		Services		680		688
		$	11,770	$	19,416			$	12,879	$	11,770

(1) Product revenues for 2022 include sales to a related party as described in Note 15, “Related Party Transactions.”

Arrangements with Multiple Performance Obligations

The CT and DA segments primarily sell chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, both segments offer various services associated to products sold which includes field services, installation, maintenance, and other functions. ~~Service revenue is recognized on an over time basis for CT as services are performed as the customer is simultaneously benefiting as the Company performs.~~ For DA, services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. DA has additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, DA may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Subscription-type arrangements were not a material revenue stream in ~~2020.~~

~~Contract Balances~~the quarters ended March 31, 2022 and 2021.

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

Contract Assets

~~Note 5 — Inventories~~

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

March 31, 2021 December 31, 2020
Raw materials $ 7,074 $ 7,190
Finished goods 15,617 15,705
Inventories 22,691 22,895
Less reserve for excess and obsolete inventory (11,075) (11,058)
Inventories, net $ 11,616 $ 11,837

~~The provision recorded~~Contract assets represent consideration paid to a ProFrac Services, LLC by the Company in the ~~first quarter~~form of ~~2021 includes charges of $0.3 million~~Contingent Convertible Notes Payable issued as an inducement to enter intothe ProFrac Agreement. As consideration for the ~~CT segment~~the economic value of the long-term revenue commitment from ProFrac Agreement as described in Note 1, “Organization and ~~0 for the DA segment. The increase in excess and obsolescence is attributable to the Company’s continued product rationalization efforts, which included a reduction in the number~~Nature of ~~materials carried within the portfolio and identification of those materials for which~~Operations”, the Company ~~will no longer actively market or carry quantities~~issued $10.0 million in ~~excess~~aggregate principal amount of ~~current~~Contingent Convertible Notes Payable to ProFrac Holdings, LLC, under theProFrac Agreement, and ~~estimated future usage requirements.~~which may be converted into shares of common stock of the Company under the terms of the Contingent Convertible Notes Payable described further in Note 8, “Debt and Convertible Notes Payable”.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Note 6 — Property and Equipment~~

~~Property and equipment are as follows (in thousands):~~
March 31, 2021 December 31, 2020
Land $ 1,986 $ 2,415
Land improvements 861 867
Buildings and leasehold improvements 6,365 6,364
Machinery and equipment 7,777 7,760
Furniture and fixtures 649 649
Transportation equipment 1,189 1,190
Computer equipment and software 1,304 1,296
Property and equipment 20,131 20,541
Less accumulated depreciation (11,873) (11,454)
Property and equipment, net $ 8,258 $ 9,087

~~Depreciation expense totaled $0.3 million and $1.7 million for~~During the three months ended March 31, ~~2021 and 2020, respectively.~~

~~During the first quarter~~2022, contract assets of ~~2020,~~$10.6 million was recorded by the Company, ~~recognized an impairment~~as consideration paid to the customer, which included $0.6 million of ~~property and equipment~~issuance costs. Under FASB ASC 606, Revenues from Contract with Customers, consideration paid to a customer is accounted for as a reduction of ~~$30.2 million. See Note 8, “Impairment~~the transaction price of ~~Fixed and Long-lived Assets.” NaN impairment was recognized for the three months ended March 31, 2021.~~

~~Note 7 — Leases~~

~~During the first quarter of 2020,~~ a contract. Accordingly, the Company ~~ceased use of~~will amortize the ~~corporate headquarters leased offices and moved corporate employees to~~contract assets against the ~~Global Research and Innovation Center (“GRIC”)~~ ~~during~~revenues under the ~~second quarter of 2020. In addition,~~ProFrac Agreement over the ~~lease liability and corresponding right-of-use (“ROU”) assets for the corporate headquarters and GRIC were remeasured to remove the anticipated~~three-year contract term ~~extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC.~~ ~~The remeasurement resulted in adjustments to lease liabilities and ROU assets totaling of $6.2 million each as~~beginning April 1, 2022. As of March 31, ~~2020. During the second quarter of 2020,~~2022, the Company ~~terminated the lease~~classified $7.1 million of the ~~corporate headquarters office and moved all employees to the GRIC facility effective June 29, 2020.~~

~~In addition, during the three months ended March 31, 2020, the Company recorded an impairment~~contract asset as long term based upon its estimate of the ~~ROU assets totaling $7.4 million. For further discussion, refer to Note 8, “Impairment~~ProFrac Agreement revenues which will not be realized within the first 12 months of ~~Fixed and Long-lived Assets.” NaN impairment was recognized for~~ the ~~three months ended March 31, 2021.~~

contract. The ~~components~~company’s estimate of ~~lease expense and supplemental cash flow information are as follows (in thousands):~~

Three months ended March 31,
2021 2020
Operating lease expense $ 238 $ 570
Finance lease expense:
Amortization of right-of-use assets 4 5
Interest on lease liabilities 3 4
Total finance lease expense 7 9
Short-term lease expense 69 32
Total lease expense $ 314 $ 611
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 372 $ 584
Operating cash flows from finance leases (3) 3
Financing cash flows from finance leases (14) (51)

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Maturities~~the timing of ~~lease liabilities are as follows (in thousands):~~

Years ending December 31, Operating Leases Finance Leases
2021 (excluding the three months ended March 31, 2021) $ 936 $ 52
2022 1,289 46
2023 1,317 39
2024 1,347 23
2025 1,347 0
Thereafter 6,865 0
Total lease payments $ 13,101 $ 160
Less: Interest (4,405) (19)
Present value of lease liabilities $ 8,696 $ 141

future contract revenues will be evaluated on a quarterly basis throughout the contract term.

~~Supplemental balance sheet information related to leases is as follows (in thousands):~~

March 31, 2021 December 31, 2020
Operating Leases
Operating lease right-of-use assets $ 2,217 $ 2,320
Current portion of operating lease liabilities $ 597 $ 636
Long-term operating lease liabilities 8,099 8,348
Total operating lease liabilities $ 8,696 $ 8,984
Finance Leases
Property and equipment $ 147 $ 147
Accumulated depreciation (29) (26)
Property and equipment, net $ 118 $ 121
Current portion of finance lease liabilities $ 61 $ 60
Long-term finance lease liabilities 80 96
Total finance lease liabilities $ 141 $ 156
Weighted Average Remaining Lease Term
Operating leases 9.6 years 9.9 years
Finance leases 3.3 years 3.1 years
Weighted Average Discount Rate
Operating leases 6.7 % 8.9 %
Finance leases 8.5 % 9.0 %

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 84 — ~~Impairment of Fixed and Long-lived Assets~~Inventories

~~The Company recorded impairment charges of fixed and intangible assets~~Inventories are as follows (in thousands):

Three months ended March 31,
2021 2020
Property and equipment, net $ 0 $ 30,178
Operating lease right-of-use assets 0 7,434
Other Intangibles:
   Patents and technology 0 9,902
   Customer relationships 0 9,165
   Intangible assets in progress 0 596
   Trademarks and brand names 0 179
Total other intangibles 0 19,842
Total impairment of fixed, long-lived and intangible assets $ 0 $ 57,454



	March 31, 2022		December 31, 2021
Raw materials	$	5,474	$	5,610
Finished goods	14,544		13,985
Inventories	20,018		19,595
Less reserve for excess and obsolete inventory	(9,875)		(10,141)
Inventories, net	$	10,143	$	9,454

~~During~~The provisions recorded in the ~~first~~three months ended March 31, 2022 and 2021 was $0.3 million for the CT segment and nil for the DA segment.

Note 5 — Property and Equipment

Property and equipment are as follows (in thousands):



	March 31, 2022		December 31, 2021
Land	$	886	$	886
Land improvements	520		520
Buildings and leasehold improvements	5,356		5,473
Machinery and equipment	6,819		6,843
Furniture and fixtures	540		620
Transportation equipment	878		878
Computer equipment and software	1,175		1,176
Property and equipment	16,174		16,396
Less accumulated depreciation	(11,095)		(11,100)
Property and equipment, net	$	5,079	$	5,296

Depreciation expense totaled $0.2 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively.

In the third quarter of 2020, the price of crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the energy industry, which began to negatively impact the Company’s results of operations. The decline of results of operations were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to COVID-19. Based on these factors,2021, the Company ~~concluded that~~committed to plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas, in their current condition and as a ~~triggering event occurred and, accordingly, an interim quantitative impairment test was performed~~result the associated assets in the amount of $2.8 million are classified as held for sale as of March 31, ~~2020.~~

~~Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends~~2021 and ~~potential growth rates~~December 31, 2021. Subsequent to ~~estimate future cash flows of the asset group. Based on the results of the quantitative assessment,~~December 31, 2021, the Company ~~concluded the carrying value~~executed a contract to sell its Waller facility for $4.3 million of the asset group exceeded its fair value as of March 31, 2020, and an impairment loss of $57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy,gross proceeds and the ~~related negative impact~~sale closed on ~~oil and natural gas prices on projections of future cash flows. Prior to the impairment,~~April 18, 2022 See further discussion in Note 17, Subsequent Events.

Note 6 — Leases

In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $40 thousand per month for sixty-four months. Rental income recognized ~~amortization expense for finite-lived intangible assets acquired of $0.5 million for~~during the three months ended March 31, ~~2020.~~2022 was $121 thousand and was included in other income in the consolidated statement of operations. As discussed in Note 1, “Organization and Nature of Operations” this facility was sold on April 18, 2022 and the lease agreement between the tenant and the Company terminated.

In August 2021, the company entered into a five-year triple net operating lease agreement to lease its warehouse facility in Monahans, Texas, for $20 thousand per month, and the tenant occupied the warehouse facility in September 2021.

~~The Company noted no triggering events~~Rental income recognized during the ~~first quarter~~three months ended March 31, 2022 was $185 thousand and was included in other income in the consolidated statement of ~~2021.~~

operations.

~~Note 9 — Accrued Liabilities~~

~~Current accrued~~In March 2022, the Company entered into an agreement with its landlord to terminate the lease on its facility in Calgary, Alberta for a one-time termination fee of $85 thousand. This lease was previously scheduled to continue until 2033, and due to its early termination, the Company recorded a gain on lease termination from the reduction of lease liabilities ~~are as follows (in thousands):~~
March 31, 2021 December 31, 2020
Loss on purchase commitments (Note 13) $ 9,383 $ 9,402
Severance costs 2,918 3,558
Payroll and benefits 1,053 1,789
Contingent liability for earn-out provision 1,081 1,416
Taxes other than income taxes 883 544
Due to third parties 531 434
Legal costs 980 333
Deferred revenue, current 134 146
Other 968 653
Total current accrued liabilities $ 17,931 $ 18,275

and ROU assets of $0.6 million that is included in the consolidated statements of operations during the three months ended March 31, 2022.

FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

~~Note 10 — Debt~~The components of lease expense and supplemental cash flow information are as follows (in thousands):


	Three months ended March 31,
		2022		2021
Operating lease expense		$	228	$	238
Finance lease expense:
Amortization of right-of-use assets		4		4
Interest on lease liabilities		3		3
Total finance lease expense		7		7
Short-term lease expense		124		69



Total lease expense		$	359	$	314

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases		$	(375)	$	(372)
Operating cash flows from finance leases		(10)		(3)
Financing cash flows from finance leases		(3)		(14)

Maturities of lease liabilities as of March 31,2022 are as follows (in thousands):


Years ending December 31,	Operating Leases		Finance Leases
2022 (excluding three months ended March 31, 2022)	$	775	$	35
2023	1,221		39
2024	1,247		18
2025	1,274		—
2026	1,302		—
Thereafter	4,783		—
Total lease payments	$	10,602	$	92
Less: Interest	(3,177)		(12)
Present value of lease liabilities	$	7,425	$	80

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental balance sheet information related to leases is as follows (in thousands):


	March 31, 2022			December 31, 2021
Operating Leases
Operating lease right-of-use assets	$	1,827		$	2,041

Current portion of operating lease liabilities	619			602
Long-term operating lease liabilities	6,806			7,779
Total operating lease liabilities	$	7,425		$	8,381

Finance Leases
Property and equipment	$	147		$	147
Accumulated depreciation	(37)			(33)
Property and equipment, net	$	110		$	114

Current portion of finance lease liabilities	$	33		$	41
Long-term finance lease liabilities	47			53
Total finance lease liabilities	$	80		$	94

Weighted Average Remaining Lease Term
Operating leases	8.9 years			9.1 years
Finance leases	2.7 years			2.9 years

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

Note 7 — Accrued Liabilities

Current accrued liabilities are as follows (in thousands):



	March 31, 2022		December 31, 2021
Severance costs	$	2,584	$	2,581
Loss on purchase commitments (Note 11)	—		1,750
Payroll and benefits	993		1,054
Legal costs	885		1,013
Contingent liability for earn-out provision	702		608
Deferred revenue, current	567		528
Taxes other than income taxes	304		241
Other	712		1,221
Total current accrued liabilities	$	6,747	$	8,996

Note 8 — Debt and Convertible Notes Payable

In April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the ~~Payroll~~Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April ~~2020.~~2020 prior to its acquisition by Flotek. The PPP loans ~~have~~

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

had a fixed interest rate of 1% and ~~have~~originally a two-year term, maturing in ~~2022.~~April and May 2022, respectively. No payments of principal or interest were required during the ~~year ended December 31, 2020, or the~~ three months ended March 31, 2022 and 2021.

A portion of the loans may be eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least 60% of the eligible costs incurred ~~are~~were used for payroll. Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company. This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that iswas not significantly detrimental to the business. ~~As of March 31, 2021, the Company had not applied for or estimated the potential forgiveness on the PPP loans.~~ The ~~receipt of these funds, and the~~ forgiveness of the loans ~~attendant to these funds,~~ is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our past and future adherence to the forgiveness criteria. The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.

During the second quarter of 2021, the Company applied for forgiveness of the JP3 PPP loan with the SBA. In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest were fully forgiven. Accordingly, during the second quarter of 2021, the Company recorded $0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other income on the consolidated statement of operations.

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

The Company has submitted to the SBA for forgiveness of substantially all of the Flotek PPP loan but as of March 31, 2022 and as of the date of this filing, the Company has not received a forgiveness notice. If the loan is not forgiven, monthly payments will be due over the remaining term of the loan upon notice that it will not be forgiven. Denial of the forgiveness of the Flotek PPP loan will negatively impact the Company’s liquidity as discussed in Note 1, “Organization and Nature of Operations”.

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


		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Long-term debt
Flotek PPP loan	Flotek PPP loan	$	4,788	$	4,788	Flotek PPP loan	$	4,788	$	4,788
JP3 PPP loan		877		877
Total		5,665		5,665

Less current maturities	Less current maturities	(5,023)		(4,048)		Less current maturities	(1,553)		(1,436)

Total long-term debt, net of current portion	Total long-term debt, net of current portion	$	642	$	1,617	Total long-term debt, net of current portion	$	3,235	$	3,352

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 on February 2, 2022, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $19.5 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum, have a maturity of one year, and are converted into 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 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. As of March 31, 2022, the Convertible Notes Payable are recorded at carrying value of $17.6 million, including accrued paid-in-kind interest of $0.3 million, and net of unamortized issuance costs of $0.8 million. The estimated fair value of the Convertible Notes Payable at March 31, 2022 was $25.5 million, estimated using a Monte Carlo simulation model.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contingent Convertible Notes Payable under the same terms as the Convertible Notes Payable issued in the PIPE transaction. Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC. If minimum volumes are not achieved in any given year, ProFrac 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 February 2, 2022, the Company also entered into a Master Transaction Agreement with ProFrac Holdings, LLC (the “Master Transaction Agreement”) which supplements the terms of the ProFrac Agreement and provides that if ProFrac does not perform their purchase obligations under the ProFrac Agreement, the Company shall have the right, but not the obligation, to repurchase a percentage of the Contingent Convertible Notes Payable, or a percentage of the securities issued pursuant to the conversion of the Contingent \Convertible Notes Payable if applicable, for aggregate consideration of $1.00, as follows: (a) 0% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first three years of the term have been paid prior to termination of the ProFrac Agreement; (b) 33% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first two years of the term have been paid prior to termination of the ProFrac Agreement; (c) 66% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first one years of the term have been paid prior to termination of the ProFrac Agreement; (d) 100% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first year of the term have not been paid prior to termination of the ProFrac Agreement. The foregoing repurchase provisions will terminate as of the closing of the ProFrac transaction as described further in Note 1, “Organization and Nature of Operations”.

The Contingent Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $10.0 million on the issuance date and remeasured to fair value of $14.1 million as of March 31, 2022 (see Note 9, “Fair Value Measurements”).

Note 119 — 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 approximate fair value due to the short-term nature of these accounts. The carrying amount of the Flotek PPP ~~loans for Flotek and JP3 also approximate~~loan approximates its fair value ~~due to maturity in less than fifteen months.~~as of March 31, 2022 and December 31, 2021.

1619

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 ~~assets and~~ liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):

Balance at March 31, Balance at December 31,
Level 1 Level 2 Level 3 2021 Level 1 Level 2 Level 3 2020
Contingent consideration $ 0 $ 0 $ 1,081 $ 1,081 $ 0 $ 0 $ 1,416 $ 1,416


							March 31,								December 31,
	Level 1		Level 2		Level 3		2022		Level 1		Level 2		Level 3		2021
Contingent earnout consideration	$	—	$	—	$	702	$	702	$	—	$	—	$	608	$	608
Contingent convertible notes	$	—	$	—	$	14,050	$	14,050	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	14,752	$	14,752	$	—	$	—	$	608	$	608

~~At March 31, 2021, and December 31, 2020, the~~The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, ~~was recorded~~is included in accrued liabilities as ~~a contingent liability.~~of March 31, 2022 and December 31, 2021. The estimated fair value of the earn-out provision at the end of each period was valued using ~~the~~a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.~~There~~

The key inputs into the Monte Carlo simulation used to estimate the fair value the earn-out provision were ~~no transfers in or out~~as follows:


	March 31, 2022	December 31, 2021
Risk-free interest rate	2.45%	1.02%
Expected volatility	90.0%	90.0%
Term until liquidation (years)	3.13	3.38
Stock price	$1.26	$1.13
Discount rate	7.86%	6.71%

The Contingent Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Contingent Convertible Notes Payable had an initial fair value of ~~either Level 1,~~$10.0 million on February 2, 2022. The Contingent Convertible Notes Payable were classified as Level 2 orat the initial measurement due to the use of a quoted price for a similar liability, and classified as Level 3 as of March 31, 2022 due to the use of unobservable inputs. The estimated value of the Contingent Convertible Notes Payable as of March 31, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.

The key inputs into the Monte Carlo simulation used to estimate the fair value ~~measurements during~~ the ~~periods ending~~Contingent Convertible Notes Payable as of March 31, ~~2021 and 2020.~~2022 were as follows:


			March 31, 2022
Risk-free interest rate			1.63%
Expected volatility			90.0%
Term until liquidation (years)			0.84
Stock price			$1.26
Discount rate			7.2%

Assets Measured at Fair Value on a Nonrecurring Basis

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s non-financial assets, including property and equipment ~~goodwill~~ and ~~other intangible~~operating lease right-of-use assets, are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. During the three months ended March 31, 2020, the Company recorded an impairment of $57.5 million for impairment of long-lived assets. Management inputs used in fair value measurements were classified as Level 3.

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

In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During 2020, the first stock performance target for the contingent consideration was achieved and settled. The Company estimated the fair value of the remaining stock performance earn-out provision atas of March 31, 2022 and 2021 and ~~decreased~~adjusted the estimated fair value of the contingent liability to $0.7 million and $1.1 ~~million.~~million, respectively. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in ~~operating expenses.~~cost of goods sold.

The Company estimated the initial fair value of $10.0 million of the Contingent Convertible Notes Payable on February 2, 2022, by reference to the cash purchase price paid by third party investors for equivalent notes issued simultaneously by the Company. . The Company adjusted the estimated fair value of the Contingent Convertible Notes Payable to $14.1 million as of March 31, 2022.

The following table presents the changes in ~~contingent consideration balances~~the assets and liabilities measured at fair value on a recurring basis classified as Level 3 ~~balances for the three months ended March 31, 2021 and 2020~~ (in thousands):

Three months ended March 31,
2021 2020
Balance - beginning of period $ 1,416 $ 0
Additions / issuances 0 0
Change in fair value (335) 0
Transfer out of Level 3 0 0
Balance - end of period $ 1,081 $ 0


	Three months ended March 31,
		2022		2021

Balance - beginning of period		$	608	$	1,416
Transfer of contingent convertible notes payable from Level 2		10,000		—
Increase in principle of convertible notes for paid-in-kind interest		158		—
Change in fair value of contingent earnout consideration		94		(335)
Change in fair value of contingent convertible notes payable		3,892		—


Balance - end of period		$	14,752	$	1,081

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 1210 — Income Taxes

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


		Three months ended March 31,					Three months ended March 31,
		2021		2020				2022		2021
U.S. federal statutory tax rate	U.S. federal statutory tax rate	21.0	%	21.0	%	U.S. federal statutory tax rate		21.0	%	21.0	%
State income taxes, net of federal benefit	State income taxes, net of federal benefit	(0.1)		(0.1)		State income taxes, net of federal benefit		0.1		(0.1)
Non-U.S. income taxed at different rates	Non-U.S. income taxed at different rates	0.6		0.1		Non-U.S. income taxed at different rates		0.2		0.6

Increase (reduction) in tax benefit related to stock-based awards	Increase (reduction) in tax benefit related to stock-based awards	0.1		(0.2)		Increase (reduction) in tax benefit related to stock-based awards		(0.1)		0.1
Non-deductible expenses		0		(0.1)
Research and development credit		0		0.1
Increase in valuation allowance		(21.7)		(15.0)
Effect of tax rate differences of NOL carryback		0		3.0

Increase in valuation allowance						Increase in valuation allowance		(20.8)		(21.7)

Permanent differences						Permanent differences		(0.4)		—

Effective income tax rate	Effective income tax rate	(0.1)	%	8.8	%	Effective income tax rate		—	%	(0.1)	%

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act provided the ability for taxpayers to carryback a net operating loss (“NOL”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five years preceding the year of the loss. Based on analysis of the extended NOL carryback provision, the Company recorded a tax receivable of $6.1 million as of March 31, 2020, which was received in July 2020.

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

Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. GAAP provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance, the Company considers all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income.

~~The Company continues to have a full valuation allowance against net deferred tax assets as it is not more-likely-than-not they will be utilized.~~

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1311 — Commitments and Contingencies

Litigation

The Company is subject to routine litigation and other claims that arise in the normal course of business. Except as disclosed below, 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.

Terpene Supply Agreement

As of December 31, 2020, the Company’s consolidated balance sheet included an accrued liability of $9.4 million associated with the terpene supply agreement with Florida Chemical Company, LLC (“FCC”), a wholly owned subsidiary of Archer-Daniels-Midland Company (“ADM”). The Company calculated the liability based on its expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased under the terpene supply agreement and the expected selling prices of the excess terpene. Losses for the year ended December 31, 2020 on the terpene contract totaled $11.7 million and was recognized in cost of goods sold in the consolidated statements of operations.

On March 26, 2021, ~~the Company~~Flotek Industries, Inc. and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against ~~Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”)~~ADM, FCC and ~~Joshua A. Snively~~other parties in state court in Harris County, Texas. The lawsuit ~~claims~~claimed damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary ~~duty by Mr. Snively.~~duty. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.

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

~~The~~On October 29, 2021, the Company ~~is subject to other routine litigation and other~~reached agreement with all parties resolving all claims between the parties (“the ADM Settlement”) that ~~arise~~resulted in the ~~normal course~~termination of ~~business. Except as disclosed above, management is not aware~~the terpene supply agreement and a settlement payment of ~~any pending or threatened lawsuits or proceedings that are expected to have a material effect on~~$1.75 million due from Flotek. In accordance with the ~~Company’s financial position, results~~terms of ~~operations or liquidity.~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Other Commitments and Contingencies~~

~~Terpene Supply Agreement~~

~~At December 31, 2020,~~ the ~~Company’s balance sheet included an~~ADM Settlement, the Company reduced the accrued liability ~~of $9.4 million~~ associated with the terpene supply agreement ~~with FCC.~~to $1.75 million and recorded a gain of $7.6 million in cost of goods sold in the consolidated statement of operations for the year ended December 31, 2021. The ~~Company calculated the liability based~~one-time payment of $1.75 million from Flotek to ADM was paid on January 3, 2022 and was included as restricted cash on the ~~Company’s expected usage~~consolidated balance sheet as of ~~terpene~~December 31, 2021.

Former CEO Matter

During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in ~~blended products being less than~~expenses and transactions during the ~~minimum quantities~~years from 2014 to 2018. The investigation revealed evidence of ~~terpene required~~related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste. Flotek’s board engaged a third party to ~~be purchased and expected selling prices~~review the findings of the ~~excess terpene as such loss was not considered recoverable.~~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.

~~The Company’s balance sheet at March 31,~~

Beginning in December 2021, ~~included an accrued liability of $9.4 million as it did not make any payments for,~~Flotek sent demand letters to, and subsequently filed arbitration or ~~purchases of, terpene during the first quarter of 2021. The Company expects that settlement of the accrued liability, if any, will be determined through the litigation disclosed~~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 ~~“Litigation” section of this Note.~~

~~Indemnification~~

~~The Company agreed to provide indemnification to National Oilwell DHT, L.P.~~arbitration proceeding for ~~certain intellectual property-related claims in connection with sale of its Teledrift business unit in 2017. The expenses incurred~~his remaining severance (currently accrued by the Company, ~~were $0.5 million~~but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and ~~$0.2 million for the three months ended March 31, 2021~~amount of any outcome cannot reasonably be predicted.

Other Commitments and ~~2020, respectively.~~

~~Concentrations and Credit Risk~~

~~The majority of t~~he Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the sanitizer, surface cleaner and disinfectant industry to a lesser extent. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. Customers within the sanitizer, surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment. The concentration in the oil and gas industry increases credit and business risk. See Note 18, “Business Segment, Geographic and Major Customer Information,” for concentration of segment revenue from major customers.Contingencies

The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1412 — Stockholders’ Equity

On May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, to increase the authorized shares of common stock from 80,000,000 to 140,000,000, par value $0.0001 per share, and 100,000 of preferred stock, par value $0.0001 per share. The additional authorized shares are available for corporate purposes, including acquisitions.

During the first quarter of 2021, the Company identified 0.6 million shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the ~~December~~March 31, ~~2020~~2021 consolidated financial statements or basic and diluted earnings per share.

Note 1513 — 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 common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and settlement of restricted stock units.

Potentially dilutive securities were excluded from the calculation of diluted loss per share for the three months ended March 31, ~~2021~~ 2022 and ~~2020,~~2021, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the periods. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were ~~0 for~~notes payable convertible into 26.3 million shares, 0.8 million restricted stock units and 4.3 million stock options for the three months ended March 31, ~~2021~~2022, and 0.4 million restricted stock units and 3.0 million stock options for the three months ended March 31, ~~2020.~~

2021

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 1614 — Supplemental Cash Flow Information

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

Three months ended March 31,
2021 2020
Supplemental cash payment information:
Interest paid $ 6 $ 4
Income taxes (received, net of payments) paid (351) (32)


	Three months ended March 31,
	2022		2021







Supplemental cash flow information:
Interest paid	$	5	$	6
Income taxes received	—		(351)
Non cash financing and investing activities:
Issuance of convertible notes payable as consideration for customer contract	10,000		—
Conversion of convertible notes payable to common stock	2,949		—

Note 1715 — Related Party Transaction

In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.

In October 2019, an amendment to the employment agreement of Mr. Chisholm was executed, giving the Company the contractual right of offset for any amounts owed by Mr. Chisholm to the Company for the IRS matter, and giving the Company the right to withhold payments to Mr. Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter from any amounts owed under the employment agreement. At December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $1.8 million for potential liability to the IRS. On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company. In September 2020, the Company informed Mr. Chisholm it would cease payment of future severance.

During first quarter of 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the receivable from Mr. Chisholm was $1.4 million, which equaled the payable to the IRS and netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mr. Ted D. Brown has been a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company formed in 2016. For the three months ended March 31, 2022, the Company’s revenues for chemical sales to Confluence was $1.4 million. As of March 31, 2022 and December 31, 2021, Confluence owed $1.4 million and $1.3 million respectively to the Company which is recorded in account receivables on the consolidated balance sheet.

During the three months ended March 31, 2022, the Company’s revenues from chemical sales to ProFrac was $1.1 million. These revenues were not pursuant to the ProFrac agreement discussed in Note 1, “Organization and Nature of Operations”. There were no revenues from ProFrac during the three months ended March 31, 2021. As of March 31, 2022 and December 31, 2021, ProFrac owed $1.1 million and $0, respectively which is recorded in account receivables on the consolidated balance sheet.

Note 1816 — 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-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: CT and DA.

Chemistry Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals. This segment also includes a portfolio of specialty chemical products to address the long-term challenges of in the ~~drilling~~janitorial, sanitization, food services, and ~~completion of their wells.~~adjacent markets. The Company designs, develops, manufactures, packages, distributes, delivers and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management ~~companies.~~companies.

In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce Food and Drug Administration and Environmental Protection Agency compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to address the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Data Analytics. The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information ~~about~~on the composition and properties of energy customers’ hydrocarbon fluids. The ~~customers~~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 ~~upstream~~ to midstream facilities to refineries and distribution networks. To date, the DA segment has focused solely on North American markets. The DA segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, optimizing transmix, increasing efficiencies of towers, enabling automation of fluid handling, and reducing losses due to give-away (i.e., that portion of a product of higher value than what is specified) using real-time process information.

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized financial information of the reportable segments is as follows (in thousands):
For the three months ended March 31, Chemistry Technologies
Data Analytics (1)
Corporate and Other Total
2021
Net revenue from external customers $ 10,302 $ 1,468 $ 0 $ 11,770
Loss from operations, including impairment (3,589) (292) (4,362) (8,243)
Depreciation and amortization 292 15 0 307
Additions to long-lived assets 19 0 0 19
2020
Net revenue from external customers $ 19,416 $ 0 $ 0 $ 19,416
Loss from operations, including impairment (70,269) 0 184 (70,085)
Depreciation and amortization 1,809 0 382 2,191
Additions to long-lived assets 42 0 0 42

~~(1)~~ ~~The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3.~~


As of and for the three months ended March 31,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2022
Revenue from external customers	$	9,311	$	1,071	$	—	$	10,382
Revenue from related party	2,497		—		—		2,497
Loss from operations	(6,057)		(808)		(3,419)		(10,284)
Depreciation and amortization	178		16		1		195
Additions to long-lived assets	—		—		—		—

2021
Revenue from external customers	$	10,302	$	1,468	$	—	$	11,770
Revenue from related party	—		—		—		—
Loss from operations	(3,589)		(292)		(4,362)		(8,243)
Depreciation and amortization	292		15		—		307
Additions to long-lived assets	19		—		—		19

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


		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Chemistry Technologies	Chemistry Technologies	$	33,804	$	43,346	Chemistry Technologies	$	33,476	$	34,387
Data Analytics	Data Analytics	14,025		13,201		Data Analytics	5,915		7,329
Corporate and Other	Corporate and Other	30,888		29,663		Corporate and Other	32,827		8,528
Total assets	Total assets	$	78,717	$	86,210	Total assets	$	72,218	$	50,244

Geographic Information

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


		Three months ended March 31,					Three months ended March 31,
		2021		2020				2022		2021
U.S.	U.S.	$	9,661	$	15,775	U.S.		$	10,334	$	9,661
UAE	UAE	1,103		1,461		UAE		1,311		1,103
Other countries	Other countries	1,006		2,180		Other countries		1,234		1,006
Total revenue	Total revenue	$	11,770	$	19,416	Total revenue		$	12,879	$	11,770

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

2125

FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

Major Customers

Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands):


For the Three Months Ended March 31,		Chemistry Technologies		% of Total Revenue		Data Analytics	% of Total Revenue
2021
Three months ended March 31,								Three months ended March 31,	Chemistry Technologies		% of Total Revenue
2022								2022
Customer A	Customer A	$	3,029	25.7	%	*	*	Customer A	$	—	—	%
Customer B	Customer B	2,849		24.2	%	*	*	Customer B	2,607		20.2	%

Customer C (Related Party)								Customer C (Related Party)	1,389		10.8	%

2020
Customer A $ 7,754 39.9 %
* (1)
* (1)
Customer B 3,480 17.9 %
* (1)
* (1)

* This customer did not account for more than 10% of revenue during this period.

*~~(1)~~ ~~Not applicable, as the Company did not form the Data Analytics segment until May 2020 upon acquiring JP3.~~


2021
Customer A	$	3,029	25.7	%
Customer B	2,849		24.2	%

~~Note 19 — Subsequent Events~~

~~On April 5, 2021, ADM~~The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and ~~FCC filed a lawsuit against Flotek Chemistry~~gas industry. Customers within the oil and ~~the Company~~gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. The concentration in the ~~Delaware Court of Chancery. See Note 13, “Commitments~~oil and ~~Contingencies” for a discussion of the lawsuit~~gas industry increases credit and ~~the lawsuit against ADM and FCC filed previously by the Company and Flotek Chemistry.~~business risk.

2226

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 — Subsequent Events

We have evaluated the effects of events that have occurred subsequent to March 31, 2022, and there have been no material events that would require recognition in the 2022 interim financial statements or disclosure in the notes to the consolidated financial statements, except as disclosed below.

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC (“ProFrac Holdings”), in exchange for $10 million of convertible notes under the same terms as the convertible notes issued in the PIPE transaction. Under the ProFrac Agreement, ProFrac Services, LLC (“ProFrac Services”) is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services. ProFrac Services 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 during such calendar year. The term of the ProFrac Agreement is three years starting April 1, 2022. In connection with the ProFrac Agreement, the Company also granted ProFrac Holdings LLC. the right to designate two nominees to serve on Flotek’s board of directors.

On February 16, 2022, the Company entered into a transaction with ProFrac Holdings, LLC that once closed, would expand the ProFrac Agreement to a term of ten years and to increase ProFrac Services’ minimum purchase obligation for each year to the greater of 70% of ProFrac Services’ requirements and a baseline measured by ProFrac Services’ first 30 hydraulic fracturing fleets deployed. Closing of the transaction is subject to customary closing conditions, including a stockholder vote as described below. As part of the transaction, at closing of the amended agreement Flotek would (a) issue to ProFrac $50 million in principal amount of 10% PIK notes convertible into Flotek’s common stock with a maturity of one year, and (b) grant ProFrac the right to designate two additional nominees to Flotek’s board of directors, for a total of four out of seven directors. Conversion price of the convertible notes will be $1.088125 per share under certain conditions prior to maturity, or $0.8705 per share at maturity. The convertible notes contain other terms and conditions similar to the convertible notes issued to ProFrac on February 2, 2022.

On May 9, 2022, the Company held a special meeting of stockholders to approve this transaction. Stockholders were also asked to approve permitting the Board to increase the authorized common stock of the Company and a reverse split of the Company’s common stock, in each case to facilitate the issuance of the additional 10% PIK notes. All proposals at the meeting passed, and the Company expects to close the transactions with ProFrac during the second quarter of 2022. The Company is evaluating its expected working capital needs in order to facilitate the ramp in activity after closing of the contract extension.

Subsequent to December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility for proceeds of $4.3 million, which closed on April 18, 2022. This will result in an estimated gain on sale of the Waller facility of $1.9 million that will be reflected in the consolidated financial statements for the three and six months ended June 30, 2022 and the cessation of rental income from this facility due to the subsequent termination of the lease agreement.

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

~~Executive Summary~~

~~This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)~~The following discussion should be read in conjunction with the ~~unaudited condensed~~Annual Report on Form 10-K for year-end December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) and the consolidated financial statements and ~~the related~~accompanying notes ~~thereto of this Quarterly Report, as well as the Annual Report. Phrases such as “Company,” “we,” “our,” and “us” refer to Flotek Industries, Inc. and its subsidiaries.~~included herein.

Executive Summary

Flotek Industries, Inc. ~~is a~~(“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, ~~that serves~~Flotek helps customers inacross industrial, commercial, and consumer ~~markets.~~markets improve their ESG performance. The Company serves specialty chemistry needs ~~that span from downstream, midstream and upstream,~~for both domestic and international energy markets toas well as applications of U.S. manufactured ~~sanitizers,~~ surface cleaners, ~~and~~ disinfectants for industrial, commercial and consumer use.

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

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

During the second quarter of 2020, the Company acquired 100% ownership of JP3 in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. In conjunction with the acquisition of JP3, the Company created the DA segment.

The Company was impacted as a result of the outbreak of COVID-19 that spread throughout the U.S. and the world during 2020, with effects continuing into 2021. For a discussion of the impacts of COVID-19, see “COVID-19 Effects and Actions” and “Outlook” in this Item 2 of this Quarterly Report.

~~Company Overview~~

The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research &and Innovation ~~(“R&I”)~~ advanced laboratory capabilities.

Company Overview

Chemistry Technologies

The Company’s CT segment ~~includes an energy-focused product line~~provides sustainable, optimized chemistry solutions that ~~is comprised of~~maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology ~~services.~~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 ~~delivers~~ and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields, as well asoptimized chemistry solutions that accelerate existing sustainability practices to reduce ~~health~~the environmental impact of energy on the air, water, land and ~~environmental risk by usin~~people.

~~g greener chemicals.~~

Customers ~~of this product line~~ of the CT segment include ~~major~~those of energy related markets as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil 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 best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.

In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for both commercial and personal use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce FDA and EPA compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today, the Company has a portfolio of specialty green chemical products designed to address the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks. Additionally, the Company’s technology helps customers reduce their carbon footprint and reduce energy consumption and emissions by minimizing processing and waste. The Company has made a commitment of being in this market for the long-term.

Data Analytics

The Company’s DA segment, created in conjunction with the acquisition of JP3 in May 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable real time information about the composition and properties for customers' oil, natural gas and refined products.

The DA 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, NGLs, natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is ~~continuing its transition~~processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

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 at the lower value products 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 supermajors, some of the largest midstream companies and large gas processing plants. We have developed a ~~recurring revenue subscription model of selling its~~new line of Verax analyzers ~~deployed~~for deployment internationally which was recently certified for compliance in ~~the field across the oil~~

hazardous locations and harsh weather conditions.

~~and gas sector, support contracts and software services via its cloud-based Viper software platform, as well as selling hardware-related solutions during the transition to a recurring revenue model.~~

The customers of the DA segment diversify the revenues of the Company and span across the entire oil and gas market, including upstream, midstream, refineries and distribution networks. The segment helps its customers generate additional profit by enhancing blending, optimizing the natural mixing between adjacent batches of different fuels (“transmix”), ensuring product quality while enabling automation of fluid handling. To date, the segment has focused sales solely on North American markets; however, the segment began preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands of overseas installations. ~~In 2020, the Company hired a business development executive, who is developing sales opportunities in the international market.~~

Research & Innovation

R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, FDA and EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.

~~COVID-19 Effects~~Outlook

Our business is subject to numerous variables which impact our outlook and ~~Actions~~

~~In March 2020,~~expectations given the World Health Organization declared the outbreak of COVID-19 a global pandemic that spread throughout the U.S. and the world. In late 2020, major pharmaceutical companies developed vaccines and received approval for wide-scale distribution in the U.S. and other countries. The vaccination effort is proceeding in the U.S. and the world. However, variant strainsshifting conditions of the ~~virus~~industry and weather volatility. We have ~~emerged, which create additional uncertainty~~based our outlook on the ~~extent~~market and ~~the duration of the pandemic.~~weather conditions we perceive today. Changes often occur.

~~The pandemic negatively impacted the U.S.~~Energy

We expect North American and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets in 2020. These effects materially and adversely affected, and mayInternational onshore activity to continue to ~~materially and adversely affect, the demand for oil and natural gas as well as~~improve throughout 2022 from first quarter levels for the ~~Company’s services~~next nine months provided that commodity prices remain at or above current levels. The strongest potential growth throughout 2022 will likely comes from private, rather than publicly traded exploration and ~~products.~~

The Company’s CT segment is energy-focused with product lines comprised of specialty chemistries, logistics and technology services. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independentproduction companies. Private exploration and production companies ~~national~~operate the majority of U.S. land rigs and ~~state-owned oil~~react quickly to changing commodity prices. In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead. Additionally, we have reestablished our ability to sell product through other service companies and ~~international supply chain management companies. Due to customer activity levels~~believe sales through indirect channels should accelerate in ~~this industry, the Company experienced materially reduced revenues and cash flows during 2020, which continued for the first quarter of 2021.~~2022.

~~Outside the oil and gas sector, the COVID-19 pandemic increased demand for certain specialty chemicals, particularly sanitizers, surface cleaners and disinfectants.~~

Industrial

In 2020, the Company launched a diversified line of EPA and FDA compliant products that target industrial, agricultural and ~~EPA-compliant sanitizers,~~consumer markets with particular focus on customers that are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers,

solvents and ~~disinfectants~~a multitude of proprietary chemistries for industrial, commercial and consumer use. ~~These products build on the Company’s historical expertise in chemistry~~The Company believes these adjacent markets provide an opportunity to diversify and leverage its infrastructure, personnel, competencies, supply chain, research and historic consumer market experience. The continued impact of COVID-19 and subsequent modification of social behavior in regard to the heightened attention to hygiene and sanitation provide a sustainable yet challenging market to expand the Company’s ~~portfolio.~~

portfolio of chemistry solutions to meet the growing demand. We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states. We will be training and educating their representatives during the next two quarters. The ~~DA segment’s largest customer base, the oil and gas midstream market, reduced gathering and infrastructure capital spending in 2020. In addition, the pandemic impacted the DA segment due~~leverage sales effort is anticipated to reduced access to facilities to complete new installations for a portion of the year. As a result, spending for the DA segment’s products and services has also been impacted by lower consumer demand. As a result,accelerate sales ~~and cash flows were below target for the DA segment.~~

The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level. Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the Company and could result in additional impairments in the ~~future. Future developments~~second half of the COVID-19 crisis are uncertain and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.2022.

While the full impact of the COVID-19 pandemic continues to evolve and the full extent of the impact is not yet known, the Company continues to closely monitor the effects of the pandemic on commodity demands, and on its customers, operations and employees. Any future developments and effects are highly uncertain and cannot be predicted, including:

•~~the scope and duration of the pandemic;~~

•~~effectiveness of vaccines;~~

•~~emergence of new coronavirus variants;~~

•~~further adverse revenue and net income effects; impairments;~~

•~~disruptions to the Company’s operations;~~

•~~third-party providers’ ability to support the Company’s operations;~~

•~~limitations on domestic and international travel for sales, system installations, and support;~~

•~~customer shutdowns of oil and gas exploration and production;~~

•~~the effectiveness of work from home arrangements;~~

•~~modifications to work schedules, including manufacturing shifts;~~

•~~impacts on employees from illness, school closures and other community response measures;~~

•~~any actions taken by governmental authorities and other third parties in response to the pandemic; and~~

•~~temporary closures of the Company’s facilities or the facilities of its customers and suppliers.~~Digital Analytics

The ~~pandemic caused the Company~~use of data and digital analytics is a growing trend in all industries where technology is leveraged to alter its business working practices, including work schedules, manufacturing shifts, employee travel, work locations, meetings and participation in events and conferences. In addition, the Company and mostanalyze large datasets of ~~its customers continued the practice of social distancing and work-from-home procedures, which have had, and may continue~~operational information to have, an impact on the ability of employees and management of the Company to communicate and work efficiently. These practices are gradually changing with increased vaccination levels in the U.S. and the world. There is no certainty that these actions will mitigate risks posed by the virus to the Company’s workforce.

In response to market conditions and anticipating ongoing volatility, the Company reduced its cost structure in 2020 to meet anticipated market activity and reduce the Company’s break-even level. In the second half of 2020 the Company recorded additional impairment charges of goodwill and intangible assetsimprove performance, as well as anfor predictive maintenance, advanced safety measures and reduced environmental impact of operations. Verax has gained a foothold in North American markets for critical applications where compositional information is needed in real-time. The technology delivers real-time insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We continue to work with our customers to identify further facilities and applications where our technology has the highest value. We expect to open and establish our international customer base with our new generation of internationally certified online analyzers. The new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments. We anticipate international sales to increase toover the ~~provision of excess and obsolete inventory.~~

~~Outlook~~

The COVID-19 pandemic negatively impacted the U.S. and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets. While market prices for West Texas Intermediate and Brent crude oil rebounded from lows during the initialnext twelve months because of the ~~pandemic~~newly certified equipment. 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 ~~2020~~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 within 60 seconds. This allows operators to ~~exceed $50 per barrel during the first quarter of 2021, many major integrated oil~~cut batches quickly and ~~gas companies~~accurately, reduce transmix and independent oil and gas companies have kept their 2021 budgets generally unchanged, though such budgets may change if crude oil prices increase. Uncertainty exists about the extent and the duration of the resulting industry contraction and consolidation. In addition, the oilfield services industry remains over supplied and the timing of returns to pre-pandemic pricing levels remains uncertain. While uncertainty remains around the extent and duration of the pandemic, there are positive indicatorsminimize off-spec product that ~~the U.S. economy is recovering, including improvements in oil and gas demand, rising COVID-19 vaccination levels, and resumption of travel and business activities.~~requires downgrades.

~~Climate change continues~~

ESG

ESG-focused solutions continue to be ~~a focus~~an emphasis for the Company as ~~investors~~the energy, industrial and consumer markets are ~~increasingly scrutinizing companies linked~~seeking to ~~the oil~~accelerate their focus on sustainability and ~~gas industry through environmental, social and corporate governance (“ESG”) factors to promote clean energy and sustainability. In addition, the~~minimized impact ~~of the actions of the new presidential administration and Congress~~ on the economy and financial markets is uncertain in the current year and longer term. During his first months in office, the President signed many executive orders, including ones with implications for stakeholders in the energy industry, suc~~h as canceling~~ ~~the Keystone XL Pipeline and another for the U.S. to rejoin the Paris Agreement on climate change.~~environment. The U.S. Department of Interior (“DOI”) issued an order in January, placing a 60-day freeze on agency permit approvals and pausing federal oil and gas leasing for a review of all existing leasing and permitting practices related to fossil fuel development on public lands and waters. In March 2021, the DOI allowed the suspension to expire. In addition, the President announced proposed plans to raise the corporate tax rate to help finance his proposed infrastructure plan. These and other potential actions by the new administration could have negative and/or positive impacts on the Company’s business and customers.

~~Amid the current environment with increased business commitments related to ESG, the~~ Company’s products and services offer a significant benefit to businesses seeking to improve their ESG performance, including improving ~~the~~ safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, ~~our~~the Company’s patented line of Complex nano-Fluid® (also known as CnF®)

~~chemistry technologies,~~ 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. Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil. Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.

The Company believes ~~that an increase in~~the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of ~~green specialty chemicals could benefit~~ our ~~business~~greener practices and ~~reduce~~chemistries. We believe the ~~impact of the current decrease in drilling and completions activity. The key sales~~performance-driven ESG focus of the Company ~~is growing market share by~~assists in reducing environmental liabilities and improving returns for ~~current customers, rebuilding relationships with past customers~~our customers.

Supply Chain

During 2020 and ~~identifying new customers~~2021 challenging supply chain issues emerged that ~~could benefit from chemistry solutions. Additionally, the Company is focused on total cost~~“are already continuing into 2022” according to Secretary of ~~recovery per barrel of oil equivalent, rather than initial cost, as well as strengthening the publicly available evidence~~Transportation Peter Buttigieg. The anticipated activity increases will strain supply chains generally. The principal supply issues facing our industry for the ~~efficacy of using advanced CnF® products to materially impact oil and gas recovery and profitability for operators.~~next twelve months will include:

The sanitizers, surface cleaners and disinfectants industry is expanding, associated with the continued impact of the COVID-19 pandemic and the need for individuals, businesses, schools and governments to minimize the spread of the coronavirus. Industry growth is also anticipated•Rising Freight Costs;

•Delays due to Port Congestion;

•Labor Shortages and

•Demand Forecasting.

All bidding will require the ~~modification~~risk of ~~social behaviors in regard to the heightened attention to hygiene~~shipping costs and ~~sanitation. In 2020, the Company launched a diversified line of FDA-compliant sanitizers, surface cleaners~~delays be factored into proposals. Trucking availability and disinfectants for industrial, commercial and consumer use. The Company believes this market provides an opportunity to expand the Company’s portfolio of chemistry products to meet the growing demand.

The use of data and analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as predictive maintenance, advanced safety measures and reduced environmentalpricing will impact ~~of operations. The Company believes that data and analytics is an area for growth. Hence, in 2020, the Company acquired JP3 and formed the DA segment. To date, the segment has focused sales solely on~~ North American ~~markets; however, the segment began preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands~~opportunities while sea-freight costs will impact sales of ~~overseas installations. The Company hired a business development executive, who is developing sales opportunities in the international market.~~

The Company continues to develop technologies to ensure our ability to provide differentiated products and services to our customers. Partnering closely with our clients to create and implement specialty chemical products and compositional analyzers remains a focus for the organization. Differentiated products and services are the result of the deployment of the organization’s capabilities and expertise in alignment with customer success. The continuing search for new ways to help make customers successful positions the Company as a leader in advanced chemicals and technology.

The Company’s emphasis in 2021 is executing the plan established by the executive team to recover from the varied impacts of COVID-19 and grow the Company’s businesses. The CT segment is focused on marketing our products and services to new and existing customers, while expanding the sanitizers, surface cleaners and disinfectants product line. The DA segment will maintain its domestic sales effort while pursuing international growth. The Company does not anticipate a material escalation in our maintenance capital spending year-over-year. In 2021, the Company is enhancing its focus on ESG and the responsible management of products and services through our Quality Assurance and Quality Control Program and Chemical Spill Prevention Program, adhering to ISO 9001:2015 standards.North American manufactured goods being

2629

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 also result in supply disruption.

Weather

During the first three months of 2022 there were no major weather events that had a material impact on first quarter results.

COVID-19

The impacts of COVID-19 continue to affect the U.S. and global economy. We believe our protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge. The resumption of travel has begun to accelerate and we estimate that in person customer visits that began in earnest during the first quarter of 2022 will continue to accelerate.

Consolidated Results of Operations (in thousands):


	Three months ended March 31,
		2022			2021
Revenue
Revenue from external customers		$	10,382		$	11,770
Revenue from related party		2,497			—
Total revenues		12,879			11,770
Cost of goods sold		13,358			12,080
Cost of good sold %		103.7		%	102.6		%
Gross profit (loss)		(479)			(310)
Gross profit (loss) %		(3.7)		%	(2.6)		%
Selling general and administrative		4,879			6,082
Selling general and administrative %		37.9		%	51.7		%


Depreciation and amortization		195			307
Research and development		1,415			1,542
Loss on sale of property and equipment		8			2

Gain on lease termination		(584)			—
Change in fair value of convertible notes payable		3,892
Loss from operations		(10,284)			(8,243)
Operating margin %		(79.9)		%	(70.0)		%
Interest and other income, net		(444)			(51)
Loss before income taxes		(10,728)			(8,294)
Income tax benefit/ (expense)		4			(6)
Net Loss		$	(10,724)		$	(8,300)


Net loss %		(83.3)		%	(70.5)		%

~~Consolidated~~
~~Results of Operations: Three Months Ended March 31, 2021, Compared to the Three Months Ended March 31, 2020~~

Three months ended March 31,
2021 2020 $ Change % Change
Revenue $ 11,770 $ 19,416 $ (7,646) (39.4) %
Operating expenses (excluding depreciation and amortization) 13,801 22,841 (9,040) (39.6) %
Operating expenses % 117.3 % 117.6 %
Corporate general and administrative costs 4,361 4,493 (132) (2.9) %
Corporate general and administrative % 37.1 % 23.1 %
Depreciation and amortization 307 2,191 (1,884) (86.0) %
Research and development 1,542 2,555 (1,013) (39.6) %
Loss (gain) on disposal of long-lived assets 2 (33) 35 (106.1) %
Impairment of fixed assets and long-lived assets — 57,454 (57,454) (100.0) %
Loss from operations (8,243) (70,085) (61,842) 88.2 %
Operating margin % (70.0) % (361.0) %
Interest and other income (expense), net (51) (51) — — %
Loss before income taxes (8,294) (70,136) (61,842) 88.2 %
Income tax (expense) benefit (6) 6,169 (6,175) (100.1) %
Net loss $ (8,300) $ (63,967) $ (55,667) 87.0 %

Consolidated revenue for the three months ended March 31, ~~2021, decreased $7.6~~2022, increased $1.1 million, or ~~39.4%~~9.4%, versus the same period of ~~2020. The~~2021. Revenue during the three months ended March 31, 2022 reflected an increase of revenue in the CT segment of $1.5 million driven by the impacts of industry consolidation of customers and increased related party activity, see further discussion in Note 15, “Related Party Transaction”. This increase was partially offset by a decrease in revenue ~~during~~in the ~~first quarter~~DA segment of $0.4 million due to one-time orders from customers in the three months ended March 31, 2021 ~~compared to the first quarter of 2020 was driven by impacts from both the supply and the demand side, primarily~~not repeated in our CT segment. The COVID-19 pandemic negatively impacted economic activity and reduced global demand for oil and gas, a key sector for our customer base. The Company’s domestic and international revenue for the first quarter of 2021 decreased as demand from major customers and smaller operators has not returned to the pre-pandemic levels of first quarter 2020. Partially offsetting the decrease, the first quarter of 2021 includes $1.5 million of revenue for the Data Analytics segment, which was created in May 2020 upon acquiring JP3.2022.

Consolidated ~~operating expenses (excluding depreciation and amortization)~~cost of goods sold for the three months ended March 31, ~~2021, decreased $9.0~~2022, increased $1.3 million, or ~~39.6%,~~10.6% versus the same period of ~~2020, and as a percentage of~~2021 primarily attributable to the increase in revenue ~~remained flat. The decrease~~with the change in ~~operating expenses resulted from reduced cost of sales~~margin being due to ~~lower~~ sales activity during the first quarter of 2021 compared to the first quarter of 2020 associated with COVID-19 impacts and related declines in activity. The Company’s operating expenses in the first quarter of 2021 also benefited from actions taken in 2020 that reduced the Company’s facility footprint and tank rentals, lowered personnel costs and cut costs within the supply chain. These reduced costs were partially offset by new operating expenses for the DA segment that was acquired in the second quarter of 2020 as well as the introduction of our sanitizer, surface cleaner and disinfectant products in the second quarter of 2020.mix.

~~Corporate~~

Selling general and administrative (“CGSG&A”) expenses are not directly attributable to products sold or services provided. CGSG&A expenses for the three months ended March 31, 2022, decreased $1.2 million, or 19.8%, versus the same period of 2021.

SG&A expenses decreased as a result of a reduction in professional fees due to a decrease in contract labor and consulting and, legal fees partially offset by increased advisor fees relating to work around the ProFrac/PIPE deal and other items. Corporate marketing costs also decreased primarily due to nonrecurring marketing fees and other initiatives.

Depreciation and amortization expense decreased $0.1 million, or 36.4% for the three months ended March 31, ~~2021, decreased $0.1 million, or 2.9%,~~2022, versus the same period of ~~2020. As~~2021 The decrease is as a ~~percentage~~result of ~~revenue, CG&A increased 14.0%~~asset disposals and the reclassification of assets relating to the Monahans, Texas and Waller, Texas facilities to assets held for sale in 2021.

Research and development (“R&D”) costs decreased $0.1 million, or 8.2% for the three months ended March 31, 2021, as revenue declined in the first quarter of 2021 as compared to the same period of 2020. The decrease in CG&A costs was primarily due to lower personnel costs in the first quarter of 2021 related to the reduction in force costs accrued in the first quarter of 2020 for $0.5 million combined with first quarter 2021 CG&A personnel costs that were $0.4 million lower. Occupancy expense also decreased $0.2 million due to the Company moving out of its corporate headquarters office and consolidating into the Global Research and Innovation Center. Offsetting the decreases was an increase in professional fees of $0.9 million that included increased accounting consultant and contractor costs of $0.6 million and increased audit fees of $0.4 million.

~~Depreciation and amortization expense decreased $1.9 million, or 86.0% for the three months ended March 31, 2021,~~2022, versus the same period of ~~2020, primarily due to impairments of fixed and long-lived assets recorded in the first quarter of 2020.~~

~~Research and development costs decreased $1.0 million, or 39.6% for the three months ended March 31,~~ 2021 ~~versus the same period of 2020~~ due to lower personnel costs as a result of our reduction in workforce ~~accrued~~and lower non-labor cost primarily from the re-negotiation of a contract which resulted in ~~the first quarter 2020.~~a credit for past expenses taken.

Impairment of fixed and long-lived assets decreased due to the first quarter 2020 write-down of $54.7 million in the CT segment and a corporate-level write-down of $2.8 million. See Note 8, “Impairment of Fixed and Long-lived Assets, in Item 1, Financial Statements, of this Quarterly Report.” No impairments of fixed and long-lived assets occurred in the first quarter of 2021.

Loss from operations ~~decreased $61.8~~worsened by $2.0 million, or ~~88.2%~~24.8% for the three months ended March 31, 2022, versus the same period in 2021. The loss from operations increase is primarily a result of the revaluation of the convertible note payable partly offset by a gain from lease termination of $0.6 million, increased revenue and the reduction in expenses for SG&A, depreciation and amortization and R&D described above.

Loss before income taxes for the three months ended March 31, 2022, was impacted by interest charges of $0.4 million versus $0.05 million for the same period in 2021.

The Company’s income tax benefit for the three months ended March 31, ~~2021, versus~~2022 and expense for the same period in ~~2020. Loss from operations decreased primarily as a result of the $57.5 impairment of fixed and long-lived assets in the first quarter of 2020 and no impairments in the same quarter of 2021.~~

~~The Company’s income tax expense for the first quarter of~~ 2021 was minimal. The Company recorded an income tax benefit of $6.2 million for the first quarter of 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act initially recorded in the first quarter 2020.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations: ~~Three Months Ended March 31, 2021, Compared to the Three Months Ended March 31, 2020~~


		Three months ended March 31,
		2021		2020
							Three months ended March 31,
							2022		2021
Revenue	Revenue	$	10,302	$	19,416	Revenue	$	11,808	$	10,302

Loss from operations	Loss from operations	(3,589)		(70,269)		Loss from operations	(6,057)		(3,589)

CT revenue for the three months ended March 31, ~~2021, decreased $9.1~~2022, increased $1.5 million ~~versus the same period of 2020.~~compared to 2021. The ~~decrease~~increase in revenue during ~~the first quarter of 2021~~2022 compared to ~~the first quarter of 2020~~2021 was driven by impacts from ~~both~~industry consolidation and increased related party activity, see further discussion in Note 15, “Related Party Transaction”. While the pandemic continued to weigh on economic activity in 2021, global supply and demand has steadily normalized through the demand side. The COVID-19 pandemic negatively impacted economic activity and reduced global demand for oil and gas, a key sector of our customer base. The Company’s domestic and international revenue for the first quartersecond half of 2021 ~~decreased as demand from major customers~~ and ~~smaller operators has not returned to the pre-pandemic levels of first quarter 2020. In addition, the CT segment granted price concessions due to the economic environment.~~into 2022.

Loss from operations for the CT segment for the three months ended March 31, ~~2021, decreased $66.7~~2022, worsened $2.4 million, or ~~94.9%, versus~~(68.8)% compared to 2021. The reduction is a result of the ~~same period~~revaluation of ~~2020.~~the convertible note of $3.9 million. Excluding the revaluation of the note there was an overall improvement. The ~~decrease~~improvement in loss from operations is due to increased revenues, lower ~~revenue~~personnel costs due to reduced headcount and ~~significantly~~ lower ~~expenses, primarily the result of no impairments~~rental fees for International Organization for Standardization (ISO) tanks. The improvement in loss from operations was partially offset by an increase in the first quarter of 2021 versus impairment charges of fixed and long-lived assets of $54.7 million in the same period of 2020. Other decreases in expenses occurred due to the first quarter of 2020 including a $2.3 million terpene purchase commitment loss with no comparable activity in 2021. Personnel costs declined period over period by $1.8 million, which included first quarter 2020 severance costs of $0.6 million for reduction in force actions. Office costs and equipment and facilities costs decreased a combined $0.6 million period over period from the consolidation of the Company’s physical facilities.

bad debt provision.

Data Analytics Results of Operations: ~~Three Months~~


	Three months ended March 31,
	2022		2021
Revenue	$	1,071	$	1,468


Loss from operations	(808)		(292)

DA revenue for the three months ended March 31, ~~2021~~2022

~~Three months ended March 31, 2021~~

~~Revenue~~

~~1,468~~

~~Loss from operations~~

~~(292)~~

~~On May 18, 2020,~~, decreased $0.4 million compared to the ~~Company purchased JP3 and formed~~same period in 2021 due to one time orders not repeated in 2022. Loss from operations for the DA ~~segment. Segment revenue~~segment for ~~the first quarter of 2021 was $1.5 million, an increase of $0.2 million over fourth quarter 2020 revenue of $1.3 million, driven primarily by increased equipment sales.~~

~~Critical Accounting Policies and Estimates~~

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments, estimates, and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Part II, Item 8 — Financial Statements

and Supplementary Data, Note 2 of “Notes to Consolidated Financial Statements” and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates” of the Company’s Annual Report, and the “Notes to Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report describe the significant accounting policies and critical accounting estimates used to prepare the consolidated financial statements. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most subjective judgments. The Company regularly reviews and challenges judgments, assumptions and estimates related to critical accounting policies, including goodwill and other intangible assets. There have been no significant changes in the Company’s critical accounting policies and estimates during the three months ended March 31, 2022 worsened by $0.5 million or 176.7% compared to the same period in 2021. The worsening loss from operations is primarily the result of the decrease in revenues and the fair value adjustment of the JP3 earnout.

~~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.31

Capital Resources and Liquidity

Overview

The Company’s ongoing capital requirements relate to the ~~need to acquire~~acquisition and ~~maintain~~maintenance of equipment and ~~fund~~funding working capital requirements. During the first three months of ~~2021,~~2022, the Company funded working capital requirements ~~primarily~~ with proceeds from convertible notes of $20.0 million and cash on hand.

As of March 31, ~~2021,~~2022, the Company had available cash and cash equivalents of ~~$33.9~~$24.8 million, as compared to ~~$38.7~~$11.5 million at December 31, ~~2020. The~~2021. During the three months ended March 31, 2022, the Company ~~recorded~~had an operating loss ~~in the first quarter~~ of ~~2021, and recorded $5.3~~$10.7 million, $8.5 million of ~~net~~ cash used ~~for~~in operating activities and ~~$0.1~~$20.0 million of ~~net~~ cash ~~used for~~provided by financing activities. Cash ~~used in~~provided by investing activities was ~~minimal..~~minimal.

Liquidity

The effects of the COVID-19 pandemic and the volatility in oil prices during 2020 and first quarter of 2021 materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. While the full impact and duration of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. See “COVID-19 Effects and Actions” for developments and possible effects.

The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. ~~While~~Uncertainty surrounding the long- term stability and strength of the oil and gas markets, or reduced spending by our customers could have a further negative impact on our liquidity

On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including with related parties, through the issuance of $21.2 million in aggregate principal amount of convertible notes that resulted in net cash proceeds of approximately $19.5 million.Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of convertible notes.Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC.If minimum volumes are not achieved in any given year, the Company receives liquidated damages equal to 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. The term of the ProFrac Agreement is three years starting on April 1, 2022.

The Company also sold and its manufacturing facility in Waller, Texas. These facilities were classified as held for sale as of March 31, 2022. Subsequent to March 31, 2022, the Company executed a contract to sell its Waller facility for $4.3 million of gross proceeds. The sale closed in April 2022.

Based on our cash and liquid assets, including the transactions subsequent to March 31, 2022 described above and in Note 17 - “Subsequent Events”, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet ~~its~~our capital requirements and anticipated obligations as they become due ~~a prolonged COVID-19 impact, a slower than expected recovery of oil and gas markets, or reduced spending at our customers could have a negative impact on our liquidity.~~

~~Accordingly, while~~in the ~~Company believes that its existing cash will enable it to fund its operations and growth,~~next 12 months. However the Company cannot guarantee ~~the~~a sufficient level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:

•~~Sale of non-core real estate properties;~~

•~~Sale-leaseback transactions of facilities;~~

•~~Sale of excess inventory and/or raw materials;~~

•~~Entry into a borrowing facility with one or more lenders;~~

•~~Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash; and~~

•~~Reducing professional advisory fees and headcount;~~

•~~Raising equity either in the public markets or via a private placement offering.~~

However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms. For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in the Company’s Annual Report.

~~The Company expects capital spending to be less than $1.0 million in 2021.~~

Cash Flows

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


		Three months ended March 31,					Three months ended March 31,
		2021		2020			2022		2021
Net cash used in operating activities	Net cash used in operating activities	$	(5,265)	$	(23,777)	Net cash used in operating activities	$	(8,474)	$	(5,265)
Net cash (used in) provided by investing activities		(17)		3,322
Net cash (used in) provided by financing activities		(81)		253

Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	24		(17)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	19,993		(81)
Effect of changes in exchange rates on cash and cash equivalents	Effect of changes in exchange rates on cash and cash equivalents	23		(109)		Effect of changes in exchange rates on cash and cash equivalents	8		23
Net change in cash, cash equivalents and restricted cash	Net change in cash, cash equivalents and restricted cash	$	(5,340)	$	(20,311)	Net change in cash, cash equivalents and restricted cash	$	11,551	$	(5,340)

Operating Activities

Net cash used in operating activities was ~~$5.3~~$8.5 million and ~~$23.8~~$5.3 million during the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. Consolidated net loss for the three months ended March 31, 2022 and 2021, were $10.7 million and ~~2020, totaled~~ $8.3 million, ~~and $64.0 million,~~ respectively.

During the three months ended March 31, ~~2021,~~2022, non-cash adjustments to net income totaled ~~$1.2~~$5.6 million as compared to ~~$61.3~~$1.2 million for the same period of ~~2020.~~2021.

•For the ~~first quarter~~three months ended March 31, 2022, non-cash adjustments included $3.9 million for the change in fair value of convertible notes, $0.7 million stock compensation expense, $0.5 million PIK interest expense, $0.2 million provision for doubtful accounts and $0.2 million for depreciation. A benefit of $0.6 million was included for the gain on lease termination.

•For the three months ended March 31, 2021, non-cash charges included $0.3 million for depreciation, ~~which was lower than the first quarter of 2020 due to asset impairments taken in 2020,~~ and a $0.3 million decrease in the fair value of contingent consideration.

During the three months ended March 31, 2022, changes in working capital used $3.3 million of cash as compared to providing $1.9 million for the same period of 2021.

•For the three months ended March 31, ~~2020, contributory non-cash adjustments consisted~~2022, changes in working capital resulted primarily from a decrease in accrued liabilities of ~~$57.5~~$2.6 million partially due to payment of ~~impairment charges, which included a $30.2 million impairment~~the ADM Settlement (Note 11) and an increase in inventories of fixed assets, $19.9 million impairment of intangible assets and $7.4 million of impairment of right-of-use assets. In addition, non-cash charges included $2.2 million for depreciation and amortization.$1.0 million.

~~During~~•For the three months ended March 31, 2021 ~~changes in working capital provided $1.9 million of cash as compared to using $21.1 million for the same period of 2020.~~

•~~For the first quarter of 2021,~~ the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable and other current assets totaling $0.5 million combined with an increase of accounts payable of $0.7 million, partially offset by a decrease in accrued liabilities of $0.3million.

•For the three months ended March 31, 2020, the use of cash in working capital primarily resulted from a reduction in accrued liabilities and accounts payable of $25.1 million, which included two one-time payments made: one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final post-closing working capital adjustment related to the 2019 sale of the Company’s ~~Consumer and Industrial Chemistry Technologies segment. Decreases in accounts receivable, inventories and other current assets provided cash of $10.1 million.~~

Investing Activities

Net cash ~~used in~~from investing activities for the three months ended March 31, 2022 and 2021 was ~~not material.~~ negligible.

Financing Activities

Net cash provided by ~~investing~~financing activities was ~~$3.3~~$20.0 million for the three months ended March 31, ~~2020. Cash provided by investing activities included $3.3 million~~2022, primarily from ~~sale~~the proceed from the issuance of ~~the Florida Chemical Company in 2019 and the subsequent release of escrow amounts.~~

~~Financing Activities~~

convertible notes. Net cash used in financing activities was $0.1 million for the three months ended March 31, 2021, primarily ~~for~~from purchases of common stock related to tax withholding requirements. ~~Net cash provided by financing activities was $0.3 million for the three months ended March 31, 2020, primarily from the sale of common stock.~~

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 March 31, 2022, 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 other than the long term terpene agreement discussed in Note 11 - Commitments and Contingencies

Item 3. Quantitative and Qualitative Disclosures ~~About~~about Market Risk

The Company is exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates. There have been no material changes to the quantitative or qualitative disclosures about market risk set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of the Company’s Annual Report.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.

The Company identified deficiencies in its internal control over financial reporting that represented material weaknesses as of December 31, 2020. Specifically, the Company’s management determined that the Company did not, as of December 31, 2020, design and maintain effective internal controls over financial reporting. The material weaknesses relate to: (1) ineffective design and operation of controls over nonrecurring transactions, including recognition of items and cash flow presentation relating to disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations; (2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations; and (3) the ineffective design and operating effectiveness of the assessment of going concern.

~~The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in~~Based upon this Quarterly Report present fairly, in all material respects, the consolidated financial positions, results of operations and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.

~~The Company’s management, including its~~evaluation, our principal executive officer and principal financial officer have ~~evaluated the effectiveness of the Company’s~~concluded that our internal control over financial reporting disclosure controls and ~~procedures, as defined by Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of March 31, 2021, and has concluded that the Company’s disclosure controls and procedures~~processes were ~~not~~ effective as of March 31, ~~2021, due to the material weaknesses in internal control over financial reporting described above.~~

~~Remediation Plan and Status~~

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

•~~Implementing monitoring controls over the review and validation of both tangible and intangible assets;~~

•~~Expanding controls over impairments of goodwill and long-lived assets;~~

•~~Enhancing specificity in the design and implementation of controls around nonrecurring, complex accounting activities, with the assistance of technical subject-matter experts;~~

•~~Implementing controls for forecasting and budgeting, to include additional process documentation and precision;~~

•~~Expanding monthly management review controls; and,~~

•~~Enhancing existing control procedures around the quarterly going concern analysis process.~~

The Company believes that the actions listed above will provide appropriate remediation of the material weaknesses; 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 effectiveness of the controls, no assurance can be given as to the timing for completion of remediation. The material weaknesses will be fully remediated when the Company concludes that the controls have been operating for sufficient time and independently validated by management. Further, in 2021 the Company made a strategic decision to bring internal audit in-house and hired a director of internal audit to manage internal controls and the remediation process.

2022

Changes in Internal ~~Control Over~~Controls over Financial Reporting

~~Except for the items described above, there~~

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 March 31, ~~2021,~~2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

3234

PART II - OTHER INFORMATION

Item 1. ~~Legal Proceedings~~

Litigation

~~On March 26, 2021,~~

There are no material changes since the ~~Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company,~~Company’s Annual Report on Form 10-K filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and Joshua A. Snively in state court in Harris County, Texas. The lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty by Mr. Snively. Contemporaneously with the ~~filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.~~

~~Subsequent to the lawsuit described above,~~SEC on April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters. The Company views this lawsuit as a strategic response to the March ~~26, 2021 lawsuit filed by Flotek Chemistry and the Company in Texas.~~

The Company believes that, notwithstanding the termination of the supply agreement, it has sufficient terpene inventory and alternate terpene supply sources to meet its requirements for the foreseeable future. The Company does not expect that termination of the terpene supply agreement will have a material effect on its operations or ability to meet customer needs.

The Company is subject to other routine litigation and other claims that arise in the normal course of business. Except as disclosed above, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.31, 2022.

~~Item 1A. Risk Factors~~

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

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

Unregistered Sales of Equity Securities

Disclosures in Note 8, “Debt and Convertible Notes Payable”, and Note 17, “Subsequent Events”, of the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 are incorporated by reference hereto.

Issuer Purchases of Equity Securities

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock. Repurchases of the Company’s equity securities during the three months ended March 31, ~~2021,~~2022, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:


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



January 1, 2022 to January 31, 2022	5,853	$	1.11
February 1, 2022 to February 28, 2022	2,471	0.82
March 1, 2021 to March 31, 2022	28,206	1.41
Total	36,530

Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
January 1 to January 31, 2021 4,053 $ 1.90
February 1 to February 28, 2021 — —
March 1 to March 31, 2021 40,811 2.28
Total 44,864

(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.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~

None.

3435

Item 6. Exhibits


Exhibit Number		Description of Exhibit
~~2.1~~		Share Purchase Agreement, dated as of January 10, 2019, by and between the Company and ADM (portions of this exhibit have been omitted pursuant to a confidential treatment request, which has been granted) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on March 4, 2019).1
~~2.2~~		Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between the Company, JP3 Measurement, LLC, the Sellers party thereto, and John A. Cardwell, as Seller Representative) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 19, 2020).1
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2007).
3.2		Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009).
3.3		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Flotek Industries, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 7, 2020).
3.4		Second Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.4 3.4 to the Company’s Form 10 -K10-K filed on March 1 6 ~~, 20~~21 )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		Form of Convertible Note (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on February 4, 2022).
4.3		Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on February 4, 2022).

10.1		~~Employment~~Note Purchase Agreement, dated ~~January 1, 2021,~~February 2, 2022, by and among Flotek Industries, Inc. and the Purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 4, 2022).

10.2		Registration Rights Agreement, dated February 2, 2022 by and among Flotek Industries, Inc. and the Purchasers party thereto (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on February 4, 2022).
10.3		Chemical Products Supply Agreement between Flotek Chemistry, LLC and ProFrac Services, LLC, dated February 2, 2022 (incorporated by reference to Exhibit 10.3 to the ~~Company~~Company’s Form 8-K filed on February 4, 2022).
10.4		Master Transaction Agreement between Flotek Industries, Inc. and ~~Ryan Ezell~~ProFrac Holdings, LLC, dated February 2, 2022 (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on February 4, 2022).


10.5	***	Securities Purchase Agreement dated February 16, 2022 by and between Flotek Industries, Inc. and ProFrac Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on ~~January 6, 2021.~~February 22, 2022).


























31.1	*	Rule 13a-14(a) Certification of Principal Executive Officer.
31.2	*	Rule 13a-14(a) Certification of Principal Financial Officer.

32.1	**	Section 1350 Certification of Principal Executive Officer.
32.2	**	Section 1350 Certification of Principal Financial Officer.

~~101~~101.INS	*	Inline XBRL Instance Document - The ~~following financial information from Flotek Industries, Inc.’s Quarterly Report on Form 10-Q for~~instance document does not appear in the ~~period ended March 31, 2021, formatted in~~ interactive data file because its XBRL tags are embedded within the inline XBRL document
101.SCH	*	Inline Extensible Business Reporting Language (iXBRL): (i) the Unaudited Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020, (ii) the Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2021 and 2020, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020, (v) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020, and (vi) Notes to Condensed Consolidated Financial Statements.XBRL Schema Document
101.CAL	*	Inline XBRL Calculation Linkbase Document
101.LAB	*	Inline XBRL Label Linkbase Document
101.PRE	*	Inline XBRL Presentation Linkbase Document
101.DEF	*	Inline XBRL Definition Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*		Filed ~~herewith.~~with this Form 10-Q.
**		~~This certification is deemed~~Furnished with this Form 10-Q, not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. filed.
1***		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 ~~SEC.~~U.S. Securities and Exchange Commission or its staff.

3536

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.



FLOTEK INDUSTRIES, INC.

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

~~Date:~~						~~May 10, 2021~~

Date: May 16, 2022

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


~~FLOTEK INDUSTRIES, INC.~~SIGNATURES	TITLE	DATE
/s/ John W. Gibson Jr. John W. Gibson, Jr.
~~By:~~President, Chief Executive Officer, and Chairman of the Board (Principal Executive Officer)		~~/s/ MICHAEL E. BORTON~~May 16, 2022
		/s/ Michael E. Borton
	Michael E. Borton	Chief Financial Officer (Principal Financial and Accounting Officer)	May 16, 2022

~~Date:~~	~~May 10, 2021~~

3637


	Three months ended March 31, 2020
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, December 31, 2019	63,657	$	6	4,145	$	(33,484)	$	347,564	$	181	$	(142,238)	$	172,029
Net loss	—	—		—	—		—		—		(63,967)		(63,967)
Foreign currency translation adjustment	—	—		—	—		—		(123)		—		(123)

Stock issued under employee stock purchase plan	—	—		(13)	—		11		—		—		11



Restricted stock granted	681	—		—	—		338		—		—		338
Restricted stock forfeited	—	—		241	—		—		—		—		—
Treasury stock purchased	—	—		22	(45)		—		—		—		(45)
Stock compensation expense	—	—		—	—		462		—		—		462




Balance, March 31, 2020	64,338	$	6	4,395	$	(33,529)	$	348,375	$	58	$	(206,205)	$	108,705



	March 31, 2021		December 31, 2020
Loss on purchase commitments (Note 13)	$	9,383	$	9,402
Severance costs	2,918		3,558
Payroll and benefits	1,053		1,789
Contingent liability for earn-out provision	1,081		1,416
Taxes other than income taxes	883		544
Due to third parties	531		434
Legal costs	980		333
Deferred revenue, current	134		146

Other	968		653


Total current accrued liabilities	$	17,931	$	18,275


							Balance at March 31,								Balance at December 31,
	Level 1		Level 2		Level 3		2021		Level 1		Level 2		Level 3		2020
Contingent consideration	$	0	$	0	$	1,081	$	1,081	$	0	$	0	$	1,416	$	1,416


2020
Customer A	$	7,754	39.9	%	* (1)	* (1)
Customer B	3,480		17.9	%	* (1)	* (1)