What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-10 compared with 2022-08-11 · 217 added, 218 removed, 679 unchanged (39% of the section changed)

1 unchanged sentence

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Current assets:

1 unchanged sentence

Restricted cash 100 1,790

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

Accounts receivable, net of allowance for doubtful accounts of $ 566 and $ 659 at September 30, 2022 and December 31, 2021, respectively

17,597 11,997

5 unchanged sentences

Total current assets 83,350 42,599

Long-term contract assets 73,878 —

Property and equipment, net 4,781 5,296

2 unchanged sentences

Other long-term assets 17 29

Long term contract assets 76,063 —

TOTAL ASSETS $ 164,019 $ 50,244

21 unchanged sentences

Common stock, $ 0.0001 par value, 240,000,000 shares authorized;

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

83,424,763 shares issued and 77,283,733 shares outstanding at September 30, 2022 ;

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

3 unchanged sentences

Treasury stock, at cost;

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

6,141,030 and 6,022,634 shares at September 30, 2022 and December 31, 2021 , respectively

( 34,268 ) ( 34,100 )

5 unchanged sentences

(in thousands, except per share data)

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

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

2022 2021 2022 2021

3 unchanged sentences

Cost of goods sold 47,465 4,022 92,500 26,876

Gross loss ( 2,305 ) ( 1,610 ) ( 2,784 ) ( 1,918 )

Gross income (loss) ( 1,842 ) 6,157 ( 4,626 ) 4,238

Operating costs and expenses:

2 unchanged sentences

Research and development 985 1,186 3,515 4,194

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

(Gain) loss on sale of property and equipment ( 10 ) 14 ( 1,916 ) ( 55 )

Gain on lease termination — — ( 584 ) —

Change in fair value of contract consideration

(Gain) loss in fair value of contract consideration

convertible notes payable 4,250 — ( 9,016 ) —

4 unchanged sentences

Interest expense ( 2,321 ) ( 18 ) ( 4,586 ) ( 53 )

Other income (expense) ( 104 ) 72 120 39

Other expense, net ( 187 ) ( 102 ) ( 67 ) ( 62 )

Total other income (expense) ( 2,508 ) ( 120 ) ( 4,653 ) 766

6 unchanged sentences

Weighted average common shares:

Weighted average common shares used in computing basic loss per common share 74,861 69,531 73,476 69,001

Weighted average common shares used in computing diluted loss per common share 124,335 69,531 107,086 69,001

Weighted average common shares used in computing basic income (loss) per common share 75,312 69,324 74,095 68,665

Weighted average common shares used in computing diluted income (loss) per common share 75,312 70,176 74,095 68,665

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

2 unchanged sentences

(in thousands)

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

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

2022 2021 2022 2021

5 unchanged sentences

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Six months ended June 30,

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands)

Nine months ended September 30,

Cash flows from operating activities:

8 unchanged sentences

Provision for doubtful accounts, net of recoveries 147 ( 42 )

Inventory purchase commitment settlement — ( 7,633 )

Inventory write down 1,036 —

Provision for excess and obsolete inventory 666 687

7 unchanged sentences

Accounts receivable ( 5,748 ) 111

Accounts receivable, related party ( 24,616 ) —

Inventories ( 11,373 ) 2,330

Income taxes receivable 3 405

Other current assets ( 244 ) ( 672 )

Contract asset, net ( 3,600 ) —

Other long-term assets 12 541

Other assets ( 537 ) ( 1,696 )

Contract assets ( 3,600 ) —

Accounts payable 22,036 ( 604 )

12 unchanged sentences

Proceeds from issuance of warrants 19,500 —

Payment of issuance costs of stock warrants ( 1,170 ) —

Payments to tax authorities for shares withheld from employees ( 191 ) ( 407 )

Proceeds from issuance of stock 24 —

Purchase from sale of common stock — ( 166 )

Payments for finance leases ( 30 ) ( 44 )

11 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Six Months Ended June 30, 2022 and 2021

Three and Nine Months Ended September 30, 2022 and 2021

(In thousands of U.S.

dollars and shares)

Three months ended June 30, 2022

Three months ended September 30, 2022

Common Stock Treasury Stock Additional

4 unchanged sentences

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

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

Net loss — — — — — — ( 18,794 ) ( 18,794 )

Foreign currency translation adjustment — — — — — 116 — 116

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

Restricted stock granted 502 — — — — — — —

Restricted stock forfeited — 5 — — — — —

Restricted stock units vested 58 — — — — — — —

Stock compensation expense — — — — 671 — — 671

Shares withheld to cover taxes ( 20 ) — 25 ( 30 ) ( 23 ) — — ( 53 )

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

Balance, September 30, 2022

83,425 $ 8 6,141 $ ( 34,268 ) $ 386,958 $ 292 $ ( 332,492 ) $ 20,498

Nine months ended September 30, 2022

Common Stock Treasury Stock Additional

9 unchanged sentences

Restricted stock forfeited ( 3 ) — 25 — — — — —

Restricted stock units vested 58 — — — — — — —

Stock compensation expense — — — — 2,262 — — 2,262

3 unchanged sentences

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

Balance, September 30, 2022 83,425 $ 8 6,141 $ ( 34,268 ) $ 386,958 $ 292 $ ( 332,492 ) $ 20,498

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

Three months ended June 30, 2021

Three months ended September 30, 2021

Common Stock Treasury Stock Additional

3 unchanged sentences

Value Shares Cost

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

Net loss — — — — — — 509 509

5 unchanged sentences

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

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

Six months ended June 30, 2021

Balance, September 30, 2021

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

Nine months ended September 30, 2021

Common Stock Treasury Stock Additional

12 unchanged sentences

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

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

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

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 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.

2 unchanged sentences

For further discussion of our operations and segments, see Note 17, “Business Segment, Geographic and Major Customer Information.”

As a result of a series of transactions in 2022 with ProFrac Holdings, LLC, Flotek has become a consolidated subsidiary of ProFrac Holding Corp.

since May 17, 2022.

Sources and Uses of Liquidity

The Company currently funds its operations and growth primarily from cash on hand.

The Company currently funds its operations and growth primarily from cash on hand and other liquid assets.

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

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 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.

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 (see Note 9, “Debt and Convertible Notes Payable”).

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”).

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 during 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) 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

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.

The availability of capital is dependent on the Company’s operating cash flow principally derived from its long-term supply agreement with ProFrac Services, LLC (see Note 16, Related Party Transactions).

We believe that our cash and other liquid assets and our forecasted operating cash flows expected to be generated from the ongoing execution of the long-term supply agreement with ProFrac Services, LLC 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 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.

The accompanying unaudited consolidated financial statements reflect all adjustments, in the opinion of management, necessary for the 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 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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s restricted cash is $ 0.1 million and $ 1.8 million as of September 30, 2022 and December 31, 2021, respectively.

The Company’s restricted cash as of September 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”.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable arise from product sales and services and are stated at estimated net realizable value.

Accounts receivable, including those with related party, 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.

7 unchanged sentences

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.

The Company’s contract assets represent consideration issued in the form of convertible notes and other incremental costs related to obtaining a contract with a related party customer.

The contract assets are amortized over the term of the related party contract based on forecasted revenues as goods are transferred to the related party 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 are tested for recoverability on a recurring basis 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 contract 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.

14 unchanged sentences

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 events or changes in circumstances indicate

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

4 unchanged sentences

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.

The Company accounts for the 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 related to a related party contract (see 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 reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

Fair Value Measurements

12 unchanged sentences

• 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.

3 unchanged sentences

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.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Foreign Currency Translation

5 unchanged sentences

Comprehensive Income (Loss)

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

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

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

1 unchanged sentence

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.

13 unchanged sentences

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.

The Company evaluated the Prefunded Warrants issued in June 2022 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 Prefunded Warrants within additional paid in capital in the consolidated balance sheets.

Use of Estimates

8 unchanged sentences

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Reclassifications

1 unchanged sentence

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.

In connection with this change in presentation, the Company reclassified selling costs of $ 1.4 million and $ 4.4 million to selling, general and administrative expenses which were previously reported in operating expenses for the three and nine months ended September 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

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

The FASB issued ASU No.

1 unchanged sentence

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

New Accounting Standards Issued But Not Adopted as of September 30, 2022

The FASB issued ASU No.

11 unchanged sentences

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.

Payment terms are customarily 30-60 days for domestic and 90-120 days f or international from invoice receipt.

In addition, sales taxes are excluded from revenues.

Disaggregation of Revenue

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

2 unchanged sentences

$ 45,623 $ 10,179 $ 87,874 $ 31,114

(1) Product revenues for 2022 include sales to a related party as described in Note 16, “Related Party Transactions.”

(1) Product revenues for 2022 include sales to related parties as described in Note 16, “Related Party Transactions.”

Arrangements with Multiple Performance Obligations

5 unchanged sentences

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.

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

Subscription-type arrangements were not a material revenue stream in the three and nine months ended September 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.

2 unchanged sentences

Contract assets are as follows (in thousands):

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Contract assets $ 83,060 $ —

1 unchanged sentence

Contract assets, net $ 81,074 $ —

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.

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”, the Company recognized contract assets of $ 10.0 million and $ 69.5 million, respectively, and associated fees of $ 3.6 million.

As of September 30, 2022, $ 73.9 million of the contract assets are classified as long term based upon our estimate of the forecasted revenues from the ProFrac agreements which will not be realized within the next twelve months of the ProFrac Agreements.

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

During the three and nine months ended September 30, 2022 the Company recognized $ 1.2 million and $ 2.0 million, respectively, 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 the Company’s current forecasted revenues from the ProFrac Agreements.

FLOTEK INDUSTRIES, INC.

1 unchanged sentence

Years ending December 31, Amortization

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

2022 (excluding the nine months ended September 30, 2022 )

Thereafter through May 2032 45,629

Total contract assets $ 81,074

Based on our tests of recoverability, we did not identify impairment of such contract assets as of September 30, 2022.

Note 5 — Inventories

Inventories are as follows (in thousands):

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Raw materials $ 7,000 $ 5,610

3 unchanged sentences

Inventories, net $ 19,189 $ 9,454

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 .

The provision recorded in the three months ended September 30, 2022 and 2021 was $ 44.8 thousand and $ 0.1 million for the CT segment and $ 14.4 thousand and nil for the DA segment, respectively.

The provision recorded in the nine months ended September 30, 2022 and 2021 was $ 0.8 million and $ 0.5 million for the CT segment and $ 0.1 million and $ 0.2 million for the DA segment, respectively .

The Company wrote off inventory of $ 1.0 million in the three and nine months ended September 30, 2022 relating to the Company’s decision to cease the manufacture and sale of hand sanitizers.

There were no inventory write offs in the three and nine months ended September 30, 2021.

Note 6 — Property and Equipment

Property and equipment are as follows (in thousands):

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Land $ 886 $ 886

8 unchanged sentences

Property and equipment, net $ 4,781 $ 5,296

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

Depreciation expense totaled $ 0.2 million and $ 0.2 million for the three months ended September 30, 2022 a nd 2021, and $ 0.6 million and $ 0.8 million for the nine months ended September 30, 2022 and 2021, respectively.

During 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 September 30, 2022 and

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021.

The company also classified $ 2.3 million for the Waller, Texas facility as held for sale as of December 2021.

The Waller, Texas facility was sold on April 18, 2022 and the Company recognized a gain on the sale of the facility of $ 1.9 million during the nine months ended September 30, 2022.

Note 7 — Leases

In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $ 40.0 thousand per month for sixty-four months .

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.

Rental income recognized during nine months ended September 30, 2022 was $ 121.0 thousand, and was included in other expense, net in the consolidated statement of operations.

Rental income recognized during the three and nine months ended September 30, 2021 was nil .

As discussed in Note 6, “Property and Equipment” 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 $ 21.0 thousand per month, and the tenant occupied the warehouse facility in September 2021.

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.

Rental income recognized during the three and nine months ended September 30, 2022 was $ 65.0 thousand and $ 196.0 thousand, respectively, and was included in other expense, net in the consolidated statement of operations.

Rental income recognized during the three and nine months ended September 30, 2021 was $ 12.0 thousand and was included in other expense, net in the consolidated statement of operations.

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

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

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

2022 2021 2022 2021

10 unchanged sentences

Financing cash flows from finance leases 1 2 5 8

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

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

Years ending December 31, Operating Leases Finance Leases

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

2022 (excluding the nine months ended September 30, 2022)

2023 1,221 39

7 unchanged sentences

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Operating Leases

18 unchanged sentences

Current accrued liabilities are as follows (in thousands):

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Severance costs $ 2,606 $ 2,581

9 unchanged sentences

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

administered by the U.S.

Small Business Administration (“SBA”).

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

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

No payments of principal or interest were required during the three or six months ended June 30, 2022 and 2021.

No payments of principal or interest were required during the three or nine months ended September 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.

5 unchanged sentences

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.

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 expense, net 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 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”.

During the third quarter of 2021, the Company submitted to the S BA, request for forgiveness of substantially all of the Flotek PPP loan.

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 from the SBA that it will not be forgiven.

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Flotek PPP loan

6 unchanged sentences

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.

The PIPE transaction was exempted from the registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws.

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 $ 20.1 million.

2 unchanged sentences

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 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.

As of September 30, 2022, the remaining Convertible Notes Payable are recorded at carrying value of $ 19.1 million, including accrued paid-in-kind interest of $ 1.3 million, and net of unamortized issuance costs of $ 0.3 million.

The estimated fair value of the Convertible Notes Payable at September 30, 2022 was $ 22.8 million.

ProFrac Agreement Contract Consideration Convertible Notes Payable

2 unchanged sentences

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.

This offering of the Contract Consideration Convertible Notes Payable was exempted from the registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws.

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 $ 12.6 million as of September 30, 2022 which includes paid-in-kind interest of $ 0.7 million.

The fair value adjustment was an increase of $ 0.6 million and a $ 1.9 million in the three and nine months ended September 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.

This offering of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable was exempted from the registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable may be converted at any time prior to the maturity date, which is 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 $ 60.5 million as of September 30, 2022 which includes paid-in-kind interest of $ 1.9 million.

The fair value adjustment was a $ 3.6 million increase and a $ 10.9 million decrease in the three and nine months ended September 30, 2022.

See Note 10, “Fair Value Measurements”.

8 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 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):

June 30, December 31,

September 30, December 31,

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

4 unchanged sentences

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 remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of September 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:

June 30, 2022 December 31, 2021

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

September 30, 2022 December 31, 2021

Risk-free interest rate 4.24 % 1.02 %

6 unchanged sentences

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:

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 subsequently due to the use of unobservable inputs.

The estimated value of the ProFrac Agreement Contract Consideration Convertible Notes Payable as of September 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 the risk free rate of interest.

The key inputs into the Monte Carlo simulation used to estimate the fair value of the ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of September 30, 2022 were as follows:

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

September 30, 2022

Risk-free interest rate 3.55 %

3 unchanged sentences

Discount rate 3.55 %

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

The valuation of the ProFrac Agreement Contract Consideration Convertible Notes Payable was $ 12.6 million as of September 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

The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable 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 the risk free rate of interest.

The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, as of September 30, 2022 were as follows:

September 30, 2022

Risk-free interest rate 3.95 %

3 unchanged sentences

Discount rate 3.95 %

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

The value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of September 30, 2022 was $ 60.5 million.

Assets Measured at Fair Value on a Nonrecurring Basis

1 unchanged sentence

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 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 estimated the fair value of the remaining stock performance earn-out provision as of September 30, 2022 and 2021 and adjusted the estimated fair value of the contingent liability to $ 0.5 million and $ 0.7 million, respectively.

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

1 unchanged sentence

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 Company adjusted the estimated fair value of the Contract Consideration Convertible Notes Payable to $ 73.0 million as of September 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):

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

2022 2021 2022 2021

11 unchanged sentences

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

Three months ended June 30,

Six months ended June 30,

Three months ended September 30, 2022 Nine months ended September 30, 2022

federal statutory tax rate

10 unchanged sentences

( 21.7 ) ( 27.3 ) ( 20.7 ) ( 23.6 )

Tax settlement

2018 IRS exam assessment

— — ( 0.4 ) —

3 unchanged sentences

income taxed at different rates.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 — Co mmitments and Contingencies

Note 12 — 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

On March 26, 2021, Flotek Industries, Inc.

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.

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.

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.

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.

Former CEO Matter

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

5 unchanged sentences

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

Terpene Supply Agreement

On October 29, 2021, the Company reached agreement (“the ADM Settlement) with Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company (“FCC”) and other parties to pay $ 1.75 million and resolve all claims between the parties in relation to lawsuit claiming damages relating to the terpene supply agreement between Flotek Chemistry, LCC (“Flotek Chemistry”), a wholly owned subsidiary of the Company and FCC.

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.

Other Commitments and Contingencies

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

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

In addition, the majority of the Company’s cash is invested in three major U.S.

financial institutions and balances often exceed insurable amounts.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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

On June 21, 2022, ProFrac Holdings II, LLC paid $ 19.5 million for PreFunded Warrants of the Company.

The PreFunded Warrants were recorded at their fair value of $11.1 million, less $1.2 million of transaction costs paid.

The remaining cash received of $ 8.4 million was recognized as an equity contribution.

This offering of the Prefunded Warrants was exempted from the registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws.

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.

The Prefunded Warrants, net of transaction fees of $ 1.1 million, and the equity contribution of $ 8.4 million from ProFrac are included in additional paid-in capital as of September 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 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 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.

This adjustment was not material to the September 30, 2022 consolidated financial statements or basic and diluted earnings per share.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Net Loss Per Share

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

Diluted income (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 conversion of convertible notes payable, exercise of stock warrants and vesting and settlement of stock awards.

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,

The calculation of the basic and diluted income (loss) per share for the three and nine months ended September 30, 2022 is as follows (in thousands):

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

Net income (loss) for basic earnings per share $ ( 18,794 ) $ ( 23,278 )

Anti-dilutive Adjustment to Net Income available to shareholders excluded from Numerator for Diluted Earnings Computation

Paid-in-Kind interest expense on convertible notes payable, net of tax 2,043 3,861

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 )

Valuation (gain) loss on convertible notes carried at FV, net of tax 4,250 ( 9,016 )

Total numerator adjustment excluded from diluted earnings computation $ 6,293 $ ( 5,155 )

Basic and diluted weighted average shares outstanding 75,312 74,095

Anti-dilutive Incremental Shares Excluded from Denominator for Diluted Earnings Computation

Average number of diluted shares for convertible notes payable 74,395 47,354

Average number of diluted shares for stock warrants 8,897 3,324

Average number of diluted shares for options and restricted 418 571

Basic and diluted loss per share ( 0.25 ) ( 0.31 )

For the three and nine months ended September 30, 2022 paid-in-kind interest expense, net of tax, on convertible notes payable and the change in fair value related to the contract consideration convertible notes payable, net of tax, were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.

For the three and nine months ended September 30, 2022 weighted average shares for convertible notes payable, weighted average shares for stock warrants and weighted average shares for employee stock awards were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.

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

For the nine months ended September 30, 2021, weighted average shares for employee stock awards of 1,130,719 , 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.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15 — Supplemental Cash Flow Information

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

Six months ended June 30,

Nine months ended September 30,

Supplemental cash flow information:

3 unchanged sentences

Employee retention credit — 2,851

JP3 PPP loan forgiveness — 881

Non cash financing and investing activities:

1 unchanged sentence

Conversion of convertible notes payable to common stock 2,948 —

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

Note 16 — Related Party Transaction

Note 16 — Related Party Transactions

In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014.

7 unchanged sentences

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

At December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $ 1.8 million for potential liability to the IRS.

On December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $ 1.8 million for potential liability to the IRS.

On January 5, 2020, Mr.

3 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 June 30, 2022 and December 31, 2021, the receivable from Mr.

As of September 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.

1 unchanged sentence

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.

Brown was a Director of the Company beginning in November of 2013 and is the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company.

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.

Brown stepped down from being a Director of the Company and Confluence will no longer be considered a related party as of April 15, 2022.

The Company’s revenues for chemical sales to Confluence were $ 1.4 million through April 15, 2022.

The Company’s revenues from chemical sales to Confluence for the three and nine months ended September 30, 2021 were $ 1.3 million and $ 1.3 million, respectively.

As of December 31, 2021, Confluence owed $ 1.3 million which is recorded in accounts receivable, related party 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”) 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”).

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

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”) 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”.

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.

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.

During the three and nine months ended September 30, 2022, the Company’s revenues from c hemical sales to ProFrac Services LLC were $ 30.4 million and $ 48.1 million respectively.

These revenues were net of amortization of contract assets of $ 1.2 million and $ 2.0 million for the three and nine months ended September 30, 2022, respectively.

As of September 30, 2022 and December 31, 2021, our accounts receivable from ProFrac Services, LLC was $ 25.9 million and zero , respectively which is recorded in accounts receivable, related party on the consolidated balance sheet.

5 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 environmental, social and governance (“ESG) and operational goals.

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

Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies .

3 unchanged sentences

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

Performance based upon a variety of criteria.

Performance is based upon a variety of criteria.

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

4 unchanged sentences

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

As of and for the three months ended June 30,

As of and for the three months ended September 30,

Chemistry Technologies Data Analytics

3 unchanged sentences

Change in fair value of contract consideration convertible notes 4,250 — — 4,250

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

Loss from operations ( 10,603 ) ( 745 ) ( 4,931 ) ( 16,279 )

Depreciation and amortization 162 14 1 177

5 unchanged sentences

Additions to long-lived assets — — — —

As of and for the six months ended June 30,

Chemistry Technologies Data Analytics (1)

Corporate and Other Total

As of and for the nine months ended September 30,

Chemistry Technologies Data Analytics Corporate and Other Total

Revenue from external customers $ 34,933 $ 3,479 $ — $ 38,412

1 unchanged sentence

Change in fair value of contract consideration convertible notes ( 9,016 ) — — ( 9,016 )

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

Loss from operations ( 1,716 ) ( 2,751 ) ( 14,057 ) ( 18,524 )

Depreciation and amortization 507 45 2 554

2 unchanged sentences

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

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

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

Depreciation and amortization 739 52 2 793

Additions to long-lived assets 31 — — 31

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Chemistry Technologies $ 150,160 $ 34,387

2 unchanged sentences

Total assets $ 164,019 $ 50,244

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The increase in Chemistry Technologies assets is primarily due to contact assets of $ 81.1 million.

4 unchanged sentences

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

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

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

2022 2021 2022 2021

3 unchanged sentences

Total revenue $ 45,623 $ 10,179 $ 87,874 $ 31,114

(1) Includes revenue from related party

Long-lived assets held in countries other than the U.S.

2 unchanged sentences

Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands):

Three months ended June 30, Revenue % of Total Revenue

Three months ended September 30, Revenue % of Total Revenue

Customer A (Related Party) $ 30,417 66.7 %

Customer B 5,611 19.1 %

Customer C $ 3,041 29.9 %

Customer D 1,332 13.1 %

Six months ended June 30, Revenue % of Total Revenue

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nine months ended September 30, Revenue % of Total Revenue

Customer A (Related Party) $ 48,074 54.7 %

5 unchanged sentences

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 — Subsequent Events

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.

The Company has evaluated the effects of events that have occurred subsequent to September 30, 2022, and there have been no material events that would require recognition in the September 30, 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