What changed in this filing

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Item 1. Financial Statements

2022-08-11 compared with 2022-05-16 · 344 added, 213 removed, 553 unchanged (50% of the section changed)

1 unchanged sentence

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Current assets:

1 unchanged sentence

Restricted cash 40 1,790

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

Accounts receivable, net of allowance for doubtful accounts of $ 514 and $ 659 at June 30, 2022 and December 31, 2021, respectively

11,747 13,297

Accounts receivable, related party 11,603 —

Inventories, net 13,249 9,454

Income taxes receivable 32 22

Other current assets 4,000 3,762

18 unchanged sentences

Convertible notes payable 18,323 —

Contingent convertible notes payable 14,050 —

Contract consideration convertible notes payable 67,220 —

Total current liabilities 114,998 18,777

9 unchanged sentences

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

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

82,884,690 shares issued and 76,773,333 shares outstanding at June 30, 2022 ;

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

3 unchanged sentences

Treasury stock, at cost;

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

6,111,357 and 6,022,634 shares at June 30, 2022 and December 31, 2021 , respectively

( 34,238 ) ( 34,100 )

5 unchanged sentences

(in thousands, except per share data)

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2022 2021 2022 2021

Revenue from external customers $ 12,824 $ 9,165 $ 23,206 $ 20,935

5 unchanged sentences

Selling, general, and administrative 7,431 4,203 12,310 10,287

Depreciation and amortization 195 307

Depreciation of property and equipment 182 253 377 560

Research and development 1,115 1,466 2,530 3,008

Loss on sale of property and equipment 8 2

Gain on sale of property and equipment ( 1,914 ) ( 71 ) ( 1,906 ) ( 69 )

Gain on lease termination — — ( 584 ) —

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

Change in fair value of contract consideration

convertible notes payable ( 17,158 ) — ( 13,266 ) —

Total operating costs and expenses ( 10,344 ) 5,851 ( 539 ) 13,786

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

Income (loss) from operations 8,039 ( 7,461 ) ( 2,245 ) ( 15,704 )

Other income (expense):

Paycheck protection plan loan forgiveness — 881 — 881

Interest expense ( 1,597 ) ( 17 ) ( 2,265 ) ( 35 )

Other income (expense) ( 104 ) 72 120 39

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:

Total other income (expense) ( 1,701 ) 936 ( 2,145 ) 885

Income (loss) before income taxes 6,338 ( 6,525 ) ( 4,390 ) ( 14,819 )

Income tax expense ( 98 ) ( 21 ) ( 94 ) ( 27 )

Net income (loss) $ 6,240 $ ( 6,546 ) $ ( 4,484 ) $ ( 14,846 )

Income (loss) per common share:

Basic $ 0.08 $ ( 0.09 ) $ ( 0.06 ) $ ( 0.22 )

5 unchanged sentences

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

Three months ended March 31,

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

Other comprehensive income:

Three months ended June 30, Six months ended June 30,

2022 2021 2022 2021

Net income (loss) $ 6,240 $ ( 6,546 ) $ ( 4,484 ) $ ( 14,846 )

Other comprehensive income (loss):

Foreign currency translation adjustment 87 ( 17 ) 95 32

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

Comprehensive income (loss) $ 6,327 $ ( 6,563 ) $ ( 4,389 ) $ ( 14,814 )

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

2 unchanged sentences

(in thousands)

Three months ended March 31,

Six months ended June 30,

Cash flows from operating activities:

2 unchanged sentences

Change in fair value of contingent consideration ( 134 ) ( 302 )

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

Change in fair value of contract consideration convertible notes payable ( 13,266 ) —

Amortization of convertible note issuance cost 414 —

Payment in kind interest expense 485 —

Paid-in-kind interest expense 1,819 —

Amortization of contract assets 737 —

Depreciation and amortization 377 560

1 unchanged sentence

Provision for excess and obsolete inventory 769 580

Loss on sale of property and equipment 8 2

Gain on sale of property and equipment ( 1,906 ) ( 69 )

Gain on lease termination ( 584 ) —

2 unchanged sentences

Deferred income tax (benefit) expense ( 5 ) 10

Paycheck protection plan loan forgiveness — ( 881 )

Changes in current assets and liabilities:

3 unchanged sentences

Other current assets ( 244 ) ( 672 )

Contract asset, net ( 3,600 ) —

Other long-term assets 12 541

1 unchanged sentence

Accrued liabilities ( 2,924 ) ( 1,048 )

Operating lease liabilities ( 308 ) —

Income taxes payable 99 168

4 unchanged sentences

Proceeds from sale of assets 4,194 74

Net cash provided by (used in) investing activities 24 ( 17 )

Net cash provided by investing activities 4,189 43

Cash flows from financing activities:

1 unchanged sentence

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

Proceeds from issuance of warrants 19,500 —

Payments to tax authorities for shares withheld from employees ( 138 ) ( 78 )

Proceeds from issuance of stock 24 —

Purchase from sale of common stock — ( 166 )

Payments for finance leases ( 21 ) ( 29 )

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2022 and 2021

Three and Six Months Ended June 30, 2022 and 2021

(In thousands of U.S.

dollars and shares)

Three months ended June 30, 2022

Common Stock Treasury Stock Additional

1 unchanged sentence

Comprehensive

Income Accumulated

Deficit Total Stockholders’ Equity

Value Shares Cost

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

Net income — — — — — — 6,240 6,240

Foreign currency translation adjustment — — — — — 87 — 87

Stock issued under employee stock purchase plan — — ( 19 ) — 24 — — 24

Restricted stock granted 339 — — — — — — —

Restricted stock forfeited ( 3 ) — 12 — — — — —

Stock compensation expense — — — — 852 — — 852

Shares withheld to cover taxes ( 15 ) — 45 ( 79 ) — — — ( 79 )

Issuance of stock warrants, net of transaction fee — — — — 9,930 — — 9,930

Equity contribution — — — — 8,400 — — 8,400

Balance, June 30, 2022 82,885 $ 8 6,111 $ ( 34,238 ) $ 386,310 $ 176 $ ( 313,698 ) $ 38,558

Six months ended June 30, 2022

Common Stock Treasury Stock Additional

Capital Accumulated

Comprehensive

Income Accumulated Deficit Total Stockholders’ Equity

3 unchanged sentences

Foreign currency translation adjustment — — — — — 95 — 95

Stock issued under employee stock purchase plan — — ( 19 ) — 24 — — 24

Restricted stock granted 626 — — — — — — —

2 unchanged sentences

Shares withheld to cover taxes ( 15 ) — 88 ( 138 ) — — — ( 138 )

Issuance of stock warrants, net of transaction fee — — — — 9,930 — — 9,930

Equity contribution 8,400 8,400

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

Balance, June 30, 2022 82,885 $ 8 6,111 — $ ( 34,238 ) — $ 386,310 — $ 176 — $ ( 313,698 ) — $ 38,558

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

Three months ended June 30, 2021

Common Stock Treasury Stock Additional

Capital Accumulated

Comprehensive

Income Accumulated Deficit Total Stockholders’ Equity

Value Shares Cost

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

Net loss — — — — — — ( 6,546 ) ( 6,546 )

Foreign currency translation adjustment — — — — — ( 17 ) — ( 17 )

Stock issued under employee stock purchase plan — — ( 26 ) ( 38 ) ( 2 ) — — ( 40 )

Restricted stock granted 1,465 — — — ( 7 ) — — ( 7 )

Restricted stock forfeited ( 134 ) — 25 54 ( 54 ) — — —

Stock compensation expense — — — — 969 — — 969

Shares withheld to cover taxes — — 56 ( 77 ) ( 19 ) — — ( 96 )

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

Six months ended June 30, 2021

Common Stock Treasury Stock Additional

12 unchanged sentences

Other (see Note 13, “Stockholders’ Equity”) ( 613 ) — — — — — — —

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

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

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

5 unchanged sentences

A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial, commercial, and consumer markets improve their environmental performance.

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

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

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

The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to 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 aims to enable 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.

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

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

Access to capital is dependent 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 availability of adequate capital is dependent on the Company’s operating cash flow, 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

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 in the next twelve months, uncertainty surrounding the stability and strength of the oil and gas markets or reduced spending by our customers could have a further negative impact on our liquidity.

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 “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”).

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) the actual purchased volume during such calendar year.

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

These Contract Consideration 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.

On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) upon issuance of $ 50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”).

The ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

as they become due in the next twelve months.

On June 21, 2022, the “Company issued prefunded warrants (the “Prefunded Warrants”) to ProFrac Holdings II, LLC in exchange for $ 19.5 million in cash (see Note 13, “Stockholders’ Equity”).

The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $ 0.0001 per share.

On April 18, 2022, the Company sold its Waller facility for $ 4.3 million of gross proceeds.

Based on our cash and liquid assets, including the transactions during the six months ended June 30, 2022 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 in the next twelve months.

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

2 unchanged sentences

Basis of Presentation

The accompanying unaudited financial statements reflect all adjustments, in the opinion of management, necessary for fair statement of the financial condition and results of operations for the periods presented.

The accompanying unaudited consolidated financial statements reflect all adjustments, in the opinion of management, necessary for fair statement of the financial condition and results of operations for the periods presented.

All such adjustments are normal and recurring in nature.

9 unchanged sentences

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 Company’s restricted cash is $ 40 thousand and $ 1.8 million as of June 30, 2022 and December 31, 2021, respectively.

The Company’s restricted cash as of June 30, 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 12, “Commitments and Contingencies”.

2 unchanged sentences

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 Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate allowance 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 recovery of accounts receivable previously written off is recorded as a reduction to the allowance for doubtful accounts charged to operating expense.

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

1 unchanged sentence

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.

Contract Assets

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s contract assets represent consideration issued in the form of convertible notes to a related party customer in connection with the ProFrac Agreement and the Amended ProFrac Agreement discussed in Note 9, “Debt and Convertible Notes Payable” and other incremental costs related to obtaining the ProFrac Agreements.

The contract assets are amortized over the term of the ProFrac Agreements based on forecasted revenues as goods are transferred to the customer and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations.

The contract assets will be tested for recoverability and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the transfer of goods under the ProFrac Agreements less the direct costs that relate to providing those goods in the future.

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.

3 unchanged sentences

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Property and equipment

15 unchanged sentences

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.

Convertible Notes Payable and Liability Classified Contract Consideration 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, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.

The Company accounts for the Contract Consideration Convertible Notes Payable issued as consideration for the ProFrac Agreement, which are discussed in Note 1, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, as liability classified convertible instruments in accordance with FASB 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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

Fair Value Measurements

10 unchanged sentences

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:

14 unchanged sentences

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.

Comprehensive Income (Loss)

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

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

Research and Development Costs

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

12 unchanged sentences

Estimated forfeitures are based on historical experience.

Stock Warrants

The Company evaluated the Pre-funded Warrants in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to be classified within stockholders’ equity, and recorded the proceeds received for the Pre-funded Warrants within additional paid in capital in the consolidated balance sheets.

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;

Significant items subject to estimates and assumptions include the useful lives of property and equipment;

long lived asset impairment assessments;

stock-based compensation expense;

1 unchanged sentence

recoverability and timing of the realization of contract assets;

and fair value of liability classified contingent convertible notes payable.

and fair value of liability classified Contract Consideration Convertible Notes Payable and equity classified Stock Warrants.

Reclassifications

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.

In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross 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 $ 1.3 million and $ 3.1 million to selling, general and administrative expenses which were previously reported in operating expenses for the three and six months ended June 30, 2021 respectively.

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

Changes to U.S.

GAAP are established by the Financial Accounting Standards Board (“FASB”).

GAAP are established by the FASB.

We evaluate the applicability and impact of all authoritative guidance issued by the FASB.

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

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

New Accounting Standards Issued and Adopted as of January 1, 2022

The FASB issued ASU No.

2 unchanged sentences

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 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 as of January 1, 2022 as there were no convertible debt instruments outstanding as of that date 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

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 fiscal 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 June 30, 2022

The FASB issued ASU No.

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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.

Revenue accruals are recorded on an ongoing basis to reflect updated variable consideration information.

Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive and discounts offered to customers for prompt payment.

The majority of the products from the CT segment are sold at a point in time and service contracts are short-term in nature.

The DA segment recognizes revenue for sales of equipment at the time of sale.

Revenue related to service and support is recognized over time.

Revenue related to service and support is recognized on an over time basis.

The Company bills sales on a monthly basis with payment terms customarily 30-60 days for domestic and 90-120 days f or international from invoice receipt.

2 unchanged sentences

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).

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three months ended March 31,

Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

$ 28,588 $ 8,444 $ 40,787 $ 19,524

Services 785 721 1,465 1,411

2 unchanged sentences

Arrangements with Multiple Performance Obligations

The CT and DA segments primarily sell chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms.

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

For DA, services are recognized 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.

The Company primarily sells chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms.

Additionally, the Company offers various services associated to products sold which includes field services, installation, maintenance, and other functions.

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

There may be additional performance obligations related to providing ongoing or reoccurring maintenance.

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

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

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

Additionally, the Company 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.

Customers may be invoiced for such maintenance and subscription-type arrangements and revenue not yet recognizable is reported under current and long term contract liabilities on the balance sheet.

Subscription-type arrangements were not a material revenue stream in the three and six months ended June 30, 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 assets associated with incomplete performance obligations are not material.

Note 4 - Contract Assets

Contract assets are as follows (in thousands):

June 30, 2022 December 31, 2021

Contract assets 83,060 —

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.

Less accumulated amortization ( 737 ) —

Contract assets, (net) $ 82,323 $ —

In connection with entering into the ProFrac Agreements on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable”, we recognized contract assets of $ 10 million and $ 69.5 million, respectively, and associated fees of $ 3.6 million, representing the excess consideration to be given over the three and ten year terms of the contracts over the fair value of the convertible notes we issued.

The value to be assigned to the contract asset was estimated based on forecasted volumes and contractual pricing in the agreements.

As of June 30, 2022, $ 76.1 million of the contract assets is classified as long term based upon our estimate of the forecasted revenues from the ProFrac agreements which will not be realized within the first twelve months of the ProFrac Agreements.

The Company’s estimate of the timing of the future contract revenues is evaluated on a quarterly basis throughout the contract term.

During the three and six months ended June 30, 2022.

the Company recognized $ 0.7 million of contract assets amortization which is presented as a reduction of the transaction price included in the related party revenue in the consolidated statement of operations.

The below table reflects our estimated amortization per year (in thousands) based on our current forecasted revenues from the ProFrac Agreements.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Years ending December 31, Amortization

2022 (excluding the six months ended June 30, 2022) $ 2,655

Thereafter through May 2032 45,658

Total contract assets $ 82,323

Note 5 — Inventories

Inventories are as follows (in thousands):

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Raw materials $ 7,807 $ 5,610

3 unchanged sentences

Inventories, net $ 13,249 $ 9,454

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.

The provision recorded in the three months ended June 30, 2022 and 2021 was $ 0.4 million and $ 0.1 million for the CT segment and $ 49 thousand and $ 0.1 million for the DA segment, respectively.

The provision recorded in the six months ended June 30, 2022 and 2021 was $ 0.7 million and $ 0.4 million for the CT segment and $ 49 thousand and $ 0.1 million for the DA segment, respectively .

Note 6 — Property and Equipment

Property and equipment are as follows (in thousands):

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Land $ 886 $ 886

8 unchanged sentences

Property and equipment, net $ 4,819 $ 5,296

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.

Depreciation expense totaled $ 0.2 million and $ 0.3 million for the three months ended June 30, 2022 a nd 2021, and $ 0.4 million and $ 0.6 million for the six months ended June 30, 2022 and 2021, respectively.

In the first quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas in its current condition and as a result the associated assets in the amount of $ 0.5 million are classified as held for sale as of June 30, 2022 and December 31, 2021.

The company also classified $ 2.3 million for the Waller facility as held for sale as of December 2021, which was sold on April 18, 2022 (See Note 1, “Organization and Nature of Operations”.

Note 7 — Leases

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Rental income recognized during the three and six months ended June 30, 2022 was nil and $ 121 thousand, respectively, 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

Rental income recognized during the three and six months ended June 30, 2022 was $ 66 thousand, and $ 131 thousand, respectively and was included in other income in the consolidated statement of operations.

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

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2022 2021 2022 2021

Operating lease expense $ 220 $ 250 $ 448 $ 488

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Financing cash flows from finance leases 3 3 6 29

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

Maturities of lease liabilities as of June 30, 2022 are as follows (in thousands):

Years ending December 31, Operating Leases Finance Leases

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

2022 (excluding the six months ended June 30, 2022) $ 519 $ 19

2023 1,221 39

7 unchanged sentences

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Operating Leases

18 unchanged sentences

Current accrued liabilities are as follows (in thousands):

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Severance costs $ 2,595 $ 2,581

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

Loss on purchase commitments — 1,750

Payroll and benefits 998 1,054

6 unchanged sentences

Note 9 — Debt and Convertible Notes Payable

Long Term Debt

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

Small Business Administration (“SBA”).

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

The PPP loans

In connection with the acquisition of JP3 in May 2020, the Company assumed a

FLOTEK INDUSTRIES, INC.

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.

PPP loan of $ 0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek.

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

No payments of principal or interest were required during the three or six months ended June 30, 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.

7 unchanged sentences

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.

The Company has submitted to the S BA for forgiveness of substantially all of the Flotek PPP loan but 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 o f 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):

March 31, 2022

December 31, 2021

Long-term debt, including current portion, assuming forgiveness is not obtained, is as follows (in thousands):

June 30, 2022 December 31, 2021

Flotek PPP loan

4 unchanged sentences

$ 3,098 $ 3,352

Convertible Notes Payable

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.

Pursuant to the PIPE transaction, 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.

1 unchanged sentence

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.

As of June 30, 2022, the remaining Convertible Notes Payable are recorded at carrying value of $ 18.3 million, including accrued paid-in-kind interest of $ 0.8 million, and net of unamortized issuance costs of $ 0.6 million The estimated fair value of the Convertible Notes Payable at June 30, 2022 was $ 21.1 million.

ProFrac Agreement Contract Consideration Convertible Notes Payable

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”).

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 Contract Consideration Convertible Notes Payable (“ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE transaction.

The ProFrac Agreement Contract Consideration 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 $ 11.7 million as of June 30, 2022 which includes payment-in-kind interest of $ 0.4 million.

The fair value adjustment was a $ 2.4 million decrease and a $ 1.7 million increase in the three and six months ended June 30, 2022, respectively.

See Note 10, “Fair Value Measurements”.

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable

On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement”) upon issuance of $ 50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”).

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable may be converted at any time prior to the maturity date, which will be one year from the date of issuance under the same stock conversion terms as the Convertible Notes Payable issued in the PIPE transaction.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $ 69.5 million on the issuance date and remeasured to fair value of $ 55.6 million as of June 30, 2022 which includes payment-in-kind interest of $ 0.6 million.

The fair value adjustment was a $ 13.9 million decrease in the three and six months ended June 30, 2022.

See Note 10, “Fair Value Measurements”.

Note 10 — Fair Value Measurements

7 unchanged sentences

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.

The carrying amount of the Flotek PPP loan approximates its fair value as of June 30, 2022 and December 31, 2021.

FLOTEK INDUSTRIES, INC.

2 unchanged sentences

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):

March 31, December 31,

June 30, December 31,

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

Contingent earnout consideration $ — $ — $ 474 $ 474 $ — $ — $ 608 $ 608

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

ProFrac Agreement contract consideration convertible notes $ — $ — 11,670 $ 11,670 $ — $ — $ — $ —

Amended ProFrac Agreement contract consideration convertible notes $ — $ — 55,550 $ 55,550 $ — $ — $ — $ —

Total $ — $ — $ 67,694 $ 67,694 $ — $ — $ 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.

Contingent Earnout Consideration Key Inputs

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 June 30, 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

June 30, 2022 December 31, 2021

Risk-free interest rate 2.99 % 1.02 %

3 unchanged sentences

Discount rate 10.77 % 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

ProFrac Agreement Contract Consideration Notes Payable Key Inputs

The ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis.

The ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $ 10.0 million on February 2, 2022.

The ProFrac Agreement Contract Consideration 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 June 30, 2022 due to the use of unobservable inputs.

The estimated value of the ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 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 ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of June 30, 2022 were as follows:

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

Risk-free interest rate 2.51 %

3 unchanged sentences

Discount rate 10.92 %

The valuation of the ProFrac Agreement Contract Consideration Convertible Notes Payable was $ 11.7 million as of June 30, 2022

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs

On May 17, 2022, the Company measured the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a Monte Carlo simulation at an estimated fair value of $ 69.5 million.

The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 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 Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, on the issuance date of May 17, 2022, and as of as of June 30, 2022 were as follows:

May 17, 2022 June 30, 2022

Risk-free interest rate 2.16 % 2.80 %

Expected volatility 90.0 % 90.0 %

Term until liquidation (years) 1.00 0.88

Stock price $ 1.29 $ 0.99

Discount rate 8.40 % 10.97 %

The value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was $ 55.6 million.

Assets Measured at Fair Value on a Nonrecurring Basis

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

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 estimated the fair value of the remaining stock performance earn-out provision as of June 30, 2022 and 2021 and adjusted the estimated fair value of the contingent liability to $ 0.5 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 Company estimated the initial fair value of $ 10.0 million of the ProFrac Agreement Contract Consideration 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 estimated the fair value of the additional $ 69.5 million of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on the issuance date of May 17, 2022 using a Monte Carlo simulation.

The Company adjusted the estimated fair value of the Contract Consideration Convertible Notes Payable to $ 55.6 million as of June 30, 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,

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Three months ended June 30, Six months ended June 30,

2022 2021 2022 2021

Balance - beginning of period $ 14,752 $ 1,081 $ 608 $ 1,416

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

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

Transfer of ProFrac Agreement contract consideration convertible notes payable from Level 2 — — 10,000 —

Issuance of Amended ProFrac Agreement contract consideration convertible notes payable 69,460 — 69,460 —

Increase in principle of ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest 257 — 415 —

Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest 611 — 611 —

Change in fair value of contingent earnout consideration ( 228 ) 34 ( 134 ) ( 301 )

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

Change in fair value of ProFrac Agreement contract consideration convertible notes payable ( 2,637 ) — 1,255 —

Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable ( 14,521 ) — ( 14,521 ) —

Balance - end of period $ 67,694 $ 1,115 $ 67,694 $ 1,115

2 unchanged sentences

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

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

federal statutory tax rate

21 % 21 % 21 % 21 %

State income taxes, net of federal benefit

— ( 0.3 ) 0.1 ( 0.2 )

income taxed at different rates

3.8 ( 0.1 ) ( 1.9 ) 0.3

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

3.1 2.2 ( 2.0 ) 1.2

Non-deductible expenses

( 0.4 ) 3.6 0.1 1.1

Increase in valuation allowance

Permanent differences ( 0.4 ) —

( 27.5 ) ( 26.5 ) ( 17.0 ) ( 23.6 )

Tax settlement

3.8 — ( 2.2 ) —

Effective income tax rate

3.8 % ( 0.1 ) % ( 1.9 ) % ( 0.2 ) %

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.

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.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — Commitments and Contingencies

Note 12 — Co mmitments and Contingencies

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

1 unchanged sentence

Terpene Supply Agreement

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

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

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

On March 26, 2021, Flotek Industries, Inc.

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

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 (“FCC”) and other parties in state court in Harris County, Texas.

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

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

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

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

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

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

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Note 13 — Stockholders’ Equity

On June 21, 2022, the Company issued the Prefunded Warrants to ProFrac Holdings II, LLC in exchange for $ 11.1 million in cash (see Note 1, “Organization and Nature of Operations”) and a cash equity contribution of $ 8.4 million, for a total cash infusion of $ 19.5 million.

The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $ 0.0001 per share, representing a 20 % premium to the 30-day volume average price of the Company’s common stock at the close of business on the day prior to the date of the issuance of the Prefunded Warrants.

The Prefunded Warrants, net of transaction fees of $1.1 million, and the equity contribution from ProFrac are included in additional paid-in capital as of June 30, 2022.

ProFrac Holdings and its affiliates may not receive any voting or consent rights in respect of the Prefunded Warrants or the underlying shares unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings and its affiliates and (ii) ProFrac Holdings has paid an additional $ 4.5 million to the Company.

The additional $ 4.5 million will be accounted for as equity contribution when received.

On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $ 3.0 million plus $ 39 thousand of accrued interest, were converted into 2,793,030 shares of the Company’s common stock.

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 March 31, 2021 consolidated financial statements or basic and diluted earnings per share.

This adjustment was not material to the June 30, 2021 consolidated financial statements or basic and diluted earnings per share.

Note 14 — Earnings (Loss) Per Share

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

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

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

Potentially dilutive securities were excluded from the calculation of diluted loss per share for the 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 .

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

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

The dilutive effect of non-vested stock issued under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the prefunded stock warrants are computed using the treasury stock method.

The dilutive effect of the Convertible Notes is computed using the if‑converted method in accordance with ASU 2020-06, which was adopted by the Company on January 1, 2022 (see Note 2, “Summary of Significant Accounting Policies”).

The calculation of the basic and diluted EPS is as follows (in thousands):

Three months ended June 30, Six months ended June 30,

Net income (loss) for basic earnings per share $ 6,240 $ ( 4,484 )

Paid-in-Kind interest expense on convertible notes payable, net of tax 1,028 1,402

Change in fair value of contract consideration convertible notes payable , net of tax ( 13,229 ) ( 10,228 )

Adjusted net (loss) for dilutive earnings per share $ ( 5,961 ) $ ( 13,310 )

Basic weighted average shares outstanding 74,861 73,476

Dilutive effect of convertible notes payable 49,474 33,610

Diluted weighted average shares outstanding 124,335 107,086

Basic earnings (loss) per share 0.08 ( 0.06 )

Diluted loss per share ( 0.05 ) ( 0.12 )

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The adjustments to net income (loss) in the numerator are net of estimated tax at 22.9 %.

For the three and six months ended June 30, 2022 weighted average shares for employee stock awards of 692,494 and 662,230 , respectively, and weighted average shares for the prefunded stock warrants of 976,177 and 490,785 , respectively, were not included in the dilution calculation since including them would have an anti-dilutive effect.

For the three and six months ended June 30, 2021 weighted average shares for employee stock awards of 1,127,080 and 1,344,233 , respectively.

were not included in the calculation of diluted loss per share since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.

Note 15 — Supplemental Cash Flow Information

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

Three months ended March 31,

Six months ended June 30,

Supplemental cash flow information:

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Income taxes received — ( 351 )

Supplemental non-cash activities:

Employee retention credit — 1,164

JP3 PPP loan forgiveness — 881

Non cash financing and investing activities:

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

Issuance of convertible notes payable as consideration for ProFrac Agreements 79,460 —

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

Issuance cost of stock warrants included in accrued accounts payable 1,170 —

Note 16 — Related Party Transaction

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

As of June 30, 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.

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

Brown was 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.

As of April 15, 2022 Ted D.

Brown stepped down from being a Director of the Company and Confluence will no longer be considered a related party..

For the three and six months ended June, 30, 2022, the Company’s revenues for chemical sales to Confluence was zero and $ 1.4 million respectively.

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.

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) under which ProFrac Services, LLC is obligated to order chemicals as per the terms of the Agreement discussed in Note 1, “Organization and Nature of Operations”.

On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement, (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) to increase the purchase obligation and term of the ProFrac Agreement, as discussed in Note 1, “Organization and Nature of Operations”.

On June 21, 2022, the Company issued prefunded warrants (the “PreFunded Warrants”) to ProFrac Holdings II, LLC, in exchange for $ 19.5 million in cash as discussed in Note 13, “Stockholders’ Equity”.

During the three and six months ended June 30, 2022, the Company’s revenues from c hemical sales to ProFrac Services LLC, were $ 16.5 million and $ 18.9 million respectively.

These revenues were net of amortization of contract assets of $ 0.7 million for the three and six months ended June 30, 2022.

As of June 30, 2022 and December 31, 2021, ProFrac Services, LLC owed $ 11.6 million and zero , respectively which is recorded in account receivables on the consolidated balance sheet.

Note 17 — Business Segment, Geographic and Major Customer Information

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Chemistry Technologies.

The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals.

This segment also includes a portfolio of specialty chemical products to address the long-term challenges of in the janitorial, sanitization, food services, and adjacent markets.

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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.

Performance based upon a variety of criteria.

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

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

As of and for the three months ended March 31,

As of and for the three months ended June 30,

Chemistry Technologies Data Analytics (1)

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Revenue from related party 16,549 — — 16,549

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

Change in fair value of contract consideration convertible notes ( 17,158 ) — — ( 17,158 )

Income (loss) from operations 14,944 ( 1,198 ) ( 5,707 ) 8,039

Depreciation and amortization 166 15 1 182

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Revenue from related party — — — —

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

Income (loss) from operations ( 3,819 ) ( 773 ) ( 2,869 ) ( 7,461 )

Depreciation and amortization 233 20 — 253

Additions to long-lived assets 13 — — 13

As of and for the six months ended June 30,

Chemistry Technologies Data Analytics (1)

Corporate and Other Total

Revenue from external customers $ 21,422 $ 1,784 $ — $ 23,206

Revenue from related party 19,046 — — 19,046

Change in fair value of contract consideration convertible notes ( 13,266 ) — — ( 13,266 )

Income (loss) from operations 8,887 ( 2,006 ) ( 9,126 ) ( 2,245 )

Depreciation and amortization 345 31 1 377

Additions to long-lived assets 5 — — 5

Revenue from external customers $ 17,990 $ 2,945 $ — $ 20,935

Revenue from related party — — — —

Income (loss) from operations ( 7,407 ) ( 1,067 ) ( 7,230 ) ( 15,704 )

Depreciation and amortization 524 35 1 560

Additions to long-lived assets 31 — — 31

Assets of the Company by reportable segments are as follows (in thousands):

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Chemistry Technologies $ 127,398 $ 34,387

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Total assets $ 163,471 $ 50,244

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The increase in Chemistry Technologies assets is primarily due to contact assets of $ 83.3 million.

Geographic Information

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

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2022 2021 2022 2021

$ 25,955 $ 6,869 $ 36,289 $ 16,530

UAE 3,139 1,319 4,450 2,422

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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):

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

Customer A $ — — %

Three months ended June 30, Revenue % of Total Revenue

Customer A (Related Party) $ 16,549 52.2 %

Customer B 5,611 19.1 %

Customer C (Related Party) 1,389 10.8 %

Customer A $ 3,029 25.7 %

Customer C $ 1,038 11.3 %

Customer D 1,810 19.8 %

Six months ended June 30, Revenue % of Total Revenue

Customer A (Related Party) $ 17,657 38.9 %

Customer B 8,218 19.5 %

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

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

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

Customer C $ 4,067 19.4 %

Customer D 4,660 22.3 %

The majority of t he Company’s revenue consists predominantly of customers within the oil and gas industry.

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

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

FLOTEK INDUSTRIES, INC.

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Note 18 — 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.

We have evaluated the effects of events that have occurred subsequent to June 30, 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.

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