UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172019
or
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¨☐ | 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.
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(Exact name of registrant as specified in its charter) |
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| | | | |
Delaware | | 90-0023731
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(State orof other jurisdiction of incorporation or organization)
| | (I.R.S. Employer Identification No.) |
| | | | |
10603 W. Sam Houston Parkway N., | Suite 300 | Houston, | TX | 77064 |
| | 77064 | | |
(Address of principal executive offices) | | (Zip Code) |
(713) (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 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yesx☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ¨☐ | | Accelerated filerFiler | | x☒ |
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Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) ☐ | | Smaller reporting company | | ¨☒ |
| | | | | | |
| | | | Emerging growth company | | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
As of OctoberJuly 31, 2017,2019, there were 56,825,81957,697,905 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | September 30, 2017 | | December 31, 2016 | June 30, 2019 | | December 31, 2018 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 4,942 |
| | $ | 4,823 |
| $ | 97,509 |
| | $ | 3,044 |
|
Accounts receivable, net of allowance for doubtful accounts of $1,089 and $664 at September 30, 2017 and December 31, 2016, respectively | 56,008 |
| | 47,152 |
| |
Inventories | 70,716 |
| | 58,283 |
| |
Restricted cash | | 661 |
| | — |
|
Accounts receivable, net of allowance for doubtful accounts of $1,676 and $1,190 at June 30, 2019 and December 31, 2018, respectively | | 30,694 |
| | 37,047 |
|
Inventories, net | | 26,442 |
| | 27,289 |
|
Income taxes receivable | 2,649 |
| | 12,752 |
| 3,467 |
| | 3,161 |
|
Assets held for sale | 4,135 |
| | 43,900 |
| — |
| | 118,470 |
|
Other current assets | 10,881 |
| | 21,708 |
| 20,406 |
| | 5,771 |
|
Total current assets | 149,331 |
| | 188,618 |
| 179,179 |
| | 194,782 |
|
Property and equipment, net | 73,711 |
| | 74,691 |
| 41,760 |
| | 45,485 |
|
Goodwill | 56,660 |
| | 56,660 |
| |
Operating lease right-of-use assets | | 17,982 |
| | — |
|
Deferred tax assets, net | 21,190 |
| | 12,894 |
| 605 |
| | 18,663 |
|
Other intangible assets, net | 48,851 |
| | 50,352 |
| 24,290 |
| | 26,827 |
|
Other long-term assets | | — |
| | 126 |
|
TOTAL ASSETS | $ | 349,743 |
| | $ | 383,215 |
| $ | 263,816 |
| | $ | 285,883 |
|
LIABILITIES AND EQUITY | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 21,725 |
| | $ | 29,960 |
| $ | 10,858 |
| | $ | 15,011 |
|
Accrued liabilities | 12,323 |
| | 12,170 |
| 11,141 |
| | 10,335 |
|
Income taxes payable | | 862 |
| | — |
|
Interest payable | 30 |
| | 24 |
| — |
| | 8 |
|
Liabilities held for sale | 1,586 |
| | 4,961 |
| — |
| | 9,174 |
|
Current portion of long-term debt | 40,589 |
| | 40,566 |
| |
Current portion of lease liabilities | | 714 |
| | — |
|
Long-term debt, classified as current | | — |
| | 49,731 |
|
Total current liabilities | 76,253 |
| | 87,681 |
| 23,575 |
| | 84,259 |
|
Long-term debt, less current portion | — |
| | 7,833 |
| |
Long-term operating lease liabilities | | 18,256 |
| | — |
|
Long-term finance lease liabilities | | 193 |
| | — |
|
Deferred tax liabilities, net | | 116 |
| | — |
|
Total liabilities | 76,253 |
| | 95,514 |
| 42,140 |
| | 84,259 |
|
Commitments and contingencies |
| |
|
| |
|
Equity: | | | | |
Cumulative convertible preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | — |
| | — |
| |
Common stock, $0.0001 par value, 80,000,000 shares authorized; 60,621,786 shares issued and 56,802,456 shares outstanding at September 30, 2017; 59,684,669 shares issued and 56,972,580 shares outstanding at December 31, 2016 | 6 |
| | 6 |
| |
Stockholders’ equity: | | | | |
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | | — |
| | — |
|
Common stock, $0.0001 par value, 80,000,000 shares authorized; 62,955,872 shares issued and 57,688,578 shares outstanding at June 30, 2019; 62,162,875 shares issued and 57,342,279 shares outstanding at December 31, 2018 | | 6 |
| | 6 |
|
Additional paid-in capital | 334,490 |
| | 318,392 |
| 345,217 |
| | 343,536 |
|
Accumulated other comprehensive income (loss) | (822 | ) | | (956 | ) | |
Accumulated other comprehensive loss | | (998 | ) | | (1,116 | ) |
Retained earnings (accumulated deficit) | (28,736 | ) | | (9,830 | ) | (89,171 | ) | | (107,565 | ) |
Treasury stock, at cost; 3,354,344 and 2,028,847 shares at September 30, 2017 and December 31, 2016, respectively | (31,806 | ) | | (20,269 | ) | |
Flotek Industries, Inc. stockholders’ equity | 273,132 |
| | 287,343 |
| |
Noncontrolling interests | 358 |
| | 358 |
| |
Total equity | 273,490 |
| | 287,701 |
| |
TOTAL LIABILITIES AND EQUITY | $ | 349,743 |
| | $ | 383,215 |
| |
Treasury stock, at cost; 3,947,982 and 3,770,224 shares at June 30, 2019 and December 31, 2018, respectively | | (33,378 | ) | | (33,237 | ) |
Total stockholders’ equity | | 221,676 |
| | 201,624 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 263,816 |
| | $ | 285,883 |
|
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Revenue | $ | 79,458 |
| | $ | 64,337 |
| | $ | 244,589 |
| | $ | 192,227 |
| $ | 34,692 |
| | $ | 39,546 |
| | $ | 77,949 |
| | $ | 80,615 |
|
Cost of revenue | 57,718 |
| | 41,983 |
| | 169,016 |
| | 124,362 |
| |
Gross profit | 21,740 |
| | 22,354 |
| | 75,573 |
| | 67,865 |
| |
Expenses: | | | | | | | | |
Costs and expenses: | | | | | | | | |
Operating expenses (excluding depreciation and amortization) | | 38,306 |
| | 35,544 |
| | 82,904 |
| | 72,199 |
|
Corporate general and administrative | 10,346 |
| | 10,302 |
| | 33,773 |
| | 30,398 |
| 6,054 |
| | 8,665 |
| | 13,335 |
| | 17,158 |
|
Segment selling and administrative | 9,277 |
| | 9,775 |
| | 28,972 |
| | 26,879 |
| |
Depreciation and amortization | 2,540 |
| | 2,217 |
| | 7,464 |
| | 6,024 |
| 2,119 |
| | 2,343 |
| | 4,379 |
| | 4,676 |
|
Research and development | 2,691 |
| | 2,327 |
| | 9,940 |
| | 6,323 |
| 2,076 |
| | 2,949 |
| | 4,360 |
| | 5,704 |
|
(Gain) loss on disposal of long-lived assets | (11 | ) | | (14 | ) | | 401 |
| | (29 | ) | |
Total expenses | 24,843 |
| | 24,607 |
| | 80,550 |
| | 69,595 |
| |
(Gain)/loss on disposal of long-lived assets | | (4 | ) | | 5 |
| | 1,093 |
| | 62 |
|
Impairment of goodwill | | — |
| | 37,180 |
| | — |
| | 37,180 |
|
Total costs and expenses | | 48,551 |
| | 86,686 |
| | 106,071 |
| | 136,979 |
|
Loss from operations | (3,103 | ) | | (2,253 | ) | | (4,977 | ) | | (1,730 | ) | (13,859 | ) | | (47,140 | ) | | (28,122 | ) | | (56,364 | ) |
Other (expense) income: | | | | | | | | | | | | | | |
Interest expense | (574 | ) | | (518 | ) | | (1,718 | ) | | (1,536 | ) | (16 | ) | | (640 | ) | | (2,014 | ) | | (1,156 | ) |
Other (expense) income, net | 273 |
| | (41 | ) | | 664 |
| | (94 | ) | |
Total other expense | (301 | ) | | (559 | ) | | (1,054 | ) | | (1,630 | ) | |
Loss on write-down of assets held for sale | | — |
| | (2,580 | ) | | — |
| | (2,580 | ) |
Other income (expense), net | | 693 |
| | (2,499 | ) | | 800 |
| | (2,609 | ) |
Total other income (expense) | | 677 |
| | (5,719 | ) | | (1,214 | ) | | (6,345 | ) |
Loss before income taxes | (3,404 | ) | | (2,812 | ) | | (6,031 | ) | | (3,360 | ) | (13,182 | ) | | (52,859 | ) | | (29,336 | ) | | (62,709 | ) |
Income tax (expense) benefit | (17 | ) | | 942 |
| | 746 |
| | 1,349 |
| |
Income tax benefit (expense) | | 192 |
| | (16,128 | ) | | 966 |
| | (15,807 | ) |
Loss from continuing operations | (3,421 | ) | | (1,870 | ) | | (5,285 | ) | | (2,011 | ) | (12,990 | ) | | (68,987 | ) | | (28,370 | ) | | (78,516 | ) |
Income (loss) from discontinued operations, net of tax | 319 |
| | (876 | ) | | (13,621 | ) | | (33,200 | ) | (1,608 | ) | | (6,404 | ) | | 46,764 |
| | 3,192 |
|
Net loss | $ | (3,102 | ) | | $ | (2,746 | ) | | $ | (18,906 | ) | | $ | (35,211 | ) | |
Net income (loss) | | $ | (14,598 | ) | | $ | (75,391 | ) | | 18,394 |
| | (75,324 | ) |
Net income attributable to noncontrolling interests | | — |
| | 357 |
| | — |
| | 357 |
|
Net income (loss) attributable to Flotek Industries, Inc. (Flotek) | | $ | (14,598 | ) | | $ | (75,034 | ) | | $ | 18,394 |
| | $ | (74,967 | ) |
| | | | | | | | |
Amounts attributable to Flotek shareholders: | | | | | | | | |
Loss from continuing operations | | $ | (12,990 | ) | | $ | (68,630 | ) | | $ | (28,370 | ) | | $ | (78,159 | ) |
Income (loss) from discontinued operations, net of tax | | (1,608 | ) | | (6,404 | ) | | 46,764 |
| | 3,192 |
|
Net income (loss) attributable to Flotek | | $ | (14,598 | ) | | $ | (75,034 | ) | | $ | 18,394 |
| | $ | (74,967 | ) |
| | | | | | | | | | | | | | |
Basic earnings (loss) per common share: | | | | | | | | Basic earnings (loss) per common share: | | | | | | |
Continuing operations | $ | (0.06 | ) | | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.04 | ) | $ | (0.22 | ) | | $ | (1.19 | ) | | $ | (0.49 | ) | | $ | (1.36 | ) |
Discontinued operations, net of tax | 0.01 |
| | (0.02 | ) | | (0.24 | ) | | (0.60 | ) | (0.03 | ) | | (0.11 | ) | | 0.80 |
| | 0.06 |
|
Basic earnings (loss) per common share | $ | (0.05 | ) | | $ | (0.05 | ) | | $ | (0.33 | ) | | $ | (0.64 | ) | $ | (0.25 | ) | | $ | (1.30 | ) | | $ | 0.31 |
| | $ | (1.30 | ) |
| | | | | | | | |
Diluted earnings (loss) per common share: | | | | | | | | Diluted earnings (loss) per common share: | | | | | | |
Continuing operations | $ | (0.06 | ) | | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.04 | ) | $ | (0.22 | ) | | $ | (1.19 | ) | | $ | (0.49 | ) | | $ | (1.36 | ) |
Discontinued operations, net of tax | 0.01 |
| | (0.02 | ) | | (0.24 | ) | | (0.60 | ) | (0.03 | ) | | (0.11 | ) | | 0.80 |
| | 0.06 |
|
Diluted earnings (loss) per common share | $ | (0.05 | ) | | $ | (0.05 | ) | | $ | (0.33 | ) | | $ | (0.64 | ) | $ | (0.25 | ) | | $ | (1.30 | ) | | $ | 0.31 |
| | $ | (1.30 | ) |
| | | | | | | | |
Weighted average common shares: | | | | | | | | | | | | | | |
Weighted average common shares used in computing basic earnings (loss) per common share | 57,602 |
| | 56,899 |
| | 57,709 |
| | 55,523 |
| 58,608 |
| | 57,869 |
| | 58,491 |
| | 57,566 |
|
Weighted average common shares used in computing diluted earnings (loss) per common share | 57,602 |
| | 56,899 |
| | 57,709 |
| | 55,523 |
| 58,608 |
| | 57,869 |
| | 58,491 |
| | 57,566 |
|
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Loss from continuing operations | $ | (3,421 | ) | | $ | (1,870 | ) | | $ | (5,285 | ) | | $ | (2,011 | ) | $ | (12,990 | ) | | $ | (68,987 | ) | | $ | (28,370 | ) | | $ | (78,516 | ) |
Income (loss) from discontinued operations, net of tax | 319 |
| | (876 | ) | | (13,621 | ) | | (33,200 | ) | (1,608 | ) | | (6,404 | ) | | 46,764 |
| | 3,192 |
|
Net loss | (3,102 | ) | | (2,746 | ) | | (18,906 | ) | | (35,211 | ) | |
Net income (loss) | | (14,598 | ) | | (75,391 | ) | | 18,394 |
| | (75,324 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | |
Foreign currency translation adjustment | 148 |
| | (68 | ) | | 134 |
| | 256 |
| 24 |
| | 18 |
| | 118 |
| | (161 | ) |
Comprehensive income (loss) | $ | (2,954 | ) | | $ | (2,814 | ) | | $ | (18,772 | ) | | $ | (34,955 | ) | $ | (14,574 | ) | | $ | (75,373 | ) | | 18,512 |
| | (75,485 | ) |
Net loss attributable to noncontrolling interests | | — |
| | 357 |
| | — |
| | 357 |
|
Comprehensive income (loss) attributable to Flotek | | $ | (14,574 | ) | | $ | (75,016 | ) | | $ | 18,512 |
| | $ | (75,128 | ) |
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | Nine months ended September 30, | Six months ended June 30, |
| 2017 | | 2016 | 2019 | | 2018 |
Cash flows from operating activities: | | | | | | |
Net loss | $ | (18,906 | ) | | $ | (35,211 | ) | |
Loss from discontinued operations, net of tax | (13,621 | ) | | (33,200 | ) | |
Net income (loss) attributable to Flotek Industries, Inc. (Flotek) | | $ | 18,394 |
| | $ | (74,967 | ) |
Income from discontinued operations, net of tax | | 46,764 |
| | 3,192 |
|
Loss from continuing operations | (5,285 | ) | | (2,011 | ) | (28,370 | ) | | (78,159 | ) |
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities: | | | | |
Adjustments to reconcile loss from continuing operations to net cash used in operating activities: | | | | |
Depreciation and amortization | 9,091 |
| | 7,380 |
| 4,379 |
| | 4,676 |
|
Amortization of deferred financing costs | 376 |
| | 308 |
| 1,428 |
| | 192 |
|
Loss (gain) on sale of assets | 401 |
| | (29 | ) | |
Provision for doubtful accounts | | 102 |
| | (471 | ) |
Provision for excess and obsolete inventory | | — |
| | 1,942 |
|
Impairment of goodwill | | — |
| | 37,180 |
|
Loss on write-down of assets held for sale | | — |
| | 2,580 |
|
Loss on disposal of long-lived assets | | 1,093 |
| | 62 |
|
Non-cash lease expense | | 464 |
| | — |
|
Stock compensation expense | 9,679 |
| | 8,591 |
| 1,669 |
| | 4,385 |
|
Deferred income tax benefit | (8,290 | ) | | (6,309 | ) | |
Deferred income tax provision | | 17,855 |
| | 15,459 |
|
Reduction in tax benefit related to share-based awards | 915 |
| | 883 |
| 24 |
| | 72 |
|
Changes in current assets and liabilities: | | | | | | |
Restricted cash | | (661 | ) | | — |
|
Accounts receivable, net | (8,704 | ) | | (7,572 | ) | 6,289 |
| | 5,881 |
|
Inventories | (12,213 | ) | | (2,959 | ) | |
Inventories, net | | 907 |
| | (2,080 | ) |
Income taxes receivable | 9,254 |
| | (13,687 | ) | (281 | ) | | 63 |
|
Other current assets | 12,649 |
| | (51 | ) | (16,209 | ) | | 1,151 |
|
Accounts payable | (8,262 | ) | | 5,959 |
| (4,157 | ) | | 4,325 |
|
Accrued liabilities | 1,561 |
| | 10,434 |
| (10,216 | ) | | (16,889 | ) |
Income taxes payable | — |
| | (1,807 | ) | 1,182 |
| | — |
|
Interest payable | 6 |
| | 45 |
| (8 | ) | | (19 | ) |
Net cash provided by (used in) operating activities | 1,178 |
| | (825 | ) | |
Net cash used in operating activities | | (24,510 | ) | | (19,650 | ) |
Cash flows from investing activities: | | | | | | |
Capital expenditures | (6,155 | ) | | (10,618 | ) | (767 | ) | | (2,631 | ) |
Proceeds from sales of businesses | 18,490 |
| | — |
| |
Proceeds from sales of business | | 169,722 |
| | — |
|
Proceeds from sale of assets | 321 |
| | 38 |
| 140 |
| | 90 |
|
Payments for acquisition, net of cash acquired | — |
| | (7,863 | ) | |
Purchase of patents and other intangible assets | (817 | ) | | (311 | ) | (227 | ) | | (181 | ) |
Net cash provided by (used in) investing activities | 11,839 |
| | (18,754 | ) | 168,868 |
| | (2,722 | ) |
Cash flows from financing activities: | | | | | | |
Repayments of indebtedness | (9,833 | ) | | (15,398 | ) | |
Borrowings on revolving credit facility | 310,021 |
| | 256,738 |
| 42,984 |
| | 146,038 |
|
Repayments on revolving credit facility | (307,998 | ) | | (249,324 | ) | (92,715 | ) | | (124,862 | ) |
Debt issuance costs | (106 | ) | | (147 | ) | — |
| | (98 | ) |
Reduction in tax benefit related to share-based awards | — |
| | (883 | ) | |
Purchase of treasury stock related to share-based awards | (1,500 | ) | | (925 | ) | (142 | ) | | (24 | ) |
Proceeds from sale of common stock | 530 |
| | 30,610 |
| — |
| | 247 |
|
Repurchase of common stock | (4,174 | ) | | — |
| |
Proceeds from exercise of stock options | 21 |
| | 134 |
| |
Payments for finance leases | | (38 | ) | | — |
|
Loss from noncontrolling interest | | — |
| | (357 | ) |
Net cash (used in) provided by financing activities | (13,039 | ) | | 20,805 |
| (49,911 | ) | | 20,944 |
|
Discontinued operations: | | | | | | |
Net cash used in operating activities | (695 | ) | | (82 | ) | |
Net cash provided by investing activities | 708 |
| | 74 |
| |
Net cash flows provided by (used in) discontinued operations | 13 |
| | (8 | ) | |
Net cash (used in) provided by operating activities | | (321 | ) | | 644 |
|
Net cash provided by (used in) investing activities | | 337 |
| | (630 | ) |
Net cash flows provided by discontinued operations | | 16 |
| | 14 |
|
Effect of changes in exchange rates on cash and cash equivalents | 128 |
| | 48 |
| 2 |
| | (74 | ) |
Net increase in cash and cash equivalents | 119 |
| | 1,266 |
| |
Net increase (decrease) in cash and cash equivalents | | 94,465 |
| | (1,488 | ) |
Cash and cash equivalents at the beginning of period | 4,823 |
| | 2,208 |
| 3,044 |
| | 4,584 |
|
Cash and cash equivalents at the end of period | $ | 4,942 |
| | $ | 3,474 |
| $ | 97,509 |
| | $ | 3,096 |
|
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Non-controlling Interests | | Total Equity |
| Shares Issued | | Par Value | | Shares | | Cost | |
Balance, December 31, 2016 | 59,685 |
| | $ | 6 |
| | 2,029 |
| | $ | (20,269 | ) | | $ | 318,392 |
| | $ | (956 | ) | | $ | (9,830 | ) | | $ | 358 |
| | $ | 287,701 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (18,906 | ) | | — |
| | (18,906 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 134 |
| | — |
| | — |
| | 134 |
|
Stock issued under employee stock purchase plan | — |
| | — |
| | (81 | ) | | — |
| | 530 |
| | — |
| | — |
| | — |
| | 530 |
|
Common stock issued in payment of accrued liability | — |
| | — |
| | — |
| | — |
| | 188 |
| | — |
| | — |
| | — |
| | 188 |
|
Stock options exercised | 663 |
| | — |
| | — |
| | — |
| | 5,884 |
| | — |
| | — |
| | — |
| | 5,884 |
|
Stock surrendered for exercise of stock options | — |
| | — |
| | 478 |
| | (5,863 | ) | | — |
| | — |
| | — |
| | — |
| | (5,863 | ) |
Restricted stock granted | 274 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeited | — |
| | — |
| | 97 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock purchased | — |
| | — |
| | 151 |
| | (1,500 | ) | | — |
| | — |
| | — |
| | — |
| | (1,500 | ) |
Stock compensation expense | — |
| | — |
| | — |
| | — |
| | 9,496 |
| | — |
| | — |
| | — |
| | 9,496 |
|
Repurchase of common stock | — |
| | — |
| | 680 |
| | (4,174 | ) | | — |
| | — |
| | — |
| | — |
| | (4,174 | ) |
Balance, September 30, 2017 | 60,622 |
| | $ | 6 |
| | 3,354 |
| | $ | (31,806 | ) | | $ | 334,490 |
| | $ | (822 | ) | | $ | (28,736 | ) | | $ | 358 |
| | $ | 273,490 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2019 |
| Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Non-controlling Interests | | Total Stockholders’ Equity |
| Shares Issued | | Par Value | | Shares | | Cost | |
Balance, March 31, 2019 | 62,199 |
| | $ | 6 |
| | 3,845 |
| | $ | (33,368 | ) | | $ | 344,004 |
| | $ | (1,022 | ) | | $ | (74,573 | ) | | $ | — |
| | $ | 235,047 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,598 | ) | | — |
| | (14,598 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
Restricted stock granted | 757 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeited | — |
| | — |
| | 99 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock purchased | — |
| | — |
| | 4 |
| | (10 | ) | | — |
| | — |
| | — |
| | — |
| | (10 | ) |
Stock compensation expense | — |
| | — |
| | — |
| | — |
| | 1,213 |
| | — |
| | — |
| | — |
| | 1,213 |
|
Balance, June 30, 2019 | 62,956 |
| | $ | 6 |
| | 3,948 |
| | $ | (33,378 | ) | | $ | 345,217 |
| | $ | (998 | ) | | $ | (89,171 | ) | | $ | — |
| | $ | 221,676 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2018 |
| Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Non-controlling Interests | | Total Stockholders’ Equity |
| Shares Issued | | Par Value | | Shares | | Cost | |
Balance, March 31, 2018 | 61,161 |
| | $ | 6 |
| | 3,599 |
| | $ | (33,067 | ) | | $ | 338,137 |
| | $ | (1,063 | ) | | $ | (37,158 | ) | | $ | 358 |
| | $ | 267,213 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (75,034 | ) | | (357 | ) | | (75,391 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | — |
| | 18 |
|
Stock issued under employee stock purchase plan | — |
| | — |
| | (36 | ) | | — |
| | 100 |
| | — |
| | — |
| | — |
| | 100 |
|
Restricted stock granted | 481 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeited | — |
| | — |
| | 39 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock purchased | — |
| | — |
| | 5 |
| | (21 | ) | | — |
| | — |
| | — |
| | — |
| | (21 | ) |
Stock compensation expense | — |
| | — |
| | — |
| | — |
| | 2,381 |
| | — |
| | — |
| | — |
| | 2,381 |
|
Balance, June 30, 2018 | 61,642 |
| | $ | 6 |
| | 3,607 |
| | $ | (33,088 | ) | | $ | 340,618 |
| | $ | (1,045 | ) | | $ | (112,192 | ) | | $ | 1 |
| | $ | 194,300 |
|
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2019 |
| Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Non-controlling Interests | | Total Stockholders’ Equity |
| Shares Issued | | Par Value | | Shares | | Cost | |
Balance, December 31, 2018 | 62,163 |
| | $ | 6 |
| | 3,770 |
| | $ | (33,237 | ) | | $ | 343,536 |
| | $ | (1,116 | ) | | $ | (107,565 | ) | | $ | — |
| | $ | 201,624 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 18,394 |
| | — |
| | 18,394 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 118 |
| | — |
| | — |
| | 118 |
|
Restricted stock granted | 793 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeited | — |
| | — |
| | 133 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock purchased | — |
| | — |
| | 45 |
| | (141 | ) | | — |
| | — |
| | — |
| | — |
| | (141 | ) |
Stock compensation expense | — |
| | — |
| | — |
| | — |
| | 1,681 |
| | — |
| | — |
| | — |
| | 1,681 |
|
Balance, June 30, 2019 | 62,956 |
| | $ | 6 |
| | 3,948 |
| | $ | (33,378 | ) | | $ | 345,217 |
| | $ | (998 | ) | | $ | (89,171 | ) | | $ | — |
| | $ | 221,676 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2018 |
| Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Non-controlling Interests | | Total Stockholders’ Equity |
| Shares Issued | | Par Value | | Shares | | Cost | |
Balance, December 31, 2017 | 60,623 |
| | $ | 6 |
| | 3,621 |
| | $ | (33,064 | ) | | $ | 336,067 |
| | $ | (884 | ) | | $ | (37,225 | ) | | $ | 358 |
| | $ | 265,258 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (74,967 | ) | | (357 | ) | | (75,324 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | (161 | ) | | — |
| | — |
| | (161 | ) |
Stock issued under employee stock purchase plan | — |
| | — |
| | (65 | ) | | — |
| | 247 |
| | — |
| | — |
| | — |
| | 247 |
|
Restricted stock granted | 1,019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeited | — |
| | — |
| | 45 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock purchased | — |
| | — |
| | 6 |
| | (24 | ) | | — |
| | — |
| | — |
| | — |
| | (24 | ) |
Stock compensation expense | — |
| | — |
| | — |
| | — |
| | 4,304 |
| | — |
| | — |
| | — |
| | 4,304 |
|
Balance, June 30, 2018 | 61,642 |
| | $ | 6 |
| | 3,607 |
| | $ | (33,088 | ) | | $ | 340,618 |
| | $ | (1,045 | ) | | $ | (112,192 | ) | | $ | 1 |
| | $ | 194,300 |
|
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Significant Accounting Policies
Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global, diversified,an international energy chemistry technology-driven company that develops and supplies chemistrieschemistry and services to the oil and gas industries, andindustry. Flotek also supplied high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets.markets, classified as discontinued operations at December 31, 2018.
The Company’s oilfield business includes specialty chemistries and logistics which enable its customers in pursuingto pursue improved efficiencies in the drilling and completion of their wells. The Company also provides automated bulk material handling, loading facilities, and blending capabilities. TheIn the segment reported as discontinued operations at December 31, 2018, the Company processesprocessed citrus oil to produce (1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous industries around the world, including the oil and gas (“O&G”) industry.
Flotek operates in over 2015 domestic and international markets. Customers include major integrated O&G companies, oilfield services companies, independent O&G companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies. The Company also servesserved customers who purchase non-energy-related citrus oil and related products, including household and commercial cleaning product companies, fragrance and cosmetic companies, and food manufacturing companies.companies, reported as discontinued operations at December 31, 2018.
Flotek was initially incorporated under the laws of the Province of British Columbia on May 17, 1985. On October 23, 2001, Flotek changed its corporate domicile to the state of Delaware.
Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements and accompanying footnotes (collectively the “Financial Statements”) reflect all adjustments, in the opinion of management, necessary for fair presentation of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The Financial Statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim Financial Statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20162018 (“Annual Report”). A copy of the Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. The results of operations for the three and ninesix months ended SeptemberJune 30, 2017,2019 are not necessarily indicative of the results to be expected for the year endingended December 31, 2017.2019.
During the fourth quarter of 2016,2018, the Company classified the DrillingConsumer and Industrial Chemistry Technologies and Production Technologies segmentssegment as held for sale based on management’s intention to sell these businesses.this business. The Company’s historical financial statements have been revised to present the operating results of the DrillingConsumer and Industrial Chemistry Technologies and Production Technologies segmentssegment as discontinued operations. The results of operations of Drilling Technologies and Production Technologiesthis segment are presented as “Loss“Income (loss) from discontinued operations” in the statement of operations and the related cash flows of these segments hasthis segment have been reclassified to discontinued operations for all periods presented. The assets and liabilities of the DrillingConsumer and Industrial Chemistry Technologies and Production Technologies segmentssegment have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheetssheet for all periods presented.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of lease liabilities, and operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current portion of lease liabilities, and finance lease liabilities in the consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
commencement date based on the present value of lease payments over the lease term. As the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The lease term is modified to reflect options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has some lease agreements that contain both lease and non-lease components. The Company has elected to account for such leases as having a single lease component.
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications did not impact net income (loss).loss.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Recent Accounting Pronouncements
Application of New Accounting Standards
Effective January 1, 2017,2019, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2015-11,2016-02, “Simplifying the Measurement of InventoryLeases.” This standard (ASC 842) requires managementthe recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP (ASC 840). The Company adopted ASC 842 using the optional transition method. Consequently, the Company’s reporting for the comparative periods presented prior to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices2019 in the ordinary coursefinancial statements will continue to be in accordance with ASC 840. Upon adoption, the Company recorded operating lease ROU assets and corresponding operating lease liabilities, net of business, less reasonably predictable costsdeferred rent, of completion, disposal,approximately $18.4 million, representing the present value of future lease payments under operating leases with terms of greater than twelve months. The adoption of this standard did not have a material impact on the consolidated statements of operations or cash flows. Refer to Note 4 — “Leases” for further information surrounding adoption of this new standard.
Effective January 1, 2019, the Company adopted ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and transportation.Jobs Act. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2017,2019, the Company adopted the accounting guidance in ASU No. 2015-17,2018-07, “Balance Sheet Classification of Deferred TaxesImprovements to Nonemployee Share-Based Payment Accounting.” This standard eliminatedexpands the requirementscope of Topic 718 to include share-based payment transactions for organizations to present deferred tax assetsacquiring goods and liabilities as current and noncurrent in a classified balance sheet. Instead, organizations are now required to classify all deferred tax assets and liabilities as noncurrent.services from nonemployees. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard retrospectively and, therefore, prior periods presented were adjusted.
Effective January 1, 2017, the Company adopted the accounting guidance in ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance requires excess tax benefits and deficiencies to be recognized in the income statement rather than in additional paid-in capital. As a result of applying this change, the Company recognized a $0.9 million reduction in tax benefit in the provision for incomes taxes during the nine months ended September 30, 2017. The Company applied this standard prospectively, where applicable, and, therefore, prior periods presented were not adjusted.
New Accounting Requirements and Disclosures
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, which improves the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, which clarifies identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-11, which rescinds certain SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, effective upon adoption of ASU 2014-09, and ASU No. 2016-12, which reduces the potential for diversity in practice at initial application and reduces the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. In December 2016, the FASB issued ASU No. 2016-20, which provides technical corrections and improvements to the original guidance issued. The Company intends to adopt the new standard in the first quarter of 2018 and is still evaluating which method to implement based on continued review of past and anticipated revenue streams given the change in strategic focus of the business during 2017. The Company has identified key contract types representative of its business for comparing historical accounting policies and practices to the new standard and is continuing to evaluate the impact these pronouncements will have on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” This standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. The pronouncement is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and should be applied using a modified retrospective transition approach, with early application permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In August 2016,2018, the FASB issued ASU No. 2016-15,2018-13, “Classification of Certain Cash Receipts and Cash Payments.” This standard addresses eight specific cash flow issues withDisclosure Framework — Changes to the objective of reducing the existing diversity in practice. The pronouncement is effectiveDisclosure Requirements for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business.” This standard provides additional guidance on whether an integrated set of assets and activities constitutes a business. The pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted in specific instances. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill ImpairmentFair Value Measurement.” This standard eliminates Step 2 from the goodwill impairment test. An entity will now recognize an impairment chargeremoves, modifies, and adds additional requirements for the amount by which the carrying amount exceeds the reporting unit’sdisclosures related to fair value.value measurement in ASC 820. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.permitted in any interim period. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting.” This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. The pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
Note 3 — Discontinued Operations
During the fourth quarter 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. The Company executed a plan to sell or otherwise dispose of the Drilling Technologies and Production Technologies segments. An investment banking advisory services firm was engaged and actively marketed these segments.
The Company met all of the criteria to classify the Drilling Technologies and Production Technologies segments’ assets and liabilities as held for sale in the fourth quarter 2016. Effective December 31, 2016, the Company classified the assets, liabilities, and results of operations for these two segments as “Discontinued Operations” for all periods presented.
Disposal of the Drilling Technologies and Production Technologies reporting segments represented a strategic shift that would have a major effect on the Company’s operations and financial results. Management expects the sale or disposal of the assets of these segments to be completed by the end of 2017.
On May 22, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Drilling Technologies segment to National Oilwell Varco, L.P. (“NOV”) for $17.0 million in cash consideration, subject to normal working capital adjustments, with $1.5 million held back by NOV for up to 18 months to satisfy potential indemnification claims.
On May 23, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Production Technologies segment to Raptor Lift Solutions, LLC (“Raptor Lift”) for $2.9 million in cash consideration, with $0.4 million held back by Raptor Lift to satisfy potential indemnification claims.
On August 16, 2017, the Company completed the sale of substantially all of the remaining assets of the Company’s Drilling Technologies segment to Galleon Mining Tools, Inc. for $1.0 million in cash consideration and a note receivable of $1.0 million due in one year.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Discontinued Operations
During the fourth quarter of 2018, the Company initiated and began executing a strategic plan to sell its Consumer and Industrial Chemistry Technologies (“CICT”) segment. An investment banking advisory services firm was engaged and actively marketed this segment.
The Company met all of the criteria to classify the CICT segment’s assets and liabilities as held for sale in the fourth quarter 2018. The Company has classified the assets, liabilities, and results of operations for this segment as “Discontinued Operations” for all periods presented.
Disposal of the CICT reporting segment represented a strategic shift that will have a major effect on the Company’s operations and financial results.
On January 10, 2019, the Company entered into a Share Purchase Agreement with Archer-Daniels-Midland Company (“ADM”) for the sale of all of the shares representing membership interests in its wholly owned subsidiary, Florida Chemical Company, LLC, which represented the CICT segment.
Effective February 28, 2019, the Company completed the sale of the CICT segment to ADM for $175.0 million in cash consideration, with $4.4 million temporarily held in escrow by ADM for post-closing working capital adjustments for up to 90 days and $13.1 million temporarily held in escrow to satisfy potential indemnification claims by ADM with anticipated releases at 6 months, 12 months, and 15 months.
As of June 30, 2019, the Company and ADM had not reached an agreement on the post-closing working capital adjustment. As of this filing, the Company is in process of engaging a third party to assist with reaching a conclusion.
Concurrent with the closing of the sale of the CICT segment, the Company retained $11.1 million of historical inventory previously held by the CICT segment. In addition, the Company executed a long-term supply agreement for terpene product, which serves as a feedstock to some of the Company’s key value-added products. The term of the agreement runs through September 2023, with an option to extend for an additional year. This agreement secures the Company’s access to a sufficient supply of terpene and includes a minimum annual purchase requirement at variable prices during the term of the agreement.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Consumer and Industrial Chemistry Technologies | | | | | | | |
Revenue | $ | — |
| | $ | 19,540 |
| | $ | 11,031 |
| | $ | 38,987 |
|
Operating expenses | — |
| | (18,066 | ) | | (11,572 | ) | | (34,236 | ) |
Depreciation and amortization | — |
| | (682 | ) | | — |
| | (1,351 | ) |
Research and development | — |
| | (153 | ) | | (69 | ) | | (322 | ) |
(Loss) income from operations | — |
| | 639 |
| | (610 | ) | | 3,078 |
|
Other income | — |
| | 366 |
| | 35 |
| | 192 |
|
Gain (Loss) on sale of business | (2,100 | ) | | — |
| | 67,694 |
| | — |
|
(Loss) income before income taxes | (2,100 | ) | | 1,005 |
| | 67,119 |
| | 3,270 |
|
Income tax benefit (expense) | 492 |
| | (7,409 | ) | | (20,355 | ) | | (78 | ) |
Net income (loss) from discontinued operations | $ | (1,608 | ) | | $ | (6,404 | ) | | $ | 46,764 |
| | $ | 3,192 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Drilling Technologies | | | | | | | |
Revenue | $ | — |
| | $ | 7,197 |
| | $ | 11,534 |
| | $ | 20,026 |
|
Cost of revenue | — |
| | (4,290 | ) | | (7,259 | ) | | (13,876 | ) |
Selling, general and administrative | (791 | ) | | (3,568 | ) | | (6,562 | ) | | (11,723 | ) |
Depreciation and amortization | — |
| | (340 | ) | | — |
| | (1,425 | ) |
Research and development | — |
| | — |
| | (6 | ) | | (65 | ) |
Gain on disposal of long-lived assets | 36 |
| | 77 |
| | 97 |
| | 92 |
|
Impairment of inventory and long-lived assets | — |
| | — |
| | — |
| | (36,522 | ) |
Loss from operations | (755 | ) | | (924 | ) | | (2,196 | ) | | (43,493 | ) |
Other income (expense) | 26 |
| | (77 | ) | | (91 | ) | | (320 | ) |
Gain (loss) on sales of businesses | 463 |
| | — |
| | (902 | ) | | — |
|
Loss on write-down of assets held for sale | — |
| | — |
| | (6,831 | ) | | — |
|
Loss before income taxes | (266 | ) | | (1,001 | ) | | (10,020 | ) | | (43,813 | ) |
Income tax benefit | 581 |
| | 592 |
| | 3,473 |
| | 15,673 |
|
Net income (loss) from discontinued operations | $ | 315 |
| | $ | (409 | ) | | $ | (6,547 | ) | | $ | (28,140 | ) |
| | | | | | | |
Production Technologies | | | | | | | |
Revenue | $ | — |
| | $ | 2,145 |
| | $ | 4,002 |
| | $ | 6,034 |
|
Cost of revenue | — |
| | (2,040 | ) | | (3,189 | ) | | (5,833 | ) |
Selling, general and administrative | (64 | ) | | (878 | ) | | (1,739 | ) | | (2,929 | ) |
Depreciation and amortization | — |
| | (149 | ) | | — |
| | (447 | ) |
Research and development | — |
| | (204 | ) | | (364 | ) | | (671 | ) |
Gain (loss) on disposal of long-lived assets | — |
| | 8 |
| | — |
| | (51 | ) |
Impairment of inventory | — |
| | — |
| | — |
| | (3,913 | ) |
Loss from operations | (64 | ) | | (1,118 | ) | | (1,290 | ) | | (7,810 | ) |
Other expense | — |
| | (24 | ) | | (52 | ) | | (68 | ) |
Gain on sale of businesses | 61 |
| | — |
| | 233 |
| | — |
|
Loss on write-down of assets held for sale | — |
| | — |
| | (9,718 | ) | | — |
|
Loss before income taxes | (3 | ) | | (1,142 | ) | | (10,827 | ) | | (7,878 | ) |
Income tax benefit | 7 |
| | 675 |
| | 3,753 |
| | 2,818 |
|
Net income (loss) from discontinued operations | $ | 4 |
| | $ | (467 | ) | | $ | (7,074 | ) | | $ | (5,060 | ) |
| | | | | | | |
Drilling Technologies and Production Technologies | | | | | | | |
Income (loss) from discontinued operations, net of tax | $ | 319 |
| | $ | (876 | ) | | $ | (13,621 | ) | | $ | (33,200 | ) |
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The assets and liabilities held for sale on the Consolidated Balance Sheets as of SeptemberJune 30, 20172019 and December 31, 20162018, are as follows (in thousands):
|
| | | | | | | |
| Consumer and Industrial Chemistry Technologies |
| June 30, 2019 | | December 31, 2018 |
Assets: | | | |
Accounts receivable, net | $ | — |
| | $ | 10,547 |
|
Inventories, net | — |
| | 52,069 |
|
Other current assets | — |
| | 446 |
|
Property and equipment, net | — |
| | 15,899 |
|
Goodwill | — |
| | 19,480 |
|
Other intangible assets, net | — |
| | 20,029 |
|
Assets held for sale | — |
| | 118,470 |
|
Valuation allowance | — |
| | — |
|
Assets held for sale, net | $ | — |
| | $ | 118,470 |
|
Liabilities: | | | |
Accounts payable | $ | — |
| | $ | 8,883 |
|
Accrued liabilities | — |
| | 291 |
|
Liabilities held for sale | $ | — |
| | $ | 9,174 |
|
|
| | | | | | | | | | | | | | | |
| Drilling Technologies | | Production Technologies |
| September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
Assets: | | | | | | | |
Accounts receivable, net | $ | 1,749 |
| | $ | 5,072 |
| | $ | 201 |
| | $ | 1,784 |
|
Inventories | 5 |
| | 9,078 |
| | 5 |
| | 8,115 |
|
Other current assets | 1,585 |
| | 278 |
| | 699 |
| | 370 |
|
Long-term receivable | — |
| | — |
| | — |
| | 4,179 |
|
Property and equipment, net | — |
| | 11,277 |
| | — |
| | 3,978 |
|
Goodwill | — |
| | 15,333 |
| | — |
| | 1,689 |
|
Other intangible assets, net | — |
| | 7,395 |
| | — |
| | 484 |
|
Assets held for sale | 3,339 |
| | 48,433 |
| | 905 |
| | 20,599 |
|
Valuation allowance | (109 | ) | | (18,971 | ) | | — |
| | (6,161 | ) |
Assets held for sale, net | $ | 3,230 |
| | $ | 29,462 |
| | $ | 905 |
| | $ | 14,438 |
|
Liabilities: | | | | | | | |
Accounts payable | $ | 15 |
| | $ | 2,472 |
| | $ | 10 |
| | $ | 914 |
|
Accrued liabilities | 1,419 |
| | 1,190 |
| | 142 |
| | 385 |
|
Liabilities held for sale | $ | 1,434 |
| | $ | 3,662 |
| | $ | 152 |
| | $ | 1,299 |
|
Note 4 — Impairment of Inventory and Long-Lived Assets for Discontinued OperationsLeases
During the three months ended March 31, 2016, as a result of changes in the oil and gas industry that occurred since the beginning of 2016 and the corresponding impact on the Company’s business outlook,Effective January 1, 2019, the Company evaluatedadopted ASC 842 using the directionprospective method applied to those leases which were not completed as of its business activities. Crude oil prices, which appeared to have stabilized during the fourth quarter of 2015, fell further during the first quarter of 2016, decreasing approximately 21% from average prices seen in the fourth quarter of 2015. The U.S. drilling rig count declined from 698 at December 31, 2015 to 450 at April 1, 2016, a decline of 35.5%.
Due to the decreased rig activity and its impact on management’s expectations for future market activity, the Company further refocused operations of its Drilling Technologies segment.2018. The Company decidedhas leases for corporate offices, research and development facilities, warehouses, sales offices and equipment. The leases have remaining lease terms of 1 year to exit19 years, some of which include options to extend the business of building and repairing motors in all domestic markets. In addition, changes in drilling technique, including further escalation of the moveleases for up to a dominance of pad drilling, reduced the marketability of certain other inventory items. The focus of the Production Technologies segment was shifted to its new technologies for electric submersible pumps for the oil and gas industry and for hydraulic pumping units. Inventory associated with older technologies for these items has been evaluated for impairment. As a result of these changes in focus and projected declines in asset utilization,10 years.
Upon adoption, the Company recorded a pre-tax impairmentoperating lease ROU assets and corresponding operating lease liabilities, net of inventories as noted below.
Changes indeferred rent, of approximately $18.4 million, representing the business climate noted above and increasing operating losses experienced within the Drilling Technologies and Production Technologies segments during the three months ended March 31, 2016, caused the Company to test asset groups within these two segments for recoverability. Recoverability of the carryingpresent 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 asset groups was based upon estimated futurebalance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the expected lease term.
The components of lease expense and supplemental cash flows while taking into consideration various assumptions and estimates, including future use of the assets, remaining useful life of the assets, and eventual disposition of the assets. Undiscounted estimated cash flows of two asset groups associated with domestic operations in the Drilling Technologies segment did not exceed the carrying value of the respective asset groups. Therefore, the Company performed an analysis of discounted future cash flows to determine the fair value of each of these two asset groups. As a result of this testing, the Company recorded a pre-tax impairment of long-lived assetsflow information are as noted below.follows (in thousands):
|
| | | | | | | |
| Three months ended June 30, 2019 | | Six months ended June 30, 2019 |
Operating lease expense | $ | 653 |
| | $ | 1,306 |
|
Finance lease expense: | | | |
Amortization of right-of-use assets | 220 |
| | 220 |
|
Interest on lease liabilities | 3 |
| | 3 |
|
Total finance lease expense | 223 |
| | 223 |
|
Short-term lease expense | 32 |
| | 75 |
|
Total lease expense | $ | 908 |
| | $ | 1,604 |
|
| | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 583 |
| | $ | 1,165 |
|
Operating cash flows from finance leases | 3 |
| | 3 |
|
Financing cash flows from finance leases | 38 |
| | 38 |
|
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded impairment charges during the three months ended March 31, 2016,Maturities of lease liabilities are as follows (in thousands):
|
| | | | | | | | |
Year ending December 31, | | Operating Leases | | Finance Leases |
2019 (excluding the three months ended June 30, 2019) | $ | 1,174 |
| | $ | 20 |
|
2020 | | 2,348 |
| | 71 |
|
2021 | | 2,307 |
| | 71 |
|
2022 | | 2,270 |
| | 39 |
|
2023 | | 2,180 |
| | 39 |
|
Thereafter | | 25,877 |
| | 23 |
|
Total lease payments | | $ | 36,156 |
| | $ | 263 |
|
Less: Interest | | (17,213 | ) | | (43 | ) |
Present value of lease liabilities | | $ | 18,943 |
| | $ | 220 |
|
|
| | | |
Drilling Technologies: | |
Inventories | $ | 12,653 |
|
Long-lived assets: |
|
|
Property and equipment | 14,642 |
|
Intangible assets other than goodwill | 9,227 |
|
Production Technologies: | |
Inventories | 3,913 |
|
Total impairment | $ | 40,435 |
|
Supplemental balance sheet information related to leases is as follows (in thousands):Based on the changes in the business climate discussed above and continuing operating losses experienced during the three months ended March 31, 2016, June 30, 2016, and September 30, 2016, goodwill within the Teledrift and Production Technologies reporting units was tested for impairment during these periods. However, no impairments of goodwill were recorded based upon this testing. |
| | | |
| June 30, 2019 |
Operating Leases | |
Operating lease right-of-use assets | $ | 17,982 |
|
| |
Current portion of lease liabilities | $ | 687 |
|
Long-term operating lease liabilities | 18,256 |
|
Total operating lease liabilities | $ | 18,943 |
|
| |
Finance Leases | |
Property and equipment | $ | 297 |
|
Accumulated depreciation | (10 | ) |
Property and equipment, net | $ | 287 |
|
| |
Current portion of lease liabilities | $ | 27 |
|
Long-term finance lease liabilities | 193 |
|
Total finance lease liabilities | $ | 220 |
|
| |
Weighted Average Remaining Lease Term | |
Operating leases | 15.8 years |
|
Finance leases | 5.1 years |
|
| |
Weighted Average Discount Rate | |
Operating leases | 8.9 | % |
Finance leases | 8.5 | % |
Note 5 — AcquisitionsRevenue from Contracts with Customers
On July 27, 2016,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 acquired 100%expects to be entitled to in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services are distinct within the context of the stockcontract. Variable consideration typically consists of product returns and interestsis 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.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For certain contracts, the Company recognizes revenue under the percentage-of-completion method of accounting, measured by the percentage of “costs incurred to date” to the “total estimated costs of completion.” This percentage is applied to the “total estimated revenue at completion” to calculate proportionate revenue earned to date. For the three and six months ended June 30, 2019 and 2018, the percentage-of-completion revenue accounted for less than 0.1% of total revenue during the respective time periods. This resulted in International Polymerics, Inc. (“IPI”)immaterial unfulfilled performance obligations and related entitiesimmaterial contract assets and/or liabilities, for $7.9 million in cash consideration, netwhich the Company did not record adjustments to opening retained earnings as of cash acquired, and 247,764 sharesDecember 31, 2015 or for any periods previously presented.
The vast majority of the Company’s common stock. IPI isproducts are sold at a U.S. based manufacturerpoint in time and service contracts are short-term in nature. Sales are billed on a monthly basis with payment terms customarily 30 days from invoice receipt. In addition, sales taxes are excluded from revenues.
Disaggregation of high viscosity guar gumRevenue
The Company has disaggregated revenues by product sales (point-in-time revenue recognition) and guar slurryservice revenue (over-time revenue recognition), where product sales accounted for over 95% of total revenue for the oilthree and gas industrysix months ended June 30, 2019 and 2018.
The Company differentiates revenue and operating expenses (excluding depreciation and amortization) based on whether the source of revenue is attributable to products or services. Revenue and operating expenses (excluding depreciation and amortization) disaggregated by revenue source are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue: | | | | | | | |
Products | $ | 33,632 |
| | $ | 38,213 |
| | $ | 75,703 |
| | $ | 78,142 |
|
Services | 1,060 |
| | 1,333 |
| | 2,246 |
| | 2,473 |
|
| $ | 34,692 |
| | $ | 39,546 |
| | $ | 77,949 |
| | $ | 80,615 |
|
Operating expenses (excluding depreciation and amortization): | | | | | | |
Products | $ | 37,798 |
| | $ | 34,062 |
| | $ | 81,877 |
| | $ | 69,247 |
|
Services | 508 |
| | 1,482 |
| | 1,027 |
| | 2,952 |
|
| $ | 38,306 |
| | $ | 35,544 |
| | $ | 82,904 |
| | $ | 72,199 |
|
Arrangements with Multiple Performance Obligations
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Standalone selling prices are generally determined based on the prices charged to customers (“observable standalone price”) or an expected cost plus a wide selectionmargin approach. For combined products and services within a contract, the Company accounts for individual products and services separately if they are distinct (i.e. if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration is allocated between separate products and services within a contract based on the prices at the observable standalone price. For items that are not sold separately, the expected cost plus a margin approach is used to estimate the standalone selling price of stimulation chemicals.each performance obligation.
Contract Balances
Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, no revenue contracts give rise to contract assets or liabilities under ASC 606.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
|
| | | | | | | |
| Six months ended June 30, |
| 2019 | | 2018 |
Supplemental cash payment information: | | | |
Interest paid | $ | 594 |
| | $ | 983 |
|
Income taxes paid, net of refunds | 627 |
| | 327 |
|
|
| | | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
Supplemental non-cash investing and financing activities: | | | |
Value of common stock issued in acquisition | $ | — |
| | $ | 3,268 |
|
Value of common stock issued in payment of accrued liability | 188 |
| | — |
|
Exercise of stock options by common stock surrender | 5,863 |
| | 50 |
|
Supplemental cash payment information: | | | |
Interest paid | $ | 1,511 |
| | $ | 1,459 |
|
Income taxes received, net of payments (paid, net of refunds) | 10,081 |
| | (1,663 | ) |
Note 7 — RevenueInventories
The Company differentiates revenue and cost of revenue based on whether the source of revenue is attributable to products or services. Revenue and cost of revenue by sourceInventories are as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Raw materials | $ | 11,076 |
| | $ | 10,608 |
|
Finished goods | 16,284 |
| | 18,798 |
|
Inventories | 27,360 |
| | 29,406 |
|
Less reserve for excess and obsolete inventory | (918 | ) | | (2,117 | ) |
Inventories, net | $ | 26,442 |
| | $ | 27,289 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue: | | | | | | | |
Products | $ | 77,956 |
| | $ | 62,562 |
| | $ | 240,306 |
| | $ | 187,122 |
|
Services | 1,502 |
| | 1,775 |
| | 4,283 |
| | 5,105 |
|
| $ | 79,458 |
| | $ | 64,337 |
| | $ | 244,589 |
| | $ | 192,227 |
|
Cost of revenue: | | | | | | | |
Products | $ | 55,846 |
| | $ | 41,117 |
| | $ | 163,587 |
| | $ | 122,055 |
|
Services | 1,345 |
| | 354 |
| | 3,802 |
| | 950 |
|
Depreciation | 527 |
| | 512 |
| | 1,627 |
| | 1,357 |
|
| $ | 57,718 |
| | $ | 41,983 |
| | $ | 169,016 |
| | $ | 124,362 |
|
Note 8 — Property and Equipment
Property and equipment are as follows (in thousands): |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Land | $ | 4,372 |
| | $ | 4,372 |
|
Buildings and leasehold improvements | 37,787 |
| | 37,719 |
|
Machinery and equipment | 26,802 |
| | 26,995 |
|
Fixed assets in progress | 639 |
| | 581 |
|
Furniture and fixtures | 1,733 |
| | 1,573 |
|
Transportation equipment | 1,700 |
| | 1,852 |
|
Computer equipment and software | 5,543 |
| | 9,370 |
|
Property and equipment | 78,576 |
| | 82,462 |
|
Less accumulated depreciation | (36,816 | ) | | (36,977 | ) |
Property and equipment, net | $ | 41,760 |
| | $ | 45,485 |
|
Depreciation expense totaled $1.6 million and $2.0 million for the three months ended June 30, 2019 and 2018, respectively, and $3.4 million and $4.0 million for the six months ended June 30, 2019 and 2018, respectively.
During the three and six months ended June 30, 2019 and 2018, no impairments were recognized related to property and equipment.
Note 9 — Goodwill
During the second quarter of 2018, the Company recognized a goodwill impairment charge of $37.2 million in the Energy Chemistry Technologies (“ECT”) reporting unit, which resulted from sustained under-performance and lower expectations related to the reporting unit. As a result of these factors, a qualitative analysis, and additional risks associated with the business, the Company concluded that sufficient indicators existed to require an interim quantitative assessment of goodwill for that reporting unit as of June 30, 2018. The fair value of the reporting unit was estimated based on an analysis of the present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The assumptions were based on the actual historical performance of the reporting unit and took into account a recent weakening of operating results in an improving market environment. The excess of the reporting unit’s carrying value over the estimated fair value was recorded as the goodwill impairment charge in the second quarter 2018 and represented all of the ECT reporting unit’s goodwill.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Inventories
Inventories are as follows (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Raw materials | $ | 37,961 |
| | $ | 28,626 |
|
Work-in-process | 3,042 |
| | 2,918 |
|
Finished goods | 29,713 |
| | 26,739 |
|
Inventories | $ | 70,716 |
| | $ | 58,283 |
|
Note 9 — PropertyThe Company has no reporting units which had a goodwill balance at December 31, 2018, and Equipment
Property and equipment are as follows (in thousands): |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Land | $ | 6,748 |
| | $ | 5,837 |
|
Buildings and leasehold improvements | 43,431 |
| | 42,986 |
|
Machinery and equipment | 38,862 |
| | 36,187 |
|
Equipment in progress | 5,475 |
| | 3,235 |
|
Furniture and fixtures | 2,029 |
| | 1,969 |
|
Transportation equipment | 2,307 |
| | 3,059 |
|
Computer equipment and software | 12,168 |
| | 11,844 |
|
Property and equipment | 111,020 |
| | 105,117 |
|
Less accumulated depreciation | (37,309 | ) | | (30,426 | ) |
Property and equipment, net | $ | 73,711 |
| | $ | 74,691 |
|
Depreciation expense, including expense recorded in cost of revenue, totaled $2.4 million and $2.1 million for the three months ended September 30, 2017 and 2016, respectively, and $7.0 million and $5.3 million for the nine months ended September 30, 2017 and 2016, respectively.
Duringthere were no acquisitions during the three and ninesix months ended SeptemberJune 30, 2017 and 2016, no impairments were recognized related to property and equipment.2019.
Note 10 — Goodwill
Changes in the carrying value of goodwill for each reporting unit are as follows (in thousands): |
| | | | | | | | | | | |
| Energy Chemistry Technologies | | Consumer and Industrial Chemistry Technologies | | Total |
Balance at December 31, 2016 | $ | 37,180 |
| | $ | 19,480 |
| | $ | 56,660 |
|
Goodwill impairment recognized | — |
| | — |
| | — |
|
Balance at September 30, 2017 | $ | 37,180 |
| | $ | 19,480 |
| | $ | 56,660 |
|
During the three and nine months ended September 30, 2017 and 2016, no impairments of goodwill were recognized.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Cost | | Accumulated Amortization | | Cost | | Accumulated Amortization |
Finite-lived intangible assets: | | | | | | | |
Patents and technology | $ | 18,851 |
| | $ | 7,270 |
| | $ | 18,884 |
| | $ | 6,689 |
|
Customer lists | 15,367 |
| | 5,636 |
| | 15,367 |
| | 5,259 |
|
Trademarks and brand names | 1,358 |
| | 1,140 |
| | 1,485 |
| | 1,149 |
|
Total finite-lived intangible assets acquired | 35,576 |
| | 14,046 |
| | 35,736 |
| | 13,097 |
|
Deferred financing costs | — |
| | — |
| | 1,924 |
| | 496 |
|
Total amortizable intangible assets | 35,576 |
| | $ | 14,046 |
| | 37,660 |
| | $ | 13,593 |
|
Indefinite-lived intangible assets: | | | | | | | |
Trademarks and brand names | 2,760 |
| | | | 2,760 |
| | |
Total other intangible assets | $ | 38,336 |
| | | | $ | 40,420 |
| | |
| | | | | | | |
Carrying value: | | | | | | | |
Other intangible assets, net | $ | 24,290 |
| | | | $ | 26,827 |
| | |
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Cost | | Accumulated Amortization | | Cost | | Accumulated Amortization |
Finite-lived intangible assets: | | | | | | | |
Patents and technology | $ | 17,236 |
| | $ | 5,323 |
| | $ | 16,815 |
| | $ | 4,537 |
|
Customer lists | 30,877 |
| | 7,745 |
| | 30,877 |
| | 6,518 |
|
Trademarks and brand names | 1,544 |
| | 1,105 |
| | 1,467 |
| | 1,069 |
|
Total finite-lived intangible assets acquired | 49,657 |
| | 14,173 |
| | 49,159 |
| | 12,124 |
|
Deferred financing costs | 2,230 |
| | 493 |
| | 1,804 |
| | 117 |
|
Total amortizable intangible assets | 51,887 |
| | $ | 14,666 |
| | 50,963 |
| | $ | 12,241 |
|
Indefinite-lived intangible assets: | | | | | | | |
Trademarks and brand names | 11,630 |
| | | | 11,630 |
| | |
Total other intangible assets | $ | 63,517 |
| | | | $ | 62,593 |
| | |
| | | | | | | |
Carrying value: | | | | | | | |
Other intangible assets, net | $ | 48,851 |
| | | | $ | 50,352 |
| | |
Finite-lived intangible assets acquired are amortized on a straight-line basis over two to 20 years. Amortization of finite-lived intangible assets acquired totaled $0.7$0.5 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively, and $1.0 million and $0.7 million for the threesix months ended SeptemberJune 30, 20172019 and 2016, respectively, and $2.0 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively.2018.
Amortization of deferred financing costs was $0.1 milliontotaled zero and $0.1 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $0.4$1.4 million and $0.30.2 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016, respectively.2018.
Note 1211 — Long-Term Debt and Credit Facility
Long-term debt is as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Long-term debt, classified as current: | | | |
Borrowings under revolving credit facility | $ | — |
| | $ | 49,731 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Long-term debt: | | | |
Borrowings under revolving credit facility | $ | 40,589 |
| | $ | 38,566 |
|
Term loan | — |
| | 9,833 |
|
Total long-term debt | 40,589 |
| | 48,399 |
|
Less current portion of long-term debt | (40,589 | ) | | (40,566 | ) |
Long-term debt, less current portion | $ | — |
| | $ | 7,833 |
|
Borrowing under the revolving credit agreement at December 31, 2018 was classified as current debt.Credit Facility
On May 10, 2013, the Company and certain of its subsidiaries (the “Borrowers”) entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement (the(as amended, the “Credit Facility”) with PNC Bank, National Association (“PNC Bank”). The Company maycould borrow under the Credit Facility for working capital, permitted acquisitions, capital expenditures and other corporate purposes. The Credit Facility as amended, continueswas to continue in effect until May 10, 2022. Under terms of the Credit Facility, as amended, the Company hashad total borrowing availability of $75 million under a revolving credit facility, including a sublimit of $75 million.
The Credit Facility is secured by substantially all$10 million that could be used for letters of credit. On March 1, 2019, the Company’s domestic realCompany repaid the outstanding balance, interest, and personal property, including accounts receivable, inventory, land, buildings, equipmentfees related to the revolving credit facility, and other intangible assets. The Credit Facility contains customary representations, warranties, and both affirmative and negative covenants. The Company was in compliance with all debt covenants at September 30, 2017. In the event of default, PNC Bank may accelerate the maturity date of any outstanding amounts borrowed undersimultaneously terminated the Credit Facility.
The Credit Facility contains financial covenants to maintain a fixed charge coverage ratio and a leverage ratio, as well as establishes an annual limit on capital expenditures. The fixed charge coverage ratio is the ratio of (a) earnings before interest, taxes, depreciation, and amortization (“EBITDA”), adjusted for non-cash stock-based compensation and the loss from discontinued operations, less
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
cash paid for taxes during the period to (b) all debt payments during the period. The fixed charge coverage ratio requirement began for the quarter ended March 31, 2017 at 1.00 to 1.00 and increases to 1.10 to 1.00 for the year ending December 31, 2017, and for each fiscal quarter thereafter. The leverage ratio (funded debt to adjusted EBITDA) requirement began for the six months ended June 30, 2017, at not greater than 5.50 to 1.10 and reduces to not greater than 3.00 to 1.00 as of September 30, 2018, and for each fiscal quarter thereafter. The annual limit on capital expenditures for 2017 is $20 million. The annual limit on capital expenditures for 2018 and each fiscal year thereafter is $26 million. The annual limit on capital expenditures is reduced if the undrawn availability under the revolving credit facility falls below $15 million at any month-end.
The Credit Facility restricts the payment of cash dividends on common stock and limits the amount that may be used to repurchase common stock and preferred stock.
Beginning with fiscal year 2017, the Credit Facility includes a provision that 25% of EBITDA minus cash paid for taxes, dividends, debt payments, and unfunded capital expenditures, not to exceed $3.0 million for any year, be paid on the outstanding balance within 60 days of the fiscal year end.
Each of the Company’s domestic subsidiaries is fully obligated for Credit Facility indebtedness as a borrower or as a guarantor.
(a) Revolving Credit Facility
Under the revolving credit facility, the Company may borrow up to $75 million through May 10, 2022. This includes a sublimit of $10 million that may be used for letters of credit. The revolving credit facility is secured by substantially all of the Company’s domestic accounts receivable and inventory.
At September 30, 2017, eligible accounts receivable and inventory securing the revolving credit facility provided total borrowing capacity of $74.9 million under the revolving credit facility. Available borrowing capacity, net of outstanding borrowings, was $34.3 million at September 30, 2017.
The interest rate on advances under the revolving credit facility varies based on the fixed charge coverage ratio. Rates range (a) between PNC Bank’s base lending rate plus 1.5% to 2.0% or (b) between the London Interbank Offered Rate (LIBOR) plus 2.5% to 3.0%. PNC Bank’s base lending rate was 4.25% at September 30, 2017. The Company is required to pay a monthly facility fee of 0.25% per annum, on any unused amount under the commitment based on daily averages. At September 30, 2017, $40.6 million was outstanding under the revolving credit facility, with $2.6 million borrowed as base rate loans at an interest rate of 5.75% and $38.0 million borrowed as LIBOR loans at an interest rate of 3.74%.
Borrowing under the revolving credit agreement is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause.
(b) Term Loan
The amount borrowed under the term loan was reset to $10 million effective as of September 30, 2016. Monthly principal payments of $0.2 million were required. On May 22, 2017, the Company repaid the outstanding balance of the term loan.
Note 1312 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the period.periods. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.30.7 million restricted stock units for the three and ninesix months ended SeptemberJune 30, 2017,2019, and 0.7 million stock options and 0.80.9 million restricted stock units for the three and ninesix months ended SeptemberJune 30, 2016.2018.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted earnings (loss) per common share are as follows (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Loss from continuing operations | $ | (3,421 | ) | | $ | (1,870 | ) | | $ | (5,285 | ) | | $ | (2,011 | ) |
Income (loss) from discontinued operations, net of tax | 319 |
| | (876 | ) | | (13,621 | ) | | (33,200 | ) |
Net loss - Basic and Diluted | $ | (3,102 | ) | | $ | (2,746 | ) | | $ | (18,906 | ) | | $ | (35,211 | ) |
| | | | | | | |
Weighted average common shares outstanding - Basic | 57,602 |
| | 56,899 |
| | 57,709 |
| | 55,523 |
|
Assumed conversions: | | | | | | | |
Incremental common shares from stock options | — |
| | — |
| | — |
| | — |
|
Incremental common shares from restricted stock units | — |
| | — |
| | — |
| | — |
|
Weighted average common shares outstanding - Diluted | 57,602 |
| | 56,899 |
| | 57,709 |
| | 55,523 |
|
| | | | | | | |
Basic earnings (loss) per common share: | | | | | | | |
Continuing operations | $ | (0.06 | ) | | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.04 | ) |
Discontinued operations, net of tax | 0.01 |
| | (0.02 | ) | | (0.24 | ) | | (0.60 | ) |
Basic earnings (loss) per common share | $ | (0.05 | ) | | $ | (0.05 | ) | | $ | (0.33 | ) | | $ | (0.64 | ) |
Diluted earnings (loss) per common share: | | | | | | | |
Continuing operations | $ | (0.06 | ) | | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.04 | ) |
Discontinued operations, net of tax | 0.01 |
| | (0.02 | ) | | (0.24 | ) | | (0.60 | ) |
Diluted earnings (loss) per common share | $ | (0.05 | ) | | $ | (0.05 | ) | | $ | (0.33 | ) | | $ | (0.64 | ) |
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, accounts receivable, accounts payable, and accrued expenses, approximate fair value due to the short-term nature of these accounts. The Company had total cash of $97.5 million, which consisted of cash equivalents of $46.6 million in a government money market account and cash deposits of $45.2 million in an interest bearing demand deposit account and $5.7 million in operating cash accounts, at June 30, 2019, and $3.0 million, which consisted of no cash equivalents and cash deposits of $3.0 million in operating cash accounts, at September 30, 2017 or December 31, 2016.2018.
The carrying valueamount and estimated fair value of the Company’s long-term debt are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Term loan | $ | — |
| | $ | — |
| | $ | 9,833 |
| | $ | 9,833 |
|
Borrowings under revolving credit facility | 40,589 |
| �� | 40,589 |
| | 38,566 |
| | 38,566 |
|
|
| | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Borrowings under Credit Facility | — |
| | — |
| | 49,731 |
| | 49,731 |
|
The carrying valueamount of the term loan and borrowings under the revolving credit facility approximate theirCredit Facility approximates its fair value because the interest rates are variable.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED 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 three months ended June 30, 2018, the Company recorded an impairment of $37.2 million for goodwill in the Energy Chemistry Technologies reporting unit. No impairments of any of these assets were recognized during the three and ninesix months ended SeptemberJune 30, 2017 and 2016.2019.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1514 — Income Taxes
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
|
| | | | | | | | | | | |
| Three months ended June 30, |
| Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
U.S. federal statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of federal benefit | 1.7 |
| | 1.0 |
| | 1.0 |
| | (0.3 | ) |
Non-U.S. income taxed at different rates | 0.7 |
| | (3.5 | ) | | 1.0 |
| | 0.3 |
|
Reduction in tax benefit related to stock-based awards | (1.1 | ) | | 6.5 |
| | (1.8 | ) | | (1.5 | ) |
Non-deductible expenses | — |
| | (9.5 | ) | | (0.3 | ) | | (9.3 | ) |
Research and development credit | 0.4 |
| | (3.9 | ) | | 0.6 |
| | 0.6 |
|
Increase in valuation allowance | (20.7 | ) | | (42.2 | ) | | (17.9 | ) | | (36.0 | ) |
Other | (0.4 | ) | | — |
| | (0.3 | ) | | — |
|
Effective income tax rate | 1.6 | % | | (30.6 | )% | | 3.3 | % | | (25.2 | )% |
|
| | | | | | | | | | | |
| Three months ended September 30, |
| Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
U.S. federal statutory tax rate | (35.0 | )% | | (35.0 | )% | | (35.0 | )% | | (35.0 | )% |
State income taxes, net of federal benefit | 14.3 |
| | 12.0 |
| | 6.7 |
| | 9.2 |
|
Non-U.S. income taxed at different rates | 8.9 |
| | 16.4 |
| | 5.4 |
| | 7.7 |
|
Reduction in tax benefit related to stock-based awards | 15.8 |
| | — |
| | 14.1 |
| | — |
|
Other | (3.5 | ) | | (26.9 | ) | | (3.6 | ) | | (22.0 | ) |
Effective income tax rate | 0.5 | % | | (33.5 | )% | | (12.4 | )% | | (40.1 | )% |
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in the valuation allowance, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates. Changes
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 for a valuation allowance in the effectivesecond quarter of 2018, the Company considered 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 ratereporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income. As a result of this analysis, the Company determined that it was more likely than not that it would not realize the benefits of certain deferred tax assets and, therefore, recorded a $15.5 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 all available evidence should be taken into consideration when assessing the need for a valuation allowance, the sale of the CICT segment provided a source of income to support the release of $11.5 million of the valuation allowance which resulted in a deferred tax asset of $18.7 million. As such, the Company reversed this portion of the valuation allowance during the fourth quarter of 2018. The increase in the valuation allowance during the three and nine months ended SeptemberJune 30, 2017, included2019, reflects management’s evaluation of deferred tax assets more-likely-than-not to be used after giving consideration to the Company implementing ASU No. 2016-09 which requires accounting for excess tax benefitsgain from the sale of the CICT segment and tax deficiencies related to stock-based awards as discrete items in the period in which they occur.anticipated results of operations.
In January 2017, the Internal Revenue Service notified the Company that it willwould examine the Company’s federal tax returns for the year ended December 31, 2014. No adjustments haveThe examination included (1) the corporate returns and (2) employment tax matters. The IRS fieldwork has been asserted, and management believes that sustained adjustments, if any, would not have a material effect oncompleted in relation to the Company’s financial position, resultscorporate returns with no adverse findings. Further discussion of operations, or liquidity.the employment tax matter can be found in Note 18 — “Related Party Transaction.”
Note 1615 — Common Stock
The Company’s Certificate of Incorporation, as amended November 9, 2009, authorizes the Company to issue up to 80 million shares of common stock, par value $0.0001 per share, and 100,000 shares of one or more series of preferred stock, par value $0.0001 per share.
A reconciliation of changes in common shares issued during the ninesix months ended SeptemberJune 30, 20172019 is as follows:
|
| | |
Shares issued at December 31, 20162018 | 59,684,66962,162,875 |
|
Issued as restricted stock award grants | 273,829792,997 |
|
Issued upon exercise of stock options | 663,288 |
|
Shares issued at SeptemberJune 30, 20172019 | 60,621,78662,955,872 |
|
Stock Repurchase Program
In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. During the three months ended September 30, 2017, the Company repurchased 630,000 shares of its outstanding common stock on the open market at a cost of $3.7 million, inclusive of transaction costs, or an average price of $5.85 per share. During the nine months ended September 30, 2017, the Company repurchased 680,000 shares of its outstanding common stock on the open market at a cost of $4.2 million, inclusive of transaction costs, or an average price of $6.14 per share. During the three and nine months ended September 30, 2016, the Company did not repurchase any shares of its outstanding common stock.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through September 30, 2017,December 31, 2018, the Company has not repurchased any of its common stock under this authorization.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AsCompany had repurchased $0.3 million of Septemberits common stock under this authorization. During the three and six months ended June 30, 2017,2019 and 2018, the Company did not repurchase any shares of its outstanding common stock under this authorization.
At June 30, 2019, the Company has $50.7$49.7 million remaining under its share repurchase programs. A covenant under the Company’s Credit Facility limits the amount that may be used to repurchase the Company’s common stock. As of September 30, 2017, this covenant limits additional share repurchases to $10.7 million.program.
Note 1716 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by chief operating decision-makers in deciding how to allocate resources and assess performance. The operations of the Company are categorized into twoone reportable segments:segment: Energy Chemistry Technologies and Consumer and Industrial Chemistry Technologies.
Energy Chemistry Technologies designs, develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty and conventional chemistries, usedfor use in oil and natural gas (“O&G”) well drilling, cementing, completion, remediation, and stimulation. In addition, the Company’s chemistries are usedstimulation activities designed to maximize recovery in specialized enhancedboth new and improved oil recovery markets.mature fields. Activities in this segment also include construction and management of automated material handling facilities and management of loading facilities and blending operations for oilfield services companies.
Consumer and Industrial Chemistry Technologies designs, develops, and manufactures products that are sold to companies in the flavor and fragrance industry and the specialty chemical industry. These technologies are used by beverage and food companies, fragrance companies, and companies providing household and industrial cleaning products.
The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segments.segment.
Summarized financial information of the reportable segments is as follows (in thousands):
| | For the three months ended September 30, | Energy Chemistry Technologies | | Consumer and Industrial Chemistry Technologies | | Corporate and Other | | Total | |
2017 | | | | | | | | |
For the three months ended June 30, | | Energy Chemistry Technologies | | Corporate and Other | | Total |
2019 | | | | | | |
Net revenue from external customers | $ | 61,167 |
| | $ | 18,291 |
| | $ | — |
| | $ | 79,458 |
| $ | 34,692 |
| | $ | — |
| | $ | 34,692 |
|
Gross profit | 18,733 |
| | 3,007 |
| | — |
| | 21,740 |
| |
Income (loss) from operations | 6,867 |
| | 985 |
| | (10,955 | ) | | (3,103 | ) | (7,651 | ) | | (6,208 | ) | | (13,859 | ) |
Depreciation and amortization | 1,863 |
| | 590 |
| | 615 |
| | 3,068 |
| 1,933 |
| | 186 |
| | 2,119 |
|
Capital expenditures | 324 |
| | 682 |
| | 641 |
| | 1,647 |
| 306 |
| | — |
| | 306 |
|
| | | | | | | | | | | | |
2016 | | | | | | | | |
2018 | | | | | | |
Net revenue from external customers | $ | 45,030 |
| | $ | 19,307 |
| | $ | — |
| | $ | 64,337 |
| $ | 39,546 |
| | $ | — |
| | $ | 39,546 |
|
Gross profit | 18,180 |
| | 4,174 |
| | — |
| | 22,354 |
| |
Income (loss) from operations | 6,196 |
| | 2,433 |
| | (10,882 | ) | | (2,253 | ) | (37,929 | ) | | (9,211 | ) | | (47,140 | ) |
Depreciation and amortization | 1,582 |
| | 567 |
| | 581 |
| | 2,730 |
| 1,797 |
| | 546 |
| | 2,343 |
|
Capital expenditures | 2,005 |
| | 148 |
| | 227 |
| | 2,380 |
| 1,167 |
| | 87 |
| | 1,254 |
|
|
| | | | | | | | | | | |
For the six months ended June 30, | Energy Chemistry Technologies | | Corporate and Other | | Total |
2019 | | | | | |
Net revenue from external customers | $ | 77,949 |
| | $ | — |
| | $ | 77,949 |
|
Income (loss) from operations | (12,984 | ) | | (15,138 | ) | | (28,122 | ) |
Depreciation and amortization | 3,718 |
| | 661 |
| | 4,379 |
|
Capital expenditures | 767 |
| | — |
| | 767 |
|
| | | | | |
2018 | | | | | |
Net revenue from external customers | $ | 80,615 |
| | $ | — |
| | $ | 80,615 |
|
Income (loss) from operations | (38,095 | ) | | (18,269 | ) | | (56,364 | ) |
Depreciation and amortization | 3,566 |
| | 1,110 |
| | 4,676 |
|
Capital expenditures | 2,178 |
| | 453 |
| | 2,631 |
|
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | |
For the nine months ended September 30, | Energy Chemistry Technologies | | Consumer and Industrial Chemistry Technologies | | Corporate and Other | | Total |
2017 | | | | | | | |
Net revenue from external customers | $ | 187,807 |
| | $ | 56,782 |
| | $ | — |
| | $ | 244,589 |
|
Gross profit | 63,840 |
| | 11,733 |
| | — |
| | 75,573 |
|
Income (loss) from operations | 24,715 |
| | 5,906 |
| | (35,598 | ) | | (4,977 | ) |
Depreciation and amortization | 5,507 |
| | 1,752 |
| | 1,832 |
| | 9,091 |
|
Capital expenditures | 2,794 |
| | 1,580 |
| | 1,781 |
| | 6,155 |
|
| | | | | | | |
2016 | | | | | | | |
Net revenue from external customers | $ | 133,094 |
| | $ | 59,133 |
| | $ | — |
| | $ | 192,227 |
|
Gross profit | 54,609 |
| | 13,256 |
| | — |
| | 67,865 |
|
Income (loss) from operations | 21,793 |
| | 8,508 |
| | (32,031 | ) | | (1,730 | ) |
Depreciation and amortization | 4,062 |
| | 1,685 |
| | 1,633 |
| | 7,380 |
|
Capital expenditures | 8,704 |
| | 494 |
| | 1,420 |
| | 10,618 |
|
Assets of the Company by reportable segments are as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Energy Chemistry Technologies | $ | 144,106 |
| | $ | 139,205 |
|
Corporate and Other | 119,710 |
| | 28,208 |
|
Total segments | 263,816 |
| | 167,413 |
|
Held for sale | — |
| | 118,470 |
|
Total assets | $ | 263,816 |
| | $ | 285,883 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Energy Chemistry Technologies | $ | 187,623 |
| | $ | 184,328 |
|
Consumer and Industrial Chemistry Technologies | 113,434 |
| | 98,105 |
|
Corporate and Other | 44,551 |
| | 56,882 |
|
Total segments | 345,608 |
| | 339,315 |
|
Held for sale | 4,135 |
| | 43,900 |
|
Total assets | $ | 349,743 |
| | $ | 383,215 |
|
Geographic Information
Revenue by country is based on the location where services are provided and products are used. No individual country other than the United States (“U.S.”) accounted for more than 10% of revenue.revenue, except as noted below. Revenue by geographic location is as follows (in thousands): | | | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
U.S. | $ | 66,638 |
| | $ | 52,545 |
| | $ | 203,123 |
| | $ | 154,532 |
| $ | 31,114 |
| | $ | 36,176 |
| | $ | 69,990 |
| | $ | 72,886 |
|
Other countries | 12,820 |
| | 11,792 |
| | 41,466 |
| | 37,695 |
| 3,578 |
| | 3,370 |
| | 7,959 |
| | 7,729 |
|
Total | $ | 79,458 |
| | $ | 64,337 |
| | $ | 244,589 |
| | $ | 192,227 |
| $ | 34,692 |
| | $ | 39,546 |
| | $ | 77,949 |
| | $ | 80,615 |
|
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:
|
| | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Customer A | 17.6 | % | | * |
| | 15.4 | % | | * |
Customer B | 11.0 | % | | 18.2 | % | | 11.3 | % | | * |
Customer C | * |
| | * |
| | 10.7 | % | | * |
|
| | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Customer A | 13.3 | % | | 12.5 | % | | 12.9 | % | | 17.9 | % |
Customer B | 8.8 | % | | 14.8 | % | | 9.6 | % | | 13.5 | % |
* This customer did not account for more than 10% of revenue.Over 90% of the revenue from these customers was for sales in the Energy Chemistry Technologies segment.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1817 — Commitments and Contingencies
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern District of Texas granted the Company’s motion to dismiss the four consolidated putative securities class action lawsuits that were filed in November 2015, against the Company and certain of its officers. The lawsuits were previously consolidated into a single case, and a consolidated amended complaint had been filed. The consolidated amended complaint asserted that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint sought an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between October 23, 2014 and November 9, 2015, inclusive. The lead plaintiff appealed the District Court’s decision granting the motion to dismiss.
In January 2016, three derivative lawsuits were filed, two in the District Court On February 7, 2019, a three-judge panel of Harris County, Texas (which have since been consolidated into one case) and one in the United States District Court of Appeals for the SouthernFifth Circuit issued a unanimous opinion affirming the District Court’s judgment of Texas, on behalf of the Company against certain ofdismissal in its officers and its current directors. The lawsuits allege violations of law, breaches of fiduciary duty, and unjust enrichment against the defendants.
The Company believes the lawsuits are without merit and intends to vigorously defend against all claims asserted. Discovery has not yet commenced. At this time, the Company is unable to reasonably estimate the outcome of this litigation.
In addition, as previously disclosed, the U.S. Securities and Exchange Commission had opened an inquiry related to similar issues to those raised in the above-described litigation. On August 21, 2017, the Company received a letter from the staff of the SEC stating that the inquiry has been concluded and that the staff does not intend to recommend an enforcement action against the Company.entirety.
Other Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. 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.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from the oil and gas industry. Customers include major oilfield services companies, major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies, and state-owned national oil companies. This concentration of customers in one industry increases credit and business risks.
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 maintained at ainvested in accounts in two major financial institutioninstitutions and balances often exceed insurable amounts.
Note 18 — Related Party Transaction
In January 2017, the Internal 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 CEO’s compensation were not properly withheld in 2014 and proposed an adjustment. As the Company has a statutory obligation to collect and withhold employment taxes, management reviewed the CEO’s compensation for tax year 2014, as well as tax years 2015 through 2018, in order to estimate the Company’s potential outstanding employment tax liability in connection with this matter. Upon completion of this review, management believes the Company’s total potential exposure in this matter for 2014 through 2018 is approximately $2.4 million. The CEO’s affiliated companies through which he provided his services have agreed to indemnify the Company for such taxes, and the CEO has executed a personal guaranty in favor of Flotek, supporting this indemnification. As such, the Company recorded an accrued liability for the potential exposure to the IRS in the amount of $2.4 million, with a corresponding receivable, recorded in other current assets, from the CEO’s affiliated companies for the same amount relating to such indemnification obligation.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”), and in particular, Part I, Item 2 — “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 (“Reform Act”). Forward-looking statements are not historical facts, but instead represent Flotek Industries, Inc.’s (“Flotek” or “Company”) current assumptions and beliefs regarding future events, 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 Quarterly Report are based on information available as of the date of this Quarterly 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,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project,” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could,” etc. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated, or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements is included in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 20162018 (“Annual Report”) and periodically in subsequent reports filed with the Securities and Exchange Commission (“SEC”). The Company has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto of this Quarterly Report, as well as the Annual Report. Phrases such as “Company,” “we,” “our,” and “us” refer to Flotek Industries, Inc. and its subsidiaries.
Basis of Presentation
During the fourth quarter of 2016,2018, the Company classified the DrillingConsumer and Industrial Chemistry Technologies and Production Technologies segmentssegment as held for sale based on management’s intention to sell these businesses.this business. The Company’s historical financial statements have been revised to present the operating results of the DrillingConsumer and Industrial Chemistry Technologies and Production Technologies segmentssegment as discontinued operations. The results of operations of Drilling Technologies and Production Technologiesthis segment are presented as “Loss“Income from discontinued operations” in the statement of operations and the related cash flows of these segments hasthis segment have been reclassified to discontinued operations for all periods presented. The assets and liabilities of the DrillingConsumer and Industrial Chemistry Technologies and Production Technologies segmentssegment have been reclassified to “Assets held for sale” and “Liabilities held for sale”,sale,” respectively, in the consolidated balance sheets for all periods presented.
By During the endfirst quarter of August 2017,2019, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.this segment.
Executive Summary
Flotek is a global, diversified,an international energy chemistry technology-driven company that develops and supplies chemistries and services to the oil and gas industries, andindustry. Through February 28, 2019, Flotek also provided high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets. Flotek operates in over 2015 domestic and international markets.
The Company’s oilfield business includes specialty chemistries and logistics. Flotek’s technologieslogistics which enable its customers in pursuingto pursue improved efficiencies in the drilling and completion of their wells. Customers include major integrated oil and gas (“O&G”) companies, oilfield services companies, independent O&G companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies. TheThrough February 28, 2019, the Company also producesproduced non-energy-related citrus oil and related products, classified as discontinued operations, including (1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous industries around the world, including the O&G industry. The Company sources citrus oil domestically and internationally and is one of the largest processors of citrus oil in the world. Additionally, the Company also provides automated bulk material handling, loading facilities, and blending capabilities.
Continuing Operations
The operations of the Company are categorized into twoone reportable segments:segment: Energy Chemistry Technologies (“ECT”) and Consumer and Industrial Chemistry Technologies (“CICT”).
Energy Chemistry Technologies designs, develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty and conventional chemistries, usedfor use in oil and gas (“O&G&G”) well drilling, cementing, completion, remediation, and stimulation. These technologies developed bystimulation activities designed to maximize recovery in both new and mature fields. Flotek’s Researchspecialty chemistries possess enhanced performance characteristics and Innovation team enable customersare manufactured to pursue improved efficienciesperform in a broad range of basins and reservoirs with varying downhole pressures, temperatures and other well-specific conditions customized to customer specifications. This segment has technical services laboratories and a research and innovation laboratory that focus on design improvements, development and viability testing of new chemistry formulations, and continued enhancement of existing products.
Discontinued Operations
In the drillingfirst quarter of 2019, the Consumer and completion of wells.Industrial Chemistry Technologies segment was sold and is classified as discontinued operations.
Consumer and Industrial Chemistry Technologies designs, develops,designed, developed, and manufacturesmanufactured products that are sold to companies in the flavor and fragrance industries and specialty chemical industry. These technologies are used by beverage and food companies, fragrance companies, and companies providing household and industrial cleaning products.
Discontinued Operations
The Drilling Technologies and Production Technologies segments are classified as discontinued operations.
Drilling Technologies assembles, rents, sells, inspects, and markets downhole drilling equipment used in energy, mining, and industrial drilling activities.
Production Technologies assembles and markets production-related equipment, including pumping system components, electric submersible pumps (“ESP”), gas separators, valves, and services that support natural gas and oil production activities.
Market Conditions
The Company’s success is sensitive to a number of factors, which include, but are not limited to, 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 O&G 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.
Historical North American drilling activity is reflected in “TABLE A” on the following page.
Customers’ demand for advanced technology products and services provided by the Company are dependent on their recognition of the value of:
Chemistries that improve the economics of their O&G operations,
Chemistries that meet the need of consumer product markets, and
Chemistries that are economically viable, socially responsible, and ecologically sound.
Market prices for commodities, including citrus oils, and guar, can be influenced by:
Historical, current, and anticipated future production levels of the global citrus (primarily orange) and guar crops,
Weather related risks,
Health and condition of citrus trees and guar plants (e.g., disease and pests), and
International competition and pricing pressures resulting from natural and artificial pricing influences.
Governmental actions may restrict the future use of hazardous chemicals, including, but not limited to, the following industrial applications:
O&G drilling and completion operations,
O&G production operations, and
Non-O&G industrial solvents.
| | TABLE A | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
| 2017 | | 2016 | | % Change |
| | 2017 | | 2016 | | % Change | 2019 | | 2018 | | % Change |
| | 2019 | | 2018 | | % Change |
Average North American Active Drilling Rigs | | | | | | | | | | | | | | | | | | | | | | |
U.S. | 946 |
| | 479 |
| | 97.5 | % | | 861 |
| | 482 |
| | 78.6 | % | 989 |
| | 1,039 |
| | (4.8 | )% | | 1,016 |
| | 1,003 |
| | 1.3 | % |
Canada | 208 |
| | 121 |
| | 71.9 | % | | 207 |
| | 112 |
| | 84.8 | % | 82 |
| | 108 |
| | (24.1 | )% | | 132 |
| | 188 |
| | (29.8 | )% |
Total | 1,154 |
| | 600 |
| | 92.3 | % | | 1,068 |
| | 594 |
| | 79.8 | % | 1,071 |
| | 1,147 |
| | (6.6 | )% | | 1,148 |
| | 1,191 |
| | (3.6 | )% |
Average U.S. Active Drilling Rigs by Type | | | | | | | | | | | | | | | | | | | | | | |
Vertical | 70 |
| | 62 |
| | 12.9 | % | | 72 |
| | 58 |
| | 24.1 | % | 50 |
| | 58 |
| | (13.8 | )% | | 56 |
| | 61 |
| | (8.2 | )% |
Horizontal | 799 |
| | 372 |
| | 114.8 | % | | 720 |
| | 376 |
| | 91.5 | % | 868 |
| | 914 |
| | (5.0 | )% | | 893 |
| | 874 |
| | 2.2 | % |
Directional | 77 |
| | 45 |
| | 71.1 | % | | 69 |
| | 48 |
| | 43.8 | % | 71 |
| | 67 |
| | 6.0 | % | | 67 |
| | 68 |
| | (1.5 | )% |
Total | 946 |
| | 479 |
| | 97.5 | % | | 861 |
| | 482 |
| | 78.6 | % | 989 |
| | 1,039 |
| | (4.8 | )% | | 1,016 |
| | 1,003 |
| | 1.3 | % |
Average North American Drilling Rigs by Product | | | | | | | | | | | | | | | | | | | | | | |
Oil | 874 |
| | 452 |
| | 93.4 | % | | 800 |
| | 440 |
| | 81.8 | % | 844 |
| | 899 |
| | (6.1 | )% | | 903 |
| | 929 |
| | (2.8 | )% |
Natural Gas | 280 |
| | 148 |
| | 89.2 | % | | 268 |
| | 154 |
| | 74.0 | % | 227 |
| | 248 |
| | (8.5 | )% | | 247 |
| | 262 |
| | (5.7 | )% |
Total | 1,154 |
| | 600 |
| | 92.3 | % | | 1,068 |
| | 594 |
| | 79.8 | % | 1,071 |
| | 1,147 |
| | (6.6 | )% | | 1,150 |
| | 1,191 |
| | (3.4 | )% |
Source: Rig counts are per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are the averages of the weekly rig count activity.
Completions are per the U.S. Energy Information Administration (https://www.eia.gov/petroleum/drilling/) as of October 16, 2017.July 15, 2019.
Average U.S. rig activity decreased by 4.8% and increased by 97.5% and 78.6%1.3% for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, when compared to the same periods of 2016,2018, and sequentially, increaseddecreased by 5.7%5.2% when compared to the secondfirst quarter of 2017.2019.
According to data collected by the U.S. Energy Information Administration (“EIA”) as reported on October 16, 2017,July 15, 2019, completions in the seven most prolific areas in the lower 48 states increased 47.3%9.4% and 37.0%12.6% for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, when compared to the same periods of 2016. Sequentially, completions2018. Completions increased 12.2%5.8% when compared to the secondfirst quarter of 2017.
2019.
Company Outlook
After a continuous decline in U.S. drilling rig activity beginning in mid-2014, the market began to gradually recover in the second quarter of 2016. Although a continuing recovery appears to be underway,oil and gas markets have improved, the level of drilling and completion activity is still depressed compared to historical levels.remains lower than previous levels experienced before the downturn in 2014. Assuming the price for crude oil remains relatively stablesoft and regulatory impediments are reduced,limited, the Company expects U.S.continued volatility in global oilfield activity to remain dependent on commodity prices.for the remainder of 2019.
During the thirdsecond quarter of 2017,2019, the Company continued to analyze and promote the efficacy of its Complex nano-Fluid® (“CnF®”) chemistries resulting in a 23.1% increase in CnFand its Prescriptive Chemistry Management® sales volumes compared to the third quarter of 2016. Third quarter 2017 CnF (“PCM® volumes decreased 12.9% compared to the second quarter of 2017.”) offering. Although quarter to quarterquarter-to-quarter performance
may vary, the Company expects its Energy Chemistry Technologies sales to outperformcontinue to penetrate the market activity metrics over time by continuing to demonstratedemonstrating the efficacy of its CnF® chemistries and reservoir-centric full fluid systems via PCM®. The Company will continue to demonstrate the value and benefit of Flotek chemistries through comparative analysis of wells with and without CnF®Flotek chemistries and field validation results conducted byin partnership with exploration and production (“E&P”) companies. Flotek is experiencing a notable shift in purchasing behaviors in which E&P companies are seeking greater transparency, control and efficacy in their fluid systems, as they see diminishing returns on mechanical factors in their completion designs, such as proppant loading, fluid loading, and lateral length in their completions. As a result, they are focusing more on sourcing consumables, including chemistry, directly from manufacturers and other providers of these products. This trend has created significant changes in Flotek’s customer base, product portfolio, and sales efforts and continues to influence changes in inventory and distribution strategies, capital allocation, and the continuation ofbusiness model for the Company. While these challenges are expected to persist in the near-term, the Company believes it can grow its direct-to-operator sales program known as the Flotek Store®. Whether operators purchase directly from Flotek or continue to purchase from oilfield distributionclient base and service companies, E&P operators are benefiting from increased transparency in pricing and a more direct relationship with Flotek’s technical expertise and supply chain.revenue opportunities over time.
The Company’s success in promotingCompany continues to enhance and improve its patented and proprietaryproven chemistries is supported through its industry leading research and innovation staff who provide customerdevelop innovative and customer- responsive product innovation,products, as well as development ofcreate new productschemistry technologies, which are expected to address oilfield challenges of the future and expand the Company’s future product lines. During the third quarter ofCompleted in 2016, the Company completed its newCompany’s Global Research & Innovation Center in Houston. This state-of-the-art facility allows forHouston houses scientists, chemists, geologists, and reservoir, petroleum and geomechanical engineers who advance the development of next-generation innovative energy chemistries, as well as expanded collaboration betweenamong clients, leaders from academia, and Company scientists. These collaborative opportunities are an important and distinguishing capability within the industry.
The outlook for the Company’s consumerindustry and industrial chemistries will be driven by the availabilityprovide real-time product and demand for citrus oils, industrial solvents, and flavor and fragrance ingredients. Although current inventory and crop expectations are sufficient to meet the Company’s needs to supply its flavor and fragrance business, as well as both internal and external industrial markets, the market supply of citrus oils has declined in recent years duefluid system development direct to the reduction in citrus crops caused by the citrus greening disease. This reduced supply has resulted in higher citrus oil prices and increased price volatility. However, the Company expects its strong market position to enable it to maintain a stable supply of citrus oils for internal use and external sales. The Company expects to manage the impact of volatile terpene costs through the development of new product formulations and pricing strategies.consumer.
During the fourth quarter 2016,of 2018, the Company implementedinitiated a strategic restructuringplan to sell its Consumer and Industrial Chemistry Technologies segment, which was completed in the first quarter of 2019. The Company continues to focus on maximizing the profitability of its product and business to enable a greater focus onportfolio, and may exit or enter new product lines or businesses which complement its core businesses in energy chemistry and consumer and industrial chemistry and initiated a process to identify potential buyers for its Drilling Technologies and Production Technologies segments. By the end of August 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments.current operations.
Capital expenditures for continuing operations totaled $6.2$0.8 million and $10.6$2.6 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. TheFor the remainder of 2019, the Company expects capital spending to be between $9approximately $2.9 million and $11 million in 2017, but anticipates to be towardsdoes not have any specific growth capital projects currently planned or committed. During the lower endfirst quarter of 2019, the range.Company formed a Strategic Capital Committee that will consider these possible growth capital projects going forward. The Company will remain nimble in its core capital expenditure plans, adjusting as market conditions warrant.warrant, and will focus any growth capital spending program on uses that generate positive returns and to areas that pose a strategic long-term benefit.
During the first quarter and into the beginning of the second quarter of 2019, the Company lost several key sales personnel. In April 2019, the Company hired a new Senior Vice President of Global Sales & Business Development who now leads the Company’s domestic and international sales and business development strategies. The Company has commenced a process to rebuild and develop a more technically oriented sales organization. As a result of the transition, revenue for the remainder of 2019 may be negatively impacted relative to the first half of the year, as the new sales organization is fully integrated into the organization. The Company believes the opportunity it has taken to enhance the technical background of its sales personnel together with relationships built with its customers, and the demonstrated value and benefit of Flotek’s chemistries will help to mitigate potential revenue declines.
Changes to geopolitical, global economic, and industry trends could have an impact, either positive or negative, on the Company’s business. In the event of significant adverse changes to the demand for oil and gas production, the market price for oil and gas, weather patterns, and/or the availability of citrus crops, the market conditions affecting the Company could change rapidly and materially. Should such adverse changes to market conditions occur, management believes the Company has access to adequate liquidity to withstand the impact of such changes while continuing to make strategic capital investments and acquisitions, if opportunities arise. In addition, management believes the Company is well-positioned to take advantage of significant increases in demand for its products should market conditions improve dramatically in the near term.
Results of Continuing Operations (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue | $ | 79,458 |
| | $ | 64,337 |
| | $ | 244,589 |
| | $ | 192,227 |
|
Cost of revenue | 57,718 |
| | 41,983 |
| | 169,016 |
| | 124,362 |
|
Gross profit | 21,740 |
| | 22,354 |
| | 75,573 |
| | 67,865 |
|
Gross margin % | 27.4 | % | | 34.7 | % | | 30.9 | % | | 35.3 | % |
Corporate general and administrative | 10,346 |
| | 10,302 |
| | 33,773 |
| | 30,398 |
|
Corporate general and administrative % | 13.0 | % | | 16.0 | % | | 13.8 | % | | 15.8 | % |
Segment selling and administrative | 9,277 |
| | 9,775 |
| | 28,972 |
| | 26,879 |
|
Segment selling and administrative % | 11.7 | % | | 15.2 | % | | 11.8 | % | | 14.0 | % |
Depreciation and amortization | 2,540 |
| | 2,217 |
| | 7,464 |
| | 6,024 |
|
Research and innovation costs | 2,691 |
| | 2,327 |
| | 9,940 |
| | 6,323 |
|
(Gain) loss on disposal of long-lived assets | (11 | ) | | (14 | ) | | 401 |
| | (29 | ) |
Loss from operations | (3,103 | ) | | (2,253 | ) | | (4,977 | ) | | (1,730 | ) |
Operating margin % | (3.9 | )% | | (3.5 | )% | | (2.0 | )% | | (0.9 | )% |
Interest and other expense, net | (301 | ) | | (559 | ) | | (1,054 | ) | | (1,630 | ) |
Loss before income taxes | (3,404 | ) | | (2,812 | ) | | (6,031 | ) | | (3,360 | ) |
Income tax (expense) benefit | (17 | ) | | 942 |
| | 746 |
| | 1,349 |
|
Loss from continuing operations | (3,421 | ) | | (1,870 | ) | | (5,285 | ) | | (2,011 | ) |
Income (loss) from discontinued operations, net of tax | 319 |
| | (876 | ) | | (13,621 | ) | | (33,200 | ) |
Net loss | $ | (3,102 | ) | | $ | (2,746 | ) | | $ | (18,906 | ) | | $ | (35,211 | ) |
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue | $ | 34,692 |
| | $ | 39,546 |
| | $ | 77,949 |
| | $ | 80,615 |
|
Operating expenses (excluding depreciation and amortization) | 38,306 |
| | 35,544 |
| | 82,904 |
| | 72,199 |
|
Operating expenses % | 110.4 | % | | 89.9 | % | | 106.4 | % | | 89.6 | % |
Corporate general and administrative | 6,054 |
| | 8,665 |
| | 13,335 |
| | 17,158 |
|
Corporate general and administrative % | 17.5 | % | | 21.9 | % | | 17.1 | % | | 21.3 | % |
Depreciation and amortization | 2,119 |
| | 2,343 |
| | 4,379 |
| | 4,676 |
|
Research and development costs | 2,076 |
| | 2,949 |
| | 4,360 |
| | 5,704 |
|
(Gain)/loss on disposal of long-lived assets | (4 | ) | | 5 |
| | 1,093 |
| | 62 |
|
Impairment of goodwill | — |
| | 37,180 |
| | — |
| | 37,180 |
|
Loss from operations | (13,859 | ) | | (47,140 | ) | | (28,122 | ) | | (56,364 | ) |
Operating margin % | (39.9 | )% | | (119.2 | )% | | (36.1 | )% | | (69.9 | )% |
Loss on write-down of assets held for sale | — |
| | (2,580 | ) | | — |
| | (2,580 | ) |
Interest and other income (expense), net | 677 |
| | (3,139 | ) | | (1,214 | ) | | (3,765 | ) |
Loss before income taxes | (13,182 | ) | | (52,859 | ) | | (29,336 | ) | | (62,709 | ) |
Income tax benefit (expense) | 192 |
| | (16,128 | ) | | 966 |
| | (15,807 | ) |
Loss from continuing operations | (12,990 | ) | | (68,987 | ) | | (28,370 | ) | | (78,516 | ) |
Income (loss) from discontinued operations, net of tax | (1,608 | ) | | (6,404 | ) | | 46,764 |
| | 3,192 |
|
Net income (loss) | $ | (14,598 | ) | | $ | (75,391 | ) | | $ | 18,394 |
| | $ | (75,324 | ) |
Consolidated Results of Operations: Three and NineSix Months Ended SeptemberJune 30, 20172019, Compared to the Three and NineSix Months Ended SeptemberJune 30, 20162018
Consolidated revenue for the three and ninesix months ended SeptemberJune 30, 2017, increased $15.12019, decreased $4.9 million, or 23.5%12.3%, and $52.4$2.7 million, or 27.2%3.3%, respectively, versus the same periods of 2016. These increases2018. The decrease in revenue were driven by increased sales withinwas a result of continued volatile macro-environment for U.S. onshore drilling and completion activity, as well as the Energy Chemistry Technologies segment due to the increased oilfield activity beginningtransition of personnel in the latter halfCompany’s sales organization, the deferral of 2016.completion activity into the third quarter by certain clients, and the utilization of performance-driven pricing programs for a limited number of strategic clients.
Consolidated gross profitOperating expenses (excluding depreciation and amortization) for the three and ninesix months ended SeptemberJune 30, 2017, decreased $0.62019, increased $2.8 million, or 2.7%7.8%, and increased $7.7$10.7 million, or 11.4%14.8%, respectively, compared to the same periods of 2016. Gross margin decreased2018, and, as a percentage of revenue, increased to 27.4%110.4% and 30.9%106.4%, for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively from 34.7%89.9% and 35.3%89.6% in the same periods of 2016,2018. The increase is primarily due to increased volumesmaterial and direct labor costs, higher equipment and logistics expenditures, lower plant utilization, and a one-time charge related to the termination of lower margin productan operations related contract, partially offset by reduced expenses related to the transition in the Company’s sales in all segments.organization.
Corporate general and administrative (“CG&A”) expenses are not directly attributable to products sold or services provided. CG&A costs remained relatively flatdecreased $2.6 million, or 30.1%, and $3.8 million, or 22.3%, respectively, for the three and six months ended SeptemberJune 30, 2017, and increased $3.4 million, or 11.1%, for the nine months ended September 30, 2017,2019, versus the same periods of 2016.2018. As a percentage of revenue, CG&A decreased 3.0%4.4% and 2.0%4.2% for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively. The increasedecrease in CG&A costs waswere primarily due to costscontinuing the aggressive cost reduction measures which began in the last quarter of 2017, decreased consulting expenses associated with executive retirement,the ERP upgrade in 2018, and lower payroll related costs and stock compensation expense and information technology costs,associated with reductions in headcount, partially offset by decreased legal expenses.
Segment sellingexpenses associated with severance and administrative (“SS&A”) expenses are not directly attributable to products sold or services provided. SS&A costs remained relatively flat for the three months ended September 30, 2017, and increased $2.1 million, or 7.8%, for the nine months ended September 30, 2017, versus the same periods of 2016. As a percentage of revenue, SS&A decreased 3.5% and 2.2% for the three and nine months ended September 30, 2017, respectively. The increase in SS&A costs was primarily due to increased headcountcertain shareholder-related activities in the Energy Chemistry Technologies and Consumer and Industrial Chemistry Technologies sales and support staff for expansion and growth in new business and related higher sales and marketing expenses.first six months of 2019.
Depreciation and amortization expense increaseddecreased $0.2 million, or 9.6%, and $0.3 million, or 14.6%, and $1.4 million, or 23.9%6.4%, for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively versus the same periods of 2016, primarily attributable to the completion and equipping of the Global Research & Innovation Center in August 2016, along with other improvements to manufacturing facilities.
2018.
Research and Innovation (“R&I”) expense increased $0.4decreased $0.9 million, or 15.6%29.6%, and $3.6$1.3 million, or 57.2%23.6%, for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to the same periods of 2016. These increases2018. The decrease is primarily due to lower personnel costs related to the reductions in R&I areheadcount associated costs savings initiatives.
Loss on disposal of long-lived assets remained flat for the three months ended June 30, 2019 but increased $1.0 million for the six months ended June 30, 2019, compared to the same periods of 2018, primarily attributabledue to increased personnel for new product development and Flotek’s commitment to remaining responsive to customer needs, increased demand, continued growth and refiningthe disposal of existing product lines, andcertain corporate software in the developmentfirst quarter of new chemistries which are expected to expand the Company’s intellectual property portfolio.2019.
Interest and other expense decreased $0.3$3.8 million or 46.2%, and $0.6$2.6 million or 35.3%, for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, versus the same periods of 2016,2018, primarily due to a $1.2 million write-off associated with the repaymentdiscontinuation of certain corporate projects during the second quarter 2018 and $1.3 million related to moving from an interest expense position to an interest income position as a result of the term loansale of the CICT segment and subsequent termination of the Amended and Restated Revolving Credit, Term Loan and Security Agreement (as amended, the “Credit Facility”) with PNC Bank in May 2017.the first quarter 2019. The decrease is partially offset by the acceleration of $1.4 million of unamortized debt issuance costs associated with the termination of the Credit Facility in the first quarter 2019.
The Company recorded an income tax provision of less than $0.1 million, yielding an effective tax rate of (0.5)%, and an income tax benefit of $0.7$0.2 million and $1.0 million, yielding an effective tax benefit rate of 12.4%1.5% and 3.3%, for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to an income tax benefitsprovision of $0.9$16.1 million and $1.3$15.8 million, yielding an effective tax benefit ratesprovision rate of 33.5%30.5% and 40.1%25.2%, for the comparable periods in 2016.2018.
As partDuring the fourth quarter of the Company’s strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry,2018, the Company initiated a strategic plan to sell its Consumer and Industrial Chemistry Technologies segment, which was completed in the salefirst quarter of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments through August 2017.2019. The Company recorded a net gain from discontinued operations of $0.3 million for the three months ended September 30, 2017, and a net loss from discontinued operations of $13.6$1.6 million and net income from discontinued operations of $46.8 million for the ninethree and six months ended SeptemberJune 30, 2017.2019, respectively.
Results by Segment
| | Energy Chemistry Technologies (“ECT”) | | | | | | | | | | | | | | |
(dollars in thousands) | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Revenue | $ | 61,167 |
| | $ | 45,030 |
| | $ | 187,807 |
| | $ | 133,094 |
| $ | 34,692 |
| | $ | 39,546 |
| | $ | 77,949 |
| | $ | 80,615 |
|
Gross profit | 18,733 |
| | 18,180 |
| | 63,840 |
| | 54,609 |
| |
Gross margin % | 30.6 | % | | 40.4 | % | | 34.0 | % | | 41.0 | % | |
Income from operations | 6,867 |
| | 6,196 |
| | 24,715 |
| | 21,793 |
| |
Loss from operations | | (7,651 | ) | | (37,929 | ) | | (12,984 | ) | | (38,095 | ) |
Loss from operations - excluding impairment | | (7,651 | ) | | (749 | ) | | (12,984 | ) | | (915 | ) |
Operating margin % | 11.2 | % | | 13.8 | % | | 13.2 | % | | 16.4 | % | (22.1 | )% | | (95.9 | )% | | (16.7 | )% | | (47.3 | )% |
ECTResults of Operations: Three and NineSix Months Ended SeptemberJune 30, 20172019, Compared to the Three and NineSix Months Ended SeptemberJune 30, 20162018
ECT revenue for the three and ninesix months ended SeptemberJune 30, 2017, increased $16.12019, decreased $4.9 million, or 35.8%12.3%, and $54.7$2.7 million, or 41.1%3.3%, respectively, and versus the same periodsperiod of 2016. CnF® sales revenues increased 28.7% (volumes increased 23.1%), compared to2018. The decrease is primarily a result of the three months ended September 30, 2016. Increased wellcontinued volatile macro-environment for U.S. onshore drilling and completion activity, by customers lead toas well as the increased CnF® chemistrytransition of personnel in the Company’s sales duringorganization, the deferral of completion activity into the third quarter by certain clients, and utilization of 2017. Quarterly non-CnF revenues rose approximately 49.8%, compared to the three months ended September 30, 2016, due to increased customer demand asperformance-driven pricing programs for a resultlimited number of oilfield market conditions.strategic clients.
Sequentially, revenues decreased $4.7 million, or 7.1%, versus the second quarter of 2017. CnF® sales revenues decreased 11.2% (volumes decreased 12.9%) on a sequential basis. Impacts related to Hurricane Harvey and certain customer delays affected the quarter.
ECT gross profit increased $0.6 million, or 3.0%, and $9.2 million, or 16.9%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. Gross margin decreased to 30.6% and 34.0% for the three and nine months ended September 30, 2017, respectively, from 40.4% and 41.0% in the same periods of 2016. The gross margin decreases over the periods were primarily due to product mix and higher raw material costs. Sequentially, gross profit decreased $4.1 million, or 17.9%, versus the second quarter of 2017.
IncomeLoss from operations for the ECT segment increased $0.7improved $30.3 million or 10.8%, and $2.9$25.1 million or 13.4%, for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, versus the same periodsperiod of 2016. These increases were primarily attributable2018, which was a result of 2018 including a non-recurring impairment of goodwill of $37.2 million as well as lower inventory adjustments and reduced expenses related to the increasetransition in CnF® sales.
|
| | | | | | | | | | | | | | | |
Consumer and Industrial Chemistry Technologies (“CICT”) | | | | | | |
(dollars in thousands) | Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue | $ | 18,291 |
| | $ | 19,307 |
| | $ | 56,782 |
| | $ | 59,133 |
|
Gross profit | 3,007 |
| | 4,174 |
| | 11,733 |
| | 13,256 |
|
Gross margin % | 16.4 | % | | 21.6 | % | | 20.7 | % | | 22.4 | % |
Income from operations | 985 |
| | 2,433 |
| | 5,906 |
| | 8,508 |
|
Operating margin % | 5.4 | % | | 12.6 | % | | 10.4 | % | | 14.4 | % |
CICT Results of Operations: Three and Nine Months Ended September 30, 2017, Compared to the Three and Nine Months Ended September 30, 2016
CICT revenue decreased $1.0 million, or 5.3%, and $2.4 million, or 4.0%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. These decreases were due to reduced volumes,Company’s sales organization. The improvement was partially offset by higher prices. Sequentially, quarterly revenues decreased $1.0 million, or 5.2%, versus the second quarter of 2017lower gross margin due to reduced volumes.
CICT gross profit for the three and nine months ended September 30, 2017, decreased $1.2 million, or 28.0%, and $1.5 million, or 11.5%, respectively, versus the same periods of 2016. Gross margin decreased to 16.4% and 20.7% for the three and nine months ended September 30, 2017, respectively, from 21.6% and 22.4% in the same periods of 2016. These decreases were a result of lower margins caused by higher material costs and product mix. Sequentially, gross profits decreased by $0.3 million,revenue and gross margins decreased to 16.4% from 17.0% in the second quarter of 2017margin compression due to product mix and increased raw material costs.
Income from operations for the CICT segment decreased $1.4 million, or 59.5%, and $2.6 million, or 30.6%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. Sequentially, quarterly operating profits decreased by $0.2 million. These decreases are primarily attributable to product mix and increased raw material and indirect costs.direct labor costs, higher equipment and logistics expenditures, lower plant utilization, and a one-time charge related to the termination of an operations related contract.
Discontinued Operations
During the fourth quarter of 2016,2018, the Company classified the DrillingConsumer and Industrial Chemistry Technologies and Production Technologies segmentssegment as held for sale based on management’s intention to sell these businesses. By the endbusiness. During the first quarter of August 2017,2019, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments.segment. The Company’s historical financial statements have been revised to present the operating results of the DrillingConsumer and Industrial Chemistry Technologies and Production Technologies segmentssegment as discontinued operations. The information below is presented for informational purposes only.
|
| | | | | | | | | | | | | | | |
Drilling Technologies | | | | | | | |
(dollars in thousands) | Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue | $ | — |
| | $ | 7,197 |
| | $ | 11,534 |
| | $ | 20,026 |
|
Gross profit (loss) | — |
| | 2,907 |
| | 4,275 |
| | 6,150 |
|
Gross margin % | — | % | | 40.4 | % | | 37.1 | % | | 30.7 | % |
Loss from operations | (755 | ) | | (924 | ) | | (2,196 | ) | | (43,493 | ) |
Loss from operations - excluding impairment | (755 | ) | | (924 | ) | | (2,196 | ) | | (6,971 | ) |
Operating margin % - excluding impairment | — | % | | (12.8 | )% | | (19.0 | )% | | (34.8 | )% |
|
| | | | | | | | | | | | | | | |
Production Technologies | | | | | | | |
(dollars in thousands) | Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue | $ | — |
| | $ | 2,145 |
| | $ | 4,002 |
| | $ | 6,034 |
|
Gross profit (loss) | — |
| | 105 |
| | 813 |
| | 201 |
|
Gross margin % | — | % | | 4.9 | % | | 20.3 | % | | 3.3 | % |
Loss from operations | (64 | ) | | (1,118 | ) | | (1,290 | ) | | (7,810 | ) |
Loss from operations - excluding impairment | (64 | ) | | (1,118 | ) | | (1,290 | ) | | (3,897 | ) |
Operating margin % - excluding impairment | — | % | | (52.1 | )% | | (32.2 | )% | | (64.6 | )% |
|
| | | | | | | | | | | | | | | |
Consumer and Industrial Chemistry Technologies (“CICT”) | | | | | | |
(dollars in thousands) | Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue | $ | — |
| | $ | 19,540 |
| | $ | 11,031 |
| | $ | 38,987 |
|
Income (loss) from operations | — |
| | 639 |
| | (610 | ) | | 3,078 |
|
Operating margin % | — | % | | 3.3 | % | | (5.5 | )% | | 7.9 | % |
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 facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of SeptemberJune 30, 20172019, the Company was not involved in any unconsolidated SPEs.
The 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 financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors.
Critical Accounting Policies and Estimates
The Company’s Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparation of these statements requires management to make judgments, estimates, and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Part II, Item 8 — Financial Statements and Supplementary Data, Note 2 of “Notes to Consolidated Financial Statements” and Part II, Item 7 — Management’s Discussion and Analysis of Financial ConditionsCondition and Results of Operations, “Critical Accounting Policies and Estimates” of the Company’s Annual Report, and the “Notes to Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report describe the significant accounting policies and critical accounting estimates used to prepare the consolidated financial statements. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most subjective judgments. The Company regularly reviews and challenges judgments, assumptions, and estimates related to critical accounting policies. The Company’s estimates and assumptions are based on historical experience and expected changes in the business environment; however, actual results may materially differ from the estimates. There have been no significant changes in the Company’s critical accounting estimates during the ninesix months ended SeptemberJune 30, 2017.2019.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2 — “Recent Accounting Pronouncements” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements arise from the Company’s need to service debt, acquire and maintain equipment, fund working capital requirements, and when the opportunities arise, to make strategic acquisitions and repurchase Company stock. During the first ninesix months of 2017,2019, the Company funded capital requirements primarily with cash on hand, including proceeds from the sale of the CICT segment, and debt financing.
The Company’s primary source of debt financing iswas its $75 million Credit Facility with PNC Bank. This Credit Facility contains provisions for aUpon closing of the sale of the CICT segment, on March 1, 2019, the Company repaid the outstanding balance, interest, and fees related to the revolving credit facility, secured by substantially all of the Company’s domestic real and personal property, including accounts receivable, inventory, land, buildings, equipment, and other intangible assets. As of September 30, 2017, the Company had $40.6 million in outstanding borrowings under the revolving debt portion ofsubsequently terminated the Credit Facility. At September 30, 2017, the Company
was in compliance with all debt covenants. Significant terms of the Credit Facility are discussed in Note 1213 — “Long-Term Debt and Credit Facility” in Part I,II, Item 18 — “Financial Statements”Statements and Supplementary Data” of this Quarterlythe Company’s Annual Report.
The Company believes it has access to adequate liquidity to fund its ongoing operations and capital expenditures. As of SeptemberJune 30, 2017,2019, the Company had available borrowing capacity under its revolving linecash and cash equivalents of credit of $34.3 million and available cash of $4.9 million, resulting in total liquidity of $39.2$97.5 million. For the remainder of 2017,2019, the Company expects maintenance capital spending of approximately $2.9 million and does not have any specific growth capital projects currently planned or committed. During the remainder of 2019, the Company plans to spend between $2.8 millionuse internally generated funds and $4.8 million for committed cash on hand to fund operations
and planned capital expenditures. TheWith the proceeds from the sale of the CICT segment, the Company may pursue external financingpaid off its Credit Facility balance and formed a Strategic Capital Committee to increaseevaluate and make recommendations to the board of directors regarding the manner in which the remaining net proceeds from the sale will be deployed. Subject to Board approval of any recommendations by the Strategic Capital Committee, the Company will continue to invest capital in what it believes to be economically attractive opportunities for its liquidity position and/or fund acquisitions when strategic opportunities arise.shareholders. This includes the potential for share repurchases included under our share repurchase program approved by the board of directors in June 2015.
Any excess cash generated may be used to pay down the level of debtfor outside growth opportunities or retained for future use.
Net Debt
Net debt represents total debt less cash and cash equivalents and combines the Company’s indebtedness and the cash and cash equivalents that could be used to repay that debt. Components of net debt are as follows (in thousands):
|
| | | | | | | |
| September 30, 2017 | | September 30, 2016 |
Cash and cash equivalents | $ | 4,942 |
| | $ | 3,474 |
|
Current portion of long-term debt | (40,589 | ) | | (34,562 | ) |
Long-term debt, less current portion | — |
| | (8,000 | ) |
Net debt | $ | (35,647 | ) | | $ | (39,088 | ) |
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
| | | Nine months ended September 30, | Six months ended June 30, |
| 2017 | | 2016 | 2019 | | 2018 |
Net cash provided by (used in) operating activities | $ | 1,178 |
| | $ | (825 | ) | |
Net cash used in operating activities | | $ | (24,510 | ) | | $ | (19,650 | ) |
Net cash provided by (used in) investing activities | 11,839 |
| | (18,754 | ) | 168,868 |
| | (2,722 | ) |
Net cash (used in) provided by financing activities | (13,039 | ) | | 20,805 |
| (49,911 | ) | | 20,944 |
|
Net cash flows provided by (used in) discontinued operations | 13 |
| | (8 | ) | |
Net cash flows provided by discontinued operations | | 16 |
| | 14 |
|
Effect of changes in exchange rates on cash and cash equivalents | 128 |
| | 48 |
| 2 |
| | (74 | ) |
Net increase in cash and cash equivalents | $ | 119 |
| | $ | 1,266 |
| |
Net increase (decrease) in cash and cash equivalents | | $ | 94,465 |
| | $ | (1,488 | ) |
Operating Activities
Net cash provided by (used in)used in operating activities was $1.2$24.5 million and $(0.8)$19.7 million during the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Consolidated net loss for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, totaled $5.3$28.4 million and $2.0$78.5 million, respectively.
During the ninesix months ended SeptemberJune 30, 2017,2019, net non-cash contributions to net income totaled $12.2$27.0 million. Contributory non-cash items consisted primarily of $9.5 million for depreciation and amortization, $9.7 million for stock-based compensation expense, $0.9 million for recognized incremental tax benefits related to the Company’s share based awards, and $0.4 million for net loss on sale of assets, partially offset by $8.3$17.9 million for changes to deferred income taxes.taxes driven by the valuation allowance recorded against deferred tax assets, $5.8 million for depreciation and amortization, $1.7 million for stock compensation expense, and $1.1 million for net loss on disposal of long-lived assets.
During the ninesix months ended SeptemberJune 30, 2016,2018, net non-cash contributions to net income totaled $10.8$66.1 million. Contributory non-cash items consisted primarily of $7.7$37.2 million for depreciation and amortization, $8.6 million for stock compensation expense, and $0.9 million for recognized incremental tax benefits related to the Company’s share based awards, partially offset by $6.3goodwill impairment charge, $15.5 million for changes to deferred income taxes.taxes driven by the valuation allowance recorded against deferred tax assets, $4.4 million for stock compensation expense, $4.9 million for depreciation and amortization, $2.6 million for the loss on write-down of assets held for sale, and $1.9 million for provisions related to inventory reserves.
During the ninesix months ended SeptemberJune 30, 2017,2019, changes in working capital used $5.7$23.2 million in cash, primarily resulting from increasing accounts receivablerestricted cash, income taxes receivables and inventoryother current assets by $20.9$17.2 million and decreasing accounts payable, by $8.3accrued liabilities and interest payable $14.3 million, partially offset by decreasing income taxesaccounts receivable and other current assetsinventories by $21.9$7.2 million and increasing accrued liabilities and interestincome tax payable by $1.6$1.2 million.
During the ninesix months ended SeptemberJune 30, 2016,2018, changes in working capital used $9.6$7.6 million in cash, primarily resulting from increasing inventory by $2.0 million and decreasing accrued liabilities and interest payable by $16.9 million, partially offset by decreasing accounts receivable, inventory, income taxestax receivable and other current assets by $24.3$7.1 million and decreasing income taxes payable by $1.8 million, partially offset by increasing accounts payable accrued liabilities, and interest payable by $16.4$4.3 million.
Investing Activities
Net cash provided by investing activities was $11.8$168.9 million for the ninesix months ended SeptemberJune 30, 2017.2019. Cash provided by investing activities primarily included $18.5$169.7 million of proceeds received from the sale of the Drilling TechnologiesCICT segment, partially offset by $0.8 million for capital expenditures and Production Technologies segments$0.2 million for the purchase of various patents.
Net cash used in investing activities was $2.7 million for the six months ended June 30, 2018. Cash used in investing activities primarily included $2.6 million for capital expenditures and $0.3$0.2 million for the purchase of various patents, partially offset by $0.1 million of proceeds received from the sale of fixed assets, partially offset by $6.2 million for capital expenditures and $0.8 million for the purchase of various patents and other intangiblelong-lived assets.
Net cash used in investing activities was $18.8 million for the nine months ended September 30, 2016. Cash used in investing activities primarily included $10.6 million for capital expenditures and $8.2 million for the purchase of IPI and various patents.
Financing Activities
Net cash used in financing activities was $13.0$49.9 million for the ninesix months ended SeptemberJune 30, 2017, primarily2019, due to using $7.8$49.7 million for repayments of debt, net of borrowings, associated with the termination of the Credit Facility and $0.1 million for purchases of treasury stock for tax withholding purposes related to the vesting of restricted stock awards of $1.5 million, and $4.2 million for the repurchase of common stock. Cash used in financing activities was partially offset by $0.5 million in proceeds from the sale of common stock.awards.
Net cash generated through financing activities was $20.8$20.9 million for the ninesix months ended SeptemberJune 30, 2016,2018, primarily due to receiving $30.6$21.2 million for borrowings of debt, net of repayments, and receiving $0.2 million in proceeds from the sale of common stock, inclusive of $29.9 million, net of issuance costs, from the private placement of 2.5 million common shares on July 27, 2016. Cash generated through financing activities was partially offset by using $8.0 million for repaymentsa loss from noncontrolling interest of debt, net of borrowings, reductions in tax benefit related to stock-based compensation of $0.9 million, and purchases of treasury stock for tax withholding purposes related to vesting of restricted stock awards and the exercise of non-qualified stock options of $0.9$0.4 million.
On August 1, 2017, the Company filed a registration statement on Form S-3 (the “Universal Shelf”) with the SEC to register for sale from time to time up to $350 million of common stock, preferred stock, senior and subordinated debt securities, warrants, units and guarantees. The Universal Shelf was declared effective by the SEC on October 11, 2017 and will remain effective for three years. Although the Company has no current plans to issue any securities under the Universal Shelf, it will remain available for use by the Company, subject to market conditions, to quickly access the capital markets should the need arise.
Contractual Obligations
Cash flows from operations are dependent on a variety of factors, including fluctuations in operating results, accounts receivable collections, inventory management, and the timing of payments for goods and services. Correspondingly, the impact of contractual obligations on the Company’s liquidity and capital resources in future periods is analyzed in conjunction with such factors.
Material contractual obligations consist of repaymentpayments of amounts borrowed on the Company’s Credit Facility with PNC Bankfinance and payment of operating lease obligations. Contractual obligations at SeptemberJune 30, 2017,2019, are as follows (in thousands):
| | | Payments Due by Period | Payments Due by Period |
| Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
Borrowings under revolving credit facility (1) | $ | 40,589 |
| | $ | 40,589 |
| | $ | — |
| | $ | — |
| | $ | — |
| |
Finance lease obligations | | 260 |
| | 70 |
| | 109 |
| | 78 |
| | 3 |
|
Operating lease obligations | 22,415 |
| | 2,679 |
| | 4,762 |
| | 3,966 |
| | 11,008 |
| 36,261 |
| | 2,450 |
| | 4,615 |
| | 4,331 |
| | 24,865 |
|
Total | $ | 63,004 |
| | $ | 43,268 |
| | $ | 4,762 |
| | $ | 3,966 |
| | $ | 11,008 |
| $ | 36,521 |
| | $ | 2,520 |
| | $ | 4,724 |
| | $ | 4,409 |
| | $ | 24,868 |
|
(1)In addition, the Company executed a long-term supply agreement for terpene product, which serves as a feedstock to some of the Company’s key value-added products. The borrowing is classified as current debt. The weighted-average interest rate is 3.86%term of the agreement runs through September 2023, with an option to extend for an additional year. This agreement secures the Company’s access to a sufficient supply of terpene and includes a minimum annual purchase requirement at September 30, 2017.variable prices during the term of the agreement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates, commodity prices, and foreign currency exchange rates. There have been no material changes to the quantitative or qualitative disclosures about market risk set forth in Part II, Item 7A of the Company’s Annual Report.
Item 4. 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. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.
The Company’s management, with the participation of the principal executive and principal financial officers, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of SeptemberJune 30, 2017,2019, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and principal financial officers have concluded that the Company’s disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2019.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s system of internal control over financial reporting during the three months ended SeptemberJune 30, 2017,2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern District of Texas granted the Company’s motion to dismiss the four consolidated putative securities class action lawsuits that were filed in November 2015, against the Company and certain of its officers. The lawsuits were previously consolidated into a single case, and a consolidated amended complaint had been filed. The consolidated amended complaint asserted that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint sought an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between October 23, 2014 and November 9, 2015, inclusive. The lead plaintiff appealed the District Court’s decision granting the motion to dismiss.
In January 2016, three derivative lawsuits were filed, two in the District Court of Harris County, Texas (which have since been consolidated into one case) and one in the United States District Court for the Southern District of Texas, on behalf of the Company against certain of its officers and its current directors. The lawsuits allege violations of law, breaches of fiduciary duty, and unjust enrichment against the defendants.
The Company believes the lawsuits are without merit and intends to vigorously defend against all claims asserted. Discovery has not yet commenced. At this time, the Company is unable to reasonably estimate the outcome of this litigation.
In addition, as previously disclosed, the U.S. Securities and Exchange Commission had opened an inquiry related to similar issues to those raised in the above-described litigation. On August 21, 2017, the Company received a letter from the staff of the SEC stating that the inquiry has been concluded and that the staff does not intend to recommend an enforcement action against the Company.
Other Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. 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 1A. Risk Factors
See Part I, Item 1A — “Risk Factors" of the Company’s 2018 Annual Report on Form 10-K and Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 for a detailed discussion of the Company’s risk factors. There have been no material changes to thethese risk factors set forth in Part I, Item 1A of the Company’s Annual Report.factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Repurchases of the Company’s equity securities during the three months ended SeptemberJune 30, 2017,2019, are as follows:
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| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (2) (3) (4) |
July 1, 2017 to July 31, 2017 | 1,880 |
| | $ | 8.94 |
| | — |
| | $ | 54,420,042 |
|
August 1, 2017 to August 31, 2017 | 377,203 |
| | $ | 6.07 |
| | 350,000 |
| | $ | 52,288,702 |
|
September 1, 2017 to September 30, 2017 | 286,009 |
| | $ | 5.55 |
| | 280,000 |
| | $ | 50,733,939 |
|
Total | 665,092 |
| | $ | 5.85 |
| | 630,000 |
| |
|
|
|
| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (2) |
April 1, 2019 to April 30, 2019 | 562 |
| | $ | 3.30 |
| | — |
| | $ | 49,704,947 |
|
May 1, 2019 to May 31, 2019 | — |
| | $ | — |
| | — |
| | $ | 49,704,947 |
|
June 1, 2019 to June 30, 2019 | 3,247 |
| | $ | 3.04 |
| | — |
| | $ | 49,704,947 |
|
Total | 3,809 |
| | $ | 3.08 |
| | — |
| |
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(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, (b) to satisfy payments required for common stock upon the exercise of stock options, and (c) as part of a publicly announced repurchase program on the open market. |
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(2) | In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common stock. Repurchases may be made in open market or privately negotiated transactions. Through September 30, 2017, the Company has repurchased $24.3 million of its common stock and $0.7 million may yet be used to purchase shares. |
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(3) | In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases may be made in open market or privately negotiated transactions. Through SeptemberJune 30, 2017,2019, the Company has not repurchased any$0.3 million of its common stock under this authorization and $50.0$49.7 million may yet be used to purchase shares. |
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(4) | A covenant under the Company’s Credit Facility limits the amount that may be used to repurchase the Company’s common stock. At September 30, 2017, this covenant limits additional share repurchases to $10.7 million. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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| | |
Exhibit Number | | Description of Exhibit |
2.1 | | |
3.1 | | |
3.2 | | |
3.3 | | |
3.4 | | |
4.1 | | |
4.2 | | |
10.1 | * | |
10.2 | * | |
10.3 | | |
10.2 | | |
10.3 | | |
10.4 | * | |
10.5 | * | |
10.6 | | |
10.7 | | |
31.1 | * | |
31.2 | * | |
32.1 | ** | |
32.2 | ** | |
101.INS | +* | XBRL Instance Document. |
101.SCH | +* | XBRL Schema Document. |
101.CAL | +* | XBRL Calculation Linkbase Document. |
101.LAB | +* | XBRL Label Linkbase Document. |
101.PRE | +* | XBRL Presentation Linkbase Document. |
101.DEF | +* | XBRL Definition Linkbase Document. |
| | |
* | | Filed herewith. |
** | | Furnished with this Form 10-Q, not filed. |
+1 | | Filed electronically withSchedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. |
2 | | Portions of this Form 10-Q.exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K in order for them to remain confidential. |
SIGNATURES
Pursuant to the requirements 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.
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| | |
FLOTEK INDUSTRIES, INC. |
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By: | | /s/ JOHN W. CHISHOLM |
| | John W. Chisholm |
| | President and Chief Executive Officer and Chairman of the Board
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| | |
Date: | November 8, 2017August 7, 2019 |
|
| | |
FLOTEK INDUSTRIES, INC. |
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By: | | /s/ H. RICHARD WALTONELIZABETH T. WILKINSON |
| | H. Richard WaltonElizabeth T. Wilkinson |
| | Executive Vice President and
Chief Financial Officer |
| | |
Date: | November 8, 2017August 7, 2019 |