What changed in this filing

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Item 9A. Controls and Procedures

2023-03-23 compared with 2022-03-31 · 73 added, 45 removed, 115 unchanged (51% of the section changed)

5 unchanged sentences

Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.

Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our internal control over financial reporting disclosure controls and processes were effective as of December 31, 2021.

Remediation of the Previously Reported Material Weaknesses in Internal Controls Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As reported in Management’s Annual Report on Internal Control over Financial Reporting for the year ended December 31, 2020, as well as in our Quarterly Reports on Form 10-Q for each interim period through the third quarter of the year ended December 31, 2021, we did not maintain effective internal controls over financial reporting as a result of material weaknesses related to:

(1) ineffective design and operation of controls over nonrecurring transactions including derecognition of items and cash flow presentation relating to disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations;

(2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations;

and (3) the ineffective design and operating effectiveness of the controls over the assessment of going concern.

During the year ended December 31, 2021, the Company implemented remediation plans to address the design and operating effectiveness of control deficiencies that led to the material weaknesses described above.

Management’s plan of remediation included adding additional resources to the Company’s finance and accounting team and:

• Enhanced the design of our monitoring controls over the identification of non-recurring transactions and the accounting, presentation and disclosures for non-recurring transactions.

• Enhanced the design of the control over the assessment of impairment evaluations, including the assessment of events or changes in circumstances that may indicate a potential impairment.

• Enhanced the design of the controls related to assumptions used in management’s forecasts used for accounting purposes.

• Implemented a control over the analysis of the assessment of going concern at each period end and a process for the monitoring of the completion of the assessment and performance of the control as designed.

• Implemented monitoring processes to ensure controls occurred on the frequency designed and that documentation was sufficient to support the operating effectiveness of the control.

After testing the design and implementation and operating effectiveness of the new controls described above, management concluded that the material weaknesses described above were remediated as of December 31, 2021.

We will continue to monitor execution of our controls to ensure the effectiveness of those controls and make enhancements when and where necessary.

Additionally, we will continue to train new and key personnel on our standard processes and systems as required.

Based upon this evaluation, our interim Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure controls and procedures were not effective because of a material weakness in our internal control over financial reporting described below.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, as amended.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our management, including the Interim Chief Executive and the Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2022, based upon criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based upon our assessment, we believe that, as of December 31, 2022, our internal control over financial reporting was not effective because of the material weakness described below.

Specifically, (i) the Company did not have sufficient resources in place throughout the reporting period with the appropriate training and knowledge of internal controls over financial reporting in order to establish the Company’s financial reporting processes to design, implement and operate an effective system of internal control over financial reporting;

(ii) the Company did not conduct an adequate continuous risk assessment over financial reporting to identify and analyze risks of financial misstatement due to error and/or fraud and to identify and assess necessary changes in financial reporting processes and internal controls impacted by significant changes in the business and increase in transactions;

and (iii) the Company did not have an effective information and communication process that ensured appropriate and accurate information was available to financial reporting personnel on a timely basis in order that they could fulfill their roles and responsibilities.

Accordingly, the Company did not establish appropriate control activities through policies and procedures to mitigate risk to the achievement of the Company’s financial reporting objectives, as follows:

The Company did not design effective controls over the identification and subsequent accounting for modifications to lease agreements;

The Company did not design effective controls over the accuracy of prepaid asset accounts;

The Company did not design effective controls over the completeness and accuracy of the related party revenue accrual at period end to ensure all sales were are properly accounted for.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in Internal Controls over Financial Reporting

As described above under “Remediation of the Previously Reported Material Weakness in Internal Controls Over Financial Reporting,” there were changes in our internal controls over financial reporting during the fourth quarter of the year ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended.

Internal control over financial reporting, no matter how well designed, has inherent limitations.

Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2021 based upon criteria set forth in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on our assessment, we believe that, as of December 31, 2021, our internal control over financial reporting was effective.

These control deficiencies resulted in several material and immaterial misstatements that were corrected prior to the issuance of the consolidated financial statements.

The Company believes that, notwithstanding the material weakness mentioned above, the consolidated financial statements contained in this Form 10-K present fairly, in all material respects, the consolidated balance sheets, statements of operations, comprehensive loss, cash flows, and stockholders’ equity of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.

Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

Remediation Plan and Status

The Company will implement the following plans of action and will continue to evaluate and adjust remediation actions as needed to ensure the elements of the remediation plan remain appropriate and are sustainable.

These elements include:

• Implementing a revised FY2023 financial control risk assessment process based on changes in process that have impacted the Company as well as a regularly recurring assessment process focused on identifying and analyzing risks of financial misstatements due to changes in our business or the nature of transactions;

• Enhancing the information and communication processes to ensure the organization communicates information internally in a timely manner, including information regarding objectives, responsibilities and the functioning of internal controls over financial reporting.

Changes will include more frequent discussion of significant business transactions and the impact of these transactions on the Company’s financial reporting, and improving communication to employees regarding their responsibilities for ensuring that effective internal controls are maintained.

The Company believes that the actions listed above will provide appropriate remediation of the material weakness;

however, the testing of the effectiveness of the controls has not been completed by the Company.

Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate and test the design and effectiveness of the controls, no assurance can be given as to the timing for completion of remediation.

The material weakness will be fully remediated when the Company concludes that the controls have been operating for sufficient time and independently validated by management.

Changes in Internal Control over Financial Reporting

Except for the items described above, there have been no changes in the Company’s system of internal control over financial reporting (as defined Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Other Information.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

PART III - OTHER INFORMATION

Directors, Executive Officers and Corporate Governance.

6 unchanged sentences

The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.

Principal Accounting Fees and Services.

Principal Accountant Fees and Services.

Our independent registered public accounting firm is KPMG LLP, Houston, TX, Auditor Firm ID:

9 unchanged sentences

(incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 7, 2020).

3.4 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Flotek Industries, Inc.

(form of which is incorporated by reference to Appendix B to the Company’s Proxy Statement filed on April 5, 2022).

3.5 Second Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.4 to the Company’s Form 10-K filed on March 16, 2021).

4.1 Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s Definitive Proxy Statement filed on September 27, 2001).

4.2 * Description of Capital Stock of the Company

4.3 Form of Convertible Note ( incorporated by reference to Exhibit 4.1 to the Compa ny ’ s Form 8-K filed on February 4 2020).

4.4 Form of Pre-Funded Warrant ( incorporated by reference to Exhibit 4.

2 to the C ompany ’ s Form 8-K filed on February 4 , 2020).

10.1 2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-K for the year ended December 31, 2007)

4.2 Description of Capital Stock of the Company (incorporated by reference to Exhibit 4.2 to the Company’s Form 10-K filed on March 31, 2022).

4.3 Form of Convertible Note (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on February 4, 2022).

4.4 Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on February 4, 2022).

4.5 10% Convertible PIK Note dated May 17, 2022 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on May 18, 2022).

4.6 Form of Pre-Funded Warrants (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on June 23, 2022).

10.1 † Employment Agreement, dated May 18, 2020, between Flotek Industries, Inc.

11 unchanged sentences

Employment Inducement Plan (incorporated by reference to Exhibit 99.3 to the Company’s Form S-8 filed on June 17, 2020)

10.8 † Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement under Flotek Industries, Inc.

Employment Inducement Plan (incorporated by reference to Exhibit 99.2 to the Company’s Form S-8 filed on June 17, 2020)

10.9 † Separation and Release Agreement, dated July 28, 2020, between the Company and Elizabeth Wilkinson (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q filed on August 17, 2020)

10.10 Promissory Note dated April 16, 2020 in favor of PNC Bank, National Association (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 17, 2020)

10.11 *** Chemical Products Supply Agreement between Flotek Chemistry, LLC and ProFrac Services, LLC, dated February 2, 2022 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on February 4, 2022).

10.12 *** Amendment No.

1 to Chemical Products Supply Agreement between Flotek Chemistry, LLC and ProFrac Services, LLC dated May 17, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 18, 2022).

10.13 *** Amendment to Supply Agreement between Flotek Chemistry, LLC and Florida Chemical Company, LLC dated February 26, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 3, 2020)

10.14 Registration Rights Agreement, by and between Flotek Industries, Inc.

and ProFrac Holdings II, LLC dated May 17, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on May 18, 2022).

10.15 Amendment No.

1 to Registration Rights Agreement Flotek Industries, Inc.

and ProFrac Holdings II, LLC dated June 21, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on June 23, 2022).

10.16 Letter Agreement between Flotek Industries, Inc.

15 unchanged sentences

Chisholm (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended June 30, 2019)

10.24 † Flotek Industries, Inc.

2018 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Current Report Form 8-K filed on June 7, 2021).

10.25 † Form of Restricted Stock Agreement pursuant to the Company’s 2018 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-Q for the quarter ended June 30, 2019)

14 unchanged sentences

Securities Purchase Agreement dated February 16, 2022 by and between Flotek Industries, Inc.

and ProFrac Holdings, LLC (incor porated by reference to Exhibit 10.1 to the Company ’ s F orm 8-K filed on February 22, 2022 )

and ProFrac Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 22, 2022)

10.34 Master Transaction Agreement between Flotek Industries, Inc.

and ProFrac Holdings, LLC, dated February 2, 2022 (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on February 4, 2022).

Note Purchase Agreement, dated February 2, 2022, by and among Flotek Industries, Inc.

and the Purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 4, 2022)

10.36 † Employment Agreement between Flotek Industries, Inc.

Carson effective as of August 5, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 9, 2022)

10.37 † Separation and Release Agreement between Michael E.

Borton and Flotek Industries, Inc.

dated July 4, 2022 (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-Q filed of August 11, 2022)

10.38 † Employment Agreement dated December 19, 2022 between Flotek Industries, Inc.

and Bond Clement (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 19, 2022)

Securities Purchase Agreement between Flotek Industries, Inc.

and ProFrac Holdings II, LLC dated June 17, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 23, 2022).

21.1 * List of Subsidiaries

23.1 * Consent of BDO USA, LLP

23.1 * Consent of KPMG LLP

12 unchanged sentences

** Furnished with this Form 10-K, not filed.

*** Portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K in order for them to remain confidential.

*** Certain identified information has been excluded from this exhibit because it is not material and is the type of information that the Company customarily and actually treats as private and confidential.

Redacted information is indicated by [***]

† Management contracts or compensatory plans or agreements.

4 unchanged sentences

FLOTEK INDUSTRIES, INC.

President, Chief Executive Officer and Chairman of the Board

/s/ Harsha V.

Interim Chief Executive Officer and Director

March 22, 2023

1 unchanged sentence

SIGNATURES TITLE DATE

President, Chief Executive Officer, and Chairman of the Board (Principal Executive Officer) March 31, 2022

/s/ Michael E.

Chief Financial Officer (Principal Financial and Accounting Officer) March 31, 2022

/s/ Harsha V.

Interim Chief Executive Officer and Director

(Principal Executive Officer) March 22, 2023

/s/ Bond Clement

Chief Financial Officer

(Principal Financial and Accounting Officer) March 22, 2023

/s/ David Nierenberg

David Nierenberg

Director March 31, 2022

/s/ Harsha V.

Director March 31, 2022

Chairman of the Board March 22, 2023

/s/ Evan Farber

Director March 22, 2023

2 unchanged sentences

Director March 22, 2023

Director March 31, 2022

/s/ Lisa Mayr

Director March 22, 2023

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

What changed 10-K

Item 9A. Controls and Procedures