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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM
10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-13270
FLOTEK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)
Delaware
 
90-0023731
(State of other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
8846 N. Sam Houston Parkway W.
Houston,
TX

77064
 
 
 
 
 
(Address of principal executive offices)
(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
FTK
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated Filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of August 4, 2020, there were 71,306,770 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.





TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019
 
 
 
 
Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




2






PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
June 30, 2020
 
December 31, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
59,926

 
$
100,575

Restricted cash
664

 
663

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
23,338

 
23,210

Income taxes receivable
6,846

 
631

Other current assets
2,407

 
13,191

Total current assets
101,289

 
153,908

Property and equipment, net
8,017

 
39,829

Operating lease right-of-use assets
2,422

 
16,388

Goodwill
17,522

 

Deferred tax assets, net
152

 
152

Other intangible assets, net
12,777

 
20,323

Other long-term assets
17

 

TOTAL ASSETS
$
142,196

 
$
230,600

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,876

 
$
16,231

Accrued liabilities
10,474

 
24,552

Income taxes payable
12

 

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
21,600

 
41,324

Long-term debt, less current portion
3,144

 

Deferred revenue, long-term
111

 

Long-term operating lease liabilities
8,497

 
16,973

Long-term finance lease liabilities
127

 
158

Deferred tax liabilities, net
11

 
116

Total liabilities
33,490

 
58,571

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, 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
357,980

 
347,564

Accumulated other comprehensive income
51

 
181

Retained earnings (accumulated deficit)
(215,766
)
 
(142,238
)
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
108,706

 
172,029

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
142,196

 
$
230,600



See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3




FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
    
 
Three months ended June 30,
 
Six months ended June 30,
 
2020
 
2019
 
2020
 
2019
Revenue
$
8,880

 
$
34,692

 
$
28,296

 
$
77,949

Costs and expenses:
 
 
 
 
 
 
 
Operating expenses (excluding depreciation and amortization)
11,632

 
38,121

 
34,473

 
82,089

Corporate general and administrative
5,395

 
6,054

 
9,888

 
13,335

Depreciation and amortization
468

 
2,119

 
2,659

 
4,379

Research and development
1,638

 
2,076

 
4,193

 
4,360

(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
19,111

 
48,366

 
108,612

 
105,256

Loss from operations
(10,231
)
 
(13,674
)
 
(80,316
)
 
(27,307
)
Other (expense) income:
 
 
 
 
 
 
 
Gain on lease termination
576

 

 
576

 

Interest expense
(16
)
 
(16
)
 
(20
)
 
(2,013
)
Other income, net
78

 
693

 
31

 
800

Total other expense, net
638

 
677

 
587

 
(1,213
)
Loss before income taxes
(9,593
)
 
(12,997
)
 
(79,729
)
 
(28,520
)
Income tax benefit
32

 
192

 
6,201

 
503

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

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
(0.14
)
 
$
(0.22
)
 
$
(1.17
)
 
$
(0.48
)
Discontinued operations, net of tax

 
(0.03
)
 

 
0.76

Basic earnings (loss) per common share
$
(0.14
)
 
$
(0.25
)
 
$
(1.17
)
 
$
0.28

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
(0.14
)
 
$
(0.22
)
 
$
(1.17
)
 
$
(0.48
)
Discontinued operations, net of tax

 
(0.03
)
 

 
0.76

Diluted earnings (loss) per common share
$
(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
66,035

 
58,608

 
62,828

 
58,491

Weighted average common shares used in computing diluted earnings (loss) per common share
66,035

 
58,608

 
62,828

 
58,491



See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4





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



See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5





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

 
Six months ended June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net (loss) income attributable to Flotek Industries, Inc.
$
(73,528
)
 
$
16,449

Less: Income from discontinued operations, net of tax

 
44,466

Loss from continuing operations
(73,528
)
 
(28,017
)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,659

 
4,379

Amortization of deferred financing costs

 
1,428

Provision for doubtful accounts
474

 
102

Provision for excess and obsolete inventory
529

 

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
242

 
464

Stock compensation expense
1,521

 
1,669

Deferred income tax provision
(105
)
 
17,855

Reduction in tax benefit related to share-based awards

 
24

Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
7,252

 
6,289

Inventories, net
6,418

 
554

Income taxes receivable
(6,351
)
 
(281
)
Other current assets
1,715

 
(1,990
)
Other long-term assets

 
3,286

Accounts payable
(10,229
)
 
(4,157
)
Accrued liabilities
(16,755
)
 
(10,216
)
Income taxes payable
119

 
1,182

Interest payable

 
(8
)
Net cash used in operating activities
(29,216
)
 
(6,344
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(42
)
 
(767
)
Proceeds from sale of business
9,844

 
152,217

Proceeds from sale of assets
66

 
140

Purchase of JP3, net of cash acquired
(26,284
)
 

Purchase of patents and other intangible assets
(8
)
 
(227
)
Net cash (used in) provided by investing activities
(16,424
)
 
151,363

Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility

 
42,984

Repayments on revolving credit facility

 
(92,715
)
Proceeds from Paycheck Protection Program loan
4,798

 

Purchase of treasury stock related to share-based awards
(82
)
 
(142
)
Proceeds from sale of common stock
358

 

Payments for finance leases
(51
)
 
(38
)
Net cash provided by (used in) financing activities
5,023

 
(49,911
)
Discontinued operations:
 
 
 
Net cash used in operating activities

 
(321
)
Net cash provided by investing activities

 
337

Net cash flows provided by discontinued operations

 
16

Effect of changes in exchange rates on cash and cash equivalents
(31
)
 
2


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6




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


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
7






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

 
Three months ended June 30, 2020
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Total Stockholders’ Equity
 
Shares
Issued
 
Par
Value
 
Shares
 
Cost
 
Balance, March 31, 2020
64,338

 
$
6

 
4,395

 
$
(33,529
)
 
$
348,375

 
$
58

 
$
(206,205
)
 
$
108,705

Net loss

 

 

 

 

 

 
(9,561
)
 
(9,561
)
Foreign currency translation adjustment

 

 

 

 

 
(7
)
 

 
(7
)
Stock issued under employee stock purchase plan

 

 
(12
)
 

 
9

 

 

 
9

Restricted stock granted
1,788

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
37

 

 

 

 

 

Treasury stock purchased

 

 
39

 
(37
)
 

 

 

 
(37
)
Stock compensation expense

 

 

 

 
1,059

 

 

 
1,059

Stock issued in JP3 acquisition
11,500

 
1

 

 

 
8,537

 

 

 
8,538

Balance, June 30, 2020
77,626

 
$
7

 
4,459

 
$
(33,566
)
 
$
357,980

 
$
51

 
$
(215,766
)
 
$
108,706


 
Three months ended June 30, 2019
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Total Stockholders’ Equity
 
Shares
Issued
 
Par
Value
 
Shares
 
Cost
 
Balance, 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

 

 

 

 

 
24

 

 
24

Restricted stock granted
757

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
99

 

 

 

 

 

Treasury stock purchased

 

 
4

 
(10
)
 

 

 

 
(10
)
Stock compensation expense

 

 

 

 
1,213

 

 

 
1,213

Balance, June 30, 2019
62,956

 
$
6

 
3,948

 
$
(33,378
)
 
$
345,217

 
$
149

 
$
(91,874
)
 
$
220,120


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
8




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

 
Six months ended June 30, 2020
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Total Stockholders’ Equity
 
Shares
Issued
 
Par
Value
 
Shares
 
Cost
 
Balance, December 31, 2019
63,657

 
$
6

 
4,145

 
$
(33,484
)
 
$
347,564

 
$
181

 
$
(142,238
)
 
$
172,029

Net loss

 

 

 

 

 

 
(73,528
)
 
(73,528
)
Foreign currency translation adjustment

 

 

 

 

 
(130
)
 

 
(130
)
Stock issued under employee stock purchase plan

 

 
(25
)
 

 
20

 

 

 
20

Restricted stock granted
2,469

 

 

 

 
338

 

 

 
338

Restricted stock forfeited

 

 
278

 

 

 

 

 

Treasury stock purchased

 

 
61

 
(82
)
 

 

 

 
(82
)
Stock compensation expense

 

 

 

 
1,521

 

 

 
1,521

Stock issued in JP3 acquisition
11,500

 
1

 

 

 
8,537

 

 

 
8,538

Balance, June 30, 2020
77,626

 
$
7

 
4,459

 
$
(33,566
)
 
$
357,980

 
$
51

 
$
(215,766
)
 
$
108,706


 
Six months ended June 30, 2019
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Total Stockholders’ Equity
 
Shares
Issued
 
Par
Value
 
Shares
 
Cost
 
Balance, December 31, 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

 

 

 

 

 
118

 

 
118

Restricted stock granted
793

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
133

 

 

 

 

 

Treasury stock purchased

 

 
45

 
(141
)
 

 

 

 
(141
)
Stock compensation expense

 

 

 

 
1,681

 

 

 
1,681

Balance, June 30, 2019
62,956

 
$
6

 
3,948

 
$
(33,378
)
 
$
345,217

 
$
149

 
$
(91,874
)
 
$
220,120



See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
9


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1 — Organization and Significant Accounting Policies
Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”) is a technology-driven international chemistry and data company that develops and supplies chemistries, services, equipment and 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 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 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.

With the acquisition of JP3, the Company evaluated its segment information and determined that there were two segments: Chemistry Technologies and Data Analytics, which are both supported by its continuing Research & Innovation advanced laboratory capabilities.
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 well drilling, cementing, completion, remediation, and stimulation activities designed to maximize recovery in both new and mature fields. Customers of the Chemistry Technologies business segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies.
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 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 of the Data Analytics segment span across the entire market, from production upstream to midstream facilities to refineries and 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 robotization of fluid handling, and 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 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,


10


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


11


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 Right-Of-Use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP (ASC 840). Upon adoption, the Company recorded operating lease ROU assets and corresponding operating lease liabilities, net of deferred rent, 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 5 — “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
Effective January 1, 2020, the Company 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 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 4 — Discontinued Operations
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 Consumer and Industrial Chemistry Technologies (“CICT”) segment.
Effective February 28, 2019, the Company completed the sale of 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 December 31, 2019, the 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 as of December 31, 2019, capped by the price paid for the terpene supply agreement amendment, executed in February 2020, which aligned purchase commitments to expected usage for blended products as of December 31, 2019. 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 engaged a neutral third party 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.

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


13


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 indemnity escrow was released to the Company. During the second quarter 2020 the remaining indemnity escrow of $6.6 million was released to the Company.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the three and six months ended June 30, 2020 and 2019 (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2020
 
2019
 
2020
 
2019
Consumer and Industrial Chemistry Technologies
 
 
 
 
 
 
 
Revenue
$

 
$

 
$

 
$
10,877

Operating expenses

 

 

 
(11,447
)
Research and development

 

 

 
(69
)
(Loss) income from operations

 

 

 
(639
)
Other income

 

 

 
35

Gain on sale of business

 
(2,100
)
 

 
64,934

(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.


14


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The components of lease expense and supplemental cash flow information are as follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2020
 
2019
 
2020
 
2019
Operating lease expense
$
283

 
$
653

 
$
854

 
$
1,306

Finance lease expense:
 
 
 
 
 
 
 
Amortization of right-of-use assets
4

 
220

 
9

 
220

Interest on lease liabilities
5

 
3

 
9

 
3

Total finance lease expense
9

 
223

 
18

 
223

Short-term lease expense
54

 
32

 
86

 
75

Total lease expense
$
346

 
$
908

 
$
958

 
$
1,604

 
 
 
 
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
 
 
 
Operating cash flows from operating leases
$
1,411

 
$
583

 
$
1,024

 
$
1,165

Operating cash flows from finance leases
5

 
3

 
9

 
3

Financing cash flows from finance leases
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




15


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Supplemental balance sheet information related to leases is as follows (in thousands):
 
June 30, 2020
December 31, 2019
Operating Leases
 
 
Operating lease right-of-use assets
$
2,422

$
16,388

 
 
 
Current portion of operating lease liabilities
$
654

$
486

Long-term operating lease liabilities
8,497

16,973

Total operating lease liabilities
$
9,151

$
17,459

 
 
 
Finance Leases
 
 
Property and equipment
$
147

$
293

Accumulated depreciation
(18
)
(28
)
Property and equipment, net
$
129

$
265

 
 
 
Current portion of finance lease liabilities
$
57

$
55

Long-term finance lease liabilities
127

158

Total finance lease liabilities
$
184

$
213

 
 
 
Weighted Average Remaining Lease Term
 
 
Operating leases
10.1 years

16.6 years

Finance leases
4.1 years

4.6 years

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

Note 6 — 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.
The vast majority of the 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 90% of total revenue for the three and six months ended June 30, 2020 and 2019.


16


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 June 30,
 
Six months ended June 30,
 
2020
 
2019
 
2020
 
2019
Revenue:
 
 
 
 
 
 
 
Products
$
8,176

 
$
33,632

 
$
26,976

 
$
75,703

Services
704

 
1,060

 
1,320

 
2,246

 
$
8,880

 
$
34,692

 
$
28,296

 
$
77,949

Operating expenses (excluding depreciation and amortization):
 
 
 
 
 
 
Products
$
11,278

 
$
37,613

 
$
33,825

 
$
81,062

Services
354

 
508

 
648

 
1,027

 
$
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. The Company has an immaterial amount of contract liabilities associated to 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

 




17


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 8 — Inventories
Inventories are as follows (in thousands):
 
June 30, 2020
 
December 31, 2019
Raw materials
$
4,810

 
$
4,339

Finished goods
20,155

 
24,569

Inventories
24,965

 
28,908

Less reserve for excess and obsolete inventory
(1,627
)
 
(5,698
)
Inventories, net
$
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 9 — Property and Equipment
Property and equipment are as follows (in thousands):
 
June 30, 2020
 
December 31, 2019
Land
$
3,282

 
$
4,440

Buildings and leasehold improvements
6,048

 
38,741

Machinery and equipment
7,227

 
27,694

Furniture and fixtures
643

 
1,671

Transportation equipment
1,190

 
1,440

Computer equipment and software
1,296

 
3,348

Property and equipment
19,686

 
77,334

Less accumulated depreciation
(11,669
)
 
(37,505
)
Property and equipment, net
$
8,017

 
$
39,829


Depreciation expense totaled $0.3 million and $1.6 million for the three months ended June 30, 2020 and 2019, and $2.0 million and $3.4 million for the six months ended June 30, 2020 and 2019.
During the six months ended June 30, 2020 an impairment was recognized for $30.2 million. No impairment was recognized for the three months ended June 30, 2020.
Note 10 — Impairment of Fixed and Long-lived Assets

During the first quarter 2020, the price of crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the industry, which began to negatively impact the Company’s results of operations. These declines of results of operations were driven by an oversupply of oil, insufficient storage, and demand destruction resulting from the reaction to COVID-19. Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020.

Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of March 31, 2020 and an impairment loss of $57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic 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):



18


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



With the acquisition of JP3, the Company evaluated its segment information and determined that there were two segments: Chemistry Technologies and Data Analytics, which are both supported by its Research & Innovation advanced laboratory capabilities.
Note 11 - 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):
 
June 30, 2020
 
December 31, 2019
 
Cost
 
Accumulated Amortization
 
Cost
 
Accumulated Amortization
Finite-lived intangible assets:
 
 
 
 
 
 
 
Patents and technology
$
5,000

 
$
55

 
$
17,493

 
$
6,715

Customer lists
6,800

 
55

 
15,367

 
6,013

Trademarks and brand names
1,100

 
13

 
1,351

 
1,160

Total finite-lived intangible assets
$
12,900

 
123

 
$
34,211

 
13,888

 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
Other intangible assets, net
$
12,777

 
 
 
$
20,323

 
 

Amortization of finite-lived intangible assets acquired totaled $0.1 million and $0.5 million for the three months and six months ended June 30, 2019 and 2019 respectively.


19


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 13 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and six months ended June 30, 2020 and 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 0.4 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 six months ended June 30, 2019.

Note 14 — 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 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 following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019, and 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 either Level 1, Level 2, or Level 3 fair measurements during the periods ending June 30, 2020 and December 31, 2019.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment, and other intangible assets are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. During the three months ended March 31, 2020, the Company recorded an impairment of $57.5 million for impairment 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 market and thus represent a Level 3 measurement, other than cash and working capital accounts which carrying amounts were determined to approximate fair value due to their short-term nature.


20


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 15 — 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):



21


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 June 30,

Six months ended June 30,
 
2020
 
2019
 
2020
 
2019
U.S. federal statutory tax rate
21.0
 %
 
21.0
 %
 
21.0
 %
 
21.0
 %
State income taxes, net of federal benefit
0.4

 
1.7

 

 
1.0

Non-U.S. income taxed at different rates
0.9

 
0.7

 
0.2

 
1.0

Reduction in tax benefit related to stock-based awards
0.9

 
(1.1
)
 
(0.1
)
 
(1.8
)
Non-deductible expenses
0.7

 

 

 
(0.3
)
Research and development credit
0.1

 
0.4

 

 
0.6

Increase in valuation allowance
(23.7
)
 
(20.7
)
 
(16.0
)
 
(17.9
)
Effect of tax rate differences of NOL carryback

 

 
2.6

 

Other

 
(0.4
)
 

 
(0.3
)
Effective income tax rate
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, except for the NOL carryback claim discussed above.
Deferred tax assets 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 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, the Company considers all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income.
As of 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 $19.9 million valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to certain state jurisdictions. As a result of the NOL carryback allowed by the CARES Act, the Company released a valuation allowance of $4.0 million related to its deferred tax assets attributable to its U.S.


22


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 they will be utilized.
Note 17 — Common Stock

On May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, to increase the authorized shares of common stock from 80,000,000 to 140,000,000, par value $0.0001 per share, and 100,000 of preferred stock, par value $0.0001 per share.  The additional authorized shares are available for corporate purposes, including acquisitions. 

A reconciliation of changes in common shares issued during the six months ended June 30, 2020 is as follows:
Shares issued at December 31, 2019
63,656,897

Issued to purchase JP3
11,500,000

Issued as restricted stock award grants
2,469,238

Shares issued at June 30, 2020
77,626,135



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.
Note 18 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by chief operating decision-makers in deciding how to allocate resources and assess performance. The operations of the Company are categorized into two reportable segments: Chemistry Technologies and Data Analytics.

The Chemistry Technologies segment includes specialty chemistries and 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 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 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, 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 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.


23


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Summarized financial information of the reportable segments is as follows (in thousands):
For the three months ended June 30,
Chemistry Technologies
 
Data Analytics (1)
 
Corporate and Other
 
Total
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
)