false--12-31FY20190000928054FLOTEK INDUSTRIES INC/CN/0.0010.0010.950.95P3M1190000152700000.00010.000180000000800000005734227957882396P2Y000007184000000.00010.00011000001000000000P30YP7YP10YP5YP2YP3YP7YP2YP3Y0037702244145481 0000928054 2019-01-01 2019-12-31 0000928054 2019-06-28 0000928054 2020-03-03 0000928054 2019-12-31 0000928054 2018-12-31 0000928054 2017-01-01 2017-12-31 0000928054 2018-01-01 2018-12-31 0000928054 us-gaap:AdditionalPaidInCapitalMember 2016-12-31 0000928054 us-gaap:RetainedEarningsMember 2016-12-31 0000928054 us-gaap:CommonStockMember 2016-12-31 0000928054 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-12-31 0000928054 us-gaap:CommonStockMember 2019-12-31 0000928054 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-12-31 0000928054 us-gaap:CommonStockMember 2018-12-31 0000928054 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0000928054 us-gaap:TreasuryStockMember 2017-12-31 0000928054 us-gaap:RetainedEarningsMember 2017-12-31 0000928054 us-gaap:TreasuryStockMember 2018-01-01 2018-12-31 0000928054 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0000928054 us-gaap:TreasuryStockMember 2019-01-01 2019-12-31 0000928054 us-gaap:CommonStockMember 2017-01-01 2017-12-31 0000928054 us-gaap:TreasuryStockMember 2017-01-01 2017-12-31 0000928054 us-gaap:NoncontrollingInterestMember 2017-12-31 0000928054 us-gaap:NoncontrollingInterestMember 2018-01-01 2018-12-31 0000928054 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-12-31 0000928054 us-gaap:CommonStockMember 2019-01-01 2019-12-31 0000928054 us-gaap:CommonStockMember 2018-01-01 2018-12-31 0000928054 us-gaap:TreasuryStockMember 2019-12-31 0000928054 us-gaap:CommonStockMember 2017-12-31 0000928054 us-gaap:TreasuryStockMember 2016-12-31 0000928054 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0000928054 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2016-12-31 0000928054 us-gaap:RetainedEarningsMember 2019-12-31 0000928054 us-gaap:NoncontrollingInterestMember 2019-12-31 0000928054 us-gaap:AdditionalPaidInCapitalMember 2017-01-01 2017-12-31 0000928054 us-gaap:TreasuryStockMember 2018-12-31 0000928054 us-gaap:RetainedEarningsMember 2017-01-01 2017-12-31 0000928054 us-gaap:NoncontrollingInterestMember 2018-12-31 0000928054 us-gaap:RetainedEarningsMember 2018-01-01 2018-12-31 0000928054 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0000928054 2016-12-31 0000928054 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0000928054 us-gaap:RetainedEarningsMember 2019-01-01 2019-12-31 0000928054 us-gaap:NoncontrollingInterestMember 2016-12-31 0000928054 us-gaap:RetainedEarningsMember 2018-12-31 0000928054 2017-12-31 0000928054 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0000928054 us-gaap:NoncontrollingInterestMember 2019-01-01 2019-12-31 0000928054 us-gaap:FurnitureAndFixturesMember 2019-01-01 2019-12-31 0000928054 srt:MaximumMember 2019-01-01 2019-12-31 0000928054 us-gaap:AccountingStandardsUpdate201602Member 2019-12-31 0000928054 us-gaap:AccountingStandardsUpdate201602Member 2019-01-01 0000928054 srt:MinimumMember 2019-01-01 2019-12-31 0000928054 srt:MinimumMember us-gaap:OtherMachineryAndEquipmentMember 2019-01-01 2019-12-31 0000928054 srt:MinimumMember ftk:BuildingsAndLeaseholdImprovementsMember 2019-01-01 2019-12-31 0000928054 srt:MinimumMember us-gaap:TransportationEquipmentMember 2019-01-01 2019-12-31 0000928054 srt:MaximumMember ftk:BuildingsAndLeaseholdImprovementsMember 2019-01-01 2019-12-31 0000928054 srt:MinimumMember ftk:ComputerEquipmentandSoftwareMember 2019-01-01 2019-12-31 0000928054 srt:MaximumMember us-gaap:OtherMachineryAndEquipmentMember 2019-01-01 2019-12-31 0000928054 srt:MaximumMember us-gaap:TransportationEquipmentMember 2019-01-01 2019-12-31 0000928054 srt:MaximumMember ftk:ComputerEquipmentandSoftwareMember 2019-01-01 2019-12-31 0000928054 ftk:NationalOilwellVarcoL.P.Member us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:DrillingMember 2017-05-22 0000928054 ftk:WorkingAdjustmentPeriod1Member us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-02-28 0000928054 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ProductionTechnologiesMember 2017-05-23 0000928054 ftk:WorkingAdjustmentPeriod2Member us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-02-28 2019-02-28 0000928054 ftk:WorkingAdjustmentPeriod24Member us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-02-28 0000928054 ftk:WorkingAdjustmentPeriod1Member us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-02-28 2019-02-28 0000928054 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-02-28 0000928054 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-12-31 0000928054 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ProductionTechnologiesMember 2017-08-16 0000928054 ftk:DrillingTechnologiesAndProductionTechnologiesMember 2018-12-31 0000928054 us-gaap:OtherCurrentAssetsMember 2019-12-31 0000928054 ftk:WorkingAdjustmentPeriod3Member us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-02-28 2019-02-28 0000928054 ftk:ArcherDanielsMidlandCompanyMember us-gaap:SubsequentEventMember 2020-02-01 2020-02-29 0000928054 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-01-01 2019-09-30 0000928054 ftk:WorkingAdjustmentPeriod4Member us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-02-28 2019-02-28 0000928054 ftk:NationalOilwellVarcoL.P.Member us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ftk:DrillingMember 2017-05-22 2017-05-22 0000928054 us-gaap:DiscontinuedOperationsHeldforsaleMember ftk:DrillingMember 2018-01-01 2018-12-31 0000928054 us-gaap:DiscontinuedOperationsHeldforsaleMember ftk:DrillingMember 2019-01-01 2019-12-31 0000928054 us-gaap:DiscontinuedOperationsHeldforsaleMember ftk:ProductionTechnologiesMember 2018-01-01 2018-12-31 0000928054 us-gaap:DiscontinuedOperationsHeldforsaleMember ftk:ProductionTechnologiesMember 2019-01-01 2019-12-31 0000928054 us-gaap:DiscontinuedOperationsHeldforsaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2018-12-31 0000928054 us-gaap:DiscontinuedOperationsHeldforsaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-12-31 0000928054 us-gaap:DiscontinuedOperationsHeldforsaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2017-01-01 2017-12-31 0000928054 us-gaap:DiscontinuedOperationsHeldforsaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2018-01-01 2018-12-31 0000928054 us-gaap:DiscontinuedOperationsHeldforsaleMember ftk:ConsumerandIndustrialChemicalTechnologiesMember 2019-01-01 2019-12-31 0000928054 us-gaap:ServiceMember 2018-01-01 2018-12-31 0000928054 us-gaap:ServiceMember 2017-01-01 2017-12-31 0000928054 us-gaap:ProductMember 2018-01-01 2018-12-31 0000928054 us-gaap:ServiceMember 2019-01-01 2019-12-31 0000928054 us-gaap:ProductMember 2019-01-01 2019-12-31 0000928054 us-gaap:ProductMember 2017-01-01 2017-12-31 0000928054 ftk:ExcessTerpeneMember 2019-12-31 0000928054 us-gaap:BuildingAndBuildingImprovementsMember 2019-12-31 0000928054 us-gaap:FurnitureAndFixturesMember 2018-12-31 0000928054 ftk:ComputerEquipmentandSoftwareMember 2018-12-31 0000928054 us-gaap:AssetUnderConstructionMember 2019-12-31 0000928054 us-gaap:BuildingAndBuildingImprovementsMember 2018-12-31 0000928054 us-gaap:MachineryAndEquipmentMember 2018-12-31 0000928054 us-gaap:LandMember 2018-12-31 0000928054 ftk:ComputerEquipmentandSoftwareMember 2019-12-31 0000928054 us-gaap:TransportationEquipmentMember 2019-12-31 0000928054 us-gaap:MachineryAndEquipmentMember 2019-12-31 0000928054 us-gaap:TransportationEquipmentMember 2018-12-31 0000928054 us-gaap:LandMember 2019-12-31 0000928054 us-gaap:FurnitureAndFixturesMember 2019-12-31 0000928054 us-gaap:AssetUnderConstructionMember 2018-12-31 0000928054 ftk:ChemicalsMember 2018-12-31 0000928054 ftk:ChemicalsMember 2019-12-31 0000928054 ftk:ChemicalsMember 2019-01-01 2019-12-31 0000928054 ftk:ChemicalsMember 2017-12-31 0000928054 ftk:ChemicalsMember 2018-01-01 2018-12-31 0000928054 ftk:EnergyChemicalTechnologiesMember 2018-04-01 2018-06-30 0000928054 ftk:DeferredFinancingCostsMember 2019-12-31 0000928054 us-gaap:CustomerListsMember 2018-12-31 0000928054 ftk:AcquiredIntangibleAssetsMember 2019-12-31 0000928054 ftk:AcquiredIntangibleAssetsMember 2018-12-31 0000928054 us-gaap:TradeNamesMember 2018-12-31 0000928054 ftk:DeferredFinancingCostsMember 2018-12-31 0000928054 us-gaap:PatentedTechnologyMember 2019-12-31 0000928054 us-gaap:PatentedTechnologyMember 2018-12-31 0000928054 us-gaap:CustomerListsMember 2019-12-31 0000928054 us-gaap:TradeNamesMember 2019-12-31 0000928054 us-gaap:TradeNamesMember 2019-12-31 0000928054 us-gaap:TradeNamesMember 2018-12-31 0000928054 us-gaap:RevolvingCreditFacilityMember 2019-12-31 0000928054 us-gaap:RevolvingCreditFacilityMember 2018-12-31 0000928054 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-12-31 0000928054 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2018-12-31 0000928054 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2018-12-31 0000928054 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2019-12-31 0000928054 us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-12-31 0000928054 us-gaap:RestrictedStockUnitsRSUMember 2017-01-01 2017-12-31 0000928054 us-gaap:RestrictedStockUnitsRSUMember 2018-01-01 2018-12-31 0000928054 us-gaap:EmployeeStockOptionMember 2017-01-01 2017-12-31 0000928054 us-gaap:EmployeeStockOptionMember 2018-01-01 2018-12-31 0000928054 us-gaap:EmployeeStockOptionMember 2019-01-01 2019-12-31 0000928054 2019-01-01 2019-03-31 0000928054 2018-06-30 0000928054 2019-03-31 0000928054 ftk:TimevestedOptionsMember 2019-01-01 2019-12-31 0000928054 ftk:PerformancebasedOptionsMember 2019-01-01 2019-12-31 0000928054 ftk:AwardDate2018Member us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-12-31 0000928054 ftk:AwardDate2019Member us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-12-31 0000928054 us-gaap:RestrictedStockUnitsRSUMember 2019-12-31 0000928054 us-gaap:RestrictedStockUnitsRSUMember 2018-12-31 0000928054 us-gaap:RestrictedStockMember 2017-01-01 2017-12-31 0000928054 ftk:Plan7Member 2019-12-31 0000928054 us-gaap:EmployeeStockOptionMember 2019-10-01 2019-12-31 0000928054 ftk:ShareRepurchaseProgramNovember2012Member 2017-01-01 2017-12-31 0000928054 ftk:RestrictedStockTimeVestingMember 2019-01-01 2019-12-31 0000928054 us-gaap:EmployeeStockMember 2018-01-01 2018-12-31 0000928054 us-gaap:RestrictedStockMember 2019-01-01 2019-12-31 0000928054 us-gaap:RestrictedStockMember 2018-01-01 2018-12-31 0000928054 2009-11-09 0000928054 ftk:ShareRepurchaseProgramNovember2012Member 2012-11-30 0000928054 ftk:TimevestedOptionsMember 2019-10-01 2019-12-31 0000928054 ftk:PerformancebasedOptionsMember 2019-10-01 2019-12-31 0000928054 2009-11-09 2009-11-09 0000928054 us-gaap:EmployeeStockMember 2019-01-01 2019-12-31 0000928054 ftk:Plan3Member 2019-12-31 0000928054 us-gaap:EmployeeStockMember 2012-05-18 0000928054 us-gaap:RestrictedStockMember 2019-12-31 0000928054 ftk:ShareRepurchaseProgramJune2015Member 2015-01-01 2019-12-31 0000928054 us-gaap:EmployeeStockMember 2012-05-18 2012-05-18 0000928054 ftk:RestrictedStockPerformancebasedMember 2019-01-01 2019-12-31 0000928054 ftk:ShareRepurchaseProgramJune2015Member 2015-06-30 0000928054 ftk:Plan4Member 2019-12-31 0000928054 ftk:ShareRepurchaseProgramNovember2012Member 2016-01-01 2016-12-31 0000928054 ftk:ShareRepurchaseProgramNovember2012Member 2019-01-01 2019-12-31 0000928054 us-gaap:EmployeeStockMember 2017-01-01 2017-12-31 0000928054 ftk:Plan6Member 2019-12-31 0000928054 ftk:Plan5Member 2019-12-31 0000928054 us-gaap:RestrictedStockMember 2018-12-31 0000928054 ftk:DefinedContributionPlanMatchingRangefrom4to8PercentMember srt:MinimumMember 2019-01-01 2019-12-31 0000928054 ftk:DefinedContributionPlanMatchingRangeupto2PercentMember 2019-01-01 2019-12-31 0000928054 ftk:DefinedContributionPlanMatchingRangefrom4to8PercentMember srt:MaximumMember 2019-01-01 2019-12-31 0000928054 ftk:DefinedContributionPlanMatchingRangefrom4to8PercentMember 2019-01-01 2019-12-31 0000928054 us-gaap:OperatingSegmentsMember ftk:ChemicalsMember 2019-12-31 0000928054 us-gaap:OperatingSegmentsMember 2019-12-31 0000928054 us-gaap:CorporateNonSegmentMember 2019-12-31 0000928054 us-gaap:OperatingSegmentsMember 2018-12-31 0000928054 us-gaap:CorporateNonSegmentMember 2018-12-31 0000928054 us-gaap:OperatingSegmentsMember ftk:ChemicalsMember 2018-12-31 0000928054 ftk:CustomerBMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2018-01-01 2018-12-31 0000928054 ftk:CustomerDMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2017-01-01 2017-12-31 0000928054 ftk:CustomerCMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2018-01-01 2018-12-31 0000928054 ftk:CustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0000928054 ftk:CustomerBMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0000928054 country:US 2018-01-01 2018-12-31 0000928054 country:US 2017-01-01 2017-12-31 0000928054 us-gaap:NonUsMember 2019-01-01 2019-12-31 0000928054 us-gaap:NonUsMember 2017-01-01 2017-12-31 0000928054 country:US 2019-01-01 2019-12-31 0000928054 us-gaap:NonUsMember 2018-01-01 2018-12-31 0000928054 us-gaap:CorporateNonSegmentMember 2017-01-01 2017-12-31 0000928054 us-gaap:CorporateNonSegmentMember 2018-01-01 2018-12-31 0000928054 us-gaap:CorporateNonSegmentMember 2019-01-01 2019-12-31 0000928054 us-gaap:OperatingSegmentsMember ftk:ChemicalsMember 2018-01-01 2018-12-31 0000928054 us-gaap:OperatingSegmentsMember ftk:ChemicalsMember 2019-01-01 2019-12-31 0000928054 us-gaap:OperatingSegmentsMember ftk:ChemicalsMember 2017-01-01 2017-12-31 0000928054 2019-04-01 2019-06-30 0000928054 2018-10-01 2018-12-31 0000928054 2018-01-01 2018-03-31 0000928054 2018-07-01 2018-09-30 0000928054 2019-07-01 2019-09-30 0000928054 2019-10-01 2019-12-31 0000928054 2018-04-01 2018-06-30 0000928054 ftk:IRSTaxIndemnificationMember 2019-09-30 0000928054 ftk:IRSTaxIndemnificationMember 2019-06-30 0000928054 ftk:IRSTaxIndemnificationMember srt:ChiefExecutiveOfficerMember 2019-06-30 0000928054 ftk:IRSTaxIndemnificationMember srt:ChiefExecutiveOfficerMember 2019-01-01 2019-09-30 0000928054 ftk:IRSTaxIndemnificationMember 2019-12-31 0000928054 us-gaap:SubsequentEventMember 2020-02-01 2020-02-29 0000928054 2020-02-26 2020-02-26 ftk:segment iso4217:USD ftk:country xbrli:pure iso4217:USD xbrli:shares xbrli:shares ftk:reporting_unit ftk:series
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K/A
    Amendment No. 2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended
December 31, 2019
 
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
 
FLOTEKA22.JPG
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

Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark:
•      if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No 
•      if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No 
•      whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
•      whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 
•      whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.
Large accelerated filer Accelerated filer Non-accelerated filer
Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
•      whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2019 (based on the closing market price on the NYSE Composite Tape on June 28, 2019) was approximately $150,815,000. At March 3, 2020, there were 58,951,784 outstanding shares of the registrant’s common stock, $0.0001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
None.
 



EXPLANATORY NOTE

This Amendment No. 2 on Form 10-K/A (this “Amendment No 2”) amends Flotek Industries, Inc.’s (the “Company”)’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 6, 2020 (the “Original 2019 Form 10-K”), and amended by the Amendment No. 1 to the Original 2019 Form 10-K, filed with the SEC on March 16, 2020 (the”Original 2019 Form 10-K, as amended”). However, this amendment does not change our consolidated financial statements as set forth in the Original 2019 Form 10-K, as amended.

The purpose of this Amendment No. 2 is to (i) revise the “Report of Independent Registered Public Accounting Firm” of Moss Adams LLP appearing in “Part II, Item 8, Financial Statements and Supplementary Data” regarding the effectiveness of our internal control over financial reporting and (ii) revise the disclosure in Part II, Item 9A, Controls and Procedures, to reflect management’s conclusion that our disclosure controls and procedures and our internal control over financial reporting were not effective at December 31, 2019 due to certain material weaknesses in our internal control over financial reporting identified subsequent to the filing of our Original 2019 Form 10-K, as amended. Notwithstanding the material weaknesses mentioned above, we believe that our consolidated financial statements as set forth in the Original 2019 Form 10-K, as amended, present fairly, in all material respects, the consolidated financial position, 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. Part IV, Item 15, “Exhibits and Financial Statement Schedules,” has been amended to include a revised auditor consent and currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002. The certifications are attached to this Amendment No. 2 as Exhibits 31.1, 31.2, 32.1 and 32.2.

Other than the inclusion within this Amendment No. 2 of new certifications by management and a new consent of our independent registered public accounting firm (and related amendment to the exhibit index that is incorporated by reference into Part IV, Item 15 of the Original 2019 Form 10-K, as amended, to reflect the addition of such certifications and consent and related changes to the footnotes to that exhibit index), this Amendment No. 2 speaks only as of the date of the Original 2019 Form 10-K and does not modify or update any other disclosures contained in our Original 2019 Form 10-K, as amended. This Amendment No. 2 should be read in conjunction with the Original 2019 Form 10-K, as amended, and reports filed with the SEC subsequent to the Original 2019 Form 10-K.

TABLE OF CONTENTS
 
3
 
 
 
3
 
 
 
38
 
 
40
 
 
 
40
 
 
42




FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent the Company’s current assumptions and beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside the Company’s control. The forward-looking statements contained in this Annual Report are based on information available as of the date of this Annual 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 such as “anticipate,” “believe,” “estimate,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.
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.
 

2


PART II
Item 8.  Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinions on the Financial Statements and Internal Control over Financial Reporting

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

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

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment in Item 9A:

The Company did not design and maintain effective internal controls to detect or prevent errors in the elimination

3


of intercompany profits in inventory.

The Company did not design and maintain effective internal controls to ensure that it has the legal right to the intangible assets included in its financial statements.

We considered the material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s consolidated financial statements as of and for the year ended December 31, 2019, and our opinion on such consolidated financial statements was not affected.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

/s/ Moss Adams LLP

Houston, Texas
March 6, 2020, except with respect to our opinion on internal control over financial reporting insofar as it relates to the effects of the matters described in Management’s Report on Internal Control over Financial Reporting, as to which the date is June 10, 2020

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



4


FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
December 31,
 
2019
 
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
100,575

 
$
3,044

Restricted cash
663

 

Accounts receivable, net of allowance for doubtful accounts of $1,527 and
    $1,190 at December 31, 2019 and 2018, respectively
15,638

 
37,047

Inventories, net
21,697

 
27,289

Income taxes receivable
631

 
3,161

Assets held for sale

 
118,470

Other current assets
13,191

 
5,771

Total current assets
152,395

 
194,782

Property and equipment, net
39,829

 
45,485

Operating lease right-of-use assets
16,388

 

Deferred tax assets, net
152

 
18,663

Other intangible assets, net
23,083

 
26,827

Other long-term assets

 
126

TOTAL ASSETS
$
231,847

 
$
285,883

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,231

 
$
15,011

Accrued liabilities
24,552

 
10,335

Interest payable

 
8

Liabilities held for sale

 
9,174

Current portion of lease liabilities
541

 

Long-term debt, classified as current

 
49,731

Total current liabilities and total liabilities
41,324

 
84,259

Long-term operating lease liabilities
16,973

 
 
Long-term finance lease liabilities
158

 

Deferred tax liabilities, net
116

 

TOTAL LIABILITIES
58,571

 
84,259

Commitments and contingencies (Note16)

 

Stockholders’ Equity:
 
 
 
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares
    issued and outstanding

 

Common stock, $0.0001 par value, 80,000,000 shares authorized; 63,656,897
    shares issued and 57,882,396 shares outstanding at December 31, 2019;
    62,162,875 shares issued and 57,342,279 shares outstanding at
    December 31, 2018
6

 
6

Additional paid-in capital
347,564

 
343,536

Accumulated other comprehensive income (loss)
(966
)
 
(1,116
)
Retained earnings (accumulated deficit)
(139,844
)
 
(107,565
)
Treasury stock, at cost; 4,145,481 and 3,770,224 shares at December 31, 2019
    and 2018, respectively
(33,484
)
 
(33,237
)
Total stockholders’ equity
173,276

 
201,624

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
231,847

 
$
285,883

See accompanying Notes to Consolidated Financial Statements.

5


FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) 
 
Year ended December 31,
 
2019
 
2018
 
2017
Revenue
$
119,353

 
$
177,773

 
$
243,106

Costs and expenses:
 
 
 
 
 
Operating expenses (excluding depreciation and amortization)
149,225

 
159,808

 
188,744

Corporate general and administrative
27,975

 
31,467

 
41,492

Depreciation and amortization
8,465

 
9,216

 
9,768

Research and development
8,863

 
10,356

 
13,130

(Gain) loss on disposal of long-lived assets
1,450

 
(443
)
 
292

Impairment of goodwill

 
37,180

 

Total costs and expenses
195,978

 
247,584

 
253,426

Loss from operations
(76,625
)
 
(69,811
)
 
(10,320
)
Other (expense) income:
 
 
 
 
 
Interest expense
(2,019
)
 
(2,866
)
 
(2,168
)
Loss on sale of business

 
(360
)
 

Loss on write-down of assets held for sale

 
(2,580
)
 

Other (expense) income, net
1,708

 
(5,040
)
 
1,096

Total other expense
(311
)
 
(10,846
)
 
(1,072
)
Loss before income taxes
(76,936
)
 
(80,657
)
 
(11,392
)
Income tax benefit (expense)
201

 
7,216

 
(6,112
)
Loss from continuing operations
(76,735
)
 
(73,441
)
 
(17,504
)
Income (loss) from discontinued operations, net of tax
44,456

 
2,743

 
(9,891
)
Net loss
(32,279
)
 
(70,698
)
 
(27,395
)
Net loss attributable to noncontrolling interests

 
358

 

Net loss attributable to Flotek Industries, Inc. (Flotek)
$
(32,279
)
 
$
(70,340
)
 
$
(27,395
)
 
 
 
 
 
 
Amounts attributable to Flotek shareholders:
 
 
 
 
 
Loss from continuing operations
$
(76,735
)
 
$
(73,083
)
 
$
(17,504
)
Income (loss) from discontinued operations, net of tax
44,456

 
2,743

 
(9,891
)
Net loss attributable to Flotek
$
(32,279
)
 
$
(70,340
)
 
$
(27,395
)
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
Continuing operations
$
(1.31
)
 
$
(1.26
)
 
$
(0.30
)
Discontinued operations, net of tax
0.76

 
0.05

 
(0.17
)
Basic earnings (loss) per common share
$
(0.55
)
 
$
(1.21
)
 
$
(0.47
)
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
Continuing operations
$
(1.31
)
 
$
(1.26
)
 
$
(0.30
)
Discontinued operations, net of tax
0.76

 
0.05

 
(0.17
)
Diluted earnings (loss) per common share
$
(0.55
)
 
$
(1.21
)
 
$
(0.47
)
 
 
 
 
 
 
Weighted average common shares:
 
 
 
 
 
Weighted average common shares used in computing basic earnings (loss) per common share
58,750

 
57,995

 
57,580

Weighted average common shares used in computing diluted earnings (loss) per common share
58,750

 
57,995

 
57,580

See accompanying Notes to Consolidated Financial Statements.

6


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

 
Years ended December 31,
 
2019
 
2018
 
2017
Loss from continuing operations
$
(76,735
)
 
$
(73,441
)
 
$
(17,504
)
Income (loss) from discontinued operations, net of tax
44,456

 
2,743

 
(9,891
)
Net loss
(32,279
)
 
(70,698
)
 
(27,395
)
Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustment
150

 
(232
)
 
72

Comprehensive loss
(32,129
)
 
(70,930
)
 
(27,323
)
Net loss attributable to noncontrolling interests

 
358

 

Comprehensive loss attributable to Flotek
$
(32,129
)
 
$
(70,572
)
 
$
(27,323
)
See accompanying Notes to Consolidated Financial Statements.



7



FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED
DECEMBER 31, 2019, 2018 AND 2017
(in thousands)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
Retained Earnings
(Accumulated
Deficit)
 
Non-controlling Interests
 
Total Stockholders’ Equity
 
Shares Issued
 
Par Value
 
Shares
 
Cost
 
Balance, December 31, 2016
59,685

 
$
6

 
2,029

 
$
(20,269
)
 
$
318,392

 
$
(956
)
 
$
(9,830
)
 
$
358

 
$
287,701

Net loss

 

 

 

 

 

 
(27,395
)
 

 
(27,395
)
Foreign currency translation adjustment

 

 

 

 

 
72

 

 

 
72

Stock issued under employee stock purchase plan

 

 
(113
)
 

 
654

 

 

 

 
654

Common stock issued in payment of accrued liability

 

 

 

 
188

 

 

 

 
188

Stock options exercised
663

 

 

 

 
5,884

 

 

 

 
5,884

Restricted stock awards granted
275

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
122

 

 

 

 

 

 

Treasury stock purchased

 

 
200

 
(1,729
)
 

 

 

 

 
(1,729
)
Stock surrendered for exercise of stock options

 

 
478

 
(5,863
)
 

 

 

 

 
(5,863
)
Stock compensation expense

 

 

 

 
10,949

 

 

 

 
10,949

Repurchase of common stock

 

 
905

 
(5,203
)
 

 

 

 

 
(5,203
)
Balance, December 31, 2017
60,623

 
$
6

 
3,621

 
$
(33,064
)
 
$
336,067

 
$
(884
)
 
$
(37,225
)
 
$
358

 
$
265,258

Net loss

 

 

 

 

 

 
(70,340
)
 
(358
)
 
(70,698
)
Foreign currency translation adjustment

 

 

 

 

 
(232
)
 

 

 
(232
)
Stock issued under employee stock purchase plan

 

 
(111
)
 

 
341

 

 

 

 
341

Restricted stock awards granted
1,540

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
158

 

 

 

 

 

 

Treasury stock purchased

 

 
102

 
(173
)
 

 

 

 

 
(173
)
Stock compensation expense

 

 

 

 
7,128

 

 

 

 
7,128

Balance, December 31, 2018
62,163

 
$
6

 
3,770

 
$
(33,237
)
 
$
343,536

 
$
(1,116
)
 
$
(107,565
)
 
$

 
$
201,624

Net loss

 

 

 

 

 

 
(32,279
)
 


 
(32,279
)
Foreign currency translation adjustment

 

 

 

 

 
150

 

 

 
150

Stock issued under employee stock purchase plan

 

 
(18
)
 

 
35

 

 

 

 
35

Restricted stock awards granted
924

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
299

 

 

 

 

 

 

Restricted stock units granted
570

 

 

 

 

 

 

 

 

Treasury stock purchased

 

 
94

 
(247
)
 

 

 

 

 
(247
)
Stock compensation expense

 

 

 

 
3,993

 

 

 

 
3,993

Balance, December 31, 2019
63,657

 
$
6

 
4,145

 
$
(33,484
)
 
$
347,564

 
$
(966
)
 
$
(139,844
)
 
$

 
$
173,276

See accompanying Notes to Consolidated Financial Statements.

8


FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Years ended December 31,
 
2019
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
 
Net loss attributable to Flotek Industries, Inc. (Flotek)
$
(32,279
)
 
$
(70,340
)
 
$
(27,395
)
Income (loss) from discontinued operations, net of tax
44,456

 
2,743

 
(9,891
)
Loss from continuing operations
(76,735
)
 
(73,083
)
 
(17,504
)
Adjustments to reconcile loss from continuing operations to net cash (used in) provided by operating activities:
 
 
 
 
 
Depreciation and amortization
8,465

 
9,216

 
9,768

Amortization of deferred financing costs
1,428

 
400

 
472

Provision for doubtful accounts
512

 
839

 
157

Provision for excess and obsolete inventory
5,659

 
2,418

 
388

Loss on sale of business

 
360

 

Loss on write-down of assets held for sale

 
2,580

 

(Gain) loss on sale of assets
1,450

 
(443
)
 
292

Impairment of goodwill

 
37,180

 

Stock compensation expense
4,235

 
7,050

 
10,643

Deferred income tax (benefit) provision
18,307

 
(5,950
)
 
181

Reduction in tax benefit related to share-based awards
24

 
709

 
1,989

Non-cash lease expense
740

 

 

Changes in current assets and liabilities:
 
 
 
 
 
Accounts receivable, net
20,993

 
(2,606
)
 
4,076

Inventories
(65
)
 
2,597

 
(3,442
)
Income taxes receivable
2,546

 
(1,116
)
 
8,008

Other current assets
(8,359
)
 
3,177

 
12,001

Accounts payable
1,131

 
4,631

 
(8,528
)
Accrued liabilities
908

 
(8,740
)
 
(6,175
)
Interest payable
(8
)
 
(35
)
 
19

Net cash (used in) provided by operating activities
(18,769
)
 
(20,816
)
 
12,345

Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(2,411
)
 
(3,559
)
 
(4,197
)
Proceeds from sale of businesses
169,722

 
1,665

 
18,490

Proceeds from sale of assets
240

 
1,387

 
689

Purchase of patents and other intangible assets
(614
)
 
(1,602
)
 
(456
)
Net cash provided (used in) by investing activities
166,937

 
(2,109
)
 
14,526

Cash flows from financing activities:
 
 
 
 
 
Repayments of indebtedness

 

 
(9,833
)
Borrowings on revolving credit facility
42,984

 
277,599

 
383,160

Repayments on revolving credit facility
(92,715
)
 
(255,818
)
 
(393,776
)
Debt issuance costs

 
(111
)
 
(579
)
Payments for finance leases
(51
)
 

 

Purchase of treasury stock
(247
)
 
(173
)
 
(1,729
)
Proceeds from sale of common stock
35

 
341

 
654

Repurchase of common stock

 

 
(5,203
)
Proceeds from exercise of stock options

 

 
21

Loss from noncontrolling interest

 
(358
)
 

Net cash (used in) provided financing activities
(49,994
)
 
21,480

 
(27,285
)
Discontinued operations:
 
 
 
 
 
Net cash provided by (used in) operating activities
(322
)
 
1,296

 
4,102

Net cash provided by (used in) investing activities
337

 
(1,303
)
 
(4,078
)
Net cash flows provided by (used in) provided by discontinued operations
15

 
(7
)
 
24

Effect of changes in exchange rates on cash and cash equivalents
5

 
(88
)
 
151

Net change in cash, cash equivalents and restricted cash
98,194

 
(1,540
)
 
(239
)
Cash, cash equivalents and restricted cash at beginning of year
3,044

 
4,584

 
4,823

Cash, cash equivalents and restricted cash at end of year
$
101,238

 
$
3,044

 
$
4,584


See accompanying Notes to Consolidated Financial Statements.

9


FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global, diversified, technology-driven company that develops and supplies chemistries and services to the oil and gas industries. Flotek also supplied high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets, classified as discontinued operations at December 31, 2018.
The Company’s oilfield business 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. Activities in this 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 oil and gas industry.
Flotek operates in seven domestic and international markets. Customers include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies. The Company also served customers who purchase non-energy-related citrus oil and related products, including household and commercial cleaning product companies, fragrance and cosmetic companies, and food manufacturing companies, in the segment reported as discontinued operations at December 31, 2018.
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.


Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The consolidated financial statements include the accounts of Flotek Industries, Inc. and all wholly-owned subsidiary corporations. Where Flotek owns less than 100% of the share capital of its subsidiaries, but is still considered to have sufficient ownership to control the business, results of the business operations are consolidated within the Company’s financial statements. The ownership interests held by other parties are shown as noncontrolling interests.
During the fourth quarter of 2018, the Company classified the Consumer and Industrial Chemistry Technologies segment as held for sale based on management’s intention to sell this business, which occurred in January 2019. The Company’s historical financial statements have been revised to present the operating results of the Consumer and Industrial Chemistry Technologies segment as discontinued operations. The results of operations of this segment are presented as “Income (loss) from discontinued operations” in the 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.
During 2017, the Company completed the sale or disposal of the assets and transfer or liquidation of liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
Cash Management
The Company uses a controlled disbursement account for its main cash account. Under this system, outstanding checks can be in excess of the cash balances at the bank before the disbursement account is funded, creating a book overdraft. Book overdrafts on this account are presented as a current liability in accounts payable in the consolidated balance sheets.




10

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):
 
Years ended December 31,
 
2019
 
2018
 
2017
Balance, beginning of year
$
1,190

 
$
673

 
$
579

Charged to provision for doubtful accounts, net of recoveries
512

 
839

 
157

Write-offs
(175
)
 
(322
)
 
(63
)
Balance, end of year
$
1,527

 
$
1,190

 
$
673



Inventories
Inventories consist of raw materials, work-in-process, and finished goods and are stated at the lower of cost, determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor, and production overhead. The Company quarterly reviews inventories on hand and current market conditions to determine if the cost of finished goods inventories exceeds current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated market value if those amounts are determined to be less than cost.
Property and Equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including assets held under capital leases, is calculated using the straight-line method over the asset’s estimated useful life as follows:
Buildings and leasehold improvements
2-30 years
Machinery and equipment
7-10 years
Furniture and fixtures
3 years
Transportation equipment
2-5 years
Computer equipment and software
3-7 years

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

11

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

12

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

13

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

14

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

15

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


Note 3 — 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, which represented the CICT segment.
Effective February 28, 2019, the Company completed the sale of the CICT segment 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. As of December 31, 2019, the escrow balance including interest was $9.9 million reflected in other current assets.
Concurrent with the closing of the sale of the CICT segment, the Company retained $11.1 million of historical inventory previously held by the CICT segment. In addition, the Company executed a long-term supply agreement for terpene. The term of the agreement runs through December 2023, with an option to extend for an additional year. The remaining minimum commitment of the agreement at December 31, 2019 is $72 million. 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 arbitrator to help reach agreement on the final post-closing working capital adjustment. In February 2020, the third party arbitrator ruled in favor of awarding ADM for the entire $4.1 million disputed amount resulting in a reduction to the gain on the sale of the business as of December 31, 2019.




16

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the years ended December 31, 2019, 2018, and 2017 (in thousands):
 
Consumer and Industrial Chemistry Technologies
 
2019
 
2018
 
2017
Discontinued operations:
 
 
 
 
 
Revenue
$
11,031

 
$
72,344

 
$
73,992

Operating expenses
(11,572
)
 
(65,940
)
 
(63,621
)
Depreciation and amortization

 
(2,760
)
 
(2,391
)
Research and development
(69
)
 
(590
)
 
(515
)
Income from operations
(610
)
 
3,054

 
7,465

Other income (expense)
35

 
341

 
(284
)
Gain on sale of businesses
64,160

 

 

Income before income taxes
63,585

 
3,395

 
7,181

Income tax expense
(19,129
)
 
(652
)
 
(2,730
)
Net income (loss) from discontinued operations
$
44,456

 
$
2,743

 
$
4,451

The assets and liabilities held for sale on the Consolidated Balance Sheets as of December 31, 2019 and 2018 are as follows (in thousands):
 
Consumer and Industrial Chemistry Technologies
 
2019
 
2018
Assets:
 
 
 
Accounts receivable, net
$

 
$
10,547

Inventories, net

 
52,069

Other current assets

 
446

Property and equipment, net

 
15,899

Goodwill

 
19,480

Other intangible assets, net

 
20,029

Assets held for sale

 
118,470

Liabilities:
 
 
 
Accounts payable
$

 
$
8,883

Accrued liabilities

 
291

Liabilities held for sale
$

 
$
9,174



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

17

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On May 23, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Production Technologies segment to Raptor Lift Solutions, LLC (“Raptor Lift”) for $2.9 million in cash consideration, with $0.4 million held back by Raptor Lift to satisfy potential indemnification claims.
On August 16, 2017, the Company completed the sale of substantially all of the remaining assets of the Company’s
 
Drilling Technologies segment to Galleon Mining Tools, Inc. for $1.0 million in cash consideration and a note receivable of $1.0 million due in one year.
The sale or disposal of the assets and transfer or liquidation of liabilities and obligations of these segments was completed in 2017. The Company has no continuing involvement with the discontinued operations.

The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the years ended December 31, 2018 and 2017 (in thousands):
 
Drilling Technologies
 
Production Technologies
 
2018
 
2017
 
 
2018
 
2017
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
Revenue
$

 
$
11,534

 
 
$

 
$
4,002

 
Cost of revenue

 
(7,309
)
 
 

 
(3,236
)
 
Selling, general and administrative

 
(6,963
)
 
 

 
(1,759
)
 
Research and development

 
(5
)
 
 

 
(364
)
 
Gain (loss) on disposal of long-lived assets

 
97

 
 

 

 
Loss from operations

 
(2,646
)
 
 

 
(1,357
)
 
Other expense

 
(96
)
 
 

 
(52
)
 
Loss on sale of businesses

 
(1,600
)
 
 

 
(479
)
 
Loss on write-down of assets held for sale

 
(6,831
)
 
 

 
(9,718
)
 
Loss before income taxes

 
(11,173
)
 
 

 
(11,606
)
 
Income tax benefit

 
4,138

 
 

 
4,299

 
Net loss from discontinued operations
$

 
$
(7,035
)
 
 
$

 
$
(7,307
)
 
At December 31, 2017, all remaining assets and liabilities of the discontinued operations were assumed by the Company’s continuing operations. These balances included $0.3 million of net accounts receivable, $1.4 million of sales price hold-back that was received during 2018, and $1.4 million of accrued liabilities partially settled in 2018, with the remainder to be settled in 2019.

Note 4 — Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted ASC 606 using the full retrospective method applied to those contracts which were not completed as of December 31, 2015. As a result of electing the full retrospective adoption approach, results for reporting periods beginning after December 31, 2015 are presented under ASC 606.
There was no material impact upon the adoption of ASC 606. As revenue is primarily related to product sales accounted for at a point in time and service contracts that are primarily short-term in nature (typically less than 30 days), the Company did not record any adjustments to retained earnings at December 31, 2015 or for any periods previously presented.
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled
 
to in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an
ongoing basis to reflect updated variable consideration information.

18

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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):
 
Years ended December 31,
 
2019
 
2018
 
2017
Revenue:
 
 
 
 
 
Products
$
115,471

 
$
172,412

 
$
237,211

Services
3,882

 
5,361

 
5,895

 
$
119,353

 
$
177,773

 
$
243,106

Operating expenses (excluding depreciation and amortization):
 
 
 
 
 
Products
$
147,709

 
$
152,846

 
$
182,330

Services
1,516

 
6,962

 
6,414

 
$
149,225

 
$
159,808

 
$
188,744



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 to contract assets or liabilities under ASC 606.
Practical Expedients and Exemptions
The Company has elected to apply several practical expedients as discussed below:
Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded within segment selling and administrative expenses.
The majority of the Company’s services are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC 606-10-50-14, exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the

19

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


Note 5 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
 
Years ended December 31,
 
2019
 
2018
 
2017
Supplemental non-cash investing and financing activities:
 
 
 
 
 
Value of common stock issued in payment of accrued liability
$

 
$

 
$
188

Exercise of stock options by common stock surrender

 

 
5,863

 
 
 
 
 
 
Supplemental cash payment information:
 
 
 
 
 
Interest paid
$
599

 
$
2,502

 
$
1,851

Income taxes (received, net of payments) paid, net of refunds
(699
)
 
(139
)
 
(10,195
)



Note 6— 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.

20

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of lease expense and supplemental cash flow information are as follows (in thousands):
 
For the years ending
 
December 31,
 
2019
 
2018
Operating lease expense
$
2,609

 
$

Finance lease expense:
 
 
 
Amortization of right-of-use assets
1,237

 

Interest on lease liabilities
10

 

Total finance lease expense
1,247

 

Short-term lease expense
123

 

Total lease expense
$
3,979

 
$

 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
2,336

 

Operating cash flows from finance leases
10

 

Financing cash flows from finance leases
51

 



Maturities of lease liabilities are as follows (in thousands):
Years ending December 31,
 
Operating Leases
 
Finance Leases
2020
 
2,012

 
70

2021
 
1,962

 
70

2022
 
1,916

 
47

2023
 
1,976

 
40

2024
 
2,017

 
23

Thereafter
 
23,692

 

Total lease payments
 
$
33,575

 
$
250

Less: Interest
 
(16,116
)
 
(37
)
Present value of lease liabilities
 
$
17,459

 
$
213



21

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental balance sheet information related to leases is as follows (in thousands):
 
December 31, 2019
Operating Leases
 
Operating lease right-of-use assets
$
16,388

 
 
Current portion of lease liabilities
$
486

Long-term operating lease liabilities
16,973

Total operating lease liabilities
$
17,459

 
 
Finance Leases
 
Property and equipment
$
293

Accumulated depreciation
(28
)
Property and equipment, net
$
265

 
 
Current portion of lease liabilities
$
55

Long-term finance lease liabilities
158

Total finance lease liabilities
$
213

 
 
Weighted Average Remaining Lease Term
 
Operating leases
16.6 years

Finance leases
4.6 years

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




Note 7 — Inventories
Inventories are as follows (in thousands):
 
December 31,
 
2019
 
2018
Raw materials
$
4,339

 
$
10,608

Work-in-process

 

Finished goods
23,056

 
18,798

Inventories
27,395

 
29,406

Less reserve for excess and obsolete inventory
(5,698
)
 
(2,117
)
Inventories, net
$
21,697

 
$
27,289


Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
 
2019
 
2018
 
2017
Balance, beginning of year
$
2,117

 
$
368

 
$
50

Charged to provisions
5,659

 
2,418

 
388

Deductions for disposals
(2,078
)
 
(669
)
 
(70
)
Balance, end of the year
$
5,698

 
$
2,117

 
$
368



22

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


Note 8 — Property and Equipment
Property and equipment are as follows (in thousands):
 
December 31
 
2019
 
2018
Land
$
4,440

 
$
4,372

Buildings and leasehold improvements
38,741

 
37,719

Machinery and equipment
27,694

 
26,995

Fixed assets in progress

 
581

Furniture and fixtures
1,671

 
1,573

Transportation equipment
1,440

 
1,852

Computer equipment and software
3,348

 
9,370

Property and equipment
77,334

 
82,462

Less accumulated depreciation
(37,505
)
 
(36,977
)
Property and equipment, net
$
39,829

 
$
45,485


Depreciation expense totaled $6.5 million, $7.8 million, and $8.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.
During the years ended December 31, 2019, 2018, and 2017, no impairments were recognized related to property and equipment.


Note 9— Goodwill
The Company has no reporting units which have a goodwill balance at December 31, 2019.
Goodwill is tested for impairment annually in the fourth quarter, or more frequently if circumstances indicate a potential impairment. During the fourth quarter of 2017, the Company adopted ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. If the carrying amount exceeds the reporting unit’s fair value, the Company will recognize an impairment charge for the excess amount.
During the second quarter of 2018, the Company recognized a goodwill impairment charge of $37.2 million in the Energy Chemistry Technologies (“ECT”) reporting unit, which resulted from sustained under-performance and lower expectations related to the reporting unit. As a result of these factors, a qualitative analysis, and additional risks associated with the business, the Company concluded that sufficient indicators existed to require an interim quantitative assessment
 
of goodwill for that reporting unit as of June 30, 2018. The fair value of the reporting unit was estimated based on an analysis of the present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The assumptions were based on the actual historical performance of the reporting unit and took into account a recent weakening of operating results in an improving market environment. The excess of the reporting unit’s carrying value over the estimated fair value was recorded as the goodwill impairment charge during the three months ended June 30, 2018 and represented all of the ECT reporting unit’s goodwill.





23

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the carrying amount of goodwill for the ECT reporting unit are as follows (in thousands):
Balance at December 31, 2017:
 
Goodwill
$
37,180

Accumulated impairment losses

Goodwill balance, net
37,180

Activity during the year 2018:
 
Goodwill impairment recognized
(37,180
)
Acquisition goodwill recognized

Balance at December 31, 2018:
 
Goodwill
37,180

Accumulated impairment losses
(37,180
)
Goodwill balance, net

Activity during the year 2019:
 
Goodwill impairment recognized

Acquisition goodwill recognized

Balance at December 31, 2019:
 
Goodwill

Accumulated impairment losses

Goodwill balance, net
$




Note 10 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
 
December 31,
 
2019
 
2018
 
Cost
 
Accumulated
Amortization
 
Cost
 
Accumulated
Amortization
Finite lived intangible assets:
 
 
 
 
 
 
 
Patents and technology
$
17,493

 
$
6,715

 
$
18,884

 
$
6,689

Customer lists
15,367

 
6,013

 
15,367

 
5,259

Trademarks and brand names
1,351

 
1,160

 
1,485

 
1,149

Total finite lived intangible assets acquired
34,211

 
13,888

 
35,736

 
13,097

Deferred financing costs

 

 
1,924

 
496

Total amortizable intangible assets
34,211

 
$
13,888

 
37,660

 
$
13,593

Indefinite lived intangible assets:
 
 
 
 
 
 
 
Trademarks and brand names
2,760

 
 
 
2,760

 
 
Total other intangible assets
$
36,971

 
 
 
$
40,420

 
 
 
 
 
 
 
 
 
 
Carrying amount:
 
 
 
 
 
 
 
Other intangible assets, net
$
23,083

 
 
 
$
26,827

 
 


Intangible assets acquired are amortized on a straight-line basis over two to 95 years. Amortization of intangible assets acquired totaled $2.0 million, $1.4 million, and $1.5 million for the years end ended December 31, 2019, 2018, and 2017, respectively.
 
Amortization of deferred financing costs totaled $1.4 million, $0.4 million, and $0.5 million for the years ended December 31, 2019, 2018, and 2017, respectively.


24

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Estimated future amortization expense for other finite lived intangible assets, including deferred financing costs, at December 31, 2019 is as follows (in thousands):
Year ending December 31,
 
 
2020
 
$
1,941

2021
 
1,935

2022
 
1,915

2023
 
1,858

2024
 
1,854

Thereafter
 
10,109

Other amortizable intangible assets, net
 
$
19,612


During the years ended December 31, 2019, 2018, and 2017, no impairments were recognized related to other intangible assets.


Note 11 — Long-Term Debt and Credit Facility
Long-term debt is as follows (in thousands): 
 
December 31,
 
2019
 
2018
Long-term debt, classified as current:
 
 
 
Borrowings under revolving credit facility
$

 
$
49,731


On March 1, 2019, the Company repaid the outstanding balance of the Credit Facility.



Note 12 — 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.


 
Liabilities Measured at Fair Value on a Recurring Basis
At December 31, 2019 and 2018, no liabilities were required to be measured at fair value on a recurring basis. There were no transfers in or out of either Level 1, Level 2, or Level 3 fair value measurements during the years ended December 31, 2019, 2018, and 2017.
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, the Company recorded an impairment of $37.2 million for goodwill in the ECT reporting unit (see Note 9). No impairments of goodwill were recognized during the years ended December 31, 2019,and 2017. No impairment of property and equipment or other intangible assets were recognized during the years ended December 31, 2019, 2018, and 2017.



25

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

value due to the short-term nature of these accounts. The Company had no cash equivalents at December 31, 2019 or 2018.

The carrying amount and estimated fair value of the Company’s long-term debt are as follows (in thousands):
 
December 31,
 
2019
 
2018
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Borrowings under revolving credit facility
$

 
$

 
$
49,731

 
$
49,731


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


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

A reconciliation of the number of shares used for the basic and diluted earnings (loss) per common share computations is as follows (in thousands):
 
Years ended December 31,
 
2019
 
2018
 
2017
Weighted average common shares outstanding - Basic
58,750

 
57,995

 
57,580

Assumed conversions:
 
 
 
 
 
Incremental common shares from stock options

 

 

Incremental common shares from restricted stock units

 

 

Weighted average common shares outstanding - Diluted
58,750

 
57,995

 
57,580





26

FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Income Taxes
Components of the income tax (benefit) expense are as follows (in thousands):
 
Years ended December 31,
 
2019