FLOTEK INDUSTRIES INC/CN/ - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-13270


FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Delaware

90-0023731

(State of other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

8846 N. Sam Houston Parkway W.

Houston, TX

77064

(Address of principal executive offices)

(Zip Code)

(713) 849-9911

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	FTK	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated Filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 8, 2021, there were 79,617,743 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.

TABLE OF CONTENTS



Forward-Looking Statements		3

PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020	4
	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020	5
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	7
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020	8
	Notes to Unaudited Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31

Item 4.	Controls and Procedures	31

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Mine Safety Disclosures	33

Item 5.	Other Information	34

Item 6.	Exhibits	35

SIGNATURES		36

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”), and in particular, Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are not historical facts, but instead represent the current assumptions and beliefs regarding future events of Flotek Industries, Inc. (“Flotek” or the “Company”), many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to the Company’s business plan, objectives, expected operating results, and assumptions upon which those statements are based. The forward-looking statements contained in this Quarterly Report are based on information available as of the date of this Quarterly Report.

The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, financial condition, future operating results and liquidity, including but not limited to the impact of the COVID-19 pandemic, pending litigation, commodity prices and other circumstances. These forward-looking statements generally are identified by words including but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,” “potential,” “schedule,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could,” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated, or implied.

A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2020 (“Annual Report” or “2020 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 16, 2021, and periodically in subsequent reports filed with the SEC. The Company has no obligation, and we disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	20,527	$	38,660
Restricted cash	40		664
Accounts receivable, net of allowance for doubtful accounts of $743 and $1,316 at September 30, 2021 and December 31, 2020, respectively	11,560		11,764
Inventories, net	8,818		11,837

Income taxes receivable	55		403

Other current assets	4,811		3,127
Assets held for sale	545		—
Total current assets	46,356		66,455
Property and equipment, net	7,769		9,087
Operating lease right-of-use assets	2,099		2,320
Goodwill	8,092		8,092
Deferred tax assets, net	209		223

Other long-term assets	29		33

TOTAL ASSETS	$	64,554	$	86,210

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,224	$	5,787
Accrued liabilities	10,465		18,275
Income taxes payable	38		21
Interest payable	70		34


Current portion of operating lease liabilities	586		636
Current portion of finance lease liabilities	48		60
Current portion of long-term debt	1,336		4,048

Total current liabilities	17,767		28,861
Deferred revenue, long-term	100		117
Long-term operating lease liabilities	7,888		8,348
Long-term finance lease liabilities	64		96
Long-term debt	3,452		1,617

TOTAL LIABILITIES	29,271		39,039
Commitments and contingencies (See Note 11)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $0.0001 par value, 140,000,000 shares authorized; 79,610,243 shares issued and 69,316,933 shares outstanding at September 30, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020	8		8
Additional paid-in capital	362,174		359,721
Accumulated other comprehensive income (loss)	51		(19)
Accumulated deficit	(293,025)		(278,688)
Treasury stock, at cost; 5,648,721 and 5,580,920 shares at September 30, 2021 and December 31, 2020, respectively	(33,925)		(33,851)


Total stockholders’ equity	35,283		47,171
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	64,554	$	86,210

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Revenue
Revenue from external customers	$	8,847	$	12,739	$	29,782	$	41,035
Revenue from related party	1,332		—		1,332		—
Total revenues	10,179		12,739		31,114		41,035
Costs and expenses:
Operating expenses (excluding depreciation and amortization)	5,418		29,466		31,330		63,939
Corporate general and administrative	2,696		2,679		9,925		12,568

Depreciation and amortization	233		518		793		3,177
Research and development	1,186		1,480		4,194		5,673
Loss (Gain) on disposal of long-lived assets	14		(37)		(55)		(92)
Impairment of goodwill	—		11,706		—		11,706
Impairment of fixed, long-lived and intangible assets	—		12,521		—		69,975
Total costs and expenses	9,547		58,333		46,187		166,946
Income (loss) from operations	632		(45,594)		(15,073)		(125,911)
Other (expense) income:
Paycheck protection plan loan forgiveness	—		—		881		—


Gain on lease termination	—		—		—		576
Interest expense	(18)		(19)		(53)		(40)



Other (expense) income, net	(102)		291		(62)		322
Total other (expense) income, net	(120)		272		766		858
Income (loss) before income taxes	512		(45,322)		(14,307)		(125,053)
Income tax (expense) benefit	(3)		81		(30)		6,282
Net income (loss)	$	509	$	(45,241)	$	(14,337)	$	(118,771)










Income (loss) per common share:
Basic	$	0.01	$	(0.66)	$	(0.21)	$	(1.75)
Diluted	$	0.01	$	(0.66)	$	(0.21)	$	(1.75)










Weighted average common shares:
Weighted average common shares used in computing basic income (loss) per common share	69,324		68,217		68,665		68,063
Weighted average common shares used in computing diluted income (loss) per common share	70,176		68,217		68,665		68,063

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Net income (loss)	$	509	$	(45,241)	$	(14,337)	$	(118,771)


Other comprehensive income (loss):
Foreign currency translation adjustment	38		(40)		70		(168)

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

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine months ended September 30,
	2021		2020
Cash flows from operating activities:


Net loss	$	(14,337)	$	(118,771)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of contingent consideration	(701)		3,200
Depreciation and amortization	793		3,177


Provision for doubtful accounts	(42)		494
Inventory purchase commitment settlement	(7,633)
Provision for excess and obsolete inventory	687		10,465
Impairment of goodwill	—		11,706
Impairment of right-of-use assets	—		7,434
Impairment of fixed assets	—		30,178
Impairment of intangible assets	—		32,363
Gain on sale of assets	(55)		(668)

Non-cash lease expense	221		299
Stock compensation expense	2,710		2,208
Deferred income tax provision (benefit)	13		(199)
Paycheck protection plan loan forgiveness	(881)		—
Changes in current assets and liabilities:



Accounts receivable, net	111		4,714
Inventories, net	2,330		3,186
Income taxes receivable	405		(140)
Other current assets	(2,237)		823
Other long-term assets	541		(16)
Accounts payable	(604)		(11,906)
Accrued liabilities	414		(17,689)
Income taxes payable	(53)		25
Interest payable	36		22

Net cash used in operating activities	(18,282)		(39,095)
Cash flows from investing activities:
Capital expenditures	(31)		(836)
Proceeds from sale of business	—		9,907
Proceeds from sale of assets	74		86
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	43		(17,135)
Cash flows from financing activities:





Proceeds from paycheck protection plan loan	—		4,788
Payments to tax authorities for shares withheld from employees	(161)		(123)
(Payments) proceeds from issuance of stock	(246)		416
Payments for finance leases	(44)		(152)




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




Effect of changes in exchange rates on cash and cash equivalents	(67)		(80)
Net change in cash, cash equivalents and restricted cash	(18,757)		(51,381)
Cash and cash equivalents at the beginning of period	38,660		100,575
Restricted cash at the beginning of period	664		663
Cash and cash equivalents and restricted cash at beginning of period	39,324		101,238
Cash and cash equivalents at end of period	20,527		49,193
Restricted cash at the end of period	40		664
Cash, cash equivalents and restricted cash at end of period	$	20,567	$	49,857

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Three Months Ended September 30, 2021 and 2020

(In thousands of U.S. dollars and shares)



	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost


























Balance, June 30, 2021	79,607	$	8	5,628	$	(34,017)	$	361,424	$	13	$	(293,534)	$	33,894
Net income	—	—		—	—		—		—		509		509
Foreign currency translation adjustment	—	—		—	—		—		38		—		38

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



Restricted stock granted	9	—		—	—		—		—		—		—
Restricted stock forfeited	(6)			4	8		3		—		—		11

Stock compensation expense	—	—		—	—		961		—		—		961
Shares withheld to cover taxes	—	—		45	64		(125)		—		—		(61)



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

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


	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
































Balance, June 30, 2020	77,626	$	7	4,459	$	(33,566)	$	357,981	$	51	$	(215,767)	$	108,706
Net loss	—	—		—	—		—		—		(45,241)		(45,241)
Foreign currency translation adjustment	—	—		—	—		—		(40)		—		(40)

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



Restricted stock granted	346	—		—	—		—		—		—		—
Restricted stock forfeited	—	—		179	—		—		—		—		—
Treasury stock purchased	—	—		36	(41)		—		—		—		(41)
Stock compensation expense	—	—		—	—		687		—		—		687




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

FLOTEK INDUSTRIES, INC.

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

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Nine Months Ended September 30, 2021 and 2020

(In thousands of U.S. dollars and shares)



	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, December 31, 2020	78,669	$	8	5,581	$	(33,851)	$	359,721	$	(19)	$	(278,688)	$	47,171


























Net loss	—	—		—	—		—		—		(14,337)		(14,337)
Foreign currency translation adjustment	—	—		—	—		—		70		—		70

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



Restricted stock granted	1,694	—		—	—		—		—		—		—
Restricted stock forfeited	(140)			34	72		4		—		—		76

Stock compensation expense	—	—		—	—		2,710		—		—		2,710
Shares withheld to cover taxes	—	—		146	(36)		(125)		—		—		(161)

Other (1)	(613)	—		—					—		—		—

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

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


	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, December 31, 2019	63,657	$	6	4,145	$	(33,484)	$	347,565	$	179	$	(142,237)	$	172,029
































Net loss	—	—		—	—		—		—		(118,771)		(118,771)
Foreign currency translation adjustment	—	—		—	—		—		(168)		—		(168)

Stock issued under employee stock purchase plan	—	—		(50)	—		78		—		—		78



Restricted stock granted	2,815	—		—	—		338		—		—		338
Restricted stock forfeited	—	—		457	—		—		—		—		—
Treasury stock purchased	—	—		97	(123)		—		—		—		(123)
Stock compensation expense	—	—		—	—		2,208		—		—		2,208



Stock issued in JP3 acquisition	11,500	1		—	—		8,537		—		—		8,538
Balance, September 30, 2020	77,972	$	7	4,649	$	(33,607)	$	358,726	$	11	$	(261,008)	$	64,129

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and Significant Accounting Policies

Organization and Nature of Operations

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

The Company’s Data Analytics (“DA”) segment enables users to maximize the value of their hydrocarbon associated processes by providing analytics associated with the streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, reducing their carbon footprint, energy consumption and emissions.

The Company formed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”). The Company’s two operating segments, CT and DA, are both supported by its continuing Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 16, “Business Segment, Geographic and Major Customer Information.” For further discussion of the JP3 acquisition, see Note 3, “Business Acquisition.”

The Company was initially incorporated under the laws of the Province of British Columbia in 1985. In October 2001, the Company changed its corporate domicile to the State of Delaware.

Basis of Presentation

The accompanying unaudited financial statements reflect all adjustments, in the opinion of management, necessary for fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the SEC regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report. A copy of the 2020 Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. The information contained on the Company’s website does not form a part of this Quarterly Report. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.

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

Sources and Uses of Liquidity

The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s operating cash flows, the monetization of non-core assets, and the availability of and access to debt and equity financing. The Company has a history of losses and negative operating cash flows from operations and expects to utilize a significant amount of cash as we wrap up 2021 and begin 2022. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a slower than expected recovery of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.

Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet the Company’s capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

•Sale of excess inventory and/or raw materials;

•Operating lease transaction of facilities;

•Sale of non-core real estate properties;

•Sale-leaseback transactions of facilities;

•Sub-leasing certain facilities;

•Renegotiating current lease facility terms and conditions;

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

•Reducing professional advisory fees and headcount.

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

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications did not impact previously reported net loss and stockholders’ equity.

Note 2 — Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“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 September 30, 2021

The FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard removes specific exceptions to the general principles in Topic 740. The pronouncement is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued. The Company has evaluated the impact of this standard and determined that there is no impact on the consolidated financial statements and related disclosures.

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. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. 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.

Note 3 — Business Acquisition

During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. The use of data and analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as predictive maintenance, advanced safety measures and reduced environmental impact of operations. The transaction was valued at approximately $36.6 million as of the transaction closing date, comprised of $25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $8.5 million, net of a discount for marketability due to a lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million. Additionally, the Company was

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

subject to contingent consideration with an estimated fair value of $1.2 million at acquisition date for two potential earn-out provisions totaling up to $5.0 million based on certain stock performance targets. The first and second earn-out provisions occur if the ten-day volume-weighted average share price equals or exceeds $2 per share and $3 per share, respectively, before May 18, 2025. See Note 9, “Fair Value Measurements,” for additional information on the current estimated fair value of the contingent consideration.

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


Tradenames and trademarks	$	1,100
Technology and know-how	5,000
Customer lists	6,800
Inventories	7,100
Cash	604
Net working capital, net of cash and inventories	(1,063)
Fixed assets	426
Long-term debt assumed and other assets (liabilities)	(893)
Goodwill	17,522
Net assets acquired	$	36,596

Note 4 — 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 days for 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). Product sales accounted for over 90% of total revenue for the three and nine months ended September 30, 2021 and 2020.

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


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Revenue:
Products	$	9,494	$	12,076	$	29,017	$	39,053

Services	685		663		2,097		1,982
	$	10,179	$	12,739	$	31,114	$	41,035

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. Service revenue is recognized on an over time basis for CT as services are performed as the customer is simultaneously benefiting as the Company performs. For DA, services are recognized upon completion of commissioning and installation due to the short-term nature of the performance

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 three and nine months September 30, 2021 and 2020.

During the third quarter 2021, we entered into a bill-and-hold contract, where we invoice the customer for products even though we retain possession of the products until a point in time in the future when the products are shipped to the customer. In these contracts, the primary performance obligation is satisfied at a point in time when the product is segregated from our general inventory, it is ready for shipment to customer, and we do not have the ability to use the product or direct it to another customer. Additionally, we have a secondary performance obligation related to custodial costs, including storage and freight, which is satisfied over time once the product has been delivered to the customer. During the three and nine months ended September 30, 2021, we recognized $1.3 million of revenue related to a bill-and-hold arrangement with a related party.

Contract Balances

Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract liabilities associated with incomplete performance obligations are not material.

Note 5 — Inventories

Inventories are as follows (in thousands):


	September 30, 2021		December 31, 2020
Raw materials	$	6,025	$	7,190

Finished goods	13,451		15,705
Inventories	19,476		22,895
Less reserve for excess and obsolete inventory	(10,658)		(11,058)
Inventories, net	$	8,818	$	11,837

The provision recorded in the three and nine months ended September 30, 2021 were $0.1 million for the CT segment and nil for the DA segment and $0.5 million for the CT segment and $0.2 million of the DA segment, respectively. The provision recorded in the three and nine months ended September 30, 2020 were $5.9 million for the CT segment and $3.9 million for the DA segment and $2.0 million for the CT segment and $3.9 million for the DA segment, respectively. The decrease in excess and obsolescence during the nine months ended September 30, 2020 is attributable to the Company’s sales of excess and obsolescence inventory.

Note 6 — Property and Equipment

Property and equipment are as follows (in thousands):


	September 30, 2021		December 31, 2020
Land	$	1,986	$	2,415
Land improvements	861		867
Buildings and leasehold improvements	6,364		6,364
Machinery and equipment	7,753		7,760

Furniture and fixtures	649		649
Transportation equipment	1,043		1,190
Computer equipment and software	1,222		1,296
Property and equipment	19,878		20,541
Less accumulated depreciation	(12,109)		(11,454)
Property and equipment, net	$	7,769	$	9,087

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the first quarter of 2021, the Company classified its warehouse facility in Monahans, Texas, as held for sale based on the criteria outlined in Accounting Standard Codification (“ASC”) 360, Property, Plant and Equipment. During the first quarter, the Company committed to a plan to sell the asset in its present condition. The Company engaged with a commercial real estate agent and is actively looking for a buyer. As such, the Company reclassified the related property, plant and equipment of $0.5 million as held for sale in the current assets of the consolidated balance sheet, as the Company expects to complete the asset sale within one year.

Note 7 — Leases

In August 2021, the company entered into a five year triple net operating lease agreement to lease a warehouse facility in Monahans, TX. The tenant occupied the Company’s warehouse facility in Monahans, TX in September 2021. The company will recognize other rental income, including rent, taxes and insurance over the lease period.

In July 2021, the Company entered into a long-term rental agreement with Resolute Oil to leverage capabilities and facilities to drive growth in adjacent green chemistry markets. The agreement includes options to renew until 2036.

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

During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the Global Research and Innovation Center (“GRIC”) during the second quarter of 2020. In addition, the lease liability and corresponding right-of-use (“ROU”) assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC. The remeasurement resulted in adjustments to lease liabilities and ROU assets totaling of $6.2 million each as of March 31, 2020. During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office and moved all employees to the GRIC facility effective June 29, 2020.

In addition, during the three months ended March 31, 2020, the Company recorded an impairment of the ROU assets totaling $7.4 million. No impairment was recognized for the three and nine months ended September 30, 2021.

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


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Operating lease expense	$	247	$	258	$	735	$	1,112
Finance lease expense:
Amortization of right-of-use assets	4		4		11		13
Interest on lease liabilities	2		5		9		14
Total finance lease expense	6		9		20		27
Short-term lease expense	15		57		44		145



Total lease expense	$	268	$	324	$	799	$	1,284

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	380	$	317	$	1,107	$	2,312
Operating cash flows from finance leases	10		5		62		13
Financing cash flows from finance leases	2		51		8		152

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


Years ending December 31,	Operating Leases		Finance Leases
2021 (excluding the nine months ended September 30, 2021)	$	285	$	14
2022	1,254		47
2023	1,318		39
2024	1,348		23
2025	1,375		—
Thereafter	6,870		—
Total lease payments	$	12,450	$	123
Less: Interest	(3,976)		(11)
Present value of lease liabilities	$	8,474	$	112

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


	September 30, 2021			December 31, 2020
Operating Leases
Operating lease right-of-use assets	$	2,099		$	2,320

Current portion of operating lease liabilities	$	586		$	636
Long-term operating lease liabilities	7,888			8,348
Total operating lease liabilities	$	8,474		$	8,984

Finance Leases
Property and equipment	$	147		$	147
Accumulated depreciation	(33)			(26)
Property and equipment, net	$	114		$	121

Current portion of finance lease liabilities	$	48		$	60
Long-term finance lease liabilities	64			96
Total finance lease liabilities	$	112		$	156

Weighted Average Remaining Lease Term
Operating leases	9.1 years			9.9 years
Finance leases	2.9 years			3.1 years

Weighted Average Discount Rate
Operating leases	8.9		%	8.9		%
Finance leases	8.5		%	9.0		%

Note 8 — Debt

In April 2020, the Company received a $4.8 million loan under the PPP, which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 in April 2020. The PPP loans have a fixed interest rate of 1% and have a two-year term, maturing in 2022. No payments of principal or interest were required during the year ended December 31, 2020, or the three and nine months ended September 30, 2021.

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

reductions and compensation limits and provided that at least 60% of the eligible costs incurred are used for payroll. Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company. This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. During the second quarter of 2021, the Company applied for forgiveness on the PPP loans. The receipt of these funds, and the forgiveness of the loans attendant to these funds, is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our past and future adherence to the forgiveness criteria. The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.

In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest was fully forgiven. Accordingly, during the second quarter, the Company recorded $0.9 million in other income on the consolidated statement of operations. The Company has submitted to the SBA for partial forgiveness on the Flotek PPP loan but as of the date of this filing, no conclusion from the SBA have been reached.

In October 2021, the Company received notice that a request to extend the Flotek PPP loan maturity date from April 15, 2022 to April 15, 2025 was confirmed. Prior to the extension approval, the $4.8 million Flotek PPP loan balance was classified as a current liability. The maturity date extension amendment occurred before the third quarter 2021 balance sheet was issued, therefore, $3.5 million was reclassified to long-term debt, reducing the current portion of long-term debt from $4.8 million to $1.3 million as of September 30, 2021.

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


	September 30, 2021		December 31, 2020
Flotek paycheck protection plan loan	$	4,788	$	4,788
JP3 paycheck protection plan loan	—		877
Total	4,788		5,665

Less current maturities	(1,336)		(4,048)

Total long-term debt, net of current portion	$	3,452	$	1,617

Note 9 — Fair Value Measurements

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.

•Level 1 — Quoted prices in active markets for identical assets or liabilities;

•Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.

Fair Value of Other Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these accounts. The PPP loan for Flotek approximates fair value as of September 30, 2021. Subsequent to the third quarter balance sheet date, the Company received notice that a request to extend the Flotek PPP loan maturity date from April 15, 2022 to April 15, 2025 was confirmed. Additionally, upon receipt of the SBA’s final decision on the Company’s reimbursement request to forgive the FTK PPP loan, any remaining balances not forgiven by the SBA will be measured on a recurring basis.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liabilities Measured at Fair Value on a Recurring Basis

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


							Balance at September 30,								Balance at December 31,
	Level 1		Level 2		Level 3		2021		Level 1		Level 2		Level 3		2020
Contingent consideration	$	—	$	—	$	715	$	715	$	—	$	—	$	1,416	$	1,416

On September 30, 2021, and December 31, 2020, the estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, was recorded as a contingent liability. The estimated fair value of the earn-out provision at the end of each period was valued using the Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility. There were no transfers in or out of either Level 1, Level 2, or Level 3 fair value measurements during the periods ending September 30, 2021 and December 31, 2020.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets, including property and equipment, goodwill and other intangible assets, are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. During the three months ended March 31, 2020, the Company recorded an impairment of $57.5 million for impairment of long-lived assets. Management inputs used in fair value measurements were classified as Level 3. During the three months ended September 30, 2020, the Company recorded additional impairment expenses of $12.5 million. Total impairment expenses recorded during the nine months ended September 30, 2020 was $70.0 million of long-lived and intangible assets.

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

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

In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During 2020, the first stock performance target for the contingent consideration was achieved and settled. The Company estimated the fair value of the remaining stock performance earn-out provision at September 30, 2021, and decreased the estimated fair value of the contingent liability to $0.7 million. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in operating expenses.

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


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Balance - beginning of period	$	1,115	$	1,200	$	1,416	$	—
Additions / issuances	—		—		—		1,200
Change in fair value	(400)		3,200		(701)		3,200

Transfer out of Level 3	—		(2,500)		—		(2,500)
Balance - end of period	$	715	$	1,900	$	715	$	1,900

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 — Income Taxes

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
U.S. federal statutory tax rate	21.0	%	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	—		0.2		(0.2)		0.1
Non-U.S. income taxed at different rates	0.8		(0.2)		0.3		—


Increase (reduction) in tax benefit related to stock-based awards	(0.3)		0.1		1.2		—
Non-deductible expenses	5.8		(0.1)		1.1		—
Research and development credit	—		—		—		0.1
Increase in valuation allowance	(27.3)		(20.8)		(23.6)		(17.9)
Effect of tax rate differences of NOL carryback	—		—		—		1.7


Effective income tax rate	—	%	0.2	%	(0.2)	%	5.0	%

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

Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. GAAP provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance, the Company considers all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income.

Note 11 — Commitments and Contingencies

Litigation

Terpene Supply Agreement

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

On March 26, 2021, the Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and other parties in state court in Harris County, Texas. The lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.

Subsequent to the lawsuit described above, on April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters. On October 29, 2021, the Company and Flotek Chemistry reached agreement with all parties resolving all claims between the parties.(“the ADM Settlement”) On or before January 3, 2022, Flotek will pay to ADM a one-time payment of $1.75 million and the terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5 million pounds of terpene through 2023.

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company is subject to other routine litigation and other claims that arise in the normal course of business. Except as disclosed above, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

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. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.

Note 12 — Stockholders’ Equity

During the first quarter 2021, the Company identified 0.6 million shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the December 31, 2020 consolidated financial statements or basic and diluted earnings per share.

Note 13 — 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. The three months ended September 30, 2021 diluted earnings per common share included 851,702 common share equivalents.

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

Note 14 — Supplemental Cash Flow Information

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


	Nine months ended September 30,
	2021		2020







Supplemental cash payment information:
Interest paid	$	17	$	20
Income taxes (received) paid	(351)		5,927

Supplemental non-cash activities:
Employee retention credit	$	2,851	$	—


Supplemental non-cash investing and financing activities:
Equity issued - acquisition of JP3	$	—	$	8,538

Under the provisions of the CARES Act, the Company is eligible for a refundable employee retention credit subject to certain criteria. In connection with the CARES Act, the Company adopted a policy to recognize the employee retention credit when earned and to offset the credit against the related payroll tax liability. Accordingly, the Company recorded a $1.9 million employee retention credit during the three months ended June 30, 2021 in other current assets with the offset recorded in accrued liabilities. In the second quarter of 2021, the Company used $0.8 million of the total employee retention credit leaving a $1.1 million credit to be applied against payroll tax liabilities. In the third quarter of 2021, the Company used $0.9 million of the total employee retention credit leaving a $1.9 million credit to be applied against payroll tax liabilities.

Note 15 — 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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2014 and proposed an adjustment. Mr. 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 to the Company, and giving the Company the right to withhold payments equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies from any amounts owed under the employment agreement. 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 September 30, 2021 and December 31, 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.

Mr. Ted D. Brown has been a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“Customer”), a private oil and gas exploration and production company formed in 2016. The Company entered into a $1.3 million bill-and-hold agreement with the Customer during the third quarter of 2021. The agreement between the Company and Customer is a related party transaction. The Company’s board was informed prior to the transaction and subsequently ratified the transaction as being in the best interests of the Company. For the three and nine months ended September 30, 2021, the Company’s revenues for chemical sales to Confluence Resources LP was $1.3 million. As of September 30, 2021, the customer owes $1.3 million to the Company and transaction is recorded in account receivables on the consolidated balance sheet.

Note 16 — Business Segment, Geographic and Major Customer Information

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: CT and DA.

Chemistry Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals. The Company designs, develops, manufactures, packages, distributes, delivers and markets optimized fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields, as well as to reduce health and environmental risk by utilization of greener chemicals. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.

In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and consumer use. The Company produces Food and Drug Administration and Environmental Protection Agency compliant products its ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets.

Data Analytics. The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The real-time information on hydrocarbon composition and properties helps customers generate additional profits by enhancing their operations including crude/condensates stabilization, blending, optimization of transmix, increasing efficiencies of gas processing plants, ensuring product quality while enabling automation of fluid handling and reducing losses through giveaways (i.e., that portion of a product of higher value than what is specified). The customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.

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



For the three months ended September 30,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2021
Revenue from external customers	$	8,044	$	803	$	—	$	8,847
Revenue from related party	1,332		—		—		1,332
Income (loss) from operations, including impairment	4,399		(1,071)		(2,696)		632
Depreciation and amortization	215		17		1		233
Additions to long-lived assets	—		—		—		—

2020
Revenue from external customers	$	12,083	$	656	$	—	$	12,739
Revenue from related party	—		—		—		—
Loss from operations, including impairment	(8,880)		(34,035)		(2,679)		(45,594)
Depreciation and amortization	244		274		—		518
Additions to long-lived assets	906		—		—		906

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


For the nine months ended September 30,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2021
Revenue from external customers	$	26,033	$	3,749	$	—	$	29,782
Revenue from related party	1,332		—		—		1,332
Loss from operations, including impairment	(3,009)		(2,138)		(9,926)		$	(15,073)
Depreciation and amortization	739		52		2		793
Additions to long-lived assets	31		—		—		31

2020
Revenue from external customers	$	39,462	$	1,573	$	—	$	41,035
Revenue from related party	—		—		—		—
Loss from operations, including impairment	(75,137)		(35,185)		(15,589)		(125,911)
Depreciation and amortization	2,300		405		472		3,177
Additions to long-lived assets	906		—		—		906

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

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


	September 30, 2021		December 31, 2020
Chemistry Technologies	$	47,625	$	43,346
Data Analytics	15,960		13,201
Corporate and Other	969		29,663
Total assets	$	64,554	$	86,210

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Geographic Information

Revenue by country is based on the location where services are provided and products are used. No individual countries other than the U.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
U.S.	$	8,094	$	9,928	$	24,624	$	32,639
UAE	1,319		1,473		3,741		3,781
Other countries	766		1,338		2,749		4,615
Total revenue	$	10,179	$	12,739	$	31,114	$	41,035

Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.

Major Customers*

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


For the three months ended September 30,	Chemistry Technologies		% of Total Revenue
2021
Customer D	$	3,041	29.9	%
Customer E - Related party	1,332		13.1	%


2020
Customer D	$	4,632	36.2	%
Customer C	2,088		16.4	%


For the nine months ended September 30,	Chemistry Technologies		% of Total Revenue
2021
Customer D	$	7,701	24.8	%
Customer C	4,067		13.1	%


2020
Customer C	$	10,412	25.4	%
Customer D	8,117		19.8	%
Customer A	3,631		8.9	%

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

The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the surface cleaner and disinfectant industry. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. Customers within the surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment. The concentration in the oil and gas industry increases credit and business risk. See Note 16, “Business Segment, Geographic and Major Customer Information,” for concentration of segment revenue from major customers.

Note 17 — Subsequent Events

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The ADM settlement agreement and the Flotek PPP loan maturity date extension approval were considered to be recognizable subsequent events under U.S. GAAP and required adjustment to our third quarter 2021 consolidated financial statements. See Note 11 - Commitments and Contingencies and Note 8 - Debt for additional information.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

This Management’s Discussion and Analysis of Financial Condition, Results of Operations (“MD&A”) and risks associated with the outbreak of COVID-19 should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto of this Quarterly Report, as well as the Annual Report. Phrases such as “Company,” “we,” “our,” and “us” refer to Flotek Industries, Inc. and its subsidiaries.

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 technology company, Flotek helps customers across industrial, commercial, and consumer markets improve their ESG performance. The Company serves specialty chemistry needs that span from downstream, midstream and upstream, both domestic and international, energy markets to applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.

The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that help their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and supplying professional chemistries that clean surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.

The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. These real-time data and analytics prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, thereby improving ESG performance. During the second quarter of 2020, the Company acquired 100% ownership of JP3 in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.

Company Overview

The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research & Innovation (“R&I”) advanced laboratory capabilities.

Chemistry Technologies

The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.

Customers of the CT segment include those of energy related markets as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.

In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and solvents for both commercial and personal use. The Company produces FDA and EPA compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today, the Company has a portfolio of specialty green chemical products designed to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets. The Company has made a commitment of being in this market for the long-term.

Data Analytics

The DA segment provides game-changing technology that delivers real-time information and insights to our customers on their refined fuels, NGLs, natural gas, crude oil, and condensates. This valuable information includes compositions and physical properties, delivered simultaneously and in real time, transforming customers’ business and helping them optimize their operations while reducing their carbon footprint and emissions. Real-time data is acquired using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with

advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

Customers who utilize this highly differentiated technology have obtained significant benefits including generating additional profits by enhancing their operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. Many customers have enjoyed the added benefits of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We began business development activities in the international markets in late third quarter 2020. We have developed a new line of Verax analyzers for deployment internationally which was recently certified for compliance in hazardous locations and harsh weather conditions.

Research & Innovation

R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, FDA and EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.

Outlook

Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry and weather volatility. We have based our outlook on the market and weather conditions we perceive today. Changes often occur.

Energy

We expect North American and International onshore activity to continue to improve from third quarter 2021 levels for the next twelve months provided that commodity prices remain at or above current levels. The strongest potential growth in the fourth quarter and throughout 2022 likely comes from private, rather than publicly traded exploration and production companies. Private exploration and production companies operate the majority of U.S. land rigs and react quickly to changing commodity prices. In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead. Additionally, we have reestablished our ability to sell product through other service companies and believe sales through indirect channels should accelerate in the fourth quarter.

Industrial

In 2020, the Company launched a diversified line of EPA and FDA compliant products that target industrial, agricultural and consumer markets with particular focus on customers that are seeking to accelerate their focus on sustainability and minimized impact on the environment. The company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers, solvents and a multitude of proprietary chemistries for industrial, commercial and consumer use. The Company believes these adjacent markets provide an opportunity to diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand. We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states. We will be training and educating their representatives during the next two quarters. The leverage sales effort is anticipated to accelerate sales in the second half of 2022.

Digital Analytics

The use of data and digital analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. The DA segment has historically focused sales solely on North American markets. Our recent press release dated October 27, announced the release of a new generation of international certified online analyzers. The new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments. The technology delivers real-time insight on valuable composition and physical properties data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We anticipate international sales to increase over the next twelve months because of the newly certified equipment. To further enhance the value of the sensors, we announced the release of a new patent pending application to enhance the value of our line of near infrared real-time analyzers. AIDA (Automated Interface Detection

Algorithm) provides real-time detection of interfaces in a liquids pipeline. AIDA can be utilized immediately on our installed analyzers without the need for additional sampling or chemometric modeling. The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces within 60 seconds. This allows operators to cut batches quickly and accurately, reduce the inadvertent mixing of two separate products (known as “transmix”) and minimize off-spec product that requires downgrades. We anticipate additional sales resulting from the detection capabilities of our new patent pending application.

ESG

ESG focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s products and services offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil. Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.

The Company believes the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of our greener practices and chemistries. We believe the performance driven ESG focus of the Company assists in reducing environmental liabilities and improving returns for our customers.

Supply Chain

During 2020 and 2021 challenging supply chain issues emerged that “will continue into 2022” according to Secretary of Transportation Peter Buttigieg. The anticipated activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:

▪Rising Freight Costs

▪Delays due to Port Congestion

▪Labor Shortages

▪Demand Forecasting

All bidding will require the risk of shipping costs and delays be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could also result in supply disruption.

Weather

While Hurricane Ida occurred during the third quarter, on October 31, 2021, there were no tropical cyclones in the Atlantic. Water temperatures need to exceed 79 degrees Fahrenheit or either hurricanes will not form or will weaken rapidly. Water temperature two meters below the surface at Station 42002, 207 nautical miles east of Brownsville, Texas was 81.3 degrees Fahrenheit on October 30, 2021, and temperatures decreased moving to the north. Consequently, disruption of business due to a severe cyclone in fourth quarter is unlikely. The National Weather Service temperature outlook for November-December-January 2021-2022 indicates “elevated odds for above-normal seasonal mean temperatures along the southern half of the U.S.”

We currently do not anticipate inclement weather in the Middle East or the Onshore U.S. to impact fourth quarter results.

COVID-19

The impacts of COVID-19 continue to affect the U.S. and global economy. The protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge. The resumption of travel while often onerous has begun to accelerate and in person customer visits that began in earnest during the third quarter will continue to accelerate.

Consolidated Results of Operations (in thousands):

Consolidated Results of Operations: Three and Nine Months Ended September 30, 2021, Compared to the Three and Nine Months Ended September 30, 2020


	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
Revenue
Revenue from external customers	$	8,847		$	12,739		$	29,782		$	41,035
Revenue from related party	1,332			—			1,332			—
Total revenues	10,179			12,739			31,114			41,035
Operating expenses (excluding depreciation and amortization)	5,418			29,466			31,330			63,939
Operating expenses %	53.2		%	231.3		%	100.7		%	155.8		%
Corporate general and administrative costs	2,696			2,679			9,925			12,568
Corporate general and administrative %	26.5		%	21.0		%	31.9		%	30.6		%


Depreciation and amortization	233			518			793			3,177
Research and development	1,186			1,480			4,194			5,673
Loss (Gain) on disposal of long-lived assets	14			(37)			(55)			(92)
Impairment of goodwill	—			11,706			—			11,706
Impairment of fixed assets and long-lived assets	—			12,521			—			69,975

Income (loss) from operations	632			(45,594)			(15,073)			(125,911)
Operating margin %	6.2		%	(357.9)		%	(48.4)		%	(306.8)		%
PPP loan forgiveness	—			—			881			—
Gain on lease termination	—			—			—			576




Interest and other (expense) income, net	(120)			272			(115)			282
Income (loss) before income taxes	512			(45,322)			(14,307)			(125,053)
Income tax (expense) benefit	(3)			81			(30)			6,282
Net income (loss)	$	509		$	(45,241)		$	(14,337)		$	(118,771)


Net loss % for continuing operations	5.0		%	(355.1)		%	(46.1)		%	(289.4)		%

Consolidated revenue for the three months ended September 30, 2021, decreased $2.6 million, or 20.1%, versus the same period of 2020. The decrease was primarily due to the loss of two major energy customers that were purchased by non-customers during the second quarter of 2021, and nominal decreases in international sales, offset by certain CT customer revenue increases during the current quarter that did not have prior year comparable activities. Consolidated revenue for the nine months ended, September 30, 2021, decreased $9.9 million, or 24.2%, versus the same period of 2020. Revenue during the nine months ended September 31, 2021 reflected a loss of revenue in the CT segment associated with two major customers changing ownership during 2021, losses related to the normalization and decline of market demand for sanitizers and non-recurring citrus terpenes sales. Current year revenue decreases were partially offset by the incremental post acquisition JP3 revenues generated in the second and third quarter of 2021.

Consolidated operating expenses (excluding depreciation and amortization) for the three months ended September 30, 2021, decreased $24.0 million, or 81.6%, versus the same period of 2020. The decrease was primarily due to an unfavorable product mix in the third quarter of 2021 versus third quarter of 2020 and the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event. Consolidated operating expenses (excluding depreciation and amortization) for the nine months ended September 30, 2021 decreased $32.6 million, or 51.0% versus the same period of 2020. The year to date decrease in operating expenses was primarily due to reduced cost of sales due to lower sales during 2021 and the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event. The Company’s 2021 operating expenses benefited from the decision to reduce operating expenses, including reducing the Company’s facility footprint and improving operational efficiencies. These reduced costs were partially offset by new operating expenses for the DA segment acquired in May of 2020.

Corporate general and administrative (“CG&A”) expenses are expenses not directly attributable to products sold or services provided. CG&A costs for the three months ended September 30, 2021 was consistent with the same comparable period last

year. CG&A for the nine months ended September 30, 2021, CG&A $2.6 million, or 21.0% versus the same period of 2020. CG&A costs declined as a result of lower compensation costs following a reduction in force, a one-time employee retention credit related to the CARES Act and a reduction in professional fees.

Depreciation and amortization expense decreased $0.3 million, or 55.0% and $2.4 million, or 75.0% for the three and nine months ended September 30, 2021, versus the same period of 2020, primarily due to impairments of fixed and long-lived assets recorded in the first quarter of 2020.

Research and development costs decreased $0.3 million, or 19.9% and $1.5 million, or 26.1% for the three and nine months ended September 30, 2021, versus the same period of 2020 due to lower personnel costs as a result of our reduction in workforce during the first quarter 2020.

Income from operations increased $46.2 million, or 101.4%, for the three months ended September 30, 2021, while the year to date loss from operations improved by $110.8 million, or 88.0% for the nine months ended September 30, 2021, versus the same periods in 2020. The income from operations improvement is primarily a result of no impairment during 2021 compared to the $24.2 million and $81.7 million in the three and nine months ended September 30, 2020. Additionally, the decrease in loss from operations is attributable to the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event, the forgiveness of the JP3 PPP loan for $0.8 million and a one-time employee retention credit to the CARES Act of $2.9 million recorded during 2021.

The Company’s income tax expense for the second and third quarter of 2021 and 2020 was minimal. The Company recorded an income tax benefit of $6.2 million for the first quarter of 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act initially recorded in the first quarter 2020.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations: Three and Nine Months Ended September 30, 2021, Compared to the Three and Nine Months Ended September 30, 2020


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Revenue	$	9,376	$	12,083	$	27,365	$	39,462


Income (loss) from operations	4,399		(8,880)		(3,009)		(75,137)

CT revenue for the three and nine months ended September 30, 2021, decreased $2.7 million, or 22.4% and $12.1 million, or 30.7%, respectively, versus the same periods of 2020. The decrease in revenue during the third quarter of 2021 compared to the third quarter of 2020 was driven by impacts from both the supply and the demand side. The COVID-19 pandemic negatively impacted economic activity and reduced global demand for oil and gas during 2020, a key sector of our customer base. The Company’s domestic and international revenue for the nine months ended September 30, 2021 decreased as demand from the company’s major customers and smaller operators has not returned to the pre-pandemic levels. In addition, revenue from two major customers was lost temporarily as a result of market consolidation in the Permian basin. CT also granted price concessions in our effort to maintain and obtain market share.

Income (loss) from operations for the CT segment for the three and nine months ended September 30, 2021, decreased $13.3 million, or 149.5%, and decreased $72.1 million, or 96.0%, respectively versus the same period of 2020. The decrease in loss from operations is due to lower revenue and significantly lower expenses, primarily the result of no impairments in 2021 versus impairment charges of fixed and long-lived assets of $70.0 million in the same period of 2020. Secondly, expenses decreased versus the first quarter of 2020 including a $2.3 million terpene purchase commitment loss with no comparable activity in 2021. Certain cost reduction initiatives to right size our cost structure contributed to the current decrease in operating losses by reducing personnel, office costs, equipment and facilities costs as the Company continues to consolidate its physical facilities and equipment rentals to align with activity.

Data Analytics Results of Operations: Three and Nine Months ended September 30, 2021


	Three months ended September 30,				Nine months ended September 30,		Period May 18- September 30,
	2021		2020		2021		2020
Revenue (1)	$	803	$	656	$	3,749	$	1,573


Loss from operations (1)	(1,071)		(34,035)		(2,138)		(35,190)

(1) On May 18, 2020, the Company purchased JP3 and formed the DA segment. The year to date JP3 revenues represents the post-acquisition partial period revenues between May 18, 2020 to September 30, 2021. Segment revenue for the third quarter of 2021 was $0.8 million, which remained flat from the same quarter in 2020. Also note that the DA segment losses include the impact related to the estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction.

Critical Accounting Policies and Estimates

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments, estimates, and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Part II, Item 8 — Financial Statements and Supplementary Data, Note 2 of “Notes to Consolidated Financial Statements” and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates” of the Company’s Annual Report, and the “Notes to Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report describe the significant accounting policies and critical accounting estimates used to prepare the consolidated financial statements. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most subjective judgments. The Company regularly reviews and challenges judgments, assumptions and estimates related to critical accounting policies, including goodwill, other intangibles and valuation of fixed long-lived assets. There have been no significant changes in the Company’s critical accounting policies and estimates during the nine months ended September 30, 2021.

Recent Accounting Pronouncements

Recent accounting pronouncements which may impact the Company are described in Note 2, “Recent Accounting Pronouncements,” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.

Capital Resources and Liquidity

Overview

The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and fund working capital requirements. During the first nine months of 2021, the Company funded capital requirements primarily with cash on hand.

As of September 30, 2021, the Company had available cash and cash equivalents of $20.5 million, as compared to $38.7 million at December 31, 2020. The Company recorded an operating loss for the nine months ended September 30, 2021 and recorded $18.3 million of net cash used for operating activities and $0.5 million of net cash used for financing activities. Cash used in investing activities was minimal.

Liquidity

The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows 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 operations in the following year. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as they become due, uncertainty surrounding the long term stability, strength and duration of the recovery of oil and gas markets, or reduced spending by our customers could, have a negative impact on our liquidity.

Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:

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

•Seeking PPP loan forgiveness from the Small Business Administration;

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

•Sale of excess inventory and/or raw materials;

•Operating lease transaction of facilities;

•Sale of non-core real estate properties;

•Sale-leaseback transactions of facilities;

•Sub-leasing certain facilities;

•Renegotiating current lease facility terms and conditions;

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

•Reducing professional advisory fees and headcount.

However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms. For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in the Company’s Annual Report.

The Company expects capital spending to be less than $1.0 million in 2021.

Cash Flows

Consolidated cash flows by type of activity are noted below (in thousands):


	Nine months ended September 30,
	2021		2020
Net cash used in operating activities	$	(18,282)	$	(39,095)
Net cash provided by (used in) investing activities	43		(17,135)
Net cash (used in) provided by financing activities	(451)		4,929


Effect of changes in exchange rates on cash and cash equivalents	(67)		(80)
Net change in cash, cash equivalents and restricted cash	$	(18,757)	$	(51,381)

Operating Activities

Net cash used in operating activities was $18.3 million and $39.1 million during the nine months ended September 30, 2021 and 2020, respectively. Consolidated net loss for the nine months ended September 30, 2021 and 2020, totaled $14.3 million and $118.8 million, respectively.

During the nine months ended September 30, 2021, non-cash adjustments to net income totaled $4.9 million as compared to $100.7 million for the same period of 2020.

•For the nine months ended September 30,2021, non-cash adjustments included $7.6 million benefit related to the ADM settlement, $0.8 million for depreciation, which was lower than the nine months ended September 30, 2020 due to asset impairments taken in 2020, stock based compensation of $2.7 million, JP3 PPP loan forgiveness of $0.9 million and a $0.7 million charge related to the fair value of contingent consideration.

•For the nine months ended September 30, 2020, contributory non-cash adjustments consisted primarily of $70.0 million of impairment charges and $3.2 million for depreciation and amortization.

During the nine months ended September 30, 2021, changes in working capital provided $0.9 million of cash as compared to using $21.0 million for the same period of 2020.

•For the nine months ended September 30, 2021, the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable and inventory of $2.4 million, offset by an increase of current assets of $2.8 million.

•For the nine months ended September 30, 2020, working capital used $21.0 million in cash, primarily resulting from a decrease in accrued liabilities and accounts payable of $29.6 million, which included two one-time payments made in 2020: one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final

post-closing working capital adjustment related to the 2019 sale of the CICT segment. Accounts receivable, inventories and other current assets decreased $8.7 million.

Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2021 was not material. Net cash used in investing activities was $17.1 million for the nine months ended September 30, 2020. Cash used in investing activities included $26.3 million from purchase of JP3 offset by cash provided of $9.8 million due to the release of escrow amounts from the sales of Florida Chemical Company.

Financing Activities

Net cash used in financing activities was $0.5 million for the nine months ended September 30, 2021, primarily for purchases of common stock related to tax withholding requirements. Net cash provided by financing activities was $4.9 million for the nine months ended September 30, 2020, primarily from the proceeds received from the PPP.

Off-Balance Sheet Arrangements

There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2021, the Company was not involved in any unconsolidated SPEs.

The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors other than the long term terpene agreement discussed in Note 13 in Part I, Item I – Financial Statements of this Quarterly Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates. There have been no material changes to the quantitative or qualitative disclosures about market risk set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of the Company’s Annual Report.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.

The Company identified deficiencies in its internal control over financial reporting that represented material weaknesses as of December 31, 2020. Specifically, the Company’s management determined that the Company did not, as of December 31, 2020, design and maintain effective internal controls over financial reporting. The material weaknesses relate to: (1) ineffective design and operation of controls over nonrecurring transactions, including recognition 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 assessment of going concern.

The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in this Quarterly Report present fairly, in all material respects, the consolidated financial position, results of operations, comprehensive loss, stockholders’ equity, and cash flows 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.

The Company’s management, including its principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined by Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of September 30, 2021, and has concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2021, due to the material weaknesses in internal control over financial reporting described above

Remediation Plan and Status

The Company has implemented remediations plan to address the material weaknesses identified at December 31, 2020. Key elements of this ongoing plan include:

•Implemented monitoring controls over the review and validation of both tangible and intangible assets;

•Expanded controls over impairments of goodwill and long-lived assets;

•Enhanced specificity in the design and implementation of controls around nonrecurring, complex accounting activities, with the assistance of technical subject-matter experts;

•Implemented controls for forecasting and budgeting, to include additional process documentation and precision;

•Expanded monthly management review controls; and

•Enhanced existing control procedures around the quarterly going concern analysis process.

In 2021, the Company made a strategic decision to bring internal audit in-house and hired a director of internal audit to manage internal controls and the remediation plan. Through a structured process of testing and monitoring elements of the remediation plan, we expect the identified material weaknesses to be fully remediated by the end of 2021.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s system of internal control over financial reporting (identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) under the Exchange Act) during the three months ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

On March 26, 2021, the Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the

Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and other parties in state court in Harris County, Texas. The lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.

Subsequent to the lawsuit described above, on April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters On October 29, 2021, the Company and Flotek Chemistry reached agreement with all parties resolving all claims between the parties. On or before January 3, 2022, Flotek will pay to ADM a one-time payment of $1.75 million and the terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5 million pounds of terpene through 2023. See Note 17 subsequent events for additional information.

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A of the Company’s Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock. Repurchases of the Company’s equity securities during the three months ended September 30, 2021, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share



July 1, 2021 to July 31, 2021	—	—
August 1, 2021 to August 31, 2021	40,385	$1.63
September 1, 2021 to September 30, 2021	24,279	$1.30
Total	64,664

(1) The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting of restricted shares and exercise of non-qualified stock options and (b) to satisfy payments required for common stock upon the exercise of stock options.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit Number		Description of Exhibit
2.1		Share Purchase Agreement, dated as of January 10, 2019, by and between the Company and ADM (portions of this exhibit have been omitted pursuant to a confidential treatment request, which has been granted) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on March 4, 2019).1
2.2		Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between the Company, JP3 Measurement, LLC, the Sellers party thereto, and John A. Cardwell, as Seller Representative) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 19, 2020).1
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2007).
3.2		Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009).
3.3		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Flotek Industries, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 7, 2020).
3.4		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).
10.1		Employment Agreement dated October 15, 2021, between the Company and Michael Borton (incorporate d by reference to Exhibit 10.1 to the Company’s Form 8-K on October 20, 2021.)
10.2		Employment Agreement dated October 15, 2021, between the Company and TengBeng Koid (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K on October 20, 2021.)


31.1	*	Rule 13a-14(a) Certification of Principal Executive Officer.
31.2	*	Rule 13a-14(a) Certification of Principal Financial Officer.

32.1	**	Section 1350 Certification of Principal Executive Officer.
32.2	**	Section 1350 Certification of Principal Financial Officer.

101	*	* The following financial information from Flotek Industries, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Unaudited Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020, (ii) the Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021 and 2020, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2021 and 2020, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (v) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2021 and 2020, and (vi) Notes to Condensed Consolidated Financial Statements.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*		Filed herewith.
**		This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
1		Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


FLOTEK INDUSTRIES, INC.

By:						/s/ JOHN W. GIBSON, JR.
						John W. Gibson, Jr.
						President, Chief Executive Officer and
						Chairman of the Board

Date:						November 9, 2021


FLOTEK INDUSTRIES, INC.

By:						/s/ MICHAEL E. BORTON
						Michael E. Borton
						Chief Financial Officer

Date:						November 9, 2021