FLOTEK INDUSTRIES INC/CN/ [FTK] Filings

10-Q 1 ftk-20230630.htm 10-Q ftk-20230630


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 June 30, 2023
or
☐			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 Exchange 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 ☒

At August 8, 2023, there were 152,401,483 outstanding shares of the registrant’s 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 June 30, 2023 and December 31, 2022	4
	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022	5
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022	7
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022	8
	Notes to Unaudited Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41

Item 4.	Controls and Procedures	43

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	44

Item 1A	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Mine Safety Disclosures	45

Item 5.	Other Information	45

Item 6.	Exhibits	46


SIGNATURES		47

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “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, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995. 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, future operating results and liquidity. 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,” “target,” “think,” “likely,” “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 may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or revenue thereunder. 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, 2022 (“Annual Report” or “2022 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 23, 2023, 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.

In certain places in this Quarterly Report on Form 10-Q, we may refer to statements provided by third parties that purport to describe trends or developments in supply chain or energy exploration and production and activity and we specifically disclaim any responsibility for the accuracy and completeness of such information and have undertaken no steps to update or independently verify such information.

The following information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and related disclosures and our 2022 Annual Report.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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


	June 30, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	8,841	$	12,290
Restricted cash	101		100
Accounts receivable, net of allowance for credit losses of $682 and $623 at June 30, 2023 and December 31, 2022, respectively	16,855		19,136
Accounts receivable, related party, net of allowance for credit losses of $0 at June 30, 2023 and December 31, 2022, respectively	23,033		22,683
Inventories, net	18,397		15,720


Other current assets	4,051		4,045
Current contract assets	7,716		7,113

Total current assets	78,994		81,087
Long-term contract assets	69,583		72,576
Property and equipment, net	4,753		4,826
Operating lease right-of-use assets	4,279		5,900

Deferred tax assets, net	404		404
Other long-term assets	17		17
TOTAL ASSETS	$	158,030	$	164,810

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	44,949	$	33,375
Accrued liabilities	5,178		8,984
Income taxes payable	12		97
Interest payable	—		130
Current portion of operating lease liabilities	2,902		3,328
Current portion of finance lease liabilities	37		36
Current portion of long-term debt	179		2,052
Convertible notes payable	—		19,799
Contract Consideration Convertible Notes Payable	—		83,570
Total current liabilities	53,257		151,371
Deferred revenue, long-term	35		44
Long-term operating lease liabilities	6,584		8,044
Long-term finance lease liabilities	3		19
Long-term debt	149		2,736
TOTAL LIABILITIES	60,028		162,214
Stockholders’ equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $0.0001 par value, 240,000,000 shares authorized; 158,220,075 shares issued and 151,541,446 shares outstanding at June 30, 2023 ; 83,915,918 shares issued and 77,788,391 shares outstanding at December 31, 2022	15		8
Additional paid-in capital	462,517		388,177
Accumulated other comprehensive income	147		181
Accumulated deficit	(330,197)		(351,519)
Treasury stock, at cost; 6,678,629 and 6,127,527 shares at June 30, 2023 and December 31, 2022, respectively	(34,480)		(34,251)
Total stockholders’ equity	98,002		2,596
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	158,030	$	164,810

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 June 30,				Six months ended June 30,
	2023		2022		2023		2022
Revenue:
Revenue from external customers	$	17,820	$	12,824	$	29,472	$	23,206
Revenue from related party	32,774		16,549		69,130		19,046
Total revenues	50,594		29,373		98,602		42,252
Cost of sales	46,690		31,678		92,817		45,036
Gross profit (loss)	3,904		(2,305)		5,785		(2,784)
Operating costs and expenses:
Selling, general, and administrative	8,351		6,821		14,803		11,707
Depreciation	174		182		349		377
Research and development	860		1,115		1,474		2,530
Severance costs	(2,279)		610		(56)		603
Gain on sale of property and equipment	—		(1,914)		—		(1,906)
Gain on lease termination	—		—		—		(584)
Gain in fair value of Contract Consideration Convertible Notes Payable	(3,874)		(17,158)		(29,969)		(13,266)
Total operating costs and expenses	3,232		(10,344)		(13,399)		(539)
Income (loss) from operations	672		8,039		19,184		(2,245)
Other income (expense):
Payment protection plan loan forgiveness	—		—		4,522		—
Interest expense	(705)		(1,597)		(2,377)		(2,265)
Other income (expense), net	19		(104)		9		120
Total other income (expense)	(686)		(1,701)		2,154		(2,145)
Income (loss) before income taxes	(14)		6,338		21,338		(4,390)
Income tax expense	(7)		(98)		(16)		(94)
Net income (loss)	$	(21)	$	6,240	$	21,322	$	(4,484)










Income (loss) per common share:
Basic	$	—	$	0.08	$	0.18	$	(0.06)
Diluted (see Note 14, “Earnings (Loss) Per Share”)	$	(0.02)	$	(0.05)	$	(0.04)	$	(0.12)










Weighted average common shares:
Weighted average common shares used in computing basic income (loss) per common share	143,433		74,861		121,244		73,476
Weighted average common shares used in computing diluted loss per common share	169,500		124,335		164,165		107,086

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

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Net income (loss)	$	(21)	$	6,240	$	21,322	$	(4,484)
Other comprehensive income (loss):
Foreign currency translation adjustment	(13)		87		(34)		95

Comprehensive income (loss)	$	(34)	$	6,327	$	21,288	$	(4,389)

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

FLOTEK INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands)


	Six months ended June 30,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	21,322	$	(4,484)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Change in fair value of contingent consideration	(324)		(134)
Change in fair value of Contract Consideration Convertible Notes Payable	(29,969)		(13,266)
Amortization of convertible note issuance cost	83		414
Paid-in-kind interest expense	2,284		1,819
Amortization of contract assets	2,390		737
Depreciation	349		377
Provision for credit losses, net of recoveries	63		87
Provision for excess and obsolete inventory	497		769
Gain on sale of property and equipment	—		(1,906)
Gain on lease termination	—		(584)
Lease expense	1,621		112
Stock compensation expense	(836)		1,591
Deferred income tax benefit	—		(5)
Paycheck protection plan loan forgiveness	(4,522)		—
Changes in current assets and liabilities:
Accounts receivable	2,218		(21,741)
Accounts receivable, related party	(350)		11,600
Inventories	(3,158)		(4,521)
Income taxes receivable	—		7
Other assets	(6)		(232)
Contract assets	—		(3,600)
Accounts payable	11,574		12,154
Accrued liabilities	(3,491)		(2,924)
Operating lease liabilities	(1,886)		(308)
Income taxes payable	(85)		99
Interest payable	(8)		24

Net cash used in operating activities	(2,234)		(23,915)
Cash flows from investing activities:
Capital expenditures	(292)		(5)
Proceeds from sale of assets	—		4,194




Net cash (used in) provided by investing activities	(292)		4,189
Cash flows from financing activities:
Payment for forfeited stock options	(617)		—
Payments on long term debt	(60)		—
Proceeds from issuance of convertible notes	—		21,150
Payment of issuance costs of convertible notes	—		(1,084)
Proceeds from issuance of warrants	—		19,500

Payments to tax authorities for shares withheld from employees	(229)		(138)
Proceeds from issuance of stock	33		24
Payments for finance leases	(15)		(21)

Net cash (used in) provided by financing activities	(888)		39,431




Effect of changes in exchange rates on cash and cash equivalents	(34)		95
Net change in cash and cash equivalents and restricted cash	(3,448)		19,800
Cash and cash equivalents at the beginning of period	12,290		11,534
Restricted cash at the beginning of period	100		1,790
Cash and cash equivalents and restricted cash at beginning of period	12,390		13,324
Cash and cash equivalents at end of period	8,841		33,084
Restricted cash at the end of period	101		40
Cash and cash equivalents and restricted cash at end of period	$	8,942	$	33,124

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

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and six months ended June 30, 2023 and 2022

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


Three months ended June 30, 2023
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, March 31, 2023	94,614	$	9	6,442	$	(34,451)	$	421,596	$	160	$	(330,176)	$	57,138
Net loss	—	—		—	—		—		—		(21)		(21)
Foreign currency translation adjustment	—	—		—	—		—		(13)		—		(13)

Stock issued under employee stock purchase plan	—	—		(22)	—		13		—		—		13




Restricted stock forfeited	—	—		214	—		—		—		—		—
Restricted stock units vested	109	—		—	—		—		—		—		—

Stock compensation expense	—	—		—	—		276		—		—		276
Shares withheld to cover taxes	—	—		43	(29)		—		—		—		(29)

Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable to Common Stock	63,497	6		—	—		40,632		—		—		40,638



Balance, June 30, 2023	158,220	$	15	6,677	$	(34,480)	$	462,517	$	147	$	(330,197)	$	98,002


Three months ended June 30, 2022
	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, March 31, 2022	82,564	$	8	6,073	$	(34,159)	$	367,104	$	89	$	(319,938)	$	13,104
Net income	—	—		—	—		—		—		6,240		6,240
Foreign currency translation adjustment	—	—		—	—		—		87		—		87
Stock issued under employee stock purchase plan	—	—		(19)	—		24		—		—		24
Restricted stock granted	339	—		—	—		—		—		—		—
Restricted stock forfeited	(3)	—		12	—		—		—		—		—

Stock compensation expense	—	—		—	—		852		—		—		852
Shares withheld to cover taxes	(15)	—		45	(79)		—		—		—		(79)
Issuance of stock warrants, net of transaction fee	—	—		—	—		9,930		—		—		9,930
Equity contribution	—	—		—	—		8,400		—		—		8,400
Balance, June 30, 2022	82,885	$	8	6,111	$	(34,238)	$	386,310	$	176	$	(313,698)	$	38,558

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


Six months ended June 30, 2023
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, December 31, 2022	83,916	$	8	6,127	$	(34,251)	$	388,177	$	181	$	(351,519)	$	2,596
Net income	—	—		—	—		—		—		21,322		21,322
Foreign currency translation adjustment	—	—		—	—		—		(34)		—		(34)

Stock issued under employee stock purchase plan	—	—		(43)	—		33		—		—		33



Restricted stock granted	15	—		—	—		—		—		—		—
Restricted stock forfeited	(40)	—		379	—		—		—		—		—
Restricted stock units vested	496	—		—	—		—		—		—		—
Forfeited stock options purchased	—	—		—	—		(617)		—		—		(617)
Stock compensation expense	—	—		—	—		(836)		—		—		(836)
Shares withheld to cover taxes	—	—		214	(229)		—		—		—		(229)
Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable to Pre-Funded Warrants	—	—		—	—		15,092		—		—		15,092
Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable to Common Stock	63,497	6		—	—		40,632		—		—		40,638
Conversion of convertible notes payable to Pre-Funded Warrants	—	—		—	—		11,040		—		—		11,040
Conversion of convertible notes payable to Common Stock	10,336	1		—	—		8,996		—		—		8,997

Balance, June 30, 2023	158,220	$	15	6,677	$	(34,480)	$	462,517	$	147	$	(330,197)	$	98,002


Six months ended June 30, 2022
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, December 31, 2021	79,484	$	8	6,022	$	(34,100)	$	363,417	$	81	$	(309,214)	$	20,192
Net loss	—	—		—	—		—		—		(4,484)		(4,484)
Foreign currency translation adjustment	—	—		—	—		—		95		—		95

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



Restricted stock granted	626	—		—	—		—		—		—		—
Restricted stock forfeited	(3)	—		20	—		—		—		—		—


Stock compensation expense	—	—			—		1,591		—		—		1,591
Shares withheld to cover taxes	(15)	—		88	(138)		—		—		—		(138)
Issuance of stock warrants, net of transaction fee	—	—		—	—		9,930		—		—		9,930
Equity contribution	—	—		—	—		8,400		—		—		8,400
Conversion of notes to common stock	2,793	—		—	—		2,948		—		—		2,948

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

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and Nature of Operations

General

Flotek Industries, Inc. (“Flotek” or the “Company”) creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial and commercial markets improve their environmental performance.

The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to enhance the profitability of hydrocarbon producers.

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

The Company’s two operating segments, CT and DA, are both supported by its Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 17, “Business Segment, Geographic and Major Customer Information.”

Going Concern

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.

The Company currently funds its operations from cash on hand and other current assets. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the unaudited condensed consolidated financial statements. The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”). It is not certain that the Company’s cash and other current assets and the Company’s forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are filed.

The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company may be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.

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

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements reflect all adjustments, in the opinion of management, necessary for the fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. 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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 2022 Annual Report. A copy of the 2022 Annual Report is available on the SEC’s website, www.sec.gov 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.

Cash Equivalents

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

Restricted Cash

The Company’s restricted cash is $0.1 million and $0.1 million as of June 30, 2023 and December 31, 2022, respectively. The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable and accounts receivable, related party, arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for credit losses to reflect any loss anticipated on accounts receivable balances. The Company applies the current expected credit loss (CECL) model, which requires immediate recognition of expected credit losses over the contractual life of receivables and records the appropriate allowance for credit losses as a charge to operating expenses. The allowance for credit losses is based on a combination of the individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for credit losses charged to operating expense.

The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.

Contract Assets

The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in Note 9, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement. The contract assets are amortized over the term of the ProFrac Agreement (10 years) based on forecasted revenues as goods are transferred to ProFrac Services, LLC, and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations.

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

Inventories

Inventories consist of raw materials and finished goods and are stated at the lower of cost determined by using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of sales.

Property and Equipment

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or the asset’s estimated useful life as follows:


Buildings and leasehold improvements			2-30 years
Machinery and equipment			7-10 years
Furniture and fixtures			3 years
Land improvements			20 years
Transportation equipment			2-5 years
Computer equipment and software			3-7 years

Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.

Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell and depreciation is ceased. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.

Leases

The Company leases certain facilities, land, vehicles, and equipment. The Company determines if an arrangement is classified as a lease at inception of the arrangement.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the related lease. Finance leases are under the current and non-current liabilities and the underlying assets are included in property and equipment on the consolidated balance sheet.

As most of the Company’s leases do not provide an implicit rate of return, on a quarterly basis, the Company’s incremental borrowing rate is used, together with the lease term information available at commencement date of the lease, in determining the present value of lease payments. Operating lease liabilities include related options to extend or terminate lease terms that are reasonably certain of being exercised.

Leases with an initial term of 12 months or less (“short term leases”) are not recorded on the balance sheet; and the lease expense on short-term leases is recognized on a straight-line basis over the lease term.

Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable

The Company accounts for the Convertible Notes Payable at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.

The Company accounted for the Contract Consideration Convertible Notes Payable issued as consideration related to a related party contract (see Note 9, “Debt and Convertible Notes Payable”), as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

Fair Value Measurements

The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 10, “Fair Value Measurements.”

Revenue Recognition

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

The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.

Products and services are sold with fixed or determinable prices. Certain sales include discounts offered to customers for prompt payment and right of return provisions, which are considered when recognizing revenue and deferred accordingly. The Company does not act as an agent in any of its revenue arrangements.

In recognizing revenue for products and services, the Company determines the transaction price of contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract.

The majority of the CT segment revenue is chemical products that are sold at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Contracts with customers for the sale of products generally state the terms of the sale, including the quantity and price of each product purchased. Additionally, the CT segment offers various services associated to products sold which includes field services, installation, maintenance, and other functions. These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the Company has a right to invoice the customer.

The DA segment recognizes revenue for sales of equipment at the time of sale based on when control transfers to the customer based on agreed upon delivery terms. Additionally, the Company offers various services associated with products sold which includes field services, installation, maintenance, and other functions. Services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. There may be additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, the Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements, and revenue not yet recognizable is reported under accrued liabilities and deferred revenue on the consolidated balance sheets. Subscription-type arrangements were not a material revenue stream in the six months ended June 30, 2023 and June 30, 2022.

Payment terms for both the CT and DA segments are customarily 30-60 days for domestic and 90-120 days for international from invoice receipt. Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract assets associated with incomplete performance obligations are not material.

The Company applies several practical expedients including:

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

•The Company’s payment terms are short-term in nature with settlements of one year or less. As a result, the Company does not adjust the promised amount of consideration for the effects of a significant financing component.

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

•The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Foreign Currency Translation

The Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and substantially all assets and liabilities of the Company are denominated in U.S. dollars. Financial statements of foreign subsidiaries that are not U.S. dollar functional currency are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of those foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.

Comprehensive Income (Loss)

Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments and distributions to stockholders. The Company’s comprehensive income loss includes consolidated net income (loss) and foreign currency translation adjustments.

Research and Development Costs

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

Income Taxes

Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company’s policy is to record interest and penalties related to uncertain tax positions as income tax expense.

Stock-Based Compensation

Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.

Stock Warrants

The Company evaluated the Pre-Funded Warrants issued in June 2022 (the “June 2022 Warrants”) and the Pre-Funded Warrants issued in February 2023 (the “February 2023 Warrants”) (see Note 13, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the June 2022 Warrants and the February 2023 Warrants meet the criteria to be classified within stockholders’ equity. Accordingly, the Company recorded the proceeds received for the June 2022 Warrants within additional paid in capital. In addition, the Company reclassified the balance of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”) for the February 2023 Warrants within additional paid in capital upon conversion.

Use of Estimates

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Significant items subject to estimates and assumptions include the useful lives of property and equipment; long lived asset impairment assessments; stock-based compensation expense; allowance for credit losses for accounts receivable; valuation allowances for inventories and deferred tax assets; recoverability and timing of the realization of contract assets; and fair value of liability classified Contract Consideration Convertible Notes Payable.

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the FASB. We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.

New Accounting Standards Issued and Adopted as of January 1, 2023

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 Company adopted this standard prospectively as of January 1, 2023 and the adoption did not have a material impact of the Company’s consolidated financial statements and related disclosures, and there was no cumulative effect on retained earnings.

Note 3 — Revenue from Contracts with Customers

Disaggregation of Revenue

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

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


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Revenue:
Products (1)	$	49,062	$	28,588	$	95,829	$	40,787
Services	1,532		785		2,773		1,465
	$	50,594	$	29,373	$	98,602	$	42,252

(1) Product revenue includes sales to related parties as described in Note 16, “Related Party Transactions.”

Disaggregation of Cost of Sales

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

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


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Cost of sales:
Tangible goods sold	$	41,878	$	27,379	$	83,407	$	37,167
Services	156		105		296		53
Other	4,656		4,194		9,114		7,816
	$	46,690	$	31,678	$	92,817	$	45,036

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services. Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs.

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


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Cost of sales:
Cost of sales for external customers	$	16,445	$	13,830	$	27,743	$	24,598
Cost of sales for related parties	30,245		17,848		65,074		20,438
	$	46,690	$	31,678	$	92,817	$	45,036

Note 4 - Contract Assets

Contract assets are as follows (in thousands):



	June 30, 2023		December 31, 2022
Contract assets	$	83,060	$	83,060
Less accumulated amortization	(5,761)		(3,371)
Contract assets, net	77,299		79,689
Less current contract assets	(7,716)		(7,113)
Contract assets, long term	$	69,583	$	72,576

In connection with entering into the ProFrac Agreement on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions,” the Company recognized contract assets of $10.0 million and $69.5 million, respectively, and associated fees of $3.6 million. As of June 30, 2023 and December 31, 2022, $69.6 million and $72.6 million, respectively, of the contract assets are classified as long term based upon our estimate of the forecasted revenues from the ProFrac Agreement which will not be realized within the next twelve months of the ProFrac Agreement. The Company’s estimate of the timing of the future contract revenues is evaluated on a quarterly basis.

During the three and six months ended June 30, 2023 the Company recognized $1.1 million and $2.4 million, respectively, of contract assets amortization which is recorded as a reduction of the transaction price included in the related party revenue in the consolidated statement of operations. During each of the three and six months ended June 30, 2022, the Company recognized $0.7 million of contract assets amortization. The below table reflects our estimated amortization per year (in thousands) based on the Company’s current forecasted revenues from the ProFrac Agreement.


Years ending December 31,	Amortization
2023 (excluding the six months ended June 30, 2023)	$	3,226
2024	8,980
2025	8,980
2026	8,980
2027	8,980
Thereafter through May 2032	38,153
Total contract assets	$	77,299

Based on our tests of recoverability, we did not identify impairment of such contract assets as of June 30, 2023.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Inventories

Inventories are as follows (in thousands):



	June 30, 2023		December 31, 2022
Raw materials	$	7,404	$	5,800
Finished goods	18,473		18,130
Inventories	25,877		23,930
Less reserve for excess and obsolete inventory	(7,480)		(8,210)
Inventories, net	$	18,397	$	15,720

The provision recorded in the three months ended June 30, 2023 and 2022 was $0.2 million and $0.4 million for the CT segment and $6 thousand and $49 thousand for the DA segment, respectively. The provision recorded in the six months ended June 30, 2023 and 2022 was $0.4 million and $0.7 million for the CT segment and $0.1 million and $49.0 thousand for the DA segment, respectively.

Note 6 — Property and Equipment

Property and equipment are as follows (in thousands):


	June 30, 2023		December 31, 2022
Land	$	886	$	886
Land improvements	520		520
Buildings and leasehold improvements	5,356		5,356
Machinery and equipment	6,890		6,758
Furniture and fixtures	532		532
Transportation equipment	784		784
Computer equipment and software	1,556		1,425
Property and equipment	16,524		16,261
Less accumulated depreciation	(11,771)		(11,435)
Property and equipment, net	$	4,753	$	4,826

Depreciation expense totaled $0.2 million and $0.2 million for the three months ended June 30, 2023 and 2022, respectively. Depreciation expense totaled $0.3 million and $0.4 million for the six months ended June 30, 2023 and 2022, respectively.

Note 7 — Leases

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Operating lease expense	$	237	$	220	$	478	$	448
Finance lease expense:
Amortization of assets	4		4		7		8
Interest on lease liabilities	1		3		2		6
Total finance lease expense	5		7		9		14
Short-term lease expense	40		79		81		203



Total lease expense	$	282	$	306	$	568	$	665

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,550	$	350	$	2,915	$	726
Operating cash flows from finance leases	7		10		17		20
Financing cash flows from finance leases	1		3		2		6

Maturities of lease liabilities as of June 30, 2023 are as follows (in thousands):


Years ending December 31,			Operating Leases				Finance Leases
2023 (excluding the six months ended June 30, 2023)	$	1,843			$	19
2024			2,624				23
2025			1,391				—
2026			1,418				—
2027			1,339				—
Thereafter			3,443				—
Total lease payments			$	12,058			$	42
Less: Interest			(2,572)				(2)
Present value of lease liabilities			$	9,486			$	40

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


	June 30, 2023			December 31, 2022
Operating Leases
Operating lease right-of-use assets	$	4,279		$	5,900

Current portion of operating lease liabilities	2,902			3,328
Long-term operating lease liabilities	6,584			8,044
Total operating lease liabilities	$	9,486		$	11,372

Finance Leases
Property and equipment	$	147		$	147
Accumulated depreciation	(63)			(55)
Property and equipment, net	$	84		$	92

Current portion of finance lease liabilities	$	37		$	36
Long-term finance lease liabilities	3			19
Total finance lease liabilities	$	40		$	55

Weighted Average Remaining Lease Term
Operating leases	5.4 years			5.3 years
Finance leases	1.0 year			1.6 years

Weighted Average Discount Rate
Operating leases	9.2		%	9.3		%
Finance leases	8.5		%	8.9		%

Note 8 — Accrued Liabilities

Current accrued liabilities are as follows (in thousands):



	June 30, 2023		December 31, 2022
Severance costs	$	1,314	$	2,617
Payroll and benefits	525		684
Legal costs	816		447
Contingent liability for earn-out provision	260		583
Deferred revenue, current	409		655
Taxes other than income taxes	946		1,884
Other	908		2,114
Total current accrued liabilities	$	5,178	$	8,984

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 — Debt and Convertible Notes Payable

Long Term Debt

Paycheck Protection Program Loans</