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Item 7. Management’s Discussion and Analysis

2022-03-31 compared with 2021-03-16 · 210 added, 384 removed, 60 unchanged (91% of the section changed)

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

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

The following information contains forward-looking statements, which are subject to risks and uncertainties.

Should one or more of these risks or uncertainties materialize, actual results could differ from those expressed or implied by the forward-looking statements.

See “Forward-Looking Statements” at the beginning of this Annual Report and Item 1A, “Risk Factors.”

Executive Summary

Flotek Industries, Inc.

is a technology-driven chemistry and data company that serves customers in industrial, commercial and consumer markets.

The Company serves specialty chemistry needs that span from downstream, midstream and upstream, both domestic and international, energy markets to applications of U.S.

manufactured, sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use.

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

The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing analytics associated with the streams in seconds rather than minutes or days.

The real-time access to information prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.

(“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.

The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research and Innovation advanced laboratory capabilities.

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

The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days.

These real-time data and analytics prevent waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, thereby improving ESG performance.

During the second quarter of 2020, the Company acquired 100% ownership of JP3 in a cash-and-stock transaction.

JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels.

JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, delivers increased profitability for its customers.

In conjunction with the acquisition of JP3, the Company created the DA segment.

The Company was impacted as a result of the outbreak of COVID-19 that spread throughout the U.S.

and the world during 2020.

For a discussion of the impacts of COVID-19, see “COVID-19 Effects and Actions” in this Item 7 of this Annual Report.

For a discussion of the risks related to COVID-19, see Item 1A, “Risk Factors.”

Continuing Operations

The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing R&I advanced laboratory capabilities.

Company Overview

Chemistry Technologies

The Company’s CT segment includes an energy-focused product line that is comprised of proprietary green chemistries, specialty chemistries, logistics and technology services.

The Company designs, develops, manufactures, packages, distributes, delivers and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields, as well as to reduce health and environmental risk by usin g greener che micals.

Customers of this product line of the CT business segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies and international supply chain management companies.

In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for both commercial and personal use.

Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce FDA and EPA compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma.

Today the Company has a portfolio of specialty chemical products to address the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks.

To restore large public gatherings, it is believed that a variety of approaches will be necessary, including vaccinations, behavioral changes, sanitizers, surface cleaners, and disinfectants are needed.

The Company has made a commitment of being in this market for the long-term.

The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital.

The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program.

The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.

Customers of the CT segment include those of energy related markets as well as consumer and industrial applications.

Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.

Data Analytics

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

The DA segment is continuing its transition to a recurring revenue subscription model of selling its line of Verax analyzers, deployed in the field across the oil and gas sector, support contracts and software services via its cloud-based Viper software platform, as well as selling hardware-related solutions during the transition to a recurring revenue model.

The customers of the DA segment diversify the revenues of the Company and span across the entire oil and gas market, including upstream, midstream, refineries and distribution networks.

The segment helps its customers generate additional profit by enhancing blending, optimizing the natural mixing between adjacent batches of different fuels (“transmix”), ensuring product quality while enabling automation of fluid handling.

To date, the segment has focused sales solely on North American markets;

however, the segment began preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands of overseas installations.

In 2020, the Company hired a business development executive, who is developing sales opportunities in the international market.

The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity.

Real-time composition and physical properties are delivered simultaneously on their refined fuels, NGLs, natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions.

The instrument's response is 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 has 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 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.

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.

Discontinued Operations

The Company sold Florida Chemical Company, LLC, a wholly-owned subsidiary, and its CICT segment, effective as of February 28, 2019.

As a result, the Company’s CICT segment and financial results through the date of sale were classified as discontinued operations.

Market Conditions

The Company’s success is sensitive to a number of factors, which include, but are not limited to global energy supply and demand, drilling and well completion activity, customer demand for its advanced technology products, market prices for raw materials and governmental actions.

Drilling and well completion activity levels are influenced by a number of factors, including the number of rigs in operation and the geographical areas of rig activity.

Additional factors that influence the level of drilling and well completion activity include:

• Historical, current and anticipated future oil and gas prices;

• Federal, state and local governmental actions that may encourage or discourage drilling activity;

• Customers’ strategies relative to capital funds allocations;

• Weather conditions;

• Technological changes to drilling and completion methods and economics.

Customers’ demand for advanced technology products and services provided by the Company are dependent on their recognition of the value of chemistries that:

• Provide differentiation in efficiency and efficacy;

• Address emerging pathogens;

• Improve the economics of operations;

• Are economically viable, socially responsible and ecologically sound.

Governmental actions may restrict the future use of hazardous chemicals, including, but not limited to, the following industrial applications:

• Oil and gas drilling and completion operations;

• Oil and gas production operations;

• Non-oil and gas industrial solvents;

• EPA and FDA regulatory changes.

The continued impact of COVID-19 and subsequent modification of social behavior for hygiene and sanitation products create opportunities for product growth in various forms of sanitizing, surface cleaning and disinfecting products.

COVID-19 Effects and Actions

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic that spread throughout the U.S.

and the world.

In late 2020, major pharmaceutical companies developed vaccines and received approval for wide-scale distribution in the U.S.

and other countries.

The vaccination effort is proceeding in the U.S.

and the world.

However, variant strains of the virus have emerged, which create additional uncertainty on the extent and the duration of the pandemic.

The pandemic negatively impacted the U.S.

and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets.

These effects materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for the Company’s services and products.

The Company’s CT segment is energy-focused with product lines comprised of specialty chemistries, logistics and technology services.

Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent exploration and production companies, national and state-owned oil companies, and international supply chain management companies.

Due to customer activity levels in this industry, the Company experienced materially reduced revenues and cash flows during 2020.

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

In 2020, the Company launched a diversified line of FDA and EPA-compliant sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use.

These products build on the Company’s historical expertise in chemistry and leverage its infrastructure, personnel, competencies, supply chain, research and historic consumer market experience.

The continued impact of COVID-19 and subsequent modification of social behavior in regard to the heightened attention to hygiene and sanitation provide a sustainable yet challenging market to expand the Company’s portfolio.

The DA segment’s largest customer base, the oil and gas midstream market, reduced gathering and infrastructure capital spending in 2020.

In addition, the pandemic impacted the DA segment due to reduced access to facilities to complete new installations for a portion of the year.

As a result, spending for the DA segment’s products and services has also been impacted by lower consumer demand.

As a result, sales and cash flows were below target for the DA segment.

During 2020, the Company’s financial results were impacted due to impairment charges.

The provision for excess and obsolete inventory included charges for the CT segment and the DA segment.

See Note 6, “Inventories” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.

The Company recorded an impairment to property, plant and equipment;

intangible assets;

and operating right-of-use assets during the first quarter of 2020.

The extended impact of COVID-19 contributed to additional impairment charges to goodwill and intangible assets in the third quarter of 2020.

See Note 9, “Goodwill;” Note 10, “Other Intangible Assets;” and Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” Due to the continuing uncertainties, additional impairments may occur in the future.

The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level.

Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the

The uncertain future development of the COVID-19 crisis and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.

While the full impact of the COVID-19 pandemic continues to evolve and the full extent of the impact is not yet known, the Company continues to closely monitor the effects of the pandemic on commodity demands, and on its customers, operations and employees.

Any future development and effects are highly uncertain and cannot be predicted, including:

• the scope and duration of the pandemic;

• effectiveness of vaccines;

• emergence of new coronavirus variants;

• further adverse revenue and net income effects;

• disruptions to the Company’s operations;

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

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

• customer shutdowns of oil and gas exploration and production;

• the effectiveness of work from home arrangements;

• modifications to work schedules, including manufacturing shifts;

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

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

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

The pandemic caused the Company to alter its business working practices, including work schedules, manufacturing shifts, employee travel, work locations, meetings and participation in events and conferences.

In addition, the Company and most of its customers continued the practice of social distancing and work-from-home procedures, which have had, and may continue to have, an impact on the ability of employees and management of the Company to communicate and work efficiently.

There is no certainty that these actions will mitigate risks posed by the virus to the Company’s workforce.

The Company’s CT segment focused on development of competitively priced product lines that are responsive to the current market including well bore protection and damage mitigation products as the domestic market has shifted to shutting in wells.

In response to a forecasted reduction in capital available to customers for drilling with a shift to optimizing existing infrastructure, the Company initiated several efforts to use specialty chemicals to improve enhanced oil recovery.

The Company has also leveraged its international footprint in the Middle East to include unconventional, conventional, and enhanced oil recovery programs.

The CT segment used its expertise in specialty chemistry, existing chemistry infrastructure and facilities, and historical consumer market experience to launch a product line of sanitizers, surface cleaners and disinfectants, as discussed above.

The Company believes these new products slot into the premium market and will be competitive over the long-term.

The Company has also made changes to its executive team to align with its growth focus.

The Company has also focused on the continuing needs of customers and the market to diversify its business and accelerate growth through deployment of capital, with an emphasis on digital transformation in the oil and gas markets.

On May 18, 2020, the Company closed the acquisition of JP3, which gives the Company access to the midstream and downstream markets and diversifies exposure to volatility in the upstream sector.

In addition to increasing market share, the DA segment is pursuing product enhancements that enable growth opportunities with current and prospective customers.

In response to market conditions and anticipating ongoing volatility, the Company reduced its cost structure in 2020 to meet anticipated market activity and reduce the Company’s break-even level.

Among other cost-cutting and cash preservation initiatives:

• The Company’s CEO, John W.

Gibson, Jr., reduced his base salary by 20%, and each of the other executive officers reduced his or her salary by 10%, through December 31, 2020, in exchange for restricted stock, effective as of April 1, 2020.

• The board of directors of the Company approved a 20% reduction in the fees to be paid to the directors, effective as of April 1, 2020.

• The Company consolidated office space by moving all employees at its corporate headquarters into its Global Research and Innovation Center in Houston, Texas and buying out the remaining term of the corporate headquarters lease for a significant discount, with the move completed by the end of June 2020.

• The Company reduced overall headcount by 35% on March 30, 2020.

Additionally, the Company reduced the headcount of the DA segment by 35% in October 2020.

• The Company decreased discretionary spending across all business operations.

Outlook for 2021

The COVID-19 pandemic negatively impacted the U.S.

and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets.

While market prices for West Texas Intermediate and Brent crude oil rebounded from lows during the initial months of the pandemic in 2020 to exceed $50 per barrel in early 2021, many major integrated oil and gas companies and independent oil and gas companies announced reductions in their 2021 budgets, though such budgets may change if crude oil prices increase.

Uncertainty exists about the extent and the duration of the resulting industry contraction and consolidation.

In addition, the oilfield services industry remains over supplied and timing on returns to pre-pandemic pricing levels remains uncertain.

Climate change continues to be a focus, as investors are increasingly scrutinizing companies linked to the oil and gas industry through environmental, social and corporate governance factors to promote clean energy and sustainability.

In addition, the impact of the actions of the new presidential administration and Congress on the economy and financial markets is uncertain in the current year and longer term.

During his first month in office, the President signed many executive orders, including ones with implications for stakeholders in the energy industry, suc h as canceling the Keystone XL Pipeline and another for the U.S.

to rejoin the Paris Agreement on climate change.

The Interior Department issued an order in January, placing a 60-day freeze on agency permit approvals and pausing federal oil and gas leasing for a review of all existing leasing and permitting practices related to fossil fuel development on public lands and waters.

These and other potential actions by the new administration could have negative and/or positive impacts on the Company’s business and customers.

Amid the current environment with increased business commitments related to ESG, the Company’s products and services offer a significant value proposition to businesses seeking to improve their ESG performance, including improving the safety, reliability and efficiency of their operations.

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.

We expect North American and International onshore activity to continue to improve throughout 2022 from fourth quarter 2021 levels for the next twelve months provided that commodity prices remain at or above current levels.

The strongest potential growth throughout 2022 will likely comes from private, rather than publicly traded exploration and production companies.

Private exploration and production companies operate the majority of U.S.

land rigs and react quickly to changing commodity prices.

In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead.

Additionally, we have reestablished our ability to sell product through other service companies and believe sales through indirect channels should accelerate in 2022.

In 2020, the Company launched a diversified line of EPA and FDA compliant products that target industrial, agricultural and consumer markets with particular focus on customers that are seeking to accelerate their focus on sustainability and minimized impact on the environment.

The Company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers, solvents and a multitude of proprietary chemistries for industrial, commercial and consumer use.

The Company believes these adjacent markets provide an opportunity to diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand.

We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states.

We will be training and educating their representatives during the next two quarters.

The leverage sales effort is anticipated to accelerate sales in the second half of 2022.

Digital Analytics

The use of data and digital analytics is a growing trend in all industries where technology is 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.

Verax has gained a foothold in NA 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 allows operators to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades.

ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment.

The Company’s products and services offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations.

The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry.

Further, our patented line of Complex nano-Fluid® (also known as CnF®) chemistry technologies, are formulated with highly effective, plant-based solvents offering safer, sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals.

Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and reduce reprocessing.

The Company believes that an increase in the adoption of specialty chemicals could benefit our business and reduce the impact of the current decrease in drilling and completions activity.

The key sales focus of the Company is growing market share by improving returns for current customers, rebuilding relationships with past customers and identifying new customers that could benefit from chemistry solutions.

Additionally, the Company is focused on total cost of recovery per barrel of oil equivalent, rather than initial cost, as well as strengthening the publicly available evidence for the efficacy of using advanced CnF® products to materially impact oil and gas recovery and profitability for operators.

The sanitizers, surface cleaners and disinfectants industry is expanding, associated with the continued impact of the COVID-19 pandemic and the need for individuals, businesses, schools and governments to minimize the spread of the coronavirus.

Industry growth is also anticipated due to the modification of social behaviors in regard to the heightened attention to hygiene and sanitation.

In 2020, the Company launched a diversified line of FDA-compliant sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use.

The Company believes this market provides an opportunity to expand the Company’s portfolio of chemistry products to meet the growing demand.

The use of data and analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as predictive maintenance, advanced safety measures and reduced environmental impact of operations.

The Company believes that data and analytics is an area for growth.

Hence, in 2020, the Company acquired JP3 and formed the DA segment.

To date, the segment has focused sales solely on North American markets;

The Company hired a business development executive, who is developing sales opportunities in the international market.

The Company continues to develop technologies to ensure our ability to provide differentiated products and services to our customers.

Partnering closely with our clients to create and implement specialty chemical products and compositional analyzers remains a focus for the organization.

Differentiated products and services are the result of the deployment of the organization’s capabilities and expertise in alignment with customer success.

The continuing search for new ways to help make customers successful positions the Company as a leader in advanced chemicals and technology.

The Company’s emphasis in 2021 will be executing the plan established by the executive team to recover from the varied impacts of COVID-19 and grow the Company’s businesses.

The CT segment will focus on marketing our products and services to new and existing customers, while expanding the sanitizers, surface cleaners and disinfectants product line.

The DA segment will maintain its domestic sales effort while pursuing international growth.

The Company does not anticipate a material escalation in our maintenance capital spending year-over-year.

In 2021, the Company expects to enhance its focus on ESG and the responsible management of products and services through our Quality Assurance and Quality Control Program and Chemical Spill Prevention Program, adhering to ISO 9001:2015 standards.

Consolidated Results of Operations (dollars in thousands):

Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals.

Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil.

Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.

The Company believes the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of our greener practices and chemistries.

We believe the performance-driven ESG focus of the Company assists in reducing environmental liabilities and improving returns for our customers.

During 2020 and 2021 challenging supply chain issues emerged that “will continue into 2022” according to Secretary of Transportation Peter Buttigieg.

The anticipated activity increases will strain supply chains generally.

The principal supply issues facing our industry for the next twelve months will include:

• Rising Freight Costs;

• Delays due to Port Congestion;

• Labor Shortages and

• Demand Forecasting.

All bidding will require the risk of shipping costs and delays be factored into proposals.

Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future.

The import of raw materials from China will also incur price increases.

Accelerating tensions between China and the U.S.

could also result in supply disruption.

During 2021, Hurricane Ida and other weather related events caused significant disruptions to the energy industry in the US.

The Company was able to maintain consistent operations throughout the year and provide support to our partners in Louisiana and surrounding areas during Hurricane Ida.

The Company’s operations, as well as those of our primary customer base, are periodically subjected to potential weather related disruptions.

The Company monitors and carefully evaluates guidance from authoritative sources including the National Weather Service and other agencies.

We currently do not anticipate weather related events to have a material impact on first quarter results.

The impacts of COVID-19 continue to affect the U.S.

and global economy.

The protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge.

The resumption of travel while often onerous has begun to accelerate and in person customer visits that began in earnest during the third quarter will continue to accelerate.

Consolidated Results of Operations (in thousands)

Years ended December 31,

Revenue $ 53,141 $ 119,353

Operating expenses (excluding depreciation and amortization) 88,266 148,100

Operating expenses % 166.1 % 124.1 %

Corporate general and administrative costs 16,311 27,975

Corporate general and administrative costs % 30.7 % 23.4 %

Revenue from external customers $ 39,627 $ 53,141

Revenue from related party 3,641 —

Total revenues 43,268 53,141

Cost of goods sold 40,012 81,814

Cost of good sold % 92.5 % 154.0 %

Gross profit (loss) 3,256 (28,673)

Gross profit (loss) % 7.5 % (54.0) %

Selling general and administrative 20,166 22,763

Selling general and administrative % 46.6 % 42.8 %

Depreciation and amortization 1,011 3,412

Research and development 5,537 7,213

(Gain) loss on disposal of long-lived assets (94) 1,450

Impairment of fixed assets and long-lived assets 69,975 —

Gain on disposal of property and equipment (94) (94)

Impairment of goodwill 8,092 11,706

Impairment of property and equipment and intangible assets — 69,975

Loss from operations (31,456) (143,648)

Operating margin % (72.7) % (270.3) %

PPP loan forgiveness 881 —

Gain on lease termination — 576

Interest and other income (expense), net 443 (311)

Interest and other income, net 9 443

Loss before income taxes (30,566) (142,629)

Income tax benefit (expense) 6,179 (262)

Loss from continuing operations (136,450) (76,073)

Income from discontinued operations, net of tax — 42,158

Income tax benefit 40 6,179

Net Loss $ (30,526) $ (136,450)

Results for 2020 compared to 2019—Consolidated

Consolidated revenue for the year ended December 31, 2020, decreased $66.2 million, or 55.5%, from 2019.

The decrease in revenue was largely a result of reduced demand due to the continued volatile macro-environment for U.S.

onshore drilling and completion activity, impacted by political and economic events in foreign markets, and the continued COVID-19 impact on productivity and customers during the year.

Partially offsetting the decrease were new revenues in 2020 from the diversification of our chemical product line and our DA segment acquired in May 2020.

Consolidated operating expenses (excluding depreciation and amortization) for the year ended December 31, 2020, decreased $59.8 million, or 40.4%, from 2019, and as a percentage of revenue, increased to 166.1% for the year ended December 31, 2020, from 124.1% for the comparable period of 2019.

Company reduction in force actions in the first quarter of 2020 lowered operational personnel costs along with a significant decrease in logistical costs as part of our overall cost-cutting efforts within supply chain.

In 2020, the Company lowered occupancy costs due to our reduced facility footprint and reduction in equipment primarily associated with tank rentals.

These savings were partially offset by operating expenses for the DA segment acquired in May 2020, and introduction of the sanitizers, surface cleaners and disinfectants product line in the second quarter of 2020.

T he provision for excess and obsolete inventory in 2020 included charges of $8.4 million for the CT segment and $3.9 million for the DA segment, primarily related to the Company’s product rationalization effort.

The Company also recognized expense of $2.7 million in 2020 for the earn-out provisions r elated to the JP3 acquisition.

For the year ended December 31, 2020, the Company recognized a purchase commitment loss of $9.9 million and carried an accrued liability of $9.4 million associated with the amended terpene supply agreement.

The commitment loss related to lower expected usage from reduced demand for terpene in the oil and gas sector due from capital spending reductions across our customer base and impacts of COVID-19, combined with product mix changes using lower concentrations of terpene.

In 2019, the Company recognized a loss of $15.8 million related to the terpene supply agreement.

Corporate general and administrative (“CG&A”) expenses are not directly attributable to products sold or services provided.

CG&A costs decreased $11.7 million, or 41.7%, for the year ended December 31, 2020, compared to 2019.

The decrease in CG&A costs for the year ended December 31, 2020, compared to 2019, was primarily due to a decrease of $8.2 million in personnel costs.

This year over year decrease in personnel costs resulted from reduction in force actions in the first quarter of 2020 combined with a decrease in severance costs of $4.2 million.

These reduced personnel costs included a $2.1 million reduction in stock-based compensation and incentives.

Other factors contributing to lower CG&A in 2020 were decreases in legal costs, travel and entertainment, and Company headquarter leasing costs, partially offset by one-time expenses related to the acquisition of JP3 during the second quarter of 2020.

Depreciation and amortization expense for the year ended December 31, 2020, decreased $5.1 million, or 59.7%, from 2019, primarily due to impairment of fixed and long-lived assets recorded in the first quarter of 2020 combined with limiting capital expenditure spend in 2020 and consolidation of our physical facility footprint.

Research and development expense for the year ended December 31, 2020, decreased $1.7 million, or 18.6%, from 2019.

The decrease in research and development expense is primarily due to lower personnel costs as a result of our company-wide reduction in workforce in the first quarter of 2020.

For the year ended December 31, 2020, the Company recognized a gain of $0.1 million on disposal of assets.

For the year ended December 31, 2019, the Company recognized a loss of $1.5 million on disposal of long-lived assets, primarily due to the disposal of corporate software.

Impairment of fixed and long-lived assets for the year ended December 31, 2020 was $70.0 million due to a $12.5 million write-down in the DA segment in the third quarter combined with the CT segment write-down of $54.7 million and a corporate-level write-down of $2.8 million recorded in the first quarter of 2020.

Impairment of goodwill was $11.7 million for the year ended December 31, 2020, due to a third quarter 2020 write-down of the goodwill in our DA segment.

See Note 3, “Business Combination;” Note 9, “Goodwill;” Note 10, “Other Intangible Assets;” and Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” for additional information.

No similar impairments occurred in 2019.

The Company recognized a gain on lease termination of $0.6 million during the second quarter of 2020, as a result of terminating the corporate headquarters office lease and making a one-time payment of $1.0 million.

Interest and other income (expense), net, changed $0.8 million for the year ended December 31, 2020, compared to 2019.

Interest expense decreased $2.0 million, primarily due to the termination of the PNC Bank Credit Facility in the first quarter of 2019.

The Company’s interest income for the year ended December 31, 2020, was $0.5 million compared to $1.9 million in 2019.

The year-over-year decrease in interest income was driven by lower average cash balances and the depressed interest rate environment in 2020 compared to 2019.

The Company recorded an income tax benefit of $6.2 million for the year ended December 31, 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act initially recorded in the first quarter of 2020, yielding an effective tax benefit rate of 4.3% for the year ended December 31, 2020.

The Company determined that it is more likely than not that it will not realize the benefits of certain deferred tax assets and, therefore, recorded a $20.3 million valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to non-amortizable intangible assets and certain state jurisdictions.

As of December 31, 2020, the Company is in a full valuation position.

See Note 15, “Income Taxes.”

Results by Segment

Chemistry Technologies

(dollars in thousands)

Net loss % (70.6) % (256.8) %

Consolidated revenue for the year ended December 31, 2021, decreased $9.9 million, or 18.6%, versus the same period of 2020.

Revenue during the year ended December 31, 2021 reflected a loss of revenue in the CT segment associated with two major customers changing ownership during 2021, losses related to the normalization and decline of market demand for sanitizers and non-recurring citrus terpenes sales.

Current year revenue decreases were partially offset by the incremental post acquisition JP3 revenues generated in the second, third, and fourth quarter of 2021.

Consolidated cost of goods sold for the year ended December 31, 2021, decreased $41.8 million, or 51.1% versus the same period of 2020.

In 2020 cost of goods sold included $11.7 million purchase commitment and excess terpene reserve of which $7.6 million was reversed in 2021.

This resulted in a $19.3 million decrease year on year.

Additionally, both segments had non-recurring product rationalization expenses in 2020 of an aggregate $9.6 million.

In 2021, the decline in revenues in addition to cost reduction initiatives including reducing personnel and facility costs also contributed to the year on year decrease.

Selling general and administrative (“SG&A”) expenses are not directly attributable to products sold or services provided.

SG&A expenses for the year ended December 31, 2021, decreased $2.6 million, or 11.4%, versus the same period of 2020.

S G&A expenses decreased as a result of a reduction in compensation costs including severance partially offset by an increase in non-recurring legal related costs related to litigation and investigations.

Depreciation and amortization expense decreased $2.4 million, or 70.4% for the year ended December 31, 2021, versus the same period of 2020, primarily due to impairments of property and equipment and other intangible assets recorded during the year ended December 31, 2020.

Research and development (“R&D”) costs decreased $1.7 million, or 23.2% for the year ended December 31, 2021, versus the same period of 2020 due to lower personnel costs as a result of our reduction in workforce from 2020 to 2021.

Loss from operations improved by $112.2 million, or 78.1% for the year ended December 31, 2021, versus the same periods in 2020.

The loss from operations improvement is primarily a result of the improvement to gross loss and reductions of expenses for SG&A, depreciation and amortization and R&D described above, and the impairment expenses of $81.7 million recorded during the year ended December 31, 2020 compared to impairment expenses of $8.1 million for the year ended December 31, 2021.

Loss before income taxes for the year ended December 31, 2021, was also impacted by an $0.9 million gain from the forgiveness of the JP3 Paycheck Protection Program (“PPP”) loan, and for the year ended December 31, 2020 by a $0.6 million gain from lease termination.

The Company’s income tax benefit for the year ended December 31, 2021 was minimal.

The Company recorded an income tax benefit of $6.2 million in 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations:

Years ended December 31

Revenue $ 38,929 $ 50,310

Loss from operations, including impairment (88,486) (45,682)

Results for 2020 compared to 2019

CT revenue for the year ended December 31, 2020, decreased $69.0 million, or 57.8% compared to 2019.

The decrease in revenue was largely a result of the volatile macro-environment.

Contributing to the volatility were OPEC-related actions disrupting market pricing and resulting in oversupply of hydrocarbons, and the COVID-19 impact on productivity and customers during the year.

Partially offsetting the decrease were new revenues in 2020 from the introduction of sanitizing, surface cleaning and disinfecting products.

Loss from operations for the CT segment increased $42.8 million for the year ended December 31, 2020, compared to 2019.

The increased loss from operations for 2020 was due to impairment charges of fixed and long-lived assets of $54.7 million, further impacted by lower revenue related to reduced demand.

The provision for excess and obsolete inventory in 2020 included charges of $8.4 million.

In 2020, the Company recognized a loss of $9.9 million for the amended terpene agreement due to adjustments to the Company’s expected usage, combined with product mix changes using lower concentration of terpene.

In 2019, the Company recognized a loss of $15.8 million for the amended terpene agreement.

Data Analytics

(dollars in thousands)

Period May 18 to December 31,

Loss from operations (5,466) (88,486)

CT revenue for the year ended December 31, 2021, decreased $11.4 million compared to 2020.

The decrease in revenue during 2021 compared to 2020 was driven by impacts from industry consolidation and international activity.

While the pandemic continued to weigh on economic activity in 2021, global supply and demand has steadily normalized through the second half of 2021.

Revenue from two major customers was reduced temporarily as a result of market consolidation in the Permian basin in addition the normalization and decline of market demand for sanitizers and non-recurring citrus terpenes sales.

Additionally, international activity, primarily in the Middle East, decreased year over year.

CT also granted price concessions in our effort to maintain and obtain market share.

Loss from operations for the CT segment for the year ended December 31, 2021, improved $83.0 million, or 93.9% compared to 2020.

The improvement in loss from operations is due to significantly lower expenses, primarily the result of impairment charges of property and equipment of $54.7 million in 2020.

Secondly, expenses during 2020 included an $11.7 million charge to reserve for terpene purchase commitment losses, while expenses during 2021 were reduced by a $7.6 million gain as a result of reaching a settlement agreement for terpene purchase commitment.

Certain cost reduction initiatives to optimize our cost structure contributed to the current decrease in operating losses by reducing personnel, office costs, equipment and facilities costs as the Company continues to consolidate its physical facilities and equipment rentals to align with activity.

Data Analytics Results of Operations:

Years ended December 31,

Revenue $ 4,339 $ 2,831

Loss from operations, including impairment (36,407)

Loss from operations (12,168) (36,407)

On May 18, 2020, the Company purchased JP3 and formed the DA segment.

The segment revenue for the period from acquisition to December 31, 2020, was $2.8 million, which came from existing customers on minor project expansions and new

For the fourth quarter of 2020, revenue was $1.3 million, an increase of $0.6 million over the third quarter of 2020, driven primarily by increased equipment sales.

Segment revenue for 2020, and the third quarter in particular, was adversely impacted by economic and COVID-19 related factors, as demand in the oil and gas sector declined due to capital spending reductions across our customer base.

The loss from operations for the period May 18 to December 31, 2020, includes write-downs to goodwill of $11.7 million and $12.5 million for finite-lived intangible assets in the third quarter.

In addition, the third quarter of 2020 included charges for excess and obsolete inventory of $3.9 million.

Results for the period May 18 to December 31, 2020, also include $2.7 million of expense for the JP3 stock performance earn-out provisions related to the purchase of JP3.

DA revenue for the year ended December 31, 2021, increased $1.5 million compared to revenue for 2020, which was only the post-acquisition partial period revenues between May 18, 2020 to December 31, 2020.

Loss from operations for the DA segment for the year ended December 31, 2021 improved $24.2 million or 66.6% compared to 2020.

The improvement in loss from operations is primarily the result of impairment charges of property and equipment, other intangible assets and goodwill of $24.2 million in 2020 compared to a goodwill impairment charge of $8.1 million in 2021.

Additionally, operating expenses in 2020 were impacted by $3.9 million related to product rationalization and also by the change in fair value of the contingent consideration for the JP3 acquisition.

A portion of the stock performance earn-out provision was triggered in 2020 resulting in $2.7 million of charges to cost of goods

sold in 2020, while the revaluations of the contingent consideration in 2021 resulted in reductions to cost of goods sold of $0.8 million.

Operating margins in 2021 were positively impacted by increased revenue and margins.

Capital Resources and Liquidity

The Company’s ongoing capital requirements relate to the need to acquire and maintain equipment, fund working capital requirements and when the opportunities arise, to make strategic acquisitions.

During the year ended December 31, 2020, the Company funded capital requirements primarily with cash on hand, which included a tax refund received of $6.1 million, combined with investing and financing cash inflows that included proceeds of $9.9 million received from escrow in 2020 from the 2019 sale of the CICT segment and proceeds from a Payroll Protection Program loan of $4.8 million.

D uring the second quarter of 2020, the Company acquired JP3, making payments for the acquisition of $26.3 million, net of cash acquired.

During the third quarter of 2020, the first stock performance target related to the acquisition was achieved and in October 2020, the Company paid $2.5 million into escrow to settle the liability.

Cash and cash equivalents totaled $38.7 million at December 31 , 2020, as compared to $100.6 million at December 31, 2019.

The Company used $47.8 million of cash outflows for operating activities (incl uding $14.8 million e xpended in working capital) and $17.7 million for investing activities.

Offsetting these cash outflows, financing activities provided the Company $3.7 million.

The effects of the COVID-19 pandemic and the volatility in oil prices during 2020 materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products.

While the full impact and duration of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees.

See “COVID-19 Effects and Actions” for developments and possible effects.

The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and funding working capital requirements.

During 2021, the Company funded capital requirements primarily with cash on hand.

As of December 31, 2021, the Company had available cash and cash equivalents of $11.5 million, as compared to $38.7 million at December 31, 2020.

During the year ended December 31, 2021, the Company had an operating loss of $31.5 million, $25.8 million of cash used for operating activities and $0.4 million of cash used for financing activities.

Cash provided by investing activities was minimal.

The Company currently funds its operations and growth primarily from cash on hand.

The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital.

Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to equity and debt financing.

Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to debt and equity financing.

The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year.

While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery in of oil and gas markets, or reduced spending at our customers could have a negative impact on our liquidity.

Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future.

In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position.

Such actions may include, but are not limited to:

• Sale of non-core real estate properties;

• Sale-leaseback transactions of facilities;

• Sale of excess inventory and/or raw materials;

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

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

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

• Reducing professional advisory fees and headcount.

However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms.

For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in this Annual Report.

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

Uncertainty surrounding the long- term stability and strength of the oil and gas markets, or reduced spending by our customers could have a further negative impact on our liquidity

On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including with related parties, through the issuance of $21.2 million aggregate of convertible notes that resulted in net cash proceeds of approximately $19.5 million.

Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million of convertible notes.

Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC.

If minimum volumes are not achieved, the Company receives 25% of the difference between (i) the aggregate Purchase Price of the quantity of Products comprising the Minimum Purchase Obligation during such calendar year.

The term of the ProFrac Agreement is three years starting on April 1, 2022.

The Company also committed to plans to sell its warehouse facility in Monahhans, Texas and its manufacturing facility in Waller, Texas.

These facilities were classified as held for sale as of December 31, 2021.

Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $4.2 million of cash proceeds.

The sale is expected to close in April 2022.

Based on our cash and liquid assets, including the transactions subsequent to year end described above and in Note 22 Subsequent Events, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due.

However the Company cannot guarantee a sufficient level of cash flows in the future.

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

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Net cash used in operating activities $ (25,840) $ (47,838)

Net cash (used in) provided by investing activities (17,701) 152,713

Net cash provided by (used in) financing activities 3,727 (49,994)

Net cash flows provided by discontinued operations — 15

Net cash provided by (used in) investing activities 112 (17,701)

Net cash (used in) provided by financing activities (372) 3,727

Effect of changes in exchange rates on cash and cash equivalents 100 (102)

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Operating Activities

During 2020 and 2019, cash used in operating activities totaled $47.8 million and $4.5 million, respectively.

Consolidated net loss from continuing operations for 2020 and 2019 totaled $136.5 million and $76.1 million, respectively.

During the year ended December 31, 2020, non-cash adjustments to net income totale d $96.6 million as compared to $40.8 million in 2019.

• In 2020, contributory non-cash adjustments consisted primarily of $81.7 million of impairment charges, which include a $30.2 million impairment of fixed assets, $32.4 million impairment of intangibles, $11.7 million impairment of goodwill and $7.4 million impairment on right-of-use assets.

The non-cash adjustment for the provision for excess and obsolete inventory was $12.3 million.

In addition, non-cash charges included $3.4 million for depreciation and amortization and $3.0 million for stock compensation expense.

Other non-cash adjustments included a $2.7 million change in fair value of contingent consideration.

• In 2019, the non-cash adjustments to net income consisted primarily of $8.5 million for depreciation and amortization expense, $4.2 million for stock compensation expense, $5.7 million provision for excess and obsolete inventory, $18.3 million for changes to deferred income taxes and $1.5 million for net gain on sale of assets.

During the year ended December 31, 2020, changes in working capital used $14.8 million in cash as compared to providing $30.7 million in 2019.

• The use of cash in working capital in 2020 primarily resulted from a reduction in accrued liabilities and accounts payable of $23.6 million, which included two one-time payments made in 2020:

Net cash used in operating activities was $25.8 million and $47.8 million during the year ended December 31, 2021 and 2020, respectively.

Consolidated net loss for the year ended December 31, 2021 and 2020, were $30.6 million and $136.5 million, respectively.

During the year ended December 31, 2021, non-cash adjustments to net income totaled $4.2 million as compared to $112.8 million for the same period of 2020.

• For the year ended December 31, 2021, non-cash adjustments included a $7.6 million benefit related to the ADM settlement and $8.1 million of impairment charges.

The non-cash adjustment for the provision of excess and obsolete inventory was $0.6 million and depreciation was $1.0 million.

Other non-cash adjustments included stock based compensation of $3.8 million, JP3 PPP loan forgiveness of $0.9 million and $0.8 million related to the change in fair value of contingent consideration.

• For the year ended December 31, 2020, contributory non-cash adjustments consisted primarily of $81.7 million of impairment charges, $9.4 million of inventory purchase commitment reserve charges, $12.3 million for the provision of excess and obsolete inventory, $3.0 million for stock compensation expense, $3.4 million for depreciation and amortization and $2.7 million related to the change in fair value consideration.

During the year ended December 31, 2021, changes in working capital provided $0.5 million of cash as compared to using $24.2 million for the same period of 2020.

• For the year ended December 31, 2021, changes in working capital resulted primarily from increases in accounts receivable and other current assets of $2.0 million and accounts payable of $1.8 million.

This has been offset by decreases in inventories and income taxes receivable of $2.1 million and accrued liabilities of $1.4 million.

• For the year ended December 31, 2020 the use of working capital primarily resulted from a reduction in accrued liabilities and accounts payable of $33.0 million, which included two one-time payments made in 2020:

one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final post-closing working capital adjustment related to the 2019 sale of the CICT segment.

Decreases in accounts receivable, inventories and other current assets during 2020 provided cash of $8.5 million.

• During 2019, changes in working capital provided $30.7 million in cash, primarily resulting from decreasing accounts receivables by $21.0 million.

Decreases in accounts receivable, inventories and other current assets provided cash of $8.5 million.

Investing Activities

Net cash used in investing activities wa s $17.7 million for the year ended December 31, 2020.

The cash used in investing activities is primarily due to $26.3 million paid for the purchase of JP3, net of cash acquired, during the second quarter of 2020, and $1.4 million paid for capitalized sanitizer equipment upgrades in 2020.

The cash outflows were partially offset by proceeds of $9.9 million received from escrow in 2020 from the 2019 sale of the CICT segment.

Net cash provided by investing activities was $152.7 million during 2019.

Cash provided by investing activities included $155.5 million of proceeds received from the sale of revenue generating assets associated with the CICT segment, partially offset by cash paid of $2.4 million for capital expenditures and $0.6 million for the purchase of various patents and other intangible assets.

Net cash provided by investing activities for the year ended December 31, 2021 was negligible.

Net cash used in investing activities was $17.7 million for the year ended December 31, 2020.

Cash used in investing activities included $26.3 million from purchase of JP3 offset by cash provided of $9.9 million due to the release of escrow amounts in 2020 from the 2019 sale of the Florida Chemical Company.

Financing Activities

Net cash provided by financing activities was $3.7 million for the year ended December 31, 2020.

Cash provided by financing activities included $4.8 million of proceeds from borrowings under the Payroll Protection Program.

Net cash used in financing activities was $50.0 m illion during 2019, primarily due to using $49.7 million for repayments of debt, net of borrowings.

Net cash used in financing activities was $0.4 million for the year ended December 31, 2021, primarily for purchases of common stock related to tax withholding requirements.

Net cash provided by financing activities was $3.7 million for the year ended December 31, 2020, primarily from the proceeds received from the PPP.

Off-Balance Sheet Arrangements

There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes.

As of December 31, 2021, the Company was not involved in any unconsolidated SPEs.

The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors other than the long term terpene agreement discussed in Note 15 in Part II, Item 8 – Financial Statements of this Annual Report.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Preparation of these statements requires management to make judgments, estimates, and assumptions that affect the amounts of assets and liabilities in the financial statements and revenue and expenses during the reporting period.

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The Company regularly reviews judgments, assumptions and estimates related to the critical accounting policies.

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.

See Note 5, “Revenue from Contracts with Customers,” in Part II of this Annual Report for further discussion.

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 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.

Service revenue is recognized on an over time basis for the CT segment as services are performed as the customer is simultaneously benefiting as the Company performs.

For the DA segment, services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation.

The DA segment has additional performance obligations related to providing ongoing or reoccurring maintenance.

Revenue for these types of arrangements is recognized ratably over time throughout the contract period.

Additionally, the DA segment 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.

As an accounting policy election, 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.

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 revenues.

Reserve for Excess and Obsolete Inventory

Inventories consist of raw materials and finished goods and are stated at the lower of cost or market, using the weighted-average cost method, or net realizable value.

Inventories consist of raw materials and finished goods and are stated at the lower of cost, or market determined using the weighted-average cost method, or net realizable value.

Finished goods inventories include raw materials, direct labor and production overhead.

The Company’s inventory reserve represents the excess of the inventory carrying amount over the amount expected to be realized from the ultimate sale or other disposal of the inventory.

The Company regularly reviews inventory quantities on hand and records provisions or impairments for excess or obsolete inventory based on the Company’s forecast of product demand, historical usage of inventory on hand, market conditions, production and procurement requirements and technological developments.

Significant or unanticipated changes in market conditions or Company forecasts could affect the amount and timing of provisions for excess and obsolete inventory and inventory impairments.

Specific assumptions are updated at the date of each evaluation to consider Company experience and current industry trends.

Significant judgment is required to predict the potential impact which the current business climate and evolving market conditions could have on the Company’s assumptions.

Changes which may occur in the energy industry are hard to predict, and they may occur rapidly.

To the extent that changes in market conditions result in adjustments to management assumptions, impairment losses could be realized in future periods.

The Company 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.

At December 31, 2021 and 2020, the reserve for excess and obsolete inventory was $10.1 million and $11.1 million, or 51.8% and 48.3% of inventory, respectively.

Business Combinations

The Company includes the results of operations of its acquisitions in its consolidated results, prospectively from the date of acquisition.

Acquisitions are accounted for by applying the acquisition method.

The Company allocates the fair value of purchase consideration to the assets acquired, liabilities assumed and any non-controlling interests in the acquired entity generally based on their fair values at the acquisition date.

The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and any non-controlling interests in the acquired entity is recorded as goodwill.

The primary items that generate goodwill include the value of the synergies between the acquired company and Flotek and the value of the acquired assembled workforce.

Acquisition-related expenses are recognized separately from the business acquisition and are recognized as expenses as incurred.

Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction.

See Note 3, “Business Combination,” in Part II of this Annual Report for further information.

Goodwill is not subject to amortization but is tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment.

These circumstances may include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, or a change in projected operations or results of a reporting unit.

Goodwill is tested for impairment at a reporting unit level.

During the annual testing, or when tested upon the occurrence of a triggering event, the Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments.

Significant or unanticipated changes to our estimates and forecasts could impact the amount and timing of any additional provisions for excess and obsolete inventory.

Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination.

Goodwill is not subject to amortization but is tested for impairment annually on October 1 or more frequently if an event occurs or circumstances change that would indicate a potential impairment.

These circumstances may include an adverse change in the business climate or a change in the assessment of future operations of a reporting unit.

When performing the annual impairment test, the Company has the option to assess whether a goodwill impairment exists using either a qualitative or quantitative assessment.

The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill.

If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.

If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative impairment test is performed to determine whether goodwill impairment exists at the reporting unit.

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If the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.

During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction and created the DA segment.

The Company recorded goodwill of $17.5 million at the date of acquisition.

D uring the third quarter of 2020, the Company identified a triggering event due to significantly lower than expected results and completed an impairment analysis at the DA reporting unit level, which resulted in a goodwill impairment charge of $11.7 million.

During the fourth quarter of 2020, the Company assessed qualitative factors to determine whether it was necessary to perform the quantitative impairment test.

As of the fourth quarter of 2020, the Company concluded it was not more-likely-than-not that there was an impairment of goodwill for the DA reporting unit based on the assessment of qualitative factors.

Long-lived Assets Other than Goodwill

Long-lived assets other than goodwill consist of property and equipment and intangible assets that have determinable and indefinite lives.

The Company makes judgments and estimates regarding the carrying amount of these assets, including amounts to be capitalized, depreciation and amortization methods to be applied, estimated useful lives and possible impairments.

Property and equipment and intangible assets with determinable lives are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.

For property and equipment, events or circumstances indicating possible impairment may include a significant decrease in market value or a significant change in the business climate.

An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition.

The amount of the impairment loss is the excess of the asset’s carrying amount over its fair value.

Fair value is generally determined using an appraisal by an independent valuation firm or by using a discounted cash flow analysis.

For intangible assets with definite lives, events or circumstances indicating possible impairment may include an adverse change in the extent or manner in which the asset is being used or a change in the assessment of future operations.

The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins and cash flows.

If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, an impairment loss is recognized.

The impairment loss recognized is the amount by which the carrying amount exceeds the fair value.

Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.

Intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment.

The Company assesses whether an indefinite lived intangible impairment exists using both qualitative and quantitative assessments.

The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount.

If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount, the Company does not perform a quantitative assessment.

If the qualitative assessment indicates that it is more likely than not that the indefinite-lived intangible asset is impaired or if the Company elects to not perform a qualitative assessment, the Company then performs the quantitative impairment test.

The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount.

If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.

The development of future net undiscounted cash flow projections requires management projections of future sales and profitability trends and the estimation of remaining useful lives of assets.

These projections are consistent with those projections the Company uses to internally manage operations.

When potential impairment is identified, a discounted cash flow valuation model similar to that used to value goodwill at the reporting unit level, incorporating discount rates commensurate with risks associated with each asset, is used to determine the fair value of the asset in order to measure potential impairment.

Discount rates are determined by using a weighted average cost of capital (“WACC”).

Estimated revenue and WACC assumptions are the most sensitive and susceptible to change in the long-lived asset analysis as they require significant management judgment.

The Company believes the assumptions used are reflective of what a market participant would have used in calculating fair value.

Valuation methodologies utilized to evaluate long-lived assets other than goodwill for impairment were consistent with prior periods.

Specific assumptions discussed above are updated at each test date to consider current industry and Company-specific risk factors from the perspective of a market participant.

The current business climate is subject to evolving market conditions and requires significant management judgment to interpret the potential impact to the Company’s assumptions.

To the extent that changes in the current business climate result in adjustments to management projections, impairment losses may be recognized in future periods.

There are significant inherent uncertainties and judgments involved in estimating fair value.

The Company cannot predict the occurrence of events or circumstances that could adversely affect the fair value of the asset group.

Such events may include, but are not limited to, deterioration of the economic environment, increases in the Company’s WACC, material negative changes in relationships with significant customers, reductions in valuations of other public companies in the Company’s industry, or strategic decisions made in response to economic and competitive conditions.

If actual results are not consistent with the Company’s current estimates and assumptions, additional impairment of long-lived assets could be required.

During the first quarter of 2020, the Company evaluated and recorded remeasurement and impairment charges on right-of-use assets, fixed assets and intangible assets totaling $57.5 million as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and the related negative impact on oil and natural gas prices on projections of future cash flows.

During the third quarter of 2020, the Company recorded an impairment write-down to estimated fair market value of $12.5 million for intangible assets of the JP3 acquisition, which resulted from reduced demand in the oil and gas sector, extended impact of the COVID-19 pandemic and lower performance than expected by the reporting unit.

See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” for additional information.

The Company’s tax provision is subject to judgments and estimates necessitated by the complexity of existing regulatory tax statutes and the effect of these upon the Company due to operations in multiple tax jurisdictions.

Income tax expense is based on taxable income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates.

The Company’s income tax expense fluctuates from year to year as the amount of pretax income or loss fluctuates.

Changes in tax laws and the Company’s profitability within and across the jurisdictions may impact the Company’s

tax liability.

While the annual tax provision is based on the best information available to the Company at the time of preparation, several years may elapse before the ultimate tax liabilities are determined.

In performing the annual quantitative impairment test and consistent with our prior practice, we determined the fair value of the DA reporting unit using an income approach.

Under the income approach, the fair value of the reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate.

We used our internal forecasts, updated for recent events, to estimate future cash flows with cash flows beyond the specific operating plans estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on our most recent views of the long-term outlook for the DA reporting unit.

Our internal forecasts include assumptions about future commodity pricing and expected demand for our goods and services.

For the DA reporting unit, production growth is still anticipated to be lower in the near term as operators continue to show an abundance of fiscal discipline in development spending.

Midstream thru-out volumes have remained well below capacity levels.

While we are expecting production growth to increase, it is likely to do so at a more conservative pace.

These factors have precipitated our impairment decision for Data Analytics goodwill.

Due to the inherent uncertainties involved in making estimates and

assumptions, actual results may differ from those assumed in our forecasts.

We derived our discount rate using a capital asset pricing model and analyzing published rates for industries relevant to the DA reporting unit to estimate the cost of equity financing.

We used a discount rate that are commensurate with the risks and uncertainties inherent in the respective business and in our internally developed forecasts.

Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain, and actual results may differ from those assumed in our analysis.

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.

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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 used to reduce deferred tax assets when uncertainty exists regarding their realization.

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.

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Except for a state jurisdiction, the Company maintains a full valuation allowance on its deferred tax assets.

The Company periodically identifies and evaluates uncertain tax positions.

This process considers the amounts and probability of various outcomes that could be realized upon final settlement.

Liabilities for uncertain tax positions are based on a two-step process.

The actual benefits ultimately realized may differ from the Company’s estimates.

Changes in facts, circumstances, and new information may require a change in recognition and measurement estimates for certain individual tax positions.

Any changes in estimates are recorded in results of operations in the period in which the change occurs .

At December 31, 2020, the Company performed an evaluation of its various tax positions and concluded that it did not have uncertain tax positions requiring disclosure.

The Company has performed an evaluation and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated financial statements.

Property and equipment

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.

Indicative events or circumstances include, but are not limited to, matters such as a significant decline in market value or a significant change in business climate.

If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset.

If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group.

The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value.

Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third party independent appraisals, as considered necessary.

The determination of whether property and equipment, including ROU assets is impaired involved a significant level of judgement in these assumptions, and changes in our forecasts, business strategy, or economic and market conditions could significantly impact these judgements.

Any resulting impairment charges could have a material impact on our results of operations.

Recent Accounting Pronouncements

Recent accounting pronouncements which may impact the Company are described in Note 2, “Summary of Significant Accounting Policies,” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.

Recent accounting pronouncements which may impact the Company are described in Note 2, “Recent Accounting Pronouncements,” in Part II, Item 8 — “Financial Statements” of this Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis