FLOTEK INDUSTRIES INC/CN/ 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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. 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 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. We conducted our audit in accordance with the standards of the PCAOB. 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. 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 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 33 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. /s/ KPMG LLP We have served as the Company’s auditor since 2021. Houston, Texas March 31, 2022 34 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors Flotek Industries, Inc. Houston, Texas 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. 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /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 35 FLOTEK INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 11,534 $ 38,660 Restricted cash 1,790 664 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 Inventories, net 9,454 11,837 Income taxes receivable 22 403 Other current assets 3,740 3,127 Assets held for sale 2,762 — Total current assets 42,599 66,455 Property and equipment, net 5,296 9,087 Operating lease right-of-use assets 2,041 2,320 Goodwill — 8,092 Deferred tax assets, net 279 223 Other long-term assets 29 33 TOTAL ASSETS $ 50,244 $ 86,210 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 7,616 $ 5,787 Accrued liabilities 8,996 18,275 Income taxes payable 4 21 Interest payable 82 34 Current portion of operating lease liabilities 602 636 Current portion of finance lease liabilities 41 60 Current portion of long-term debt 1,436 4,048 Total current liabilities 18,777 28,861 Deferred revenue, long-term 91 117 Long-term operating lease liabilities 7,779 8,348 Long-term finance lease liabilities 53 96 Long-term debt 3,352 1,617 TOTAL LIABILITIES 30,052 39,039 Commitments and contingencies (See Note 15) Stockholders’ equity: Preferred stock, $ 0.0001 par value, 100,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.0001 par value, 140,000,000 shares authorized; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020 8 8 Additional paid-in capital 363,417 359,721 Accumulated other comprehensive income (loss) 81 ( 19 ) Accumulated deficit ( 309,214 ) ( 278,688 ) Treasury stock, at cost; 6,022,634 and 5,580,920 shares at December 31, 2021 and December 31, 2020, respectively ( 34,100 ) ( 33,851 ) Total stockholders’ equity 20,192 47,171 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 50,244 $ 86,210 = 36 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Years ended December 31, 2021 2020 Revenue: 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 on disposal of property and equipment ( 94 ) ( 94 ) Impairment of goodwill 8,092 11,706 Impairment of property and equipment and intangible assets — 69,975 Total operating costs and expenses 34,712 114,975 Loss from operations ( 31,456 ) ( 143,648 ) Other income (expense): Paycheck protection plan loan forgiveness 881 — Interest expense ( 78 ) ( 60 ) Other income, net 87 1,079 Total other income 890 1,019 Loss before income taxes ( 30,566 ) ( 142,629 ) Income tax benefit 40 6,179 Net Loss $ ( 30,526 ) $ ( 136,450 ) 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 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. 37 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Years ended December 31, 2021 2020 Net Loss $ ( 30,526 ) $ ( 136,450 ) Other comprehensive income (loss): Foreign currency translation adjustment 100 ( 200 ) Comprehensive Loss $ ( 30,426 ) $ ( 136,650 ) The accompanying Notes are an integral part of these Consolidated Financial Statements. 38 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 30,526 ) $ ( 136,450 ) 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 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 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 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 ( 1,406 ) 3,556 Inventories 1,760 3,955 Income taxes receivable 381 182 Other current assets ( 613 ) 1,026 Other long-term assets 4 ( 16 ) Accounts payable 1,829 ( 12,323 ) Accrued liabilities ( 1,463 ) ( 20,662 ) Income taxes payable ( 17 ) 84 Interest payable 48 34 Net cash used in operating activities ( 25,840 ) ( 47,838 ) Cash flows from investing activities: Capital expenditures ( 39 ) ( 1,425 ) Proceeds from sale of business — 9,907 Proceeds from sale of assets 151 109 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: Payment for contingent consideration — ( 1,200 ) 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 ) 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 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 Cash and cash equivalents at end of period 11,534 38,660 Restricted cash at the end of period 1,790 664 Cash, cash equivalents and restricted cash at end of period $ 13,324 $ 39,324 The accompanying Notes are an integral part of these Consolidated Financial Statements. 39 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 Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost Balance, December 31, 2020 78,669 $ 8 5,581 $ ( 33,851 ) $ 359,721 $ ( 19 ) $ ( 278,688 ) $ 47,171 Net loss — — — — — — ( 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 ) Other (1) ( 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 Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Issued Par Value Shares Cost Balance, December 31, 2019 63,657 $ 6 4,145 $ ( 33,484 ) $ 347,564 $ 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. 40 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Organization and Nature of Operations General Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data 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 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. Sources and Uses of Liquidity The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent 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. 41 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 — Summary of Significant Accounting Policies Basis of Presentation The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of Flotek Industries, Inc. and subsidiaries it controls. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries. Cash Equivalents Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. Cash Management The Company uses a controlled disbursement account for its main cash account. Under this system, outstanding checks can be in excess of the cash balances at the bank before the disbursement account is funded, creating a book overdraft. Book overdrafts on this account are presented as a current liability in accounts payable in the consolidated balance sheets. 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 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 Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate provision for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the provision for doubtful accounts charged to operating expense. The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables. Changes in the allowance for doubtful accounts are as follows (in thousands): Years ended December 31, 2021 2020 Balance, beginning of year $ 1,316 $ 1,527 Charges to provision for doubtful accounts, net of recoveries ( 127 ) 652 Write-offs ( 530 ) ( 863 ) Balance, end of year $ 659 $ 1,316 Inventories Inventories consist of raw materials and finished goods and are stated at the lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw 42 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 Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including right-of-use assets (“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows: Buildings and leasehold improvements 2 - 30 years Machinery and equipment 7 - 10 years Furniture and fixtures 3 years Land improvements 20 years Transportation equipment 2 - 5 years Computer equipment and software 3 - 7 years Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third party independent appraisals, as considered necessary. Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to 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 Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization but is tested for impairment annually on October 1 or more frequently if an event occurs or circumstances change that would indicate a potential impairment. 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 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 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 43 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. Fair Value Measurements The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 13, “Fair Value Measurements.” Revenue Recognition The Company recognizes revenue to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied. Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete. The Company applies several practical expedients including: • Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less. • The majority of the Company’s services are short-term in nature with a contract term of one year or less. As a result the Company does not disclose the transaction price allocated to remaining performance obligations. • The Company’s payment terms are short-term in nature with settlements of one year or less. As a result the Company does not adjust the promised amount of consideration for the effects of a significant financing component. • In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice. • The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold on our consolidated statement of operations. Foreign Currency Translation Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity. Comprehensive Loss Comprehensive loss encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive loss includes consolidated net loss and foreign currency translation adjustments. Research and Development Costs Expenditures for research activities relating to product development and improvement are charged to expense as incurred. 44 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income Taxes Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to record interest and penalties related to uncertain tax positions as income tax expense. Stock-Based Compensation Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates. Significant items subject to estimates and assumptions include the 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 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. 45 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”). We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company. New Accounting Standards Issued But Not Adopted as of December 31, 2021 The FASB issued ASU No. 2019-12, “ Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes .” This standard removes specific exceptions to the general principles in Topic 740. 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 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. 2016-13, “ Measurement of Credit Losses on Financial Instruments .” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures. 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 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): 46 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Tradenames and trademarks $ 1,100 Technology and know-how 5,000 Customer lists 6,800 Inventories 7,100 Cash 604 Net working capital, net of cash and inventories ( 1,063 ) Fixed assets 426 Long-term debt assumed and other assets (liabilities) ( 893 ) Goodwill 17,522 Net assets acquired $ 36,596 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. Pro forma information for JP3 is not provided as the impact is not considered material. 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 . Note 4 — Revenue from Contracts with Customers Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an ongoing basis to reflect updated variable consideration information. The majority of the products from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized over time. The Company bills sales on a monthly basis with payment terms customarily 30-60 days for domestic and 90-120 days f or international from invoice receipt. In addition, sales taxes are excluded from revenues. Disaggregation of Revenue The Company differentiates revenue based on whether the source of revenue is attributable to product sales (point-in-time revenue recognition) or service revenue (over-time revenue recognition). Revenue disaggregated by revenue source is as follows (in thousands): Years ended December 31, 2021 2020 Revenue: Products (1) $ 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 The CT and DA segments primarily sell chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, both segments offer various services associated to products sold which includes field services, installation, maintenance, and other functions. For DA, services are recognized 47 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, DA may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Subscription-type arrangements were not a material revenue stream in the 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 assets associated with incomplete performance obligations are not material. Note 5 — Inventories Inventories are as follows (in thousands): December 31, 2021 2020 Raw materials $ 5,610 $ 7,190 Finished goods 13,985 15,705 Inventories 19,595 22,895 Less reserve for excess and obsolete inventory ( 10,141 ) ( 11,058 ) Inventories, net $ 9,454 $ 11,837 Changes in the reserve for excess and obsolete inventory are as follows (in thousands): Years ended December 31, 2021 2020 Balance, beginning of year $ 11,058 $ 5,698 Charged to provisions 623 12,261 Deductions for sales and disposals ( 1,540 ) ( 6,901 ) Balance, end of the year $ 10,141 $ 11,058 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 Property and equipment are as follows (in thousands): December 31, 2021 2020 Land $ 886 $ 2,415 Land improvements 520 867 Buildings and leasehold improvements 5,473 6,364 Machinery and equipment 6,843 7,760 Furniture and fixtures 620 649 Transportation equipment 878 1,190 Computer equipment and software 1,176 1,296 Property and equipment 16,396 20,541 Less accumulated depreciation ( 11,100 ) ( 11,454 ) Property and equipment, net $ 5,296 $ 9,087 Depreciation expense totaled $ 1.0 million and $ 2.5 million for the years ended December 31, 2021 and 2020, respectively. 48 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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): Years ended December 31, 2021 2020 Operating lease expense $ 797 $ 1,370 Finance lease expense: Amortization of right-of-use assets 15 17 Interest on lease liabilities 12 18 Total finance lease expense 27 35 Short-term lease expense 267 202 Total lease expense $ 1,091 $ 1,607 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,107 $ 2,884 Operating cash flows from finance leases 62 18 Financing cash flows from finance leases 8 70 49 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 2022 $ 1,254 $ 47 2023 1,318 39 2024 1,348 23 2025 1,375 2026 1,423 — Thereafter 5,453 — Total lease payments $ 12,171 $ 109 Less: Interest ( 3,790 ) ( 15 ) Present value of lease liabilities $ 8,381 $ 94 Supplemental balance sheet information related to leases is as follows (in thousands): December 31, 2021 December 31, 2020 Operating Leases Operating lease right-of-use assets $ 2,041 $ 2,320 Current portion of operating lease liabilities $ 602 $ 636 Long-term operating lease liabilities 7,779 8,348 Total operating lease liabilities $ 8,381 $ 8,984 Finance Leases Property and equipment $ 147 $ 147 Accumulated depreciation ( 33 ) ( 26 ) Property and equipment, net $ 114 $ 121 Current portion of finance lease liabilities $ 41 $ 60 Long-term finance lease liabilities 53 96 Total finance lease liabilities $ 94 $ 156 Weighted Average Remaining Lease Term Operating leases 9.1 years 9.9 years Finance leases 2.9 years 3.1 years Weighted Average Discount Rate Operating leases 8.9 % 8.9 % Finance leases 8.9 % 9.0 % 50 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Goodwill 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. We used our internal forecasts, updated for recent events, to estimate future cash flows with cash flows beyond the specific operating plans estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on our most recent views of the long-term outlook for the DA reporting unit. Our internal forecasts include assumptions about future commodity pricing and expected demand for our goods and services. For the DA reporting unit, production growth is 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): Balance at December 31, 2019 $ — Acquisition goodwill recognized 17,522 Measurement period adjustment 2,276 Goodwill impairment recognized ( 11,706 ) 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 Accumulated impairment losses ( 19,798 ) ( 11,706 ) Goodwill balance, net of impairment $ — $ 8,092 51 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 — Other Intangible Assets 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 acquisition of JP3 discussed in Note 3, Business Acquisition. 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 Intangible Assets: Patents and technology 14,733 Customer relationships 15,796 Intangible assets in progress 596 Trademarks and brand names 1,238 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. 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 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. 52 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 — Accrued Liabilities Current accrued liabilities are as follows (in thousands): December 31, 2021 2020 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 Other 1,185 653 Total current accrued liabilities $ 8,996 $ 18,275 Note 12 — 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”. 53 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Long-term debt, including current portion, is as follows (in thousands): December 31, 2021 2020 Flotek PPP loan $ 4,788 $ 4,788 JP3 PPP loan — 877 Total 4,788 5,665 Less current maturities ( 1,436 ) ( 4,048 ) Total long-term debt, net of current portion $ 3,352 $ 1,617 Note 13 — Fair Value Measurements Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement. • Level 1 — Quoted prices in active markets for identical assets or liabilities; • Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs. Fair Value of Other Financial Instruments The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts. The carrying amount of the Flotek PPP loan approximates its fair value as of December 31, 2021. Liabilities Measured at Fair Value on a Recurring Basis The following table presents the Company’s liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands): 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 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 54 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 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. 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, 2021 2020 Balance - beginning of period $ 1,416 $ — Additions / issuances — 1,200 Change in fair value ( 808 ) 2,716 Transfer out of Level 3 — ( 2,500 ) Balance - end of period $ 608 $ 1,416 Note 14 — Income Taxes Components of the income tax benefit is as follows (in thousands): Years ended December 31, 2021 2020 Current: Federal $ — $ ( 6,115 ) State 16 144 Foreign — ( 21 ) Total current 16 ( 5,992 ) Deferred: Federal — ( 116 ) State ( 56 ) ( 71 ) Foreign — — Total deferred ( 56 ) ( 187 ) Income tax benefit $ ( 40 ) $ ( 6,179 ) The components of loss before income taxes are as follows (in thousands): Years ended December 31, 2021 2020 United States $ ( 30,037 ) $ ( 141,864 ) Foreign ( 529 ) ( 765 ) Loss before income taxes $ ( 30,566 ) $ ( 142,629 ) 55 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows: Years ended December 31, 2021 2020 U.S. federal statutory tax rate 21.0 % 21.0 % State income taxes, net of federal benefit 0.1 2.1 Non-U.S. 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 ) Effect of tax rate differences of NOL carryback — 1.5 Permanent differences related to CARES Act 2.6 — Other 0.7 — Effective income tax rate 0.1 % 4.3 % On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. 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 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. 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. The components of deferred tax assets and liabilities are as follows (in thousands): 56 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 33,166 $ 23,589 Intangible assets 2,916 6,026 Tax credit carryforwards 4,001 3,802 Goodwill 5,284 4,087 Property and equipment 3,229 3,640 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 Valuation allowance ( 54,875 ) ( 48,671 ) Total deferred tax assets, net 1,003 1,166 Deferred tax liabilities: ROU asset ( 453 ) ( 686 ) Prepaid insurance and other ( 271 ) ( 257 ) Total gross deferred tax liabilities ( 724 ) ( 943 ) Net deferred tax assets $ 279 $ 223 As of December 31, 2021, the Company had U.S. 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. 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. 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 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. 57 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15 — Commitments and Contingencies Litigation The Company is subject to routine litigation and other claims that arise in the normal course of business. Except as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity. Terpene Supply Agreement 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. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts. 58 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 — Stockholders’ Equity Common and Preferred Stock On May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, to increase the authorized shares of common stock from 80 million shares to 140 million shares of common stock, par value $ 0.0001 per share, and 100,000 shares of one or more series of preferred stock, par value $ 0.0001 per share. 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: Year ended December 31, 2021 2020 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 Issued upon exercise of stock options — 111,298 Issued as restricted stock award grants 1,702,289 3,114,978 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 Shares issued at the end of the year 79,483,837 78,669,414 Treasury Stock The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. 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 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, restricted stock units, 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. At December 31, 2021, the Company had a total of 4.2 million shares remaining to be granted under the 2019 Plan and 2018 Plan. Shares may no longer be granted under the 2007, 2010 and 2014 Plans. 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 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. The Company uses historical data to estimate pre-vesting option forfeitures. Estimates are adjusted when actual forfeitures differ from the estimate. 59 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-based compensation expense is recorded for all equity awards expected to vest. 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 Shares Weighted-Average Exercise Price Weighted-Average Fair Value Outstanding as of January 1, 2020 3,000,000 $ — $ — Granted 1,327,795 1.12 0.62 Exercised ( 111,298 ) 0.92 0.51 Forfeited ( 556,497 ) 0.92 0.51 Outstanding as of January 1, 2021 3,660,000 Granted 1,448,959 1.07 0.88 Exercised — — — Forfeited ( 777,084 ) 1.02 0.52 Expired ( 50,000 ) 0.52 0.52 Outstanding as of December 31, 2021 4,281,875 Vested or expected to vest at December 31, 2021 3,775,148 . The following table sets forth significant assumptions used in the Monte Carlo model for market-based options to determine the fair value of the option s at the date of grant: Year Ended December 31, 2021 Year Ended December 31, 2020 Market-Based Options Market-Based Options Risk-free interest rate 1.61 % 0.12 % Expected volatility of common stock 90.00 % 103.50 % Expected life of options in years 10 2 Dividend yield — % — % At December 31, 2021, the unrecognized compensation cost related to stock options was $ 3.3 million. Restricted Stock 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. • Time-vesting restricted shares vest after a stipulated period has elapsed after the date of grant, generally three years . Certain time-vested shares have also been issued with a portion of the shares granted vesting immediately. • Market-based restricted shares are issued with criteria defined over a designated period and vest only when, and if, the outlined criteria are met. 60 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted stock share activity for the years ended December 31, 2021 and 2020, are as follows: Restricted Stock Shares Shares Weighted- Average Fair Value at Date of Grant Non-vested at January 1, 2020 1,629,020 $ 2.66 Granted 3,114,978 0.83 Vested ( 711,988 ) 2.94 Forfeited ( 1,236,910 ) 1.65 Non-vested at January 1, 2021 2,795,100 1.00 Granted 1,702,289 1.73 Vested ( 1,453,854 ) 1.24 Forfeited ( 1,275,172 ) 1.36 Non-vested at December 31, 2021 1,768,363 $ 1.61 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, 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 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. 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 Units Weighted- Average Fair Value at Date of Grant RSUs at January 1, 2020 1,038,474 $ 3.24 2020 granted 922,786 1.19 2020 forfeited ( 733,711 ) 3.79 RSUs at January 1, 2021 1,227,549 1.25 2021 granted — — 2021 forfeited ( 184,173 ) 2.61 RSUs at December 31, 2021 1,043,376 $ 1.07 At December 31, 2021, unrecognized compensation expense related to restricted stock units was $ 1.0 million. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.1 years. Employee Stock Purchase Plan The Company’s Employee Stock Purchase Plan (“ESPP”) was approved by stockholders in 2012. The Company registered 500,000 shares of its common stock, currently held as treasury shares, for issuance under the ESPP. The purpose of the ESPP is to provide employees with an opportunity to purchase shares of the Company’s common stock through accumulated payroll deductions. The ESPP allows participants to purchase common stock at a purchase price equal to 85 % of the fair market value of the common stock on the last business day of a three-month offering period which coincides with calendar quarters. 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 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 61 FLOTEK INDUSTRIES, INC. 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. Stock-Based Compensation Expense 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 The Company maintains a 401(k) retirement plan for the benefit of eligible employees in the U.S. All employees are eligible to participate in the plan upon employment. 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. Note 18 — Earnings (Loss) Per Share Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive. 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, 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 Supplemental cash flow information is as follows (in thousands): Years ended December 31, 2021 2020 Supplemental cash payment information: Interest paid $ 26 $ 25 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 Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification. In October 2019, an amendment to the employment agreement of Mr. Chisholm was executed, giving the Company the contractual right of offset for any amounts owed by Mr. Chisholm to the Company for the IRS matter, and giving the Company 62 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the right to withhold payments to Mr. Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter from any amounts owed under the employment agreement. At December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $ 1.8 million for potential liability to the IRS. On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company. In September 2020, the Company informed Mr. Chisholm it would cease payment of future severance. During first quarter of 2020, an additional accrual was recorded for $ 0.2 million related to potential penalties and interest on the IRS obligation. As of 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. Mr. Ted D. Brown has been a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“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 Segment Information Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: CT and DA. Chemistry Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals. This segment also includes a portfolio of specialty chemical products to address the long term challenges of in the janitorial, sanitization, food services, and adjacent markets. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies . Data Analytics. The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The company markets products and services that support in-line data analysis of hydrocarbon components and properties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks. The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income (loss). Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment. 63 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 Other Total 2021 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 2020 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 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): December 31, 2021 2020 Chemistry Technologies $ 34,387 $ 43,346 Data Analytics 7,329 13,201 Corporate and Other 8,528 29,663 Total assets $ 50,244 $ 86,210 Geographic Information Revenue by country is based on the location where services are provided and products are sold. No individual countries other than the U.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands): Years ended December 31, 2021 2020 U.S. $ 33,187 $ 40,632 UAE 4,512 6,763 Other countries 5,569 5,746 Total revenue $ 43,268 $ 53,141 Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements. 64 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Major Customers 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 % Year ended December 31, 2020 Customer A $ 12,891 24 % Customer B 9,394 18 % 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. 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. The concentration in the oil and gas industry increases credit and business risk . 65 FLOTEK INDUSTRIES, INC. 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. 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 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. 66 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not Applicable.