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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, 2021
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 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 August 5, 2021, there were 74,098,258 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 June 30, 2021 and December 31, 2020 | 4
| Unaudited Condensed Consolidated Statements of Operations for the three and si x months ended June 30, 2021 and 2020 | 5
| Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2021 and 2020 | 6
| Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 | 7
| Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 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 | 25
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 33
Item 4. | Controls and Procedures | 33
PART II—OTHER INFORMATION |
Item 1. | Legal Proceedings | 35
Item 1A. | Risk Factors | 35
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 35
Item 3. | Defaults Upon Senior Securities | 35
Item 4. | Mine Safety Disclosures | 36
Item 5. | Other Information | 36
Item 6. | Exhibits | 37
SIGNATURES | 38

2

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 conditions, 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.
3

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

| June 30, 2021 |  | December 31, 2020
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 27,781 |  |  | $ | 38,660 |
Restricted cash | 40 |  |  | 664 |
Accounts receivable, net of allowance for doubtful accounts of $1,329 and $1,316 at June 30, 2021 and December 31, 2020, respectively | 9,713 |  |  | 11,764 |
Inventories, net | 11,499 |  |  | 11,837 |
Income taxes receivable | 71 |  |  | 403 |
Other current assets | 3,255 |  |  | 3,127 |
Assets held for sale | 546 |  |  | — |
Total current assets | 52,905 |  |  | 66,455 |
Property and equipment, net | 8,017 |  |  | 9,087 |
Operating lease right-of-use assets | 2,162 |  |  | 2,320 |
Goodwill | 8,092 |  |  | 8,092 |
Deferred tax assets, net | 213 |  |  | 223 |
Other long-term assets | 29 |  |  | 33 |
TOTAL ASSETS | $ | 71,418 |  |  | $ | 86,210 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 6,587 |  |  | $ | 5,787 |
Accrued liabilities | 17,221 |  |  | 18,275 |
Income taxes payable | 39 |  |  | 21 |
Interest payable | 58 |  |  | 34 |
Current portion of operating lease liabilities | 589 |  |  | 636 |
Current portion of finance lease liabilities | 55 |  |  | 60 |
Current portion of long-term debt | 4,788 |  |  | 4,048 |
Total current liabilities | 29,337 |  |  | 28,861 |
Deferred revenue, long-term | 104 |  |  | 117 |
Long-term operating lease liabilities | 8,011 |  |  | 8,348 |
Long-term finance lease liabilities | 72 |  |  | 96 |
Long-term debt | — |  |  | 1,617 |
TOTAL LIABILITIES | 37,524 |  |  | 39,039 |
Commitments and contingencies (See Note 13) |  |  |
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; 79,606,743 shares issued and 70,152,591 shares outstanding at June 30, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020 | 8 |  |  | 8 |
Additional paid-in capital | 361,424 |  |  | 359,721 |
Accumulated other comprehensive income (loss) | 13 |  |  | (19) |
Accumulated deficit | (293,534) |  |  | (278,688) |
Treasury stock, at cost; 5,627,646 and 5,580,920 shares at June 30, 2021 and December 31, 2020, respectively | (34,017) |  |  | (33,851) |
Total stockholders’ equity | 33,894 |  |  | 47,171 |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 71,418 |  |  | $ | 86,210 |

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
4

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,
| 2021 |  | 2020 |  | 2021 |  | 2020
Revenue | $ | 9,165 |  |  | $ | 8,880 |  |  | $ | 20,935 |  |  | $ | 28,296 |
Costs and expenses: |  |  |  |  |  |  |
Operating expenses (excluding depreciation and amortization) | 12,110 |  |  | 11,632 |  |  | 25,911 |  |  | 34,473 |
Corporate general and administrative | 2,868 |  |  | 5,395 |  |  | 7,229 |  |  | 9,888 |
Depreciation and amortization | 253 |  |  | 468 |  |  | 560 |  |  | 2,659 |
Research and development | 1,466 |  |  | 1,638 |  |  | 3,008 |  |  | 4,193 |
Gain on disposal of long-lived assets | (71) |  |  | (22) |  |  | (69) |  |  | (55) |
Impairment of fixed, long-lived and intangible assets | — |  |  | — |  |  | — |  |  | 57,454 |
Total costs and expenses | 16,626 |  |  | 19,111 |  |  | 36,639 |  |  | 108,612 |
Loss from operations | (7,461) |  |  | (10,231) |  |  | (15,704) |  |  | (80,316) |
Other (expense) income: |  |  |  |  |  |  |
Payment Protection Program forgiveness | 881 |  |  | — |  |  | 881 |  |  | — |
Gain on lease termination | — |  |  | 576 |  |  | — |  |  | 576 |
Interest expense | (17) |  |  | (16) |  |  | (35) |  |  | (20) |
Other income, net | 72 |  |  | 78 |  |  | 39 |  |  | 31 |
Total other income, net | 936 |  |  | 638 |  |  | 885 |  |  | 587 |
Loss before income taxes | (6,525) |  |  | (9,593) |  |  | (14,819) |  |  | (79,729) |
Income tax (expense) benefit | (21) |  |  | 32 |  |  | (27) |  |  | 6,201 |
Net loss | $ | (6,546) |  |  | $ | (9,561) |  |  | $ | (14,846) |  |  | $ | (73,528) |
Loss per common share: |  |  |  |  |  |
Basic | $ | (0.09) |  |  | $ | (0.14) |  |  | $ | (0.22) |  |  | $ | (1.17) |
Diluted | $ | (0.09) |  |  | $ | (0.14) |  |  | $ | (0.22) |  |  | $ | (1.17) |
Weighted average common shares: |  |  |  |  |  |  |
Weighted average common shares used in computing basic loss per common share | 69,531 |  |  | 66,035 |  |  | 69,001 |  |  | 62,828 |
Weighted average common shares used in computing diluted loss per common share | 69,531 |  |  | 66,035 |  |  | 69,001 |  |  | 62,828 |

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
5

FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)

| Three months ended June 30, |  | Six months ended June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Net loss | $ | (6,546) |  |  | $ | (9,561) |  |  | $ | (14,846) |  |  | $ | (73,528) |
Other comprehensive (loss) income: |  |  |  |  |  |  |
Foreign currency translation adjustment | (17) |  |  | (7) |  |  | 32 |  |  | (130) |
Comprehensive loss | $ | (6,563) |  |  | $ | (9,568) |  |  | $ | (14,814) |  |  | $ | (73,658) |

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
6

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

| Six months ended June 30,
| 2021 |  | 2020
Cash flows from operating activities: |  |  |
Net loss | $ | (14,846) |  |  | $ | (73,528) |
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |
Change in fair value of contingent consideration | (302) |  |  | — |
Depreciation and amortization | 560 |  |  | 2,659 |
Provision for doubtful accounts | (1) |  |  | 474 |
Provision for excess and obsolete inventory | 580 |  |  | 529 |
Impairment of right-of-use assets | — |  |  | 7,434 |
Impairment of fixed assets | — |  |  | 30,178 |
Impairment of intangible assets | — |  |  | 19,842 |
Gain on sale of assets | (69) |  |  | (631) |
Non-cash lease expense | 163 |  |  | 242 |
Stock compensation expense | 1,750 |  |  | 1,521 |
Deferred income tax provision (benefit) | 10 |  |  | (105) |
PPP loan forgiveness | (881) |  |  | — |
Changes in current assets and liabilities: |  |  |
Accounts receivable, net | 1,995 |  |  | 7,252 |
Inventories, net | (222) |  |  | 6,418 |
Income taxes receivable | 207 |  |  | (6,351) |
Other current assets | (672) |  |  | 1,715 |
Other long-term assets | 541 |  |  | — |
Accounts payable | 801 |  |  | (10,229) |
Accrued liabilities | (1,048) |  |  | (16,755) |
Income taxes payable | 168 |  |  | 119 |
Interest payable | 24 |  |  | — |
Net cash used in operating activities | (11,242) |  |  | (29,216) |
Cash flows from investing activities: |  |  |
Capital expenditures | (31) |  |  | (42) |
Proceeds from sale of business | — |  |  | 9,844 |
Proceeds from sale of assets | 74 |  |  | 66 |
Purchase of JP3, net of cash acquired | — |  |  | (26,284) |
Abandonment of patents and other intangible assets | — |  |  | (8) |
Net cash provided (used in) by investing activities | 43 |  |  | (16,424) |
Cash flows from financing activities: |  |  |
Proceeds from Paycheck Protection Program loan | — |  |  | 4,798 |
Purchase of treasury stock | (78) |  |  | (82) |
Proceeds from sale of common stock | (166) |  |  | 358 |
Payments for finance leases | (29) |  |  | (51) |
Net cash (used in) provided by financing activities | (273) |  |  | 5,023 |
Effect of changes in exchange rates on cash and cash equivalents | (31) |  |  | (31) |
Net change in cash, cash equivalents and restricted cash | (11,503) |  |  | (40,648) |
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 | 27,781 |  |  | 59,926 |
Restricted cash at the end of period | 40 |  |  | 664 |
Cash, cash equivalents and restricted cash at end of period | $ | 27,821 |  |  | $ | 60,590 |

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
7

FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

| Three months ended June 30, 2021
| 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, 2021 | 78,276 |  |  | $ | 8 |  |  | 5,573 |  |  | $ | (33,956) |  |  | $ | 360,537 |  |  | $ | 30 |  |  | $ | (286,988) |  |  |  |  | $ | 39,631 |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (6,546) |  |  |  |  | (6,546) |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (17) |  |  | — |  |  |  |  | (17) |
Stock issued under employee stock purchase plan | — |  |  | — |  |  | (26) |  |  | (38) |  |  | (2) |  |  | — |  |  | — |  |  |  |  | (40) |
Restricted stock granted | 1,465 |  |  |  |  | — |  |  | — |  |  | (7) |  |  | — |  |  | — |  |  |  |  | (7) |
Restricted stock forfeited | (134) |  |  |  |  | 25 |  |  | 54 |  |  | (54) |  |  | — |  |  | — |  |  |  |  | — |
Treasury stock purchased | — |  |  | — |  |  | — |  |  |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Stock compensation expense | — |  |  | — |  |  | — |  |  | — |  |  | 969 |  |  | — |  |  | — |  |  |  |  | 969 |
Excess tax benefit related to share-based awards | — |  |  | — |  |  | 56 |  |  | (77) |  |  | (19) |  |  | — |  |  | — |  |  |  |  | (96) |
Balance, June 30, 2021 | 79,607 |  |  | $ | 8 |  |  | 5,628 |  |  | $ | (34,017) |  |  | $ | 361,424 |  |  | $ | 13 |  |  | $ | (293,534) |  |  |  |  | $ | 33,894 |

| Six months ended June 30, 2021
| 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 | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (14,846) |  |  |  |  | (14,846) |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 32 |  |  | — |  |  |  |  | 32 |
Stock issued under employee stock purchase plan | — |  |  | — |  |  | (84) |  |  | (130) |  |  | (47) |  |  | — |  |  | — |  |  |  |  | (177) |
Restricted stock granted | 1,684 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Restricted stock forfeited | (133) |  |  | — |  |  | 30 |  |  | 64 |  |  | — |  |  | — |  |  | — |  |  |  |  | 64 |
Treasury stock purchased | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Stock compensation expense | — |  |  | — |  |  | — |  |  | — |  |  | 1,750 |  |  | — |  |  | — |  |  |  |  | 1,750 |
Excess tax benefit related to share-based awards | — |  |  | — |  |  | 101 |  |  | (100) |  |  | — |  |  | — |  |  | — |  |  |  |  | (100) |
Other (1) | (613) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Balance, June 30, 2021 | 79,607 |  |  | $ | 8 |  |  | 5,628 |  |  | $ | (34,017) |  |  | $ | 361,424 |  |  | $ | 13 |  |  | $ | (293,534) |  |  |  |  | $ | 33,894 |

(1) See Note 14, “Stockholders’ Equity” for further discussion.
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
8

| Three months ended June 30, 2020
| 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, 2020 | 64,338 |  |  | $ | 6 |  |  | 4,395 |  |  | $ | (33,529) |  |  | $ | 348,375 |  |  | $ | 58 |  |  | $ | (206,205) |  |  |  |  | $ | 108,705 |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (9,561) |  |  |  |  | (9,561) |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7) |  |  | — |  |  |  |  | (7) |
Stock issued under employee stock purchase plan | — |  |  | — |  |  | (12) |  |  | — |  |  | 9 |  |  | — |  |  | — |  |  |  |  | 9 |
Restricted stock granted | 1,788 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Restricted stock forfeited | — |  |  | — |  |  | 37 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Treasury stock purchased | — |  |  | — |  |  | 39 |  |  | (37) |  |  | — |  |  | — |  |  | — |  |  |  |  | (37) |
Stock compensation expense | — |  |  | — |  |  | — |  |  | — |  |  | 1,059 |  |  | — |  |  | — |  |  |  |  | 1,059 |
Stock issued in JP3 acquisition | 11,500 |  |  | 1 |  |  | — |  |  | — |  |  | 8,537 |  |  | — |  |  | — |  |  |  |  | 8,538 |
Balance, June 30, 2020 | 77,626 |  |  | 7 |  |  | 4,459 |  |  | (33,566) |  |  | 357,980 |  |  | 51 |  |  | (215,766) |  |  |  |  | 108,706 |

| Six months ended June 30, 2020
| Common Stock |  | Treasury Stock |  | Additional Paid-in Capital |  | Accumulated Other Comprehensive Income (Loss) |  | Retained Earnings (Accumulated Deficit) |  |  |  | Total Stockholders’ Equity
| Shares Issued |  | Par Value |  | Shares |  | Cost |
Balance, December 31, 2019 | 63,657 |  |  | $ | 6 |  |  | 4,145 |  |  | $ | (33,484) |  |  | $ | 347,564 |  |  | $ | 181 |  |  | $ | (142,238) |  |  |  |  | $ | 172,029 |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (73,528) |  |  |  |  | (73,528) |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (130) |  |  | — |  |  |  |  | (130) |
Stock issued under employee stock purchase plan | — |  |  | — |  |  | (25) |  |  | — |  |  | 20 |  |  | — |  |  | — |  |  |  |  | 20 |
Restricted stock granted | 2,469 |  |  | — |  |  | — |  |  | — |  |  | 338 |  |  | — |  |  | — |  |  |  |  | 338 |
Restricted stock forfeited | — |  |  | — |  |  | 278 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Treasury stock purchased | — |  |  | — |  |  | 61 |  |  | (82) |  |  | — |  |  | — |  |  | — |  |  |  |  | (82) |
Stock compensation expense | — |  |  | — |  |  | — |  |  | — |  |  | 1,521 |  |  | — |  |  | — |  |  |  |  | 1,521 |
Stock issued in JP3 acquisition | 11,500 |  |  | 1 |  |  | — |  |  | — |  |  | 8,537 |  |  | — |  |  | — |  |  |  |  | 8,538 |
Balance, June 30, 2020 | 77,626 |  |  | $ | 7 |  |  | 4,459 |  |  | $ | (33,566) |  |  | $ | 357,980 |  |  | $ | 51 |  |  | $ | (215,766) |  |  |  |  | $ | 108,706 |

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
9

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Significant Accounting Policies
Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial, commercial, and consumer markets improve their Environmental, Social, and Governance (ESG) performance.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that enhance the profitability of hydrocarbon producers and cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s Data Analytics (“DA”) segment enables users to maximize the value of their hydrocarbon associated processes by providing analytics associated with 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 18, “Business Segment, Geographic and Major Customer Information.” For further discussion of the JP3 acquisition, see Note 3, “Business Combination.”
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.
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.
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.
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic. The pandemic negatively impacted the U.S. and global economy, disrupted domestic and international oil and gas markets, and increased volatility in financial markets. These effects materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. The Company’s primary markets in the U.S. are particularly subject to the impacts on the oil and gas industry. In the first quarter of 2020, the Company recorded impairments to property, plant and equipment; intangible assets; and operating right-of-use assets. In the second half of 2020 the Company recorded additional impairment charges of goodwill and intangible assets as well as an increase to the provision of excess and obsolete inventory.
10

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level. Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the Company and could result in additional impairments in the future. Future developments of the COVID-19 crisis are uncertain and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.
The Company continues to monitor the impact of COVID-19 on the business, suppliers and customers. Future developments and effects are highly uncertain and cannot be predicted, including the scope and duration of the pandemic. This uncertainty could have a material impact on accounting estimates and assumptions used in our consolidated financial statements.
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 future payroll tax liabilities.
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 excess and 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 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 our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, 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 its 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:
•Sale of non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sale of excess inventory and/or raw materials;
•Entry into a borrowing facility with one or more lenders;
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash;
•Reducing professional advisory fees and headcount; and
•Raising equity either in the public markets or via a private placement offering.
However, with respect to anticipated transactions, 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.
11

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 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 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 subject to contingent consideration with an estimated fair value of $1.2 million at acquisition date for two potential earn-out provisions totaling $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 11, “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
12

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 30-45 days for domestic and 60 days f or international from invoice receipt. In addition, sales taxes are excluded from revenues.
Disaggregation of Revenue
The Company differentiates revenue based on whether the source of revenue is attributable to product sales (point-in-time revenue recognition) or service revenue (over-time revenue recognition). Product sales accounted for over 90% of total revenue for the three and six months ended June 30, 2021 and 2020.
Revenue disaggregated by revenue source is as follows (in thousands):

| Three months ended June 30, |  | Six months ended June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Revenue: |  |  |  |  |  |  |
Products | $ | 8,444 |  |  | $ | 8,176 |  |  | $ | 19,524 |  |  | $ | 26,976 |
Services | 721 |  |  | 704 |  |  | 1,411 |  |  | 1,320 |
| $ | 9,165 |  |  | $ | 8,880 |  |  | $ | 20,935 |  |  | $ | 28,296 |

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 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 six months June 30, 2021 and 2020.
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):

| June 30, 2021 |  | December 31, 2020
Raw materials | $ | 7,203 |  |  | $ | 7,190 |
Finished goods | 16,198 |  |  | 15,705 |
Inventories | 23,401 |  |  | 22,895 |
Less reserve for excess and obsolete inventory | (11,902) |  |  | (11,058) |
Inventories, net | $ | 11,499 |  |  | $ | 11,837 |

The provision recorded in the three and six months ended June 30, 2021 were $0.1 million for the CT segment and $0.1 million for the DA segment and $0.4 million for the CT segment and $0.1 million of the DA segment, respectively. The increase in excess and obsolescence is attributable to the Company’s continued product rationalization efforts, which included a reduction
13

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
in the number of materials carried within the portfolio and identification of those materials for which the Company will no longer actively market or carry quantities in excess of current and estimated future usage requirements.
Note 6 — Property and Equipment
Property and equipment are as follows (in thousands):

| June 30, 2021 |  | December 31, 2020
Land | $ | 1,986 |  |  | $ | 2,415 |
Land improvements | 861 |  |  | 867 |
Buildings and leasehold improvements | 6,367 |  |  | 6,364 |
Machinery and equipment | 7,782 |  |  | 7,760 |
Furniture and fixtures | 651 |  |  | 649 |
Transportation equipment | 1,045 |  |  | 1,190 |
Computer equipment and software | 1,304 |  |  | 1,296 |
Property and equipment | 19,996 |  |  | 20,541 |
Less accumulated depreciation | (11,979) |  |  | (11,454) |
Property and equipment, net | $ | 8,017 |  |  | $ | 9,087 |

Depreciation expense totaled $0.3 million and $0.5 million for the three months ended June 30, 2021 and 2020, and $0.3 million and $2.0 million for the six months ended June 30, 2021 and 2020, respectively.
During the first quarter of 2020, the Company recognized an impairment of property and equipment of $30.2 million. See Note 8, “Impairment of Fixed and Long-lived Assets.” No impairment was recognized for the three and six months ended June 30, 2021.
Note 7 — Leases
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. For further discussion, refer to Note 8, “Impairment of Fixed and Long-lived Assets.” No impairment was recognized for the three and six months ended June 30, 2021.
14

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The components of lease expense and supplemental cash flow information are as follows (in thousands):

| Three months ended June 30, |  | Six months ended June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Operating lease expense | $ | 250 |  |  | $ | 283 |  |  | $ | 488 |  |  | $ | 854 |
Finance lease expense: |  |  |  |  |  |  |
Amortization of right-of-use assets | 4 |  |  | 4 |  |  | 7 |  |  | 9 |
Interest on lease liabilities | 3 |  |  | 5 |  |  | 6 |  |  | 9 |
Total finance lease expense | 7 |  |  | 9 |  |  | 13 |  |  | 18 |
Short-term lease expense | 61 |  |  | 54 |  |  | 55 |  |  | 86 |
Total lease expense | $ | 318 |  |  | $ | 346 |  |  | $ | 556 |  |  | $ | 958 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |  |
Operating cash flows from operating leases | $ | 394 |  |  | $ | 1,411 |  |  | $ | 727 |  |  | $ | 1,024 |
Operating cash flows from finance leases | 43 |  |  | 5 |  |  | 53 |  |  | 9 |
Financing cash flows from finance leases | 3 |  |  | 14 |  |  | 29 |  |  | 51 |

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

Years ending December 31, |  | Operating Leases |  | Finance Leases
2021 (excluding the six months ended June 30, 2021) | $ | 581 |  |  | $ | 35 |
2022 |  | 1,256 |  |  | 47 |
2023 |  | 1,321 |  |  | 39 |
2024 |  | 1,351 |  |  | 25 |
2025 |  | 1,378 |  |  | — |
Thereafter |  | 6,891 |  |  | — |
Total lease payments |  | $ | 12,778 |  |  | $ | 146 |
Less: Interest |  | (4,178) |  |  | (19) |
Present value of lease liabilities |  | $ | 8,600 |  |  | $ | 127 |

15

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases is as follows (in thousands):

| June 30, 2021 | December 31, 2020 |  |
Operating Leases |  |  |  |
Operating lease right-of-use assets | $ | 2,162 |  | $ | 2,320 |  |  |
Current portion of operating lease liabilities | $ | 589 |  | $ | 636 |  |  |
Long-term operating lease liabilities | 8,011 |  | 8,348 |  |  |
Total operating lease liabilities | $ | 8,600 |  | $ | 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 | $ | 55 |  | $ | 60 |  |  |
Long-term finance lease liabilities | 72 |  | 96 |  |  |
Total finance lease liabilities | $ | 127 |  | $ | 156 |  |  |
Weighted Average Remaining Lease Term |  |  |  |
Operating leases | 9.3 years | 9.9 years |  |
Finance leases | 3.1 years | 3.1 years |  |
Weighted Average Discount Rate |  |  |  |
Operating leases | 4.5 | % | 8.9 | % |  |
Finance leases | 8.5 | % | 9.0 | % |  |

Note 8 — Impairment of Fixed and Long-lived Assets
During the first quarter of 2020, the price of crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the energy industry, which began to negatively impact the Company’s results of operations. The decline of results of operations were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to COVID-19. Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020.
The impairment loss of fixed and intangible assets as of March 31, 2020 was recorded as follows (in thousands):

|  | March, 31, 2020 |  |
Property and equipment, net |  |  | $ | 30,178 |  |  |
Operating lease right-of-use assets |  |  | 7,434 |  |  |
Other Intangibles: |  |  |  |  |
Patents and technology |  |  | 9,902 |  |  |
Customer relationships |  |  | 9,165 |  |  |
Intangible assets in progress |  |  | 596 |  |  |
Trademarks and brand names |  |  | 179 |  |  |
Total other intangibles |  |  | 19,842 |  |  |
Total impairment of fixed, long-lived and intangible assets |  |  | $ | 57,454 |  |  |

16

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of March 31, 2020, and an impairment loss of $57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and the related negative impact on oil and natural gas prices on projections of future cash flows. Prior to the impairment, the Company recognized amortization expense for finite-lived intangible assets acquired of $0.5 million for the three months ended March 31, 2020.
The Company concluded no triggering events during the first and second quarters of 2021.
Note 9 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):

| June 30, 2021 |  | December 31, 2020
Loss on purchase commitments (Note 13) | $ | 9,383 |  |  | $ | 9,402 |
Severance costs | 3,419 |  |  | 3,558 |
Payroll and benefits | 994 |  |  | 1,789 |
Contingent liability for earn-out provision | 1,115 |  |  | 1,416 |
Taxes other than income taxes | 633 |  |  | 544 |
Due to third parties | 504 |  |  | 434 |
Legal costs | 721 |  |  | 333 |
Deferred revenue, current | 152 |  |  | 146 |
Other | 300 |  |  | 653 |
Total current accrued liabilities | $ | 17,221 |  |  | $ | 18,275 |

Note 10 — Debt
In April 2020, the Company received a $4.8 million loan under the Payroll Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a 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 six months ended June 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 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, 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. 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 has been reached. The Flotek PPP loan is classified as current portion of long term debt as of June 30, 2021 on the consolidated balance sheet.
17

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt, including current portion, is as follows (in thousands):

| June 30, 2021 |  | December 31, 2020
Long-term debt |  |  |
Flotek PPP loan | $ | — |  |  | $ | 4,788 |
JP3 PPP loan | — |  |  | 877 |
Total | — |  |  | 5,665 |
Less current maturities | — |  |  | (4,048) |
Total long-term debt, net of current portion | $ | — |  |  | $ | 1,617 |

Note 11 — 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 approximate fair value due to maturity in less than fifteen months.
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):

|  |  |  |  |  | Balance at June 30, |  |  |  |  |  |  |  | Balance at December 31,
| Level 1 |  | Level 2 |  | Level 3 | 2021 |  | Level 1 |  | Level 2 |  | Level 3 |  | 2020
Contingent consideration | $ | — |  |  | $ | — |  |  | $ | 1,115 |  | $ | 1,115 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,416 |  |  | $ | 1,416 |

At June 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 June 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.
18

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2021, and decreased the estimated fair value of the contingent liability to $1.1 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 months ended June 30, 2021 and 2020 (in thousands):

| Three months ended June 30, |  | Six months ended June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Balance - beginning of period | $ | 1,081 |  |  | $ | — |  |  | $ | 1,416 |  |  | $ | — |
Additions / issuances | — |  |  | 1,200 |  |  | — |  |  | 1,200 |
Change in fair value | 34 |  |  | — |  |  | (301) |  |  | — |
Transfer out of Level 3 | — |  |  | — |  |  | — |  |  | — |
Balance - end of period | $ | 1,115 |  |  | $ | 1,200 |  |  | $ | 1,115 |  |  | $ | 1,200 |

Note 12 — 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 June 30, |  | Six months ended June 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 | (0.3) |  |  | 0.4 |  |  | (0.2) |  |  | — |
Non-U.S. income taxed at different rates | (0.1) |  |  | 0.9 |  |  | 0.3 |  |  | 0.2 |
Increase (reduction) in tax benefit related to stock-based awards | 2.2 |  |  | 0.9 |  |  | 1.2 |  |  | (0.1) |
Non-deductible expenses | 3.6 |  |  | 0.7 |  |  | 1.1 |  |  | — |
Research and development credit | — |  |  | 0.1 |  |  | — |  |  | — |
Increase in valuation allowance | (26.5) |  |  | (23.7) |  |  | (23.6) |  |  | (16.0) |
Effect of tax rate differences of NOL carryback | — |  |  | — |  |  | — |  |  | 2.6 |
Effective income tax rate | (0.1) | % |  | 0.3 | % |  | (0.2) | % |  | 7.7 | %

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 discussed above.
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.
The Company continues to have a full valuation allowance against net deferred tax assets as it is not more-likely-than-not they will be utilized.
19

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — Commitments and Contingencies
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 Joshua A. Snively 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 by Mr. Snively. 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.
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
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. 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.
The Company’s balance sheet at June 30, 2021 included an accrued liability of $9.4 million as it did not make any payments for, or purchases of, terpene during the first and second quarters of 2021. The Company expects that settlement of the accrued liability, if any, will be determined through the litigation disclosed in the “Litigation” section of this Note.
Indemnification
The Company agreed to provide indemnification to National Oilwell DHT, L.P. for certain intellectual property-related claims in connection with sale of its Teledrift business unit in 2017. The total expenses in this matter are estimated at a range of $0.2 million to $0.5 million as of June 30, 2021.
Concentrations and Credit Risk
The majority of t he Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry 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 18, “Business Segment, Geographic and Major Customer Information,” for concentration of segment revenue from major customers.
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 14 — Stockholders’ Equity
On May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, to increase the authorized shares of common stock from 80,000,000 to 140,000,000, par value $0.0001 per share, and 100,000 of preferred stock, par value $0.0001 per share. The additional authorized shares are available for corporate purposes, including acquisitions.
During the first quarter 2021, the Company identified 0.6 million shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the December 31, 2020 consolidated financial statements or basic and diluted earnings per share.
20

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and six months ended June 30, 2021 and 2020, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the periods.
Note 16 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):

| Six months ended June 30,
| 2021 |  | 2020
Supplemental cash payment information: |  |  |
Interest paid | $ | 11 |  |  | $ | 20 |
Income taxes (received, net of payments) paid | (351) |  |  | 149 |
Supplemental non-cash activities: |  |  |
Employee retention credit | $ | 1,164 |  |  | $ | — |
JP3 PPP loan forgiveness | 881 |  |  | — |
Supplemental non-cash investing and financing activities: |  |  |
Equity issued - acquisition of JP3 | $ | — |  |  | $ | 8,538 |

Note 17 — Related Party Transaction
In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. 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 June 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.
21

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — 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 give-aways (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.
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.
22

FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of the reportable segments is as follows (in thousands):

For the three months ended June 30, | Chemistry Technologies |  |  |  | Data Analytics (1) |  | Corporate and Other |  | Total
2021 |  |  |  |  |  |  |  |  |
Net revenue from external customers | $ | 7,688 |  |  |  |  | $ | 1,477 |  |  | $ | — |  |  | $ | 9,165 |
Loss from operations, including impairment | (3,819) |  |  |  |  | (773) |  |  | (2,869) |  |  | (7,461) |
Depreciation and amortization | 233 |  |  |  |  | 20 |  |  | — |  |  | 253 |
Additions to long-lived assets | 13 |  |  |  |  | — |  |  | — |  |  | 13 |
2020 |  |  |  |  |  |  |  |  |
Net revenue from external customers | $ | 7,962 |  |  |  |  | $ | 918 |  |  | $ | — |  |  | $ | 8,880 |
Loss from operations, including impairment | (3,596) |  |  |  |  | (1,151) |  |  | (5,484) |  |  | (10,231) |
Depreciation and amortization | 246 |  |  |  |  | 131 |  |  | 91 |  |  | 468 |
Additions to long-lived assets | — |  |  |  |  | — |  |  | — |  |  | — |

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

For the six months ended June 30, | Chemistry Technologies |  |  |  | Data Analytics (1) |  | Corporate and Other |  | Total
2021 |  |  |  |  |  |  |  |  |
Net revenue from external customers | $ | 17,990 |  |  |  |  | $ | 2,945 |  |  | $ | — |  |  | $ | 20,935 |
Loss from operations, including impairment | (7,407) |  |  |  |  | (1,067) |  |  | (7,230) |  |  | $ | (15,704) |
Depreciation and amortization | 524 |  |  |  |  | 35 |  |  | 1 |  |  | $ | 560 |
Additions to long-lived assets | 31 |  |  |  |  | — |  |  | — |  |  | $ | 31 |
2020 |  |  |  |  |  |  |  |  |
Net revenue from external customers | $ | 27,378 |  |  |  |  | $ | 918 |  |  | $ | — |  |  | $ | 28,296 |
Loss from operations, including impairment | (66,257) |  |  |  |  | (1,151) |  |  | (12,908) |  |  | (80,316) |
Depreciation and amortization | 2,056 |  |  |  |  | 131 |  |  | 472 |  |  | 2,659 |
Additions to long-lived assets | 42 |  |  |  |  | — |  |  | — |  |  | 42 |

(1) The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3.
Assets of the Company by reportable segments are as follows (in thousands):

| June 30, 2021 |  | December 31, 2020
Chemistry Technologies | $ | 41,950 |  |  | $ | 43,346 |
Data Analytics | 5,154 |  |  | 13,201 |
Corporate and Other | 24,314 |  |  | 29,663 |
Total assets | $ | 71,418 |  |  | $ | 86,210 |

23

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 June 30, |  | Six months ended June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
U.S. | $ | 6,869 |  |  | $ | 6,936 |  |  | $ | 16,530 |  |  | $ | 22,711 |
UAE | 1,319 |  |  | 847 |  |  | 2,422 |  |  | 2,308 |
Other countries | 977 |  |  | 1,097 |  |  | 1,983 |  |  | 3,277 |
Total revenue | $ | 9,165 |  |  | $ | 8,880 |  |  | $ | 20,935 |  |  | $ | 28,296 |

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 June 30, |  | Chemistry Technologies |  | % of Total Revenue |  | Data Analytics |  | % of Total Revenue
2021 |  |  |  |  |  |  |  |
Customer C |  | $ | 1,038 |  |  | 11.3 | % |  | * |  | *
Customer D |  | 1,810 |  |  | 19.8 | % |  | * |  | *

2020 |  |  |  |  |  |  |  |
Customer A |  | $ | 2,004 |  |  | 22.6 | % |  | * (1) |  | * (1)
Customer B |  | 1,246 |  |  | 14.0 | % |  | * (1) |  | * (1)

For the six months ended June 30, |  | Chemistry Technologies |  | % of Total Revenue |  | Data Analytics |  | % of Total Revenue
2021 |  |  |  |  |  |  |  |
Customer C |  | $ | 4,067 |  |  | 19.4 | % |  | * |  | *
Customer D |  | 4,660 |  |  | 22.3 | % |  | * |  | *

2020 |  |  |  |  |  |  |  |
Customer C |  | $ | 8,324 |  |  | 29.4 | % |  | * (1) |  | * (1)
Customer A |  | 3,536 |  |  | 12.5 | % |  | * (1) |  | * (1)
Customer D |  | 3,485 |  |  | 12.3 | % |  | * (1) |  | * (1)

* This customer did not account for more than 10% of revenue during this period.
*(1) Not applicable, as the Company did not form the Data Analytics segment until May 2020 upon acquiring JP3.
Note 19 — Subsequent Events
On July 27, 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.
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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 and Results of Operations (“MD&A”) 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 company, Flotek helps customers across industrial, commercial, and consumer markets improve their Environmental, Social, and Governance (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 cleans 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.
The Company was impacted as a result of the outbreak of COVID-19 that spread throughout the U.S. and the world during 2020, with effects continuing into 2021. For a discussion of the impacts of COVID-19, see “COVID-19 Effects and Actions” and “Outlook” in this Quarterly Report.
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 includes energy-focused products and services comprised of proprietary green chemistries, specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout life cycle 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 using 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 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, created in conjunction with the acquisition of JP3 in May 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable real time information on the
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composition and properties for customers' oil, natural gas and refined products. The DA segment is transitioning to a recurring revenue subscription model of selling its application packages while continuing to sell its line of Verax analyzers, deployed in the field across the oil and gas sector.
The customers of the DA segment diversify the revenues of the Company and span across the entire oil and gas market, including upstream, midstream, refineries and distribution networks. The segment helps its customers generate additional profit by enhancing their operations including crude/condensates stabilization, blending, optimization of transmix, increasing efficiencies of gas plants, and ensuring product quality while enabling automation of fluid handling and reducing losses through give-aways (i.e., that portion of a product of higher value than what is specified) . While the DA segment was focused entirely on North American markets in the past, business development activities started in late third quarter 2020 in the international markets. This segment began preparing the Verax analyzers for international deployment including product design modifications, certifications and export controls.
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.
COVID-19 Effects and Actions
In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic that spread throughout the U.S. and the world. In late 2020, major pharmaceutical companies developed vaccines and received approval for wide-scale distribution in the U.S. and other countries. The vaccination effort is proceeding in the U.S. and the world. However, variant strains of the virus have emerged, which create additional uncertainty on the extent and the duration of the pandemic.
The pandemic negatively impacted the U.S. and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets in 2020. These effects materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for the Company’s services and products.
The Company’s CT segment is energy-focused with product lines comprised of specialty chemistries, logistics and technology services. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent exploration and production companies, national and state-owned oil companies, and international supply chain management companies. Due to customer activity levels in this industry, the Company experienced materially reduced revenues and cash flows during 2020, which continued for the first half of 2021.
Outside the oil and gas sector, the COVID-19 pandemic increased demand for certain specialty chemicals, particularly surface cleaners and disinfectants. In 2020, the Company launched a diversified line of FDA and EPA-compliant disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and consumer use. These products build on the Company’s historical expertise in chemistry and leverage its infrastructure, personnel, competencies, supply chain, research and historic consumer market experience. The continued impact of COVID-19 and subsequent modification of social behavior in regard to the heightened attention to hygiene and sanitation provide a sustainable yet challenging market to expand the Company’s portfolio.
The DA segment’s largest customer base, the oil and gas midstream market, reduced gathering and infrastructure capital spending in 2020. In addition, the pandemic impacted the DA segment due to reduced access to facilities to complete new installations for a portion of the year. As a result, spending for the DA segment’s products and services has also been impacted by lower consumer demand. As a result, sales and cash flows were below target for the DA segment.
The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level. Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the Company and could result in additional impairments in the future. Future developments of the COVID-19 crisis are uncertain and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.
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While the full impact of the COVID-19 pandemic continues to evolve and the full extent of the impact is not yet known, the Company continues to closely monitor the effects of the pandemic on commodity demands, and on its customers, operations and employees. Any future developments and effects are highly uncertain and cannot be predicted, including:
•the scope and duration of the pandemic;
•effectiveness of vaccines;
•emergence of new coronavirus variants;
•further adverse revenue and net income effects; impairments;
•disruptions to the Company’s operations;
•third-party providers’ ability to support the Company’s operations;
•limitations on domestic and international travel for sales, system installations, and support;
•customer shutdowns of oil and gas exploration and production;
•the effectiveness of work from home arrangements;
•modifications to work schedules, including manufacturing shifts;
•impacts on employees from illness, school closures and other community response measures;
•any actions taken by governmental authorities and other third parties in response to the pandemic; and
•temporary closures of the Company’s facilities or the facilities of its customers and suppliers.
The pandemic caused the Company to alter its business working practices, including work schedules, manufacturing shifts, employee travel, work locations, meetings and participation in events and conferences. In addition, the Company and most of its customers continued the practice of social distancing and work-from-home procedures, which have had, and may continue to have, an impact on the ability of employees and management of the Company to communicate and work efficiently. These practices are gradually changing with increased vaccination levels in the U.S. and the world. There is no certainty that these actions will mitigate risks posed by the virus to the Company’s workforce.
In response to market conditions and the anticipating ongoing volatility, the Company reduced its cost structure in 2020 to meet anticipated market activity and reduce the Company’s break-even level. In the second half of 2020 the Company recorded additional impairment charges of goodwill and intangible assets as well as an increase to the provision of excess and obsolete inventory.
Outlook
The COVID-19 pandemic negatively impacted the U.S. and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets. While market prices for West Texas Intermediate and Brent crude oil rebounded from lows during the initial months of the pandemic in 2020 to exceed $50 per barrel during the first quarter of 2021 and $70 per barrel during the second quarter of 2021, many major integrated oil and gas companies and independent oil and gas companies have kept their 2021 budgets generally unchanged, though such budgets may change if crude oil prices increase. Uncertainty exists about the extent and the duration of the resulting industry contraction and consolidation. In addition, the oilfield services industry remains over supplied and the timing of returns to pre-pandemic pricing levels remains uncertain. While uncertainty remains around the extent and duration of the pandemic, there are positive indicators that the U.S. economy is recovering, including improvements in oil and gas demand, rising COVID-19 vaccination levels, and resumption of travel and business activities.
ESG solutions continue to be a focus for the Company as the energy industry is seeking to accelerate their focus on cleaner energy and sustainability. The impact of the actions of the new presidential administration and Congress on the economy and financial markets is uncertain in the current year and longer term. During his first months in office, the President signed many executive orders, including ones with implications for stakeholders in the energy industry, such as canceling the Keystone XL Pipeline and another for the U.S. to rejoin the Paris Agreement on climate change. The U.S. Department of Interior (“DOI”) issued an order in January, placing a 60-day freeze on agency permit approvals and pausing federal oil and gas leasing for a review of all existing leasing and permitting practices related to fossil fuel development on public lands and waters. In March 2021, the DOI allowed the suspension to expire. In addition, the President announced proposed plans to raise the corporate tax rate to help finance his proposed infrastructure plan. These and other potential actions by the new administration could have negative and/or positive impacts on the Company’s business and customers.
Amid the current environment with increased business commitments related to ESG, the Company’s products and services offer a significant benefit to businesses seeking to improve their ESG performance, including improving the safety, reliability and
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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. 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 that an increase in the adoption of green specialty chemicals could benefit our business and reduce the impact of the slow recovery from the 2020 lows in drilling and completions activity. The key sales focus of the Company is growing market share by improving returns for current customers, rebuilding relationships with past customers and identifying new customers that could benefit from collaborative and innovative chemistry solutions. Additionally, the Company is focused on optimizing total cost of recovery per barrel of oil, reducing both financial cost and environmental risk associated with operation s.
The disinfectants and surface cleaners industry is expanding, associated with the continued impact of the COVID-19 pandemic and the need for individuals, businesses, schools and governments to minimize the spread of the coronavirus, as well preparing for emerging variants. Industry growth is also anticipated due to the modification of social behaviors in regard to the heightened attention to hygiene and sanitation. In 2020, the Company launched a diversified line of EPA and FDA-compliant disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and consumer use. The Company believes this market provides an opportunity to expand the Company’s portfolio of chemistry products to meet the growing demand. 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 Company believes that data and analytics is an area for growth. Hence, in 2020, the Company acquired JP3 and formed the DA segment. Prior to and throughout the majority of 2020, the DA segment focused sales solely on North American markets; however, the segment is preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands of overseas installations.
The Company continues to develop technologies to ensure its ability to provide differentiated products and services to its customers. The Company remains focused on partnering closely with its customers to create and implement specialty chemical products and compositional analyzers. Differentiated products and services are the result of the deployment of the organization’s technical capabilities and expertise in alignment with customer success. The Company believes the pursuit of new solutions to help make its customers successful will continue to position Flotek as a leader in advanced chemicals and technology.
The Company’s emphasis in 2021 is executing the plan established by the executive team to recover from the varied impacts of COVID-19 and grow the Company’s businesses. The CT segment is focused on marketing our products and services to new and existing customers, while expanding the disinfectants, surface cleaners, degreasers and solvents product line. The DA segment is enhancing its product offerings and customer service while accelerating the business development and sales effort in both the domestic and international markets. The Company does not anticipate a material increase in our maintenance capital spending year-over-year. In 2021, the Company is enhancing its focus on ESG and the responsible management of products and services through our Quality Assurance and Quality Control Program and Chemical Spill Prevention Program, adhering to ISO 9001:2015 standards.
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Consolidated Results of Operations (in thousands):
Consolidated Results of Operations: Three and Six Months Ended June 30, 2021, Compared to the Three and Six Months Ended June 30, 2020

| Three months ended June 30, | Six months ended June 30,
| 2021 |  | 2020 |  |  |  |  | 2021 |  | 2020
Revenue | $9,165 |  | $ | 8,880 |  |  |  |  |  | $ | 20,935 |  |  | $ | 28,296 |
Operating expenses (excluding depreciation and amortization) | 12,110 |  |  | 11,632 |  |  |  |  |  | 25,911 |  |  | 34,473 |
Operating expenses % | 132.1 | % |  | 131.0 | % |  |  |  |  | 123.8 | % |  | 121.8 | %
Corporate general and administrative costs | 2,868 |  |  | 5,395 |  |  |  |  |  | 7,229 |  |  | 9,888 |
Corporate general and administrative % | 31.3 | % |  | 60.8 | % |  |  |  |  | 34.5 | % |  | 34.9 | %
Depreciation and amortization | 253 |  |  | 468 |  |  |  |  |  | 560 |  |  | 2,659 |
Research and development | 1,466 |  |  | 1,638 |  |  |  |  |  | 3,008 |  |  | 4,193 |
Gain on disposal of long-lived assets | (71) |  |  | (22) |  |  |  |  |  | (69) |  |  | (55) |
Impairment of fixed assets and long-lived assets | — |  |  | — |  |  |  |  |  | — |  |  | 57,454 |
Loss from operations | (7,461) |  |  | (10,231) |  |  |  |  |  | (15,704) |  |  | (80,316) |
Operating margin % | (81.4) | % |  | (115.2) | % |  |  |  |  | (75.0) | % |  | (283.8) | %
PPP forgiveness | 881 |  |  | — |  |  |  |  |  | 881 |  |  | — |
Gain on lease termination | — |  |  | 576 |  |  |  |  |  | — |  |  | 576 |
Interest and other income (expense), net | 55 |  |  | 62 |  |  |  |  |  | 4 |  |  | 11 |
Loss before income taxes | (6,525) |  |  | (9,593) |  |  |  |  |  | (14,819) |  |  | (79,729) |
Income tax (expense) benefit | (21) |  |  | 32 |  |  |  |  |  | (27) |  |  | 6,201 |
Net loss | $ | (6,546) |  |  | $ | (9,561) |  |  |  |  |  | $ | (14,846) |  |  | $ | (73,528) |
Net loss % for continuing operations | (71.4) | % |  | (107.7) | % |  |  |  |  | (70.9) | % |  | (259.9) | %

Consolidated revenue for the three months ended June 30, 2021, increased $0.3 million, or 3.2%, primarily due to the acquisition of JP3 in mid-May of the second quarter of 2020, which was partially offset by the loss of two major energy customers that were purchased by non-customers during the second quarter of 2021. Consolidated revenue for the six months ended, June 30, 2021, decreased $7.4 million, or 26.0%, versus the same period of 2020. First half 2020 revenues experienced less COVID-19 impact than first half 2021 results. Second quarter 2021 experienced a loss of revenue in the CT segment associated with two major customers changing ownership during the quarter, partially offset by full-quarter revenue in the second quarter 2021 for JP3.
Consolidated operating expenses (excluding depreciation and amortization) for the three months ended June 30, 2021, increased $0.5 million, or 4.1%, versus the same period of 2020, and as a percentage of revenue, remained flat. The increase was primarily due to an unfavorable product mix in the second quarter of 2021 versus second quarter of 2020. Consolidated operating expenses (excluding depreciation and amortization) for the six months ended June 30, 2021 decreased $8.6 million, or 24.8% versus the same period of 2020, and 2.0% as a percentage of revenue. The decrease in operating expenses for the first half of 2021 resulted from reduced cost of sales due to lower sales activity during 2021 compared to 2020 associated with COVID-19 impacts and related declines in activity. The Company’s operating expenses benefited from actions taken in 2020. Actions taken to reduce operating expenses include 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 the second quarter of 2020.
Corporate general and administrative (“CG&A”) expenses are those expenses not directly attributable to products sold or services provided. CG&A costs for the three and six months ended June 30, 2021, decreased $2.5 million, or 46.8%, and $2.7 million, or 26.9% 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 $0.2 million, or 45.9% and $2.1 million, or 78.9% for the three and six months ended June 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.
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Research and development costs decreased $0.2 million, or 10.5% and $1.1 million, or 28.3% for the three and six months ended June 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.
Impairment of fixed and long-lived assets decreased due to the first quarter 2020 write-down of $54.7 million in the CT segment and a corporate-level write-down of $2.8 million. See Note 8, “Impairment of Fixed and Long-lived Assets, in Item 1, Financial Statements, of this Quarterly Report.” No impairments of fixed and long-lived assets occurred in the first half of 2021.
Loss from operations decreased $2.8 million, or 27.1%, for the three months ended June 30, 2021 and $64.6 million, or 80.4% for the six months ended June 30, 2021, versus the same period in 2020. The loss from operations improvement is primarily a result of the $57.5 million impairment of fixed and long-lived assets in the first quarter of 2020 and no impairments in the first half of 2021. Additionally, the decrease in loss from operations is attributable to the forgiveness of the JP3 PPP loan for $0.8 million and a one-time employee retention credit to the CARES Act of $1.9 million, both recorded in the second quarter of 2021.
The Company’s income tax expense for the second 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 Six Months Ended June 30, 2021, Compared to the Three and Six Months Ended June 30, 2020

| Three months ended June 30, |  |  |  |  | Six months ended June 30,
| 2021 |  | 2020 |  |  |  |  | 2021 |  | 2020
Revenue | $ | 7,688 |  |  | $ | 7,962 |  |  |  |  |  | $ | 17,990 |  |  | $ | 27,378 |
Loss from operations | (3,819) |  |  | (3,596) |  |  |  |  |  | (7,407) |  |  | (66,257) |

CT revenue for the three and six months ended June 30, 2021, decreased $0.3 million, or 3.4% and $9.4 million, or 34.3%, respectively, versus the same periods of 2020. The decrease in revenue during the second quarter of 2021 compared to the second 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, a key sector of our customer base. The Company’s domestic and international revenue for the first half of 2021 decreased as demand from major customers and smaller operators has not returned to the pre-pandemic levels of first quarter 2020. In addition, revenue from two major customers was lost as a result of market consolidation in the Permian basin. CT also granted price concessions due to maintain and obtain market share.
Loss from operations for the CT segment for the three and six months ended June 30, 2021, increased $0.2 million, or 6.2%, and decreased $58.9 million, or 88.8%, respectively versus the same period of 2020. The increase in loss from operations is due to lower revenue and significantly lower expenses, primarily the result of no impairments in the first half of 2021 versus impairment charges of fixed and long-lived assets of $57.5 million in the same period of 2020. Additionally, unfavorable product mix contributed to the increased loss from operations as compared to 2021. Secondly, expenses decreased due to the first quarter of 2020 including a $2.3 million terpene purchase commitment loss with no comparable activity in 2021. Personnel costs declined period over period by $1.0 million, which included first quarter 2020 severance costs of $0.6 million for reduction in force actions. Office costs and equipment and facilities costs decreased a combined $0.6 million period over period from the consolidation of the Company’s physical facilities and equipment rentals to align with activity.
Data Analytics Results of Operations: Three and Six Months ended June 30, 2021 and May 18 -June 30, 2020

| Three months ended June 30, | Period May 18- June 30, |  |  |  |  |  | Six months ended June 30, |  | Period May 18- June 30, |  |  |
| 2021 | 2020 |  |  |  |  |  | 2021 |  | 2020 |  |  |
Revenue | 1,477 |  | 918 |  |  |  |  |  |  | $ | 2,945 |  |  | $ | 918 |  |  |  |
Loss from operations | (773) |  | (1,151) |  |  |  |  |  |  | (1,067) |  |  | (1,151) |  |  |  |

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On May 18, 2020, the Company purchased JP3 and formed the DA segment. Segment revenue for the second quarter of 2021 was $1.5 million, which remained flat from the first quarter 2021.
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 and other intangible assets. There have been no significant changes in the Company’s critical accounting policies and estimates during the six months ended June 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 need to acquire and maintain equipment and fund working capital requirements. During the first six months of 2021, the Company funded capital requirements primarily with cash on hand.
As of June 30, 2021, the Company had available cash and cash equivalents of $27.8 million, as compared to $38.7 million at December 31, 2020. The Company recorded an operating loss for the six months ended June 30, 2021 and recorded $11.2 million of net cash used for operating activities and $0.3 million of net cash used for financing activities. Cash used in investing activities was minimal.
Liquidity
The effects of the COVID-19 pandemic and the volatility in oil prices during 2020 and the first half of 2021 materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. While the full impact and duration of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. See “COVID-19 Effects and Actions” for developments and possible effects.
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 its capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, 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 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:
•Sale of non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sale of excess inventory and/or raw materials;
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•Entry into a borrowing facility with one or more lenders;
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash;
•Reducing professional advisory fees and headcount; and
•Raising equity either in the public markets or via a private placement offering.
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):

| Six months ended June 30,
| 2021 |  | 2020
Net cash used in operating activities | $ | (11,242) |  |  | $ | (29,216) |
Net cash provided (used in) by investing activities | 43 |  |  | (16,424) |
Net cash (used in) provided by financing activities | (273) |  |  | 5,023 |
Effect of changes in exchange rates on cash and cash equivalents | (31) |  |  | (31) |
Net change in cash, cash equivalents and restricted cash | $ | (11,503) |  |  | $ | (40,648) |

Operating Activities
Net cash used in operating activities was $11.2 million and $29.2 million during the six months ended June 30, 2021 and 2020, respectively. Consolidated net loss for the six months ended June 30, 2021 and 2020, totaled $6.5 million and $73.5 million, respectively.
During the six months ended June 30, 2021, non-cash adjustments to net income totaled $1.8 million as compared to $62.1 million for the same period of 2020.
•For the six months ended June 30,2021, non-cash charges included $0.6 million for depreciation, which was lower than the six months ended June 30, 2020 due to asset impairments taken in 2020, and a $0.3 million charge related to the fair value of contingent consideration, stock based compensation of $1.8 million and JP3 PPP loan forgiveness of $0.9 million.
•For the six months ended June 30, 2020, contributory non-cash adjustments consisted primarily of $57.5 million of impairment charges, which included a $30.2 million impairment of fixed assets, $19.9 million impairment of intangible assets and $7.4 million of impairment of right-of-use assets. In addition, non-cash charges included $2.7 million for depreciation and amortization.
During the six months ended June 30, 2021, changes in working capital provided $1.8 million of cash as compared to using $17.8 million for the same period of 2020.
•For the six months ended June 2021, the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable of $2.0 million, partially offset by a decrease in accrued liabilities of $1.0 million.
•For the six months ended June 30, 2020, the use of cash in working capital primarily resulted from a reduction in accrued liabilities and accounts payable of $26.9 million, which included two one-time payments made: 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 Company’s Consumer and Industrial Chemistry Technologies segmen t. Decreases in accounts receivable, inventories and other current assets provided cash of $15.4 million.
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Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2021 was not material. Net cash used in investing activities was $16.4 million for the six months ended June 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 $0.3 million for the six months ended June 30, 2021, primarily for purchases of common stock related to tax withholding requirements. Net cash provided by financing activities was $5.0 million for the six months ended June 30, 2020, primarily from the proceeds received from the Paycheck Protection Program.
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 June 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
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Exchange Act as of June 30, 2021, and has concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2021, due to the material weaknesses in internal control over financial reporting described above.
Remediation Plan and Status
The Company has implemented a remediation plan to address the material weaknesses identified at December 31, 2020. Key elements of this ongoing plan include:
•Implementing monitoring controls over the review and validation of both tangible and intangible assets;
•Expanding controls over impairments of goodwill and long-lived assets;
•Enhancing specificity in the design and implementation of controls around nonrecurring, complex accounting activities, with the assistance of technical subject-matter experts;
•Implementing controls for forecasting and budgeting, to include additional process documentation and precision;
•Expanding monthly management review controls; and
•Enhancing 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 June 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 Joshua A. Snively 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 by Mr. Snively. 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. The Company views this lawsuit as a strategic response to the March 26, 2021 lawsuit filed by Flotek Chemistry and the Company in Texas.
The Company believes that, notwithstanding the termination of the supply agreement, it has sufficient terpene inventory and alternate terpene supply sources to meet its requirements for the foreseeable future. The Company does not expect that termination of the terpene supply agreement will have a material effect on its operations or ability to meet customer needs.
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.
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 June 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 |  |  |  |
April 1, 2021 to April 30, 2021 | 56,219 |  |  | $ | 1.75 |  |  |  |  |
May 1, 2021 to May 31, 2021 | — |  |  | — |  |  |  |  |
June 1, 2021 to June 30, 2021 | — |  |  | — |  |  |  |  |
Total | 56,219 |  |  |  |  |  |  |

(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.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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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 |  | Flotek Industries, Inc. 2018 Long-Term Incentive Plan (incorporated by reference in Exhibit 10.1 to the Company’s Form 8-K filed on June 7, 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 June 30, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Unaudited Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020, (ii) the Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended June 30, 2021 and 2020, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020, (v) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 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.

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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: | August 9, 2021

FLOTEK INDUSTRIES, INC.
By: |  | /s/ MICHAEL E. BORTON
|  | Michael E. Borton
|  | Chief Financial Officer
Date: | August 9, 2021

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