UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM10-K/A 10-K
    Amendment No. 1
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2019
2020
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 Number1-13270
 
ftk-20201231_g1.jpg
FLOTEK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware90-0023731
(State of other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
Delaware
90-0023731
(State of other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
10603 W.8846 N. Sam Houston Parkway N.Suite 300W. Houston,TX77064
(Address of principal executive offices)(Zip Code)
(713) (713) 849-9911
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueFTKNew York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark:
•      if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒
•      if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒
•      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 ☐
•      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 ☐
•      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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
•  whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒
The aggregate market value of votingcommon stock held by non-affiliates of the registrant as of June 28, 201930, 2020 (based on the closing market price on the NYSE Composite TapeNew York Stock Exchange on June 28, 2019)30, 2020) was approximately $150,815,000.$87,800,063. At March 3, 2020,12, 2021, there were 63,275,37272,548,297 outstanding shares of the registrant’s common stock, $0.0001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information requiredPortions of the Company’s definitive proxy statement in connection with the 2021 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A are incorporated by reference into Part III of thethis Annual Report on Form 10-K is incorporated by reference to the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A for the registrant’s 2020 Annual Meeting of Stockholders.
10-K.



EXPLANATORY NOTE

This Amendment No. 1 (this “Amendment”) to the Annual Report on Form 10-K of Flotek Industries, Inc. (the “Company”) for the year ended December 31, 2019 (the “2019 Form 10-K”) is being filed for the purpose of correcting certain errors in the Exhibit Index under Part IV, Item 15 “Exhibits, Financial Statement Schedules” of the 2019 Form 10-K together with each of the exhibits filed as part of the 2019 Form 10-K, each of which has been amended and restated in its entirety. No revisions are being made to the Company’s financial statements, and this Amendment does not reflect events occurring after the filing of the 2019 Form 10-K, or modify or update those disclosures that may be affected by subsequent events, and no other changes are being made to any other disclosure contained in the Form 10-K.

TABLE OF CONTENTS
 
Forward-Looking Statements
3
PART I
14
Item 1.
Business
Business4
1
Item 1A.
Risk Factors
Risk Factors9
4
Item 1B.
Unresolved Staff Comments
1323
Item 2.
Properties
Properties23
14
Item 3.
Legal Proceedings
Legal Proceedings23
14
Item 4.
Mine Safety Disclosures
1423
PART II
1524
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
1524
Item 6.
Selected Financial Data
17
25
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1826
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
3340
Item 8.
3442
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
6882
Item 9A.
6882
Item 9B.
Other Information
Other Information83
69
PART III
7084
Item 10.
Directors, Executive Officers and Corporate Governance
7084
Item 11.
Executive Compensation
Executive Compensation84
70
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
7084
Item 13.
Certain Relationships and Related Transactions, and Director Independence
7084
Item 14.
Principal Accounting Fees and Services
7084
7185
Item 15.
7185
Item 16.Form 10-K Summary
86
7388


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FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K (this “Annual Report”), and in particular, Part II, Item 7 –— “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent the Company’s 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 Annual Report are based on information available as of the date of this Annual Report.
The forward lookingforward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words such asincluding but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,” “potential,” “schedule,” “continue,” “intend,”
“expect, “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 this Annual Report and periodically in futuresubsequent reports filed with the Securities and Exchange Commission (the “SEC”(“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.
 

ii
3


PART I

Item 1. Business.
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global, technology-driven chemistry and data company that serves customers in industrial, commercial and consumer markets.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers and supplies chemistrymarkets specialty chemicals that enhance the profitability of hydrocarbon producers and servicescleans surfaces in both commercial and personal settings to help reduce the oilspread of bacteria, viruses and gas industries. Flotek also supplied high-value compoundsgerms.
The Company’s Data Analytics (“DA”) segment enables users to companies that make foodmaximize the value of their processes by providing analytics associated with their hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets, which became classified as discontinued operations at December 31, 2018.allows users to pursue automation of their hydrocarbon streams to maximize their profitability.
The Company was originallyinitially incorporated inunder the laws of the Province of British Columbia on May 17,in 1985. In October 2001, the Company moved thechanged its corporate domicile to Delaware and effected a 120 to 1 reverse stock split by waythe State of a reverse merger with CESI Chemical, Inc. Since then, the Company has grown organically and through a series of acquisitions.
Delaware. In December 2007, the Company’s common stock began trading on the New York Stock Exchange (“NYSE”) under the stock ticker symbol “FTK.” Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are posted to the Company’s website, www.flotekind.com, as soon as practicable subsequent to electronically filing or furnishing to the SEC. Information contained in the Company’s website is not to be considered as part of any regulatory filing.
As used herein, “Flotek,” the “Company,” “we,” “our,”“our” and “us” refers to Flotek Industries, Inc. and/or the Company’s wholly ownedwholly-owned subsidiaries. The use of these terms is not intended to connote any particular corporate status or relationship.
Recent Developments
During the fourthsecond quarter of 2018,2020, the Company initiatedacquired 100% ownership of JP3 Measurement, LLC (“JP3”), a strategic plan to sell its Consumerprivately-held data and Industrial Chemistry Technologies, (“CICT”) segment,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, which was completed intargets an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. In conjunction with the first quarteracquisition of 2019. An investment banking advisory services firm was engaged and actively marketed this segment. Effective December 31, 2018,JP3, the Company classifiedcreated the assets, liabilities, and results of operations for this segment as “Discontinued Operations” for all periods presented.DA segment.
DuringThe Company was impacted by the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry and effective December 31, 2016 classified the Drilling Technologies and Production Technology segments into discontinuing operations. During 2017, the Company completed the sale of substantially alloutbreak of the assetsnovel coronavirus (“COVID-19”), a global pandemic that spread throughout the U.S. and transfer of certain specified liabilities and obligations of eachthe world during 2020. For a discussion of the Drilling Technologiesimpacts of COVID-19, see “COVID-19 Effects and Production Technologies segments.Actions” in this Item 7 of this Form 10-K. For a discussion of the risks related to COVID-19, see Item 1A, “Risk Factors.”

Description of Operations and Segments
The Company’s continuing operations have one strategichas two business segment: Energy Chemistry Technologies (“ECT”). The CICT segment was sold in 2019,segments, CT and the Drilling Technologies, and Production Technologies segments were sold in 2017 and all three are classified as discontinued operations.
The Company offers competitive products and services derived from technological advances, some ofDA, which are patented, and experience in fluid systems applications that are responsive to industry demands in both domestic and international markets. Flotek operates and/or distributes its products in seven domestic and international markets.
supported by the Company’s continuing Research & Innovation (“R&I”) advanced laboratory capabilities. Financial information about the Company’s operating segments and geographic concentration is provided in Note 17 –22, “Business Segment, Geographic and Major Customer Information” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.
Information about the Company’s operating segment is below.
Energy Chemistry Technologies
The ECTCompany’s CT segment includes an energy-focused product line that is comprised of proprietary green chemistries, specialty chemistries, logistics and technology services. The Company designs, develops, manufactures, packages, distributes, delivers and markets reservoir-centric 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. Flotek’s specialty chemistries possess enhanced performance characteristicsfields, as well as to reduce health and are manufacturedenvironmental risk by using greener chemicals. Customers of this product line of
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the CT business 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 performaddress the emerging demand for sanitizers, surface cleaners and disinfectants for both commercial and personal use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce Food and Drug Administration (“FDA”) and Environmental Protection Agency (“EPA”) compliant products by completing all necessary upgrades to its ISO 9001:2015 certified facility in a broad range of basins and reservoirs with varying downhole pressures, temperatures and other well-specific conditions customized to customer specifications. This segmentMarlow, Oklahoma. Today the Company has a portfolio of U.S. manufactured specialty chemical products to address the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks. To restore large public gatherings, it is believed that both vaccinations, behavioral changes, sanitizers, surface cleaners, and disinfectants are needed. The Company has made a commitment of being in this market for the long-term.
Data Analytics
Customers of the DA segment span across the entire oil and gas market, including upstream producers, midstream companies, refineries and distribution networks. The segment is continuing its transition to a revenue subscription model from selling its line of Verax analyzers, deployed in the field across the oil and gas sector, to support contracts and software services via its cloud-based Viper software platform.
In 2020, the DA segment began preparing for international deployments, including export control classification, international certifications and product design modifications to meet the demands of overseas installations. Also in 2020, the Company hired a business development executive who is developing sales opportunities in the international market.
Research & Innovation
R&I supports 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. For the years ended December 31, 2020 and 2019, the Company incurred $7.2 million and $8.9 million, respectively, of research and innovation laboratorydevelopment expense. In 2020, research and technical services laboratoriesdevelopment expense were approximately 13.6% of consolidated revenue. The Company expects that focus on design improvements,its 2021 research and development investment will continue to support new product development, especially in support of enhanced environmental, social and viability testinggovernance (“ESG”) standards, increased adoption of newgreen chemistry formulations, and continued enhancement of existing products. Flotek’s flagship patented chemistry technologies include Complex nano-Fluid® (“CnF® products”), Pressure reducing Fluids®, and MicroSolv™.
Chemistries branded as Complex nano-Fluid® technologies are patented both domestically and internationally and are performance additives within both oil and natural gas markets. The CnF® product mixtures are stable mixtures of plant derived oils, water, and surface active agents which organize molecules into nano structures. The combined advantage of solvents, surface active agents and water, and the resultant nano structures, improve well treatment results as compared to the independent use of solvents and surface active agents. CnF® products are composed of renewable, plant-derived ingredients and oils that are certified as biodegradable. CnF® chemistries help achieve improved operational and financial

resultsconventional customization initiatives for the Company’s customers in low permeability sand and shale reservoirs.
Chemistries branded as Pressure reducing Fluids® technologies(“PrF® products”) are a patented line of high molecular weight polymers used as friction reducers that reduce turbulence and maximize the use of the polymer at a lower loading rate. The products have proven efficacy in a broad range of water quality, including high brine and high iron environments.
Introduced in April 2018, chemistries branded as MicroSolv™ are a patented line of microemulsion technologies designed to deliver cost-effective performance.its clients.
Discontinued Operations
Previously, the Company’s Consumer and Industrial Chemistry Technologies. Technologies (”CICT”) segment supplied high value compounds to companies that make food and beverages, cleaning products, cosmetics and other products sold in consumer and industrial markets. The CICTCompany classified the assets, liabilities and results of operations for this segment reported as discontinued operations sourced citrus oil domestically and internationally and processed citrus oils. Products produced from processed citrus oil include (1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in the oil & gas industry and numerous other industries around the world. The CICT segment designed, developed, and manufactured products that were sold to companies in the flavor and fragrance industries and specialty chemical industry. These technologies were used within food and beverage, fragrance, and household and industrial cleaning products industries.
Drilling Technologies. The Drilling Technologies segment provided downhole drilling tools for use in energy and mining activities. This segment assembled, rented, sold, inspected, and marketed specialized equipment used in energy, mining, and industrial drilling activities. Established tool rental operations were located throughout the United States (the “U.S.”) and in a number of international markets.
Production Technologies. The Production Technologies segment provided pumping system components, electric submersible pumps (“ESPs”), gas separators, production valves, and complementary services. Through the Company’s acquisition of International Artificial Lift, LLC,at December 31, 2018. Effective February 2019, the Company provided a line of next generation hydraulic pumping units that served to increase and maximize production for oil and natural gas wells.sold the CICT segment.
Seasonality
Overall, operations are not significantly affected by seasonality; however, winter weather conditions can pose delays in clients’ activity levels. Certain working capital components build and recede throughout the year in conjunction with established purchasing and selling cycles that can impact operations and financial position. The performance of certain services within the Company’s remaining ECT segmentservices can be susceptible to both weather and naturally occurring phenomena, including, but not limited to, the following:
•the severity and duration of winter temperatures in North America, which impacts natural gas storage levels, drilling activity, commodity prices and commodity prices;operations at the Company’s facilities;
5

•material deviations from normal seasonality for an extended period can impact access to operations, reduced performance at manufacturing facilities, inability to deploy required personnel, supply chain interruptions, facility damage and customer activity levels;
•the timing and duration of the Canadian spring thaw and resulting restrictions that impact activity levels;
•the timing and impact of hurricanes upon coastal and offshore operations; and
•the adverse weatherCOVID-19 pandemic or other pandemics or similar phenomena, which may impact seasonal purchasing and disease that affect citrus crops in Florida and Brazil which can negatively impact the availability of citrus oils and increase raw material costs for the ECT segment.selling cycles.
Product Demand and Marketing
Demand for the Company’s energy-focused products and services in both the CT and DA segments is driven by energy supply and demand, as well as operator desire to deploy improved ESG solutions. Demand for the Company’s energy chemistry products and services is dependent on levels of conventional and non-conventionalunconventional oil and natural gas well drilling and completion activity, both domestically and internationally. ProductsDemand for the Company’s U.S. manufactured sanitizing, surface cleaning and disinfecting products in the ECTCT segment is driven by hygiene and cleaning trends and related purchasing behaviors among the commercial, governmental and consumer markets for sanitizing, surface cleaning and disinfecting products and services.
The Company’s products are marketed directly to customers through the Company’s own sales force and through certain contractual agency arrangements. Established customer relationships provide repeat sales opportunities. TheIn 2020, the Company participatesparticipated in industry trade shows, andsome of which were virtual shows due to COVID-19 pandemic impacts. The Company also publishes technical papers and case studies examining the performance of its chemistries and methodologies for evaluating chemistries more effectively. While the Company’s primary marketing efforts remain focused in North America, a growing amount of resources and effort are focused on emerging international markets, especially in the Middle East and North Africa (“MENA”) and South America.East. In addition to direct marketing and relationship development, the Company also markets products and services through the use of third partythird-party agents, primarily in international markets.
Customers
The Company’s customers primarily include major integrated oil and natural gas companies, oilfield service companies, independent oil and natural gas companies, pressure pumping service companies, and national and state-owned oil companies. Within the ECT segment, the Company had two major customers for the year ended December 31, 2019, which accounted for 20% and 10%, respectively, of consolidated revenue, two major customers for the year ended December 31, 2018, which accounted for 12% and 10%, respectively, of consolidated revenue, and one major customer for the year ended December 31, 2017, which accounted for 17% of consolidated revenue. In aggregate, the Company’s largest three customers collectively accounted for 40%, 30%, and 32% of consolidated revenue for the years ended December 31, 2019, 2018, and 2017, respectively.

Research and Innovation
The Company is engaged in research and innovation activities focused on the design of reservoir specific, customized chemistries in the ECT segment. In this segment, for the years ended December 31, 2019, 2018, and 2017, the Company incurred $8.9 million, $10.4 million, and $13.1 million, respectively, of research and innovation expense. In 2019, research and innovation expense was approximately 7.4% of consolidated revenue. The Company expects that its 2020 research and innovation investment will continue to remain a significant portion of overall spending to support new product development and customization initiatives for its clients.
Backlog
Due to the nature of the Company’s contractual customer relationships and the way they operate,their transactional nature, the Company has historically not had significant backlog order activity.
Intellectual Property

The Company’s policy isCompany endeavors to protect its intellectual property, both within and outside of the U.S. The Company considers patent protection for all products and methods deemed to have commercial significance and that may qualify for patent protection. The decision to pursue patent protection is
dependent upon several factors, including whether patent protection can be obtained, cost effectiveness, and alignment with operational and commercial interests. The Company believes its patent and trademark portfolio, combined with confidentiality agreements, FDA and EPA registrations and licensing, trade secrets, proprietary designs, and manufacturing and operational expertise, are necessary and appropriatesufficient to protect its intellectual property and ensureprovide continued strategic advantage. Within its continuing operations,As of December 31, 2020, the Company has 82had 115 granted patents, consisting of 93 patents in our CT segment and approximately 5022 patents in our DA segment. In addition, the Company also had 44 pending patent applications filed in the U.S. and abroad, coveringincluding 32 for the CT segment and 12 for the DA segment. The patents of the CT segment cover various chemical compositions and methods of use. The patents of the DA segment cover various systems and methods of use for online determination of chemical composition and data analysis. In addition, within its continuing operations, the Company hashad 60 registered trademarks in the U.S. and abroad, covering a variety of its goods and services.
Competition
The ability to compete in the oilfield services industry is dependent upon the Company’s ability to differentiate its products and services, provide superior quality and service, and maintain a competitive cost structure with sufficient raw material supplies. Activity levels in the oil fieldoilfield goods and services industry are impacted by current and expected oil and natural gas prices, oil and natural gas drilling activity, production levels, and customer drilling and completion designatedcompletion-designated capital spending. Domesticspending, and international regions in which Flotek operates are highly competitive.customer commitment to improved ESG performance. The unpredictability of the energy industry and commodity price fluctuations creates both
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increased risk and opportunity for the products and services of both the Company and its competitors.
Certain oil The Company’s CT segment also competes with established companies and natural gas service companies competing withbrands in the Company are largersanitizers, surface cleaners and have access to more resources. Such competitors could be better situated to withstand industry downturns, compete on the basisdisinfectants market. The DA segment faces competition from other providers of price, and acquire and develop new equipment and technologies, all of which could affectservices for real-time information in the Company’s revenueupstream, midstream, refining and profitability. Oil and natural gas service companies also compete for customers and strategic business opportunities. Thus, competition could have a detrimental impact on the Company’s business.distribution market.
Raw Materials
Materials and components used in the Company’s servicing and manufacturing operations, as well as those purchased for sale, are generally available on the open market from multiple sources. When able, the Company uses multiple suppliers, both domestically and internationally, to purchase raw materials on the open market. The prices paid for raw materials vary based on energy, citrus, andavailability, weather, other commodity price fluctuations, contractual obligations, tariffs, duties on imported materials, foreign currency exchange rates, business cycle position and global demand. Higher prices for chemistries citrus, polymers, and othercertain raw materials could adversely impact future sales, contract fulfillment and contract fulfillments.
Citrus-based terpene (d-limonene) is an important feedstock for many of the Company’s formulations. In addition, the Company utilizes naturally derived terpenes from other sources and bio-based solvents from other natural sources.
product margins. The Company is diligent in its efforts to identify alternate suppliers in its contingency planning forby reducing the number of contractually obligated volumes and utilizing competitive bidding practices to proactively reduce costs and potential supply shortagesshortages.
The DA segment currently sources spectrometers from a single supplier. Sufficient inventory exists to meet the expected 2021 needs without additional purchases. Supply chain disruption could adversely impact the results of the segment in the years 2022 and in its proactive efforts to reduce costs through competitive bidding practices.beyond.
Government Regulations
The Company is subject to federal, state, and local laws and regulations, including laws related to the environment, occupational safety, health, transportation and trade within the U.S. and other countries in which the Company does business. These laws and regulations strictly govern the manufacture, storage, transportation, sale, use and disposal of chemistry products. The Company strives to ensure full compliance with all regulatory requirements and is unaware of any material instances of noncompliance.requirements.
The Company continually evaluates the environmental impact of its operations and attempts to identify potential liabilities and costs of any environmental remediation, litigation or associated claims. Several products of the ECT and discontinued CICT segmentsCT segment are considered hazardous materials. In the event of a leak or spill in association with Company operations, the Company could be exposed to risk of material cost, net of insurance proceeds, if any, to remediate any contamination. No environmental claims are currently being litigated or investigated, and the Company does not expect that costs related to remediation requirements will have a significant adverse effect on the Company’s consolidated financial position or results of operations.
Human Capital

Objectives & Culture
The Company’s vision is to be the collaborative partner of choice for chemistry and data technologies that transform businesses. Chemistry is our common platform across the Company’s business segments, and we apply our knowledge and passion for chemistry to empower value creation for all our stakeholders. At the center of our mission is our Human Capital. We are focused on attracting, retaining and developing high-potential talent, who make a positive impact and create a strong culture where innovation and value thrives.
Our culture is built around the following core values:
•Prioritizing safety;
•Leading through ESG;
•Creating customer success;
•Driving value for all Flotek stakeholders;
•Maintaining integrity;
•Conducting ourselves with humility;
•Taking personal accountability; and
•Having fun.
Employees7

At
Employee Overview
As of December 31, 2019,2020, the Company had 174147 employees, exclusive of existing worldwide agency relationships.
None of the Company’s employees are covered by a collective bargaining agreement and labor relations are generally positive. Certain
Employees & Health, Safety & Environment
The Company is committed to acting with care to protect the health and safety of people, resources and the environment. We will stop operations to avoid putting persons or property in harm’s way as we operate. Each of us owns health, safety and environment (“HSE”), as it is not isolated to certain individuals or roles. We aim to hold each other accountable to a high standard. Thus, every employee is empowered and expected to stop any activity, big or small, that could jeopardize people, the environment or assets.
As a result, safety is woven into the fabric of the Company, from our robust training programs to our ESG moments that begin team meetings, to our Hazardous Observation Card program.
Our safety, health and environmental goals are designed to sustain our drive to zero incidents, both relentlessly and responsibly. We constantly emphasize the importance of monitoring the safety, security and environmental impact of our job sites. Through our day-to-day due diligence, the Company strives to be recognized as one of the industry's best performers. Company operations worldwide endeavor to comply with, or exceed, all local requirements to protect the environment, health, safety and security of our operations.
Our training program is fundamental to operating safely and protecting people and the environment. The Company maintains a robust health, safety and environmental training program that includes both classroom and online curriculum. We assign specific trainings to employees based on their role and function within the Company. Additionally, the Company’s field and plant personnel complete more than 24 hours of training annually. We continuously monitor all operational activities and update the training programs as needed to ensure that the curriculum remains relevant and effective for minimizing risk and protecting our employees and the environment.
Our safety, health and environmental goals are designed to sustain our drive to zero incidents. In 2020, our company-wide Total Recordable Incident Rate, a key safety performance metric which calculates the number of recordable incidents per full-time workers during a one-year period, was 0.80. When comparing to the safety record of the chemical manufacturing sector, Flotek’s safety performance leads the industry.
Employee Safety and COVID-19
In 2020, the Company established a COVID-19 task force comprised of the executive team and key functional leaders who created and introduced a COVID-19 preparedness and response plan to protect our employees and business partners through the global pandemic. Across the organization, the Company implemented new protocols and standards to guide workplace behaviors and facilitate remote work productivity.
The task force frequently communicated with employees regarding the impacts of the COVID-19 pandemic, as well as health and safety protocols and procedures. Key actions taken include:
•Adopted remote work procedures and modified work shifts for employees;
•Required employees to stay-at-home when exhibiting any of the following symptoms: fever, chills, headache, sore throat, loss of taste or smell and muscle pain;
•Upon return-to-work, provided face masks, hand sanitizer and access to cleaning supplies for all employees;
•Increased cleaning protocols across all locations;
•Implemented social distancing for in-person engagements, requiring face coverings for in-person meeting attendance, contactless greetings and limited sizes of group meetings;
•Modified travel policy to reduce or eliminate non-essential business travel, prohibiting international travel;
•Created isolation areas at all locations have staffing orfor employees who became ill during work arrangementshours;
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•Performed contact tracing in cases of potential exposure to COVID-19; and
•Continued our policy to treat all medical information as a confidential medical record in accordance with employee privacy rights under the Americans with Disabilities Act and Health Insurance Portability and Accountability Act.
Compensation: Wages & Benefits
The Company’s compensation programs are designed to provide employee wages that are contingentcompetitive and consistent with employee positions, skill levels, experience, knowledge and geographic location. We align our programs to attract, retain and motivate employees to achieve high-impact results that create value for all of our stakeholders. In addition to competitive base wages, all employees are eligible for a discretionary bonus, which is based upon local work councils or other regulatory approvals.individual and company performance.
A key component of our compensation program is benefits. We engage an outside benefits consulting firm to independently evaluate the effectiveness and competitiveness of our employee benefits program, as well as to tailor our program to the unique needs of the Company’s employee base.
All full-time Company employees are eligible for comprehensive health insurance, including medical insurance, prescription drug benefits, dental insurance and vision insurance. Additionally, the Company offers flexible spending and health savings accounts, life and disability/accident coverage, telemedicine programs, critical illness insurance and paid and unpaid leave. Eligible employees may elect to participate in the Company’s employee stock purchase plan and retirement plans, including its 401(k) plan in the U.S. and its Registered Retirement Savings Plan in Canada. The Company also offers access to online and personalized financial planning services as a component of its retirement plan benefit.
In 2020, the Company prioritized the mental health and wellness needs of its employees, maintaining an ongoing dialogue with employees and providing resources through its employee assistance program, which is available to all employees and their families.

Available Information and Website
The Company’s website is accessible at www.flotekind.com. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available (see the “Investor Relations” section of the Company’s website), as soon as reasonably practicable, subsequent to electronically filing or otherwise providing reports to the SEC. Corporate governance materials, guidelines, by laws, and code of business conduct and ethics are also available on the website. A copy of corporate governance materials is available upon written request to the Company.
The SEC maintains the www.sec.gov website, which contains reports, proxy and information statements, and other registrant information filed electronically with the SEC.
The Annual Chief Executive Officer Certification required by the NYSE was submitted on June 21, 2019. The certification was not qualified in any respect. Additionally, the Company has filed all principal executive officer and financial officer certifications as required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with this Annual Report. Information with respect to the Company’s executive officers and directors is incorporated herein by reference to information to be included in the proxy statement for the Company’s 20202021 Annual Meeting of Stockholders.
The Company has disclosed and will continue to disclose any changes or amendments to the Company’s code of business conduct and ethics as well as waivers to the code of ethics applicable to executive management by posting such changes or waivers on the Company’s website.
website or in filings with the SEC.

Item 1A. Risk Factors.
The Company’s business, financial condition, results of operations, and cash flows and liquidity are subject to various risks and uncertainties. Readers of this reportAnnual Report should not consider any descriptions of these risk factors to be a complete set of all potential risks that could affect Flotek.the Company. These factors should be carefully considered together with the other information contained in this Annual Report and the other reports and materials filed by the Company with the SEC. Further,
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many of these risks are interrelated and, as a result, the occurrence of certain risks could trigger and/or exacerbate other risks. Such a combination could materially increase the severity of the impact of these risks on the Company’s business, results of operations, financial condition, cash flows or liquidity.
This Annual Report contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Forward-looking statements discuss Company prospects, expected revenue, expenses and profits, strategic and operational initiatives, and other activities. Forward-looking statements also contain suppositions regarding future oil and natural gas industry and other conditions, both domestically and internationally. The Company’s results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including risks described below and elsewhere. See “Forward-Looking Statements” at the beginning of this Annual Report.
Risks Related to the Company’s Business
The Company’s business is largely dependent upon domestic and internationalits customers’ spending, both in the oil and natural gas industry spending.
and in the sanitizer, surface cleaner and disinfectant sector. Spending could be adversely affected by industry conditions or by new or increased governmental regulations,regulations; global economic conditions,conditions; spending on sanitizer, surface cleaner and disinfectant products; sentiment surrounding the COVID-19 pandemic; the availability of credit,credit; and lower oil and natural gas prices. All of these factors are beyond the Company’s control. The resulting reductions in customers’ expenditures could have a significant adverse effect on Company revenue, margins, and overall operating results.
The Company’s ECT segment isCT and DA segments are dependent upon customers’ willingness to make operating and capital expenditures for exploration, development and production of oil and natural gas in both North American and global markets. Customers’ expectationspurchasing decisions related to the Company’s products. Expectations of a decline in future oil and natural gas market prices or lessened focus on sanitation chemicals could result in curtailed spending, thereby reducingreduce demand for the Company’s products and services. Industry conditions are influenced by numerous factors over which the Company has no control, including the supply of and demand for oil and natural gas, domestic and international economic conditions, political instability in oilavailability and natural gas producing countrieseffectiveness of a COVID-19 vaccine, general focus on sanitization and mergercleansing, and divestiture activitymergers and divestitures among oilthe Company’s target customer base.
Demand for and natural gas producers and service companies.
The price for oil and natural gas isprices of the Company’s products are subject to a variety of factors, including, but not limited to:
•global demand for energy as a result of population growth, economic development, and general economic and business conditions;
•the timing and rate of economic recovery from the effects of COVID-19;
•the need for sanitization products related to concern over COVID-19 and similar diseases and related consumer behavior;
•the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and the impact of non-OPEC producers on global supply;

•availability and quantity of natural gas storage;
•import and export volumes and pricingpricing of liquefied naturalnatural gas;
•domestic and international refining activity;
•availability of vaccines and other therapeutic treatments for COVID-19;
•pipeline capacity to critical markets and out of producing regions;
•political and economic uncertainty and socio-politicalsociopolitical unrest;
•cost of exploration, production and transport of oil and natural gas;
•technological advances impacting energy production and consumption; and
•weather conditions.
The volatility of oil and natural gascommodity prices and the consequential effect on exploration and production activitythe activities of the Company’s target customer base could adversely impact the activity levels of the Company’s customers.
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Volatile economic conditions could weaken customer exploration and production expenditures, causing reduced demand for the Company’s products and services and a significant adverse effect on the Company’s operating results. It is difficult to predict the pace of industry growth, the direction of oil and natural gas prices, the direction and magnitude of economic activity, the effects or duration of the COVID-19 pandemic, the demand for sanitizer, surface cleaner and disinfectant products, and to what extent these conditions could affect the Company. However, reduced cash flow and capital availability could adversely impact the financial condition of the Company’s customers, which could result in customer project modifications, delays or cancellations, general business disruptions, and delay in, or nonpayment of, amounts that are owed to the Company. This could cause a negative impact on the Company’s results of operations and cash flows.
Furthermore, if certain of the Company’s suppliers were to experience significant cash flow constraints or become insolvent as a result of such conditions, a reduction or interruption in supplies or a significant increase in the price of supplies could occur, adversely impacting the Company’s results of operations and cash flows.
The COVID-19 pandemic has significantly reduced demand for our services and may continue to have a prolonged material adverse impact on our financial condition, results of operations and cash flows.
The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant and continued reduction in international and U.S. economic activity. These effects have materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas, as well as for our oil and gas related services and products. The decline in our customers’ demand for our oil and gas related services and products has had a material adverse impact on our financial condition, results of operations and cash flows. In addition, we have adopted 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. We expect such impact will continue to have certain negative effects on the Company’s reliance onbusiness.
The timing of the effectiveness of vaccines, economic uncertainty, and future developments and effects are highly uncertain and cannot be predicted. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity and/or capital levels.
Reduced unconventional oil production could lessen the positive effects of a general recovery of the oil and gas industry.
The majority of the Company’s current product offerings in its CT segment, other than sanitizer, surface cleaner and disinfectant products, are used in unconventional oil and gas plays.operations. The Company has little to no exposure to conventional or offshore sectors. In the event that an industry recovery is disproportionately driven by conventional and offshore oil and gas plays,operations, the Company may not have a resulting increase in its operational results.
The Company’s inability to develop and/or introduce new products or differentiate existing products could have an adverse effect on its ability to be responsive to customers’ needs and could result in a loss of customers, as well as adversely affecting the Company’s future success and profitability.
The oil and natural gas industry isindustries in which the Company does business are characterized by technological advancements that have historically resulted in, and will likely continue to result in, substantial improvements in the scope and quality of oilfieldspecialty chemistries and their function and performance.analytical services. Consequently, the Company’s future success is dependent, in part, upon the Company’s continued ability to timely develop innovative products and services. Increasingly sophisticated customer needs and the ability to anticipate and respond to technological and operational advances in the oil and natural gas industry is critical. Proving upSuccessful introduction of new technology requires time and resources, and there is no assurance that the Company will be able to commercialize new technology in a timely manner. If the Company fails to successfully develop and introduce innovative products and services that appeal to customers, or if existing or new market competitors develop superior products and services, the Company’s revenue and profitability could deteriorate. The Company develops, markets and produces certain green alternatives to many existing products. If these green alternatives do not perform as well as existing conventional products, the Company’s revenue and profitability could be adversely affected.
Increased competition could exert downward pressure on prices charged for the Company’s products and services.
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The Company operates in a competitive environment characterized by large and small competitors. Competitors with greater resources and lower cost structures or who are trying to gain market share may be successful in providing competing products and services to the Company’s customers at lower prices than the Company currently charges. Employees of the Company may leave and compete directly with the Company. This may require the Company to lower its prices, resulting in an adverse impact on revenues, margins, and operating results. Thus, competition could have a detrimental impact on the Company’s business.
If the Company is unable to adequately protect intellectual property rights or is found to infringe upon the intellectual property rights of others, or is unable to maintain the registrations and certifications of its products and facilities, the Company’s business is likely to be adversely affected.
The Company relies on a combination of patents, trademarks, copyrights, trade secrets, non-disclosure agreements and other security measuresmethods to establishaccess markets and protect the Company’s intellectual property rights.create a competitive advantage. Although the Company believes that existing measures are reasonably adequate to protect intellectual property rights, there is no assurance that the measures taken will prevent misappropriation of proprietary information or dissuade others from independent development of similar products or services. Moreover, there is no assurance that the Company will be able to prevent competitors from copying, reverse engineering, modifying or otherwise obtaining and/or using the Company’s technology and proprietary rights to create competitive products or services. The Company may not be able to enforce intellectual property rights outside of the U.S. Additionally, the laws of certain countries in which the Company’s products and services are manufactured or marketed may not protect the Company’s proprietary rights to the same extent as do the laws of the U.S. Furthermore, other third parties may infringe, challenge, invalidate or circumvent the Company’s patents, trademarks, copyrights and trade secrets. In each case, the Company’s ability to compete could be significantly impaired.

A portion of the Company’s products and services are without patent protection. The issuance of a patent does not guarantee validity or enforceability. The Company’s patents may not necessarily be valid or enforceable against third parties. The issuance of a patent does not guarantee that the Company has the right to use the patented invention. Third parties may have blocking patents that could be used to prevent the Company from marketing the Company’s own patented products and services and utilizing the Company’s patented technology.
The Company is exposed and, in the future, may be exposed to allegations of patent and other intellectual property infringement from others. The Company may allege infringement of its patents and other intellectual property rights against others. Under either scenario, the Company could become involved in costly litigation or other legal proceedings regarding its patent or other intellectual property rights, from both an enforcement and defensive standpoint. Even if the Company chooses to enforce its patent or other intellectual property rights against a third party, there may be risk that the Company’s patent or other intellectual property rights become invalidated or otherwise unenforceable through legal proceedings. If intellectual property infringement claims are asserted against the Company, the Company could defend itself from such assertions or could seek to obtain a license under the third party’s intellectual property rights in order to mitigate exposure. In the event the Company cannot obtain a license, third parties could file lawsuits or other legal proceedings against the Company, seeking damages (including treble damages) or an injunction against the manufacture, use, sale, offer for sale, or importation of the Company’s products and services. These could result in the Company having to discontinue the use, manufacture and sale of certain products and services, increase the cost of selling certain products and services, or result in damage to the Company’s reputation. An award of damages, including material royalty payments, or the entry of an injunction order against the use, manufacture and sale of any of the Company’s products and services found to be infringing, could have an adverse effect on the Company’s results of operations and ability to compete.
Certain of the Company’s products and facilities, especially those related to the sanitizer, surface cleaner and disinfectant business, have been registered with the EPA and/or FDA.The failure of the Company to maintain such EPA and FDA registrations could result in the inability of the Company to market or sell its products.In the event that the Company cannot maintain its registrations or licenses or is unable to procure new licenses or registrations for new products or in response to changes to regulatory requirements, the ability of the Company to sell its products and obtain revenue may be adversely affected.
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The loss of key customers could have an adverse impact on the Company’s results of operations and could result in a decline in the Company’s revenue.
The Company has critical customer relationships which are dependent upon production and development activity related to a handful of customers. In the continuing operationsCT segment, reported,in the aggregate, revenue derived from the Company’s three largest customers as a percentage of consolidated revenue for the years ended December 31, 2020 and 2019, 2018,totaled 50% and 2017, totaled 40%, 30%, and 32%, respectively. CustomerCustomer relationships are historically governed by purchase orders or other short-term contractual obligations as opposed to long-term contracts. Losses of customers also may occur due to product, service or pricing issues, as well as industry consolidation. The Company competes in a highly competitive environment and must work diligently to create and maintain productive customer relationships, and the failure to maintain those relationships could result in the loss of one or more key customers. The loss of one or more key customers could have an adverse effect on the Company’s results of operations and could result in a decline in the Company’s revenue.
Loss of key suppliers, the inability to secure raw materials on a timely basis, or the Company’s inability to pass commodity price increases on to its customers could have ana material adverse effect on the Company’s ability to service its customers’ needs and could result in a significant loss of customers.
Materials used in servicing and manufacturing operations, as well as those purchased for sale, are generally available on the open market from multiple sources. Acquisition costs and transportation of raw materials to Companythe Company’s facilities have historically been impacted by extreme weather conditions. Certain raw materials used by the ECTCompany’s CT segment are available only from limited sources; accordingly, any disruptions to critical suppliers’ operations could materially and adversely impact the Company’s operations. Prices paid for raw materials could be affected by energy products and other commodity prices; weather and disease associated with the Company’sour crop dependent raw materials, specifically citrus greening;materials; tariffs and duties on imported materials; foreign currency exchange rates; and phases of the general business cycle and global demand. The ECTCompany’s CT segment secures shortshort- and long termlong-term supply agreements for most of its critical raw materials from both domestic and international vendors.
Certain of the Company’s products use citrus terpene as a raw material. While the Company believes that its existing supply and contractual arrangements are sufficient for its current usage, a loss of current supply may require the Company to find alternative raw materials or alternative sources of citrus terpene, each of which could have an adverse effect on the cost of the Company to produce its products.
The prices of key raw materials are subject to market fluctuations, which at times can be significant and unpredictable. Availability of key raw materials, weather events, natural disasters, and health epidemics in countries from which the Company sources its raw materials may significantly impact prices. The Company may be unable to pass along price increases to its customers, which could result in ana materially adverse impact on margins and operating profits. The Company currently uses purchasing strategies designed, where possible, to align the timing of customer demand with ourthe Company’s supply commitments. However, the Company currently does not hedge commodity prices, but may consider such strategies in the future, and there is no guarantee that the Company’s purchasing strategies will prevent cost increases from resulting in materially adverse impacts on margins and operating profits.
The Company dependsCompany’s DA segment is dependent on a single-source supplierits ability to source appropriate technical components for citrus terpene,its Verax measurement system, certain of which are specialty products that are sole-sourced and the loss of this supplier could significantly harm the Company’s business, financial condition, and results of operations.
Citrus-based terpene (d-limonene) is an important feedstock for many of the Company’s formulations. In February 2019, the Company entered into a terpene Supply Agreement (the “Supply Agreement”)are not easily replaceable with Flotek’s former subsidiary, Florida Chemical Company, LLC (“FCC”),other sources. Any inability to serve as the Company’s supplier of terpene. The Company depends on FCC to provide it with terpene in a timely manner that meets its quality, quantity, and cost requirements. FCC may encounter problems that preclude it from supplying terpene on the terms set forthsource appropriate components in the Supply Agreement, including with respect to pricing and production volumes. In the event that FCC encounters such problems or otherwise breaches the Supply Agreement, the Company’s inability to contract with alternative sourcesfuture could result in a prolonged interruption in its abilitysignificant difficulty supplying equipment or services to produce the Company’s formulations. Any such delays or interruptions

could ultimately result in a significant increase in the price of the various formulations or a significant reduction in the Company’s margins on these formulations, which could adversely affect the Company’s business, financial condition, and results of operations.
If the Company loses the services of key members of management, the Company may not be able to manage operations and implement growth strategies.
The Company depends on the continued service of the Chief Executive Officer and President, the Chief Financial Officer and other key members of the executive management team, who possess significant expertise and knowledge of the Company’s business and industry. Furthermore, the Chief Executive Officer and President serves as Chairman of the Board of Directors. The Company has entered into employment agreements with certain of these key members; however, at December 31, 2019, the Company only carried key man life insurance for the Chief Executive Officer and President. Any loss or interruption of the services of key members of the Company’s management could significantly reduce the Company’s ability to manage operations effectively and implement strategic business initiatives.customers.
Removal of members of management or directors may be difficult or costly.
The Company’s management, employees and directors may have retention, employment or severance agreements in place. In the event that our employees, management or directors do not have the proper skills for management or operation of the Company, or the Company otherwise wishes to remove them from their position(s), the Company may be required to pay severance or similar payments. Removal of some management and employees by the Company may also be difficult and require negotiations by the Company.

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Failure to maintain effective disclosure controls and procedures and internal controls over financial reporting could have an adverse effect on the Company’s operations and the trading price of the Company’s common stock.
Effective internal controls are necessary for the Company to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. If the Company cannot provide reliable financial reports or effectively prevent fraud, the Company’s reputation and operating results could be harmed. If the Company is unable to maintain effective disclosure controls and procedures and internal controls over financial reporting, the Company may not be able to provide reliable financial reports, which in turn could affect the Company’s operating results or cause the Company to fail to meet its reporting obligations. Ineffective internal controls could also cause investors to lose confidence in reported financial information, which could negatively affect the trading price of the Company’s common stock, limit the ability of the Company to access capital markets in the future, and require additional costs to improve internal control systems and procedures. The Company disclosed material weaknesses in internal controls during 2020. The failure to properly remediate each of the material weaknesses, or the discovery of additional material weaknesses, could affect the Company’s operating results or cause the Company to be unable to meet its reporting obligations.
Network disruptions, security threats and activity related to global cyber-crime pose risks to the Company’s key operational, reporting and communication systems.
The Company relies on access to information systems for its operations. Failures of, or interference with, access to these systems, such as network communications disruptions, could have an adverse effect on our ability to conduct operations and could directly impact consolidated reporting. Phishing attacks could result in sensitive or confidential information being released by the Company. Security breaches pose a risk to confidential data and intellectual property, which could result in damages to our competitiveness and reputation. The Company’s policies and procedures, system monitoring and data back-up processes may not prevent or mitigate the effects of these potential disruptions or breaches. There can be no assurance that existing or emerging threats will not have an adverse impact on our systems or communications networks. While the Company does carry cybersecurity insurance, the coverage and amount of such insurance may not be sufficient to adequately compensate the Company for cybersecurity loss.
The Company may pursue strategic acquisitions, joint ventures and strategic divestitures, which could have an adverse impact on the Company’s business.
The Company’s past and potential future acquisitions, joint ventures, and divestitures involve risks that could adversely affect the Company’s business. Negotiations of potential acquisitions, joint ventures, or other strategic relationships, integration of newly acquired businesses, and/or sales of existing businesses could be time consuming and divert management’s attention from other business concerns. Acquisitions and joint ventures could also expose the Company to unforeseen liabilities or risks associated with new markets or businesses. Unforeseen operational difficulties related to acquisitions and joint ventures could result in diminished financial performance or require a disproportionate amount of the Company’s management’s attention and resources. Additionally, acquisitions could result in the commitment of capital resources without the realization of anticipated returns. Divestitures could result in the loss of future earnings without adequate compensation and the loss of unrealized strategic opportunities.
Failure to manage the Company’s costs during the current period of retraction may have a negative effect on the Company’s ability to reach profitability.
The Company has been in a period of rapid retraction, has sold or discontinued all but one operating segment, and is in the process of adjusting costs and expenses to match its new smaller size. If the Company does not manage its costs and expenses properly, it may not be able to reach profitability.
If the Company does not manage the potential difficulties associated with expansion successfully, the Company’s operating results could be adversely affected.
The Company believes future success will depend, in part, on the Company’s ability to adapt to market opportunities and changes, to successfully integrate the operations of any businesses acquired, expansion of existing product and service

lines, and potentially expand into new product and service areas in which the Company may not have prior experience. Factors that could result in strategic business difficulties include, but are not limited to:
•
failure to effectively integrate acquisitions, joint ventures or strategic alliances;
•failure to effectively plan for risks associated with expansion into areas in which management lacks prior experience;
•lack of experienced management personnel;
•increased administrative burdens;
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•lack of customer retention;
•technological obsolescence; and
•infrastructure, technological, communication and logistical problems associated with large, expansive operations.
If the Company fails to manage potential difficulties successfully, the Company’s operating results could be adversely impacted.
The Company’s ability to grow and compete could be adversely affected if adequate capital is not available.
The ability of the Company to grow and be competitive in the market placemarketplace 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 equity and debt financing. The Company cannot guarantee that internally generated cash flows will be sufficient, or that the Company will to be able to obtain equity or debt financing on acceptable terms, or at all. As a result, the Company may not be able to finance strategic growth plans, take advantage of business opportunities, or to respond to competitive pressures. The Company’s existing shelf registration statement expires in September 2020,does not have extra capacity for equity offerings, and there is no guarantee that the Company will file a new shelf registration statement. The Company’s ability to procure debt financing, is dependent on, among other things, the willingness of banks and other financial institutions to lend into the Company’s industry and on their evaluation of the Company’s credit risk. There is no guarantee that the Company will be able to procure debt financing or, in the event that it is able to procure debt financing, that the financing will be on favorable terms and conditions or at favorable rates of interest.
Failure to adapt to changing buying habitshabits at the Company’s potential and existing customers could have a negative effect on the Company’s ability to attract and retain business.business.
The demographics and habits of the purchasing departments of many of the Company’s customers and potential customers is changing. Key decision makers are youngerless experienced and show different buying habits and approaches. Customers are increasingly using advanced analytics to make purchasing decisions. If the Company does not adapt to these changing purchasing trends, the Company may not be able to attract or retain business.
Failure to collect for goods and services sold to key customers could have an adverse effect on the Company’s financial results, liquidity and cash flows.
The Company performs credit analyses on potential customers; however, credit analysis does not provide full assurance that customers will be willing and/or able to pay for goods and services purchased from the Company.
Furthermore, collectability of international sales can be subject to the laws of foreign countries, which may provide more limited protection to the Company in the event of a dispute over payment. Because sales to domestic and international customers are generally made on an unsecured basis, there can be no assurance of collectability. If one or more major customers are unwilling or unable to pay its debts to the Company, it could have an adverse effect of the Company’s financial results, liquidity and cash flows.
Unforeseen contingencies such as litigation could adversely affect the Company’s financial condition.
The Company is, and from time to time may become, a party to legal proceedings incidental to the Company’s business involving alleged injuries arising from the use of Company products, exposure to hazardous substances, patent infringement, employment matters, commercial disputes, claims related to adverse physical reactions to the Company’s products such as rashes or allergic reactions and shareholder lawsuits. The defense of these lawsuits may require significant expenses, divert management’s attention, and may require the Company to pay damages that could adversely affect the Company’s financial condition. In addition, any insurance or indemnification rights that the Company may have may be insufficient or unavailable to protect against potential loss exposures.
The Company’s current insurance policies may not adequately protect the Company’s business from all potential risks.
The Company’s operations are subject to risks inherent in the oil and natural gasspecialty chemical industry, such as, but not limited to, accidents, blowouts, explosions, fires, severe weather, oil and chemical spills, and other hazards. These conditions can result in personal injury or loss of life, damage to property, equipment and the environment, as well as suspension of customers’ oil and gas operations.
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These events could result in damages requiring costly repairs, the interruption of Company business, including the loss of revenue and profits, and/or the Company being named as a defendant in lawsuits asserting large claims. The Company does not have insurance against all foreseeable risks. Consequently, losses and liabilities arising from uninsured or underinsured events could have an adverse effect on the Company’s business, financial condition and results of operations.
Regulatory pressures, environmental activism, and legislation could result in reduced demand for the Company’s products and services, increase the Company’s costs, and adversely affect the Company’s business, financial condition and results of operations.
Regulations restricting volatile organic compounds (“VOC”) exist in many states and/or communities which limit demand for certain products. Although citrus oil is considered a VOC, its health, safety, and environmental profile is preferred over other solvents (e.g., BTEX)benzene, toluene, ethylbenzene and xylene), which is currently creating new market opportunities around the world. Changes in the perception of citrus oils as a preferred VOC, increased consumer activism against hydraulic fracturing or other

regulatory or legislative actions by governments could potentially result in materially reduced demand for the Company’s products and services and could adversely affect the Company’s business, financial condition, and results of operations.
The Company is subject to complex foreign, federal, state and local environmental, health, and safety laws and regulations, which expose the Company to liabilities that could adversely affect the Company’s business, financial condition, and results of operations.
The Company’s operations are subject to foreign, federal, state, and local laws and regulations related to, among other things, the protection of natural resources, injury, health and safety considerations, chemical exposure assessment, waste management, and transportation of waste and other hazardous materials. The Company’s operations expose the Company to risks of environmental liability that could result in fines, penalties, remediation, property damage, and personal injury liability. In order to remain compliant with laws and regulations, the Company maintains permits, authorizations, registrations, and certificates as required from regulatory authorities. Sanctions for noncompliance with such laws and regulations could include assessment of administrative, civil and criminal penalties, revocation of permits, and issuance of corrective action orders.
The Company could incur substantial costs to ensure compliance with existing and future laws and regulations. Laws protecting the environment have generally become more stringent and are expected to continue to evolve and become more complex and restrictive into the future. Failure to comply with applicable laws and regulations could result in material expense associated with future environmental compliance and remediation. The Company’s costs of compliance could also increase if existing laws and regulations are amended or reinterpreted. Such amendments or reinterpretations of existing laws or regulations, or the adoption of new laws or regulations, could curtail exploratory or developmental drilling for, and production of, oil and natural gas which, in turn, could limit demand for the Company’s products and services. Some environmental laws and regulations could also impose joint and strict liability, meaning that the Company could be exposed in certain situations to increased liabilities as a result of the Company’s conduct that was lawful at the time it occurred or conduct of, or conditions caused by, prior operators or other third parties. Remediation expense and other damages arising as a result of such laws and regulations could be substantial and have a material adverse effect on the Company’s financial condition and results of operations.
Changes in law and regulation relating to hydraulic fracturing may have a negative effect on the Company’s operations.
Much of the Company’s revenue in its CT segment is derived from customers engaged in hydraulic fracturing services, a process that creates fractures extending from the well bore through the rock formation to enable natural gas or oil to flow more easily
through the rock pores to a production well. Some states have adopted regulations which require operators to publicly disclose certain non-proprietary information. These regulations could require the reporting and public disclosure of the Company’s proprietary chemistry formulas. In addition, several presidential candidates havethe Biden administration has proposed additional restrictions on hydraulic fracturing. The adoption of any future federal or state laws or local requirements, or the implementation of regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process, could increase the difficulty of oil and natural gas well production activity and could have an adverse effect on the Company’s future results of operations.
Regulation of greenhouse gases and/or climate change could have a negative impact on the Company’s business.
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Certain scientific studies have suggested that emissions of certain gases, commonly referred to as “greenhouse gases,” which include carbon dioxide, methane, and other volatile organic compounds, may be contributory to the warming effect of the Earth’s atmosphere and other climatic changes. In response to such studies, the issue of climate change and the effect of greenhouse gas emissions, in particular emissions from fossil fuels, is attracting increasing worldwide attention.
Existing or future laws, regulations, treaties, or international agreements related to greenhouse gases, climate change, and indoor air quality, including energy conservation or alternative energy incentives, could have a negative impact on the Company’s operations, if regulations resulted in a reduction in worldwide demand for oil and natural gas. Other results could be increased compliance costs and additional operating restrictions, each of which could have a negative impact on the Company’s operations.
The Company and the Company’s customers are subject to risks associated with doing business outside of the U.S., including political risk, foreign exchange risk, and other uncertainties.
The Company and its customers are subject to risks inherent in doing business outside of the U.S., including, but not limited to:
•governmental instability;
•corruption;
•war and other international conflicts;
•civil and labor disturbances;
•requirements of local ownership;
•cartel behavior;
•partial or total expropriation or nationalization;
•currency devaluation; and
•foreign laws and policies, each of which can limit the movement of assets or funds or result in the deprivation of contractual rights or appropriation of property without fair compensation.

Collections from international customers and agents could also prove difficult due to inherent uncertainties in foreign law and judicial procedures. The Company could experience significant difficulty with collections or recovery due to the political or judicial climate in foreign countries where Company operations occur or in which the Company’s products are used.
The Company’s international operations must be compliant with the Foreign Corrupt Practices Act (the “FCPA”) and other applicable U.S. laws. The Company could become liable under these laws for actions taken by employees or agents. Compliance with international laws and regulations could become more complex and expensive thereby creating increased risk as the Company’s international business portfolio grows. Further, the U.S. periodically enacts laws and imposes regulations prohibiting or restricting trade with certain nations. The U.S. government could also change these laws or enact new laws that could restrict or prohibit the Company from doing business in identified foreign countries. The Company conducts, and will continue to conduct, business in currencies other than the U.S. dollar. Historically, the Company has not hedged against foreign currency fluctuations. Accordingly, the Company’s profitability could be affected by fluctuations in foreign exchange rates.
The Company has no control over and can provide no assurances that future laws and regulations will not materially impact the Company’s ability to conduct international business.
The Company’s ability to use net operating loss and tax returns are subjectattribute carryforwards to audit by tax authorities. Taxing authoritiesoffset future taxable income may make claims for back taxes, interest, and penalties.be limited.
The CompanyUnder Section 382 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to income, property, excise, employment, and other taxes in the U.S. and a variety of other jurisdictions around the world. Tax rules and regulations in the U.S. and around the world are complex and subject to interpretation. From time to time, taxing authorities conduct audits oflimitations on the Company’s ability to utilize pre-change net operating losses (“NOLs”), and certain other tax filingsattributes to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). An ownership change could limit the Company’s ability to utilize existing NOLs and may make claimstax attribute carryforwards for increased taxes and, in some cases, assess interest and penalties. The assessments for back taxes, interest, and penalties could be significant. Iftaxable years including or following an identified “ownership change.” Transactions involving the Company is unsuccessful in contesting these claims,
17

Company’s common stock, even those outside the resulting paymentsCompany’s control, such as purchases or sales by investors, within the testing period could result in a drain onan “ownership change.”
On March 27, 2020, the Company’s capital resourcesCoronavirus Aid, Relief, and liquidity.
Recent U.S. tax legislation, as well as future U.S. tax legislation, may adversely affect our business, results of operations, financial condition and cash flow.
Comprehensive tax reform legislationEconomic Act (“CARES Act”) was enacted in December 2017, commonly referredresponse to as the Tax Cuts and Jobs Act (the “2017 Tax Act”), made significant changes to U.S. federal income 2017 tax laws. The 2017 Tax Act, amongCOVID-19 pandemic. Among other things, reduced the corporate income tax rateCARES Act provided the ability for taxpayers to 21%, partially limitscarryback NOLs arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the deductibilityfive years preceding the year of business interest expense and net operating losses, imposed a one-time tax on unrepatriated earnings from certain foreign subsidiaries, taxes offshore earnings at reduced rates regardless of whether they are repatriated and allows the
immediate deduction of certain new investments instead of deductions for depreciation expense over time. The 2017 Tax Act is complex and far-reaching, and the Company continues to evaluate the actual impact of its enactment on the Company. There may be material adverse effects resulting fromloss. In addition, under the 2017 Tax Act, that have not been identifiedthe ability to carry back NOLs to prior taxable years is generally eliminated, and that could have an adverse effectwhile NOLs arising in tax years beginning after 2017 may be carried forward indefinitely, these post-2017 NOLs may only reduce 80% of the Company’s taxable income in a tax year. Limitations imposed on the Company’s business, resultsability to use NOLs and tax credits to offset future taxable income could reduce or eliminate the benefit of operations, financial conditionthe NOLs and cash flow.tax attributes and could require the Company to pay U.S. federal income taxes in excess of that which would otherwise be required if such limitations were not in effect. Similar rules and limitations may apply for state income tax purposes.
Risks Related to the Company’s Industry
General economic declines (recessions),or recessions, limits to credit availability, and industry specific factors could have an adverse effect on energy industry activity resulting in lower demand for the Company’s products and services.
Worldwide economic uncertainty can reduce the availability of liquidity and credit markets to fund the continuation and expansion of industrial business operations worldwide. The shortage of liquidity and credit combined with pressure on worldwide equity markets could continue to impact the worldwide economic climate. Geopolitical unrest around the world may also impact demand for the Company’s products and services both domestically and internationally.
Demand for many of the Company’s ECT segment’s products and services is dependent on oil and natural gas industry activity and expenditure levels that are directly affected by trends in oil and natural gas prices. Demand for the Company’s products and services is particularly sensitive to levels of exploration, development,activity in the upstream, downstream and production activity of,midstream sectors, and the corresponding capital spending by, oil and natural gas companies, including national oil companies. One indication of drilling and completion activity and spending is rig count, which the Company monitors to gauge market conditions. In addition, the U.S. Energy Information Administration (“EIA”) and other industry data sources report completion activity, which is utilized by the Company. Any prolonged reduction in oil and natural gas prices or drop in rig and/or completion count could depress current levels of exploration, development, and production activity. Perceptions of longer-term lower oil and natural gas prices by oil and natural gas companies could similarly reduce or defer major expenditures given the long-term nature of many large-scale development projects. Lower levels of activity could result in a corresponding decline in the demand for the Company’s oil and natural gas wellrelated products and services, which could have a material adverse effect on the Company’s revenue and profitability.
The demand for our sanitizer products is dependent on many factors, including human behavior in response to COVID-19 and market participants in the sanitizer, surface cleaner and disinfectant space. A change in general behavior in response to widespread vaccine availability, relaxed attitudes towards sanitization, consumer reception of our products, or entrants into the sanitizer, surface cleaner and disinfectant space, may materially and adversely affect the demand for our products.
Events in global credit markets can significantly impact the availability of credit and associated financing costs for many of the Company’s customers. Many of the Company’s upstream customers finance their drilling and completion programs through third-party lenders or public debt offerings. Lack of available credit or increased costs of borrowing could cause customers to reduce spending on drilling programs, thereby reducing demand and potentially resulting in lower prices for the Company’s products and services. Also, the credit and economic environment could significantly impact the

financial condition of some customers over a prolonged period, leading to business disruptions and restricted ability to pay for the Company’s products and services. The Company’s forward-looking statements assume that the Company’s lenders, insurers, and other financial institutions will be able to fulfill their obligations under various credit agreements, insurance policies, and contracts. If any of the Company’s significant lenders, insurers and others are unable to perform under such agreements, and if the Company was unable to find suitable replacements at a reasonable cost, the Company’s results of operations, liquidity, and cash flows could be adversely impacted.
A continuing period of depressed oil and natural gas prices could result in further reductions in demand for the Company’s products and services and adversely affect the Company’s business, financial condition, and results of operations.
The markets for the Company’s products, especially oil and natural gas markets, have historically been volatile. Such volatility in oil and natural gas prices, or the perception by the Company’s customers of unpredictability in oil and natural gas prices, could adversely affect spending levels. The oil and natural gas markets may be volatile in the future. The demand for the Company’s
18

products and services is, in large part, driven by general levels of exploration and production spending and drilling activity by its customers. Future declines in oil or natural gas prices could adversely affect the Company’s business, financial condition, and results of operations.
New and existing competitors within the Company’s industryindustries could have an adverse effect on results of operations.
The oil and natural gas industry isindustries in which the Company competes are highly competitive. The Company’s principal competitors include numerous small companies capable of competing effectively in the Company’s markets on a local basis, as well as a number of large companies that possess substantially greater financial and other resources than does the Company. Larger competitors may be able to devote greater resources to developing, promoting, and selling products and services. The Company may also face increased competition due to the entry of new competitors including current suppliers that decide to sell their products and services directly to the Company’s customers. As a result of this competition, the Company could experience lower sales or greater operating costs, which could have an adverse effect on the Company’s margins and results of operations.
The Company’s industry has a high rate of employee turnover. Difficulty attracting or retaining personnel or agents could adversely affect the Company’s business.
The Company operates in an industry that has historically been highly competitive in securing qualified personnel with the required technical skills and experience. The Company’s services require skilled personnel able to perform physically demanding work. Due to industry volatility, the demanding nature of the work, and the need for industry specific
knowledge and technical skills, current employees could choose to pursue employment opportunities outside the Company that offer a more desirable work environment and/or higher compensation than is offered by the Company. As a result of these competitive labor conditions, the Company may not be able to find qualified labor, which could limit the Company’s growth. In addition, the cost of attracting and retaining qualified personnel has increased over the past several years due to competitive pressures. In order to attract and retain qualified personnel, the Company may be required to offer increased wages and benefits. If the Company is unable to increase the prices of products and services to compensate for increases in compensation, or is unable to attract and retain qualified personnel, operating results could be adversely affected.
Severe weather could have an adverse impact on the Company’s business.
The Company’s business could be materially and adversely affected by severe weather conditions. Hurricanes, tropical storms, flash floods, blizzards, cold weather, and other severe weather conditions could result in curtailment of services, damage to equipment and facilities, interruption in transportation of products and materials, and loss of productivity. If the Company’s customers are unable to operate or are required to reduce operations due to severe weather conditions, and as a result curtail purchases of the Company’s products and services, the Company’s business could be adversely affected.
A terrorist attack or armed conflict could harm the Company’s business.
Terrorist activities, anti-terrorist efforts, and other armed conflicts involving the U.S. could adversely affect the U.S. and global economies and could prevent the Company from meeting financial and other obligations. The Company could experience loss of business, delays or defaults in payments from payors, or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, or refineries are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas which, in turn, could also reduce the demand for the Company’s products and services. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect the Company’s results of operations, impair the ability to raise capital, or otherwise adversely impact the Company’s ability to realize certain business strategies.

Our DA segment may be materially and negatively affected by government regulations and/or facility disruptions.
The Company maydemand for our equipment and services offerings in our DA segment could be adverselymaterially affected by additional regulations on the recent coronavirus outbreak.

In December 2019, a novel strainupstream, midstream, and downstream portions of coronavirus was reported to have surfaced in Wuhan, China. While we do not have any operations in China, our operations could be adversely affected to the extent that coronavirus or any other epidemic harms world economy in general and global demand for oil and gas sectors. Additional regulation on oil and gas production, transportation, or processing of hydrocarbons may result in particular. Our operationssignificantly reduced demand for our offerings, either individually or as a result of a decline in the overall oil and gas markets in the United States and abroad. In addition, our products are subject to export control laws and regulations, and changes to those laws and regulations may experiencenegatively impact
19


disruptions inour ability to pursue international opportunities. Disruptions to pipelines and refineries, whether due to regulation, weather, demand, or other factors, may also have a materially adverse effect on our ability to derive revenue from our DA segment. Adjustments to our DA segment’s commercial strategy, with a shift towards subscription revenue and away from equipment sales, and the event of a global pandemic or restriction on travelmarket’s response to that results from a global pandemic, whichstrategy, may materially and adversely affect our business, financial condition and results of operations. The duration ofrevenues in the business disruption and related financial impact cannot be reasonably estimated at this time but may materially affect our abilitynear term, even if the strategic shift is successful, due to operate our business and result in additional costs. The extent to which the coronavirus or other health epidemic may impact our results will dependlonger payback periods on future developments, which are highly uncertain and cannot be predicted.subscription models.
Risks Related to the Company’s Securities
The market price of the Company’s common stock has been and may continue to be volatile.
The market price of the Company’s common stock has historically been subject to significant fluctuations. The following factors, among others, could cause the price of the Company’s common stock to fluctuate due to:
•variations in the Company’s quarterly results of operations;
•changes in market valuations of companies in the Company’s industry;
•fluctuations in stock market prices and volume;
•fluctuations in oil and natural gas prices;
•issuances of common stock or other securities in the future;
•additions or departures of key personnel;
•announcements by the Company or the Company’s competitors of new business, acquisitions, or joint ventures; and
•negative statements made by external parties about the Company’s business in public forums.
The stock market has experienced significant price and volume fluctuations in recent years that have affected the price of common stock of companies within many industries including the oil and natural gas industry. The price of the Company’s common stock could fluctuate based upon factors that have little to do with the Company’s operational performance, and these fluctuations could materially reduce the Company’s stock price. The Company could be a defendant in a legal case related to a significant loss of value for the shareholders. This could be expensive and divert management’s attention and Company resources, as well as have an adverse effect on the Company’s business, operating results, cash flows, financial condition and results of operations.or securities.
If the Company cannot meet the New York Stock Exchange continued listing requirements, the NYSE may delist the Company’s common stock.
The Company’s common stock is currently listed on the NYSE. In the future, if it is not able to meet the continued listing requirements of the NYSE, which require, among other things, that the average closing price of our common stock be above $1.00 over 30 consecutive trading days, the Company’s
common stock may be delisted. The Company’s closing stock price on March 3, 2020 was $1.47, and on December 31, 2019, closed at $2.00. If the Company is unable to satisfy the NYSE criteria for continued listing, its common stock would be subject to delisting. A delisting of its common stock could negatively impact the Company by, among other things, reducing the liquidity and market price of the its common stock; reducing the number of investors willing to hold or acquire the Company’s common stock, which could negatively impact its ability to raise equity financing; decreasing the amount of news and analyst coverage of the Company; and limiting the Company’s ability to issue additional securities or obtain additional financing in the future. In addition, delisting from the NYSE might negatively impact the Company’s reputation and, as a consequence, its business.business, operating results, cash flows, financial condition or securities.
An active market for the Company’s common stock may not continue to exist or may not continue to exist at current trading levels.
Trading volume for the Company’s common stock historically has been very volatile when compared to companies with larger market capitalizations.capitalization. The Company cannot presume that an active trading market for the Company’s common stock will continue or be sustained. Sales of a significant number of shares of the Company’s common stock in the public market could lower the market price of the Company’s stock.
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If securities or industry analysts do not publish research or reports about the Company’s business or publish negative reports, the Company’s securities prices and trading volumes could decline and affect the price at which investors could sell securities.
The trading market for the Company’s securities may be affected by the research and reports that industry or securities analysts publish about the Company or its business. The Company does not have any control over these analysts. If analysts do not cover the Company on a regular basis or if one or more analysts cease coverage of the Company or fail to regularly publish reports about the Company, the Company could lose visibility in the financial markets, which in turn could cause the Company’s securities prices or trading volumes to decline. If one or more of such analysts publish negative reports about the Company, the Company’s securities prices would likely decline. These occurrences could affect the price investors could receive from the sale of the Company’s securities.

The Company has no plans to pay dividends on the Company’s common stock, and, therefore, investors will have to look to stock appreciation for return on investments.
The Company does not anticipate paying any cash dividends on the Company’s common stock within the foreseeable future. Any payment of future dividends will be at the discretion of the Company’s board of directors and will depend, among other things, on the Company’s earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations deemed relevant by the board of directors. Investors must rely on sales of common stock held after price appreciation, which may never occur, in order to realize a return on their investment. The lack of plans for dividends may make the common stock of the Company an unattractive investment for investors who are seeking regular yield.dividends.
Certain anti-takeover provisions of the Company’s charter documentscertificate of incorporation and applicable Delaware law could discourage or prevent others from acquiring the Company, which may adversely affect the market price of the Company’s common stock.
The Company’s certificate of incorporation and bylaws contain provisions that:that, among other things:
•permit the Company to issue, without stockholder approval, up to 100,000 shares of preferred stock, in one or more series and, with respect to each series, to

fix the designation, powers, preferences, and rights of the shares of the series;
•prohibit stockholders from calling special meetings;
•limit the ability of stockholders to act by written consent;
•prohibit cumulative voting; and
•require advance notice for stockholder proposals and nominations for election to the board of directors to be acted upon at meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation Law limits business combinations with owners of more than 15% of the Company’s voting stock without the approval of the board of directors. Aforementioned provisions and other similar provisions make it more difficult for a third party to acquire the Company exclusive of negotiation. The Company’s board of directors could choose not to negotiate with an acquirer deemed not beneficial to or synergistic with the Company’s strategic outlook. If an acquirer were discouraged from offering to acquire the Company or prevented from successfully completing a hostile acquisition by these anti-takeover measures, stockholders could lose the opportunity to sell their shares at a favorable price.
Future issuance of additional shares of common stock could cause dilution of ownership interests and adversely affect the Company’s common stock price.
The Company is currently authorized to issue up to 80,000,000140,000,000 shares of common stock. The Company may, in the future, issue previously authorized and unissued shares of common stock, which would result in the dilution of current stockholdersstockholders’ ownership interests. Additional shares are subject to issuance through various equity compensation plans or through the exercise of currently outstanding options.equity awards. The potential issuance of additional shares of common stock may create downward pressure on the trading price of the Company’s common stock. The Company may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in order to raise capital or effectuate
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other business purposes. Future sales of substantial amounts of common stock, or the perception that sales could occur, could have an adverse effect on the price of the Company’s common stock.

The Company may issue a substantial amount of securities in connection with future acquisitions, and the sale of those securities could adversely affect the trading price of our common stock or other securities.

As part of our growth strategy, we may issue additional securities, or securities that have rights, preferences, and privileges senior to our other securities. We may file future shelf registration statements with the SEC that we may use to sell securities from time to time in connection with acquisitions. To the extent that we are able to grow through acquisitions and are able to pay for such acquisitions with shares of our common stock or other securities, the number of outstanding shares of common stock or other securities that will be eligible for sale in the future is likely to increase substantially. Persons receiving shares of our common stock or other securities in connection with these acquisitions may be more likely to sell large quantities of their common stock or other securities, which may influence the price of our common stock or other securities. In addition, the potential issuance of additional shares of common stock or other securities in connection with anticipated acquisitions could lessen demand for our common stock or other securities and result in a lower price than would otherwise be obtained.
The Company may issue shares of preferred stock or debt securities with greater rights than the Company’s common stock.
Subject to the rules of the NYSE, the Company’s certificate of incorporation authorizes the board of directors to issue one
or more additional series of preferred stock and to set the terms of the issuance without seeking approval from holders of common stock. Currently, there are 100,000 preferred shares authorized, with no shares currently outstanding. Any preferred stock that is issued may rank senior to common stock in terms of dividends, priority and liquidation premiums, and may have greater voting rights than holders of common stock.

General Risk Factors

If the Company loses the services of key members of management, the Company may not be able to manage operations and implement growth strategies.

The Company’s ability to use net operating loss carryforwards and tax attribute carryforwards to offset future taxable income may be limited.
Under section 382Company depends on the continued service of the Internal Revenue CodeChief Executive Officer and President, the Chief Financial Officer and other key members of 1986,the executive management team, who possess significant expertise and knowledge of the Company’s business and industry. Furthermore, the Chief Executive Officer and President serves as amended, a corporation that undergoes an “ownership change” is subject to limitations onChairman of the Board of Directors. The Company has entered into employment agreements with certain of these key members. Any loss or interruption of the services of key members of the Company’s management could significantly reduce the Company’s ability to utilize pre-change net operating losses (“NOLs”),manage operations effectively and certain other tax attributesimplement strategic business initiatives.During 2020, the Company replaced its Chief Executive Officer, Chief Financial Officer, General Counsel and lead sales executive. The failure of the new executives to offset future taxable income. In general,effectively provide services to the Company and build experience and knowledge of the Company could have an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). An ownership change could limitadverse effect on the Company’s results of operations and ability to utilize existing NOLscompete.

The Company’s tax returns are subject to audit by tax authorities. Taxing authorities may make claims for back taxes, interest and penalties. Changes in U.S. tax attribute carryforwards for taxable years including or following an identified “ownership change.” Transactions involvinglegislation may adversely affect our business, results of operations, financial condition and cash flows.
The Company is subject to income, property, excise, employment, and other taxes in the U.S. and a variety of other jurisdictions around the world. Tax rules and regulations in the U.S. and around the world are complex and subject to interpretation. From time to time, taxing authorities conduct audits of the Company’s common stock, even those outsidetax filings and may make claims for increased taxes and, in some cases, assess interest and penalties. The assessments for back taxes, interest, and penalties could be significant. If the Company’s control, such as purchases or sales by investors, withinCompany is unsuccessful in contesting these claims, the testing periodresulting payments could result in an “ownership change.”
a drain on the Company’s capital resources and liquidity. In addition, under the 2017 Tax Act, the ability to carry back NOLs to prior taxable years is generally eliminated, and while NOLs arising in tax years beginning after 2017there may be carried forward indefinitely, these post-2017 NOLs may only reduce 80% ofmaterial adverse effects resulting from new or future U.S. tax reforms that have not been identified and that could have an adverse effect on the Company’s taxable income in a tax year. Limitations imposed on the ability to use NOLsbusiness, results of operations, financial condition and tax credits to offset future taxable income could reduce or eliminate the benefit of the NOLs and tax attributes and could require the Company to pay U.S. federal income taxes in excess of that which would otherwise be required if such limitations were not in effect. Similar rules and limitations may apply for state income tax purposes.cash flows.
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Disclaimer of Obligation to Update
Except as required by applicable law or regulation, the Company assumes no obligation (and specifically disclaims any such obligation) to update these risk factors or any other forward-looking statement contained in this Annual Report to reflect actual results, changes in assumptions, or other factors affecting such forward-looking statements.

Item 1B. Unresolved Staff Comments.
Not applicable.


Item 2. Properties.
AtAs of December 31, 2019,2020, the Company operated five and twooperates four manufacturing, warehouse and research facilities in the U.S. and internationally, respectively. Additionally,Internationally, the Company has onea warehouse and research facility in Calgary, Alberta, Canada and onea warehouse in Dubai, United Arab Emirates. The Company also has sales offices are located in Denver, Colorado, Midland, Texas, Oklahoma City, Oklahoma, andOklahoma; Dubai, United Arab Emirates.Emirates; and Calgary, Alberta, Canada. The Company owns four of these facilities and the remainder are leased with lease terms that expire from 20202021 through 2030. In addition, the Company’s corporate office is a leased facility located in Houston, Texas. The following table sets forth facility locations:
SegmentOwned/LeasedLocation
Energy Chemistry
Technologies		OwnedMarlow, Oklahoma
OwnedMonahans, Texas
OwnedRaceland, Louisiana
OwnedWaller, Texas
LeasedDubai, United Arab Emirates
LeasedHouston, TexasCalgary, Alberta
LeasedMidland, Texas
LeasedOklahoma City, Oklahoma
LeasedRaceland, Louisiana
LeasedCalgary, AlbertaHouston, Texas
Data AnalyticsLeasedDenver, ColoradoAustin, Texas

The Company considers owned and leased facilities to be in good condition and suitable for the conduct of business.
Item 3. Legal Proceedings.
Other Litigation
The Company is subject to routine litigationSee Note 16, “Commitments and other claims that ariseContingencies” in the normal coursePart II, Item 8 – “Financial Statements and Supplementary Data” of business. Management is not aware of any pending or threatened lawsuits or proceedings
this Annual Report for information regarding our legal proceedings.

that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Item 4. Mine Safety Disclosures.
Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock began trading on the NYSE on December 27, 2007, under the stock ticker symbol “FTK.” As of the close of business on March 3, 2020,11, 2021, there were 63,275,372 shares of common stock outstanding held by approximately 7,9007,800 holders of record. The Company’s closing sale price of the common stock on the NYSE on
March 3, 20201, 2021 was $1.47.$2.25. The Company has never declared or paid cash dividends on common stock. While the Company regularly assesses the dividend policy, the Company has no current plans to declare dividends on its common stock and intends, subject to Board approval.
stock.

Securities Authorized for Issuance Under Equity Compensation Plans
Equity compensation plan information relating to equity securities authorized for issuance under individual compensation agreements at December 31, 20192020, is as follows:
Plan Category
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights(1)
Weighted-Average Exercise
Price of Outstanding
Options, Warrants and Rights(2)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column(a))
 (a)(b)(c)
Equity compensation plans approved by security holders7,682,649 $1.36 1,839,489 
(1) Includes shares for outstanding stock options (3,660,000 shares), restricted stock awards (2,795,100 shares), and restricted stock unit share equivalents (1,227,549 shares).
(2) The weighted-average exercise price is for outstanding stock options only and does not include outstanding restricted stock awards. restricted stock unit equivalents, and rights that have no exercise price.

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Plan Category 
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights(1)
 
Weighted-Average Exercise
Price of Outstanding
Options, Warrants and Rights(2)
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column(a))
  
 (a) (b) (c)
Equity compensation plans approved by security holders 2,097,494
 $1.22
 3,858,783
Equity compensation plans not approved by security holders 4,141,168
 $1.33
 —
Total 6,238,662
 $1.29
 3,858,783
(1)Includes shares for outstanding stock options (3,000,000 shares), restricted stock awards (1,629,020 shares), restricted stock unit share equivalents (1,038,474 shares), and the right to purchase (572,168 shares).
(2)The weighted-average exercise price is for outstanding stock options only and does not include outstanding restricted stock awards. restricted stock unit equivalents, and rights that have no exercise price.


Issuer Purchases of Equity Securities
In November 2012,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 Company’s Boardexercise price of Directors authorized the repurchaseoptions. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of up to $25 millionthe award.
Repurchases of the Company’s common stock. Repurchases may be madeequity securities in open market or privately negotiated transactions. Throughrespect of withholding for tax liabilities during the three months ended December 31, 2019, the2020, are as follows:
Total Number
of Shares
Purchased (1)
Average Price
Paid per Share
October 1 to October 31, 20202,181 $2.75 
November 1 to November 30, 202023,711 1.97 
December 1 to December 31, 202089,524 2.12 
Total115,416 $2.10 
(1)The Company has repurchased $25 millionpurchases shares of its common stock under this repurchase program.(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.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases maycould be made in the open market or through privately negotiated transactions. Through December 31, 2019,No shares were repurchased under this program during 2020.
On June 9, 2020, the board of directors of the Company has repurchased $0.3 million of its common stock under this authorization and $49.7 million may yet be used to purchase shares.rescinded the authorization.
Repurchases of the Company’s equity securities during the three months ended December 31, 2019 are as follows:
  
Total Number
of Shares
Purchased (1)
 
Average Price
Paid per Share
 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 
Maximum Dollar Value
of Shares that May Yet be
Purchased Under the
Plans or Programs
October 1 to October 31, 2019 3,410
 $2.09
 —
 $49,704,947
November 1 to November 30, 2019 —
 $—
 —
 $49,704,947
December 1 to December 31, 2019 16,336
 $2.00
 —
 $49,704,947
Total 19,746
 $2.02
 —
 

(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, (b) to satisfy payments required for common stock upon the exercise of stock options, and (c) as part of a publicly announced repurchase program on the open market.


Item 6. Selected Financial Data.
The following table sets forth certain selected historical financial data and should be read in conjunction with Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report. The selected operating and financial position data as of and for each of the five years presented has been derived from audited consolidated Company financial statements, some of which appear elsewhere in this Annual Report. Financial data has been adjusted for discontinued operations, as indicated.
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its CICT segment, which was completed in the first quarter of 2019. An investment banking advisory services firm was engaged and actively marketed this segment.
Not applicable.
Effective December 31, 2018, the Company classified the assets, liabilities, and results of operations for this segment as “Discontinued Operations.”
During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. During 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.


25

 As of and for the year ended December 31,
 2019 2018 2017 2016 2015
 (in thousands, except per share data)
Operating Data         
Revenue (1)
$119,353
 $177,773
 $243,106
 $188,233
 $213,593
(Loss) income from operations (1)
(76,625) (69,811) (10,320) (16,968) 3,536
          
(Loss) income from continuing operations (1)
$(76,735) $(73,441) $(17,504) $(4,447) $1,489
Income (loss) from discontinued operations, net of tax44,456
 2,743
 (9,891) (44,683) (14,951)
Net loss$(32,279) $(70,698) $(27,395) $(49,130) $(13,462)
          
(1) Amounts exclude impact of discontinued operations.
          
Per Share Data         
Basic earnings (loss) per share:         
Continuing operations$(1.31) $(1.26) $(0.30) $(0.08) $0.03
Discontinued operations, net of tax0.76
 0.05
 (0.17) (0.80) (0.27)
Basic earnings (loss) per share$(0.55) $(1.21) $(0.47) $(0.88) $(0.24)
Diluted earnings (loss) per share:         
Continuing operations$(1.31) $(1.26) $(0.30) $(0.08) $0.03
Discontinued operations, net of tax0.76
 0.05
 (0.17) (0.80) (0.27)
Diluted earnings (loss) per share$(0.55) $(1.21) $(0.47) $(0.88) $(0.24)
          
Financial Position Data         
Total assets$231,847
 $285,883
 $329,888
 $383,215
 $403,090
Convertible senior notes, long-term debt, and capital
     lease obligations, less discount and current portion
—
 —
 —
 7,833
 18,255
Stockholders’ equity173,276
 201,624
 264,900
 287,343
 293,651

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related Notes to the Consolidated Financial Statements included elsewhere in this Annual Report. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results could differ from those expressed or implied by the forward-looking statements. See “Forward-Looking Statements” at the beginning of this Annual Report.
Basis of Presentation

During the fourth quarter of 2018, the Company initiated a strategic plan to sell its CICT segment, which was completed in the first quarter of 2019. Effective December 31, 2018, the Company classified the assets, liabilities,Report and results of operations for this segment as “Discontinued Operations” for all periods presented.
During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. During 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.
The results of operations of these segments are presented as “Income from discontinued operations” in the statement of operations and the related cash flows of these segments has been reclassified to discontinued operations for all periods presented. The assets and liabilities of these segments have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheet for all periods presented, as applicable.Item 1A, “Risk Factors.”
Executive Summary
Flotek Industries, Inc. is a global, technology-driven chemistry and data company that serves customers in industrial, commercial and consumer markets. 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, sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use.
The Company’s CT segment develops, manufactures, packages, distributes, delivers, and suppliesmarkets 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 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.
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, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. 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. For a discussion of the impacts of COVID-19, see “COVID-19 Effects and Actions” in this Item 7 of this Annual Report. For a discussion of the risks related to COVID-19, see Item 1A, “Risk Factors.”
Continuing Operations
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing R&I advanced laboratory capabilities.
Chemistry Technologies
The Company’s CT segment includes an energy-focused product line that is comprised of proprietary green chemistries, specialty chemistries, logistics and services to thetechnology services. The Company designs, develops, manufactures, packages, distributes, delivers and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas industries. Flotek also supplied high value compoundswell drilling, cementing, completion, remediation and stimulation activities designed to companies that make foodmaximize recovery in both new and beverages, cleaning products, cosmetics,mature fields, as well as to reduce health and other products that are sold in consumer and industrial markets, classified as discontinued operations at December 31, 2018. Flotek operates in seven domestic and international markets.

The Company’senvironmental risk by using greener chemicals. Customers of this product line of the CT business includes specialty chemistries and logistics which enable its customers to pursue improved efficiencies in the drilling and completion of their wells. Customerssegment include major integrated oil and gas oil and gas companies, oilfield services companies, independent oil and gas companies, pressure-pumping service companies, and national and state-owned oil companies and international supply chain management companies. Additionally,
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for both commercial and personal use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce 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 chemical products to address the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks. To restore large public gatherings, it is believed that a variety of approaches will be necessary, including vaccinations, behavioral changes, sanitizers, surface cleaners, and disinfectants are needed. The Company has made a commitment of being in this market for the long-term.
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Company also provides automated bulk material handling, loading facilities, and blending capabilities.
Continuing OperationsData Analytics
The operationsCompany’s DA segment, created in conjunction with the acquisition of JP3, includes the design, development, production, sale and support of equipment and services that create and provide valuable real time information about the composition and properties for customers' oil, natural gas and refined products. The DA segment is continuing its transition to a recurring revenue subscription model of selling its line of Verax analyzers, deployed in the field across the oil and gas sector, support contracts and software services via its cloud-based Viper software platform, as well as selling hardware-related solutions during the transition to a recurring revenue model.
The customers of the DA segment diversify the revenues of the Company are categorized into one reportable segment: Energy Chemistry Technologies.
Energy Chemistry Technologies designs, develops, manufactures, packages, and markets specialty chemistries used inspan across the entire oil and gas well drilling, cementing, completion,market, including upstream, midstream, refineries and stimulation. These technologies developeddistribution networks. The segment helps its customers generate additional profit by Flotek’s Researchenhancing blending, optimizing the natural mixing between adjacent batches of different fuels (“transmix”), ensuring product quality while enabling automation of fluid handling. To date, the segment has focused sales solely on North American markets; however, the segment began preparing for international deployments, including export control investigations, certifications and Innovation team enable customersproduct design modifications to pursue improved efficienciesmeet the demands of overseas installations. In 2020, the Company hired a business development executive, who is developing sales opportunities in the drillinginternational market.
Research & Innovation
R&I supports both segments through green chemistry formulation, specialty chemical formulations, FDA and completionEPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of wells.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.
Discontinued Operations
In 2018, theThe Company sold Florida Chemical Company, LLC, a wholly-owned subsidiary, and its CICT segment, qualified for classificationeffective as of February 28, 2019. As a discontinued operation. The Drilling Technologiesresult, the Company’s CICT segment and Production Technologies segmentsfinancial results through the date of sale were sold during 2017 and are classified as discontinued operations, as well.operations.
Market Conditions
The Company’s success is sensitive to a number of factors, which include, but are not limited to global energy supply and demand, drilling and well completion activity, customer demand for its advanced technology products, market prices for raw materials and governmental actions.
Drilling and well completion activity levels are influenced by a number of factors, including the number of rigs in operation and the geographical areas of rig activity. Additional factors that influence the level of drilling and well completion activity include:
•Historical, current and anticipated future oil and gas prices,prices;
•Federal, state and local governmental actions that may encourage or discourage drilling activity,activity;
•Customers’ strategies relative to capital funds allocations,allocations;
•Weather conditions,conditions; and
•Technological changes to drilling and completion methods and economics.
Customers’ demand for advanced technology products and services provided by the Company are dependent on their recognition of the value of:of chemistries that:
Chemistries that improve•Provide differentiation in efficiency and efficacy;
•Address emerging pathogens;
•Improve the economics of their oiloperations; and gas operations, and
Chemistries that are•Are economically viable, socially responsible and ecologically sound.
Market prices for commodities, including citrus oils, can be influenced by:

Historical, current, and anticipated future production levels of the global citrus (primarily orange) crops,27

Weather related risks,
Health and condition of citrus trees (e.g., disease and pests),
International competition and pricing pressures resulting from natural and artificial pricing influences, and
market demand for orange juice.
Governmental actions may restrict the future use of hazardous chemicals, including, but not limited to, the following industrial applications:
•Oil and gas drilling and completion operations,operations;
•Oil and gas production operations, andoperations;
•Non-oil and gas industrial solvents.solvents; and
•EPA and FDA regulatory changes.
The chartcontinued impact of COVID-19 and subsequent modification of social behavior for hygiene and sanitation products create opportunities for product growth in various forms of sanitizing, surface cleaning and disinfecting products.
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. 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.
Outside the oil and gas sector, the COVID-19 pandemic increased demand for certain specialty chemicals, particularly sanitizers, surface cleaners and disinfectants. In 2020, the Company launched a diversified line of FDA and EPA-compliant sanitizers, surface cleaners and disinfectants 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 reflectstarget for the trendDA segment.
During 2020, the Company’s financial results were impacted due to impairment charges. The provision for excess and obsolete inventory included charges for the CT segment and the DA segment. See Note 6, “Inventories” in Part II, Item 8 – “Financial Statements and Supplementary Data” of total completions,this Annual Report. The Company recorded an impairment to property, plant and equipment; intangible assets; and operating right-of-use assets during the first quarter of 2020. The extended impact of COVID-19 contributed to additional impairment charges to goodwill and intangible assets in the third quarter of 2020. See Note 9, “Goodwill;” Note 10, “Other Intangible Assets;” and Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” Due to the continuing uncertainties, additional impairments may occur in the future.
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
28

Company. The uncertain future development of the COVID-19 crisis and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.
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 development 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. There is no certainty that these actions will mitigate risks posed by the virus to the Company’s workforce.
The Company’s CT segment focused on development of competitively priced product lines that are responsive to the current market including well bore protection and damage mitigation products as the domestic market has shifted to shutting in wells. In response to a forecasted reduction in capital available to customers for drilling but uncompleted wells (“ DUCs”)with a shift to optimizing existing infrastructure, the Company initiated several efforts to use specialty chemicals to improve enhanced oil recovery. The Company has also leveraged its international footprint in the Middle East to include unconventional, conventional, and rig countenhanced oil recovery programs.
The CT segment used its expertise in specialty chemistry, existing chemistry infrastructure and facilities, and historical consumer market experience to launch a product line of sanitizers, surface cleaners and disinfectants, as discussed above. The Company believes these new products slot into the premium market and will be competitive over the last three years.long-term. The Company has also made changes to its executive team to align with its growth focus.
The Company has also focused on the continuing needs of customers and the market to diversify its business and accelerate growth through deployment of capital, with an emphasis on digital transformation in the oil and gas markets. On May 18, 2020, the Company closed the acquisition of JP3, which gives the Company access to the midstream and downstream markets and diversifies exposure to volatility in the upstream sector. In addition to increasing market share, the DA segment is pursuing product enhancements that enable growth opportunities with current and prospective customers.
In response to market conditions and anticipating ongoing volatility, the Company reduced its cost structure in 2020 to meet anticipated market activity and reduce the Company’s break-even level. Among other cost-cutting and cash preservation initiatives:
•The Company’s CEO, John W. Gibson, Jr., reduced his base salary by 20%, and each of the other executive officers reduced his or her salary by 10%, through December 31, 2020, in exchange for restricted stock, effective as of April 1, 2020.
29


chartpic.jpg

Source: Rig counts and DUCs are per Baker Hughes (•www.bakerhughes.com); Rig counts are the annual averageThe board of directors of the reported weekly rig count activity.
Completions are perCompany approved a 20% reduction in the U.S. Energy Information Administration (https:www.eia.gov/petroleum/drilling/)fees to be paid to the directors, effective as of January 21,April 1, 2020.

•The Company consolidated office space by moving all employees at its corporate headquarters into its Global Research and Innovation Center in Houston, Texas and buying out the remaining term of the corporate headquarters lease for a significant discount, with the move completed by the end of June 2020.

•The Company reduced overall headcount by 35% on March 30, 2020. Additionally, the Company reduced the headcount of the DA segment by 35% in October 2020.

•The Company decreased discretionary spending across all business operations.



Outlook for 2020

2021
The current consensus is there will be further softening inCOVID-19 pandemic negatively impacted the U.S. onshoreand 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. However, we believe2020 to exceed $50 per barrel in early 2021, many major integrated oil and gas companies and independent oil and gas companies announced reductions in their 2021 budgets, 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 timing on returns to pre-pandemic pricing levels remains uncertain.
Climate change continues to be a focus, as investors are increasingly scrutinizing companies linked to the oil and gas industry through environmental, social and corporate governance factors to promote clean energy and sustainability. In addition, 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 month 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 Interior Department 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. 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 value proposition to businesses seeking to improve their ESG performance, including improving the safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, our patented line of Complex nano-Fluid® (also known as CnF®) chemistry technologies, are formulated with highly effective, plant-based solvents offering safer, 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 reduce reprocessing.
The Company believes that an increase in the adoption of specialty chemicals could more than offsetbenefit our business and reduce the impact of the current decrease in drilling and completions activity. OurThe key sales focus of the Company is growing market share by improving returns for our current customers, rebuilding relationships with past customers and identifying new customers that could benefit from our chemistry solutions. Additionally, we are catalyzing focusthe Company is focused on total cost of recovery per BOE,barrel of oil equivalent, rather than initial cost, as well as strengthening the publicly available evidence for the efficacy of using advanced CnF® products to materially impact oil and gas recovery and profitability for operators.
As a resultThe sanitizers, surface cleaners and disinfectants industry is expanding, associated with the continued impact of the pivot we made from an indirect sales channelCOVID-19 pandemic and the need for individuals, businesses, schools and governments to a direct sales channel,minimize the spread of the coronavirus. 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 lost nearly all sales persons by April 2019.launched a diversified line of FDA-compliant sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use. The organization has been rebuilt and new sales processes have been implemented. We expect thatCompany believes this market segmentation improvements currently underway will better focus sales personnel on higher probability customers. We intendprovides an opportunity to expand sales effortsthe Company’s portfolio of chemistry products to include reestablishing an indirect sales channel for specific customers and markets. A blended approach of indirect and direct sales is expected to increasemeet the sales funnel for existing products and services.growing demand.
A second sales challenge involves customer procurement strategies that utilize integrated single supplier contracting methodologies. This “bundled-lowest-cost” strategy provides efficiency but diminishes focus on effectiveness and potentially compromises both production rates and ultimate recovery. We do not intend to focus on customers that use “bundled-lowest-cost” methodologies, enabling our sales force to focus on those customers with the desire to achieve the highest return on capital rather than the lowest cost per activity.
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During 2020, we intend to invest in analytics, both internally and externally, demonstrating the value and benefits of our products. Our efforts are expected to include partnering with specific clients willing to share the required data to validate publicly the increased profitability of wells using Flotek’s proprietary chemistry. We are also exploring relationships with third-party digital fluid flow modeling experts to provide production forecast for wells with and without treatment.

We continueThe use of data and analytics is a growing trend in all industries where technology is used to pursue patents associated with our coreanalyze 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. To date, the segment has focused sales solely on North American markets; however, the segment began preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands of overseas installations. The Company hired a business development executive, who is developing sales opportunities in the international market.
The Company continues to develop technologies to ensure our ability to provide uninterrupteddifferentiated products and services to our customers. Our creationPartnering closely with our clients to create and implement specialty chemical products and compositional analyzers remains a focus for the organization. Differentiated products and services are the result of intellectual property associatedthe deployment of the organization’s capabilities and expertise in alignment with chemistry supports our belief thatcustomer success. The continuing search for new ways to help make customers successful positions the manipulation of subsurface flow conditions through chemistry-coupled with advances in proppant loading, fluid loading and increases in lateral length will yield the most profitable results for our customers. We also believe that to maintain premium pricing and differentiation, our research group must continually position the companyCompany as a leader in advanced chemicals.chemicals and technology.
Building upon significant effortsThe Company’s emphasis in 2021 will be executing the plan established by the executive team to recover from the varied impacts of COVID-19 and progress made in 2019, Flotekgrow the Company’s businesses. The CT segment will continue to focus on operational excellence as a means for driving efficiencies, cost savingsmarketing our products and differentiation inservices to new and existing customers, while expanding the marketplace. Our emphasis in 2020sanitizers, surface cleaners and disinfectants product line. The DA segment will remain on consistent execution, underpinned by our relentless focus on safety.
We domaintain its domestic sales effort while pursuing international growth. The Company does not anticipate a material escalation in our maintenance capital spending year-over-year. We have numerous evaluations underwayIn 2021, the Company expects to determine the best possible use of our cash in 2020. These include seeking growth opportunities that reduce our dependence on rig count; working on developing lines that create a greater amount of backlog and/or annually recurring revenue; increasing efforts to differentiate our offering from competitors, while enhancing our capability to provide digital transformation of chemistry; striving to strengthen our market share for our current product lines; and evaluating a special distribution to shareholders.
We believe that our cash position, public equity, strong market presence in North America, debt-free status, continuousenhance its focus on cost reduction, commitmentESG and the responsible management of products and services through our Quality Assurance and Quality Control Program and Chemical Spill Prevention Program, adhering to environmental, social and governance (“ESG”) matters and strong governance make us attractive to numerous privately held companies seeking liquidity, as well as to independent and major operators who are seeking to increase production for an overall lower cost-per-barrel.ISO 9001:2015 standards.


Consolidated Results of Operations (dollars in thousands):

Years ended December 31,
20202019
Revenue$53,141 $119,353 
Operating expenses (excluding depreciation and amortization)88,266 148,100 
Operating expenses %166.1 %124.1 %
Corporate general and administrative costs16,311 27,975 
Corporate general and administrative costs %30.7 %23.4 %
Depreciation and amortization3,412 8,465 
Research and development7,213 8,863 
(Gain) loss on disposal of long-lived assets(94)1,450 
Impairment of fixed assets and long-lived assets69,975 — 
Impairment of goodwill11,706 — 
Loss from operations(143,648)(75,500)
Operating margin %(270.3)%(63.3)%
Gain on lease termination576 — 
Interest and other income (expense), net443 (311)
Loss before income taxes(142,629)(75,811)
Income tax benefit (expense)6,179 (262)
Loss from continuing operations(136,450)(76,073)
Income from discontinued operations, net of tax— 42,158 
Net loss$(136,450)$(33,915)

31

Results of Continuing Operations (in thousands):
 Years ended December 31,
 2019 2018 2017
Revenue$119,353
 $177,773
 $243,106
Operating expenses (excluding depreciation and amortization)149,225
 159,808
 188,744
Operating expenses %125.0 % 89.9 % 77.6 %
Corporate general and administrative costs27,975
 31,467
 41,492
Corporate general and administrative costs %23.4 % 17.7 % 17.1 %
Depreciation and amortization8,465
 9,216
 9,768
Research and development costs8,863
 10,356
 13,130
(Gain) loss on disposal of long-lived assets1,450
 (443) 292
Impairment of goodwill—
 37,180
 —
Loss from operations(76,625) (69,811) (10,320)
Operating margin %(64.2)% (39.3)% (4.2)%
Loss on sale of business—
 (360) —
Loss on write-down of assets held for sale—
 (2,580) —
Interest and other expense, net(311) (7,906) (1,072)
Loss before income taxes(76,936) (80,657) (11,392)
Income tax benefit (expense)201
 7,216
 (6,112)
Loss from continuing operations(76,735) (73,441) (17,504)
Income (loss) from discontinued operations, net of tax44,456
 2,743
 (9,891)
Net loss$(32,279) $(70,698) $(27,395)
Net loss attributable to noncontrolling interests—
 358
 —
Net loss attributable to Flotek Industries, Inc. (Flotek)$(32,279) $(70,340) $(27,395)

Results for 20192020 compared to 2018—2019—Consolidated
Consolidated revenue for the year ended December 31, 2019,2020, decreased $58.4$66.2 million, or 32.9%55.5%, from 2018.2019. The decrease in revenue was largely a result of reduced demand due to changes in product mix andthe continued volatile macro-environment for U.S. onshore drilling and completion activity, impacted by political and economic events in foreign markets, and the transitioncontinued COVID-19 impact on productivity and customers during the year. Partially offsetting the decrease were new revenues in 2020 from the diversification of personnelour chemical product line and our DA segment acquired in the Company’s sales organization as well as the ongoing transition related to the Company selling progressively more to oil and gas company end users rather than through energy service companies.May 2020.
Consolidated operating expenses (excluding depreciation and amortization) for the year ended December 31, 2019,2020, decreased $10.6$59.8 million, or 6.6%40.4%, from 2018,2019, and as a percentage of revenue, increased to 125.0%166.1% for the year ended December 31, 2019,2020, from 89.9%124.1% for the comparable period of 2019. Company reduction in 2018. Theforce actions in the first quarter of 2020 lowered operational personnel costs along with a significant decrease in expenses waslogistical costs as part of our overall cost-cutting efforts within supply chain. In 2020, the Company lowered occupancy costs due to our reduced facility footprint and reduction in equipment primarily attributable to decreased sales, improved logistical and supply chain costs, lower inventory adjustments, and decreased headcount,associated with tank rentals. These savings were partially offset by operating expenses for the loss onDA segment acquired in May 2020, and introduction of the purchase commitment associated withsanitizers, surface cleaners and disinfectants product line in the terpene supply agreement,second quarter of 2020. The provision for excess and obsolete inventory costs, lower plant utilizationin 2020 included charges of $8.4 million for the CT segment and a one-time charge$3.9 million for the DA segment, primarily related to the terminationCompany’s product rationalization effort. The Company also recognized expense of $2.7 million in 2020 for the earn-out provisions related to the JP3 acquisition. For the year ended December 31, 2020, the Company recognized a purchase commitment loss of $9.9 million and carried an operationsaccrued liability of $9.4 million associated with the amended terpene supply agreement. The commitment loss related contract.to lower expected usage from reduced demand for terpene in the oil and gas sector due from capital spending reductions across our customer base and impacts of COVID-19, combined with product mix changes using lower concentrations of terpene. In 2019, the Company recognized a loss of $15.8 million related to the terpene supply agreement.
Corporate general and administrative (“CG&A”) expenses are not directly attributable to products sold or services provided. CG&A costs decreased $3.5$11.7 million, or 11.1%41.7%, for the year
ended December 31, 2019, from 2018. As a percentage of revenue, CG&A rose from 17.7% to 23.4% for the year ended December 31, 2019,2020, compared to 2018.2019. The decrease in CG&A costs for the year ended December 31, 2020, compared to 2019, was primarily due to continuing aggressive costa decrease of $8.2 million in personnel costs. This year over year decrease in personnel costs resulted from reduction measures which beganin force actions in the lastfirst quarter of 2017,2020 combined with a decrease in severance costs of $4.2 million. These reduced personnel costs included a $2.1 million reduction in stock-based compensation and incentives. Other factors contributing to lower incentiveCG&A in 2020 were decreases in legal costs, travel and stock compensation expense, lower professional fees as well as decreased headcountentertainment, and software licensing fees,Company headquarter leasing costs, partially offset by costs associated with severance, legal fees, and certain shareholder-related activities.one-time expenses related to the acquisition of JP3 during the second quarter of 2020.
Depreciation and amortization expense for the year ended December 31, 2019,2020, decreased by $0.8$5.1 million, or 8.1%59.7%, from 2018.2019, primarily due to impairment of fixed and long-lived assets recorded in the first quarter of 2020 combined with limiting capital expenditure spend in 2020 and consolidation of our physical facility footprint.
Research and Innovation (“R&I”)development expense for the year ended December 31, 2019,2020, decreased $1.5$1.7 million, or 14.4%18.6%, from 2018.2019. The decrease in R&Iresearch and development expense is primarily attributabledue to lower headcount.
Duringpersonnel costs as a result of our company-wide reduction in workforce in the secondfirst quarter of 2018,2020.
For the year ended December 31, 2020, the Company recognized a goodwill impairment chargegain of $37.2$0.1 million inon disposal of assets. For the Energy Chemistry Technologies reporting unit, which resulted from sustained under-performance, lower expectations for the reporting unit.
During the second quarter of 2018,year ended December 31, 2019, the Company committed to a plan to divest the revenue generating assets associated

with the Dalton, Georgia facility within the Energy Chemistry Technologies segment. As a result of this planned divestiture, the Company recordedrecognized a loss on write-down of assets held for sale of $2.6$1.5 million for the three months ended June 30, 2018. During the third quarter of 2018, the Company completed the sale and recorded a loss on the sale of the business of $0.4 million for the three months ended September 30, 2018.
Loss on disposal of long-lived assets, increased $1.9 million primarily due to the disposal of certain corporate software.
InterestImpairment of fixed and other expense decreased $7.6long-lived assets for the year ended December 31, 2020 was $70.0 million due to a $12.5 million write-down in the DA segment in the third quarter combined with the CT segment write-down of $54.7 million and a corporate-level write-down of $2.8 million recorded in the first quarter of 2020. Impairment of goodwill was $11.7 million for the year ended December 31, 2019, compared to 2018, primarily2020, due to nonrecurring $1.2a third quarter 2020 write-down of the goodwill in our DA segment. See Note 3, “Business Combination;” Note 9, “Goodwill;” Note 10, “Other Intangible Assets;” and Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” for additional information. No similar impairments occurred in 2019.
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The Company recognized a gain on lease termination of $0.6 million and $1.9 million write-offs associated with the discontinuation of certain corporate projects during the second and fourth quarter of 2018, respectively, $3.4 million related to moving from an interest expense position to an interest income position2020, as a result of terminating the salecorporate headquarters office lease and making a one-time payment of $1.0 million.
Interest and other income (expense), net, changed $0.8 million for the CICT segment and subsequentyear ended December 31, 2020, compared to 2019. Interest expense decreased $2.0 million, primarily due to the termination of the PNC Bank Credit Facility in the first quarter of 2019. The Company’s interest income for the year ended December 31, 2020, was $0.5 million compared to $1.9 million in 2019. The year-over-year decrease in interest income was driven by lower average cash balances and $2.6 million associated with a write-down of assets held for sale associated with the Dalton, Georgia facility within the Energy Chemistry Technologies segment offset by acceleration of $1.4 million of unamortized debt issuance costs associated with PNC Bank Credit Facility upon termination of the facility.depressed interest rate environment in 2020 compared to 2019.
The Company recorded an income tax benefit of $0.2$6.2 million for the year ended December 31, 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act initially recorded in the first quarter of 2020, yielding an effective tax benefit rate of 0.3%,4.3% for the year ended December 31, 2019, compared to an income tax benefit of $7.2 million, yielding an effective tax rate of 8.9%, in 2018. In the second quarter of 2018, the2020. The Company determined that it wasis more likely than not that it will not realize the benefits of its grosscertain deferred tax assets and, therefore, recorded a $15.5$20.3 million valuation allowance against the carrying value of net deferred tax assets.assets, except for deferred tax liabilities related to non-amortizable intangible assets and certain state jurisdictions. As all available evidence should be taken into consideration when assessingof December 31, 2020, the needCompany is in a full valuation position. See Note 15, “Income Taxes.”
Results by Segment

Chemistry Technologies
(dollars in thousands)
 Years ended December 31,
20202019
Revenue$50,310 $119,353 
Loss from operations, including impairment(88,486)(45,682)
Results for 2020 compared to 2019
CT revenue for the year ended December 31, 2020, decreased $69.0 million, or 57.8% compared to 2019. The decrease in revenue was largely a valuation allowance, the subsequent events that occurred in the first quarter of 2019 provided a source of income to support the release of $11.5 millionresult of the valuation allowance. As such,volatile macro-environment. Contributing to the Company reversed this portionvolatility were OPEC-related actions disrupting market pricing and resulting in oversupply of hydrocarbons, and the valuation allowanceCOVID-19 impact on productivity and customers during the fourth quarteryear. Partially offsetting the decrease were new revenues in 2020 from the introduction of 2018.sanitizing, surface cleaning and disinfecting products.
DuringLoss from operations for the fourth quarter of 2018, the Company initiated a strategic plan to sell its Consumer and Industrial Chemistry TechnologiesCT segment which was completed in the first quarter of 2019. The Company recorded net income from discontinued operations of $44.5increased $42.8 million for the year ended December 31, 2020, compared to 2019. The increased loss from operations for 2020 was due to impairment charges of fixed and long-lived assets of $54.7 million, further impacted by lower revenue related to reduced demand. The provision for excess and obsolete inventory in 2020 included charges of $8.4 million. In 2020, the Company recognized a loss of $9.9 million for the amended terpene agreement due to adjustments to the Company’s expected usage, combined with product mix changes using lower concentration of terpene. In 2019, the Company recognized a loss of $15.8 million for the amended terpene agreement.

Data Analytics
(dollars in thousands)
Period May 18 to December 31,
2020
Revenue$2,831 
Loss from operations, including impairment(36,407)
On May 18, 2020, the Company purchased JP3 and formed the DA segment. The segment revenue for the period from acquisition to December 31, 2020, was $2.8 million, which came from existing customers on minor project expansions and new
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customers. For the fourth quarter of 2020, revenue was $1.3 million, an increase of $0.6 million over the third quarter of 2020, driven primarily by increased equipment sales. Segment revenue for 2020, and the third quarter in particular, was adversely impacted by economic and COVID-19 related factors, as demand in the oil and gas sector declined due to capital spending reductions across our customer base.
The loss from operations for the period May 18 to December 31, 2020, includes write-downs to goodwill of $11.7 million and $12.5 million for finite-lived intangible assets in the third quarter. In addition, the third quarter of 2020 included charges for excess and obsolete inventory of $3.9 million. Results for 2018 comparedthe period May 18 to 2017—ConsolidatedDecember 31, 2020, also include $2.7 million of expense for the JP3 stock performance earn-out provisions related to the purchase of JP3.
Consolidated revenue for
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements relate to the need to acquire and maintain equipment, fund working capital requirements and when the opportunities arise, to make strategic acquisitions. During the year ended December 31, 2018, decreased $65.3 million, or 26.9%, from 2017. The decrease in revenue was due to changes in product mix and ongoing transition related to the Company selling progressively more to oil and gas company end users rather than through energy service companies.
Consolidated operating expenses for the year ended December 31, 2018, decreased $28.9 million, or 15.3%, from
2017, and, as a percentage of revenue, increased to 89.9% for the year ended December 31, 2018, from 77.6% in 2017. The decrease in expenses was primarily attributable to decreased sales, lower stock compensation expense, and decreased headcount, partially offset by increased freight and other direct costs associated with manufacturing.
CG&A expenses are not directly attributable to products sold or services provided. CG&A costs decreased $10.0 million, or 24.2%, for the year ended December 31, 2018 from 2017. As a percentage of revenue, CG&A rose from 17.1% to 17.7% for the year ended December 31, 2018, compared to 2017. The decrease in CG&A costs was primarily due to aggressive cost reduction measures which began in the last quarter of 2017, as well as lower incentive and stock compensation expense.
Depreciation and amortization expense for the year ended December 31, 2018, decreased $0.6 million, or 5.7%, from 2017.
Research and Innovation (“R&I”) expense for the year ended December 31, 2018, decreased $2.8 million, or 21.1%, from 2017. The decrease in R&I is primarily attributable to reallocating personnel into operational roles.
During the second quarter of 2018, the Company recognized a goodwill impairment charge of $37.2 million in the Energy Chemistry Technologies reporting unit, which resulted from sustained under-performance, lower expectations for the reporting unit.
During the second quarter of 2018, the Company committed to a plan to divest the revenue generating assets associated with the Dalton, Georgia facility within the Energy Chemistry Technologies segment. As a result of this planned divestiture, the Company recorded a loss on write-down of asses held for sale of $2.6 million for the three months ended June 30, 2018. During the third quarter of 2018, the Company completed the sale and recorded a loss on the sale of the business of $0.4 million for the three months ended September 30, 2018.
Interest and other expense increased $6.8 million for the year ended December 31, 2018, compared to 2017, primarily due to $1.2 million and $1.9 million write-offs associated with the discontinuation of certain corporate projects during the second and fourth quarter of 2018, respectively, expenses related to winding down of certain business ventures, changes in foreign currency exchange rates, and increased borrowing on the PNC Bank Credit Facility throughout 2018.
The Company recorded an income tax benefit of $7.2 million, yielding an effective tax benefit rate of 8.9%, for the year ended December 31, 2018, compared to an income tax provision of $6.1 million, yielding an effective tax provision rate of 53.7%, in 2017. In the second quarter of 2018, the Company determined that it was more likely than not that it will not realize the benefits of its gross deferred tax assets and, therefore, recorded a $15.5 million valuation allowance against the carrying value of the net deferred tax assets. As all available evidence should be taken into consideration when

assessing the need for a valuation allowance, the subsequent events that occurred in the first quarter of 2019 provided a source of income to support the release of $11.5 million of the valuation allowance. As such, the Company reversed this portion of the valuation allowance during the fourth quarter of 2018.
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its Consumer and Industrial Chemistry
Technologies segment, which was completed in the first quarter of 2019. The Company recorded net income from discontinued operations of $2.7 million for the year ended December 31, 2018 for the classification of this segment as held for sale. The sale was completed during the first quarter of 2019 as expected.
Results by Segment
Energy Chemistry Technologies (“ECT”)     
(dollars in thousands)Years ended December 31,
 2019 2018 2017
Revenue$119,353
 $177,773
 $243,106
(Loss) income from operations(46,485) (36,817) 33,611
Income from operations - excluding impairment(46,485) 363
 33,611
Operating margin % - excluding impairment(38.9)% 0.2% 13.8%
Results for 2019 compared to 2018—Energy Chemistry Technologies
ECT revenue for the year ended December 31, 2019, decreased $58.4 million, or 32.9%, from 2018. ECT’s under-performance when compared to these market indicators were primarily attributable to product mix and continued volatile macro-environment for U.S. onshore drilling and completion activity, the transition of personnel in the Company’s sales organization as well as the ongoing transition related to the Company selling progressively more to oil and gas company end users rather than through energy service companies.
Income from operations for the ECT segment decreased $9.7 million for the year ended December 31, 2019, compared to 2018. This decrease is primarily a result of the loss on the terpene supply agreement, excess and obsolete inventory costs, lower plant utilization and a one-time charge related to the termination of an operations related contract. The loss is partially offset by improved logistical and supply chain costs, lower inventory adjustments, and decreased headcount, partially offset by lower plant utilization and a one-time charge related to the termination of an operations related contract.


Results for 2018 compared to 2017—Energy Chemistry Technologies
ECT revenue for the year ended December 31, 2018, decreased $65.3 million, or 26.9% from 2017. ECT’s under-performance when compared to these market indicators was primarily attributable to product mix and an ongoing transition related to the Company selling progressively more to oil and gas company end users rather than through energy service companies.
Income from operations for the ECT segment decreased $70.4 million for the year ended December 31, 2018, compared to 2017, partially due to the $37.2 million goodwill impairment charge taken in the second quarter of 2018. Income from operations, excluding impairment, decreased $33.2 million, or 98.9%, for the year ended December 31, 2018, compared to 2017. This decrease is primarily a result of gross margin compression caused by reduced sales activity coupled with increases in material and labor costs, inventory reserve adjustments, and higher logistics expenditures, partially offset by a reduction in overhead expenses.
Discontinued Operations
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its Consumer and Industrial Chemistry Technologies segment, which was completed in the first quarter of 2019. During 2017, the Company completed the
sale or disposal of the assets and transfer or liquidation of liabilities and obligations of the Drilling Technologies and Production Technologies segments.

Consumer and Industrial Chemistry Technologies (“CICT”)    
(dollars in thousands) Years ended December 31,
  2019 2018 2017
Revenue $11,031
 $72,344
 $73,992
Income (loss) from operations $(610) $3,054
 $7,465
Operating margin % (5.5)% 4.2% 10.1%
Results for 2019 compared to 2018—Consumer and Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2019, decreased $61.3 million, or 84.8%, from 2018, primarily due to the sale of the segment as of February 28, 2019.
Income from operations for the CICT segment decreased $3.7 million, or 120.0%, for the year ended December 31, 2019, from 2018, primarily due to the sale of the segment as of February 28, 2019.
Results for 2018 compared to 2017—Consumer and Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2018, decreased $1.6 million, or 2.2%, from 2017, primarily due to
a decline in the value of terpenes and some softness for flavor ingredients. The market of citrus oils was affected by the historic high prices experienced in 2017 and 2018, which limited market activity and top line revenue. Citrus greening reduced citrus crops globally, thereby limiting the Company’s performance in comparison to the growth experienced in 2016 and 2017.
Income from operations for the CICT segment decreased $4.4 million, or 59.1%, for the year ended December 31, 2018, from 2017, primarily due to higher raw material costs and reduced by-product sales, as well as increased expenses related to operations of the new still put into production in the third quarter of 2018.
Drilling Technologies      
(dollars in thousands) Years ended December 31,
  2019 2018 2017
Revenue $—
 $—
 $11,534
Loss from operations $—
 $—
 $(2,646)
Loss from operations - excluding impairment $—
 $—
 $(2,646)
Operating margin % - excluding impairment —% —% (22.9)%
Results for 2018 compared to 2017—Drilling Technologies
On May 22, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Drilling Technologies segment to National Oilwell Varco, L.P. (“NOV”) for $17.0 million in cash consideration.

On August 16, 2017, the Company completed the sale of substantially all of the remaining assets of the Company’s Drilling Technologies segment to Galleon Mining Tools, Inc. for $1.0 million in cash consideration and a note receivable of $1.0 million due in one year.
Upon completion of these sales, the Company ceased all operations for the Drilling Technologies segment.
Production Technologies      
(dollars in thousands) Years ended December 31,
  2019 2018 2017
Revenue $—
 $—
 $4,002
Loss from operations $—
 $—
 $(1,357)
Loss from operations - excluding impairment $—
 $—
 $(1,357)
Operating margin % - excluding impairment —% —% (33.9)%

Results for 2018 compared to 2017—Production Technologies
On May 23, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Production
Technologies segment to Raptor Lift Solutions, LLC (“Raptor Lift”) for $2.9 million in cash consideration.
Upon completion of this sale, the Company ceased all operations for the Production Technologies segment.
Capital Resources and Liquidity
Overview
Upon closing of the sale of the CICT segment, the Company repaid the outstanding balance, interest, and fees related on the PNC Bank Credit Facility on March 1, 2019 and subsequently terminated the PNC Bank Credit Facility. As of December 31, 2019, the Company has no debt outstanding.

During 2019,2020, the Company funded capital requirements primarily with cash on hand, includingwhich included a tax refund received of $6.1 million, combined with investing and financing cash inflows that included proceeds of $9.9 million received from escrow in 2020 from the 2019 sale of the CICT segment.
At December 31, 2019,segment and proceeds from a Payroll Protection Program loan of $4.8 million. During the second quarter of 2020, the Company remained compliant withacquired JP3, making payments for the continued listing standardsacquisition of $26.3 million, net of cash acquired. During the NYSE.third quarter of 2020, the first stock performance target related to the acquisition was achieved and in October 2020, the Company paid $2.5 million into escrow to settle the liability.
Cash and cash equivalents totaled $38.7 million at December 31, 2020, as compared to $100.6 million at December 31, 2019. The Company used $18.8$47.8 million of cash outflows from continuing operations (including $17.1for operating activities (including $14.8 million expendedexpended in working capital), $2.4 and $17.7 million for capital expenditures, and $0.6 million for purchases of various patents and other intangible assets.investing activities. Offsetting these cash outflows, financing activities provided the Company received $49.7 million$3.7 million.
Liquidity
The effects of the COVID-19 pandemic and the volatility in oil prices during 2020 materially and adversely affected, and may continue to materially and adversely affect, the demand for repaymentsoil 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 equity and debt netfinancing. 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 our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery in of oil and gas markets, or reduced spending at 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;
•Entry into a borrowing facility with one or more lenders;
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•Raising equity either in the public markets or via a private placement offering;
•Reducing executive salaries and/or board of borrowings, $169.8 million for saledirectors’ fees, or making a portion of CICT,those fees or salaries in equity instead of cash; and $0.2 million as proceeds from sale
•Reducing professional advisory fees and headcount.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms. For a further discussion of assets.
Liquiditythe risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in this Annual Report.
The Company expects maintenance capital spending to be between $2 million and $4less than $1.0 million in 2020 and does not have any specific growth capital projects currently committed. During 2020, the Company expects to use2021.
Cash Flows

Consolidated cash on hand and internally generated funds to fund operations and capital expenditures. With the proceeds from the saleflows by type of the CICT segment, the Company paid off its credit facility balance and began evaluation of the manner in which the remaining net proceeds from the sale will be deployed. During 2019, management and the board of directors reviewed options associated with the proceeds from the sale of CICT to include organic and inorganic growth projects, short to mid-term retention of capital, special dividends, and share buybacks, bearing in mind issues related to the optimal timing of capital deployment.

Net Debt
Net debt represents total debt less cash and cash equivalents and combines the Company’s indebtedness and the cash and cash equivalents that could be used to repay that debt. Components of net debtactivity are as followsnoted below (in thousands):
 Years ended December 31,
 20202019
Net cash used in operating activities$(47,838)$(4,545)
Net cash (used in) provided by investing activities(17,701)152,713 
Net cash provided by (used in) financing activities3,727 (49,994)
Net cash flows provided by discontinued operations— 15 
Effect of changes in exchange rates on cash and cash equivalents(102)5 
Net change in cash, cash equivalents and restricted cash$(61,914)$98,194 

 December 31, 2019 December 31, 2018
Cash and cash equivalents$100,575
 $3,044
Current portion of long-term debt—
 (49,731)
Net debt$100,575
 $(46,687)
Cash Flows
Cash flow metrics from the consolidated statements of cash flows are as follows (in thousands):
  
Years ended December 31,
  
2019 2018 2017
Net cash (used in) provided by operating activities$(18,769) $(20,816) $12,345
Net cash provided (used in) by investing activities166,937
 (2,109) 14,526
Net cash (used in) provided financing activities(49,994) 21,480
 (27,285)
Net cash flows provided by (used in) provided by discontinued operations15
 (7) 24
Effect of changes in exchange rates on cash and cash equivalents5
 (88) 151
Net change in cash, cash equivalents and restricted cash$98,194
 $(1,540) $(239)
Operating Activities
During 2020 and 2019, 2018, and 2017, cash (used in)used in operating activities totaled $18.8 million, $20.8$47.8 million and $12.3$4.5 million, respectively. Consolidated net loss from continuing operations for 2020 and 2019 2018, and 2017 totaled $76.7 million, $73.1$136.5 million and $17.5$76.1 million, respectively.
NetDuring the year ended December 31, 2020, non-cash contributionsadjustments to net income totaled $96.6 million as compared to $40.8 million in 2019, totaled $40.8 million. Contributory2019.
•In 2020, contributory non-cash itemsadjustments consisted primarily of $9.9$81.7 million of impairment charges, which include a $30.2 million impairment of fixed assets, $32.4 million impairment of intangibles, $11.7 million impairment of goodwill and $7.4 million impairment on right-of-use assets. The non-cash adjustment for the provision for excess and obsolete inventory was $12.3 million. In addition, non-cash charges included $3.4 million for depreciation and amortization and $3.0 million for stock compensation expense. Other non-cash adjustments included a $2.7 million change in fair value of contingent consideration.
•In 2019, the non-cash adjustments to net income consisted primarily of $8.5 million for depreciation and amortization expense, $4.2 million for stock compensation expense, $5.7 million provision for excess and obsolete inventory, $18.3 million for changes to deferred income taxes and $1.5 million for net gain on sale of assets.
Net non-cash contributionsDuring the year ended December 31, 2020, changes in working capital used $14.8 million in cash as compared to net incomeproviding $30.7 million in 2018, totaled $54.4 million. Contributory non-cash items consisted2019.
•The use of cash in working capital in 2020 primarily resulted from a reduction in accrued liabilities and accounts payable of $9.6$23.6 million, for depreciationwhich included two one-time payments made in 2020: one payment of $15.8 million to amend a long-term supply agreement and amortization expense, $37.2one to pay $4.1 million for the impairment of goodwill, intangible assets or fixed assets, $7.1 million for stock compensation expense, $2.6 million for the loss on write down of assets held for sale, $0.7 million for reduction in incremental tax benefitfinal post-closing working capital adjustment related to share-based awards, $3.3 million for provisions related to accounts receivables and inventory reserves, $(0.4) million for net loss onthe 2019 sale of the CICT segment. Decreases in accounts receivable, inventories and other current assets and $(6.0) million for changes to deferred income taxes.during 2020 provided cash of $8.5 million.

Net non-cash contributions to net income in 2017, totaled $23.9 million. Contributory non-cash items consisted primarily of $10.2 million for depreciation and amortization expense, $10.6 million for stock compensation expense, $2.0 million for reduction in incremental tax benefit related to
share-based awards and $0.2 million for provisions related to accounts receivables, partially offset by $0.2 million for changes to deferred income taxes.
•During 2019, changes in working capital provided $17.1 million in cash, primarily resulting from increasing accounts receivables and income taxes receivable by $8.4 million and decreasing accrued liabilities and interest payable by $0.0 million, partially offset by decreasing inventories and other current assets by $23.5 million and increasing accounts payable by $2.0 million.
During 2018, changes in working capital used $2.1$30.7 million in cash, primarily resulting from decreasing accounts receivables income taxes receivable,by $21.0 million.
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Investing Activities
Net cash used in investing activities was $17.7 million for the year ended December 31, 2020. The cash used in investing activities is primarily due to $26.3 million paid for the purchase of JP3, net of cash acquired, during the second quarter of 2020, and other current assets by $5.8$1.4 million paid for capitalized sanitizer equipment upgrades in 2020. The cash outflows were partially offset by increasing inventories by $3.7proceeds of $9.9 million and decreasing accounts payable and accrued liabilities by $8.8 million.
During 2017, changesreceived from escrow in working capital provided $6.0 million in cash, primarily resulting2020 from increasing accounts payable while accrued liabilities remained relatively unchanged, partially offset by increasing accounts receivables, inventories, income taxes receivable, and other current assets by $3.4 million and decreasing income taxes payable and interest payable by $14.7 million.

Investing Activitiesthe 2019 sale of the CICT segment.
Net cash provided by investing activities was $166.9$152.7 million during 2019. Cash provided by investing activities included $169.7$155.5 million of proceeds received from the sale of revenue generating assets associated with a business line within the ECTCICT segment, and $0.2 million of proceeds received from the sale of fixed assets, partially offset by cash paid of $2.4 million for capital expenditures and $0.6 million for the purchase of various patents and other intangible assets.
Net cash used in investing activities was $2.1 million during 2018. Cash used in investing activities primarily included $1.7 million of proceeds received from the sale of the Drilling Technologies and Production Technologies segments and $1.4 million of proceeds received from the sale of fixed assets, partially offset by $3.6 million for capital expenditures and $1.6 million for the purchase of various patents and other intangible assets.Financing Activities
Net cash provided by investingfinancing activities was $14.5$3.7 million during 2017. for the year ended December 31, 2020. Cash provided by investingfinancing activities primarily included $4.2 million for capital expenditures, $0.5 million for the purchase of patents and intangible assets offset by $18.5$4.8 million of proceeds from sale of business and $0.7 million of proceeds from sales of assets.borrowings under the Payroll Protection Program.
Financing Activities
Net cash used in financing activities was $50.0 millionmillion during 2019, primarily due to using $49.7 million for repayments of debt, net of borrowings.
Net cash generated through financing activities was $21.5 million during 2018, due to receiving $21.8 million for borrowings of debt, net of repayments, $0.2 million for purchases of treasury stock for tax withholding purposes related to the vesting of restricted stock awards and the exercise of non-qualified stock options, and $0.1 million for payments of debt issuance costs. Cash generated through financing activities was partially offset by receiving $0.3 million in proceeds from the sale of common stock.
During 2017, net cash used in financing activities was $27.3 million. Cash used in financing activities was primarily due
to receiving $0.7 million in proceeds from the sale of common stock, inclusive of $30.1 million, net of issuance costs, from the private placement of 2.5 million common shares on July 27, 2016. Cash used in financing activities was partially offset by using $20.4 million for repayments of debt, net of borrowings, purchases of treasury stock for tax withholding purposes related to the vesting of restricted stock awards and the exercise of non-qualified stock options of $1.7 million, and payments of debt issuance costs of $0.6 million.
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 December 31, 2019, 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 are material to investors.
Contractual Obligations
Cash flows from operations are dependent on a variety of factors, including fluctuations in operating results, accounts receivable collections, inventory management, and the timing of payments for goods and services. Correspondingly, the impact of contractual obligations on the Company’s liquidity and capital resources in future periods is analyzed in conjunction with such factors.
Material contractual obligations consist of supply commitments, operating and finance lease obligations.
Contractual obligations at December 31, 2019 are as follows (in thousands):
 Payments Due by Period
 Total Less than 1 year 1 - 3 years 3 -5 years 
More than
5 years
Finance lease obligation$249
 $70
 $117
 $62
 $—
Operating lease obligations33,599
 2,036
 3,878
 3,993
 23,692
Supply commitments for raw materials72,020
 18,005
 54,015
 —
 —
Total$105,868
 $20,111
 $58,010
 $4,055
 $23,692
.


Critical Accounting Policies and Estimates
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).America. Preparation of these statements requires management to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenue and expenses during the reporting period. Significant accounting policies are described in Note 2, – “Summary of Significant Accounting Policies”Policies,” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report. The Company believes the following accounting policies are critical due to the significant, subjective and complex judgments and estimates required when preparing the consolidated financial statements. The Company regularly reviews judgments, assumptions and estimates related to the critical accounting policies.
Basis of Presentation
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its CICT segment, which was completed in the first quarter of 2019. Effective December 31, 2018, the Company classified the assets, liabilities, and results of operations for this segment as “Discontinued Operations” for all periods presented.
Amounts previously reported have been reclassified to conform to this presentation to allow for meaningful comparison of continuing operations.
During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. During 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.
Revenue Recognition
The Company recognizes revenuesrevenue to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Refer toSee Note 4 —5, “Revenue from Contracts with Customers”Customers,” in Part II of this Annual Report for further discussion on Revenue.discussion.
The Company recognizes revenue based on the Accounting Standards Codification (“ASC”) 606a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred
accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.
For certain contracts,The Company primarily sells chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, the Company recognizesoffers various services associated to products sold which includes field services, installation, maintenance and other functions. Service revenue underis recognized on an over time basis for the percentage-of-completion methodCT segment as services are performed as the customer is simultaneously benefiting as the Company performs. For the DA segment, services are recognized upon completion of accounting, measured by the percentage of “costs incurred to date”commissioning and installation due to the “total estimated costsshort-term nature of completion.” This percentagethe performance obligation. The DA segment has additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is applied torecognized ratably over time throughout the “total estimatedcontract period. Additionally, the DA segment may provide subscription-type arrangements with customers in which monthly reoccurring revenue at completion” to calculate proportionate revenue earned to date. For the years ended December 31, 2019, 2018,is recognized ratably over time in accordance with agreed upon terms and 2017, the percentage-of-completion revenue accounted for less than 0.1% of total revenue during the respective time periods.conditions.
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As an accounting policy election, the Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.
AllowanceReserve for Doubtful Accounts
The Company performs ongoing credit evaluations of customersExcess and grants credit based upon historical payment history, financial condition, and industry expectations, as available. Determination of the collectability of amounts due from customers requires the Company to use estimates and make judgments regarding future events and trends, including monitoring customers’ payment history and current credit worthiness, in order to determine that collectability is reasonably assured. The Company also considers the overall business climate in which its customers operate.
These uncertainties require the Company to make frequent judgments and estimates regarding a customers’ ability to pay amounts due in order to assess and quantify an appropriate allowance for doubtful accounts. The primary factors used to quantify the allowance are customer delinquency, bankruptcy, and the Company’s estimate of its ability to collect outstanding receivables based on the number of days a receivable has been outstanding.
The majority of the Company’s customers operate in the energy industry. The cyclical nature of the industry may affect customers’ operating performance and cash flows, which could impact the Company’s ability to collect on these obligations. Additionally, some customers are located in international areas that are inherently subject to risks of economic, political, and civil instability.
The Company continues to monitor the economic climate in which its customers operate and the aging of its accounts receivable. The allowance for doubtful accounts is based on the aging of accounts and an individual assessment of each invoice.At December 31, 2019, the allowance was 8.9% of

gross accounts receivable, compared to an allowance of 3.1% a year earlier.While credit losses have historically been within expectations and the provisions established, should actual write-offs differ from estimates, revisions to the allowance would be required.
Obsolete Inventory Reserves
Inventories consist of raw materials work-in-process, and finished goods and are stated at the lower of cost or market, using the weighted-average cost method.method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company’s inventory reserve represents the excess of the inventory carrying amount over the amount expected to be realized from the ultimate sale or other disposal of the inventory.
The Company regularly reviews inventory quantities on hand and records provisions or impairments for excess or obsolete inventory based on the Company’s forecast of product demand, historical usage of inventory on hand, market conditions, production and procurement requirements and technological developments. Significant or unanticipated changes in market conditions or Company forecasts could affect the amount and timing of provisions for excess and obsolete inventory and inventory impairments.
Significant changes have not been made in the methodology used to estimate the reserve for excess and obsolete inventory or impairments during the past four years. Specific assumptions are updated at the date of each evaluation to consider Company experience and current industry trends. Significant judgment is required to predict the potential impact which the current business climate and evolving market conditions could have on the Company’s assumptions. Changes which may occur in the energy industry are hard to predict, and they may occur rapidly. To the extent that changes in market conditions result in adjustments to management assumptions, impairment losses could be realized in future periods.
At December 31, 20192020 and 2018,2019, the reserve for excess and obsolete inventory was $11.1 million and $5.7 million, or 48.3% and $2.1 million, or 20.8% and 7.2%19.7% of inventory, respectively.
Business Combinations
The Company includes the results of operations of its acquisitions in its consolidated results, prospectively from the date of acquisition. Acquisitions are accounted for by applying the acquisition method. The Company allocates the fair value of purchase consideration to the assets acquired, liabilities assumed and any non-controlling interests in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and any non-controlling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and Flotek and the value of the acquired assembled workforce. Acquisition-related expenses are recognized separately from the business acquisition and are recognized as expenses as incurred.
Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
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. See Note 3, “Business Combination,” in Part II of this Annual Report for further information.
Goodwill
Goodwill is not subject to amortization but is tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, or a change in projected operations or results of a reporting unit. Goodwill is tested for impairment at a reporting unit level.
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During the annual testing, or when tested upon the occurrence of a triggering event, the Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative impairment test is performed to determine whether goodwill impairment exists at the reporting unit.
The quantitative impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the estimated fair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined, when appropriate, with a market-based approach. The market-based approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly traded businesses operating in industries consistent with the reporting unit. If the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.
During annualthe 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 and created the DA segment. The Company recorded goodwill of $17.5 million at the date of acquisition. During the third quarter of 2020, the Company identified a triggering event due to significantly lower than expected results and completed an impairment analysis at the DA reporting unit level, which resulted in a goodwill impairment testing in 2018 and 2017,charge of $11.7 million. During the fourth quarter of 2020, the Company first assessed qualitative factors to determine whether it was necessary to perform the quantitative impairment test. During annual goodwill impairment testing in 2017, the Company first assessed qualitative factors to determine whether it was necessary to perform the two-step goodwill impairment test.
As of the fourth quarter of 2018,2020, the Company concluded it was not more-likely-than-not that there was an impairment of goodwill for the CICTDA reporting unit based on the assessment of qualitative factors. During the fourth quarter of 2018, the final criterion was met for classifying the CICT reporting unit as held for sale. Therefore, the CICT reporting unit was reported as discontinued operations. After receiving initial interests from potential buyers, it was determined that the disposal proceeds, after considering selling costs, would result in excess over book value. As this was in-line with quantitative impairment tests performed in previous quarters for the CICT reporting unit, no further impairment assessment was needed.
For the second quarter of 2018, the Company was not able to conclude that it was not more-likely-than-not that the estimated fair value of the Energy Chemistry Technologies (“ECT”) reporting unit exceeded the carrying amount.

Therefore, the Company performed a quantitative impairment test for the reporting unit. The results of the impairment test indicated that the carrying amount of the ECT reporting unit exceeded the estimated fair value of the reporting unit by approximately $37.8 million, or 25.6% of the carrying amount. To evaluate the sensitivity of the fair value calculations for the ECT reporting units, the Company applied a hypothetical 0.5% unfavorable change in the weighted average cost of capital, which would have reduced the estimated fair value of the ECT reporting unit by approximately $5.7 million. Additionally, reducing the revenue projections by 1.0% and holding gross margins steady reduced the estimated fair value approximately $4.4 million. These sensitivity analyses confirmed the need for an impairment for the ECT reporting unit. The Company recorded a full impairment of the goodwill for $37.2 million in the ECT reporting unit during the second quarter of 2018.
At December 31, 2019, no goodwill was reported on the balance sheet.
Long-LivedLong-lived Assets Other than Goodwill
Long-lived assets other than goodwill consist of property and equipment and intangible assets that have determinable and indefinite lives. The Company makes judgments and estimates regarding the carrying amount of these assets, including amounts to be capitalized, depreciation and amortization methods to be applied, estimated useful lives and possible impairments. Property and equipment and intangible assets with determinable lives are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
For property and equipment, events or circumstances indicating possible impairment may include a significant decrease in market value or a significant change in the business climate. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss is the excess of the asset’s carrying amount over its fair value. Fair value is generally determined using an appraisal by an independent valuation firm or by using a discounted cash flow analysis.
For intangible assets with definite lives, events or circumstances indicating possible impairment may include an adverse change in the extent or manner in which the asset is being used or a change in the assessment of future operations. The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins and cash flows. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, an impairment loss is recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.
Intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, or a change in projected operations or results of a reporting unit.
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The Company assesses whether an indefinite lived intangible impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the indefinite-lived intangible asset is impaired or if the Company elects to not perform a qualitative assessment, the Company then performs the quantitative impairment test. The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.
The development of future net undiscounted cash flow projections requires management projections of future sales and profitability trends and the estimation of remaining useful lives of assets. These projections are consistent with those projections the Company uses to internally manage operations. When potential impairment is identified, a discounted cash flow valuation model similar to that used to value goodwill at the reporting unit level, incorporating discount rates commensurate with risks associated with each asset, is used to determine the fair value of the asset in order to measure potential impairment. Discount rates are determined by using a WACC.weighted average cost of capital (“WACC”). Estimated revenue and WACC assumptions are the most sensitive and susceptible to change in the long-lived asset analysis as they require significant management judgment. The Company believes the assumptions used are reflective of what a market participant would have used in calculating fair value.
Valuation methodologies utilized to evaluate long-lived assets other than goodwill for impairment were consistent with prior periods. Specific assumptions discussed above are updated at each test date to consider current industry and Company-specific risk factors from the perspective of a market participant. The current business climate is subject to evolving market conditions and requires significant management judgment to interpret the potential impact to the Company’s assumptions. To the extent that changes in the current business

climate result in adjustments to management projections, impairment losses may be recognized in future periods.
There are significant inherent uncertainties and judgments involved in estimating fair value. The Company cannot predict the occurrence of events or circumstances that could adversely affect the fair value of the asset group. Such events may include, but are not limited to, deterioration of the economic environment, increases in the Company’s WACC, material negative changes in relationships with significant customers, reductions in valuations of other public companies in the Company’s industry, or strategic decisions made in response to economic and competitive conditions. If actual results are not consistent with the Company’s current estimates and assumptions, additional impairment of long-lived assets could be required.
In 2019, 2018, and 2017, while testing annual indefinite lived intangible assets for impairment,During the first quarter of 2020, the Company first assessed qualitative factors to determine whether it was necessary to perform theevaluated and recorded remeasurement and impairment test. Basedcharges on its qualitative assessment, the Company concluded there was no indication of the need for an impairment of indefinite lived intangibles, and therefore no further testing was required.
No impairment was recorded for property and equipmentright-of-use assets, fixed assets and intangible assets with determinable or indefinite lives during 2019totaling $57.5 million as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and 2018.
Fair Value Measurements
Fair value is defined as the amount that would be received forrelated negative impact on oil and natural gas prices on projections of future cash flows. During the salethird quarter of an asset or paid for the transfer of a liability in an orderly transaction between unrelated third party market participants at the measurement date. In determination of fair value measurements for assets and liabilities,2020, the Company considers the principal, or most advantageous,recorded an impairment write-down to estimated fair market and assumptions that market participants would use when pricing the asset or liability. The Company categorizes financialvalue of $12.5 million for intangible assets and liabilities using a three-tiered fair value hierarchy, based upon the nature of the inputs usedJP3 acquisition, which resulted from reduced demand in the determinationoil and gas sector, extended impact of fair value. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liabilityCOVID-19 pandemic and may be observable or unobservable. Significant judgmentslower performance than expected by the reporting unit. See Note 11, “Impairment of Fixed, Long-lived and estimates are required, particularly when inputs are based on pricingIntangible Assets,” for similar assets or liabilities, pricing in non-active markets, or when unobservable inputs are required.additional information.
Income Taxes
The Company’s tax provision is subject to judgments and estimates necessitated by the complexity of existing regulatory tax statutes and the effect of these upon the Company due to operations in multiple tax jurisdictions. Income tax expense is based on taxable income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. The Company’s income tax expense will fluctuatefluctuates from year to year as the amount of pretax income or loss fluctuates. Changes in tax laws and the Company’s profitability within and across the jurisdictions
may impact the Company’s
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tax liability. While the annual tax provision is based on the best information available to the Company at the time of preparation, several years may elapse before the ultimate tax liabilities are determined.
The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets and liabilities are recognized related to the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company’s assets and liabilities using statutory tax rates at the applicable year end. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously recorded tax assetsestablished when it becomes more likely than not such assets will not be realized. The Company evaluates, at least annually, net operating loss carry forwards and other net deferred tax assets and considers all available evidence, both positive and negative, to determine whether a valuation allowance is necessary relative to net operating loss carry forwards and other net deferred tax assets. In making this determination, the Company considers cumulative losses in recent years as significant negative evidence. The Company considers recent years to mean the current year plus the two preceding years. The Company considers the recent cumulative income or loss position of its filings groups as objectively verifiable evidence for the projection of future income, which consists primarily of determining the average of the pre-tax income of the current and prior two years after adjusting for certain items not indicative of future performance. Based on this analysis, the Company determines whether a valuation allowance is necessary.
In assessing the need for a valuation allowance in the second quarter of 2018, the Company considered 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. As a result of this analysis, the Company determined that it is more likely than not that it will not realizesome portion or all of the benefits of certain deferred tax assets and, therefore, recordedwill not be realized. The establishment of a valuation allowance againstrequires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the carrying valueobjectivity and verifiability of net deferred tax assets, except for deferred tax liabilities related to non-amortizable intangible assets and certain state jurisdictions. As all availablethat evidence, should be taken into consideration when assessingis considered in determining the need forappropriateness of recording a valuation allowance the subsequent events that occurred in the first quarter of 2019 providedon deferred tax assets. Except for a source of income to support the release of $11.5 million of the valuation allowance. As such,state jurisdiction, the Company reversed this portion of themaintains a full valuation allowance during the fourth quarter of 2018.on its deferred tax assets.
The Company periodically identifies and evaluates uncertain tax positions. This process considers the amounts and

probability of various outcomes that could be realized upon final settlement. Liabilities for uncertain tax positions are based on a two-step process. The actual benefits ultimately realized may differ from the Company’s estimates. Changes in facts, circumstances, and new information may require a change in recognition and measurement estimates for certain individual tax positions. Any changes in estimates are recorded in results of operations in the period in which the change occurs.occurs. At December 31, 2019,2020, the Company performed an evaluation of its various tax positions and concluded that it did not have significant uncertain tax positions requiring disclosure. The Company’s policy is to record interest and penalties related to income tax matters as income tax expense.
Share-Based Compensation
The Company has stock-based incentive plans which are authorized to issue stock options, restricted stock, and other incentive awards. Stock-based compensation expense for stock options and restricted stock is determined based upon estimated grant-date fair value. This fair value for the stock options is calculated using the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The option-pricing model requires the input of highly subjective assumptions, including expected stock price volatility and expected option life. For all stock-based incentive plans, the Company estimates an expected forfeiture
rate and recognizes expense only for those shares expected to vest. The estimated forfeiture rate is based on historical experience. To the extent actual forfeiture rates differ from the estimate, stock-based compensation expense is adjusted accordingly.
Loss Contingencies
The Company is subject to a variety of loss contingencies that could arise during the Company’s conduct of business. Management considers the likelihood of a loss or impairment of an asset or the incurrence of a liability, as well as the Company’s ability to reasonably estimate the amount of loss, in determining potential loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. Accruals for loss contingencies have not been recorded during the past three years. The Company regularly evaluates current information available to determine whether such accruals should be made or adjusted.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2, – “Summary of Significant Accounting Policies”Policies,” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company is primarily exposed to market risk from changes in foreign currency exchange rates and commodityraw material prices. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates, commodity prices or foreign currency exchange rates over the next year. The Company manages exposure to market risks at the corporate level. The portfolio of interest-sensitive assets and liabilities is monitored and adjusted to provide liquidity necessary to satisfy anticipated short-term needs. The Company’s risk management policies allow the use of specified financial instruments for hedging purposes only. Speculation on interest rates or foreign currency rates is not permitted. The Company does not consider any of these risk management activities to be material.
Foreign Currency Exchange Risk
The Company presently has limited exposure to foreign currency risk. As a global company, Flotek operates in seven domestic and international markets. Flotek’sCompany’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and has limited exposure to foreign currency risk in its international operations. During 2019,2020, approximately 4.0%4% of revenue was denominated in non-U.S. dollar currencies and virtually all assets and liabilities of the Company are denominated in U.S. dollars. However, as the
Company expands its international operations, non-U.S. denominated activity is likely to increase. The Company has not historically performed noused swaps and noor foreign currency hedges. The Company may utilize swaps or foreign currency hedges in the future.
Commodity Risk
The Company, purchases raw materials derived from citrus oils and therefore, has a commodity risk inherentthe CT segment in orange harvests. In recent years, citrus greening has disrupted citrus fruit production in Florida and Brazil which caused raw material feedstock cost to increase. Tropical storms and hurricanes, as experienced during 2017, can also impact the future citrus crop yields in growing regions. The Company believes that adequate global supply is available to meet the Company’s needs. The Companyparticular, primarily relies upon long-term strategic supply relationships to meet many of its raw material needs whichand are expected to remain in place for the foreseeable future. Price increases have beenare passed along to the
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Company’s customers, where applicable. The Company presently does not have any commodity futures contracts but may consider utilizing forms of hedging from time to time in the future.
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Item 8.  Financial Statements and Supplementary Data.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the StockholdersShareholders and the Board of Directors of
Flotek Industries, Inc.

Houston, Texas
Opinions
Opinion on the Consolidated Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheetssheet of Flotek Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018,2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the periodyear then ended, December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as ofat December 31, 2019 and 2018,2020 and the consolidated results of theirits operations and theirits cash flows for each of the three years in the periodyear then ended December 31, 2019,, in conformity with accounting principles generally accepted in the United States of America. Also

We also have audited, in our opinion,accordance with the standards of the Public Company maintained, in all material respects, effectiveAccounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control -– Integrated Framework (2013) issued by COSO.the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2021 expressed an adverse opinion thereon.

Change in Accounting PrincipleBasis for Opinion

As discussed in Note 6 to theThese consolidated financial statements are the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic No. 842.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessmentresponsibility of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.fraud.

Our audits of the consolidated financial statementsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures tothat respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Impairment of Fixed and Long-lived Assets – CT Reporting Unit

As described in Notes 7, 8 and 10 to the consolidated financial statements, the Company has recorded net property and equipment (“fixed assets”) of $9.1 million, and operating lease right-of-use assets and intangible assets (“long-lived assets”) of $2.3 million and $0 million, respectively, as of December 31, 2020. As of March 31, 2020, the Company had one reporting unit, ECT, which it considered an asset group for purposes of assessing asset impairment. The Company reviews the asset group for impairment whenever events and changes in circumstances indicate the carrying value of such assets may not be recoverable (“triggering events”). During the quarter ended March 31, 2020, the Company determined there were triggering events, primarily related to the COVID-19 pandemic and the decline in energy prices, and performed an asset impairment test as of March 31, 2020. The asset group is considered impaired when the carrying value exceeds its fair value. The Company determined fair value using the income approach, which requires management to make significant assumptions about expected
42

future cash flows, including projected revenue and profitability growth rates, discount rates, obsolescence rates, and royalty rates. Management utilized a third-party valuation specialist to assist in the preparation of the valuation of the asset group.

We identified the impairment assessment of the Company’s fixed and long-lived assets as a critical audit matter. Auditing the Company’s impairment test for the asset group was complex and highly judgmental because (i) there was significant judgment used by management to develop the fair value measurement, which led to a high degree of audit judgment and subjectivity in performing procedures relating to fair value measurement; (ii) there was significant effort in performing procedures to evaluate the reasonableness of the fair value measurement and significant assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

The primary procedures we performed to address this critical audit matter included:
•Evaluating the appropriateness of the method used by management to determine the fair value of the asset group.
•Evaluating the reasonableness of the assumptions used to estimate expected future cash flows, including revenue and profitability growth rates, by comparing the rates to historical performance and industry data.
•Testing the completeness, accuracy and relevance of underlying data used in the impairment assessment.
•Utilizing professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the Company's impairment assessment and reasonableness of certain significant assumptions described above, including the discount rate, obsolescence rate, and royalty rate.

Business Combination

As described in Note 3 to the consolidated financial statements, the Company completed its acquisition of JP3 Measurement, LLC for consideration of $36.6 million during the second quarter of 2020. The Company allocated the fair value of the purchase consideration to the assets acquired, liabilities assumed and any noncontrolling interests in the acquired entity generally based on their fair values at the acquisition date. As a result of the acquisition, management was required to estimate fair values of the assets acquired and liabilities assumed, including certain identifiable intangible assets. Management utilized a third-party valuation specialist to assist in the preparation of the valuation of certain identifiable intangible assets.

We identified the determination of fair values of certain identifiable intangible assets, which primarily included customer relationships, as a critical audit matter. Management exercised significant judgment to select the valuation methods and to develop the assumptions used in the measurement of the fair value of the identifiable intangible assets. Significant assumptions included discount rates, customer attrition, and projected revenue growth rates. These assumptions are forward-looking and could be affected by future economic and market conditions. The principal considerations for our determination included the following: (i) changes in the significant assumptions could have a significant impact on the fair value of the assets acquired, (ii) significant unobservable inputs and assumptions utilized by management in determining the fair value of the identifiable intangible assets acquired and liabilities assumed, including the earn-out provision, and (iii) appropriateness of use of various valuation models to determine the fair value of the identifiable intangible assets acquired. Auditing these elements involved especially subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

•Testing the completeness, accuracy and relevance of underlying data used in the analysis.
•Assessing the reasonableness of significant underlying assumptions through: (i) comparing prospective financial information to current industry trends, as well as to historical performance of the acquired business, and (ii) performing analyses to evaluate the potential effect of changes in the significant assumptions.
•Utilizing personnel with specialized knowledge and skill with valuation to assist in: (i) assessing the reasonableness of certain significant assumptions incorporated into the various valuation models, and (ii) assessing the appropriateness of various valuation models utilized by management to determine the fair values of the assets acquired.

Impairment of Goodwill and Long-lived Assets – Data Analytics

As described in Notes 9 and 11 to the consolidated financial statements, during the third quarter of 2020, the Company identified a triggering event related to the Data Analytics operating segment resulting from lower than expected performance and performed a recoverability test of the Data Analytics asset group as of September 30, 2020. As a result of not passing the recoverability test, the Company was required to measure the fair value of the asset group in order to determine the impairment
43

loss. The fair value of the asset group was estimated based on the discounted future cash flows. The Company also identified a triggering event related to goodwill and performed an impairment analysis. To determine the fair value of the Data Analytics reporting unit, the Company used the discounted cash flow method under the income approach, and the guideline public company method under the market approach. The significant assumptions used to determine the fair value of the asset group and the reporting unit included the projected sales growth rate, discount rate, customer attrition rate, obsolescence rate, and royalty rate.

We identified the impairment assessment of the Company’s goodwill and long-lived assets, including customer relationships, trademarks and patents, as a critical audit matter. Auditing the Company’s impairment test was complex and highly judgmental because (i) there was significant judgment used by management to develop the fair value measurement, which led to a high degree of audit judgment and subjectivity in performing procedures relating to fair value measurement; (ii) there was significant effort in performing procedures to evaluate the reasonableness of the fair value measurement and significant assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

The primary procedures we performed to address this critical audit matter included:

•Evaluating the appropriateness of the method management used to estimate the fair value of the asset group and reporting unit.
•Evaluating the reasonableness of the projections for revenue growth and profitability by comparing the rates to the current and past performance of the business and evaluating whether these assumptions were consistent with evidence obtained in other areas of the audit and industry data.
•Testing the completeness, accuracy and relevance of underlying data used in the impairment assessment.
•Utilizing professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the Company's impairment assessment and reasonableness of certain significant assumptions described above, including the discount rate.

Reserve for Excess and Obsolete Inventory

As described in Note 6 to the consolidated financial statements, the Company has recorded net inventories of $11.8 million as of December 31, 2020. The Company regularly reviews inventory quantities on hand and records provisions for excess or obsolete inventory based on the Company’s forecast of product demand, historical usage of inventory on hand, market conditions, production and procurement requirements and technological developments. Significant management judgment is required to predict the potential impact that the current business climate and evolving market conditions could have on the Company’s assumptions.

We identified the reserve for excess and obsolete inventory as a critical audit matter. The principal considerations for our determination are (i) there was significant judgment by management when developing the reserve for excess and obsolete inventory, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures relating to the reserve for excess and obsolete inventory; and (ii) there was significant audit effort in performing procedures to evaluate management’s analysis and significant assumptions, including projections of future demand and risk of technological or competitive obsolescence for products.

The primary procedures we performed to address this critical audit matter included:

•Testing management’s process for developing the reserve for excess and obsolete inventory, including evaluating the appropriateness of the method,
•Testing the completeness, accuracy, and relevance of underlying data used in the estimate;
•Evaluating the reasonableness of the projections of future demand for products by evaluating whether the assumption was consistent with the product’s historical performance.
•Evaluating the reasonableness of management’s assumption related to the risk of technological or competitive obsolescence for products by evaluating whether the assumption was consistent with technological or competitive obsolescence experienced during the product life cycle of existing products.

44

Sources and Uses of Liquidity

As described in Note 1 to the Company’s financial statements, the Company currently funds its operations primarily from cash on hand. The Company has a history of operating losses and expects to utilize material cash flows in operations in the 12 months subsequent to the issuance of the financial statements, and while the Company believes that cash and liquid assets will provide sufficient financial resources, it has identified conditions that could have a negative impact on liquidity. In the event that the Company’s cash on hand is not sufficient to fund operations, the Company has identified actions it may take.

We identified the Company's future cash flows and management’s plans as a critical audit matter because of the significant judgment involved in estimating cash flows and the evaluation of management’s plans. Auditing the Company's forecasted cash flows was especially challenging and required significant auditor judgment because (i) there was significant judgment used by management to develop their forecasts, which led to a high degree of audit judgment and subjectivity in performing procedures relating to projected liquidity, and (ii) there was significant effort in performing procedures to evaluate management's conclusion that the Company's plans will be effectively implemented.

The primary procedures we performed to address the critical audit matter included:
•Assessing the reasonableness of management’s key assumptions, including projected revenue, in the forecasted future cash flows and evaluating positive and negative evidence that support or contradict the conclusions reached by management.
•Evaluating management's plans in the context of other audit evidence obtained during the audit to assess the probability of successfully implementing the plans.
•Evaluating the adequacy of the Company’s disclosures in the notes to the financial statements.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2020.

Houston, Texas
March 16, 2021


45


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors
Flotek Industries, Inc.
Houston, Texas

Opinion on Internal Control over Financial Reporting

We have audited Flotek Industries, Inc. (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”) In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as “the financial statements”) and our report dated March 16, 2021, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditsaudit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses have been identified regarding management’s failure to design and maintain controls over i) the forecasting process, ii) and nonrecurring transactions, including derecognition of items and cash flow presentation relating to disposal transactions and operating ineffectiveness of controls relating to impairment evaluations, and iii) going concern evaluations, all as described in management’s assessment. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 financial statements, and this report does not affect our report dated March 16, 2021 on those financial statements.

Definition and Limitations of Internal Control Overover Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial

statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
46


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ MOSS ADAMSBDO USA, LLP

Houston, Texas
March 16, 2021
47



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of
Flotek Industries, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

The Company’s management is responsible for these consolidated financial statements and for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Moss Adams LLP

Houston, Texas
March 6, 2020

We have served as the Company’s auditor since 2017.from 2017 to 2020.

48


FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 December 31,
 2019 2018
ASSETS   
Current assets:   
Cash and cash equivalents$100,575
 $3,044
Restricted cash663
 —
Accounts receivable, net of allowance for doubtful accounts of $1,527 and
    $1,190 at December 31, 2019 and 2018, respectively
15,638
 37,047
Inventories, net21,697
 27,289
Income taxes receivable631
 3,161
Assets held for sale—
 118,470
Other current assets13,191
 5,771
Total current assets152,395
 194,782
Property and equipment, net39,829
 45,485
Operating lease right-of-use assets16,388
 —
Deferred tax assets, net152
 18,663
Other intangible assets, net23,083
 26,827
Other long-term assets—
 126
TOTAL ASSETS$231,847
 $285,883
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable$16,231
 $15,011
Accrued liabilities24,552
 10,335
Interest payable—
 8
Liabilities held for sale—
 9,174
Current portion of lease liabilities541
 —
Long-term debt, classified as current—
 49,731
Total current liabilities and total liabilities41,324
 84,259
Long-term operating lease liabilities16,973
  
Long-term finance lease liabilities158
 —
Deferred tax liabilities, net116
 —
TOTAL LIABILITIES58,571
 84,259
Commitments and contingencies (Note16)

 

Stockholders’ Equity:   
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares
    issued and outstanding
—
 —
Common stock, $0.0001 par value, 80,000,000 shares authorized; 63,656,897
    shares issued and 57,882,396 shares outstanding at December 31, 2019;
    62,162,875 shares issued and 57,342,279 shares outstanding at
    December 31, 2018
6
 6
Additional paid-in capital347,564
 343,536
Accumulated other comprehensive income (loss)(966) (1,116)
Retained earnings (accumulated deficit)(139,844) (107,565)
Treasury stock, at cost; 4,145,481 and 3,770,224 shares at December 31, 2019
    and 2018, respectively
(33,484) (33,237)
Total stockholders’ equity173,276
 201,624
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$231,847
 $285,883
December 31,
20202019
ASSETS
Current assets:
Cash and cash equivalents$38,660 $100,575 
Restricted cash664 663 
Accounts receivable, net of allowance for doubtful accounts of $1,316 and $1,527 at December 31, 2020 and 2019, respectively11,764 15,638 
Inventories, net11,837 23,210 
Income taxes receivable403 631 
Other current assets3,127 13,191 
Total current assets66,455 153,908 
Property and equipment, net9,087 39,829 
Operating lease right-of-use assets2,320 16,388 
Goodwill8,092 0 
Deferred tax assets, net223 152 
Other intangible assets, net0 20,323 
Other long-term assets33 0 
TOTAL ASSETS$86,210 $230,600 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$5,787 $16,231 
Accrued liabilities18,275 24,552 
Income taxes payable21 0 
Interest payable34 0 
Current portion of operating lease liabilities636 486 
Current portion of finance lease liabilities60 55 
Current portion of long-term debt4,048 0 
Total current liabilities28,861 41,324 
Deferred revenue, long-term117 0 
Long-term operating lease liabilities8,348 16,973 
Long-term finance lease liabilities96 158 
Long-term debt1,617 0 
Deferred tax liabilities, net0 116 
TOTAL LIABILITIES39,039 58,571 
Commitments and contingencies (Note 16)00
Stockholders’ Equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; 0 shares issued and outstanding0 0 
Common stock, $0.0001 par value, 140,000,000 shares authorized; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020; 63,656,897 shares issued and 59,511,416 shares outstanding at December 31, 20198 6 
Additional paid-in capital359,721 347,564 
Accumulated other comprehensive (loss) income(19)181 
Accumulated deficit(278,688)(142,238)
Treasury stock, at cost; 5,580,920 and 4,145,481 shares at December 31, 2020 and 2019, respectively(33,851)(33,484)
Total stockholders’ equity47,171 172,029 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$86,210 $230,600 
See accompanying Notes to Consolidated Financial Statements.
49

FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) 
Year ended December 31, Years ended December 31,
2019 2018 2017 20202019
Revenue$119,353
 $177,773
 $243,106
Revenue$53,141 $119,353 
Costs and expenses:     Costs and expenses:
Operating expenses (excluding depreciation and amortization)149,225
 159,808
 188,744
Operating expenses (excluding depreciation and amortization)88,266 148,100 
Corporate general and administrative27,975
 31,467
 41,492
Corporate general and administrative16,311 27,975 
Depreciation and amortization8,465
 9,216
 9,768
Depreciation and amortization3,412 8,465 
Research and development8,863
 10,356
 13,130
Research and development7,213 8,863 
(Gain) loss on disposal of long-lived assets1,450
 (443) 292
(Gain) loss on disposal of long-lived assets(94)1,450 
Impairment of fixed and long-lived assetsImpairment of fixed and long-lived assets69,975 0 
Impairment of goodwill—
 37,180
 —
Impairment of goodwill11,706 0 
Total costs and expenses195,978
 247,584
 253,426
Total costs and expenses196,789 194,853 
Loss from operations(76,625) (69,811) (10,320)Loss from operations(143,648)(75,500)
Other (expense) income:     Other (expense) income:
Gain on lease terminationGain on lease termination576 0 
Interest expense(2,019) (2,866) (2,168)Interest expense(60)(2,019)
Loss on sale of business—
 (360) —
Loss on write-down of assets held for sale—
 (2,580) —
Other (expense) income, net1,708
 (5,040) 1,096
Total other expense(311) (10,846) (1,072)
Other income (expense), netOther income (expense), net503 1,708 
Total other income (expense)Total other income (expense)1,019 (311)
Loss before income taxes(76,936) (80,657) (11,392)Loss before income taxes(142,629)(75,811)
Income tax benefit (expense)201
 7,216
 (6,112)Income tax benefit (expense)6,179 (262)
Loss from continuing operations(76,735) (73,441) (17,504)Loss from continuing operations(136,450)(76,073)
Income (loss) from discontinued operations, net of tax44,456
 2,743
 (9,891)
Income from discontinued operations, net of taxIncome from discontinued operations, net of tax0 42,158 
Net loss(32,279) (70,698) (27,395)Net loss$(136,450)$(33,915)
Net loss attributable to noncontrolling interests—
 358
 —
Net loss attributable to Flotek Industries, Inc. (Flotek)$(32,279) $(70,340) $(27,395)
     
Amounts attributable to Flotek shareholders:     
Loss from continuing operations$(76,735) $(73,083) $(17,504)
Income (loss) from discontinued operations, net of tax44,456
 2,743
 (9,891)
Net loss attributable to Flotek$(32,279) $(70,340) $(27,395)
     
Basic earnings (loss) per common share:     
Basic and diluted earnings (loss) per common share:Basic and diluted earnings (loss) per common share:
Continuing operations$(1.31) $(1.26) $(0.30)Continuing operations$(2.00)$(1.29)
Discontinued operations, net of tax0.76
 0.05
 (0.17)Discontinued operations, net of tax0 0.72 
Basic earnings (loss) per common share$(0.55) $(1.21) $(0.47)Basic earnings (loss) per common share$(2.00)$(0.57)
     
Diluted earnings (loss) per common share:     
Continuing operations$(1.31) $(1.26) $(0.30)
Discontinued operations, net of tax0.76
 0.05
 (0.17)
Diluted earnings (loss) per common share$(0.55) $(1.21) $(0.47)
     
Weighted average common shares:     Weighted average common shares:
Weighted average common shares used in computing basic earnings (loss) per common share58,750
 57,995
 57,580
Weighted average common shares used in computing diluted earnings (loss) per common share58,750
 57,995
 57,580
Weighted average common shares used in computing basic and diluted loss per common shareWeighted average common shares used in computing basic and diluted loss per common share68,312 58,750 
See accompanying Notes to Consolidated Financial Statements.
50

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

 Years ended December 31,
 2019 2018 2017
Loss from continuing operations$(76,735) $(73,441) $(17,504)
Income (loss) from discontinued operations, net of tax44,456
 2,743
 (9,891)
Net loss(32,279) (70,698) (27,395)
Other comprehensive income (loss):     
Foreign currency translation adjustment150
 (232) 72
Comprehensive loss(32,129) (70,930) (27,323)
Net loss attributable to noncontrolling interests—
 358
 —
Comprehensive loss attributable to Flotek$(32,129) $(70,572) $(27,323)
Years ended December 31,
20202019
Loss from continuing operations, net of tax$(136,450)$(76,073)
Income from discontinued operations, net of tax0 42,158 
Net loss(136,450)(33,915)
Other comprehensive (loss) income:
Foreign currency translation adjustment(200)150 
Comprehensive loss$(136,650)$(33,765)
See accompanying Notes to Consolidated Financial Statements.



51

FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED
DECEMBER 31, 2019, 2018 AND 2017
(in thousands)
 Common Stock Treasury Stock 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
Retained Earnings
(Accumulated
Deficit)
 Non-controlling Interests Total Stockholders’ Equity
 Shares Issued Par Value Shares Cost 
Balance, December 31, 201659,685
 $6
 2,029
 $(20,269) $318,392
 $(956) $(9,830) $358
 $287,701
Net loss—
 —
 —
 —
 —
 —
 (27,395) —
 (27,395)
Foreign currency translation adjustment—
 —
 —
 —
 —
 72
 —
 —
 72
Stock issued under employee stock purchase plan—
 —
 (113) —
 654
 —
 —
 —
 654
Common stock issued in payment of accrued liability—
 —
 —
 —
 188
 —
 —
 —
 188
Stock options exercised663
 —
 —
 —
 5,884
 —
 —
 —
 5,884
Restricted stock awards granted275
 —
 —
 —
 —
 —
 —
 —
 —
Restricted stock forfeited—
 —
 122
 —
 —
 —
 —
 —
 —
Treasury stock purchased—
 —
 200
 (1,729) —
 —
 —
 —
 (1,729)
Stock surrendered for exercise of stock options—
 —
 478
 (5,863) —
 —
 —
 —
 (5,863)
Stock compensation expense—
 —
 —
 —
 10,949
 —
 —
 —
 10,949
Repurchase of common stock—
 —
 905
 (5,203) —
 —
 —
 —
 (5,203)
Balance, December 31, 201760,623
 $6
 3,621
 $(33,064) $336,067
 $(884) $(37,225) $358
 $265,258
Net loss—
 —
 —
 —
 —
 —
 (70,340) (358) (70,698)
Foreign currency translation adjustment—
 —
 —
 —
 —
 (232) —
 —
 (232)
Stock issued under employee stock purchase plan—
 —
 (111) —
 341
 —
 —
 —
 341
Restricted stock awards granted1,540
 —
 —
 —
 —
 —
 —
 —
 —
Restricted stock forfeited—
 —
 158
 —
 —
 —
 —
 —
 —
Treasury stock purchased—
 —
 102
 (173) —
 —
 —
 —
 (173)
Stock compensation expense—
 —
 —
 —
 7,128
 —
 —
 —
 7,128
Balance, December 31, 201862,163
 $6
 3,770
 $(33,237) $343,536
 $(1,116) $(107,565) $—
 $201,624
Net loss—
 —
 —
 —
 —
 —
 (32,279) 


 (32,279)
Foreign currency translation adjustment—
 —
 —
 —
 —
 150
 —
 —
 150
Stock issued under employee stock purchase plan—
 —
 (18) —
 35
 —
 —
 —
 35
Restricted stock awards granted924
 —
 —
 —
 —
 —
 —
 —
 —
Restricted stock forfeited—
 —
 299
 —
 —
 —
 —
 —
 —
Restricted stock units granted570
 —
 —
 —
 —
 —
 —
 —
 —
Treasury stock purchased—
 —
 94
 (247) —
 —
 —
 —
 (247)
Stock compensation expense—
 —
 —
 —
 3,993
 —
 —
 —
 3,993
Balance, December 31, 201963,657
 $6
 4,145
 $(33,484) $347,564
 $(966) $(139,844) $—
 $173,276


 Common StockTreasury StockAdditional
Paid-in
Capital		Accumulated
Other Comprehensive
Income (Loss)		Retained Earnings
(Accumulated
Deficit)		Total Stockholders’ Equity
 Shares IssuedPar ValueSharesCost
Balance, December 31, 201862,163 $6 3,770 $(33,237)$343,536 $31 $(108,323)$202,013 
Net loss— — — — — — (33,915)(33,915)
Foreign currency translation adjustment— — — — — 150 — 150 
Stock issued under employee stock purchase plan— — (18)— 35 — — 35 
Restricted stock awards granted924 — — — — — — — 
Restricted stock forfeited— — 299 — — — — — 
Restricted stock units granted570 — — — — — — — 
Treasury stock purchased— — 94 (247)— — — (247)
Stock compensation expense— — — — 3,993 — — 3,993 
Balance, December 31, 201963,657 $6 4,145 $(33,484)$347,564 $181 $(142,238)$172,029 
Net loss— — — — — — (136,450)(136,450)
Foreign currency translation adjustment— — — — — (200)— (200)
Sale of common stock200 — — — 339 — — 339 
Stock issued under employee stock purchase plan— — (78)— 123 — — 123 
Restricted stock awards granted3,115 1 — — 2,322 — — 2,323 
Restricted stock forfeited— — 1,302 — — — — — 
Restricted stock units granted86 — — — — — — — 
Stock surrendered for exercise of stock options— — 66 — — — — — 
Treasury stock purchased— — 146 (253)— — — (253)
Stock issued in JP3 acquisition11,500 1 — — 8,537 — — 8,538 
Stock options granted— — — — 722 — — 722 
Stock options exercised111 — — (114)114 — — — 
Balance, December 31, 202078,669 $8 5,581 $(33,851)$359,721 $(19)$(278,688)$47,171 
See accompanying Notes to Consolidated Financial Statements.
52

FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Years ended December 31,
 2019 2018 2017
Cash flows from operating activities:     
Net loss attributable to Flotek Industries, Inc. (Flotek)$(32,279) $(70,340) $(27,395)
Income (loss) from discontinued operations, net of tax44,456
 2,743
 (9,891)
Loss from continuing operations(76,735) (73,083) (17,504)
Adjustments to reconcile loss from continuing operations to net cash (used in) provided by operating activities:     
Depreciation and amortization8,465
 9,216
 9,768
Amortization of deferred financing costs1,428
 400
 472
Provision for doubtful accounts512
 839
 157
Provision for excess and obsolete inventory5,659
 2,418
 388
Loss on sale of business—
 360
 —
Loss on write-down of assets held for sale—
 2,580
 —
(Gain) loss on sale of assets1,450
 (443) 292
Impairment of goodwill—
 37,180
 —
Stock compensation expense4,235
 7,050
 10,643
Deferred income tax (benefit) provision18,307
 (5,950) 181
Reduction in tax benefit related to share-based awards24
 709
 1,989
Non-cash lease expense740
 —
 —
Changes in current assets and liabilities:     
Accounts receivable, net20,993
 (2,606) 4,076
Inventories(65) 2,597
 (3,442)
Income taxes receivable2,546
 (1,116) 8,008
Other current assets(8,359) 3,177
 12,001
Accounts payable1,131
 4,631
 (8,528)
Accrued liabilities908
 (8,740) (6,175)
Interest payable(8) (35) 19
Net cash (used in) provided by operating activities(18,769) (20,816) 12,345
Cash flows from investing activities:     
Capital expenditures(2,411) (3,559) (4,197)
Proceeds from sale of businesses169,722
 1,665
 18,490
Proceeds from sale of assets240
 1,387
 689
Purchase of patents and other intangible assets(614) (1,602) (456)
Net cash provided (used in) by investing activities166,937
 (2,109) 14,526
Cash flows from financing activities:     
Repayments of indebtedness—
 —
 (9,833)
Borrowings on revolving credit facility42,984
 277,599
 383,160
Repayments on revolving credit facility(92,715) (255,818) (393,776)
Debt issuance costs—
 (111) (579)
Payments for finance leases(51) —
 —
Purchase of treasury stock(247) (173) (1,729)
Proceeds from sale of common stock35
 341
 654
Repurchase of common stock—
 —
 (5,203)
Proceeds from exercise of stock options—
 —
 21
Loss from noncontrolling interest—
 (358) —
Net cash (used in) provided financing activities(49,994) 21,480
 (27,285)
Discontinued operations:     
Net cash provided by (used in) operating activities(322) 1,296
 4,102
Net cash provided by (used in) investing activities337
 (1,303) (4,078)
Net cash flows provided by (used in) provided by discontinued operations15
 (7) 24
Effect of changes in exchange rates on cash and cash equivalents5
 (88) 151
Net change in cash, cash equivalents and restricted cash98,194
 (1,540) (239)
Cash, cash equivalents and restricted cash at beginning of year3,044
 4,584
 4,823
Cash, cash equivalents and restricted cash at end of year$101,238
 $3,044
 $4,584

 Years ended December 31,
 20202019
Cash flows from operating activities:
Net loss$(136,450)$(33,915)
Income from discontinued operations, net of tax0 42,158 
Loss from continuing operations(136,450)(76,073)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
Change in fair value of contingent consideration2,716 0 
Depreciation and amortization3,412 8,465 
Amortization of deferred financing costs0 1,428 
Provision for doubtful accounts652 512 
Provision for excess and obsolete inventory12,261 5,659 
Impairment of fixed assets30,178 0 
(Gain) loss on sale of assets(561)1,450 
Impairment of goodwill11,706 0 
Impairment of right-of-use assets7,434 0 
Impairment of intangible assets32,363 0 
Stock compensation expense3,044 4,235 
Deferred income tax (benefit) provision(187)18,307 
Reduction in tax benefit related to stock-based awards0 24 
Non-cash lease expense356 740 
Changes in current assets and liabilities:
Accounts receivable, net3,556 20,993 
Inventories3,955 (727)
Income taxes receivable182 2,546 
Other current assets1,026 2,579 
Other long-term assets(16)3,286 
Accounts payable(12,323)1,131 
Accrued liabilities(11,260)908 
Income taxes payable84 0 
Interest payable34 (8)
Net cash used in operating activities(47,838)(4,545)
Cash flows from investing activities:
Capital expenditures(1,425)(2,411)
Proceeds from sale of businesses9,907 155,498 
Proceeds from sale of assets109 240 
Payments for acquisitions, net of cash acquired(26,284)0 
Purchase of patents and other intangible assets(8)(614)
Net cash (used in) provided by investing activities(17,701)152,713 
Cash flows from financing activities:
Borrowings on revolving credit facility0 42,984 
Repayments on revolving credit facility0 (92,715)
Payment for contingent consideration(1,200)0 
Proceeds from Paycheck Protection Program loan4,788 0 
Payments for finance leases(70)(51)
Purchase of treasury stock(253)(247)
Proceeds from sale of common stock462 35 
Net cash provided by (used in) financing activities3,727 (49,994)
Discontinued operations:
Net cash used in operating activities0 (322)
Net cash provided by investing activities0 337 
Net cash flows provided by discontinued operations0 15 
Effect of changes in exchange rates on cash and cash equivalents(102)5 
Net change in cash, cash equivalents and restricted cash(61,914)98,194 
Cash, cash equivalents at beginning of period100,575 3,044 
Restricted cash at the beginning of the period663 663 
Cash and cash equivalents and restricted cash at beginning of period101,238 3,707 
Cash and cash equivalents at end of period38,660 100,575 
Restricted cash at the end of period664 663 
Cash, cash equivalents and restricted cash at end of period$39,324 $101,238 
See accompanying Notes to Consolidated Financial Statements.
53

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and Nature of Operations
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global, diversified, technology-driven chemistry and data company that developsserves customers in industrial, commercial and supplies chemistries and services to the oil and gas industries. Flotek also supplied high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets, classified as discontinued operations at December 31, 2018.markets.
The Company’s oilfield business designs,Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty chemicals that enhance the profitability of hydrocarbon producers and conventional chemistries, for usecleans surfaces in oilboth commercial and gas well drilling, cementing, completion, remediation,personal settings to help reduce the spread of bacteria, viruses and stimulation activities designedgerms.
The Company’s Data Analytics (“DA”) segment enables users to maximize recoverythe value of their hydrocarbon associated processes by providing analytics associated with the streams in both newseconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and mature fields. Activities in this segment also include construction and managementallows users to pursue automation of automated material handling facilities as well as management of loading facilities and blending operations for oilfield services companies. In the segment reported as discontinued operations at December 31, 2018, the Company processed citrus oiltheir hydrocarbon streams to produce (1) high
maximize their profitability.
value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous industries around the world, including the oil and gas industry.
Flotek operates in seven domestic and international markets. Customers include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies. The Company also served customers who purchase non-energy-related citrus oilformed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”). The Company’s 2 operating segments, CT and related products, including householdDA, are both supported by its continuing Research & Innovation advanced laboratory capabilities. For further discussion of our operations and commercial cleaning product companies, fragrancesegments, see Note 22, “Business Segment, Geographic and cosmetic companies, and food manufacturing companies, inMajor Customer Information.” For further discussion of the segment reported as discontinued operations at December 31, 2018.JP3 acquisition, see Note 3, “Business Combination.”
FlotekThe Company was initially incorporated under the laws of the Province of British Columbia on May 17,in 1985. OnIn October 23, 2001, Flotekthe Company changed its corporate domicile to the state of Delaware.
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. As a result, the Company recorded an impairment to property, plant and equipment; intangible assets; and operating right-of-use assets during the first quarter of 2020. The extended impact of COVID-19 and its effect on the oil and gas industry contributed to additional impairment charges to goodwill and intangible assets in the third quarter of 2020. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” and Note 9, “Goodwill.” In addition, the Company increased the provision of excess and obsolete inventory as discussed in Note 6, “Inventories.” 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.
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 cash flows and the availability of and access to equity and debt 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 our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery in 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;
54
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

•Entry into a borrowing facility with one or more lenders;
•Raising equity either in the public markets or via a private placement offering;
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash; and
•Reducing professional advisory fees and headcount.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms or at all.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The consolidated financial statements include the accounts of Flotek Industries, Inc. and all wholly-owned subsidiary corporations.subsidiaries. Where Flotek owns less than 100% of the share capital of its subsidiaries but is still considered to have sufficient ownership to control the business, results of the business operations are consolidated within the Company’s financial statements. The ownership interests held by other parties are shown as noncontrolling interests.
During the fourth quarter of 2018, the Company classified the Consumer and Industrial Chemistry Technologies (“CICT”) segment as held for sale based on management’s intention to sell this business, which occurred in JanuaryFebruary 2019. The Company’s historical financial statements have been revised to present the operating results of the Consumer and Industrial Chemistry Technologies segment as discontinued operations. The results of operations of this segment are presented as “Income (loss) from discontinued operations” in the statementconsolidated statements of operations, and the related cash flows of this segment have been reclassified to discontinued operations for all periods presented. The assets and liabilities of the Consumer and Industrial Chemistry Technologies segment have been reclassified to “Assets held for sale” and “Liabilities held for
sale”, respectively, in the consolidated balance sheet for all periods presented.
During 2017, the Company completed the sale or disposal of the assets and transfer or liquidation of liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.For further discussion, see Note 4, “Discontinued Operations.”
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
Cash Management
The Company uses a controlled disbursement account for its main cash account. Under this system, outstanding checks can be in excess of the cash balances at the bank before the disbursement account is funded, creating a book overdraft. Book overdrafts on this account are presented as a current liability in accounts payable in the consolidated balance sheets.

Restricted Cash

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

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate provision for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical
write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible.

The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.
55
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):
Years ended December 31, Years ended December 31,
2019 2018 2017 20202019
Balance, beginning of year$1,190
 $673
 $579
Balance, beginning of year$1,527 $1,190 
Charged to provision for doubtful accounts, net of recoveries512
 839
 157
Charges to provision for doubtful accounts, net of recoveriesCharges to provision for doubtful accounts, net of recoveries652 512 
Write-offs(175) (322) (63)Write-offs(863)(175)
Balance, end of year$1,527
 $1,190
 $673
Balance, end of year$1,316 $1,527 

Inventories
Inventories consist of raw materials work-in-process, and finished goods and are stated at the lower of cost, or market determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company quarterly reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceedsexceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated market value if those amounts are determined to be less than cost. See Note 6 “Inventories” for discussion of the inventory write-down recorded in 2020.
Property and Equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including right-of-use assets held under capital leases,(“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows:
Buildings and leasehold improvements2-30 years
Machinery and equipment7-10 years
Furniture and fixtures3 years
Land improvements20 years
Transportation equipment2-5 years
Computer equipment and software3-7 years

Property and equipment, including ROU assets, are reviewed for impairment on ana quarterly basis or whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. Indicative events or circumstances include, but are not limited to, matters such as a significant decline in market value or a significant change in business climate. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows from the use of the asset and its eventual disposition. The amount of impairment loss recognized is the excess of the asset’s carrying amount over its fair value. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less cost to sell.sell. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.
Internal Use Computer Software Costs
Direct costs incurred to purchase and develop computer software for internal use are capitalized during the application development and implementation stages. These software costs have been primarily for enterprise-level business and finance software that is customized to meet the Company’s specific operational needs. Capitalized costs are included in property and equipment and are amortized on a straight-line basis over the estimated useful life of the software beginning when the software project is substantially complete and placed in service. Costs incurred during the preliminary project stage and costs for training, data conversion, and maintenance are expensed as incurred.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company amortizes software costs using the straight-line method over the expected life of the software, generally three to seven years. The unamortized amount of capitalized software was $1.0 million at December 31, 2019.
Goodwill
Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization but is tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include an adverse change in the business climate or a change in the assessment of future operations of a reporting unit.
The Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.
56
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative impairment test is performed to determine whether goodwill impairment exists at the reporting unit.
The quantitative impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the estimated fair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined, when appropriate, with a market-based approach. The market-based approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly traded businesses operating in industries consistent with the reporting unit. If the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.
Other Intangible Assets
The Company’s other intangible assets have finite and indefinite lives and consist ofincluded customer relationships, technology and know-how, trademarks, brand names and purchased patents.
The cost of intangible assets with finite lives is amortized using the straight-line method over the estimated period of economic
benefit, ranging from two to 95 years. benefit. Asset lives are adjusted whenever there is a change in the estimated period of economic benefit. No residual value has been assigned to these intangible assets.
Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations. The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins, and cash flows. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, an impairment loss is recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flow models.
Intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, or a change in projected operations or results of a reporting unit.
The Company assesses whether an indefinite lived intangible impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the indefinite-lived intangible asset is impaired or if the Company elects to not perform a qualitative assessment, the Company then performs the quantitative impairment test. The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.
Business Combinations
The Company includes the results of operations of its acquisitions in its consolidated results, prospectively from the date of acquisition. Acquisitions are accounted for by applying the acquisition method. The Company allocates the fair value of purchase consideration to the assets acquired, liabilities
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

assumed and any noncontrolling interests in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and any noncontrolling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and Flotek and the value of the acquired assembled workforce. Acquisition-related expenses are recognized separately from the business acquisition and are recognized as expenses as incurred.
Fair Value Measurements
57
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). “Level 1” measurements are measurements using quoted prices in active markets for identical assets and liabilities. “Level 2” measurements are measurements using quoted prices in markets that are not active or that are based on quoted prices for similar assets or liabilities. “Level 3” measurements are measurements that use significant unobservable inputs which require a company to develop its own assumptions. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 14, “Fair Value Measurements.”
Revenue Recognition
The Company recognizes revenuesrevenue to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Refer toSee Note 4 –5, “Revenue from Contracts with Customers”Customers,” for further discussion on Revenue.revenue.
The Company recognizes revenue based on the Accounting Standards Codification (“ASC”) 606a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.
For certain contracts, the Company recognizes revenue under the percentage-of-completion method of accounting, measured by the percentage of “costs incurred to date” to the
“total estimated costs of completion.” This percentage is applied to the “total estimated revenue at completion” to calculate proportionate revenue earned to date. For the years ended December 31, 2019, 2018, and 2017, the percentage-of-completion revenue accounted for less than 0.1% of total revenue during the respective time periods.
As an accounting policy election, the Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Income Taxes
The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets and liabilities are recognized related to the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company’s assets and liabilities using statutory tax rates at the applicable year end. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.
A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Except for a state jurisdiction, the Company maintains a full valuation allowance on its deferred tax assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously recorded tax assets when it becomes more likely than not that such assets will not be realized. The Company evaluates, at least annually, net operating loss carry forwards and other net deferred tax assets and considers all available evidence, both positive and negative, to determine whether a valuation allowance is necessary relative to net operating loss carry forwards and other net deferred tax assets. In making this determination, the Company considers cumulative losses in recent years as significant negative evidence. The Company considers recent years to mean the current year plus the two preceding years. The Company considers the recent cumulative income or loss position as objectively verifiable evidence for the projection of future income, which consists primarily of determining the average of the pre-tax income of the current and prior two years after adjusting for certain items not indicative of future performance. Based on this analysis, the Company determines whether a valuation allowance is necessary.
Historically, U.S. Federal income taxes are not provided on unremitted earnings of subsidiaries operating outside the U.S. because it is the Company’s intention to permanently reinvest undistributed earnings in the subsidiary. These earnings would become subject to income tax if they were remitted as dividends or loaned to a U.S. affiliate. Due to the 2017 Tax Act, U.S. federal transition taxes have been recorded at December 31, 2017, for a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable.
The Company has performed an evaluation and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated financial statements.
The Company’s policy is to record interest and penalties related to income tax matters as income tax expense.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) attributable to common stockholders, adjusted for the effect of assumed conversions of convertible notes and preferred stock, by the weighted average number of common shares outstanding, including potentially dilutive common share equivalents, if the effect is dilutive. Potentially dilutive common shares equivalents consist of incremental shares of common stock issuable upon exercise of stock options and warrants,
settlement of restricted stock units, and conversion of convertible notes and convertible preferred stock.
Debt Issuance Costs
Costs related to debt issuance are capitalized and amortized as interest expense over the term of the related debt using the straight-line method, which approximates the effective interest method. Upon the repayment of debt, the Company accelerates the recognition of an appropriate amount of the costs as interest expense.
Capitalization of Interest
Interest costs are capitalized for qualifying in-process software development projects. Capitalization of interest commences when activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the assets are ready for their intended use. Capitalized interest is added to the cost of the underlying assets and amortized over the estimated useful lives of the assets.
Stock-Based Compensation
Stock-based compensation expense for share-basedstock-based payments, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.
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.
Significant items subject to estimates and assumptions include application of the carrying amount and useful lives of property and equipment and intangible assets, impairment assessments, share-basedbusiness combinations, stock-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; (3) an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and transfer of the disposal group
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is expected to qualify for recognition as a completed sale, within one year, except if events of circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying amount or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met.
Subsequent changes in the fair value of a disposal group less any costs to sell are reported as an adjustment to the carrying amount of the disposal group, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group for all periods presented in the line items assets held for sale and liabilities held for sale, respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not impact previously recorded net loss.loss and stockholders’ equity.
NewRecent Accounting Pronouncements
(a) Application of NewChanges 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.
(a) Recently Adopted Guidance
Effective January 1, 2019,2020, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2016-02, “Leases” This standard (ASC 842) requires the recognition of Right of Use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP (ASC 840). The Company adopted ASC 842 using the optional transition method. Consequently, the Company’s reporting for the comparative periods presented prior to 2019 in the financial statements will continue to be in accordance with ASC 840. Upon adoption, the Company recorded operating lease ROU assets and corresponding operating lease liabilities, net of
deferred rent, of approximately $18.4 million, representing the present value of future lease payments under operating leases with terms of greater than twelve months. Refer to Note 6 - “Leases” for further information surrounding adoption of this new standard.
Effective January 1, 2019, the Company adopted ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2019, the Company adopted ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting.” This standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2018, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” This standard supersedes most of the existing revenue recognition requirements in U.S. GAAP under Accounting Standards Codification (“ASC”) 605 and establishes a new revenue standard, ASC 606. This new standard requires entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASC 606 using the full retrospective method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Refer to Note 4 — “Revenue from Contracts with Customers” for further information surrounding adoption of this new standard.
Effective January 1, 2018, the Company adopted the accounting guidance in ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” This standard addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard prospectively, where applicable, as there were no historical transactions affected by this implementation.
Effective January 1, 2018, the Company adopted the accounting guidance in ASU No. 2017-01, “Clarifying the
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Definition of a Business.” This standard provided additional guidance on whether an integrated set of assets and activities constitutes a business. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard prospectively and, therefore, prior periods were not adjusted. In addition, the Company had no activity during the year ended December 31, 2019 that was required to be treated differently under this ASU than previously issued guidance.
Effective January 1, 2018, the Company adopted the accounting guidance in ASU No. 2017-09, “Scope of Modification Accounting.” This standard provided guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard prospectively and, therefore, prior periods presented were not adjusted. There were no changes to the terms or conditions of current share-based payment awards during the year ended December 31, 2019.
(b) New Accounting Requirements and Disclosures
In June 2016, 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 expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” This standard removes, modifies and adds additional requirements for disclosures related to fair value measurement in ASCthe FASB’s Accounting Standards Codification (“ASC”) 820. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted in any interim period. The Company is currently evaluating the impact the pronouncement willImplementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
(b) New Accounting Standards Issued But Not Adopted as of December 31, 2020
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 is currently evaluating the impact of this standard on the consolidated financial statements and related disclosures.
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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 Combination

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 for 2 potential earn-out provisions up to $5.0 million based on certain stock performance targets. The first and second earn-out provisions are payable if the ten-day volume-weighted average share price equals or exceeds $2 per share and $3 per share, respectively, before May 18, 2025.

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-how5,000 
Customer lists6,800 
Inventories7,100 
Cash604 
Net working capital, net of cash and inventories(1,063)
Fixed assets426 
Long-term debt assumed and other assets (liabilities)(893)
Goodwill17,522 
Net assets acquired$36,596 

The Company recorded transaction costs of $0.5 million for professional services including legal, accounting, and other professional or consulting fees in connection with the JP3 acquisition to the Company’s operating expenses (excluding depreciation and amortization) in the consolidated statements of operations during the second quarter of 2020.
Pro forma information for JP3 is not provided as the impact is not considered material.
During the third quarter of 2020, the Company made certain measurement period adjustments to inventory, resulting in an increase of goodwill of $2.3 million. See Note 6, “Inventories.”
As discussed in Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” during the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other, and completed an impairment analysis at the DA reporting unit level. During the third quarter of 2020, the Company recognized a finite-lived intangible assets impairment charge of $12.5 million in the DA reporting unit, which resulted from lower performance than expected by the reporting unit. The extended impact of COVID-19 and subsequent decline in oil and gas demand further contributed to the impairment charge. As a result of these factors, the Company concluded that sufficient indicators existed to require an interim quantitative assessment of goodwill for that reporting unit as of September 30, 2020. The fair value of the reporting unit was estimated based on an analysis of the present value of future discounted cash flows, and the Company recognized a goodwill
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FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment charge of $11.7 million. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth.
During the third quarter of 2020, the first stock performance target was achieved. In October 2020, the Company paid $2.5 million into escrow in accordance with the terms of the JP3 Membership Interests Purchase Agreement to partially settle the earn-out payment that had been recorded as an accrued liability at September 30, 2020. At December 31, 2020, the estimated fair value of the second stock performance earn-out provision was $1.4 million, which was recorded as a contingent liability in accrued liabilities.

As the achievement of earn-out provisions and changes in fair value estimates are not acquisition adjustments, the Company recorded $2.7 million of expense for achievement of the first stock performance target and the increase in the fair value of the contingent consideration for the second earn-out provision in operating expenses for the year ended December 31, 2020.

Note 4 —Discontinued Operations
During the fourth quarter of 2018, the Company initiated and began executing a strategic plan to sell its Consumer and Industrial Chemistry Technologies (“CICT”)CICT segment. An investment banking advisory services firm was engaged and actively marketed this segment.
The Company met all of the criteria to classify the CICT segment’s assets and liabilitiessegment as held for sale in the fourth quarter 2018. The Company has2018, and classified the assets, liabilities and results of operations for this segment as “Discontinued Operations” for all periods presented.
Disposal of the CICT reporting segment represented a strategic shift that will have a major effect on the Company’s operations and financial results.periods.
On January 10, 2019, the Company entered into a Share Purchase Agreement with Archer-Daniels-Midland Company (“ADM”) for the sale of all of the shares representing membership interests in its wholly ownedwholly-owned subsidiary, Florida Chemical Company, LLC (“FCC”), which represented the CICT segment.
Effective February 28, 2019, the Company completed the sale of the CICT segmentFCC to ADM for $175.0 million in cash consideration, with $4.4 million temporarily held in escrow
by ADM forsubject to post-closing working capital adjustments for up to 90 days and $13.1 million temporarily held in escrow to satisfy potential indemnification claims by ADM. ADM with anticipated releasesplaced $17.5 million in escrow for these items, which were released over a period of time through the second quarter of 2020. The escrow balance included in other current assets was 0 and $9.9 million at 6 months, 12 months,December 31, 2020 and 15 months. 2019, respectively. Pursuant to the terms of the Share Purchase Agreement, Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, entered into a supply agreement in which FCC would supply terpene at specified prices for specified quantities.
As of December 31, 2019, the escrow balance including interest was $9.9 million reflected in other current assets.
Concurrent withCompany concluded that the closing of the sale of the CICT segment, the Company retained $11.1 million of historical inventory previously held by the CICT segment. In addition, the Company executed aoriginal long-term supply agreement for terpene. The termmet the definition of a loss contract. As such, the agreement runs through December 2023, with an option to extend for an additional year. The remaining minimum commitmentCompany recognized a current liability and loss of the agreement at$15.8 million as of December 31, 2019 is $72 million. 2019. The loss was capped by the price paid for the terpene supply agreement amendment, executed in February 2020, which aligned purchase commitments to expected usage for blended products as of December 31, 2019.
Pursuant to the post-closing working capital dispute resolution procedures set forth in the Share Purchase Agreement, the Company and ADM engaged a neutral third party arbitratorthird-party auditor to help reach agreement on the final post-closing working capital adjustment. In February 2020, the third party arbitratorthird-party auditor ruled in favor of awarding ADM for the entire $4.1 million disputed amount resulting inof $4.1 million. As a result, the working capital adjustment escrow balance was released to ADM and a corresponding reduction was made to the gain on the sale of the business as of December 31, 2019.

The following summarized financial information has been reported as Discontinued Operations for the years ended December 31 (in thousands):

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FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consumer and Industrial Chemistry Technologies
20202019
Discontinued operations:
Revenue$0 $11,031 
Operating expenses0 (11,572)
Depreciation and amortization0 0 
Research and development0 (69)
(Loss) income from operations0 (610)
Other income0 35 
Gain on sale of businesses0 65,417 
Income before income taxes0 64,842 
Income tax expense0 (22,684)
Net income from discontinued operations$0 $42,158 
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the years ended December 31, 2019, 2018, and 2017 (in thousands):
 Consumer and Industrial Chemistry Technologies
 2019 2018 2017
Discontinued operations:     
Revenue$11,031
 $72,344
 $73,992
Operating expenses(11,572) (65,940) (63,621)
Depreciation and amortization—
 (2,760) (2,391)
Research and development(69) (590) (515)
Income from operations(610) 3,054
 7,465
Other income (expense)35
 341
 (284)
Gain on sale of businesses64,160
 —
 —
Income before income taxes63,585
 3,395
 7,181
Income tax expense(19,129) (652) (2,730)
Net income (loss) from discontinued operations$44,456
 $2,743
 $4,451
The assets and liabilities held for sale on the Consolidated Balance Sheets as of December 31, 2019 and 2018 are as follows (in thousands):
 Consumer and Industrial Chemistry Technologies
 2019 2018
Assets:   
Accounts receivable, net$—
 $10,547
Inventories, net—
 52,069
Other current assets—
 446
Property and equipment, net—
 15,899
Goodwill—
 19,480
Other intangible assets, net—
 20,029
Assets held for sale—
 118,470
Liabilities:   
Accounts payable$—
 $8,883
Accrued liabilities—
 291
Liabilities held for sale$—
 $9,174

During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. The Company executed a plan to sell or otherwise dispose of the Drilling Technologies and Production Technologies segments. An investment banking advisory services firm was engaged and actively marketed these segments.
The Company met all of the criteria to classify the Drilling Technologies and Production Technologies segments’ assets and liabilities as held for sale in the fourth quarter 2016. The Company has classified the assets, liabilities, and results of operations for these 2 segments as “Discontinued Operations” for all periods presented.
Disposal of the Drilling Technologies and Production Technologies reporting segments represented a strategic shift that would have a major effect on the Company’s operations and financial results.
On May 22, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Drilling Technologies segment to National Oilwell Varco, L.P. (“NOV”) for $17.0 million in cash consideration, subject to normal working capital adjustments, with $1.5 million held back by NOV for up to 18 months to satisfy potential indemnification claims.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On May 23, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Production Technologies segment to Raptor Lift Solutions, LLC (“Raptor Lift”) for $2.9 million in cash consideration, with $0.4 million held back by Raptor Lift to satisfy potential indemnification claims.
On August 16, 2017, the Company completed the sale of substantially all of the remaining assets of the Company’s
Drilling Technologies segment to Galleon Mining Tools, Inc. for $1.0 million in cash consideration and a note receivable of $1.0 million due in one year.
The sale or disposal of the assets and transfer or liquidation of liabilities and obligations of these segments was completed in 2017. The Company has no continuing involvement with the discontinued operations.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the years ended December 31, 2018 and 2017 (in thousands):
 Drilling Technologies Production Technologies
 2018 2017  2018 2017 
Discontinued operations:         
Revenue$—
 $11,534
  $—
 $4,002
 
Cost of revenue—
 (7,309)  —
 (3,236) 
Selling, general and administrative—
 (6,963)  —
 (1,759) 
Research and development—
 (5)  —
 (364) 
Gain (loss) on disposal of long-lived assets—
 97
  —
 —
 
Loss from operations—
 (2,646)  —
 (1,357) 
Other expense—
 (96)  —
 (52) 
Loss on sale of businesses—
 (1,600)  —
 (479) 
Loss on write-down of assets held for sale—
 (6,831)  —
 (9,718) 
Loss before income taxes—
 (11,173)  —
 (11,606) 
Income tax benefit—
 4,138
  —
 4,299
 
Net loss from discontinued operations$—
 $(7,035)  $—
 $(7,307) 
At December 31, 2017, all remaining assets and liabilities of the discontinued operations were assumed by the Company’s continuing operations. These balances included $0.3 million of net accounts receivable, $1.4 million of sales price hold-back that was received during 2018, and $1.4 million of accrued liabilities partially settled in 2018, with the remainder to be settled in 2019.
Note 45 — Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted ASC 606 using the full retrospective method applied to those contracts which were not completed as of December 31, 2015. As a result of electing the full retrospective adoption approach, results for reporting periods beginning after December 31, 2015 are presented under ASC 606.
There was no material impact upon the adoption of ASC 606. As revenue is primarily related to product sales accounted for at a point in time and service contracts that are primarily short-term in nature (typically less than 30 days), the Company did not record any adjustments to retained earnings at December 31, 2015 or for any periods previously presented.
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
to in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an
ongoing basis to reflect updated variable consideration information.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For certain contracts, the Company recognizes revenue under the percentage-of-completion method of accounting, measured by the percentage of “costs incurred to date” to the “total estimated costs of completion.” This percentage is applied to the “total estimated revenue at completion” to calculate proportionate revenue earned to date. For the years ended December 31, 2019, 2018, and 2017, the percentage-of-completion revenue accounted for less than 0.1% of total revenue during the respective time periods. This resulted in immaterial unfulfilled performance obligations and immaterial contract assets and/or liabilities for which the Company did not record adjustments to opening retained earnings as of December 31, 2015 or for any periods previously presented.
The vast majority of the Company’s products from the CT segment are sold at a point in time and service contracts are short-term in nature. Sales are billedThe 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 for international from invoice receipt. In addition, sales taxes are excluded from revenues.
Disaggregation of Revenue
The Company has disaggregated revenues by product sales (point-in-time revenue recognition) and service revenue (over-time revenue recognition), where product. Product sales accounted for over 95% or more of total revenue for the years ended December 31, 2019, 2018,2020 and 2017.
2019.

The Company differentiates revenue and operating expenses (excluding depreciation and amortization) based on whether the source of revenue is attributable to products or services. Revenue and operating expenses (excluding depreciation and amortization) disaggregated by revenue source areis as follows (in thousands):
Years ended December 31, Years ended December 31,
2019 2018 2017 20202019
Revenue:     Revenue:
Products$115,471
 $172,412
 $237,211
Products$50,478 $115,683 
Services3,882
 5,361
 5,895
Services2,663 3,670 
$119,353
 $177,773
 $243,106
$53,141 $119,353 
Operating expenses (excluding depreciation and amortization):     
Products$147,709
 $152,846
 $182,330
Services1,516
 6,962
 6,414
$149,225
 $159,808
 $188,744

Arrangements with Multiple Performance Obligations
The Company’s contractsCT 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
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FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 may include multiple performance obligations. For suchin which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Subscription-type arrangements the total transaction price is allocated to each performance obligationwere not a material revenue stream in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Standalone selling prices are generally determined based on the prices charged to customers (“observable standalone price”) or an expected cost plus a margin approach. For combined products and services within a contract, the Company accounts for individual products and services separately if they are distinct (i.e. if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration is allocated between separate products and services within a contract based on the prices at the observable standalone price. For items that are not sold separately, the expected cost plus a margin approach is used to estimate the standalone selling price of each performance obligation.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. Accordingly, no revenue contracts give rise to contract assets orContract liabilities under ASC 606.associated with incomplete performance obligations are not material.
Practical Expedients and Exemptions
The Company has elected to applyapplies several practical expedients as discussed below:
•Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded within segment sellingcorporate general and administrative expenses.
•The majority of the Company’s services are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC 606-10-50-14, exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

performance obligation is part of a contract that has an original expected duration of one year or less.
•The Company’s payment terms are short-term in nature with settlements of one year or less. The Company has utilized the practical expedient in ASC 606-10-32-18, exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
•In most service contracts, the Company has the right to consideration from a customer in an amount that
corresponds directly with the value to the customer of the Company’s performance completed to date. For these contracts, the Company has utilized the practical expedient in ASC 606-10-55-18, allowing the Company to recognize revenue in the amount to which it has a right to invoice.
Accordingly, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.

Note 6 — Inventories
Note 5 — Supplemental Cash Flow Information
Supplemental cash flow information isInventories are as follows (in thousands):
 Years ended December 31,
 2019 2018 2017
Supplemental non-cash investing and financing activities:     
Value of common stock issued in payment of accrued liability$—
 $—
 $188
Exercise of stock options by common stock surrender—
 —
 5,863
      
Supplemental cash payment information:     
Interest paid$599
 $2,502
 $1,851
Income taxes (received, net of payments) paid, net of refunds(699) (139) (10,195)

December 31,
20202019
Raw materials$7,190 $4,339 
Finished goods15,705 24,569 
Inventories22,895 28,908 
Less reserve for excess and obsolete inventory(11,058)(5,698)
Inventories, net$11,837 $23,210 

Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
 20202019
Balance, beginning of year$5,698 $2,117 
Charged to provisions12,261 5,659 
Deductions for sales and disposals(6,901)(2,078)
Balance, end of the year$11,058 $5,698 
63
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on an assessment of market values. Write-downs or write-offs of inventory are charged to cost of goods sold.
The provision for excess and obsolete inventory includes charges of $8.4 million for the CT segment and $3.9 million for the DA segment, offset by sales and disposals of $6.9 million, primarily related to terpene sales in 2020.
At December 31, 2020, the Company recognized an increase in the reserve for excess and obsolete inventory of $0.4 million due to terpene on hand exceeding anticipated usage. Also see Note 6— Leases
Effective January 1,16, “Commitments and Contingencies,” for terpene purchase commitments at December 31, 2020. At December 31, 2019, the Company adopted ASC 842 usingrecorded a reserve for excess terpene of $4.4 million.

Note 7 — Property and Equipment
Property and equipment are as follows (in thousands):
December 31,
20202019
Land$2,415 $2,415 
Land improvements867 2,025 
Buildings and leasehold improvements6,364 38,741 
Machinery and equipment7,760 27,694 
Furniture and fixtures649 1,671 
Transportation equipment1,190 1,440 
Computer equipment and software1,296 3,348 
Property and equipment20,541 77,334 
Less accumulated depreciation(11,454)(37,505)
Property and equipment, net$9,087 $39,829 
Depreciation expense totaled $2.5 million and $6.5 million for the prospective method applied to those leases which were not completed as ofyears ended December 31, 2018. 2020 and 2019, respectively.
During the first quarter of 2020, the Company recognized an impairment of property and equipment of $30.2 million. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” During the year ended December 31, 2019, 0 impairments were recognized related to property and equipment.


Note 8 — Leases
The Company has leases for corporate offices, research and development facilities, warehouses, sales offices and equipment. The leases have remaining lease terms of 1 yearone to 19fifteen years, somesome of which include options to extend the leases for up to 10ten years. The Company’s largest lease is for the Global Research and Innovation Center (“GRIC”). The lease was entered into on July 12, 2015, with a fifteen-year term and an option to renew for an additional seven years. The rent payments on the GRIC lease escalate each year until the end of the term.
Upon adoption, the Company recorded operatingOperating lease ROUright-of-use assets and corresponding operating lease liabilities, net of deferred rent, of approximately $18.4 million, representingrepresent the present value of future lease payments under operating leases with terms of greater than twelve months. Leases with an initial expected term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the expected lease term. The discount rate used upon adoption of ASC 842, “Leases,” in the calculation was the incremental borrowing rate on the revolving credit facility in 2019.
During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the GRIC during the second quarter of 2020. In addition, the lease liability and corresponding right-of-use 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 right-of-use assets totaling of $6.2 million at March 31, 2020.
64
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition, during the first quarter of 2020, the Company recorded an impairment of the right-of-use assets totaling $7.4 million. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.”
During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office in exchange for a one-time payment of $1.0 million and moved all corporate employees to the GRIC facility effective as of June 29, 2020. As a result of terminating the corporate headquarters office lease and making the one-time payment, the Company recorded a gain on lease termination of $0.6 million.
The components of lease expense and supplemental cash flow information are as follows (in thousands):
For the years ended
December 31,
20202019
Operating lease expense$1,370 $2,609 
Finance lease expense:
Amortization of right-of-use assets17 1,237 
Interest on lease liabilities18 10 
Total finance lease expense35 1,247 
Short-term lease expense202 123 
Total lease expense$1,607 $3,979 
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$2,884 $2,336 
Operating cash flows from finance leases18 10 
Financing cash flows from finance leases70 51 
 For the years ending
 December 31,
 2019 2018
Operating lease expense$2,609
 $—
Finance lease expense:   
Amortization of right-of-use assets1,237
 —
Interest on lease liabilities10
 —
Total finance lease expense1,247
 —
Short-term lease expense123
 —
Total lease expense$3,979
 $—
    
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows from operating leases2,336
 —
Operating cash flows from finance leases10
 —
Financing cash flows from finance leases51
 —


Maturities of lease liabilities are as follows (in thousands):
Years ending December 31,Operating LeasesFinance Leases
2021$1,367 $69 
20221,289 46 
20231,317 39 
20241,347 23 
20251,347 0 
Thereafter6,865 0 
Total lease payments13,532 177 
Less: Interest(4,548)(21)
Present value of lease liabilities$8,984 $156 
Years ending December 31, Operating Leases Finance Leases
2020 2,012
 70
2021 1,962
 70
2022 1,916
 47
2023 1,976
 40
2024 2,017
 23
Thereafter 23,692
 —
Total lease payments $33,575
 $250
Less: Interest (16,116) (37)
Present value of lease liabilities $17,459
 $213
65

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental balance sheet information related to leases is as follows for the years ended December 31 (in thousands):
20202019
Operating Leases
Operating lease right-of-use assets$2,320 $16,388 
Current portion of operating lease liabilities$636 $486 
Long-term operating lease liabilities8,348 16,973 
Total operating lease liabilities$8,984 $17,459 
Finance Leases
Property and equipment$147 $293 
Accumulated depreciation(26)(28)
Property and equipment, net$121 $265 
Current portion of finance lease liabilities$60 $55 
Long-term finance lease liabilities96 158 
Total finance lease liabilities$156 $213 
Weighted Average Remaining Lease Term
Operating leases9.9 years16.6 years
Finance leases3.1 years4.6 years
Weighted Average Discount Rate
Operating leases8.9 %8.9 %
Finance leases9.0 %9.0 %
 December 31, 2019
Operating Leases 
Operating lease right-of-use assets$16,388
  
Current portion of lease liabilities$486
Long-term operating lease liabilities16,973
Total operating lease liabilities$17,459
  
Finance Leases 
Property and equipment$293
Accumulated depreciation(28)
Property and equipment, net$265
  
Current portion of lease liabilities$55
Long-term finance lease liabilities158
Total finance lease liabilities$213
  
Weighted Average Remaining Lease Term 
Operating leases16.6 years
Finance leases4.6 years
  
Weighted Average Discount Rate 
Operating leases8.9%
Finance leases9.0%
Rent expense under operating leases totaled $1.6 million for the year ended December 31, 2020, and $2.9 million for the year ended December 31, 2019.


66

Note 7 — Inventories
Inventories are as follows (in thousands):
 December 31,
 2019 2018
Raw materials$4,339
 $10,608
Work-in-process—
 —
Finished goods23,056
 18,798
Inventories27,395
 29,406
Less reserve for excess and obsolete inventory(5,698) (2,117)
Inventories, net$21,697
 $27,289

Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
 2019 2018 2017
Balance, beginning of year$2,117
 $368
 $50
Charged to provisions5,659
 2,418
 388
Deductions for disposals(2,078) (669) (70)
Balance, end of the year$5,698
 $2,117
 $368

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on an assessment of market values. Write-downs or write-offs of inventory are charged to cost of goods sold. At December 31, 2019, the Company recorded a reserve for excess terpene of $4.4 million.

Note 8 — Property and Equipment
Property and equipment are as follows (in thousands):
 December 31
 2019 2018
Land$4,440
 $4,372
Buildings and leasehold improvements38,741
 37,719
Machinery and equipment27,694
 26,995
Fixed assets in progress—
 581
Furniture and fixtures1,671
 1,573
Transportation equipment1,440
 1,852
Computer equipment and software3,348
 9,370
Property and equipment77,334
 82,462
Less accumulated depreciation(37,505) (36,977)
Property and equipment, net$39,829
 $45,485

Depreciation expense totaled $6.5 million, $7.8 million, and $8.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.
During the years ended December 31, 2019, 2018, and 2017, 0 impairments were recognized related to property and equipment.

Note 9— Goodwill
The Company has 0 reporting units which have a goodwill balance at December 31, 2019.
Goodwill is tested for impairment annually in the fourth quarter, or more frequently if circumstances indicate a potential impairment. During the fourth quarter of 2017, the Company adopted ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. If the carrying amount exceeds the reporting unit’s fair value, the Company will recognize an impairment charge for the excess amount.
During the second quarter of 2018,2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. The Company identified the acquired company as the DA segment, a new operating segment. See Note 3, “Business Combination.” The Company recorded goodwill of $17.5 million at the date of acquisition.
During the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other, and completed an impairment analysis at the DA reporting unit level. During the third quarter of 2020, the Company recognized a goodwill impairment charge of $37.2 million$11.7 million.
Also, during the third quarter of 2020, the Company made certain measurement period adjustments to inventory obtained in the Energy Chemistry Technologies (“ECT”) reporting unit, which resulted from sustained under-performanceJP3 acquisition, resulting in an increase of goodwill of $2.3 million. See Note 6, “Inventories.”
Changes in the carrying amount of goodwill are as follows (in thousands):
Activity during the year ended December 31, 2020:
Acquisition goodwill recognized$17,522 
Measurement period adjustment2,276 
Goodwill impairment recognized(11,706)
Goodwill balance, net of impairment$8,092 
Balance at December 31, 2020:
Goodwill$19,798 
Accumulated impairment losses(11,706)
Goodwill balance, net of impairment$8,092 

Note 10 — Other Intangible Assets
Intangible assets acquired are amortized on a straight-line basis. Amortization of intangible assets acquired totaled $0.9 million and, lower expectations$2.0 million for the years ended December 31, 2020 and 2019, respectively.
Amortization of deferred financing costs totaled $1.4 million for the year ended December 31, 2019. In March 2019, the Company repaid the outstanding balance of its credit facility. See Note 13, “Debt.”
During the year ended December 31, 2020, the Company recorded impairment charges of $32.4 million for other intangible assets, impairing all finite-lived intangible assets, including those acquired in the May 2020 acquisition of JP3. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” During the year ended December 31, 2019, 0 impairments were recognized related to other intangible assets.
At December 31, 2019, the reporting unit. As a result of these factors, a qualitative analysis, and additional risks associated with the business, the Company concluded that sufficient indicators existed to require an interim quantitative assessment
of goodwill for that reporting unit as of June 30, 2018. The fairnet carrying value of the reporting unitother intangible assets was estimated based on an analysis of the present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The assumptions were based on the actual historical performance of the reporting unit and took into account a recent weakening of operating results in an improving market environment. The excess of the reporting unit’s carrying value over the estimated fair value was recorded$20.3 million, as the goodwill impairment charge during the three months ended June 30, 2018 and represented all of the ECT reporting unit’s goodwill.follows (in thousands):

 CostAccumulated
Amortization
Finite-lived intangible assets:
Patents and technology$17,493 $(6,715)
Customer relationships15,367 (6,013)
Trademarks and brand names1,351 (1,160)
Total finite-lived intangible assets$34,211 $(13,888)


67
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in
Note 11 — Impairment of Fixed, Long-lived and Intangible Assets

The Company recorded impairment charges of fixed, long-lived and intangible assets during the carrying amount of goodwill for the ECT reporting unit areyear ended December 31, 2020, as follows (in thousands):
Property and equipment, net$30,178 
Operating lease right-of-use assets7,434 
Other Intangibles:
   Patents and technology14,733 
   Customer relationships15,796 
   Intangible assets in progress596 
   Trademarks and brand names1,238 
Total other intangibles32,363 
Total impairment of fixed, long-lived and intangible assets$69,975 
Balance at December 31, 2017: 
Goodwill$37,180
Accumulated impairment losses—
Goodwill balance, net37,180
Activity during the year 2018: 
Goodwill impairment recognized(37,180)
Acquisition goodwill recognized—
Balance at December 31, 2018: 
Goodwill37,180
Accumulated impairment losses(37,180)
Goodwill balance, net—
Activity during the year 2019: 
Goodwill impairment recognized—
Acquisition goodwill recognized—
Balance at December 31, 2019: 
Goodwill—
Accumulated impairment losses—
Goodwill balance, net$—

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 industry, which began to negatively impact the Company’s results of operations. These declines 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.

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.
Note 10 — Other Intangible Assets
OtherDuring the second quarter of 2020, the Company purchased JP3 and formed the DA segment. During the third quarter of 2020, revenue declined due to limited access to worksites, inability to install equipment, changes in the Company’s leadership, reduction of capital spending by clients due to COVID-19, inability to present to new customers and difficulty in working on the international marketing of the Verax analyzer. Further, the Company was negatively impacted by reduced demand in the oil and gas sector because of reductions in capital spending across our customer base, lower than anticipated growth in the international market gained from the JP3 acquisition and the delayed start of the Company’s global sales business executive.
Although the site lockdowns and extreme caution to prevent the spread of COVID-19 that began in the first half of 2020 began to ease during the third quarter, the segment saw very little of the expected repeat business and almost none from new customers due to frozen budgets. Secondly, COVID-19 restrictions adversely impacted the Company’s ability to physically gain on-site access to customers’ operations, including laboratory and testing facilities, which is a critical component to JP3’s multi-phased sales approach.
In consideration of these events, management reevaluated forecasted sales activity, expected margins and the long-term expectations of the DA segment for the third quarter of 2020. Based on these factors, the Company concluded a triggering event occurred in the DA segment, and accordingly, an interim quantitative impairment test was performed as of September 30, 2020.
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 September 30, 2020. The Company recognized an impairment loss of $12.5 million in the DA reporting unit finite-lived intangible assets, are as follows (in thousands):
 December 31,
 2019 2018
 Cost 
Accumulated
Amortization
 Cost 
Accumulated
Amortization
Finite lived intangible assets:       
Patents and technology$17,493
 $6,715
 $18,884
 $6,689
Customer lists15,367
 6,013
 15,367
 5,259
Trademarks and brand names1,351
 1,160
 1,485
 1,149
Total finite lived intangible assets acquired34,211
 13,888
 35,736
 13,097
Deferred financing costs—
 —
 1,924
 496
Total amortizable intangible assets34,211
 $13,888
 37,660
 $13,593
Indefinite lived intangible assets:       
Trademarks and brand names2,760
   2,760
  
Total other intangible assets$36,971
   $40,420
  
        
Carrying amount:       
Other intangible assets, net$23,083
   $26,827
  

which resulted primarily from lower performance than expected by the reporting unit. The extended
Intangible assets acquired are amortized on a straight-line basis over two to 95 years. Amortization of intangible assets acquired totaled $2.0 million, $1.4 million, and $1.5 million for the years end ended December 31, 2019, 2018, and 2017, respectively.
Amortization of deferred financing costs totaled $1.4 million, $0.4 million, and $0.5 million for the years ended December 31, 2019, 2018, and 2017, respectively.68
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Estimated future amortization expense for other finite livedimpact of COVID-19 and declines in the oil and gas sector also contributed to the impairment loss. Also see Note 3, “Business Combination.” No impairments of fixed, long-lived and intangible assets including deferred financing costs, at December 31, 2019 isoccurred during the fourth quarter of 2020.

Note 12 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):
December 31,
20202019
Loss on purchase commitments (Note 16)$9,402 $15,750 
Severance costs3,558 3,450 
Payroll and benefits1,789 471 
Contingent liability for earn-out provision1,416 0 
Taxes other than income taxes544 1,799 
Due to third parties434 2,509 
Legal costs333 149 
Deferred revenue, current146 0 
Other653 424 
Total current accrued liabilities$18,275 $24,552 
Year ending December 31,  
2020 $1,941
2021 1,935
2022 1,915
2023 1,858
2024 1,854
Thereafter 10,109
Other amortizable intangible assets, net $19,612

During the years ended December 31, 2019, 2018, and 2017, 0 impairments were recognized related to other intangible assets.

Note 1113 — Long-Term Debt and Credit Facility
Long-term debt is as follows (in thousands):
December 31,
20202019
Long-term debt
    Flotek PPP loan$4,788 $0 
    JP3 PPP loan877 0 
Total5,665 0 
Less current maturities(4,048)0 
Total long-term debt, net of current portion$1,617 $0 
 December 31,
 2019 2018
Long-term debt, classified as current:   
Borrowings under revolving credit facility$—
 $49,731
Payroll Protection Program Loan
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 2022. No payments of principal or interest were required during the year ended December 31, 2020.

OnA 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. As of December 31, 2020, the Company had not applied for or estimated the potential 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
69
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a government audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.

Bank Credit Facility

Through March 1, 2019, the Company maintained a revolving credit facility with PNC Bank, National Association (the “Credit Facility”) with a maximum revolving advance amount of $75 million. Upon closing the sale of the CICT segment in 2019, the Company repaid the outstanding balance, ofinterest and fees on the Credit Facility on March 1, 2019, and terminated the Credit Facility.


0
Note 1214 — 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 loans for Flotek and JP3 also approximate fair value due to maturity in less than eighteen months.
Liabilities Measured at Fair Value on a Recurring Basis
At December 31, 2019The following table presents the Company’s assets and 2018, no liabilities were required to bethat are measured at fair value on a recurring basis.basis and the level within the fair value hierarchy:
Balance at December 31,Balance at December 31,
Level 1Level 2Level 32020Level 1Level 2Level 32019
Contingent consideration$0 $0 $1,416 $1,416 $0 $0 $0 $0 
During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved, and the Company accrued a liability of $2.5 million, which was transferred out of Level 3 to a current liability and subsequently settled during the fourth quarter of 2020. No other transfers occurred during the year ended December 31, 2020. At December 31, 2020, the estimated fair value of the remaining stock performance earn-out provision was $1.4 million, which was recorded as a contingent liability. The estimated fair value of the earn-out provision 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 yearsyear ended December 31, 2019. At December 31, 2019, 2018, and 2017.no liabilities were required to be measured at fair value on a recurring basis.


70
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment, 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 June 30, 2018,first quarter of 2020, the Company recorded an impairment of $37.2$57.5 million for goodwillimpairment of long-lived assets. Management inputs used in fair value measurements were classified as Level 3.
As disclosed in Note 3, “Business Combination,” the Company acquired JP3 in May 2020. The fair values of JP3’s long-lived assets and intangibles were determined using the income approach. The fair value of the Company’s inventory was determined using the comparative sales method. The fair value measurements were primarily based on significant inputs that are not observable in the ECTmarket and thus represent a Level 3 measurement, other than cash and working capital accounts, which carrying amounts were determined to approximate fair value due to their short-term nature.
During the third quarter of 2020, the Company’s DA segment recorded an impairment charge on finite-lived intangible assets of $12.5 million and an impairment charge on goodwill of $11.7 million. The fair value of the DA reporting unit (see Note 9). NaN impairmentswas estimated based on an analysis of goodwillthe present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The fair value measurements were recognizedprimarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement.
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 the third quarter of 2020, the first stock performance target for the contingent consideration was achieved, resulting in an accrued liability of $2.5 million, which was settled during the yearsfourth quarter of 2020. The Company also estimated the fair value of the remaining stock performance earn-out provision at December 31, 2020 and recorded the fair value of the contingent liability of $1.4 million. The expense for achievement of the first stock performance target and the change in the fair value of the contingent consideration for the second earn-out provision are recorded in operating expenses in continuing operations for the period ended December 31, 2019,and 2017. No impairment of property and equipment or other intangible assets were recognized during2020.
The following table presents the years ended December 31, 2019, 2018, and 2017.changes in contingent consideration balances classified as Level 3 balances:

Years ended December 31,
20202019
Balance - beginning of period$0 $0 
Additions / issuances1,200 0 
Change in fair value2,716 0 
Transfer out of Level 3(2,500)0 
Balance - end of period$1,416 $0 

71
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair


value due to the short-term nature of these accounts. The Company had 0 cash equivalents at December 31, 2019 or 2018.
The carrying amount and estimated fair value of the Company’s long-term debt are as follows (in thousands):
 December 31,
 2019 2018
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Borrowings under revolving credit facility$—
 $—
 $49,731
 $49,731

The carrying amount of borrowings under the revolving credit facility approximates its fair value because the interest rate is variable.

Note 13 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the years ended December 31, 2019, 2018, and 2017, since including them
would have an anti-dilutive effect on loss per share due to the loss from continuing operations incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 0.1 million restricted stock units and 3.0 million stock options for the year ended December 31, 2019, and 0.7 million restricted stock units for the year ended December 31, 2018, and 0.7 million stock options and 0.8 million restricted stock units for the year ended December 31, 2017.
A reconciliation of the number of shares used for the basic and diluted earnings (loss) per common share computations is as follows (in thousands):
 Years ended December 31,
 2019 2018 2017
Weighted average common shares outstanding - Basic58,750
 57,995
 57,580
Assumed conversions:     
Incremental common shares from stock options—
 —
 —
Incremental common shares from restricted stock units—
 —
 —
Weighted average common shares outstanding - Diluted58,750
 57,995
 57,580


FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1415 — Income Taxes
Components of the income tax (benefit) expense are as follows (in thousands):
 Years ended December 31,
 2019 2018 2017
Current:     
Federal$(22,923) $—
 $(1,126)
State(2,295) 97
 587
Foreign(238) (740) 488
Total current(25,456) (643) (51)
Deferred:     
Federal23,910
 (6,585) 5,994
State1,345
 (89) 214
Foreign—
 101
 (45)
Total deferred25,255
 (6,573) 6,163
Income tax (benefit) expense$(201) $(7,216) $6,112

 Years ended December 31,
 20202019
Current:
Federal$(6,115)$(22,923)
State144 (2,295)
Foreign(21)(238)
Total current(5,992)(25,456)
Deferred:
Federal(116)24,373 
State(71)1,345 
Foreign0 0 
Total deferred(187)25,718 
Income tax (benefit) expense$(6,179)$262 
The components of (loss) incomeloss before income taxes are as follows (in thousands):
 Years ended December 31,
 2019 2018 2017
United States$(76,758) $(80,034) $(10,025)
Foreign(178) (623) (1,367)
Loss before income taxes$(76,936) $(80,657) $(11,392)

 Years ended December 31,
 20202019
United States$(141,864)$(75,633)
Foreign(765)(178)
Loss before income taxes$(142,629)$(75,811)
A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:
 Years ended December 31,
 20202019
Federal statutory tax rate21.0 %21.0 %
State income taxes, net of federal benefit2.1 0.6 
Non-U.S. income taxed at different rates0.2 0.5 
Increase in valuation allowance(20.3)(20.5)
Reduction in tax benefit related to stock-based awards(0.2)(0.1)
 Effect of tax rate differences of NOL carryback1.5 0 
Research and development credit0 0.2 
Other0 (2.0)
Effective income tax rate4.3 %(0.3)%
 Year ended December 31,
 2019 2018 2017
Federal statutory tax rate21.0 % 21.0 % 35.0 %
State income taxes, net of federal benefit0.6
 0.8
 (3.2)
Non-U.S. income taxed at different rates0.5
 0.8
 (4.3)
(Increase) decrease in valuation allowance(19.9) (3.6) 0.1
Impact of 2017 Tax Cuts and Jobs Act—
 —
 (64.2)
Net operating loss carryback adjustment—
 —
 —
Reduction in tax benefit related to stock-based awards(0.1) (1.0) (16.9)
Non-deductible expenditures and goodwill—
 (9.0) (3.9)
Research and development credit0.2
 0.3
 3.6
Other(2.0) (0.4) 0.1
Effective income tax rate0.3 % 8.9 % (53.7)%

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act provided the ability for taxpayers to carryback a net operating loss (“NOL”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five years preceding the year of the loss. Based on analysis of the extended NOL carryback provision, the Company recorded a tax receivable of $6.1 million as of March 31, 2020, which was received in July 2020.
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.
Comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Acts (“2017 Tax Act”), makes significant changes to U.S. federal income tax laws. The 2017 Tax Act, among other things, reduces the corporate income tax rate from 35% to 21%, partially limits the deductibility of business interest expense and net operating losses, provides additional limitations on the deductibility of executive compensation, imposes a one-time tax on unrepatriated earnings from certain foreign subsidiaries, taxes offshore earnings at reduced rates, regardless of whether they are repatriated, and allows the immediate deduction of certain new investments instead of deductions for depreciation expense over time. The Company had not completed its determination of the 2017 Tax Act and recorded provisional amounts in its financial statements as of December 31, 2017. The Company recorded a provisional expenseexcept for the effects of the 2017 Tax Act of $7.3 million. The effects of the 2017
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tax Act on the Company include three main categories: 1) remeasurement of the net deferred tax assets from 35% to 21%, which resulted in tax expense of $5.5 million; 2) a one-time tax on unrepatriated earnings from certain foreign subsidiaries of $0.2 million; and 3) additional limitations on the deductibility of executive compensation, which resulted in tax expense of $1.6 million. The Company completed its review of the 2017 Tax Act in 2018, and there were no material changes in the measurement period.
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. The components of deferred tax assets and liabilities are as follows (in thousands):
 December 31,
 2019 2018
Deferred tax assets:   
Net operating loss carryforwards$17,248
 $30,241
Allowance for doubtful accounts1,037
 1,073
Inventory valuation reserves629
 1,057
Equity compensation353
 548
Goodwill965
 1,089
Accrued compensation587
 342
Foreign tax credit carryforward3,894
 4,041
Settlement liability3,530
 —
Lease liability3,992
 —
Interest expense limitation—
 534
Other96
 50
Total gross deferred tax assets32,331
 38,975
Valuation allowance(19,878) (4,042)
Total deferred tax assets, net12,453
 34,933
Deferred tax liabilities:   
Property and equipment(3,696) (6,613)
Intangible assets(4,597) (9,657)
ROU asset(3,793) —
Prepaid insurance and other(331) —
Total gross deferred tax liabilities(12,417) (16,270)
Net deferred tax assets$36
 $18,663
72

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31,
 20202019
Deferred tax assets:
Net operating loss carryforwards$23,589 $17,248 
Allowance for doubtful accounts1,134 1,037 
Inventory valuation reserves2,093 629 
Equity compensation435 353 
Goodwill4,087 965 
Accrued compensation657 587 
Foreign tax credit carryforward3,802 3,894 
Accrued liabilities2,076 3,530 
Lease liability1,945 3,992 
Property and equipment3,640 0 
Intangible assets6,026 0 
Other353 96 
Total gross deferred tax assets49,837 32,331 
Valuation allowance(48,671)(20,341)
Total deferred tax assets, net1,166 11,990 
Deferred tax liabilities:
Property and equipment0 (3,696)
Intangible assets0 (4,134)
ROU asset(686)(3,793)
Prepaid insurance and other(257)(331)
Total gross deferred tax liabilities(943)(11,954)
Net deferred tax assets$223 $36 
As of December 31, 2019,2020, the Company had U.S. net operating loss carryforwards of $68.9$94.7 million, including $49.6$46.4 million expiring in various amounts in 2035 through 2037 which can offset 100% of taxable income and $19.3$48.3 million that has an indefinite carryforward period which can offset 80% of taxable income per year. The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo an “ownership change” for purposes of Section 382 of the Tax Code.
Net deferred tax assets arise due to the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes. ASC 740, Income Taxes, 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, in the second quarter of 2018, the Company consideredconsiders 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. As a result of this analysis,December 31, 2019, the Company determined that it iswas more likely than not that it willwould not realize the benefits of certain deferred tax assets and, therefore, recorded a $15.5$20.3 million valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to non-amortizable intangible assets and certain state jurisdictions. As all available evidence should be taken into consideration when assessing the need for a valuation allowance, the subsequent events that occurred in the first quarter of 2019 provided a source of income to support the release of $11.5 million of the valuation allowance which resulted in a deferred tax asset of $18.7 million. As such, the Company reversed this portion of the valuation allowance during the fourth quarter of 2018. At December 31, 2019,2020, the
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

valuation allowance against the net federal and state deferred tax assets was $19.9$48.7 million.
The Company has not calculated U.S. taxes on unremitted earnings of certain non-U.S. subsidiaries due to the Company’s intent to reinvest the unremitted earnings of the non-U.S. subsidiaries. At December 31, 2019,2020, the Company had approximately $2.3$5.7 million in unremitted earnings for one of its foreign jurisdictions, which were not included for U.S. tax purposes. Due to the 2017 Tax Act, U.S. federal transition taxes have been recorded for a one-time U.S. tax liability on these earnings which have not previously been repatriated to the U.S. However, certain withholding taxes will need to be paid upon repatriation. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.
The Company has performed an evaluation and concluded there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The
evaluation was performed for the tax years which remain subject to examination by tax jurisdictions as of December 31, 2019,2020, which are the years ended December 31, 20152017 through December 31, 20192020 for U.S. federal taxes and the years ended December 31, 20142016 through December 31, 20192020 for state tax jurisdictions.
At December 31, 2019, the Company had 0 unrecognized tax benefits.
In January 2017,During 2020, the Internal Revenue Service (“IRS”) notified the Company that ita 2018 tax return was selected for examination as
a result of a carryback claim. At this time, the Company is not aware of any findings that would examinehave a material impact on the
consolidated financial statements.
73
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 — Commitments and Contingencies
Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s “IRS” federal tax returnsfinancial position, results of operations or liquidity.
Commitments
Terpene Supply Agreement
On February 26, 2020, Flotek Chemistry entered into an amendment to the terpene supply agreement between Flotek Chemistry and FCC. Pursuant to the terms and conditions of the amendment, the terpene supply agreement was amended to, among other things, (a) reduce the minimum quantity of terpene that Flotek Chemistry is required to purchase by approximately 3/4ths in 2020 and by approximately half in each of 2021, 2022 and 2023, (b) provide a fixed per pound price for terpene in 2020, (c) reduce the maximum amount of terpene subject to the terpene supply agreement by approximately 1/3rd, and (d) change the payment terms to net 45 days. In order to make the terms and conditions of the amendment to the terpene supply agreement effective, Flotek Chemistry made a one-time payment in February 2020 of $15.8 million to ADM. The expense associated with the terpene supply agreement amendment payment was recorded as a loss on contract purchase commitments, reported in operating expenses in continuing operations in December 2019.
For the year ended December 31, 2020, the Company recognized a loss of $9.9 million and an accrued liability of $9.4 million at December 31, 2020, associated with the amended terpene supply agreement due to 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 is not considered recoverable. The reductions in expected usage resulted from reduced demand for terpene in the oil and gas sector due of capital spending reductions across our customer base and impacts of COVID-19, combined with product mix changes using lower concentrations of terpene.
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 expenses incurred by the Company were $0.4 million and $0.6 million for the years ended December 31, 2020 and 2019, respectively. The Company expects to incur additional costs during 2021, which are uncertain, but could be as much as $0.5 million or more.
Lease Obligations
See Note 8, “Leases.”
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the sanitizer, surface cleaner and disinfectant industry to a lesser extent.  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 sanitizer, 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.
Within the CT segment, the Company had two major customers for the year ended December 31, 2014.2020, which accounted for 24% and 18% of consolidated revenue, and two major customers for the year ended December 31, 2019, which accounted for 20% and 10% of consolidated revenue. The examination included (1)Company’s largest three customers collectively accounted for 50% and 40% of consolidated revenue for the corporate returnsyears ended December 31, 2020 and (2) employment tax matters. 2019, respectively.
No single customer of the DA segment accounted for 10% or more of the Company’s consolidated revenue for the year ended December 31, 2020.
74
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The IRS fieldwork has been completedCompany 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 relationthree major U.S. financial institutions and balances often exceed insurable amounts.
Note 17 —Stockholders’ Equity
Common and Preferred Stock
On May 5, 2020, the shareholders of the Company approved an amendment to the corporate returns with no adverse findings. Further discussion of the employment tax matter can be found in Note 19 ---“Related Party Transaction.”

Note 15 — Common Stock
The Company’s Amended and Restated Certificate of Incorporation, as previously amended, November 9, 2009, authorizesto increase the Companyauthorized shares of common stock from 80 million shares to issue up to 80140 million shares of common stock, par value $0.0001 per share, and 100,000 shares of 1 or more series of preferred stock, par value $0.0001 per share. The additional authorized shares are available for corporate purposes, including acquisitions.
A reconciliation of the changes in common shares issued is as follows:
 Years ended December 31,
 20202019
Shares issued at the beginning of the year63,656,897 62,162,875 
Issued upon sale of common stock200,000 0 
Issued upon exercise of stock options111,298 0 
Issued as restricted stock award grants3,114,978 924,022 
Issued as restricted stock unit grants86,241 570,000 
Issued in business combination to acquire JP311,500,000 0 
Shares issued at the end of the year78,669,414 63,656,897 
 Year ended December 31,
 2019 2018
Shares issued at the beginning of the year62,162,875
 60,622,986
Issued as restricted stock award grants924,022
 1,539,889
Issued as restricted stock unit grants570,000
 —
Shares issued at the end of the year63,656,897
 62,162,875
Treasury Stock
The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. During the years ended December 31, 2020 and 2019, the Company purchased 145,703 shares and 93,977 shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options. Shares issued as restricted stock awards to employees that were forfeited are accounted for as treasury stock. During the year ended December 31, 2020, there were 66,115 shares surrendered for the exercise of stock options. During the year ended December 31, 2019, 0 shares were surrendered for the exercise of stock options.
Stock Repurchase Program
In June 2015, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock. Repurchases could be made in the open market or through privately negotiated transactions. On June 9, 2020, the board of directors of the Company rescinded the authorization to repurchase the Company’s stock under this program.
During the year ended December 31, 2019, the Company repurchased $0.3 million of its common stock under this authorization. NaN shares were repurchased under this program during the year ended December 31, 2020.

Note 18 — Stock-Based Compensation and Other Benefit Plans
Stock-Based Incentive Plans
Stockholders approved long termlong-term incentive plans in 2019, 2018, 2014, 2010 and 2007 (the “2019 Plan”,Plan,” the “2018 Plan,” the “2014 Plan,” the “2010 Plan,”Plan” and the “2007 Plan,” respectively) under which the Company may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, and certain other incentive awards. The maximum

number of shares that may be issued under the 2019 Plan, 2018 Plan, 2014 Plan, 2010 Plan and 2007 Plan are 1.0 million, 3.0 million, 5.2 million, 6.0 million and 2.2 million, respectively. At December 31, 2019,2020, the Company had a total of 3.91.8 million shares remaining to be granted under the 2019 Plan 2018 Plan, 2014 Plan, and 20102018 Plan. Shares may no longer be granted under the 2007, Plan.

2010 and 2014 Plans.


75





FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Stock Options
All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant. During the fourth quarter 2019, 3.02020, 1.3 million stock options were granted, 1.0 million time-vested and 2.0 million performance-based.all market-based options. The time-vested stock options will vest equally over the next five years. The performance-basedmarket-based options are restricted until performance criteria defined in the agreement are met. Proceeds received from stock option exercises are credited to common stock and additional paid-in capital, as appropriate. The Company uses historical data to estimate pre-vesting option forfeitures. Estimates are adjusted when actual forfeitures differ from the estimate. Stock-based compensation expense is recorded for all equity awards expected to vest. 
During the year ended December 31, 2020, 0.1 million stock options vested, and 0.6 million stock options were forfeited. NaN stock options vested or were forfeited during the year ended December 31, 2019.
Stock option activity for the years ended December 31, 2020 and 2019, 2018, and 2017.are as follows
Stock OptionsShares Weighted-Average
Exercise
Price
SharesWeighted-Average
Exercise
Price		Weighted-Average
Fair Value
Outstanding as of January 1, 2019—
 $—
Outstanding as of January 1, 20190 $0 $0 
Granted3,000,000
 1.22
Granted3,000,000 1.93 1.25 
Exercised—
 —
Exercised0 0 0 
Forfeited—
 —
Forfeited0 0 0 
Expired—
 —
Outstanding as of January 1, 2020Outstanding as of January 1, 20203,000,000 0
GrantedGranted1,327,795 1.12 0.62 
ExercisedExercised(111,298)0.92 0.51 
ForfeitedForfeited(556,497)0.92 0.51 
Outstanding as of   Outstanding as of
December 31, 20193,000,000
 $1.22
December 31, 2020December 31, 20203,660,000 0
Vested or expected to vest at   Vested or expected to vest at
December 31, 2019—
 $—
Options exercisable as of   
December 31, 2019—
 $—
December 31, 2020December 31, 20201,111,298 

.
The following table sets forth significant assumptions used in the Black-Scholes model for time-vested options and the Monte Carlo model for performance-basedmarket-based options to determine the fair value of the options at the date of grant:
Year Ended December 31, 2020Year Ended December 31, 2019
Market-Based OptionsMarket-Based Options
Risk-free interest rate0.12 %1.84 %
Expected volatility of common stock103.50 %71.57 %
Expected life of options in years27
Vesting period in years27
76
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth significant assumptions used in the Black Scholes model for time-vested options to determine the fair value of the options at the date of grant:
Year Ended December 31, 2019
Time-Vested Options
Initial stock price$1.93
Strike price1.93
Term (in years)6.5
Risk-free rate1.8 %
Volatility rate73.6 %
The Company had no time-vested options granted in 2020. At December 31, 2019.2020, the unrecognized compensation cost related to stock options was $3.6 million.
 Time-Vested Options Performance-Based Options
Risk-free interest rate1.81% 1.84%
Expected volatility of common stock73.59% 71.57%
Expected life of options in years5.0
 7.0
Dividend yield—% —%
Vesting period in years5.0
 7.0



Restricted Stock
The Company grants employees either time-vesting or performance-basedmarket-based restricted shares in accordance with terms specified in the Restricted Stock Agreements (“RSAs”). Time-
Agreements. During the year ended December 31, 2020, 53% of the restricted shares granted were time-vesting and 47% were performance-based. Grantees of restricted shares retain voting rights for the granted shares.
vesting•Time-vesting restricted shares vest after a stipulated period of time has elapsed subsequent toafter the date of grant, generally three


FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

years. Certain time-vested shares have also been issued with a portion of the shares granted vesting immediately.
Performance-based•Market-based restricted shares are issued with performance criteria defined over a designated performance period and vest only when, and if, the outlined performance
criteria are met. During the year ended December 31, 2019, 63% of the restricted shares granted were time-vesting and 37% were performance-based. Grantees of restricted shares retain voting rights for the granted shares.
Restricted stock share activity for the year ended December 31, 2019 is as follows:
Restricted Stock Shares Shares 
Weighted-
Average Fair
Value at Date of
Grant
Non-vested at January 1, 2019 1,050,372
 $3.47
Granted to employees 1,494,022
 2.62
Vested (615,941) 3.72
Forfeited (299,433) 3.16
Non-vested at December 31, 2019 1,629,020
 $2.66

The weighted-average grant-date fair value of restricted stock granted during the years ended December 31, 2020 and 2019, 2018, and 2017 was $2.62, $10.62, and $11.92 per share, respectively. are as follows:
Restricted Stock SharesSharesWeighted-
Average Fair
Value at Date of
Grant
Non-vested at January 1, 20191,050,372 $3.47 
Granted to employees1,494,022 2.62 
Vested(615,941)3.72 
Forfeited(299,433)3.16 
Non-vested at January 1, 20201,629,020 2.66 
Granted to employees3,114,978 0.83 
Vested(711,988)2.94 
Forfeited(1,236,910)1.65 
Non-vested at December 31, 20202,795,100 $1.00 
The total fair value of restricted stock that vested during the years ended December 31, 2020 and 2019 2018,was $2.1 million and 2017 was $6.3 million, $8.6 million, and $15.4 million, respectively.
At December 31, 2019, there was $1.8 million of2020, unrecognized compensation expense related to non-vested restricted stock.stock was $1.8 million. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.00.8 years.
Restricted Stock Units
During the year ended December 31, 2020, the Company granted 0.9 million market-based restricted stock units (“RSUs”). The performance period for these RSUs continues until December 22, 2024.
During the year ended December 31, 2019, the Company granted performance-based restricted stock units (“RSUs”) for 1,071,530 shares equivalents.1.1 million RSUs. The performance period for these share equivalentsRSUs continues until December 31, 2024.2024.
During the year ended December 31, 2018, the Company granted performance-based RSUs for 604,682 share equivalents, which had a performance period through December 31, 2019. No RSUs were earned during this performance period.
77
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock units activity for the yearyears ended December 31, 2020 and 2019, isare as follows:
Restricted Stock Units (1)
UnitsWeighted-
Average Fair
Value at Date of
Grant
RSUs at January 1, 2019301,766 $3.94 
2018 forfeited(272,046)6.39 
2019 granted1,071,530 3.75 
2019 forfeited(62,776)1.66 
RSUs at January 1, 20201,038,474 3.24 
2020 granted922,786 1.19 
2020 forfeited(733,711)3.79 
RSUs at December 31, 20201,227,549 $1.25 
Restricted Stock Units Units 
Weighted-
Average Fair
Value at Date of
Grant
RSU equivalents at January 1, 2019 301,766
 $3.94
2018 equivalents forfeited (272,046) 6.39
Total equivalents 29,720
 —
2019 equivalents granted 1,071,530
 3.75
2019 equivalents forfeited (62,776) 1.66
RSU equivalents at December 31, 2019 1,038,474
 $3.24

(1) Restricted stock units and performance stock units are disclosed in the preceding table.
At December 31, 2019, there was $2.1 million of2020, unrecognized compensation expense related to 2019 and 2018 restricted stock units.units was $2.0 million. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.31.2 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) was approved by stockholders on May 18,in 2012. The Company registered 500,000 shares of its common stock, currently held as treasury shares, for issuance under the ESPP. The purpose of the ESPP is to provide employees with an opportunity to purchase shares of the Company’s common stock through accumulated payroll deductions. The ESPP allows participants
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to purchase common stock at a purchase price equal to 85% of the fair market value of the common stock on the last business day of a three-month offering period which coincides with calendar quarters. Payroll deductions may not exceed 10% of an employee’s compensation and participants may not purchase more than 1,000 shares in any one offering period. In addition, for each calendar year, an employee may not be granted purchase rights for Flotek Stock valued over $25,000, as determined at the time such purchase right is granted. The fair valuevalue of the discount associated with shares purchased under the plan is recognized as share-basedstock-based compensation expense and was $0.1 million $0.1 million, and $0.1 million duringfor each of the years ended December 31, 2019, 2018,2020 and 2017, respectively.2019. The total fair value of the shares purchased under the plan during each of the years ended December 31, 2019, 2018,2020 and 20172019 was $0.1 million $0.8 million, and $1.0 million, respectively.. The employee payment associated with participation in the plan was satisfiedoccurs through payroll deductions. Effective after the third quarter 2018 purchase, the Company temporarily suspended the ESPP due to lack of shares. Following shareholder approval for additional shares, the Company initiatedresumed the ESPP during the second quarter 2019.
Share-BasedStock-Based Compensation Expense
Non-cash share-basedstock-based compensation expense related to restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP was $7.1 million, $10.6$3.2 million and $11.4$4.0 million during the years ended December 31, 2019, 2018,2020 and 2017,2019, respectively.
Treasury Stock
The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. During the years ended December 31, 2019, 2018, and 2017, the Company purchased 93,977 shares, 199,644 shares, and 238,216 shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options. Shares issued as restricted stock awards to employees that were forfeited are accounted for as treasury stock. During the year ended December 31, 2019, there were 0 shares surrendered
for the exercise of stock options. During the years ended December 31, 2018 and 2017, shares surrendered for the exercise of stock options were 478,287 and 3,225, respectively. These surrendered shares are also accounted for as treasury stock.

Stock Repurchase Program
In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through December 31, 2019, the Company has repurchased $25 million of its common stock under this authorization.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through December 31, 2019, the Company repurchased $0.3 million of its common stock under this authorization.
During the year ended December 31, 2018, the Company did 0t repurchase any shares of its outstanding common stock. During the year ended December 31, 2017, the Company repurchased 905,000 shares of its outstanding common stock on the open market at a cost of $5.2 million, inclusive of transaction costs, or an average price of $5.75 per share. During the year ended December 31, 2016, the Company did 0t repurchase any shares of its outstanding common stock.
At December 31, 2019, the Company had $49.7 million remaining under its share repurchase program. A covenant under the Company’s Credit Facility limited the amount that may be used to repurchase the Company’s common stock. At December 31, 2019, this covenant did not permit additional share repurchases.




FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 — Commitments and Contingencies
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern District of Texas granted the Company’s motion to dismiss the four consolidated putative securities class action lawsuits that were filed in November 2015, against the Company and certain of its officers. The lawsuits were previously consolidated into a single case, and a consolidated amended complaint had been filed. The consolidated amended complaint asserted that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint sought an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between October 23, 2014 and November 9, 2015, inclusive. The lead plaintiff appealed the District Court’s decision granting the motion to dismiss. On February 7, 2019, a three-judge panel of the United States Court of Appeals for the Fifth Circuit issued a unanimous opinion affirming the District Court’s judgment of dismissal in its entirety.
Other Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. 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
Rent expense under operating leases totaled $2.9 million, $2.9 million, and $3.3 million during the years ended December 31, 2019, 2018, and 2017, respectively.
401(k) Retirement Plan
The Company maintains a 401(k) retirement plan for the benefit of eligible employees in the U.S. All employees are eligible to participate in the plan upon employment. On January 1, 2015, the Company implemented a new matching program. The Company matches contributions at 100% of up to 2% of an employee’s compensation and, if greater, the Company matches contributions at 50% from 5% to 8% of an employee’s compensation.compensation. In April 2020, the Company suspended its matching contribution to employee accounts.
During the years ended December 31, 2019, 2018,2020 and 2017,2019, compensation expense included $0.7 million, $1.0$0.2 million and $1.0$0.7 million, respectively, related to the Company’s 401(k) match.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from the oil and gas industry. Customers include major oilfield services companies, major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies, and state-owned national oil companies. This concentration of customers in one industry increases credit and business risks.
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 maintained at a major financial institution and balances often exceed insurable amounts.

Note 1719 — Business Segment, Geographic and Major Customer InformationEarnings (Loss) Per Share
Segment InformationBasic 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
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by chief operating decision-makers in deciding how to allocate resources and assess performance. The operations of the Company are categorized into 1 reportable segment: Energy Chemistry Technologies.
Energy Chemistry Technologies designs, develops, manufactures, packages, and markets specialty chemistries used in oil and natural gas well drilling, cementing, completion, and stimulation. In addition, the Company’s chemistries are used in specialized enhanced and improved oil recovery markets. Activities in this segment also include
construction and management of automated material handling facilities and management of loading facilities and blending operations for oilfield services companies.
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 reportable segments.78
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and settlement of restricted stock units.
Summarized financial informationPotentially dilutive securities were excluded from the calculation of diluted loss per share for the reportable segments is as follows (in thousands):years ended December 31, 2020 and 2019, since including them would have an anti-dilutive effect on loss per share due to the loss from continuing operations incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.8 million restricted stock units and 3.8 million stock options for the year ended December 31, 2020 and 0.1 million restricted stock units for the year ended December 31, 2019.
As of and for the years ended December 31, Energy Chemistry Technologies 
Corporate and
Other
 Total
       
2019      
Net revenue from external customers $119,353
 $—
 $119,353
Loss from operations (46,485) (30,140) (76,625)
Depreciation and amortization 7,439
 1,026
 8,465
Capital expenditures 2,411
 —
 2,411
       
2018      
Net revenue from external customers $177,773
 $—
 $177,773
Income (loss) from operations (36,817) (32,994) (69,811)
Depreciation and amortization 7,107
 2,109
 9,216
Capital expenditures 2,733
 826
 3,559
       
2017      
Net revenue from external customers $243,106
 $—
 $243,106
Income (loss) from operations 33,611
 (43,931) (10,320)
Depreciation and amortization 7,323
 2,445
 9,768
Capital expenditures 3,279
 918
 4,197

Assets of the Company by reportable segments are as follows (in thousands):
 December 31, 2019 December 31, 2018
Energy Chemistry Technologies$117,357
 $139,205
Corporate and Other114,490
 28,208
Total segments231,847
 167,413
Held for sale—
 118,470
Total assets$231,847
 $285,883

Geographic
Note 20 — Supplemental Cash Flow Information
Revenue by country is based on the location where services are provided and products are used. No individual country other than the United States (“U.S.”) accounted for more than 10% of revenue. Revenue by geographic locationSupplemental cash flow information is as follows (in thousands):
 Years ended December 31,
 20202019
Supplemental non-cash investing and financing activities:
Equity issued — acquisition of JP3$8,538 $0 
Supplemental cash payment information:
Interest paid$25 $599 
Income taxes (received, net of payments) paid(6,246)(699)
 Years ended December 31,
 2019 2018 2017
U.S.$104,786
 $146,421
 $219,517
Other countries14,567
 31,352
 23,589
Total$119,353
 $177,773
 $243,106

Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:
 Years ended December 31,
 2019 2018 2017
Customer A20.4% * *
Customer B10.3% 12.23% *
Customer C* 10.1% *
Customer D* * 16.7%


FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 — Quarterly Financial Data (Unaudited)
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 Total
 (in thousands, except per share data)
2019         
Revenue (1)
$43,256
 $34,692
 $21,879
 $19,526
 $119,353
Loss from operations (1)
(14,266) (13,859) (11,853) (36,647) (76,625)
          
(Loss) income from continuing operations (1)
$(15,380) $(12,990) $(11,227) $(37,138) $(76,735)
Income (loss) from discontinued operations, net of tax48,372
 (1,608) 117
 (2,425) 44,456
Net (loss) income32,992
 (14,598) (11,110) (39,563) (32,279)
Net loss attributable to noncontrolling interests—
 —
 —
 —
 —
Net loss attributable to Flotek Industries, Inc. (Flotek)$32,992
 $(14,598) $(11,110) $(39,563) $(32,279)
          
Amounts attributable to Flotek shareholders:         
Loss from continuing operations (1)
$(15,380) $(12,990) $(11,227) $(37,138) $(76,735)
Income (loss) from discontinued operations, net of tax48,372
 (1,608) 117
 (2,425) 44,456
Net income (loss) attributable to Flotek$32,992
 $(14,598) $(11,110) $(39,563) $(32,279)
          
Basic earnings (loss) per common share (2):
         
Continuing operations$(0.26) $(0.22) $(0.19) $(0.64) $(1.31)
Discontinued operations0.83
 (0.03) —
 (0.04) 0.76
Basic earnings (loss) per common share$0.57
 $(0.25) $(0.19) $(0.68) $(0.55)
Diluted earnings (loss) per common share (2):
         
Continuing operations$(0.26) $(0.22) $(0.19) $(0.64) $(1.31)
Discontinued operations0.83
 (0.03) —
 (0.04) 0.76
Diluted earnings (loss) per common share$0.57
 $(0.25) $(0.19) $(0.68) $(0.55)
          
2018         
Revenue (1)
$41,069
 $39,546
 $53,709
 $43,449
 $177,773
(Loss) income from operations (1)
(9,223) (47,140) (4,080) (9,368) (69,811)
          
Loss from continuing operations (1)
$(9,528) $(68,987) $(4,869) $9,943
 $(73,441)
(Loss) income from discontinued operations, net of tax9,595
 (6,404) 937
 (1,385) 2,743
Net loss (income)$67
 $(75,391) $(3,932) $8,558
 $(70,698)
          
Basic earnings (loss) per common share (2):
         
Continuing operations$(0.17) $(1.19) $(0.08) $0.18
 $(1.26)
Discontinued operations0.17
 (0.11) 0.02
 (0.02) 0.05
Basic earnings (loss) per common share$—
 $(1.30) $(0.06) $0.16
 $(1.21)
Diluted earnings (loss) per common share (2):
         
Continuing operations$(0.17) $(1.19) $(0.08) $0.18
 $(1.26)
Discontinued operations0.17
 (0.11) 0.02
 (0.02) 0.05
Diluted earnings (loss) per common share$—
 $(1.30) $(0.06) $0.16
 $(1.21)
          
(1) Amounts exclude impact of discontinued operations.
(2) The sum of the quarterly earnings (loss) per share (basic and diluted) may not agree to the earnings (loss) per share for the year due to the timing of common stock issuances.


FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1921 — Related Party Transaction
In January 2017, the 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 has executed a personal guaranty in favor of the Company, supporting this indemnification.
At June 30, 2019, the Company recorded a liability of $2.4 million related to the estimated employment tax under-withholding for the years 2014 through 2018. By September 30, 2019, the liability totaled $1.8 million, after the Company paid $0.6 million to the IRS for these taxes and made an additional accrual covering the estimated under-withholding
tax liability through 2019. In addition, at June 30, 2019, the Company recorded a receivable from the affiliated companies of Mr. Chisholm totaling $2.4 million. In October 2019, an amendment to the employment agreement was executed, giving the Company the contractual right of offset for any amounts owed to the Company, against, 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. The Company netted the related party receivable against the severance payable as of December 31, 2019. At December 31, 2019, the Company recorded $1.8 million for potential liability to the IRS.



Note 20 — Subsequent Events

On February 26,January 5, 2020, Flotek Chemistry, LLC, a wholly-owned subsidiaryMr. Chisholm ceased to be an employee of the Company. During 2020, the Company entered intodid not make any payments to Mr. Chisholm.
During the first quarter of 2020, an amendmentadditional accrual was recorded for $0.2 million related to potential penalties and interest on the terpene supply agreement between Flotek Chemistry and Florida Chemical Company, LLC. Pursuant to the terms and conditions of the amendment, the terpene supply agreement is amended to, among other things, (a) reduce the minimum quantity of terpene that Flotek Chemistry is required to purchase by approximately 3/4ths in 2020 and by approximately half in each of 2021, 2022 and 2023, (b) provide a fixed per pound price for terpene in 2020, (c) reduce the maximum amount of terpene subject to the terpene supply Agreement by approximately 1/3rd, and (d) change the payment terms to net 45 days. In order to make the terms and conditions of the Amendment effective, Flotek Chemistry made a one-time payment of $15.8 million to Florida Chemical Company, LLC, which is included in accrued liabilities at December 31, 2019.

IRS obligation. As of December 31, 2019,2020, the Company concluded that the amended long-term supply agreement met the definition of a
loss contract. As such, the Company recognized a loss as of December 31, 2019receivable from Mr. Chisholm was $1.4 million, which is equal to the price paid for terpene supply agreement amendment which aligns purchase commitments to expected usage for blended products.
Pursuantpayable to the post-closing working capital dispute resolution procedures set forthIRS and was netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet. In September 2020, the Company stopped all payments to Mr. Chisholm pending the completion and results of ongoing IRS audits.


79
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22 — 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 specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies in the Share Purchase Agreement,drilling and completion of their wells.The Company designs, develops, manufactures, packages, distributes, delivers and markets reservoir-centric 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. Customers of the CT business 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 ADM engagedresident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce Food and Drug Administration and Environmental Protection Agency compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a neutral third party auditorportfolio of specialty chemical products to help reach agreementaddress the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks.
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 about the composition of energy customers’ hydrocarbon fluids. The customers of the DA segment span across the entire market, from production upstream to midstream facilities to refineries and distribution networks. To date, the DA segment has focused solely on North American markets. The DA segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, optimizing transmix, increasing efficiencies of towers, enabling automation of fluid handling, and reducing losses due to give-away (i.e., that portion of a product of higher value than what is specified) using real-time process information.

The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.
Summarized financial information of the reportable segments is as follows (in thousands):
As of and for the years ended December 31,Chemistry Technologies
Data Analytics(1)
Corporate and
Other		Total
2020
Net revenue from external customers$50,310 $2,831 $0 $53,141 
Loss from operations, including impairment(88,486)(36,407)(18,755)(143,648)
Depreciation and amortization2,519 422 471 3,412 
Additions to long-lived assets1,425 0 0 1,425 
2019
Net revenue from external customers$119,353 $0 $0 $119,353 
Loss from operations, including impairment(45,682)0 (29,818)(75,500)
Depreciation and amortization7,439 0 1,026 8,465 
Additions to long-lived assets2,411 0 0 2,411 
(1) The financial information disclosed for the DA segment is for the period May 18, 2020 to December 31, 2020.
80
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the Company by reportable segment are as follows (in thousands):
December 31,
20202019
Chemistry Technologies$43,346 $116,110 
Data Analytics13,201 0 
Corporate and Other29,663 114,490 
Total assets$86,210 $230,600 
Geographic Information
Revenue by country is based on the final post-closing working capital adjustment. In February 2020,location where services are provided and products are used. No individual countries other than the third party auditor ruledU.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
 Years ended December 31,
 20202019
U.S.$40,632 $104,786 
UAE6,763 3,897 
Other countries5,746 10,670 
Total revenue$53,141 $119,353 
Long-lived assets held in favor of awarding ADM forcountries other than the entire $4.1 million disputed amount resulting in a reductionU.S. are not considered material to the gain on the saleconsolidated financial statements.
Major Customers
Revenue from major customers and as a percentage of the businessconsolidated revenue, is as follows:
Year ended December 31, 2020Chemistry Technologies% of Total RevenueData Analytics% of Total Revenue
Customer A$12,891 24.26 %**
Customer B****
Customer C$9,394 17.68 %**
Year ended December 31, 2019   
Customer A$24,386 20.43 %**
Customer B$12,322 10.32 %**
Customer C****
*This customer did not account for more than 10% of December 31, 2019.revenue during this period.





81

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.


Item 9A. 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’s

Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are designed to provide such reasonable assurance.
The Company’s management, with the participationprocesses were not effective because of the principal executive and principalmaterial weaknesses in our internal control over financial officers, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2019, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and principal financial officers have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019.reporting described below.

Management’s Annual Report on Internal Control over Financial Reporting

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act.
The As of December 31, 2020, Company’s management including the principal executive and principal financial officers, assessedhas evaluated the effectiveness of its internal control over financial reporting as of December 31, 2019, based on criteriaunder the Exchange Act. The Company’s management used the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“COSO”)(COSO) to perform this evaluation. Management excluded JP3, which was acquired by the Company in Internal Control – Integrated Framework. UponMay 2020, from its assessment of the effectiveness of internal control over financial reporting, as the Company may omit an assessment of an acquired business’s internal control over financial reporting from its assessment of the registrant’s internal control for up to one year from the acquisition date. As of and for the year ended December 31, 2020, JP3 represented 5% of total revenue and 15% of total assets of the consolidated financial statement amounts. Based upon this evaluation, the Company’sour management has concluded as of December 31, 2020, that the Company’sour internal control over financial reporting was not effective because of the material weaknesses described below.
A material weakness is a deficiency, or a combination of deficiencies, in connection withinternal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the preparationCompany’s annual or interim financial statements will not be prevented or detected on a timely basis.

The Company identified deficiencies in its internal control over financial reporting that represented material weaknesses. 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 derecognition of items and cash flow presentation relating to disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations; (2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations; and (3) the ineffective design and operating effectiveness of the assessment of going concern.

The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in this Form 10-K present fairly, in all material respects, the consolidated financial positions, results of operations
82

and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of December 31, 2019.the dates and for the periods stated therein.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 20192020, has been audited by Moss AdamsBDO USA, LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Remediation Plan and Status

The Company has implemented and continues to implement certain remediation actions and continues to test and evaluate the elements of the remediation plan. These elements 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.

The Company believes that the actions listed above will provide appropriate remediation of the material weaknesses; however, the testing of the effectiveness of the controls has not been completed by the Company. Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate and test the effectiveness of the controls, no assurance can be given as to the timing for completion of remediation. The material weaknesses will be fully remediated when the Company concludes that the controls have been operating for sufficient time and independently validated by management.

Changes in Internal Control over Financial Reporting
There
During the second quarter of 2020, the Company acquired JP3, a privately-held data and analytics technology company. Due to the timing of the acquisition, management did not include the internal control processes for JP3 in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2020. The acquisition is excluded from the certifications required under the Sarbanes-Oxley Act. We will include all aspects of internal control over financial reporting for this acquisition in our 2021 assessment. Upon acquisition and at December 31, 2020, management has concluded that there have been no changes to JP3’s previous structure around internal controls over financial reporting.

Additionally, the Company remediated a previously reported material weakness related to the elimination of intercompany
profits in inventory during Q4 2020.

Except for the items described above, there have been no changes in the Company’s system of internal control over financial reporting during the three monthsfiscal quarter ended December 31, 20192020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.


83

PART III

Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.

Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.


Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.

Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
84

PART IV

Item 15. Exhibits and Financial Statement Schedules.

EXHIBIT INDEX
Exhibit

Number
Exhibit Title
2.1††
ShareMembership Interest Purchase Agreement, dated as of January 10, 2019,May 18, 2020, by and between Flotek Industries, Inc., JP3 Measurement, LLC, the CompanySellers party thereto, and Archer-Daniels-Midland Company (portions of this exhibit have been omitted pursuant to a confidential treatment request, which has been granted)John A. Cardwell, as Seller Representative (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on March 4, 2019).May 19, 2020)

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 Amendmentof Amendment to the AmendedAmended and RestatedRestated 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
SecondCertificate of Amendment to the Amended and Restated Bylaws, dated October 11, 2017 (incorporatedCertificate of Incorporation (incorporation by reference to Exhibit 3.1 to the Company’s Form 8-K filed on October 17, 2017).May 7, 2020)

4.13.4*
Second Amended and Restated Bylaws of Flotek Industries, Inc. approved on October 11, 2017 and amended on March 11, 2021.
4.1
Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s Definitive Proxy Statement filed on September 27, 2001).

4.2*
Description of Capital Stock of the Company.Company
10.1†
2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-K for the year ended December 31, 2007)
Fifth Amended and Restated Service10.1†
Employment Agreement, dated as of April 15, 2014,May 18, 2020, between Flotek Industries, Inc. and Matthew R. Thomas (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 19, 2020)
10.2†
Employment Agreement, dated July 29, 2020, between the Company Protechnics II, Inc. and Chisholm Management, Inc.Michael E. Borton (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 21, 2014).July 31, 2020)
10.210.3†
LetterPurchase Agreement, dated February 13, 2017, among the Company, Protechnics II, Inc. and Chisholm Management, Inc. amending the Fifth Amended and Restated Service Agreement among such parties (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on February 17, 2017).
10.3†
Employment Agreement, dated effective March 16, 2018,January 10, 2020, between the Company and Joshua A. Snively, Sr.John W. Gibson, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 22, 2018)January 13, 2020).
10.4†
Employment Agreement dated June 4, 2020 between Flotek Industries, Inc. and TengBeng Koid (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 22, 2020).
10.5†
Employment Agreement between Flotek Industries, Inc. and Ryan Ezell effective as of January 1, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 6, 2021)
10.6†
Flotek Industries, Inc. Employment Inducement Plan (incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 filed on June 17, 2020)
10.7†
Form of Restricted Stock Option Grant Notice and Stock Option Agreement under Flotek Industries, Inc. Employment Inducement Plan (incorporated by reference to Exhibit 99.3 to the Company’s Form S-8 filed on June 17, 2020)
10.8†
Separation and Release Agreement, dated March 16, 2018,July 28, 2020, between the Company and Joshua A. Snively, Sr. and Matthew B. MariettaElizabeth Wilkinson (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K10-Q filed on March 22, 2018).August 17, 2020)
10.510.9†
2018 Long-Term Incentive PlanPromissory Note dated April 16, 2020 in favor of PNC Bank, National Association (incorporated by reference to Exhibit A10.1 to the Company’s definitive proxy statementCurrent Report on Schedule 14AForm 8-K filed on April 17, 2020)
10.10***
Amendment to Supply Agreement between Flotek Chemistry, LLC and Florida Chemical Company, LLC dated February 26, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 30, 2018).3, 2020)
10.610.11†
EmploymentLetter Agreement between Flotek Industries, Inc. and North Sound Management, Inc. dated effective December 20, 2018, between the Company and Elizabeth T. Wilkinson2, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 27, 2018)2, 2020).
10.710.12†***
Form of Restricted Stock Agreement, dated December 27, 2018, between the Company and Elizabeth T. Wilkinson (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on December 27, 2018).
10.8†
2019 Non-Employee Director Incentive Plan (incorporated by reference to Exhibit A to the Company’s definitive proxy statement on Schedule 14A filed on April 24, 2019).
10.9†
Amendment to 2012 Employee Stock Purchase Plan (incorporated by reference to Exhibit B to the Company’s definitive proxy statement on Schedule 14A filed on April 24, 2019).
10.10†
Amendment to 2018 Long-Term Incentive Plan (incorporated by reference to Exhibit C to the Company’s definitive proxy statement on Schedule 14A filed on April 24, 2019).
10.11***
Supply Agreement (Terpene), dated as of February 28, 2019, by and among the Company, Florida Chemical Company, LLC and Archer-Daniels-Midland Company (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2019).
10.12***
Supply Agreement (Citrus Burst), dated as of February 28, 2019, by and between Florida Chemical Company, LLC and Flotek Chemistry, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended March 31, 2019).
10.13
Cooperation Agreement, dated as of March 19, 2019, by and among the Company and BLR Partners LP and its affiliates (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 20, 2019).
10.14†
Employment Agreement, dated effective as of April 1, 2019, by and between the Company and John W. Chisholm (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 24, 2019).
10.15†
First Amended and Restated Employment Agreement, dated effective as of April 1, 2019, by and between the Company and Elizabeth T. Wilkinson (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on May 24, 2019).
85

10.16Exhibit
Number		Exhibit Title
10.16†
Termination and Release Agreement, dated as of May 20, 2019, by and among the Company, John W. Chisholm, Protechnics II, Inc. and Chisholm Management, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended June 30, 2019).

10.17
Exhibit
Number
Exhibit Title
10.17†
Stand-Alone Cash-Settled Restricted Stock Unit Agreement, dated as of May 20, 2019, by and between the Company and John W. Chisholm (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended June 30, 2019).
10.18†
Restricted Stock Agreement, dated as of May 24, 2019, by and between the Company and John W. Chisholm (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended June 30, 2019).
10.19†
Form of Restricted Stock Agreement pursuant to the Company’s 2018 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-Q for the quarter ended June 30, 2019).
10.20†
Form of Restricted Stock Agreement pursuant to the Company’s 2019 Non-Employee Director Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company’s Form 10-Q for the quarter ended June 30, 2019).
10.21†
Amendment No. 1 to Employment Agreement, dated October 18, 2019, by and between the Company and John W. Chisholm (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 24, 2019).
10.22†
Guaranty, dated May 8, 2019, by John W. Chisholm in favor of the Company (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on October 24, 2019).
10.23†
Employment Agreement, dated effective as of December 22, 2019, by and between the Company and John W. Gibson, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 27, 2019).
10.24†
Stand-Alone Restricted Stock Unit Award Agreement, dated as of December 22, 2019, by and between the Company and John W. Gibson, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on December 27, 2019).
10.25†
Stand-Alone Time-Based Stock Option Award Agreement, dated as of December 22, 2019, by and between the Company and John W. Gibson, Jr. (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on December 27, 2019).
10.26†
Stand-Alone Performance-Based Stock Option Award Agreement, dated as of December 22, 2019, by and between the Company and John W. Gibson, Jr. (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on December 27, 2019).
21.1*
List of Subsidiaries.Subsidiaries
23.1*
Consent of Moss Adams, LLP.LLP
31.123.2*
Consent of BDO USA, LLP
31.1*
Rule 13a-14(a) Certification of Principal Executive Officer.Officer
31.2*
Rule 13a-14(a) Certification of Principal Financial Officer.Officer
32.1**
Section 1350 Certification of Principal Executive Officer.Officer
32.2**
Section 1350 Certification of Principal Financial Officer.Officer
101.INS*Inline XBRL Instance Document.
101.SCH*Inline XBRL Schema Document.
101.CAL*Inline XBRL Calculation Linkbase Document.
101.LAB*Inline XBRL Label Linkbase Document.
101.PRE*Inline XBRL Presentation Linkbase Document.
101.DEF*Inline XBRL Definition Linkbase Document.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*Filed with this Form 10-K/A.10-K.
**Furnished with this Form 10-K/A,10-K, not filed.
***Portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K in order for them to remain confidential.
†Management contracts or compensatory plans or agreements.
††Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments have been omitted. The Company hereby agrees to furnish a copy of any omitted schedule or attachment to the Securities and Exchange Commission upon request.

Item 16. Form 10-K Summary.
86

None.
87

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 13, 202016, 2021


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURESTITLEDATE
SignatureTitleDate
/s/ JOHNJohn W. GIBSON JR.Gibson Jr.    
John W. Gibson, Jr.
President, Chief Executive Officer, and Chairman of the Board (Principal Executive Officer)March 13, 202016, 2021
John W. Gibson Jr.(Principal Executive Officer)
/s/ ELIZABETH T. WILKINSONMichael E. Borton    
Michael E. Borton
Chief Financial Officer (Principal Financial and Accounting Officer)March 13, 202016, 2021
Elizabeth T. Wilkinson  (Principal Financial Officer and Principal Accounting Officer)
/s/ MICHELLE M. ADAMS
DirectorMarch 13, 2020
Michelle M. Adams
Michelle M. Adams
DirectorMarch 16, 2021
/s/ TED D. BROWNHarsha V. Agadi    
Harsha V. Agadi
DirectorDirectorMarch 13, 202016, 2021
/s/ Ted D. Brown
Ted D. Brown
DirectorMarch 16, 2021
/s/ L. MELVIN COOPERMichael Fucci    
Michael Fucci
DirectorDirectorMarch 13, 202016, 2021
L. Melvin Cooper
/s/ PAUL W. HOBBY
DirectorMarch 13, 2020
Paul W. Hobby
Paul W. Hobby
DirectorMarch 16, 2021
/s/ L.V. “BUD” MCGUIRE
DirectorMarch 13, 2020
L.V. “Bud” McGuire
/s/ DAVID NIERENBERGDirectorMarch 13, 2020
David Nierenberg
David Nierenberg
DirectorMarch 16, 2021



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