
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 ~~June~~September 30, 2022
or
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from to
			Commission File Number 1-13270


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

(Address of principal executive offices)

(Zip Code)

(713) 849-9911

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each 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 ☐

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 ☒

At ~~August 10,~~November 7, 2022, there were ~~76,597,249~~77,507,267 outstanding shares of the registrant’s common stock, $0.0001 par value.

TABLE OF CONTENTS


Forward-Looking Statements		3

PART I - FINANCIAL INFORMATION

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

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3837

Item 4.	Controls and Procedures	38

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A	Risk Factors	39

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

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40


SIGNATURES		41

FORWARD-LOOKING STATEMENTS

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

The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words including but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,” “potential,” “schedule,” “continue,” “intend,” “expect,” “plan,” “forecast,” “target”, “think”, “likely”, “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or revenue thereafter. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.

A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2021 (“Annual Report” or “2021 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 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.

In certain places in this Quarterly Report on Form 10-Q, we may refer to statements provided by third parties that purport to describe trends or developments in supply chain or energy exploration and production and activity and we specifically disclaim any responsibility for the accuracy and completeness of such information and have undertaken no steps to update or independently verify such information.

The following information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and related disclosures and our 2021 Annual Report.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FLOTEK INDUSTRIES INC, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	33,084	$	11,534	Cash and cash equivalents	$	8,508	$	11,534
Restricted cash	Restricted cash	40		1,790		Restricted cash	100		1,790
Accounts receivable, net of allowance for doubtful accounts of $514 and $659 at June 30, 2022 and December 31, 2021, respectively		11,747		13,297
Accounts receivable, net of allowance for doubtful accounts of $566 and $659 at September 30, 2022 and December 31, 2021, respectively						Accounts receivable, net of allowance for doubtful accounts of $566 and $659 at September 30, 2022 and December 31, 2021, respectively	17,597		11,997
Accounts receivable, related party	Accounts receivable, related party	11,603		—		Accounts receivable, related party	25,916		1,300
Inventories, net	Inventories, net	13,249		9,454		Inventories, net	19,189		9,454

Other current assets	Other current assets	4,000		3,762		Other current assets	4,309		3,762
Current contract assets	Current contract assets	6,260		—		Current contract assets	7,196		—
Assets held for sale	Assets held for sale	535		2,762		Assets held for sale	535		2,762
Total current assets	Total current assets	80,518		42,599		Total current assets	83,350		42,599
Long-term contract assets						Long-term contract assets	73,878		—
Property and equipment, net	Property and equipment, net	4,819		5,296		Property and equipment, net	4,781		5,296
Operating lease right-of-use assets	Operating lease right-of-use assets	1,771		2,041		Operating lease right-of-use assets	1,715		2,041

Deferred tax assets, net	Deferred tax assets, net	283		279		Deferred tax assets, net	278		279
Other long-term assets	Other long-term assets	17		29		Other long-term assets	17		29
Long term contract assets		76,063		—
TOTAL ASSETS	TOTAL ASSETS	$	163,471	$	50,244	TOTAL ASSETS	$	164,019	$	50,244

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	19,771	$	7,616	Accounts payable	$	29,653	$	7,616
Accrued liabilities	Accrued liabilities	7,115		8,996		Accrued liabilities	9,400		8,996
Income taxes payable	Income taxes payable	103		4		Income taxes payable	104		4
Interest payable	Interest payable	106		82		Interest payable	118		82
Current portion of operating lease liabilities	Current portion of operating lease liabilities	636		602		Current portion of operating lease liabilities	653		602
Current portion of finance lease liabilities	Current portion of finance lease liabilities	34		41		Current portion of finance lease liabilities	35		41
Current portion of long-term debt	Current portion of long-term debt	1,690		1,436		Current portion of long-term debt	1,853		1,436
Convertible notes payable	Convertible notes payable	18,323		—		Convertible notes payable	19,055		—
Contract consideration convertible notes payable	Contract consideration convertible notes payable	67,220		—		Contract consideration convertible notes payable	73,030		—
Total current liabilities	Total current liabilities	114,998		18,777		Total current liabilities	133,901		18,777
Deferred revenue, long-term	Deferred revenue, long-term	84		91		Deferred revenue, long-term	74		91
Long-term operating lease liabilities	Long-term operating lease liabilities	6,695		7,779		Long-term operating lease liabilities	6,582		7,779
Long-term finance lease liabilities	Long-term finance lease liabilities	38		53		Long-term finance lease liabilities	29		53
Long-term debt	Long-term debt	3,098		3,352		Long-term debt	2,935		3,352
TOTAL LIABILITIES	TOTAL LIABILITIES	124,913		30,052		TOTAL LIABILITIES	143,521		30,052
Commitments and contingencies (See Note 12)	Commitments and contingencies (See Note 12)	0		0		Commitments and contingencies (See Note 12)
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; 82,884,690 shares issued and 76,773,333 shares outstanding at June 30, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021		8		8
Common stock, $0.0001 par value, 240,000,000 shares authorized; 83,424,763 shares issued and 77,283,733 shares outstanding at September 30, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021						Common stock, $0.0001 par value, 240,000,000 shares authorized; 83,424,763 shares issued and 77,283,733 shares outstanding at September 30, 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	386,310		363,417		Additional paid-in capital	386,958		363,417
Accumulated other comprehensive income	Accumulated other comprehensive income	176		81		Accumulated other comprehensive income	292		81
Accumulated deficit	Accumulated deficit	(313,698)		(309,214)		Accumulated deficit	(332,492)		(309,214)
Treasury stock, at cost; 6,111,357 and 6,022,634 shares at June 30, 2022 and December 31, 2021 , respectively		(34,238)		(34,100)
Treasury stock, at cost; 6,141,030 and 6,022,634 shares at September 30, 2022 and December 31, 2021 , respectively						Treasury stock, at cost; 6,141,030 and 6,022,634 shares at September 30, 2022 and December 31, 2021 , respectively	(34,268)		(34,100)
Total stockholders’ equity	Total stockholders’ equity	38,558		20,192		Total stockholders’ equity	20,498		20,192
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	163,471	$	50,244	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	164,019	$	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 June 30, Six months ended June 30,
2022 2021 2022 2021
Revenue:
Revenue from external customers $ 12,824 $ 9,165 $ 23,206 $ 20,935
Revenue from related party 16,549 — 19,046 —
Total revenues 29,373 9,165 42,252 20,935
Cost of goods sold 31,678 10,775 45,036 22,853
Gross loss (2,305) (1,610) (2,784) (1,918)
Operating costs and expenses:
Selling, general, and administrative 7,431 4,203 12,310 10,287
Depreciation of property and equipment 182 253 377 560
Research and development 1,115 1,466 2,530 3,008
Gain on sale of property and equipment (1,914) (71) (1,906) (69)
Gain on lease termination — — (584) —
Change in fair value of contract consideration
convertible notes payable (17,158) — (13,266) —
Total operating costs and expenses (10,344) 5,851 (539) 13,786
Income (loss) from operations 8,039 (7,461) (2,245) (15,704)
Other income (expense):
Paycheck protection plan loan forgiveness — 881 — 881
Interest expense (1,597) (17) (2,265) (35)
Other income (expense) (104) 72 120 39
Total other income (expense) (1,701) 936 (2,145) 885
Income (loss) before income taxes 6,338 (6,525) (4,390) (14,819)
Income tax expense (98) (21) (94) (27)
Net income (loss) $ 6,240 $ (6,546) $ (4,484) $ (14,846)
Income (loss) per common share:
Basic $ 0.08 $ (0.09) $ (0.06) $ (0.22)
Diluted $ (0.05) $ (0.09) $ (0.12) $ (0.22)
Weighted average common shares:
Weighted average common shares used in computing basic loss per common share 74,861 69,531 73,476 69,001
Weighted average common shares used in computing diluted loss per common share 124,335 69,531 107,086 69,001


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Revenue:
Revenue from external customers	$	15,206	$	8,847	$	38,412	$	29,782
Revenue from related party	30,417		1,332		49,462		1,332
Total revenues	45,623		10,179		87,874		31,114
Cost of goods sold	47,465		4,022		92,500		26,876
Gross income (loss)	(1,842)		6,157		(4,626)		4,238
Operating costs and expenses:
Selling, general, and administrative	9,035		4,092		21,345		14,379
Depreciation of property and equipment	177		233		554		793
Research and development	985		1,186		3,515		4,194
(Gain) loss on sale of property and equipment	(10)		14		(1,916)		(55)
Gain on lease termination	—		—		(584)		—
(Gain) loss in fair value of contract consideration convertible notes payable	4,250		—		(9,016)		—
Total operating costs and expenses	14,437		5,525		13,898		19,311
Income (loss) from operations	(16,279)		632		(18,524)		(15,073)
Other income (expense):
Paycheck protection plan loan forgiveness	—		—		—		881
Interest expense	(2,321)		(18)		(4,586)		(53)
Other expense, net	(187)		(102)		(67)		(62)
Total other income (expense)	(2,508)		(120)		(4,653)		766
Income (loss) before income taxes	(18,787)		512		(23,177)		(14,307)
Income tax expense	(7)		(3)		(101)		(30)
Net income (loss)	$	(18,794)	$	509	$	(23,278)	$	(14,337)










Income (loss) per common share:
Basic	$	(0.25)	$	0.01	$	(0.31)	$	(0.21)
Diluted	$	(0.25)	$	0.01	$	(0.31)	$	(0.21)










Weighted average common shares:
Weighted average common shares used in computing basic income (loss) per common share	75,312		69,324		74,095		68,665
Weighted average common shares used in computing diluted income (loss) per common share	75,312		70,176		74,095		68,665

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

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Net income (loss)	$	(18,794)	$	509	$	(23,278)	$	(14,337)


Other comprehensive income (loss):
Foreign currency translation adjustment	116		38		211		70

Comprehensive income (loss)	$	(18,678)	$	547	$	(23,067)	$	(14,267)

Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Net income (loss) $ 6,240 $ (6,546) $ (4,484) $ (14,846)
Other comprehensive income (loss):
Foreign currency translation adjustment 87 (17) 95 32
Comprehensive income (loss) $ 6,327 $ (6,563) $ (4,389) $ (14,814)

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

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

~~(in~~FLOW (in thousands)


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

Net loss	Net loss	$	(4,484)	$	(14,846)	Net loss	$	(23,278)	$	(14,337)
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	(134)		(302)		Change in fair value of contingent consideration	(106)		(701)
Change in fair value of contract consideration convertible notes payable	Change in fair value of contract consideration convertible notes payable	(13,266)		—		Change in fair value of contract consideration convertible notes payable	(9,016)		—
Amortization of convertible note issuance cost	Amortization of convertible note issuance cost	414		—		Amortization of convertible note issuance cost	663		—
Paid-in-kind interest expense	Paid-in-kind interest expense	1,819		—		Paid-in-kind interest expense	3,861		—
Amortization of contract assets	Amortization of contract assets	737		—		Amortization of contract assets	1,986		—
Depreciation and amortization	Depreciation and amortization	377		560		Depreciation and amortization	554		793
Provision for doubtful accounts, net of recoveries	Provision for doubtful accounts, net of recoveries	87		(1)		Provision for doubtful accounts, net of recoveries	147		(42)
Inventory purchase commitment settlement						Inventory purchase commitment settlement	—		(7,633)
Inventory write down						Inventory write down	1,036		—
Provision for excess and obsolete inventory	Provision for excess and obsolete inventory	769		580		Provision for excess and obsolete inventory	666		687
Gain on sale of property and equipment	Gain on sale of property and equipment	(1,906)		(69)		Gain on sale of property and equipment	(1,916)		(55)
Gain on lease termination	Gain on lease termination	(584)		—		Gain on lease termination	(584)		—
Non-cash lease expense	Non-cash lease expense	112		163		Non-cash lease expense	168		223
Stock compensation expense	Stock compensation expense	1,591		1,750		Stock compensation expense	2,262		2,710
Deferred income tax (benefit) expense	Deferred income tax (benefit) expense	(5)		10		Deferred income tax (benefit) expense	1		13
Paycheck protection plan loan forgiveness	Paycheck protection plan loan forgiveness	—		(881)		Paycheck protection plan loan forgiveness	—		(881)
Changes in current assets and liabilities:	Changes in current assets and liabilities:					Changes in current assets and liabilities:

Accounts receivable	Accounts receivable	(10,141)		1,995		Accounts receivable	(5,748)		111
Accounts receivable, related party						Accounts receivable, related party	(24,616)		—
Inventories	Inventories	(4,521)		(222)		Inventories	(11,373)		2,330
Income taxes receivable	Income taxes receivable	7		207		Income taxes receivable	3		405
Other current assets		(244)		(672)
Contract asset, net		(3,600)		—
Other long-term assets		12		541
Other assets						Other assets	(537)		(1,696)
Contract assets						Contract assets	(3,600)		—
Accounts payable	Accounts payable	12,154		801		Accounts payable	22,036		(604)
Accrued liabilities	Accrued liabilities	(2,924)		(1,048)		Accrued liabilities	493		415
Operating lease liabilities	Operating lease liabilities	(308)		—		Operating lease liabilities	(404)		—
Income taxes payable	Income taxes payable	99		168		Income taxes payable	100		(53)
Interest payable	Interest payable	24		24		Interest payable	36		36

Net cash used in operating activities	Net cash used in operating activities	(23,915)		(11,242)		Net cash used in operating activities	(47,166)		(18,279)
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Capital expenditures	Capital expenditures	(5)		(31)		Capital expenditures	(175)		(31)
Proceeds from sale of assets	Proceeds from sale of assets	4,194		74		Proceeds from sale of assets	4,215		74

Net cash provided by investing activities	Net cash provided by investing activities	4,189		43		Net cash provided by investing activities	4,040		43
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Proceeds from issuance of convertible notes	Proceeds from issuance of convertible notes	21,150		—		Proceeds from issuance of convertible notes	21,150		—
Payment of issuance costs of convertible notes	Payment of issuance costs of convertible notes	(1,084)		—		Payment of issuance costs of convertible notes	(1,084)		—
Proceeds from issuance of warrants	Proceeds from issuance of warrants	19,500		—		Proceeds from issuance of warrants	19,500		—
Payment of issuance costs of stock warrants						Payment of issuance costs of stock warrants	(1,170)		—
Payments to tax authorities for shares withheld from employees	Payments to tax authorities for shares withheld from employees	(138)		(78)		Payments to tax authorities for shares withheld from employees	(191)		(407)
Proceeds from issuance of stock	Proceeds from issuance of stock	24		—		Proceeds from issuance of stock	24		—

Purchase from sale of common stock		—		(166)
Payments for finance leases	Payments for finance leases	(21)		(29)		Payments for finance leases	(30)		(44)

Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	39,431		(273)		Net cash provided by (used in) financing activities	38,199		(451)

Effect of changes in exchange rates on cash and cash equivalents	Effect of changes in exchange rates on cash and cash equivalents	95		(31)		Effect of changes in exchange rates on cash and cash equivalents	211		(70)
Net change in cash, cash equivalents and restricted cash	Net change in cash, cash equivalents and restricted cash	19,800		(11,503)		Net change in cash, cash equivalents and restricted cash	(4,716)		(18,757)
Cash and cash equivalents at the beginning of period	Cash and cash equivalents at the beginning of period	11,534		38,660		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	1,790		664		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	13,324		39,324		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	33,084		27,781		Cash and cash equivalents at end of period	8,508		20,527
Restricted cash at the end of period	Restricted cash at the end of period	40		40		Restricted cash at the end of period	100		40
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	33,124	$	27,821	Cash, cash equivalents and restricted cash at end of period	$	8,608	$	20,567

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2022 and 2021

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


Three months ended June 30, 2022
Three months ended September 30, 2022																		Three months ended September 30, 2022
		Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit				Total Stockholders’ Equity			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit				Total Stockholders’ Equity
		Shares Issued	Par Value		Shares	Cost								Total Stockholders’ Equity	Shares Issued				Par Value	Shares		Cost	Additional Paid-in Capital
Balance, March 31, 2022		82,564	$	8	6,073	$	(34,159)	$	367,104	$	89	$	(319,938)			$	13,104
Balance, June 30, 2022																		Balance, June 30, 2022	82,885	$	8	6,111			$	(34,238)	$	386,310	$	176	$	(313,698)			$	38,558

Net income		—	—		—	—		—		—		6,240				6,240
Net loss																		Net loss	—	—		—	—		—		—		(18,794)				(18,794)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—	—		—		87		—				87		Foreign currency translation adjustment	—	—		—	—		—		116		—				116

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

Restricted stock granted	Restricted stock granted	339	—		—	—		—		—		—				—		Restricted stock granted	502	—		—	—		—		—		—				—

Restricted stock forfeited	Restricted stock forfeited	(3)	—		12	—		—		—		—				—		Restricted stock forfeited		—		5	—		—		—		—				—

Restricted stock units vested																		Restricted stock units vested	58	—		—	—		—		—		—				—
Stock compensation expense	Stock compensation expense	—	—		—	—		852		—		—				852		Stock compensation expense	—	—		—	—		671		—		—				671
Shares withheld to cover taxes	Shares withheld to cover taxes	(15)	—		45	(79)		—		—		—				(79)		Shares withheld to cover taxes	(20)	—		25	(30)		(23)		—		—				(53)
Issuance of stock warrants, net of transaction fee		—	—		—	—		9,930		—		—				9,930
Equity contribution		—	—		—	—		8,400		—		—				8,400

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

Balance, September 30, 2022																		Balance, September 30, 2022	83,425	$	8	6,141	$	(34,268)	$	386,958	$	292	$	(332,492)			$	20,498


Six months ended June 30, 2022
Nine months ended September 30, 2022																							Nine months ended September 30, 2022
		Common Stock			Treasury Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income			Accumulated Deficit					Total Stockholders’ Equity			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
		Shares Issued	Par Value		Shares		Cost												Total Stockholders’ Equity	Shares Issued				Par Value	Shares		Cost	Additional Paid-in Capital
Balance, December 31, 2021	Balance, December 31, 2021	79,484	$	8	6,022		$	(34,100)		$	363,417		$	81		$	(309,214)				$	20,192	Balance, December 31, 2021	79,484	$	8	6,022			$	363,417	$	81	$	(309,214)	$	20,192
Net loss	Net loss	—	—		—		—			—			—			(4,484)					(4,484)		Net loss	—	—		—	—		—		—		(23,278)		(23,278)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		—			—			95			—					95		Foreign currency translation adjustment	—	—		—	—		—		211		—		211

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

Restricted stock granted	Restricted stock granted	626	—		—		—			—			—			—					—		Restricted stock granted	1,128	—		—	—		—		—		—		—
Restricted stock forfeited	Restricted stock forfeited	(3)	—		20		—			—			—			—					—		Restricted stock forfeited	(3)	—		25	—		—		—		—		—

Restricted stock units vested																							Restricted stock units vested	58	—		—	—		—		—		—		—
Stock compensation expense	Stock compensation expense	—	—		—		—			1,591			—			—					1,591		Stock compensation expense	—	—		—	—		2,262		—		—		2,262
Shares withheld to cover taxes	Shares withheld to cover taxes	(15)	—		88		(138)			—			—			—					(138)		Shares withheld to cover taxes	(35)	—		113	(168)		(23)		—		—		(191)
Issuance of stock warrants, net of transaction fee	Issuance of stock warrants, net of transaction fee	—	—		—		—			9,930			—			—					9,930		Issuance of stock warrants, net of transaction fee	—	—		—	—		9,930		—		—		9,930
Equity contribution	Equity contribution									8,400											8,400		Equity contribution	—	—		—	—		8,400		—		—		8,400
Conversion of notes to common stock	Conversion of notes to common stock	2,793	—		—		—			2,948			—			—					2,948		Conversion of notes to common stock	2,793	—		—	—		2,948		—		—		2,948

Balance, June 30, 2022		82,885	$	8	6,111	—	$	(34,238)	—	$	386,310	—	$	176	—	$	(313,698)	—			$	38,558
Balance, September 30, 2022																							Balance, September 30, 2022	83,425	$	8	6,141	$	(34,268)	$	386,958	$	292	$	(332,492)	$	20,498

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


Three months ended June 30, 2021
Three months ended September 30, 2021																		Three months ended September 30, 2021
		Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit				Total Stockholders’ Equity			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit				Total Stockholders’ Equity
		Shares Issued	Par Value		Shares	Cost								Total Stockholders’ Equity	Shares Issued				Par Value	Shares		Cost	Additional Paid-in Capital
Balance, March 31, 2021		78,276	$	8	5,573	$	(33,956)	$	360,537	$	30	$	(286,988)			$	39,631
Balance, June 30, 2021																		Balance, June 30, 2021	79,607	$	8	5,628			$	(34,017)	$	361,424	$	13	$	(293,534)			$	33,894

Net loss	Net loss	—	—		—	—		—		—		(6,546)				(6,546)		Net loss	—	—		—	—		—		—		509				509
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—	—		—		(17)		—				(17)		Foreign currency translation adjustment	—	—		—	—		—		38		—				38

Stock issued under employee stock purchase plan	Stock issued under employee stock purchase plan	—	—		(26)	(38)		(2)		—		—				(40)		Stock issued under employee stock purchase plan	—	—		(28)	20		(89)		—		—				(69)

Restricted stock granted	Restricted stock granted	1,465	—		—	—		(7)		—		—				(7)		Restricted stock granted	9	—		—	—		—		—		—				—

Restricted stock forfeited	Restricted stock forfeited	(134)	—		25	54		(54)		—		—				—		Restricted stock forfeited	(6)	—		4	8		3		—		—				11
Stock compensation expense	Stock compensation expense	—	—		—	—		969		—		—				969		Stock compensation expense	—	—		—	—		961		—		—				961
Shares withheld to cover taxes	Shares withheld to cover taxes	—	—		56	(77)		(19)		—		—				(96)		Shares withheld to cover taxes	—	—		45	64		(125)		—		—				(61)

Balance, June 30, 2021		79,607	$	8	5,628	$	(34,017)	$	361,424	$	13	$	(293,534)			$	33,894
Balance, September 30, 2021																		Balance, September 30, 2021	79,610	$	8	5,649	$	(33,925)	$	362,174	$	51	$	(293,025)			$	35,283


Six months ended June 30, 2021
Nine months ended September 30, 2021																		Nine months ended September 30, 2021
		Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit				Total Stockholders’ Equity			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
		Shares Issued	Par Value		Shares	Cost								Total Stockholders’ Equity	Shares Issued				Par Value	Shares		Cost	Additional Paid-in Capital
Balance, December 31, 2020	Balance, December 31, 2020	78,669	$	8	5,581	$	(33,851)	$	359,721	$	(19)	$	(278,688)			$	47,171	Balance, December 31, 2020	78,669	$	8	5,581			$	359,721	$	(19)	$	(278,688)	$	47,171
Net loss	Net loss	—	—		—	—		—		—		(14,846)				(14,846)		Net loss	—	—		—	—		—				(14,337)		(14,337)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—	—		—		32		—				32		Foreign currency translation adjustment	—	—		—	—		—		70		—		70

Stock issued under employee stock purchase plan	Stock issued under employee stock purchase plan	—	—		(84)	(130)		(47)		—		—				(177)		Stock issued under employee stock purchase plan	—	—		(112)	(110)		(136)		—		—		(246)

Restricted stock granted	Restricted stock granted	1,684	—		—	—		—		—		—				—		Restricted stock granted	1,694	—		—	—		—		—		—		—
Restricted stock forfeited	Restricted stock forfeited	(133)	—		30	64		—		—		—				64		Restricted stock forfeited	(140)	—		34	72		4		—		—		76

Stock compensation expense	Stock compensation expense	—	—		—	—		1,750		—		—				1,750		Stock compensation expense	—	—		—	—		2,710		—		—		2,710
Shares withheld to cover taxes	Shares withheld to cover taxes	—	—		101	(100)		—		—		—				(100)		Shares withheld to cover taxes	—	—		146	(36)		(125)		—		—		(161)

Other (see Note 13, “Stockholders’ Equity”)	Other (see Note 13, “Stockholders’ Equity”)	(613)	—		—	—		—		—		—				—		Other (see Note 13, “Stockholders’ Equity”)	(613)	—		—	—		—		—		—		—
Balance, June 30, 2021		79,607	$	8	5,628	$	(34,017)	$	361,424	$	13	$	(293,534)			$	33,894
Balance, September 30, 2021																		Balance, September 30, 2021	79,610	$	8	5,649	$	(33,925)	$	362,174	$	51	$	(293,025)	$	35,283

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 Nature of Operations

General

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

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

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

As a result of a series of transactions in 2022 with ProFrac Holdings, LLC, Flotek has become a consolidated subsidiary of ProFrac Holding Corp. since May 17, 2022.

Sources and Uses of Liquidity

The Company currently funds its operations and growth primarily from cash on ~~hand.~~hand and other liquid assets. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. ~~The availability of adequate capital is dependent on the Company’s operating cash flow, and the availability of and access to debt and equity financing.~~ The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in the twelve months subsequent to the date of filing the consolidated financial statements. While we believe that 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 in the next twelve months, uncertainty surrounding the 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 availability of capital is dependent on the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in netCompany’s operating cash ~~proceeds of approximately $19.5 million (see Note 9, “Debt and Convertible Notes Payable”).~~

~~Also, on February 2, 2022, the Company entered into a~~flow principally derived from its long-term supply agreement with ProFrac Services, LLC ~~(the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC~~ (see Note ~~9, “Debt and Convertible Notes Payable”)~~16, Related Party Transactions). Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products 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. These Contract Consideration 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.

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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

~~Based on our cash and liquid assets, including the transactions during the six months ended June 30, 2022 we~~We believe that our cash and other liquid assets and our forecasted operating cash flows expected to be generated from the ongoing execution of the long-term supply agreement with ProFrac Services, LLC 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. 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 consolidated financial statements reflect all adjustments, in the opinion of management, necessary for the 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 2021 Annual Report. A copy of the 2021 Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. 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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s restricted cash is ~~$40 thousand~~$0.1 million and $1.8 million as of ~~June~~September 30, 2022 and December 31, 2021, respectively. The Company’s restricted cash as of ~~June~~September 30, 2022 consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution. The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $1.75 million for amounts due under the terms of the legal settlement discussed in Note 12, “Commitments and Contingencies”.

Accounts Receivable and Allowance for Doubtful Accounts

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

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

Contract Assets

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Inventories

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable

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

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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Fair Value Measurements

The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on 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 10, “Fair Value Measurements.”

Revenue Recognition

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

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

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

The Company applies several practical expedients including:

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

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

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

•In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Foreign Currency Translation

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

Comprehensive Income (Loss)

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

Research and Development Costs

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

Income Taxes

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

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

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

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

Stock-Based Compensation

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

Stock Warrants

The Company evaluated the ~~Pre-funded~~Prefunded Warrants issued in June 2022 in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to be classified within stockholders’ equity and recorded the proceeds received for the ~~Pre-funded~~Prefunded Warrants within additional paid in capital in the consolidated balance sheets.

Use of Estimates

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Reclassifications

Certain prior year amounts in the unaudited condensed consolidated statement of operations have been reclassified to conform to the current year presentation. In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross loss and eliminated the reporting of operating expenses (excluding depreciation and amortization) on the consolidated statements of operations to conform to customary industry reporting practices. In connection with this change in presentation, the Company reclassified selling costs of ~~$1.3~~$1.4 million and ~~$3.1~~$4.4 million to selling, general and administrative expenses which were previously reported in operating expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2021 respectively. The reclassifications and change in presentation of the statements of operations did not impact previously recorded income (loss) from operations, net income (loss) or stockholders’ equity.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Recent Accounting Pronouncements

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

New Accounting Standards Issued and Adopted as of January 1, 2022

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

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 fiscal 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 ~~June~~September 30, 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 — Revenue from Contracts with Customers

Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive and discounts offered to customers for prompt payment.

The majority of the products from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized on an over time basis. ~~The Company bills sales on a monthly basis with payment~~Payment terms are customarily 30-60 days for domestic and 90-120 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.

Disaggregation of Revenue

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Revenue:	Revenue:									Revenue:
Products (1)	Products (1)	$	28,588	$	8,444	$	40,787	$	19,524	Products (1)	$	44,574	$	9,494	$	85,356	$	29,017
Services	Services	785		721		1,465		1,411		Services	1,049		685		2,518		2,097
		$	29,373	$	9,165	$	42,252	$	20,935		$	45,623	$	10,179	$	87,874	$	31,114

(1) Product revenues for 2022 include sales to a related ~~party~~parties as described in Note 16, “Related Party Transactions.”

Arrangements with Multiple Performance Obligations

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

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

Note 4 - Contract Assets

Contract assets are as follows (in thousands):



	~~June~~September 30, 2022		December 31, 2021
Contract assets	$	83,060	$	—
Less accumulated amortization	~~(737)~~(1,986)		—
Contract assets, ~~(net)~~net	$	~~82,323~~81,074	$	—

In connection with entering into the ProFrac Agreements on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable”, wethe Company recognized contract assets of ~~$10~~$10.0 million and $69.5 million, respectively, and associated fees of $3.6 million, representing the excess consideration to be given over the three and ten year terms of the contracts over the fair value of the convertible notes we issued. The value to be assigned to the contract asset was estimated based on forecasted volumes and contractual pricing in the agreements.million. As of ~~June~~September 30, 2022, ~~$76.1~~$73.9 million of the contract assets isare classified as long term based upon our estimate of the forecasted revenues from the ProFrac agreements which will not be realized within the ~~first~~next twelve months of the ProFrac Agreements. The Company’s estimate of the timing of the future contract revenues is evaluated on a quarterly ~~basis throughout the contract term.~~basis.

During the three and ~~six~~nine months ended ~~June~~September 30, ~~2022.~~2022 the Company recognized ~~$0.7~~$1.2 million and $2.0 million, respectively, of contract assets amortization which is presented as a reduction of the transaction price included in the related party revenue in the consolidated statement of operations. The below table reflects our estimated amortization per year (in thousands) based on ~~our~~the Company’s current forecasted revenues from the ProFrac Agreements.

1615

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Years ending December 31,	Years ending December 31,	Amortization		Years ending December 31,	Amortization
2022 (excluding the six months ended June 30, 2022)		$	2,655
2022 (excluding the nine months ended September 30, 2022 )				2022 (excluding the nine months ended September 30, 2022 )	$	1,451
2023	2023	7,922		2023	7,918
2024	2024	8,696		2024	8,692
2025	2025	8,696		2025	8,692
2026	2026	8,696		2026	8,692
Thereafter through May 2032	Thereafter through May 2032	45,658		Thereafter through May 2032	45,629
Total contract assets	Total contract assets	$	82,323	Total contract assets	$	81,074

Based on our tests of recoverability, we did not identify impairment of such contract assets as of September 30, 2022.

Note 5 — Inventories

Inventories are as follows (in thousands):


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Raw materials	Raw materials	$	7,807	$	5,610	Raw materials	$	7,000	$	5,610
Finished goods	Finished goods	15,124		13,985		Finished goods	21,490		13,985
Inventories	Inventories	22,931		19,595		Inventories	28,490		19,595
Less reserve for excess and obsolete inventory	Less reserve for excess and obsolete inventory	(9,682)		(10,141)		Less reserve for excess and obsolete inventory	(9,301)		(10,141)
Inventories, net	Inventories, net	$	13,249	$	9,454	Inventories, net	$	19,189	$	9,454

The provision recorded in the three months ended ~~June~~September 30, 2022 and 2021 was ~~$0.4~~$44.8 thousand and $0.1 million ~~and $0.1 million~~ for the CT segment and ~~$49~~ $14.4 thousand and ~~$0.1 million~~nil for the DA segment, respectively. The provision recorded in the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 was ~~$0.7~~$0.8 million and ~~$0.4~~$0.5 million for the CT segment and ~~$49 thousand~~$0.1 million and ~~$0.1~~$0.2 million for the DA segment, respectively.

The Company wrote off inventory of $1.0 million in the three and nine months ended September 30, 2022 relating to the Company’s decision to cease the manufacture and sale of hand sanitizers. There were no inventory write offs in the three and nine months ended September 30, 2021.

Note 6 — Property and Equipment

Property and equipment are as follows (in thousands):


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Land	Land	$	886	$	886	Land	$	886	$	886
Land improvements	Land improvements	520		520		Land improvements	520		520
Buildings and leasehold improvements	Buildings and leasehold improvements	5,356		5,473		Buildings and leasehold improvements	5,356		5,473
Machinery and equipment	Machinery and equipment	6,686		6,843		Machinery and equipment	6,683		6,843
Furniture and fixtures	Furniture and fixtures	545		620		Furniture and fixtures	545		620
Transportation equipment	Transportation equipment	878		878		Transportation equipment	806		878
Computer equipment and software	Computer equipment and software	1,175		1,176		Computer equipment and software	1,288		1,176
Property and equipment	Property and equipment	16,046		16,396		Property and equipment	16,084		16,396
Less accumulated depreciation	Less accumulated depreciation	(11,227)		(11,100)		Less accumulated depreciation	(11,303)		(11,100)
Property and equipment, net	Property and equipment, net	$	4,819	$	5,296	Property and equipment, net	$	4,781	$	5,296

Depreciation expense totaled $0.2 million and ~~$0.3~~$0.2 million for the three months ended ~~June~~September 30, 2022 and 2021, and ~~$0.4~~$0.6 million and ~~$0.6~~$0.8 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively.

~~In the first quarter of~~During 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas in its current condition and as a result the associated assets in the amount of $0.5 million are classified as held for sale as of ~~June~~September 30, 2022 and December 31, 2021. The company also classified $2.3 million for the Waller facility as held for sale as of December 2021, which was sold on April 18, 2022 (See Note 1, “Organization and Nature of Operations”.

~~Note 7 — Leases~~

1716

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021. The company also classified $2.3 million for the Waller, Texas facility as held for sale as of December 2021. The Waller, Texas facility was sold on April 18, 2022 and the Company recognized a gain on the sale of the facility of $1.9 million during the nine months ended September 30, 2022.

Note 7 — Leases

In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for ~~$40~~$40.0 thousand per month for sixty-four months. Rental income recognized during ~~the three and six~~nine months ended ~~June~~September 30, 2022 was ~~nil and $121~~$121.0 thousand, ~~respectively,~~ and was included in other ~~income~~expense, net in the consolidated statement of operations. Rental income recognized during the three and nine months ended September 30, 2021 was nil. As discussed in Note ~~1, “Organization~~6, “Property and ~~Nature of Operations”~~Equipment” 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~~$21.0 thousand per month, and the tenant occupied the warehouse facility in September 2021. Rental income recognized during the three and ~~six~~nine months ended ~~June~~September 30, 2022 was ~~$66~~$65.0 thousand and ~~$131~~$196.0 thousand, respectively, and was included in other expense, net in the consolidated statement of operations. Rental income recognized during the three and nine months ended September 30, 2021 was $12.0 thousand and was included in other expense, net in the consolidated statement of operations.

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


		Three months ended June 30,				Six months ended June 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Operating lease expense	Operating lease expense	$	220	$	250	$	448	$	488	Operating lease expense	$	217	$	247	$	665	$	735
Finance lease expense:	Finance lease expense:									Finance lease expense:
Amortization of right-of-use assets	Amortization of right-of-use assets	4		4		8		7		Amortization of right-of-use assets	4		4		11		11
Interest on lease liabilities	Interest on lease liabilities	3		3		6		6		Interest on lease liabilities	1		2		5		9
Total finance lease expense	Total finance lease expense	7		7		14		13		Total finance lease expense	5		6		16		20
Short-term lease expense	Short-term lease expense	79		61		203		134		Short-term lease expense	68		15		270		44

Total lease expense	Total lease expense	$	306	$	318	$	665	$	635	Total lease expense	$	290	$	268	$	951	$	799

Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:									Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases	Operating cash flows used in operating leases	$	350	$	394	$	726	$	727	Operating cash flows used in operating leases	$	461	$	380	$	1,186	$	1,107
Operating cash flows from finance leases	Operating cash flows from finance leases	10		43		20		53		Operating cash flows from finance leases	13		10		32		62
Financing cash flows from finance leases	Financing cash flows from finance leases	3		3		6		29		Financing cash flows from finance leases	1		2		5		8

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


Years ending December 31,	Years ending December 31,	Operating Leases		Finance Leases		Years ending December 31,	Operating Leases		Finance Leases
2022 (excluding the six months ended June 30, 2022)		$	519	$	19
2022 (excluding the nine months ended September 30, 2022)						2022 (excluding the nine months ended September 30, 2022)	$	262	$	9
2023	2023	1,221		39		2023	1,221		39
2024	2024	1,247		21		2024	1,247		22
2025	2025	1,274		—		2025	1,274		—
2026	2026	1,302		—		2026	1,302		—
Thereafter	Thereafter	4,782		—		Thereafter	4,782		—
Total lease payments	Total lease payments	$	10,345	$	79	Total lease payments	$	10,088	$	70
Less: Interest	Less: Interest	(3,014)		(7)		Less: Interest	(2,853)		(6)
Present value of lease liabilities	Present value of lease liabilities	$	7,331	$	72	Present value of lease liabilities	$	7,235	$	64

1817

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


		June 30, 2022			December 31, 2021				September 30, 2022			December 31, 2021
Operating Leases	Operating Leases							Operating Leases
Operating lease right-of-use assets	Operating lease right-of-use assets	$	1,771		$	2,041		Operating lease right-of-use assets	$	1,715		$	2,041

Current portion of operating lease liabilities	Current portion of operating lease liabilities	636			602			Current portion of operating lease liabilities	653			602
Long-term operating lease liabilities	Long-term operating lease liabilities	6,695			7,779			Long-term operating lease liabilities	6,582			7,779
Total operating lease liabilities	Total operating lease liabilities	$	7,331		$	8,381		Total operating lease liabilities	$	7,235		$	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	(40)			(33)			Accumulated depreciation	(52)			(33)
Property and equipment, net	Property and equipment, net	$	107		$	114		Property and equipment, net	$	95		$	114

Current portion of finance lease liabilities	Current portion of finance lease liabilities	$	34		$	41		Current portion of finance lease liabilities	$	35		$	41
Long-term finance lease liabilities	Long-term finance lease liabilities	38			53			Long-term finance lease liabilities	29			53
Total finance lease liabilities	Total finance lease liabilities	$	72		$	94		Total finance lease liabilities	$	64		$	94

Weighted Average Remaining Lease Term	Weighted Average Remaining Lease Term							Weighted Average Remaining Lease Term
Operating leases	Operating leases	9.4 years			9.1 years			Operating leases	8.9 years			9.1 years
Finance leases	Finance leases	3.1 years			2.9 years			Finance leases	1.8 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	8.9		%	8.9		%	Finance leases	9.0		%	8.9		%

Note 8 — Accrued Liabilities

Current accrued liabilities are as follows (in thousands):


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Severance costs	Severance costs	$	2,595	$	2,581	Severance costs	$	2,606	$	2,581
Loss on purchase commitments	Loss on purchase commitments	—		1,750		Loss on purchase commitments	—		1,750
Payroll and benefits	Payroll and benefits	998		1,054		Payroll and benefits	2,866		1,054
Legal costs	Legal costs	1,108		1,013		Legal costs	41		1,013
Contingent liability for earn-out provision	Contingent liability for earn-out provision	474		608		Contingent liability for earn-out provision	502		608
Deferred revenue, current	Deferred revenue, current	368		528		Deferred revenue, current	283		528
Taxes other than income taxes	Taxes other than income taxes	852		241		Taxes other than income taxes	1,359		241
Other	Other	720		1,221		Other	1,743		1,221
Total current accrued liabilities	Total current accrued liabilities	$	7,115	$	8,996	Total current accrued liabilities	$	9,400	$	8,996

Note 9 — Debt and Convertible Notes Payable

Long Term Debt

In April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek. The PPP loans had a fixed interest rate of 1% and originally a two-year term, maturing in April and May 2022, respectively. No payments of principal or interest were required during the three or ~~six~~nine months ended ~~June~~September 30, 2022 and 2021.

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

During the second quarter of 2021, the Company applied for forgiveness of the JP3 PPP loan with the SBA. In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest were fully forgiven. Accordingly, during the second quarter of 2021, the Company recorded $0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other ~~income~~expense, net 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~~During the third quarter of 2021, the Company ~~has~~ submitted to the SBA, request for forgiveness of substantially all of the Flotek PPP ~~loan but as~~loan. As of the date of this filing, the Company has not received a forgiveness notice. If the loan is not forgiven, monthly payments will be due over the remaining term of the loan upon notice from the SBA that it will not be forgiven. ~~Denial of the forgiveness of the Flotek PPP loan will negatively impact the Company’s liquidity as discussed in Note 1, “Organization and Nature of Operations”.~~

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


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Flotek PPP loan	Flotek PPP loan	$	4,788	$	4,788	Flotek PPP loan	$	4,788	$	4,788
Less current maturities	Less current maturities	(1,690)		(1,436)		Less current maturities	(1,853)		(1,436)
Total long-term debt, net of current portion	Total long-term debt, net of current portion	$	3,098	$	3,352	Total long-term debt, net of current portion	$	2,935	$	3,352

Convertible Notes Payable

On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. The PIPE transaction was exempted from the registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws.Pursuant to the PIPE transaction, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately ~~$19.5~~$20.1 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 ~~June~~September 30, 2022, the remaining Convertible Notes Payable are recorded at carrying value of ~~$18.3~~$19.1 million, including accrued paid-in-kind interest of ~~$0.8~~$1.3 million, and net of unamortized issuance costs of ~~$0.6 million~~$0.3 million. The estimated fair value of the Convertible Notes Payable at ~~June~~September 30, 2022 was ~~$21.1~~$22.8 million.

ProFrac Agreement Contract Consideration Convertible Notes Payable

2019

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 Contract Consideration Convertible Notes Payable (“ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE transaction. This offering of the Contract Consideration Convertible Notes Payable was exempted from the registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws.

The ProFrac Agreement Contract Consideration 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 ~~$11.7~~$12.6 million as of ~~June~~September 30, 2022 which includes ~~payment-in-kind~~paid-in-kind interest of ~~$0.4~~$0.7 million. The fair value adjustment was ~~a $2.4~~an increase of $0.6 million ~~decrease~~ and a ~~$1.7~~$1.9 million ~~increase~~ in the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively. See Note 10, “Fair Value Measurements”.

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable

On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”). to ProFrac. This offering of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable was exempted from the registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable may be converted at any time prior to the maturity date, which ~~will be~~is one year from the date of issuance under the same stock conversion terms as the Convertible Notes Payable issued in the PIPE transaction.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments and were initially recorded at fair value of $69.5 million on the issuance date and remeasured to fair value of ~~$55.6~~$60.5 million as of ~~June~~September 30, 2022 which includes ~~payment-in-kind~~paid-in-kind interest of ~~$0.6~~$1.9 million. The fair value adjustment was a ~~$13.9~~$3.6 million increase and a $10.9 million decrease in the three and ~~six~~nine months ended ~~June~~September 30, 2022. See Note 10, “Fair Value Measurements”.

Note 10 — 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 approximates its fair value as of June 30, 2022 and December 31, 2021.~~

2120

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Liabilities Measured at Fair Value on a Recurring Basis

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


								June 30,								December 31,									September 30,								December 31,
		Level 1		Level 2		Level 3		2022		Level 1		Level 2		Level 3		2021			Level 1		Level 2		Level 3		2022		Level 1		Level 2		Level 3		2021
Contingent earnout consideration	Contingent earnout consideration	$	—	$	—	$	474	$	474	$	—	$	—	$	608	$	608	Contingent earnout consideration	$	—	$	—	$	502	$	502	$	—	$	—	$	608	$	608
ProFrac Agreement contract consideration convertible notes	ProFrac Agreement contract consideration convertible notes	$	—	$	—	11,670		$	11,670	$	—	$	—	$	—	$	—	ProFrac Agreement contract consideration convertible notes	$	—	$	—	12,570		$	12,570	$	—	$	—	$	—	$	—
Amended ProFrac Agreement contract consideration convertible notes	Amended ProFrac Agreement contract consideration convertible notes	$	—	$	—	55,550		$	55,550	$	—	$	—	$	—	$	—	Amended ProFrac Agreement contract consideration convertible notes	$	—	$	—	60,460		$	60,460	$	—	$	—	$	—	$	—
Total	Total	$	—	$	—	$	67,694	$	67,694	$	—	$	—	$	608	$	608	Total	$	—	$	—	$	73,532	$	73,532	$	—	$	—	$	608	$	608

Contingent Earnout Consideration Key Inputs

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

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


		June 30, 2022	December 31, 2021		September 30, 2022	December 31, 2021
Risk-free interest rate	Risk-free interest rate	2.99%	1.02%	Risk-free interest rate	4.24%	1.02%
Expected volatility	Expected volatility	90.0%		Expected volatility	100.0%	90.0%
Term until liquidation (years)	Term until liquidation (years)	2.88	3.38	Term until liquidation (years)	2.63	3.38
Stock price	Stock price	$0.99	$1.13	Stock price	$1.00	$1.13
Discount rate	Discount rate	10.77%	6.71%	Discount rate	11.91%	6.71%

ProFrac Agreement Contract Consideration Notes Payable Key Inputs

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

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

2221

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


			~~June~~September 30, 2022
Risk-free interest rate			~~2.51%~~3.55%
Expected volatility			~~90.0%~~100.0%
Term until liquidation (years)			~~0.60~~0.342
Stock price			$~~0.99~~1.00
Discount rate			~~10.92%~~3.55%

The valuation of the ProFrac Agreement Contract Consideration Convertible Notes Payable was ~~$11.7~~ $12.6 million as of ~~June~~September 30, ~~2022~~2022.

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs

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

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

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


						September 30, 2022
Risk-free interest rate						3.95%
Expected volatility						100.0%
Term until liquidation (years)						0.63
Stock price						$1.00
Discount rate						3.95%

The value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of ~~June~~September 30, 2022 was ~~$55.6~~$60.5 million.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets, including property and equipment and 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.

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

The Company estimated the fair value of the remaining stock performance earn-out provision as of ~~June~~September 30, 2022 and 2021 and adjusted the estimated fair value of the contingent liability to $0.5 million and ~~$1.1~~$0.7 million, respectively. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in cost of goods sold.

The Company estimated the initial fair value of $10.0 million of the ProFrac Agreement Contract Consideration Convertible Notes Payable on February 2, 2022, by reference to the cash purchase price paid by third party investors for equivalent notes issued simultaneously by the Company. The Company estimated the fair value of the additional $69.5 million of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on the issuance date of May 17, 2022 using a Monte Carlo simulation. The Company adjusted the estimated fair value of the Contract Consideration Convertible Notes Payable to ~~$55.6~~$73.0 million as of ~~June~~September 30, 2022.

The following table presents the changes in the assets and liabilities measured at fair value on a recurring basis classified as Level 3 (in thousands):

2322

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		Three months ended June 30,				Six months ended June 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Balance - beginning of period	Balance - beginning of period	$	14,752	$	1,081	$	608	$	1,416	Balance - beginning of period	$	67,694	$	1,115	$	608	$	1,416
Transfer of ProFrac Agreement contract consideration convertible notes payable from Level 2	Transfer of ProFrac Agreement contract consideration convertible notes payable from Level 2	—		—		10,000		—		Transfer of ProFrac Agreement contract consideration convertible notes payable from Level 2	—		—		10,000		—
Issuance of Amended ProFrac Agreement contract consideration convertible notes payable	Issuance of Amended ProFrac Agreement contract consideration convertible notes payable	69,460		—		69,460		—		Issuance of Amended ProFrac Agreement contract consideration convertible notes payable	—		—		69,460		—
Increase in principle of ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	Increase in principle of ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	257		—		415		—		Increase in principle of ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	266		—		681		—
Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	611		—		611		—		Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	1,293		—		1,905		—
Change in fair value of contingent earnout consideration	Change in fair value of contingent earnout consideration	(228)		34		(134)		(301)		Change in fair value of contingent earnout consideration	28		(400)		(106)		(701)
Change in fair value of ProFrac Agreement contract consideration convertible notes payable	Change in fair value of ProFrac Agreement contract consideration convertible notes payable	(2,637)		—		1,255		—		Change in fair value of ProFrac Agreement contract consideration convertible notes payable	634		—		1,889		—
Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable	Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable	(14,521)		—		(14,521)		—		Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable	3,617		—		(10,905)		—

Balance - end of period	Balance - end of period	$	67,694	$	1,115	$	67,694	$	1,115	Balance - end of period	$	73,532	$	715	$	73,532	$	715

Note 11 — Income Taxes

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


		Three months ended June 30,				Six months ended June 30,					Three months ended September 30, 2022				Nine months ended September 30, 2022
		2022		2021		2022		2021			2022		2021		2022		2021
U.S. federal statutory tax rate	U.S. federal statutory tax rate	21	%	21	%	21	%	21	%	U.S. federal statutory tax rate	21.0	%	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	State income taxes, net of federal benefit	—		(0.3)		0.1		(0.2)		State income taxes, net of federal benefit	—		—		—		(0.2)
Non-U.S. income taxed at different rates	Non-U.S. income taxed at different rates	3.8		(0.1)		(1.9)		0.3		Non-U.S. income taxed at different rates	0.2		0.8		(0.3)		0.3
Increase (reduction) in tax benefit related to stock-based awards	Increase (reduction) in tax benefit related to stock-based awards	3.1		2.2		(2.0)		1.2		Increase (reduction) in tax benefit related to stock-based awards	—		(0.3)		(0.4)		1.2
Non-deductible expenses	Non-deductible expenses	(0.4)		3.6		0.1		1.1		Non-deductible expenses	0.5		5.8		0.4		1.1
Increase in valuation allowance	Increase in valuation allowance	(27.5)		(26.5)		(17.0)		(23.6)		Increase in valuation allowance	(21.7)		(27.3)		(20.7)		(23.6)
Tax settlement		3.8		—		(2.2)		—
2018 IRS exam assessment										2018 IRS exam assessment	—		—		(0.4)		—
Effective income tax rate	Effective income tax rate	3.8	%	(0.1)	%	(1.9)	%	(0.2)	%	Effective income tax rate	—	%	—	%	(0.4)	%	(0.2)	%

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.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Note 12 — Co~~mmitments~~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~~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~~

On March 26, 2021, Flotek Industries, Inc. and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company (“FCC”) and other parties in state court in Harris County, Texas. The lawsuit claimed damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty.

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

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

Former CEO Matter

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Terpene Supply Agreement

On October 29, 2021, the Company reached agreement (“the ADM Settlement) with Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company (“FCC”) and other parties to pay $1.75 million and resolve all claims between the parties in relation to lawsuit claiming damages relating to the terpene supply agreement between Flotek Chemistry, LCC (“Flotek Chemistry”), a wholly owned subsidiary of the Company and FCC. The one-time payment of $1.75 million from Flotek to ADM was paid on January 3, 2022 and was included as restricted cash on the consolidated balance sheet as of December 31, 2021.

Other Commitments and Contingencies

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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Note 13 — Stockholders’ Equity

On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors, which aggregated $3.0 million plus $39 thousand of accrued interest, were converted into 2,793,030 shares of the Company’s common stock.

On June 21, 2022, ~~the Company issued the Prefunded Warrants to~~ ProFrac Holdings II, LLC ~~in exchange~~paid $19.5 million for PreFunded Warrants of the Company. The PreFunded Warrants were recorded at their fair value of $11.1 million, inless $1.2 million of transaction costs paid. The remaining cash ~~(see Note 1, “Organization and Nature of Operations”) and a cash equity contribution~~received of $8.4 million ~~for a total cash infusion~~was recognized as an equity contribution. This offering of ~~$19.5 million.~~the Prefunded Warrants was exempted from the registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws. The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $0.0001 per share, representing a 20% premium to the 30-day volume average price of the Company’s common stock at the close of business on the day prior to the date of the issuance of the Prefunded Warrants. The Prefunded Warrants, net of transaction fees of $1.1 million, and the equity contribution of $8.4 million from ProFrac are included in additional paid-in capital as of ~~June~~September 30, 2022.

ProFrac Holdings and its affiliates may not receive any voting or consent rights in respect of the Prefunded Warrants or the underlying shares unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings and its affiliates and (ii) ProFrac Holdings has paid an additional ~~$4.5~~$4.5 million to the Company. The additional $4.5 million will be accounted for as equity contribution when received.

On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $3.0 million plus $39 thousand of accrued interest, were converted into 2,793,030 shares of the Company’s common stock.

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 ~~June~~September 30, ~~2021~~2022 consolidated financial statements or basic and diluted earnings per share.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — ~~Earnings (Loss)~~Net Loss Per Share

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

The calculation of the basic and diluted ~~EPS~~income (loss) per share for the three and nine months ended September 30, 2022 is as follows (in thousands):

Three months ended June 30, Six months ended June 30,
2022 2022
Numerator:
Net income (loss) for basic earnings per share $ 6,240 $ (4,484)
Paid-in-Kind interest expense on convertible notes payable, net of tax 1,028 1,402
Change in fair value of contract consideration convertible notes payable , net of tax (13,229) (10,228)
Adjusted net (loss) for dilutive earnings per share $ (5,961) $ (13,310)
Denominator:
Basic weighted average shares outstanding 74,861 73,476
Dilutive effect of convertible notes payable 49,474 33,610
Diluted weighted average shares outstanding 124,335 107,086
Basic earnings (loss) per share 0.08 (0.06)
Diluted loss per share (0.05) (0.12)


	Three months ended September 30,		Nine months ended September 30,
	2022			2022
Numerator:
Net income (loss) for basic earnings per share	$	(18,794)		$	(23,278)
Anti-dilutive Adjustment to Net Income available to shareholders excluded from Numerator for Diluted Earnings Computation
Paid-in-Kind interest expense on convertible notes payable, net of tax	2,043			3,861
Valuation (gain) loss on convertible notes carried at FV, net of tax	4,250			(9,016)
Total numerator adjustment excluded from diluted earnings computation	$	6,293		$	(5,155)

Denominator:
Basic and diluted weighted average shares outstanding	75,312			74,095
Anti-dilutive Incremental Shares Excluded from Denominator for Diluted Earnings Computation
Average number of diluted shares for convertible notes payable	74,395			47,354
Average number of diluted shares for stock warrants	8,897			3,324
Average number of diluted shares for options and restricted	418			571

Basic and diluted loss per share	(0.25)			(0.31)

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~The adjustments to net income (loss) in the numerator are net of estimated tax at 22.9%.~~ For the three and ~~six~~nine months ended ~~June~~September 30, 2022 ~~weighted average shares for employee stock awards~~paid-in-kind interest expense, net of ~~692,494~~tax, on convertible notes payable and ~~662,230, respectively, and weighted average shares for~~ the ~~prefunded stock warrants~~change in fair value related to the contract consideration convertible notes payable, net of ~~976,177 and 490,785, respectively,~~tax, were not included in the dilution calculation since including them would have an anti-dilutive ~~effect.~~effect on the loss per share due to the net loss incurred during the periods. For the three and nine months ended September 30, 2022 weighted average shares for convertible notes payable, weighted average shares for stock warrants and weighted average shares for employee stock awards were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.

For the three ~~and six~~ months ended ~~June~~September 30, 2021, diluted earnings per common share included 851,702 common share equivalents. For the nine months ended September 30, 2021, weighted average shares for employee stock awards of ~~1,127,080 and 1,344,233, respectively.~~1,130,719, were not included in the calculation of diluted loss per share since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15 — Supplemental Cash Flow Information

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


		Six months ended June 30,					Nine months ended September 30,
		2022		2021			2022		2021

Supplemental cash flow information:	Supplemental cash flow information:					Supplemental cash flow information:
Interest paid	Interest paid	$	7	$	11	Interest paid	$	25	$	17
Income taxes received	Income taxes received	—		(351)		Income taxes received	—		(351)
Supplemental non-cash activities:	Supplemental non-cash activities:					Supplemental non-cash activities:
Employee retention credit	Employee retention credit	—		1,164		Employee retention credit	—		2,851
JP3 PPP loan forgiveness		—		881

Non cash financing and investing activities:	Non cash financing and investing activities:					Non cash financing and investing activities:
Issuance of convertible notes payable as consideration for ProFrac Agreements	Issuance of convertible notes payable as consideration for ProFrac Agreements	79,460		—		Issuance of convertible notes payable as consideration for ProFrac Agreements	79,460		—
Conversion of convertible notes payable to common stock	Conversion of convertible notes payable to common stock	2,949		—		Conversion of convertible notes payable to common stock	2,948		—
Issuance cost of stock warrants included in accrued accounts payable		1,170		—

Note 16— Related Party ~~Transaction~~Transactions

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

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

During first quarter of 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of ~~June~~September 30, 2022 and December 31, 2021, the receivable from Mr. Chisholm was $1.4 million, which equaled the payable to the IRS and netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.

Mr. Ted D. Brown was a Director of the Company ~~since~~beginning in November of 2013 and ~~has been~~is the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production ~~company formed in 2016.~~company. As of April 15, 2022 Ted D. Brown stepped down from being a Director of the Company and Confluence will no longer be considered a related ~~party.. For the three and six months ended June, 30, 2022, the~~party as of April 15, 2022. The Company’s revenues for chemical sales to Confluence ~~was zero and~~were $1.4 million through April 15, 2022. The Company’s revenues from chemical sales to Confluence for the three and nine months ended September 30, 2021 were $1.3 million and $1.3 million, respectively.

As of December 31, 2021, Confluence owed $1.3 million
which is recorded in accounts receivable, related party on the consolidated balance sheet.

~~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”) ~~under which~~upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals ~~as per~~from the ~~terms~~Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year. The term of the ProFrac Agreement ~~discussed in Note~~is three years starting on April 1, ~~“Organization and Nature of Operations”.~~ 2022.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On June 21, 2022, the Company issued prefunded warrants (the “PreFunded Warrants”) to ProFrac Holdings II, LLC, in exchange for $19.5 million in cash as discussed in Note 13, “Stockholders’ Equity”.

During the three and ~~six~~nine months ended ~~June~~September 30, 2022, the Company’s revenues from chemical sales to ProFrac Services LLC were ~~$16.5~~$30.4 million and ~~$18.9~~$48.1 million respectively. These revenues were net of amortization of contract assets of ~~$0.7~~$1.2 million and $2.0 million for the three and ~~six~~nine months ended ~~June~~September 30, ~~2022.~~2022, respectively. As of ~~June~~September 30, 2022 and December 31, 2021, our accounts receivable from ProFrac Services, LLC ~~owed $11.6~~was $25.9 million and zero, respectively which is recorded in ~~account receivables~~accounts receivable, related party on the consolidated balance sheet.

Note 17 — Business Segment, Geographic and Major Customer Information

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-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 environmental, social and governance (“ESG) and operational goals. ~~This segment also includes a portfolio of specialty chemical products to address the long-term challenges of in the janitorial, sanitization, food services, and adjacent markets.~~ Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.

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 company markets products and services that support in-line data analysis of hydrocarbon components and properties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks

Performance is based upon a variety of criteria. The primary financial measure is segment operating 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.

2827

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


As of and for the three months ended June 30,		Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
As of and for the three months ended September 30,										As of and for the three months ended September 30,	Chemistry Technologies		Data Analytics		Corporate and Other		Total
2022	2022									2022
Revenue from external customers	Revenue from external customers	$	12,111	$	713	$	—	$	12,824	Revenue from external customers	$	13,511	$	1,695	$	—	$	15,206
Revenue from related party	Revenue from related party	16,549		—		—		16,549		Revenue from related party	30,417		—		—		30,417
Change in fair value of contract consideration convertible notes	Change in fair value of contract consideration convertible notes	(17,158)		—		—		(17,158)		Change in fair value of contract consideration convertible notes	4,250		—		—		4,250
Income (loss) from operations		14,944		(1,198)		(5,707)		8,039
Loss from operations										Loss from operations	(10,603)		(745)		(4,931)		(16,279)
Depreciation and amortization	Depreciation and amortization	166		15		1		182		Depreciation and amortization	162		14		1		177
Additions to long-lived assets	Additions to long-lived assets	5		—		—		5		Additions to long-lived assets	25		33		112		170

2021	2021									2021
Revenue from external customers	Revenue from external customers	$	7,688	$	1,477	$	—	$	9,165	Revenue from external customers	$	8,044	$	803	$	—	$	8,847
Revenue from related party	Revenue from related party	—		—		—		—		Revenue from related party	1,332		—		—		1,332
Income (loss) from operations	Income (loss) from operations	(3,819)		(773)		(2,869)		(7,461)		Income (loss) from operations	4,399		(1,071)		(2,696)		632
Depreciation and amortization	Depreciation and amortization	233		20		—		253		Depreciation and amortization	215		17		1		233
Additions to long-lived assets	Additions to long-lived assets	13		—		—		13		Additions to long-lived assets	—		—		—		—


As of and for the six months ended June 30,		Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
As of and for the nine months ended September 30,										As of and for the nine months ended September 30,	Chemistry Technologies		Data Analytics		Corporate and Other		Total
2022	2022									2022
Revenue from external customers	Revenue from external customers	$	21,422	$	1,784	$	—	$	23,206	Revenue from external customers	$	34,933	$	3,479	$	—	$	38,412
Revenue from related party	Revenue from related party	19,046		—		—		19,046		Revenue from related party	49,462		—		—		49,462
Change in fair value of contract consideration convertible notes	Change in fair value of contract consideration convertible notes	(13,266)		—		—		(13,266)		Change in fair value of contract consideration convertible notes	(9,016)		—		—		(9,016)
Income (loss) from operations		8,887		(2,006)		(9,126)		(2,245)
Loss from operations										Loss from operations	(1,716)		(2,751)		(14,057)		(18,524)
Depreciation and amortization	Depreciation and amortization	345		31		1		377		Depreciation and amortization	507		45		2		554
Additions to long-lived assets	Additions to long-lived assets	5		—		—		5		Additions to long-lived assets	30		33		112		175

2021	2021									2021
Revenue from external customers	Revenue from external customers	$	17,990	$	2,945	$	—	$	20,935	Revenue from external customers	$	26,033	$	3,749	$	—	$	29,782
Revenue from related party	Revenue from related party	—		—		—		—		Revenue from related party	1,332		—		—		1,332
Income (loss) from operations		(7,407)		(1,067)		(7,230)		(15,704)
Loss from operations										Loss from operations	(3,009)		(2,138)		(9,926)		(15,073)
Depreciation and amortization	Depreciation and amortization	524		35		1		560		Depreciation and amortization	739		52		2		793
Additions to long-lived assets	Additions to long-lived assets	31		—		—		31		Additions to long-lived assets	31		—		—		31

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

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

2928

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



	September 30, 2022		December 31, 2021
Chemistry Technologies	$	150,160	$	34,387
Data Analytics	7,215		7,329
Corporate and Other	6,644		8,528
Total assets	$	164,019	$	50,244

The increase in Chemistry Technologies assets is primarily due to contact assets of ~~$83.3~~$81.1 million.

Geographic Information

Revenue by country is based on the location where services are provided and products are 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 June 30,				Six months ended June 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
U.S.(1)	U.S.(1)	$	25,955	$	6,869	$	36,289	$	16,530	U.S.(1)	$	42,670	$	8,094	$	78,959	$	24,624
UAE	UAE	3,139		1,319		4,450		2,422		UAE	2,242		1,319		6,692		3,741
Other countries	Other countries	279		977		1,513		1,983		Other countries	711		766		2,223		2,749
Total revenue	Total revenue	$	29,373	$	9,165	$	42,252	$	20,935	Total revenue	$	45,623	$	10,179	$	87,874	$	31,114

(1) Includes revenue from related party

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

Major Customers

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

Three months ended June 30, Revenue % of Total Revenue
2022
Customer A (Related Party) $ 16,549 52.2 %
Customer B 5,611 19.1 %
2021
Customer C $ 1,038 11.3 %
Customer D 1,810 19.8 %


Three months ended September 30,	Revenue		% of Total Revenue
2022
Customer A (Related Party)	$	30,417	66.7	%

2021
Customer C	$	3,041	29.9	%
Customer D	1,332		13.1	%

Six months ended June 30, Revenue % of Total Revenue
2022
Customer A (Related Party) $ 17,657 38.9 %
Customer B 8,218 19.5 %
2021
Customer C $ 4,067 19.4 %
Customer D 4,660 22.3 %
29

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Nine months ended September 30,	Revenue		% of Total Revenue
2022
Customer A (Related Party)	$	48,074	54.7	%
Customer B	10,905		12.4	%

2021
Customer C	$	7,701	24.8	%
Customer D	4,067		13.1	%

The majority of the Company’s revenue consists predominantly of customers within the oil and gas industry. Customers within the oil and gas industry include ProFrac and other oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. The concentration with ProFrac and in the oil and gas industry increases credit and business risk.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Note 18 — Subsequent Events

~~We have~~The Company has evaluated the effects of events that have occurred subsequent to ~~June~~September 30, 2022, and there have been no material events that would require recognition in the September 30, 2022 interim financial statements or disclosure in the notes to the consolidated financial statements.

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

The following discussion should be read in conjunction with the Annual Report on Form 10-K for ~~year-end~~the fiscal ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) and the unaudited consolidated financial statements and accompanying notes included herein. Comparative segment revenues and related financial information are discussed herein and are presented in Note 17 to our unaudited consolidated financial statements. See “Forward Looking Statements” in this report and “Risk Factors” included in our filings with the SEC, including our Quarterly Reports on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, for a description of important factors that could cause actual results to differ from expected results. Our historical financial information may not be indicative of our future performance.

Executive Summary

Flotek 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 for both domestic and international energy ~~markets as well as applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.~~markets.

The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research and Innovation 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, such as our related party ProFrac Services, LLC, 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 our best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.

Data Analytics

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

Customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations have the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We have developed a 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 energy, exploration and production activity to continue to improve throughout 2022 from ~~second~~third quarter ~~levels~~levels. Going into 2023 we believe that we are in the early years of a tight supply cycle triggered by underinvestment in infrastructure and new sources of oil and gas production. While shorter demand cycles will come and go depending on the fluctuating macroeconomic backdrop, the tight supply cycle is durable and will provide underlying support to oil prices for ~~the next nine months provided that commodity prices remain at or above current levels.~~multiple years. The strongest potential growth 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 oilfield service companies and believe sales through indirect channels ~~should~~to the exploration and production companies and oilfield service companies could accelerate in ~~2022.~~2023.

Industrial

The Company has 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 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 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 leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. We believe Verax ~~has~~analyzers have gained a foothold in North American markets for critical applications where compositional information is needed in real-time. The technology delivers real-time insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We continue to work with our customers to identify further facilities and applications where our technology has the highest value. We expect to open and establish our international customer base with our new generation of internationally certified online analyzers. The new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments. We anticipate international sales to increase over the next twelve months because of the newly certified equipment. To drive recurring revenue, we continue to build on the modular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations. AIDA (Automated Interface Detection Algorithm) provides real-time detection of interfaces in a liquids pipeline without the need for additional sampling or chemometric modeling. The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces within 60 seconds. ~~This~~We believe this allows operators to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades.

ESG

ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment. ~~The~~We anticipate the Company’s products and services

could offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® ~~(also~~

(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, we believe 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~~sale of our products and services that we believe can help the customer achieve a greener ~~practices and chemistries.~~goal. 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 are continuing throughout 2022 according to Secretary of Transportation Peter Buttigieg. ~~The~~We expect the anticipated supply chain activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:

•~~Rising~~Fluctuating freight costs;

•Delays due to port congestion;

•Labor shortages and

•Demand forecasting.

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

~~Weather~~

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

COVID-19

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

Consolidated Results of Operations (in thousands)


		Three months ended June 30,						Six months ended June 30,							Three months ended September 30,						Nine months ended September 30,
		2022			2021			2022			2021				2022			2021			2022			2021
Revenue	Revenue													Revenue
Revenue from external customers	Revenue from external customers	$	12,824		$	9,165		$	23,206		$	20,935		Revenue from external customers	$	15,206		$	8,847		$	38,412		$	29,782
Revenue from related party	Revenue from related party	16,549			—			19,046			—			Revenue from related party	30,417			1,332			49,462			1,332
Total revenues	Total revenues	29,373			9,165			42,252			20,935			Total revenues	45,623			10,179			87,874			31,114
Cost of goods sold	Cost of goods sold	31,678			10,775			45,036			22,853			Cost of goods sold	47,465			4,022			92,500			26,876
Cost of goods sold %	Cost of goods sold %	107.8		%	117.6		%	106.6		%	109.2		%	Cost of goods sold %	104.0		%	39.5		%	105.3		%	86.4		%
Gross profit (loss)	Gross profit (loss)	(2,305)			(1,610)			(2,784)			(1,918)			Gross profit (loss)	(1,842)			6,157			(4,626)			4,238
Gross profit (loss) %	Gross profit (loss) %	(7.85)		%	(17.6)		%	(6.6)		%	(9.2)		%	Gross profit (loss) %	(4.04)		%	60.5		%	(5.3)		%	13.6		%
Selling general and administrative	Selling general and administrative	7,431			4,203			12,310			10,287			Selling general and administrative	9,035			4,092			21,345			14,379
Selling general and administrative %	Selling general and administrative %	25.3		%	45.9		%	29.1		%	49.1		%	Selling general and administrative %	19.8		%	40.2		%	24.3		%	46.2		%

Depreciation and amortization	Depreciation and amortization	182			253			377			560			Depreciation and amortization	177			233			554			793
Research and development	Research and development	1,115			1,466			2,530			3,008			Research and development	985			1,186			3,515			4,194
Gain on sale of property and equipment		(1,914)			(71)			(1,906)			(69)
(Gain) loss on sale of property and equipment														(Gain) loss on sale of property and equipment	(10)			14			(1,916)			(55)

Gain on lease termination	Gain on lease termination	—			—			(584)			—			Gain on lease termination	—			—			(584)			—
Change in fair value of contract consideration convertible notes payable	Change in fair value of contract consideration convertible notes payable	(17,158)			—			(13,266)			—			Change in fair value of contract consideration convertible notes payable	4,250			—			(9,016)			—
Income (loss) from operations	Income (loss) from operations	8,039			(7,461)			(2,245)			(15,704)			Income (loss) from operations	(16,279)			632			(18,524)			(15,073)
Operating margin %	Operating margin %	27.4		%	(81.4)		%	(5.3)		%	(75.0)		%	Operating margin %	(35.7)		%	6.2		%	(21.1)		%	(48.4)		%
Interest and other income, net	Interest and other income, net	(1,701)			936			(2,145)			885			Interest and other income, net	(2,508)			(120)			(4,653)			766
Income (loss) before income taxes	Income (loss) before income taxes	6,338			(6,525)			(4,390)			(14,819)			Income (loss) before income taxes	(18,787)			512			(23,177)			(14,307)
Income tax expense	Income tax expense	(98)			(21)			(94)			(27)			Income tax expense	(7)			(3)			(101)			(30)
Net income (loss)	Net income (loss)	$	6,240		$	(6,546)		$	(4,484)		$	(14,846)		Net income (loss)	$	(18,794)		$	509		$	(23,278)		$	(14,337)

Consolidated revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2022, increased ~~$20.2~~$35.4 million, or ~~220.5%~~348%, and ~~$21.3~~$56.8 million or ~~101.8%~~182%, respectively, versus the same period of 2021, primarily driven by activity ~~with~~under the ProFrac ~~starting~~contract which commenced in the second ~~quarter.~~quarter of 2022 and continued increased activity across our customer base, particularly in the Chemistry Technologies segment.

Consolidated cost of goods sold for the three and ~~six~~nine months ended ~~June~~September 30, 2022, increased ~~$20.9~~$43.4 million or ~~194.0%~~1080%, and ~~$22.2~~$65.6 million or ~~97.1%~~244%, respectively, versus the same periods of 2021, primarily attributable to the increase in revenues. Cost of goods sold in 2022 were ~~also~~negatively impacted by one- time expenses incurred due to the ramp up of ProFrac ~~activity.~~activity and the write down of inventory of $1.0 million in the three months ended September 30, 2022, relating to the decision to cease the manufacture and sale of hand sanitizers. Cost of goods sold in three months ended September 30, 2021, benefited from the release of accrued costs of $7.6 million subsequent to the agreement of a settlement with ADM, see Note 12, “Commitments and Contingencies”.

Selling general and administrative (“SG&A”) expenses are not directly attributable to products sold or services provided. SG&A expenses for the three ~~and six~~ months ended ~~June~~September 30, 2022, increased ~~$3.2~~$4.9 million or ~~76.8%, and $2.0 million or 19.7%, respectively,~~121% versus the same period of 2021. $1.9 million of the increase related to bonus accruals. No bonus amounts had been accrued previously during 2022 and nil was accrued as of the same period in the prior year. The remainder of the increase was largely driven by increased professional fees. SG&A expenses for the nine months ended September 30, 2022, increased $7.0 million or 48%, versus the same period of 2021 as a result of increased personnel costs mainly attributable to higher ~~professional~~year on year bonus costs and 2021 benefiting from an Employee Retention Credit, (“ERC”). Professional fees ~~relating to~~for the ~~ProFrac and PIPE transactions,~~nine months ended September 30, 2022 were higher ~~employee costs~~ due to ~~an ERC credit reported in 2021 and decreased~~costs associated with potential financing transactions, partially offset by lower legal ~~fees due to large expense incurred on two significant matters in 2021.~~fees.

Depreciation of property and equipment decreased $0.1 million or ~~28.2%~~24%, for the three months ended ~~June~~September 30, 2022, versus the same period of 2021. Depreciation of property and equipment decreased $0.2 million or ~~32.7%~~30% for the ~~six~~nine months ended ~~June~~September 30, 2022.

Research and development (“R&D”) costs for the three and ~~six~~nine months ended ~~June~~September 30, 2022, decreased ~~$0.4~~$0.2 million or ~~23.9%~~17% and ~~$0.5~~$0.7 million or ~~15.9%~~16%, respectively, versus the same period of 2021 due to lower personnel costs as a result of a reduction in workforce and lower non-labor cost.

~~Income~~Loss from operations ~~increased~~decreased by ~~$15.5~~$16.9 million or ~~207.7%~~2676% for the three months ended ~~June~~September 30, 2022, versus the same period in 2021. The ~~income~~increased loss from operations ~~increase~~ is ~~a result~~partly attributable to the negative gross margin, increased SG&A costs and the loss on fair value of Contract Consideration Convertible Notes Payable. For the ~~revaluation of~~nine months ended September 30, 2022, the ~~contract consideration convertible notes payable~~loss from operations increased by $3.5 million or 23% attributable mainly to the negative gross margin and increased SG&A costs. This was partially offset by the gain on sale of property and equipment ~~partially offset by higher SG&A expenses. For the six months ended June 30, 2022, loss from operations decreased by $13.5 million or 85.7% attributable mainly~~and lease termination and a credit relating to the ~~revaluation~~change in fair value of ~~the~~Contract Consideration Convertible Notes Payable.

~~contract consideration convertible notes payable and gain on sale of property and equipment and partially offset by increased SG&A expenses.~~

~~Income~~Loss before ~~income~~ taxes for the three months ended ~~June~~September 30, 2022, was impacted by interest charges of ~~$1.6~~$2.3 million versus ~~$17~~$18 thousand for the same period in 2021. For the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 interest charges were ~~$2.3~~$4.6 million and ~~$35~~$53 thousand respectively. The increased interest ~~costs relate~~cost relates to payment in kind interest expense on the Convertible Notes Payable and the Contract Consideration Convertible Notes Payable.

The Company’s income tax expense for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 was minimal.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations:


		Three months ended June 30,				Six months ended June 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Revenue	Revenue	$	28,660	$	7,688	$	40,468	$	17,990	Revenue	$	43,928	$	9,376	$	84,395	$	27,365

Income (loss) from operations	Income (loss) from operations	14,944		(3,819)		8,887		(7,407)		Income (loss) from operations	(10,603)		4,399		(1,716)		(3,009)

CT revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2022 increased ~~$21.0~~$34.6 million, and ~~$22.5~~$57.0 million, respectively, compared to the same periods of 2021. The increased revenue in 2022 is driven ~~mainly~~primarily by the ProFrac ~~contract commencing~~Agreements which commenced in the second quarter of 2022, of which ~~$16.5~~the Company recognized $30.4 million ~~relates to~~and $48.1 million, for the ~~ProFrac Agreements along with a significant increase in revenue with two other major customers.~~three and nine months ended September 30, 2022, respectively.

Income (loss) from operations for the CT segment for the three months ended ~~June~~September 30, 2022 ~~improved~~decreased by ~~$18.8~~$15.0 million or ~~491%~~341% compared to the same period of 2021. The ~~improvement~~decline is ~~primarily as a result of~~attributable to the ~~favourable~~loss on revaluation of the Contract Consideration Convertible Notes Payable of ~~$17.2 million. Excluding~~$4.3 million, increased costs primarily due to bonus accruals and the ~~revaluation there was an overall improvement in income from operations~~gross margin decrease driven by the inventory write down of ~~$1.6~~$1.0 million and cost of goods sold for the three months ended ~~June~~September 30, ~~2022, attributable mainly~~2021 benefiting from the release of accrued costs relating to the ~~gain on sale~~ADM settlement of ~~property and equipment. Income~~$7.6 million. The loss from operations for the ~~six~~nine months ended ~~June~~September 30, 2022 ~~improved~~decreased by ~~$16.3~~$1.3 million or ~~$220%~~43% compared to the same period of 2021. The improvement relates mainly to the revaluation of the Contract Consideration Convertible Notes Payable of ~~$13.3~~$9.0 million and the gain on sale of property and equipment and lease ~~termination.~~termination, partially offset by the lower gross margin and increased costs primarily due to bonus accruals.

Data Analytics Results of Operations:


		Three months ended June 30,				Six months ended June 30,					Three months ended September 30, 2022				Nine months ended September 30, 2022
		2022		2021		2022		2021			2022		2021		2022		2021
Revenue	Revenue	$	713	$	1,477	$	1,784	$	2,945	Revenue	$	1,695	$	803	$	3,479	$	3,749

Loss from operations	Loss from operations	(1,198)		(773)		(2,006)		(1,067)		Loss from operations	(745)		(1,071)		(2,751)		(2,138)

DA revenue for the three ~~and six~~ months ended ~~June~~September 30, 2022 ~~decreased $0.8~~increased $0.9 million ~~and $1.2 million, respectively,~~or 111% compared to the same ~~periods~~period of 2021 due to ~~less orders in~~significant revenues from three new customers and several existing customers. DA revenue for the nine months ended September 30, 2022 ~~and some projects being delayed~~decreased $0.3 million or 7% compared to ~~later in~~ the ~~year.~~same period of 2021.

Loss from operations for the DA segment for the three ~~and six~~ months ended ~~June~~September 30, 2022 decreased by $0.3 million or 30% compared to the same period for 2021 due to increased revenues and improved margins partially offset by an increase in costs driven primarily by bonus accruals. Loss from operations for the DA segment for the nine months ended September 30, 2022

worsened by ~~$0.4~~$0.6 million or ~~55%~~29%, ~~and $0.9 million or 88%, respectively,~~ compared to the same period of 2021. The worsening loss from operations is primarily as a result of ~~the decrease in revenues.~~increased R&D expense and decreased revenues partially offset by lower personnel cost.

Capital Resources and Liquidity

Overview

The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and funding working capital requirements. During the ~~six~~nine months ended ~~June~~September 30, 2022, the Company funded working capital requirements with net cash proceeds from the issuance of Convertible Notes Payable for $20.1 million, prefunded warrants issued for ~~$19.5~~ $18.3 million and cash on hand.

As of ~~June~~September 30, 2022, the Company had available cash and cash equivalents of ~~$33.1~~$8.5 million, as compared to $11.5 million at December 31, 2021. During the ~~six~~nine months ended ~~June~~September 30, 2022, the Company had an operating loss of ~~$2.2~~$18.5 million, ~~$23.9~~$47.2 million of cash used in operating activities, ~~$4.2~~$4.0 million cash provided by investing activities and ~~$39.4~~$38.2 million of cash provided by financing activities.

Liquidity

The Company currently funds its operations and growth primarily from cash on hand ~~which includes the proceeds from the convertible notes~~ and ~~warrants received in the second quarter.~~other liquid assets. 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. Uncertainty surrounding~~twelve months subsequent to the ~~stability and strength~~date of filing 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 related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $19.5 million (see Note 9, “Debt and Convertible Notes Payable”).consolidated financial statements.

~~Also,~~The availability of capital is dependent on ~~February 2, 2022,~~ the ~~Company entered into a~~Company’s operating cash flow principally derived from its long-term supply agreement with ProFrac Services, LLC ~~(the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC~~ (see Note ~~9, “Debt and Convertible Notes Payable”)~~16, Related Party Transactions). Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products 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. These Contract Consideration 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.

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

~~The Company also sold its manufacturing facility in Waller, Texas. The sale closed on April 18,2022 with $4.3 million of gross proceeds.~~

~~Based on our cash and liquid assets, we~~We believe that our cash and other liquid assets and our forecasted operating cash flows expected to be generated from the ongoing execution of the long-term supply agreement with ProFrac Services, LLC 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 12twelve 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.

Cash Flows

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


		Six months ended June 30,					Nine months ended September 30,
		2022		2021			2022		2021
Net cash used in operating activities	Net cash used in operating activities	$	(23,915)	$	(11,242)	Net cash used in operating activities	$	(47,166)	$	(18,279)
Net cash provided by investing activities	Net cash provided by investing activities	4,189		43		Net cash provided by investing activities	4,040		43
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	39,431		(273)		Net cash provided by (used in) financing activities	38,199		(451)
Effect of changes in exchange rates on cash and cash equivalents	Effect of changes in exchange rates on cash and cash equivalents	95		(31)		Effect of changes in exchange rates on cash and cash equivalents	211		(70)
Net change in cash, cash equivalents and restricted cash	Net change in cash, cash equivalents and restricted cash	$	19,800	$	(11,503)	Net change in cash, cash equivalents and restricted cash	$	(4,716)	$	(18,757)

Operating Activities

Net cash used in operating activities was ~~$23.9~~$47.2 million and ~~$11.2~~$18.3 million during the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively. Consolidated net loss for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 were ~~$4.5~~$23.3 million and ~~$14.8~~$14.3 million, respectively.

During the ~~six~~nine months ended ~~June~~September 30, 2022, non-cash adjustments to net income (loss) totaled ~~$10.0~~$0.3 million as compared to ~~$1.8~~$4.9 million for the same period of 2021.

During the ~~six~~nine months ended ~~June~~September 30, 2022, changes in working capital used ~~$9.4~~$23.6 million of cash as compared to providing ~~$1.8~~$0.9 million for the same period of 2021.

•For the ~~six~~nine months ended ~~June~~September 30, 2022, changes in working capital resulted primarily from an increase in accounts receivable, accounts receivable related party and inventories of ~~$10.1~~$5.7 million, $24.6 million and ~~$4.5~~$11.4 million, respectively, due to ~~increased~~the significant revenue ~~change in contract asset of~~increase. Contract assets increased $3.6 million ~~attributable~~relating to transaction fees

paid, associated with ~~the~~ Contract Consideration Convertible Notes ~~Payable and decreased accrued liabilities due mainly to payment of the ADM Settlement (Note 12, “Commitments and Contingencies”).~~Payable. This is partially offset by an increase in accounts payable of ~~$12.2~~$22.0 million relating ~~mainly~~primarily to purchases made to support our contract with ProFrac.

•For the ~~six~~nine months ended ~~June~~September 30, 2021, the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable and inventory of ~~$2.0~~$2.4 million, ~~partially~~ offset by ~~a decrease in accrued liabilities~~an increase of ~~$1.0~~other assets of $1.7 million.

Investing Activities

Net cash from investing activities for the ~~six~~nine months ended ~~June~~September 30, 2022 was ~~$4.2~~$4.0 million from the sale of the manufacturing facility in Waller, Texas which closed on April 18, ~~2022.~~2022 partially offset by capital additions.

Net cash from investing activities for the ~~six~~nine months ended ~~June~~September 30, 2021 was negligible.

Financing Activities

Net cash provided by financing activities was ~~$39.4~~$38.2 million for the ~~six~~nine months ended ~~June~~September 30, 2022, primarily from the proceeds of the issuance of convertible notes and prefunded warrants partially offset by issuance ~~costs relating to the convertible notes.~~costs.

Net cash used in financing activities was ~~$0.3~~$0.5 million for the ~~six~~nine months ended ~~June~~September 30, 2021, primarily for purchases of common stock related to tax withholding requirements.

Off-Balance Sheet Arrangements

The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported. Note 2, “Summary of Significant Accounting Policies” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Based upon this evaluation, ~~our~~the Company’s principal executive officer and principal financial officer have concluded that ~~our~~the Company’s disclosure controls and procedures were effective as of ~~June~~September 30, 2022.

Changes in Internal 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 ~~June~~September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no material changes since the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2022.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors contained in “Item 1A.-Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), which could materially affect our business, financial condition and/or future results. As of ~~June~~September 30, 2022, there have been no material changes in our risk factors from those set forth in the Annual Report. The risks described in the Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.

Item 2. Unregistered Sales of Equity Securities

Unregistered Sales of Equity Securities

Disclosures in Note 9, “Debt and Convertible Notes Payable” and Note 13, ~~“Stockholders’Equity”,~~“Stockholders’ Equity” 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 ~~June~~September 30, 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
April 1, 2022 to April 30, 2022 43,280 1.36
May 1, 2022 to May 31, 2022 16,344 1.19
June 1, 2022 to June 30, 2022 989 1.06
Total 60,613


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



July 1, 2022 to July 31, 2022	—	0.00
August 1, 2022 to August 31, 2022	30,599	1.16
September 1, 2022 to September 30, 2022	14,054	1.21
Total	44,653

(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.

Item 6. Exhibits

Exhibit
Number

Description of Exhibit

2.1

***

Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between the Company, JP3 Measurement, LLC, the Sellers party thereto, and John A. Cardwell, as Seller Representative) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 19, 2020).

3.1

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2007).

3.2

Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009).

3.3

Certificate of Amendment to the Amended and Restated 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

Certificate of Amendment to the Amended and Restated Certificate of Incorporation (form of which is incorporated by reference to Appendix B to the Company’s Proxy Statement filed on April 5, 2022).

3.5

Second Amended and Restated Bylaws, 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).

4.4

Form of Pre-Funded Warrants (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on June 23, 2022).

10.1

~~***~~

~~Amendment No. 1 to Chemical Products Supply~~Employment Agreement between Flotek ~~Chemistry, LLC~~Industries, Inc. and ~~ProFrac Services, LLC dated May 17,~~Seham S. Carson effective as of August 5, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on ~~May 18,~~August 9, 2022).

10.2

~~Registration Rights Agreement,~~ Separat ~~by and~~ ion ~~between~~ ~~Flotek Industries, Inc. and~~ ~~ProFrac Holdings II, LLC dated May 17, 2022~~ ~~(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on~~ ~~May 18,~~ ~~2022).~~

~~10.3~~

~~10% Convertible PIK Note~~ ~~dated~~ ~~May 17,~~ ~~2022 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on~~ ~~May 18,~~ ~~2022).~~

~~10.4~~

~~Securities Purchase~~ ~~Agreement between Flotek Industries, Inc. and ProFrac~~ ~~Holdings II, LLC~~ ~~dated~~ ~~June 17,~~ ~~2022 (incorporated by reference to Exhibit~~ ~~10.1~~ ~~to the Company’s Form 8-K filed on~~ ~~June 23,~~ ~~2022).~~

~~10.5~~

~~Amendment No. 1 to Registration Rights Agreement~~ ~~Flotek Industries, Inc. and ProFrac~~ ~~Holdings II,~~ ~~LLC~~ ~~dated June 21, 2022~~ ~~(incorporated by reference to Exhibit~~ ~~10.2~~ ~~to the Company’s Form 8-K filed on~~ ~~June 23,~~ ~~2022).~~

~~10.6~~

~~Separate~~ and Release Agreement between Michael E. Borton and Flotek Industries, Inc. dated July 4, ~~2022.~~2022 (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-Q filed of August 11 , 2022)

31.1

Rule 13a-14(a) Certification of Principal Executive Officer.

31.2

Rule 13a-14(a) Certification of Principal Financial Officer.

32.1

Section 1350 Certification of Principal Executive Officer.

32.2

Section 1350 Certification of Principal Financial Officer.

101.INS

Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document

101.SCH

Inline XBRL Schema Document

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 with this Form 10-Q.

Furnished with this Form 10-Q, not filed.

***

Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the U.S. Securities and Exchange Commission or its staff.

SIGNATURES

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

Date: ~~August 10,~~November 9, 2022



FLOTEK INDUSTRIES, INC.

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

By:						/s/ Seham Carson
						Seham Carson
						Interim Chief Financial Officer (Principal Financial and Accounting ~~Officer~~Officer)


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