Debt and Convertible Notes Payable

3 Months Ended

Mar. 31, 2022

Debt Disclosure [Abstract]

Debt and Convertible Notes Payable

Debt and Convertible Notes PayableIn April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek. The PPP loans

had a fixed interest rate of 1% and originally a two-year term, maturing in April and May 2022, respectively. No payments of principal or interest were required during the three months ended March 31, 2022 and 2021.

A portion of the loans may be eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least 60% of the eligible costs incurred were used for payroll. Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company. This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that was not significantly detrimental to the business. The forgiveness of the loans is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our past and future adherence to the forgiveness criteria. The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.

During the second quarter of 2021, the Company applied for forgiveness of the JP3 PPP loan with the SBA. In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest were fully forgiven. Accordingly, during the second quarter of 2021, the Company recorded $0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other income on the consolidated statement of operations.

In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025.

The Company has submitted to the SBA for forgiveness of substantially all of the Flotek PPP loan but as of March 31, 2022 and as of the date of this filing, the Company has not received a forgiveness notice. If the loan is not forgiven, monthly payments will be due over the remaining term of the loan upon notice that it will not be forgiven. Denial of the forgiveness of the Flotek PPP loan will negatively impact the Company’s liquidity as discussed in Note 1, “Organization and Nature of Operations”.

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

	March 31, 2022		December 31, 2021
Flotek PPP loan	$	4,788	$	4,788
Less current maturities	(1,553)		(1,436)
Total long-term debt, net of current portion	$	3,235	$	3,352

On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE transaction on February 2, 2022, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $19.5 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum, have a maturity of one year, and are converted into common stock of Flotek (a) at the holder's option at any time prior to maturity, at a price of $1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $2.50 for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $0.8705. On March 21, 2022, $3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately 2.8 million shares of common stock. As of March 31, 2022, the Convertible Notes Payable are recorded at carrying value of $17.6 million, including accrued paid-in-kind interest of $0.3 million, and net of unamortized issuance costs of $0.8 million. The estimated fair value of the Convertible Notes Payable at March 31, 2022 was $25.5 million, estimated using a Monte Carlo simulation model.

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contingent Convertible Notes Payable under the same terms as the Convertible Notes Payable issued in the PIPE transaction. Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC. If minimum volumes are not achieved in any given year, ProFrac shall pay to the company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate Purchase Price of the quantity of Products comprising the Minimum Purchase Obligation and (ii) the actual purchased volume during such calendar year.

On February 2, 2022, the Company also entered into a Master Transaction Agreement with ProFrac Holdings, LLC (the “Master Transaction Agreement”) which supplements the terms of the ProFrac Agreement and provides that if ProFrac does not perform their purchase obligations under the ProFrac Agreement, the Company shall have the right, but not the obligation, to repurchase a percentage of the Contingent Convertible Notes Payable, or a percentage of the securities issued pursuant to the conversion of the Contingent \Convertible Notes Payable if applicable, for aggregate consideration of $1.00, as follows: (a) 0% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first three years of the term have been paid prior to termination of the ProFrac Agreement; (b) 33% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first two years of the term have been paid prior to termination of the ProFrac Agreement; (c) 66% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first one years of the term have been paid prior to termination of the ProFrac Agreement; (d) 100% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first year of the term have not been paid prior to termination of the ProFrac Agreement. The foregoing repurchase provisions will terminate as of the closing of the ProFrac transaction as described further in Note 1, “Organization and Nature of Operations”.

The Contingent Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $10.0 million on the issuance date and remeasured to fair value of $14.1 million as of March 31, 2022 (see Note 9, “Fair Value Measurements”).