What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-23 compared with 2022-03-31 · 514 added, 537 removed, 582 unchanged (64% of the section changed)

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc.

and subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of operations, comprehensive loss, cash flows, and stockholders’ equity for the year then ended, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended December 31, 2021, in conformity with U.S.

We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc.

and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, cash flows, and stockholders’ equity for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with U.S.

generally accepted accounting principles.

Going Concern

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

As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring operating losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern.

Management’s plans in regard to these matters are also described in Note 1.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for convertible instruments as of January 1, 2022 due to the adoption of ASU No.

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

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

(1) relates to accounts or

disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Sources and Uses of Liquidity

As described in Note 1 to the Company’s consolidated financial statements, the Company currently funds its operations and growth primarily from cash on hand.

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

Access to capital is dependent on the Company’s operating cash flows, the monetization of non-core assets, and the availability of and access to debt and equity financing.

The Company has a history of losses and negative cash flows from operations and expects to use a significant amount of cash in the year following the issuance of the consolidated financial statements as of and for the year ended December 31, 2021.

Uncertainty surrounding the long-term stability and strength of the oil and gas markets or reduced spending by the Company’s customers could have a further negative impact on the Company’s liquidity.

The Company believes that their cash and liquid assets, including certain transactions

executed after year end, will provide the Company with sufficient financial resources to fund its operations and meet its capital requirements and anticipated obligations as they become due over the twelve-month period following the date the consolidated financial statements are issued.

We identified the evaluation of the Company’s assessment of its ability to continue as a going concern and related disclosures as a critical audit matter.

There was significant auditor judgment required in evaluating (1) forecasted revenue growth rates and operating expenses used in the Company’s forecasted cash flows analysis for the twelve-month period subsequent to issuance of the consolidated financial statements and (2) management's ability to implement its plans with respect to the disposition of assets held for sale.

Recoverability of contract assets

As described in Note 2 to the Company’s consolidated financial statements, the Company’s contract assets represent consideration issued in the form of convertible notes and other incremental costs related to obtaining a contract with ProFrac Services, LLC, a related party customer.

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 revenue the Company expects to receive in the future for the transfer of goods under the long-term supply agreement and the amendment to that agreement (collectively, the ProFrac Agreement) less the direct costs that relate to providing those goods in the future.

As described in Note 4, the Company had recorded contract assets, net of $79.7 million as of December 31, 2022.

We identified the evaluation of the recoverability of contract assets as a critical audit matter.

There was subjective auditor judgement in evaluating the key assumptions used in the Company’s contract asset recoverability assessment, specifically the forecasted product revenue and related forecasted costs to provide products over the term of the ProFrac Agreement.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design of certain internal controls related to the Company’s assessment of its ability to continue as a going concern, including the development of the forecasted revenue growth rates and operating expenses over the twelve-month period following the date the consolidated financial statements are issued, and the Company’s assessment of the probability of disposing assets held for sale.

To assess the Company’s ability to forecast revenue and operating expenses, we compared historical revenue and operating expense forecasts to actual results.

We also compared the Company's forecasted revenue growth rates to certain relevant industry trends.

We performed sensitivity analyses over the Company’s going concern assessment by evaluating the effect of changes in the forecasted revenue growth rates and operating expenses and the effect of potential outcomes of the disposition of assets held for sale.

We evaluated the reasonableness of the Company’s forecasted revenue and operating expenses by comparing them to management’s stated plans which were corroborated by meeting minutes of the Board of Directors.

We evaluated management’s plans related to disposition of certain assets held for sale by inspecting the contractual sale document.

We assessed the Company’s disclosures related to its going concern assessment by comparing the disclosures to the audit evidence obtained.

We evaluated the design of certain internal controls related to the Company’s contract assets recoverability assessment, including controls over the development of forecasted revenue and costs over the term of the ProFrac Agreement.

To assess the Company’s ability to forecast revenue and costs, we compared revenue and cost forecasts for the current year to actual results.

We performed sensitivity analyses over the Company’s contract asset recoverability assessment by evaluating the effect of changes in the forecasted revenue and costs over the term of the ProFrac Agreement.

We assessed the reasonableness of forecasted revenue and costs by considering whether such amounts were consistent with evidence obtained in other areas of the audit.

We have served as the Company’s auditor since 2021.

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March 22, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

FLOTEK INDUSTRIES, INC.

Houston, Texas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc.

(the “Company”) as of December 31, 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and the results of its operations and its cash flows for the year then ended , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ BDO USA, LLP

We began serving as the Company's auditor in 2020 and became the predecessor auditor in 2021.

Houston, Texas

March 16, 2021

FLOTEK INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

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19,136 11,997

Accounts receivable, related party 22,683 1,300

Inventories, net 15,720 9,454

Income taxes receivable 22 403

Other current assets 4,045 3,762

Current contract assets 7,113 —

Assets held for sale — 2,762

Total current assets 81,087 42,599

Long-term contract assets 72,576 —

Property and equipment, net 4,826 5,296

Operating lease right-of-use assets 5,900 2,041

Goodwill — 8,092

Deferred tax assets, net 404 279

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Current portion of long-term debt 2,052 1,436

Convertible notes payable 19,799 —

Contract consideration convertible notes payable 83,570 —

Total current liabilities 151,371 18,777

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TOTAL LIABILITIES 162,214 30,052

Commitments and contingencies (See Note 15)

Stockholders’ equity:

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Additional paid-in capital 388,177 363,417

Accumulated other comprehensive income (loss) 81 ( 19 )

Accumulated other comprehensive income 181 81

Accumulated deficit ( 351,519 ) ( 309,214 )

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Total revenues 136,092 43,268

Cost of goods sold 40,012 81,814

Cost of sales 142,792 40,012

Gross profit (loss) ( 6,700 ) 3,256

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Selling, general, and administrative 27,124 20,166

Depreciation and amortization 1,011 3,412

Depreciation 734 1,011

Research and development 4,438 5,537

Gain on disposal of property and equipment ( 2,916 ) ( 94 )

Gain on lease termination ( 584 ) —

Gain on fair value of contract consideration convertible notes payable ( 75 ) —

Impairment of goodwill — 8,092

Impairment of property and equipment and intangible assets — 69,975

Total operating costs and expenses 28,721 34,712

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Other income, net 145 87

Total other income 890 1,019

Total other income (expense) ( 6,906 ) 890

Loss before income taxes ( 42,327 ) ( 30,566 )

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Net loss $ ( 42,305 ) $ ( 30,526 )

Other comprehensive income (loss):

Other comprehensive income:

Foreign currency translation adjustment 100 100

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Change in fair value of contingent consideration ( 25 ) ( 808 )

Depreciation and amortization 1,011 3,412

Change in fair value of contract consideration convertible notes payable ( 75 ) —

Amortization of convertible note issuance cost 1,002 —

Paid-in-kind interest expense 5,956 —

Amortization of contract assets 3,371 —

Depreciation 734 1,011

Provision for doubtful accounts, net of recoveries 203 ( 127 )

Inventory purchase commitment provision and settlement ( 7,633 ) 9,402

Inventory purchase commitment settlement — ( 7,633 )

Provision for excess and obsolete inventory 1,734 623

Impairment of goodwill — 8,092

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

Impairment of property and equipment — 30,178

Impairment of intangible assets — 32,363

Gain on sale of assets ( 94 ) ( 561 )

Gain on sale of property and equipment ( 2,916 ) ( 94 )

Gain on lease termination ( 584 ) —

Non-cash lease expense 226 279

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Accounts receivable ( 7,342 ) ( 106 )

Accounts receivable, related party ( 21,383 ) ( 1,300 )

Inventories ( 7,917 ) 1,760

Income taxes receivable 14 381

Other current assets ( 613 ) 1,026

Other long-term assets 4 ( 16 )

Other assets ( 285 ) ( 609 )

Contract assets ( 3,600 ) —

Accounts payable 25,760 1,829

Accrued liabilities ( 34 ) ( 860 )

Operating lease liabilities ( 507 ) ( 603 )

Income taxes payable 93 ( 17 )

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Capital expenditures ( 421 ) ( 39 )

Proceeds from sale of business — 9,907

Proceeds from sale of assets 5,752 151

Purchase of JP3, net of cash acquired — ( 26,284 )

Abandonment of patents and other intangible assets — ( 8 )

Net cash provided by (used in) investing activities 112 ( 17,701 )

Net cash provided by investing activities 5,331 112

Cash flows from financing activities:

Payment for contingent consideration — ( 1,200 )

Proceeds from paycheck protection plan loan — 4,788

Proceeds from issuance of convertible notes 21,150 —

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

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 ( 224 ) ( 390 )

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Payments for finance leases ( 38 ) ( 62 )

Net cash (used in) provided by financing activities ( 372 ) 3,727

Net cash provided by (used in) financing activities 38,267 ( 372 )

Effect of changes in exchange rates on cash and cash equivalents 100 100

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Comprehensive

Income (Loss) Accumulated Deficit Total Stockholders’ Equity

Income Accumulated Deficit Total Stockholders’ Equity

Value Shares Cost

Balance, December 31, 2021

79,484 $ 8 6,022 $ ( 34,100 ) $ 363,417 $ 81 $ ( 309,214 ) $ 20,192

Net loss — — — — — — ( 42,305 ) ( 42,305 )

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Restricted stock forfeited ( 3 ) — 30 — — — — —

Restricted units vested 86 — — — — — — —

Restricted stock units vested 144 — — — ( 31 ) — — ( 31 )

Stock compensation expense — — — — 3,325 — — 3,325

Shares withheld to cover taxes ( 35 ) — 115 ( 151 ) ( 42 ) — — ( 193 )

( 613 ) — — 24 9 — — 33

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 — — — 3,038 — — 3,038

Balance, December 31, 2022

(1) See Note 16, “Stockholders’ Equity” for further discussion.

83,916 $ 8 6,127 $ ( 34,251 ) $ 388,177 $ 181 $ ( 351,519 ) $ 2,596

Common Stock Treasury Stock Additional

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Balance, December 31, 2020

78,669 $ 8 5,581 $ ( 33,851 ) $ 359,721 $ ( 19 ) $ ( 278,688 ) $ 47,171

Net loss — — — — — — ( 30,526 ) ( 30,526 )

Foreign currency translation adjustment — — — — — 100 — 100

Sale of common stock, net of issuance cost 200 — — — 339 — — 339

Stock issued under employee stock purchase plan — — ( 136 ) — 80 — — 80

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Restricted stock forfeited ( 284 ) — 422 — — — — —

Treasury stock purchased — — 146 ( 253 ) — — — ( 253 )

Restricted units vested 86 — — — — — — —

Stock compensation expense — — — — 3,757 — — 3,757

Excess tax benefit related to share-based awards — — 66 — — — — —

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

Stock options exercised 111 — — ( 114 ) 114 — — —

Shares withheld to cover taxes ( 76 ) — 155 ( 273 ) ( 150 ) ( 423 )

Other (1) ( 613 ) — — 24 9 — — 33

Balance, December 31, 2021

79,484 $ 8 6,022 $ ( 34,100 ) $ 363,417 $ 81 $ ( 309,214 ) $ 20,192

(1) See Note 14, “Stockholders’ Equity” for further discussion.

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

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Flotek Industries, Inc.

(“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people.

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

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

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

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

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

(“Flotek” or the “Company”) creates unique solutions to reduce the environmental impact of energy on air, water, land and people.

A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial and commercial 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.

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.

For further discussion of our operations and segments, see Note 21, “Business Segment, Geographic and Major Customer Information.” For further discussion of the JP3 acquisition, see Note 3, “Business Acquisition.”

The Company was initially incorporated under the laws of the Province of British Columbia in 1985.

In October 2001, the Company changed its corporate domicile to the State of Delaware.

Sources and Uses of Liquidity

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

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

Access to capital is dependent on the Company’s operating cash flows, the monetization of non-core assets, and the availability of and access to debt and equity financing.

The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in the following year.

While we believe that our cash and liquid assets, including the actions taken subsequent to year end discussed below and in Note 22, “Subsequent Events”, will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, uncertainty surrounding the long term stability and strength of the oil and gas markets or reduced spending by our customers could have a further negative impact on our liquidity.

On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $ 21.2 million aggregate of convertible notes that resulted in net cash proceeds of approximately $ 19.5 million.

Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $ 10 million of convertible notes.

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

Profrac shall pay to the company, as liquidated damages an amount equal to twenty-five percent ( 25 %) of the difference between (i) the aggregate Purchase Price of the quantity of Products comprising the Minimum Purchase Obligation during such calendar year.

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

The Company also committed to plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas.

These facilities were classified as held for sale as of December 31, 2021.

Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $ 4.2 million of cash proceeds.

The sale is expected to close in April 2022.

Based on our cash and liquid assets, including the transactions subsequent to year end described above and in Note 22 Subsequent Events, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due.

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For further discussion of our operations and segments, see Note 19, “Business Segment, Geographic and Major Customer Information.”

Going Concern

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.

GAAP”) assuming the Company will continue as a going concern.

The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

However, substantial doubt about the Company’s ability to continue as a going concern exists.

The Company currently funds its operations from cash on hand and other current assets.

The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the consolidated financial statements.

The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 18, “Related Party Transactions”).

It is not certain that the Company’s cash and other current assets and our forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company 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 Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

The Company is evaluating strategies to obtain additional funding for future operations.

These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses.

However, the Company may be unable to access further equity or debt financing when needed.

As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.

The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S.

The Company’s consolidated financial statements have been prepared in accordance with U.S.

The consolidated financial statements include the accounts of Flotek Industries, Inc.

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The Company does not have investments in any unconsolidated subsidiaries.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash Equivalents

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

Cash Management

The Company uses a controlled disbursement account for its main cash account.

Under this system, outstanding checks can be in excess of the cash balances at the bank before the disbursement account is funded, creating a book overdraft.

Book overdrafts on this account are presented as a current liability in accounts payable in the consolidated balance sheets.

Restricted Cash

The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution and as of December 31, 2021 an amount held in escrow of $ 1.75 million for amounts due under the terms of the legal settlement discussed in Note 15, Commitments and Contingencies.

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

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

The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $ 1.75 million for amounts due under the terms of the legal settlement discussed in Note 13, “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 and Accounts receivable, 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.

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.

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Balance, end of year $ 623 $ 659

As of December 31, 2022 and 2021 the Company has not recorded an allowance for doubtful accounts for the related party accounts receivable, including ProFrac Services, LLC.

Contract Assets

The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in Note 10, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement.

The contract assets are amortized over the term of the ProFrac Agreement ( 10 years) based on forecasted revenues as goods are transferred to ProFrac Services, LLC 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 ProFrac Agreement less the direct costs that relate to providing those goods in the future.

Based on our tests of recoverability, we did not identify an impairment of the contract assets during the year ended December 31, 2022.

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.

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

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

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

Property and equipment

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The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized.

Depreciation or amortization of property and equipment, including right-of-use assets (“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows:

Depreciation or amortization of property and equipment, including operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or the asset’s estimated useful life as follows:

Buildings and leasehold improvements 2 - 30 years

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Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.

There were no impairments of property and equipment and ROU assets during the years ended December 31, 2022 and 2021.

Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to s ell and depreciation is ceased.

Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.

Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination.

Goodwill is not subject to amortization but is tested for impairment annually on October 1 or more frequently if an event occurs or circumstances change that would indicate a potential impairment.

When performing the annual impairment test, the Company has the option to assess whether a goodwill impairment exists using either a qualitative or quantitative assessment.

The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill.

If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative impairment test is performed to determine whether goodwill impairment exists at the reporting unit.

The quantitative impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the estimated fair value of the reporting unit to its carrying amount, including goodwill.

To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined, when appropriate, with a market-based approach.

Under the income approach, the fair value of the reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate.

We used our internal forecasts, updated for recent events, to estimate future cash flows with cash flows beyond the specific operating plans estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on our most recent views of the long-term outlook for the reporting unit.

We derive our discount rate using a capital asset pricing model and analyzing published rates for industries relevant to the reporting unit to estimate the cost of equity financing.

We use discount rates that are commensurate with the risks and uncertainties inherent in the respective business and in our

The Company leases certain facilities, land, vehicles, and equipment.

The Company determines if an arrangement is classified as a lease at inception of the arrangement.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the related lease.

Finance leases are under the current and non-current liabilities and the underlying assets are included in property and equipment on the consolidated balance sheet.

As most of the Company’s leases do not provide an implicit rate of return, on a quarterly basis, the Company’s incremental borrowing rate is used, together with the lease term information available at commencement date of the lease, in determining the present value of lease payments .

Operating lease liabilities include related options to extend or terminate lease terms that are reasonably certain of being exercised.

Leases with an initial term of 12 months or less (“short term leases”) are not recorded on the balance sheet;

and the lease expense on short-term leases is recognized on a straight-line basis over the lease term.

Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable

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 10, “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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

internally developed forecasts.

The market-based approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly traded businesses operating in industries consistent with the reporting unit.

If the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.

measured at fair value at the grant date and at each reporting date (see Note 11, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

Fair Value Measurements

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Revenue Recognition

The Company recognizes revenue to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.

The Company only has revenue from customers.

The Company recognizes revenue when it satisfies performance obligations under the terms of the contract with a customer, and control of the promised goods are transferred to the customer or services are performed, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services.

The Company recognizes revenue based on a five-step model when all of the following criteria have been met:

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Products and services are sold with fixed or determinable prices.

Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly.

Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.

Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly, and discounts offered to customers for prompt payment.

The Company does not act as an agent in any of its revenue arrangements.

In recognizing revenue for products and services, the Company determines the transaction price of contracts with customers, which may consist of fixed and variable consideration.

Determining the transaction price may require 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.

The majority of the CT segment revenue is chemical products that are sold at a point in time based on when control transfers to the customer determined by agreed upon delivery terms.

Contracts with customers for the sale of products generally state the terms of the sale, including the quantity and price of each product purchased.

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

These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the Company has a right to invoice the customer.

The DA segment recognizes revenue for sales of equipment at the time of sale based on when control transfers to the customer based on 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, 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 accrued liabilities and deferred revenue on the consolidated balance sheets.

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

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

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.

The Company applies several practical expedients including:

• Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less.

• The majority of the Company’s services are short-term in nature with a contract term of one year or less.

As a result the Company does not disclose the transaction price allocated to remaining performance obligations.

• The Company’s payment terms are short-term in nature with settlements of one year or less.

As a result, the Company does not adjust the promised amount of consideration for the effects of a significant financing component.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.

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Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold on our consolidated statement of operations.

Foreign Currency Translation

Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency.

Assets and liabilities of foreign subsidiaries are translated into U.S.

The Company’s functional currency is primarily the U.S.

The Company operates principally in the United States and substantially all assets and liabilities of the Company are denominated in U.S.

Financial statements of foreign subsidiaries that are not U.S.

dollar functional currency are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency.

Assets and liabilities of those foreign subsidiaries are translated into U.S.

dollars at exchange rates in effect as of the end of identified reporting periods.

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Comprehensive Loss

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

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

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO 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.

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Estimated forfeitures are based on historical experience.

Stock Warrants

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluated the Prefunded Warrants issued in June 2022 (see Note 14, “Stockholders’ Equity) 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

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Actual results could differ from these estimates.

Significant items subject to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible assets;

goodwill, property and equipment and intangible asset impairment assessments;

allocation of purchase price in business combinations;

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

long lived asset impairment assessments;

stock-based compensation expense;

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

Reclassifications

Certain prior year amounts in the consolidated statement of operations and consolidated statement of stockholders’ equity have been reclassified to conform to the current year presentation..

In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross profit (loss) and eliminated the reporting of operating expenses (excluding depreciation and amortization) on the consolidated statements of operations to conform to customary industry reporting practices.

In connection with this change in presentation, the Company reclassified selling costs of $ 6.5 million to selling, general and administrative expenses which were previously reported in operating expenses for the year ended December 31, 2020.

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

Business Combinations

The Company includes the results of operations of its acquisitions in its consolidated results, prospectively from the date of acquisition.

The Company allocates the fair value of purchase consideration to the assets acquired, liabilities assumed and any non-controlling interests in the acquired entity generally based on their fair values at the acquisition date.

The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and any non-controlling interests in the acquired entity is recorded as goodwill.

The primary items that generate goodwill include the value of the synergies between the acquired company and Flotek and the value of the acquired assembled workforce.

Acquisition-related expenses are recognized separately from the business acquisition and are recognized as expenses as incurred.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

recoverability and timing of the realization of contract assets;

and fair value of liability classified Contract Consideration Convertible Notes Payable and equity classified stock warrants.

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 But Not Adopted as of December 31, 2021

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

The FASB issued ASU No.

2019-12, “ Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .” This standard removes specific exceptions to the general principles in Topic 740.

The pronouncement is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued.

The Company evaluated the impact of this standard and determined that there is no impact on the consolidated financial statements and related disclosures.

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

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

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

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

The FASB issued ASU No.

2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.

The pronouncement is effective for 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 consolidated financial statements and related disclosures.

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

The FASB issued ASU No.

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

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The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022.

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

The FASB issued ASU No.

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

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

The Company has adopted this standard on January 1, 2022, and is evaluating the impact of this standard, on the consolidated financial statements and related disclosures.

The FASB issued ASU No.

2021-10, “ Government Assistance (Topic 832);

Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.

The pronouncement is effective for fiscals years beginning after December 15, 2021.

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

Note 3 — Business Acquisition

On May 18, 2020, the Company acquired 100 % ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction.

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

The payment of $ 25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing on May 18, 2020 was comprised of $ 25.0 million plus net working capital in excess of the target net working capital of $ 1.9 million.

Additionally, the Company was subject to contingent consideration with an estimated fair value of $ 1.2 million at acquisition date for two potential earn-out provisions totaling up to $ 5.0 million based on certain stock performance targets.

The first and second earn-out provisions occur if the ten-day volume-weighted average share price equals or exceeds $ 2 per share and $ 3 per share, respectively, before May 18, 2025.

See Note 13, “Fair Value Measurements,” for additional information on the current estimated fair value of the contingent consideration.

The following table summarizes the fair value of JP3’s assets acquired as of the closing date of May 18, 2020 (in thousands):

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tradenames and trademarks $ 1,100

Technology and know-how 5,000

Customer lists 6,800

Inventories 7,100

Net working capital, net of cash and inventories ( 1,063 )

Fixed assets 426

Long-term debt assumed and other assets (liabilities) ( 893 )

Goodwill 17,522

Net assets acquired $ 36,596

See Note 8, “Goodwill,” for additional information on goodwill remeasurement and impairment.

The Company recorded transaction costs of $ 0.5 million for professional services including legal, accounting, and other professional or consulting fees in connection with the JP3 acquisition to the Company’s operating expenses (excluding depreciation and amortization) in the consolidated statements of operations during the second quarter of 2020.

Pro forma information for JP3 is not provided as the impact is not considered material.

During the third quarter of 2020, the Company made certain measurement period adjustments to inventory, resulting in an increase of goodwill of $ 2.3 million .

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 therefore the Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements and related disclosures.

Note 3 — Revenue from Contracts with Customers

Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services.

In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration.

Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract.

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

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

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

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

Revenue related to service and support is recognized over time.

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

In addition, sales taxes are excluded from revenues.

Disaggregation of Revenue

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

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

The Company differentiates revenue based on whether the source of revenue is attributable to product sales or service revenue.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years ended December 31,

2 unchanged sentences

$ 136,092 $ 43,268

(1) Product revenues for 2021 include sales to a related party as described in Note 20, “Related Party Transactions.”

Arrangements with Multiple Performance Obligations

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

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

For DA, services are recognized

(1) Product revenues include sales to related parties as described in Note 18, “Related Party Transactions.”

Disaggregation of Cost of Sales

The Company differentiates cost of sales based on whether the cost is attributable to tangible goods sold, cost of services sold or other costs which cannot be directly attributable to either tangible goods or services.

Total cost of sales disaggregated is as follows (in thousands):

Years ended December 31,

Cost of sales:

Tangible goods sold $ 126,914 $ 24,083

Services 285 532

Other $ 15,593 $ 15,397

$ 142,792 $ 40,012

Other cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services.

Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs.

Cost of sales for the year ended December 31, 2021 included a one time credit of $ 7.6 million (shown in Other and below in cost of sales for external customers), related to the release of accrued costs subsequent to the ADM settlement (see Note 13, “Commitments and Contingencies”).

Cost of sales split between external and related party sales is as follows (in thousands):

Years ended December 31,

Cost of sales:

Cost of sales for external customers $ 56,844 $ 36,646

Cost of sales for related parties 85,948 3,366

$ 142,792 $ 40,012

Note 4 - Contract Assets

Contract assets are as follows (in thousands):

Contract assets $ 83,060 $ —

Less accumulated amortization ( 3,371 ) —

Contract assets, net 79,689 —

Less current contract assets ( 7,113 ) —

Contract assets, long term $ 72,576 $ —

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

Subscription-type arrangements were not a material revenue stream in the years ended December 31, 2021 and 2020.

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

Contract assets associated with incomplete performance obligations are not material.

In connection with entering into the ProFrac Agreement on February 2, 2022 and May 17, 2022 as discussed in Note 10, “Debt and Convertible Notes Payable” and Note 18, “Related Party Transactions”, the Company recognized contract assets of $ 10.0 million and $ 69.5 million, respectively, and associated fees of $ 3.6 million.

As of December 31, 2022, $ 72.6 million of the contract assets are classified as long term based upon our estimate of the forecasted revenues from the ProFrac Agreement which will not be realized within the next twelve months of the ProFrac Agreement.

During the year ended December 31, 2022 the Company recognized $ 3.4 million of contract assets amortization which is recorded 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 Agreement.

Years ending December 31, Amortization

Thereafter through May 2032 37,585

Total contract assets $ 79,689

Note 5 — Inventories

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$ 8,210 $ 10,141

The provisions recorded in the year ended December 31, 2021 w ere $ 0.6 million for the CT segment an d nil for the DA segment.

The provisions recorded in the year ended December 31, 2020 were $ 8.4 million for the CT segment and $ 3.9 million for the DA segment.

The provisions recorded in the year ended December 31, 2022 w ere $ 1.6 million for the CT segment an d $ 0.1 million for the DA segment.

The CT segment provision includes $ 1.0 million for the exit of the hand sanitizers business line.

The provisions recorded in the year ended December 31, 2021 wer e $ 0.6 million for the CT segment and nil for the DA segment.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Property and Equipment

11 unchanged sentences

Depreciation expense totaled $ 0.7 million and $ 1.0 million for the years ended December 31, 2022 and 2021, respectively.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the third quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas, in their current condition and as a result the associated assets in the amount of $ 2.8 million are classified as held for sale as of December 31, 2021.

Subsequent to December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility which is expected to close in April 2022.

See further discussion in Note 22, Subsequent Events.

During the year ended December 31, 2020, the Company recorded an impairment of property and equipment assets totaling $ 30.2 million.

No impairment was recognized during the year ended December 31, 2021.

Refer to Note 10 — Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets.

During 2022, the Company sold its two facilities that were classified as held for sale as of December 31, 2021 for proceeds of $ 5.8 million resulting in a net gain of $ 2.9 million.

Note 7 — Leases

In August 2021, the company entered into a five-year triple net operating lease agreement to lease its warehouse facility in Monahans, Texas, for $ 20,000 per month, and the tenant occupied the warehouse facility in September 2021.

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

Rental income recognized during the year ended December 31, 2021 was $ 76,000 and was included in other income in the consolidated statement of operations.

In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $ 40,000 per month for sixty-four months .

Rental income recognized during the year ended December 31, 2021 was $ 121,000 and was included in other income in the consolidated statement of operations.

During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the Global Research and Innovation Center (“GRIC”) during the second quarter of 2020.

In addition, the operating lease liability and corresponding operating lease right-of-use (“ROU”) assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC.

The remeasurement resulted in reductions to lease liabilities and ROU assets totaling of $ 6.2 million during the year ended December 31, 2020.

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

No impairment was recognized during the year ended December 31, 2021.

Refer to Note 10, “Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets”.

Rental income recognized from leasing manufacturing facilities was $ 375 thousand and $ 197 thousand for the years ended December 31, 2022 and December 31, 2021, respectively, and is included in other income in the consolidated statement of operations.

As discussed in Note 6, “Property and Equipment” these facilities were sold in 2022 and the lease agreements between the tenants and the Company terminated.

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

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Finance lease expense:

Amortization of right-of-use assets 15 17

Amortization of assets 15 15

Interest on lease liabilities 12 12

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2024 2,676 20

2024 1,348 23

Thereafter 3,444 —

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Finance leases 8.9 % 8.9 %

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Goodwill

As discussed in Note 3 Business Acquisition, during the second quarter of 2020, the Company acquired 100 % ownership of JP3, as a new operating segment and reporting unit.

The Company recorded goodwill of $ 17.5 million.

During the third quarter of 2020, the Company made certain measurement period adjustments to inventory obtained in the JP3 acquisition, resulting in an increase of goodwill of $ 2.3 million .

On October 1 of each fiscal year, we perform our annual goodwill impairment test for the DA reporting unit.

We also test goodwill for impairment whenever events or circumstances occur which, in our judgment, could more likely than not reduce the fair value of the DA reporting unit below its carrying amount.

Potential impairment indicators include, but are not limited to, (i) the results of our most recent annual impairment testing, in particular the magnitude of the excess of fair value over carrying value observed, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, and (iii) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any.

In performing the annual quantitative impairment test and consistent with our prior practice, we determined the fair value of the DA reporting unit using an income approach.

Under the income approach, the fair value of the reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate.

Our internal forecasts include assumptions about future commodity pricing and expected demand for our goods and services.

For the DA reporting unit, production growth is anticipated to be moderate in the near term as operators continue to show an abundance of fiscal discipline in development spending.

Midstream thru-put volumes remain well below capacity levels.

While we are expecting production growth to increase, it is likely to do so at a more conservative pace.

These factors have precipitated our impairment decision for Data Analytics goodwill.

Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in our forecasts.

We derived our discount rate using a capital asset pricing model and analyzing published rates for industries relevant to the DA reporting unit to estimate the cost of equity financing.

We used a discount rate that are commensurate with the risks and uncertainties inherent in the respective business and in our internally developed forecasts.

Based upon the results of our annual quantitative impairment test, we concluded that the carrying value of the DA reporting unit exceeded its estimated fair value as of the testing date, which resulted in goodwill impairment charges of $ 8.1 million.

Based upon the results of our annual quantitative impairment test for the year ended December 31, 2021, the Company concluded that the carrying value of the DA reporting unit exceeded its estimated fair value as of the testing date, which resulted in goodwill impairment charges of $ 8.1 million and reduced the goodwill balance to $ 0 as of December 31, 2021.

The goodwill impairment was calculated as the amount that the carrying value of the DA reporting unit, including any goodwill, exceeded its fair value.

The carrying value of the DA reporting unit equals its fair value upon completion of the goodwill impairment test.

Changes in the carrying amount of goodwill are as follows (in thousands):

Balance at December 31, 2019 $ —

Acquisition goodwill recognized 17,522

Measurement period adjustment 2,276

Goodwill impairment recognized ( 11,706 )

Balance at December 31, 2020 $ 8,092

Goodwill impairment recognized ( 8,092 )

Balance at December 31, 2021 $ —

December 31, 2021 December 31, 2020

Goodwill $ 19,798 $ 19,798

Accumulated impairment losses ( 19,798 ) ( 11,706 )

Goodwill balance, net of impairment $ — $ 8,092

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 — Other Intangible Assets

During the year ended December 31, 2020, the Company recorded impairment charges of $ 32.4 million for other intangible assets, impairing all finite-lived intangible assets, including those acquired in the acquisition of JP3 discussed in Note 3, Business Acquisition.

See Note 10, “Impairment of Property and Equipment, Operating Lease Right-of-use Assets, and Intangible Assets.”

Amortization of intangible assets acquired totaled $ 0.9 million for the year ended December 31, 2020.

There was no intangible amortization recorded during the year ended December 31, 2021.

Note 10 — Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets

There were no impairments of property and equipment, operating lease right-of-use assets, and intangible assets during the year ended December 31, 2021.

The Company recorded impairment charges of property and equipment, operating lease right-of-use assets and intangible assets during the year ended December 31, 2020, as follows (in thousands):

Property and equipment $ 30,178

Operating lease right-of-use assets 7,434

Other Intangible Assets:

Patents and technology 14,733

Customer relationships 15,796

Intangible assets in progress 596

Trademarks and brand names 1,238

Total other intangible assets 32,363

Total impairment charges $ 69,975

During the first quarter of 2020, with the onset of the global COVID-19 Pandemic and the significant disruption across the industry, the Company’s operations were negatively impacted resulting in actual and projected declines in the Company’s revenues and results of operations.

These declines were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to the pandemic.

Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim impairment test was performed as of March 31, 2020, for the CT segment.

Using the income approach, the fair value of the CT segment asset group was determined based on the present value of future cash flows.

The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group.

Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of March 31, 2020, and an impairment loss of $ 57.5 million was recorded.

Management performed an interim impairment test as of September 30, 2020 for the DA business segment which was negatively impacted by reduced demand in the oil and gas sector because of reductions in capital spending across our customer base, lower than anticipated growth in the international market gained from the JP3 acquisition.

Using the income approach, the fair value of the DA segment asset group was determined based on the present value of future cash flows.

The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group.

Based on the results of the assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of September 30, 2020.

The Company recognized an impairment loss of $ 12.5 million in the DA segment asset group.

During the year ended December 31, 2020, all finite lived intangible assets were fully impaired.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 — Accrued Liabilities

Current accrued liabilities are as follows (in thousands):

Severance costs $ 2,581 $ 3,558

Loss on purchase commitments (Note 15) 1,750 9,402

Severance costs (see Note 13, “Commitments and Contingencies”) $ 2,617 $ 2,581

Loss on purchase commitments (Note 13, “Commitments and Contingencies”) — 1,750

Payroll and benefits 684 1,054

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Taxes other than income taxes 1,884 241

Due to third parties 36 434

Other 2,114 1,221

Total current accrued liabilities $ 8,984 $ 8,996

Note 12 — Debt

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

Note 10 — Debt and Convertible Notes Payable

Long Term Debt

Paycheck Protection Program Loans

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 Security Act (“CARES Act”) and is administered by the U.S.

Small Business Administration (“SBA”).

In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025.

On January 5, 2023 the Company received notice from the SBA that $ 4.4 million of the $ 4.8 million principal amount and accrued interest to this date of $ 0.1 million, was forgiven.

The remaining principal amount of $ 0.4 million and accrued interest, will be repaid over the remaining term of the loan through April 15, 2025 beginning on March 15, 2023.

The forgiveness of the Flotek PPP loan will be accounted for as an extinguishment of the debt and will result in the Company recording a $ 4.5 million gain in the first quarter of 2023 comprising the principal amount forgiven of $ 4.4 million and accrued interest of $ 0.1 million.

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

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

No payments of principal or interest were required during the years ended December 31, 2021 or 2020.

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

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

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

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

The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.

During the second quarter of 2021, the Company applied for forgiveness of the JP3 PPP loan with the SBA.

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

Accordingly, during the second quarter of 2021, the Company recorded $ 0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other income on the consolidated statement of operations.

In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025.

The Company has submitted to the SBA for forgiveness of substantially all of the Flotek PPP loan but as of December 31, 2021 and as of the date of this filing, the Company has not received a forgiveness notice.

If the loan is not forgiven, monthly payments will be due over the remaining term of the loan.

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accordingly, during the year ended December 31, 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 statements of operations.

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

Flotek PPP loan $ 4,788 $ 4,788

JP3 PPP loan — 877

Total 4,788 5,665

Less current maturities ( 2,052 ) ( 1,436 )

Total long-term debt, net of current portion $ 2,736 $ 3,352

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, Flotek issued $ 21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $ 20.1 million.

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

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

The issuance cost of $ 1.1 million is amortized on a straight line basis over the term of the Convertible Notes Payable and the amortization is included in interest expense in the consolidated statements of operations.

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 resulting in a 3.0 million credit to additional paid-in-capital in stockholders’ equity.

As of December 31, 2022, the remaining Convertible Notes Payable are recorded at carrying value of $ 19.8 million, including accrued paid-in-kind interest of $ 1.8 million, and net of unamortized issuance costs of $ 0.1 million.

The estimated fair value of the Convertible Notes Payable at December 31, 2022 was $ 25.8 million.

Interest expense for the year ended December 31, 2022 includes $ 1.8 million of accrued paid-in-kind interest and $ 1.0 million of issuance cost amortization related to these Convertible Notes Payable.

Interest expense relating to the Convertible Notes Payable held by ProFrac Holdings, LLC (related party) is $ 1.0 million for the year ended December 31, 2022.

Initial ProFrac Agreement Contract Consideration Convertible Notes Payable

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $ 10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Initial ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE Transaction described above, including the paid-in-kind interest at a rate of 10% per annum and conversion features.

The Initial 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 with a corresponding contract asset.

The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured to fair value of $ 14.2 million as of December 31, 2022 which includes paid-in-kind interest of $ 1.0 million.

The fair value adjustment increased the carrying amount of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable by $ 3.3 million during the year ended December 31, 2022 and is recognized in gain on fair value of contract consideration convertible notes payable, net on our consolidated statements of operations.

See Note 11, “Fair Value Measurements”.

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable

On May 17, 2022, the Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “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”) to ProFrac Holdings LLC.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable accrue paid-in-kind interest at a rate of 10 % per annum and may be converted at any time prior to the maturity date, which is one year from the date of issuance under the same conversion terms as the Convertible Notes Payable issued in the PIPE Transaction described above.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 with a corresponding contract asset.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured to fair value of $ 69.4 million as of December 31, 2022 which includes paid-in-kind interest of $ 3.2 million The fair value adjustment resulted in a $ 3.3 million decrease during the year ended December 31, 2022 and is recognized in gain on fair value of contract consideration convertible notes payable, net on our consolidated statement of operations.

See Note 11, “Fair Value Measurements”.

Note 11 — Fair Value Measurements

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

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

Liabilities Measured at Fair Value on a Recurring Basis

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

Contingent consideration $ — $ — $ 608 $ 608 $ — $ — $ 1,416 $ 1,416

The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, discussed in Note 3, Business Acquisition, is included in accrued liabilities as of December 31, 2021 and 2020.

Contingent earnout consideration $ — $ — $ 583 $ 583 $ — $ — $ 608 $ 608

Initial ProFrac Agreement contract consideration convertible notes — — 14,220 14,220 — — — —

Amended ProFrac Agreement contract consideration convertible notes — — 69,350 69,350 — — — —

Total $ — $ — $ 84,153 $ 84,153 $ — $ — $ 608 $ 608

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 December 31, 2022 and 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.

During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved, and the Company accrued a liability of $ 2.5 million, which was subsequently settled during the fourth quarter of 2020.

Assets Measured at Fair Value on a Nonrecurring Basis

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

Impairments of long-lived assets of $ 70 million were recorded during the year ended December 31, 2020.

See Note 10, Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets.

Impairments of

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

goodwill of $ 8.1 million and $ 11.7 million were recorded during the year ended December 31, 2021 and 2020, respectively.

Risk-free interest rate 4.34 % 1.02 %

Expected volatility 100.0 % 90.0 %

Term until liquidation (years) 2.38 3.38

Stock price $ 1.12 $ 1.13

Discount rate 9.95 % 6.71 %

Initial ProFrac Agreement Contract Consideration Notes Payable Key Inputs

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

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

The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement upon issuance due to the use of a quoted price for a similar liability at that date (the PIPE transaction), and subsequently classified as Level 3 due to the use of unobservable inputs.

The estimated value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation.

The key inputs into the Monte Carlo simulation used to estimate the fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of December 31, 2022 were as follows:

December 31, 2022

Risk-free interest rate 4.12 %

Expected volatility 100.0 %

Term until liquidation (years) 0.09

Stock price $ 1.12

Discount rate 4.12 %

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 Company reduced the discount rate assumed due to the reduced likelihood of occurrence of any of the default events in the shorter term remaining on the notes.

The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as at December 31, 2022 was valued using a Monte Carlo simulation.

The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, on the issuance date of May 17, 2022, and as of December 31, 2022 were as follows:

May 17, 2022 December 31, 2022

Risk-free interest rate 2.16 % 4.59 %

Expected volatility 90.0 % 100.0 %

Term until liquidation (years) 1.00 0.38

Stock price $ 1.29 $ 1.12

Discount rate 8.40 % 4.59 %

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets Measured at Fair Value on a Nonrecurring Basis

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

Impairment of goodwill of $ 8.1 million was recorded during the year ended December 31, 2021.

See Note 8, “Goodwill”.

Management inputs used in fair value measurements in 2021 and 2020 to estimate the fair value of the non-financial assets were classified as Level 3.

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

In conjunction with the acquisition of JP3, discussed in Note 3, Business Acquisition, during the year ended December 31, 2020, the Company recorded contingent consideration of $ 1.2 million.

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

During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved, and the Company accrued a liability of $ 2.5 million, which was transferred out of Level 3 to a current liability and subsequently settled during the fourth quarter of 2020.

The Company estimated the fair value of the remaining stock performance earn-out provision as of December 31, 2021 and 2020 and adjusted the estimated fair value of the contingent liability to $ 0.6 million and $ 1.4 million, respectively.

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

The following table presents the changes in contingent consideration balances classified as Level 3 balances (in thousands):

The following table presents the changes in balances of liabilities for the years ended December 31, 2022 and 2021 classified as Level 3 balances (in thousands):

Years ended December 31,

Balance - beginning of period $ 608 $ 1,416

Additions / issuances — 1,200

Change in fair value ( 808 ) 2,716

Transfer out of Level 3 — ( 2,500 )

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

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

Increase in principle of Initial ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest 954 —

Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest 3,231 —

Change in fair value of contingent earnout consideration ( 25 ) ( 808 )

Change in fair value of Initial ProFrac Agreement contract consideration convertible notes payable 3,266 —

Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable ( 3,341 ) —

Balance - end of period $ 84,153 $ 608

Note 12 — Income Taxes

Components of the income tax benefit is as follows (in thousands):

Components of the income tax benefit are as follows (in thousands):

Years ended December 31,

Federal $ 101 $ —

Foreign — ( 21 )

Total current 16 ( 5,992 )

Federal — ( 116 )

Total current expense 103 16

State ( 125 ) ( 56 )

Total deferred ( 56 ) ( 187 )

Total deferred benefit ( 125 ) ( 56 )

Income tax benefit $ ( 22 ) $ ( 40 )

6 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the U.S.

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

The income tax benefit differed from the amounts computed by applying the U.S.

federal income tax rate of 21% respectively, to loss before income tax for the reasons set forth below:

Years ended December 31,

2 unchanged sentences

income taxed at different rates ( 0.1 ) 0.5

Increase (reduction) in tax benefit related to stock-based awards 0.1 ( 0.2 )

Increase in tax benefit related to stock-based awards ( 0.4 ) 0.1

Increase in valuation allowance ( 21.8 ) ( 24.9 )

Effect of tax rate differences of NOL carryback — 1.5

Permanent differences related to CARES Act — 2.6

Other 1.2 0.7

Effective income tax rate 0.1 % 0.1 %

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic.

Among other things, the CARES Act provided the ability for taxpayers to carryback a net operating loss (“NOL”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five years preceding the year of the loss.

Based on analysis of the extended NOL carryback provision, the Company recorded an income tax benefit and related receivable of $ 6.1 million as of March 31, 2020, which was received in July 2020.

Further, the CARES Act included provisions to assist employers during the pandemic including the Employee Retention Credit (“ERC”).

The ERC provision provides a refundable payroll tax credit on qualified wages paid by eligible employers to certain employees.

On March 11, 2021, the American Rescue Plan Act of 2021 was enacted to combat the ongoing public health and economic impacts of the pandemic and provides some tax relief to businesses in the form of extending and modifying the ERC as well as other provisions.

The Company applied for and received $ 2.9 million of refundable payroll tax credits during the year ended December 31, 2021.

This was recorded as a credit to payroll taxes in SG&A.

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

income taxed at different rates.

During the years ended December 31, 2021 and 2020, the effective tax rate was further impacted by permanent difference related to the CARES Act provisions and the NOL carryback claim, respectively.

Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse.

The components of deferred tax assets and liabilities are as follows (in thousands):

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The movement in the temporary differences for the year ended December 31, 2022 does not affect the estimated annual effective tax rate as it is offset by a corresponding change in the valuation allowance.

The component of deferred tax assets and liabilities are as follows (in thousands):

Deferred tax assets:

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Equity compensation 536 399

Interest limitation 1,616 13

Other 230 291

9 unchanged sentences

net operating loss carryforwards of $ 176 million, including $ 46.4 million expiring in various amounts from 2029 through 2037 which can offset 100 % of taxable income and $ 129.6 million that has an indefinite carryforward period which can offset 80 % of taxable income per year.

The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo an “ownership change” for purposes of Section 382 of the Tax Code.

We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions.As of December 31, 2021 and 2020, the valuation allowance against the net federal and state deferred tax assets was $ 54.9 million and $ 48.7 million, respectively.

Except for a state jurisdiction, the Company maintains a full valuation allowance on its deferred tax assets.

The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo a change in control as defined for purposes of Section 382 of the Internal Revenue Code of 1986, as amended.

The Company performed a study in which it determined that no ownership change has occurred as of December 31, 2022.

However, the Company anticipates that a change in control will occur in the near term when certain convertible notes are converted during the year ended 2023.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

change in control will significantly limit the ability of the Company to utilize the pre-change net operating losses and credits, the Company does not expect a significant impact to their financial statements given the valuation allowance that is recorded to estimate the realizability of the deferred tax assets.

The Company’s cumulative recent losses (before permanent items) of $ 215.5 million in the recent thirty-six months are negative evidence that it will not likely generate sufficient future income to utilize its deferred tax assets.

Therefore, the Company believes that it is not more likely than not that it will realize its deferred tax assets in all taxing jurisdictions with the exception of a portion of Louisiana and Texas.

Therefore, the Company recorded a valuation allowance for the years ended December 31, 2022 and December 31, 2021 to reflect the estimated amount of deferred tax asset realizability.

The Company intends to reinvest the unremitted earnings of its non-U.S.

subsidiaries.

As of December 31, 2021, the Company had approximately $ 8.5 million in unremitted earnings from its foreign jurisdictions.

As of December 31, 2022 and 2021, the Company had approximately $ 7.4 million and $ 8.5 million, respectively, in unremitted earnings from its foreign jurisdictions.

As a result of the 2017 Tax Act these earnings have been previously taxed in the U.S.

although they have not been repatriated to the U.S.

However, certain withholding taxes will need to be paid upon repatriation.

although they have not been repatriated.

However, certain withholding taxes may need to be paid upon repatriation depending on the US treaty with the applicable country.

It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.

The Company performed an evaluation and concluded there are no uncertain tax positions requiring recognition in the Company’s financial statements.

Tax years which remain subject to examination by tax jurisdictions as of December 31, 2021, are the years ended December 31, 2018 through December 31, 2021 for U.S.

federal taxes and the years ended December 31, 2017 through December 31, 2021 for various state tax jurisdictions.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has performed an analysis of its tax positions for the year ended December 31, 2022, concluding all tax positions taken were highly certain.

Note 13 — Commitments and Contingencies

1 unchanged sentence

Except as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

Terpene Supply Agreement

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

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

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

On March 26, 2021, Flotek Industries, Inc.

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

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

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

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

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

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

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

Former CEO Matter

During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in expenses and transactions during the years from 2014 to 2018.

Former CEO (J Chisholm) Matter

During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (a previous CEO of Flotek) due to irregularities in expenses and transactions during the years from 2014 to 2018.

The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste.

1 unchanged sentence

After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.

Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages.

Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration and other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages.

John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended).

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

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.

A credit of $ 7.6 million was recorded in cost of sales in the consolidated statements operations for the year ended December 31, 2021 relating to the release of excess costs accrued for this matter.

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.

3 unchanged sentences

Note 14 — Stockholders’ Equity

Common and Preferred Stock

On May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, to increase the authorized shares of common stock from 80 million shares to 140 million shares of common stock, par value $ 0.0001 per share, and 100,000 shares of one or more series of preferred stock, par value $ 0.0001 per share.

The additional authorized shares are available for corporate purposes, including acquisitions.

During the first quarter 2021, the Company identified 0.6 million shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity.

On March 21, 2022, Convertible Notes Payable pursuant to the PIPE Transaction discussed in Note 10, “Debt and 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.

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

The PreFunded Warrants were recorded in equity at their fair value of $ 11.1 million, estimated using a Black-Scholes Option Pricing model, le ss $ 1.2 million of transaction costs paid.

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

Th e Prefunded Warrants 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 of $ 8.4 million from ProFrac Holdings, II, LLC are included in additional paid-in capital as of December 31, 2022.

The key inputs into the Black-Scholes Option Pricing Model used to estimate the fair value of the Pre-Funded Warrants as of the issuance on June 21, 2022 were as follows:

Risk-free interest rate 3.21 %

Expected volatility 90.0 %

Term until liquidation (years) 2.00

Stock price $ 1.11

Strike price (exercise fee) $ 4.5 million

ProFrac Holdings II, LLC 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 II, LLC and its affiliates and (ii) ProFrac Holdings II, LLC has paid an additional $ 4.5 million to the Company.

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

During the first quarter of 2021, the Company identified 613,000 shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity.

This adjustment was not material to the December 31, 2020 consolidated financial statements or basic and diluted earnings per share.

A reconciliation of the changes in common shares issued is as follows:

Year ended December 31,

Shares issued at the beginning of the year 78,669,414 63,656,897

Correction to issued share count at beginning of the year ( 613,419 ) —

Issued upon sale of common stock — 200,000

Issued upon exercise of stock options — 111,298

Issued as restricted stock award grants 1,702,289 3,114,978

Issued upon vesting of restricted stock units 86,240 86,241

Restricted stock awards forfeited and cancelled ( 284,334 ) —

Shares withheld to cover taxes and cancelled ( 76,353 ) —

Issued in business combination to acquire JP3 — 11,500,000

Shares issued at the end of the year 79,483,837 78,669,414

Treasury Stock

The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity.

During the years ended December 31, 2021 and 2020, the Company purchased 155,317 shares and 145,703 shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options.

Shares issued as restricted stock awards to employees under the 2018 long-term incentive plan that were forfeited are accounted for as treasury stock.

During the years ended December 31, 2022 and 2021, the Company withheld 114,797 shares and 155,317 shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options.

Shares issued as restricted stock awards to employees under the 2018 long-term incentive plan that were forfeited were 39,547 and 135,092 during the years ended December 31, 2022 and 2021, respectively, are accounted for as treasury stock.

During the years ended December 31, 2022 and 2021, forfeited stock awards returned to treasury stock were 30,055 shares and 421,389 shares, respectively.

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Stock-Based Incentive Plans

Stockholders approved long-term incentive plans in 2019, 2018, 2014, 2010 and 2007 (the “2019 Plan,” the “2018 Plan,” the “2014 Plan,” the “2010 Plan” and the “2007 Plan,” respectively) under which the Company may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, restricted stock units, and certain other incentive awards.

The maximum number of shares that may be issued under the 2019 Plan, 2018 Plan, 2014 Plan, 2010 Plan and 2007 Plan are 1.0 million, 3.0 million, 5.2 million, 6.0 million and 2.2 million, respectively.

At December 31, 2021, the Company had a total of 4.2 million shares remaining to be granted under the 2019 Plan and 2018 Plan.

Shares may no longer be granted under the 2007, 2010 and 2014 Plans.

Stockholders approved long-term incentive plans in 2020, 2019 and 2018 (the “2020 Plan”, the “2019 Plan,” and the “2018 Plan,”, respectively) under which the Company may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, restricted stock units, and certain other incentive awards.

The maximum number of shares that may be issued under the 2020 Plan, 2019 Plan and 2018 Plan are 3 million, 1.0 million, and 8.5 million, respectively.

At December 31, 2022 and 2021, the Company had a total o f 2.8 million and 4.2 million shares remaining, respectively, to be granted under the 2020 Plan, 2019 Plan and 2018 Plan.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant.

During the years ended December 31, 2021 and 2020, 1.4 million and 1.3 million market-based stock options were granted, respectively.

During the year ended December 31, 2022 no market-based stock options were granted compared to 1.4 million during the year ended December 31, 2021.

The market-based options are restricted until criteria defined in the agreements are met.

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Estimates are adjusted when actual forfeitures differ from the estimate.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-based compensation expense is recorded for all equity awards expected to vest.

During the years ended December 31, 2021 and 2020, 0.2 million and 0.1 million stock options vested, respectively, and 0.8 million and 0.6 million stock options were forfeited, respectively.

During the years ended December 31, 2022 and 2021, 0.5 million and 0.2 million stock options vested, respectively.

During the year ended December 31, 2022, no stock options were forfeited compared to 0.8 million for the year ended December 31, 2021.

The total fair value of the stock options that vested was $ 0.3 million and $ 0.2 million for the years ended December 31, 2022 and 2021, respectively.

Stock option activity for the years ended December 31, 2022 and 2021, are as follows:

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Price Weighted-Average

Outstanding as of January 1, 2020 3,000,000 $ — $ —

Granted 1,327,795 1.12 0.62

Exercised ( 111,298 ) 0.92 0.51

Forfeited ( 556,497 ) 0.92 0.51

Outstanding as of January 1, 2021 3,660,000

Outstanding as of December 31, 2020 3,660,000

Granted 1,448,959 $ 1.07 $ 0.88

Exercised — — —

Forfeited ( 777,084 ) 1.02 0.52

Expired ( 50,000 ) 0.52 0.52

Outstanding as of

December 31, 2021 4,281,875

Vested or expected to vest at

December 31, 2021 3,775,148

The following table sets forth significant assumptions used in the Monte Carlo model for market-based options to determine the fair value of the option s at the date of grant:

Year Ended December 31, 2021 Year Ended December 31, 2020

Market-Based Options Market-Based Options

Outstanding as of December 31, 2021

Expired ( 120,000 ) $ 0.72 $ 0.10

Outstanding as of December 31, 2022

Vested or expected to vest at December 31, 2022

The below table shows the aggregate intrinsic value and weighted average remaining contractual term of share options outstanding, currently exercisable and vested or expected to vest.

Share Options Outstanding Share Options Currently Exercisable Share Options Vested or Expected to Vest

Number 4,161,875 840,000 3,889,147

Weighted-average exercise price $ 1.19 $ 1.28 $ 1.19

Aggregate intrinsic value ($000’s) 121 24 114

Weighted-average remaining contractual term in years 3.41 2.15 3.43

The following table sets forth significant assumptions used in the Monte Carlo model for market-based options to determine the fair value of the option s at the date of grant for the year ended December 31, 2021.

There were no options granted during the year ended December 31, 2022.

Year Ended December 31, 2021

Risk-free interest rate 1.61 %

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Dividend yield — %

At December 31, 2021, the unrecognized compensation cost related to stock options was $ 3.3 million.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2022 and 2021, the unrecognized compensation cost related to stock options was $ 2.1 million and $ 3.3 million, respectively.

Upon the departure of the Company’s Chief Executive Officer and President effective January 19, 2023, 3,000,000 of the outstanding stock options were forfeited (see Note 20, “Subsequent Events”).

The unrecognized compensation expense related to these forfeited options was $ 1.8 million.

Restricted Stock

The Company grants employees and directors either time-vesting or market-based restricted shares in accordance with terms specified in the Restricted Stock Agreements.

During the year ended December 31, 2021, all of the restricted stock granted were time-vesting restricted shares.

During the years ended December 31, 2022 and 2021, all of the restricted stock granted were time-vesting restricted shares.

Grantees of restricted shares retain voting rights for the granted shares.

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• Market-based restricted shares are issued with criteria defined over a designated period and vest only when, and if, the outlined criteria are met.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted stock share activity for the years ended December 31, 2022 and 2021, are as follows:

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Value at Date of

Non-vested at January 1, 2020 1,629,020 $ 2.66

Non-vested at December 31, 2020

2,795,100 $ 1.00

Granted 1,702,289 1.73

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Forfeited ( 1,275,172 ) 1.36

Non-vested at January 1, 2021 2,795,100 1.00

Non-vested at December 31, 2021

1,768,363 1.61

Granted 1,532,926 1.32

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Non-vested at December 31, 2022

2,299,679 $ 1.37

The total fair value of restricted stock that vested during the years ended December 31, 2022 and 2021 was $ 1.3 million and $ 2.5 million, respectively.

At December 31, 2021, unrecognized compensation expense related to non-vested restricted stoc k wa s $ 1.9 million .

At December 31, 2022 and 2021, unrecognized compensation expense related to non-vested restricted stock was $ 2.0 million and $ 1.9 million, respectively.

The unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.7 years.

Restricted Stock Units

During the years ended December 31, 2020, the Company granted 0.9 million market-based restricted stock units (“RSU s”).

The performance period for these RSUs continues until December 22, 2024.

No RSU’s were granted during the year ended December 31, 2021.

No RSU’s were granted during the years ended December 31, 2022 and 2021.

Restricted stock units activity for the years ended December 31, 2022 and 2021, are as follows:

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Value at Date of

RSUs at January 1, 2020 1,038,474 $ 3.24

2020 granted 922,786 1.19

RSUs at December 31, 2020

1,141,144 $ 2.30

Vested ( 186,901 ) —

Forfeited ( 184,173 ) 2.61

RSUs at January 1, 2021 1,227,549 1.25

2021 granted — —

RSUs at December 31, 2021

Vested ( 500,868 ) 1.90

Forfeited $ ( 41,202 ) 1.92

RSUs at December 31, 2022

At December 31, 2021, unrecognized compensation expense related to restricted stock units was $ 1.0 million.

The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.1 years.

Employee Stock Purchase Plan

228,000 $ 1.93

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2022 and 2021, unrecognized compensation expense related to restricted stock units was $ 0.4 million and $ 1.0 million.

Upon the departure of the Company’s Chief Executive Officer and President effective January 19, 2023, all the unvested restricted stock units outstanding as of December 31, 2022 were forfeited (see Note 20, “Subsequent Events”).

Employee Stoc k Purchase Plan

The Company’s Employee Stock Purchase Plan (“ESPP”) was approved by stockholders in 2012.

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In addition, for each calendar year, an employee may not be granted purchase rights valued over $ 25,000 , as determined at the time such purchase right is granted.

The fair v alue of the discount associated with shares purchased under the plan is recognized as stock-based compensation expense and was $ 0.02 and $ 0.1 million for the years

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ended December 31, 2021 and 2020, respectively.

The fair v alue of the discount associated with shares purchased under the plan is recognized as stock-based compensation expense and wa s $ 10.2 thousand and $ 23.6 thousand for the years ended December 31, 2022 and 2021, respectively.

The total fair value of the shares purchased under the plan during each of the years ended December 31, 2022 and 2021 was $ 0.1 million and $ 0.2 million , respectively .

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During the years ended December 31, 2022 and 2021, compensation expense included $ 0.3 million and $ 0.2 million, respectively, related to the Company’s 401(k) match.

Note 18 — Earnings (Loss) Per Share

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

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

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

Potentially dilutive securities were excluded from the calculation of diluted loss per share for the years ended December 31, 2021 and 2020, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the periods.

Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.0 million restricted stock units and 4.3 million stock options for the year ended December 31, 2021, and 1.8 million restricted stock units and 3.8 million stock options for the year ended December 31, 2020.

Note 16 — Loss Per Share

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

Diluted loss per common share is calculated by dividing the adjusted net 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 loss per share for the years ended December 31, 2022 and 2021 is as follows (in thousands):

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31,

Net loss for basic earnings per share $ ( 42,305 ) $ ( 30,526 )

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 and contract consideration convertible notes payable, net of tax 5,956 —

Valuation gain on convertible notes carried at fair value, net of tax ( 75 ) —

Total numerator adjustment excluded from diluted earnings computation $ 5,881 $ —

Basic and diluted weighted average shares outstanding 74,425 73,361

Anti-dilutive incremental shares excluded from denominator for diluted earnings computation

Average number of diluted shares for convertible notes payable and contract consideration convertible notes payable 54,649 —

Average number of diluted shares for stock warrants 4,814 —

Average number of diluted shares for stock options and restricted stock 598 906

Basic and diluted loss per share $ ( 0.57 ) $ ( 0.42 )

For the year ended December 31, 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 year ended December 31, 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 period.

For the year ended December 31, 2021, potentially dilutive securities were excluded from the calculation of diluted loss per share, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the year.

Note 17 — Supplemental Cash Flow Information

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Income taxes received — ( 351 )

Supplemental non-cash investing and financing activities:

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

Note 20 — Related Party Transaction

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

As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr.

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

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

Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.

In October 2019, an amendment to the employment agreement of Mr.

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

Chisholm to the Company for the IRS matter, and giving the Company

Supplemental non-cash financing and investing activities:

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

Conversion of convertible notes payable to common stock 3,038 $ —

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the right to withhold payments to Mr.

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

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

On January 5, 2020, Mr.

Chisholm ceased to be an employee of the Company.

In September 2020, the Company informed Mr.

Chisholm it would cease payment of future severance.

During first quarter of 2020, an additional accrual was recorded for $ 0.2 million related to potential penalties and interest on the IRS obligation.

As of December 31, 2021 and 2020, the receivable from Mr.

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

Chisholm’s severance liability.

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

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

For the year ended December 31, 2021, the Company’s revenues for chemical sales to Confluence was $ 3.6 million.

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

There were no transactions with Confluence in the year ended December 31, 2020.

Note 21 — Business Segment, Geographic and Major Customer Information

Note 18 — Related Party Transaction

On February 2, 2022, the Company entered into the Initial 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 10, “Debt and Convertible Notes Payable”).

Under the Initial 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 Initial 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.

On May 17, 2022, the Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreement”) upon issuance of $ 50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 10, “Debt and Convertible Notes Payable”).

The Initial 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.

During the years ended December 31, 2022 and 2021, the Company’s revenues from ProFrac Services LLC were $ 80.4 million and zero , respectively.

For the year ended December 31, 2022, these revenues were net of amortization of contract assets of $ 3.4 million .

Cost of sales attributable to these revenues were $ 84.5 million and nil , respectively, for the years ended December 31, 2022 and 2021.

As of December 31, 2022 and 2021 our accounts receivable from ProFrac Services, LLC was $ 22.7 million and zero , respectively which is recorded in accounts receivable, related party on the consolidated balance sheet.

Also during 2022, we entered into the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC:

• PIPE Transaction (see Note 10, “Debt and Convertible Notes Payable”)

• PreFunded Warrants (see Note 14, “Stockholders’ Equity)

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 and amortization of issuance costs of $ 90 thousand, were converted into 2,793,030 shares of the Company’s common stock.

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 Mr.

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

The Company’s revenues and related cost of sales for product sales to Confluence were $ 1.4 million and $ 1.4 million, respectively, through April 15, 2022.

The accounts receivable balance from Confluence as at December 31, 2021 was $ 1.3 million.

The Company’s revenues and related cost of sales from chemical sales to Confluence for the year ended December 31, 2021 were $ 3.6 million and $ 3.4 million, respectively.

Note 19 — Business Segment, Geographic and Major Customer and Supplier Information

Segment Information

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

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Data Analytics.

The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids.

The DA segment includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids.

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

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

The Company evaluates performance based upon a variety of criteria.

Performance is based upon a variety of criteria.

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2 unchanged sentences

Revenue from external customers

Products $ 47,004 $ 3,903 $ — $ 50,907

Services 1,956 1,481 — 3,437

Total revenue from external customers 48,960 5,384 — 54,344

Revenue from related party

Products 81,614 — — 81,614

Services 4 130 — 134

Total revenue from related parties 81,618 130 — 81,748

Gross profit (loss) ( 7,317 ) 617 — ( 6,700 )

Change in fair value of contract consideration convertible notes ( 75 ) — — ( 75 )

Loss from operations ( 14,729 ) ( 2,877 ) ( 17,815 ) ( 35,421 )

Depreciation and amortization 939 70 2 1,011

Paid-in-kind interest on contract consideration convertible notes payable 4,185 — — 4,185

Paid-in-kind interest on convertible notes payable — — 1,771 1,771

Depreciation 668 63 3 734

Additions to long-lived assets 56 134 231 421

Revenue from external customers

Product $ 32,984 $ 3,640 $ — $ 36,624

Service 2,304 699 — 3,003

Total revenue from external customers 35,288 4,339 — 39,627

Revenue from related party

Product 3,641 — — 3,641

Service — — — —

Total revenue from related parties 3,641 — — 3,641

Gross profit (loss) 5,430 ( 2,174 ) — 3,256

Loss from operations (1) ( 5,466 ) ( 12,168 ) ( 13,822 ) ( 31,456 )

Depreciation and amortization 2,519 422 471 3,412

Depreciation 939 70 2 1,011

Additions to long-lived assets 39 — — 39

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

(1) CT loss from operations includes a credit of $ 7.6 million from the release of accrued costs relating to the ADM settlement, see Note 13, “Commitments and Contingencies”.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Total assets $ 164,810 $ 50,244

The increase in Chemistry Technologies assets is primarily due to contract asset of $ 79.7 million

Geographic Information

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

No individual countries other than the U.S.

and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue.

For the year ended December 31, 2022 no individual countries other than the U.S accounted for more than 10% of revenue.

For the year ended December 31, 2021 no individual countries other than the U.S and United Arab Emirates (“UAE”) accounted for more than 10% of revenue.

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

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Total revenue $ 136,092 $ 43,268

(1) Includes revenue from related parties of $ 81,748 and $ 3,641 , respectively.

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

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

Chemistry Technologies % of Total Revenue

Revenue % of Total Revenue

Year ended December 31, 2022

Customer A $ 4,067 9 %

Customer A (related party - ProFrac Services, LLC) $ 80,359 59.0 %

Customer B 14,395 10.6 %

Year ended December 31, 2021

Customer A $ 12,891 24 %

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 B $ 11,632 26.0 %

The concentration with ProFrac Services, LLC and in the oil and gas industry increases credit, commodity and business risk .

Major Suppliers

Expenditure with major suppliers, as a percentage of consolidated supplier expenditure, is as follows (in thousands):

Expenditure % of Total Expenditure

Year ended December 31, 2022

Supplier A $ 25,057 27.7 %

Supplier B 15,302 16.9 %

Supplier C 15,255 16.8 %

Year ended December 31, 2021

Supplier C $ 3,643 17.0 %

Supplier D 4,562 21.3 %

FLOTEK INDUSTRIES, INC.

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

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

Pursuant to the PIPE transaction on February 2, 2022, Flotek issued $ 21.2 million aggregate initial principal amount of convertible notes for net cash proceeds of approximately $ 19 million.

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

The issuance of the additional shares may trigger a change in ownership defined as 50% or more under IRC Section 382 that will limit the amount of net operating losses deductible and tax credits allowable starting in 2022.

Also on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of Profrac Holdings LLC, in exchange for $ 10 million of convertible notes under the same terms as the convertible notes issued in the PIPE transaction.

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

In connection with the Profrac Agreement, the Company also granted Profrac Holdings LLC.

the right to designate two members to serve on Flotek’s board of directors.

On February 16, 2022, the Company entered into an amended agreement with ProFrac Holdings, LLC to expand the Profrac Agreement to a term of ten years and up to thirty hydraulic fracturing fleets deployed by ProFrac Services, LLC.

Closing of the transaction is expected to occur in the second quarter of 2022 and is subject to a vote of the shareholders of Flotek’s common stock, as well as other customary conditions.

As part of the transaction, at closing of the amended agreement Flotek would (a) issue to ProFrac notes convertible into Flotek’s common stock with a maturity of one year, with the amount of notes based on the size of expansion, and (b) grant ProFrac the right to appoint two members to Flotek’s board of directors, for a total of four out of seven directors.

Conversion price of the convertible notes will be $ 1.088125 per share under certain conditions prior to maturity, or $ 0.8705 per share at maturity.

The convertible notes contain other terms and conditions similar to the convertible notes issued to Profrac on February 2, 2022.

As a result of these transactions, the Company will seek shareholder approval to increase the authorized shares of common stock or perform a reverse split to allow for the conversion of these convertible notes.

On December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility for proceeds of $ 4.2 million net of brokerage fee, which is expected to close in April 2022.

On January 19, 2023, the Company announced the departure of John W.

from his role as Chief Executive Officer and President of the Company, effective January 19, 2023.

Gibson also stepped down from his role as Chairman of the Board of Directors (the “Board”) of the Company.

In connection with his separation, the Company and Mr.

Gibson have entered into a Separation Agreement and General Release (the “Separation Agreement”) pursuant to which Mr.

Gibson will receive $ 1,500,000 payable in four installments and being fully paid by April 2023.

As part of the Separation Agreement, Mr.

Gibson has agreed to forfeit all of his outstanding options and unvested restricted stock units.

In addition, Mr.

Gibson has agreed to a 6 -month lock up period with respect to 250,000 shares of common stock owned by Mr.

Gibson, which will prohibit Mr.

Gibson from selling those shares during the lock up period.

On February 1, 2023, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No.

2”) between Flotek Chemistry and ProFrac Services, LLC dated February 2, 2022.

The Amended ProFrac Agreement No.

2 has an effective date of January 1, 2023.

Pursuant to the Amended ProFrac Agreement No.

2, the Parties agree (1) to a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of active fleets to 30 fleets, (2) that the potential liquidated damages payment relating to order shortfall, prior to January 1, 2023 is waived for that period, (3) to add additional fees to certain products, and (4) to provide margin increases based on revenue percentages from non-ProFrac customers.

On February 2, 2023, the Convertible Notes Payable and certain Contract Consideration Convertible Notes previously issued on February 2, 2022 were converted upon maturity into 10,355,840 shares of common stock and 25,366,561 Pre-Funded Warrants to purchase common stock for a nominal exercise price of $ 0.0001 per share exercisable subject to the limitations on exercise described therein.

All of the holders elected to receive shares of common stock upon conversion except for ProFrac Holdings LLC, which elected to receive the Pre-Funded Warrants.

FLOTEK INDUSTRIES, INC.

3 unchanged sentences

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What changed 10-K

Item 8. Financial Statements and Supplementary Data