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Item 9A. Controls and Procedures

2022-03-31 compared with 2021-03-16 · 53 added, 56 removed, 107 unchanged (50% of the section changed)

5 unchanged sentences

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

Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and processes were not effective because of the material weaknesses in our internal control over financial reporting described below.

Management’s Annual Report on Internal Control over Financial Reporting

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act.

As of December 31, 2020, Company’s management has evaluated the effectiveness of its internal control over financial reporting under the Exchange Act.

The Company’s management used the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to perform this evaluation.

Management excluded JP3, which was acquired by the Company in May 2020, from its assessment of the effectiveness of internal control over financial reporting, as the Company may omit an assessment of an acquired business’s internal control over financial reporting from its assessment of the registrant’s internal control for up to one year from the acquisition date.

As of and for the year ended December 31, 2020, JP3 represented 5% of total revenue and 15% of total assets of the consolidated financial statement amounts.

Based upon this evaluation, our management concluded as of December 31, 2020, that our internal control over financial reporting was not effective because of the material weaknesses described below.

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.

The Company identified deficiencies in its internal control over financial reporting that represented material weaknesses.

Specifically, the Company’s management determined that the Company did not, as of December 31, 2020, design and maintain effective internal controls over financial reporting.

The material weaknesses relate to:

Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our internal control over financial reporting disclosure controls and processes were effective as of December 31, 2021.

Remediation of the Previously Reported Material Weaknesses in Internal Controls Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal controls 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.

As reported in Management’s Annual Report on Internal Control over Financial Reporting for the year ended December 31, 2020, as well as in our Quarterly Reports on Form 10-Q for each interim period through the third quarter of the year ended December 31, 2021, we did not maintain effective internal controls over financial reporting as a result of material weaknesses related to:

(1) ineffective design and operation of controls over nonrecurring transactions including derecognition of items and cash flow presentation relating to disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations;

(2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations;

and (3) the ineffective design and operating effectiveness of the assessment of going concern.

The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in this Form 10-K present fairly, in all material respects, the consolidated financial positions, results of operations

and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Remediation Plan and Status

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

These elements include:

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

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

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

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

• Expanding monthly management review controls;

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

The Company believes that the actions listed above will provide appropriate remediation of the material weaknesses;

however, the testing of the effectiveness of the controls has not been completed by the Company.

Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate and test the effectiveness of the controls, no assurance can be given as to the timing for completion of remediation.

The material weaknesses will be fully remediated when the Company concludes that the controls have been operating for sufficient time and independently validated by management.

Changes in Internal Control over Financial Reporting

During the second quarter of 2020, the Company acquired JP3, a privately-held data and analytics technology company.

Due to the timing of the acquisition, management did not include the internal control processes for JP3 in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2020.

The acquisition is excluded from the certifications required under the Sarbanes-Oxley Act.

We will include all aspects of internal control over financial reporting for this acquisition in our 2021 assessment.

Upon acquisition and at December 31, 2020, management has concluded that there have been no changes to JP3’s previous structure around internal controls over financial reporting.

Additionally, the Company remediated a previously reported material weakness related to the elimination of intercompany

profits in inventory during Q4 2020.

Except for the items described above, there have been no changes in the Company’s system of internal control over financial reporting during the fiscal quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

and (3) the ineffective design and operating effectiveness of the controls over the assessment of going concern.

During the year ended December 31, 2021, the Company implemented remediation plans to address the design and operating effectiveness of control deficiencies that led to the material weaknesses described above.

Management’s plan of remediation included adding additional resources to the Company’s finance and accounting team and:

• Enhanced the design of our monitoring controls over the identification of non-recurring transactions and the accounting, presentation and disclosures for non-recurring transactions.

• Enhanced the design of the control over the assessment of impairment evaluations, including the assessment of events or changes in circumstances that may indicate a potential impairment.

• Enhanced the design of the controls related to assumptions used in management’s forecasts used for accounting purposes.

• Implemented a control over the analysis of the assessment of going concern at each period end and a process for the monitoring of the completion of the assessment and performance of the control as designed.

• Implemented monitoring processes to ensure controls occurred on the frequency designed and that documentation was sufficient to support the operating effectiveness of the control.

After testing the design and implementation and operating effectiveness of the new controls described above, management concluded that the material weaknesses described above were remediated as of December 31, 2021.

We will continue to monitor execution of our controls to ensure the effectiveness of those controls and make enhancements when and where necessary.

Additionally, we will continue to train new and key personnel on our standard processes and systems as required.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in Internal Controls over Financial Reporting

As described above under “Remediation of the Previously Reported Material Weakness in Internal Controls Over Financial Reporting,” there were changes in our internal controls over financial reporting during the fourth quarter of the year ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended.

Internal control over financial reporting, no matter how well designed, has inherent limitations.

Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2021 based upon criteria set forth in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on our assessment, we believe that, as of December 31, 2021, our internal control over financial reporting was effective.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.

Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Other Information.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

PART III - OTHER INFORMATION

Directors, Executive Officers and Corporate Governance.

7 unchanged sentences

Principal Accounting Fees and Services.

Our independent registered public accounting firm is KPMG LLP, Houston, TX, Auditor Firm ID:

The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.

Exhibits and Financial Statement Schedules

EXHIBIT INDEX

Number Exhibit Title

Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between Flotek Industries, Inc., JP3 Measurement, LLC, the Sellers party thereto, and John A.

Cardwell, as Seller Representative (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 19, 2020)

Number Description of Exhibit

Share Purchase Agreement, dated as of January 10, 2019, by and between the Company and ADM (portions of this exhibit have been omitted pursuant to a confidential treatment request, which has been granted) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on March 4, 2019) .

Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between the Company, JP3 Measurement, LLC, the Sellers party thereto, and John A.

Cardwell, as Seller Representative) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 19, 2020).

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

3.2 Certificate o f Ame nd ment to the Ame nded and R estated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009)

3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporation by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 7, 2020)

3.4 * Second Amended and Restated Bylaws of Flotek Industries, Inc.

approved on October 11, 2017 and amended on March 11, 2021.

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

3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Flotek Industries, Inc.

(incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 7, 2020).

3.4 Second Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.4 to the Company’s Form 10-K filed on March 16, 2021).

4.1 Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s Definitive Proxy Statement filed on September 27, 2001).

4.2 * Description of Capital Stock of the Company

4.3 Form of Convertible Note ( incorporated by reference to Exhibit 4.1 to the Compa ny ’ s Form 8-K filed on February 4 2020).

4.4 Form of Pre-Funded Warrant ( incorporated by reference to Exhibit 4.

2 to the C ompany ’ s Form 8-K filed on February 4 , 2020).

10.1 2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-K for the year ended December 31, 2007)

2 unchanged sentences

Thomas (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 19, 2020)

10.2 † Employment Agreement, dated July 29, 2020, between the Company and Michael E.

Borton (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 3 1 , 2020)

10.2 † Employment Agreement dated October 15, 2021, between the Company and Michael Borton (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K on October 20, 2021.)

10.3 † Purchase Agreement, dated January 10, 2020, between the Company and John W.

(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 13, 2020).

10.4 † Employment Agreement dated June 4, 2020 between Flotek Industries, Inc.

and TengBeng Koid (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 22, 2020) .

10.4 † Employment Agreement dated October 15, 2021, between the Company and TengBeng Koid (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K on October 20, 2021.)

10.5 † Employment Agreement between Flotek Industries, Inc.

16 unchanged sentences

Wilkinson (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on May 24, 2019)

Number Exhibit Title

10.16 † Termination and Release Agreement, dated as of May 20, 2019, by and among the Company, John W.

21 unchanged sentences

(incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on December 27, 2019)

10.27 Securities Purchase Agreement dated February 16, 2022 by and between Flotek Industries, Inc.

and ProFrac Holdings, LLC (incor porated by reference to Exhibit 10.1 to the Company ’ s F orm 8-K filed on February 22, 2022 )

10.28 Note Purchase Agreement, dated February 2, 2022, by and among Flotek Industries, Inc.

and the Purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Company ’ s Form 8-K filed on February 4, 202 2)

21.1 * List of Subsidiaries

23.1 * Consent of Moss Adams, LLP

23.1 * Consent of BDO USA, LLP

23.2 * Consent of KPMG LLP

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

2 unchanged sentences

32.2 ** Section 1350 Certification of Principal Financial Officer.

101.INS * Inline XBRL Instance Document.

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

101.SCH * Inline XBRL Schema Document

20 unchanged sentences

Chief Financial Officer (Principal Financial and Accounting Officer) March 31, 2022

/s/ Michelle M.

/s/ David Nierenberg

David Nierenberg

Director March 31, 2022

6 unchanged sentences

Director March 31, 2022

/s/ David Nierenberg

David Nierenberg

/s/ Lisa Mayr

Director March 31, 2022

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 9A. Controls and Procedures