UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM	10-Q



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

For the quarterly period ended ~~September~~June 30, ~~2019~~2020



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

For the transition period from to

Commission File Number 1-13270

FLOTEK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



Delaware				90-0023731
(State of other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

~~10603 W.~~8846 N. Sam Houston Parkway N.	~~Suite 300~~W.	Houston,	TX		77064

(Address of principal executive offices)				(Zip Code)

(713) 849-9911

(Registrant’s telephone number, including area code)



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

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

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

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



Large accelerated filer	☐	Accelerated Filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒

		Emerging growth company	☐

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

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

As of ~~October 31, 2019,~~August 4, 2020, there were ~~57,794,676~~71,306,770 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.

TABLE OF CONTENTS




PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019	3
	Unaudited Condensed Consolidated Statements of Operations for the three ~~and~~ ~~nine~~and six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the~~nine~~ six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	6
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	78
	Notes to Unaudited Condensed Consolidated Financial Statements	910

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2231

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3039

Item 4.	Controls and Procedures	3039

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	3241

Item 1A.	Risk Factors	3241

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3342

Item 3.	Defaults Upon Senior Securities	3342

Item 4.	Mine Safety Disclosures	3342

Item 5.	Other Information	3342

Item 6.	Exhibits	3443

SIGNATURES		3544

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	106,994		$	3,044		$	59,926		$	100,575
Restricted cash	663			—			664			663
Accounts receivable, net of allowance for doubtful accounts of $1,520 and $1,190 at September 30, 2019 and December 31, 2018, respectively	15,014			37,047
Accounts receivable, net of allowance for doubtful accounts of $1,383 and $1,527 at June 30, 2020 and December 31, 2019, respectively							8,108			15,638
Inventories, net	24,333			27,289			23,338			23,210
Income taxes receivable	313			3,161			6,846			631
Assets held for sale	—			118,470
Other current assets	19,181			5,771			2,407			13,191
Total current assets	166,498			194,782			101,289			153,908
Property and equipment, net	41,180			45,485			8,017			39,829
Operating lease right-of-use assets	17,625			—			2,422			16,388
Goodwill							17,522			—
Deferred tax assets, net	476			18,663			152			152
Other intangible assets, net	23,578			26,827			12,777			20,323
Other long-term assets	—			126			17			—
TOTAL ASSETS	$	249,357		$	285,883		$	142,196		$	230,600
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,578		$	15,011		$	7,876		$	16,231
Accrued liabilities	7,797			10,335			10,474			24,552
Income taxes payable	276			—			12			—
Interest payable	—			8
Liabilities held for sale	—			9,174
Current portion of lease liabilities	762			—
Long-term debt, classified as current	—			49,731
Current portion of long-term debt							2,527			—
Current portion of operating lease liabilities							654			486
Current portion of finance lease liabilities							57			55
Total current liabilities	19,413			84,259			21,600			41,324
Long-term debt, less current portion							3,144			—
Deferred revenue, long-term							111			—
Long-term operating lease liabilities	17,945			—			8,497			16,973
Long-term finance lease liabilities	172			—			127			158
Deferred tax liabilities, net	116			—			11			116
Total liabilities	37,646			84,259			33,490			58,571
Commitments and contingencies
Commitments and contingencies (See Note 19)
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; 63,038,397 shares issued and 58,909,280 shares outstanding at September 30, 2019; 62,162,875 shares issued and 57,342,279 shares outstanding at December 31, 2018	6			6
Common stock, $0.0001 par value, 140,000,000 shares authorized; 77,626,135 shares issued and 73,166,719 shares outstanding at June 30, 2020; 63,656,897 shares issued and 59,511,416 shares outstanding at December 31, 2019							7			6
Additional paid-in capital	346,392			343,536			357,980			347,564
Accumulated other comprehensive loss	(962		)	(1,116		)
Accumulated other comprehensive income							51			181
Retained earnings (accumulated deficit)	(100,281		)	(107,565		)	(215,766		)	(142,238		)
Treasury stock, at cost; 4,129,117 and 3,770,224 shares at September 30, 2019 and December 31, 2018, respectively	(33,444		)	(33,237		)
Treasury stock, at cost; 4,459,416 and 4,145,481 shares at June 30, 2020 and December 31, 2019, respectively							(33,566		)	(33,484		)
Total stockholders’ equity	211,711			201,624			108,706			172,029
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	249,357		$	285,883		$	142,196		$	230,600

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Revenue	$	21,879		$	53,709		$	99,827		$	134,324		$	8,880		$	34,692		$	28,296		$	77,949
Costs and expenses:
Operating expenses (excluding depreciation and amortization)	23,689			45,647			106,593			117,848			11,632			38,121			34,473			82,089
Corporate general and administrative	5,685			7,476			19,020			24,634			5,395			6,054			9,888			13,335
Depreciation and amortization	2,058			2,259			6,437			6,935			468			2,119			2,659			4,379
Research and development	2,297			2,350			6,657			8,054			1,638			2,076			4,193			4,360
Loss on disposal of long-lived assets	3			57			1,096			119
Impairment of goodwill	—			—			—			37,180
(Gain) loss on disposal of long-lived assets													(22		)	(4		)	(55		)	1,093
Impairment of fixed and long-lived assets													—			—			57,454			—
Total costs and expenses	33,732			57,789			139,803			194,770			19,111			48,366			108,612			105,256
Loss from operations	(11,853		)	(4,080		)	(39,976		)	(60,446		)	(10,231		)	(13,674		)	(80,316		)	(27,307		)
Other (expense) income:
Gain on lease termination													576			—			576			—
Interest expense	(1		)	(746		)	(2,014		)	(1,902		)	(16		)	(16		)	(20		)	(2,013		)
Loss on sale of business	—			(360		)	—			(360		)
Loss on write-down of assets held for sale	—			—			—			(2,580		)
Other income (expense), net	436			10			1,236			(2,599		)
Total other income (expense)	435			(1,096		)	(778		)	(7,441		)
Other income, net													78			693			31			800
Total other expense, net													638			677			587			(1,213		)
Loss before income taxes	(11,418		)	(5,176		)	(40,754		)	(67,887		)	(9,593		)	(12,997		)	(79,729		)	(28,520		)
Income tax benefit (expense)	191			333			1,157			(15,545		)
Income tax benefit													32			192			6,201			503
Loss from continuing operations	(11,227		)	(4,843		)	(39,597		)	(83,432		)	(9,561		)	(12,805		)	(73,528		)	(28,017		)
Income from discontinued operations, net of tax	117			911			46,881			4,176
Net income (loss)	$	(11,110	)	$	(3,932	)	$	7,284		$	(79,256	)
Net loss attributable to noncontrolling interests	—			—			—			357
Net income (loss) attributable to Flotek Industries, Inc. (Flotek)	$	(11,110	)	$	(3,932	)	$	7,284		$	(78,899	)

Amounts attributable to Flotek shareholders:
Loss from continuing operations	$	(11,227	)	$	(4,843	)	$	(39,597	)	$	(83,075	)
Income from discontinued operations, net of tax	117			911			46,881			4,176
Net income (loss) attributable to Flotek	$	(11,110	)	$	(3,932	)	$	7,284		$	(78,899	)
(Loss) income from discontinued operations, net of tax													—			(1,608		)	—			44,466
Net (loss) income													$	(9,561	)	$	(14,413	)	$	(73,528	)	$	16,449

Basic earnings (loss) per common share:	Basic earnings (loss) per common share:												Basic earnings (loss) per common share:
Continuing operations	$	(0.19	)	$	(0.08	)	$	(0.67	)	$	(1.44	)	$	(0.14	)	$	(0.22	)	$	(1.17	)	$	(0.48	)
Discontinued operations, net of tax	—			0.02			0.80			0.07			—			(0.03		)	—			0.76
Basic earnings (loss) per common share	$	(0.19	)	$	(0.06	)	$	0.13		$	(1.37	)	$	(0.14	)	$	(0.25	)	$	(1.17	)	$	0.28

Diluted earnings (loss) per common share:	Diluted earnings (loss) per common share:												Diluted earnings (loss) per common share:
Continuing operations	$	(0.19	)	$	(0.08	)	$	(0.67	)	$	(1.44	)	$	(0.14	)	$	(0.22	)	$	(1.17	)	$	(0.48	)
Discontinued operations, net of tax	—			0.02			0.80			0.07			—			(0.03		)	—			0.76
Diluted earnings (loss) per common share	$	(0.19	)	$	(0.06	)	$	0.13		$	(1.37	)	$	(0.14	)	$	(0.25	)	$	(1.17	)	$	0.28

Weighted average common shares:
Weighted average common shares used in computing basic earnings (loss) per common share	59,004			58,319			58,725			57,820			66,035			58,608			62,828			58,491
Weighted average common shares used in computing diluted earnings (loss) per common share	59,004			58,319			58,725			57,820			66,035			58,608			62,828			58,491

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
Loss from continuing operations $ (11,227 ) $ (4,843 ) $ (39,597 ) $ (83,432 )
Income from discontinued operations, net of tax 117
911
46,881
4,176
Net income (loss) (11,110 ) (3,932 ) 7,284
(79,256 )
Other comprehensive income (loss):
Foreign currency translation adjustment 36
85
154
(76 )
Comprehensive income (loss) $ (11,074 ) $ (3,847 ) $ 7,438
$ (79,332 )
Net loss attributable to noncontrolling interests —
—
—
357
Comprehensive income (loss) attributable to Flotek $ (11,074 ) $ (3,847 ) $ 7,438
$ (78,975 )



	Three months ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
Loss from continuing operations	$	(9,561	)	$	(12,805	)	$	(73,528	)	$	(28,017	)
(Loss) income from discontinued operations, net of tax	—			(1,608		)	—			44,466
Net (loss) income	(9,561		)	(14,413		)	(73,528		)	16,449
Other comprehensive (loss) income:
Foreign currency translation adjustment	(7		)	24			(130		)	118
Comprehensive (loss) income	$	(9,568	)	$	(14,389	)	$	(73,658	)	$	16,567

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine months ended September 30,						Six months ended June 30,
	2019			2018			2020			2019
Cash flows from operating activities:
Net income (loss) attributable to Flotek Industries, Inc. (Flotek)	$	7,284		$	(78,899	)
Net (loss) income attributable to Flotek Industries, Inc.							$	(73,528	)	$	16,449
Less: Income from discontinued operations, net of tax	46,881			4,176			—			44,466
Loss from continuing operations	(39,597		)	(83,075		)	(73,528		)	(28,017		)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
Depreciation and amortization	6,437			6,935			2,659			4,379
Amortization of deferred financing costs	1,428			294			—			1,428
Provision for doubtful accounts	426			176			474			102
Provision for excess and obsolete inventory	—			1,817			529			—
Impairment of goodwill	—			37,180
Loss on sale of business	—			360
Loss on write-down of assets held for sale	—			2,580
Loss on disposal of long-lived assets	1,096			119
Impairment of right-of-use assets							7,434			—
Impairment of fixed assets							30,178			—
Impairment of intangible assets							19,842			—
(Gain)/loss on disposal of long-lived assets							(631		)	1,093
Non-cash lease expense	813			—			242			464
Stock compensation expense	2,829			6,594			1,521			1,669
Deferred income tax provision	17,983			15,358			(105		)	17,855
Reduction in tax benefit related to share-based awards	24			312			—			24
Changes in current assets and liabilities:
Restricted cash	(663		)	—
Accounts receivable, net	21,629			(10,392		)	7,252			6,289
Inventories, net	3,000			(1,490		)	6,418			554
Income taxes receivable	2,853			58			(6,351		)	(281		)
Other current assets	(14,974		)	1,759			1,715			(1,990		)
Other long-term assets							—			3,286
Accounts payable	(4,434		)	5,672			(10,229		)	(4,157		)
Accrued liabilities	(13,122		)	(9,001		)	(16,755		)	(10,216		)
Income taxes payable	595			—			119			1,182
Interest payable	(8		)	(37		)	—			(8		)
Net cash used in operating activities	(13,685		)	(24,781		)	(29,216		)	(6,344		)
Cash flows from investing activities:
Capital expenditures	(1,869		)	(3,965		)	(42		)	(767		)
Proceeds from sale of business	169,722			1,665			9,844			152,217
Proceeds from sale of assets	234			361			66			140
Purchase of JP3, net of cash acquired							(26,284		)	—
Purchase of patents and other intangible assets	(590		)	(1,466		)	(8		)	(227		)
Net cash (used in) provided by investing activities	167,497			(3,405		)	(16,424		)	151,363
Cash flows from financing activities:
Borrowings on revolving credit facility	42,984			213,612			—			42,984
Repayments on revolving credit facility	(92,715		)	(188,160		)	—			(92,715		)
Debt issuance costs	—			(98		)
Proceeds from Paycheck Protection Program loan							4,798			—
Purchase of treasury stock related to share-based awards	(207		)	(91		)	(82		)	(142		)
Proceeds from sale of common stock	7			341			358			—
Payments for finance leases	51			—			(51		)	(38		)
Loss from noncontrolling interest	—			(357		)
Net cash (used in) provided by financing activities	(49,880		)	25,247
Net cash provided by (used in) financing activities							5,023			(49,911		)
Discontinued operations:
Net cash (used in) provided by operating activities	(321		)	880
Net cash (used in) provided by investing activities	337			(630		)
Net cash used in operating activities							—			(321		)
Net cash provided by investing activities							—			337
Net cash flows provided by discontinued operations	16			250			—			16
Effect of changes in exchange rates on cash and cash equivalents	2			(66		)	(31		)	2
Net increase (decrease) in cash and cash equivalents	103,950			(2,755		)
Cash and cash equivalents at the beginning of period	3,044			4,584
Cash and cash equivalents at the end of period	$	106,994		$	1,829



Net (decrease) increase in cash and cash equivalents and restricted cash	(40,648		)	95,126
Cash and cash equivalents at the beginning of period	100,575			3,044
Restricted cash at the beginning of period	663			—
Cash and cash equivalents and restricted cash at beginning of period	101,238			3,044
Cash and cash equivalents at end of period	59,926			97,509
Restricted cash at the end of period	664			661
Cash and cash equivalents and restricted cash at the end of period	$	60,590		$	98,170

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)


	Three months ended September 30, 2019																					Three months ended June 30, 2020
	Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests		Total Stockholders’ Equity			Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
	Shares Issued	Par Value		Shares		Cost			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			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance, June 30, 2019	62,956	$	6	3,948		$	(33,378	)	$	345,217	$	(998	)	$	(89,171	)	$	—	$	221,676
Net income	—	—		—		—			—		—			(11,110		)	—		(11,110		)
Balance, March 31, 2020																						64,338	$	6	4,395		$	(33,529	)	$	348,375	$	58		$	(206,205	)	$	108,705
Net loss																						—	—		—		—			—		—			(9,561		)	(9,561		)
Foreign currency translation adjustment	—	—		—		—			—		36			—			—		36			—	—		—		—			—		(7		)	—			(7		)
Stock issued under employee stock purchase plan	—	—		(8	)	—			15		—			—			—		15			—	—		(12	)	—			9		—			—			9
Restricted stock granted	82	—		—		—			—		—			—			—		—			1,788	—		—		—			—		—			—			—
Restricted stock forfeited	—	—		159		—			—		—			—			—		—			—	—		37		—			—		—			—			—
Treasury stock purchased	—	—		30		(66		)	—		—			—			—		(66		)	—	—		39		(37		)	—		—			—			(37		)
Stock compensation expense	—	—		—		—			1,160		—			—			—		1,160			—	—		—		—			1,059		—			—			1,059
Balance, September 30, 2019	63,038	$	6	4,129		$	(33,444	)	$	346,392	$	(962	)	$	(100,281	)	$	—	$	211,711

Stock issued in JP3 acquisition																						11,500	1		—		—			8,537		—			—			8,538
Balance, June 30, 2020																						77,626	$	7	4,459		$	(33,566	)	$	357,980	$	51		$	(215,766	)	$	108,706


	Three months ended September 30, 2018																					Three months ended June 30, 2019
	Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests		Total Stockholders’ Equity			Common Stock			Treasury Stock				Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
	Shares Issued	Par Value		Shares		Cost			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			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance, June 30, 2018	61,642	$	6	3,607		$	(33,088	)	$	340,618	$	(1,045	)	$	(112,192	)	$	1	$	194,300
Net loss	—	—		—		—			—		—			(3,932		)	—		(3,932		)
Balance, March 31, 2019																						62,199	$	6	3,845	$	(33,368	)	$	344,004	$	125	$	(77,461	)	$	233,306
Net income																						—	—		—	—			—		—		(14,413		)	(14,413		)
Foreign currency translation adjustment	—	—		—		—			—		85			—			—		85			—	—		—	—			—		24		—			24
Stock issued under employee stock purchase plan	—	—		(46	)	—			94		—			—			—		94
Restricted stock granted	461	—		—		—			—		—			—			—		—			757	—		—	—			—		—		—			—
Restricted stock forfeited	—	—		—		—			—		—			—			—		—			—	—		99	—			—		—		—			—
Treasury stock purchased	—	—		23		(67		)	—		—			—			—		(67		)	—	—		4	(10		)	—		—		—			(10		)
Stock compensation expense	—	—		—		—			2,336		—			—			—		2,336			—	—		—	—			1,213		—		—			1,213
Balance, September 30, 2018	62,103	$	6	3,584		$	(33,155	)	$	343,048	$	(960	)	$	(116,124	)	$	1	$	192,816
Balance, June 30, 2019																						62,956	$	6	3,948	$	(33,378	)	$	345,217	$	149	$	(91,874	)	$	220,120

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ~~(continued)~~

(in thousands)


	Nine months ended September 30, 2019																					Six months ended June 30, 2020
	Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests		Total Stockholders’ Equity			Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
	Shares Issued	Par Value		Shares		Cost			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			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance, December 31, 2018	62,163	$	6	3,770		$	(33,237	)	$	343,536	$	(1,116	)	$	(107,565	)	$	—	$	201,624
Net income	—	—		—		—			—		—			7,284			—		7,284
Balance, December 31, 2019																						63,657	$	6	4,145		$	(33,484	)	$	347,564	$	181		$	(142,238	)	$	172,029
Net loss																						—	—		—		—			—		—			(73,528		)	(73,528		)
Foreign currency translation adjustment	—	—		—		—			—		154			—			—		154			—	—		—		—			—		(130		)	—			(130		)
Stock issued under employee stock purchase plan	—	—		(7	)	—			15		—			—			—		15			—	—		(25	)	—			20		—			—			20
Restricted stock granted	875			—		—					—			—			—		—			2,469	—		—		—			338		—			—			338
Restricted stock forfeited	—	—		292		—			—		—			—			—		—			—	—		278		—			—		—			—			—
Treasury stock purchased	—	—		74		(207		)	—		—			—			—		(207		)	—	—		61		(82		)	—		—			—			(82		)
Stock compensation expense	—	—		—		—			2,841		—			—			—		2,841			—	—		—		—			1,521		—			—			1,521
Balance, September 30, 2019	63,038	$	6	4,129		$	(33,444	)	$	346,392	$	(962	)	$	(100,281	)	$	—	$	211,711
Stock issued in JP3 acquisition																						11,500	1		—		—			8,537		—			—			8,538
Balance, June 30, 2020																						77,626	$	7	4,459		$	(33,566	)	$	357,980	$	51		$	(215,766	)	$	108,706


	Nine months ended September 30, 2018																						Six months ended June 30, 2019
	Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-controlling Interests			Total Stockholders’ Equity			Common Stock			Treasury Stock				Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
	Shares Issued	Par Value		Shares		Cost			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			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance, December 31, 2017	60,623	$	6	3,621		$	(33,064	)	$	336,067	$	(884	)	$	(37,225	)	$	358		$	265,258
Net loss	—	—		—		—			—		—			(78,899		)	(357		)	(79,256		)
Balance, December 31, 2018																							62,163	$	6	3,770	$	(33,237	)	$	343,536	$	31	$	(108,323	)	$	202,013
Net income																							—	—		—	—			—		—		16,449			16,449
Foreign currency translation adjustment	—	—		—		—			—		(76		)	—			—			(76		)	—	—		—	—			—		118		—			118
Stock issued under employee stock purchase plan	—	—		(111	)	—			341		—			—			—			341
Restricted stock granted	1,480	—		—		—			—		—			—			—			—			793	—		—	—			—		—		—			—
Restricted stock forfeited	—	—		45		—			—		—			—			—			—			—	—		133	—			—		—		—			—
Treasury stock purchased	—	—		29		(91		)	—		—			—			—			(91		)	—	—		45	(141		)	—		—		—			(141		)
Stock compensation expense	—	—		—		—			6,640		—			—			—			6,640			—	—		—	—			1,681		—		—			1,681
Balance, September 30, 2018	62,103	$	6	3,584		$	(33,155	)	$	343,048	$	(960	)	$	(116,124	)	$	1		$	192,816
Balance, June 30, 2019																							62,956	$	6	3,948	$	(33,378	)	$	345,217	$	149	$	(91,874	)	$	220,120

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and Significant Accounting Policies

Organization and Nature of Operations

Flotek Industries, Inc. (“Flotek” or the “Company”) is ana technology-driven international ~~energy~~ chemistry ~~technology-driven~~and data company that develops and supplies ~~chemistry~~chemistries, services, equipment and ~~services~~data analytics to industrial, commercial and consumer markets.

During the second quarter of 2020, the Company acquired 100% ownership of JP3 Measurement, LLC (“JP3”), a privately-held leading 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 ~~gas industry.~~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 and 11.5 million shares in Flotek ~~also supplied high~~common stock with an estimated fair value ~~compounds~~of $8.5 million, net of a discount for marketability due to ~~companies~~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 and contingent consideration of an estimated $1.2 million for two potential earn-out provisions totaling $5.0 million based on certain stock performance targets.

With the acquisition of JP3, the Company evaluated its segment information and determined that ~~make food~~there were two segments: Chemistry Technologies and ~~beverages, cleaning products, cosmetics, and other products that~~Data Analytics, which are ~~sold in consumer and industrial markets, which was classified as discontinued operations at December 31, 2018.~~both supported by its continuing Research & Innovation advanced laboratory capabilities.

The Company’s ~~oilfield business~~Chemistry Technologies segment includes 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 ~~(“O&G”)~~ well drilling, cementing, completion, remediation, and stimulation activities designed to maximize recovery in both new and mature fields. ~~Activities in this~~Customers of the Chemistry Technologies business segment also include construction and management 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 oil to produce (1) high 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 O&G industry.

~~Flotek operates in over 15 domestic and international markets. Customers~~ include major integrated ~~O&G~~oil and gas companies, oilfield services companies, independent ~~O&G~~oil and gas companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies.

In the second quarter of 2020, the Chemistry Technologies segment launched a line of sanitizers and disinfectants for commercial and personal 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 experiences, yielding a competitive product offering in this rapidly growing area. The ~~Company also served~~newly-launched products include hand sanitizers for retail and e-commerce sales and disinfecting liquids for use in and by hospitals, first responders, the travel and hospitality industry, food services, sporting facilities, and other commercial and industrial applications.

The Company’s Data Analytics 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 information about the composition of its energy customers’ hydrocarbon streams.

The customers ~~who purchase non-energy-related citrus oil~~of the Data Analytics segment span across the entire market, from production upstream to midstream facilities to refineries and ~~related products, including household~~distribution networks. To date, the Data Analytics segment has focused solely on North American markets. The Data Analytics segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, increasing efficiencies of towers, enabling automation and ~~commercial cleaning product companies, fragrance~~robotization of fluid handling, and ~~cosmetic companies, and food manufacturing companies, reported as discontinued operations at December 31, 2018.~~reducing losses due to give-away.

Flotek was initially incorporated under the laws of the Province of British Columbia on May 17, 1985. On October 23, 2001, Flotek changed its corporate domicile to the state of Delaware.

Basis of Presentation

The accompanying ~~Unaudited Condensed Consolidated~~ Financial Statements ~~and accompanying footnotes (collectively the “Financial Statements”)~~ reflect all adjustments, in the opinion of management, necessary for fair presentation of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The Financial Statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim Financial Statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2019 (“2019Annual Report”) as amended by the Amendment No. 2 on Form 10-K/A to the 2019 Annual ~~Report”).~~Report, filed with the SEC on June 11, 2020. A copy of the 2019 Annual Report is available on the SEC’s website, www.sec.gov,, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, ~~www.flotekind.com. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ended December 31, 2019.~~

During the fourth quarter of 2018, the Company classified the Consumer and Industrial Chemistry Technologies segment as held for sale based on management’s intention to sell this business. 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 statement 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.www.flotekind.com.

All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.

~~Leases~~

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of lease liabilities, and operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, ~~current portion of lease liabilities, and finance lease liabilities in the consolidated balance sheets.~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The lease term is modified to reflect options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

~~The Company has some lease agreements that contain both lease and non-lease components. The Company has elected to account for such leases as having a single lease component.~~

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.

Potential Impact of COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic, which continues to spread throughout the United States and around the world. This outbreak has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel. In addition, global oil producers, including the Organization of Petroleum Exporting Countries and other oil producing nations, have experienced disagreements relating to oil production which has led to downward pressure on commodity prices.

The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant and swift reduction in international and U.S. economic activity. These effects and the volatility in oil prices have materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas. The Company’s primary markets in Texas are particularly subject to the financial impact of a collapse in oil prices. In the second quarter of 2020, these conditions and the related financial impact have continued and, in some cases, worsened. As a result, the Company has recorded an impairment to property, plant and equipment, intangible assets, and operating right-of-use assets during the first quarter of 2020. In addition, the Company 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.

In response to the deteriorating market conditions and anticipating ongoing volatility, the Company has also reduced its cost structure to meet anticipated market activity and reduce the Company’s break-even levels. Among other cost-cutting 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.

• The board of directors of Flotek approved a 20% reduction in the fees to be paid to the directors, effective as of April 1, 2020.

• The Company consolidated office space by moving all employees at its corporate headquarters into the Houston Global Resource and Innovation Center, (“GRIC”) facility 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 headcount by 35% on March 30, 2020.

While the full impact 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. Any future development and effects will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic; further adverse revenue and net income effects; disruptions to our operations; third party providers’ ability to support our operations; customer shutdowns of oil and gas exploration and production; the effectiveness of our work from home arrangements; employee impacts 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 our facilities or the facilities of our customers and suppliers.

Reclassifications

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Recent Accounting Pronouncements

Application of New Accounting Standards

Effective January 1, 2019, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2016-02, “Leases.” This standard (ASC 842) requires the recognition of ~~ROU~~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. The adoption of this standard did not have a material impact on the consolidated statements of operations or cash flows. Refer to Note 45 — “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.

New Accounting Requirements and Disclosures

~~In June 2016,~~Effective January 1, 2020, 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~~adopted 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 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. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.

New Accounting Standards to be Adopted

The Financial Accounting Standards Board (“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.

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 ~~will have~~is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard on the consolidated financial statements and related disclosures.

Note 3 — Acquisition of JP3 Measurement LLC

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 and contingent consideration of an estimated $1.2 million for two potential earn-out provisions totaling $5.0 million based on certain stock performance targets.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



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

These amounts are preliminary in nature and subject to adjustments from the final determination of working capital, which could be material. Any necessary adjustments are expected to be finalized within one year from the date of acquisition. The Company recorded transaction costs of $0.5 million for professional services including legal, accounting, and other professional or consulting fees to the Company’s Operating expenses (excluding depreciation and amortization) in the consolidated statement of income for the three and six months ended June 30, 2020.

Pro forma information for JP3 is not provided as the impact is not considered material.

Note 34 — 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”) 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 liabilities as held for sale in the fourth quarter 2018. The Company has 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.~~

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 owned subsidiary, Florida Chemical Company, LLC (“FCC”), which represented the ~~CICT~~Consumer and Industrial Chemistry Technologies (“CICT”) segment.

Effective February 28, 2019, the Company completed the sale of ~~the CICT segment~~FCC to ADM for $175.0 million in cash consideration, with $4.4 million temporarily held in escrow by ADM for 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 with anticipated releases at 6 months, 12 months, and 15 months. 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 with FCC who will supply terpene at specified prices for specified quantities. The agreement will expire on December 31, 2023.

As of ~~September 30,~~December 31, 2019, the ~~escrow balance including interest was $12.5~~Company concluded that the original long-term supply agreement met the definition of a loss contract. As such, the Company recognized a loss of $19 million ~~reflected~~as of December 31, 2019, capped by the price paid for the terpene supply agreement amendment, executed in ~~other current assets.~~February 2020, which aligned purchase commitments to expected usage for blended products as of December 31, 2019. The Company has classified the assets, liabilities, and results of operations for this segment as “Discontinued Operations” for all periods presented.

Pursuant to the post-closing working capital dispute resolution procedures set forth in the Share Purchase Agreement, the Company and ADM ~~are in the process of engaging~~engaged a neutral third party ~~arbitrator~~auditor to help reach agreement on the final post-closing working capital adjustment. In February 2020, the third party auditor ruled in favor of awarding ADM the entire disputed amount. As a result, the working capital adjustment escrow balance was released to ADM and a corresponding reduction was made to the gain on sale of business as of December 31, 2019.

~~Concurrent~~

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 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 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 ~~closing~~terpene supply agreement amendment payment was recorded as a loss on contract purchase commitments, reported in operating expenses in continuing operations in December 2019.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended June 30, 2020, the Company recognized a loss of $0.8 million associated with the amended terpene supply agreement due to adjustments in the Company’s expected usage of terpene in blended products in 2020.

During the first quarter 2020, as scheduled, $3.3 million of the ~~sale~~indemnity escrow was released to the Company. During the second quarter 2020 the remaining indemnity escrow of $6.6 million was released to the CICT segment, the Company retained $11.1 million of historical inventory previously held by the CICT segment. In addition, the Company executed a long-term supply agreement for terpene. The term of the agreement runs through September 2023, with an option to extend for an additional year. The remaining minimum commitment of the agreement at September 30, 2019 is $72 million.Company.

The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,					Six months ended June 30,
	2019			2018			2019			2018			2020		2019			2020		2019
Consumer and Industrial Chemistry Technologies
Revenue	$	—		$	17,280		$	11,031		$	56,267		$	—	$	—		$	—	$	10,877
Operating expenses	—			(15,562		)	(11,572		)	(49,797		)	—		—			—		(11,447		)
Depreciation and amortization	—			(699		)	—			(2,049		)
Research and development	—			(161		)	(69		)	(483		)	—		—			—		(69		)
(Loss) income from operations	—			858			(610		)	3,938			—		—			—		(639		)
Other income	—			59			35			251			—		—			—		35
Gain on sale of business	148			—			67,842			—			—		(2,100		)	—		64,934
Income before income taxes	148			917			67,267			4,189
Income tax expense	(31		)	(6		)	(20,386		)	(13		)
Net income from discontinued operations	$	117		$	911		$	46,881		$	4,176
(Loss) Income before income taxes													—		(2,100		)	—		64,330
Income tax benefit (expense)													—		492			—		(19,864		)
Net (loss) income from discontinued operations													$	—	$	(1,608	)	$	—	$	44,466

Note 5 — Leases

During the first quarter 2020, the Company made the decision to cease use of the corporate headquarters leased offices and move corporate employees to the GRIC during second quarter of 2020. In addition, the lease liability and corresponding ROU assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as it was determined the Company was no longer reasonably certain to utilize the extension at the GRIC. The remeasurement resulted in adjustments to lease liabilities and ROU assets totaling of $6.2 million each as of March 31, 2020.

In addition, during the three months ended March 31, 2020, the Company recorded an impairment of the ROU assets totaling $7.4 million. See Note 10 - Impairment of Fixed and Long-lived Assets for further discussion of the impairment charge booked in the first quarter 2020.

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 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 million recorded in gain on lease termination.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~The assets and liabilities held for sale on the Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, are as follows (in thousands):~~

Consumer and Industrial Chemistry Technologies
September 30, 2019 December 31, 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
Valuation allowance —
—
Assets held for sale, net $ —
$ 118,470
Liabilities:
Accounts payable $ —
$ 8,883
Accrued liabilities —
291
Liabilities held for sale $ —
$ 9,174

~~Note 4 — Leases~~

Effective January 1, 2019, the Company adopted ASC 842 using the prospective method applied to those leases which were not completed as of December 31, 2018. The Company has leases for corporate offices, research and development facilities, warehouses, sales offices and equipment. The leases have remaining lease terms of 1 year to 19 years, some of which include options to extend the leases for up to 10 years.

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


					Three months ended June 30,				Six months ended June 30,
	Three months ended September 30, 2019		Nine months ended September 30, 2019		2020		2019		2020		2019
Operating lease expense	$	652	$	1,958	$	283	$	653	$	854	$	1,306
Finance lease expense:
Amortization of right-of-use assets	357		577		4		220		9		220
Interest on lease liabilities	3		6		5		3		9		3
Total finance lease expense	360		583		9		223		18		223
Short-term lease expense	22		97		54		32		86		75
Total lease expense	$	1,034	$	2,638	$	346	$	908	$	958	$	1,604

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	584	$	1,749	$	1,411	$	583	$	1,024	$	1,165
Operating cash flows from finance leases	3		6		5		3		9		3
Financing cash flows from finance leases	6		51		14		38		51		38

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



Years ending December 31,	Operating Leases			Finance Leases
2020 (excluding the six months ended June 30, 2020)	$	617		$	33
2021	1,330			70
2022	1,283			47
2023	1,311			39
2024	1,341			23
Thereafter	8,185			—
Total lease payments	$	14,067		$	212
Less: Interest	(4,916		)	(28		)
Present value of lease liabilities	$	9,151		$	184

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Year ending December 31, Operating Leases Finance Leases
2019 (excluding the three months ended September 30, 2019) $ 586
$ 17
2020 2,335
70
2021 2,293
70
2022 2,257
46
2023 2,166
38
Thereafter 25,695
22
Total lease payments $ 35,332
$ 263
Less: Interest (16,678 ) (43 )
Present value of lease liabilities $ 18,654
$ 220

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


	September 30, 2019			June 30, 2020			December 31, 2019
Operating Leases
Operating lease right-of-use assets	$	17,625		$	2,422		$	16,388

Current portion of lease liabilities	$	709
Current portion of operating lease liabilities				$	654		$	486
Long-term operating lease liabilities	17,945			8,497			16,973
Total operating lease liabilities	$	18,654		$	9,151		$	17,459

Finance Leases
Property and equipment	$	293		$	147		$	293
Accumulated depreciation	(19		)	(18		)	(28		)
Property and equipment, net	$	274		$	129		$	265

Current portion of lease liabilities	$	48
Current portion of finance lease liabilities				$	57		$	55
Long-term finance lease liabilities	172			127			158
Total finance lease liabilities	$	220		$	184		$	213

Weighted Average Remaining Lease Term
Operating leases	15.7 years			10.1 years			16.6 years
Finance leases	4.8 years			4.1 years			4.6 years

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

Note 56 — Revenue from Contracts with Customers

Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled 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 are distinct within 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 UNAUDITED CONDENSED 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 three and nine months ended September 30, 2019 and 2018, 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, 2016 or for any periods previously presented.

The vast majority of the ~~Company’s~~Chemistry Technologies’ segment products are sold at a point in time and service contracts are short-term in nature. Sales are billed on a monthly basis with payment terms customarily 30-45 days for domestic and 60 day for international from invoice receipt. In addition, sales taxes are excluded from revenues.

The Data Analytics segment provides services over a period of time and for those services, the revenues are recognized over time.

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 sales accounted for over ~~95%~~90% of total revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 are as follows (in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Revenue:
Products	$	21,031	$	52,510	$	96,733	$	130,652	$	8,176	$	33,632	$	26,976	$	75,703
Services	848		1,199		3,094		3,672		704		1,060		1,320		2,246
	$	21,879	$	53,709	$	99,827	$	134,324	$	8,880	$	34,692	$	28,296	$	77,949
Operating expenses (excluding depreciation and amortization):	Operating expenses (excluding depreciation and amortization):								Operating expenses (excluding depreciation and amortization):
Products	$	23,637	$	44,048	$	105,440	$	114,365	$	11,278	$	37,613	$	33,825	$	81,062
Services	52		1,599		1,153		3,483		354		508		648		1,027
	$	23,689	$	45,647	$	106,593	$	117,848	$	11,632	$	38,121	$	34,473	$	82,089

Arrangements with Multiple Performance Obligations

The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the total transaction price is allocated to each performance obligation 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.

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~~The Company has an immaterial amount of contract liabilities associated to ~~contract assets or liabilities under ASC 606.~~incomplete performance obligations.

Note 7 — Supplemental Cash Flow Information

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



	Six months ended June 30,
	2020		2019
Supplemental cash payment information:
Interest paid	$	20	$	594
Income taxes paid, net of refunds	149		627
Supplemental schedule of non-cash investing and financing activities:
Equity issued - acquisition of JP3	8,538		—

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note ~~6 — Supplemental Cash Flow Information~~

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

Nine months ended September 30,
2019 2018
Supplemental cash payment information:
Interest paid $ 595
$ 1,645
Income taxes paid, net of refunds 887
16

~~Note 7~~8 — Inventories

Inventories are as follows (in thousands):


	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
Raw materials	$	7,339		$	10,608		$	4,810		$	4,339
Finished goods	17,809			18,798			20,155			24,569
Inventories	25,148			29,406			24,965			28,908
Less reserve for excess and obsolete inventory	(815		)	(2,117		)	(1,627		)	(5,698		)
Inventories, net	$	24,333		$	27,289		$	23,338		$	23,210

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 of inventory are charged to cost of goods sold. Low-turn inventory or inventory in excess of management's estimated usage requirement are analyzed for sale before conducting an analysis to write off or write down inventory to the estimated market value if those amounts are determined to be less than cost.

Note 89 — Property and Equipment

Property and equipment are as follows (in thousands):


	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
Land	$	4,372		$	4,372		$	3,282		$	4,440
Buildings and leasehold improvements	37,729			37,719			6,048			38,741
Machinery and equipment	26,871			26,995			7,227			27,694
Fixed assets in progress	1,462			581
Furniture and fixtures	1,670			1,573			643			1,671
Transportation equipment	1,448			1,852			1,190			1,440
Computer equipment and software	5,212			9,370			1,296			3,348
Property and equipment	78,764			82,462			19,686			77,334
Less accumulated depreciation	(37,584		)	(36,977		)	(11,669		)	(37,505		)
Property and equipment, net	$	41,180		$	45,485		$	8,017		$	39,829

Depreciation expense totaled ~~$1.6~~$0.3 million and ~~$1.9~~$1.6 million for the three months ended ~~September~~June 30, 2020 and 2019, and ~~2018, respectively, and $5.0~~$2.0 million and ~~$5.9~~$3.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively.~~2019.

During the ~~three and nine~~six months ended ~~September~~June 30, ~~2019 and 2018, no impairments were~~2020 an impairment was recognized ~~related to property and equipment.~~for $30.2 million. NaN impairment was recognized for the three months ended June 30, 2020.

Note 910 — ~~Goodwill~~Impairment of Fixed and Long-lived Assets

During the ~~second~~first quarter 2020, the price of ~~2018,~~crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the ~~Company recognized a goodwill impairment charge~~industry, which began to negatively impact the Company’s results of ~~$37.2 million in~~operations. These declines of results of operations were driven by an oversupply of oil, insufficient storage, and demand destruction resulting from the ~~Energy Chemistry Technologies (“ECT”) reporting unit, which resulted from sustained under-performance and lower expectations related~~reaction to ~~the reporting unit. As a result of~~COVID-19. Based on these factors, ~~a qualitative analysis, and additional risks associated with the business,~~ the Company concluded that ~~sufficient indicators existed to require~~a triggering event occurred and, accordingly, an interim quantitative ~~assessment of goodwill for that reporting unit~~impairment test was performed as of ~~September 30, 2018. The~~March 31, 2020.

Using the income approach, the fair value of the reporting unit was ~~estimated~~determined based on ~~an analysis of~~ the present value of future ~~discounted~~ cash flows. The ~~significant estimates used in the discounted~~Company utilized internal forecast trends and potential growth rates to estimate future cash flows ~~model included~~of the ~~Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The assumptions were based~~asset group. Based on the ~~actual historical performance~~results of the ~~reporting unit and took into account a recent weakening of operating results in an improving market environment. The excess~~quantitative assessment, the Company concluded the carrying value of the ~~reporting unit’s carrying~~asset group exceeded its fair value ~~over the estimated fair value~~as of March 31, 2020 and an impairment loss of $57.5 million was recorded as ~~the goodwill impairment charge in the second quarter 2018 and represented all~~a result of the ~~ECT reporting unit’s goodwill.~~adverse effect of the COVID-19 pandemic and the related negative impact on oil and natural gas prices on projections of future cash flows.

The Company recorded impairment charges during the six months ended June 30, 2020 as follows (in thousands):

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Property and equipment, net	$	30,178
Operating lease right-of-use assets	7,434

Other Intangibles:
Patents	9,902
Customer Lists	9,165
Intangibles assets in progress	596
Trademarks and brand names	179
Total Other Intangibles	19,842

Total Impairment of fixed and long-lived assets	$	57,454

~~The~~With the acquisition of JP3, the Company ~~has 0 reporting units which had a goodwill balance at December 31, 2018,~~evaluated its segment information and determined that there were ~~0 acquisitions during the three~~2 segments: Chemistry Technologies and ~~nine months ended September 30, 2019.~~Data Analytics, which are both supported by its Research & Innovation advanced laboratory capabilities.

Note 1011 - Goodwill

Goodwill associated with the acquisition of JP3 on May 18, 2020 is as follows (in thousands):



Goodwill at December 31, 2019	$	—
Goodwill from acquisition of JP3	17,522
Goodwill at June 30, 2020	$	17,522

Note 12 — Other Intangible Assets

Other intangible assets are as follows (in thousands):


	September 30, 2019				December 31, 2018				June 30, 2020				December 31, 2019
	Cost		Accumulated Amortization		Cost		Accumulated Amortization		Cost		Accumulated Amortization		Cost		Accumulated Amortization
Finite-lived intangible assets:
Patents and technology	$	16,711	$	6,427	$	17,399	$	6,689	$	5,000	$	55	$	17,493	$	6,715
Customer lists	15,367		5,824		15,367		5,259		6,800		55		15,367		6,013
Trademarks and brand names	1,349		1,150		1,385		1,149		1,100		13		1,351		1,160
Intangible assets in progress	792		—		1,614		—
Total finite-lived intangible assets acquired	34,219		13,401		35,765		13,097
Deferred financing costs	—		—		1,895		496
Total amortizable intangible assets	34,219		$	13,401	37,660		$	13,593
Indefinite-lived intangible assets:
Trademarks and brand names	2,760				2,760
Total other intangible assets	$	36,979			$	40,420
Total finite-lived intangible assets									$	12,900	123		$	34,211	13,888

Carrying value:
Other intangible assets, net	$	23,578			$	26,827			$	12,777			$	20,323

~~Finite-lived intangible assets acquired are amortized on a straight-line basis over two to 20 years.~~ Amortization of finite-lived intangible assets acquired totaled ~~$0.5~~$0.1 million and ~~$0.3~~$0.5 million for the three months and six months ended ~~September~~June 30, 2019 and ~~2018, respectively, and $1.5 million and $1.0 million for the nine months ended September 30,~~ 2019 ~~and 2018.~~respectively.

Amortization of deferred financing costs totaled 0 and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $1.4 million and 0.3 million for the nine months ended September 30, 2019 and 2018.

~~Note 11 — Long-Term Debt and Credit Facility~~

~~Long-term debt is as follows (in thousands):~~

September 30, 2019 December 31, 2018
Long-term debt, classified as current:
Borrowings under revolving credit facility $ —
$ 49,731

~~Borrowing under the revolving credit agreement at December 31, 2018 was classified as current debt.~~19

~~Credit Facility~~

On May 10, 2013, the Company and certain of its subsidiaries entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement (as amended, the “Credit Facility”) with PNC Bank, National Association (“PNC Bank”). The Company could borrow under the Credit Facility for working capital, permitted acquisitions, capital expenditures and other corporate purposes. The Credit Facility was to continue in effect until May 10, 2022. Under terms of the Credit Facility, the Company had total borrowing availability of $75 million under a revolving credit facility, including a sublimit of $10 million that could be used for letters of credit. On March 1, 2019, the Company repaid the outstanding balance, interest, and fees related to the revolving credit facility, and simultaneously terminated the Credit Facility. Simultaneously with the termination of the Credit Facility, the Company expensed the remaining amount of deferred financing costs totaling $1.4 million.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1213 — Earnings (Loss) Per Share

Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.

Potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the periods. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were ~~0.5~~0.4 million restricted stock units and 4.0 million stock options for the three and six months ended June 30, 2020 and 0.7 million restricted stock units for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, and 0.9 million restricted stock units for the three and nine months ended September 30, 2018.~~2019.

Note 1314 — 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, accounts payable, and ~~accrued expenses,~~Flotek’s Payroll Protection Program (“PPP”) loan approximate fair value due to the short-term nature of these accounts.

Liabilities Measured at Fair Value on a Recurring Basis

The ~~Company had total cash of $107.0 million, which consisted of cash equivalents of $57.7 million in~~following tables present the Company’s assets and liabilities that are measured at fair value on a ~~government money market account~~recurring basis at June 30, 2020 and ~~cash deposits of $45.5 million in an interest bearing demand deposit account and $3.8 million in operating cash accounts, at September 30,~~December 31, 2019, and ~~$3.0 million, which consisted~~the level within the fair value hierarchy:



							Balance at June 30,								Balance at December 31,
	Level 1		Level 2		Level 3		2020		Level 1		Level 2		Level 3		2019
Contingent consideration	$	—	$	—	$	1,200	$	1,200	$	—	$	—	$	—	$	—

There were no transfers in or out of ~~0 cash equivalents~~either Level 1, Level 2, or Level 3 fair measurements during the periods ending June 30, 2020 and ~~cash deposits of $3.0 million in operating cash accounts, at~~ December 31, ~~2018.~~

~~The carrying amount and estimated fair value of the Company’s long-term debt are as follows (in thousands):~~

September 30, 2019 December 31, 2018

Carrying
Amount

Fair
Value
Carrying Amount
Fair
Value
Borrowings under Credit Facility —
—
49,731
49,731

~~The carrying amount of borrowings under the Credit Facility approximates its fair value because the interest rates are variable.~~2019.

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,~~March 31, 2020, the Company recorded an impairment of ~~$37.2~~$57.5 million for ~~goodwill~~impairment on long-lived assets. Management inputs used in fair value measurement were classified as Level 3.

The fair values of the JP3 long-lived assets, and intangibles were determined using the income approach. The fair value of the JP3 contingent consideration was determined using a Monte Carlo simulation. The fair value of the JP3 inventory was determined using the comparative sales method. The fair value measurements were primarily based on significant inputs that are not observable in the ~~Energy Chemistry Technologies reporting unit. NaN impairments of any of these assets~~market and thus represent a Level 3 measurement, other than cash and working capital accounts which carrying amounts were ~~recognized during the three and nine months ended September 30, 2019.~~determined to approximate fair value due to their short-term nature.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the quarter ended June 30, 2020, the Company assumed long-term debt of $0.9 million comprised of the PPP loan held by JP3. Management inputs used in fair value measurement were classified as Level 3.

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

In conjunction with the 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. The following table presents the changes in contingent consideration balances classified as Level 3 balances for the three and six months ended June 30, 2020 and 2019:



	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Balance - beginning of period	$	—	$	—	$	—	$	—
Additions / issuances	1,200		—		1,200		—
Gains (losses) recognized in earnings	—		—		—		—
Payments	—		—		—		—
Balance - end of period	$	1,200	$	—	$	1,200	$	—

Note 1415 — Debt

In April 2020, the Company received a $4.8 million loan, under the PPP, which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The loans have a fixed interest rate of 1%, mature in two years and payments are deferred for six months. In addition, in connection with the acquisition of JP3, the Company assumed a PPP loan of $0.9 million

A portion of the loans are 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 requires 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 June 30, 2020, the Company has not applied for or estimated the potential forgiveness on the PPP loans. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The term of the Company’s PPP Loan is two years. The annual interest rate on the PPP Loan is 1% and no payments of principal or interest are due during the six-month period beginning on the date of the PPP Loan. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has recently indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (Small Business Administration) audit to further ensure PPP loans are limited to eligible borrowers in need.

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

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	June 30, 2020
Current Portion of Long-Term Debt
Flotek PPP Loan	$	2,138
JP3 PPP Loan	389
Total current portion of long-term debt	$	2,527

Long-term debt:
Flotek PPP Loan	$	2,660
JP3 PPP Loan	484
Total long-term debt	$	3,144

Note 16 — Income Taxes

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


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
U.S. federal statutory tax rate	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	1.7		1.5		1.2		(0.2	)	0.4		1.7		—		1.0
Non-U.S. income taxed at different rates	0.2		3.9		0.8		0.6		0.9		0.7		0.2		1.0
Reduction in tax benefit related to stock-based awards	(0.6	)	(4.9	)	(1.4	)	(1.7	)	0.9		(1.1	)	(0.1	)	(1.8	)
Non-deductible expenses	(0.7	)	(8.6	)	(0.4	)	(9.2	)	0.7		—		—		(0.3	)
Research and development credit (expense)	0.2		(3.5	)	0.5		0.3
Research and development credit									0.1		0.4		—		0.6
Increase in valuation allowance	(18.8	)	(3.4	)	(18.2	)	(33.6	)	(23.7	)	(20.7	)	(16.0	)	(17.9	)
Effect of tax rate differences of NOL carryback									—		—		2.6		—
Other	(1.4	)	—		(0.7	)	—		—		(0.4	)	—		(0.3	)
Effective income tax rate	1.6	%	6.0	%	2.8	%	(22.8	)%	0.3	%	1.6	%	7.7	%	3.3	%

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 the Company’s analysis of the extended NOL carryback provision, it 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 the valuation allowance, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different ~~rates.~~rates, except for the NOL carryback claim discussed above.

~~Net deferred~~Deferred tax assets ~~arise due~~and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted rates and laws that will be in effect when the differences are expected to ~~the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes.~~reverse. 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 ~~considered~~considers all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income.

As ~~a result~~ of ~~this analysis,~~December 31, 2019, the Company determined that it was more likely than not that it would not realize the benefits of certain deferred tax assets and, therefore, it recorded a ~~$15.5~~$19.9 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~~a result of the ~~need for~~NOL carryback allowed by the CARES Act, the Company released a valuation allowance ~~the sale~~ of ~~the CICT segment provided a source of income~~$4.0 million related 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. The increase in the valuation allowance during the nine months ended September 30, 2019, reflects management’s evaluation ofits deferred tax assets attributable to its U.S.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

federal NOLs. The Company continues to have a full valuation allowance against net deferred tax assets as it is not more-likely-than-not tothey will be ~~used after giving consideration to the gain from the sale of the CICT segment and anticipated results of operations.~~

In January 2017, the Internal Revenue Service notified the Company that it would examine the Company’s federal tax returns for the year ended December 31, 2014. The examination included (1) the corporate returns and (2) employment tax matters. The IRS fieldwork has been completed in relation to the corporate returns with no adverse findings. Further discussion of the employment tax matter can be found in Note 18 — “Related Party Transaction.”utilized.

Note 1517 — Common Stock

~~The~~

On May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, ~~on November 9, 2009, authorizes~~to increase the ~~Company to issue up to~~ ~~80 million~~authorized shares of common stock from 80,000,000 to 140,000,000, par value ~~$0.0001~~$0.0001 per share, and 100,000 ~~shares of 1 or more series~~ of preferred stock, par value ~~$0.0001~~$0.0001 per share. The additional authorized shares are available for corporate purposes, including acquisitions.

A reconciliation of changes in common shares issued during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 is as follows:



Shares issued at December 31, ~~2018~~2019	~~62,162,875~~63,656,897
Issued to purchase JP3	11,500,000
Issued as restricted stock award grants	~~875,522~~2,469,238
Shares issued at ~~September~~June 30, ~~2019~~2020	~~63,038,397~~77,626,135

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Stock Repurchase Program~~

InOn June ~~2015,~~9, 2020, the board of directors of the Company rescinded the authorization to repurchase the Company’s ~~Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock. Repurchases may be made~~stock that had been previously approved in the open market or through privately negotiated transactions. Through December 31, 2018, the Company had repurchased $0.3 million of its common stock under this authorization. During the three and nine months ended September 30, 2019 and 2018, the Company did 0t repurchase any shares of its outstanding common stock under this authorization.

~~At September 30, 2019, the Company has $49.7 million remaining under its share repurchase program.~~June 2015.

Note 1618 — 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 chief operating decision-makers in deciding how to allocate resources and assess performance. The operations of the Company are categorized into 12 reportable ~~segment: Energy Chemistry Technologies.~~

~~Energy~~segments: Chemistry Technologies ~~designs, develops, manufactures, packages, distributes, delivers,~~ and ~~markets reservoir-centric fluid systems, including~~Data Analytics.

The Chemistry Technologies segment includes specialty chemistries and ~~conventional chemistries,~~logistics which enable its customers to pursue improved efficiencies in the drilling and completion of their wells.

In the second quarter of 2020, the Company launched a line of sanitizers and disinfectants for ~~use~~commercial and personal consumer use. These products build on the Company’s historical expertise in ~~O&G well drilling, cementing, completion, remediation,~~chemistry and ~~stimulation activities designed to maximize recovery in both new~~leverage its infrastructure, personnel, competencies, supply chain, research, and ~~mature fields. Activities~~historic consumer market experiences yielding a competitive product offering in this rapidly growing segment. The newly launched products, which include hand and surface sanitizers, target growth opportunities across diverse sectors including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment and other industrial and commercial markets.

The Data Analytics segment, ~~also include construction~~created in conjunction with the acquisition of JP3, includes the design, development, production, sale and ~~management~~support of ~~automated material handling facilities as well as management~~equipment and services that create and provide valuable information about the composition of ~~loading facilities and blending operations for oilfield services companies.~~its energy customers’ hydrocarbon fluids.

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

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

For the three months ended September 30, Energy Chemistry Technologies Corporate and Other Total
2019
Net revenue from external customers $ 21,879
$ —
$ 21,879
Loss from operations (5,984 ) (5,869 ) (11,853 )
Depreciation and amortization 1,870
188
2,058
Capital expenditures 1,102
—
1,102

2018
Net revenue from external customers $ 53,709
$ —
$ 53,709
Income (loss) from operations 3,921
(8,001 ) (4,080 )
Depreciation and amortization 1,734
525
2,259
Capital expenditures 302
861
1,163

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

For the nine months ended September 30, Energy Chemistry Technologies Corporate and Other Total
2019
Net revenue from external customers $ 99,827
$ —
$ 99,827
Loss from operations (18,968 ) (21,008 ) (39,976 )
Depreciation and amortization 5,588
849
6,437
Capital expenditures 1,869
—
1,869

2018
Net revenue from external customers $ 134,324
$ —
$ 134,324
Loss from operations (34,176 ) (26,270 ) (60,446 )
Depreciation and amortization 5,300
1,635
6,935
Capital expenditures 2,480
1,314
3,794



For the three months ended June 30,	Chemistry Technologies			Data Analytics⁽¹⁾			Corporate and Other			Total
2020
Net revenue from external customers	$	7,962		$	918		$	—		$	8,880
Loss from operations, including impairment	(3,596		)	(1,151		)	(5,484		)	(10,231		)
Depreciation and amortization	246			131			91			468
Capital expenditures	—			—			—			—

2019
Net revenue from external customers	$	34,692		$	—		$	—		$	34,692
Loss from operations	(7,651		)	—			(6,023		)	(13,674		)
Depreciation and amortization	1,933			—			186			2,119
Capital expenditures	306			—			—			306



For the six months ended June 30,	Chemistry Technologies			Data Analytics⁽¹⁾			Corporate and Other			Total
2020
Net revenue from external customers	$	27,378		$	918		$	—		$	28,296
Loss from operations, including impairment	(66,257		)	(1,151		)	(12,908		)	(80,316		)
Depreciation and amortization	2,056			131			472			2,659
Capital expenditures	42			—			—			42

2019
Net revenue from external customers	$	77,949		$	—		$	—		$	77,949
Loss from operations	(12,984		)	—			(14,323		)	(27,307		)
Depreciation and amortization	3,718			—			661			4,379
Capital expenditures	767			—			—			767

⁽¹⁾The financial information disclosed above for Data Analytics is for the period May 18, 2020 to June 30, 2020.

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

September 30, 2019 December 31, 2018
Energy Chemistry Technologies $ 123,309
$ 139,205
Corporate and Other 126,048
28,208
Total segments 249,357
167,413
Held for sale —
118,470
Total assets $ 249,357
$ 285,883



	June 30, 2020		December 31, 2019
Chemistry Technologies	$	34,439	$	116,110
Data Analytics	40,922		—
Corporate and Other	66,835		114,490
Total assets	$	142,196	$	230,600

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Geographic Information

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


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
U.S.	$	19,663	$	35,685	$	89,653	$	108,571	$	6,936	$	31,114	$	22,711	$	69,990
Other countries	2,216		18,024		10,174		25,753		1,944		3,578		5,585		7,959
Total	$	21,879	$	53,709	$	99,827	$	134,324	$	8,880	$	34,692	$	28,296	$	77,949

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

Major Customers

Revenue from major customers, as a percentage of consolidated revenue, is as follows:


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Customer A	35.9	%	*		16.7	%	*		22.6	%	17.6	%	29.4	%	15.4	%
Customer B	*		12.2	%	12.3	%	10.4	%	14.0	%	11.0	%	12.5	%	11.3	%
Customer C	6.6	%	25.6	%	*		13.6	%	*		*		12.3	%	10.7	%

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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 1719 — 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 4 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.

Concentrations and Credit Risk

The majority of the Company’s revenue is derived from ~~O&G industry.~~its Chemistry Technologies segment which consist predominantly of customers within the oil and gas industry and the sanitizer industry to a lesser extent. Customers within the oil and gas industry 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~~Customers within the hand sanitizer industry typically include healthcare institutions such as hospitals, distributors, and various public entities. Given the increase in global demand for sanitizer products due to COVID-19, the Company's concentration of customers ~~in one industry increases~~is shifting and diversifying, which helps to reduce credit and business ~~risks.~~risk. Customers within the sanitizer industry are not significantly impacted by commodity prices and typically are financially stable or public institutions.

The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in accounts in two major financial institutions and balances often exceed insurable amounts.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1820 — Related Party Transaction

In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019 that certain employment taxes related to the ~~CEO’s~~ compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. ~~The CEO’s~~Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and ~~the CEO~~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 September 30, 2019 the Company recorded a receivable from the ~~CEO’s~~ affiliated companies totaling $2.4 million. In October 2019, an amendment to the ~~CEO’s~~ 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 ~~CEO’s~~ affiliated companies from any amounts owed ~~to the CEO~~ under the employment agreement. During the three months ended March 31, 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of June 30, 2020, the receivable from Mr. Chisholm was $1.4 million, which is equal to the payable to the IRS 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.

On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company.

Note 21 — Revision of Prior Financial Statements

During preparation of June 30, 2020 financial statements, two additional errors impacting the prior financial statements were identified, as follows:

Currency Translation Adjustment and Other Comprehensive Income of $1.1 million was not recognized in earnings in connection with the dissolution of the Company’s wholly owned foreign entity, PetroValve International in 2015.

Cash flow presentation relating to proceeds received from the sale of FCC (which occurred in the first quarter of 2019) and subsequent release of escrow amounts in subsequent periods that were improperly classified between operating and investing activities.

Consolidated Balance Sheets - The revision relating to currency translation discussed above had no impact on total stockholders’ equity, but impacted the components of stockholders’ equity as follows (in thousands):



	As of December 31, 2018
	As previously reported			Revisions			As revised
Accumulated other comprehensive loss	$	(1,116	)	$	1,147		$	31
Retained earnings (accumulated deficit)	(107,176		)	(1,147		)	(108,323		)



	As of March 31, 2019
	As previously reported*			Revisions			As revised
Accumulated other comprehensive loss	$	(1,022	)	$	1,147		$	125
Retained earnings (accumulated deficit)	(76,314		)	(1,147		)	(77,461		)

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	As of June 30, 2019
	As previously reported*			Revisions			As revised
Accumulated other comprehensive loss	$	(998	)	$	1,147		$	149
Retained earnings (accumulated deficit)	(90,727		)	(1,147		)	(91,874		)



	As of September 30, 2019
	As previously reported*			Revisions			As revised
Accumulated other comprehensive loss	$	(962	)	$	1,147		$	185
Retained earnings (accumulated deficit)	(101,770		)	(1,147		)	(102,917		)



	As of December 31, 2019
	As previously reported*			Revisions			As revised
Accumulated other comprehensive loss	$	(966	)	$	1,147		$	181
Retained earnings (accumulated deficit)	(141,091		)	(1,147		)	(142,238		)



	As of March 31, 2020
	As previously reported*			Revisions			As revised
Accumulated other comprehensive loss	$	(1,089	)	$	1,147		$	58
Retained earnings (accumulated deficit)	(205,058		)	(1,147		)	(206,205		)

*As previously reported numbers reflect the revised balances for each of the periods as disclosed in the period ended March 31, 2020.

Consolidated Statements of Cash Flows - The revision discussed above impacted the statement of cash flow as follows (in thousands):



	For the three months ended March 31, 2019
	As previously reported			Revisions			As revised
Adjustment to reconcile net cash in operating activities
Other current assets	$	(18,661	)	$	14,219		$	(4,442	)
Other long-term assets	—			3,286			3,286
Net cash used in operating activities	(25,721		)	17,505			(8,216		)
Proceeds from sale of business	169,722			(17,505		)	152,217
Net cash provided by investing activities	169,290			(17,505		)	151,785

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	For the six months ended June 30, 2019
	As previously reported			Revisions			As revised
Adjustment to reconcile net cash in operating activities
Other current assets	$	(16,209	)	$	14,219		$	(1,990	)
Other long-term assets	—			3,286			3,286
Net cash used in operating activities	(23,849		)	17,505			(6,344		)
Proceeds from sale of business	169,722			(17,505		)	152,217
Net cash provided by investing activities	168,868			(17,505		)	151,363



	For the nine months ended September 30, 2019
	As previously reported			Revisions			As revised
Adjustment to reconcile net cash in operating activities
Other current assets	$	(14,974	)	$	10,938		$	(4,036	)
Other long-term assets	—			3,286			3,286
Net cash used in operating activities	(14,348		)	14,224			(124		)
Proceeds from sale of business	169,722			(14,224		)	155,498
Net cash provided by investing activities	167,497			(14,224		)	153,273



	For the year ended December 31, 2019
	As previously reported			Revisions			As revised
Adjustment to reconcile net cash in operating activities
Other current assets	$	(8,359	)	$	10,938		$	2,579
Other long-term assets	1,131			3,286			4,417
Net cash used in operating activities	(18,769		)	14,224			(4,545		)
Proceeds from sale of business	169,722			(14,224		)	155,498
Net cash provided by investing activities	166,937			(14,224		)	152,713



	For the three months ended March 31, 2020
	As previously reported			Revisions			As revised
Adjustment to reconcile net cash in operating activities
Other current assets	$	6,926		$	(3,281	)	$	3,645
Net cash used in operating activities	(20,496		)	(3,281		)	(23,777		)
Proceeds from sale of business	—			3,281			3,281
Net cash provided by investing activities	41			3,281			3,322

In our March 31, 2020 financial statements, we disclosed the correction of two immaterial errors relating to intangibles that should have been written off in prior periods and improper elimination of profit on intercompany inventory transactions. Such revisions were not material to the previously issued financial statements.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Management evaluated the impact of these errors, individually and in the aggregate, on previously issued financial statements and concluded the impact was not material. Due to the currency translation error, net loss for the year ended December 31, 2015 was originally reported as $13.5 million and would be revised to $14.6 million.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 22 — Subsequent Events

In April 2020, the Company was notified by the NYSE that the average closing stock price had fallen below the continued listing standard of a share price of $1.00 (measured over a 30 day trading average). The Company had until October 2020 (later extended to December 2020) to cure the deficiency. On July 1, 2020, the Company was notified by the NYSE that the deficiency had been cured, and the noncompliance indicator was removed from the Company’s common shares.

On July 28, 2020, the Company received a $6.3 million tax refund, including $0.2 million of interest, pursuant to the CARES Act that extended NOL carryback provisions related to the filing of Form 1139 requesting a refund as a result of an analysis related to the extended NOL carryback provision.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Quarterly Report”), and in particular, Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995 (“Reform Act”). Forward-looking statements are not historical facts, but instead represent Flotek Industries, Inc.’s (“Flotek” or “Company”) current assumptions and beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to the Company’s business plan, objectives, expected operating results, and assumptions upon which those statements are based. The forward-looking statements contained in this Quarterly Report are based on information available as of the date of this Quarterly Report.

The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words including, but not limited to, “anticipate,” “believe,” “estimate,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project,” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could,” etc. 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 is included in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019, as amended (“Annual Report”) and periodically in subsequent reports filed with the Securities and Exchange Commission (“SEC”). The Company has no 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.

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

~~Basis of Presentation~~

During the fourth quarter of 2018, the Company classified the Consumer and Industrial Chemistry Technologies segment as held for sale based on management’s intention to sell this business. 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 from discontinued operations” in the statement 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 sheets for all periods presented. During the first quarter of 2019, the Company completed the sale of this segment.

Executive Summary

Flotek is ~~an international energy~~a technology-driven global chemistry ~~technology-driven~~and data company that develops and supplies ~~chemistries~~engineered chemistry solutions, equipment, data and analytical services to ~~the oil~~industrial, commercial and ~~gas industry. Through February 28, 2019, Flotek also provided high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in~~ consumer ~~and industrial~~ markets. ~~Flotek operates in over 15 domestic and international markets.~~

The ~~Company’s oilfield business includes specialty chemistries and logistics~~Company continued its reinvention, which ~~enable its customers to pursue improved efficiencies~~began in the ~~drilling and completion~~first quarter of their wells. Customers include major integrated oil and gas (“O&G”) companies, oilfield services companies, independent O&G companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies. Through February 28, 2019, the Company also produced non-energy-related citrus oil and related products, classified as discontinued operations, including (1) high value compounds used as additives2020 by ~~companies~~reducing expenses, scrutinizing capital spending to ensure alignment to near-term revenue, acquiring JP3 to secure a footprint in the ~~flavors~~emerging data analytics market, and ~~fragrances markets~~aggressively launching a sustainable line of sanitizer and ~~(2) environmentally friendly chemistries for use~~disinfectant products built on its expertise in ~~numerous industries around the world, including the O&G industry. Additionally, the Company also provides automated bulk material handling, loading facilities, and blending capabilities.~~

high-quality, specialized chemistry technologies.

Continuing Operations

~~The operations~~

With the acquisition of JP3 in May 2020, the Company ~~are categorized into one reportable segment: Energy~~now has two operating segments: Chemistry Technologies ~~(“ECT”).~~and Data Analytics, which are both supported by its continuing Research & Innovation advanced laboratory capabilities.

~~Energy~~ Chemistry Technologies

The Company’s Chemistry Technologies segment includes 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 ~~(“O&G”)~~ 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 characteristics~~Customers of this product line of the Chemistry Technologies business segment include major integrated oil and ~~are manufactured to perform in a broad range of basins~~gas companies, oilfield services companies, independent oil and ~~reservoirs with varying downhole pressures, temperatures~~gas companies, pressure-pumping service companies, national and ~~other well-specific conditions customized to customer specifications. This segment has technical services laboratories~~state-owned oil companies, and ~~a research and innovation laboratory that focus on design improvements, development and viability testing of new chemistry formulations, and continued enhancement of existing products.~~

~~Discontinued Operations~~international supply chain management companies.

In the ~~first~~second quarter of ~~2019,~~2020, the ~~Consumer~~Company launched a line of sanitizers and ~~Industrial Chemistry Technologies segment was sold~~disinfectants for commercial and ~~is classified as discontinued operations.~~

~~Consumer~~personal consumer use. These products build on the Company’s historical expertise in chemistry and ~~Industrial Chemistry Technologies designed, developed,~~leverage its infrastructure, personnel, competencies, supply chain, research, and ~~manufactured products that are sold to companies~~historic consumer market experiences yielding a competitive product offering in this rapidly growing segment. Given the flavor and fragrance industries and specialty chemical industry. These technologies are used by beverage and food companies, fragrance companies, and companies providing household and industrial cleaning products.

~~Market Conditions~~

~~The Company’s success is sensitive to a number of factors, which include, but are not limited to, drilling and well completion activity, customer~~increase in global demand for ~~its advanced technology~~sanitizer products ~~market prices for raw materials,~~due to COVID-19, the Company's concentration of customers is shifting and ~~governmental actions.~~diversifying, which helps to reduce credit and business risk.

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 O&G prices,~~

~~Federal, state, and local governmental actions that may encourage or discourage drilling activity,~~31

~~Customers’ strategies relative to capital funds allocations,~~

~~Weather conditions, and~~

~~Technological changes to drilling and completion methods and economics.~~

~~Historical North American drilling activity is reflected in “TABLE A” on the following page.~~

~~Customers’ demand for advanced technology products and services provided by the Company are dependent on their recognition of the value of:~~

~~Chemistries that improve the economics of their O&G operations,~~

~~Chemistries that meet the need of consumer product markets, and~~

~~Chemistries that are economically viable, socially responsible, and ecologically sound.~~

~~Market prices for commodities, including citrus oils, which are a major raw material used by the Company in its operations, can be influenced by:~~

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

~~Weather related risks,~~

~~Health and condition of citrus trees (e.g., disease and pests), and~~

~~International competition and pricing pressures resulting from natural and artificial pricing influences.~~

~~Governmental actions may restrict the future use of hazardous chemicals, including, but not limited to, the following industrial applications:~~

~~O&G drilling and completion operations,~~

~~O&G production operations, and~~

~~Non-O&G industrial solvents.~~

Data Analytics

TABLE A Three months ended September 30, Nine months ended September 30,
2019 2018 % Change
2019 2018 % Change
Average North American Active Drilling Rigs
U.S. 920
1,051
(12.5 )% 985
1,019
(3.3 )%
Canada 132
209
(36.8 )% 132
195
(32.3 )%
Total 1,052
1,260
(16.5 )% 1,117
1,214
(8.0 )%
Average U.S. Active Drilling Rigs by Type
Vertical 52
63
(17.5 )% 55
61
(9.8 )%
Horizontal 802
921
(12.9 )% 863
890
(3.0 )%
Directional 66
67
(1.5 )% 67
68
(1.5 )%
Total 920
1,051
(12.5 )% 985
1,019
(3.3 )%
Average North American Drilling Rigs by Product
Oil 847
1,004
(15.6 )% 884
954
(7.3 )%
Natural Gas 205
256
(19.9 )% 233
260
(10.4 )%
Total 1,052
1,260
(16.5 )% 1,117
1,214
(8.0 )%
The Company’s Data Analytics 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 information about the composition of its energy customers’ hydrocarbon streams. JP3 is continuing its transition to a Data-as-a-Service (DaaS) subscription model of selling data generated by its line of Verax analyzers, deployed remotely “at the edge” across the oil and gas sector, and software services via its cloud-based Viper software platform.

JP3 creates and sells data systems and analytics services into the oil and gas market. The Company sells equipment with a software license and (DaaS) subscriptions. The data is provided in real time, every fifteen seconds, at the point-of-use and via the cloud, to end use customers. This composition and physical properties information increases efficiency and decreases operating costs for producers, midstream operators, refiners and distribution companies.

~~Source: Rig counts are per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are~~The customers of JP3 span across the ~~averages~~entire market, from production upstream to midstream facilities to refineries and distribution networks. To date, JP3 has focused sales solely on North American markets. The Data Analytics segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, increasing efficiencies of towers, enabling automation and robotization of fluid handling, and reducing losses due to give-away.

Research & Innovation

Flotek Research and Innovation supports both segments through formulations, technical support, basin & reservoir studies, data analytics, and new technology projects. The purpose of the ~~weekly rig count activity.~~organization is to supply the 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 Research and Innovation facilities support advances in chemistry performance, detection, optimization, and manufacturing.

~~Completions are per~~Discontinued Operations

As previously disclosed, the ~~U.S. Energy Information Administration (https://www.eia.gov/petroleum/drilling/~~Company sold Florida Chemical Company, LLC (“FCC”) effective as of ~~October 15,~~February 28, 2019.

~~Average U.S. rig activity decreased by 12.5% and 3.3%~~ As a result, the Company’s CICT segment was classified as discontinued operations. Financial results for the first three and ~~nine~~six months ~~ended September 30,~~of 2019 ~~respectively, when compared~~include results from the Company’s CICT segment during that time period.

Outlook on Economic Conditions

During the first and second quarters of ~~2018,~~2020, the oil and ~~sequentially, decreased by 7.0% when compared~~gas markets experienced significant impacts from both the supply and the demand side. On the demand side, the COVID-19 pandemic resulted in a drop in economic activity and a corresponding destruction of global demand for oil, gas and associated products. On the supply side, pricing and production wars between key oil-producing countries led to global oversupply.

The demand destruction and oversupply together caused unprecedented disruption to all sectors of the ~~second quarter of 2019.~~

According to data collected by the U.S. Energy Information Administration (“EIA”) as reported on October 15, 2019, completions in the seven most prolific areas in the lower 48 states increased 10.1%oil and ~~11.8% for the three and nine months ended September 30, 2019, respectively, when compared to the same periods of 2018. Completions increased 0.3% when compared to the second quarter of 2019.~~

~~Company Outlook~~

After a continuous decline in U.S. drilling activity beginning in mid-2014, the market began to gradually recover in the second quarter of 2016. Although O&G markets have improved, the level of drilling and completion activity remains lower than previous levels experienced before the downturn in 2014. Assuming the pricegas markets. Prices for crude oil ~~remains relatively soft~~fell from over $60/bbl. in January 2020 to nearly $20/bbl. by May 2020, with futures turning negative for a brief period in April 2020. Oil and ~~regulatory impediments are limited,~~gas operators announced budget cuts of more than 40%, or $42 billion year-over-year, according to RS Energy Group, and announced shut-ins of more than 1.4 million barrels of production. The North American rig count declined approximately 70% from January 2020 to the end of June 2020, based on the Baker Hughes rig count figures, reflecting disproportionate impact to domestic markets.

Midstream and downstream markets were affected as well, as domestic gasoline demand fell by approximately 45% in April 2020 (almost 5 million barrels per day) and refinery utilization dropped below 70%. The Company expects ~~continued volatility~~negative impacts to all facets of the oil and gas markets to continue for an extended period before returning to pre-crash levels. Any further material COVID-19 disruption or significant setback in ~~global oilfield activity~~oil demand arising from a slower economic recovery could present downside risks to this outlook.

Conversely, the COVID-19 pandemic has created increased demand for certain specialty chemicals, and in particular disinfectants and sanitizers. The increased usage globally of personal protection equipment has expanded beyond masks, face shields, and gloves to include both disinfectants and sanitizers. With the ~~remainder~~outbreak of ~~2019.~~COVID-19, sales of hand sanitizers and disinfectants has swelled

~~During~~across every region in the world, which led to a global shortage. Consequently, the market has experienced shortages of key raw materials used to make these products, including USP-grade alcohol, woven cellulosics for wipes, and various active ingredients. This rapid growth is accompanied by a need for sustained higher volumes of sanitizing products as COVID-19 is expected to have a long-term impact on social awareness, personal hygiene habits and consumer and commercial cleaning protocols.

Company Outlook

In response to the deteriorating market conditions and anticipating ongoing volatility, Flotek has reduced its cost structure to meet anticipated market activity and reduce the Company’s break-even levels. Among other cost-cutting 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.

The board of directors of Flotek approved a 20% reduction in the fees to be paid to the directors, effective as of April 1, 2020.

The Company consolidated office space by moving all employees at its corporate headquarters into its GRIC facility 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 headcount by 35% on March 30, 2020.

The Company decreased discretionary spending across all business operations.

These efforts were in addition to the previously-announced restructuring of the Company’s terpene supply agreement in February of 2020, which more closely matched the Company’s ongoing obligations for terpene with expected need, and bringing more legal work in-house to reduce outside legal expenses.

While the full impact 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. Any future development and effects will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic; further adverse revenue and net income effects; disruptions to our operations; third ~~quarter~~party providers’ ability to support our operations; customer shutdowns of ~~2019,~~oil and gas exploration and production; the effectiveness of our work from home arrangements; employee impacts 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 our facilities or the facilities of our customers and suppliers. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

Flotek has also focused on ongoing 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 ~~continued~~closed the acquisition of all the ownership interests of JP3, which gives Flotek access to ~~promote~~ the ~~efficacy~~midstream and downstream markets and diversifies exposure to volatility in the upstream sector. As Flotek’s newly-created Data Analytics segment, JP3 is positioned for growth both domestically and internationally. In addition to increasing market share, the Data Analytics segment is pursuing product enhancements that enable growth opportunities with current and prospective customers.

The Company’s Chemistry Technologies segment has focused on development of ~~its Complex nano-Fluid~~^® ~~(“CnF~~^®~~”) chemistries~~competitively-priced product lines that are responsive to current market including wellbore protection and ~~its Prescriptive Chemistry Management~~^® ~~(“PCM~~^®~~”) offering. Although quarter-to-quarter performance may vary,~~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 with a shift to optimizing existing infrastructure, the Company ~~expects~~initiated several efforts to ~~continue~~use specialty chemicals to ~~penetrate the market over time by demonstrating the efficacy of its CnF~~^® ~~chemistries and reservoir-centric full fluid systems via PCM~~^®improve enhanced oil recovery (EOR). The Company will continue to demonstrate the value and benefit of Flotek chemistries through comparative analysis of wells with and without Flotek chemistries and field validation results conducted in partnership with exploration and production (“E&P”) companies. Flotek is experiencing a notable shift in purchasing behaviors in which E&P companies are seeking greater transparency, control and efficacy in their fluid systems, as they see diminishing returns on mechanical factors in their completion designs, such as proppant loading, fluid loading, and lateral length in their completions. As a result, they are focusing more on sourcing consumables, including chemistry, directly from manufacturers and other providers of these products. This trend has created significant changes in Flotek’s customer base, product portfolio, and sales efforts and continues to influence changes in inventory and distribution strategies, capital allocation, and the business model for the Company. While these challenges are expected to persistalso leveraged its international footprint in the ~~near-term, the~~Middle East to include unconventional, conventional, and enhanced oil recovery programs.

The Chemistry Technologies segment has also used its expertise in specialty chemistry, existing chemistry infrastructure and facilities, and historical consumer market experience to launch a product line of sanitizers and disinfectants, as discussed above. The Company believes ~~it can grow its client base~~the new sanitizer and ~~revenue opportunities~~disinfectant products slot into the premium market and will be competitive over ~~time.~~the long-term.

The Company ~~continues~~has also made changes to ~~enhance~~its executive team to align with its growth focus. TengBeng Koid, an experienced energy executive with significant upstream, midstream, downstream and ~~improve its patented and proven chemistries through its industry leading research and innovation staff who develop innovative and customer- responsive products,~~digital experience, joined Flotek as well as create new chemistry technologies, which are expected to address oilfield challenges of the future and expand the Company’s product lines. Completed in 2016, the Company’s Houston based Global Research & Innovation Center houses scientists, chemists, geologists, and reservoir, petroleum and geomechanical engineers who advance the development of next-generation innovative energy chemistries, as well as expanded collaboration among clients, leaders from academia, and Company scientists. These collaborative opportunities are an important and distinguishing capability within the industry and provide real-time product and fluid system development support directly to the customer.

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 continues to focus on maximizing the profitability of its product and business portfolio, and may exit or enter new product lines or businesses which complement its current operations.

Capital expenditures for continuing operations totaled $1.9 million and $3.8 million for the nine months ended September 30, 2019 and 2018, respectively. The Company expects capital expenditures to total approximately $2.2 million for 2019 and does not have any specific growth capital projects currently planned or committed. During the first quarter of 2019, the Company formed a Strategic Capital Committee that will consider these possible growth capital projects going forward. The Company will remain nimble in its core capital expenditure plans, adjusting as market conditions warrant, and will focus any growth capital spending program on uses that generate positive returns and to areas that pose a strategic long-term benefit.

~~During the first quarter and into the beginning of the second quarter of 2019, the Company lost several key sales personnel. In April 2019, the Company hired a new Senior Vice~~ President of Global ~~Sales &~~ Business ~~Development who now leads the Company’s~~in June 2020 and oversees all domestic and international sales and business development ~~strategies as well as operations. By~~efforts for both the ~~end of~~Chemistry Technologies and the ~~third quarter,~~Data Analytics segments. Additionally, Michael E. Borton joined the Company ~~had substantially rebuilt a more technically oriented sales organization; however,~~as Chief Financial Officer in August 2020, bringing 35 years of experience serving in financial and operational leadership roles for high-growth, Software as a result of the transition of sales personnel, and the typically longer sales cycle for the company’s products, revenue for the remainder of 2019 may be negatively impacted. The Company believes the opportunity it has taken to enhance the technical background of its sales personnel together with relationships built with its customers, and the demonstrated value and benefit of Flotek’s chemistries will help to mitigate further potential revenue declines.Service (SaaS)

Changes to geopolitical, global economic, and industry trends could have an impact, either positive or negative, on the Company’s business. In the event of significant adverse changes to the demand for oil and gas production, the market price for oil and gas, weather patterns, and/or the availability of citrus crops, the market conditions affecting the Company could change rapidly and materially. Should such adverse changes to market conditions occur, management believes the Company has adequate liquidity to withstand the impact of such changes while continuing to make strategic capital investments and acquisitions, if opportunities arise. In addition, management believes the Company is well-positioned to take advantage of significant increases in demand for its products should market conditions improve dramatically in the near term.

technology companies in a wide range of industries. Finally, Ryan Ezell, Ph.D, has been promoted to the role of President of Chemistry Technologies from Senior Vice President of Operations at Flotek.

Consolidated Results of ~~Continuing~~ Operations (in thousands):


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Revenue	$	21,879		$	53,709		$	99,827		$	134,324		$	8,880		$	34,692		$	28,296		$	77,949
Operating expenses (excluding depreciation and amortization)	23,689			45,647			106,593			117,848			11,632			38,121			34,473			82,089
Operating expenses %	108.3		%	85.0		%	106.8		%	87.7		%	131.0		%	109.9		%	121.8		%	105.3		%
Corporate general and administrative	5,685			7,476			19,020			24,634			5,395			6,054			9,888			13,335
Corporate general and administrative %	26.0		%	13.9		%	19.1		%	18.3		%	60.8		%	17.5		%	34.9		%	17.1		%
Depreciation and amortization	2,058			2,259			6,437			6,935			468			2,119			2,659			4,379
Research and development costs	2,297			2,350			6,657			8,054			1,638			2,076			4,193			4,360
Loss on disposal of long-lived assets	3			57			1,096			119
Impairment of goodwill	—			—			—			37,180
(Gain) loss on disposal of long-lived assets													(22		)	(4		)	(55		)	1,093
Impairment of fixed assets and long-lived assets													—			—			57,454			—
Loss from operations	(11,853		)	(4,080		)	(39,976		)	(60,446		)	(10,231		)	(13,674		)	(80,316		)	(27,307		)
Operating margin %	(54.2		)%	(7.6		)%	(40.0		)%	(45.0		)%	(115.2		)%	(39.4		)%	(283.8		)%	(35.0		)%
Loss on sale of business	—			(360		)	—			(360		)
Loss on write-down of assets held for sale	—			—			—			(2,580		)
Gain on lease termination													576			—			576			—
Interest and other income (expense), net	435			(736		)	(778		)	(4,501		)	62			677			11			(1,213		)
Loss before income taxes	(11,418		)	(5,176		)	(40,754		)	(67,887		)	(9,593		)	(12,997		)	(79,729		)	(28,520		)
Income tax benefit (expense)	191			333			1,157			(15,545		)
Income tax benefit													32			192			6,201			503
Loss from continuing operations	(11,227		)	(4,843		)	(39,597		)	(83,432		)	(9,561		)	(12,805		)	(73,528		)	(28,017		)
Income from discontinued operations, net of tax	117			911			46,881			4,176
Net income (loss)	$	(11,110	)	$	(3,932	)	$	7,284		$	(79,256	)
(Loss) income from discontinued operations, net of tax													—			(1,608		)	—			44,466
Net (loss) income													$	(9,561	)	$	(14,413	)	$	(73,528	)	$	16,449
Net (loss) income %	(51.3		)%	(9.0		)%	(39.7		)%	(62.1		)%	(107.7		)%	(36.9		)%	(259.9		)%	(35.9		)%
Net loss attributable to noncontrolling interests	—			—			—			357
Net income (loss) attributable to Flotek Industries, Inc. (Flotek)	$	(11,110	)	$	(3,932	)	$	7,284		$	(78,899	)

Consolidated Results of Operations: Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020, Compared to the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019

Consolidated revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, decreased ~~$31.8~~$25.8 million, or ~~59.3%~~74.4%, and ~~$34.5~~$49.7 million or ~~25.7%~~63.7%, respectively, and versus the same periods of ~~2018.~~2019. The decrease in revenue was largely a result of the continued volatile macro-environment for U.S. onshore drilling and completion activity, impacted by political and economic events in foreign markets. In addition, concerns related to the ~~transition of personnel in the Company’s sales organization,~~COVID-19 virus impacted productivity and ~~the deferral of completion activity by certain clients.~~customers demand for products.

Consolidated operating expenses (excluding depreciation and amortization) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, decreased ~~$22.0~~$26.5 million, or ~~48.1%~~69.5%, and ~~$11.3~~$48 million or ~~9.6%~~58.0%, respectively, ~~compared to~~versus the same periods of ~~2018,~~2019, and, as a percentage of revenue, increased ~~to 108.3%~~by 21.1%, and ~~106.8%~~16.5%, respectively for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively from 85.0% and 87.7%~~2020. The decrease in ~~the same periods of 2018. The decrease~~operating expenses is primarily due to the lower ~~material costs, lower logistics, lower labor,~~cost of sales as a result of reduced revenues and lower ~~inventory adjustments.~~freight, personnel, and travel and entertainment expenses.

Corporate general and administrative (“CG&A”) expenses are not directly attributable to products sold or services provided. CG&A costs ~~decreased $1.8 million, or 24.0%, and $5.6 million, or 22.8%, respectively,~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, decreased $0.7 million, or 10.9%, and $3.4 million or 25.8%, respectively, versus the same ~~periods~~period of ~~2018.~~2019. As a percentage of revenue, CG&A increased ~~12.1%~~43.3% and ~~0.7%~~17.8% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively.~~2020. The decrease in CG&A costs were primarily due to lower personnel costs, lower software licensing fees, lower stock based compensation and lower professional fees.

Depreciation and amortization expense decreased ~~$0.2~~$1.7 million, or ~~8.9%~~77.9%, and ~~$0.5~~$1.7 million, or ~~7.2%~~39.3%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, and versus the same periods of ~~2018.~~2019 primarily due to impairment of fixed and long-lived assets recorded in the first quarter 2020.

Research and ~~Innovation (“R&I”) expense~~development costs decreased ~~$0.1~~$0.4 million, or ~~2.3%~~21.1%, and ~~$1.4~~$0.2 million, or ~~17.3%~~3.8%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, ~~compared to~~and versus the same periods of ~~2018. The decrease is primarily~~2019 due to lower personnel costs ~~related to the reductions~~as a result of reduction in ~~headcount associated costs savings initiatives during~~force in the first ~~half of 2019.~~quarter 2020.

~~Loss~~Gain on disposal of long-lived assets ~~remained flat~~had no change and increased $1.1 million, or 105.0% for the three and six months ended ~~September~~June 30, ~~2019 but increased $1.0 million for the nine months ended September 30, 2019, compared to~~2020, respectively, and versus the same periods of ~~2018, primarily~~2019.

Impairment of fixed asset and long-lived assets was $57.5 million due to ~~the disposal~~a write-down of ~~certain corporate software~~fixed assets, operating right-of-use (“ROU”) assets and intangible assets to estimated fair market value and recorded in the first quarter of 2020.

Loss from operations decreased $3.4 million, or 25.2%, and increased $53.0 million, or 194.1% and for the three and six months ended June 30, 2020, respectively, and versus the same period in 2019. The change in loss is primarily the result of the impairment charges, lower margins, lower sales volumes and lower plant utilization.

Interest and other ~~expense~~income (expense), net increased $0.6 million, or 90.8%, and decreased $1.2 million, ~~and $3.7 million~~or 100.9% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, and versus the same ~~periods~~period of ~~2018,~~2019, primarily due to ~~a $1.2 million write-off associated with~~ the discontinuation of certain corporate projects during the second quarter 2018 and $1.3 million related to moving from an interest expense position to an interest income position as a result of the sale of the CICT segment and subsequent termination of the Amended and Restated Revolving Credit, Term Loan and Security Agreement (as amended, the “Credit Facility”) with PNC Bank in the first quarter 2019. ~~The decrease is partially offset by the acceleration of $1.4 million of unamortized debt issuance costs associated with the termination of the Credit Facility in the first quarter 2019.~~

The Company recorded an income tax benefit of ~~$0.2~~$6.2 million, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act, yielding an effective tax benefit rate of 0.3%, and ~~$1.2~~7.7%, for the three and six months ended June 30, 2020, respectively, compared to an income tax benefit of $0.5 million, yielding an effective tax benefit rate of 1.6% and ~~2.8%, for the three~~ and nine months ended September 30, 2019, respectively, compared to an income tax benefit of $0.3 million and income tax expense of $15.5 million, yielding an effective tax benefit rate of 6.0% and 22.8%,3.3% for the comparable periods in ~~2018.~~2019.

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 $0.1 million and $46.9 million for the three and nine months ended September 30, 2019, respectively.

~~Results by Segment~~

Energy Chemistry Technologies (“ECT”)
(dollars in thousands) Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
Revenue $ 21,879
$ 53,709
$ 99,827
$ 134,324
Income (loss) from operations (5,984 ) 3,921
(18,968 ) (34,176 )
Income (loss) from operations - excluding impairment (5,984 ) 41,101
(18,968 ) 3,004
Operating margin % (27.4 )% 7.3 % (19.0 )% (25.4 )%

~~ECTResults of Operations: Three and Nine Months Ended~~ ~~September 30, 2019, Compared to the Three and Nine Months Ended~~ ~~September 30, 2018~~

ECT revenue for the three and nine months ended September 30, 2019, decreased $31.8 million, or 59.3%, and $34.5 million, or 25.7%, respectively, and versus the same period of 2018. The decrease in revenue was a result of the continued volatile macro-environment for U.S. onshore drilling and completion activity, the transition of personnel in the Company’s sales organization, and the deferral of completion activity by certain clients.

The change in income (loss) from operations was unfavorable for the ECT segment by $9.9 million and favorable by $15.2 million for the three and nine months ended September 30, 2019, respectively, versus the same period in 2018. The unfavorability for the three months ended September 30, 2019 is primarily the result of lower sales volumes and lower plant utilization, partially offset by lower logistics and personnel costs. The favorability for the nine months ended September 30, 2019 is due to a non-recurring impairment of goodwill of $37.2 million in 2018 and lower personnel costs, partially offset by lower sales volumes and lower plant utilization.

~~Discontinued Operations~~Results by Segment (in thousands):

~~During~~

Chemistry Technologies



	Three months ended June 30,					Six months ended June 30,
	2020		2019			2020			2019
Revenue	7,962		$	34,692		$	27,378		$	77,949
Gross margin	1,301		18,180			2,539			54,609
Gross margin %	16.3	%	52.4		%	9.3		%	70.1		%
Income from operations	(3,596	)	(7,651		)	(66,257		)	(12,984		)
Income from operations %	(45.2	)%	(22.1		)%	(242.0		)%	(16.7		)%

Chemistry Technologies Results of Operations: Three and Six Months Ended June 30, 2020, Compared to the ~~fourth~~Three and Six Months Ended June 30, 2019

Chemistry Technologies revenue for the three and six months ended June 30, 2020 decreased $26.7 million or 77.0%, and $50.6 million or 64.9%, respectively, versus the same period of 2019. The decrease in revenue during the second quarter of ~~2018,~~2020 and the ~~Company classified~~majority of the ~~Consumer~~first half of 2020 was significantly driven by impacts from both the supply and ~~Industrial~~the demand side. The COVID-19 pandemic resulted in a sharp decline in economic activity and a corresponding destruction of global demand for oil and gas, while pricing and production wars between key oil-producing countries led to global oversupply. The demand destruction and oversupply together caused unprecedented disruption to all sectors of the oil and gas markets, with a significant reduction in North American drilling and completion activity and its need for chemicals. While experiencing pricing and overall market compression in the oil and gas sector of the Chemistry Technologies segment, growth in the sanitizer and disinfectant sector evolved as ~~held~~a natural fit with the Company’s core technical and manufacturing capabilities, with potential positive long-term opportunity for ~~sale based~~diversification and sustainability of the portfolio, representing revenue for the Company in the second quarter of 2020.

Chemistry Technologies gross margin (excluding depreciation and amortization) for the three and six months ended June 30, 2020, decreased $16.9 million, or 92.8%, and $52.1 million or 95.4%, respectively versus the same period of 2019, and as a percentage of revenue, decreased 36.1%, and 60.8% for the three and six months ended June 30, 2020. Gross margins were influenced by shifts in completion technologies to more cost efficient and simplified chemistry and engineering packages, as well as continued pressure on ~~management’s intention~~market pricing to ~~sell~~maintain key accounts and available market share. Subsequently, the ~~business. During~~Company executed on a number of activities to reduce cost of sales, freight, personnel, and its operational cost structure to minimize the impacts of revenue declines and modified product mix.

Chemistry Technologies income from operations (excluding depreciation and amortization) for the three and six months ended June 30, 2020, improved $4.1 million, or 53.0%, and decreased $53.3 million or 410.3%, respectively versus the same period of 2019, and as a percentage of revenue, decreased 23.1%, and 225.4% for the three and six months ended June 30, 2020. The increase in loss during the six months ended June 20, 2020 is primarily the result of the impairment charges of $57.5 million and lower margins due to sales volumes and plant utilization recorded in the first quarter of 2019, the Company completed the sale of the segment. 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 information below is presented for informational purposes only.2020.

Data Analytics

Consumer and Industrial Chemistry Technologies (“CICT”)
(dollars in thousands) Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
Revenue $ —
$ 17,280
$ 11,031
$ 56,267
Income (loss) from operations —
858
(610 ) 3,938
Operating margin % — % 5.0 % (5.5 )% 7.0 %



	May 18 - June 30
	2020
Revenue	$	918
Gross margin	370
Gross margin %	40.3		%
Income from operations	(1,151		)
Income from operations %	(125.4		)%

Data Analytics Results of Operations: May 18, 2020 to June 30, 2020

During the second quarter of 2020, the Company announced the purchase of JP3, an equipment and data company that automates real-time data and analytics to the energy industry to maximize the value of their hydrocarbons.

During the second quarter, revenue was hindered by sluggish-to-nonexistent capital spending across the entire oil and gas market. The second quarter came with site lockdowns and extreme caution to prevent the spread of COVID-19. The segment finished the quarter with $0.9 million of revenue that came from existing JP3 customers.

Off-Balance Sheet Arrangements

There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of ~~September~~June 30, ~~2019~~2020, the Company was not involved in any unconsolidated SPEs.

The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors other than the long term terpene agreement discussed in Note 3.3 in Part I, Item I - Financial Statements of this Quarterly Report.

Critical Accounting Policies and Estimates

The Company’s Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparation of these statements requires management to make judgments, estimates, and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Part II, Item 8 — Financial Statements and Supplementary Data, Note 2 of “Notes to Consolidated Financial Statements” and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates” of the Company’s Annual Report, and the “Notes to Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report describe the significant accounting policies and critical accounting estimates used to prepare the consolidated financial statements. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most subjective judgments. The Company regularly reviews and challenges judgments, assumptions, and estimates related to critical accounting policies. The Company’s estimates and assumptions are based on historical experience and expected changes in the business environment; however, actual results may materially differ from the estimates. There have been no significant changes in the Company’s critical accounting policies and estimates during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. However, during the six months ended June 30, 2020, the Company evaluated and recorded remeasurement and impairment charges on right of use assets and fixed assets, respectively. Secondly, during the six months ended June 30, 2020, the Company acquired JP3 and recorded the fair value of net assets acquired as of the closing date of May 18, 2020.

Recent Accounting Pronouncements

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

Capital Resources and Liquidity

Overview

The Company’s ongoing capital requirements ~~arise from~~relate to the ~~Company’s~~Company's need to to acquire and maintain equipment, fund working capital requirements, and when the opportunities arise, to make strategic acquisitions and repurchase Company stock. During the first ~~nine~~six months of ~~2019,~~2020, the Company funded capital requirements primarily with cash from operations and cash on hand, including proceeds from the sale of the CICT segment, ~~and debt financing.~~

received on March 1, 2019.

Historically, the Company’s primary source of debt financing was its $75 million Credit Facility with PNC Bank. Upon closing of the sale of the CICT segment, on March 1, 2019, the Company repaid the outstanding balance, interest, and fees related to the revolving credit facility, and subsequently terminated the Credit Facility. Significant terms of the Credit Facility are discussed in Note 13 — “Long-Term Debt and Credit Facility” in Part II, Item 8 — “Financial Statements and Supplementary Data” of the Company’s Annual Report.

~~The Company believes it has adequate liquidity to fund its ongoing operations and capital expenditures.~~

As of ~~September~~June 30, ~~2019,~~2020, the Company had available cash and cash equivalents of ~~$107.0~~$59.9 million. For the remainder of ~~2019,~~2020, the Company expects ~~maintenance~~ capital spending of approximately ~~$0.3~~$2.0 million to $3.0 million for the Company’s Chemistry segment and ~~does not have any specific growth capital projects currently planned or committed. Futhermore,~~$1.0 million to $2.0 million for the Company’s Data Analytics segment. The Company ~~plans to use internally generated funds and cash on hand~~expects to fund operations and capital ~~expenditures. With~~expenditures with internal cash on hand, including the ~~proceeds~~PPP loan funded in April 2020 for $4.8 million to Flotek and $0.9 million to JP3, the tax refund of $6.1 million, and the release of $6.6 million from the indemnity escrow established pursuant to the sale of ~~the CICT segment, the Company paid off its Credit Facility balance and formed a Strategic Capital Committee~~FCC to evaluate and make recommendations to the board of directors regarding the manner in which the remaining net proceeds from the sale will be deployed. Subject to Board approval of any recommendations by the Strategic Capital Committee, the Company will continue to invest capital in what it believes to be economically attractive opportunities for its shareholders. This includes the potential for share repurchases included under our share repurchase program approved by the board of directors in June 2015.ADM effective February 28, 2019.

Any excess cash generated may be used for outside growth opportunities or retained for future use.

Cash Flows

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


	Nine months ended September 30,						Six months ended June 30,
	2019			2018			2020			2019
Net cash used in operating activities	$	(13,685	)	$	(24,781	)	$	(29,216	)	$	(6,344	)
Net cash (used in) provided by investing activities	167,497			(3,405		)	(16,424		)	151,363
Net cash (used in) provided by financing activities	(49,880		)	25,247
Net cash flows provided by discontinued operations	16			250
Net cash provided by (used in) financing activities							5,023			(49,911		)
Net cash provided by discontinued operations							—			16
Effect of changes in exchange rates on cash and cash equivalents	2			(66		)	(31		)	2
Net increase (decrease) in cash and cash equivalents	$	103,950		$	(2,755	)
Net (decrease) increase in cash and cash equivalents and restricted cash							$	(40,648	)	$	95,126

Operating Activities

Net cash used in operating activities was ~~$13.7~~$29.2 million and ~~$24.8~~$6.3 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Consolidated net loss for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ totaled ~~$39.6~~$73.5 million and ~~$83.4~~$28.0 million, respectively. The cash used in operating activities is primarily due to two one-time payments, one to FCC to amend the Company’s long-term terpene supply agreement and one to ADM related to the final post-closing working capital adjustment related to the sale of the CICT segment in 2019.

During the ~~nine~~six months ended ~~September~~June 30, ~~2019, net~~2020, non-cash ~~contributions~~adjustments to net income totaled ~~$31.0~~$62.1 million. Contributory non-cash items consisted primarily of ~~$18.0~~a $57.5 million impairment charge consisting of $30.2 million impairment on fixed assets, $15.2 million on impairment of intangibles, and$7.4 million impairment on ROU assets. Additional non-cash charges included $2.7 million for depreciation and amortization, $0.5 million for allowance for doubtful accounts, $1.5 million for stock compensation expense, and $0.5 million for provision for excess and obsolete inventory.

During the six months ended June 30, 2019, non-cash adjustments to net income totaled $27.0 million. Contributory non-cash items consisted primarily of $17.9 million for changes to deferred income taxes driven by the valuation allowance recorded against deferred tax assets, ~~$7.9~~$4.4 million for depreciation and amortization, ~~$2.8~~$1.1 million on loss of disposal of assets,$0.5 million non-cash lease expense, and $1.7 million for stock compensation ~~expense, and $1.1 million for net loss on disposal of long-lived assets.~~expense.

During the ~~nine~~six months ended ~~September~~June 30, ~~2018, net non-cash contributions to net~~2020, changes in working capital used $17.8 million in cash, primarily resulting from a decrease in accrued liabilities and accounts payable of $27.3 million, increase in accounts receivable, inventories and other current assets of $25.2 million, offset by an increase in income ~~totaled $71.7~~tax payable of $0.1 million and reducing income tax receivable by $6.3 million. Contributory non-cash items consisted primarily of $37.2 million for the goodwill impairment charge, $15.4 million for changes to deferred income taxes driven by the valuation allowance recorded against deferred tax assets, $6.6 million for stock compensation expense, loss on write-down of assets held for sale of $2.5 million, $7.2 million for depreciation and amortization and $1.8 million for provisions related to inventory reserves.

During the ~~nine~~six months ended ~~September~~June 30, 2019, changes in working capital used ~~$5.1~~$5.3 million in cash, primarily resulting from ~~increasing restricted cash and other current assets by $15.6 million and decreasing accounts payable,~~a decrease in accrued liabilities and ~~interest~~accounts payable ~~$17.6~~of $14.4 million, increase in accounts receivable and inventories of $7.2 million partially offset by ~~decreasing accounts receivable, inventories~~an increase in income tax payable of $1.2 million, and reducing income tax receivable ~~by $27.5 million and increasing income tax payable by $0.6 million.~~

During the nine months ended September 30, 2018, changes in working capital used $13.4 million in cash, primarily resulting from increasing accounts receivable and inventory by $11.9 million and decreasing accrued liabilities and interest payable by $9.0 million, partially offset by increasing income tax receivable and, other current assets and restricted cash by ~~$1.8 million and increasing accounts payable by $5.6~~$17.2 million.

Investing Activities

Net cash used in investing activities was $16.4 million for the six months ended June 30, 2020. The cash used in investing activities is primarily due to the acquisition of JP3 during the second quarter 2020.

Net cash provided by investing activities was ~~$167.5~~$151.4 million for the ~~nine~~six months ended ~~September~~June 30, 2019. Cash provided by investing activities primarily included ~~$169.7~~$152.2 million of proceeds from sale of business and $0.1 million of proceeds received from the sale of ~~the CICT segment,~~assets, partially offset by ~~$1.9~~$0.8 million for capital expenditures and ~~$0.5~~$0.2 million for the purchase of various ~~patents and intangible assets.~~patents.

Financing Activities

Net cash ~~used in investing~~generated through financing activities was ~~$3.4~~$5.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2020. Cash ~~used in investing~~generated through financing activities primarily included ~~$4.0~~$4.8 million ~~for capital expenditures~~proceeds from borrowings under the PPP, and ~~$1.5 million for the purchase of various patents, partially offset by~~ $0.4 million of proceeds ~~received~~ from the sale of ~~long-lived assets and $1.6~~common stock partially offset by $0.1 million cash used in the purchase of ~~proceeds from sale of business.~~

~~Financing Activities~~treasury stock.

Net cash used in financing activities was $49.9 million for the ~~nine~~six months ended ~~September~~June 30, 2019, primarily due to using ~~$49.7~~$92.7 million for repayments of debt, net of borrowings, associated with the termination of the Credit Facility and $0.2 million for purchases of treasury stock for tax withholding purposes related to the vesting of restricted stock awards.

Net cash generated through financing activities was $25.2 million for the nine months ended September 30, 2018, primarily due to receiving $25.5 million for borrowings of debt, net of repayments, and receiving $0.3 million in proceeds from the sale of common stock, partially offset by ~~a loss from noncontrolling interest~~borrowings on revolving credit facility of ~~$0.4 million and $0.2 million related to debt issuance costs and purchase of treasury stock.~~$42.9 million.

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 payments of finance and operating lease obligations. Contractual obligations at ~~September~~June 30, ~~2019,~~2020, are as follows (in thousands):


	Payments Due by Period										Payments Due by Period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years		Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Finance lease obligations	260		70		109		78		3		$	213	$	70	$	101	$	42	$	—
Operating lease obligations	36,261		2,450		4,615		4,331		24,865		13,969		1,371		2,593		2,684		7,321
Supply commitments for raw materials	72,020		18,005		54,015		—		—		17,724		1,974		15,750		—		—
Total	$	108,541	$	20,525	$	58,739	$	4,409	$	24,868	$	32,390	$	3,899	$	18,444	$	2,726	$	7,321

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

The ~~Company’s disclosure~~Company previously identified material weaknesses in its internal control over financial reporting relating to the ineffective design and operating effectiveness of internal controls over the elimination of intercompany profits in inventory, the recording of certain intangible assets and ~~procedures are designed~~the operating effectiveness of controls relating to ~~provide such reasonable assurance.~~impairment analyses of fixed and long-lived assets.

In addition to the material weaknesses mentioned above, during the preparation of the financial statements for the quarter ended June 30, 2020 the Company identified an error relating to the classification of cash flows from the Florida Chemical Company sale in 2019. Specifically, errors were identified relating to the classification of proceeds from the sale and treatment of funds released from escrow subsequent to the sale. Based on these evaluations, the Company has identified the material weaknesses in internal control of financial reporting relating to ineffective design and operation of controls over nonrecurring transactions, including derecognition of items and cash flow presentation relating to disposal transactions, ineffective design and operation of

controls over the elimination of intercompany profits in inventory, and operating ineffectiveness of controls relating to impairment evaluations.

The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in this Form 10-Q and its previously issued financial statements, present fairly in all material respects, the consolidated financial positions, results of operations and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.

The Company’s management, ~~with the participation of the~~including its principal executive officer and principal financial ~~officers,~~officer, have evaluated the effectiveness ~~of the design and operation~~ of the Company’s disclosure controls and procedures, as ~~of September 30, 2019, as~~ required by Rule 13a-15(e) and 15d-15(c) of the Exchange ~~Act. Based upon that evaluation, the principal executive~~Act as of June 30, 2020 and ~~principal financial officers have~~has concluded that the Company’s disclosure controls and procedures were not effective as of ~~September~~June 30, ~~2019.~~2020 due to the material weaknesses in internal control over financial reporting described above.

Remediation Plan

As of June 30, 2020, the material weaknesses discussed above have not been remediated. The Company implemented certain remediation action and continues to test and evaluate the elements of the remediation plan.

These elements include:

Implementing monitoring controls over the review and validation of intangible assets

Expanding monthly close and consolidation procedures

Modifying the chart of accounts

Expanded monthly management review controls

Expanding controls over impairments of long-lived assets

Changes in Internal Control Over Financial Reporting

~~There~~Except for the remediation actions discussed above, there have been no changes in the Company’s system of internal control over financial reporting during the three months ended ~~September~~June 30, ~~2019,~~2020, that have materially affected, or are reasonably likely to materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

~~Other~~ Litigation

Item 1A. Risk Factors

~~See~~

The following risk factor supplements the “Risk Factors” section in Part I,1, Item 1A ~~— “Risk Factors"~~ of the Company’s ~~2018~~ Annual Report on Form 10-K ~~and Company’s Quarterly Report on Form 10-Q~~ for the ~~quarter~~fiscal year ended ~~March~~December 31, 2019 filed on March 16, 2020:

The COVID-19 pandemic has significantly reduced demand for our services and may have a ~~detailed discussion~~material adverse impact on our financial condition, results of operations and cash flows.

The effects of the ~~Company’s risk factors. There~~COVID-19 (coronavirus) pandemic, including actions taken by businesses and governments, have ~~been no~~resulted in a significant and swift 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 services and products. The decline in our customers’ demand for our services and products is likely to have a material ~~changes~~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 ~~these risk factors.~~have an impact on the ability of employees and management of the Company to communicate and work efficiently.

While the full impact 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. Any future development and effects will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic; further adverse revenue, accounts receivable aging and collections, and net income effects; disruptions to our operations; third party providers’ ability to support our operations; customer shutdowns of oil and gas exploration and production; the effectiveness of our work from home arrangements; employee impacts 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 our facilities or the facilities of our customers and suppliers. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

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

None.

Issuer Purchases of Equity Securities

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock.

On June 9, 2020, the board of directors of the Company rescinded the authorization to repurchase the Company’s stock that had been previously approved in June 2015.

Repurchases of the Company’s equity securities during the three months ended ~~September~~June 30, ~~2019,~~2020 that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:

Period
Total Number of Shares Purchased ⁽¹⁾
Average Price Paid per Share 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 ⁽²⁾
July 1, 2019 to July 31, 2019 4,766
$ 3.20
—
$ 49,704,947
August 1, 2019 to August 31, 2019 24,631
$ 1.99
—
$ 49,704,947
September 1, 2019 to September 30, 2019 —
$ —
—
$ 49,704,947
Total 29,397

—



Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share
April 1, 2020 to April 30, 2020	562	$	0.81
May 1, 2020 to May 31, 2020	40,040	$	0.99
June 1, 2020 to June 30, 2020	1,779	$	1.02
Total	42,381


(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.


~~(2)~~	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 open market or privately negotiated transactions. Through September 30, 2019, 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.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit Number		Description of Exhibit
2.1		Share Purchase Agreement, dated as of January 10, 2019, by and between the Company and ADM (portions of this exhibit have been omitted pursuant to a confidential treatment request, which has been granted) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on March 4, 2019).¹
2.2		Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between the Company, JP3 Measurement, LLC, the Sellers party thereto, and John A. Cardwell, as Seller Representative) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 19, 2020).¹
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2007).
3.2		Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009).
3.3		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Flotek Industries, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 7, 2020).
3.4		Second Amended and Restated Bylaws, dated October 11, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on October 17, 2017).
4.1		Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s Definitive Proxy Statement filed on September 27, 2001).
10.1		Promissory Note dated April 16, 2020 in favor of PNC Bank, National Association (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 3,April 17, 2020). ¹
10.2		Employment Agreement, dated May 18, 2020, between the Company and Matthew R. Thomas (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 19, 2020).
10.3		Employment Agreement, dated June 4, 2020, between the Company and TengBeng Koid (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 22, 2020).
10.4	*	Separation and Release Agreement, dated July 28, 2020, between the Company and Elizabeth Wilkinson
31.1	*	Rule 13a-14(a) Certification of Principal Executive Officer.
31.2	*	Rule 13a-14(a) Certification of Principal Financial Officer.
32.1	**	Section 1350 Certification of Principal Executive Officer.
32.2	**	Section 1350 Certification of Principal Financial Officer.
101.INS	*	XBRL Instance Document.
101.SCH	*	XBRL Schema Document.
101.CAL	*	XBRL Calculation Linkbase Document.
101.LAB	*	XBRL Label Linkbase Document.
101.PRE	*	XBRL Presentation Linkbase Document.
101.DEF	*	XBRL Definition Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*		Filed herewith.
**		~~Furnished with this Form 10-Q,~~ This certification is deemed not ~~filed.~~filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
1		Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC.

SIGNATURES

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



FLOTEK INDUSTRIES, INC.

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

Date:		~~November 12, 2019~~August 17, 2020



FLOTEK INDUSTRIES, INC.

By:		/s/ ~~ELIZABETH T. WILKINSON~~
		~~Elizabeth T. Wilkinson~~Michael Borton
		Chief Financial Officer


Date:		~~November 12, 2019~~August 17, 2020



Year ending December 31,	Operating Leases			Finance Leases
2019 (excluding the three months ended September 30, 2019)	$	586		$	17
2020	2,335			70
2021	2,293			70
2022	2,257			46
2023	2,166			38
Thereafter	25,695			22
Total lease payments	$	35,332		$	263
Less: Interest	(16,678		)	(43		)
Present value of lease liabilities	$	18,654		$	220



	September 30, 2019		December 31, 2018
Long-term debt, classified as current:
Borrowings under revolving credit facility	$	—	$	49,731



	September 30, 2019		December 31, 2018
	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Borrowings under Credit Facility	—	—	49,731	49,731



For the three months ended September 30,	Energy Chemistry Technologies			Corporate and Other			Total
2019
Net revenue from external customers	$	21,879		$	—		$	21,879
Loss from operations	(5,984		)	(5,869		)	(11,853		)
Depreciation and amortization	1,870			188			2,058
Capital expenditures	1,102			—			1,102

2018
Net revenue from external customers	$	53,709		$	—		$	53,709
Income (loss) from operations	3,921			(8,001		)	(4,080		)
Depreciation and amortization	1,734			525			2,259
Capital expenditures	302			861			1,163



For the nine months ended September 30,	Energy Chemistry Technologies			Corporate and Other			Total
2019
Net revenue from external customers	$	99,827		$	—		$	99,827
Loss from operations	(18,968		)	(21,008		)	(39,976		)
Depreciation and amortization	5,588			849			6,437
Capital expenditures	1,869			—			1,869

2018
Net revenue from external customers	$	134,324		$	—		$	134,324
Loss from operations	(34,176		)	(26,270		)	(60,446		)
Depreciation and amortization	5,300			1,635			6,935
Capital expenditures	2,480			1,314			3,794



TABLE A	Three months ended September 30,				Nine months ended September 30,
	2019	2018	% Change		2019	2018	% Change
Average North American Active Drilling Rigs
U.S.	920	1,051	(12.5	)%	985	1,019	(3.3	)%
Canada	132	209	(36.8	)%	132	195	(32.3	)%
Total	1,052	1,260	(16.5	)%	1,117	1,214	(8.0	)%
Average U.S. Active Drilling Rigs by Type
Vertical	52	63	(17.5	)%	55	61	(9.8	)%
Horizontal	802	921	(12.9	)%	863	890	(3.0	)%
Directional	66	67	(1.5	)%	67	68	(1.5	)%
Total	920	1,051	(12.5	)%	985	1,019	(3.3	)%
Average North American Drilling Rigs by Product
Oil	847	1,004	(15.6	)%	884	954	(7.3	)%
Natural Gas	205	256	(19.9	)%	233	260	(10.4	)%
Total	1,052	1,260	(16.5	)%	1,117	1,214	(8.0	)%



Energy Chemistry Technologies (“ECT”)
(dollars in thousands)	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Revenue	$	21,879		$	53,709		$	99,827		$	134,324
Income (loss) from operations	(5,984		)	3,921			(18,968		)	(34,176		)
Income (loss) from operations - excluding impairment	(5,984		)	41,101			(18,968		)	3,004
Operating margin %	(27.4		)%	7.3		%	(19.0		)%	(25.4		)%