What changed in this filing

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Item 1. Financial Statements

2022-05-16 compared with 2021-11-09 · 422 added, 357 removed, 344 unchanged (69% of the section changed)

Financial Statements

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

September 30, 2021 December 31, 2020

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

March 31, 2022 December 31, 2021

Current assets:

1 unchanged sentence

Restricted cash 40 1,790

Accounts receivable, net of allowance for doubtful accounts of $ 743 and $ 1,316 at September 30, 2021 and December 31, 2020, respectively

Accounts receivable, net of allowance for doubtful accounts of $ 684 and $ 659 at March 31, 2022 and December 31, 2021, respectively

13,239 13,297

2 unchanged sentences

Other current assets 3,372 3,740

Current contract assets 3,533 —

Assets held for sale 2,752 2,762

2 unchanged sentences

Operating lease right-of-use assets 1,827 2,041

Goodwill 8,092 8,092

Deferred tax assets, net 282 279

Other long-term assets 17 —

Long term contract assets 7,067 29

TOTAL ASSETS $ 72,218 $ 50,244

8 unchanged sentences

Current portion of long-term debt 1,553 1,436

Convertible notes payable 17,609 —

Contingent convertible notes payable 14,050 —

Total current liabilities 48,942 18,777

9 unchanged sentences

Common stock, $ 0.0001 par value, 140,000,000 shares authorized;

79,610,243 shares issued and 69,316,933 shares outstanding at September 30, 2021;

82,563,610 shares issued and 76,490,522 shares outstanding at March 31, 2022 ;

79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021

Additional paid-in capital 367,104 363,417

Accumulated other comprehensive income (loss) 51 ( 19 )

Accumulated other comprehensive income 89 81

Accumulated deficit ( 319,938 ) ( 309,214 )

Treasury stock, at cost;

5,648,721 and 5,580,920 shares at September 30, 2021 and December 31, 2020, respectively

6,073,088 and 6,022,634 shares at March 31, 2022 and December 31, 2021 , respectively

( 34,159 ) ( 34,100 )

5 unchanged sentences

(in thousands, except per share data)

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Three months ended March 31,

Revenue from external customers $ 10,382 $ 11,770

1 unchanged sentence

Total revenues 12,879 11,770

Costs and expenses:

Operating expenses (excluding depreciation and amortization) 5,418 29,466 31,330 63,939

Corporate general and administrative 2,696 2,679 9,925 12,568

Cost of goods sold 13,358 12,080

Gross loss ( 479 ) ( 310 )

Operating costs and expenses:

Selling, general, and administrative 4,879 6,082

Depreciation and amortization 195 307

Research and development 1,415 1,542

Loss (Gain) on disposal of long-lived assets 14 ( 37 ) ( 55 ) ( 92 )

Impairment of goodwill — 11,706 — 11,706

Impairment of fixed, long-lived and intangible assets — 12,521 — 69,975

Total costs and expenses 9,547 58,333 46,187 166,946

Income (loss) from operations 632 ( 45,594 ) ( 15,073 ) ( 125,911 )

Other (expense) income:

Paycheck protection plan loan forgiveness — — 881 —

Loss on sale of property and equipment 8 2

Gain on lease termination ( 584 ) —

Change in fair value of contingent convertible notes payable 3,892 —

Total operating costs and expenses 9,805 7,933

Loss from operations ( 10,284 ) ( 8,243 )

Other income (expense):

Interest expense ( 668 ) ( 18 )

Other (expense) income, net ( 102 ) 291 ( 62 ) 322

Total other (expense) income, net ( 120 ) 272 766 858

Income (loss) before income taxes 512 ( 45,322 ) ( 14,307 ) ( 125,053 )

Income tax (expense) benefit ( 3 ) 81 ( 30 ) 6,282

Net income (loss) $ 509 $ ( 45,241 ) $ ( 14,337 ) $ ( 118,771 )

Income (loss) per common share:

Other income (expense) 224 ( 33 )

Total other expense ( 444 ) ( 51 )

Loss before income taxes ( 10,728 ) ( 8,294 )

Income tax benefit (expense) 4 ( 6 )

Net Loss $ ( 10,724 ) $ ( 8,300 )

Loss per common share:

Basic $ ( 0.15 ) $ ( 0.12 )

1 unchanged sentence

Weighted average common shares:

Weighted average common shares used in computing basic income (loss) per common share 69,324 68,217 68,665 68,063

Weighted average common shares used in computing diluted income (loss) per common share 70,176 68,217 68,665 68,063

Weighted average common shares used in computing basic loss per common share 73,858 68,447

Weighted average common shares used in computing diluted loss per common share 73,858 68,447

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Net income (loss) $ 509 $ ( 45,241 ) $ ( 14,337 ) $ ( 118,771 )

Other comprehensive income (loss):

Three months ended March 31,

Net Loss $ ( 10,724 ) $ ( 8,300 )

Other comprehensive income:

Foreign currency translation adjustment 8 49

Comprehensive Income (loss) $ 547 $ ( 45,281 ) $ ( 14,267 ) $ ( 118,939 )

Comprehensive Loss $ ( 10,716 ) $ ( 8,251 )

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

2 unchanged sentences

(in thousands)

Nine months ended September 30,

Three months ended March 31,

Cash flows from operating activities:

2 unchanged sentences

Change in fair value of contingent consideration 94 ( 335 )

Change in fair value of contingent convertible notes payable 3,892 —

Amortization of convertible note issuance cost 166 —

Payment in kind interest expense 485 —

Depreciation and amortization 195 307

Provision for doubtful accounts ( 42 ) 494

Inventory purchase commitment settlement ( 7,633 )

Provision for doubtful accounts, net of recoveries 238 —

Provision for excess and obsolete inventory 310 307

Impairment of goodwill — 11,706

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

Impairment of fixed assets — 30,178

Impairment of intangible assets — 32,363

Gain on sale of assets ( 55 ) ( 668 )

Loss on sale of property and equipment 8 2

Gain on lease termination ( 584 ) —

Non-cash lease expense 56 105

Stock compensation expense 739 778

Deferred income tax provision (benefit) 13 ( 199 )

Paycheck protection plan loan forgiveness ( 881 ) —

Deferred income tax (benefit) expense ( 4 ) 2

Changes in current assets and liabilities:

Accounts receivable, net 111 4,714

Inventories, net 2,330 3,186

Accounts receivable ( 180 ) 255

Inventories ( 999 ) ( 78 )

Income taxes receivable ( 10 ) 267

8 unchanged sentences

Capital expenditures — ( 19 )

Proceeds from sale of business — 9,907

Proceeds from sale of assets 24 2

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 24 ( 17 )

Cash flows from financing activities:

Proceeds from paycheck protection plan loan — 4,788

Proceeds from issuance of convertible notes 21,150 —

Payment of issuance costs of convertible notes ( 1,084 ) —

Payments to tax authorities for shares withheld from employees ( 59 ) ( 105 )

(Payments) proceeds from issuance of stock ( 246 ) 416

Proceeds from issuance of stock — 38

Payments for finance leases ( 14 ) ( 14 )

Net cash (used in) provided by financing activities ( 451 ) 4,929

Net cash provided by (used in) financing activities 19,993 ( 81 )

Effect of changes in exchange rates on cash and cash equivalents 8 23

8 unchanged sentences

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Three Months Ended September 30, 2021 and 2020

(In thousands of U.S.

dollars and shares)

Common Stock Treasury Stock Additional

Capital Accumulated

Comprehensive

Income (Loss) Accumulated Deficit Total Stockholders’ Equity

Value Shares Cost

Balance, June 30, 2021 79,607 $ 8 5,628 $ ( 34,017 ) $ 361,424 $ 13 $ ( 293,534 ) $ 33,894

Net income — — — — — — 509 509

Foreign currency translation adjustment — — — — — 38 — 38

Stock issued under employee stock purchase plan — — ( 28 ) 20 ( 89 ) — — ( 69 )

Restricted stock granted 9 — — — — — — —

Restricted stock forfeited ( 6 ) 4 8 3 — — 11

Stock compensation expense — — — — 961 — — 961

Shares withheld to cover taxes — — 45 64 ( 125 ) — — ( 61 )

Balance, September 30, 2021 79,610 $ 8 5,649 $ ( 33,925 ) $ 362,174 $ 51 $ ( 293,025 ) $ 35,283

(1) See Note 12, “Stockholders’ Equity” for further discussion.

Common Stock Treasury Stock Additional

Capital Accumulated

Comprehensive

Income (Loss) Accumulated Deficit Total Stockholders’ Equity

Value Shares Cost

Balance, June 30, 2020 77,626 $ 7 4,459 $ ( 33,566 ) $ 357,981 $ 51 $ ( 215,767 ) $ 108,706

Net loss — — — — — — ( 45,241 ) ( 45,241 )

Foreign currency translation adjustment — — — — — ( 40 ) — ( 40 )

Stock issued under employee stock purchase plan — — ( 25 ) — 58 — — 58

Restricted stock granted 346 — — — — — — —

Restricted stock forfeited — — 179 — — — — —

Treasury stock purchased — — 36 ( 41 ) — — — ( 41 )

Stock compensation expense — — — — 687 — — 687

Balance, September 30, 2020 77,972 $ 7 4,649 $ ( 33,607 ) $ 358,726 $ 11 $ ( 261,008 ) $ 64,129

FLOTEK INDUSTRIES, INC.

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

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Nine Months Ended September 30, 2021 and 2020

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2022 and 2021

(In thousands of U.S.

3 unchanged sentences

Comprehensive

Income (Loss) Accumulated Deficit Total Stockholders’ Equity

Income Accumulated Deficit Total Stockholders’ Equity

Value Shares Cost

2 unchanged sentences

Foreign currency translation adjustment — — — — — 8 — 8

Stock issued under employee stock purchase plan — — ( 112 ) ( 110 ) ( 136 ) — — ( 246 )

Restricted stock granted 287 — — — — — — —

2 unchanged sentences

Shares withheld to cover taxes — — 43 ( 59 ) — — — ( 59 )

( 613 ) — — — — —

Balance, September 30, 2021 79,610 $ 8 5,649 $ ( 33,925 ) $ 362,174 $ 51 $ ( 293,025 ) $ 35,283

(1) See Note 12, “Stockholders’ Equity” for further discussion.

Conversion of notes to common stock 2,793 — — — 2,948 — — 2,948

Balance, March 31, 2022 82,564 $ 8 6,073 $ ( 34,159 ) $ 367,104 $ 89 $ ( 319,938 ) $ 13,104

Common Stock Treasury Stock Additional

9 unchanged sentences

Restricted stock forfeited — — 5 — — — — —

Treasury stock purchased — — 97 ( 123 ) — — — ( 123 )

Stock compensation expense — — — — 778 — — 778

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

Balance, September 30, 2020 77,972 $ 7 4,649 $ ( 33,607 ) $ 358,726 $ 11 $ ( 261,008 ) $ 64,129

Shares withheld to cover taxes — — 45 ( 105 ) — — — ( 105 )

Other (see Note 12, “Stockholders’ Equity”) ( 613 ) — — — — — — —

Balance, March 31, 2021 78,276 $ 8 5,573 $ ( 33,956 ) $ 360,537 $ 30 $ ( 286,988 ) $ 39,631

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

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and Significant Accounting Policies

Organization and Nature of Operations

Note 1 — Organization and Nature of Operations

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, Social, and Governance (ESG) performance .

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 the streams in seconds rather than minutes or days.

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

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

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

For further discussion of our operations and segments, see Note 16, “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.

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’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 16, “Business Segment, Geographic and Major Customer Information.”

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 twelve months subsequent to the date of filing the consolidated financial statements..

While we believe that our cash and liquid assets, including the actions taken subsequent to March 31, 2022 discussed below and in Note 17, “Subsequent Events”, will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months, uncertainty surrounding the 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 in aggregate principal amount of 10 % convertible notes (the Convertible Notes Payable) 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 in aggregate principal amount of the convertible notes (the “Contingent Convertible Notes Payable”) to ProFrac Holdings LLC.

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

If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent ( 25 %) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) thh actual purchased volume during such calendar year.

The term of the ProFrac Agreement is three years starting on April 1, 2022 (see Note 3, “Revenue from Contracts with Customers” and Note 8, “Debt and Convertible Notes Payable”).

These $ 10 million Contingent Convertible Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.

During 2021, the Company also entered into 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 March 31, 2022 and December 31, 2022.

Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $ 4.3 million of gross proceeds and the sale closed on April 18 2022.

Based on our cash and liquid assets, including the transactions during the three months ended March 31, 2022 and subsequent to March 31, 2022 described above and in Note 17, “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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

as they become due in the next twelve months.

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

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

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

8 unchanged sentences

The Company does not have investments in any unconsolidated subsidiaries.

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

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, in large part, 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 operating cash flows from operations and expects to utilize a significant amount of cash as we wrap up 2021 and begin 2022.

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

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

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

Such actions may include, but are not limited to:

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

• Seeking Paycheck Protection Program (“PPP”) loan (“PPP loan”) forgiveness from the Small Business Administration;

Cash Equivalents

Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.

Restricted Cash

The Company’s restricted cash is $ 40 thousand and $ 1.8 million as of March 31, 2022 and December 31, 2021, respectively.

The Company’s restricted cash as of March 31, 2022 consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution.

The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $ 1.75 million for amounts due under the terms of the legal settlement discussed in Note 11, “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.

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

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

The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly.

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

• Sale of excess inventory and/or raw materials;

• Operating lease transaction of facilities;

• Sale of non-core real estate properties;

• Sale-leaseback transactions of facilities;

• Sub-leasing certain facilities;

• Renegotiating current lease facility terms and conditions;

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

• Reducing professional advisory fees and headcount.

However, there can be no assurance that such matters can be implemented on acceptable terms or at all.

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.

Liability Classified Convertible Notes Payable and Contingent Convertible Notes Payable

The Company accounts for the Convertible Notes Payable issued to the PIPE investors for cash proceeds, which is discussed in Note 1 and Note 8, at amortized cost pursuant to FASB ASC Topic 470, Debt.

The Company accounts for the Contingent Convertible Notes Payable issued as consideration for the ProFrac Agreement, which is discussed in Note 8, “Debt and Convertible Notes Payable”, as liability classified convertible instruments in accordance with Financial Accounting Standards Board ASC 718, “Stock Compensation” (“ASC 718”).

Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each reporting date (see Note 9, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

Fair Value Measurements

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

Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable.

When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available.

See Note 9, “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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The preparation of financial statements in conformity with U.S.

1 unchanged sentence

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;

property and equipment and intangible asset impairment assessments;

stock-based compensation expense;

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

recoverability and timing of the realization of contract assets;

and fair value of liability classified contingent convertible notes payable.

Reclassifications

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

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

Note 2 — Recent Accounting Pronouncements

Certain prior year amounts in the unaudited condensed consolidated statement of operations have been reclassified to conform to the current year presentation.

In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross 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 $ 1.7 million to selling, general and administrative expenses which were previously reported in operating expenses for the three months ended March 31, 2021.

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

Recent Accounting Pronouncements

Changes to U.S.

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

New Accounting Standards Issued But Not Adopted as of September 30, 2021

New Accounting Standards Issued and Adopted as of March 31, 2022

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, 2021, 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 has evaluated the impact of this standard and determined that there is no impact on the consolidated financial statements and related disclosures.

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

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

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

The Company has adopted this standard as of January 1, 2022, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures but will have an impact on the future issuances of convertible instruments and contracts in the Company’s equity.

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 adopted this standard as of January 1, 2022 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

New Accounting Standards Issued But Not Adopted as of March 31, 2022

The FASB issued ASU No.

2016-13, “ Measurement of Credit Losses on Financial Instruments .” This standard replaces the incurred loss impairment methodology in current U.S.

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

Note 3 — Business Acquisition

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

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

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

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

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

Additionally, the Company was

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 9, “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):

Tradenames and trademarks $ 1,100

Technology and know-how 5,000

Customer lists 6,800

Inventories 7,100

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

Note 3 — Revenue from Contracts with Customers

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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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive.

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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).

Product sales accounted for over 90 % of total revenue for the three and nine months ended September 30, 2021 and 2020.

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

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

$ 12,199 $ 11,082

Products $ 9,494 $ 12,076 $ 29,017 $ 39,053

Services 680 688

$ 12,879 $ 11,770

(1) Product revenues for 2022 include sales to a related party as described in Note 15, “Related Party Transactions.”

Arrangements with Multiple Performance Obligations

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

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Subscription-type arrangements were not a material revenue stream in the three and nine months September 30, 2021 and 2020.

During the third quarter 2021, we entered into a bill-and-hold contract, where we invoice the customer for products even though we retain possession of the products until a point in time in the future when the products are shipped to the customer.

In these contracts, the primary performance obligation is satisfied at a point in time when the product is segregated from our general inventory, it is ready for shipment to customer, and we do not have the ability to use the product or direct it to another customer.

Additionally, we have a secondary performance obligation related to custodial costs, including storage and freight, which is satisfied over time once the product has been delivered to the customer.

During the three and nine months ended September 30, 2021, we recognized $ 1.3 million of revenue related to a bill-and-hold arrangement with a related party.

Contract Balances

Subscription-type arrangements were not a material revenue stream in the quarters ended March 31, 2022 and 2021.

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

Contract liabilities associated with incomplete performance obligations are not material.

Contract assets associated with incomplete performance obligations are not material.

Contract Assets

Contract assets represent consideration paid to a ProFrac Services, LLC by the Company in the form of Contingent Convertible Notes Payable issued as an inducement to enter intothe ProFrac Agreement.

As consideration for the the economic value of the long-term revenue commitment from ProFrac Agreement as described in Note 1, “Organization and Nature of Operations”, the Company issued $ 10.0 million in aggregate principal amount of Contingent Convertible Notes Payable to ProFrac Holdings, LLC, under theProFrac Agreement, and which may be converted into shares of common stock of the Company under the terms of the Contingent Convertible Notes Payable described further in Note 8, “Debt and Convertible Notes Payable”.

During the three months ended March 31, 2022, contract assets of $ 10.6 million was recorded by the Company, as consideration paid to the customer, which included $ 0.6 million of issuance costs.

Under FASB ASC 606, Revenues from Contract with Customers , consideration paid to a customer is accounted for as a reduction of the transaction price of a contract.

Accordingly, the Company will amortize the contract assets against the revenues under the ProFrac Agreement over the three-year contract term beginning April 1, 2022.

As of March 31, 2022, the Company classified $ 7.1 million of the contract asset as long term based upon its estimate of the ProFrac Agreement revenues which will not be realized within the first 12 months of the contract.

The company’s estimate of the timing of future contract revenues will be evaluated on a quarterly basis throughout the contract term.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4 — Inventories

Inventories are as follows (in thousands):

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Raw materials $ 5,474 $ 5,610

3 unchanged sentences

Inventories, net $ 10,143 $ 9,454

The provision recorded in the three and nine months ended September 30, 2021 were $ 0.1 million for the CT segment and nil for the DA segment and $ 0.5 million for the CT segment and $ 0.2 million of the DA segment, respectively.

The provision recorded in the three and nine months ended September 30, 2020 were $ 5.9 million for the CT segment and $ 3.9 million for the DA segment and $ 2.0 million for the CT segment and $ 3.9 million for the DA segment, respectively.

The decrease in excess and obsolescence during the nine months ended September 30, 2020 is attributable to the Company’s sales of excess and obsolescence inventory.

The provisions recorded in the three months ended March 31, 2022 and 2021 was $ 0.3 million for the CT segment an d nil for the DA segment.

Note 5 — Property and Equipment

Property and equipment are as follows (in thousands):

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Land $ 886 $ 886

8 unchanged sentences

Property and equipment, net $ 5,079 $ 5,296

Depreciation expense totaled $ 0.2 million and $ 0.5 million for the three months ended September 30, 2021 and 2020, and $ 0.8 million and $ 2.3 million for the nine months ended September 30, 2021 and 2020, respectively.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the first quarter of 2021, the Company classified its warehouse facility in Monahans, Texas, as held for sale based on the criteria outlined in Accounting Standard Codification (“ASC”) 360 , Property, Plant and Equipment .

During the first quarter, the Company committed to a plan to sell the asset in its present condition.

The Company engaged with a commercial real estate agent and is actively looking for a buyer.

As such, the Company reclassified the related property, plant and equipment of $ 0.5 million as held for sale in the current assets of the consolidated balance sheet, as the Company expects to complete the asset sale within one year.

Depreciation expense totaled $ 0.2 million and $ 0.3 million for the three months ended March 31, 2022 and 2021, respectively.

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 March 31, 2021 and December 31, 2021.

Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $ 4.3 million of gross proceeds and the sale closed on April 18, 2022 See further discussion in Note 17, Subsequent Events.

Note 6 — Leases

In August 2021, the company entered into a five year triple net operating lease agreement to lease a warehouse facility in Monahans, TX.

The tenant occupied the Company’s warehouse facility in Monahans, TX in September 2021.

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

In July 2021, the Company entered into a long-term rental agreement with Resolute Oil to leverage capabilities and facilities to drive growth in adjacent green chemistry markets.

The agreement includes options to renew until 2036.

Through the agreement, Resolute Oil will fully utilize the Company’s entire 15 -acre campus, including the 38,000 square foot chemical blending facility, based in Waller, TX, to manufacture United States Pharmacopeia-National Formulary (USP-NF)-grade white mineral oil distributed globally to customers in the agricultural, energy, food & beverage, cosmetic, and personal care markets.

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 lease liability and corresponding 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 adjustments to lease liabilities and ROU assets totaling of $ 6.2 million each as of March 31, 2020.

During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office and moved all employees to the GRIC facility effective June 29, 2020.

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

No impairment was recognized for the three and nine months ended September 30, 2021.

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

Rental income recognized during the three months ended March 31, 2022 was $ 121 thousand and was included in other income in the consolidated statement of operations.

As discussed in Note 1, “Organization and Nature of Operations” this facility was sold on April 18, 2022 and the lease agreement between the tenant and the Company terminated.

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

Rental income recognized during the three months ended March 31, 2022 was $ 185 thousand and was included in other income in the consolidated statement of operations.

In March 2022, the Company entered into an agreement with its landlord to terminate the lease on its facility in Calgary, Alberta for a one-time termination fee of $ 85 thousand.

This lease was previously scheduled to continue until 2033, and due to its early termination, the Company recorded a gain on lease termination from the reduction of lease liabilities and ROU assets of $ 0.6 million that is included in the consolidated statements of operations during the three months ended March 31, 2022.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Three months ended March 31,

Operating lease expense $ 228 $ 238

6 unchanged sentences

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 380 $ 317 $ 1,107 $ 2,312

Operating cash flows used in operating leases $ ( 375 ) $ ( 372 )

Operating cash flows from finance leases ( 10 ) ( 3 )

Financing cash flows from finance leases ( 3 ) ( 14 )

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Maturities of lease liabilities as of March 31,2022 are as follows (in thousands):

Years ending December 31, Operating Leases Finance Leases

2021 (excluding the nine months ended September 30, 2021) $ 285 $ 14

2022 1,254 47

2022 (excluding three months ended March 31, 2022) $ 775 $ 35

2023 1,221 39

4 unchanged sentences

Present value of lease liabilities $ 7,425 $ 80

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Operating Leases

16 unchanged sentences

Finance leases 8.9 % 8.9 %

Note 8 — Debt

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

Note 7 — Accrued Liabilities

Current accrued liabilities are as follows (in thousands):

March 31, 2022 December 31, 2021

Severance costs $ 2,584 $ 2,581

Loss on purchase commitments (Note 11) — 1,750

Payroll and benefits 993 1,054

Legal costs 885 1,013

Contingent liability for earn-out provision 702 608

Deferred revenue, current 567 528

Taxes other than income taxes 304 241

Other 712 1,221

Total current accrued liabilities $ 6,747 $ 8,996

Note 8 — Debt and Convertible Notes Payable

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 in April 2020.

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

No payments of principal or interest were required during the year ended December 31, 2020, or the three and nine months ended September 30, 2021.

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

reductions and compensation limits and provided that at least 60 % of the eligible costs incurred are used for payroll.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

No payments of principal or interest were required during the three months ended March 31, 2022 and 2021.

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

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

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

During the second quarter of 2021, the Company applied for forgiveness on the PPP loans.

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

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.

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

Accordingly, during the second quarter, the Company recorded $ 0.9 million in other income on the consolidated statement of operations.

The Company has submitted to the SBA for partial forgiveness on the Flotek PPP loan but as of the date of this filing, no conclusion from the SBA have been reached.

In October 2021, the Company received notice that a request to extend the Flotek PPP loan maturity date from April 15, 2022 to April 15, 2025 was confirmed.

Prior to the extension approval, the $ 4.8 million Flotek PPP loan balance was classified as a current liability.

The maturity date extension amendment occurred before the third quarter 2021 balance sheet was issued, therefore, $ 3.5 million was reclassified to long-term debt, reducing the current portion of long-term debt from $ 4.8 million to $ 1.3 million as of September 30, 2021.

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 March 31, 2022 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 upon notice that it will not be forgiven.

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

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

September 30, 2021 December 31, 2020

Flotek paycheck protection plan loan $ 4,788 $ 4,788

JP3 paycheck protection plan loan — 877

Total 4,788 5,665

March 31, 2022

December 31, 2021

Flotek PPP loan

$ 4,788 $ 4,788

Less current maturities

( 1,553 ) ( 1,436 )

Total long-term debt, net of current portion

$ 3,235 $ 3,352

On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company.

Pursuant to the PIPE transaction on February 2, 2022, Flotek issued $ 21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $ 19.5 million.

The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC.

The Convertible Notes Payable accrue paid-in-kind interest at a rate of 10 % per annum, have a maturity of one year, and are converted into common stock of Flotek (a) at the holder's option at any time prior to maturity, at a price of $ 1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $ 2.50 for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $ 0.8705 .

On March 21, 2022, $ 3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately 2.8 million shares of common stock.

As of March 31, 2022, the Convertible Notes Payable are recorded at carrying value of $ 17.6 million, including accrued paid-in-kind interest of $ 0.3 million, and net of unamortized issuance costs of $ 0.8 million.

The estimated fair value of the Convertible Notes Payable at March 31, 2022 was $ 25.5 million, estimated using a Monte Carlo simulation model.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $ 10 million in aggregate principal amount of Contingent Convertible Notes Payable under the same terms as the Convertible Notes Payable issued in the PIPE transaction.

If minimum volumes are not achieved in any given year, 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 and (ii) the actual purchased volume during such calendar year.

On February 2, 2022, the Company also entered into a Master Transaction Agreement with ProFrac Holdings, LLC (the “Master Transaction Agreement”) which supplements the terms of the ProFrac Agreement and provides that if ProFrac does not perform their purchase obligations under the ProFrac Agreement, the Company shall have the right, but not the obligation, to repurchase a percentage of the Contingent Convertible Notes Payable, or a percentage of the securities issued pursuant to the conversion of the Contingent \Convertible Notes Payable if applicable, for aggregate consideration of $ 1.00 , as follows:

(a) 0 % if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first three years of the term have been paid prior to termination of the ProFrac Agreement;

(b) 33 % if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first two years of the term have been paid prior to termination of the ProFrac Agreement;

(c) 66 % if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first one years of the term have been paid prior to termination of the ProFrac Agreement;

(d) 100 % if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first year of the term have not been paid prior to termination of the ProFrac Agreement.

The foregoing repurchase provisions will terminate as of the closing of the ProFrac transaction as described further in Note 1, “Organization and Nature of Operations”.

The Contingent Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $ 10.0 million on the issuance date and remeasured to fair value of $ 14.1 million as of March 31, 2022 (see Note 9, “Fair Value Measurements”).

Note 9 — Fair Value Measurements

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Fair Value of Other Financial Instruments

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

The PPP loan for Flotek approximates fair value as of September 30, 2021.

Subsequent to the third quarter balance sheet date, the Company received notice that a request to extend the Flotek PPP loan maturity date from April 15, 2022 to April 15, 2025 was confirmed.

Additionally, u pon receipt of the SBA’s final decision on the Company’s reimbursement request to forgive the FTK PPP loan, any remaining balances not forgiven by the SBA will be measured on a recurring basis.

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 March 31, 2022 and December 31, 2021.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Liabilities Measured at Fair Value on a Recurring Basis

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

Balance at September 30, Balance at December 31,

March 31, December 31,

Level 1 Level 2 Level 3 2022 Level 1 Level 2 Level 3 2021

Contingent consideration $ — $ — $ 715 $ 715 $ — $ — $ 1,416 $ 1,416

On September 30, 2021, and December 31, 2020, the estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, was recorded as a contingent liability.

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

There were no transfers in or out of either Level 1, Level 2, or Level 3 fair value measurements during the periods ending September 30, 2021 and December 31, 2020.

Contingent earnout consideration $ — $ — $ 702 $ 702 $ — $ — $ 608 $ 608

Contingent convertible notes $ — $ — $ 14,050 $ 14,050 $ — $ — $ — $ —

Total $ — $ — $ 14,752 $ 14,752 $ — $ — $ 608 $ 608

The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of March 31, 2022 and December 31, 2021.

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

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

March 31, 2022 December 31, 2021

Risk-free interest rate 2.45 % 1.02 %

Expected volatility 90.0 % 90.0 %

Term until liquidation (years) 3.13 3.38

Stock price $ 1.26 $ 1.13

Discount rate 7.86 % 6.71 %

The Contingent Convertible Notes Payable were measured at fair value at issuance and on a recurring basis.

The Contingent Convertible Notes Payable had an initial fair value of $ 10.0 million on February 2, 2022.

The Contingent Convertible Notes Payable were classified as Level 2 at the initial measurement due to the use of a quoted price for a similar liability, and classified as Level 3 as of March 31, 2022 due to the use of unobservable inputs.

The estimated value of the Contingent Convertible Notes Payable as of March 31, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.

The key inputs into the Monte Carlo simulation used to estimate the fair value the Contingent Convertible Notes Payable as of March 31, 2022 were as follows:

March 31, 2022

Risk-free interest rate 1.63 %

Expected volatility 90.0 %

Term until liquidation (years) 0.84

Stock price $ 1.26

Discount rate 7.2 %

Assets Measured at Fair Value on a Nonrecurring Basis

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

During the three months ended March 31, 2020, the Company recorded an impairment of $ 57.5 million for impairment of long-lived assets.

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

During the three months ended September 30, 2020, the Company recorded additional impairment expenses of $ 12.5 million.

Total impairment expenses recorded during the nine months ended September 30, 2020 was $ 70.0 million of long-lived and intangible assets.

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

During 2020, the first stock performance target for the contingent consideration was achieved and settled.

The Company estimated the fair value of the remaining stock performance earn-out provision at September 30, 2021, and decreased the estimated fair value of the contingent liability to $ 0.7 million.

The Company records changes in the fair value of the contingent consideration and achievement of performance targets in operating expenses.

The following table presents the changes in contingent consideration balances classified as Level 3 balances for the three and nine months ended September 30, 2021 and 2020 (in thousands):

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

The Company estimated the fair value of the remaining stock performance earn-out provision as of March 31, 2022 and 2021 and adjusted the estimated fair value of the contingent liability to $ 0.7 million and $ 1.1 million, respectively.

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

The Company estimated the initial fair value of $ 10.0 million of the Contingent Convertible Notes Payable on February 2, 2022, by reference to the cash purchase price paid by third party investors for equivalent notes issued simultaneously by the Company.

The Company adjusted the estimated fair value of the Contingent Convertible Notes Payable to $ 14.1 million as of March 31, 2022.

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

Three months ended March 31,

Balance - beginning of period $ 608 $ 1,416

Additions / issuances — — — 1,200

Change in fair value ( 400 ) 3,200 ( 701 ) 3,200

Transfer out of Level 3 — ( 2,500 ) — ( 2,500 )

Transfer of contingent convertible notes payable from Level 2 10,000 —

Increase in principle of convertible notes for paid-in-kind interest 158 —

Change in fair value of contingent earnout consideration 94 ( 335 )

Change in fair value of contingent convertible notes payable 3,892 —

Balance - end of period $ 14,752 $ 1,081

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 — Income Taxes

1 unchanged sentence

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

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Three months ended March 31,

federal statutory tax rate 21.0 % 21.0 %

2 unchanged sentences

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

Non-deductible expenses 5.8 ( 0.1 ) 1.1 —

Research and development credit — — — 0.1

Increase in valuation allowance ( 20.8 ) ( 21.7 )

Effect of tax rate differences of NOL carryback — — — 1.7

Permanent differences ( 0.4 ) —

Effective income tax rate — % ( 0.1 ) %

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

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

income taxed at different rates.

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.

GAAP provides for the recognition of deferred tax assets if realization of such assets is more likely than not.

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — Commitments and Contingencies

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

At December 31, 2020, the Company’s balance sheet included an accrued liability of $ 9.4 million associated with the terpene supply agreement with FCC and the Company’s expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased and expected selling prices of the excess terpene as such loss was not considered recoverable.

The Company calculated the liability based on the Company’s expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased and expected selling prices of the excess terpene as such loss was not considered recoverable.

On March 26, 2021, the Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and other parties in state court in Harris County, Texas.

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

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.

Subsequent to the lawsuit described above, 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 and Flotek Chemistry reached agreement with all parties resolving all claims between the parties.(“the ADM Settlement”) On or before January 3, 2022, Flotek will pay to ADM a one-time payment of $ 1.75 million and the terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5 million pounds of terpene through 2023.

As a result of the third quarter 2021 recognition of the ADM Settlement, operating expenses (excluding depreciation and amortization) for the three and nine months ended September 31, 2021 benefited by $ 7.6 million, excluding legal fees.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Except as disclosed above, 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.

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

2 unchanged sentences

financial institutions and balances often exceed insurable amounts.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 — Stockholders’ Equity

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.

This adjustment was not material to the March 31, 2021 consolidated financial statements or basic and diluted earnings per share.

Note 13 — Earnings (Loss) Per Share

1 unchanged sentence

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.

The three months ended September 30, 2021 diluted earnings per common share included 851,702 common share equivalents.

Potentially dilutive securities were excluded from the calculation of diluted loss per share for the nine months ended September 30, 2021 and for the three and nine months ended September 30, 2020, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the periods.

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 three months ended March 31, 2022 and 2021, 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 notes payable convertible into 26.3 million shares, 0.8 million restricted stock units and 4.3 million stock options for the three months ended March 31, 2022, and 0.4 million restricted stock units and 3.0 million stock options for the three months ended March 31, 2021 .

Note 14 — Supplemental Cash Flow Information

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

Nine months ended September 30,

Supplemental cash payment information:

Three months ended March 31,

Supplemental cash flow information:

Interest paid $ 5 $ 6

Income taxes (received) paid ( 351 ) 5,927

Supplemental non-cash activities:

Employee retention credit $ 2,851 $ —

Supplemental non-cash investing and financing activities:

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

Under the provisions of the CARES Act, the Company is eligible for a refundable employee retention credit subject to certain criteria.

In connection with the CARES Act, the Company adopted a policy to recognize the employee retention credit when earned and to offset the credit against the related payroll tax liability.

Accordingly, the Company recorded a $ 1.9 million employee retention credit during the three months ended June 30, 2021 in other current assets with the offset recorded in accrued liabilities.

In the second quarter of 2021, the Company used $ 0.8 million of the total employee retention credit leaving a $ 1.1 million credit to be applied against payroll tax liabilities.

In the third quarter of 2021, the Company used $ 0.9 million of the total employee retention credit leaving a $ 1.9 million credit to be applied against payroll tax liabilities.

Income taxes received — ( 351 )

Non cash financing and investing activities:

Issuance of convertible notes payable as consideration for customer contract 10,000 —

Conversion of convertible notes payable to common stock 2,949 —

Note 15 — Related Party Transaction

1 unchanged sentence

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2014 and proposed an adjustment.

Chisholm, were not properly withheld in 2014 and proposed an adjustment.

Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr.

1 unchanged sentence

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 to the Company, and giving the Company the right to withhold payments equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies from any amounts owed under the employment agreement.

Chisholm was executed, giving the Company the contractual right of offset for any amounts owed by Mr.

Chisholm to the Company for the IRS matter, and giving the Company the right to withhold payments to Mr.

Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter from any amounts owed under the employment agreement.

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.

4 unchanged sentences

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 September 30, 2021 and December 31, 2020, the receivable from Mr.

As of March 31, 2022 and December 31, 2021, the receivable from Mr.

Chisholm was $ 1.4 million, which equaled the payable to the IRS and netted with Mr.

1 unchanged sentence

Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.

Brown has been a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“Customer”), a private oil and gas exploration and production company formed in 2016.

The Company entered into a $ 1.3 million bill-and-hold agreement with the Customer during the third quarter of 2021.

The agreement between the Company and Customer is a related party transaction.

The Company’s board was informed prior to the transaction and subsequently ratified the transaction as being in the best interests of the Company.

For the three and nine months ended September 30, 2021, the Company’s revenues for chemical sales to Confluence Resources LP was $ 1.3 million.

As of September 30, 2021, the customer owes $ 1.3 million to the Company and transaction is recorded in account receivables on the consolidated balance sheet.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Brown has been a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company formed in 2016.

For the three months ended March 31, 2022, the Company’s revenues for chemical sales to Confluence was $ 1.4 million.

As of March 31, 2022 and December 31, 2021, Confluence owed $ 1.4 million and $ 1.3 million respectively to the Company which is recorded in account receivables on the consolidated balance sheet.

During the three months ended March 31, 2022, the Company’s revenues from chemical sales to ProFrac was $ 1.1 million.

These revenues were not pursuant to the ProFrac agreement discussed in Note 1, “Organization and Nature of Operations”.

There were no revenues from ProFrac during the three months ended March 31, 2021.

As of March 31, 2022 and December 31, 2021, ProFrac owed $ 1.1 million and $ 0 , respectively which is recorded in account receivables on the consolidated balance sheet.

Note 16 — Business Segment, Geographic and Major Customer Information

4 unchanged sentences

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.

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

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 .

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

The Company produces Food and Drug Administration and Environmental Protection Agency compliant products its ISO 9001:2015 certified facility in Marlow, Oklahoma.

Today the Company has a portfolio of specialty chemical products to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets .

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 real-time information on hydrocarbon composition and properties helps customers generate additional profits by enhancing their operations including crude/condensates stabilization, blending, optimization of transmix, increasing efficiencies of gas processing plants, ensuring product quality while enabling automation of fluid handling and reducing losses through giveaways (i.e., that portion of a product of higher value than what is specified).

The customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The company markets products and services that support in-line data analysis of hydrocarbon components and properties.

Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks.

The Company evaluates performance based upon a variety of criteria.

The primary financial measure is segment operating income.

The primary financial measure is segment operating income (loss).

Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office.

Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

For the three months ended September 30, Chemistry Technologies Data Analytics (1)

Corporate and Other Total

Revenue from external customers $ 8,044 $ 803 $ — $ 8,847

Revenue from related party 1,332 — — 1,332

Income (loss) from operations, including impairment 4,399 ( 1,071 ) ( 2,696 ) 632

Depreciation and amortization 215 17 1 233

Additions to long-lived assets — — — —

Revenue from external customers $ 12,083 $ 656 $ — $ 12,739

Revenue from related party — — — —

Loss from operations, including impairment ( 8,880 ) ( 34,035 ) ( 2,679 ) ( 45,594 )

Depreciation and amortization 244 274 — 518

Additions to long-lived assets 906 — — 906

(1) The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3.

For the nine months ended September 30, Chemistry Technologies Data Analytics (1)

As of and for the three months ended March 31,

Chemistry Technologies Data Analytics (1)

Corporate and Other Total

1 unchanged sentence

Revenue from related party 2,497 — — 2,497

Loss from operations, including impairment ( 3,009 ) ( 2,138 ) ( 9,926 ) $ ( 15,073 )

Loss from operations ( 6,057 ) ( 808 ) ( 3,419 ) ( 10,284 )

Depreciation and amortization 178 16 1 195

2 unchanged sentences

Revenue from related party — — — —

Loss from operations, including impairment ( 75,137 ) ( 35,185 ) ( 15,589 ) ( 125,911 )

Loss from operations ( 3,589 ) ( 292 ) ( 4,362 ) ( 8,243 )

Depreciation and amortization 292 15 — 307

Additions to long-lived assets 19 — — 19

(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):

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Chemistry Technologies $ 33,476 $ 34,387

2 unchanged sentences

Total assets $ 72,218 $ 50,244

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Geographic Information

Revenue by country is based on the location where services are provided and products are used.

Revenue by country is based on the location where services are provided and products are sold.

No individual countries other than the U.S.

1 unchanged sentence

Revenue by geographic location is as follows (in thousands):

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Three months ended March 31,

$ 10,334 $ 9,661

4 unchanged sentences

are not considered material to the consolidated financial statements.

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):

For the three months ended September 30, Chemistry Technologies % of Total Revenue

Customer D $ 3,041 29.9 %

Customer E - Related party 1,332 13.1 %

Customer D $ 4,632 36.2 %

Customer C 2,088 16.4 %

For the nine months ended September 30, Chemistry Technologies % of Total Revenue

Customer D $ 7,701 24.8 %

Customer C 4,067 13.1 %

Customer C $ 10,412 25.4 %

Customer D 8,117 19.8 %

Three months ended March 31, Chemistry Technologies % of Total Revenue

Customer A $ — — %

* DA customer did not account for more than 10% of revenue during this period.

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

Customer B 2,607 20.2 %

Customer C (Related Party) 1,389 10.8 %

Customer A $ 3,029 25.7 %

Customer B 2,849 24.2 %

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.

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

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

See Note 16, “Business Segment, Geographic and Major Customer Information,” for concentration of segment revenue from major customers.

Note 17 — Subsequent Events

We have evaluated the effects of events that have occurred subsequent to September 30, 2021, and there have been no material events that would require recognition in our third quarter 2021 consolidated financial statements or disclosure in the Notes to the consolidated financial statements, except that on October 28, 2021, the Company also received a confirmation approving a request to extend the maturity date of Flotek’s PPP loan maturity date from April 15, 2022 to April 15, 2025.

Additionally on

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 29, 2021, the Company and Flotek Chemistry reached an agreement with all parties resolving all claims between the parties.

The ADM settlement agreement and the Flotek PPP loan maturity date extension approval were considered to be recognizable subsequent events under U.S.

GAAP and required adjustment to our third quarter 2021 consolidated financial statements.

See Note 11 - Commitments and Contingencies and Note 8 - Debt for additional information.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 — Subsequent Events

We have evaluated the effects of events that have occurred subsequent to March 31, 2022, and there have been no material events that would require recognition in the 2022 interim financial statements or disclosure in the notes to the consolidated financial statements, except as disclosed below.

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 (“ProFrac Holdings”), 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 (“ProFrac Services”) 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.

ProFrac Services 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 nominees to serve on Flotek’s board of directors.

On February 16, 2022, the Company entered into a transaction with ProFrac Holdings, LLC that once closed, would expand the ProFrac Agreement to a term of ten years and to increase ProFrac Services’ minimum purchase obligation for each year to the greater of 70% of ProFrac Services’ requirements and a baseline measured by ProFrac Services’ first 30 hydraulic fracturing fleets deployed.

Closing of the transaction is subject to customary closing conditions, including a stockholder vote as described below.

As part of the transaction, at closing of the amended agreement Flotek would (a) issue to ProFrac $ 50 million in principal amount of 10 % PIK notes convertible into Flotek’s common stock with a maturity of one year , and (b) grant ProFrac the right to designate two additional nominees 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.

On May 9, 2022, the Company held a special meeting of stockholders to approve this transaction.

Stockholders were also asked to approve permitting the Board to increase the authorized common stock of the Company and a reverse split of the Company’s common stock, in each case to facilitate the issuance of the additional 10% PIK notes.

All proposals at the meeting passed, and the Company expects to close the transactions with ProFrac during the second quarter of 2022.

The Company is evaluating its expected working capital needs in order to facilitate the ramp in activity after closing of the contract extension.

Subsequent to December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility for proceeds of $ 4.3 million, which closed on April 18, 2022.

This will result in an estimated gain on sale of the Waller facility of $ 1.9 million that will be reflected in the consolidated financial statements for the three and six months ended June 30, 2022 and the cessation of rental income from this facility due to the subsequent termination of the lease agreement.

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

What changed 10-Q

Item 1. Financial Statements