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Item 8. Financial Statements and Supplementary Data

2022-03-31 compared with 2021-03-16 · 526 added, 701 removed, 593 unchanged (67% of the section changed)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

Flotek Industries, Inc.

Houston, Texas

To the Stockholders and the Board of Directors Flotek Industries, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc.

(the “Company”) as of December 31, 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and the results of its operations and its cash flows for the year then ended , in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2021 expressed an adverse opinion thereon.

and subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of operations, comprehensive loss, cash flows, and stockholders’ equity for the year then ended, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended December 31, 2021, in conformity with U.S.

generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Impairment of Fixed and Long-lived Assets – CT Reporting Unit

As described in Notes 7, 8 and 10 to the consolidated financial statements, the Company has recorded net property and equipment (“fixed assets”) of $9.1 million, and operating lease right-of-use assets and intangible assets (“long-lived assets”) of $2.3 million and $0 million, respectively, as of December 31, 2020.

As of March 31, 2020, the Company had one reporting unit, ECT, which it considered an asset group for purposes of assessing asset impairment.

The Company reviews the asset group for impairment whenever events and changes in circumstances indicate the carrying value of such assets may not be recoverable (“triggering events”).

During the quarter ended March 31, 2020, the Company determined there were triggering events, primarily related to the COVID-19 pandemic and the decline in energy prices, and performed an asset impairment test as of March 31, 2020.

The asset group is considered impaired when the carrying value exceeds its fair value.

The Company determined fair value using the income approach, which requires management to make significant assumptions about expected

future cash flows, including projected revenue and profitability growth rates, discount rates, obsolescence rates, and royalty rates.

Management utilized a third-party valuation specialist to assist in the preparation of the valuation of the asset group.

We identified the impairment assessment of the Company’s fixed and long-lived assets as a critical audit matter.

Auditing the Company’s impairment test for the asset group was complex and highly judgmental because (i) there was significant judgment used by management to develop the fair value measurement, which led to a high degree of audit judgment and subjectivity in performing procedures relating to fair value measurement;

(ii) there was significant effort in performing procedures to evaluate the reasonableness of the fair value measurement and significant assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

The primary procedures we performed to address this critical audit matter included:

• Evaluating the appropriateness of the method used by management to determine the fair value of the asset group.

• Evaluating the reasonableness of the assumptions used to estimate expected future cash flows, including revenue and profitability growth rates, by comparing the rates to historical performance and industry data.

• Testing the completeness, accuracy and relevance of underlying data used in the impairment assessment.

• Utilizing professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the Company's impairment assessment and reasonableness of certain significant assumptions described above, including the discount rate, obsolescence rate, and royalty rate.

Business Combination

As described in Note 3 to the consolidated financial statements, the Company completed its acquisition of JP3 Measurement, LLC for consideration of $36.6 million during the second quarter of 2020.

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

As a result of the acquisition, management was required to estimate fair values of the assets acquired and liabilities assumed, including certain identifiable intangible assets.

Management utilized a third-party valuation specialist to assist in the preparation of the valuation of certain identifiable intangible assets.

We identified the determination of fair values of certain identifiable intangible assets, which primarily included customer relationships, as a critical audit matter.

Management exercised significant judgment to select the valuation methods and to develop the assumptions used in the measurement of the fair value of the identifiable intangible assets.

Significant assumptions included discount rates, customer attrition, and projected revenue growth rates.

These assumptions are forward-looking and could be affected by future economic and market conditions.

The principal considerations for our determination included the following:

(i) changes in the significant assumptions could have a significant impact on the fair value of the assets acquired, (ii) significant unobservable inputs and assumptions utilized by management in determining the fair value of the identifiable intangible assets acquired and liabilities assumed, including the earn-out provision, and (iii) appropriateness of use of various valuation models to determine the fair value of the identifiable intangible assets acquired.

Auditing these elements involved especially subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

• Testing the completeness, accuracy and relevance of underlying data used in the analysis.

• Assessing the reasonableness of significant underlying assumptions through:

(i) comparing prospective financial information to current industry trends, as well as to historical performance of the acquired business, and (ii) performing analyses to evaluate the potential effect of changes in the significant assumptions.

• Utilizing personnel with specialized knowledge and skill with valuation to assist in:

(i) assessing the reasonableness of certain significant assumptions incorporated into the various valuation models, and (ii) assessing the appropriateness of various valuation models utilized by management to determine the fair values of the assets acquired.

Impairment of Goodwill and Long-lived Assets – Data Analytics

As described in Notes 9 and 11 to the consolidated financial statements, during the third quarter of 2020, the Company identified a triggering event related to the Data Analytics operating segment resulting from lower than expected performance and performed a recoverability test of the Data Analytics asset group as of September 30, 2020.

As a result of not passing the recoverability test, the Company was required to measure the fair value of the asset group in order to determine the impairment

The fair value of the asset group was estimated based on the discounted future cash flows.

The Company also identified a triggering event related to goodwill and performed an impairment analysis.

To determine the fair value of the Data Analytics reporting unit, the Company used the discounted cash flow method under the income approach, and the guideline public company method under the market approach.

The significant assumptions used to determine the fair value of the asset group and the reporting unit included the projected sales growth rate, discount rate, customer attrition rate, obsolescence rate, and royalty rate.

We identified the impairment assessment of the Company’s goodwill and long-lived assets, including customer relationships, trademarks and patents, as a critical audit matter.

Auditing the Company’s impairment test was complex and highly judgmental because (i) there was significant judgment used by management to develop the fair value measurement, which led to a high degree of audit judgment and subjectivity in performing procedures relating to fair value measurement;

The primary procedures we performed to address this critical audit matter included:

• Evaluating the appropriateness of the method management used to estimate the fair value of the asset group and reporting unit.

• Evaluating the reasonableness of the projections for revenue growth and profitability by comparing the rates to the current and past performance of the business and evaluating whether these assumptions were consistent with evidence obtained in other areas of the audit and industry data.

• Testing the completeness, accuracy and relevance of underlying data used in the impairment assessment.

Reserve for Excess and Obsolete Inventory

As described in Note 6 to the consolidated financial statements, the Company has recorded net inventories of $11.8 million as of December 31, 2020.

The Company regularly reviews inventory quantities on hand and records provisions 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 management judgment is required to predict the potential impact that the current business climate and evolving market conditions could have on the Company’s assumptions.

We identified the reserve for excess and obsolete inventory as a critical audit matter.

The principal considerations for our determination are (i) there was significant judgment by management when developing the reserve for excess and obsolete inventory, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures relating to the reserve for excess and obsolete inventory;

and (ii) there was significant audit effort in performing procedures to evaluate management’s analysis and significant assumptions, including projections of future demand and risk of technological or competitive obsolescence for products.

The primary procedures we performed to address this critical audit matter included:

• Testing management’s process for developing the reserve for excess and obsolete inventory, including evaluating the appropriateness of the method,

• Testing the completeness, accuracy, and relevance of underlying data used in the estimate;

• Evaluating the reasonableness of the projections of future demand for products by evaluating whether the assumption was consistent with the product’s historical performance.

• Evaluating the reasonableness of management’s assumption related to the risk of technological or competitive obsolescence for products by evaluating whether the assumption was consistent with technological or competitive obsolescence experienced during the product life cycle of existing products.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Sources and Uses of Liquidity

As described in Note 1 to the Company’s financial statements, the Company currently funds its operations primarily from cash on hand.

The Company has a history of operating losses and expects to utilize material cash flows in operations in the 12 months subsequent to the issuance of the financial statements, and while the Company believes that cash and liquid assets will provide sufficient financial resources, it has identified conditions that could have a negative impact on liquidity.

In the event that the Company’s cash on hand is not sufficient to fund operations, the Company has identified actions it may take.

We identified the Company's future cash flows and management’s plans as a critical audit matter because of the significant judgment involved in estimating cash flows and the evaluation of management’s plans.

Auditing the Company's forecasted cash flows was especially challenging and required significant auditor judgment because (i) there was significant judgment used by management to develop their forecasts, which led to a high degree of audit judgment and subjectivity in performing procedures relating to projected liquidity, and (ii) there was significant effort in performing procedures to evaluate management's conclusion that the Company's plans will be effectively implemented.

The primary procedures we performed to address the critical audit matter included:

• Assessing the reasonableness of management’s key assumptions, including projected revenue, in the forecasted future cash flows and evaluating positive and negative evidence that support or contradict the conclusions reached by management.

• Evaluating management's plans in the context of other audit evidence obtained during the audit to assess the probability of successfully implementing the plans.

• Evaluating the adequacy of the Company’s disclosures in the notes to the financial statements.

/s/ BDO USA, LLP

As described in Note 1 to the Company’s consolidated financial statements, 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 on the Company’s operating cash flows, the monetization of non-core assets, and the availability of and access to debt and equity financing.

The Company has a history of losses and negative cash flows from operations and expects to use a significant amount of cash in the year following the issuance of the consolidated financial statements as of and for the year ended December 31, 2021.

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

The Company believes that their cash and liquid assets, including certain transactions

executed after year end, will provide the Company with sufficient financial resources to fund its operations and meet its capital requirements and anticipated obligations as they become due over the twelve-month period following the date the consolidated financial statements are issued.

We identified the evaluation of the Company’s assessment of its ability to continue as a going concern and related disclosures as a critical audit matter.

There was significant auditor judgment required in evaluating (1) forecasted revenue growth rates and operating expenses used in the Company’s forecasted cash flows analysis for the twelve-month period subsequent to issuance of the consolidated financial statements and (2) management's ability to implement its plans with respect to the disposition of assets held for sale.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design of certain internal controls related to the Company’s assessment of its ability to continue as a going concern, including the development of the forecasted revenue growth rates and operating expenses over the twelve-month period following the date the consolidated financial statements are issued, and the Company’s assessment of the probability of disposing assets held for sale.

To assess the Company’s ability to forecast revenue and operating expenses, we compared historical revenue and operating expense forecasts to actual results.

We also compared the Company's forecasted revenue growth rates to certain relevant industry trends.

We performed sensitivity analyses over the Company’s going concern assessment by evaluating the effect of changes in the forecasted revenue growth rates and operating expenses and the effect of potential outcomes of the disposition of assets held for sale.

We evaluated the reasonableness of the Company’s forecasted revenue and operating expenses by comparing them to management’s stated plans which were corroborated by meeting minutes of the Board of Directors.

We evaluated management’s plans related to disposition of certain assets held for sale by inspecting the contractual sale document.

We assessed the Company’s disclosures related to its going concern assessment by comparing the disclosures to the audit evidence obtained.

We have served as the Company’s auditor since 2021.

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Houston, Texas

Opinion on Internal Control over Financial Reporting

We have audited Flotek Industries, Inc.

(the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”) In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as “the financial statements”) and our report dated March 16, 2021, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

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

Material weaknesses have been identified regarding management’s failure to design and maintain controls over i) the forecasting process, ii) and nonrecurring transactions, including derecognition of items and cash flow presentation relating to disposal transactions and operating ineffectiveness of controls relating to impairment evaluations, and iii) going concern evaluations, all as described in management’s assessment.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 financial statements, and this report does not affect our report dated March 16, 2021 on those financial statements.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BDO USA, LLP

Houston, Texas

March 16, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of

Flotek Industries, Inc.

Opinion on the Financial Statements

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc.

and subsidiaries (the “Company”) as of December 31, 2019 and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

The Company’s management is responsible for these consolidated financial statements and for maintaining effective internal control over financial reporting.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

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We believe that our audit provides a reasonable basis for our opinion.

/s/ Moss Adams LLP

/s/ BDO USA, LLP

We began serving as the Company's auditor in 2020 and became the predecessor auditor in 2021.

Houston, Texas

March 16, 2021

We served as the Company’s auditor from 2017 to 2020.

FLOTEK INDUSTRIES, INC.

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Restricted cash 1,790 664

Accounts receivable, net of allowance for doubtful accounts of $ 1,316 and $ 1,527 at December 31, 2020 and 2019, respectively

Accounts receivable, net of allowance for doubtful accounts of $ 659 and $ 1,316 at December 31, 2021 and December 31, 2020, respectively

13,297 11,764

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Other current assets 3,740 3,127

Assets held for sale 2,762 —

Total current assets 42,599 66,455

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Deferred tax assets, net 279 223

Other intangible assets, net — 20,323

Other long-term assets 29 33

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Long-term debt 3,352 1,617

Deferred tax liabilities, net — 116

TOTAL LIABILITIES 30,052 39,039

Commitments and contingencies (Note 16)

Commitments and contingencies (See Note 15)

Stockholders’ equity:

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Additional paid-in capital 363,417 359,721

Accumulated other comprehensive (loss) income ( 19 ) 181

Accumulated other comprehensive income (loss) 81 ( 19 )

Accumulated deficit ( 309,214 ) ( 278,688 )

Treasury stock, at cost;

5,580,920 and 4,145,481 shares at December 31, 2020 and 2019, respectively

6,022,634 and 5,580,920 shares at December 31, 2021 and December 31, 2020, respectively

( 34,100 ) ( 33,851 )

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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 50,244 $ 86,210

See accompanying Notes to Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

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Years ended December 31,

Revenue $ 53,141 $ 119,353

Costs and expenses:

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

Corporate general and administrative 16,311 27,975

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

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

Operating costs and expenses:

Selling, general, and administrative 20,166 22,763

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 and long-lived assets 69,975 —

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

Impairment of goodwill 8,092 11,706

Total costs and expenses 196,789 194,853

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

Total operating costs and expenses 34,712 114,975

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

Other (expense) income:

Gain on lease termination 576 —

Other income (expense):

Paycheck protection plan loan forgiveness 881 —

Interest expense ( 78 ) ( 60 )

Other income (expense), net 503 1,708

Total other income (expense) 1,019 ( 311 )

Other income, net 87 1,079

Total other income 890 1,019

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 )

Basic and diluted earnings (loss) per common share:

Continuing operations $ ( 2.00 ) $ ( 1.29 )

Discontinued operations, net of tax — 0.72

Basic earnings (loss) per common share $ ( 2.00 ) $ ( 0.57 )

Loss per common share:

Basic $ ( 0.42 ) $ ( 2.00 )

Diluted $ ( 0.42 ) $ ( 2.00 )

Weighted average common shares:

Weighted average common shares used in computing basic and diluted loss per common share 68,312 58,750

See accompanying Notes to Consolidated Financial Statements.

Weighted average common shares used in computing basic loss per common share 73,361 68,312

Weighted average common shares used in computing diluted loss per common share 73,361 68,312

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

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

Years ended December 31,

Loss from continuing operations, net of tax $ ( 136,450 ) $ ( 76,073 )

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

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

Other comprehensive (loss) income:

Other comprehensive income (loss):

Foreign currency translation adjustment 100 ( 200 )

Comprehensive Loss $ ( 30,426 ) $ ( 136,650 )

See accompanying Notes to Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

Common Stock Treasury Stock Additional

Capital Accumulated

Other Comprehensive

Income (Loss) Retained Earnings

Deficit) Total Stockholders’ Equity

Shares Issued Par Value Shares Cost

Balance, December 31, 2018 62,163 $ 6 3,770 $ ( 33,237 ) $ 343,536 $ 31 $ ( 108,323 ) $ 202,013

Net loss — — — — — — ( 33,915 ) ( 33,915 )

Foreign currency translation adjustment — — — — — 150 — 150

Stock issued under employee stock purchase plan — — ( 18 ) — 35 — — 35

Restricted stock awards granted 924 — — — — — — —

Restricted stock forfeited — — 299 — — — — —

Restricted stock units granted 570 — — — — — — —

Treasury stock purchased — — 94 ( 247 ) — — — ( 247 )

Stock compensation expense — — — — 3,993 — — 3,993

Balance, December 31, 2019 63,657 $ 6 4,145 $ ( 33,484 ) $ 347,564 $ 181 $ ( 142,238 ) $ 172,029

Net loss — — — — — — ( 136,450 ) ( 136,450 )

Foreign currency translation adjustment — — — — — ( 200 ) — ( 200 )

Sale of common stock 200 — — — 339 — — 339

Stock issued under employee stock purchase plan — — ( 78 ) — 123 — — 123

Restricted stock awards granted 3,115 1 — — 2,322 — — 2,323

Restricted stock forfeited — — 1,302 — — — — —

Restricted stock units granted 86 — — — — — — —

Stock surrendered for exercise of stock options — — 66 — — — — —

Treasury stock purchased — — 146 ( 253 ) — — — ( 253 )

Stock issued in JP3 acquisition 11,500 1 — — 8,537 — — 8,538

Stock options granted — — — — 722 — — 722

Stock options exercised 111 — — ( 114 ) 114 — — —

Balance, December 31, 2020 78,669 $ 8 5,581 $ ( 33,851 ) $ 359,721 $ ( 19 ) $ ( 278,688 ) $ 47,171

See accompanying Notes to Consolidated Financial Statements.

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

FLOTEK INDUSTRIES, INC.

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

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

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

Adjustments to reconcile loss from continuing operations to net cash used in operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Change in fair value of contingent consideration ( 808 ) 2,716

Depreciation and amortization 1,011 3,412

Amortization of deferred financing costs — 1,428

Provision for doubtful accounts 652 512

Provision for doubtful accounts, net of recoveries ( 127 ) 652

Inventory purchase commitment provision and settlement ( 7,633 ) 9,402

Provision for excess and obsolete inventory 623 12,261

Impairment of fixed assets 30,178 —

(Gain) loss on sale of assets ( 561 ) 1,450

Impairment of goodwill 8,092 11,706

Impairment of right-of-use assets — 7,434

Impairment of property and equipment — 30,178

Impairment of intangible assets — 32,363

Stock compensation expense 3,044 4,235

Deferred income tax (benefit) provision ( 187 ) 18,307

Reduction in tax benefit related to stock-based awards — 24

Gain on sale of assets ( 94 ) ( 561 )

Non-cash lease expense 279 356

Stock compensation expense 3,757 3,044

Deferred income tax benefit ( 56 ) ( 187 )

Paycheck protection plan loan forgiveness ( 881 ) —

Changes in current assets and liabilities:

Accounts receivable, net 3,556 20,993

Accounts receivable ( 1,406 ) 3,556

Inventories 1,760 3,955

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Capital expenditures ( 39 ) ( 1,425 )

Proceeds from sale of businesses 9,907 155,498

Proceeds from sale of business — 9,907

Proceeds from sale of assets 151 109

Payments for acquisitions, net of cash acquired ( 26,284 ) —

Purchase of patents and other intangible assets ( 8 ) ( 614 )

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

Purchase of JP3, net of cash acquired — ( 26,284 )

Abandonment of patents and other intangible assets — ( 8 )

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

Cash flows from financing activities:

Borrowings on revolving credit facility — 42,984

Repayments on revolving credit facility — ( 92,715 )

Payment for contingent consideration — ( 1,200 )

Proceeds from Paycheck Protection Program loan 4,788 —

Proceeds from paycheck protection plan loan — 4,788

Payments to tax authorities for shares withheld from employees ( 390 ) ( 253 )

Proceeds from issuance of stock 80 462

Payments for finance leases ( 62 ) ( 70 )

Purchase of treasury stock ( 253 ) ( 247 )

Proceeds from sale of common stock 462 35

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

Discontinued operations:

Net cash used in operating activities — ( 322 )

Net cash provided by investing activities — 337

Net cash flows provided by discontinued operations — 15

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

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

Net change in cash, cash equivalents and restricted cash ( 26,000 ) ( 61,914 )

Cash, cash equivalents at beginning of period 100,575 3,044

Restricted cash at the beginning of the period 663 663

Cash and cash equivalents at the beginning of period 38,660 100,575

Restricted cash at the beginning of period 664 663

Cash and cash equivalents and restricted cash at beginning of period 39,324 101,238

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Cash, cash equivalents and restricted cash at end of period $ 13,324 $ 39,324

See accompanying Notes to Consolidated Financial Statements.

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

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2021 and 2020

(In thousands of U.S.

dollars and shares)

Common Stock Treasury Stock Additional

Capital Accumulated

Comprehensive

Income (Loss) Accumulated Deficit Total Stockholders’ Equity

Value Shares Cost

Balance, December 31, 2020 78,669 $ 8 5,581 $ ( 33,851 ) $ 359,721 $ ( 19 ) $ ( 278,688 ) $ 47,171

Net loss — — — — — — ( 30,526 ) ( 30,526 )

Foreign currency translation adjustment — — — — — 100 — 100

Stock issued under employee stock purchase plan — — ( 136 ) — 80 — — 80

Restricted stock granted 1,702 — — — — — — —

Restricted stock forfeited ( 284 ) 422 — — — — —

Restricted units vested 86 — — — — — — —

Stock compensation expense — — — — 3,757 — — 3,757

Shares withheld to cover taxes ( 76 ) — 155 ( 273 ) ( 150 ) — — ( 423 )

( 613 ) — — 24 9 — — 33

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

(1) See Note 16, “Stockholders’ Equity” for further discussion.

Common Stock Treasury Stock Additional

Capital Accumulated

Comprehensive

Income (Loss) Accumulated Deficit Total Stockholders’ Equity

Value Shares Cost

Balance, December 31, 2019 63,657 $ 6 4,145 $ ( 33,484 ) $ 347,564 $ 181 $ ( 142,238 ) $ 172,029

Net loss — — — — — — ( 136,450 ) ( 136,450 )

Foreign currency translation adjustment — — — — — ( 200 ) — ( 200 )

Sale of common stock, net of issuance cost 200 — — — 339 — — 339

Stock issued under employee stock purchase plan — ( 78 ) — 123 — — 123

Restricted stock granted 3,201 1 — — — — — 1

Restricted stock forfeited — — 1,302 — — — — —

Treasury stock purchased — — 146 ( 253 ) — — — ( 253 )

Stock compensation expense — — — — 3,044 — — 3,044

Excess tax benefit related to share-based awards — — 66 — — — — —

Stock issued in JP3 acquisition 11,500 1 — — 8,537 — — 8,538

Stock options exercised 111 — — ( 114 ) 114 — — —

Balance, December 31, 2020 78,669 $ 8 5,581 $ ( 33,851 ) $ 359,721 $ ( 19 ) $ ( 278,688 ) $ 47,171

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Flotek Industries, Inc.

(“Flotek” or the “Company”) is a technology-driven chemistry and data company that serves customers in industrial, commercial and consumer markets.

The Company’s Chemistry Technologies (“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 Data Analytics (“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 company, Flotek helps customers across industrial, commercial, and consumer markets improve their environmental performance.

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

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

The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, while reducing their carbon footprint, energy consumption and emissions.

The Company formed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”).

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

For further discussion of our operations and segments, see Note 22, “Business Segment, Geographic and Major Customer Information.” For further discussion of the JP3 acquisition, see Note 3, “Business Combination.”

The Company’s two operating segments, CT and DA, are both supported by its Research & Innovation advanced laboratory capabilities.

For further discussion of our operations and segments, see Note 21, “Business Segment, Geographic and Major Customer Information.” For further discussion of the JP3 acquisition, see Note 3, “Business Acquisition.”

The Company was initially incorporated under the laws of the Province of British Columbia in 1985.

In October 2001, the Company changed its corporate domicile to the State of Delaware.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic.

The pandemic negatively impacted the U.S.

and global economy, disrupted 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 our services and products.

The Company’s primary markets in the U.S.

are particularly subject to the impacts on the oil and gas industry.

As a result, 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 and its effect on the oil and gas industry contributed to additional impairment charges to goodwill and intangible assets in the third quarter of 2020.

See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” and Note 9, “Goodwill.” In addition, the Company increased the provision of excess and obsolete inventory as discussed in Note 6, “Inventories.” Future developments and effects are highly uncertain and cannot be predicted, including the scope and duration of the pandemic.

This uncertainty could have a material impact on accounting estimates and assumptions used in our consolidated financial statements.

Sources and Uses of Liquidity

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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.

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 by our customers could have a negative impact on our liquidity.

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

In the event that the Company’s existing 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;

Access to capital is dependent on the Company’s operating cash flows, the monetization of non-core assets, and the availability of and access to debt and equity financing.

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

While we believe that our cash and liquid assets, including the actions taken subsequent to year end discussed below and in Note 22, “Subsequent Events”, will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, 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 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.

Profrac shall pay to the company, as liquidated damages an amount equal to twenty-five percent ( 25 %) of the difference between (i) the aggregate Purchase Price of the quantity of Products comprising the Minimum Purchase Obligation 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 Monahans, 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.

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• 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 or at all.

Note 2 — Summary of Significant Accounting Policies

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The consolidated financial statements include the accounts of Flotek Industries, Inc.

and all wholly-owned subsidiaries.

Where Flotek owns less than 100% of the share capital of its subsidiaries but is still considered to have sufficient ownership to control the business, results of the business operations are consolidated within the Company’s financial statements.

The ownership interests held by other parties are shown as noncontrolling interests.

During the fourth quarter of 2018, the Company classified the Consumer and Industrial Chemistry Technologies (“CICT”) segment as held for sale based on management’s intention to sell this business, which occurred in February 2019.

The results of operations of this segment are presented as “Income from discontinued operations” in the consolidated statements of operations, and the related cash flows of this segment have been reclassified to discontinued operations for all periods presented.

For further discussion, see Note 4, “Discontinued Operations.”

and subsidiaries it controls.

All significant intercompany accounts and transactions have been eliminated in consolidation.

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Restricted Cash

The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution.

The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution and as of December 31, 2021 an amount held in escrow of $ 1.75 million for amounts due under the terms of the legal settlement discussed in Note 15, Commitments and Contingencies.

Accounts Receivable and Allowance for Doubtful Accounts

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The Company writes off specific accounts receivable when they are determined to be uncollectible.

The recovery of accounts receivable previously written off is recorded as a reduction to the provision for doubtful accounts charged to operating expense.

The majority of the Company’s customers are engaged in the energy industry.

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Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):

Changes in the allowance for doubtful accounts are as follows (in thousands):

Years ended December 31,

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Balance, end of year $ 659 $ 1,316

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.

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

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

The Company 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 estimated market value if those amounts are determined to be less than cost.

See Note 6 “Inventories” for discussion of the inventory write-down recorded in 2020.

The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly.

Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost.

Write-downs or write-offs of inventory are charged to cost of goods sold.

Property and equipment

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Computer equipment and software 3 - 7 years

Property and equipment, including ROU assets, are reviewed for impairment on a quarterly basis or 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.

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

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

Assets to be disposed of are reported at the lower of the carrying amount or the fair value less cost to s ell.

Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable.

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

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

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

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

Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to s ell and depreciation is ceased.

Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.

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 during the fourth quarter, 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.

The Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments.

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.

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.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The quantitative impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the estimated fair value of each reporting unit with goodwill to its carrying amount, including goodwill.

The quantitative impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the estimated fair value of the reporting unit to its carrying amount, including goodwill.

To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined, when appropriate, with a market-based 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 reporting unit.

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

We use discount rates that are commensurate with the risks and uncertainties inherent in the respective business and in our

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

internally developed forecasts.

The market-based approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly traded businesses operating in industries consistent with the reporting unit.

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.

Other Intangible Assets

The Company’s other intangible assets have finite and indefinite lives and included customer relationships, technology and know-how, trademarks, brand names and purchased patents.

The cost of intangible assets with finite lives is amortized using the straight-line method over the estimated period of economic benefit.

Asset lives are adjusted whenever there is a change in the estimated period of economic benefit.

No residual value has been assigned to these intangible assets.

Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

These conditions may include a change in the extent or manner in which the asset is being used or a change in 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 flow models.

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.

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.

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.

Business Combinations

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

The Company allocates the fair value of purchase consideration to the assets acquired, liabilities assumed and any noncontrolling 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 noncontrolling 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.

Fair Value Measurements

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value.

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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,” for further discussion on revenue.

The Company recognizes revenue based on a five-step model when all of the following criteria have been met:

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Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.

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.

The Company applies several practical expedients including:

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

• The majority of the Company’s services are short-term in nature with a contract term of one year or less.

As a result the Company does not disclose the transaction price allocated to remaining performance obligations.

• The Company’s payment terms are short-term in nature with settlements of one year or less.

As a result the Company does not adjust the promised amount of consideration for the effects of a significant financing component.

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

• The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.

Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.

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

Foreign Currency Translation

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Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.

Comprehensive Income (Loss)

Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders.

The Company’s comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments.

Comprehensive Loss

Comprehensive loss encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders.

The Company’s comprehensive loss includes consolidated net loss and foreign currency translation adjustments.

Research and Development Costs

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse.

Deferred tax assets and liabilities are recognized related to the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company’s assets and liabilities using statutory tax rates at the applicable year end.

Deferred tax assets are also recognized for operating loss and tax credit carry forwards.

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Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.

Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.

Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

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

Stock-Based Compensation

Stock-based compensation expense for stock-based payments, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values.

Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values.

The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award.

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Actual results could differ from these estimates.

Significant items subject to estimates and assumptions include application of the carrying amount and useful lives of property and equipment and intangible assets, impairment assessments, business combinations, stock-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.

Discontinued Operations

The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.

Significant items subject to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible assets;

goodwill, property and equipment and intangible asset impairment assessments;

allocation of purchase price in business combinations;

stock-based compensation expense;

and valuation allowances for accounts receivable, inventories, and deferred tax assets.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

The reclassifications did not impact previously recorded net loss and stockholders’ equity.

Certain prior year amounts in the consolidated statement of operations and consolidated statement of stockholders’ equity have been reclassified to conform to the current year presentation..

In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross profit (loss) and eliminated the reporting of operating expenses (excluding depreciation and amortization) on the consolidated statements of operations to conform to customary industry reporting practices.

In connection with this change in presentation, the Company reclassified selling costs of $ 6.5 million to selling, general and administrative expenses which were previously reported in operating expenses for the year ended December 31, 2020.

The reclassifications and change in presentation of the statements of operations did not impact previously recorded net loss and stockholders’ equity.

Business Combinations

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

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.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

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Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.

(a) Recently Adopted Guidance

Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No.

2018-13, “ Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement .” This standard removes, modifies and adds additional requirements for disclosures related to fair value measurement in the FASB’s Accounting Standards Codification (“ASC”) 820.

The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted in any interim period.

Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.

(b) New Accounting Standards Issued But Not Adopted as of December 31, 2020

New Accounting Standards Issued But Not Adopted as of December 31, 2021

The FASB issued ASU No.

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The pronouncement is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued.

The Company is currently evaluating the impact of this standard on the consolidated financial statements and related disclosures.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluated the impact of this standard and determined that there is no impact on the consolidated financial statements and related disclosures.

The FASB issued ASU No.

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The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.

Note 3 — Business Combination

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

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

The FASB issued ASU No.

2020-06, “ Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

” This standard changes the accounting for convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to be classified in equity and amends diluted earnings per share calculations for certain convertible debt instruments.

The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, with early adoption allowed for fiscal years beginning after December 15, 2020.

The Company has adopted this standard on January 1, 2022, and is evaluating the impact of this standard, on the consolidated financial statements and related disclosures.

The FASB issued ASU No.

2021-10, “ Government Assistance (Topic 832);

Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.

The pronouncement is effective for fiscals years beginning after December 15, 2021.

The Company is currently evaluating the impact of this standard on the consolidated financial statements and related disclosures.

Note 3 — Business Acquisition

On May 18, 2020, the Company acquired 100 % ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction.

The transaction was valued at approximately $ 36.6 million as of the transaction closing date, comprised of $ 25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $ 8.5 million, net of a discount for marketability due to a lock-up period.

The payment of $ 25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $ 25.0 million plus net working capital in excess of the target net working capital of $ 1.9 million.

Additionally, the Company was subject to contingent consideration with an estimated fair value of $ 1.2 million for two potential earn-out provisions up to $ 5.0 million based on certain stock performance targets.

The first and second earn-out provisions are payable if the ten-day volume-weighted average share price equals or exceeds $ 2 per share and $ 3 per share, respectively, before May 18, 2025.

The payment of $ 25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing on May 18, 2020 was comprised of $ 25.0 million plus net working capital in excess of the target net working capital of $ 1.9 million.

Additionally, the Company was subject to contingent consideration with an estimated fair value of $ 1.2 million at acquisition date for two potential earn-out provisions totaling up to $ 5.0 million based on certain stock performance targets.

The first and second earn-out provisions occur if the ten-day volume-weighted average share price equals or exceeds $ 2 per share and $ 3 per share, respectively, before May 18, 2025.

See Note 13, “Fair Value Measurements,” for additional information on the current estimated fair value of the contingent consideration.

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tradenames and trademarks $ 1,100

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Net assets acquired $ 36,596

See Note 8, “Goodwill,” for additional information on goodwill remeasurement and impairment.

The Company recorded transaction costs of $ 0.5 million for professional services including legal, accounting, and other professional or consulting fees in connection with the JP3 acquisition to the Company’s operating expenses (excluding depreciation and amortization) in the consolidated statements of operations during the second quarter of 2020.

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During the third quarter of 2020, the Company made certain measurement period adjustments to inventory, resulting in an increase of goodwill of $ 2.3 million .

See Note 6, “ Inventories.”

As discusse d in Note 11, “Impai rment of Fixed, Long-lived and Intangible Assets,” during the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other , and completed an impairment analysis at the DA reporting unit level.

During the third quarter of 2020, the Company recognized a finite-lived intangible assets impairment charge of $ 12.5 million in the DA reporting unit, which resulted from lower performance than expected by the reporting unit.

The extended impact of COVID-19 and subsequent decline in oil and gas demand further contributed to the impairment charge.

As a result of these factors, the Company concluded that sufficient indicators existed to require an interim quantitative assessment of goodwill for that reporting unit as of September 30, 2020.

The fair value of the reporting unit was estimated based on an analysis of the present value of future discounted cash flows, and the Company recognized a goodwill

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

impairment charge of $ 11.7 million.

The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth.

During the third quarter of 2020, the first stock performance target was achieved.

In October 2020, the Company paid $ 2.5 million into escrow in accordance with the terms of the JP3 Membership Interests Purchase Agreement to partially settle the earn-out payment that had been recorded as an accrued liability at September 30, 2020.

At December 31, 2020, the estimated fair value of the second stock performance earn-out provision was $ 1.4 million, which was recorded as a contingent liability in accrued liabilities.

As the achievement of earn-out provisions and changes in fair value estimates are not acquisition adjustments, the Company recorded $ 2.7 million of expense for achievement of the first stock performance target and the increase in the fair value of the contingent consideration for the second earn-out provision in operating expenses for the year ended December 31, 2020.

Note 4 — Discontinued Operations

During the fourth quarter of 2018, the Company initiated and began executing a strategic plan to sell its CICT segment.

The Company met all of the criteria to classify the CICT segment as held for sale in the fourth quarter 2018, and classified the assets, liabilities and results of operations for this segment as “Discontinued Operations” for all periods.

On January 10, 2019, the Company entered into a Share Purchase Agreement with Archer-Daniels-Midland Company (“ADM”) for the sale of all of the shares representing membership interests in its wholly-owned subsidiary, Florida Chemical Company, LLC (“FCC”), which represented the CICT segment.

Effective February 28, 2019, the Company completed the sale of FCC to ADM for $ 175.0 million in cash consideration, subject to post-closing working capital adjustments and potential indemnification claims by ADM.

ADM placed $ 17.5 million in escrow for these items, which were released over a period of time through the second quarter of 2020.

The escrow balance included in other current assets was zero and $ 9.9 million at December 31, 2020 and 2019, respectively.

P ursuant to the terms of the Share Purchase Agreement, Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, entered into a supply agreement in which FCC would supply terpene at specified prices for specified quantities.

As of December 31, 2019, the Company concluded that the original long-term supply agreement met the definition of a loss contract.

As such, the Company recognized a current liability and loss of $ 15.8 million as of December 31, 2019.

The loss was capped by the price paid for the terpene supply agreement amendment, executed in February 2020, which aligned purchase commitments to expected usage for blended products as of December 31, 2019.

Pursuant to the post-closing working capital dispute resolution procedures set forth in the Share Purchase Agreement, the Company and ADM engaged a neutral third-party auditor to help reach agreement on the final post-closing working capital adjustment.

In February 2020, the third-party auditor ruled in favor of awarding ADM the entire disputed amount of $ 4.1 million.

As a result, the working capital adjustment escrow balance was released to ADM and a corresponding reduction was made to the gain on sale of business as of December 31, 2019.

The following summarized financial information has been reported as Discontinued Operations for the years ended December 31 (in thousands):

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consumer and Industrial Chemistry Technologies

Discontinued operations:

Revenue $ — $ 11,031

Operating expenses — ( 11,572 )

Depreciation and amortization — —

Research and development — ( 69 )

(Loss) income from operations — ( 610 )

Other income — 35

Gain on sale of businesses — 65,417

Income before income taxes — 64,842

Income tax expense — ( 22,684 )

Net income from discontinued operations $ — $ 42,158

Note 4 — Revenue from Contracts with Customers

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Disaggregation of Revenue

The Company has disaggregated revenues by product sales (point-in-time revenue recognition) and service revenue (over-time revenue recognition).

Product sales accounted for 95 % or more of total revenue for the years ended December 31, 2020 and 2019.

The Company differentiates revenue and based on whether the source of revenue is attributable to products or services.

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

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

Years ended December 31,

Products $ 50,478 $ 115,683

$ 40,265 $ 50,478

Services 3,003 2,663

$ 43,268 $ 53,141

(1) Product revenues for 2021 include sales to a related party as described in Note 20, “Related Party Transactions.”

Arrangements with Multiple Performance Obligations

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Additionally, both segments offer various services associated to products sold which includes field services, installation, maintenance, and other functions.

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

For DA, services are recognized

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

upon completion of commissioning and installation due to the short-term nature of the performance obligation.

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

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Additionally, DA may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions.

Subscription-type arrangements were not a material revenue stream in 2020.

Contract Balances

Subscription-type arrangements were not a material revenue stream in the years ended December 31, 2021 and 2020.

Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional.

Contract liabilities associated with incomplete performance obligations are not material.

Practical Expedients and Exemptions

The Company applies several practical expedients as discussed below:

• Sales commissions are expensed when incurred because the amortization period would have been one year or less.

These costs are recorded within corporate general and administrative expenses.

• The majority of the Company’s services are short-term in nature with a contract term of one year or less.

For those contracts, the Company has utilized the practical expedient in ASC 606-10-50-14, exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

• The Company’s payment terms are short-term in nature with settlements of one year or less.

The Company utilized the practical expedient in ASC 606-10-32-18, exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

For these contracts, the Company has utilized the practical expedient in ASC 606-10-55-18, allowing the Company to recognize revenue in the amount to which it has a right to invoice.

Accordingly, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.

Contract assets associated with incomplete performance obligations are not material.

Note 5 — Inventories

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Changes in the reserve for excess and obsolete inventory are as follows (in thousands):

Years ended December 31,

Balance, beginning of year $ 11,058 $ 5,698

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$ 10,141 $ 11,058

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on an assessment of market values.

Write-downs or write-offs of inventory are charged to cost of goods sold.

The provision for excess and obsolete inventory includes charges of $ 8.4 million for the CT segment and $ 3.9 million for the DA segment, offset by sales and disposals of $ 6.9 million, primarily related to terpene sales in 2020.

At December 31, 2020, the Company recognized an increase in the reserve for excess and obsolete inventory of $ 0.4 million due to terpene on hand exceeding anticipated usage.

Also see Note 16, “Commitments and Contingencies,” for terpene purchase commitments at December 31, 2020.

At December 31, 2019, the Company recorded a reserve for excess terpene of $ 4.4 million.

The provisions recorded in the year ended December 31, 2021 w ere $ 0.6 million for the CT segment an d nil for the DA segment.

The provisions recorded in the year ended December 31, 2020 were $ 8.4 million for the CT segment and $ 3.9 million for the DA segment.

Note 6 — Property and Equipment

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Depreciation expense totaled $ 1.0 million and $ 2.5 million for the years ended December 31, 2021 and 2020, respectively.

During the first quarter of 2020, the Company recognized an impairment of property and equipment of $ 30.2 million .

See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” During the year ended December 31, 2019, no impairments were recognized related to property and equipment.

Note 8 — Leases

The Company has leases for corporate offices, research and development facilities, warehouses, sales offices and equipment.

The leases have remaining lease terms of one to fifteen years , s ome of which include options to extend the leases for up to ten years .

The Company’s largest lease is for the Global Research and Innovation Center (“GRIC”).

The lease was entered into on July 12, 2015, with a fifteen-year term and an option to renew for an additional seven years .

The rent payments on the GRIC lease escalate each year until the end of the term.

Operating lease right-of-use assets and corresponding operating lease liabilities, net of deferred rent, represent the present value of future lease payments under operating leases with terms of greater than twelve months.

Leases with an initial expected term of 12 months or less are not recorded on the balance sheet.

The Company recognizes lease expense for these leases on a straight-line basis over the expected lease term.

The discount rate used upon adoption of ASC 842, “Leases,” in the calculation was the incremental borrowing rate on the revolving credit facility in 2019.

During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the GRIC during the second quarter of 2020.

In addition, the lease liability and corresponding right-of-use assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC.

The remeasurement resulted in adjustments to lease liabilities and right-of-use assets totaling of $ 6.2 million at March 31, 2020.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition, during the first quarter of 2020, the Company recorded an impairment of the right-of-use assets totaling $ 7.4 million.

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

During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office in exchange for a one-time payment of $ 1.0 million and moved all corporate employees to the GRIC facility effective as of June 29, 2020.

As a result of terminating the corporate headquarters office lease and making the one-time payment, the Company recorded a gain on lease termination of $ 0.6 million.

In the third quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas, in their current condition and as a result the associated assets in the amount of $ 2.8 million are classified as held for sale as of December 31, 2021.

Subsequent to December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility which is expected to close in April 2022.

See further discussion in Note 22, Subsequent Events.

During the year ended December 31, 2020, the Company recorded an impairment of property and equipment assets totaling $ 30.2 million.

No impairment was recognized during the year ended December 31, 2021.

Refer to Note 10 — Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets.

Note 7 — Leases

In August 2021, the company entered into a five-year triple net operating lease agreement to lease its warehouse facility in Monahans, Texas, for $ 20,000 per month, and the tenant occupied the warehouse facility in September 2021.

The Company will recognize rental income, including rent, taxes and insurance over the lease period.

Rental income recognized during the year ended December 31, 2021 was $ 76,000 and was included in other income in the consolidated statement of operations.

In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $ 40,000 per month for sixty-four months .

Rental income recognized during the year ended December 31, 2021 was $ 121,000 and was included in other income in the consolidated statement of operations.

During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the Global Research and Innovation Center (“GRIC”) during the second quarter of 2020.

In addition, the operating lease liability and corresponding operating lease right-of-use (“ROU”) assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC.

The remeasurement resulted in reductions to lease liabilities and ROU assets totaling of $ 6.2 million during the year ended December 31, 2020.

In addition, during the year ended December 31 2020, the Company recorded an impairment of the ROU assets totaling $ 7.4 million.

No impairment was recognized during the year ended December 31, 2021.

Refer to Note 10, “Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets”.

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

For the years ended

Years ended December 31,

Operating lease expense $ 797 $ 1,370

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Financing cash flows from finance leases 8 70

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturities of lease liabilities as of December 31,2021 are as follows (in thousands):

Years ending December 31, Operating Leases Finance Leases

2 unchanged sentences

2024 1,348 23

2024 1,347 23

Thereafter 5,453 —

2 unchanged sentences

Present value of lease liabilities $ 8,381 $ 94

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental balance sheet information related to leases is as follows for the years ended December 31 (in thousands):

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

December 31, 2021 December 31, 2020

Operating Leases

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Finance leases 8.9 % 9.0 %

Rent expense under operating leases totaled $ 1.6 million for the year ended December 31, 2020, and $ 2.9 million for the year ended December 31, 2019.

FLOTEK INDUSTRIES, INC.

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Note 8 - Goodwill

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.

The Company identified the acquired company as the DA segment, a new operating segment.

See Note 3, “Business Combination.” The Company recorded goodwill of $ 17.5 million at the date of acquisition.

During the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other , and completed an impairment analysis at the DA reporting unit level.

During the third quarter of 2020, the Company recognized a goodwill impairment charge of $ 11.7 million.

Also, during the third quarter of 2020, the Company made certain measurement period adjustments to inventory obtained in the JP3 acquisition, resulting in an increase of goodwill of $ 2.3 million .

See Note 6, “Inventories.”

As discussed in Note 3 Business Acquisition, during the second quarter of 2020, the Company acquired 100 % ownership of JP3, as a new operating segment and reporting unit.

The Company recorded goodwill of $ 17.5 million.

During the third quarter of 2020, the Company made certain measurement period adjustments to inventory obtained in the JP3 acquisition, resulting in an increase of goodwill of $ 2.3 million .

On October 1 of each fiscal year, we perform our annual goodwill impairment test for the DA reporting unit.

We also test goodwill for impairment whenever events or circumstances occur which, in our judgment, could more likely than not reduce the fair value of the DA reporting unit below its carrying amount.

Potential impairment indicators include, but are not limited to, (i) the results of our most recent annual impairment testing, in particular the magnitude of the excess of fair value over carrying value observed, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, and (iii) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any.

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.

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 anticipated to be moderate in the near term as operators continue to show an abundance of fiscal discipline in development spending.

Midstream thru-put volumes remain 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.

Based upon the results of our annual quantitative impairment test, we concluded that the carrying value of the DA reporting unit exceeded its estimated fair value as of the testing date, which resulted in goodwill impairment charges of $ 8.1 million.

The goodwill impairment was calculated as the amount that the carrying value of the DA reporting unit, including any goodwill, exceeded its fair value.

The carrying value of the DA reporting unit equals its fair value upon completion of the goodwill impairment test.

Changes in the carrying amount of goodwill are as follows (in thousands):

Activity during the year ended December 31, 2020:

Balance at December 31, 2019 $ —

Acquisition goodwill recognized 17,522

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Goodwill impairment recognized ( 11,706 )

Goodwill balance, net of impairment $ 8,092

Balance at December 31, 2020 $ 8,092

Goodwill impairment recognized ( 8,092 )

Balance at December 31, 2021 $ —

December 31, 2021 December 31, 2020

Goodwill $ 19,798 $ 19,798

1 unchanged sentence

Goodwill balance, net of impairment $ — $ 8,092

Note 10 — Other Intangible Assets

Intangible assets acquired are amortized on a straight-line basis.

Amortization of intangible assets acquired totaled $ 0.9 million and, $ 2.0 million for the years ended December 31, 2020 and 2019, respectively.

Amortization of deferred financing costs totaled $ 1.4 million for the year ended December 31, 2019.

In March 2019, the Company repaid the outstanding balance of its credit facility.

See Note 13, “Debt.”

During the year ended December 31, 2020, the Company recorded impairment charges of $ 32.4 million for other intangible assets, impairing all finite-lived intangible assets, including those acquired in the May 2020 acquisition of JP3.

See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” During the year ended December 31, 2019, no impairments were recognized related to other intangible assets.

At December 31, 2019, the net carrying value of other intangible assets was $ 20.3 million, as follows (in thousands):

Cost Accumulated

Finite-lived intangible assets:

Patents and technology $ 17,493 $ ( 6,715 )

Customer relationships 15,367 ( 6,013 )

Trademarks and brand names 1,351 ( 1,160 )

Total finite-lived intangible assets $ 34,211 $ ( 13,888 )

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — Impairment of Fixed, Long-lived and Intangible Assets

The Company recorded impairment charges of fixed, long-lived and intangible assets during the year ended December 31, 2020, as follows (in thousands):

Property and equipment, net $ 30,178

Note 9 — Other Intangible Assets

See Note 10, “Impairment of Property and Equipment, Operating Lease Right-of-use Assets, and Intangible Assets.”

Amortization of intangible assets acquired totaled $ 0.9 million for the year ended December 31, 2020.

There was no intangible amortization recorded during the year ended December 31, 2021.

Note 10 — Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets

There were no impairments of property and equipment, operating lease right-of-use assets, and intangible assets during the year ended December 31, 2021.

The Company recorded impairment charges of property and equipment, operating lease right-of-use assets and intangible assets during the year ended December 31, 2020, as follows (in thousands):

Property and equipment $ 30,178

Operating lease right-of-use assets 7,434

Other Intangibles:

Other Intangible Assets:

Patents and technology 14,733

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Trademarks and brand names 1,238

Total other intangibles 32,363

Total impairment of fixed, long-lived and intangible assets $ 69,975

During the first quarter of 2020, the price of crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the industry, which began to negatively impact the Company’s results of operations.

These declines of results of operations were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to COVID-19.

Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020.

Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows.

Total other intangible assets 32,363

Total impairment charges $ 69,975

During the first quarter of 2020, with the onset of the global COVID-19 Pandemic and the significant disruption across the industry, the Company’s operations were negatively impacted resulting in actual and projected declines in the Company’s revenues and results of operations.

These declines were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to the pandemic.

Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim impairment test was performed as of March 31, 2020, for the CT segment.

Using the income approach, the fair value of the CT segment asset group was determined based on the present value of future cash flows.

The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group.

Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of March 31, 2020, and an impairment loss of $ 57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and the related negative impact on oil and natural gas prices on projections of future cash flows.

During the second quarter of 2020, the Company purchased JP3 and formed the DA segment.

During the third quarter of 2020, revenue declined due to limited access to worksites, inability to install equipment, changes in the Company’s leadership, reduction of capital spending by clients due to COVID-19, inability to present to new customers and difficulty in working on the international marketing of the Verax analyzer.

Further, the Company was negatively impacted by reduced demand in the oil and gas sector because of reductions in capital spending across our customer base, lower than anticipated growth in the international market gained from the JP3 acquisition and the delayed start of the Company’s global sales business executive.

Although the site lockdowns and extreme caution to prevent the spread of COVID-19 that began in the first half of 2020 began to ease during the third quarter, the segment saw very little of the expected repeat business and almost none from new customers due to frozen budgets.

Secondly, COVID-19 restrictions adversely impacted the Company’s ability to physically gain on-site access to customers’ operations, including laboratory and testing facilities, which is a critical component to JP3’s multi-phased sales approach.

In consideration of these events, management reevaluated forecasted sales activity, expected margins and the long-term expectations of the DA segment for the third quarter of 2020.

Based on these factors, the Company concluded a triggering event occurred in the DA segment, and accordingly, an interim quantitative impairment test was performed as of September 30, 2020.

Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows.

Management performed an interim impairment test as of September 30, 2020 for the DA business segment which was negatively impacted by reduced demand in the oil and gas sector because of reductions in capital spending across our customer base, lower than anticipated growth in the international market gained from the JP3 acquisition.

Using the income approach, the fair value of the DA segment asset group was determined based on the present value of future cash flows.

The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group.

Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of September 30, 2020.

The Company recognized an impairment loss of $ 12.5 million in the DA reporting unit finite-lived intangible assets, which resulted primarily from lower performance than expected by the reporting unit.

Based on the results of the assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of September 30, 2020.

The Company recognized an impairment loss of $ 12.5 million in the DA segment asset group.

During the year ended December 31, 2020, all finite lived intangible assets were fully impaired.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

impact of COVID-19 and declines in the oil and gas sector also contributed to the impairment loss.

Also see Note 3, “Business Combination.” No impairments of fixed, long-lived and intangible assets occurred during the fourth quarter of 2020.

Note 11 — Accrued Liabilities

Current accrued liabilities are as follows (in thousands):

Loss on purchase commitments (Note 16) $ 9,402 $ 15,750

Severance costs $ 2,581 $ 3,558

Loss on purchase commitments (Note 15) 1,750 9,402

Payroll and benefits 1,054 1,789

Legal costs 1,013 333

Contingent liability for earn-out provision 608 1,416

Deferred revenue, current 528 146

Taxes other than income taxes 241 544

Due to third parties 36 434

Legal costs 333 149

Deferred revenue, current 146 —

Other 1,185 653

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Note 12 — Debt

Long-term debt is as follows (in thousands):

Long-term debt

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

Small Business Administration (“SBA”).

In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $ 0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek.

The PPP loans had a fixed interest rate of 1 % and originally a two-year term, maturing in April and May 2022, respectively.

No payments of principal or interest were required during the years ended December 31, 2021 or 2020.

A portion of the loans may be eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least 60 % of the eligible costs incurred were used for payroll.

Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company.

This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that was not significantly detrimental to the business.

The forgiveness of the loans is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our past and future adherence to the forgiveness criteria.

The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.

During the second quarter of 2021, the Company applied for forgiveness of the JP3 PPP loan with the SBA.

In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest were fully forgiven.

Accordingly, during the second quarter of 2021, the Company recorded $ 0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other income on the consolidated statement of operations.

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

The Company has submitted to the SBA for forgiveness of substantially all of the Flotek PPP loan but as of December 31, 2021 and as of the date of this filing, the Company has not received a forgiveness notice.

If the loan is not forgiven, monthly payments will be due over the remaining term of the loan.

Denial of the forgiveness of the Flotek PPP loan will negatively impact the Company’s liquidity as discussed in Note 1, “Organization and Nature of Operations”.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Flotek PPP loan $ 4,788 $ 4,788

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

Payroll Protection Program Loan

In April 2020, the Company received a $ 4.8 million loan under the Payroll Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S.

Small Business Administration (“SBA”).

In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $ 0.9 million obtained by JP3 in April 2020.

The PPP loans have a fixed interest rate of 1 % and have a two-year term, maturing 2022.

No payments of principal or interest were required during the year ended December 31, 2020.

Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company.

As of December 31, 2020, the Company had not applied for or estimated the potential forgiveness on the PPP loans.

The receipt of these funds, and the forgiveness of the loans attendant to these funds, is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

past and future adherence to the forgiveness criteria.

The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to a government audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.

Bank Credit Facility

Through March 1, 2019, the Company maintained a revolving credit facility with PNC Bank, National Association (the “Credit Facility”) with a maximum revolving advance amount of $ 75 million.

Upon closing the sale of the CICT segment in 2019, the Company repaid the outstanding balance, interest and fees on the Credit Facility on March 1, 2019, and terminated the Credit Facility.

Note 13 — Fair Value Measurements

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Fair Value of Other Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these accounts.

The PPP loans for Flotek and JP3 also approximate fair value due to maturity in less than eighteen months.

The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts.

The carrying amount of the Flotek PPP loan approximates its fair value as of December 31, 2021.

Liabilities Measured at Fair Value on a Recurring Basis

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

Balance at December 31, Balance at December 31,

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

December 31 December 31,

Level 1 Level 2 Level 3 2021 Level 1 Level 2 Level 3 2020

Contingent consideration $ — $ — $ 608 $ 608 $ — $ — $ 1,416 $ 1,416

During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved, and the Company accrued a liability of $ 2.5 million, which was transferred out of Level 3 to a current liability and subsequently settled during the fourth quarter of 2020.

No other transfers occurred during the year ended December 31, 2020.

At December 31, 2020, the estimated fair value of the remaining stock performance earn-out provision was $ 1.4 million, which was recorded as a contingent liability.

The estimated fair value of the earn-out provision was valued using the Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.

There were no transfers in or out of either Level 1, Level 2 or Level 3 fair value measurements during the year ended December 31, 2019.

At December 31, 2019, no liabilities were required to be measured at fair value on a recurring basis.

The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, discussed in Note 3, Business Acquisition, is included in accrued liabilities as of December 31, 2021 and 2020.

The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.

During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved, and the Company accrued a liability of $ 2.5 million, which was subsequently settled during the fourth quarter of 2020.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets, including property and equipment, operating lease right-of-use assets, goodwill and other intangible assets, are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances.

Impairments of long-lived assets of $ 70 million were recorded during the year ended December 31, 2020.

See Note 10, Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets.

Impairments of

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets, including property and equipment, goodwill and other intangible assets are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances.

During the first quarter of 2020, the Company recorded an impairment of $ 57.5 million for impairment of long-lived assets.

Management inputs used in fair value measurements were classified as Level 3.

As disclosed in N ote 3, “Business Combination,” t he Company acquired JP3 in May 2020.

The fair values of JP3’s long-lived assets and intangibles were determined using the income approach.

The fair value of the Company’s inventory was determined using the comparative sales method.

The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement, other than cash and working capital accounts, which carrying amounts were determined to approximate fair value due to their short-term nature.

During the third quarter of 2020, the Company’s DA segment recorded an impairment charge on finite-lived intangible assets of $ 12.5 million and an impairment charge on goodwill of $ 11.7 million.

The fair value of the DA reporting unit was estimated based on an analysis of the present value of future discounted cash flows.

The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth.

The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement.

goodwill of $ 8.1 million and $ 11.7 million were recorded during the year ended December 31, 2021 and 2020, respectively.

See Note 8, “Goodwill”.

Management inputs used in fair value measurements in 2021 and 2020 to estimate the fair value of the non-financial assets were classified as Level 3.

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

In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $ 1.2 million.

In conjunction with the acquisition of JP3, discussed in Note 3, Business Acquisition, during the year ended December 31, 2020, the Company recorded contingent consideration of $ 1.2 million.

Management inputs used in the fair value measurement were classified as Level 3.

During the third quarter of 2020, the first stock performance target for the contingent consideration was achieved, resulting in an accrued liability of $ 2.5 million, which was settled during the fourth quarter of 2020.

The Company also estimated the fair value of the remaining stock performance earn-out provision at December 31, 2020 and recorded the fair value of the contingent liability of $ 1.4 million.

The expense for achievement of the first stock performance target and the change in the fair value of the contingent consideration for the second earn-out provision are recorded in operating expenses in continuing operations for the period ended December 31, 2020.

The following table presents the changes in contingent consideration balances classified as Level 3 balances:

The Company estimated the fair value of the remaining stock performance earn-out provision as of December 31, 2021 and 2020 and adjusted the estimated fair value of the contingent liability to $ 0.6 million and $ 1.4 million, respectively.

The Company records changes in the fair value of the contingent consideration and achievement of performance targets in cost of goods sold.

The following table presents the changes in contingent consideration balances classified as Level 3 balances (in thousands):

Years ended December 31,

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Balance - end of period $ 608 $ 1,416

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Income Taxes

Components of the income tax (benefit) expense are as follows (in thousands):

Components of the income tax benefit is as follows (in thousands):

Years ended December 31,

Federal $ — $ ( 6,115 )

State 144 ( 2,295 )

Foreign — ( 21 )

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Total deferred ( 56 ) ( 187 )

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

Income tax benefit $ ( 40 ) $ ( 6,179 )

The components of loss before income taxes are as follows (in thousands):

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the U.S.

federal statutory tax rate to the effective income tax rate is as follows:

federal statutory tax rate to the Company’s effective income tax rate is as follows:

Years ended December 31,

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income taxed at different rates 0.5 0.2

Increase (reduction) in tax benefit related to stock-based awards 0.1 ( 0.2 )

Increase in valuation allowance ( 24.9 ) ( 20.3 )

Reduction in tax benefit related to stock-based awards ( 0.2 ) ( 0.1 )

Effect of tax rate differences of NOL carryback — 1.5

Research and development credit — 0.2

Other — ( 2.0 )

Permanent differences related to CARES Act 2.6 —

Effective income tax rate 0.1 % 4.3 %

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Among other things, the CARES Act provided the ability for taxpayers to carryback a net operating loss (“NOL”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five years preceding the year of the loss.

Based on analysis of the extended NOL carryback provision, the Company recorded a tax receivable of $ 6.1 million as of March 31, 2020, which was received in July 2020.

Based on analysis of the extended NOL carryback provision, the Company recorded an income tax benefit and related receivable of $ 6.1 million as of March 31, 2020, which was received in July 2020.

Further, the CARES Act included provisions to assist employers during the pandemic including the Employee Retention Credit (“ERC”).

The ERC provision provides a refundable payroll tax credit on qualified wages paid by eligible employers to certain employees.

On March 11, 2021, the American Rescue Plan Act of 2021 was enacted to combat the ongoing public health and economic impacts of the pandemic and provides some tax relief to businesses in the form of extending and modifying the ERC as well as other provisions.

The Company applied for and received $ 2.9 million of refundable payroll tax credits during the year ended December 31, 2021.

This was recorded as a credit to payroll taxes in SG&A.

Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S.

income taxed at different rates, except for the NOL carryback claim discussed above.

income taxed at different rates.

During the years ended December 31, 2021 and 2020, the effective tax rate was further impacted by permanent difference related to the CARES Act provisions and the NOL carryback claim, respectively.

Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse.

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Net operating loss carryforwards $ 33,166 $ 23,589

Allowance for doubtful accounts 1,134 1,037

Inventory valuation reserves 2,093 629

Equity compensation 435 353

Intangible assets 2,916 6,026

Tax credit carryforwards 4,001 3,802

Goodwill 5,284 4,087

Accrued compensation 657 587

Foreign tax credit carryforward 3,802 3,894

Accrued liabilities 2,076 3,530

Lease liability 1,945 3,992

Property and equipment 3,229 3,640

Intangible assets 6,026 —

Lease liability 1,750 1,945

Inventory valuation reserves 2,675 2,093

Allowance for doubtful accounts 1,184 1,134

Accrued liabilities 569 2,076

Accrued compensation 401 657

Equity compensation 399 435

Other 304 353

Total gross deferred tax assets 55,878 49,837

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Deferred tax liabilities:

Property and equipment — ( 3,696 )

Intangible assets — ( 4,134 )

ROU asset ( 453 ) ( 686 )

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As of December 31, 2021, the Company had U.S.

net operating loss carryforwards of $ 94.7 million, including $ 46.4 million expiring in various amounts in 2035 through 2037 which can offset 100% of taxable income and $ 48.3 million that has an indefinite carryforward period which can offset 80% of taxable income per year.

net operating loss carryforwards of $ 140.6 million, including $ 46.4 million expiring in various amounts from 2029 through 2037 which can offset 100 % of taxable income and $ 94.2 million that has an indefinite carryforward period which can offset 80 % of taxable income per year.

The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo an “ownership change” for purposes of Section 382 of the Tax Code.

Net deferred tax assets arise due to the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes.

ASC 740, Income Taxes , provides for the recognition of deferred tax assets if realization of such assets is more likely than not.

In assessing the need for a valuation allowance, the Company considers all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income.

As of December 31, 2019, the Company determined that it was more likely than not that it would 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 certain state jurisdictions.

At December 31, 2020, the valuation allowance against the net federal and state deferred tax assets was $ 48.7 million.

The Company has not calculated U.S.

taxes on unremitted earnings of certain non-U.S.

subsidiaries due to the Company’s intent to reinvest the unremitted earnings of the non-U.S.

We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions.As of December 31, 2021 and 2020, the valuation allowance against the net federal and state deferred tax assets was $ 54.9 million and $ 48.7 million, respectively.

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

The Company intends to reinvest the unremitted earnings of its non-U.S.

subsidiaries.

At December 31, 2020, the Company had approximately $ 5.7 million in unremitted earnings for one of its foreign jurisdictions, which were not included for U.S.

tax purposes.

Due to the 2017 Tax Act, U.S.

federal transition taxes have been recorded for a one-time U.S.

tax liability on these earnings which have not previously been repatriated to the U.S.

As of December 31, 2021, the Company had approximately $ 8.5 million in unremitted earnings from its foreign jurisdictions.

As a result of the 2017 Tax Act these earnings have been previously taxed in the U.S.

although they have not been repatriated to the U.S.

However, certain withholding taxes will need to be paid upon repatriation.

It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.

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

The evaluation was performed for the tax years which remain subject to examination by tax jurisdictions as of December 31, 2020, which are the years ended December 31, 2017 through December 31, 2020 for U.S.

federal taxes and the years ended December 31, 2016 through December 31, 2020 for state tax jurisdictions.

During 2020, the Internal Revenue Service (“IRS”) notified the Company that a 2018 tax return was selected for examination as

a result of a carryback claim.

At this time, the Company is not aware of any findings that would have a material impact on the

consolidated financial statements.

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

Tax years which remain subject to examination by tax jurisdictions as of December 31, 2021, are the years ended December 31, 2018 through December 31, 2021 for U.S.

federal taxes and the years ended December 31, 2017 through December 31, 2021 for various state tax jurisdictions.

FLOTEK INDUSTRIES, INC.

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The Company is subject to routine litigation and other claims that arise in the normal course of business.

Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

Except as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

Terpene Supply Agreement

On February 26, 2020, Flotek Chemistry entered into an amendment to the terpene supply agreement between Flotek Chemistry and FCC.

Pursuant to the terms and conditions of the amendment, the terpene supply agreement was amended to, among other things, (a) reduce the minimum quantity of terpene that Flotek Chemistry is required to purchase by approximately 3/4ths in 2020 and by approximately half in each of 2021, 2022 and 2023, (b) provide a fixed per pound price for terpene in 2020, (c) reduce the maximum amount of terpene subject to the terpene supply agreement by approximately 1/3rd, and (d) change the payment terms to net 45 days.

In order to make the terms and conditions of the amendment to the terpene supply agreement effective, Flotek Chemistry made a one-time payment in February 2020 of $ 15.8 million to ADM.

The expense associated with the terpene supply agreement amendment payment was recorded as a loss on contract purchase commitments, reported in operating expenses in continuing operations in December 2019.

For the year ended December 31, 2020, the Company recognized a loss of $ 9.9 million and an accrued liability of $ 9.4 million at December 31, 2020, associated with the amended terpene supply agreement due to the Company’s expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased and expected selling prices of the excess terpene as such loss is not considered recoverable.

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

Indemnification

The Company agreed to provide indemnification to National Oilwell DHT, L.P.

for certain intellectual property-related claims in connection with sale of its Teledrift business unit in 2017.

The expenses incurred by the Company we re $ 0.4 million and $ 0.6 million for the years ended December 31, 2020 and 2019, respectively.

The Company expects to incur additional costs during 2021, which are uncertain, but could be as much as $ 0.5 million or more.

Lease Obligations

See Note 8, “Leases.”

Concentrations and Credit Risk

The majority of t he Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the sanitizer, surface cleaner and disinfectant industry to a lesser extent.

Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies.

Customers within the sanitizer, surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment.

The concentration in the oil and gas industry increases credit and business risk.

Within the CT segment, the Company had two major customers for the year ended December 31, 2020, which accounted for 24 % and 18 % of consolidated revenue, and two major customers for the year ended December 31, 2019, which accounted for 20 % and 10 % of consolidated revenue.

The Company’s largest three customers collectively accounted for 50 % and 40 % of consolidated revenue for the years ended December 31, 2020 and 2019, respectively.

No single customer of the DA segment accounted for 10 % or more of the Company’s consolidated revenue for the year ended December 31, 2020.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2020, the Company’s consolidated balance sheet included an accrued liability of $ 9.4 million associated with the terpene supply agreement with Florida Chemical Company, LLC (“FCC”), a wholly owned subsidiary of Archer-Daniels-Midland Company (“ADM”).

The Company calculated the liability based on its expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased under the terpene supply agreement and the expected selling prices of the excess terpene.

Losses for the year ended December 31, 2020 on the terpene contract totaled $ 11.7 million and was recognized in cost of goods sold in the consolidated statements of operations.

On March 26, 2021, Flotek Industries, Inc.

and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against ADM, FCC and other parties in state court in Harris County, Texas.

The lawsuit claimed damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty.

Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.

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

On October 29, 2021, the Company reached agreement with all parties resolving all claims between the parties (“the ADM Settlement”) that resulted in the termination of the terpene supply agreement and a settlement payment of $ 1.75 million due from Flotek.

In accordance with the terms of the ADM Settlement, the Company reduced the accrued liability associated with the terpene supply agreement to $ 1.75 million and recorded a gain of $ 7.6 million in cost of goods sold in the consolidated statement of operations for the year ended December 31, 2021.

The one-time payment of $ 1.75 million from Flotek to ADM was paid on January 3, 2022 and was included as restricted cash on the consolidated balance sheet as of December 31, 2021.

Former CEO Matter

During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in expenses and transactions during the years from 2014 to 2018.

The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste.

Flotek’s board engaged a third party to review the findings of the investigation.

After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.

Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages.

John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended).

Although Flotek believes its claims are supported by the available evidence, the timing and amount of any outcome cannot reasonably be predicted.

Other Commitments and Contingencies

The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables.

1 unchanged sentence

financial institutions and balances often exceed insurable amounts.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 — Stockholders’ Equity

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The additional authorized shares are available for corporate purposes, including acquisitions.

During the first quarter 2021, the Company identified 0.6 million shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity.

This adjustment was not material to the December 31, 2020 consolidated financial statements or basic and diluted earnings per share.

A reconciliation of the changes in common shares issued is as follows:

Years ended December 31,

Year ended December 31,

Shares issued at the beginning of the year 78,669,414 63,656,897

Correction to issued share count at beginning of the year ( 613,419 ) —

Issued upon sale of common stock — 200,000

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Issued as restricted stock award grants 1,702,289 3,114,978

Issued as restricted stock unit grants 86,241 570,000

Issued upon vesting of restricted stock units 86,240 86,241

Restricted stock awards forfeited and cancelled ( 284,334 ) —

Shares withheld to cover taxes and cancelled ( 76,353 ) —

Issued in business combination to acquire JP3 — 11,500,000

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During the years ended December 31, 2021 and 2020, the Company purchased 155,317 shares and 145,703 shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options.

Shares issued as restricted stock awards to employees that were forfeited are accounted for as treasury stock.

During the year ende d December 31, 2020, there were 66,115 shares surrendered for the exercise of stock options.

During the year ended December 31, 2019, no shares were surrendered for the exercise of stock options.

Stock Repurchase Program

In June 2015, the Company’s Board of Directors authorized the repurchase of up to $ 50 million of the Company’s common stock.

Repurchases could be made in the open market or through privately negotiated transactions.

On June 9, 2020, the board of directors of the Company rescinded the authorization to repurchase the Company’s stock under this program.

During the year ended December 31, 2019, the Company repurchased $ 0.3 million of its common stock under this authorization.

No shares were repurchased under this program during the year ended December 31, 2020.

Shares issued as restricted stock awards to employees under the 2018 long-term incentive plan that were forfeited are accounted for as treasury stock.

During the years ended December 31, 2021 and 2020, forfeited stock awards returned to treasury stock were 421,839 shares and 1,301,470 shares, respectively.

Note 17 — Stock-Based Compensation and Other Benefit Plans

Stock-Based Incentive Plans

Stockholders approved long-term incentive plans in 2019, 2018, 2014, 2010 and 2007 (the “2019 Plan,” the “2018 Plan,” the “2014 Plan,” the “2010 Plan” and the “2007 Plan,” respectively) under which the Company may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, and certain other incentive awards.

The maximum number of shares that may be issued under the 2019 Plan, 2018 Plan, 2014 Plan, 2010 Plan and 2007 Plan are 1.0 million, 3.0 million, 5.2 million, 6.0 million and 2.2 million, respectively.

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Shares may no longer be granted under the 2007, 2010 and 2014 Plans.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant.

During 2020, 1.3 million stock options were granted, all market-based options.

The market-based options are restricted until criteria defined in the agreement are met.

During the years ended December 31, 2021 and 2020, 1.4 million and 1.3 million market-based stock options were granted, respectively.

The market-based options are restricted until criteria defined in the agreements are met.

Proceeds received from stock option exercises are credited to common stock and additional paid-in capital, as appropriate.

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Estimates are adjusted when actual forfeitures differ from the estimate.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-based compensation expense is recorded for all equity awards expected to vest.

During the year ended December 31, 2020, 0.1 million stock options vested, and 0.6 million stock options were forfeited.

No stock options vested or were forfeited during the year ended December 31, 2019.

During the years ended December 31, 2021 and 2020, 0.2 million and 0.1 million stock options vested, respectively, and 0.8 million and 0.6 million stock options were forfeited, respectively.

Stock option activity for the years ended December 31, 2021 and 2020, are as follows

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Forfeited ( 777,084 ) 1.02 0.52

Expired ( 50,000 ) 0.52 0.52

Outstanding as of

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Expected life of options in years 10 2

Vesting period in years 2 7

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth significant assumptions used in the Black Scholes model for time-vested options to determine the fair value of the option s at the date of grant:

Year Ended December 31, 2019

Time-Vested Options

Initial stock price $ 1.93

Strike price 1.93

Term (in years) 6.5

Risk-free rate 1.8 %

Volatility rate 73.6 %

The Company had no time-vested options granted in 2020.

Dividend yield — % — %

At December 31, 2021, the unrecognized compensation cost related to stock options was $ 3.3 million.

Restricted Stock

The Company grants employees either time-vesting or market-based restricted shares in accordance with terms specified in the Restricted Stock Agreements.

During the year ended December 31, 2020, 53 % of the restricted shares granted were time-vesting and 47 % were performance-based.

The Company grants employees and directors either time-vesting or market-based restricted shares in accordance with terms specified in the Restricted Stock Agreements.

During the year ended December 31, 2021, all of the restricted stock granted were time-vesting restricted shares.

Grantees of restricted shares retain voting rights for the granted shares.

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• Market-based restricted shares are issued with criteria defined over a designated period and vest only when, and if, the outlined criteria are met.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted stock share activity for the years ended December 31, 2021 and 2020, are as follows:

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Non-vested at January 1, 2020 1,629,020 $ 2.66

Granted to employees 1,494,022 2.62

Granted 3,114,978 0.83

Vested ( 711,988 ) 2.94

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Non-vested at January 1, 2021 2,795,100 1.00

Granted to employees 3,114,978 0.83

Granted 1,702,289 1.73

Vested ( 1,453,854 ) 1.24

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The total fair value of restricted stock that vested during the years ended December 31, 2021 and 2020 was $ 2.5 million and $ 2.1 million, respectively.

At December 31, 2020, unrecognized compensation expense related to non-vested restricted stoc k was $ 1.8 million.

At December 31, 2021, unrecognized compensation expense related to non-vested restricted stoc k wa s $ 1.9 million .

The unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.8 years.

Restricted Stock Units

During the year ended December 31, 2020, the Company granted 0.9 million market-based restricted stock units (“RSU s”).

During the years ended December 31, 2020, the Company granted 0.9 million market-based restricted stock units (“RSU s”).

The performance period for these RSUs continues until December 22, 2024.

During the year ended December 31, 2019, the Company granted 1.1 million RSUs.

The period for these RSUs continues until December 31, 2024 .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

No RSU’s were granted during the year ended December 31, 2021.

Restricted stock units activity for the years ended December 31, 2021 and 2020, are as follows:

Restricted Stock Units (1)

Units Weighted-

Restricted Stock Units Units Weighted-

Value at Date of

RSUs at January 1, 2020 1,038,474 $ 3.24

2018 forfeited ( 272,046 ) 6.39

2020 granted 922,786 1.19

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RSUs at December 31, 2021 1,043,376 $ 1.07

(1) Restricted stock units and performance stock units are disclosed in the preceding table .

At December 31, 2021, unrecognized compensation expense related to restricted stock units was $ 1.0 million.

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Payroll deductions may not exceed 10 % of an employee’s compensation and participants may not purchase more than 1,000 shares in any one offering period.

In addition, for each calendar year, an employee may not be granted purchase rights for Flotek Stock valued over $ 25,000 , as determined at the time such purchase right is granted.

The fair v alue of the discount associated with shares purchased under the plan is recognized as stock-based compensation expense and was $ 0.1 million for each of the years ended December 31, 2020 and 2019.

The total fair value of the shares purchased under the plan during each of the years ended December 31, 2020 and 2019 was $ 0.1 million .

In addition, for each calendar year, an employee may not be granted purchase rights valued over $ 25,000 , as determined at the time such purchase right is granted.

The fair v alue of the discount associated with shares purchased under the plan is recognized as stock-based compensation expense and was $ 0.02 and $ 0.1 million for the years

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ended December 31, 2021 and 2020, respectively.

The total fair value of the shares purchased under the plan during each of the years ended December 31, 2021 and 2020 was $ 0.2 million and $ 0.1 million , respectively .

The employee payment associated with participation in the plan occurs through payroll deductions.

Effective after the third quarter 2018 purchase, the Company suspended the ESPP due to lack of shares.

Following shareholder approval for additional shares, the Company resumed the ESPP during the second quarter 2019.

Stock-Based Compensation Expense

Non-cash stock-based compensation expense related to restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP was $ 3.2 million and $ 4.0 million during the years ended December 31, 2020 and 2019, respectively.

Non-cash stock-based compensation expense related to stock options, restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP was $ 3.8 million and $ 3.0 million during the years ended December 31, 2021 and 2020, respectively.

401(k) Retirement Plan

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All employees are eligible to participate in the plan upon employment.

On January 1, 2015, the Company implemented a new matching program.

The Company matches contributions at 100 % of up to 2 % of an employee’s compensation and, if greater, the Company matches contributions at 50 % from 5 % to 8 % of an employee’s compensati on.

In April 2020, the Company suspended its matching contribution to employee accounts.

The Company currently matches contributions at 100 % of up to 2 % of an employee’s compensation .

During the years ended December 31, 2021 and 2020, compensation expense included $ 0.2 million and $ 0.2 million, respectively, related to the Company’s 401(k) match.

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Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period.

Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

effect is dilutive.

Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and settlement of restricted stock units.

Potentially dilutive securities were excluded from the calculation of diluted loss per share for the years ended December 31, 2020 and 2019, since including them would have an anti-dilutive effect on loss per share due to the loss from continuing operations incurred during the period.

Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.8 million restricted stock units and 3.8 million stock options for the year ended December 31, 2020 and 0.1 million restricted stock units for the year ended December 31, 2019.

Potentially dilutive securities were excluded from the calculation of diluted loss per share for the years ended December 31, 2021 and 2020, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the periods.

Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.0 million restricted stock units and 4.3 million stock options for the year ended December 31, 2021, and 1.8 million restricted stock units and 3.8 million stock options for the year ended December 31, 2020.

Note 19 — Supplemental Cash Flow Information

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Years ended December 31,

Supplemental non-cash investing and financing activities:

Equity issued — acquisition of JP3 $ 8,538 $ —

Supplemental cash payment information:

Interest paid $ 26 $ 25

Income taxes (received, net of payments) paid ( 6,246 ) ( 699 )

Income taxes received ( 351 ) ( 6,246 )

Supplemental non-cash investing and financing activities:

Equity issued - acquisition of JP3 $ — $ 8,538

Note 20 — Related Party Transaction

In January 2017, the IRS notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014.

In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014.

As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr.

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Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.

At June 30, 2019, the Company recorded a liability of $ 2.4 million related to the estimated employment tax under-withholding for the years 2014 through 2018.

By September 30, 2019, the liability totaled $ 1.8 million, after the Company paid $ 0.6 million to the IRS for these taxes and made an additional accrual covering the estimated under-withholding tax liability through 2019.

In addition, at June 30, 2019, the Company recorded a receivable from the affiliated companies of Mr.

Chisholm totaling $ 2.4 million.

In October 2019, an amendment to the employment agreement was executed, giving the Company the contractual right of offset for any amounts owed to the Company, and giving the Company the right to withhold payments equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies from, any amounts owed under the employment agreement.

The Company netted the related party receivable against the severance payable as of December 31, 2019.

At December 31, 2019, the Company recorded $ 1.8 million for potential liability to the IRS.

In October 2019, an amendment to the employment agreement of Mr.

Chisholm was executed, giving the Company the contractual right of offset for any amounts owed by Mr.

Chisholm to the Company for the IRS matter, and giving the Company

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the right to withhold payments to Mr.

Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter from any amounts owed under the employment agreement.

At December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $ 1.8 million for potential liability to the IRS.

On January 5, 2020, Mr.

Chisholm ceased to be an employee of the Company.

During 2020, the Company did not make any payments to Mr.

During the first quarter of 2020, an additional accrual was recorded for $ 0.2 million related to potential penalties and interest on the IRS obligation.

As of December 31, 2020, the receivable from Mr.

Chisholm was $ 1.4 million, which is equal to the payable to the IRS and was netted with Mr.

In September 2020, the Company informed Mr.

Chisholm it would cease payment of future severance.

During first quarter of 2020, an additional accrual was recorded for $ 0.2 million related to potential penalties and interest on the IRS obligation.

As of December 31, 2021 and 2020, the receivable from Mr.

Chisholm was $ 1.4 million, which equaled the payable to the IRS and netted with Mr.

Chisholm’s severance liability.

Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.

In September 2020, the Company stopped all payments to Mr.

Chisholm pending the completion and results of ongoing IRS audits.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Brown has been a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company formed in 2016.

For the year ended December 31, 2021, the Company’s revenues for chemical sales to Confluence was $ 3.6 million.

As of December 31, 2021, Confluence owed $ 1.3 million to the Company which is recorded in account receivables on the consolidated balance sheet.

There were no transactions with Confluence in the year ended December 31, 2020.

Note 21 — Business Segment, Geographic and Major Customer Information

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Chemistry Technologies.

The CT segment includes specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies in the drilling and completion of their wells.

The Company designs, develops, manufactures, packages, distributes, delivers and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields.

Customers of the CT 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 industrial, commercial and consumer use.

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

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

The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals.

This segment also includes a portfolio of specialty chemical products to address the long term challenges of in the janitorial, sanitization, food services, and adjacent markets.

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

Data Analytics.

The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information about the composition of energy customers’ hydrocarbon fluids.

The customers of the DA segment span across the entire market, from production upstream to midstream facilities to refineries and distribution networks.

To date, the DA segment has focused solely on North American markets.

The DA segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, optimizing transmix, increasing efficiencies of towers, enabling automation of fluid handling, and reducing losses due to give-away (i.e., that portion of a product of higher value than what is specified) using real-time process information.

The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids.

The company markets products and services that support in-line data analysis of hydrocarbon components and properties.

Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks.

The Company evaluates performance based upon a variety of criteria.

The primary financial measure is segment operating income.

The primary financial measure is segment operating income (loss).

Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office.

Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As of and for the years ended December 31, Chemistry Technologies Data Analytics (1)

Corporate and

Net revenue from external customers $ 50,310 $ 2,831 $ — $ 53,141

Loss from operations, including impairment ( 88,486 ) ( 36,407 ) ( 18,755 ) ( 143,648 )

Corporate and Other Total

Revenue from external customers $ 35,288 $ 4,339 $ — $ 39,627

Revenue from related party 3,641 — — 3,641

Loss from operations ( 5,466 ) ( 12,168 ) ( 13,822 ) ( 31,456 )

Depreciation and amortization 939 70 2 1,011

Additions to long-lived assets 39 — — 39

Net revenue from external customers $ 119,353 $ — $ — $ 119,353

Loss from operations, including impairment ( 45,682 ) — ( 29,818 ) ( 75,500 )

Revenue from external customers $ 50,310 $ 2,831 $ — $ 53,141

Revenue from related party — — — —

Loss from operations ( 88,486 ) ( 36,407 ) ( 18,755 ) ( 143,648 )

Depreciation and amortization 2,519 422 471 3,412

Additions to long-lived assets 1,425 — — 1,425

( 1) The financial information disclosed for the DA segment is for the period May 18, 2020 to December 31, 2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Chemistry Technologies $ 34,387 $ 43,346

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Geographic Information

Revenue by country is based on the location where services are provided and products are used.

Revenue by country is based on the location where services are provided and products are sold.

No individual countries other than the U.S.

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are not considered material to the consolidated financial statements.

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Major Customers

Revenue from major customers and as a percentage of consolidated revenue, is as follows:

Year ended December 31, 2020 Chemistry Technologies % of Total Revenue Data Analytics % of Total Revenue

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

Chemistry Technologies % of Total Revenue

Year ended December 31, 2021

Customer A $ 4,067 9 %

Customer B 11,632 26 %

Customer C $ 9,394 17.68 % * *

Year ended December 31, 2020

Customer A $ 12,891 24 %

Customer B $ 12,322 10.32 % * *

Customer C * * * *

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

The majority of t he Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry.

The concentration in the oil and gas industry increases credit and business risk .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 — Subsequent Events

We have evaluated the effects of events that have occurred subsequent to December 31, 2021, and there have been no material events that would require recognition in the 2021 consolidated financial statements or disclosure in the notes to the consolidated financial statements, except as disclosed below.

On February 2, 2022, Flotek entered into a Private Investment in Public Equity (PIPE) transaction with a consortium of investors to secure growth capital for the Company.

Pursuant to the PIPE transaction on February 2, 2022, Flotek issued $ 21.2 million aggregate initial principal amount of convertible notes for net cash proceeds of approximately $ 19 million.

The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC.

The convertible notes accrue paid-in-kind interest at a rate of 10 % per annum, have a maturity of one year, and are converted into common stock of Flotek (a) at the holder's option at any time prior to maturity, at a price of $ 1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $ 2.50 for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $ 0.8705 .

The issuance of the additional shares may trigger a change in ownership defined as 50% or more under IRC Section 382 that will limit the amount of net operating losses deductible and tax credits allowable starting in 2022.

Also on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of Profrac Holdings LLC, in exchange for $ 10 million of convertible notes under the same terms as the convertible notes issued in the PIPE transaction.

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

In connection with the Profrac Agreement, the Company also granted Profrac Holdings LLC.

the right to designate two members to serve on Flotek’s board of directors.

On February 16, 2022, the Company entered into an amended agreement with ProFrac Holdings, LLC to expand the Profrac Agreement to a term of ten years and up to thirty hydraulic fracturing fleets deployed by ProFrac Services, LLC.

Closing of the transaction is expected to occur in the second quarter of 2022 and is subject to a vote of the shareholders of Flotek’s common stock, as well as other customary conditions.

As part of the transaction, at closing of the amended agreement Flotek would (a) issue to ProFrac notes convertible into Flotek’s common stock with a maturity of one year, with the amount of notes based on the size of expansion, and (b) grant ProFrac the right to appoint two members to Flotek’s board of directors, for a total of four out of seven directors.

Conversion price of the convertible notes will be $ 1.088125 per share under certain conditions prior to maturity, or $ 0.8705 per share at maturity.

The convertible notes contain other terms and conditions similar to the convertible notes issued to Profrac on February 2, 2022.

As a result of these transactions, the Company will seek shareholder approval to increase the authorized shares of common stock or perform a reverse split to allow for the conversion of these convertible notes.

On December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility for proceeds of $ 4.2 million net of brokerage fee, which is expected to close in April 2022.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

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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 8. Financial Statements and Supplementary Data