~~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 September 30, 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 November 8, 2021,~~At May 13, 2022, there were ~~79,617,743~~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 ~~September 30, 2021~~ March 31, 2022 and December 31, ~~2020~~ 2021	4
	Unaudited Condensed Consolidated Statements of Operations for thethree ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	5
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	7
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	8
	Notes to Unaudited Condensed Consolidated Financial Statements	109

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2422

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	3331

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 condition,~~ 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 ~~“2020~~“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)


		September 30, 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	$	20,527	$	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 $743 and $1,316 at September 30, 2021 and December 31, 2020, respectively		11,560		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	8,818		11,837		Inventories, net	10,143		9,454

Income taxes receivable	Income taxes receivable	55		403		Income taxes receivable	32		22

Other current assets	Other current assets	4,811		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	545		—		Assets held for sale	2,752		2,762
Total current assets	Total current assets	46,356		66,455		Total current assets	57,946		42,599
Property and equipment, net	Property and equipment, net	7,769		9,087		Property and equipment, net	5,079		5,296
Operating lease right-of-use assets	Operating lease right-of-use assets	2,099		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	209		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	$	64,554	$	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	$	5,224	$	5,787	Accounts payable	$	8,233	$	7,616
Accrued liabilities	Accrued liabilities	10,465		18,275		Accrued liabilities	6,747		8,996
Income taxes payable	Income taxes payable	38		21		Income taxes payable	4		4
Interest payable	Interest payable	70		34		Interest payable	94		82

Current portion of operating lease liabilities	Current portion of operating lease liabilities	586		636		Current portion of operating lease liabilities	619		602
Current portion of finance lease liabilities	Current portion of finance lease liabilities	48		60		Current portion of finance lease liabilities	33		41
Current portion of long-term debt	Current portion of long-term debt	1,336		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	17,767		28,861		Total current liabilities	48,942		18,777
Deferred revenue, long-term	Deferred revenue, long-term	100		117		Deferred revenue, long-term	84		91
Long-term operating lease liabilities	Long-term operating lease liabilities	7,888		8,348		Long-term operating lease liabilities	6,806		7,779
Long-term finance lease liabilities	Long-term finance lease liabilities	64		96		Long-term finance lease liabilities	47		53
Long-term debt	Long-term debt	3,452		1,617		Long-term debt	3,235		3,352

TOTAL LIABILITIES	TOTAL LIABILITIES	29,271		39,039		TOTAL LIABILITIES	59,114		30,052
Commitments and contingencies (See Note 11)		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; no shares issued and outstanding	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; 79,610,243 shares issued and 69,316,933 shares outstanding at September 30, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020		8		8
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	362,174		359,721		Additional paid-in capital	367,104		363,417
Accumulated other comprehensive income (loss)		51		(19)
Accumulated other comprehensive income						Accumulated other comprehensive income	89		81
Accumulated deficit	Accumulated deficit	(293,025)		(278,688)		Accumulated deficit	(319,938)		(309,214)
Treasury stock, at cost; 5,648,721 and 5,580,920 shares at September 30, 2021 and December 31, 2020, respectively		(33,925)		(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	35,283		47,171		Total stockholders’ equity	13,104		20,192
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	64,554	$	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 September 30, Nine months ended September 30,
2021 2020 2021 2020
Revenue
Revenue from external customers $ 8,847 $ 12,739 $ 29,782 $ 41,035
Revenue from related party 1,332 — 1,332 —
Total revenues 10,179 12,739 31,114 41,035
Costs and expenses:
Operating expenses (excluding depreciation and amortization) 5,418 29,466 31,330 63,939
Corporate general and administrative 2,696 2,679 9,925 12,568
Depreciation and amortization 233 518 793 3,177
Research and development 1,186 1,480 4,194 5,673
Loss (Gain) on disposal of long-lived assets 14 (37) (55) (92)
Impairment of goodwill — 11,706 — 11,706
Impairment of fixed, long-lived and intangible assets — 12,521 — 69,975
Total costs and expenses 9,547 58,333 46,187 166,946
Income (loss) from operations 632 (45,594) (15,073) (125,911)
Other (expense) income:
Paycheck protection plan loan forgiveness — — 881 —
Gain on lease termination — — — 576
Interest expense (18) (19) (53) (40)
Other (expense) income, net (102) 291 (62) 322
Total other (expense) income, net (120) 272 766 858
Income (loss) before income taxes 512 (45,322) (14,307) (125,053)
Income tax (expense) benefit (3) 81 (30) 6,282
Net income (loss) $ 509 $ (45,241) $ (14,337) $ (118,771)
Income (loss) per common share:
Basic $ 0.01 $ (0.66) $ (0.21) $ (1.75)
Diluted $ 0.01 $ (0.66) $ (0.21) $ (1.75)
Weighted average common shares:
Weighted average common shares used in computing basic income (loss) per common share 69,324 68,217 68,665 68,063
Weighted average common shares used in computing diluted income (loss) per common share 70,176 68,217 68,665 68,063


	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

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

FLOTEK INDUSTRIES, INC.

~~UNAUDITED CONDENSED~~ CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME (LOSS)~~LOSS

(in thousands)

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Net income (loss) $ 509 $ (45,241) $ (14,337) $ (118,771)
Other comprehensive income (loss):
Foreign currency translation adjustment 38 (40) 70 (168)
Comprehensive Income (loss) $ 547 $ (45,281) $ (14,267) $ (118,939)



	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)


		Nine months ended September 30,					Three months ended March 31,
		2021		2020			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:

Net loss	Net loss	$	(14,337)	$	(118,771)	Net loss	$	(10,724)	$	(8,300)
Adjustments to reconcile net loss to net cash used in operating activities:	Adjustments to reconcile net loss to net cash used in operating activities:					Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of contingent consideration	Change in fair value of contingent consideration	(701)		3,200		Change in fair value of contingent consideration	94		(335)
Change in fair value of contingent convertible notes payable						Change in fair value of contingent convertible notes payable	3,892		—
Amortization of convertible note issuance cost						Amortization of convertible note issuance cost	166		—
Payment in kind interest expense						Payment in kind interest expense	485		—
Depreciation and amortization	Depreciation and amortization	793		3,177		Depreciation and amortization	195		307

Provision for doubtful accounts		(42)		494
Inventory purchase commitment settlement		(7,633)		0
Provision for doubtful accounts, net of recoveries						Provision for doubtful accounts, net of recoveries	238		—
Provision for excess and obsolete inventory	Provision for excess and obsolete inventory	687		10,465		Provision for excess and obsolete inventory	310		307
Impairment of goodwill		—		11,706
Impairment of right-of-use assets		—		7,434
Impairment of fixed assets		—		30,178
Impairment of intangible assets		—		32,363
Gain on sale of assets		(55)		(668)

Loss on sale of property and equipment						Loss on sale of property and equipment	8		2
Gain on lease termination						Gain on lease termination	(584)		—
Non-cash lease expense	Non-cash lease expense	221		299		Non-cash lease expense	56		105
Stock compensation expense	Stock compensation expense	2,710		2,208		Stock compensation expense	739		778
Deferred income tax provision (benefit)		13		(199)
Paycheck protection plan loan forgiveness		(881)		—
Deferred income tax (benefit) expense						Deferred income tax (benefit) expense	(4)		2

Changes in current assets and liabilities:	Changes in current assets and liabilities:					Changes in current assets and liabilities:

Accounts receivable, net		111		4,714
Inventories, net		2,330		3,186
Accounts receivable						Accounts receivable	(180)		255
Inventories						Inventories	(999)		(78)
Income taxes receivable	Income taxes receivable	405		(140)		Income taxes receivable	(10)		267
Other current assets	Other current assets	(2,237)		823		Other current assets	168		405
Other long-term assets	Other long-term assets	541		(16)		Other long-term assets	(388)		541
Accounts payable	Accounts payable	(604)		(11,906)		Accounts payable	616		695
Accrued liabilities	Accrued liabilities	414		(17,689)		Accrued liabilities	(2,564)		(317)
Income taxes payable	Income taxes payable	(53)		25		Income taxes payable	—		89
Interest payable	Interest payable	36		22		Interest payable	12		12

Net cash used in operating activities	Net cash used in operating activities	(18,282)		(39,095)		Net cash used in operating activities	(8,474)		(5,265)
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Capital expenditures	Capital expenditures	(31)		(836)		Capital expenditures	—		(19)
Proceeds from sale of business		—		9,907
Proceeds from sale of assets	Proceeds from sale of assets	74		86		Proceeds from sale of assets	24		2
Purchase of JP3, net of cash acquired		—		(26,284)

Abandonment of patents and other intangible assets		—		(8)

Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	43		(17,135)		Net cash provided by (used in) investing activities	24		(17)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Proceeds from paycheck protection plan loan		—		4,788

Proceeds from issuance of convertible notes						Proceeds from issuance of convertible notes	21,150		—
Payment of issuance costs of convertible notes						Payment of issuance costs of convertible notes	(1,084)		—
Payments to tax authorities for shares withheld from employees	Payments to tax authorities for shares withheld from employees	(161)		(123)		Payments to tax authorities for shares withheld from employees	(59)		(105)
(Payments) proceeds from issuance of stock		(246)		416
Proceeds from issuance of stock						Proceeds from issuance of stock	—		38
Payments for finance leases	Payments for finance leases	(44)		(152)		Payments for finance leases	(14)		(14)

Net cash (used in) provided by financing activities		(451)		4,929
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	(67)		(80)		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	(18,757)		(51,381)		Net change in cash, cash equivalents and restricted cash	11,551		(5,340)
Cash and cash equivalents at the beginning of period	Cash and cash equivalents at the beginning of period	38,660		100,575		Cash and cash equivalents at the beginning of period	11,534		38,660
Restricted cash at the beginning of period	Restricted cash at the beginning of period	664		663		Restricted cash at the beginning of period	1,790		664
Cash and cash equivalents and restricted cash at beginning of period	Cash and cash equivalents and restricted cash at beginning of period	39,324		101,238		Cash and cash equivalents and restricted cash at beginning of period	13,324		39,324
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	20,527		49,193		Cash and cash equivalents at end of period	24,835		33,945
Restricted cash at the end of period	Restricted cash at the end of period	40		664		Restricted cash at the end of period	40		40
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	20,567	$	49,857	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 ~~(DEFICIT)~~

Three Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

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

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, June 30, 2021 79,607 $ 8 5,628 $ (34,017) $ 361,424 $ 13 $ (293,534) $ 33,894
Net income — — — — — — 509 509
Foreign currency translation adjustment — — — — — 38 — 38
Stock issued under employee stock purchase plan — — (28) 20 (89) — — (69)
Restricted stock granted 9 — — — — — — —
Restricted stock forfeited (6) 4 8 3 — — 11
Stock compensation expense — — — — 961 — — 961
Shares withheld to cover taxes — — 45 64 (125) — — (61)
Balance, September 30, 2021 79,610 $ 8 5,649 $ (33,925) $ 362,174 $ 51 $ (293,025) $ 35,283

~~(1) See Note 12, “Stockholders’ Equity” for further discussion.~~


																		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
Balance, December 31, 2021																Balance, December 31, 2021		79,484	$	8	6,022	$	(34,100)	$	363,417	$	81	$	(309,214)		$	20,192

	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit			Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost								Total Stockholders’ Equity

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

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

Restricted stock forfeited																Restricted stock forfeited		—	—		8	—		—		—		—			—
Stock compensation expense																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

Balance, June 30, 2020	77,626	$	7	4,459	$	(33,566)	$	357,981	$	51	$	(215,767)				$	108,706
Net loss	—	—		—	—		—		—		(45,241)					(45,241)
Foreign currency translation adjustment	—	—		—	—		—		(40)		—			(40)

Stock issued under employee stock purchase plan	—	—		(25)	—		58		—		—			58

Restricted stock granted	346	—		—	—		—		—		—			—
Restricted stock forfeited	—	—		179	—		—		—		—			—
Treasury stock purchased	—	—		36	(41)		—		—		—			(41)
Stock compensation expense	—	—		—	—		687		—		—			687

Balance, September 30, 2020	77,972	$	7	4,649	$	(33,607)	$	358,726	$	11	$	(261,008)		$	64,129
Balance, March 31, 2022																Balance, March 31, 2022		82,564	$	8	6,073	$	(34,159)	$	367,104	$	89	$	(319,938)		$	13,104

~~FLOTEK INDUSTRIES, INC.~~


	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.

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)~~

~~Nine Months Ended September 30, 2021 and 2020~~

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

Common Stock Treasury Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated Deficit Total Stockholders’ Equity
Shares
Issued Par
Value Shares Cost
Balance, December 31, 2020 78,669 $ 8 5,581 $ (33,851) $ 359,721 $ (19) $ (278,688) $ 47,171
Net loss — — — — — — (14,337) (14,337)
Foreign currency translation adjustment — — — — — 70 — 70
Stock issued under employee stock purchase plan — — (112) (110) (136) — — (246)
Restricted stock granted 1,694 — — — — — — —
Restricted stock forfeited (140) 34 72 4 — — 76
Stock compensation expense — — — — 2,710 — — 2,710
Shares withheld to cover taxes — — 146 (36) (125) — — (161)
Other (1)
(613) — — — — —
Balance, September 30, 2021 79,610 $ 8 5,649 $ (33,925) $ 362,174 $ 51 $ (293,025) $ 35,283

~~(1) See Note 12, “Stockholders’ Equity” for further discussion.~~

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) $ 347,565 $ 179 $ (142,237) $ 172,029
Net loss — — — — — — (118,771) (118,771)
Foreign currency translation adjustment — — — — — (168) — (168)
Stock issued under employee stock purchase plan — — (50) — 78 — — 78
Restricted stock granted 2,815 — — — 338 — — 338
Restricted stock forfeited — — 457 — — — — —
Treasury stock purchased — — 97 (123) — — — (123)
Stock compensation expense — — — — 2,208 — — 2,208
Stock issued in JP3 acquisition 11,500 1 — — 8,537 — — 8,538
Balance, September 30, 2020 77,972 $ 7 4,649 $ (33,607) $ 358,726 $ 11 $ (261,008) $ 64,129

~~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

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, 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 16, “Business Segment, Geographic and Major Customer Information.” ~~For further discussion~~

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

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

Cash Equivalents

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

Restricted Cash

The ~~consolidated financial statements have been prepared assuming~~Company’s restricted cash is $40 thousand and $1.8 million as of March 31, 2022 and December 31, 2021, respectively.The Company’s restricted cash as of March 31, 2022 consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution. The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $1.75 million for amounts due under the terms of the legal settlement discussed in Note 11, “Commitments and Contingencies”.

Accounts Receivable and Allowance for Doubtful Accounts

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

~~Sources and Uses of Liquidity~~

The ~~Company currently funds its operations and growth primarily from cash on hand. The ability~~majority of the ~~Company to grow and be competitive~~Company’s customers are engaged in the ~~marketplace is dependent on~~energy industry. The cyclical nature of the ~~availability of adequate capital. Access to capital is dependent, in large part, on~~energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ~~operating cash flows,~~ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the ~~monetization~~collectability of ~~non-core assets,~~receivables.

Inventories

Inventories consist of raw materials and finished goods and are stated at the ~~availability~~lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and ~~access to debt and equity financing.~~production overhead. The Company has a history of losses and negative operating cash flows from operations and expects to utilize a significant amount of cash as we wrap up 2021 and begin 2022. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a slower than expected recovery of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.

Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that the Company’s existing cashperiodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is ~~not sufficient~~written down to ~~fund operations, meet the Company’s capital requirements~~its net realizable value if those amounts are determined to be less than cost. Write-downs or ~~satisfy the anticipated obligations as they become due, the Company expects~~write-offs of inventory are charged to ~~take further action to protect its liquidity position. Such actions may include, but are not limited to:~~cost of goods sold.

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

•~~Seeking Paycheck Protection Program (“PPP”) loan (“PPP loan”) forgiveness from the Small Business Administration;~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Property and equipment

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


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

Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the 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 first compares the carrying amount of an asset or asset group to the sum of the 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 reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell and depreciation is ceased. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.

Liability Classified Convertible Notes Payable and Contingent Convertible Notes Payable

The Company accounts for the Convertible Notes Payable issued to the PIPE investors for cash proceeds, which is discussed in Note 1 and Note 8, at amortized cost pursuant to FASB ASC Topic 470, Debt.

The Company accounts for the Contingent Convertible Notes Payable issued as consideration for the ProFrac Agreement, which is discussed in Note 8, “Debt and 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 the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 9, “Fair Value Measurements.”

Revenue Recognition

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

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company applies several practical expedients including:

•~~Entry into a borrowing facility with~~Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or ~~more lenders;~~less.

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

•~~Operating lease transaction~~The Company’s payment terms are short-term in nature with settlements of ~~facilities;~~one year or less. As a result the Company does not adjust the promised amount of consideration for the effects of a significant financing component.

•~~Sale~~In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of ~~non-core real estate properties;~~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.

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

•~~Sub-leasing certain facilities;~~

•~~Renegotiating current lease facility terms~~Shipping and ~~conditions;~~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.

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, 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 results of operations in the period that includes the enactment date.

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

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

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

•
~~Reducing executive salaries and/or board~~

Stock-Based Compensation

Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of ~~directors’ fees, or making~~estimated forfeitures, on a ~~portion~~straight-line basis over the requisite service period of ~~those fees or salaries in equity instead of cash; and~~

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

~~However, there can be no assurance that such matters can be implemented~~the award. Estimated forfeitures are based on ~~acceptable terms or at all.~~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 ~~But Not~~and Adopted as of ~~September 30, 2021~~March 31, 2022

The FASB issued ASU No. ~~2019-12,~~2020-06, “~~Income Taxes (Topic 740): Simplifying the~~ Accounting for ~~Income Taxes~~Convertible Instruments and Contracts in an Entity’s Own Equity..” This standard ~~removes specific exceptions~~changes the accounting for convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to ~~the general principles~~be classified in ~~Topic 740.~~ 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, ~~2021, including interim periods within those fiscal years,~~2023, with early adoption ~~permitted~~allowed for ~~public companies for periods in which financial statements have not yet been issued.~~fiscal years beginning after December 15, 2020. The Company has ~~evaluated the impact of~~adopted this standard as of January 1, 2022, and ~~determined that there is no~~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, 2022

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 Acquisition~~

During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. The use of data and analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as predictive maintenance, advanced safety measures and reduced environmental impact of operations. The 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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

subject to contingent consideration with an estimated fair value of $1.2 million at acquisition date for 2 potential earn-out provisions totaling up to $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 9, “Fair Value Measurements,” for additional information on the current estimated fair value of the contingent consideration.

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


~~Tradenames and trademarks~~	$	~~1,100~~
~~Technology and know-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 43 — 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.

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 30-60 days for domestic and 9090-120 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 and nine months ended September 30, 2021 and 2020.~~

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


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020				2022		2021
Revenue:	Revenue:									Revenue:
Products(1)	Products(1)	$	9,494	$	12,076	$	29,017	$	39,053	Products(1)		$	12,199	$	11,082

Services	Services	685		663		2,097		1,982		Services		680		688
		$	10,179	$	12,739	$	31,114	$	41,035			$	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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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 the ~~three~~quarters ended March 31, 2022 and ~~nine months September 30, 2021 and 2020.~~

During the third quarter 2021, we entered into a bill-and-hold contract, where we invoice the customer for products even though we retain possession of the products until a point in time in the future when the products are shipped to the customer. In these contracts, the primary performance obligation is satisfied at a point in time when the product is segregated from our general inventory, it is ready for shipment to customer, and we do not have the ability to use the product or direct it to another customer. Additionally, we have a secondary performance obligation related to custodial costs, including storage and freight, which is satisfied over time once the product has been delivered to the customer. During the three and nine months ended September 30, 2021, we recognized $1.3 million of revenue related to a bill-and-hold arrangement with a related party.

~~Contract Balances~~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):~~

September 30, 2021 December 31, 2020
Raw materials $ 6,025 $ 7,190
Finished goods 13,451 15,705
Inventories 19,476 22,895
Less reserve for excess and obsolete inventory (10,658) (11,058)
Inventories, net $ 8,818 $ 11,837

~~The provision recorded~~Contract assets represent consideration paid to a ProFrac Services, LLC by the Company in the ~~three and nine months ended September 30, 2021 were $0.1 million~~form of Contingent Convertible Notes Payable issued as an inducement to enter intothe ProFrac Agreement. As consideration for the ~~CT segment and nil for~~ the ~~DA segment and $0.5 million for the CT segment and $0.2 million~~economic value of the ~~DA segment, respectively. The provision recorded~~long-term revenue commitment from ProFrac Agreement as described in Note 1, “Organization and Nature of Operations”, the ~~three~~Company issued $10.0 million in aggregate principal amount of Contingent Convertible Notes Payable to ProFrac Holdings, LLC, under theProFrac Agreement, and ~~nine months ended September 30, 2020 were $5.9 million for~~which may be converted into shares of common stock of the ~~CT segment~~Company under the terms of the Contingent Convertible Notes Payable described further in Note 8, “Debt and $3.9 million for the DA segment and $2.0 million for the CT segment and $3.9 million for the DA segment, respectively. The decrease in excess and obsolescence during the nine months ended September 30, 2020 is attributable to the Company’s sales of excess and obsolescence inventory.

~~Note 6 — Property and Equipment~~Convertible Notes Payable”.

~~Property and equipment are as follows (in thousands):~~
September 30, 2021 December 31, 2020
Land $ 1,986 $ 2,415
Land improvements 861 867
Buildings and leasehold improvements 6,364 6,364
Machinery and equipment 7,753 7,760
Furniture and fixtures 649 649
Transportation equipment 1,043 1,190
Computer equipment and software 1,222 1,296
Property and equipment 19,878 20,541
Less accumulated depreciation (12,109) (11,454)
Property and equipment, net $ 7,769 $ 9,087

~~Depreciation expense totaled $0.2 million and $0.5 million for~~During the three months ended ~~September 30, 2021 and 2020, and $0.8~~March 31, 2022, contract assets of $10.6 million ~~and $2.3~~was recorded by the Company, as consideration paid to the customer, which included $0.6 million of issuance costs. Under FASB ASC 606, Revenues from Contract with Customers, consideration paid to a customer is accounted for as a reduction of the ~~nine~~transaction price of a contract. Accordingly, the Company will amortize the contract assets against the revenues under the ProFrac Agreement over the three-year contract term beginning April 1, 2022. As of March 31, 2022, the Company classified $7.1 million of the contract asset as long term based upon its estimate of the ProFrac Agreement revenues which will not be realized within the first 12 months ~~ended September 30, 2021 and 2020, respectively.~~of the contract. The company’s estimate of the timing of future contract revenues will be evaluated on a quarterly basis throughout the contract term.

1314

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4 — Inventories

Inventories are as follows (in thousands):



	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 2021, the Company ~~classified~~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 result the associated assets in the amount of $2.8 million are classified as held for sale ~~based on the criteria outlined inAccounting Standard Codification (“ASC”) 360, Property, Plant~~as of March 31, 2021 and ~~Equipment. During the first quarter,~~December 31, 2021. Subsequent to December 31, 2021, the Company ~~committed to~~executed a ~~plan~~contract to sell its Waller facility for $4.3 million of gross proceeds and the ~~asset~~sale closed on April 18, 2022 See further discussion 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 the Company expects to complete the asset sale within one year.Note 17, Subsequent Events.

Note 76 — Leases

In August 2021, the company entered into a five year triple net operating lease agreement to lease a warehouse facility in Monahans, TX. The tenant occupied the Company’s warehouse facility in Monahans, TX in September 2021. The company will recognize other rental income, including rent, taxes and insurance over the lease period.

In July 2021, the Company entered into a long-term rental agreement ~~with Resolute Oil~~ to ~~leverage capabilities and facilities to drive growth in adjacent green chemistry markets. The agreement includes options to renew until 2036.~~

~~Through the agreement, Resolute Oil will fully utilize the Company’s entire 15-acre campus, including the 38,000 square foot chemical blending~~lease its manufacturing facility ~~based~~ in Waller, TX, to manufacture United States Pharmacopeia-National Formulary (USP-NF)-grade white mineral oil distributed globally to customers in the agricultural, energy, food & beverage, cosmetic, and personal care markets.

~~During the first quarter of 2020,~~ ~~the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the~~ ~~Global Research and Innovation Center (“GRIC”)~~ ~~during the second quarter of 2020. In addition, the lease liability and corresponding right-of-use (“ROU”) assets~~Texas, for ~~the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC.~~ The remeasurement resulted in adjustments to lease liabilities and ROU assets totaling of $6.2 million each as of March 31, 2020. During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office and moved all employees to the GRIC facility effective June 29, 2020.

~~In addition,~~$40 thousand per month for sixty-four months. Rental income recognized 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. Rental income recognized during the three months ended March 31, 2022 was $185 thousand and was included in other income in the consolidated statement of operations.

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 ~~an impairment~~a gain on lease termination from the reduction of ~~the~~lease liabilities and ROU assets ~~totaling $7.4 million. No impairment was recognized for~~of $0.6 million that is included in the consolidated statements of operations during the three ~~and nine~~ months ended ~~September 30, 2021.~~March 31, 2022.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Operating lease expense $ 247 $ 258 $ 735 $ 1,112
Finance lease expense:
Amortization of right-of-use assets 4 4 11 13
Interest on lease liabilities 2 5 9 14
Total finance lease expense 6 9 20 27
Short-term lease expense 15 57 44 145
Total lease expense $ 268 $ 324 $ 799 $ 1,284
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 380 $ 317 $ 1,107 $ 2,312
Operating cash flows from finance leases 10 5 62 13
Financing cash flows from finance leases 2 51 8 152

1416

FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

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

Years ending December 31, Operating Leases Finance Leases
2021 (excluding the nine months ended September 30, 2021) $ 285 $ 14
2022 1,254 47
2023 1,318 39
2024 1,348 23
2025 1,375 —
Thereafter 6,870 —
Total lease payments $ 12,450 $ 123
Less: Interest (3,976) (11)
Present value of lease liabilities $ 8,474 $ 112

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


		September 30, 2021			December 31, 2020				March 31, 2022			December 31, 2021
Operating Leases	Operating Leases							Operating Leases
Operating lease right-of-use assets	Operating lease right-of-use assets	$	2,099		$	2,320		Operating lease right-of-use assets	$	1,827		$	2,041

Current portion of operating lease liabilities	Current portion of operating lease liabilities	$	586		$	636		Current portion of operating lease liabilities	619			602
Long-term operating lease liabilities	Long-term operating lease liabilities	7,888			8,348			Long-term operating lease liabilities	6,806			7,779
Total operating lease liabilities	Total operating lease liabilities	$	8,474		$	8,984		Total operating lease liabilities	$	7,425		$	8,381

Finance Leases	Finance Leases							Finance Leases
Property and equipment	Property and equipment	$	147		$	147		Property and equipment	$	147		$	147
Accumulated depreciation	Accumulated depreciation	(33)			(26)			Accumulated depreciation	(37)			(33)
Property and equipment, net	Property and equipment, net	$	114		$	121		Property and equipment, net	$	110		$	114

Current portion of finance lease liabilities	Current portion of finance lease liabilities	$	48		$	60		Current portion of finance lease liabilities	$	33		$	41
Long-term finance lease liabilities	Long-term finance lease liabilities	64			96			Long-term finance lease liabilities	47			53
Total finance lease liabilities	Total finance lease liabilities	$	112		$	156		Total finance lease liabilities	$	80		$	94

Weighted Average Remaining Lease Term	Weighted Average Remaining Lease Term							Weighted Average Remaining Lease Term
Operating leases	Operating leases	9.1 years			9.9 years			Operating leases	8.9 years			9.1 years
Finance leases	Finance leases	2.9 years			3.1 years			Finance leases	2.7 years			2.9 years

Weighted Average Discount Rate	Weighted Average Discount Rate							Weighted Average Discount Rate
Operating leases	Operating leases	8.9		%	8.9		%	Operating leases	8.9		%	8.9		%
Finance leases	Finance leases	8.5		%	9.0		%	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 ~~PPP,~~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 ~~and nine~~ months ended ~~September 30,~~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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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.~~During the second quarter of 2021, the Company applied for 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 ~~was~~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 ~~partial~~ forgiveness onof substantially all of the Flotek PPP loan but as of March 31, 2022 and as of the date of this filing, ~~no conclusion from the SBA have been reached.~~

~~In October 2021,~~ 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 ~~a request to extend~~it will not be forgiven. Denial of the forgiveness of the Flotek PPP loan ~~maturity date from April 15, 2022 to April 15, 2025 was confirmed. Prior to~~will negatively impact the ~~extension approval, the $4.8 million Flotek PPP loan balance was classified~~Company’s liquidity as a current liability. The maturity date extension amendment occurred before the third quarter 2021 balance sheet was issued, therefore, $3.5 million was reclassified to long-term debt, reducing the current portiondiscussed in Note 1, “Organization and Nature of ~~long-term debt from $4.8 million to $1.3 million as of September 30, 2021.~~Operations”.

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

September 30, 2021 December 31, 2020
Flotek paycheck protection plan loan $ 4,788 $ 4,788
JP3 paycheck protection plan loan — 877
Total 4,788 5,665
Less current maturities (1,336) (4,048)
Total long-term debt, net of current portion $ 3,452 $ 1,617


	March 31, 2022		December 31, 2021
Flotek PPP loan	$	4,788	$	4,788
Less current maturities	(1,553)		(1,436)
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 9 — 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 loan ~~for Flotek~~ approximates its fair value as of ~~September 30,~~March 31, 2022 and December 31, 2021. ~~Subsequent to the third quarter balance sheet date,~~ ~~the Company received notice that a request to extend the Flotek PPP loan maturity date from April 15, 2022 to April 15, 2025 was confirmed. Additionally, upon receipt of the SBA’s final decision on the Company’s reimbursement request to forgive the FTK PPP loan, any remaining balances not forgiven by the SBA will be measured on a recurring basis.~~

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

Balance at September 30, Balance at December 31,
Level 1 Level 2 Level 3 2021 Level 1 Level 2 Level 3 2020
Contingent consideration $ — $ — $ 715 $ 715 $ — $ — $ 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

~~On September 30, 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 September 30, 2021 and December~~Contingent Convertible Notes Payable as of March 31, ~~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. During the three months ended September 30, 2020, the Company recorded additional impairment expenses of $12.5 million. Total impairment expenses recorded during the nine months ended September 30, 2020 was $70.0 million of long-lived and intangible 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 ~~at September 30,~~as of March 31, 2022 and 2021 and ~~decreased~~adjusted the estimated fair value of the contingent liability to $0.7 ~~million.~~million and $1.1 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 and nine months ended September 30, 2021 and 2020~~ (in thousands):

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Balance - beginning of period $ 1,115 $ 1,200 $ 1,416 $ —
Additions / issuances — — — 1,200
Change in fair value (400) 3,200 (701) 3,200
Transfer out of Level 3 — (2,500) — (2,500)
Balance - end of period $ 715 $ 1,900 $ 715 $ 1,900


	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 10 — 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 September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020				2022		2021
U.S. federal statutory tax rate	U.S. federal statutory tax rate	21.0	%	21.0	%	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	—		0.2		(0.2)		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	0.8		(0.2)		0.3		—		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	(0.3)		0.1		1.2		—		Increase (reduction) in tax benefit related to stock-based awards		(0.1)		0.1
Non-deductible expenses		5.8		(0.1)		1.1		—
Research and development credit		—		—		—		0.1
Increase in valuation allowance		(27.3)		(20.8)		(23.6)		(17.9)
Effect of tax rate differences of NOL carryback		—		—		—		1.7

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	—	%	0.2	%	(0.2)	%	5.0	%	Effective income tax rate		—	%	(0.1)	%

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — 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

AtAs 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 ~~FCC and~~Florida Chemical Company, LLC (“FCC”), a wholly owned subsidiary of Archer-Daniels-Midland Company (“ADM”). The Company calculated the ~~Company’s~~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 as such loss was not considered recoverable. The Company calculated~~terpene. Losses for the ~~liability based~~year ended December 31, 2020 on the ~~Company’s expected usage~~terpene contract totaled $11.7 million and was recognized in cost of ~~terpene~~goods sold in ~~blended products being less than~~ the ~~minimum quantities~~consolidated statements of ~~terpene required to be purchased and expected selling prices of the excess terpene as such loss was not considered recoverable.~~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 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. 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.

On October 29, 2021, the Company ~~and Flotek Chemistry~~ reached agreement with all parties resolving all claims between the ~~parties.(“~~parties (“the ADM Settlement”) ~~On or before January 3, 2022, Flotek will pay~~that resulted in the termination of the terpene supply agreement and a settlement payment of $1.75 million due from Flotek. In accordance with the terms of the ADM Settlement, the Company reduced the accrued liability associated with the terpene supply agreement to ~~ADM~~$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 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 ~~terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5 million pounds~~consolidated balance sheet as of ~~terpene through 2023.~~

~~As a result of the third quarter 2021 recognition of the ADM Settlement, operating expenses (excluding depreciation and amortization) for the three and nine months ended September~~December 31, ~~2021 benefited by $7.6 million, excluding legal fees.~~2021.

18Former CEO Matter

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

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~The Company is subject~~Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other ~~routine litigation~~legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and ~~other claims that arise~~Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the ~~normal course of business. Except as disclosed above, management is not aware~~arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any ~~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.~~

outcome cannot reasonably be predicted.

Other Commitments and Contingencies

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 — Stockholders’ Equity

During the first quarter 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 13 — Earnings (Loss) Per Share

Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive. ~~The three months ended September 30, 2021 diluted earnings per~~Potentially dilutive common share ~~included 851,702~~equivalents consist of incremental shares of common ~~share equivalents.~~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 ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and for the three and nine months ended September 30, 2020,~~ 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 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, 2022, and 0.4 million restricted stock units and 3.0 million stock options for the three months ended March 31, 2021.

Note 14 — Supplemental Cash Flow Information

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

Nine months ended September 30,
2021 2020
Supplemental cash payment information:
Interest paid $ 17 $ 20
Income taxes (received) paid (351) 5,927
Supplemental non-cash activities:
Employee retention credit $ 2,851 $ —
Supplemental non-cash investing and financing activities:
Equity issued - acquisition of JP3 $ — $ 8,538

Under the provisions of the CARES Act, the Company is eligible for a refundable employee retention credit subject to certain criteria. In connection with the CARES Act, the Company adopted a policy to recognize the employee retention credit when earned and to offset the credit against the related payroll tax liability. Accordingly, the Company recorded a $1.9 million employee retention credit during the three months ended June 30, 2021 in other current assets with the offset recorded in accrued liabilities. In the second quarter of 2021, the Company used $0.8 million of the total employee retention credit leaving a $1.1 million credit to be applied against payroll tax liabilities. In the third ~~quarter of 2021, the Company used $0.9 million of the total employee retention credit leaving a $1.9 million credit to~~ ~~be applied against payroll tax liabilities.~~


	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 15 — 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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.

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

During first quarter of 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of ~~September 30, 2021~~March 31, 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 (“~~Customer”~~Confluence”), a private oil and gas exploration and production company formed in 2016. The Company entered into a $1.3 million bill-and-hold agreement with the Customer during the third quarter of 2021. The agreement between the Company and Customer is a related party transaction. The Company’s board was informed prior to the transaction and subsequently ratified the transaction as being in the best interests of the Company. For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, the Company’s revenues for chemical sales to Confluence ~~Resources LP~~ was ~~$1.3~~$1.4 million. As of ~~September 30,~~March 31, 2022 and December 31, 2021, ~~the customer owes~~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 ~~transaction~~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 16 — 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 janitorial, sanitization, food services, and adjacent markets. The Company designs, develops, manufactures, packages, distributes, delivers and markets optimized 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 as to reduce health and environmental risk by utilization of greener chemicals. 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.

In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and consumer use. The Company produces Food and Drug Administration and Environmental Protection Agency compliant products its ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets.

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 on the composition and properties of energy customers’ hydrocarbon fluids. The ~~real-time information on~~company markets products and services that support in-line data analysis of hydrocarbon ~~composition~~components and properties helps customers generate additional profits by enhancing their operations including crude/condensates stabilization, blending, optimization of transmix, increasing efficiencies of gas processing plants, ensuring product quality while enabling automation of fluid handling and reducing losses through giveaways (i.e., that portion of a product of higher value than what is specified). The customersproperties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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 September 30, Chemistry Technologies
Data Analytics (1)
Corporate and Other Total
2021
Revenue from external customers $ 8,044 $ 803 $ — $ 8,847
Revenue from related party 1,332 — — 1,332
Income (loss) from operations, including impairment 4,399 (1,071) (2,696) 632
Depreciation and amortization 215 17 1 233
Additions to long-lived assets — — — —
2020
Revenue from external customers $ 12,083 $ 656 $ — $ 12,739
Revenue from related party — — — —
Loss from operations, including impairment (8,880) (34,035) (2,679) (45,594)
Depreciation and amortization 244 274 — 518
Additions to long-lived assets 906 — — 906

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

For the nine months ended September 30, Chemistry Technologies
Data Analytics (1)
Corporate and Other Total
2021
Revenue from external customers $ 26,033 $ 3,749 $ — $ 29,782
Revenue from related party 1,332 — — 1,332
Loss from operations, including impairment (3,009) (2,138) (9,926) $ (15,073)
Depreciation and amortization 739 52 2 793
Additions to long-lived assets 31 — — 31
2020
Revenue from external customers $ 39,462 $ 1,573 $ — $ 41,035
Revenue from related party — — — —
Loss from operations, including impairment (75,137) (35,185) (15,589) (125,911)
Depreciation and amortization 2,300 405 472 3,177
Additions to long-lived assets 906 — — 906

~~(1)~~ ~~The Company formed the DA 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):

September 30, 2021 December 31, 2020
Chemistry Technologies $ 47,625 $ 43,346
Data Analytics 15,960 13,201
Corporate and Other 969 29,663
Total assets $ 64,554 $ 86,210

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~



	March 31, 2022		December 31, 2021
Chemistry Technologies	$	33,476	$	34,387
Data Analytics	5,915		7,329
Corporate and Other	32,827		8,528
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 September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021
U.S.	U.S.	$	8,094	$	9,928	$	24,624	$	32,639	U.S.	$	10,334	$	9,661
UAE	UAE	1,319		1,473		3,741		3,781		UAE	1,311		1,103
Other countries	Other countries	766		1,338		2,749		4,615		Other countries	1,234		1,006
Total revenue	Total revenue	$	10,179	$	12,739	$	31,114	$	41,035	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.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Major Customers*Customers

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

For the three months ended September 30, Chemistry Technologies % of Total Revenue
2021
Customer D $ 3,041 29.9 %
Customer E - Related party 1,332 13.1 %


Three months ended March 31,	Chemistry Technologies		% of Total Revenue
2022
Customer A	$	—	—	%
Customer B	2,607		20.2	%
Customer C (Related Party)	1,389		10.8	%

2020
Customer D $ 4,632 36.2 %
Customer C 2,088 16.4 %


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

For the nine months ended September 30, Chemistry Technologies % of Total Revenue
2021
Customer D $ 7,701 24.8 %
Customer C 4,067 13.1 %

2020
Customer C $ 10,412 25.4 %
Customer D 8,117 19.8 %
Customer A 3,631 8.9 %

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

The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas ~~industry and the surface cleaner and disinfectant~~ industry. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. Customers within the surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment. The concentration in the oil and gas industry increases credit and business risk. ~~See Note 16, “Business Segment, Geographic and Major Customer Information,” for concentration of segment revenue from major customers.~~

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 — Subsequent Events

We have evaluated the effects of events that have occurred subsequent to ~~September 30, 2021,~~March 31, 2022, and there have been no material events that would require recognition in ~~our third quarter 2021 consolidated~~the 2022 interim financial statements or disclosure in the ~~Notes~~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 ~~October 28,~~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 ~~also received~~entered into a ~~confirmation approving a request~~contract to ~~extend~~sell the ~~maturity date~~Waller manufacturing facility for proceeds of ~~Flotek’s PPP loan maturity date from~~$4.3 million, which closed on April ~~15,~~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 ~~to April 15, 2025. Additionally on~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~October 29, 2021, the Company and Flotek Chemistry reached an agreement with all parties resolving all claims between the parties.~~

~~The ADM settlement agreement~~ and the ~~Flotek PPP loan maturity date extension approval were considered~~cessation of rental income from this facility due to ~~be recognizable~~the subsequent ~~events under U.S. GAAP and required adjustment to our third quarter 2021 consolidated financial statements. See Note 11 - Commitments and Contingencies and Note 8 - Debt for additional information.~~

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, Results of Operations (“MD&A”) and risks associated with the outbreak of COVID-19~~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. (“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, Flotek helps customers across industrial, commercial, and consumer 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 surface cleaners, disinfectants for industrial, commercial and consumer use.

The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that help their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and supplying professional chemistries that clean surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.

The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. These real-time data and analytics prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, thereby improving ESG performance. During the 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, delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.

~~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 provides sustainable, optimized chemistry solutions that 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 enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.

Customers of the CT segment include those of energy related 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 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 disinfectants, surface cleaners, degreasers and solvents for both commercial and personal use. The Company produces 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 in the janitorial and sanitization (JanSan), food service and adjacent markets. The Company has made a commitment of being in this market for the long-term.Data Analytics

~~Data Analytics~~

The DA segment ~~provides game-changing technology that~~ 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. This valuable information includes compositions and physical properties, delivered simultaneously and in real time, transforming customers’ business and helping them optimize their operations while reducing their carbon footprint and emissions. Real-time data is acquiredcondensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with

advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

Customers ~~who utilize~~using this ~~highly differentiated~~ technology have obtained significant benefits including ~~generating~~ additional profits by enhancing ~~their~~ 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. ~~Many customers~~More efficient operations have ~~enjoyed~~ the ~~added benefits~~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 ~~began business development activities in the international markets in late third quarter 2020. We~~ have developed a new line of Verax analyzers for deployment internationally which was recently certified for compliance in hazardous locations and harsh weather conditions.

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.

Outlook

Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry and weather volatility. We have based our outlook on the market and weather conditions we perceive today. Changes often occur.

Energy

We expect North American and International onshore activity to continue to improve throughout 2022 from ~~third~~first quarter ~~2021~~ levels for the next ~~twelve~~nine months provided that commodity prices remain at or above current levels. The strongest potential growth ~~in the fourth quarter and~~ throughout 2022 will likely comes from private, rather than publicly traded exploration and production companies. Private exploration and production companies operate the majority of U.S. land rigs and react quickly to changing commodity prices. In the current commodity price environment, we expect 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 believe sales through indirect channels should accelerate in ~~the fourth quarter.~~2022.

Industrial

In 2020, the Company launched a diversified line of EPA and FDA compliant products that target industrial, agricultural and 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~~Company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers,

solvents and a multitude of proprietary chemistries for industrial, commercial and consumer use. The Company believes these adjacent markets provide an opportunity to diversify and expand the Company’s 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 leverage sales effort is anticipated to accelerate sales in the second half of 2022.

Digital Analytics

The use of data and digital analytics is a growing trend in all industries where technology is ~~used~~leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. ~~The DA segment~~Verax has ~~historically focused sales solely on~~gained a foothold in North American ~~markets. Our recent press release dated October 27, announced~~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 ~~release of a~~highest value. We expect to open and establish our international customer base with our new generation of ~~international~~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. The technology delivers real-time insight on valuable composition and physical properties data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We anticipate international sales to increase over the next twelve months because of the newly certified equipment. To ~~further enhance~~drive recurring revenue, we continue to build on the ~~value~~modular nature of ~~the sensors, we announced the release of a~~our sensor and analysis packages with new ~~patent pending application to~~data processing techniques that enhance the value of our ~~line of near infrared real-time analyzers.~~installations. AIDA (Automated Interface Detection

Algorithm) provides real-time detection of interfaces in a liquids ~~pipeline. AIDA can be utilized immediately on our installed analyzers~~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 cut batches quickly and accurately, reduce ~~the inadvertent mixing of two separate products (known as “transmix”)~~transmix and minimize off-spec product that requires downgrades. ~~We anticipate additional sales resulting from the detection capabilities of our new patent pending application.~~

ESG

~~ESG focused~~

ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s products and services offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. 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 the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of our greener practices and chemistries. We believe the ~~performance driven~~performance-driven ESG focus of the Company assists in reducing environmental liabilities and improving returns for our customers.

Supply Chain

During 2020 and 2021 challenging supply chain issues emerged that ~~“will continue~~“are already continuing into 2022” according to Secretary of Transportation Peter Buttigieg. The anticipated activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:

▪•Rising Freight ~~Costs~~Costs;

▪•Delays due to Port ~~Congestion~~Congestion;

▪•Labor Shortages and

▪•Demand ~~Forecasting~~Forecasting.

All bidding will require the risk of shipping costs and delays be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being

delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could also result in supply disruption.

Weather

~~While Hurricane Ida occurred during~~

During the ~~third quarter, on October 31, 2021,~~first three months of 2022 there were no tropical cyclones in the Atlantic. Water temperatures need to exceed 79 degrees Fahrenheit or either hurricanes will not form or will weaken rapidly. Water temperature two meters below the surface at Station 42002, 207 nautical miles east of Brownsville, Texas was 81.3 degrees Fahrenheitmajor weather events that had a material impact on October 30, 2021, and temperatures decreased moving to the north. Consequently, disruption of business due to a severe cyclone in fourth quarter is unlikely. The National Weather Service temperature outlook for November-December-January 2021-2022 indicates “elevated odds for above-normal seasonal mean temperatures along the southern half of the U.S.”

~~We currently do not anticipate inclement weather in the Middle East or the Onshore U.S. to impact fourth~~first quarter results.

COVID-19

The impacts of COVID-19 continue to affect the U.S. and global economy. ~~The~~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 ~~while often onerous~~ has begun to accelerate and we estimate that in person customer visits that began in earnest during the ~~third~~first quarter of 2022 will continue to accelerate.

Consolidated Results of Operations (in thousands):

~~Consolidated~~ ~~Results of Operations: Three and Nine Months Ended September 30, 2021, Compared to the Three and Nine Months Ended September 30, 2020~~

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Revenue
   Revenue from external customers $ 8,847 $ 12,739 $ 29,782 $ 41,035
   Revenue from related party 1,332 — 1,332 —
     Total revenues 10,179 12,739 31,114 41,035
Operating expenses (excluding depreciation and amortization) 5,418 29,466 31,330 63,939
Operating expenses % 53.2 % 231.3 % 100.7 % 155.8 %
Corporate general and administrative costs 2,696 2,679 9,925 12,568
Corporate general and administrative % 26.5 % 21.0 % 31.9 % 30.6 %
Depreciation and amortization 233 518 793 3,177
Research and development 1,186 1,480 4,194 5,673
Loss (Gain) on disposal of long-lived assets 14 (37) (55) (92)
Impairment of goodwill — 11,706 — 11,706
Impairment of fixed assets and long-lived assets — 12,521 — 69,975
Income (loss) from operations 632 (45,594) (15,073) (125,911)
Operating margin % 6.2 % (357.9) % (48.4) % (306.8) %
PPP loan forgiveness — — 881 —
Gain on lease termination — — — 576
Interest and other (expense) income, net (120) 272 (115) 282
Income (loss) before income taxes 512 (45,322) (14,307) (125,053)
Income tax (expense) benefit (3) 81 (30) 6,282
Net income (loss) $ 509 $ (45,241) $ (14,337) $ (118,771)
Net loss % for continuing operations 5.0 % (355.1) % (46.1) % (289.4) %


	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 revenue for the three months ended ~~September 30, 2021, decreased $2.6~~March 31, 2022, increased $1.1 million, or ~~20.1%~~9.4%, versus the same period of 2020. The decrease was primarily due to the loss of two major energy customers that were purchased by non-customers during the second quarter of 2021, and nominal decreases in international sales, offset by certain CT customer revenue increases during the current quarter that did not have prior year comparable activities. Consolidated revenue for the nine months ended, September 30, 2021, decreased $9.9 million, or 24.2%, versus the same period of 2020.2021. Revenue during the ~~nine~~three months ended ~~September~~March 31, ~~2021~~2022 reflected ~~a loss~~an increase of revenue in the CT segment ~~associated with two major~~of $1.5 million driven by the impacts of industry consolidation of customers ~~changing ownership during 2021, losses~~and increased related ~~to the normalization and decline of market demand for sanitizers and non-recurring citrus terpenes sales. Current year revenue decreases were~~party activity, see further discussion in Note 15, “Related Party Transaction”. This increase was partially offset by ~~the incremental post acquisition JP3 revenues generated~~a decrease in revenue in the ~~second and third quarter~~DA segment of ~~2021.~~$0.4 million due to one-time orders from customers in the three months ended March 31, 2021 not repeated in 2022.

Consolidated ~~operating expenses (excluding depreciation and amortization)~~cost of goods sold for the three months ended ~~September 30, 2021, decreased~~ ~~$24.0~~March 31, 2022, increased $1.3 million, or ~~81.6%,~~10.6% versus the same period of ~~2020. The decrease was~~2021 primarily attributable to the increase in revenue with the change in margin being due to an unfavorable product mix in the third quarter of 2021 versus third quarter of 2020 and the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event. Consolidated operating expenses (excluding depreciation and amortization) for the nine months ended September 30, 2021 decreased $32.6 million, or 51.0% versus the same period of 2020. The year to date decrease in operating expenses was primarily due to reduced cost of sales due to lower sales during 2021 and the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event. The Company’s 2021 operating expenses benefited from the decision to reduce operating expenses, including reducing the Company’s facility footprint and improving operational efficiencies. These reduced costs were partially offset by new operating expenses for the DA segment acquired in May of 2020.mix.

~~Corporate~~Selling general and administrative (“CGSG&A”) expenses are ~~expenses~~ not directly attributable to products sold or services provided. CGSG&A ~~costs~~expenses for the three months ended ~~September 30, 2021 was consistent with the same comparable period last~~

March 31, 2022
,

decreased

~~year. CG&A for the nine months ended September 30, 2021, CG&A $2.6~~ $1.2 million, or ~~21.0%~~19.8%, versus the same period of ~~2020.~~2021.

SCGG&A ~~costs declined~~expenses decreased as a result of ~~lower compensation costs following a reduction in force, a one-time employee retention credit related to the CARES Act and~~ a reduction in professional fees. 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 ~~$0.3~~$0.1 million, or ~~55.0% and $2.4 million, or 75.0%~~36.4% for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, versus the same period of ~~2020, primarily due~~2021 The decrease is as a result of asset disposals and the reclassification of assets relating to ~~impairments of fixed~~the Monahans, Texas and ~~long-lived~~Waller, Texas facilities to assets ~~recorded~~held for sale in ~~the first quarter of 2020.~~2021.

Research and development (“R&D”) costs decreased ~~$0.3~~$0.1 million, or ~~19.9% and $1.5 million, or 26.1%~~8.2% for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, versus the same period of ~~2020~~2021 due to lower personnel costs as a result of our reduction in workforce ~~during~~and lower non-labor cost primarily from the ~~first quarter 2020.~~re-negotiation of a contract which resulted in a credit for past expenses taken.

~~Income~~

Loss from operations ~~increased $46.2~~worsened by $2.0 million, or ~~101.4%,~~24.8% for the three months ended ~~September 30, 2021, while~~March 31, 2022, versus the ~~year to date~~same period in 2021. The loss from operations ~~improved by $110.8 million, or 88.0% for the nine months ended September 30, 2021, versus the same periods in 2020. The income from operations improvement~~increase is primarily a result of ~~no impairment during 2021 compared to~~ the ~~$24.2~~revaluation of the convertible note payable partly offset by a gain from lease termination of $0.6 million, increased revenue and ~~$81.7 million~~the reduction in expenses for SG&A, depreciation and amortization and R&D described above.

Loss before income taxes for the three ~~and nine~~ months ended ~~September 30, 2020. Additionally,~~March 31, 2022, was impacted by interest charges of $0.4 million versus $0.05 million for the ~~decrease~~same period in ~~loss from operations is attributable to~~ ~~the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event,~~ ~~the forgiveness of the JP3 PPP loan for $0.8 million and a one-time employee retention credit to the CARES Act of $2.9 million recorded during~~ 2021.

The Company’s income tax benefit for the three months ended March 31, 2022 and expense for the ~~second and third quarter of~~same period in 2021 ~~and 2020~~ 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 and Nine Months Ended September 30, 2021, Compared to the Three and Nine Months Ended September 30, 2020~~


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020			2022		2021
Revenue	Revenue	$	9,376	$	12,083	$	27,365	$	39,462	Revenue	$	11,808	$	10,302

Income (loss) from operations		4,399		(8,880)		(3,009)		(75,137)
Loss from operations										Loss from operations	(6,057)		(3,589)

CT revenue for the three ~~and nine~~ months ended ~~September 30, 2021, decreased $2.7~~March 31, 2022, increased $1.5 million ~~or 22.4% and $12.1 million, or 30.7%, respectively, versus the same periods of 2020.~~compared to 2021. The ~~decrease~~increase in revenue during ~~the third quarter of 2021~~2022 compared to ~~the third 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~~second half of 2021 and ~~reduced global demand for oil and gas during 2020, a key sector of our customer base.~~ The Company’s domestic and international revenue for the nine months ended September 30, 2021 decreased as demand from the company’s major customers and smaller operators has not returned to the pre-pandemic levels. In addition, revenue from two major customers was lost temporarily as a result of market consolidation in the Permian basin. ~~CT also granted price concessions in our effort to maintain and obtain market share.~~into 2022.

~~Income (loss)~~Loss from operations for the CT segment for the three ~~and nine~~ months ended ~~September 30, 2021, decreased $13.3~~March 31, 2022, worsened $2.4 million, or ~~149.5%, and decreased $72.1 million, or 96.0%, respectively 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 ~~2021 versus impairment charges of fixed and long-lived assets of $70.0 million~~loss from operations was partially offset by an increase in the ~~same period of 2020. Secondly, expenses decreased versus the first quarter of 2020 including a $2.3 million terpene purchase commitment loss with no comparable activity in 2021.~~ Certain cost reduction initiatives to right size our cost structure contributed to the current decrease in operating losses by reducing personnel, office costs, equipment and facilities costs as the Company continues to consolidate its physical facilities and equipment rentals to align with activity.

bad debt provision.

Data Analytics Results of Operations: ~~Three~~


	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, 2022, decreased $0.4 million compared to the same period in 2021 due to one time orders not repeated in 2022. Loss from operations for the DA segment for 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 ~~Nine Months ended September 30, 2021~~the fair value adjustment of the JP3 earnout.

2831

Three months ended September 30, Nine months ended September 30, Period May 18- September 30,
2021 2020 2021 2020
Revenue (1)
$ 803 $ 656 $ 3,749 $ 1,573
Loss from operations (1)
(1,071) (34,035) (2,138) (35,190)

~~(1)~~On May 18, 2020, the Company purchased JP3 and formed the DA segment. The year to date JP3 revenues represents the post-acquisition partial period revenues between May 18, 2020 to September 30, 2021. Segment revenue for the third quarter of 2021 was $0.8 million~~, which remained flat from the same quarter in 2020. Also note that the DA segment losses include the impact related to the~~ ~~estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction.~~

~~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, other intangibles and valuation of fixed long-lived assets. There have been no significant changes in the Company’s critical accounting policies and estimates during the nine months ended September 30, 2021.

~~Recent Accounting Pronouncements~~

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

Capital Resources and Liquidity

Overview

The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and ~~fund~~funding working capital requirements. During the first ~~nine~~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 ~~September 30, 2021,~~March 31, 2022, the Company had available cash and cash equivalents of ~~$20.5~~$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 ~~for the nine months ended September 30, 2021 and recorded $18.3~~of $10.7 million, $8.5 million of ~~net~~ cash used ~~for~~in operating activities and ~~$0.5~~$20.0 million of ~~net~~ cash ~~used for~~provided by financing activities. Cash ~~used in~~provided by investing activities was minimal.

Liquidity

The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. 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 ~~the Company’s~~our capital requirements and anticipated obligations as they become due ~~uncertainty surrounding~~in the ~~long term stability, strength and duration of the recovery of oil and gas markets, or reduced spending by our customers could, have a negative impact on our liquidity.~~

~~Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth,~~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:

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

•~~Seeking PPP loan forgiveness from the Small Business Administration;~~

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

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

•~~Operating lease transaction of facilities;~~

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

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

•~~Sub-leasing certain facilities;~~

•~~Renegotiating current lease facility terms and conditions;~~

•~~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.~~

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

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

Cash Flows

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


		Nine months ended September 30,					Three months ended March 31,
		2021		2020			2022		2021
Net cash used in operating activities	Net cash used in operating activities	$	(18,282)	$	(39,095)	Net cash used in operating activities	$	(8,474)	$	(5,265)
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	43		(17,135)		Net cash provided by (used in) investing activities	24		(17)
Net cash (used in) provided by financing activities		(451)		4,929

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	(67)		(80)		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	$	(18,757)	$	(51,381)	Net change in cash, cash equivalents and restricted cash	$	11,551	$	(5,340)

Operating Activities

Net cash used in operating activities was ~~$18.3~~$8.5 million and ~~$39.1~~$5.3 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. Consolidated net loss for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, totaled $14.3~~were $10.7 million and ~~$118.8~~$8.3 million, respectively.

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, non-cash adjustments to net income totaled ~~$4.9~~$5.6 million as compared to ~~$100.7~~$1.2 million for the same period of ~~2020.~~2021.

•For the ~~nine~~three months ended ~~September 30,2021,~~March 31, 2022, non-cash adjustments included ~~$7.6~~$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 ~~related to~~of $0.6 million was included for the ~~ADM settlement, $0.8~~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 nine months ended September 30, 2020 due to asset impairments taken in 2020, stock based compensation of $2.7 million, JP3 PPP loan forgiveness of $0.9 million~~ and a ~~$0.7~~$0.3 million ~~charge related to~~decrease in the fair value of contingent consideration.

•~~For~~During the ~~nine~~three months ended ~~September 30, 2020, contributory non-cash adjustments consisted primarily of $70.0 million of impairment charges and $3.2 million for depreciation and amortization.~~

~~During the nine months ended September 30, 2021,~~March 31, 2022, changes in working capital ~~provided $0.9~~used $3.3 million of cash as compared to ~~using $21.0~~providing $1.9 million for the same period of ~~2020.~~2021.

•For the ~~nine~~three months ended ~~September 30,~~March 31, 2022, changes in working capital resulted primarily from a decrease in accrued liabilities of $2.6 million partially due to payment of the ADM Settlement (Note 11) and an increase in inventories of $1.0 million.

•For the three months ended March 31, 2021 the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable and ~~inventory of $2.4~~other current assets totaling $0.5 million ~~offset by~~combined with an increase of ~~current assets~~accounts payable of ~~$2.8 million.~~

•~~For the nine months ended September 30, 2020, working capital used $21.0~~$0.7 million, ~~in cash, primarily resulting from~~partially offset by a decrease in accrued liabilities ~~and accounts payable~~ of ~~$29.6 million, which included two one-time payments made in 2020: one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final~~$0.3million.

~~post-closing working capital adjustment related to the 2019 sale of the CICT segment. Accounts receivable, inventories and other current assets decreased $8.7 million.~~

Investing Activities

Net cash ~~provided by~~from investing activities for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 was ~~not material.~~ negligible.

Financing Activities

Net cash ~~used in investing~~provided by financing activities was ~~$17.1~~$20.0 million for the ~~nine~~three months ended ~~September 30, 2020. Cash used in investing activities included $26.3 million from purchase of JP3 offset by cash provided of $9.8 million due to the release of escrow amounts~~March 31, 2022, primarily from the ~~sales~~proceed from the issuance of ~~Florida Chemical Company.~~

~~Financing Activities~~

convertible notes. Net cash used in financing activities was ~~$0.5~~$0.1 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2021, primarily ~~for~~from purchases of common stock related to tax withholding requirements. ~~Net cash provided by financing activities was $4.9 million for the nine months ended September 30, 2020, primarily from the proceeds received from the PPP.~~

Off-Balance Sheet Arrangements

There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. As of ~~September 30, 2021,~~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 ~~13 in Part I, Item I – Financial Statements of this Quarterly Report.~~

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 this Quarterly Report present fairly, in all material respects, the consolidated financial position, results of operations, comprehensive loss, stockholders’ equity, and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.

~~The Company’s management, including its~~Based upon this evaluation, our principal executive officer and principal financial officer have ~~evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined by Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of September 30, 2021, and has~~ concluded that ~~the Company’s disclosure controls and procedures were not effective as of September 30, 2021, due to the material weaknesses in~~our internal control over financial reporting ~~described above~~

~~Remediation Plan and Status~~

~~The Company has implemented remediations plan to address the material weaknesses identified at December 31, 2020. Key elements of this ongoing plan include:~~

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

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

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

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

•~~Expanded monthly management review controls; and~~

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

~~In 2021, the Company made a strategic decision to bring internal audit in-house and hired a director of internal audit to manage internal~~disclosure controls and ~~the remediation plan. Through a structured process~~processes were effective as of ~~testing and monitoring elements of the remediation plan, we expect the identified material weaknesses to be fully remediated by the end of 2021.~~March 31, 2022

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

There have been no changes in the Company’s system of internal control over financial reporting (identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) under the Exchange Act) during the three months ended ~~September 30, 2021,~~March 31, 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, the Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the~~

Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and other parties 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. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.

Subsequent to the lawsuit described above, on April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters On October 29, 2021, the Company and Flotek Chemistry reached agreement with all parties resolving all claims between the parties. On or before January 3, 2022, Flotek will pay to ADM a one-time payment of $1.75 million and the terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5 million pounds of terpene through 2023. See Note 17 subsequent events for additional information.

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 thatThere are ~~expected to have a material effect on the Company’s financial position, results of operations or liquidity.~~

~~Item 1A. Risk Factors~~

~~There have been~~ no material changes ~~to the risk factors set forth in Part I, Item 1A of~~since the Company’s Annual ~~Report.~~Report on Form 10-K filed with the SEC on March 31, 2022.

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

Unregistered Sales of Equity Securities

~~None.~~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 ~~September 30, 2021,~~March 31, 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
July 1, 2021 to July 31, 2021 — —
August 1, 2021 to August 31, 2021 40,385 $1.63
September 1, 2021 to September 30, 2021 24,279 $1.30
Total 64,664

(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 to the Company’s Form 10-K filed on March 16, 2021).
4.1		Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s Definitive Proxy Statement filed on September 27, 2001).
4.2		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 ~~October 15, 2021, between~~February 2, 2022, by and among Flotek Industries, Inc. and the ~~Company and Michael Borton (~~Purchasers party thereto ~~incorporate~~d (incorporated by reference to Exhibit by10.1 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’s Form 8-K filed on February 4, 2022).
10.4		Master Transaction Agreement between Flotek Industries, Inc. and 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 ~~October 20, 2021.~~)February 22, 2022).
~~10.2~~		~~Employment Agreement dated October 15, 2021, between the Company and TengBeng Koid (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K on October 20, 2021.~~)

























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 September 30, 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 September 30, 2021 and December 31, 2020, (ii) the Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021 and 2020, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2021 and 2020, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (v) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 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:~~						~~November 9, 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:~~	~~November 9, 2021~~

3637


	September 30, 2021		December 31, 2020
Flotek paycheck protection plan loan	$	4,788	$	4,788
JP3 paycheck protection plan loan	—		877
Total	4,788		5,665

Less current maturities	(1,336)		(4,048)

Total long-term debt, net of current portion	$	3,452	$	1,617


							Balance at September 30,								Balance at December 31,
	Level 1		Level 2		Level 3		2021		Level 1		Level 2		Level 3		2020
Contingent consideration	$	—	$	—	$	715	$	715	$	—	$	—	$	1,416	$	1,416


For the nine months ended September 30,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2021
Revenue from external customers	$	26,033	$	3,749	$	—	$	29,782
Revenue from related party	1,332		—		—		1,332
Loss from operations, including impairment	(3,009)		(2,138)		(9,926)		$	(15,073)
Depreciation and amortization	739		52		2		793
Additions to long-lived assets	31		—		—		31

2020
Revenue from external customers	$	39,462	$	1,573	$	—	$	41,035
Revenue from related party	—		—		—		—
Loss from operations, including impairment	(75,137)		(35,185)		(15,589)		(125,911)
Depreciation and amortization	2,300		405		472		3,177
Additions to long-lived assets	906		—		—		906


2020
Customer C	$	10,412	25.4	%
Customer D	8,117		19.8	%
Customer A	3,631		8.9	%


	Three months ended September 30,				Nine months ended September 30,		Period May 18- September 30,
	2021		2020		2021		2020
Revenue (1)	$	803	$	656	$	3,749	$	1,573


Loss from operations (1)	(1,071)		(34,035)		(2,138)		(35,190)