Oilfield technology company Flotek Industries Inc. (NYSE: FTK) continues to battle questions about the accuracy of its proprietary software, and the Securities and Exchange Commission (SEC) has joined the fray.

On Jan. 19, the company said it received notification from the SEC of an agency inquiry related to the software, which is used to track hydraulically fractured wells and includes the results of its fluid technology, Complex nano-Fluid (CnF).

In November, an independent report challenged Flotek’s FracMax software, and the company has been named as a defendant in several shareholder class action and derivative lawsuits.

FracMax is a data analytics and visualization software package that Flotek says provides access to about 25 million records for wells that show the results and potential profitability of using Flotek’s fluid technology.

Shares of Flotek fell by nearly 50% after the company's data was first called into question in a blog post. Since then the stock has fallen further, and on Jan. 19 traded at $5.52 compared to about $9 on Nov. 11.

James Schumm, analyst, Oppenheimer & Co. Inc., said in a Jan. 19 report that Flotek needs to disclose all publically available completion data to set the record straight.

Schumm said investors could be concerned that Flotek altered data to exaggerate the beneficial impact of its fluid technology.

“We believe that selective disclosure of a handful of wells over different time periods, with different completion methods, lateral lengths and proppant intensity, etc. is of very limited value,” Schumm said. “Given the continued macro and micro uncertainty, we remain on the sidelines.”

Schumm said in November that disclosing data on a few wells with varying characteristics would have little value, and full disclosure could show the beneficial impact of its production chemical while establishing that Flotek “has no need to manipulate data.”

“Given the functionality of FracMax, we believe Flotek had the ability to release completions data very quickly, but the company wanted to make sure all the data are accurate,” he said.

An SEC inquiry is typically a prelude to an investigation and involves the SEC requesting a company to voluntarily provide information to agency staff. An inquiry can develop into a formal investigation should SEC officials believe they require a subpoena to compel an organization to produce documents or to access bank and telephone records, Schumm said.

Flotek’s board has formed a special committee of five independent board members to conduct an independent review.

In November, Flotek said it reviewed a report challenging the validity of its data.

“The analysis suggests the production data presented by Flotek—for three of the wells analyzed—were misinterpreted by Flotek and understated the production of those wells,” the company said.

The company said no customers had revised or canceled orders subsequent to the report.

“We take any contention of errors in our data, processes and analysis very seriously,” said John Chisholm, chairman, president and CEO. “We appreciate the thorough analysis provided in the report and are using this critique, as well as others, to improve our FracMax application to ensure both the validity and reliability of the underlying data as well as the accuracy of the analytical processes.”

The company said that its database, partly as a result of third-party data used by Flotek, identified three wells contained in units with multiple wells. The FracMax application uses algorithms to assign production to individual wells within multiple well units.

Flotek said its initial review of the FracMax database determined the error did not apply to the vast majority of wells in it.

“There were several other wells in the investor presentation that were unitized and reported correctly, showing the benefits of CnF that were not discussed or referred to in the report,” Chisholm said.

The report contended that the wells were on single-well units and, as a result, 100% of the production from those units should be assigned to the identified wells.

“After review of the report, data from the Texas Railroad Commission [and] other third-party data providers, it appears that the wells in question are single-well units,” the company said.

Mark Brown, analyst, Seaport Global, said Jan. 20 that Flotek’s fluid performance had been resilient, with volume increasing by 5% since the third quarter of 2015.

Darren Barbee can be reached at dbarbee@hartenergy.com.