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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 |
| FORM 10-K |
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 20202021 | |
| 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 |
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| FLOTEK INDUSTRIES, INC. |
| (Exact name of registrant as specified in its charter) |
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| Delaware | | 90-0023731
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(State of other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
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| 8846 N. Sam Houston Parkway W. Houston, TX | | 77064 |
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| (Address of principal executive offices) | (Zip Code) |
(713) 849-9911(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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| 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. ☐
Indicate by check mark
•whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒☐
• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 20202021 (based on the closing market price on the New York Stock Exchange on June 30, 2020)2021) was approximately $87,800,063.$128 million. At March 12, 2021,30, 2022, there were 72,548,29776,635,518 outstanding shares of the registrant’s common stock, $0.0001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive proxy statement in connection with the 20212022 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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| Forward-Looking Statements | |
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| PART I | |
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| Item 1. | Business | |
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| Item 1A. | Risk Factors | |
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| Item 1B. | Unresolved Staff Comments | |
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| Item 2. | Properties | |
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| Item 3. | Legal Proceedings | |
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| Item 4. | Mine Safety Disclosures | |
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
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| Item 6. | Selected Financial Data[Reserved] | |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
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| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | |
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| Item 9B. | Other Information | |
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| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |
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| PART III | |
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| Item 10. | Directors, Executive Officers and Corporate Governance | |
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| Item 11. | Executive Compensation | |
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
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| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
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| Item 14. | Principal Accounting Fees and Services | |
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| Item 16. | Form 10-K Summary | |
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”), and in particular, Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent the current assumptions and beliefs regarding future events of Flotek Industries, Inc. (“Flotek” or the “Company”), many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to the Company’s business plan, objectives, expected operating results, and assumptions upon which those statements are based. The forward-looking statements contained in this 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 including but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,” “potential,” “schedule,” “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 may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or revenue thereafter. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of this Annual Report and periodically in subsequent reports filed with the Securities and Exchange Commission (“SEC”). The Company has no obligation, and we disclaim any 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.
PART I
Item 1. Business.
General
Flotek Industries, Inc. is acreates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, that servesFlotek helps customers inacross industrial, commercial, and consumer markets.markets improve their ESG performance. The Company serves specialty chemistry needs for both domestic and international energy markets as well as applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers and markets green, specialty chemicals that enhancehelp their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and cleanssupplying professional chemistries that clean surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s Data Analytics (“DA”) segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with their hydrocarbonthe streams in seconds rather than minutes or days. TheThese real-time access to informationdata and analytics prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.profitability, thereby improving ESG performance. During the second quarter of 2020, the Company acquired 100% ownership of JP3 in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.
The Company was initially incorporated under the laws of the Province of British Columbia in 1985. In October 2001, the Company changed its corporate domicile to the State of Delaware. In December 2007, the Company’s common stock began trading on the New York Stock Exchange (“NYSE”) under the stock ticker symbol “FTK.” Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are posted to the Company’s website, www.flotekind.com, as soon as practicable subsequent to electronically filing or furnishing to the SEC. Information contained in the Company’s website is not to be considered as part of any regulatory filing.
As used herein, “Flotek,” the “Company,” “we,” “our” and “us” refers to Flotek Industries, Inc. and/or the Company’s wholly-owned subsidiaries. The use of these terms is not intended to connote any particular corporate status or relationship.
Recent Developments
During
On February 2, 2022, Flotek entered into a Private Investment in Public Equity (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 aggregate initial principal amount of convertible notes for net cash proceeds of approximately $19 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 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. The issuance of the additional shares may trigger a change in ownership defined as 50% or more under IRC Section 382 that will limit the amount of net operating losses deductible and tax credits allowable starting in 2022.
Also on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) in exchange for $10 million of convertible notes with terms substantially the same as those described above. 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 their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC. The term of the ProFrac Agreement is three years starting April 1, 2022.
On February 16, 2022, the Company entered into an amended agreement with ProFrac Holdings, LLC to expand the Profrac Agreement. Closing of the transaction is expected to occur in the second quarter of 2020,2022 and is subject to a vote of the shareholders of Flotek’s common stock, as well as other customary conditions. It is anticipated that the expansion of the Profrac Agreement will increase revenue backlog by at least $1 billion, and up to $2.1 billion, over the next ten years. As part of the transaction, at closing Flotek would (a) issue to ProFrac notes convertible into Flotek’s common stock with a maturity of one year, with the amount of notes based on the size of expansion, and (b) grant ProFrac the right to appoint two members to Flotek’s board of directors, for a total of four out of seven directors. Conversion price of the convertible notes is $1.088125 per share under certain conditions prior to maturity, or $0.8705 per share at maturity. The convertible notes contain other terms and conditions similar to the convertible notes issued to Profrac on February 2, 2022.
Subsequent to December 31, 2021, the Company acquired 100% ownershipentered into a contract to sell the Waller manufacturing facility for proceeds of JP3 Measurement, LLC (“JP3”), a privately-held data and analytics technology company,$4.2 million. The transaction is expected to close in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, which targets an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. In conjunction with the acquisition of JP3, the Company created the DA segment.
The Company was impacted by the outbreak of the novel coronavirus (“COVID-19”), a global pandemic that spread throughout the U.S. and the world during 2020. For a discussion of the impacts of COVID-19, see “COVID-19 Effects and Actions” in this Item 7 of this Form 10-K. For a discussion of the risks related to COVID-19, see Item 1A, “Risk Factors.”April 2022.
Description of Operations and Segments
The Company’s continuing operations has two business segments, CT and DA, which are both supported by the Company’s continuing Research & Innovation (“R&I”) advanced laboratory capabilities. Financial information about the Company’s operating segments and geographic concentration is provided in Note 22,21, “Business Segment, Geographic and Major Customer Information” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.
Chemistry Technologies
The Company’s CT segment includes an energy-focused product lineprovides sustainable, optimized chemistry solutions that is comprised ofmaximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services.services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes delivers and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields, as well asoptimized chemistry solutions that accelerate existing sustainability practices to reduce healththe environmental impact of energy on the air, water, land and environmental risk by usinpeople.
g greener chemicals. Customers of this product line of
Customers of the CT business segment include majorthose of energy related markets as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and international supply chain management companies.advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for both commercial and personal use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce Food and Drug Administration (“FDA”) and Environmental Protection Agency (“EPA”) compliant products by completing all necessary upgrades to its ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of U.S. manufactured specialty chemical products to address the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks. To restore large public gatherings, it is believed that both vaccinations, behavioral changes, sanitizers, surface cleaners, and disinfectants are needed. The Company has made a commitment of being in this market for the long-term.
Data Analytics
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, NGLs, natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.
Customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations has the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the DA segment span across the entire oil and gas market, including upstream producers,largest midstream companies refineries and distribution networks. The segment is continuing its transition tolarge gas processing plants. We have developed a revenue subscription model from selling itsnew line of Verax analyzers deployedfor deployment internationally which was recently certified for compliance in the field across the oilhazardous locations and gas sector, to support contracts and software services via its cloud-based Viper software platform.
In 2020, the DA segment began preparing for international deployments, including export control classification, international certifications and product design modifications to meet the demands of overseas installations. Also in 2020, the Company hired a business development executive who is developing sales opportunities in the international market.harsh weather conditions
Research & Innovation
R&I supports both segments through green chemistry formulation, specialty chemical formulations, FDAFood and EPADrug Administration (“FDA”) and Environmental Protection Agency (“EPA”) regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing. For the years ended December 31, 20202021 and 2019,2020, the Company incurred $7.2$5.5 million and $8.9$7.2 million respectively of research and development expense. In 2020,2021, research and development expense werewas approximately 13.6%12.8% of consolidated revenue. The Company expects that its 20212022 research and development investment will continue to support new product development, especially in support of enhanced environmental, social and governance (“ESG”) standards, increased adoption of green chemistry and conventional customization initiatives for its clients.
Discontinued Operations
Previously, the Company’s Consumer and Industrial Chemistry Technologies (”CICT”) segment supplied high value compounds to companies that make food and beverages, cleaning products, cosmetics and other products sold in consumer and industrial markets. The Company classified the assets, liabilities and results of operations for this segment as discontinued operations at December 31, 2018. Effective February 2019, the Company sold the CICT segment.
Seasonality
Overall, operations are not significantly affected by seasonality; however, weather conditions can pose delays in clients’ activity levels. Certain working capital components build and recede throughout the year in conjunction with established purchasing and selling cycles that can impact operationsoperating results and financial position. The performance of the Company’s services can be susceptible to both weather and naturally occurring phenomena, including, but not limited to, the following:
•the severity and duration of winter temperatures in North America, which impacts natural gas storage levels, drilling activity, commodity prices and operations at the Company’s facilities;
•material deviations from normal seasonality for an extended period can impact access to operations, reduced performance at manufacturing facilities, inability to deploy required personnel, supply chain interruptions, facility damage and customer activity levels;
•the timing and duration of the Canadian spring thaw and resulting restrictions that impact activity levels;
•the timing and impact of hurricanes upon coastal and offshore operations; and
•the COVID-19 pandemic or other pandemics or similar phenomena, which may impact seasonal purchasing and selling cycles.
Product Demand and Marketing
Demand for the Company’s energy-focused products and services in both the CT and DA segments is driven by energy supply and demand, as well as operator desire to deploy improved ESG solutions. Demand for the Company’s energy chemistry
products and services is dependent on levels of conventional and unconventional oil and natural gas well drilling and completion activity, both domestically and internationally. Demand for the Company’s U.S. manufactured sanitizing, surface cleaning and disinfecting products in the CT segment is driven by hygiene and cleaning trends and related purchasing behaviors among the commercial, governmental and consumer markets for sanitizing, surface cleaning and disinfecting products and services.
The Company’sCompany markets its products to end use customers using both direct and indirect sales channels. These sales channels are marketed directly to customers through the Company’s ownaccessed using a mix of in-house sales force and throughprofessionals as well as certain contractual agency arrangements. In 2020, theagreements. The Company participatedalso actively participates in industry trade shows, some of which wereboth live and virtual, shows duepublishes articles in industry publications, and participates in podcasts and creates other online content to COVID-19 pandemic impacts. The Company also publishes technical paperseducate the market on its product and case studies examining the performance of its chemistries and methodologies for evaluating chemistries more effectively.service offerings. While the Company’s primary marketing efforts remain focused in North America, a growing amount of resources and effort are also focused on emerging international markets, especially in the Middle East. In addition to direct marketing and relationship development, the Company also markets products and services through the use of third-party agents, primarily in international markets.
Backlog
Due
The Company estimates that entry into the ProFrac Agreement has resulted in a backlog of $225 million of contracted revenue over the next three years, which is expected to increase to at least $1 billion, and up to $2.1 billion, over the Company’s contractual customer relationshipsnext ten years in the event that the ProFrac Amendment Transaction closes. This is all subject to macro- environmental factors and their transactional nature, the Company has historically not had significant backlog order activity.geo-political stability.
Intellectual Property
The Company endeavors to protect its intellectual property, both within and outside of the U.S. The Company considers patent protection for all products and methods deemed to have commercial significance and that may qualify for patent protection. The decision to pursue patent protection is dependent upon several factors, including whether patent protection can be obtained, cost effectiveness, and alignment with operational and commercial interests. The Company believes its patent and trademark portfolio, combined with confidentiality agreements, FDA and EPA registrations and licensing, trade secrets, proprietary designs, and manufacturing and operational expertise, are sufficient to protect its intellectual property and provide continued strategic advantage. As of December 31, 2020,2021, the Company had 115128 granted patents, consisting of 93including 104 patents in our CT segment and 2223 patents in our DA segment. In addition, the Company also had 4426 pending patent applications filed in the U.S. and abroad, including 3221 for the CT segment and 125 for the DA segment. The patents of the CT segment cover various chemical compositions and methods of use. The patents of the DA segment cover various systems and methods of use for online determination of chemical composition and data analysis. In addition, the Company had 6054 registered trademarks in the U.S. and abroad, covering a variety of its goods and services.
Competition
The ability to compete is dependent upon the Company’s ability to differentiate its products and services provideby providing superior quality and service, and maintainmaintaining a competitive cost structure with sufficient raw material supplies. Activity levels in the oilfield goods and services industry are impacted by current and expected oil and natural gas prices, oil and natural gas drilling activity, production levels, customer drilling and completion-designated capital spending, and customer commitment to improved ESG performance. The unpredictability of the energy industry and commodity price fluctuations creates both
increased risk and opportunity for the products and services of both the Company and its competitors. The Company’s CT segment also competes with established companies and brands in the sanitizers, surface cleaners and disinfectants market. The DA segment faces competition from other providers of equipment and services for real-time information in the upstream, midstream, refining and distribution market.
Raw Materials
Materials and components used in the Company’s servicing and manufacturing operations, as well as those purchased for sale, are generally available on the open market from multiple sources. When able, the Company uses multiple suppliers, both domestically and internationally, to purchase raw materials on the open market. The prices paid for raw materials vary based on availability, weather, other commodity price fluctuations, contractual obligations, tariffs, duties on imported materials, foreign currency exchange rates, business cycle position and global demand. Higher prices for chemistries and certain raw materials could adversely impact future sales, contract fulfillment and product margins. The Company is diligent in its efforts to identify alternate suppliers in its contingency planning by reducing the number of contractually obligated volumes and utilizing competitive bidding practices to proactively reduce costs and potential supply shortages.
The DA segment currently sources spectrometers from a single supplier. Sufficient inventory existsDue to meet the expected 2021 needs without additional purchases. Supplylong lead times, supply chain disruption could adversely impact the results of the segment in the years 2022 and beyond.beyond, although re-ordering for 2022 has already begun.
Government Regulations
The Company is subject to federal, state, and local laws and regulations, including laws related to the environment, occupational safety, health, transportation and trade within the U.S. and other countries in which the Company does business. These laws and regulations strictly govern the manufacture, storage, transportation, sale, use and disposal of chemistry products. The Company strives to ensure full compliance with all regulatory requirements.
The Company continually evaluates the environmental impact of its operations and attempts to identify potential liabilities and costs of any environmental remediation, litigation or associated claims. Several products of the CT segment are considered hazardous materials. In the event of a leak or spill in association with Company operations, the Company could be exposed to risk of material cost, net of insurance proceeds, if any, to remediate any contamination. No environmental claims are currently being litigated or investigated (to the Company’s knowledge), and the Company does not expect that costs related to remediation requirements will have a significant adverse effect on the Company’s consolidated financial position or results of operations.
Human Capital
Objectives & CultureSustainability
The Company’s
Flotek’s vision is to create solutions to reduce the environmental impact of energy on air, water, land and people. Our mission is to be the collaborative ESG partner of choice for sustainable chemistry technology and digital analytics solutions. We believe that green chemistry and data technologies that transform businesses. Chemistry is our common platform acrossdigital transformation reduce the Company’s business segments,total cost of ownership and we apply our knowledge and passion for chemistry to empower value creation for all our stakeholders. At the centerenvironmental risk of our mission is our Human Capital. We are focused on attracting, retainingcustomers and developing high-potential talent, who make a positive impactcan transform business by reducing carbon footprints, energy consumption, emissions and create a strong culture where innovation and value thrives.overall environmental impact.
Our culture is built around the following core values:
•Prioritizing safety;
•Leading through ESG;
•Creating customer success;
•Driving value for all Flotek stakeholders;
•Maintaining integrity;
•Conducting ourselves with humility;
•Taking personal accountability; and
•Having fun.
We have green, sustainable chemistry at our core, and we focus on providing responsible specialty chemistry solutions that are environmentally friendly and cost-competitive. Our products offered by our CT segment displace harmful chemicals such as BTEX in energy production, and our logistics and delivery methodology results in lower product usage and lower carbon emissions due to delivery. The analyzers produced by our DA segment are a closed-loop system, meaning that samples of potentially harmful gasses and fluids do not need to be routinely taken and flared, as is the case with gas chromatographs. This results in lower emissions. In addition, our analyzers’ ability to determine the mixing of two batches of product (“transmix”) in real time results in less time, energy and resources spent processing transmix.
Human Capital
Employee Overview
As of December 31, 2020,2021, the Company had 147approximately 131 employees, exclusive of existing worldwide agency relationships.
None of the Company’s employees are covered by a collective bargaining agreement and labor relations are generally positive.good.
Employees & Health, Safety & Environment
The Company is committed to acting with care to protect the health and safety of people, resources and the environment. We will stop operations to avoid putting persons or property in harm’s way as we operate. Each of us owns health, safety and environment (“HSE”), as it is not isolated to certain individuals or roles. We aim to hold each other accountable to a high standard. Thus, every employee is empowered and expected to stop any activity, big or small, that could jeopardize people, the environment or assets.
Our safety, health and environmental goals are designed to sustain our drive to zero incidents. As a result, safety is woven into the fabric of the Company, from our robust training programs to our ESG moments that begin team meetings, to our Hazardous Observation Card program.
Our safety, health and environmental goals are designed to sustain our drive to zero incidents, both relentlessly and responsibly. We constantly emphasize the importance of monitoring the safety, security and environmental impact of our job sites. Through our day-to-day due diligence, the Company strives to be recognized as one of the industry's best performers. Company operations worldwide endeavor to comply with, or exceed, all local requirements to protect the environment, health, safety and security of our operations.
Our training program is fundamental to operating safely and protecting people and the environment. The Company maintains a robust health, safety and environmental training program that includes both classroom and online curriculum. We assign specific trainings to employees based on their role and function within the Company. Additionally, the Company’s field and plant personnel complete more than 24 hours of training annually. We continuously monitor all operational activities and update the training programs as needed to ensure that the curriculum remains relevant and effective for minimizing risk and protecting our employees and the environment.
Our
We have a strong company commitment to safety healthin all aspects of our operations through training, safety culture, and environmental goals are designed to sustaintracking of key safety metrics. In 2021, we realized our drive to zero incidents. In 2020, our company-widegoal of 0.0 Total Recordable Incident Rate (TRIR) company wide. The TRIR is a key safety performance metric which calculates the number of recordable incidents per full-time workers during a one-year period, was 0.80.
period. When comparing to the safety record of the chemical manufacturing sector, Flotek’s safety performance leadsis an industry leader. This achievement is the industry.
Employee Safety and COVID-19
In 2020, the Company established a COVID-19 task force comprisedresult of the executive teamfocus of our entire organization on building and key functional leaders who created and introducedsustaining a COVID-19 preparedness and response plan to protect our employees and business partners through the global pandemic. Across the organization, the Company implemented new protocols and standards to guide workplace behaviors and facilitate remote work productivity.
The task force frequently communicated with employees regarding the impacts of the COVID-19 pandemic, as well as health and safety protocols and procedures. Key actions taken include:culture.
•Adopted remote work procedures and modified work shifts for employees;
•Required employees to stay-at-home when exhibiting any of the following symptoms: fever, chills, headache, sore throat, loss of taste or smell and muscle pain;
•Upon return-to-work, provided face masks, hand sanitizer and access to cleaning supplies for all employees;
•Increased cleaning protocols across all locations;
•Implemented social distancing for in-person engagements, requiring face coverings for in-person meeting attendance, contactless greetings and limited sizes of group meetings;
•Modified travel policy to reduce or eliminate non-essential business travel, prohibiting international travel;
•Created isolation areas at all locations for employees who became ill during work hours;
•Performed contact tracing in cases of potential exposure to COVID-19; and
•Continued our policy to treat all medical information as a confidential medical record in accordance with employee privacy rights under the Americans with Disabilities Act and Health Insurance Portability and Accountability Act.
Compensation: Wages & Benefits
The Company’s compensation programs are designed to provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location. We align our programs to attract, retain and motivate employees to achieve high-impact results that create value for all of our stakeholders. In addition to competitive base wages, all employees are eligible for a discretionary bonus, which is based upon individual and triggered by company performance.
A key component of our compensation program is benefits. We engage an outside benefits consulting firm to independently evaluate the effectiveness and competitiveness of our employee benefits program, as well as to tailor our program to the unique needs of the Company’s employee base.
All full-time Company employees are eligible for comprehensive health insurance, including medical insurance, prescription drug benefits, dental insurance and vision insurance. Additionally, the Company offers flexible spending and health savings accounts, life and disability/accident coverage, telemedicine, programs, critical illness insurance and paid and unpaid leave. Eligible employees may elect to participate in the Company’s employee stock purchase plan and retirement plans, including its 401(k) plan in the U.S. and its Registered Retirement Savings Plan in Canada. The Company currently matches 401(k) contributions at 100% of up to 2% of an employee’s compensation. The Company also offers access to online and personalized financial planning services as a component of its retirement plan benefit.
In 2020, the
The Company prioritized thecontinues to prioritize mental health and wellness needs of itsfor employees, maintaining an ongoing dialogue with employees and providing resources through its employee assistance program, which is available to all employees and their families.
Available Information and Website
The Company’s website is www.flotekind.com. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available (see the “Investor Relations” section of the Company’s website), as soon as reasonably practicable, subsequent to electronically filing or otherwise providing reports to the SEC. Corporate governance materials, guidelines, by laws, and code of business conduct and ethics are also available on the website. A copy of corporate governance materials is available upon written request to the Company.
The SEC maintains the www.sec.gov website, which contains reports, proxy and information statements, and other registrant information filed electronically with the SEC.
The Company filed, or furnished, as applicable, all principal executive officer and financial officer certifications as required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with this Annual Report. Information with respect to the Company’s executive officers and directors is incorporated herein by reference to information to be included in the proxy statement for the Company’s 20212022 Annual Meeting of Stockholders.
The Company has disclosed and will continue to disclose any changes or amendments to the Company’s code of business conduct and ethics as well as waivers to the code of ethics applicable to executive management by posting such changes or waivers on the Company’s website or in filings with the SEC.
Item 1A. Risk Factors.Factors
The Company’s business, financial condition, results of operations, cash flows, liquidity and liquidityprospects are subject to various risks and uncertainties. Readers of this Annual Report should not consider any descriptions of these risk factors to be a complete set of all potential risks that could affect the Company. These factors should be carefully considered together with the other information contained in this Annual Report and the other reports and materials filed by the Company with the SEC. Further,
many of these risks are interrelated and, as a result, the occurrence of certain risks could trigger and/or exacerbate other risks. Such a combination could materially increase the severity of the impact of these risks on the Company’s business, results of operations, financial condition, cash flows, liquidity or liquidity.prospects.
This Annual Report contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Forward-looking statements discuss Company prospects, expected revenue, expenses and profits, strategic and operational initiatives, and other activities. Forward-looking statements also contain suppositions regarding future oil and natural gas industry and other conditions, both domestically and internationally. The Company’s results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including risks described below and elsewhere. See “Forward-Looking Statements” at the beginning of this Annual Report.
Risks Related to the Company’s Business
The Company’s business is largely dependent upon its customers’ spending, both in the oil and gas industry and in the sanitizer, surface cleaner and disinfectant sector.adjacent industrial applications for professional chemistries. Spending could be adversely affected by industry conditions or by new or increased governmental regulations; global economic conditions; spending on sanitizer, surface cleaner and disinfectant products;lingering sentiment surrounding the COVID-19 pandemic; the availability of credit; and oil and natural gas prices.
The Company’s CT and DA segments are dependent upon customers’ willingness to make operating and capital expenditures and purchasing decisions related to the Company’s products. Expectations of a decline in future oil and natural gas market prices or lessened focus on sanitation chemicals could reduce demand for the Company’s products and services. Industry conditions are influenced by numerous factors over which the Company has no control, including the supply of and demand for oil and natural gas, domestic and international economic conditions, availability and effectiveness of a COVID-19 vaccine, general focus on sanitization and cleansing, and mergers and divestitures among the Company’s target customer base.
Demand for and prices of the Company’s products are subject to a variety of factors, including, but not limited to:
•global demand for energy as a result of population growth, economic development, and general economic and business conditions;
•the timing and rate of economic recovery from the effects of COVID-19;
•the need for sanitization products related to concern over COVID-19 and similar diseases and related consumer behavior;pandemic;
•the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and the impact of non-OPEC producers on global supply;
•availability and quantity of natural gas storage;
•import and export volumes and pricing of liquefied natural gas;
•domestic and international refining activity;
•availability of vaccines and other therapeutic treatments for COVID-19;
•pipeline capacity to critical markets and out of producing regions;
•political and economic uncertainty, sociopolitical unrest including the current conflict in Ukraine and sociopolitical unrest;ongoing sanctions imposed on Russia
•cost of exploration, production and transport of oil and natural gas;
•sustained market adoption of green chemistry solutions;
•technological advances impacting energy production and consumption;
•weather conditions; and
•weather conditions.foreign exchange rates.
The volatility of commodity prices and the consequential effect on the activities of the Company’s target customer base could adversely impact the activity levels of the Company’s customers.
VolatileDemand for the Company’s goods and services may be adversely impacted if volatile economic conditions could weaken customer expenditures, causing reduced demand forspecifically as it concerns the Company’s products and services and a significant adverse effectcontinued adoption of chemistry solutions with lower overall impact on the Company’s operating results.environment. It is difficult to predict the pace of industry growth, the direction of oil and natural gas prices, the direction and magnitude of economic activity, the effects or durationcontinuing impact of the COVID-19 pandemic, the demand for sanitizer, surface cleaner and disinfectantprofessional chemistry products, and to what extent these conditions could affect the Company. However, reduced cash flow and capital availability could adversely impact the financial condition of the Company’s customers, which could result in customer project modifications, delays or cancellations, general business disruptions, and delay in, or nonpayment of, amounts that are owed to the Company. This could cause a negative impact on the Company’s results of operations and cash flows.
Furthermore, if certain of the Company’s suppliers were to experience significant cash flow constraints or become insolvent as a result of such conditions, a reduction or interruption in supplies or a significant increase in the price of supplies could occur, adversely impacting the Company’s results of operations and cash flows.
The COVID-19persistence and or emergence of new pandemic hasthreats can significantly reducedreduce demand for our services and may continue to have a prolonged material adverseadversely impact on our financial condition, results of operations and cash flows.
The effects of the COVID-19 pandemic, including actions
Actions taken by businesses and governments in efforts to mitigate pandemic threats have resulted in a significant and continued reduction inthe potential to negatively impact international and U.S. economic activity.activity for an indeterminable duration. These effects have materially and adversely affected, and may continue to materially and adversely affect,can directly impact the demand for oil and natural gas, as well as for our oil and gas related services and products. The declineFurthermore, pandemic conditions can create disruptions in our customers’ demand for our oilraw materials, logistics, and gas related servicesaccess to other critical resources such as human capital and products has had a material adverse impact on our financial condition, results of operations and cash flows. In addition, we have adopted social distancing and work-from-home procedures, which have had and may continue to have an impact on the ability of employees and management of the Company to communicate and work efficiently. We expect such impact will continue to have certain negative effects on the Company’s business.markets.
The timing of the effectiveness of vaccines, economic uncertainty, and future developments and effects are highly uncertain and cannot be predicted. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity and/or capital levels.
Reduced unconventional oil production could lessen the positive effects of a general recovery of the oil and gas industry.
The majority of the Company’s product offerings in its CT segment, other than sanitizer, surface cleaner and disinfectantprofessional chemistry products are used in unconventional oil and gas operations. The Company has little to no exposure to conventional or offshore sectors. In the event that an industry recovery is disproportionately driven by conventional and offshore oil and gas operations, the Company may not have a resulting increase in its operational results.
The Company’s inability to develop and/or introduce new products or differentiate existing products could have an adverse effect on its ability to be responsive to customers’ needs and could result in a loss of customers, as well as adversely affecting the Company’s future success and profitability.
The industries in which the Company does business are characterized by technological advancements that have historically resulted in, and will likely continue to result in, substantial improvements in the scope and quality of specialty chemistries and analytical services.services. Consequently, the Company’s future success is dependent, in part, upon the Company’s continued ability to timely develop innovative products and services. Successful introduction of new technology requires time and resources, and there is no assurance that the Company will be able to commercialize new technology in a timely manner. If the Company fails to successfully develop and introduce innovative products and services that appeal to customers, or if existing or new market competitors develop superior products and services, the Company’s revenue and profitability could deteriorate. The Company develops, markets and produces certain green alternatives to many existing products. If these green alternatives do not perform as well as existing conventional products, the Company’s revenue and profitability could be adversely affected.
Increased competition could exert downward pressure on prices charged for the Company’s products and services.
The Company operates in a competitive environment characterized by large and small competitors. Competitors with greater resources and lower cost structures or who are trying to gain market share may be successful in providing competing products and services to the Company’s customers at lower prices than the Company currently charges. EmployeesThe Company operates in an environment with relatively low barriers to entry; employees of the Company may leave and compete directly with the Company. This may require the Company to lower its prices, resulting in an adverse impact on revenues, margins, and operating results. Thus, competition could have a detrimental impact on the Company’s business.
If the Company is unable to adequately protect intellectual property rights or is found to infringe upon the intellectual property rights of others, or is unable to maintain the registrations and certifications of its products and facilities, the Company’s business is likely to be adversely affected.
The Company relies on a combination of patents, trademarks, copyrights, trade secrets, non-disclosure agreements and other methods to access markets and create a competitive advantage. Although the Company believes that existing measures are reasonably adequate to protect intellectual property rights, there is no assurance that the measures taken will prevent misappropriation of proprietary information or dissuade others from independent development of similar products or services. Moreover, there is no assurance that the Company will be able to prevent competitors from copying, reverse engineering, modifying or otherwise obtaining and/or using the Company’s technology and proprietary rights to create competitive products or services. The Company may not be able to enforce intellectual property rights outside of the U.S. Additionally, the laws of certain countries in which the Company’s products and services are manufactured or marketed may not protect the Company’s proprietary rights to the same extent as do the laws of the U.S. Furthermore, other third parties may infringe, challenge, invalidate or circumvent the Company’s patents, trademarks, copyrights and trade secrets. In each case, the Company’s ability to compete could be significantly impaired.
A portion of the Company’s products and services are without patent protection. The issuance of a patent does not guarantee validity or enforceability. The Company’s patents may not necessarily be valid or enforceable against third parties. The issuance of a patent does not guarantee that the Company has the right to use the patented invention. Third parties may have blocking patents that could be used to prevent the Company from marketing the Company’s own patented products and services and utilizing the Company’s patented technology.
The Company is exposed and, in the future, may be exposed to allegations of patent and other intellectual property infringement from others. The Company may allege infringement of its patents and other intellectual property rights against others. Under either scenario, the Company could become involved in costly litigation or other legal proceedings regarding its patent or other intellectual property rights, from both an enforcement and defensive standpoint. Even if the Company chooses to enforce its patent or other intellectual property rights against a third party, there may be risk that the Company’s patent or other intellectual
property rights become invalidated or otherwise unenforceable through legal proceedings. If intellectual property infringement claims are asserted against the Company, the Company could defend itself from such assertions or could seek to obtain a license under the third party’s intellectual property rights in order to mitigate exposure. In the event the Company cannot obtain a license, third parties could file lawsuits or other legal proceedings against the Company, seeking damages (including treble damages) or an injunction against the manufacture, use, sale, offer for sale, or importation of the Company’s products and services. These could result in the Company having to discontinue the use, manufacture and sale of certain products and services, increase the cost of selling certain products and services, or result in damage to the Company’s reputation. An award of damages, including material royalty payments, or the entry of an injunction order against the use, manufacture and sale of any of the Company’s products and services found to be infringing, could have an adverse effect on the Company’s results of operations and ability to compete.
Certain of the Company’s products and facilities, especially those related to the sanitizer, surface cleaner and disinfectant business,professional chemistry products, have been registered with the EPA and/or FDA.The failure of the Company to maintain such EPA and FDA registrations could result in the inability of the Company to market or sell its products.In the event that the Company cannot maintain its registrations or licenses or is unable to procure new licenses or registrations for new products or in response to changes to regulatory requirements, the ability of the Company to sell its products and obtain revenue may be adversely affected.
The loss of key customers could have an adverse impact on the Company’s results of operations and could result in a decline in the Company’s revenue.
In the CT segment in the aggregate, revenue derived from the Company’s three largest customers as a percentage of consolidated revenue for the years ended December 31, 2021 and 2020, totaled 44% and 2019, totaled 50% and 40%, respectively. The Company expects that customer concentration risk will increase due to the recent entry into the long-term supply agreement with Profrac Services LLC.Customer relationships are historicallysubstantially governed by purchase orders or other short-term contractual obligations as opposed to long-term contracts. Losses of customers also may occur due to product, service or pricing issues, as well as industry consolidation. The Company competes in a highly competitive environment and must work diligently to create and maintain productive customer relationships, and the failure to maintain those relationships could result in the loss of one or more key customers. The loss of one or more key customers could have an adverse effect on the Company’s results of operations and could result in a decline in the Company’s revenue.
Loss of key suppliers, the inability to secure raw materials on a timely basis, or the Company’s inability to pass commodity price increases on to its customers could have a material adverse effect on the Company’s ability to service its customers’ needs and could result in a significant loss of customers.
Materials used in servicing and manufacturing operations, as well as those purchased for sale, are generally available on the open market from multiple sources. Acquisition costs and transportation of raw materials to the Company’s facilities have historically been impacted by extreme weather conditions. Certain raw materials used by the Company’s CT segment are available only from limited sources; accordingly, any disruptions to critical suppliers’ operations could materially and adversely impact the Company’s operations. PricesAcquisition costs and transportation of raw materials to the Company’s facilities have historically been impacted by extreme weather conditions. Additionally, prices paid for raw materials could be affected by energy products and other commodity prices; weather and disease associated with our crop dependent raw materials; tariffs and duties on imported materials; evolving geopolitical risks; foreign currency exchange rates; and phases of the general business cycle and global demand. The Company’s CT segment secures short- and long-term supply agreements for most of its critical raw materials from both domestic and international vendors.
Certain of the Company’s products use citrus terpene as a raw material. While the Company believes that its existing supply and contractual arrangements are sufficient for its current usage, a loss of current supply may require the Company to find alternative raw materials or alternative sources of citrus terpene, each of which could have an adverse effect on the cost of the Company to produce its products.
The prices of key raw materials are subject to market fluctuations, which at times can be significant and unpredictable. Availability of key raw materials, weather events, natural disasters, and health epidemics in countries from which the Company sources raw materials may significantly impact prices. During a period of scarcity of supply the Company may also be negatively impacted by prioritization decisions enacted by its suppliers.
The Company may be unable to pass along price increases to its customers, which could result in a materially adverse impact on margins and operating profits. The Company currently uses purchasing strategies designed, where possible, to align the timing of customer demand with the Company’s supply commitments. However, the Company currently does not hedge commodity prices, but may consider such strategies in the future, and there is no guarantee that the Company’s purchasing strategies will prevent cost increases from resulting in materially adverse impacts on margins and operating profits.
The Company’s DA segment is dependent on its ability to source appropriate technical components for its Verax measurement system, certain of which are specialty products that are sole-sourced and are not easily replaceable with other sources. Any inability to source appropriate components in the future could result in significant difficulty supplying equipment or services to the Company’s customers.
Removal of members of management or directors may be difficult or costly.
The Company’s management, employees, Chairman and directorsChief Executive Officer may have retention, employment or severance agreements in place. In the event that our employees, management or directors do not have the proper skills for management or operation of the Company, or the Company otherwise wishes to remove them from their position(s), the Company may be required to pay severance or similar payments. Removal of some management and employees by the Company may also be difficult and require negotiations by the Company.
Failure to maintain effective disclosure controls and procedures and internal controls over financial reporting could have an adverse effect on the Company’s operations and the trading price of the Company’s common stock.
Effective internal controls are necessary for the Company to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. If the Company cannot provide reliable financial reports or effectively prevent fraud, the Company’s reputation and operating results could be harmed. If the Company is unable to maintain effective disclosure controls and procedures and internal controls over financial reporting, the Company may not be able to provide reliable financial reports, which in turn could affect the Company’s operating results or cause the Company to fail to meet its reporting obligations. Ineffective internal controls could also cause investors to lose confidence in reported financial information, which could negatively affect the trading price of the Company’s common stock, limit the ability of the Company to access capital markets in the future, and require additional costs to improve internal control systems and procedures. The Company disclosed material weaknesses in internal controls during 2020. The failure to properly remediate each of the material weaknesses, or the discovery of additional material weaknesses, could affect
Cyberattacks may have a significant and adverse impact on the Company’s operating results or cause the Company to be unable to meet its reporting obligations.operations and related financial condition.
Network disruptions, security threats and activity related to global cyber-crime pose risks to the Company’s key operational, reporting and communication systems.
The Company relies on access to information systems for its operations. Failuresoperational, reporting and communication functions.. Impairments of or interference with, access to these systems, such as ransomware and network communications disruptions, could have an adverse effect on our ability to conduct operations and could directly impact consolidated reporting. Phishing attacks could result in sensitive or confidential information being released by the Company. Security breaches pose a risk to confidential data and intellectual property, which could result in damages to our competitiveness and reputation. The Company’s policies and procedures, system monitoring and data back-up processes may not prevent or mitigate the effects of thesedetect potential disruptions or breaches.breaches in a timely or effective manner. There can be no assurance that existing or emerging threats will not have an adverse impact on our systems or communications networks. While the Company does carry cybersecurity insurance, the coverage and amount of such insurance may not be sufficient to adequately compensate the Company for cybersecurity loss.
The Company may pursue strategic acquisitions, joint ventures and strategic divestitures, which could have an adverse impact on the Company’s business.
The Company’s past and potential future acquisitions, joint ventures, and divestitures involve risks that could adversely affect the Company’s business. Negotiations of potential acquisitions, joint ventures, or other strategic relationships, integration of newly acquired businesses, and/or sales of existing businesses could be time consuming and divert management’s attention from other business concerns. Acquisitions and joint ventures could also expose the Company to unforeseen liabilities or risks associated with new markets or businesses. Unforeseen operational difficulties related to acquisitions and joint ventures could result in diminished financial performance or require a disproportionate amount of the Company’s management’s attention and resources. Additionally, acquisitions could result in the commitment of capital resources without the realization of anticipated returns. Divestitures could result in the loss of future earnings without adequate compensation and the loss of unrealized strategic opportunities.
If the Company does not manage the potential difficulties associated with expansion successfully, the Company’s operating results could be adversely affected.
The Company believes future success will depend, in part, on the Company’s ability to adapt to market opportunities and changes, to successfully integrate the operations of any businesses acquired, expansion of existing product and service lines, and potentially expand into new product and service areas in which the Company may not have prior experience. Factors that could result in strategic business difficulties include, but are not limited to:
•failure to effectively integrate acquisitions, joint ventures or strategic alliances;
•failure to effectively plan for risks associated with expansion into areas in which management lacks prior experience;
•lack of experienced management personnel;
•increased administrative burdens;
•lack of customer retention;
•technological obsolescence; and
•infrastructure, technological, communication and logistical problems associated with large, expansive operations.
If the Company fails to manage potential difficulties successfully, the Company’s operating results could be adversely impacted.
The Company’s ability to grow and compete could be adversely affected if adequate capital is not available.
The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to equity and debt financing. The Company cannot guarantee that internally generated cash flows will be sufficient, or that the Company will to be able to obtain equity or debt financing on acceptable terms, or at all. As a result, the Company may not be able to finance strategic growth plans, take advantage of business opportunities, or to respond to competitive pressures. The Company’s existing shelf registration statement does not have extra capacity for equity offerings, and thereThere is no guarantee that the Company will file a new shelf registration statement. The Company’s ability to procure debt financing, is dependent on, among other things, the willingness of banks and other financial institutions to lend into the Company’s industry and on their evaluation of the Company’s credit risk. There is no guarantee that the Company will be able to procure debt financing or, in the event that it is able to procure debt financing, that the financing will be on favorable terms and conditions or at favorable rates of interest.
Failure to adapt to changing buying habits athabits of the Company’s potential and existing customers could have a negative effect on the Company’s ability to attract and retain businebusiness.
ss.
The demographics and habits of the purchasing departments of many of the Company’s customers and potential customers is changing. Key decision makers are less experienced and show different buying habits and approaches. Customers are increasingly requiring vendors to integrate with purchasing modules and using advanced analytics to make purchasing decisions. If the Company does not adapt to these changing purchasing trends, the Company may not be able to attract or retain business.
Failure to collect for goods and services sold to key customers could have an adverse effect on the Company’s financial results, liquidity and cash flows.
The Company performs credit analysesanalysis on potential customers; however, credit analysis does not provide full assurance that customers will be willing and/or able to pay for goods and services purchased from the Company. Furthermore, collectability of international sales can be subject to the laws of foreign countries, which may provide more limited protection to the Company in the event of a dispute over payment. Because sales to domestic and international customers are generally made on an unsecured basis, there can be no assurance of collectability. The Company’s sales revenues are concentrated among customers operating in the oil and gas industry. Furthermore, the Company anticipates an increase in concentration risk in 2022 and beyond as a result of the entry of the Company into a substantial long-term agreement with ProFrac Services LLC. If one or more major customers are unwilling or unable to pay its debts to the Company, it could have an adverse effect of the Company’s financial results, liquidity and cash flows.
Unforeseen contingencies such as litigation could adversely affect the Company’s financial condition.
The Company is, and from time to time may become, a party to legal proceedings incidental to the Company’s business involving alleged injuries arising from the use of Company products, exposure to hazardous substances, patent infringement, employment matters, commercial disputes, claims related to adverse physical reactions to the Company’s products such as rashes or allergic reactions and shareholder lawsuits. The defense of these lawsuits may require significant expenses, divert management’s attention, and may require the Company to pay damages that could adversely affect the Company’s financial condition. In addition, any insurance or indemnification rights that the Company may have may be insufficient or unavailable to protect against potential loss exposures.
The Company’s current insurance policies may not adequately protect the Company’s business from all potential risks.
The Company’s operations are subject to risks inherent in the specialty chemical industry, such as, but not limited to, accidents, explosions, fires, severe weather, oil and chemical spills, and other hazards. These conditions can result in personal injury or loss of life, damage to property, equipment and the environment, as well as suspension of customers’ oil and gas operations.
These events could result in damages requiring costly repairs, the interruption of Company business, including the loss of revenue and profits, and/or the Company being named as a defendant in lawsuits asserting large claims. The Company does not
have insurance against all foreseeable or unforeseeable risks. Consequently, losses and liabilities arising from uninsured or underinsured events could have an adverse effect on the Company’s business, financial condition and results of operations.
Regulatory pressures, environmental activism, and legislation could result in reduced demand for the Company’s products and services, increase the Company’s costs, and adversely affect the Company’s business, financial condition and results of operations.
Regulations restricting volatile organic compounds (“VOC”) exist in many states and/or communities which limit demand for certain products. Although citrus oil is considered a VOC, its health, safety, and environmental profile is preferred over other solvents (e.g., benzene, toluene, ethylbenzene and xylene), which is currently creating new market opportunities around the world. Changes in the perception of citrus oils as a preferred VOC, increased consumer activism against hydraulic fracturing or other regulatory or legislative actions by governments could potentially result in materially reduced demand for the Company’s products and services and could adversely affect the Company’s business, financial condition, and results of operations.
Perceptions and related usage of chemistry solutions that are currently considered safe and acceptable, within specified parameters, may be subject to change in future periods as research and testing of environmental impacts mature.
The Company is subject to complex foreign, federal, state and local environmental, health, and safety laws and regulations, which expose the Company to liabilities that could adversely affect the Company’s business, financial condition, and results of operations.
The Company’s operations are subject to foreign, federal, state, and local laws and regulations related to, among other things, the protection of natural resources, injury, health and safety considerations, chemical exposure assessment, waste management, and transportation of waste and other hazardous materials. The Company’s operations expose the Companyare exposed to risks of environmental liability that could result in fines, penalties, remediation, property damage, and personal injury liability. In order to remain compliant with laws and regulations, the Company maintains permits, authorizations, registrations, and certificates as required from regulatory authorities. Sanctions for noncompliance with such laws and regulations could include assessment of administrative, civil and criminal penalties, revocation of permits, and issuance of corrective action orders.
The Company could incur substantial costs to ensure compliance with existing and future laws and regulations. Laws protecting the environment have generally become more stringent and are expected to continue to evolve and become more complex and restrictive intoin the future. Failure to comply with applicable laws and regulations could result in material expense associated with future environmental compliance and remediation. The Company’s costs of compliance could also increase if existing laws and regulations are amended or reinterpreted. Such amendments or reinterpretations of existing laws or regulations, or the adoption of new laws or regulations, could curtail exploratory or developmental drilling for, and production of, oil and natural gas which, in turn, could limit demand for the Company’s products and services. Some environmental laws and regulations could also impose joint and strict liability, meaning that the Company could be exposed in certain situations to increased liabilities as a result of the Company’s conduct that was lawful at the time it occurred or conduct of, or conditions caused by, prior operators or other third parties. Remediation expense and other damages arising as a result of such laws and regulations could be substantial and have a material adverse effect on the Company’s financial condition and results of operations.
Changes in lawlaws and regulationregulations relating to hydraulic fracturing may have a negative effect on the Company’s operations.
Much of the Company’s revenue in its CT segment is derived from customers engaged in hydraulic fracturing services, a process that creates fractures extending from the well bore through the rock formation to enable natural gas or oil to flow more easily through the rock pores to a production well.services. Some states have adopted regulations which require operators to publicly disclose certain non-proprietary information. These regulations could require the reporting and public disclosure of the Company’s proprietary chemistry formulas. In addition, the Biden administration has proposed additional restrictions on hydraulic fracturing. The adoption of any future federal or state laws or local requirements, or the implementation of regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process, could increase the difficulty of oil and natural gas well production activity and could have an adverse effect on the Company’s future results of operations.
Regulation of greenhouse gases and/or climate change could have a negative impact on the Company’s business.
Certain scientific studies have suggested that emissions of certain gases, commonly referred to as “greenhouse gases,” which include carbon dioxide, methane, and other volatile organic compounds, may be contributory to the warming effect of the Earth’s atmosphere and other climatic changes. In response to such studies, the issue of climate change and the effect of greenhouse gas emissions, in particular emissions from fossil fuels, is attracting increasing worldwide attention.
Existing or future laws, regulations, treaties, or international agreements related to greenhouse gases, climate change, and indoor air quality, including energy conservation or alternative energy incentives, could have a negative impact on the
Company’s operations, if regulations resulted in a reduction in worldwide demand for oil and natural gas. Other results could be increased compliance costs and additional operating restrictions, each of which could have a negative impact on the Company’s operations.
The Company and the Company’s customers are subject to risks associated with doing business outside of the U.S., including political risk, foreign exchange risk, and other uncertainties.
The Company and its customers are subject to risks inherent in doing business outside of the U.S., including, but not limited to:
•governmental instability;
•corruption;
•war and other international conflicts;
•civil and labor disturbances;
•requirements of local ownership;
•cartel behavior;
•partial or total expropriation or nationalization;
•currency devaluation; and
•foreign laws and policies, each of which can limit the movement of assets or funds or result in the deprivation of contractual rights or appropriation of property without fair compensation.
Collections from international customers and agents could also prove difficult due to inherent uncertainties in foreign law and judicial procedures. The Company could experience significant difficulty with collections or recovery due to the political or judicial climate in foreign countries where Company operations occur or in which the Company’s products are used.sold.
The Company’s international operations must be compliant with the Foreign Corrupt Practices Act and other applicable U.S. laws. The Company could become liable under these laws for actions taken by employees or agents. Compliance with international laws and regulations could become more complex and expensive thereby creating increased risk as the Company’s international business portfolio grows. Further, the U.S. periodically enacts laws and imposes regulations prohibiting or restricting trade with certain nations. The U.S. government could also change these laws or enact new laws that could restrict or prohibit the Company from doing business in identified foreign countries. The Company conducts, and will continue to conduct, business in currencies other than the U.S. dollar. Historically, the Company has not hedged against foreign currency fluctuations. Accordingly, the Company’s profitability could be affected by fluctuations in foreign exchange rates.
The Company has no control over and can provide no assurances that future laws and regulations will not materially impact the Company’s ability to conduct international business.
The Company’s ability to use net operating loss and tax attribute carryforwards to offset future taxable income may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on the Company’s ability to utilize pre-change net operating losses (“NOLs”), and certain other tax attributes to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). An ownership change could limit the Company’s ability to utilize existing NOLs and tax attribute carryforwards for taxable years including or following an identified “ownership change.” Transactions involving the
Company’s common stock, even those outside the Company’s control, such as purchases or sales by investors, within the testing period could result in an “ownership change.” Moreover, we believe the recently completed and pending convertible notes transactions may substantially impact our ability to use NOLs.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act provided the ability for taxpayers to carryback NOLs arising in a taxable year beginning after December 31, 2017, and before January 1, 2021 to each of the five years preceding the year of the loss. In addition, under the 2017 Tax Act, the ability to carry back NOLs to prior taxable years is generally eliminated, and while NOLs arising in tax years beginning after 2017 may be carried forward indefinitely, these post-2017 NOLs may only reduce 80% of the Company’s taxable income in a tax year. Limitations imposed on the ability to use NOLs and tax credits to offset future taxable income could reduce or eliminate the benefit of the NOLs and tax attributes and could require the Company to pay U.S. federal income taxes in excess of that which would otherwise be required if such limitations were not in effect. Similar rules and limitations may apply for state income tax purposes.
Risks Related to the Company’s Industry
General economic declines or recessions, limits to credit availability, and industry specific factors could have an adverse effect on energy industry activity resulting in lower demand for the Company’s products and services.
Worldwide economic uncertainty can reduce the availability of liquidity and credit markets to fund the continuation and expansion of industrial business operations worldwide. The shortage of liquidity and credit combined with pressure on worldwide equity markets could continue to impact the worldwide economic climate. Geopolitical unrest around the world may also impact demand for the Company’s products and services both domestically and internationally.
Demand for many of the Company’s products and services is dependent on oil and natural gas industry activity and expenditure levels that are directly affected by trends in oil and natural gas prices. Demand for the Company’s products and services is particularly sensitive to levels of activity in the upstream, downstream and midstream sectors, and the corresponding capital spending by, oil and natural gas companies, including national oil companies. One indication of drilling and completion activity andWhile capital spending is rig count, whichprograms for domestic producers appear to be improving, uncertainties around the Company monitors to gauge market conditions. In addition, the U.S. Energy Information Administration and other industry data sources report completion activity, which is utilized by the Company. Any prolonged reductionpotential for longer-term weakness in oil and natural gas prices or drop in rig and/or completion count could depress current levels of exploration, development, and production activity. Perceptions of longer-term lower oil and natural gas prices by oil and natural gas companies could similarly reduce or defer major expenditures given the long-term nature of many large-scale development projects. Lower levels of activity could result in a corresponding decline in the demand for the Company’s oil and natural gas related products and services, which could have a material adverse effect on the Company’s revenue and profitability.
The demand for our sanitizer products is dependent on many factors, including human behavior in response to COVID-19 and market participants in the sanitizer, surface cleaner and disinfectant space. A change in general behavior in response to widespread vaccine availability, relaxed attitudes towards sanitization, consumer reception of our products, or entrants into the sanitizer, surface cleaner and disinfectant space, may materially and adversely affect the demand for our products.
Events in global credit markets can significantly impact the availability of credit and associated financing costs for many of the Company’s customers. Many of the Company’s upstream customers finance their drilling and completion programs through third-party lenders or public debt offerings. Lack of available credit or increased costs of borrowing could cause customers to reduce spending on drilling programs, thereby reducing demand and potentially resulting in lower prices for the Company’s products and services. Also, the credit and economic environment could significantly impact the financial condition of some customers over a prolonged period, leading to business disruptions and restricted ability to pay for the Company’s products and services.
A continuingcontinuous period of depressedswings in oil and natural gas prices could result in further reductions in demand for the Company’s products and services and adversely affect the Company’s business, financial condition, and results of operations.
The markets for the Company’s products, especially oil and gas markets, have historically been volatile. Such volatility in oil and natural gas prices, or the perception by the Company’s customers of unpredictability in oil and natural gas prices, could adversely affect spending levels. The oil and natural gas markets may be volatile in the future. The demand for the Company’s
products and services is, in large part, driven by general levels of exploration and production spending and drilling activity by its customers. Future declines in oil or gas prices could adversely affect the Company’s business, financial condition, and results of operations.
New and existing competitors within the Company’s industries could have an adverse effect on results of operations.
The industries in which the Company competes are highly competitive. The Company’s principal competitors include numerous small companies capable of competing effectively in the Company’s markets on a local basis, as well as a number of large companies that possess substantially greater financial and other resources than does the Company. Larger competitors may be able to devote greater resources to developing, promoting, and selling products and services. The Company may also face increased competition due to the entry of new competitors including current suppliers that decide to sell their products and services directly to the Company’s customers. As a result of this competition, the Company could experience lower sales or greater operating costs, which could have an adverse effect on the Company’s margins and results of operations.
The Company’s industry has a high rate of employee turnover. Difficulty attracting or retaining personnel or agents could adversely affect the Company’s business.
The Company operates in an industry that has historically been highly competitive in securing qualified personnel with the required technical skills and experience. The Company’s services require skilled personnel able to perform physically demanding work. Due to industry volatility, the demanding nature of the work, and the need for industry specific knowledge and technical skills, current employees could choose to pursue employment opportunities outside the Company that offer a
more desirable work environment and/or higher compensation than is offered by the Company. As a result of these competitive labor conditions, the Company may not be able to find qualified labor, which could limit the Company’s growth. In addition, the cost of attracting and retaining qualified personnel has increased over the past several years due to competitive pressures. In order to attract and retain qualified personnel, the Company may be required to offer increased wages and benefits. If the Company is unable to increase the prices of products and services to compensate for increases in compensation including inflation, or is unable to attract and retain qualified personnel, operating results could be adversely affected.
Severe weather could have an adverse impact on the Company’s business.
The Company’s business could be materially and adversely affected by severe weather conditions. Hurricanes, tropical storms, flash floods, blizzards, cold weather, and other severe weather conditions could result in curtailment of services, damage to equipment and facilities, interruption in transportation of products and materials, and loss of productivity. If the Company’s customers are unable to operate or are required to reduce operations due to severe weather conditions, and as a result curtail purchases of the Company’s products and services, the Company’s business could be adversely affected.
A terrorist attack or armed conflict could harm the Company’s business.
Terrorist activities, anti-terrorist efforts, and other armed conflicts involving the U.S. could adversely affect the U.S. and global economies and could prevent the Company from meeting financial and other obligations. The Company could experience loss of business, delays or defaults in payments from payors, or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, or refineries are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas which, in turn, could also reduce the demand for the Company’s products and services. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect the Company’s results of operations, impair the ability to raise capital, or otherwise adversely impact the Company’s ability to realize certain business strategies. The armed conflict in Ukraine could affect regions in which the Company does business directly or indirectly and could harm the Company’s ability to sell its good and services in those regions.
Our DA segment may be materially and negatively affected by government regulations and/or facility disruptions.
The demand for our equipment and services offerings in our DA segment could be materially affected by additional regulations on the upstream, midstream, and downstream portions of the oil and gas sectors. Additional regulation on oil and gas production, transportation, or processing of hydrocarbons may result in significantly reduced demand for our offerings, either individually or as a result of a decline in the overall oil and gas markets in the United States and abroad. In addition, our products are subject to export control laws and regulations, and changes to those laws and regulations may negatively impact
our ability to pursue international opportunities. Disruptions to pipelines and refineries, whether due to regulation, weather, demand, or other factors, may also have a materially adverse effect on our ability to derive revenue from our DA segment. Adjustments to our DA segment’s commercial strategy, with a shift towards subscription revenue and away from equipment sales, and the market’s response to that strategy, may materially and adversely affect revenues in the near term, even if the strategic shift is successful, due to longer payback periods on subscription models.
Risks Related to the Company’s Securities
The market price of the Company’s common stock has been and may continue to be volatile.
The market price of the Company’s common stock has historically been subject to significant fluctuations. The following factors, among others, could cause the price of the Company’s common stock to fluctuate due to:fluctuate:
•variations in the Company’s quarterly results of operations;
•changes in market valuations of companies in the Company’s industry;
•fluctuations in stock market prices and volume;
•fluctuations in oil and natural gas prices;
•issuances of common stock or other securities in the future; including debt convertible into the Company’s common stock;
•additions or departures of key personnel;
•announcements by the Company or the Company’s competitors of new business, acquisitions, or joint ventures; and
•negative statements made by external parties about the Company’s business in public forums.
The stock market has experienced significant price and volume fluctuations in recent years that have affected the price of common stock of companies within many industries including the oil and natural gas industry. The price of the Company’s common stock could fluctuate based upon factors that have little to do with the Company’s operational performance, and these fluctuations could materially reduce the Company’s stock price. The Company could be a defendant in a legal case related to a significant loss of value for the shareholders. This could be expensive and divert management’s attention and Company resources, as well as have an adverse effect on the Company’s business, operating results, cash flows, financial condition or securities.
If the Company cannot meet the New York Stock Exchange continued listing requirements, the NYSE may delist the Company’s common stock.
The Company’s common stock is currently listed on the NYSE. In the future, if it is not able to meet the continued listing requirements of the NYSE, which require, among other things, that the average closing price of our common stock be above $1.00 over 30 consecutive trading days, the Company’s common stock may be delisted. If the Company is unable to satisfy the NYSE criteria for continued listing, its common stock would be subject to delisting. A delisting of its common stock could negatively impact the Company by, among other things, reducing the liquidity and market price of the its common stock; reducing the number of investors willing to hold or acquire the Company’s common stock, which could negatively impact its ability to raise equity financing; decreasing the amount of news and analyst coverage of the Company; and limiting the Company’s ability to issue additional securities or obtain additional financing in the future. In addition, delisting from the NYSE might negatively impact the Company’s reputation and, as a consequence, its business, operating results, cash flows, financial condition or securities.
An active market for the Company’s common stock may not continue to exist or may not continue to exist at current trading levels.
Trading volume for the Company’s common stock historically has been very volatile when compared to companies with larger market capitalization. The Company cannot presume that an active trading market for the Company’s common stock will continue or be sustained. Sales of a significant number of shares of the Company’s common stock in the public market could lower the market price of the Company’s stock.
If securities or industry analysts do not publish research or reports about the Company’s business or publish negative reports, the Company’s securities prices and trading volumes could decline and affect the price at which investors could sell securities.
The trading market for the Company’s securities may be affected by the research and reports that industry or securities analysts publish about the Company or its business. The Company does not have any control over these analysts. If analysts do not cover the Company on a regular basis or if one or more analysts cease coverage of the Company or fail to regularly publish reports about the Company, the Company could lose visibility in the financial markets, which in turn could cause the Company’s securities prices or trading volumes to decline. If one or more of such analysts publish negative reports about the Company, the Company’s securities prices would likely decline. These occurrences could affect the price investors could receive from the sale of the Company’s securities.
The Company has no plans to pay dividends on the Company’s common stock, and, therefore, investors will have to look to stock appreciation for return on investments.
The Company does not anticipate paying any cash dividends on the Company’s common stock within the foreseeable future. Any payment of future dividends will be at the discretion of the Company’s board of directors and will depend, among other things, on the Company’s earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations deemed relevant by the board of directors. Investors must rely on sales of common stock held after price appreciation, which may never occur, in order to realize a return on their investment. The lack of plans for dividends may make the common stock of the Company an unattractive investment for investors who are seeking dividends.
Certain anti-takeover provisions of the Company’s certificate of incorporation and applicable Delaware law could discourage or prevent others from acquiring the Company, which may adversely affect the market price of the Company’s common stock.
The Company’s certificate of incorporation and bylaws contain provisions that, among other things:
•permit the Company to issue, without stockholder approval, shares of preferred stock, in one or more series and, with respect to each series, to fix the designation, powers, preferences, and rights of the shares of the series;
•prohibit stockholders from calling special meetings;
•limit the ability of stockholders to act by written consent;
•prohibit cumulative voting; and
•require advance notice for stockholder proposals and nominations for election to the board of directors to be acted upon at meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation Law limits business combinations with owners of more than 15% of the Company’s voting stock without the approval of the board of directors. Aforementioned provisions and other similar provisions make it more difficult for a third party to acquire the Company exclusive of negotiation. The Company’s board of directors could choose not to negotiate with an acquirer deemed not beneficial to or synergistic with the Company’s strategic outlook. If an acquirer were discouraged from offering to acquire the Company or prevented from successfully completing a hostile acquisition by these anti-takeover measures, stockholders could lose the opportunity to sell their shares at a favorable price.
Future issuance of additional shares of common stock could cause dilution of ownership interests and adversely affect the Company’s common stock price.
The Company is currently authorized to issue up to 140,000,000 shares of common stock. The Company may, in the future, issue previously authorized and unissued shares of common stock, which would result in the dilution of current stockholders’ ownership interests. Additional shares are subject to issuance through various equity compensation plans or through the exercise of currently outstanding equity awards. The potential issuance of additional shares of common stock may create downward pressure on the trading price of the Company’s common stock. The Company may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in order to raise capital or effectuate
other business purposes. Future sales of substantial amounts of common stock, or the perception that sales could occur, could have an adverse effect on the price of the Company’s common stock.
The Company may issue a substantial amount of securities in connection with future acquisitions, and the sale of those securities could adversely affect the trading price of our common stock or other securities.
As part of our growth strategy, we may issue additional securities, or securities that have rights, preferences, and privileges senior to our other securities. We may file future shelf registration statements with the SEC that we may use to sell securities from time to time in connection with acquisitions. To the extent that we are able to grow through acquisitions and are able to pay for such acquisitions with shares of our common stock or other securities, the number of outstanding shares of common stock or other securities that will be eligible for sale in the future is likely to increase substantially. Persons receiving shares of our common stock or other securities in connection with these acquisitions may be more likely to sell large quantities of their common stock or other securities, which may influence the price of our common stock or other securities. In addition, the potential issuance of additional shares of common stock or other securities in connection with anticipated acquisitions could lessen demand for our common stock or other securities and result in a lower price than would otherwise be obtained.
The Company may issue shares of preferred stock or debt securities with greater rights than the Company’s common stock.
Subject to the rules of the NYSE, the Company’s certificate of incorporation authorizes the board of directors to issue one or more additional series of preferred stock and to set the terms of the issuance without seeking approval from holders of common stock. Currently, there are 100,000 preferred shares authorized, with no shares currently outstanding. Any preferred stock that is issued may rank senior to common stock in terms of dividends, priority and liquidation premiums, and may have greater voting rights than holders of common stock.
General Risk Factors
If the Company loses the services of key members of management, the Company may not be able to manage operations and implement growth strategies.
The Company depends on the continued service of the Chief Executive Officer and President, the Chief Operating Officer, the Chief Financial Officer and other key members of the executive management team, who possess significant expertise and knowledge of the Company’s business and industry. Furthermore, the Chief Executive Officer and President serves as Chairman of the Board of Directors. The Company has entered into employment agreements with certain of these key members. Any loss or interruption of the services of key members of the Company’s management could significantly reduce the Company’s ability to manage operations effectively and implement strategic business initiatives.During 2020, the Company replaced its Chief Executive Officer, Chief Financial Officer, General Counsel and lead sales executive. The failure of the new executives to effectively provide services to the Company and build experience and knowledge of the Company could have an adverse effect on the Company’s results of operations and ability to compete.
The Company’s tax returns are subject to audit by tax authorities. Taxing authorities may make claims for back taxes, interest and penalties. Changes in U.S. tax legislation may adversely affect our business, results of operations, financial condition and cash flows.
The Company is subject to income, property, excise, employment, and other taxes in the U.S. and a variety of other jurisdictions around the world. Tax rules and regulations in the U.S. and around the world are complex and subject to interpretation. From time to time, taxing authorities conduct audits of the Company’s tax filings and may make claims for increased taxes and, in some cases, assess interest and penalties. The assessments for back taxes, interest, and penalties could be significant. If the Company is unsuccessful in contesting these claims, the resulting payments could result in a drain on the Company’s capital resources and liquidity. In addition, there may be material adverse effects resulting from new or future U.S. tax reforms that have not been identified and that could have an adverse effect on the Company’s business, results of operations, financial condition and cash flows.
Disclaimer of Obligation to Update
Except as required by applicable law or regulation, the Company assumes no obligation (and specifically disclaims any such obligation) to update these risk factors or any other forward-looking statement contained in this Annual Report to reflect actual results, changes in assumptions, or other factors affecting such forward-looking statements.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
As of December 31, 2020,2021, the Company operates fourtwo manufacturing, warehouse and research facilities in the U.S. Internationally, the Company has a warehouse and research facility in Calgary, Alberta, Canada and a warehouse in Dubai, United Arab Emirates. The Company also has sales offices in Oklahoma City, Oklahoma; Dubai, United Arab Emirates;Emirates and Calgary, Alberta, Canada. The Company owns four of these facilities and the remainder are leased with lease terms that expire from 20212022 through 2030. In addition, the Company’s corporate office is a leased facility located in Houston, Texas. The following table sets forth facility locations:
| | | | | | | | |
| Segment | Owned/Leased | Location |
| Chemistry Technologies | Owned | Marlow, Oklahoma |
| Chemistry Technologies | Owned | Monahans, Texas |
| Chemistry Technologies | Owned | Raceland, Louisiana |
| Chemistry Technologies | Owned | Waller, Texas |
| Chemistry Technologies | Leased | Dubai, United Arab Emirates |
| Chemistry Technologies | Leased | Calgary, Alberta |
| LeasedChemistry Technologies | Oklahoma City, Oklahoma |
| Leased | Raceland, Louisiana |
| Chemistry Technologies | Leased | Houston, Texas |
| Data Analytics | Leased | Austin, Texas |
In the third quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas, and subsequent to December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility for proceeds of $4.2 million, which is expected to close in April 2022.
Item 3. Legal Proceedings.Proceeding
See Note 16, “CommitmentsLitigation
On March 26, 2021, the Company and Contingencies”Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the
Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and other parties in Part II, Item 8 – “Financial Statementsstate court in Harris County, Texas. The lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and Supplementary Data”FCC and related breaches of this Annual Report for information regarding our legal proceedings.fiduciary duty. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.
Subsequent to the lawsuit described above, on April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters. On October 29, 2021, the Company and Flotek Chemistry reached agreement with all parties resolving all claims between the parties. On or before January 3, 2022, Flotek will pay to ADM a one-time payment of $1.75 million and the terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5 million pounds of terpene through 2023.
In 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste. Flotek’s board engaged a third party to review the findings of the investigation. After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.
Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any outcome cannot reasonably be predicted.
The Company is subject to other routine litigation and other claims that arise in the normal course of business. Except as disclosed above, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Item 4. Mine Safety Disclosures.Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock began trading on the NYSE on December 27, 2007, under the stock ticker symbol “FTK.” As of the close of business on March 11, 2021,28, 2022, there were approximately 7,8009,980 holders of record. The Company’s closing sale price of the common stock on the NYSE on March 1, 202130, 2022 was $2.25.$1.33. The Company has never declared or paid cash dividends on common stock. While the Company regularly assesses the dividend policy, the Company has no current plans to declare dividends on its common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity compensation plan information relating to equity securities authorized for issuance under individual compensation agreements at December 31, 2020,2021, is as follows:
| | Plan Category | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights(1) | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights(2) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights(1) | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights(2) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) |
| | | | (a) | | (b) | | (c) | | | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders | Equity compensation plans approved by security holders | | 7,682,649 | | | $ | 1.36 | | | 1,839,489 | | Equity compensation plans approved by security holders | | 6,401,581 | | | $ | 1.17 | | | 4,241,722 | |
|
(1) Includes shares for outstanding stock options (3,660,000(3,821,875 shares), restricted stock awards (2,795,100(1,809,636 shares), and restricted stock unit share equivalents (1,227,549(770,070 shares).
(2) The weighted-average exercise price is for outstanding stock options only and does not include outstanding restricted stock awards. restricted stock unit equivalents, and rights that have no exercise price.
Issuer Purchases of Equity Securities
The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award.
award stock. Repurchases of the Company’s equity securities in respect of withholding for tax liabilities during the three months ended December 31, 2020,2021, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | | | |
| October 1 to October 31, 2020 | | 2,181 | | | $ | 2.75 | | | | | | |
| November 1 to November 30, 2020 | | 23,711 | | | 1.97 | | | | | | |
| December 1 to December 31, 2020 | | 89,524 | | | 2.12 | | | | | | |
| Total | | 115,416 | | | $ | 2.10 | | | | | |
| | | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| October 1, 2021 to October 31, 2021 | 1,624 | | | $1.26 | | | | |
| November 1, 2021 to November 30, 2021 | 1,015 | | | $0.82 | | | | |
| December 1, 2021 to December 31, 2021 | 34,171 | | | $0.70 | | | | |
| Total | 36,810 | | | $0.73 | | | | |
(1)The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting of restricted shares and exercise of non-qualified stock options and (b) to satisfy payments required for common stock upon the exercise of stock options.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock. Repurchases could be made in the open market or through privately negotiated transactions. No shares were repurchased under this program during 2020.
On June 9, 2020, the board of directors of the Company rescinded the authorization.
Item 6. Selected Financial Data.[Reserved]
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included elsewhere in this Annual Report. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results could differ from those expressed or implied by the forward-looking statements. See “Forward-Looking Statements” at the beginning of this Annual Report and Item 1A, “Risk Factors.”
Executive Summary
Flotek Industries, Inc. is a(“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, that servesFlotek helps customers inacross industrial, commercial, and consumer markets.markets improve their ESG performance. The Company serves specialty chemistry needs that span from downstream, midstream and upstream,for both domestic and international energy markets toas well as applications of U.S. manufactured sanitizers, surface cleaners, and disinfectants for industrial, commercial and consumer use.
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research and Innovation advanced laboratory capabilities.
The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that enhancehelp their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and cleanssupplying professional chemistries that clean surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. TheThese real-time access to information preventsdata and analytics prevent waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.
profitability, thereby improving ESG performance. During the second quarter of 2020, the Company acquired 100% ownership of JP3 in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels.delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.
The Company was impacted as a result of the outbreak of COVID-19 that spread throughout the U.S. and the world during 2020. For a discussion of the impacts of COVID-19, see “COVID-19 Effects and Actions” in this Item 7 of this Annual Report. For a discussion of the risks related to COVID-19, see Item 1A, “Risk Factors.”
Continuing Operations
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing R&I advanced laboratory capabilities.Overview
Chemistry Technologies
The Company’s CT segment includes an energy-focused product lineprovides sustainable, optimized chemistry solutions that is comprised ofmaximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services.services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes delivers and markets reservoir-centric fluid systems, including specialtyoptimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land 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,people.
Customers of the CT segment include those of energy related markets as well as to reduce healthconsumer and environmental risk by using greener chemicals. Customers of this product line of the CT business segment include majorindustrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and international supply chain management companies.
In 2020, the Company leveraged historical expertise,advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for both commercial and personal use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce FDA and EPA compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to address the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks. To restore large public gatherings, it is believed that a variety of approaches will be necessary, including vaccinations, behavioral changes, sanitizers, surface cleaners, and disinfectants are needed. The Company has made a commitment of being in this market for the long-term.sustainability practices.
Data Analytics
The Company’s DA segment, created in conjunction with the acquisition of JP3, includes the design, development, production, sale and support of equipment and services that create and provide valuable real time information about the composition and properties for customers' oil, natural gas and refined products.
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, NGLs, natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is continuing its transitionprocessed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.
Customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations has the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We have developed a recurring revenue subscription model of selling itsnew line of Verax analyzers deployedfor deployment internationally which was recently certified for compliance in the field across the oilhazardous locations and gas sector, support contracts and software services via its cloud-based Viper software platform, as well as selling hardware-related solutions during the transition to a recurring revenue model.harsh weather conditions.
The customers of the DA segment diversify the revenues of the Company and span across the entire oil and gas market, including upstream, midstream, refineries and distribution networks. The segment helps its customers generate additional profit by enhancing blending, optimizing the natural mixing between adjacent batches of different fuels (“transmix”), ensuring product quality while enabling automation of fluid handling. To date, the segment has focused sales solely on North American markets; however, the segment began preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands of overseas installations. In 2020, the Company hired a business development executive, who is developing sales opportunities in the international market.
Research & Innovation
R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, FDA and EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.
Discontinued OperationsOutlook
The Company sold Florida Chemical Company, LLC, a wholly-owned subsidiary,Our business is subject to numerous variables which impact our outlook and its CICT segment, effective as of February 28, 2019. As a result,expectations given the Company’s CICT segment and financial results through the date of sale were classified as discontinued operations.
Market Conditions
The Company’s success is sensitive to a number of factors, which include, but are not limited to global energy supply and demand, drilling and well completion activity, customer demand for its advanced technology products, market prices for raw materials and governmental actions.
Drilling and well completion activity levels are influenced by a number of factors, including the number of rigs in operation and the geographical areas of rig activity. Additional factors that influence the level of drilling and well completion activity include:
•Historical, current and anticipated future oil and gas prices;
•Federal, state and local governmental actions that may encourage or discourage drilling activity;
•Customers’ strategies relative to capital funds allocations;
•Weather conditions; and
•Technological changes to drilling and completion methods and economics.
Customers’ demand for advanced technology products and services provided by the Company are dependent on their recognitionshifting conditions of the value of chemistries that:
•Provide differentiation in efficiencyindustry and efficacy;
•Address emerging pathogens;
•Improve the economics of operations; and
•Are economically viable, socially responsible and ecologically sound.
Governmental actions may restrict the future use of hazardous chemicals, including, but not limited to, the following industrial applications:
•Oil and gas drilling and completion operations;
•Oil and gas production operations;
•Non-oil and gas industrial solvents; and
•EPA and FDA regulatory changes.
The continued impact of COVID-19 and subsequent modification of social behavior for hygiene and sanitation products create opportunities for product growth in various forms of sanitizing, surface cleaning and disinfecting products.
COVID-19 Effects and Actions
In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic that spread throughout the U.S. and the world. In late 2020, major pharmaceutical companies developed vaccines and received approval for wide-scale distribution in the U.S. and other countries. The vaccination effort is proceeding in the U.S. and the world. However, variant strains of the virusweather volatility. We have emerged, which create additional uncertaintybased our outlook on the extentmarket and the duration of the pandemic.weather conditions we perceive today. Changes often occur.
The pandemic negatively impacted the U.S.Energy
We expect North American and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets. These effects materially and adversely affected, and mayInternational onshore activity to continue to materially and adversely affect, the demand for oil and natural gas as well asimprove throughout 2022 from fourth quarter 2021 levels for the Company’s servicesnext twelve months provided that commodity prices remain at or above current levels. The strongest potential growth throughout 2022 will likely comes from private, rather than publicly traded exploration and products.
The Company’s CT segment is energy-focused with product lines comprised of specialty chemistries, logistics and technology services. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independentproduction companies. Private exploration and production companies nationaloperate the majority of U.S. land rigs and state-owned oilreact quickly to changing commodity prices. In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead. Additionally, we have reestablished our ability to sell product through other service companies and international supply chain management companies. Due to customer activity levelsbelieve sales through indirect channels should accelerate in this industry, the Company experienced materially reduced revenues and cash flows during 2020.2022.
Outside the oil and gas sector, the COVID-19 pandemic increased demand for certain specialty chemicals, particularly sanitizers, surface cleaners and disinfectants.
Industrial
In 2020, the Company launched a diversified line of EPA and FDA compliant products that target industrial, agricultural and EPA-compliant sanitizers,consumer markets with particular focus on customers that are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers, solvents and disinfectantsa multitude of proprietary chemistries for industrial, commercial and consumer use. These productsThe Company believes these adjacent markets provide an opportunity to diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand. We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states. We will be training and educating their representatives during the next two quarters. The leverage sales effort is anticipated to accelerate sales in the second half of 2022.
Digital Analytics
The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. Verax has gained a foothold in NA markets for critical applications where compositional information is needed in real-time. The technology delivers real-time insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We continue to work with our customers to identify further facilities and applications where our technology has the highest value. We expect to open and establish our international customer base with our new generation of internationally certified online analyzers. The new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments. We anticipate international sales to increase over the next twelve months because of the newly certified equipment. To drive recurring revenue, we continue to build on the Company’s historical expertisemodular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations. AIDA (Automated Interface Detection Algorithm) provides real-time detection of interfaces in chemistrya liquids pipeline without the need for additional sampling or chemometric modeling. The application can identify products such as refined fuels, crude and leverageNGLs with its infrastructure, personnel, competencies, supply chain, researchadvanced machine learning algorithms and historic consumer market experience. The continued impact of COVID-19detect interfaces within 60 seconds. This allows operators to cut batches quickly and subsequent modification of social behavior in regard to the heightened attention to hygieneaccurately, reduce transmix and sanitation provide a sustainable yet challenging market to expand the Company’s portfolio.minimize off-spec product that requires downgrades.
The DA segment’s largest customer base, the oil and gas midstream market, reduced gathering and infrastructure capital spending in 2020. In addition, the pandemic impacted the DA segment due to reduced access to facilities to complete new installations for a portion of the year. As a result, spending for the DA segment’s products and services has also been impacted by lower consumer demand. As a result, sales and cash flows were below target for the DA segment.
During 2020, the Company’s financial results were impacted due to impairment charges. The provision for excess and obsolete inventory included charges for the CT segment and the DA segment. See Note 6, “Inventories” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report. The Company recorded an impairment to property, plant and equipment; intangible assets; and operating right-of-use assets during the first quarter of 2020. The extended impact of COVID-19 contributed to additional impairment charges to goodwill and intangible assets in the third quarter of 2020. See Note 9, “Goodwill;” Note 10, “Other Intangible Assets;” and Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” Due to the continuing uncertainties, additional impairments may occur in the future.ESG
The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level. Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the
Company. The uncertain future development of the COVID-19 crisis and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.
While the full impact of the COVID-19 pandemic continuesESG-focused solutions continue to evolve and the full extent of the impact is not yet known,be an emphasis for the Company continuesas the energy, industrial and consumer markets are seeking to closely monitor the effects of the pandemicaccelerate their focus on commodity demands,sustainability and on its customers, operations and employees. Any future development and effects are highly uncertain and cannot be predicted, including:
•the scope and duration of the pandemic;
•effectiveness of vaccines;
•emergence of new coronavirus variants;
•further adverse revenue and net income effects; impairments;
•disruptions to the Company’s operations;
•third-party providers’ ability to support the Company’s operations;
•limitations on domestic and international travel for sales, system installations, and support;
•customer shutdowns of oil and gas exploration and production;
•the effectiveness of work from home arrangements;
•modifications to work schedules, including manufacturing shifts;
•impacts on employees from illness, school closures and other community response measures;
•any actions taken by governmental authorities and other third parties in response to the pandemic; and
•temporary closures of the Company’s facilities or the facilities of its customers and suppliers.
The pandemic caused the Company to alter its business working practices, including work schedules, manufacturing shifts, employee travel, work locations, meetings and participation in events and conferences. In addition, the Company and most of its customers continued the practice of social distancing and work-from-home procedures, which have had, and may continue to have, anminimized impact on the ability of employees and management of the Company to communicate and work efficiently. There is no certainty that these actions will mitigate risks posed by the virus to the Company’s workforce.
environment. The Company’s CT segment focused on development of competitively priced product lines that are responsive to the current market including well bore protection and damage mitigation products as the domestic market has shifted to shutting in wells. In response to a forecasted reduction in capital available to customers for drilling with a shift to optimizing existing infrastructure, the Company initiated several efforts to use specialty chemicals to improve enhanced oil recovery. The Company has also leveraged its international footprint in the Middle East to include unconventional, conventional, and enhanced oil recovery programs.
The CT segment used its expertise in specialty chemistry, existing chemistry infrastructure and facilities, and historical consumer market experience to launch a product line of sanitizers, surface cleaners and disinfectants, as discussed above. The Company believes these new products slot into the premium market and will be competitive over the long-term. The Company has also made changes to its executive team to align with its growth focus.
The Company has also focused on the continuing needs of customers and the market to diversify its business and accelerate growth through deployment of capital, with an emphasis on digital transformation in the oil and gas markets. On May 18, 2020, the Company closed the acquisition of JP3, which gives the Company access to the midstream and downstream markets and diversifies exposure to volatility in the upstream sector. In addition to increasing market share, the DA segment is pursuing product enhancements that enable growth opportunities with current and prospective customers.
In response to market conditions and anticipating ongoing volatility, the Company reduced its cost structure in 2020 to meet anticipated market activity and reduce the Company’s break-even level. Among other cost-cutting and cash preservation initiatives:
•The Company’s CEO, John W. Gibson, Jr., reduced his base salary by 20%, and each of the other executive officers reduced his or her salary by 10%, through December 31, 2020, in exchange for restricted stock, effective as of April 1, 2020.
•The board of directors of the Company approved a 20% reduction in the fees to be paid to the directors, effective as of April 1, 2020.
•The Company consolidated office space by moving all employees at its corporate headquarters into its Global Research and Innovation Center in Houston, Texas and buying out the remaining term of the corporate headquarters lease for a significant discount, with the move completed by the end of June 2020.
•The Company reduced overall headcount by 35% on March 30, 2020. Additionally, the Company reduced the headcount of the DA segment by 35% in October 2020.
•The Company decreased discretionary spending across all business operations.
Outlook for 2021
The COVID-19 pandemic negatively impacted the U.S. and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets. While market prices for West Texas Intermediate and Brent crude oil rebounded from lows during the initial months of the pandemic in 2020 to exceed $50 per barrel in early 2021, many major integrated oil and gas companies and independent oil and gas companies announced reductions in their 2021 budgets, though such budgets may change if crude oil prices increase. Uncertainty exists about the extent and the duration of the resulting industry contraction and consolidation. In addition, the oilfield services industry remains over supplied and timing on returns to pre-pandemic pricing levels remains uncertain.
Climate change continues to be a focus, as investors are increasingly scrutinizing companies linked to the oil and gas industry through environmental, social and corporate governance factors to promote clean energy and sustainability. In addition, the impact of the actions of the new presidential administration and Congress on the economy and financial markets is uncertain in the current year and longer term. During his first month in office, the President signed many executive orders, including ones with implications for stakeholders in the energy industry, such as canceling the Keystone XL Pipeline and another for the U.S. to rejoin the Paris Agreement on climate change. The Interior Department issued an order in January, placing a 60-day freeze on agency permit approvals and pausing federal oil and gas leasing for a review of all existing leasing and permitting practices related to fossil fuel development on public lands and waters. These and other potential actions by the new administration could have negative and/or positive impacts on the Company’s business and customers.
Amid the current environment with increased business commitments related to ESG, the Company’s products and services offer a significant value propositionbenefit to businesses seeking to improve their ESG performance, including improving the safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, ourthe Company’s patented line of Complex nano-Fluid® (also known as CnF®) chemistry technologies,products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil. Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce reprocessing.emissions.
The Company believes that an increase inthe industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of specialty chemicals could benefit our businessgreener practices and reducechemistries. We believe the impact of the current decrease in drilling and completions activity. The key salesperformance-driven ESG focus of the Company is growing market share byassists in reducing environmental liabilities and improving returns for current customers, rebuilding relationships with past customersour customers.
Supply Chain
During 2020 and identifying new customers2021 challenging supply chain issues emerged that “will continue into 2022” according to Secretary of Transportation Peter Buttigieg. The anticipated activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:
•Rising Freight Costs;
•Delays due to Port Congestion;
•Labor Shortages and
•Demand Forecasting.
All bidding will require the risk of shipping costs and delays be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could benefit from chemistry solutions. Additionally,also result in supply disruption.
Weather
During 2021, Hurricane Ida and other weather related events caused significant disruptions to the energy industry in the US. The Company is focused on total cost of recovery per barrel of oil equivalent, rather than initial cost,was able to maintain consistent operations throughout the year and provide support to our partners in Louisiana and surrounding areas during Hurricane Ida. The Company’s operations, as well as strengtheningthose of our primary customer base, are periodically subjected to potential weather related disruptions. The Company monitors and carefully evaluates guidance from authoritative sources including the publicly available evidence for the efficacy of using advanced CnF® productsNational Weather Service and other agencies. We currently do not anticipate weather related events to materiallyhave a material impact oil and gas recovery and profitability for operators.on first quarter results.
COVID-19
The sanitizers, surface cleanersimpacts of COVID-19 continue to affect the U.S. and disinfectants industry is expanding, associatedglobal economy. The protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge. The resumption of travel while often onerous has begun to accelerate and in person customer visits that began in earnest during the continued impact of the COVID-19 pandemic and the need for individuals, businesses, schools and governmentsthird quarter will continue to minimize the spread of the coronavirus. Industry growth is also anticipated due to the modification of social behaviors in regard to the heightened attention to hygiene and sanitation. In 2020, the Company launched a diversified line of FDA-compliant sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use. The Company believes this market provides an opportunity to expand the Company’s portfolio of chemistry products to meet the growing demand.accelerate.
The use of data and analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as predictive maintenance, advanced safety measures and reduced environmental impact of operations. The Company believes that data and analytics is an area for growth. Hence, in 2020, the Company acquired JP3 and formed the DA segment. To date, the segment has focused sales solely on North American markets; however, the segment began preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands of overseas installations. The Company hired a business development executive, who is developing sales opportunities in the international market.
The Company continues to develop technologies to ensure our ability to provide differentiated products and services to our customers. Partnering closely with our clients to create and implement specialty chemical products and compositional analyzers remains a focus for the organization. Differentiated products and services are the result of the deployment of the organization’s capabilities and expertise in alignment with customer success. The continuing search for new ways to help make customers successful positions the Company as a leader in advanced chemicals and technology.
The Company’s emphasis in 2021 will be executing the plan established by the executive team to recover from the varied impacts of COVID-19 and grow the Company’s businesses. The CT segment will focus on marketing our products and services to new and existing customers, while expanding the sanitizers, surface cleaners and disinfectants product line. The DA segment will maintain its domestic sales effort while pursuing international growth. The Company does not anticipate a material escalation in our maintenance capital spending year-over-year. In 2021, the Company expects to enhance its focus on ESG and the responsible management of products and services through our Quality Assurance and Quality Control Program and Chemical Spill Prevention Program, adhering to ISO 9001:2015 standards.
Consolidated Results of Operations (dollars in thousands):
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | |
| Revenue | $ | 53,141 | | | $ | 119,353 | | | |
| Operating expenses (excluding depreciation and amortization) | 88,266 | | | 148,100 | | | |
| Operating expenses % | 166.1 | % | | 124.1 | % | | |
| Corporate general and administrative costs | 16,311 | | | 27,975 | | | |
| Corporate general and administrative costs % | 30.7 | % | | 23.4 | % | | |
| Depreciation and amortization | 3,412 | | | 8,465 | | | |
| Research and development | 7,213 | | | 8,863 | | | |
| (Gain) loss on disposal of long-lived assets | (94) | | | 1,450 | | | |
| Impairment of fixed assets and long-lived assets | 69,975 | | | — | | | |
| Impairment of goodwill | 11,706 | | | — | | | |
| Loss from operations | (143,648) | | | (75,500) | | | |
| Operating margin % | (270.3) | % | | (63.3) | % | | |
| Gain on lease termination | 576 | | | — | | | |
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| Interest and other income (expense), net | 443 | | | (311) | | | |
| Loss before income taxes | (142,629) | | | (75,811) | | | |
| Income tax benefit (expense) | 6,179 | | | (262) | | | |
| Loss from continuing operations | (136,450) | | | (76,073) | | | |
| Income from discontinued operations, net of tax | — | | | 42,158 | | | |
| Net loss | $ | (136,450) | | | $ | (33,915) | | | |
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Consolidated Results for 2020 compared to 2019—Consolidatedof Operations (in thousands)
| | | | | | | | | | | | | | | | | | |
| | | | | | Years ended December 31, |
| | | | | | | | | 2021 | | 2020 |
| Revenue | | | | | | | | | | |
| Revenue from external customers | | | | | | | | $ | 39,627 | | | $ | 53,141 | |
| Revenue from related party | | | | | | | | 3,641 | | | — | |
| Total revenues | | | | | | | | 43,268 | | | 53,141 | |
| Cost of goods sold | | | | | | | | 40,012 | | | 81,814 | |
| Cost of good sold % | | | | | | | | 92.5 | % | | 154.0 | % |
| Gross profit (loss) | | | | | | | | 3,256 | | | (28,673) | |
| Gross profit (loss) % | | | | | | | | 7.5 | % | | (54.0) | % |
| Selling general and administrative | | | | | | | | 20,166 | | | 22,763 | |
| Selling general and administrative % | | | | | | | | 46.6 | % | | 42.8 | % |
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| Depreciation and amortization | | | | | | | | 1,011 | | | 3,412 | |
| Research and development | | | | | | | | 5,537 | | | 7,213 | |
| Gain on disposal of property and equipment | | | | | | | | (94) | | | (94) | |
| Impairment of goodwill | | | | | | | | 8,092 | | | 11,706 | |
| Impairment of property and equipment and intangible assets | | | | | | | | — | | | 69,975 | |
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| Loss from operations | | | | | | | | (31,456) | | | (143,648) | |
| Operating margin % | | | | | | | | (72.7) | % | | (270.3) | % |
| PPP loan forgiveness | | | | | | | | 881 | | | — | |
| Gain on lease termination | | | | | | | | — | | | 576 | |
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| Interest and other income, net | | | | | | | | 9 | | | 443 | |
| Loss before income taxes | | | | | | | | (30,566) | | | (142,629) | |
| Income tax benefit | | | | | | | | 40 | | | 6,179 | |
| Net Loss | | | | | | | | $ | (30,526) | | | $ | (136,450) | |
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| Net loss % | | | | | | | | (70.6) | % | | (256.8) | % |
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Consolidated revenue for the year ended December 31, 2020,2021, decreased $66.2$9.9 million, or 55.5%18.6%, from 2019. The decreaseversus the same period of 2020. Revenue during the year ended December 31, 2021 reflected a loss of revenue in revenue was largely a result of reduced demand duethe CT segment associated with two major customers changing ownership during 2021, losses related to the continued volatile macro-environmentnormalization and decline of market demand for U.S. onshore drillingsanitizers and completion activity, impactednon-recurring citrus terpenes sales. Current year revenue decreases were partially offset by politicalthe incremental post acquisition JP3 revenues generated in the second, third, and economic events in foreign markets, and the continued COVID-19 impact on productivity and customers during the year. Partially offsetting the decrease were new revenues in 2020 from the diversificationfourth quarter of our chemical product line and our DA segment acquired in May 2020.2021.
Consolidated operating expenses (excluding depreciation and amortization)cost of goods sold for the year ended December 31, 2020,2021, decreased $59.8$41.8 million, or 40.4%, from 2019,51.1% versus the same period of 2020. In 2020 cost of goods sold included $11.7 million purchase commitment and asexcess terpene reserve of which $7.6 million was reversed in 2021. This resulted in a percentage$19.3 million decrease year on year. Additionally, both segments had non-recurring product rationalization expenses in 2020 of revenue, increasedan aggregate $9.6 million. In 2021, the decline in revenues in addition to 166.1% forcost reduction initiatives including reducing personnel and facility costs also contributed to the year ended December 31, 2020, from 124.1% for the comparable period of 2019. Company reduction in force actions in the first quarter of 2020 lowered operational personnel costs along with a significant decrease in logistical costs as part of our overall cost-cutting efforts within supply chain. In 2020, the Company lowered occupancy costs due to our reduced facility footprint and reduction in equipment primarily associated with tank rentals. These savings were partially offset by operating expenses for the DA segment acquired in May 2020, and introduction of the sanitizers, surface cleaners and disinfectants product line in the second quarter of 2020. The provision for excess and obsolete inventory in 2020 included charges of $8.4 million for the CT segment and $3.9 million for the DA segment, primarily related to the Company’s product rationalization effort. The Company also recognized expense of $2.7 million in 2020 for the earn-out provisions related to the JP3 acquisition. For theon year ended December 31, 2020, the Company recognized a purchase commitment loss of $9.9 million and carried an accrued liability of $9.4 million associated with the amended terpene supply agreement. The commitment loss related to lower expected usage from reduced demand for terpene in the oil and gas sector due from capital spending reductions across our customer base and impacts of COVID-19, combined with product mix changes using lower concentrations of terpene. In 2019, the Company recognized a loss of $15.8 million related to the terpene supply agreement.decrease.
CorporateSelling general and administrative (“CGSG&A”) expenses are not directly attributable to products sold or services provided. CGSG&A costs decreased $11.7 million, or 41.7%,expenses for the year ended December 31, 2020, compared2021, decreased $2.6 million, or 11.4%, versus the same period of 2020. SG&A expenses decreased as a result of a reduction in compensation costs including severance partially offset by an increase in non-recurring legal related costs related to 2019. The decrease in CG&A costslitigation and investigations.
Depreciation and amortization expense decreased $2.4 million, or 70.4% for the year ended December 31, 2021, versus the same period of 2020, compared to 2019, was primarily due to a decreaseimpairments of $8.2 million in personnel costs. This year over year decrease in personnel costs resulted from reduction in force actions in the first quarter of 2020 combined with a decrease in severance costs of $4.2 million. These reduced personnel costs included a $2.1 million reduction in stock-based compensationproperty and incentives. Other factors contributing to lower CG&A in 2020 were decreases in legal costs, travelequipment and entertainment, and Company headquarter leasing costs, partially offset by one-time expenses related to the acquisition of JP3other intangible assets recorded during the second quarter ofyear ended December 31, 2020.
Research and amortization expensedevelopment (“R&D”) costs decreased $1.7 million, or 23.2% for the year ended December 31, 2020, decreased $5.1 million, or 59.7%, from 2019, primarily due to impairment2021, versus the same period of fixed and long-lived assets recorded in the first quarter of 2020 combined with limiting capital expenditure spend in 2020 and consolidation of our physical facility footprint.
Research and development expense for the year ended December 31, 2020, decreased $1.7 million, or 18.6%, from 2019. The decrease in research and development expense is primarily due to lower personnel costs as a result of our company-wide reduction in workforce in the first quarter of 2020.from 2020 to 2021.
For the year ended December 31, 2020, the Company recognized a gain of $0.1Loss from operations improved by $112.2 million, on disposal of assets. For the year ended December 31, 2019, the Company recognized a loss of $1.5 million on disposal of long-lived assets, primarily due to the disposal of corporate software.
Impairment of fixed and long-lived assetsor 78.1% for the year ended December 31, 2020 was $70.0 million due to a $12.5 million write-down2021, versus the same periods in the DA segment in the third quarter combined with the CT segment write-down of $54.7 million and a corporate-level write-down of $2.8 million recorded in the first quarter of 2020. Impairment of goodwill was $11.7 million for the year ended December 31, 2020, due to a third quarter 2020 write-down of the goodwill in our DA segment. See Note 3, “Business Combination;” Note 9, “Goodwill;” Note 10, “Other Intangible Assets;” and Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” for additional information. No similar impairments occurred in 2019.
The Company recognized a gain on lease termination of $0.6 million during the second quarter of 2020, asloss from operations improvement is primarily a result of terminating the corporate headquarters office leaseimprovement to gross loss and making a one-time paymentreductions of $1.0 million.
Interestexpenses for SG&A, depreciation and other income (expense), net, changed $0.8amortization and R&D described above, and the impairment expenses of $81.7 million forrecorded during the year ended December 31, 2020 compared to 2019. Interest expense decreased $2.0impairment expenses of $8.1 million primarily due tofor the terminationyear ended December 31, 2021.
Loss before income taxes for the year ended December 31, 2021, was also impacted by an $0.9 million gain from the forgiveness of the PNC Bank Credit Facility in the first quarter of 2019. The Company’s interest incomeJP3 Paycheck Protection Program (“PPP”) loan, and for the year ended December 31, 2020 by a $0.6 million gain from lease termination.
The Company’s income tax benefit for the year ended December 31, 2021 was $0.5 million compared to $1.9 million in 2019. The year-over-year decrease in interest income was driven by lower average cash balances and the depressed interest rate environment in 2020 compared to 2019.
minimal. The Company recorded an income tax benefit of $6.2 million for the year ended December 31,in 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act initially recorded in the first quarter of 2020, yielding an effective tax benefit rate of 4.3% for the year ended December 31, 2020. The Company determined that it is more likely than not that it will not realize the benefits of certain deferred tax assets and, therefore, recorded a $20.3 million valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to non-amortizable intangible assets and certain state jurisdictions. As of December 31, 2020, the Company is in a full valuation position. See Note 15, “Income Taxes.”Act.
Results by Segment (in thousands):
Chemistry Technologies
(dollars in thousands)
| | | | | | | | | | | | | |
| | | | | |
| | Years ended December 31, |
| 2020 | | 2019 | | |
| Revenue | $ | 50,310 | | | $ | 119,353 | | | |
| | | | | |
| | | | | |
| Loss from operations, including impairment | (88,486) | | | (45,682) | | | |
| | | | | |
| | | | | |
Results for 2020 compared to 2019 | | | | | | | | | | | | | | | | | |
| Years ended December 31 | | | | |
| 2021 | | 2020 | | | | |
| Revenue | $ | 38,929 | | | $ | 50,310 | | | | | |
| | | | | | | |
| | | | | | | |
| Loss from operations | (5,466) | | | (88,486) | | | | | |
| | | | | | | |
CT revenue for the year ended December 31, 2020,2021, decreased $69.0$11.4 million or 57.8% compared to 2019.2020. The decrease in revenue during 2021 compared to 2020 was largelydriven by impacts from industry consolidation and international activity. While the pandemic continued to weigh on economic activity in 2021, global supply and demand has steadily normalized through the second half of 2021. Revenue from two major customers was reduced temporarily as a result of market consolidation in the volatile macro-environment. ContributingPermian basin in addition the normalization and decline of market demand for sanitizers and non-recurring citrus terpenes sales. Additionally, international activity, primarily in the Middle East, decreased year over year. CT also granted price concessions in our effort to the volatility were OPEC-related actions disruptingmaintain and obtain market pricing and resulting in oversupply of hydrocarbons, and the COVID-19 impact on productivity and customers during the year. Partially offsetting the decrease were new revenues in 2020 from the introduction of sanitizing, surface cleaning and disinfecting products.share.
Loss from operations for the CT segment increased $42.8 million for the year ended December 31, 2020,2021, improved $83.0 million, or 93.9% compared to 2019.2020. The increasedimprovement in loss from operations for 2020 wasis due to significantly lower expenses, primarily the result of impairment charges of fixedproperty and long-lived assetsequipment of $54.7 million further impacted by lower revenue related to reduced demand. The provision for excess and obsolete inventory in 2020. Secondly, expenses during 2020 included chargesan $11.7 million charge to reserve for terpene purchase commitment losses, while expenses during 2021 were reduced by a $7.6 million gain as a result of $8.4 million.reaching a settlement agreement for terpene purchase commitment. In 2020,Certain cost reduction initiatives to optimize our cost structure contributed to the current decrease in operating losses by reducing personnel, office costs, equipment and facilities costs as the Company recognized a loss of $9.9 million for the amended terpene agreement duecontinues to adjustmentsconsolidate its physical facilities and equipment rentals to the Company’s expected usage, combinedalign with product mix changes using lower concentration of terpene. In 2019, the Company recognized a loss of $15.8 million for the amended terpene agreement.activity.
Data AnalyticsResults of Operations:
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, | | | | | | | | | | |
| 2021 | | 2020 | | | | | | | | | | |
| Revenue | $ | 4,339 | | | $ | 2,831 | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Loss from operations | (12,168) | | | (36,407) | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | Period May 18 to December 31,
| | | |
| | | | | | | 2020 | | | | | |
| | | | | | | | | | | | |
Revenue | | | | | | | $ | 2,831 | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Loss from operations, including impairment | | | | | | | (36,407) | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
On May 18, 2020, the Company purchased JP3 and formed the DA segment. The segmentDA revenue for the year ended December 31, 2021, increased $1.5 million compared to revenue for 2020, which was only the post-acquisition partial period from acquisitionrevenues between May 18, 2020 to December 31, 2020. Loss from operations for the DA segment for the year ended December 31, 2021 improved $24.2 million or 66.6% compared to 2020. The improvement in loss from operations is primarily the result of impairment charges of property and equipment, other intangible assets and goodwill of $24.2 million in 2020 compared to a goodwill impairment charge of $8.1 million in 2021. Additionally, operating expenses in 2020 were impacted by $3.9 million related to product rationalization and also by the change in fair value of the contingent consideration for the JP3 acquisition. A portion of the stock performance earn-out provision was $2.8triggered in 2020 resulting in $2.7 million which came from existing customers on minor project expansions and newof charges to cost of goods
customers. Forsold in 2020, while the fourth quarterrevaluations of 2020, revenue was $1.3 million, an increasethe contingent consideration in 2021 resulted in reductions to cost of $0.6 million over the third quartergoods sold of 2020, driven primarily$0.8 million. Operating margins in 2021 were positively impacted by increased equipment sales. Segment revenue for 2020, and the third quarter in particular, was adversely impacted by economic and COVID-19 related factors, as demand in the oil and gas sector declined due to capital spending reductions across our customer base.
The loss from operations for the period May 18 to December 31, 2020, includes write-downs to goodwill of $11.7 million and $12.5 million for finite-lived intangible assets in the third quarter. In addition, the third quarter of 2020 included charges for excess and obsolete inventory of $3.9 million. Results for the period May 18 to December 31, 2020, also include $2.7 million of expense for the JP3 stock performance earn-out provisions related to the purchase of JP3.margins.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements relate to the need to acquireacquisition and maintainmaintenance of equipment fundand funding working capital requirements and when the opportunities arise, to make strategic acquisitions.requirements. During the year ended December 31, 2020,2021, the Company funded capital requirements primarily with cash on hand, which included a tax refund receivedhand.
As of $6.1 million, combined with investing and financing cash inflows that included proceeds of $9.9 million received from escrow in 2020 from the 2019 sale of the CICT segment and proceeds from a Payroll Protection Program loan of $4.8 million. During the second quarter of 2020,December 31, 2021, the Company acquired JP3, making payments for the acquisition of $26.3 million, net ofhad available cash acquired. During the third quarter of 2020, the first stock performance target related to the acquisition was achieved and in October 2020, the Company paid $2.5 million into escrow to settle the liability.
Cash and cash equivalents totaledof $11.5 million, as compared to $38.7 million at December 31,, 2020, as compared to $100.6 million at 2020. During the year ended December 31, 2019. The2021, the Company used $47.8had an operating loss of $31.5 million, $25.8 million of cash outflowsused for operating activities (including $14.8and $0.4 million expended in working capital) and $17.7 millionof cash used for financing activities. Cash provided by investing activities. Offsetting these cash outflows, financing activities provided the Company $3.7 million.was minimal.
Liquidity
The effects of the COVID-19 pandemic and the volatility in oil prices during 2020 materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. While the full impact and duration of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. See “COVID-19 Effects and Actions” for developments and possible effects.
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to equitydebt and debtequity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. WhileUncertainty surrounding the long- term stability and strength of the oil and gas markets, or reduced spending by our customers could have a further negative impact on our liquidity
On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including with related parties, through the issuance of $21.2 million aggregate of convertible notes that resulted in net cash proceeds of approximately $19.5 million. Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million of convertible notes. 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 their 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, the Company receives 25% of the difference between (i) the aggregate Purchase Price of the quantity of Products comprising the Minimum Purchase Obligation during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022.
The Company also committed to plans to sell its warehouse facility in Monahhans, Texas and its manufacturing facility in Waller, Texas. These facilities were classified as held for sale as of December 31, 2021. Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $4.2 million of cash proceeds. The sale is expected to close in April 2022.
Based on our cash and liquid assets, including the transactions subsequent to year end described above and in Note 22 Subsequent Events, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery in of oil and gas markets, or reduced spending at our customers could have a negative impact on our liquidity.
Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth,due. However the Company cannot guarantee thea sufficient level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:
•Sale of non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sale of excess inventory and/or raw materials;
•Entry into a borrowing facility with one or more lenders;
•Raising equity either in the public markets or via a private placement offering;
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash; and
•Reducing professional advisory fees and headcount.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms. For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in this Annual Report.
The Company expects capital spending to be less than $1.0 million in 2021.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
| | | | Years ended December 31, | | Years ended December 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
| Net cash used in operating activities | Net cash used in operating activities | $ | (47,838) | | | $ | (4,545) | | | Net cash used in operating activities | $ | (25,840) | | | $ | (47,838) | |
| Net cash (used in) provided by investing activities | (17,701) | | | 152,713 | | | |
| Net cash provided by (used in) financing activities | 3,727 | | | (49,994) | | | |
| Net cash flows provided by discontinued operations | — | | | 15 | | | |
| Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 112 | | | (17,701) | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (372) | | | 3,727 | |
| | Effect of changes in exchange rates on cash and cash equivalents | Effect of changes in exchange rates on cash and cash equivalents | (102) | | | 5 | | | Effect of changes in exchange rates on cash and cash equivalents | 100 | | | (102) | |
| Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | $ | (61,914) | | | $ | 98,194 | | | Net change in cash, cash equivalents and restricted cash | $ | (26,000) | | | $ | (61,914) | |
Operating Activities
During 2020 and 2019,Net cash used in operating activities totaledwas $25.8 million and $47.8 million during the year ended December 31, 2021 and $4.5 million,2020, respectively. Consolidated net loss from continuing operations for the year ended December 31, 2021 and 2020, were $30.6 million and 2019 totaled $136.5 million, and $76.1 million, respectively.
During the year ended December 31, 2020,2021, non-cash adjustments to net income totaled $96.6totaled $4.2 million as compared to $40.8$112.8 million for the same period of 2020.
•For the year ended December 31, 2021, non-cash adjustments included a $7.6 million benefit related to the ADM settlement and $8.1 million of impairment charges. The non-cash adjustment for the provision of excess and obsolete inventory was $0.6 million and depreciation was $1.0 million. Other non-cash adjustments included stock based compensation of $3.8 million, JP3 PPP loan forgiveness of $0.9 million and $0.8 million related to the change in 2019.fair value of contingent consideration.
•InFor the year ended December 31, 2020, contributory non-cash adjustments consisted primarily of $81.7 million of impairment charges, which include a $30.2$9.4 million impairment of fixed assets, $32.4inventory purchase commitment reserve charges, $12.3 million impairment of intangibles, $11.7 million impairment of goodwill and $7.4 million impairment on right-of-use assets. The non-cash adjustment for the provision forof excess and obsolete inventory, was $12.3 million. In addition, non-cash charges included$3.0 million for stock compensation expense, $3.4 million for depreciation and amortization and $3.0$2.7 million for stock compensation expense. Other non-cash adjustments included a $2.7 millionrelated to the change in fair value of contingent consideration.
•In 2019, the non-cash adjustments to net income consisted primarily of $8.5 million for depreciation and amortization expense, $4.2 million for stock compensation expense, $5.7 million provision for excess and obsolete inventory, $18.3 million for changes to deferred income taxes and $1.5 million for net gain on sale of assets.
During the year ended December 31, 2020,2021, changes in working capital used $14.8provided $0.5 million inof cash as compared to providing $30.7using $24.2 million in 2019.for the same period of 2020.
•The use of cashFor the year ended December 31, 2021, changes in working capital resulted primarily from increases in accounts receivable and other current assets of $2.0 million and accounts payable of $1.8 million. This has been offset by decreases in inventories and income taxes receivable of $2.1 million and accrued liabilities of $1.4 million.
•For the year ended December 31, 2020 the use of working capital primarily resulted from a reduction in accrued liabilities and accounts payable of $23.6$33.0 million, which included two one-time payments made in 2020: one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final post-closing working capital adjustment related to the 2019 sale of the CICT segment. Decreases in accounts receivable, inventories and other current assets during 2020 provided cash of $8.5$8.5 million.
•During 2019, changes in working capital provided $30.7 million in cash, primarily resulting from decreasing accounts receivables by $21.0 million.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2021 was negligible. Net cash used in investing activities waswas $17.7 million for the year ended December 31, 2020. The cashCash used in investing activities is primarily due toincluded $26.3 million paid for thefrom purchase of JP3 net of cash acquired, during the second quarter of 2020, and $1.4 million paid for capitalized sanitizer equipment upgrades in 2020. The cash outflows were partially offset by proceedscash provided of $9.9 million received fromdue to the release of escrow amounts in 2020 from the 2019 sale of the CICT segment.
Net cash provided by investing activities was $152.7 million during 2019. Cash provided by investing activities included $155.5 million of proceeds received from the sale of revenue generating assets associated with the CICT segment, partially offset by cash paid of $2.4 million for capital expenditures and $0.6 million for the purchase of various patents and other intangible assets.Florida Chemical Company.
Financing Activities
Net cash used in financing activities was $0.4 million for the year ended December 31, 2021, primarily for purchases of common stock related to tax withholding requirements. Net cash provided by financing activities was $3.7 million for the year ended December 31, 2020. Cash provided by financing activities included $4.8 million2020, primarily from the proceeds received from the PPP.
Off-Balance Sheet Arrangements
There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of proceeds from borrowings underfacilitating off balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2021, the Payroll Protection Program.Company was not involved in any unconsolidated SPEs.
Net cash usedThe Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financing activities was $50.0 million during 2019, primarily duefinancial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to using $49.7 million for repaymentsinvestors other than the long term terpene agreement discussed in Note 15 in Part II, Item 8 – Financial Statements of debt, net of borrowings.this Annual Report.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments, estimates, and assumptions that affect the amounts of assets and liabilities in the financial statements and revenue and expenses during the reporting period. Significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in Part II, Item 8 –— “Financial Statements and Supplementary Data”Data,” of this Annual Report. The Company believes the following accounting policies are critical due to the significant subjective and complex judgments and estimates required when preparing the consolidated financial statements. The Company regularly reviews judgments, assumptions and estimates related to the critical accounting policies.
Revenue Recognition
The Company recognizes revenue 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. See Note 5, “Revenue from Contracts with Customers,” in Part II of this Annual Report for further discussion.
The Company recognizes revenue based on a 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.
The Company primarily sells chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, the Company offers various services associated to products sold which includes field services, installation, maintenance and other functions. Service revenue is recognized on an over time basis for the CT segment as services are performed as the customer is simultaneously benefiting as the Company performs. For the DA segment, services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. The DA segment has additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, the DA segment may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions.
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.
Reserve for Excess and Obsolete Inventory
Inventories consist of raw materials and finished goods and are stated at the lower of cost, or market determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead.
The Company’s inventory reserve representsCompany reviews inventories on hand and current market conditions to determine if the excesscost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory carrying amount over the amount expectedaccordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be realized from the ultimate saleless than cost. Write-downs or other disposal of the inventory.
The Company regularly reviews inventory quantities on hand and records provisions or impairments for excess or obsolete inventory based on the Company’s forecast of product demand, historical usagewrite-offs of inventory on hand, market conditions, production and procurement requirements and technological developments. Significant or unanticipated changes in market conditions or Company forecasts could affect the amount and timingare charged to cost of provisions for excess and obsolete inventory and inventory impairments.
Specific assumptions are updated at the date of each evaluation to consider Company experience and current industry trends. Significant judgment is required to predict the potential impact which the current business climate and evolving market conditions could have on the Company’s assumptions. Changes which may occur in the energy industry are hard to predict, and they may occur rapidly. To the extent that changes in market conditions result in adjustments to management assumptions, impairment losses could be realized in future periods.goods sold.
At December 31, 20202021 and 2019,2020, the reserve for excess and obsolete inventory was $10.1 million and $11.1 million, or 51.8% and $5.7 million, or 48.3% and 19.7% of inventory, respectively. Significant or unanticipated changes to our estimates and forecasts could impact the amount and timing of any additional provisions for excess and obsolete inventory.
Business Combinations
The Company includesGoodwill
Goodwill is the resultsexcess of operationscost of its acquisitions in its consolidated results, prospectively froman acquired entity over the date of acquisition. Acquisitions are accounted for by applying the acquisition method. The Company allocates the fair value of purchase considerationamounts assigned to theidentifiable assets acquired and liabilities assumed and any non-controlling 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 non-controlling 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.
Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. See Note 3, “Business Combination,” in Part II of this Annual Report for further information.
Goodwill
business combination. Goodwill is not subject to amortization but is tested for impairment annually during the fourth quarter,on October 1 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 significantan adverse change in the business climate unanticipated competition, or a change in projectedthe assessment of future operations or results of a reporting unit. Goodwill is tested for impairment at a reporting unit level.
DuringWhen performing the annual testing, or when tested upon the occurrence of a triggering event,impairment test, the Company assesseshas the option to assess whether a goodwill impairment exists using botheither a qualitative andor quantitative assessments.assessment. 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.
DuringIn performing the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction and created the DA segment. The Company recorded goodwill of $17.5 million at the date of acquisition. During the third quarter of 2020, the Company identified a triggering event due to significantly lower than expected results and completed an impairment analysis at the DA reporting unit level, which resulted in a goodwill impairment charge of $11.7 million. During the fourth quarter of 2020, the Company assessed qualitative factors to determine whether it was necessary to perform theannual quantitative impairment test. As of the fourth quarter of 2020, the Company concluded it was not more-likely-than-not that there was an impairment of goodwill for the DA reporting unit based on the assessment of qualitative factors.
Long-lived Assets Other than Goodwill
Long-lived assets other than goodwill consist of propertytest and equipment and intangible assets that have determinable and indefinite lives. The Company makes judgments and estimates regarding the carrying amount of these assets, including amounts to be capitalized, depreciation and amortization methods to be applied, estimated useful lives and possible impairments. Property and equipment and intangible assetsconsistent with determinable lives are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
For property and equipment, events or circumstances indicating possible impairment may include a significant decrease in market value or a significant change in the business climate. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss is the excess of the asset’s carrying amount over its fair value. Fair value is generallyour prior practice, we determined using an appraisal by an independent valuation firm or by using a discounted cash flow analysis.
For intangible assets with definite lives, events or circumstances indicating possible impairment may include an adverse change in the extent or manner in which the asset is being used or a change in the assessment of 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 flows.
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 thatDA reporting unit using an income approach. Under the income approach, the fair value of the indefinite lived intangiblereporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts, updated for recent events, to estimate future cash flows with cash flows beyond the specific operating plans estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on our most recent views of the long-term outlook for the DA reporting unit. Our internal forecasts include assumptions about future commodity pricing and expected demand for our goods and services. For the DA reporting unit, production growth is less than its carrying amount,still anticipated to be lower in the Company does not perform a quantitative assessment.
If the qualitative assessment indicates thatnear term as operators continue to show an abundance of fiscal discipline in development spending. Midstream thru-out volumes have remained well below capacity levels. While we are expecting production growth to increase, it is likely to do so at a 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 quantitativeconservative pace. These factors have precipitated our impairment test. The quantitative impairment testdecision 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.
The development of future net undiscounted cash flow projections requires management projections of future sales and profitability trends and the estimation of remaining useful lives of assets. These projections are consistent with those projections the Company uses to internally manage operations. When potential impairment is identified, a discounted cash flow valuation model similar to that used to value goodwill at the reporting unit level, incorporating discount rates commensurate with risks associated with each asset, is used to determine the fair value of the asset in order to measure potential impairment. Discount rates are determined by using a weighted average cost of capital (“WACC”). Estimated revenue and WACC assumptions are the most sensitive and susceptible to change in the long-lived asset analysis as they require significant management judgment. The Company believes the assumptions used are reflective of what a market participant would have used in calculating fair value.
Valuation methodologies utilized to evaluate long-lived assets other than goodwill for impairment were consistent with prior periods. Specific assumptions discussed above are updated at each test date to consider current industry and Company-specific risk factors from the perspective of a market participant. The current business climate is subject to evolving market conditions and requires significant management judgment to interpret the potential impactData Analytics goodwill. Due to the Company’s assumptions. To the extent that changes in the current business climate result in adjustments to management projections, impairment losses may be recognized in future periods.
There are significant inherent uncertainties and judgments involved in estimating fair value. The Company cannot predict the occurrence of events or circumstances that could adversely affect the fair value of the asset group. Such events may include, but are not limited to, deterioration of the economic environment, increases in the Company’s WACC, material negative changes in relationships with significant customers, reductions in valuations of other public companies in the Company’s industry, or strategic decisions made in response to economic and competitive conditions. If actual results are not consistent with the Company’s currentmaking estimates and assumptions, additional impairment of long-lived assets could be required.
During the first quarter of 2020, the Company evaluated and recorded remeasurement and impairment charges on right-of-use assets, fixed assets and intangible assets totaling $57.5 million as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and the related negative impact on oil and natural gas prices on projections of future cash flows. During the third quarter of 2020, the Company recorded an impairment write-down to estimated fair market value of $12.5 million for intangible assets of the JP3 acquisition, which resulted from reduced demand in the oil and gas sector, extended impact of the COVID-19 pandemic and lower performance than expected by the reporting unit. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” for additional information.
Income Taxes
The Company’s tax provision is subject to judgments and estimates necessitated by the complexity of existing regulatory tax statutes and the effect of these upon the Company due to operations in multiple tax jurisdictions. Income tax expense is based on taxable income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. The Company’s income tax expense fluctuates from year to year as the amount of pretax income or loss fluctuates. Changes in tax laws and the Company’s profitability within and across the jurisdictions may impact the Company’s
tax liability. While the annual tax provision is based on the best information availableassumptions, actual results may differ from those assumed in our forecasts. We derived our discount rate using a capital asset pricing model and analyzing published rates for industries relevant to the Company atDA reporting unit to estimate the timecost of preparation, several yearsequity financing. We used a discount rate that are commensurate with the risks and uncertainties inherent in the respective business and in our internally developed forecasts.
Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain, and actual results may elapse before the ultimate tax liabilities are determined.differ from those assumed in our analysis.
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 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 established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Except for a state jurisdiction, the Company maintains a full valuation allowance on its deferred tax assets.
The Company periodically identifies and evaluates uncertain tax positions. This process considers the amounts and probability of various outcomes that could be realized upon final settlement. Liabilities for uncertain tax positions are based on a two-step process. The actual benefits ultimately realized may differ from the Company’s estimates. Changes in facts, circumstances, and new information may require a change in recognition and measurement estimates for certain individual tax positions. Any changes in estimates are recorded in results of operations in the period in which the change occurs. At December 31, 2020, the Companyhas performed an evaluation of its various tax positions and concluded that it did not havethere are no significant uncertain tax positions requiring disclosure.recognition in the Company’s consolidated financial statements.
Property and equipment
Property and equipment, including ROU assets, are reviewed for impairment 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. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third party independent appraisals, as considered necessary.
The determination of whether property and equipment, including ROU assets is impaired involved a significant level of judgement in these assumptions, and changes in our forecasts, business strategy, or economic and market conditions could significantly impact these judgements. Any resulting impairment charges could have a material impact on our results of operations.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2, “Summary of Significant“Recent Accounting Policies,Pronouncements,” in Part II, Item 8 –— “Financial Statements and Supplementary Data”Statements” of this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Risk
The Company is primarily exposed to market risk from changes in foreign currency exchange rates and raw material prices. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates, commodity prices or foreign currency exchange rates over the next year. The Company manages exposure to market risks at the corporate level. The portfolio of interest-sensitive assets and liabilities is monitored and adjusted to provide liquidity necessary to satisfy anticipated short-term needs. The Company’s risk management policies allow the use of specified financial instruments for hedging purposes only. Speculation on interest rates or foreign currency rates is not permitted. The Company does not consider any of these risk management activities to be material.
Foreign Currency Exchange Risk
The Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and has limited exposure to foreign currency risk in its international operations. During 2020,2021, approximately 4% 3% of revenue was denominated in non-U.S. dollar currencies and virtually all assets and liabilities of the Company are denominated in U.S. dollars. However, as the Company expands its international operations, non-U.S. denominated activity is likely to increase. The Company has not historically used swaps or foreign currency hedges. Thehedges, however, the Company may utilize swaps or foreign currency hedges in the future.
Commodity Risk
The Company, and the CT segment in particular, primarily relies upon long-term strategic supply relationships to meet many of its raw material needs and are expected to remain in place for the foreseeable future. Price increases are passed along to the
Company’s customers, where applicable.applicable or possible. The Company presently does not have any commodity futures contracts but may consider utilizing forms of hedging from time to time in the future.
Item 8. Financial Statements and Supplementary Data.
Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors Flotek Industries, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc. and subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of operations, comprehensive loss, cash flows, and stockholders’ equity for the year then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit 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. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sources and Uses of Liquidity
As described in Note 1 to the Company’s consolidated financial statements, the Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent on the Company’s operating cash flows, the monetization of non-core assets, and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to use a significant amount of cash in the year following the issuance of the consolidated financial statements as of and for the year ended December 31, 2021. Uncertainty surrounding the long-term stability and strength of the oil and gas markets or reduced spending by the Company’s customers could have a further negative impact on the Company’s liquidity. The Company believes that their cash and liquid assets, including certain transactions
executed after year end, will provide the Company with sufficient financial resources to fund its operations and meet its capital requirements and anticipated obligations as they become due over the twelve-month period following the date the consolidated financial statements are issued.
We identified the evaluation of the Company’s assessment of its ability to continue as a going concern and related disclosures as a critical audit matter. There was significant auditor judgment required in evaluating (1) forecasted revenue growth rates and operating expenses used in the Company’s forecasted cash flows analysis for the twelve-month period subsequent to issuance of the consolidated financial statements and (2) management's ability to implement its plans with respect to the disposition of assets held for sale.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls related to the Company’s assessment of its ability to continue as a going concern, including the development of the forecasted revenue growth rates and operating expenses over the twelve-month period following the date the consolidated financial statements are issued, and the Company’s assessment of the probability of disposing assets held for sale. To assess the Company’s ability to forecast revenue and operating expenses, we compared historical revenue and operating expense forecasts to actual results. We also compared the Company's forecasted revenue growth rates to certain relevant industry trends. We performed sensitivity analyses over the Company’s going concern assessment by evaluating the effect of changes in the forecasted revenue growth rates and operating expenses and the effect of potential outcomes of the disposition of assets held for sale. We evaluated the reasonableness of the Company’s forecasted revenue and operating expenses by comparing them to management’s stated plans which were corroborated by meeting minutes of the Board of Directors. We evaluated management’s plans related to disposition of certain assets held for sale by inspecting the contractual sale document. We assessed the Company’s disclosures related to its going concern assessment by comparing the disclosures to the audit evidence obtained.
/s/ KPMG LLP
We have served as the Company’s auditor since 2021.
Houston, Texas
March 31, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Flotek Industries, Inc.
Houston, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc. (the “Company”) as of December 31, 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and the results of its operations and its cash flows for the year then ended,in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2021 expressed an adverse opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit 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. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of Fixed and Long-lived Assets – CT Reporting Unit
As described in Notes 7, 8 and 10 to the consolidated financial statements, the Company has recorded net property and equipment (“fixed assets”) of $9.1 million, and operating lease right-of-use assets and intangible assets (“long-lived assets”) of $2.3 million and $0 million, respectively, as of December 31, 2020. As of March 31, 2020, the Company had one reporting unit, ECT, which it considered an asset group for purposes of assessing asset impairment. The Company reviews the asset group for impairment whenever events and changes in circumstances indicate the carrying value of such assets may not be recoverable (“triggering events”). During the quarter ended March 31, 2020, the Company determined there were triggering events, primarily related to the COVID-19 pandemic and the decline in energy prices, and performed an asset impairment test as of March 31, 2020. The asset group is considered impaired when the carrying value exceeds its fair value. The Company determined fair value using the income approach, which requires management to make significant assumptions about expected
future cash flows, including projected revenue and profitability growth rates, discount rates, obsolescence rates, and royalty rates. Management utilized a third-party valuation specialist to assist in the preparation of the valuation of the asset group.
We identified the impairment assessment of the Company’s fixed and long-lived assets as a critical audit matter. Auditing the Company’s impairment test for the asset group was complex and highly judgmental because (i) there was significant judgment used by management to develop the fair value measurement, which led to a high degree of audit judgment and subjectivity in performing procedures relating to fair value measurement; (ii) there was significant effort in performing procedures to evaluate the reasonableness of the fair value measurement and significant assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the appropriateness of the method used by management to determine the fair value of the asset group.
•Evaluating the reasonableness of the assumptions used to estimate expected future cash flows, including revenue and profitability growth rates, by comparing the rates to historical performance and industry data.
•Testing the completeness, accuracy and relevance of underlying data used in the impairment assessment.
•Utilizing professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the Company's impairment assessment and reasonableness of certain significant assumptions described above, including the discount rate, obsolescence rate, and royalty rate.
Business Combination
As described in Note 3 to the consolidated financial statements, the Company completed its acquisition of JP3 Measurement, LLC for consideration of $36.6 million during the second quarter of 2020. The Company allocated the fair value of the purchase consideration to the assets acquired, liabilities assumed and any noncontrolling interests in the acquired entity generally based on their fair values at the acquisition date. As a result of the acquisition, management was required to estimate fair values of the assets acquired and liabilities assumed, including certain identifiable intangible assets. Management utilized a third-party valuation specialist to assist in the preparation of the valuation of certain identifiable intangible assets.
We identified the determination of fair values of certain identifiable intangible assets, which primarily included customer relationships, as a critical audit matter. Management exercised significant judgment to select the valuation methods and to develop the assumptions used in the measurement of the fair value of the identifiable intangible assets. Significant assumptions included discount rates, customer attrition, and projected revenue growth rates. These assumptions are forward-looking and could be affected by future economic and market conditions. The principal considerations for our determination included the following: (i) changes in the significant assumptions could have a significant impact on the fair value of the assets acquired, (ii) significant unobservable inputs and assumptions utilized by management in determining the fair value of the identifiable intangible assets acquired and liabilities assumed, including the earn-out provision, and (iii) appropriateness of use of various valuation models to determine the fair value of the identifiable intangible assets acquired. Auditing these elements involved especially subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Testing the completeness, accuracy and relevance of underlying data used in the analysis.
•Assessing the reasonableness of significant underlying assumptions through: (i) comparing prospective financial information to current industry trends, as well as to historical performance of the acquired business, and (ii) performing analyses to evaluate the potential effect of changes in the significant assumptions.
•Utilizing personnel with specialized knowledge and skill with valuation to assist in: (i) assessing the reasonableness of certain significant assumptions incorporated into the various valuation models, and (ii) assessing the appropriateness of various valuation models utilized by management to determine the fair values of the assets acquired.
Impairment of Goodwill and Long-lived Assets – Data Analytics
As described in Notes 9 and 11 to the consolidated financial statements, during the third quarter of 2020, the Company identified a triggering event related to the Data Analytics operating segment resulting from lower than expected performance and performed a recoverability test of the Data Analytics asset group as of September 30, 2020. As a result of not passing the recoverability test, the Company was required to measure the fair value of the asset group in order to determine the impairment
loss. The fair value of the asset group was estimated based on the discounted future cash flows. The Company also identified a triggering event related to goodwill and performed an impairment analysis. To determine the fair value of the Data Analytics reporting unit, the Company used the discounted cash flow method under the income approach, and the guideline public company method under the market approach. The significant assumptions used to determine the fair value of the asset group and the reporting unit included the projected sales growth rate, discount rate, customer attrition rate, obsolescence rate, and royalty rate.
We identified the impairment assessment of the Company’s goodwill and long-lived assets, including customer relationships, trademarks and patents, as a critical audit matter. Auditing the Company’s impairment test was complex and highly judgmental because (i) there was significant judgment used by management to develop the fair value measurement, which led to a high degree of audit judgment and subjectivity in performing procedures relating to fair value measurement; (ii) there was significant effort in performing procedures to evaluate the reasonableness of the fair value measurement and significant assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the appropriateness of the method management used to estimate the fair value of the asset group and reporting unit.
•Evaluating the reasonableness of the projections for revenue growth and profitability by comparing the rates to the current and past performance of the business and evaluating whether these assumptions were consistent with evidence obtained in other areas of the audit and industry data.
•Testing the completeness, accuracy and relevance of underlying data used in the impairment assessment.
•Utilizing professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the Company's impairment assessment and reasonableness of certain significant assumptions described above, including the discount rate.
Reserve for Excess and Obsolete Inventory
As described in Note 6 to the consolidated financial statements, the Company has recorded net inventories of $11.8 million as of December 31, 2020. The Company regularly reviews inventory quantities on hand and records provisions for excess or obsolete inventory based on the Company’s forecast of product demand, historical usage of inventory on hand, market conditions, production and procurement requirements and technological developments. Significant management judgment is required to predict the potential impact that the current business climate and evolving market conditions could have on the Company’s assumptions.
We identified the reserve for excess and obsolete inventory as a critical audit matter. The principal considerations for our determination are (i) there was significant judgment by management when developing the reserve for excess and obsolete inventory, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures relating to the reserve for excess and obsolete inventory; and (ii) there was significant audit effort in performing procedures to evaluate management’s analysis and significant assumptions, including projections of future demand and risk of technological or competitive obsolescence for products.
The primary procedures we performed to address this critical audit matter included:
•Testing management’s process for developing the reserve for excess and obsolete inventory, including evaluating the appropriateness of the method,
•Testing the completeness, accuracy, and relevance of underlying data used in the estimate;
•Evaluating the reasonableness of the projections of future demand for products by evaluating whether the assumption was consistent with the product’s historical performance.
•Evaluating the reasonableness of management’s assumption related to the risk of technological or competitive obsolescence for products by evaluating whether the assumption was consistent with technological or competitive obsolescence experienced during the product life cycle of existing products.
Sources and Uses of Liquidity
As described in Note 1 to the Company’s financial statements, the Company currently funds its operations primarily from cash on hand. The Company has a history of operating losses and expects to utilize material cash flows in operations in the 12 months subsequent to the issuance of the financial statements, and while the Company believes that cash and liquid assets will provide sufficient financial resources, it has identified conditions that could have a negative impact on liquidity. In the event that the Company’s cash on hand is not sufficient to fund operations, the Company has identified actions it may take.
We identified the Company's future cash flows and management’s plans as a critical audit matter because of the significant judgment involved in estimating cash flows and the evaluation of management’s plans. Auditing the Company's forecasted cash flows was especially challenging and required significant auditor judgment because (i) there was significant judgment used by management to develop their forecasts, which led to a high degree of audit judgment and subjectivity in performing procedures relating to projected liquidity, and (ii) there was significant effort in performing procedures to evaluate management's conclusion that the Company's plans will be effectively implemented.
The primary procedures we performed to address the critical audit matter included:
•Assessing the reasonableness of management’s key assumptions, including projected revenue, in the forecasted future cash flows and evaluating positive and negative evidence that support or contradict the conclusions reached by management.
•Evaluating management's plans in the context of other audit evidence obtained during the audit to assess the probability of successfully implementing the plans.
•Evaluating the adequacy of the Company’s disclosures in the notes to the financial statements.
/s/ BDO USA, LLP
We have servedbegan serving as the Company's auditor since 2020.in 2020 and became the predecessor auditor in 2021.
Houston, Texas
March 16, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Flotek Industries, Inc.
Houston, Texas
Opinion on Internal Control over Financial Reporting
We have audited Flotek Industries, Inc. (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”) In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as “the financial statements”) and our report dated March 16, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible 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 Item 9A, Controls and Procedures. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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. Material weaknesses have been identified regarding management’s failure to design and maintain controls over i) the forecasting process, ii) and nonrecurring transactions, including derecognition of items and cash flow presentation relating to disposal transactions and operating ineffectiveness of controls relating to impairment evaluations, and iii) going concern evaluations, all as described in management’s assessment. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 financial statements, and this report does not affect our report dated March 16, 2021 on those financial statements.
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/ BDO USA, LLP
Houston, Texas
March 16, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Flotek Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).
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 the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements and for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit 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 audit 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. We believe that our audit provides a reasonable basis for our opinion.
/s/ Moss Adams LLP
Houston, Texas
March 6, 2020
We served as the Company’s auditor from 2017 to 2020.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) | | | December 31, | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| ASSETS | ASSETS | | | | ASSETS | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 38,660 | | | $ | 100,575 | | Cash and cash equivalents | $ | 11,534 | | | $ | 38,660 | |
| Restricted cash | Restricted cash | 664 | | | 663 | | Restricted cash | 1,790 | | | 664 | |
| Accounts receivable, net of allowance for doubtful accounts of $1,316 and $1,527 at December 31, 2020 and 2019, respectively | 11,764 | | | 15,638 | | |
| Accounts receivable, net of allowance for doubtful accounts of $659 and $1,316 at December 31, 2021 and December 31, 2020, respectively | | Accounts receivable, net of allowance for doubtful accounts of $659 and $1,316 at December 31, 2021 and December 31, 2020, respectively | 13,297 | | | 11,764 | |
| Inventories, net | Inventories, net | 11,837 | | | 23,210 | | Inventories, net | 9,454 | | | 11,837 | |
| | Income taxes receivable | Income taxes receivable | 403 | | | 631 | | Income taxes receivable | 22 | | | 403 | |
| | Other current assets | Other current assets | 3,127 | | | 13,191 | | Other current assets | 3,740 | | | 3,127 | |
| Assets held for sale | | Assets held for sale | 2,762 | | | — | |
| Total current assets | Total current assets | 66,455 | | | 153,908 | | Total current assets | 42,599 | | | 66,455 | |
| Property and equipment, net | Property and equipment, net | 9,087 | | | 39,829 | | Property and equipment, net | 5,296 | | | 9,087 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 2,320 | | | 16,388 | | Operating lease right-of-use assets | 2,041 | | | 2,320 | |
| Goodwill | Goodwill | 8,092 | | | 0 | | Goodwill | — | | | 8,092 | |
| Deferred tax assets, net | Deferred tax assets, net | 223 | | | 152 | | Deferred tax assets, net | 279 | | | 223 | |
| Other intangible assets, net | 0 | | | 20,323 | | |
| | Other long-term assets | Other long-term assets | 33 | | | 0 | | Other long-term assets | 29 | | | 33 | |
| | TOTAL ASSETS | TOTAL ASSETS | $ | 86,210 | | | $ | 230,600 | | TOTAL ASSETS | $ | 50,244 | | | $ | 86,210 | |
| | LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | $ | 5,787 | | | $ | 16,231 | | Accounts payable | $ | 7,616 | | | $ | 5,787 | |
| Accrued liabilities | Accrued liabilities | 18,275 | | | 24,552 | | Accrued liabilities | 8,996 | | | 18,275 | |
| Income taxes payable | Income taxes payable | 21 | | | 0 | | Income taxes payable | 4 | | | 21 | |
| Interest payable | Interest payable | 34 | | | 0 | | Interest payable | 82 | | | 34 | |
| | Current portion of operating lease liabilities | Current portion of operating lease liabilities | 636 | | | 486 | | Current portion of operating lease liabilities | 602 | | | 636 | |
| Current portion of finance lease liabilities | Current portion of finance lease liabilities | 60 | | | 55 | | Current portion of finance lease liabilities | 41 | | | 60 | |
| Current portion of long-term debt | Current portion of long-term debt | 4,048 | | | 0 | | Current portion of long-term debt | 1,436 | | | 4,048 | |
| | Total current liabilities | Total current liabilities | 28,861 | | | 41,324 | | Total current liabilities | 18,777 | | | 28,861 | |
| Deferred revenue, long-term | Deferred revenue, long-term | 117 | | | 0 | | Deferred revenue, long-term | 91 | | | 117 | |
| Long-term operating lease liabilities | Long-term operating lease liabilities | 8,348 | | | 16,973 | | Long-term operating lease liabilities | 7,779 | | | 8,348 | |
| Long-term finance lease liabilities | Long-term finance lease liabilities | 96 | | | 158 | | Long-term finance lease liabilities | 53 | | | 96 | |
| Long-term debt | | Long-term debt | 3,352 | | | 1,617 | |
| | TOTAL LIABILITIES | | TOTAL LIABILITIES | 30,052 | | | 39,039 | |
| Commitments and contingencies (See Note 15) | | Commitments and contingencies (See Note 15) | 0 | | 0 |
| Stockholders’ equity: | | Stockholders’ equity: | |
| Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | | Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | — | | | — | |
| Common stock, $0.0001 par value, 140,000,000 shares authorized; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020 | | Common stock, $0.0001 par value, 140,000,000 shares authorized; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020 | 8 | | | 8 | |
| Additional paid-in capital | | Additional paid-in capital | 363,417 | | | 359,721 | |
| Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | 81 | | | (19) | |
| Accumulated deficit | | Accumulated deficit | (309,214) | | | (278,688) | |
| Treasury stock, at cost; 6,022,634 and 5,580,920 shares at December 31, 2021 and December 31, 2020, respectively | | Treasury stock, at cost; 6,022,634 and 5,580,920 shares at December 31, 2021 and December 31, 2020, respectively | (34,100) | | | (33,851) | |
| | Long-term debt | 1,617 | | | 0 | | |
| | Deferred tax liabilities, net | 0 | | | 116 | | |
| TOTAL LIABILITIES | 39,039 | | | 58,571 | | |
| Commitments and contingencies (Note 16) | 0 | | 0 | |
| Stockholders’ Equity: | | |
| Preferred stock, $0.0001 par value, 100,000 shares authorized; 0 shares issued and outstanding | 0 | | | 0 | | |
| Common stock, $0.0001 par value, 140,000,000 shares authorized; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020; 63,656,897 shares issued and 59,511,416 shares outstanding at December 31, 2019 | 8 | | | 6 | | |
| Additional paid-in capital | 359,721 | | | 347,564 | | |
| Accumulated other comprehensive (loss) income | (19) | | | 181 | | |
| Accumulated deficit | (278,688) | | | (142,238) | | |
| Treasury stock, at cost; 5,580,920 and 4,145,481 shares at December 31, 2020 and 2019, respectively | (33,851) | | | (33,484) | | |
| Total stockholders’ equity | Total stockholders’ equity | 47,171 | | | 172,029 | | Total stockholders’ equity | 20,192 | | | 47,171 | |
| | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 86,210 | | | $ | 230,600 | | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 50,244 | | | $ | 86,210 | |
| |
See accompanying Notes to Consolidated Financial Statements.=
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | | | | | | | | | | | | | |
| | | | | | Years ended December 31, |
| | | | | | 2021 | | 2020 |
| Revenue: | | | | | | | |
| Revenue from external customers | | | | | $ | 39,627 | | | $ | 53,141 | |
| Revenue from related party | | | | | 3,641 | | | — | |
| Total revenues | | | | | 43,268 | | | 53,141 | |
| Cost of goods sold | | | | | 40,012 | | | 81,814 | |
| Gross profit (loss) | | | | | 3,256 | | | (28,673) | |
| Operating costs and expenses: | | | | | | | |
| | | | | | | |
| Selling, general, and administrative | | | | | 20,166 | | | 22,763 | |
| | | | | | | |
| Depreciation and amortization | | | | | 1,011 | | | 3,412 | |
| Research and development | | | | | 5,537 | | | 7,213 | |
| Gain on disposal of property and equipment | | | | | (94) | | | (94) | |
| Impairment of goodwill | | | | | 8,092 | | | 11,706 | |
| Impairment of property and equipment and intangible assets | | | | | — | | | 69,975 | |
| Total operating costs and expenses | | | | | 34,712 | | | 114,975 | |
| Loss from operations | | | | | (31,456) | | | (143,648) | |
| Other income (expense): | | | | | | | |
| Paycheck protection plan loan forgiveness | | | | | 881 | | | — | |
| | | | | | | |
| | | | | | | |
| Interest expense | | | | | (78) | | | (60) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other income, net | | | | | 87 | | | 1,079 | |
| Total other income | | | | | 890 | | | 1,019 | |
| Loss before income taxes | | | | | (30,566) | | | (142,629) | |
| Income tax benefit | | | | | 40 | | | 6,179 | |
| Net Loss | | | | | $ | (30,526) | | | $ | (136,450) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Loss per common share: | | | | | | |
| Basic | | | | | $ | (0.42) | | | $ | (2.00) | |
| Diluted | | | | | $ | (0.42) | | | $ | (2.00) | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Weighted average common shares: | | | | | | | |
| Weighted average common shares used in computing basic loss per common share | | | | | 73,361 | | | 68,312 | |
| Weighted average common shares used in computing diluted loss per common share | | | | | 73,361 | | | 68,312 | |
| | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | |
| Revenue | $ | 53,141 | | | $ | 119,353 | | | |
| Costs and expenses: | | | | | |
| Operating expenses (excluding depreciation and amortization) | 88,266 | | | 148,100 | | | |
| Corporate general and administrative | 16,311 | | | 27,975 | | | |
| | | | | |
| Depreciation and amortization | 3,412 | | | 8,465 | | | |
| Research and development | 7,213 | | | 8,863 | | | |
| | | | | |
| | | | | |
| (Gain) loss on disposal of long-lived assets | (94) | | | 1,450 | | | |
| Impairment of fixed and long-lived assets | 69,975 | | | 0 | | | |
| Impairment of goodwill | 11,706 | | | 0 | | | |
| Total costs and expenses | 196,789 | | | 194,853 | | | |
| Loss from operations | (143,648) | | | (75,500) | | | |
| Other (expense) income: | | | | | |
| Gain on lease termination | 576 | | | 0 | | | |
| | | | | |
| Interest expense | (60) | | | (2,019) | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Other income (expense), net | 503 | | | 1,708 | | | |
| Total other income (expense) | 1,019 | | | (311) | | | |
| Loss before income taxes | (142,629) | | | (75,811) | | | |
| Income tax benefit (expense) | 6,179 | | | (262) | | | |
| Loss from continuing operations | (136,450) | | | (76,073) | | | |
| Income from discontinued operations, net of tax | 0 | | | 42,158 | | | |
| | | | | |
| | | | | |
| Net loss | $ | (136,450) | | | $ | (33,915) | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Basic and diluted earnings (loss) per common share: | | | | | |
| Continuing operations | $ | (2.00) | | | $ | (1.29) | | | |
| Discontinued operations, net of tax | 0 | | | 0.72 | | | |
| Basic earnings (loss) per common share | $ | (2.00) | | | $ | (0.57) | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Weighted average common shares: | | | | | |
| Weighted average common shares used in computing basic and diluted loss per common share | 68,312 | | | 58,750 | | | |
| | | | | |
SeeThe accompanying Notes toare an integral part of these Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(in thousands)
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | |
| Loss from continuing operations, net of tax | $ | (136,450) | | | $ | (76,073) | | | |
| Income from discontinued operations, net of tax | 0 | | | 42,158 | | | |
| Net loss | (136,450) | | | (33,915) | | | |
| Other comprehensive (loss) income: | | | | | |
| Foreign currency translation adjustment | (200) | | | 150 | | | |
| Comprehensive loss | $ | (136,650) | | | $ | (33,765) | | | |
| | | | | |
| | | | | |
See accompanying Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | Years ended December 31, |
| | | | | | 2021 | | 2020 |
| Net Loss | | | | | $ | (30,526) | | | $ | (136,450) | |
| | | | | | | |
| | | | | | | |
| Other comprehensive income (loss): | | | | | | | |
| Foreign currency translation adjustment | | | | | 100 | | | (200) | |
| | | | | | | |
| Comprehensive Loss | | | | | $ | (30,426) | | | $ | (136,650) | |
| | | | | | | |
| | | | | | | |
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other Comprehensive
Income (Loss) | | Retained Earnings
(Accumulated
Deficit) | | | | Total Stockholders’ Equity |
| | Shares Issued | | Par Value | | | | | | Shares | | Cost | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2018 | 62,163 | | | $ | 6 | | | | | | | 3,770 | | | $ | (33,237) | | | $ | 343,536 | | | $ | 31 | | | $ | (108,323) | | | | | $ | 202,013 | |
| Net loss | — | | | — | | | | | | | — | | | — | | | — | | | — | | | (33,915) | | | | | (33,915) | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2019 | 63,657 | | | $ | 6 | | | | | | | 4,145 | | | $ | (33,484) | | | $ | 347,564 | | | $ | 181 | | | $ | (142,238) | | | | | $ | 172,029 | |
| Net loss | — | | | — | | | | | | | — | | | — | | | — | | | — | | | (136,450) | | | | | (136,450) | |
| Foreign currency translation adjustment | — | | | — | | | | | | | — | | | — | | | — | | | (200) | | | — | | | | | (200) | |
| Sale of common stock | 200 | | | — | | | | | | | — | | | — | | | 339 | | | — | | | — | | | | | 339 | |
| Stock issued under employee stock purchase plan | — | | | — | | | | | | | (78) | | | — | | | 123 | | | — | | | — | | | | | 123 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Restricted stock awards granted | 3,115 | | | 1 | | | | | | | — | | | — | | | 2,322 | | | — | | | — | | | | | 2,323 | |
| Restricted stock forfeited | — | | | — | | | | | | | 1,302 | | | — | | | — | | | — | | | — | | | | | — | |
| Restricted stock units granted | 86 | | | — | | | | | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Stock surrendered for exercise of stock options | — | | | — | | | | | | | 66 | | | — | | | — | | | — | | | — | | | | | — | |
| Treasury stock purchased | — | | | — | | | | | | | 146 | | | (253) | | | — | | | — | | | — | | | | | (253) | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Stock issued in JP3 acquisition | 11,500 | | | 1 | | | | | | | — | | | — | | | 8,537 | | | — | | | — | | | | | 8,538 | |
| Stock options granted | — | | | — | | | | | | | — | | | — | | | 722 | | | — | | | — | | | | | 722 | |
| Stock options exercised | 111 | | | — | | | | | | | — | | | (114) | | | 114 | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2020 | 78,669 | | | $ | 8 | | | | | | | 5,581 | | | $ | (33,851) | | | $ | 359,721 | | | $ | (19) | | | $ | (278,688) | | | | | $ | 47,171 | |
SeeThe accompanying Notes toare an integral part of these Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) | | | | Years ended December 31, | | Years ended December 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | |
| Net loss | $ | (136,450) | | | $ | (33,915) | | | |
| Income from discontinued operations, net of tax | 0 | | | 42,158 | | | |
| Loss from continuing operations | (136,450) | | | (76,073) | | | |
| Adjustments to reconcile loss from continuing operations to net cash used in operating activities: | | | |
| | Net loss | | Net loss | $ | (30,526) | | | $ | (136,450) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | 2,716 | | | 0 | | | Change in fair value of contingent consideration | (808) | | | 2,716 | |
| Depreciation and amortization | Depreciation and amortization | 3,412 | | | 8,465 | | | Depreciation and amortization | 1,011 | | | 3,412 | |
| Amortization of deferred financing costs | 0 | | | 1,428 | | | |
| | Provision for doubtful accounts | 652 | | | 512 | | | |
| Provision for excess and obsolete inventory | 12,261 | | | 5,659 | | | |
| | Impairment of fixed assets | 30,178 | | | 0 | | | |
| (Gain) loss on sale of assets | (561) | | | 1,450 | | | |
| Provision for doubtful accounts, net of recoveries | | Provision for doubtful accounts, net of recoveries | (127) | | | 652 | |
| Inventory purchase commitment provision and settlement | | Inventory purchase commitment provision and settlement | (7,633) | | | 9,402 | |
| Provision for excess and obsolete inventory | | Provision for excess and obsolete inventory | 623 | | | 12,261 | |
| Impairment of goodwill | Impairment of goodwill | 11,706 | | | 0 | | | Impairment of goodwill | 8,092 | | | 11,706 | |
| Impairment of right-of-use assets | Impairment of right-of-use assets | 7,434 | | | 0 | | | Impairment of right-of-use assets | — | | | 7,434 | |
| Impairment of property and equipment | | Impairment of property and equipment | — | | | 30,178 | |
| Impairment of intangible assets | | Impairment of intangible assets | — | | | 32,363 | |
| Gain on sale of assets | | Gain on sale of assets | (94) | | | (561) | |
| | Impairment of intangible assets | 32,363 | | | 0 | | | |
| Non-cash lease expense | | Non-cash lease expense | 279 | | | 356 | |
| Stock compensation expense | Stock compensation expense | 3,044 | | | 4,235 | | | Stock compensation expense | 3,757 | | | 3,044 | |
| Deferred income tax (benefit) provision | (187) | | | 18,307 | | | |
| | Reduction in tax benefit related to stock-based awards | 0 | | | 24 | | | |
| Non-cash lease expense | 356 | | | 740 | | | |
| Deferred income tax benefit | | Deferred income tax benefit | (56) | | | (187) | |
| Paycheck protection plan loan forgiveness | | Paycheck protection plan loan forgiveness | (881) | | | — | |
| Changes in current assets and liabilities: | Changes in current assets and liabilities: | | | Changes in current assets and liabilities: | |
| | Accounts receivable, net | 3,556 | | | 20,993 | | | |
| | Accounts receivable | | Accounts receivable | (1,406) | | | 3,556 | |
| Inventories | Inventories | 3,955 | | | (727) | | | Inventories | 1,760 | | | 3,955 | |
| Income taxes receivable | Income taxes receivable | 182 | | | 2,546 | | | Income taxes receivable | 381 | | | 182 | |
| Other current assets | Other current assets | 1,026 | | | 2,579 | | | Other current assets | (613) | | | 1,026 | |
| Other long-term assets | Other long-term assets | (16) | | | 3,286 | | | Other long-term assets | 4 | | | (16) | |
| Accounts payable | Accounts payable | (12,323) | | | 1,131 | | | Accounts payable | 1,829 | | | (12,323) | |
| Accrued liabilities | Accrued liabilities | (11,260) | | | 908 | | | Accrued liabilities | (1,463) | | | (20,662) | |
| Income taxes payable | Income taxes payable | 84 | | | 0 | | | Income taxes payable | (17) | | | 84 | |
| Interest payable | Interest payable | 34 | | | (8) | | | Interest payable | 48 | | | 34 | |
| | Net cash used in operating activities | Net cash used in operating activities | (47,838) | | | (4,545) | | | Net cash used in operating activities | (25,840) | | | (47,838) | |
| Cash flows from investing activities: | Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | |
| Capital expenditures | Capital expenditures | (1,425) | | | (2,411) | | | Capital expenditures | (39) | | | (1,425) | |
| Proceeds from sale of businesses | 9,907 | | | 155,498 | | | |
| Proceeds from sale of business | | Proceeds from sale of business | — | | | 9,907 | |
| Proceeds from sale of assets | Proceeds from sale of assets | 109 | | | 240 | | | Proceeds from sale of assets | 151 | | | 109 | |
| Payments for acquisitions, net of cash acquired | (26,284) | | | 0 | | | |
| | Purchase of patents and other intangible assets | (8) | | | (614) | | | |
| Net cash (used in) provided by investing activities | (17,701) | | | 152,713 | | | |
| Cash flows from financing activities: | | | | | |
| Purchase of JP3, net of cash acquired | | Purchase of JP3, net of cash acquired | — | | | (26,284) | |
| | Borrowings on revolving credit facility | 0 | | | 42,984 | | | |
| Repayments on revolving credit facility | 0 | | | (92,715) | | | |
| Payment for contingent consideration | (1,200) | | | 0 | | | |
| Proceeds from Paycheck Protection Program loan | 4,788 | | | 0 | | | |
| | Payments for finance leases | (70) | | | (51) | | | |
| | Purchase of treasury stock | (253) | | | (247) | | | |
| | Proceeds from sale of common stock | 462 | | | 35 | | | |
| Abandonment of patents and other intangible assets | | Abandonment of patents and other intangible assets | — | | | (8) | |
| Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 112 | | | (17,701) | |
| Cash flows from financing activities: | | Cash flows from financing activities: | | | |
| | Net cash provided by (used in) financing activities | 3,727 | | | (49,994) | | | |
| Discontinued operations: | | | | | |
| Net cash used in operating activities | 0 | | | (322) | | | |
| Net cash provided by investing activities | 0 | | | 337 | | | |
| Net cash flows provided by discontinued operations | 0 | | | 15 | | | |
| | Payment for contingent consideration | | Payment for contingent consideration | — | | | (1,200) | |
| Proceeds from paycheck protection plan loan | | Proceeds from paycheck protection plan loan | — | | | 4,788 | |
| Payments to tax authorities for shares withheld from employees | | Payments to tax authorities for shares withheld from employees | (390) | | | (253) | |
| Proceeds from issuance of stock | | Proceeds from issuance of stock | 80 | | | 462 | |
| Payments for finance leases | | Payments for finance leases | (62) | | | (70) | |
| | Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (372) | | | 3,727 | |
| | Effect of changes in exchange rates on cash and cash equivalents | Effect of changes in exchange rates on cash and cash equivalents | (102) | | | 5 | | | Effect of changes in exchange rates on cash and cash equivalents | 100 | | | (102) | |
| Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | (61,914) | | | 98,194 | | | Net change in cash, cash equivalents and restricted cash | (26,000) | | | (61,914) | |
| Cash, cash equivalents at beginning of period | 100,575 | | | 3,044 | | | |
| Restricted cash at the beginning of the period | 663 | | | 663 | | | |
| Cash and cash equivalents at the beginning of period | | Cash and cash equivalents at the beginning of period | 38,660 | | | 100,575 | |
| Restricted cash at the beginning of period | | Restricted cash at the beginning of period | 664 | | | 663 | |
| Cash and cash equivalents and restricted cash at beginning of period | Cash and cash equivalents and restricted cash at beginning of period | 101,238 | | | 3,707 | | | Cash and cash equivalents and restricted cash at beginning of period | 39,324 | | | 101,238 | |
| Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | 38,660 | | | 100,575 | | | Cash and cash equivalents at end of period | 11,534 | | | 38,660 | |
| Restricted cash at the end of period | Restricted cash at the end of period | 664 | | | 663 | | | Restricted cash at the end of period | 1,790 | | | 664 | |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 39,324 | | | $ | 101,238 | | | Cash, cash equivalents and restricted cash at end of period | $ | 13,324 | | | $ | 39,324 | |
SeeThe accompanying Notes toare an integral part of these Consolidated Financial Statements.
39
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2021 and 2020
(In thousands of U.S. dollars and shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| Balance, December 31, 2020 | 78,669 | | | $ | 8 | | | 5,581 | | | $ | (33,851) | | | $ | 359,721 | | | $ | (19) | | | $ | (278,688) | | | | | $ | 47,171 | |
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| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (30,526) | | | | | (30,526) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 100 | | | — | | | | | 100 | |
| | | | | | | | | | | | | | | | | |
| Stock issued under employee stock purchase plan | — | | | — | | | (136) | | | — | | | 80 | | | — | | | — | | | | | 80 | |
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| Restricted stock granted | 1,702 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Restricted stock forfeited | (284) | | | | | 422 | | | — | | | — | | | — | | | — | | | | | — | |
| Restricted units vested | 86 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Stock compensation expense | — | | | — | | | — | | | — | | | 3,757 | | | — | | | — | | | | | 3,757 | |
| Shares withheld to cover taxes | (76) | | | — | | | 155 | | | (273) | | | (150) | | | — | | | — | | | | | (423) | |
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Other (1) | (613) | | | — | | | — | | | 24 | | | 9 | | | — | | | — | | | | | 33 | |
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| Balance, December 31, 2021 | 79,484 | | | $ | 8 | | | 6,022 | | | $ | (34,100) | | | $ | 363,417 | | | $ | 81 | | | $ | (309,214) | | | | | $ | 20,192 | |
(1) See Note 16, “Stockholders’ Equity” for further discussion.
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| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| Balance, December 31, 2019 | 63,657 | | | $ | 6 | | | 4,145 | | | $ | (33,484) | | | $ | 347,564 | | | $ | 181 | | | $ | (142,238) | | | | | $ | 172,029 | |
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| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (136,450) | | | | | (136,450) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (200) | | | — | | | | | (200) | |
| Sale of common stock, net of issuance cost | 200 | | | — | | | — | | | — | | | 339 | | | — | | | — | | | | | 339 | |
| Stock issued under employee stock purchase plan | | | — | | | (78) | | | — | | | 123 | | | — | | | — | | | | | 123 | |
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| Restricted stock granted | 3,201 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | | | 1 | |
| Restricted stock forfeited | — | | | — | | | 1,302 | | | — | | | — | | | — | | | — | | | | | — | |
| Treasury stock purchased | — | | | — | | | 146 | | | (253) | | | — | | | — | | | — | | | | | (253) | |
| Stock compensation expense | — | | | — | | | — | | | — | | | 3,044 | | | — | | | — | | | | | 3,044 | |
| Excess tax benefit related to share-based awards | — | | | — | | | 66 | | | — | | | — | | | — | | | — | | | | | — | |
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| Stock issued in JP3 acquisition | 11,500 | | | 1 | | | — | | | — | | | 8,537 | | | — | | | — | | | | | 8,538 | |
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| Stock options exercised | 111 | | | — | | | — | | | (114) | | | 114 | | | — | | | — | | | | | — | |
| Balance, December 31, 2020 | 78,669 | | | $ | 8 | | | 5,581 | | | $ | (33,851) | | | $ | 359,721 | | | $ | (19) | | | $ | (278,688) | | | | | $ | 47,171 | |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
40
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Operations
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is acreates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, that servesFlotek helps customers inacross industrial, commercial, and consumer markets.markets improve their environmental performance.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that enhance the profitability of hydrocarbon producers and cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s Data Analytics (“DA”) segment enables users to maximize the value of their hydrocarbon associated processes by providing analytics associated with thetheir hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.profitability, while reducing their carbon footprint, energy consumption and emissions.
The Company formed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”). The Company’s 2 operating segments, CT and DA, are both supported by its continuing Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 22,21, “Business Segment, Geographic and Major Customer Information.” For further discussion of the JP3 acquisition, see Note 3, “Business Combination.Acquisition.”
The Company was initially incorporated under the laws of the Province of British Columbia in 1985. In October 2001, the Company changed its corporate domicile to the stateState of Delaware.
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic. The pandemic negatively impacted the U.S. and global economy, disrupted domestic and international oil and gas markets, and increased volatility in financial markets. These effects materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. The Company’s primary markets in the U.S. are particularly subject to the impacts on the oil and gas industry. As a result, the Company recorded an impairment to property, plant and equipment; intangible assets; and operating right-of-use assets during the first quarter of 2020. The extended impact of COVID-19 and its effect on the oil and gas industry contributed to additional impairment charges to goodwill and intangible assets in the third quarter of 2020. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” and Note 9, “Goodwill.” In addition, the Company increased the provision of excess and obsolete inventory as discussed in Note 6, “Inventories.” Future developments and effects are highly uncertain and cannot be predicted, including the scope and duration of the pandemic. This uncertainty could have a material impact on accounting estimates and assumptions used in our consolidated financial statements.
Sources and Uses of Liquidity
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent in large part, on the Company’s operating cash flows, the monetization of non-core assets, and the availability of and access to equitydebt and debtequity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. While we believe that our cash and liquid assets, including the actions taken subsequent to year end discussed below and in Note 22, “Subsequent Events”, will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, uncertainty surrounding the long term stability and strength of the oil and gas markets or reduced spending by our customers could have a further negative impact on our liquidity.
On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million aggregate of convertible notes that resulted in net cash proceeds of approximately $19.5 million. Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million of convertible notes. 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 their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC. 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 during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022.
The Company also committed to plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas. These facilities were classified as held for sale as of December 31, 2021. Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $4.2 million of cash proceeds. The sale is expected to close in April 2022.
Based on our cash and liquid assets, including the transactions subsequent to year end described above and in Note 22 Subsequent Events, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery in of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.
Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth,due. However, the Company cannot guarantee thea sufficient level of cash flows in the future. In the eventThe consolidated financial statements have been prepared assuming that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligationsCompany will continue as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:
•Sale of non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sale of excess inventory and/or raw materials;a going concern.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Entry into a borrowing facility with one or more lenders;
•
Raising equity either in the public markets or via a private placement offering;
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash; and
•Reducing professional advisory fees and headcount.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms or at all.
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 subsidiaries. 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 (“CICT”) segment as held for sale based on management’s intention to sell this business, which occurred in February 2019. The results of operations of this segment are presented as “Income from discontinued operations” in the consolidated statements of operations, and the related cash flows of this segment have been reclassified to discontinued operations for all periods presented. For further discussion, see Note 4, “Discontinued Operations.”it controls.
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.
Restricted Cash
The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution.institution and as of December 31, 2021 an amount held in escrow of $1.75 million for amounts due under the terms of the legal settlement discussed in Note 15, Commitments and Contingencies.
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 recovery of accounts receivable previously written off is recorded as a reduction to the provision for doubtful accounts charged to operating expense.
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.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):
| | | | Years ended December 31, | | Years ended December 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| Balance, beginning of year | Balance, beginning of year | $ | 1,527 | | | $ | 1,190 | | | Balance, beginning of year | $ | 1,316 | | | $ | 1,527 | | |
| Charges to provision for doubtful accounts, net of recoveries | Charges to provision for doubtful accounts, net of recoveries | 652 | | | 512 | | | Charges to provision for doubtful accounts, net of recoveries | (127) | | | 652 | | |
| Write-offs | Write-offs | (863) | | | (175) | | | Write-offs | (530) | | | (863) | | |
| Balance, end of year | Balance, end of year | $ | 1,316 | | | $ | 1,527 | | | Balance, end of year | $ | 659 | | | $ | 1,316 | | |
Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of cost or market determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
materials and finished goods inventories exceed 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 marketnet realizable value if those amounts are determined to be less than cost. See Note 6 “Inventories” for discussionWrite-downs or write-offs of the inventory write-down recorded in 2020.are charged to cost of goods sold.
Property and Equipmentequipment
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 right-of-use assets (“ROU”), 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 |
| Land improvements | 20 years |
| Transportation equipment | 2-5 years |
| Computer equipment and software | 3-7 years |
Property and equipment, including ROU assets, are reviewed for impairment on a quarterly basis or whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. IndicativeIf events or changes in 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 whenindicate the carrying amount of an asset exceedsor asset group may not be recoverable, the estimatedCompany first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, and its eventual disposition.the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset’sasset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third party independent appraisals, as considered necessary.
Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell.ell and depreciation is ceased. 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.
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,on October 1 or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include an adverse change in
When performing the business climate or a change inannual impairment test, the assessment of future operations of a reporting unit.
The Company assesseshas the option to assess whether a goodwill impairment exists using botheither a qualitative andor quantitative assessments.assessment. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 eachthe 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. Under the income approach, the fair value of the reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts, updated for recent events, to estimate future cash flows with cash flows beyond the specific operating plans estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on our most recent views of the long-term outlook for the reporting unit. We derive our discount rate using a capital asset pricing model and analyzing published rates for industries relevant to the reporting unit to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainties inherent in the respective business and in our
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
internally developed forecasts. 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 included customer relationships, technology and know-how, 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. 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. The Company allocates the fair value of purchase consideration to the assets acquired, liabilities 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 14,13, “Fair Value Measurements.”
Revenue Recognition
The Company recognizes revenue 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. See Note 5, “Revenue from Contracts with Customers,” for further discussion on revenue.
The Company recognizes revenue based on a 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.
The Company applies several practical expedients including:
•Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less.
•The majority of the Company’s services are short-term in nature with a contract term of one year or less. As a result the Company does not disclose the transaction price allocated to remaining performance obligations.
•The Company’s payment terms are short-term in nature with settlements of one year or less. As a result the Company does not adjust the promised amount of consideration for the effects of a significant financing component.
•In most service contracts, the Company has the right to consideration from a customer in an accounting policy election,amount that corresponds directly with the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.
•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. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.
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.goods sold on our consolidated statement of operations.
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)Loss
Comprehensive income (loss)loss encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss)loss includes consolidated net income (loss)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.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 in the period that includes the enactment date.
A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Except for a state jurisdiction, the Company maintains a full valuation allowance on its deferred tax assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has performed an evaluation and concluded that there are no significant uncertainrecognizes the effect of income tax positions requiringonly if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the Company’s consolidated financial statements.period in which the change in judgment occurs.
The Company’s policy is to record interest and penalties related to incomeuncertain tax matterspositions as income tax expense.
Stock-Based Compensation
Stock-based compensation expense, for stock-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,assets; goodwill, property and equipment and intangible asset impairment assessments,assessments; allocation of purchase price in business combinations,combinations; stock-based compensation expense,expense; and valuation allowances for accounts receivable, inventories, and deferred tax assets.
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 in the consolidated statement of operations and consolidated statement of stockholders’ equity have been reclassified to conform to the current year presentation.presentation.. In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross profit (loss) and eliminated the reporting of operating expenses (excluding depreciation and amortization) on the consolidated statements of operations to conform to customary industry reporting practices. In connection with this change in presentation, the Company reclassified selling costs of $6.5 million to selling, general and administrative expenses which were previously reported in operating expenses for the year ended December 31, 2020. The reclassifications and change in presentation of the statements of operations did not impact previously recorded net loss and stockholders’ equity.
Business Combinations
The Company includes the results of operations of its acquisitions in its consolidated results, prospectively from the date of acquisition. The Company allocates the fair value of purchase consideration to the assets acquired, liabilities assumed and any non-controlling 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 non-controlling 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.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”). We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.
(a) Recently Adopted Guidance
Effective January 1, 2020, the Company adopted Accounting Standards Update (“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 the FASB’s Accounting Standards Codification (“ASC”) 820. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted in any interim period. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
(b) New Accounting Standards Issued But Not Adopted as of December 31, 20202021
The FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard removes specific exceptions to the general principles in Topic 740. The pronouncement is effective for fiscal years beginning after December 15, 2021,2020, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued. The Company is currently evaluatingevaluated the impact of this standard and determined that there is no impact on the consolidated financial statements and related disclosures.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.
The FASB issued ASU No. 2021-10, “Government Assistance (Topic 832); Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The pronouncement is effective for fiscals years beginning after December 15, 2021. The Company is currently evaluating the impact of this standard on the consolidated financial statements and related disclosures.
Note 3 — Business CombinationAcquisition
During the second quarter ofOn May 18, 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. The transaction was valued at approximately $36.6 million as of the transaction closing date, comprised of $25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $8.5 million, net of a discount for marketability due to a lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing on May 18, 2020 was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million. Additionally, the Company was subject to contingent consideration with an estimated fair value of $1.2 million at acquisition date for 2 potential earn-out provisions totaling up to $5.0 million based on certain stock performance targets. The first and second earn-out provisions are payableoccur if the ten-day volume-weighted average share price equals or exceeds $2 per share and $3 per share, respectively, before May 18, 2025. See Note 13, “Fair Value Measurements,” for additional information on the current estimated fair value of the contingent consideration.
The following table summarizes the fair value of JP3’s assets acquired as of the closing date of May 18, 2020 (in thousands):
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
| Tradenames and trademarks | | $ | 1,100 | |
| Technology and know-how | | 5,000 | |
| Customer lists | | 6,800 | |
| Inventories | | 7,100 | |
| Cash | | 604 | |
| Net working capital, net of cash and inventories | | (1,063) | |
| Fixed assets | | 426 | |
| Long-term debt assumed and other assets (liabilities) | | (893) | |
| Goodwill | | 17,522 | |
| Net assets acquired | | $ | 36,596 | |
The Company recorded transaction costs of $0.5 million for professional services including legal, accounting, and other professional or consulting fees in connection with the JP3 acquisition to the Company’s operating expenses (excluding depreciation and amortization) in the consolidated statements of operations during the second quarter of 2020.
Pro forma information for JP3 is not provided as the impact is not considered material.
During the third quarter of 2020, the Company made certain measurement period adjustments to inventory, resulting in an increase of goodwill of $2.3 million. See Note 6, “Inventories.”
As discussed in Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” during the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other, and completed an impairment analysis at the DA reporting unit level. During the third quarter of 2020, the Company recognized a finite-lived intangible assets impairment charge of $12.5 million in the DA reporting unit, which resulted from lower performance than expected by the reporting unit. The extended impact of COVID-19 and subsequent decline in oil and gas demand further contributed to the impairment charge. As a result of these factors, the Company concluded that sufficient indicators existed to require an interim quantitative assessment of goodwill for that reporting unit as of September 30, 2020. The fair value of the reporting unit was estimated based on an analysis of the present value of future discounted cash flows, and the Company recognized a goodwill
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment charge of $11.7 million. 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.
During the third quarter of 2020, the first stock performance target was achieved. In October 2020, the Company paid $2.5 million into escrow in accordance with the terms of the JP3 Membership Interests Purchase Agreement to partially settle the earn-out payment that had been recorded as an accrued liability at September 30, 2020. At December 31, 2020, the estimated fair value of the second stock performance earn-out provision was $1.4 million, which was recorded as a contingent liability in accrued liabilities.
As the achievement of earn-out provisions and changes in fair value estimates are not acquisition adjustments, the Company recorded $2.7 million of expense for achievement of the first stock performance target and the increase in the fair value of the contingent consideration for the second earn-out provision in operating expenses for the year ended December 31, 2020.
Note 4 — Discontinued Operations
During the fourth quarter of 2018, the Company initiated and began executing a strategic plan to sell its CICT segment. The Company met all of the criteria to classify the CICT segment as held for sale in the fourth quarter 2018, and classified the assets, liabilities and results of operations for this segment as “Discontinued Operations” for all periods.
On January 10, 2019, the Company entered into a Share Purchase Agreement with Archer-Daniels-Midland Company (“ADM”) for the sale of all of the shares representing membership interests in its wholly-owned subsidiary, Florida Chemical Company, LLC (“FCC”), which represented the CICT segment.
Effective February 28, 2019, the Company completed the sale of FCC to ADM for $175.0 million in cash consideration, subject to post-closing working capital adjustments and potential indemnification claims by ADM. ADM placed $17.5 million in escrow for these items, which were released over a period of time through the second quarter of 2020. The escrow balance included in other current assets was 0 and $9.9 million at December 31, 2020 and 2019, respectively. Pursuant to the terms of the Share Purchase Agreement, Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, entered into a supply agreement in which FCC would supply terpene at specified prices for specified quantities.
As of December 31, 2019, the Company concluded that the original long-term supply agreement met the definition of a loss contract. As such, the Company recognized a current liability and loss of $15.8 million as of December 31, 2019. The loss was capped by the price paid for the terpene supply agreement amendment, executed in February 2020, which aligned purchase commitments to expected usage for blended products as of December 31, 2019.
Pursuant to the post-closing working capital dispute resolution procedures set forth in the Share Purchase Agreement, the Company and ADM engaged a neutral third-party auditor to help reach agreement on the final post-closing working capital adjustment. In February 2020, the third-party auditor ruled in favor of awarding ADM the entire disputed amount of $4.1 million. As a result, the working capital adjustment escrow balance was released to ADM and a corresponding reduction was made to the gain on sale of business as of December 31, 2019.
The following summarized financial information has been reported as Discontinued Operations for the years ended December 31 (in thousands):
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | |
| Consumer and Industrial Chemistry Technologies |
| 2020 | | 2019 | | |
| Discontinued operations: | | | | | |
| Revenue | $ | 0 | | | $ | 11,031 | | | |
| Operating expenses | 0 | | | (11,572) | | | |
| Depreciation and amortization | 0 | | | 0 | | | |
| Research and development | 0 | | | (69) | | | |
| | | | | |
| | | | | |
| (Loss) income from operations | 0 | | | (610) | | | |
| Other income | 0 | | | 35 | | | |
| Gain on sale of businesses | 0 | | | 65,417 | | | |
| | | | | |
| Income before income taxes | 0 | | | 64,842 | | | |
| Income tax expense | 0 | | | (22,684) | | | |
| Net income from discontinued operations | $ | 0 | | | $ | 42,158 | | | |
| | | | | |
| | | | | |
| | | | | |
Note 54 — Revenue from Contracts with Customers
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled 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.
The majority of the products from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized over time. The Company bills sales on a monthly basis with payment terms customarily 30-4530-60 days for domestic and 6090-120 days for international 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). Product sales accounted for 95% or more of total revenue for the years ended December 31, 2020 and 2019.
The Company differentiates revenue and based on whether the source of revenue is attributable to productsproduct sales (point-in-time revenue recognition) or services. service revenue (over-time revenue recognition).
Revenue disaggregated by revenue source is as follows (in thousands):
| | | | Years ended December 31, | | | Years ended December 31, |
| | | 2020 | | 2019 | | | | 2021 | | 2020 |
| Revenue: | Revenue: | | | | | Revenue: | | | | |
Products | Products | $ | 50,478 | | | $ | 115,683 | | | Products | | $ | 40,265 | | | $ | 50,478 | |
| | Services | Services | 2,663 | | | 3,670 | | | Services | | 3,003 | | | 2,663 | |
| | $ | 53,141 | | | $ | 119,353 | | | | | $ | 43,268 | | | $ | 53,141 | |
| |
(1) Product revenues for 2021 include sales to a related party as described in Note 20, “Related Party Transactions.”
Arrangements with Multiple Performance Obligations
The CT and DA segments primarily sell chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, both segments offer various services associated to products sold which includes field services, installation, maintenance, and other functions. Service revenue is recognized on an over time basis for CT asFor DA, services are performed as the customer is simultaneously benefiting as the Company performs. Forrecognized
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DA, services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. DA has additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, DA may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Subscription-type arrangements were not a material revenue stream in the years ended December 31, 2021 and 2020.
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. Contract liabilitiesassets associated with incomplete performance obligations are not material.
Practical Expedients and Exemptions
The Company applies 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 corporate general 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 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 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 65 — Inventories
Inventories are as follows (in thousands):
| | | December 31, | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Raw materials | Raw materials | $ | 7,190 | | | $ | 4,339 | | Raw materials | $ | 5,610 | | | $ | 7,190 | |
| | Finished goods | Finished goods | 15,705 | | | 24,569 | | Finished goods | 13,985 | | | 15,705 | |
| Inventories | Inventories | 22,895 | | | 28,908 | | Inventories | 19,595 | | | 22,895 | |
| Less reserve for excess and obsolete inventory | Less reserve for excess and obsolete inventory | (11,058) | | | (5,698) | | Less reserve for excess and obsolete inventory | (10,141) | | | (11,058) | |
| Inventories, net | Inventories, net | $ | 11,837 | | | $ | 23,210 | | Inventories, net | $ | 9,454 | | | $ | 11,837 | |
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
| | | | | | | | | | | | | | Years ended December 31, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| Balance, beginning of year | Balance, beginning of year | $ | 5,698 | | | $ | 2,117 | | | Balance, beginning of year | $ | 11,058 | | | $ | 5,698 | | |
| Charged to provisions | Charged to provisions | 12,261 | | | 5,659 | | | Charged to provisions | 623 | | | 12,261 | | |
| Deductions for sales and disposals | Deductions for sales and disposals | (6,901) | | | (2,078) | | | Deductions for sales and disposals | (1,540) | | | (6,901) | | |
| Balance, end of the year | Balance, end of the year | $ | 11,058 | | | $ | 5,698 | | | Balance, end of the year | $ | 10,141 | | | $ | 11,058 | | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically reviewsprovisions recorded in the value of itemsyear ended December 31, 2021 were $0.6 million for the CT segment and nil for the DA segment. The provisions recorded 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.
The provision for excess and obsolete inventory includes charges ofthe year ended December 31, 2020 were $8.4 million for the CT segment and $3.9 million for the DA segment, offset by sales and disposals of $6.9 million, primarily related to terpene sales in 2020.
At December 31, 2020, the Company recognized an increase in the reserve for excess and obsolete inventory of $0.4 million due to terpene on hand exceeding anticipated usage. Also see Note 16, “Commitments and Contingencies,” for terpene purchase commitments at December 31, 2020. At December 31, 2019, the Company recorded a reserve for excess terpene of $4.4 million.
Note 76 — Property and Equipment
Property and equipment are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Land | $ | 2,415 | | | $ | 2,415 | |
| Land improvements | 867 | | | 2,025 | |
| Buildings and leasehold improvements | 6,364 | | | 38,741 | |
| Machinery and equipment | 7,760 | | | 27,694 | |
| | | |
| Furniture and fixtures | 649 | | | 1,671 | |
| Transportation equipment | 1,190 | | | 1,440 | |
| Computer equipment and software | 1,296 | | | 3,348 | |
| Property and equipment | 20,541 | | | 77,334 | |
| Less accumulated depreciation | (11,454) | | | (37,505) | |
| Property and equipment, net | $ | 9,087 | | | $ | 39,829 | |
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Land | $ | 886 | | | $ | 2,415 | |
| Land improvements | 520 | | | 867 | |
| Buildings and leasehold improvements | 5,473 | | | 6,364 | |
| Machinery and equipment | 6,843 | | | 7,760 | |
| | | |
| Furniture and fixtures | 620 | | | 649 | |
| Transportation equipment | 878 | | | 1,190 | |
| Computer equipment and software | 1,176 | | | 1,296 | |
| Property and equipment | 16,396 | | | 20,541 | |
| Less accumulated depreciation | (11,100) | | | (11,454) | |
| Property and equipment, net | $ | 5,296 | | | $ | 9,087 | |
Depreciation expense totaled $2.5$1.0 million and $6.5$2.5 million for the years ended December 31, 2021 and 2020, respectively.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the third quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas and 2019, respectively.its manufacturing facility in Waller, Texas, in their current condition and as a result the associated assets in the amount of $2.8 million are classified as held for sale as of December 31, 2021. Subsequent to December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility which is expected to close in April 2022. See further discussion in Note 22, Subsequent Events.
During the year ended December 31, 2020, the Company recorded an impairment of property and equipment assets totaling $30.2 million. No impairment was recognized during the year ended December 31, 2021. Refer to Note 10 — Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets.
Note 7 — Leases
In August 2021, the company entered into a five-year triple net operating lease agreement to lease its warehouse facility in Monahans, Texas, for $20,000 per month, and the tenant occupied the warehouse facility in September 2021. The Company will recognize rental income, including rent, taxes and insurance over the lease period. Rental income recognized during the year ended December 31, 2021 was $76,000 and was included in other income in the consolidated statement of operations.
In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $40,000 per month for sixty-four months. Rental income recognized during the year ended December 31, 2021 was $121,000 and was included in other income in the consolidated statement of operations.
During the first quarter of 2020, the Company recognized an impairment of property and equipment of $30.2 million. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” During the year ended December 31, 2019, 0 impairments were recognized related to property and equipment.
Note 8 — Leases
The Company has leases for corporate offices, research and development facilities, warehouses, sales offices and equipment. The leases have remaining lease terms ofone to fifteen years, some of which include options to extend the leases for up to ten years. The Company’s largest lease is for the Global Research and Innovation Center (“GRIC”). The lease was entered into on July 12, 2015, with a fifteen-year term and an option to renew for an additional seven years. The rent payments on the GRIC lease escalate each year until the end of the term.
Operating lease right-of-use assets and corresponding operating lease liabilities, net of deferred rent, represent the present value of future lease payments under operating leases with terms of greater than twelve months. Leases with an initial expected term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the expected lease term. The discount rate used upon adoption of ASC 842, “Leases,” in the calculation was the incremental borrowing rate on the revolving credit facility in 2019.
During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the GRICGlobal Research and Innovation Center (“GRIC”) during the second quarter of 2020. In addition, the operating lease liability and corresponding operating lease right-of-use (“ROU”) assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC. The remeasurement resulted in adjustmentsreductions to lease liabilities and right-of-useROU assets totaling of $6.2 million at Marchduring the year ended December 31, 2020.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, during the first quarter ofyear ended December 31 2020, the Company recorded an impairment of the right-of-useROU assets totaling $7.4 million. SeeNo impairment was recognized during the year ended December 31, 2021. Refer to Note 11,10, “Impairment of Fixed, Long-livedProperty and Equipment, Operating Lease Right-of-use Assets and Intangible Assets.”
During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office in exchange for a one-time payment of $1.0 million and moved all corporate employees to the GRIC facility effective as of June 29, 2020. As a result of terminating the corporate headquarters office lease and making the one-time payment, the Company recorded a gain on lease termination of $0.6 million.Assets”.
The components of lease expense and supplemental cash flow information are as follows (in thousands):
| | | | | | | | | | | | | | | |
| For the years ended | | |
| December 31, |
| 2020 | | 2019 |
| | | | | | | |
| Operating lease expense | $ | 1,370 | | | | | $ | 2,609 | | | |
| Finance lease expense: | | | | | | | |
| Amortization of right-of-use assets | 17 | | | | | 1,237 | | | |
| Interest on lease liabilities | 18 | | | | | 10 | | | |
| Total finance lease expense | 35 | | | | | 1,247 | | | |
| Short-term lease expense | 202 | | | | | 123 | | | |
| | | | | | | |
| Total lease expense | $ | 1,607 | | | | | $ | 3,979 | | | |
| | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows from operating leases | $ | 2,884 | | | | | $ | 2,336 | | | |
| Operating cash flows from finance leases | 18 | | | | | 10 | | | |
| Financing cash flows from finance leases | 70 | | | | | 51 | | | |
| | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | 2021 | | 2020 |
| Operating lease expense | | | | | $ | 797 | | | $ | 1,370 | |
| Finance lease expense: | | | | | | | |
| Amortization of right-of-use assets | | | | | 15 | | | 17 | |
| Interest on lease liabilities | | | | | 12 | | | 18 | |
| Total finance lease expense | | | | | 27 | | | 35 | |
| Short-term lease expense | | | | | 267 | | | 202 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total lease expense | | | | | $ | 1,091 | | | $ | 1,607 | |
| | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows from operating leases | | | | | $ | 1,107 | | | $ | 2,884 | |
| Operating cash flows from finance leases | | | | | 62 | | | 18 | |
| Financing cash flows from finance leases | | | | | 8 | | | 70 | |
Maturities of lease liabilities are as follows (in thousands):
| | | | | | | | | | | | | | |
| Years ending December 31, | | Operating Leases | | Finance Leases |
| | | |
| 2021 | | $ | 1,367 | | | $ | 69 | |
| 2022 | | 1,289 | | | 46 | |
| 2023 | | 1,317 | | | 39 | |
| 2024 | | 1,347 | | | 23 | |
| 2025 | | 1,347 | | | 0 | |
| Thereafter | | 6,865 | | | 0 | |
| Total lease payments | | 13,532 | | | 177 | |
| Less: Interest | | (4,548) | | | (21) | |
| Present value of lease liabilities | | $ | 8,984 | | | $ | 156 | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease liabilities as of December 31,2021 are as follows (in thousands):
| | | | | | | | | | | | | | |
| Years ending December 31, | | Operating Leases | | Finance Leases |
| 2022 | $ | 1,254 | | | $ | 47 | |
| 2023 | | 1,318 | | | 39 | |
| 2024 | | 1,348 | | | 23 | |
| 2025 | | 1,375 | | | 0 |
| 2026 | | 1,423 | | | — | |
| Thereafter | | 5,453 | | | — | |
| Total lease payments | | $ | 12,171 | | | $ | 109 | |
| Less: Interest | | (3,790) | | | (15) | |
| Present value of lease liabilities | | $ | 8,381 | | | $ | 94 | |
Supplemental balance sheet information related to leases is as follows for the years ended December 31 (in thousands):
| | | 2020 | | 2019 | | | December 31, 2021 | | December 31, 2020 | |
| Operating Leases | Operating Leases | | | | | Operating Leases | | | | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 2,320 | | | $ | 16,388 | | | Operating lease right-of-use assets | $ | 2,041 | | | $ | 2,320 | | |
| | Current portion of operating lease liabilities | Current portion of operating lease liabilities | $ | 636 | | | $ | 486 | | | Current portion of operating lease liabilities | $ | 602 | | | $ | 636 | | |
| Long-term operating lease liabilities | Long-term operating lease liabilities | 8,348 | | | 16,973 | | | Long-term operating lease liabilities | 7,779 | | | 8,348 | | |
| Total operating lease liabilities | Total operating lease liabilities | $ | 8,984 | | | $ | 17,459 | | | Total operating lease liabilities | $ | 8,381 | | | $ | 8,984 | | |
| | Finance Leases | Finance Leases | | | Finance Leases | | |
| Property and equipment | Property and equipment | $ | 147 | | | $ | 293 | | | Property and equipment | $ | 147 | | | $ | 147 | | |
| Accumulated depreciation | Accumulated depreciation | (26) | | | (28) | | | Accumulated depreciation | (33) | | | (26) | | |
| Property and equipment, net | Property and equipment, net | $ | 121 | | | $ | 265 | | | Property and equipment, net | $ | 114 | | | $ | 121 | | |
| | Current portion of finance lease liabilities | Current portion of finance lease liabilities | $ | 60 | | | $ | 55 | | | Current portion of finance lease liabilities | $ | 41 | | | $ | 60 | | |
| Long-term finance lease liabilities | Long-term finance lease liabilities | 96 | | | 158 | | | Long-term finance lease liabilities | 53 | | | 96 | | |
| Total finance lease liabilities | Total finance lease liabilities | $ | 156 | | | $ | 213 | | | Total finance lease liabilities | $ | 94 | | | $ | 156 | | |
| | Weighted Average Remaining Lease Term | Weighted Average Remaining Lease Term | | | Weighted Average Remaining Lease Term | | |
| Operating leases | Operating leases | 9.9 years | | 16.6 years | | Operating leases | 9.1 years | | 9.9 years | |
| Finance leases | Finance leases | 3.1 years | | 4.6 years | | Finance leases | 2.9 years | | 3.1 years | |
| | Weighted Average Discount Rate | Weighted Average Discount Rate | | | Weighted Average Discount Rate | | |
| Operating leases | Operating leases | 8.9 | % | | 8.9 | % | | Operating leases | 8.9 | % | | 8.9 | % | |
| Finance leases | Finance leases | 9.0 | % | | 9.0 | % | | Finance leases | 8.9 | % | | 9.0 | % | |
Rent expense under operating leases totaled $1.6 million for the year ended December 31, 2020, and $2.9 million for the year ended December 31, 2019.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9—8 - Goodwill
DuringAs discussed in Note 3 Business Acquisition, during the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. The Company identified the acquired company as the DA segment, a new operating segment. See Note 3, “Business Combination.”segment and reporting unit. The Company recorded goodwill of $17.5 million at the date of acquisition.
million. During the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other, and completed an impairment analysis at the DA reporting unit level. During the third quarter of 2020, the Company recognized a goodwill impairment charge of $11.7 million.
Also, during the third quarter of 2020, the Company made certain measurement period adjustments to inventory obtained in the JP3 acquisition, resulting in an increase of goodwill of $2.3 million. See Note 6, “Inventories.”
On October 1 of each fiscal year, we perform our annual goodwill impairment test for the DA reporting unit. We also test goodwill for impairment whenever events or circumstances occur which, in our judgment, could more likely than not reduce the fair value of the DA reporting unit below its carrying amount. Potential impairment indicators include, but are not limited to, (i) the results of our most recent annual impairment testing, in particular the magnitude of the excess of fair value over carrying value observed, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, and (iii) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any.
In performing the annual quantitative impairment test and consistent with our prior practice, we determined the fair value of the DA reporting unit using an income approach. Under the income approach, the fair value of the reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts, updated for recent events, to estimate future cash flows with cash flows beyond the specific operating plans estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on our most recent views of the long-term outlook for the DA reporting unit. Our internal forecasts include assumptions about future commodity pricing and expected demand for our goods and services. For the DA reporting unit, production growth is anticipated to be moderate in the near term as operators continue to show an abundance of fiscal discipline in development spending. Midstream thru-put volumes remain well below capacity levels. While we are expecting production growth to increase, it is likely to do so at a more conservative pace. These factors have precipitated our impairment decision for Data Analytics goodwill. Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in our forecasts. We derived our discount rate using a capital asset pricing model and analyzing published rates for industries relevant to the DA reporting unit to estimate the cost of equity financing. We used a discount rate that are commensurate with the risks and uncertainties inherent in the respective business and in our internally developed forecasts.
Based upon the results of our annual quantitative impairment test, we concluded that the carrying value of the DA reporting unit exceeded its estimated fair value as of the testing date, which resulted in goodwill impairment charges of $8.1 million. The goodwill impairment was calculated as the amount that the carrying value of the DA reporting unit, including any goodwill, exceeded its fair value. The carrying value of the DA reporting unit equals its fair value upon completion of the goodwill impairment test.
Changes in the carrying amount of goodwill are as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Activity during the year endedBalance at December 31, 2020:2019 | | $ | | | | | | | | — | |
| Acquisition goodwill recognized | $ | 17,522 | | | | | | | | | | | |
| Measurement period adjustment | | 2,276 | | | | | | | | | | | |
| Goodwill impairment recognized | | (11,706) | | | | | | | | | | | |
Goodwill balance, net of impairment | $ | 8,092 | | | | | | | | | | | |
| | | | | | | | | | | |
Balance at December 31, 2020:2020 | | | | | | | | | | | |
Goodwill | $ | 19,798 | | | | | | | | | | | |
Accumulated impairment losses | (11,706) | | | | | | | | | | | |
Goodwill balance, net of impairment | $ | 8,092 | |
| Goodwill impairment recognized | | (8,092) | |
| Balance at December 31, 2021 | | $ | | | | — | |
| | | | | | | | | | | |
| | December 31, 2021 | December 31, 2020 |
| Goodwill | | $ | 19,798 | | $ | 19,798 | |
| Accumulated impairment losses | | (19,798) | | (11,706) | |
| Goodwill balance, net of impairment | | $ | — | | $ | 8,092 | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 109 — Other Intangible Assets
Intangible assets acquired are amortized on a straight-line basis. Amortization of intangible assets acquired totaled $0.9 million and, $2.0 million for the years ended December 31, 2020 and 2019, respectively.
Amortization of deferred financing costs totaled $1.4 million for the year ended December 31, 2019. In March 2019, the Company repaid the outstanding balance of its credit facility. See Note 13, “Debt.”
During the year ended December 31, 2020, the Company recorded impairment charges of $32.4 million for other intangible assets, impairing all finite-lived intangible assets, including those acquired in the May 2020 acquisition of JP3.JP3 discussed in Note 3, Business Acquisition. See Note 11,10, “Impairment of Fixed, Long-livedProperty and Equipment, Operating Lease Right-of-use Assets, and Intangible Assets.”During
Amortization of intangible assets acquired totaled $0.9 million for the year ended December 31, 2019, 0 impairments were recognized related to other2020. There was no intangible assets.
Atamortization recorded during the year ended December 31, 2019, the net carrying value of other intangible assets was $20.3 million, as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | |
| | | |
| | | | | | Cost | | Accumulated
Amortization |
| Finite-lived intangible assets: | | | | | | | |
| Patents and technology | | | | | $ | 17,493 | | | $ | (6,715) | |
| Customer relationships | | | | | 15,367 | | | (6,013) | |
| | | | | | | |
| Trademarks and brand names | | | | | 1,351 | | | (1,160) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total finite-lived intangible assets | | | | | $ | 34,211 | | | $ | (13,888) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1110 — Impairment of Fixed, Long-livedProperty and Equipment, Operating Lease Right-of-use Assets and Intangible Assets
There were no impairments of property and equipment, operating lease right-of-use assets, and intangible assets during the year ended December 31, 2021.
The Company recorded impairment charges of fixed, long-livedproperty and equipment, operating lease right-of-use assets and intangible assets during the year ended December 31, 2020, as follows (in thousands):
| | | | | | | |
| | | |
| | | |
Property and equipment net | $ | 30,178 | | | |
| Operating lease right-of-use assets | 7,434 | | | |
Other Intangibles:Intangible Assets: | | | |
| Patents and technology | 14,733 | | | |
| Customer relationships | 15,796 | | | |
| Intangible assets in progress | 596 | | | |
| Trademarks and brand names | 1,238 | | | |
Total other intangiblesintangible assets | 32,363 | | | |
| | | |
Total impairment of fixed, long-lived and intangible assetscharges | $ | 69,975 | | | |
During the first quarter of 2020, with the priceonset of crude oil declined by over 50%, trading below $25 per barrel, causing athe global COVID-19 Pandemic and the significant disruption across the industry, which began tothe Company’s operations were negatively impactimpacted resulting in actual and projected declines in the Company’s revenues and results of operations. These declines of results of operations were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to COVID-19.the pandemic. Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020.2020, for the CT segment.
Using the income approach, the fair value of the reporting unitCT segment asset group was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of March 31, 2020, and an impairment loss of $57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and the related negative impact on oil and natural gas prices on projections of future cash flows.recorded.
During the second quarterManagement performed an interim impairment test as of September 30, 2020 the Company purchased JP3 and formedfor the DA segment. During the third quarter of 2020, revenue declined due to limited access to worksites, inability to install equipment, changes in the Company’s leadership, reduction of capital spending by clients due to COVID-19, inability to present to new customers and difficulty in working on the international marketing of the Verax analyzer. Further, the Companybusiness segment which was negatively impacted by reduced demand demand in the oil and gas sector because of reductions in capital spending across our customer base, lower than anticipated growth in the international market gained from the JP3 acquisition and the delayed start of the Company’s global sales business executive.acquisition.
Although the site lockdowns and extreme caution to prevent the spread of COVID-19 that began in the first half of 2020 began to ease during the third quarter, the segment saw very little of the expected repeat business and almost none from new customers due to frozen budgets. Secondly, COVID-19 restrictions adversely impacted the Company’s ability to physically gain on-site access to customers’ operations, including laboratory and testing facilities, which is a critical component to JP3’s multi-phased sales approach.
In consideration of these events, management reevaluated forecasted sales activity, expected margins and the long-term expectations of the DA segment for the third quarter of 2020. Based on these factors, the Company concluded a triggering event occurred in the DA segment, and accordingly, an interim quantitative impairment test was performed as of September 30, 2020.
Using the income approach, the fair value of the reporting unitDA segment asset group was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of September 30, 2020. The Company recognized an impairment loss of $12.5 million in the DA reporting unit finite-livedsegment asset group.
During the year ended December 31, 2020, all finite lived intangible assets which resulted primarily from lower performance than expected by the reporting unit. The extendedwere fully impaired.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impact of COVID-19 and declines in the oil and gas sector also contributed to the impairment loss. Also see Note 3, “Business Combination.” No impairments of fixed, long-lived and intangible assets occurred during the fourth quarter of 2020.
Note 1211 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):
| | | December 31, | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Loss on purchase commitments (Note 16) | $ | 9,402 | | | $ | 15,750 | | |
| Severance costs | Severance costs | 3,558 | | | 3,450 | | Severance costs | $ | 2,581 | | | $ | 3,558 | |
| Loss on purchase commitments (Note 15) | | Loss on purchase commitments (Note 15) | 1,750 | | | 9,402 | |
| Payroll and benefits | Payroll and benefits | 1,789 | | | 471 | | Payroll and benefits | 1,054 | | | 1,789 | |
| Legal costs | | Legal costs | 1,013 | | | 333 | |
| Contingent liability for earn-out provision | Contingent liability for earn-out provision | 1,416 | | | 0 | | Contingent liability for earn-out provision | 608 | | | 1,416 | |
| Deferred revenue, current | | Deferred revenue, current | 528 | | | 146 | |
| Taxes other than income taxes | Taxes other than income taxes | 544 | | | 1,799 | | Taxes other than income taxes | 241 | | | 544 | |
| Due to third parties | Due to third parties | 434 | | | 2,509 | | Due to third parties | 36 | | | 434 | |
| Legal costs | 333 | | | 149 | | |
| Deferred revenue, current | 146 | | | 0 | | |
| | Other | Other | 653 | | | 424 | | Other | 1,185 | | | 653 | |
| | Total current accrued liabilities | Total current accrued liabilities | $ | 18,275 | | | $ | 24,552 | | Total current accrued liabilities | $ | 8,996 | | | $ | 18,275 | |
Note 12 — Debt
Note 13 — Debt
Long-term debt is as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Long-term debt | | | |
| Flotek PPP loan | $ | 4,788 | | | $ | 0 | |
| JP3 PPP loan | 877 | | | 0 | |
| Total | 5,665 | | | 0 | |
| | | |
| Less current maturities | (4,048) | | | 0 | |
| | | |
| Total long-term debt, net of current portion | $ | 1,617 | | | $ | 0 | |
| | | |
| | | |
Payroll Protection Program Loan
In April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the PayrollPaycheck 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 2020.2020 prior to its acquisition by Flotek. The PPP loans havehad a fixed interest rate of 1% and haveoriginally a two-year term, maturing 2022. in April and May 2022, respectively. No payments of principal or interest were required during the yearyears ended December 31, 2021 or 2020.
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 arewere 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 iswas not significantly detrimental to the business. As of December 31, 2020, the Company had not applied for or estimated the potential forgiveness on the PPP loans. The receipt of these funds, and the forgiveness of the loans attendant to these funds, is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a government audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.
Bank Credit FacilityDuring 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.
Through March 1, 2019,In October 2021, the Company maintained a revolving credit facility with PNC Bank, National Association (the “Credit Facility”) with a maximum revolving advance amount of $75 million. Upon closing the sale of the CICT segment in 2019, the Company repaid the outstanding balance, interest and fees on the Credit Facility on March 1, 2019, and terminated the Credit Facility.Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025.
0The Company has submitted to the SBA for forgiveness of substantially all of the Flotek PPP loan but as of December 31, 2021 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. 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”.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt, including current portion, is as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Flotek PPP loan | $ | 4,788 | | | $ | 4,788 | |
| JP3 PPP loan | — | | | 877 | |
| Total | 4,788 | | | 5,665 | |
| | | |
| Less current maturities | (1,436) | | | (4,048) | |
| | | |
| Total long-term debt, net of current portion | $ | 3,352 | | | $ | 1,617 | |
| | | |
| | | |
Note 1413 — Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.
•Level 1 — Quoted prices in active markets for identical assets or liabilities;
•Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts. The carrying amount of the Flotek PPP loans for Flotek and JP3 also approximateloan approximates its fair value due to maturity in less than eighteen months.as of December 31, 2021.
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy:hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Balance at December 31, | | | | | | | | Balance at December 31, |
| Level 1 | | Level 2 | | Level 3 | 2020 | | Level 1 | | Level 2 | | Level 3 | | 2019 |
| Contingent consideration | $ | 0 | | | $ | 0 | | | $ | 1,416 | | $ | 1,416 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | December 31 | | | | | | | | December 31, |
| Level 1 | | Level 2 | | Level 3 | 2021 | | Level 1 | | Level 2 | | Level 3 | | 2020 |
| Contingent consideration | $ | — | | | $ | — | | | $ | 608 | | $ | 608 | | | $ | — | | | $ | — | | | $ | 1,416 | | | $ | 1,416 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, discussed in Note 3, Business Acquisition, is included in accrued liabilities as of December 31, 2021 and 2020. The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility. During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved, and the Company accrued a liability of $2.5 million, which was subsequently settled during the fourth quarter of 2020.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment, operating lease right-of-use assets, 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. Impairments of long-lived assets of $70 million were recorded during the year ended December 31, 2020. See Note 10, Impairment of Property and Equipment, Operating Lease Right-of-use Assets and Intangible Assets. Impairments of
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
goodwill of $8.1 million and $11.7 million were recorded during the year ended December 31, 2021 and 2020, respectively. See Note 8, “Goodwill”.
Management inputs used in fair value measurements in 2021 and 2020 to estimate the fair value of the non-financial assets were classified as Level 3.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
In conjunction with the acquisition of JP3, discussed in Note 3, Business Acquisition, during the year ended December 31, 2020, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved, and the Company accrued a liability of $2.5 million, which was transferred out of Level 3 to a current liability and subsequently settled during the fourth quarter of 2020. No other transfers occurred during the year ended December 31, 2020. At December 31, 2020, the estimated fair value of the remaining stock performance earn-out provision was $1.4 million, which was recorded as a contingent liability. The estimated fair value of the earn-out provision was valued using the Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.
There were no transfers in or out of either Level 1, Level 2 or Level 3 fair value measurements during the year ended December 31, 2019. At December 31, 2019, no liabilities were required to be measured at fair value on a recurring basis.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 first quarter of 2020, the Company recorded an impairment of $57.5 million for impairment of long-lived assets. Management inputs used in fair value measurements were classified as Level 3.
As disclosed in Note 3, “Business Combination,” the Company acquired JP3 in May 2020. The fair values of JP3’s long-lived assets and intangibles were determined using the income approach. The fair value of the Company’s inventory was determined using the comparative sales method. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement, other than cash and working capital accounts, which carrying amounts were determined to approximate fair value due to their short-term nature.
During the third quarter of 2020, the Company’s DA segment recorded an impairment charge on finite-lived intangible assets of $12.5 million and an impairment charge on goodwill of $11.7 million. The fair value of the DA 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 fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During the third quarter of 2020, the first stock performance target for the contingent consideration was achieved, resulting in an accrued liability of $2.5 million, which was settled during the fourth quarter of 2020. The Company also estimated the fair value of the remaining stock performance earn-out provision atas of December 31, 2021 and 2020 and recordedadjusted the estimated fair value of the contingent liability ofto $0.6 million and $1.4 million.million, respectively. The expense for achievement of the first stock performance target and the changeCompany records changes in the fair value of the contingent consideration for the second earn-out provision are recordedand achievement of performance targets in operating expenses in continuing operations for the period ended December 31, 2020.cost of goods sold.
The following table presents the changes in contingent consideration balances classified as Level 3 balances:balances (in thousands):
| | | Years ended December 31, | | | | Years ended December 31, |
| | 2020 | | 2019 | | | | 2021 | | 2020 |
| Balance - beginning of period | Balance - beginning of period | | $ | 0 | | | $ | 0 | | Balance - beginning of period | | | $ | 1,416 | | | $ | — | |
| Additions / issuances | Additions / issuances | | 1,200 | | | 0 | | Additions / issuances | | | — | | | 1,200 | |
| Change in fair value | Change in fair value | | 2,716 | | | 0 | | Change in fair value | | | (808) | | | 2,716 | |
| | Transfer out of Level 3 | Transfer out of Level 3 | | (2,500) | | | 0 | | Transfer out of Level 3 | | | — | | | (2,500) | |
| Balance - end of period | Balance - end of period | | $ | 1,416 | | | $ | 0 | | Balance - end of period | | | $ | 608 | | | $ | 1,416 | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1514 — Income Taxes
Components of the income tax (benefit) expense arebenefit is as follows (in thousands):
| | | | Years ended December 31, | | Years ended December 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| Current: | Current: | | | | | Current: | | | | |
| Federal | Federal | $ | (6,115) | | | $ | (22,923) | | | Federal | $ | — | | | $ | (6,115) | | |
| State | State | 144 | | | (2,295) | | | State | 16 | | | 144 | | |
| Foreign | Foreign | (21) | | | (238) | | | Foreign | — | | | (21) | | |
| Total current | Total current | (5,992) | | | (25,456) | | | Total current | 16 | | | (5,992) | | |
| Deferred: | Deferred: | | | | | Deferred: | | | | |
| Federal | Federal | (116) | | | 24,373 | | | Federal | — | | | (116) | | |
| State | State | (71) | | | 1,345 | | | State | (56) | | | (71) | | |
| Foreign | Foreign | 0 | | | 0 | | | Foreign | — | | | — | | |
| Total deferred | Total deferred | (187) | | | 25,718 | | | Total deferred | (56) | | | (187) | | |
| Income tax (benefit) expense | $ | (6,179) | | | $ | 262 | | | |
| Income tax benefit | | Income tax benefit | $ | (40) | | | $ | (6,179) | | |
The components of loss before income taxes are as follows (in thousands):
| | | | Years ended December 31, | | Years ended December 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| United States | United States | $ | (141,864) | | | $ | (75,633) | | | United States | $ | (30,037) | | | $ | (141,864) | | |
| Foreign | Foreign | (765) | | | (178) | | | Foreign | (529) | | | (765) | | |
| Loss before income taxes | Loss before income taxes | $ | (142,629) | | | $ | (75,811) | | | Loss before income taxes | $ | (30,566) | | | $ | (142,629) | | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
| | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | |
| Federal statutory tax rate | 21.0 | % | | 21.0 | % | | |
| State income taxes, net of federal benefit | 2.1 | | | 0.6 | | | |
| Non-U.S. income taxed at different rates | 0.2 | | | 0.5 | | | |
| | | | | |
| Increase in valuation allowance | (20.3) | | | (20.5) | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Reduction in tax benefit related to stock-based awards | (0.2) | | | (0.1) | | | |
| | | | | |
| Effect of tax rate differences of NOL carryback | 1.5 | | | 0 | | | |
| Research and development credit | 0 | | | 0.2 | | | |
| Other | 0 | | | (2.0) | | | |
| Effective income tax rate | 4.3 | % | | (0.3) | % | | |
| | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | 2021 | | 2020 |
| U.S. federal statutory tax rate | | | | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal benefit | | | | | 0.1 | | | 2.1 | |
| Non-U.S. income taxed at different rates | | | | | 0.5 | | | 0.2 | |
| | | | | | | |
| | | | | | | |
| Increase (reduction) in tax benefit related to stock-based awards | | | | | 0.1 | | | (0.2) | |
| | | | | | | |
| | | | | | | |
| Increase in valuation allowance | | | | | (24.9) | | | (20.3) | |
| Effect of tax rate differences of NOL carryback | | | | | — | | | 1.5 | |
| Permanent differences related to CARES Act | | | | | 2.6 | | | — | |
| Other | | | | | 0.7 | | | — | |
| Effective income tax rate | | | | | 0.1 | % | | 4.3 | % |
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act provided the ability for taxpayers to carryback a net operating loss (“NOL”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five years preceding the year of the loss. Based on analysis of the extended NOL carryback provision, the Company recorded aan income tax benefit and related receivable of $6.1 million as of March 31, 2020, which was received in July 2020.
Further, the CARES Act included provisions to assist employers during the pandemic including the Employee Retention Credit (“ERC”). The ERC provision provides a refundable payroll tax credit on qualified wages paid by eligible employers to certain employees. On March 11, 2021, the American Rescue Plan Act of 2021 was enacted to combat the ongoing public health and economic impacts of the pandemic and provides some tax relief to businesses in the form of extending and modifying the ERC as well as other provisions. The Company applied for and received $2.9 million of refundable payroll tax credits during the year ended December 31, 2021. This was recorded as a credit to payroll taxes in SG&A.
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates, except forrates. During the years ended December 31, 2021 and 2020, the effective tax rate was further impacted by permanent difference related to the CARES Act provisions and the NOL carryback claim, discussed above.respectively.
Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. The components of deferred tax assets and liabilities are as follows (in thousands):
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | December 31, | | December 31, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Deferred tax assets: | Deferred tax assets: | | | | Deferred tax assets: | | | |
| Net operating loss carryforwards | Net operating loss carryforwards | $ | 23,589 | | | $ | 17,248 | | Net operating loss carryforwards | $ | 33,166 | | | $ | 23,589 | |
| Intangible assets | | Intangible assets | 2,916 | | | 6,026 | |
| Tax credit carryforwards | | Tax credit carryforwards | 4,001 | | | 3,802 | |
| Goodwill | | Goodwill | 5,284 | | | 4,087 | |
| Property and equipment | | Property and equipment | 3,229 | | | 3,640 | |
| Lease liability | | Lease liability | 1,750 | | | 1,945 | |
| Inventory valuation reserves | | Inventory valuation reserves | 2,675 | | | 2,093 | |
| Allowance for doubtful accounts | Allowance for doubtful accounts | 1,134 | | | 1,037 | | Allowance for doubtful accounts | 1,184 | | | 1,134 | |
| Inventory valuation reserves | 2,093 | | | 629 | | |
| Accrued liabilities | | Accrued liabilities | 569 | | | 2,076 | |
| Accrued compensation | | Accrued compensation | 401 | | | 657 | |
| | Equity compensation | Equity compensation | 435 | | | 353 | | Equity compensation | 399 | | | 435 | |
| Goodwill | 4,087 | | | 965 | | |
| Accrued compensation | 657 | | | 587 | | |
| Foreign tax credit carryforward | 3,802 | | | 3,894 | | |
| Accrued liabilities | 2,076 | | | 3,530 | | |
| Lease liability | 1,945 | | | 3,992 | | |
| Property and equipment | 3,640 | | | 0 | | |
| Intangible assets | 6,026 | | | 0 | | |
| | Other | Other | 353 | | | 96 | | Other | 304 | | | 353 | |
| Total gross deferred tax assets | Total gross deferred tax assets | 49,837 | | | 32,331 | | Total gross deferred tax assets | 55,878 | | | 49,837 | |
| Valuation allowance | Valuation allowance | (48,671) | | | (20,341) | | Valuation allowance | (54,875) | | | (48,671) | |
| Total deferred tax assets, net | Total deferred tax assets, net | 1,166 | | | 11,990 | | Total deferred tax assets, net | 1,003 | | | 1,166 | |
| Deferred tax liabilities: | Deferred tax liabilities: | | | | Deferred tax liabilities: | | | |
| Property and equipment | 0 | | | (3,696) | | |
| Intangible assets | 0 | | | (4,134) | | |
| | ROU asset | ROU asset | (686) | | | (3,793) | | ROU asset | (453) | | | (686) | |
| | Prepaid insurance and other | Prepaid insurance and other | (257) | | | (331) | | Prepaid insurance and other | (271) | | | (257) | |
| Total gross deferred tax liabilities | Total gross deferred tax liabilities | (943) | | | (11,954) | | Total gross deferred tax liabilities | (724) | | | (943) | |
| Net deferred tax assets | Net deferred tax assets | $ | 223 | | | $ | 36 | | Net deferred tax assets | $ | 279 | | | $ | 223 | |
As of December 31, 2020,2021, the Company had U.S. net operating loss carryforwards of $94.7$140.6 million, including $46.4 million expiring in various amounts in 2035from 2029 through 2037 which can offset 100% of taxable income and $48.3$94.2 million that has an indefinite carryforward period which can offset 80% of taxable income per year. The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo an “ownership change” for purposes of Section 382 of the Tax Code.
Net deferred tax assets arise due to the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes. ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need forWe record a valuation allowance the Company considers all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income. As of December 31, 2019, the Company determined thatwhen it wasis more likely than not that it would not realizesome portion or all of the benefits of certain deferred tax assets and, therefore, recorded a $20.3 million valuation allowance againstwill not be realized. The ultimate realization of the carrying value of net deferred tax assets except for deferred tax liabilities relateddepends on the ability to certain state jurisdictions. Atgenerate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions.As of December 31, 2021 and 2020, the valuation allowance against the net federal and state deferred tax assets was $54.9 million and $48.7 million.million, respectively. Except for a state jurisdiction, the Company maintains a full valuation allowance on its deferred tax assets.
The Company has not calculated U.S. taxes on unremitted earnings of certain non-U.S. subsidiaries due to the Company’s intentintends to reinvest the unremitted earnings of theits non-U.S. subsidiaries. AtAs of December 31, 2020,2021, the Company had approximately $5.7$8.5 million in unremitted earnings for one offrom its foreign jurisdictions, which were not included for U.S. tax purposes. Due tojurisdictions. As a result of the 2017 Tax Act U.S. federal transition taxesthese earnings have been recorded for a one-timepreviously taxed in the U.S. tax liability on these earnings whichalthough they have not previously been repatriated to the U.S. However, certain withholding taxes will need to be paid upon repatriation. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.
The Company performed an evaluation and concluded there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the taxTax years which remain subject to examination by tax jurisdictions as of December 31, 2020, which2021, are the years ended December 31, 20172018 through December 31, 20202021 for U.S. federal taxes and the years ended December 31, 20162017 through December 31, 20202021 for various state tax jurisdictions.
During 2020, the Internal Revenue Service (“IRS”) notified the Company that a 2018 tax return was selected for examination as
a result of a carryback claim. At this time, the Company is not aware of any findings that would have a material impact on the
consolidated financial statements.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1615 — Commitments and Contingencies
Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. ManagementExcept as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Commitments
Terpene Supply Agreement
On February 26,As of December 31, 2020, Flotek Chemistry entered intothe Company’s consolidated balance sheet included an amendment to the terpene supply agreement between Flotek Chemistry and FCC. Pursuant to the terms and conditionsaccrued liability of the amendment, the terpene supply agreement was amended to, among other things, (a) reduce the minimum quantity of terpene that Flotek Chemistry is required to purchase by approximately 3/4ths in 2020 and by approximately half in each of 2021, 2022 and 2023, (b) provide a fixed per pound price for terpene in 2020, (c) reduce the maximum amount of terpene subject to the terpene supply agreement by approximately 1/3rd, and (d) change the payment terms to net 45 days. In order to make the terms and conditions of the amendment to the terpene supply agreement effective, Flotek Chemistry made a one-time payment in February 2020 of $15.8$9.4 million to ADM. The expense associated with the terpene supply agreement amendment payment was recorded aswith Florida Chemical Company, LLC (“FCC”), a losswholly owned subsidiary of Archer-Daniels-Midland Company (“ADM”). The Company calculated the liability based on contract purchase commitments, reported in operating expenses in continuing operations in December 2019.
For the year ended December 31, 2020, the Company recognized a loss of $9.9 million and an accrued liability of $9.4 million at December 31, 2020, associated with the amended terpene supply agreement due to the Company’sits expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased under the terpene supply agreement and the expected selling prices of the excess terpene as such loss is not considered recoverable. The reductions in expected usage resulted from reduced demand for terpene in the oil and gas sector due of capital spending reductions across our customer base and impacts of COVID-19, combined with product mix changes using lower concentrations of terpene.
Indemnification
The Company agreed to provide indemnification to National Oilwell DHT, L.P. for certain intellectual property-related claims in connection with sale of its Teledrift business unit in 2017. The expenses incurred by the Company were $0.4 million and $0.6 million for the years ended December 31, 2020 and 2019, respectively. The Company expects to incur additional costs during 2021, which are uncertain, but could be as much as $0.5 million or more.
Lease Obligations
See Note 8, “Leases.”
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the sanitizer, surface cleaner and disinfectant industry to a lesser extent. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. Customers within the sanitizer, surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment. The concentration in the oil and gas industry increases credit and business risk.
Within the CT segment, the Company had two major customers Losses for the year ended December 31, 2020 which accounted for 24%on the terpene contract totaled $11.7 million and 18%was recognized in cost of goods sold in the consolidated revenue,statements of operations.
On March 26, 2021, Flotek Industries, Inc. and two major customersFlotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against ADM, FCC and other parties in state court in Harris County, Texas. The lawsuit claimed damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.
On April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters.
On October 29, 2021, the Company reached agreement with all parties resolving all claims between the parties (“the ADM Settlement”) that resulted in the termination of the terpene supply agreement and a settlement payment of $1.75 million due from Flotek. In accordance with the terms of the ADM Settlement, the Company reduced the accrued liability associated with the terpene supply agreement to $1.75 million and recorded a gain of $7.6 million in cost of goods sold in the consolidated statement of operations for the year ended December 31, 2019, which accounted for 20%2021. The one-time payment of $1.75 million from Flotek to ADM was paid on January 3, 2022 and 10%was included as restricted cash on the consolidated balance sheet as of consolidated revenue. The Company’s largest three customers collectively accounted for 50% and 40% of consolidated revenue for the years ended December 31, 2020 and 2019, respectively.2021.
No single customer of the DA segment accounted for 10% or more of the Company’s consolidated revenue for
Former CEO Matter
During the year ended December 31, 2020.2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste. Flotek’s board engaged a third party to review the findings of the investigation. After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any outcome cannot reasonably be predicted.Other Commitments and Contingencies
The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 —Stockholders’16 — Stockholders’ Equity
Common and Preferred Stock
On May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, to increase the authorized shares of common stock from 80 million shares to 140 million shares of common stock, par value $0.0001 per share, and 100,000 shares of 1 or more series of preferred stock, par value $0.0001 per share. The additional authorized shares are available for corporate purposes, including acquisitions.
During the first quarter 2021, the Company identified 0.6 million shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the December 31, 2020 consolidated financial statements or basic and diluted earnings per share.
A reconciliation of the changes in common shares issued is as follows:
| | | | Years ended December 31, | | Year ended December 31, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Shares issued at the beginning of the year | Shares issued at the beginning of the year | 63,656,897 | | | 62,162,875 | | Shares issued at the beginning of the year | 78,669,414 | | | 63,656,897 | |
| Correction to issued share count at beginning of the year | | Correction to issued share count at beginning of the year | (613,419) | | | — | |
| Issued upon sale of common stock | Issued upon sale of common stock | 200,000 | | | 0 | | Issued upon sale of common stock | — | | | 200,000 | |
| | Issued upon exercise of stock options | Issued upon exercise of stock options | 111,298 | | | 0 | | Issued upon exercise of stock options | — | | | 111,298 | |
| | Issued as restricted stock award grants | Issued as restricted stock award grants | 3,114,978 | | | 924,022 | | Issued as restricted stock award grants | 1,702,289 | | | 3,114,978 | |
| Issued as restricted stock unit grants | 86,241 | | | 570,000 | | |
| | Issued upon vesting of restricted stock units | | Issued upon vesting of restricted stock units | 86,240 | | | 86,241 | |
| Restricted stock awards forfeited and cancelled | | Restricted stock awards forfeited and cancelled | (284,334) | | | — | |
| Shares withheld to cover taxes and cancelled | | Shares withheld to cover taxes and cancelled | (76,353) | | | — | |
| Issued in business combination to acquire JP3 | Issued in business combination to acquire JP3 | 11,500,000 | | | 0 | | Issued in business combination to acquire JP3 | — | | | 11,500,000 | |
| | Shares issued at the end of the year | Shares issued at the end of the year | 78,669,414 | | | 63,656,897 | | Shares issued at the end of the year | 79,483,837 | | | 78,669,414 | |
Treasury Stock
The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. During the years ended December 31, 20202021 and 2019,2020, the Company purchased 155,317145,703 shares and 145,70393,977 shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options. Shares issued as restricted stock awards to employees under the 2018 long-term incentive plan that were forfeited are accounted for as treasury stock. During the year ended December 31, 2020, there were 66,115 shares surrendered for the exercise of stock options. During the yearyears ended December 31, 2019, 02021 and 2020, forfeited stock awards returned to treasury stock were 421,839 shares were surrendered for the exercise of stock options.
Stock Repurchase Program
In June 2015, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock. Repurchases could be made in the open market or through privately negotiated transactions. On June 9, 2020, the board of directors of the Company rescinded the authorization to repurchase the Company’s stock under this program.
During the year ended December 31, 2019, the Company repurchased $0.3 million of its common stock under this authorization. NaNand 1,301,470 shares, were repurchased under this program during the year ended December 31, 2020.
Note 1817 — Stock-Based Compensation and Other Benefit Plans
Stock-Based Incentive Plans
Stockholders approved long-term incentive plans in 2019, 2018, 2014, 2010 and 2007 (the “2019 Plan,” the “2018 Plan,” the “2014 Plan,” the “2010 Plan” and the “2007 Plan,” respectively) under which the Company may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, restricted stock units, and certain other incentive awards. The maximum number of shares that may be issued under the 2019 Plan, 2018 Plan, 2014 Plan, 2010 Plan and 2007 Plan are 1.0 million, 3.0 million, 5.2 million, 6.0 million and 2.2 million, respectively. At December 31, 2020,2021, the Company had a total of 1.84.2 million shares remaining to be granted under the 2019 Plan and 2018 Plan. Shares may no longer be granted under the 2007, 2010 and 2014 Plans.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant. During the years ended December 31, 2021 and 2020, 1.4 million and 1.3 million market-based stock options were granted, all market-based options.respectively. The market-based options are restricted until criteria defined in the agreementagreements are met. Proceeds received from stock option exercises are credited to common stock and additional paid-in capital, as appropriate. The Company uses historical data to estimate pre-vesting option forfeitures. Estimates are adjusted when actual forfeitures differ from the estimate.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-based compensation expense is recorded for all equity awards expected to vest.During the yearyears ended December 31, 2021 and 2020, 0.2 million and 0.1 million stock options vested, respectively, and 0.8 million and 0.6 million stock options were forfeited. NaN stock options vested or were forfeited, during the year ended December 31, 2019.respectively.
Stock option activity for the years ended December 31, 20202021 and 2019,2020, are as follows
| | | Shares | | Weighted-Average
Exercise
Price | Weighted-Average
Fair Value | | |
| Outstanding as of January 1, 2019 | 0 | | | $ | 0 | | $ | 0 | | | |
| Granted | 3,000,000 | | | 1.93 | | 1.25 | | | |
| Exercised | 0 | | | 0 | | 0 | | | |
| Forfeited | 0 | | | 0 | | 0 | | | |
| | | | | Shares | | Weighted-Average
Exercise
Price | Weighted-Average
Fair Value | |
| Outstanding as of January 1, 2020 | Outstanding as of January 1, 2020 | 3,000,000 | | | 0 | | Outstanding as of January 1, 2020 | 3,000,000 | | | $ | — | | $ | — | | |
| Granted | Granted | 1,327,795 | | | 1.12 | | 0.62 | | | Granted | 1,327,795 | | | 1.12 | | 0.62 | | |
| Exercised | Exercised | (111,298) | | | 0.92 | | 0.51 | | | Exercised | (111,298) | | | 0.92 | | 0.51 | | |
| Forfeited | Forfeited | (556,497) | | | 0.92 | | 0.51 | | | Forfeited | (556,497) | | | 0.92 | | 0.51 | | |
| | Outstanding as of | | | | | |
| December 31, 2020 | 3,660,000 | | | 0 | | |
| Vested or expected to vest at | | | | | |
| December 31, 2020 | 1,111,298 | | | | |
| | Outstanding as of January 1, 2021 | | Outstanding as of January 1, 2021 | 3,660,000 | | | 0 | |
| Granted | | Granted | 1,448,959 | | | 1.07 | | 0.88 | | |
| Exercised | | Exercised | — | | | — | | — | | |
| Forfeited | | Forfeited | (777,084) | | | 1.02 | | 0.52 | | |
| Expired | | Expired | (50,000) | | | 0.52 | | 0.52 | | |
| Outstanding as of | | Outstanding as of | | | | |
| December 31, 2021 | | December 31, 2021 | 4,281,875 | | | |
| Vested or expected to vest at | | Vested or expected to vest at | | | | |
| December 31, 2021 | | December 31, 2021 | 3,775,148 | | | |
|
The following table sets forth significant assumptions used in the Monte Carlo model for market-based options to determine the fair value of the options at the date of grant:
| | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 | |
| | Market-Based Options | | Market-Based Options | | | Market-Based Options | | Market-Based Options | |
| Risk-free interest rate | Risk-free interest rate | 0.12 | % | | 1.84 | % | | Risk-free interest rate | 1.61 | % | | 0.12 | % | |
| Expected volatility of common stock | Expected volatility of common stock | 103.50 | % | | 71.57 | % | | Expected volatility of common stock | 90.00 | % | | 103.50 | % | |
| Expected life of options in years | Expected life of options in years | 2 | | 7 | | Expected life of options in years | 10 | | 2 | |
| | Vesting period in years | 2 | | 7 | | |
| Dividend yield | | Dividend yield | — | % | | — | % | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth significant assumptions used in the Black Scholes model for time-vested options to determine the fair value of the options at the date of grant:
| | | | | | | |
| | Year Ended December 31, 2019 |
| | | Time-Vested Options |
| Initial stock price | | | $ | 1.93 |
| Strike price | | | 1.93 |
| Term (in years) | | | 6.5 |
| Risk-free rate | | | 1.8 | % |
| Volatility rate | | | 73.6 | % |
The Company had no time-vested options granted in 2020. At December 31, 2020,2021, the unrecognized compensation cost related to stock options was $3.6$3.3 million.
Restricted Stock
The Company grants employees and directors either time-vesting or market-based restricted shares in accordance with terms specified in the Restricted Stock Agreements. During the year ended December 31, 2020,2021, all 53% of the restricted sharesstock granted were time-vesting and 47% were performance-based.restricted shares. Grantees of restricted shares retain voting rights for the granted shares.
•Time-vesting restricted shares vest after a stipulated period has elapsed after the date of grant, generally three years. Certain time-vested shares have also been issued with a portion of the shares granted vesting immediately.
•Market-based restricted shares are issued with criteria defined over a designated period and vest only when, and if, the outlined criteria are met.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock share activity for the years ended December 31, 20202021 and 2019,2020, are as follows:
| | Restricted Stock Shares | Restricted Stock Shares | | Shares | | Weighted-
Average Fair
Value at Date of
Grant | Restricted Stock Shares | | Shares | | Weighted-
Average Fair
Value at Date of
Grant |
| Non-vested at January 1, 2019 | | 1,050,372 | | | $ | 3.47 | | |
| Granted to employees | | 1,494,022 | | | 2.62 | | |
| Non-vested at January 1, 2020 | | Non-vested at January 1, 2020 | | 1,629,020 | | | $ | 2.66 | |
| Granted | | Granted | | 3,114,978 | | | 0.83 | |
| Vested | Vested | | (615,941) | | | 3.72 | | Vested | | (711,988) | | | 2.94 | |
| Forfeited | Forfeited | | (299,433) | | | 3.16 | | Forfeited | | (1,236,910) | | | 1.65 | |
| Non-vested at January 1, 2020 | | 1,629,020 | | | 2.66 | | |
| Granted to employees | | 3,114,978 | | | 0.83 | | |
| Non-vested at January 1, 2021 | | Non-vested at January 1, 2021 | | 2,795,100 | | | 1.00 | |
| Granted | | Granted | | 1,702,289 | | | 1.73 | |
| | Vested | Vested | | (711,988) | | | 2.94 | | Vested | | (1,453,854) | | | 1.24 | |
| Forfeited | Forfeited | | (1,236,910) | | | 1.65 | | Forfeited | | (1,275,172) | | | 1.36 | |
| Non-vested at December 31, 2020 | | 2,795,100 | | | $ | 1.00 | | |
| Non-vested at December 31, 2021 | | Non-vested at December 31, 2021 | | 1,768,363 | | | $ | 1.61 | |
The total fair value of restricted stock that vested during the years ended December 31, 2021 and 2020 and 2019 was $2.1$2.5 million and $6.3$2.1 million, respectively.
At December 31, 2020,2021, unrecognized compensation expense related to non-vested restricted stock was $1.8 million.was $1.9 million. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 0.8 1.8 years.
Restricted Stock Units
During the yearyears ended December 31, 2020, the Company granted 0.9 million market-based restricted stock units (“RSUs”). The performance period for these RSUs continues until December 22, 2024.
During No RSU’s were granted during the year ended December 31, 2019, the Company granted 1.1 million RSUs. The 2021.period for these RSUs continues until December 31, 2024.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock units activity for the years ended December 31, 20202021 and 2019,2020, are as follows:
| | | | | | | | | | | | | | |
Restricted Stock Units (1) | | Units | | Weighted-
Average Fair
Value at Date of
Grant |
| RSUs at January 1, 2019 | | 301,766 | | | $ | 3.94 | |
| 2018 forfeited | | (272,046) | | | 6.39 | |
| 2019 granted | | 1,071,530 | | | 3.75 | |
| 2019 forfeited | | (62,776) | | | 1.66 | |
| RSUs at January 1, 2020 | | 1,038,474 | | | 3.24 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| 2020 granted | | 922,786 | | | 1.19 | |
| | | | |
| 2020 forfeited | | (733,711) | | | 3.79 | |
| RSUs at December 31, 2020 | | 1,227,549 | | | $ | 1.25 | |
| | | | | | | | | | | | | | |
| Restricted Stock Units | | Units | | Weighted-
Average Fair
Value at Date of
Grant |
| RSUs at January 1, 2020 | | 1,038,474 | | | $ | 3.24 | |
| 2020 granted | | 922,786 | | | 1.19 | |
| 2020 forfeited | | (733,711) | | | 3.79 | |
| RSUs at January 1, 2021 | | 1,227,549 | | | 1.25 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| 2021 granted | | — | | | — | |
| | | | |
| 2021 forfeited | | (184,173) | | | 2.61 | |
| RSUs at December 31, 2021 | | 1,043,376 | | | $ | 1.07 | |
(1) Restricted stock units and performance stock units are disclosed in the preceding table.
At December 31, 2020,2021, unrecognized compensation expense related to restricted stock units was $2.0$1.0 million. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.22.1 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) was approved by stockholders in 2012. The Company registered 500,000 shares of its common stock, currently held as treasury shares, for issuance under the ESPP. The purpose of the ESPP is to provide employees with an opportunity to purchase shares of the Company’s common stock through accumulated payroll deductions. The ESPP allows participants to purchase common stock at a purchase price equal to 85% of the fair market value of the common stock on the last business day of a three-month offering period which coincides with calendar quarters. Payroll deductions may not exceed 10% of an employee’s compensation and participants may not purchase more than 1,000 shares in any one offering period. In addition, for each calendar year, an employee may not be granted purchase rights for Flotek Stock valued over $25,000, as determined at the time such purchase right is granted. The fair value of the discount associated with shares purchased under the plan is recognized as stock-based compensation expense and was $0.02 and $0.1 million for each of the years
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ended December 31, 2021 and 2020, and 2019.respectively. The total fair value of the shares purchased under the plan during each of the years ended December 31, 2021 and 2020 was $0.2 million and 2019 was $0.1 million, respectively. The employee payment associated with participation in the plan occurs through payroll deductions. Effective after the third quarter 2018 purchase, the Company suspended the ESPP due to lack of shares. Following shareholder approval for additional shares, the Company resumed the ESPP during the second quarter 2019.
Stock-Based Compensation Expense
Non-cash stock-based compensation expense related to stock options, restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP was $3.2 $3.8 million and $4.0$3.0 million during the years ended December 31, 2021 and 2020, and 2019, respectively.
401(k) Retirement Plan
The Company maintains a 401(k) retirement plan for the benefit of eligible employees in the U.S. All employees are eligible to participate in the plan upon employment. On January 1, 2015, theThe Company implemented a new matching program. The Companycurrently matches contributions at 100% of up to 2% of an employee’s compensation and, if greater, the Company matches contributions at 50% from 5% to 8% of an employee’s compensation. In April 2020, the Company suspended its matching contribution to employee accounts..
During the years ended December 31, 20202021 and 2019,2020, compensation expense included $0.2 million and $0.7$0.2 million, respectively, related to the Company’s 401(k) match.
Note 1918 — 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
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and settlement of restricted stock units.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the years ended December 31, 20202021 and 2019,2020, since including them would have an anti-dilutive effect on loss per share due to the net loss from continuing operations incurred during the period.periods. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.0 million restricted stock units and 4.3 million stock options for the year ended December 31, 2021, and 1.8 million restricted stock units and 3.8 million stock options for the year ended December 31, 2020 and 0.1 million restricted stock units for the year ended December 31, 2019.
Note 2019 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
| | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | |
| Supplemental non-cash investing and financing activities: | | | | | |
| Equity issued — acquisition of JP3 | $ | 8,538 | | | $ | 0 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Supplemental cash payment information: | | | | | |
| Interest paid | $ | 25 | | | $ | 599 | | | |
| Income taxes (received, net of payments) paid | (6,246) | | | (699) | | | |
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2021 | | 2020 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Supplemental cash payment information: | | | |
| Interest paid | $ | 26 | | | $ | 25 | |
| Income taxes received | (351) | | | (6,246) | |
| | | |
| | | |
| | | |
| Supplemental non-cash investing and financing activities: | | | |
| Equity issued - acquisition of JP3 | $ | — | | | $ | 8,538 | |
| | | |
| | | |
Note 2120 — Related Party Transaction
In January 2017, the IRSInternal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.
At June 30, 2019, the Company recorded a liability of $2.4 million related to the estimated employment tax under-withholding for the years 2014 through 2018. By September 30, 2019, the liability totaled $1.8 million, after the Company paid $0.6 million to the IRS for these taxes and made an additional accrual covering the estimated under-withholding tax liability through 2019. In addition, at June 30, 2019, the Company recorded a receivable from the affiliated companies of Mr. Chisholm totaling $2.4 million. In October 2019, an amendment to the employment agreement of Mr. Chisholm was executed, giving the Company the contractual right of offset for any amounts owed by Mr. Chisholm to the Company for the IRS matter, and giving the Company
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the right to withhold payments to Mr. Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter from any amounts owed under the employment agreement. TheAt December 31, 2019, the Company netted the related party receivable against the severance payable as of December 31, 2019. At December 31, 2019, the Companyand recorded $1.8 million for potential liability to the IRS.
On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company. DuringIn September 2020, the Company did not make any payments toinformed Mr. Chisholm.Chisholm it would cease payment of future severance.
During the first quarter of 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of December 31, 2021 and 2020, the receivable from Mr. Chisholm was $1.4 million, which is equal toequaled the payable to the IRS and was netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.In September 2020,
Mr. Ted D. Brown has been a Director of the Company stopped all paymentssince November of 2013 and has been the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company formed in 2016. For the year ended December 31, 2021, the Company’s revenues for chemical sales to Mr. Chisholm pendingConfluence was $3.6 million. As of December 31, 2021, Confluence owed $1.3 million to the completion and results of ongoing IRS audits.Company which is recorded in account receivables on the consolidated balance sheet. There were no transactions with Confluence in the year ended December 31, 2020.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2221 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: CT and DA.
Chemistry Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals. This segment also includes a portfolio of specialty chemical products to address the long term challenges of in the drillingjanitorial, sanitization, food services, and completion of their wells.adjacent markets. The Company designs, develops, manufactures, packages, distributes, delivers and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields. Customers of the CT business segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.companies.
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce Food and Drug Administration and Environmental Protection Agency compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to address the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks.
Data Analytics. The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information abouton the composition and properties of energy customers’ hydrocarbon fluids. The customerscompany markets products and services that support in-line data analysis of hydrocarbon components and properties. Customers of the DA segment span across the entire oil and gas market, from upstream production upstream to midstream facilities to refineries and distribution networks. To date, the DA segment has focused solely on North American markets. The DA segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, optimizing transmix, increasing efficiencies of towers, enabling automation of fluid handling, and reducing losses due to give-away (i.e., that portion of a product of higher value than what is specified) using real-time process information.
The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income.income (loss). Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of the reportable segments is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the years ended December 31, | | Chemistry Technologies | | | | | | Data Analytics(1) | | Corporate and
Other | | Total |
| | | | | | | | | | | | |
| 2020 | | | | | | | | | | | | |
| Net revenue from external customers | | $ | 50,310 | | | | | | | $ | 2,831 | | | $ | 0 | | | $ | 53,141 | |
| Loss from operations, including impairment | | (88,486) | | | | | | | (36,407) | | | (18,755) | | | (143,648) | |
| Depreciation and amortization | | 2,519 | | | | | | | 422 | | | 471 | | | 3,412 | |
| | | | | | | | | | | | |
| Additions to long-lived assets | | 1,425 | | | | | | | 0 | | | 0 | | | 1,425 | |
| | | | | | | | | | | | |
| 2019 | | | | | | | | | | | | |
| Net revenue from external customers | | $ | 119,353 | | | | | | | $ | 0 | | | $ | 0 | | | $ | 119,353 | |
| Loss from operations, including impairment | | (45,682) | | | | | | | 0 | | | (29,818) | | | (75,500) | |
| Depreciation and amortization | | 7,439 | | | | | | | 0 | | | 1,026 | | | 8,465 | |
| | | | | | | | | | | | |
| Additions to long-lived assets | | 2,411 | | | | | | | 0 | | | 0 | | | 2,411 | |
| | | | | | | | | | | | |
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| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the years ended December 31, | Chemistry Technologies | | | | Data Analytics (1) | | Corporate and Other | | Total |
| 2021 | | | | | | | | | |
| Revenue from external customers | $ | 35,288 | | | | | $ | 4,339 | | | $ | — | | | $ | 39,627 | |
| Revenue from related party | 3,641 | | | | | — | | | — | | | 3,641 | |
| Loss from operations | (5,466) | | | | | (12,168) | | | (13,822) | | | (31,456) | |
| Depreciation and amortization | 939 | | | | | 70 | | | 2 | | | 1,011 | |
| Additions to long-lived assets | 39 | | | | | — | | | — | | | 39 | |
| | | | | | | | | |
| 2020 | | | | | | | | | |
| Revenue from external customers | $ | 50,310 | | | | | $ | 2,831 | | | $ | — | | | $ | 53,141 | |
| Revenue from related party | — | | | | | — | | | — | | | — | |
| Loss from operations | (88,486) | | | | | (36,407) | | | (18,755) | | | (143,648) | |
| Depreciation and amortization | 2,519 | | | | | 422 | | | 471 | | | 3,412 | |
| Additions to long-lived assets | 1,425 | | | | | — | | | — | | | 1,425 | |
(1) (1) The financial information disclosed forCompany formed the DA segment is forin the period May 18,second quarter of 2020 to December 31, 2020.upon acquiring JP3.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the Company by reportable segmentsegments are as follows (in thousands):
| | | December 31, | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Chemistry Technologies | Chemistry Technologies | $ | 43,346 | | | $ | 116,110 | | Chemistry Technologies | $ | 34,387 | | | $ | 43,346 | |
| Data Analytics | Data Analytics | 13,201 | | | 0 | | Data Analytics | 7,329 | | | 13,201 | |
| Corporate and Other | Corporate and Other | 29,663 | | | 114,490 | | Corporate and Other | 8,528 | | | 29,663 | |
| Total assets | | Total assets | $ | 50,244 | | | $ | 86,210 | |
| | Total assets | $ | 86,210 | | | $ | 230,600 | | |
Geographic Information
Revenue by country is based on the location where services are provided and products are used.sold. No individual countries other than the U.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
| | | | Years ended December 31, | | | Years ended December 31, |
| | | 2020 | | 2019 | | | | | 2021 | | 2020 |
| U.S. | U.S. | $ | 40,632 | | | $ | 104,786 | | | U.S. | | $ | 33,187 | | | $ | 40,632 | |
| UAE | UAE | 6,763 | | | 3,897 | | | UAE | | 4,512 | | | 6,763 | |
| Other countries | Other countries | 5,746 | | | 10,670 | | | Other countries | | 5,569 | | | 5,746 | |
| Total revenue | Total revenue | $ | 53,141 | | | $ | 119,353 | | | Total revenue | | $ | 43,268 | | | $ | 53,141 | |
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customers
Revenue from major customers, and as a percentage of consolidated revenue, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 | | Chemistry Technologies | | % of Total Revenue | | Data Analytics | | % of Total Revenue |
| Customer A | | $ | 12,891 | | | 24.26 | % | | * | | * |
| Customer B | | * | | * | | * | | * |
| Customer C | | $ | 9,394 | | | 17.68 | % | | * | | * |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2019 | | | | | | | | |
| Customer A | | $ | 24,386 | | | 20.43 | % | | * | | * |
| Customer B | | $ | 12,322 | | | 10.32 | % | | * | | * |
| Customer C | | * | | * | | * | | * |
*
| | | | | | | | | | | | | | | | | | |
| | Chemistry Technologies | | % of Total Revenue | | | | |
| Year ended December 31, 2021 | | | | | | | | |
| Customer A | | $ | 4,067 | | | 9 | % | | | | |
| Customer B | | 11,632 | | | 26 | % | | | | |
| | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 | | | | | | | | |
| Customer A | | $ | 12,891 | | | 24 | % | | | | |
Customer B | | 9,394 | | | 18 | % | | | | |
The majority of tThis customer did not account for more than 10%he Company’s revenue is derived from its CT segment, which consists predominantly of revenue during this period.customers within the oil and gas industry. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. The concentration in the oil and gas industry increases credit and business risk.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22 — Subsequent Events
We have evaluated the effects of events that have occurred subsequent to December 31, 2021, and there have been no material events that would require recognition in the 2021 consolidated financial statements or disclosure in the notes to the consolidated financial statements, except as disclosed below.
On February 2, 2022, Flotek entered into a Private Investment in Public Equity (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 aggregate initial principal amount of convertible notes for net cash proceeds of approximately $19 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 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. The issuance of the additional shares may trigger a change in ownership defined as 50% or more under IRC Section 382 that will limit the amount of net operating losses deductible and tax credits allowable starting in 2022.
Also 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 of convertible notes under the same terms as the convertible notes 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 their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC. 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 during such calendar year. The term of the ProFrac Agreement is three years starting April 1, 2022. In connection with the Profrac Agreement, the Company also granted Profrac Holdings LLC. the right to designate two members to serve on Flotek’s board of directors.
On February 16, 2022, the Company entered into an amended agreement with ProFrac Holdings, LLC to expand the Profrac Agreement to a term of ten years and up to thirty hydraulic fracturing fleets deployed by ProFrac Services, LLC. Closing of the transaction is expected to occur in the second quarter of 2022 and is subject to a vote of the shareholders of Flotek’s common stock, as well as other customary conditions. As part of the transaction, at closing of the amended agreement Flotek would (a) issue to ProFrac notes convertible into Flotek’s common stock with a maturity of one year, with the amount of notes based on the size of expansion, and (b) grant ProFrac the right to appoint two members to Flotek’s board of directors, for a total of four out of seven directors. Conversion price of the convertible notes will be $1.088125 per share under certain conditions prior to maturity, or $0.8705 per share at maturity. The convertible notes contain other terms and conditions similar to the convertible notes issued to Profrac on February 2, 2022.
As a result of these transactions, the Company will seek shareholder approval to increase the authorized shares of common stock or perform a reverse split to allow for the conversion of these convertible notes.
On December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility for proceeds of $4.2 million net of brokerage fee, which is expected to close in April 2022.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.
Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our internal control over financial reporting disclosure controls and processes were not effective because of the material weaknesses in our internal control over financial reporting described below.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. As of December 31, 2020, Company’s management has evaluated the effectiveness of its internal control over financial reporting under the Exchange Act. The Company’s management used the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to perform this evaluation. Management excluded JP3, which was acquired by the Company in May 2020, from its assessment of the effectiveness of internal control over financial reporting, as the Company may omit an assessment of an acquired business’s internal control over financial reporting from its assessment of the registrant’s internal control for up to one year from the acquisition date. As of and for the year ended December 31, 2020, JP3 represented 5% of total revenue and 15% of total assets of the consolidated financial statement amounts. Based upon this evaluation, our management concluded as of December 31, 2020, that our internal control over financial reporting was not effective because2021.
Remediation of the material weaknesses described below.Previously Reported Material Weaknesses in Internal Controls Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal controlcontrols 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 Company identified deficiencies As reported in its internal controlManagement’s Annual Report on Internal Control over financial reporting that represented material weaknesses. Specifically,Financial Reporting for the Company’s management determined that the Company did not, as ofyear ended December 31, 2020, design andas well as in our Quarterly Reports on Form 10-Q for each interim period through the third quarter of the year ended December 31, 2021, we did not maintain effective internal controls over financial reporting. Thereporting as a result of material weaknesses relaterelated to: (1) ineffective design and operation of controls over nonrecurring transactions including derecognition of items and cash flow presentation relating to disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations; (2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations; and (3) the ineffective design and operating effectiveness of the controls over the assessment of going concern.
TheDuring the year ended December 31, 2021, the Company believesimplemented remediation plans to address the design and operating effectiveness of control deficiencies that notwithstandingled to the material weaknesses mentioneddescribed above. Management’s plan of remediation included adding additional resources to the Company’s finance and accounting team and:
•Enhanced the design of our monitoring controls over the identification of non-recurring transactions and the accounting, presentation and disclosures for non-recurring transactions.
•Enhanced the design of the control over the assessment of impairment evaluations, including the assessment of events or changes in circumstances that may indicate a potential impairment.
•Enhanced the design of the controls related to assumptions used in management’s forecasts used for accounting purposes.
•Implemented a control over the analysis of the assessment of going concern at each period end and a process for the monitoring of the completion of the assessment and performance of the control as designed.
•Implemented monitoring processes to ensure controls occurred on the frequency designed and that documentation was sufficient to support the operating effectiveness of the control.
After testing the design and implementation and operating effectiveness of the new controls described above, management concluded that the consolidated financial statements contained in this Form 10-K present fairly, in all material respects,weaknesses described above were remediated as of December 31, 2021. We will continue to monitor execution of our controls to ensure the consolidated financial positions, resultseffectiveness of operationsthose controls and make enhancements when and where necessary. Additionally, we will continue to train new and key personnel on our standard processes and systems as required.
FLOTEK INDUSTRIES, INC.
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.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Remediation Plan and Status
The Company has implemented and continues to implement certain remediation actions and continues to test and evaluate the elements of the remediation plan. These elements include:
•Implementing monitoring controls over the review and validation of both tangible and intangible assets;
•Expanding controls over impairments of goodwill and long-lived assets;
•Enhancing specificity in the design and implementation of controls around nonrecurring, complex accounting activities, with the assistance of technical subject-matter experts;
•Implementing controls for forecasting and budgeting, to include additional process documentation and precision;
•Expanding monthly management review controls; and,
•Enhancing existing control procedures around the quarterly going concern analysis process.
The Company believes that the actions listed above will provide appropriate remediation of the material weaknesses; however, the testing of the effectiveness of the controls has not been completed by the Company. Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate and test the effectiveness of the controls, no assurance can be given as to the timing for completion of remediation. The material weaknesses will be fully remediated when the Company concludes that the controls have been operating for sufficient time and independently validated by management.
Changes in Internal ControlControls over Financial Reporting
During the second quarter of 2020, the Company acquired JP3, a privately-held data and analytics technology company. Due to the timingAs described above under “Remediation of the acquisition, management did not include the internal control processes for JP3Previously Reported Material Weakness in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2020. The acquisition is excluded from the certifications required under the Sarbanes-Oxley Act. We will include all aspects of internal control over financial reporting for this acquisitionInternal Controls Over Financial Reporting,” there were changes in our 2021 assessment. Upon acquisition and at December 31, 2020, management has concluded that there have been no changes to JP3’s previous structure around internal controls over financial reporting.
Additionally, the Company remediated a previously reported material weakness related to the elimination of intercompany
profits in inventory during Q4 2020.
Except for the items described above, there have been no changes in the Company’s system of internal control over financial reporting during the fiscalfourth quarter of the year ended December 31, 2020,2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2021 based upon criteria set forth in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of December 31, 2021, our internal control over financial reporting was effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20212022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20212022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20212022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20212022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
Item 14. Principal Accounting Fees and Services.
Our independent registered public accounting firm is KPMG LLP, Houston, TX, Auditor Firm ID: 185
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20212022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
PART IV
Item 15. Exhibits and Financial Statement Schedules.Schedules
EXHIBIT INDEX | | | | | | | | |
Exhibit
Number | | Description of Exhibit Title |
| 2.1 | †† | |
| 2.2 | †† | Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between Flotek Industries, Inc.,the Company, JP3 Measurement, LLC, the Sellers party thereto, and John A. Cardwell, as Seller RepresentativeRepresentative) (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 19, 2020). |
| 3.1 | | |
| 3.2 | | |
| 3.3 | | |
| 3.4 | * | |
| 4.1 | | |
| 4.2 | * | |
| 4.3 | | |
| 4.4 | | |
| 10.1 | | |
| 10.1 | † | |
| 10.2 | † | |
| 10.3 | † | |
| 10.4 | † | |
| | |
| | |
| 10.5 | † | |
| 10.6 | † | |
| 10.7 | † | |
| 10.8 | † | |
| 10.9 | † | |
| 10.10 | *** | |
| 10.11 | † | |
| 10.12 | *** | |
| 10.13 | | |
| 10.14 | † | |
| | | | | | | | |
Exhibit
Number | | Exhibit Title |
| 10.16 | † | |
| 10.17 | † | |
| 10.18 | † | |
| 10.19 | † | |
| 10.20 | † | |
| 10.21 | † | |
| 10.22 | † | |
| 10.23 | † | |
| 10.24 | † | |
| 10.25 | † | |
| 10.26 | † | |
| 10.27 | | |
| 10.28 | | |
| 21.1 | * | |
| 23.1 | * | |
| 23.2 | * | |
| 31.1 | * | |
| 31.2 | * | |
| | |
| 32.1 | ** | |
| 32.2 | ** | |
| | |
| 101.INS | * | Inline XBRL Instance Document.Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document |
| 101.SCH | * | Inline XBRL Schema Document.Document |
| 101.CAL | * | Inline XBRL Calculation Linkbase Document.Document |
| 101.LAB | * | Inline XBRL Label Linkbase Document.Document |
| 101.PRE | * | Inline XBRL Presentation Linkbase Document.Document |
| 101.DEF | * | Inline XBRL Definition Linkbase Document.Document |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| | |
| * | | Filed with this Form 10-K. |
| ** | | Furnished with this Form 10-K, not filed. |
| *** | | Portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K in order for them to remain confidential. |
| | | | | | | | |
| † | | Management contracts or compensatory plans or agreements. |
| †† | | Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments have been omitted. The Company hereby agrees to furnish a copy of any omitted schedule or attachment to the Securities and Exchange Commission upon request. |
Item 16. Form 10-K Summary.Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| | |
| FLOTEK INDUSTRIES, INC. |
| |
| By: | | /s/ John W. Gibson, Jr. |
| | John W. Gibson, Jr. |
| | President, Chief Executive Officer and Chairman of the Board |
Date: March 16, 202131, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | |
| SIGNATURES | TITLE | DATE |
/s/ John W. Gibson Jr. John W. Gibson, Jr. | President, Chief Executive Officer, and Chairman of the Board (Principal Executive Officer) | March 16, 202131, 2022 |
/s/ Michael E. Borton Michael E. Borton | Chief Financial Officer (Principal Financial and Accounting Officer) | March 16, 202131, 2022 |
/s/ Michelle M. AdamsDavid Nierenberg Michelle M. AdamsDavid Nierenberg
| Director | March 16, 202131, 2022 |
/s/ Harsha V. Agadi Harsha V. Agadi | Director | March 16, 202131, 2022 |
| | |
/s/ Ted D. Brown Ted D. Brown | Director | March 16, 202131, 2022 |
/s/ Michael Fucci Michael Fucci | Director | March 16, 202131, 2022 |
/s/ Paul W. Hobby Paul W. Hobby | Director | March 16, 202131, 2022 |
/s/ David NierenbergLisa Mayr David NierenbergLisa Mayr
| Director | March 16, 202131, 2022 |
