UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM | 10-Q |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended SeptemberJune 30, 20172020
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission File Number 1-13270
FLOTEK INDUSTRIES, INC. |
| (Exact name of registrant as specified in its charter) |
| Delaware | 90-0023731 | ||||
(State incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
W. | Houston, | TX | 77064 | ||
| (Address of principal executive offices) | (Zip Code) | ||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | ||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.0001 par value | FTK | New York Stock Exchange |
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.
| Large accelerated filer | Accelerated | |||||
| Non-accelerated filer | Smaller reporting company | |||||
| Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
As of October 31, 2017,August 4, 2020, there were 56,825,81971,306,770 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.
TABLE OF CONTENTS
Unaudited Condensed Consolidated Balance Sheets at | ||
Unaudited Condensed Consolidated Statements of Operations for the three and | ||
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and | ||
Unaudited Condensed Consolidated Statements of Cash Flows for the | ||
| 2020 and 2019 | ||
2
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, 2020 | December 31, 2019 | |||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 4,942 | $ | 4,823 | $ | 59,926 | $ | 100,575 | ||||||
| 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 | 664 | 663 | ||||||||||||
| Accounts receivable, net of allowance for doubtful accounts of $1,383 and $1,527 at June 30, 2020 and December 31, 2019, respectively | 8,108 | 15,638 | ||||||||||||
| Inventories, net | 23,338 | 23,210 | ||||||||||||
| Income taxes receivable | 2,649 | 12,752 | 6,846 | 631 | ||||||||||
| Assets held for sale | 4,135 | 43,900 | ||||||||||||
| Other current assets | 10,881 | 21,708 | 2,407 | 13,191 | ||||||||||
| Total current assets | 149,331 | 188,618 | 101,289 | 153,908 | ||||||||||
| Property and equipment, net | 73,711 | 74,691 | 8,017 | 39,829 | ||||||||||
| Operating lease right-of-use assets | 2,422 | 16,388 | ||||||||||||
| Goodwill | 56,660 | 56,660 | 17,522 | — | ||||||||||
| Deferred tax assets, net | 21,190 | 12,894 | 152 | 152 | ||||||||||
| Other intangible assets, net | 48,851 | 50,352 | 12,777 | 20,323 | ||||||||||
| Other long-term assets | 17 | — | ||||||||||||
| TOTAL ASSETS | $ | 349,743 | $ | 383,215 | $ | 142,196 | $ | 230,600 | ||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 21,725 | $ | 29,960 | $ | 7,876 | $ | 16,231 | ||||||
| Accrued liabilities | 12,323 | 12,170 | 10,474 | 24,552 | ||||||||||
| Interest payable | 30 | 24 | ||||||||||||
| Liabilities held for sale | 1,586 | 4,961 | ||||||||||||
| Income taxes payable | 12 | — | ||||||||||||
| Current portion of long-term debt | 40,589 | 40,566 | 2,527 | — | ||||||||||
| Current portion of operating lease liabilities | 654 | 486 | ||||||||||||
| Current portion of finance lease liabilities | 57 | 55 | ||||||||||||
| Total current liabilities | 76,253 | 87,681 | 21,600 | 41,324 | ||||||||||
| Long-term debt, less current portion | — | 7,833 | 3,144 | — | ||||||||||
| Deferred revenue, long-term | 111 | — | ||||||||||||
| Long-term operating lease liabilities | 8,497 | 16,973 | ||||||||||||
| Long-term finance lease liabilities | 127 | 158 | ||||||||||||
| Deferred tax liabilities, net | 11 | 116 | ||||||||||||
| Total liabilities | 76,253 | 95,514 | 33,490 | 58,571 | ||||||||||
| 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 | ||||||||||||
| Commitments and contingencies (See Note 19) | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
| Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | — | — | ||||||||||||
| Common stock, $0.0001 par value, 140,000,000 shares authorized; 77,626,135 shares issued and 73,166,719 shares outstanding at June 30, 2020; 63,656,897 shares issued and 59,511,416 shares outstanding at December 31, 2019 | 7 | 6 | ||||||||||||
| Additional paid-in capital | 334,490 | 318,392 | 357,980 | 347,564 | ||||||||||
| Accumulated other comprehensive income (loss) | (822 | ) | (956 | ) | ||||||||||
| Accumulated other comprehensive income | 51 | 181 | ||||||||||||
| Retained earnings (accumulated deficit) | (28,736 | ) | (9,830 | ) | (215,766 | ) | (142,238 | ) | ||||||
| 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; 4,459,416 and 4,145,481 shares at June 30, 2020 and December 31, 2019, respectively | (33,566 | ) | (33,484 | ) | ||||||||||
| Total stockholders’ equity | 108,706 | 172,029 | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 142,196 | $ | 230,600 | ||||||||||
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 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Revenue | $ | 79,458 | $ | 64,337 | $ | 244,589 | $ | 192,227 | $ | 8,880 | $ | 34,692 | $ | 28,296 | $ | 77,949 | ||||||||||||||
| 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) | 11,632 | 38,121 | 34,473 | 82,089 | ||||||||||||||||||||||||||
| Corporate general and administrative | 10,346 | 10,302 | 33,773 | 30,398 | 5,395 | 6,054 | 9,888 | 13,335 | ||||||||||||||||||||||
| Segment selling and administrative | 9,277 | 9,775 | 28,972 | 26,879 | ||||||||||||||||||||||||||
| Depreciation and amortization | 2,540 | 2,217 | 7,464 | 6,024 | 468 | 2,119 | 2,659 | 4,379 | ||||||||||||||||||||||
| Research and development | 2,691 | 2,327 | 9,940 | 6,323 | 1,638 | 2,076 | 4,193 | 4,360 | ||||||||||||||||||||||
| (Gain) loss on disposal of long-lived assets | (11 | ) | (14 | ) | 401 | (29 | ) | (22 | ) | (4 | ) | (55 | ) | 1,093 | ||||||||||||||||
| Total expenses | 24,843 | 24,607 | 80,550 | 69,595 | ||||||||||||||||||||||||||
| Impairment of fixed and long-lived assets | — | — | 57,454 | — | ||||||||||||||||||||||||||
| Total costs and expenses | 19,111 | 48,366 | 108,612 | 105,256 | ||||||||||||||||||||||||||
| Loss from operations | (3,103 | ) | (2,253 | ) | (4,977 | ) | (1,730 | ) | (10,231 | ) | (13,674 | ) | (80,316 | ) | (27,307 | ) | ||||||||||||||
| Other (expense) income: | ||||||||||||||||||||||||||||||
| Gain on lease termination | 576 | — | 576 | — | ||||||||||||||||||||||||||
| Interest expense | (574 | ) | (518 | ) | (1,718 | ) | (1,536 | ) | (16 | ) | (16 | ) | (20 | ) | (2,013 | ) | ||||||||||||||
| Other (expense) income, net | 273 | (41 | ) | 664 | (94 | ) | ||||||||||||||||||||||||
| Total other expense | (301 | ) | (559 | ) | (1,054 | ) | (1,630 | ) | ||||||||||||||||||||||
| Other income, net | 78 | 693 | 31 | 800 | ||||||||||||||||||||||||||
| Total other expense, net | 638 | 677 | 587 | (1,213 | ) | |||||||||||||||||||||||||
| Loss before income taxes | (3,404 | ) | (2,812 | ) | (6,031 | ) | (3,360 | ) | (9,593 | ) | (12,997 | ) | (79,729 | ) | (28,520 | ) | ||||||||||||||
| Income tax (expense) benefit | (17 | ) | 942 | 746 | 1,349 | |||||||||||||||||||||||||
| Income tax benefit | 32 | 192 | 6,201 | 503 | ||||||||||||||||||||||||||
| Loss from continuing operations | (3,421 | ) | (1,870 | ) | (5,285 | ) | (2,011 | ) | (9,561 | ) | (12,805 | ) | (73,528 | ) | (28,017 | ) | ||||||||||||||
| Income (loss) from discontinued operations, net of tax | 319 | (876 | ) | (13,621 | ) | (33,200 | ) | |||||||||||||||||||||||
| Net loss | $ | (3,102 | ) | $ | (2,746 | ) | $ | (18,906 | ) | $ | (35,211 | ) | ||||||||||||||||||
| (Loss) income from discontinued operations, net of tax | — | (1,608 | ) | — | 44,466 | |||||||||||||||||||||||||
| Net (loss) income | $ | (9,561 | ) | $ | (14,413 | ) | $ | (73,528 | ) | $ | 16,449 | |||||||||||||||||||
| Basic earnings (loss) per common share: | Basic earnings (loss) per common share: | |||||||||||||||||||||||||||||
| Continuing operations | $ | (0.06 | ) | $ | (0.03 | ) | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.14 | ) | $ | (0.22 | ) | $ | (1.17 | ) | $ | (0.48 | ) | ||||||
| Discontinued operations, net of tax | 0.01 | (0.02 | ) | (0.24 | ) | (0.60 | ) | — | (0.03 | ) | — | 0.76 | ||||||||||||||||||
| Basic earnings (loss) per common share | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.33 | ) | $ | (0.64 | ) | $ | (0.14 | ) | $ | (0.25 | ) | $ | (1.17 | ) | $ | 0.28 | |||||||
| Diluted earnings (loss) per common share: | Diluted earnings (loss) per common share: | |||||||||||||||||||||||||||||
| Continuing operations | $ | (0.06 | ) | $ | (0.03 | ) | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.14 | ) | $ | (0.22 | ) | $ | (1.17 | ) | $ | (0.48 | ) | ||||||
| Discontinued operations, net of tax | 0.01 | (0.02 | ) | (0.24 | ) | (0.60 | ) | — | (0.03 | ) | — | 0.76 | ||||||||||||||||||
| Diluted earnings (loss) per common share | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.33 | ) | $ | (0.64 | ) | $ | (0.14 | ) | $ | (0.25 | ) | $ | (1.17 | ) | $ | 0.28 | |||||||
| 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 | 66,035 | 58,608 | 62,828 | 58,491 | ||||||||||||||||||||||
| Weighted average common shares used in computing diluted earnings (loss) per common share | 57,602 | 56,899 | 57,709 | 55,523 | 66,035 | 58,608 | 62,828 | 58,491 | ||||||||||||||||||||||
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| 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 | (3,102 | ) | (2,746 | ) | (18,906 | ) | (35,211 | ) | |||||||
| Other comprehensive income (loss): | |||||||||||||||
| Foreign currency translation adjustment | 148 | (68 | ) | 134 | 256 | ||||||||||
| Comprehensive income (loss) | $ | (2,954 | ) | $ | (2,814 | ) | $ | (18,772 | ) | $ | (34,955 | ) | |||
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Loss from continuing operations | $ | (9,561 | ) | $ | (12,805 | ) | $ | (73,528 | ) | $ | (28,017 | ) | |||
| (Loss) income from discontinued operations, net of tax | — | (1,608 | ) | — | 44,466 | ||||||||||
| Net (loss) income | (9,561 | ) | (14,413 | ) | (73,528 | ) | 16,449 | ||||||||
| Other comprehensive (loss) income: | |||||||||||||||
| Foreign currency translation adjustment | (7 | ) | 24 | (130 | ) | 118 | |||||||||
| Comprehensive (loss) income | $ | (9,568 | ) | $ | (14,389 | ) | $ | (73,658 | ) | $ | 16,567 | ||||
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine months ended September 30, | Six months ended June 30, | |||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net loss | $ | (18,906 | ) | $ | (35,211 | ) | ||||||||
| Loss from discontinued operations, net of tax | (13,621 | ) | (33,200 | ) | ||||||||||
| Net (loss) income attributable to Flotek Industries, Inc. | $ | (73,528 | ) | $ | 16,449 | |||||||||
| Less: Income from discontinued operations, net of tax | — | 44,466 | ||||||||||||
| Loss from continuing operations | (5,285 | ) | (2,011 | ) | (73,528 | ) | (28,017 | ) | ||||||
| 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 | 2,659 | 4,379 | ||||||||||
| Amortization of deferred financing costs | 376 | 308 | — | 1,428 | ||||||||||
| Loss (gain) on sale of assets | 401 | (29 | ) | |||||||||||
| Provision for doubtful accounts | 474 | 102 | ||||||||||||
| Provision for excess and obsolete inventory | 529 | — | ||||||||||||
| Impairment of right-of-use assets | 7,434 | — | ||||||||||||
| Impairment of fixed assets | 30,178 | — | ||||||||||||
| Impairment of intangible assets | 19,842 | — | ||||||||||||
| (Gain)/loss on disposal of long-lived assets | (631 | ) | 1,093 | |||||||||||
| Non-cash lease expense | 242 | 464 | ||||||||||||
| Stock compensation expense | 9,679 | 8,591 | 1,521 | 1,669 | ||||||||||
| Deferred income tax benefit | (8,290 | ) | (6,309 | ) | ||||||||||
| Deferred income tax provision | (105 | ) | 17,855 | |||||||||||
| Reduction in tax benefit related to share-based awards | 915 | 883 | — | 24 | ||||||||||
| Changes in current assets and liabilities: | ||||||||||||||
| Accounts receivable, net | (8,704 | ) | (7,572 | ) | 7,252 | 6,289 | ||||||||
| Inventories | (12,213 | ) | (2,959 | ) | ||||||||||
| Inventories, net | 6,418 | 554 | ||||||||||||
| Income taxes receivable | 9,254 | (13,687 | ) | (6,351 | ) | (281 | ) | |||||||
| Other current assets | 12,649 | (51 | ) | 1,715 | (1,990 | ) | ||||||||
| Other long-term assets | — | 3,286 | ||||||||||||
| Accounts payable | (8,262 | ) | 5,959 | (10,229 | ) | (4,157 | ) | |||||||
| Accrued liabilities | 1,561 | 10,434 | (16,755 | ) | (10,216 | ) | ||||||||
| Income taxes payable | — | (1,807 | ) | 119 | 1,182 | |||||||||
| Interest payable | 6 | 45 | — | (8 | ) | |||||||||
| Net cash provided by (used in) operating activities | 1,178 | (825 | ) | |||||||||||
| Net cash used in operating activities | (29,216 | ) | (6,344 | ) | ||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Capital expenditures | (6,155 | ) | (10,618 | ) | (42 | ) | (767 | ) | ||||||
| Proceeds from sales of businesses | 18,490 | — | ||||||||||||
| Proceeds from sale of business | 9,844 | 152,217 | ||||||||||||
| Proceeds from sale of assets | 321 | 38 | 66 | 140 | ||||||||||
| Payments for acquisition, net of cash acquired | — | (7,863 | ) | |||||||||||
| Purchase of JP3, net of cash acquired | (26,284 | ) | — | |||||||||||
| Purchase of patents and other intangible assets | (817 | ) | (311 | ) | (8 | ) | (227 | ) | ||||||
| Net cash provided by (used in) investing activities | 11,839 | (18,754 | ) | |||||||||||
| Net cash (used in) provided by investing activities | (16,424 | ) | 151,363 | |||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Repayments of indebtedness | (9,833 | ) | (15,398 | ) | ||||||||||
| Borrowings on revolving credit facility | 310,021 | 256,738 | — | 42,984 | ||||||||||
| Repayments on revolving credit facility | (307,998 | ) | (249,324 | ) | — | (92,715 | ) | |||||||
| Debt issuance costs | (106 | ) | (147 | ) | ||||||||||
| Reduction in tax benefit related to share-based awards | — | (883 | ) | |||||||||||
| Proceeds from Paycheck Protection Program loan | 4,798 | — | ||||||||||||
| Purchase of treasury stock related to share-based awards | (1,500 | ) | (925 | ) | (82 | ) | (142 | ) | ||||||
| Proceeds from sale of common stock | 530 | 30,610 | 358 | — | ||||||||||
| Repurchase of common stock | (4,174 | ) | — | |||||||||||
| Proceeds from exercise of stock options | 21 | 134 | ||||||||||||
| Net cash (used in) provided by financing activities | (13,039 | ) | 20,805 | |||||||||||
| Payments for finance leases | (51 | ) | (38 | ) | ||||||||||
| Net cash provided by (used in) financing activities | 5,023 | (49,911 | ) | |||||||||||
| Discontinued operations: | ||||||||||||||
| Net cash used in operating activities | (695 | ) | (82 | ) | — | (321 | ) | |||||||
| Net cash provided by investing activities | 708 | 74 | — | 337 | ||||||||||
| Net cash flows provided by (used in) discontinued operations | 13 | (8 | ) | |||||||||||
| Net cash flows provided by discontinued operations | — | 16 | ||||||||||||
| Effect of changes in exchange rates on cash and cash equivalents | 128 | 48 | (31 | ) | 2 | |||||||||
| Net increase in cash and cash equivalents | 119 | 1,266 | ||||||||||||
| Cash and cash equivalents at the beginning of period | 4,823 | 2,208 | ||||||||||||
| Cash and cash equivalents at the end of period | $ | 4,942 | $ | 3,474 | ||||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | (40,648 | ) | 95,126 | ||||
| Cash and cash equivalents at the beginning of period | 100,575 | 3,044 | |||||
| Restricted cash at the beginning of period | 663 | — | |||||
| Cash and cash equivalents and restricted cash at beginning of period | 101,238 | 3,044 | |||||
| Cash and cash equivalents at end of period | 59,926 | 97,509 | |||||
| Restricted cash at the end of period | 664 | 661 | |||||
| Cash and cash equivalents and restricted cash at the end of period | $ | 60,590 | $ | 98,170 | |||
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 | Three months ended June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares Issued | Par Value | Shares | Cost | Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | 59,685 | $ | 6 | 2,029 | $ | (20,269 | ) | $ | 318,392 | $ | (956 | ) | $ | (9,830 | ) | $ | 358 | $ | 287,701 | |||||||||||||||||||||||||||||||||||||||||||
Shares Issued | Par Value | Shares | Cost | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 64,338 | $ | 6 | 4,395 | $ | (33,529 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (18,906 | ) | — | (18,906 | ) | — | — | — | — | — | — | (9,561 | ) | (9,561 | ) | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 134 | — | — | 134 | — | — | — | — | — | (7 | ) | — | (7 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | (81 | ) | — | 530 | — | — | — | 530 | — | — | (12 | ) | — | 9 | — | — | 9 | |||||||||||||||||||||||||||||||||||||||||||
| 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 | — | — | — | — | — | — | — | — | 1,788 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeited | — | — | 97 | — | — | — | — | — | — | — | — | 37 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock purchased | — | — | 151 | (1,500 | ) | — | — | — | — | (1,500 | ) | — | — | 39 | (37 | ) | — | — | — | (37 | ) | |||||||||||||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | 9,496 | — | — | — | 9,496 | — | — | — | — | 1,059 | — | — | 1,059 | |||||||||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||||||||
| Stock issued in JP3 acquisition | 11,500 | 1 | — | — | 8,537 | — | — | 8,538 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 77,626 | $ | 7 | 4,459 | $ | (33,566 | ) | $ | 357,980 | $ | 51 | $ | (215,766 | ) | $ | 108,706 | ||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended June 30, 2019 | |||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | ||||||||||||||||||||||||
Shares Issued | Par Value | Shares | Cost | ||||||||||||||||||||||||||
| Balance, March 31, 2019 | 62,199 | $ | 6 | 3,845 | $ | (33,368 | ) | $ | 344,004 | $ | 125 | $ | (77,461 | ) | $ | 233,306 | |||||||||||||
| Net income | — | — | — | — | — | — | (14,413 | ) | (14,413 | ) | |||||||||||||||||||
| 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 | $ | 149 | $ | (91,874 | ) | $ | 220,120 | |||||||||||||
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Six months ended June 30, 2020 | |||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | ||||||||||||||||||||||||
Shares Issued | Par Value | Shares | Cost | ||||||||||||||||||||||||||
| Balance, December 31, 2019 | 63,657 | $ | 6 | 4,145 | $ | (33,484 | ) | $ | 347,564 | $ | 181 | $ | (142,238 | ) | $ | 172,029 | |||||||||||||
| Net loss | — | — | — | — | — | — | (73,528 | ) | (73,528 | ) | |||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (130 | ) | — | (130 | ) | |||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | (25 | ) | — | 20 | — | — | 20 | ||||||||||||||||||||
| Restricted stock granted | 2,469 | — | — | — | 338 | — | — | 338 | |||||||||||||||||||||
| Restricted stock forfeited | — | — | 278 | — | — | — | — | — | |||||||||||||||||||||
| Treasury stock purchased | — | — | 61 | (82 | ) | — | — | — | (82 | ) | |||||||||||||||||||
| Stock compensation expense | — | — | — | — | 1,521 | — | — | 1,521 | |||||||||||||||||||||
| Stock issued in JP3 acquisition | 11,500 | 1 | — | — | 8,537 | — | — | 8,538 | |||||||||||||||||||||
| Balance, June 30, 2020 | 77,626 | $ | 7 | 4,459 | $ | (33,566 | ) | $ | 357,980 | $ | 51 | $ | (215,766 | ) | $ | 108,706 | |||||||||||||
| Six months ended June 30, 2019 | |||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | ||||||||||||||||||||||||
Shares Issued | Par Value | Shares | Cost | ||||||||||||||||||||||||||
| Balance, December 31, 2018 | 62,163 | $ | 6 | 3,770 | $ | (33,237 | ) | $ | 343,536 | $ | 31 | $ | (108,323 | ) | $ | 202,013 | |||||||||||||
| Net income | — | — | — | — | — | — | 16,449 | 16,449 | |||||||||||||||||||||
| 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 | $ | 149 | $ | (91,874 | ) | $ | 220,120 | |||||||||||||
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, technology-driven international chemistry and data company that develops and supplies chemistries, services, equipment and servicesdata analytics to industrial, commercial and consumer markets.
During the second quarter of 2020, the Company acquired 100% ownership of JP3 Measurement, LLC (“JP3”), a privately-held leading data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil, and gas industries,refined fuels. The transaction was valued at approximately $36.6 million, as of the transaction closing date, comprised of $25.0 million in cash subject to certain adjustments and highcontingent consideration and 11.5 million shares in Flotek common stock with an estimated fair value compoundsof $8.5 million, net of a discount for marketability due to companiesa lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million and contingent consideration of an estimated $1.2 million for two potential earn-out provisions totaling $5.0 million based on certain stock performance targets.
With the acquisition of JP3, the Company evaluated its segment information and determined that make foodthere were two segments: Chemistry Technologies and beverages, cleaning products, cosmetics, and other products thatData Analytics, which are sold in consumer and industrial markets.both supported by its continuing Research & Innovation advanced laboratory capabilities.
The Company’s oilfield businessChemistry Technologies segment includes specialty chemistries, logistics and logistics which enable its customers in pursuing improved efficiencies in the drilling and completion of their wells.technology services. The Company also provides automated bulk material handling, loading facilities,designs, develops, manufactures, packages, distributes, delivers, and blending capabilities. The Company processes citrus oil to produce (1) high value compounds used as additives by companies in the flavorsmarkets reservoir-centric fluid systems, including specialty and fragrances markets and (2) environmentally friendlyconventional chemistries, for use in numerous industries around the world, including the oil and gas (“O&G”) industry.
In the second quarter of 2020, the Chemistry Technologies segment launched a line of sanitizers and disinfectants for commercial and personal consumer use. These products build on the Company’s historical expertise in chemistry and leverage its infrastructure, personnel, competencies, supply chain, research, and historic consumer market experiences, yielding a competitive product offering in this rapidly growing area. The Company also servesnewly-launched products include hand sanitizers for retail and e-commerce sales and disinfecting liquids for use in and by hospitals, first responders, the travel and hospitality industry, food services, sporting facilities, and other commercial and industrial applications.
The Company’s Data Analytics segment, created in conjunction with the acquisition of JP3, includes the design, development, production, sale and support of equipment and services that create and provide valuable information about the composition of its energy customers’ hydrocarbon streams.
The customers who purchase non-energy-related citrus oilof the Data Analytics segment span across the entire market, from production upstream to midstream facilities to refineries and related products, including householddistribution networks. To date, the Data Analytics segment has focused solely on North American markets. The Data Analytics segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, increasing efficiencies of towers, enabling automation and commercial cleaning product companies, fragrancerobotization of fluid handling, and cosmetic companies, and food manufacturing companies.reducing losses due to give-away.
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, 2016
10
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2019 (“2019Annual Report”) as amended by the Amendment No. 2 on Form 10-K/A to the 2019 Annual Report”).Report, filed with the SEC on June 11, 2020. A copy of the 2019 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 threewww.flotekind.com.
All significant intercompany accounts and nine months ended September 30, 2017, are not necessarily indicative of the results to be expected for the year ending December 31, 2017.
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.
Potential Impact of COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic, which continues to spread throughout the United States and around the world. This outbreak has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel. In addition, global oil producers, including the Organization of Petroleum Exporting Countries and other oil producing nations, have experienced disagreements relating to oil production which has led to downward pressure on commodity prices.
The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant and swift reduction in international and U.S. economic activity. These effects and the volatility in oil prices have materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas. The Company’s primary markets in Texas are particularly subject to the financial impact of a collapse in oil prices. In the second quarter of 2020, these conditions and the related financial impact have continued and, in some cases, worsened. As a result, the Company has recorded an impairment to property, plant and equipment, intangible assets, and operating right-of-use assets during the first quarter of 2020. In addition, the Company adopted social distancing and work-from-home procedures, which have had and may continue to have an impact on the ability of employees and management of the Company to communicate and work efficiently.
In response to the deteriorating market conditions and anticipating ongoing volatility, the Company has also reduced its cost structure to meet anticipated market activity and reduce the Company’s break-even levels. Among other cost-cutting initiatives:
• The Company’s CEO, John W. Gibson, Jr., reduced his base salary by 20%, and each of the other executive officers reduced his or her salary by 10% , through December 31, 2020 in exchange for restricted stock, effective as of April 1, 2020.
• The board of directors of Flotek approved a 20% reduction in the fees to be paid to the directors, effective as of April 1, 2020.
• The Company consolidated office space by moving all employees at its corporate headquarters into the Houston Global Resource and Innovation Center, (“GRIC”) facility and buying out the remaining term of the corporate headquarters lease for a significant discount, with the move completed by the end of June 2020.
• The Company reduced headcount by 35% on March 30, 2020.
While the full impact of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. Any future development and effects will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic; further adverse revenue and net income effects; disruptions to our operations; third party providers’ ability to support our operations; customer shutdowns of oil and gas exploration and production; the effectiveness of our work from home arrangements; employee impacts from illness, school closures and other community response measures; any actions taken by governmental authorities and other third parties in response to the pandemic; and temporary closures of our facilities or the facilities of our customers and suppliers.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications did not impact previously reported net income (loss).loss and stockholders’ equity.
11
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 Right-Of-Use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP (ASC 840). Upon adoption, the Company recorded operating lease ROU assets and corresponding operating lease liabilities, net of deferred rent, 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 measure inventory atNote 5 — “Leases” for further information surrounding adoption of this new standard.
Effective January 1, 2019, the lowerCompany adopted ASU No. 2018-02, “Reclassification of cost or net realizable value. Net realizable value isCertain 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 estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,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 non-employees. 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.
New Accounting Requirements and Disclosures
New Accounting Standards to be Adopted
The Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09,2019-12, “Revenue from Contracts with CustomersIncome Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard removes specific exceptions to the general principles in Topic 740. 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 exchangepronouncement is effective 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 periodsfiscal years beginning after December 15, 2017,2021, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08,those fiscal years, with early adoption permitted for public companies for periods in 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 guidancefinancial statements have not yet been issued. The Company intends to adopt the new standard in the first quarter of 2018 and is stillcurrently 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 haveof this standard on the consolidated financial statements and related disclosures.
Note 3 — Acquisition of JP3 Measurement LLC
During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil, and refined fuels. The transaction was valued at approximately $36.6 million, as of the transaction closing date, comprised of $25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $8.5 million, net of a discount for marketability due to a lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million and contingent consideration of an estimated $1.2 million for two potential earn-out provisions totaling $5.0 million based on certain stock performance targets.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Tradenames and trademarks | $ | 1,100 | ||
| Technology and know-how | 5,000 | |||
| Customer relationships | 6,800 | |||
| Inventory | 7,100 | |||
| Cash | 604 | |||
| Net working capital, net of cash and inventory | (1,063 | ) | ||
| Fixed assets | 426 | |||
| Long-term debt assumed and other assets (liabilities) | (893 | ) | ||
| Goodwill | 17,522 | |||
| Net assets acquired | $ | 36,596 | ||
These amounts are preliminary in nature and Cash Payments.” This standard addresses eight specific cash flow issues withsubject to adjustments from the objectivefinal determination of reducingworking capital, which could be material. Any necessary adjustments are expected to be finalized within one year from the existing diversity in practice. The pronouncement is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.date of acquisition. The Company recorded transaction costs of $0.5 million for professional services including legal, accounting, and other professional or consulting fees to the Company’s Operating expenses (excluding depreciation and amortization) in the consolidated statement of income for the three and six months ended June 30, 2020.
Pro forma information for JP3 is currently evaluatingnot provided as the impact the pronouncement will have on the consolidated financial statements and related disclosures.
Note 34 — Discontinued Operations
Effective February 28, 2019, the Company completed the sale of FCC to classifyADM 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. Pursuant to the Drilling Technologies and Production Technologies segments’ assets and liabilities as heldterms of the Share Purchase Agreement, Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly owned subsidiary of the Company, entered into a supply agreement with FCC who will supply terpene at specified prices for sale in the fourth quarter 2016. Effectivespecified quantities. The agreement will expire on December 31, 2016,2023.
As of December 31, 2019, the Company concluded that the original long-term supply agreement met the definition of a loss contract. As such, the Company recognized a loss of $19 million as of December 31, 2019, capped by the price paid for the terpene supply agreement amendment, executed in February 2020, which aligned purchase commitments to expected usage for blended products as of December 31, 2019. The Company has classified the assets, liabilities, and results of operations for these two segmentsthis segment as “Discontinued Operations” for all periods presented.
On February 26, 2020, Flotek Chemistry entered into an amendment to the terpene supply agreement between Flotek Chemistry and FCC. Pursuant to the terms and conditions of the Drilling Technologiesamendment, the terpene supply agreement is amended to, among other things, (a) reduce the minimum quantity of terpene that Flotek Chemistry is required to purchase by approximately 3/4ths in 2020 and Production Technologies reporting segments representedby approximately half in each of 2021, 2022 and 2023, (b) provide a strategic shift that would have a major effect onfixed per pound price for terpene in 2020, (c) reduce the Company’s operationsmaximum amount of terpene subject to the terpene supply agreement by approximately 1/3rd, and financial results. Management expects(d) change the sale or disposalpayment terms to net 45 days. In order to make the terms and conditions of the assetsamendment to the terpene supply agreement effective, Flotek Chemistry made a one-time payment in February 2020 of these segments$15.8 million to be completed byADM. The expense associated with the end of 2017.terpene supply agreement amendment payment was recorded as a loss on contract purchase commitments, reported in operating expenses in continuing operations in December 2019.
13
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2020, the Company recognized a loss of $0.8 million associated with the amended terpene supply agreement due to adjustments in the Company’s expected usage of terpene in blended products in 2020.
During the first quarter 2020, as scheduled, $3.3 million of the indemnity escrow was released to the Company. During the second quarter 2020 the remaining indemnity escrow of $6.6 million was released to the Company.
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, 20172020 and 20162019 (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Consumer and Industrial Chemistry Technologies | |||||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | 10,877 | |||||||
| Operating expenses | — | — | — | (11,447 | ) | ||||||||||
| Research and development | — | — | — | (69 | ) | ||||||||||
| (Loss) income from operations | — | — | — | (639 | ) | ||||||||||
| Other income | — | — | — | 35 | |||||||||||
| Gain on sale of business | — | (2,100 | ) | — | 64,934 | ||||||||||
| (Loss) Income before income taxes | — | (2,100 | ) | — | 64,330 | ||||||||||
| Income tax benefit (expense) | — | 492 | — | (19,864 | ) | ||||||||||
| Net (loss) income from discontinued operations | $ | — | $ | (1,608 | ) | $ | — | $ | 44,466 | ||||||
| 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 | ) | ||||
Note 5 — Leases
During the first quarter 2020, the Company made the decision to cease use of the corporate headquarters leased offices and move corporate employees to the GRIC during second quarter of 2020. In addition, the lease liability and corresponding ROU assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as it was determined the Company was no longer reasonably certain to utilize the extension at the GRIC. The remeasurement resulted in adjustments to lease liabilities and ROU assets totaling of $6.2 million each as of March 31, 2020.
In addition, during the three months ended March 31, 2020, the Company recorded an impairment of the ROU assets totaling $7.4 million. See Note 10 - Impairment of Fixed and Long-lived Assets for further discussion of the impairment charge booked in the first quarter 2020.
During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office in exchange for a one-time payment of $1.0 million and moved all employees to the GRIC facility effective as of June 29, 2020. As a result of terminating the corporate headquarters office lease and making the one-time payment, the Company recorded a gain on lease termination of $0.6 million million recorded in gain on lease termination.
14
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The assetscomponents of lease expense and liabilities held for sale on the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016supplemental cash flow information are as follows (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Operating lease expense | $ | 283 | $ | 653 | $ | 854 | $ | 1,306 | |||||||
| Finance lease expense: | |||||||||||||||
| Amortization of right-of-use assets | 4 | 220 | 9 | 220 | |||||||||||
| Interest on lease liabilities | 5 | 3 | 9 | 3 | |||||||||||
| Total finance lease expense | 9 | 223 | 18 | 223 | |||||||||||
| Short-term lease expense | 54 | 32 | 86 | 75 | |||||||||||
| Total lease expense | $ | 346 | $ | 908 | $ | 958 | $ | 1,604 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||
| Operating cash flows from operating leases | $ | 1,411 | $ | 583 | $ | 1,024 | $ | 1,165 | |||||||
| Operating cash flows from finance leases | 5 | 3 | 9 | 3 | |||||||||||
| Financing cash flows from finance leases | 14 | 38 | 51 | 38 | |||||||||||
| 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 | |||||||
| Years ending December 31, | Operating Leases | Finance Leases | ||||||
| 2020 (excluding the six months ended June 30, 2020) | $ | 617 | $ | 33 | ||||
| 2021 | 1,330 | 70 | ||||||
| 2022 | 1,283 | 47 | ||||||
| 2023 | 1,311 | 39 | ||||||
| 2024 | 1,341 | 23 | ||||||
| Thereafter | 8,185 | — | ||||||
| Total lease payments | $ | 14,067 | $ | 212 | ||||
| Less: Interest | (4,916 | ) | (28 | ) | ||||
| Present value of lease liabilities | $ | 9,151 | $ | 184 | ||||
15
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases is as follows (in thousands):
| June 30, 2020 | December 31, 2019 | |||||
| Operating Leases | ||||||
| Operating lease right-of-use assets | $ | 2,422 | $ | 16,388 | ||
| Current portion of operating lease liabilities | $ | 654 | $ | 486 | ||
| Long-term operating lease liabilities | 8,497 | 16,973 | ||||
| Total operating lease liabilities | $ | 9,151 | $ | 17,459 | ||
| Finance Leases | ||||||
| Property and equipment | $ | 147 | $ | 293 | ||
| Accumulated depreciation | (18 | ) | (28 | ) | ||
| Property and equipment, net | $ | 129 | $ | 265 | ||
| Current portion of finance lease liabilities | $ | 57 | $ | 55 | ||
| Long-term finance lease liabilities | 127 | 158 | ||||
| Total finance lease liabilities | $ | 184 | $ | 213 | ||
| Weighted Average Remaining Lease Term | ||||||
| Operating leases | 10.1 years | 16.6 years | ||||
| Finance leases | 4.1 years | 4.6 years | ||||
| Weighted Average Discount Rate | ||||||
| Operating leases | 8.9 | % | 8.9 | % | ||
| Finance leases | 8.5 | % | 9.0 | % | ||
| 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 | |
Note 6 — Revenue from Contracts with Customers
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled 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 contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an ongoing basis to reflect updated variable consideration information.
The vast majority of the Chemistry Technologies’ segment products are sold at a point in time and service contracts are short-term in nature. Sales are billed on a monthly basis with payment terms customarily 30-45 days for domestic and 60 day for international from invoice receipt. In addition, sales taxes are excluded from revenues.
The Data Analytics segment provides services over a period of time and for those services, the revenues are recognized over time.
Disaggregation of Revenue
The Company has disaggregated revenues by product sales (point-in-time revenue recognition) and service revenue (over-time revenue recognition), where product sales accounted for over 90% of total revenue for the three and six months ended June 30, 2020 and 2019.
16
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Revenue: | |||||||||||||||
| Products | $ | 8,176 | $ | 33,632 | $ | 26,976 | $ | 75,703 | |||||||
| Services | 704 | 1,060 | 1,320 | 2,246 | |||||||||||
| $ | 8,880 | $ | 34,692 | $ | 28,296 | $ | 77,949 | ||||||||
| Operating expenses (excluding depreciation and amortization): | |||||||||||||||
| Products | $ | 11,278 | $ | 37,613 | $ | 33,825 | $ | 81,062 | |||||||
| Services | 354 | 508 | 648 | 1,027 | |||||||||||
| $ | 11,632 | $ | 38,121 | $ | 34,473 | $ | 82,089 | ||||||||
Arrangements with Multiple Performance Obligations
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Standalone selling prices are generally determined based on the prices charged to customers (“observable standalone price”) or an expected cost plus a margin approach. For combined products and services within a contract, the Company accounts for individual products and services separately if they are distinct (i.e. if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration is allocated between separate products and services within a contract based on the prices at the observable standalone price. For items that are not sold separately, the expected cost plus a margin approach is used to estimate the standalone selling price of each performance obligation.
Contract Balances
Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. The Company has an immaterial amount of contract liabilities associated to incomplete performance obligations.
Note 7 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
| Six months ended June 30, | |||||||
| 2020 | 2019 | ||||||
| Supplemental cash payment information: | |||||||
| Interest paid | $ | 20 | $ | 594 | |||
| Income taxes paid, net of refunds | 149 | 627 | |||||
| Supplemental schedule of non-cash investing and financing activities: | |||||||
| Equity issued - acquisition of JP3 | 8,538 | — | |||||
17
| 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 | ) | ||||
| 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 | ||||||||
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Inventories
Inventories are as follows (in thousands):
| June 30, 2020 | December 31, 2019 | ||||||
| Raw materials | $ | 4,810 | $ | 4,339 | |||
| Finished goods | 20,155 | 24,569 | |||||
| Inventories | 24,965 | 28,908 | |||||
| Less reserve for excess and obsolete inventory | (1,627 | ) | (5,698 | ) | |||
| Inventories, net | $ | 23,338 | $ | 23,210 | |||
| 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 | |||
The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on an assessment of market values. Write-downs of inventory are charged to cost of goods sold. Low-turn inventory or inventory in excess of management's estimated usage requirement are analyzed for sale before conducting an analysis to write off or write down inventory to the estimated market value if those amounts are determined to be less than cost.
Note 9 — Property and Equipment
Property and equipment are as follows (in thousands):
| June 30, 2020 | December 31, 2019 | ||||||
| Land | $ | 3,282 | $ | 4,440 | |||
| Buildings and leasehold improvements | 6,048 | 38,741 | |||||
| Machinery and equipment | 7,227 | 27,694 | |||||
| Furniture and fixtures | 643 | 1,671 | |||||
| Transportation equipment | 1,190 | 1,440 | |||||
| Computer equipment and software | 1,296 | 3,348 | |||||
| Property and equipment | 19,686 | 77,334 | |||||
| Less accumulated depreciation | (11,669 | ) | (37,505 | ) | |||
| Property and equipment, net | $ | 8,017 | $ | 39,829 | |||
| 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$0.3 million and $2.1$1.6 million for the three months ended SeptemberJune 30, 20172020 and 2016, respectively,2019, and $7.0$2.0 million and $5.3$3.4 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016, respectively.2019.
During the three and ninesix months ended SeptemberJune 30, 2017 and 2016, no impairments were2020 an impairment was recognized related to property and equipment.for $30.2 million. NaN impairment was recognized for the three months ended June 30, 2020.
Note 10 — GoodwillImpairment of Fixed and Long-lived Assets
During the first quarter 2020, the price of crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the industry, which began to negatively impact the Company’s results of operations. These declines of results of operations were driven by an oversupply of oil, insufficient storage, and demand destruction resulting from the reaction to COVID-19. Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020.
Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of goodwill for each reporting unit arethe asset group exceeded its fair value as of March 31, 2020 and an impairment loss of $57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic and the related negative impact on oil and natural gas prices on projections of future cash flows.
The Company recorded impairment charges during the six months ended June 30, 2020 as follows (in thousands):
18
| 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 | |||||
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Property and equipment, net | $ | 30,178 | |
| Operating lease right-of-use assets | 7,434 | ||
| Other Intangibles: | |||
| Patents | 9,902 | ||
| Customer Lists | 9,165 | ||
| Intangibles assets in progress | 596 | ||
| Trademarks and brand names | 179 | ||
| Total Other Intangibles | 19,842 | ||
| Total Impairment of fixed and long-lived assets | $ | 57,454 | |
With the acquisition of JP3, the Company evaluated its segment information and determined that there were 2 segments: Chemistry Technologies and Data Analytics, which are both supported by its Research & Innovation advanced laboratory capabilities.
Note 11 - Goodwill
Goodwill associated with the acquisition of JP3 on May 18, 2020 is as follows (in thousands):
| Goodwill at December 31, 2019 | $ | — | ||
| Goodwill from acquisition of JP3 | 17,522 | |||
| Goodwill at June 30, 2020 | $ | 17,522 | ||
Note 12 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
| June 30, 2020 | December 31, 2019 | ||||||||||||||
| Cost | Accumulated Amortization | Cost | Accumulated Amortization | ||||||||||||
| Finite-lived intangible assets: | |||||||||||||||
| Patents and technology | $ | 5,000 | $ | 55 | $ | 17,493 | $ | 6,715 | |||||||
| Customer lists | 6,800 | 55 | 15,367 | 6,013 | |||||||||||
| Trademarks and brand names | 1,100 | 13 | 1,351 | 1,160 | |||||||||||
| Total finite-lived intangible assets | $ | 12,900 | 123 | $ | 34,211 | 13,888 | |||||||||
| Carrying value: | |||||||||||||||
| Other intangible assets, net | $ | 12,777 | $ | 20,323 | |||||||||||
| 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 | |||||||||||
19
| 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 | |||
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, 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 1.30.4 million restricted stock units and 4.0 million stock options for the three and six months ended June 30, 2020 and 0.7 million restricted stock units for the three and ninesix months ended SeptemberJune 30, 2017, and 0.7 million stock options and 0.8 million restricted stock units for the three and nine months ended September 30, 2016.2019.
| 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 14 — 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,Flotek’s Payroll Protection Program (“PPP”) loan approximate fair value due to the short-term nature of these accounts.
Liabilities Measured at Fair Value on a Recurring Basis
The Company had no cash equivalentsfollowing tables present the Company’s assets and liabilities that are measured at Septemberfair value on a recurring basis at June 30, 2017 or2020 and December 31, 2016.
| 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 | ||||||||||
| Balance at June 30, | Balance at December 31, | |||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | 2020 | Level 1 | Level 2 | Level 3 | 2019 | |||||||||||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 1,200 | $ | 1,200 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
December 31, 2019.
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. No impairmentsDuring the three months ended March 31, 2020, the Company recorded an impairment of any$57.5 million for impairment on long-lived assets. Management inputs used in fair value measurement were classified as Level 3.
The fair values of thesethe JP3 long-lived assets, and intangibles were recognized duringdetermined using the income approach. The fair value of the JP3 contingent consideration was determined using a Monte Carlo simulation. The fair value of the JP3 inventory was determined using the comparative sales method. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement, other than cash and working capital accounts which carrying amounts were determined to approximate fair value due to their short-term nature.
20
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the quarter ended June 30, 2020, the Company assumed long-term debt of $0.9 million comprised of the PPP loan held by JP3. Management inputs used in fair value measurement were classified as Level 3.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
In conjunction with the acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. The following table presents the changes in contingent consideration balances classified as Level 3 balances for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019:
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Balance - beginning of period | $ | — | $ | — | $ | — | $ | — | |||||||
| Additions / issuances | 1,200 | — | 1,200 | — | |||||||||||
| Gains (losses) recognized in earnings | — | — | — | — | |||||||||||
| Payments | — | — | — | — | |||||||||||
| Balance - end of period | $ | 1,200 | $ | — | $ | 1,200 | $ | — | |||||||
Note 15 — Debt
In April 2020, the Company received a $4.8 million loan, under the PPP, which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The loans have a fixed interest rate of 1%, mature in two years and payments are deferred for six months. In addition, in connection with the acquisition of JP3, the Company assumed a PPP loan of $0.9 million
A portion of the loans are eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least 60% of the eligible costs incurred are used for payroll. Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company. This certification further requires the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. As of June 30, 2020, the Company has not applied for or estimated the potential forgiveness on the PPP loans. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The term of the Company’s PPP Loan is two years. The annual interest rate on the PPP Loan is 1% and no payments of principal or interest are due during the six-month period beginning on the date of the PPP Loan. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has recently indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (Small Business Administration) audit to further ensure PPP loans are limited to eligible borrowers in need.
Long-term debt, including current portion is as follows (in thousands):
21
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| June 30, 2020 | |||
| Current Portion of Long-Term Debt | |||
| Flotek PPP Loan | $ | 2,138 | |
| JP3 PPP Loan | 389 | ||
| Total current portion of long-term debt | $ | 2,527 | |
| Long-term debt: | |||
| Flotek PPP Loan | $ | 2,660 | |
| JP3 PPP Loan | 484 | ||
| Total long-term debt | $ | 3,144 | |
Note 16 — 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, | ||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||
| U.S. federal statutory tax rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | |||
| State income taxes, net of federal benefit | 0.4 | 1.7 | — | 1.0 | |||||||
| Non-U.S. income taxed at different rates | 0.9 | 0.7 | 0.2 | 1.0 | |||||||
| Reduction in tax benefit related to stock-based awards | 0.9 | (1.1 | ) | (0.1 | ) | (1.8 | ) | ||||
| Non-deductible expenses | 0.7 | — | — | (0.3 | ) | ||||||
| Research and development credit | 0.1 | 0.4 | — | 0.6 | |||||||
| Increase in valuation allowance | (23.7 | ) | (20.7 | ) | (16.0 | ) | (17.9 | ) | |||
| Effect of tax rate differences of NOL carryback | — | — | 2.6 | — | |||||||
| Other | — | (0.4 | ) | — | (0.3 | ) | |||||
| Effective income tax rate | 0.3 | % | 1.6 | % | 7.7 | % | 3.3 | % | |||
| 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 | )% | |||
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act provided the ability for taxpayers to carryback a net operating loss (“NOL”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five years preceding the year of the loss. Based on the Company’s analysis of the extended NOL carryback provision, it recorded a tax receivable of $6.1 million as of March 31, 2020, which was received in July 2020.
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. Changesrates, except for the NOL carryback claim discussed above.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted rates and laws that will be in effect when the effectivedifferences are expected to reverse. ASC 740, Income Taxes, provides for the recognition of deferred tax rate duringassets if realization of such assets is more likely than not. In assessing the three and nine months ended September 30, 2017, includedneed for a valuation allowance, the Company implementing ASU No. 2016-09 which requires accounting for excess tax benefitsconsiders 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 deficienciesreporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income.
As of December 31, 2019, the Company determined that it was more likely than not that it would not realize the benefits of certain deferred tax assets and, therefore, it recorded a $19.9 million valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to stock-based awards as discrete items incertain state jurisdictions. As a result of the period in which they occur.
22
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
federal tax returns for the year ended December 31, 2014. No adjustments have been asserted, and management believes that sustained adjustments, if any, would notNOLs. The Company continues to have a material effect on the Company’s financial position, results of operations, or liquidity.full valuation allowance against net deferred tax assets as it is not more-likely-than-not they will be utilized.
Note 1617 — Common Stock
On May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, November 9, 2009, authorizesto increase the Company to issue up to 80 millionauthorized shares of common stock from 80,000,000 to 140,000,000, par value $0.0001$0.0001 per share, and 100,000 shares of one or more series of preferred stock, par value $0.0001$0.0001 per share. The additional authorized shares are available for corporate purposes, including acquisitions.
A reconciliation of changes in common shares issued during the ninesix months ended SeptemberJune 30, 20172020 is as follows:
| Shares issued at December 31, | ||
| Issued to purchase JP3 | 11,500,000 | |
| Issued as restricted stock award grants | ||
| Shares issued at | ||
On June 9, 2020, the Company’s Boardboard of Directors authorized the repurchase of up to $25 milliondirectors of the Company’s common stock. Repurchases may be made inCompany rescinded 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.
Note 1718 — 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 two2 reportable segments: Energy Chemistry Technologies and Consumer and Industrial Chemistry Technologies.Data Analytics.
The Chemistry Technologies designs, develops, manufactures, packages, and marketssegment includes specialty chemistries usedand logistics which enable its customers to pursue improved efficiencies in oilthe drilling and natural gas well drilling, cementing, completion of their wells.
In the second quarter of 2020, the Company launched a line of sanitizers and stimulation. In addition,disinfectants for commercial and personal consumer use. These products build on the Company’s chemistries are usedhistorical expertise in specialized enhancedchemistry and improved oil recovery markets. Activitiesleverage its infrastructure, personnel, competencies, supply chain, research, and historic consumer market experiences yielding a competitive product offering in this rapidly growing segment. The newly launched products, which include hand and surface sanitizers, target growth opportunities across diverse sectors including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment and other industrial and commercial markets.
The Data Analytics segment, also include constructioncreated in conjunction with the acquisition of JP3, includes the design, development, production, sale and managementsupport of automated material handling facilitiesequipment and managementservices that create and provide valuable information about the composition of loading facilities and blending operations for oilfield services companies.
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 reportable segments.
23
| For the three months ended September 30, | Energy Chemistry Technologies | Consumer and Industrial Chemistry Technologies | Corporate and Other | Total | |||||||||||
| 2017 | |||||||||||||||
| Net revenue from external customers | $ | 61,167 | $ | 18,291 | $ | — | $ | 79,458 | |||||||
| Gross profit | 18,733 | 3,007 | — | 21,740 | |||||||||||
| Income (loss) from operations | 6,867 | 985 | (10,955 | ) | (3,103 | ) | |||||||||
| Depreciation and amortization | 1,863 | 590 | 615 | 3,068 | |||||||||||
| Capital expenditures | 324 | 682 | 641 | 1,647 | |||||||||||
| 2016 | |||||||||||||||
| Net revenue from external customers | $ | 45,030 | $ | 19,307 | $ | — | $ | 64,337 | |||||||
| Gross profit | 18,180 | 4,174 | — | 22,354 | |||||||||||
| Income (loss) from operations | 6,196 | 2,433 | (10,882 | ) | (2,253 | ) | |||||||||
| Depreciation and amortization | 1,582 | 567 | 581 | 2,730 | |||||||||||
| Capital expenditures | 2,005 | 148 | 227 | 2,380 | |||||||||||
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of the reportable segments is as follows (in thousands):
| 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 | |||||||||||
| For the three months ended June 30, | Chemistry Technologies | Data Analytics (1) | Corporate and Other | Total | |||||||||||
| 2020 | |||||||||||||||
| Net revenue from external customers | $ | 7,962 | $ | 918 | $ | — | $ | 8,880 | |||||||
| Loss from operations, including impairment | (3,596 | ) | (1,151 | ) | (5,484 | ) | (10,231 | ) | |||||||
| Depreciation and amortization | 246 | 131 | 91 | 468 | |||||||||||
| Capital expenditures | — | — | — | — | |||||||||||
| 2019 | |||||||||||||||
| Net revenue from external customers | $ | 34,692 | $ | — | $ | — | $ | 34,692 | |||||||
| Loss from operations | (7,651 | ) | — | (6,023 | ) | (13,674 | ) | ||||||||
| Depreciation and amortization | 1,933 | — | 186 | 2,119 | |||||||||||
| Capital expenditures | 306 | — | — | 306 | |||||||||||
| For the six months ended June 30, | Chemistry Technologies | Data Analytics (1) | Corporate and Other | Total | |||||||||||
| 2020 | |||||||||||||||
| Net revenue from external customers | $ | 27,378 | $ | 918 | $ | — | $ | 28,296 | |||||||
| Loss from operations, including impairment | (66,257 | ) | (1,151 | ) | (12,908 | ) | (80,316 | ) | |||||||
| Depreciation and amortization | 2,056 | 131 | 472 | 2,659 | |||||||||||
| Capital expenditures | 42 | — | — | 42 | |||||||||||
| 2019 | |||||||||||||||
| Net revenue from external customers | $ | 77,949 | $ | — | $ | — | $ | 77,949 | |||||||
| Loss from operations | (12,984 | ) | — | (14,323 | ) | (27,307 | ) | ||||||||
| Depreciation and amortization | 3,718 | — | 661 | 4,379 | |||||||||||
| Capital expenditures | 767 | — | — | 767 | |||||||||||
(1) The financial information disclosed above for Data Analytics is for the period May 18, 2020 to June 30, 2020.
Assets of the Company by reportable segments are as follows (in thousands):
| June 30, 2020 | December 31, 2019 | ||||||
| Chemistry Technologies | $ | 34,439 | $ | 116,110 | |||
| Data Analytics | 40,922 | — | |||||
| Corporate and Other | 66,835 | 114,490 | |||||
| Total assets | $ | 142,196 | $ | 230,600 | |||
24
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 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 by geographic location is as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| U.S. | $ | 66,638 | $ | 52,545 | $ | 203,123 | $ | 154,532 | |||||||
| Other countries | 12,820 | 11,792 | 41,466 | 37,695 | |||||||||||
| Total | $ | 79,458 | $ | 64,337 | $ | 244,589 | $ | 192,227 | |||||||
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||
| U.S. | $ | 6,936 | $ | 31,114 | $ | 22,711 | $ | 69,990 | |||||||
| Other countries | 1,944 | 3,578 | 5,585 | 7,959 | |||||||||||
| Total | $ | 8,880 | $ | 34,692 | $ | 28,296 | $ | 77,949 | |||||||
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, | ||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||
| Customer A | 22.6 | % | 17.6 | % | 29.4 | % | 15.4 | % | |||
| Customer B | 14.0 | % | 11.0 | % | 12.5 | % | 11.3 | % | |||
| Customer C | * | * | 12.3 | % | 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 | % | |||
Note 1819 — Commitments and Contingencies
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.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from its Chemistry Technologies segment which consist predominantly of customers within the oil and gas industry.industry and the sanitizer industry to a lesser extent. Customers within the oil and gas industry 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. ThisCustomers within the hand sanitizer industry typically include healthcare institutions such as hospitals, distributors, and various public entities. Given the increase in global demand for sanitizer products due to COVID-19, the Company's concentration of customers in one industry increasesis shifting and diversifying, which helps to reduce credit and business risks.risk. Customers within the sanitizer industry are not significantly impacted by commodity prices and typically are financially stable or public institutions.
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.
25
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 20 — 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 compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm has executed a personal guaranty in favor of the Company, supporting this indemnification.
At June 30, 2019, the Company recorded a liability of $2.4 million related to the estimated employment tax under-withholding for the years 2014 through 2018. By September 30, 2019, the liability totaled $1.8 million, after the Company paid $0.6 million to the IRS for these taxes and made an additional accrual covering the estimated under-withholding tax liability through 2019. In addition, at September 30, 2019 the Company recorded a receivable from the affiliated companies totaling $2.4 million. In October 2019, an amendment to the employment agreement was executed, giving the Company the contractual right of offset for any amounts owed to the Company, and giving the Company the right to withhold payments equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies from any amounts owed under the employment agreement. During the three months ended March 31, 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of June 30, 2020, the receivable from Mr. Chisholm was $1.4 million, which is equal to the payable to the IRS and was netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.
On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company.
Note 21 — Revision of Prior Financial Statements
During preparation of June 30, 2020 financial statements, two additional errors impacting the prior financial statements were identified, as follows:
Currency Translation Adjustment and Other Comprehensive Income of $1.1 million was not recognized in earnings in connection with the dissolution of the Company’s wholly owned foreign entity, PetroValve International in 2015.
Cash flow presentation relating to proceeds received from the sale of FCC (which occurred in the first quarter of 2019) and subsequent release of escrow amounts in subsequent periods that were improperly classified between operating and investing activities.
Consolidated Balance Sheets - The revision relating to currency translation discussed above had no impact on total stockholders’ equity, but impacted the components of stockholders’ equity as follows (in thousands):
| As of December 31, 2018 | ||||||||||
| As previously reported | Revisions | As revised | ||||||||
| Accumulated other comprehensive loss | $ | (1,116 | ) | $ | 1,147 | $ | 31 | |||
| Retained earnings (accumulated deficit) | (107,176 | ) | (1,147 | ) | (108,323 | ) | ||||
| As of March 31, 2019 | ||||||||||
| As previously reported* | Revisions | As revised | ||||||||
| Accumulated other comprehensive loss | $ | (1,022 | ) | $ | 1,147 | $ | 125 | |||
| Retained earnings (accumulated deficit) | (76,314 | ) | (1,147 | ) | (77,461 | ) | ||||
26
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| As of June 30, 2019 | ||||||||||
| As previously reported* | Revisions | As revised | ||||||||
| Accumulated other comprehensive loss | $ | (998 | ) | $ | 1,147 | $ | 149 | |||
| Retained earnings (accumulated deficit) | (90,727 | ) | (1,147 | ) | (91,874 | ) | ||||
| As of September 30, 2019 | ||||||||||
| As previously reported* | Revisions | As revised | ||||||||
| Accumulated other comprehensive loss | $ | (962 | ) | $ | 1,147 | $ | 185 | |||
| Retained earnings (accumulated deficit) | (101,770 | ) | (1,147 | ) | (102,917 | ) | ||||
| As of December 31, 2019 | ||||||||||
| As previously reported* | Revisions | As revised | ||||||||
| Accumulated other comprehensive loss | $ | (966 | ) | $ | 1,147 | $ | 181 | |||
| Retained earnings (accumulated deficit) | (141,091 | ) | (1,147 | ) | (142,238 | ) | ||||
| As of March 31, 2020 | ||||||||||
| As previously reported* | Revisions | As revised | ||||||||
| Accumulated other comprehensive loss | $ | (1,089 | ) | $ | 1,147 | $ | 58 | |||
| Retained earnings (accumulated deficit) | (205,058 | ) | (1,147 | ) | (206,205 | ) | ||||
*As previously reported numbers reflect the revised balances for each of the periods as disclosed in the period ended March 31, 2020.
Consolidated Statements of Cash Flows - The revision discussed above impacted the statement of cash flow as follows (in thousands):
| For the three months ended March 31, 2019 | ||||||||||
| As previously reported | Revisions | As revised | ||||||||
| Adjustment to reconcile net cash in operating activities | ||||||||||
| Other current assets | $ | (18,661 | ) | $ | 14,219 | $ | (4,442 | ) | ||
| Other long-term assets | — | 3,286 | 3,286 | |||||||
| Net cash used in operating activities | (25,721 | ) | 17,505 | (8,216 | ) | |||||
| Proceeds from sale of business | 169,722 | (17,505 | ) | 152,217 | ||||||
| Net cash provided by investing activities | 169,290 | (17,505 | ) | 151,785 | ||||||
27
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| For the six months ended June 30, 2019 | ||||||||||
| As previously reported | Revisions | As revised | ||||||||
| Adjustment to reconcile net cash in operating activities | ||||||||||
| Other current assets | $ | (16,209 | ) | $ | 14,219 | $ | (1,990 | ) | ||
| Other long-term assets | — | 3,286 | 3,286 | |||||||
| Net cash used in operating activities | (23,849 | ) | 17,505 | (6,344 | ) | |||||
| Proceeds from sale of business | 169,722 | (17,505 | ) | 152,217 | ||||||
| Net cash provided by investing activities | 168,868 | (17,505 | ) | 151,363 | ||||||
| For the nine months ended September 30, 2019 | ||||||||||
| As previously reported | Revisions | As revised | ||||||||
| Adjustment to reconcile net cash in operating activities | ||||||||||
| Other current assets | $ | (14,974 | ) | $ | 10,938 | $ | (4,036 | ) | ||
| Other long-term assets | — | 3,286 | 3,286 | |||||||
| Net cash used in operating activities | (14,348 | ) | 14,224 | (124 | ) | |||||
| Proceeds from sale of business | 169,722 | (14,224 | ) | 155,498 | ||||||
| Net cash provided by investing activities | 167,497 | (14,224 | ) | 153,273 | ||||||
| For the year ended December 31, 2019 | ||||||||||
| As previously reported | Revisions | As revised | ||||||||
| Adjustment to reconcile net cash in operating activities | ||||||||||
| Other current assets | $ | (8,359 | ) | $ | 10,938 | $ | 2,579 | |||
| Other long-term assets | 1,131 | 3,286 | 4,417 | |||||||
| Net cash used in operating activities | (18,769 | ) | 14,224 | (4,545 | ) | |||||
| Proceeds from sale of business | 169,722 | (14,224 | ) | 155,498 | ||||||
| Net cash provided by investing activities | 166,937 | (14,224 | ) | 152,713 | ||||||
| For the three months ended March 31, 2020 | ||||||||||
| As previously reported | Revisions | As revised | ||||||||
| Adjustment to reconcile net cash in operating activities | ||||||||||
| Other current assets | $ | 6,926 | $ | (3,281 | ) | $ | 3,645 | |||
| Net cash used in operating activities | (20,496 | ) | (3,281 | ) | (23,777 | ) | ||||
| Proceeds from sale of business | — | 3,281 | 3,281 | |||||||
| Net cash provided by investing activities | 41 | 3,281 | 3,322 | |||||||
In our March 31, 2020 financial statements, we disclosed the correction of two immaterial errors relating to intangibles that should have been written off in prior periods and improper elimination of profit on intercompany inventory transactions. Such revisions were not material to the previously issued financial statements.
28
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Management evaluated the impact of these errors, individually and in the aggregate, on previously issued financial statements and concluded the impact was not material. Due to the currency translation error, net loss for the year ended December 31, 2015 was originally reported as $13.5 million and would be revised to $14.6 million.
29
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 22 — Subsequent Events
In April 2020, the Company was notified by the NYSE that the average closing stock price had fallen below the continued listing standard of a share price of $1.00 (measured over a 30 day trading average). The Company had until October 2020 (later extended to December 2020) to cure the deficiency. On July 1, 2020, the Company was notified by the NYSE that the deficiency had been cured, and the noncompliance indicator was removed from the Company’s common shares.
On July 28, 2020, the Company received a $6.3 million tax refund, including $0.2 million of interest, pursuant to the CARES Act that extended NOL carryback provisions related to the filing of Form 1139 requesting a refund as a result of an analysis related to the extended NOL carryback provision.
30
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, 20162019, as amended (“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.
Executive Summary
Flotek is a technology-driven global diversified, technology-drivenchemistry and data company that develops and supplies chemistriesengineered chemistry solutions, equipment, data and analytical services to industrial, commercial and consumer markets. The Company continued its reinvention, which began in the first quarter of 2020 by reducing expenses, scrutinizing capital spending to ensure alignment to near-term revenue, acquiring JP3 to secure a footprint in the emerging data analytics market, and aggressively launching a sustainable line of sanitizer and disinfectant products built on its expertise in high-quality, specialized chemistry technologies.
Continuing Operations
With the acquisition of JP3 in May 2020, the Company now has two operating segments: Chemistry Technologies and Data Analytics, which are both supported by its continuing Research & Innovation advanced laboratory capabilities.
Chemistry Technologies
The Company’s Chemistry Technologies segment includes specialty chemistries, logistics and technology services. The Company designs, develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas industries,well drilling, cementing, completion, remediation, and high value compoundsstimulation activities designed to companies that make foodmaximize recovery in both new and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets. Flotek operates in over 20 domestic and international markets.
| TABLE A | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | % Change | 2017 | 2016 | % Change | ||||||||||||
| Average North American Active Drilling Rigs | |||||||||||||||||
| U.S. | 946 | 479 | 97.5 | % | 861 | 482 | 78.6 | % | |||||||||
| Canada | 208 | 121 | 71.9 | % | 207 | 112 | 84.8 | % | |||||||||
| Total | 1,154 | 600 | 92.3 | % | 1,068 | 594 | 79.8 | % | |||||||||
| Average U.S. Active Drilling Rigs by Type | |||||||||||||||||
| Vertical | 70 | 62 | 12.9 | % | 72 | 58 | 24.1 | % | |||||||||
| Horizontal | 799 | 372 | 114.8 | % | 720 | 376 | 91.5 | % | |||||||||
| Directional | 77 | 45 | 71.1 | % | 69 | 48 | 43.8 | % | |||||||||
| Total | 946 | 479 | 97.5 | % | 861 | 482 | 78.6 | % | |||||||||
| Average North American Drilling Rigs by Product | |||||||||||||||||
| Oil | 874 | 452 | 93.4 | % | 800 | 440 | 81.8 | % | |||||||||
| Natural Gas | 280 | 148 | 89.2 | % | 268 | 154 | 74.0 | % | |||||||||
| Total | 1,154 | 600 | 92.3 | % | 1,068 | 594 | 79.8 | % | |||||||||
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Data Analytics
The Company’s Data Analytics segment, created in conjunction with the acquisition of JP3, includes the design, development, production, sale and support of equipment and services that create and provide valuable information about the composition of its energy customers’ hydrocarbon streams. JP3 is continuing its transition to a Data-as-a-Service (DaaS) subscription model of selling data collectedgenerated by its line of Verax analyzers, deployed remotely “at the U.S. Energy Information Administrationedge” across the oil and gas sector, and software services via its cloud-based Viper software platform.
JP3 creates and sells data systems and analytics services into the oil and gas market. The Company sells equipment with a software license and (DaaS) subscriptions. The data is provided in real time, every fifteen seconds, at the point-of-use and via the cloud, to end use customers. This composition and physical properties information increases efficiency and decreases operating costs for producers, midstream operators, refiners and distribution companies.
The customers of JP3 span across the entire market, from production upstream to midstream facilities to refineries and distribution networks. To date, JP3 has focused sales solely on North American markets. The Data Analytics segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, increasing efficiencies of towers, enabling automation and robotization of fluid handling, and reducing losses due to give-away.
Research & Innovation
Flotek Research and Innovation supports both segments through formulations, technical support, basin & reservoir studies, data analytics, and new technology projects. The purpose of the organization is to supply the segments with enhanced products and services that generate current and future revenues, while advising company management on opportunities concerning technology, environmental, and industry trends. The Research and Innovation facilities support advances in chemistry performance, detection, optimization, and manufacturing.
Discontinued Operations
As previously disclosed, the Company sold Florida Chemical Company, LLC (“EIA”FCC”) effective as reportedof February 28, 2019. As a result, the Company’s CICT segment was classified as discontinued operations. Financial results for the first three and six months of 2019 include results from the Company’s CICT segment during that time period.
Outlook on October 16, 2017, completionsEconomic Conditions
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic, which continues to spread throughout the United States and around the world. This outbreak has severely impacted global economic activity, and many countries and many states in the seven most prolific areasUnited States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel.
During the first and second quarters of 2020, the oil and gas markets experienced significant impacts from both the supply and the demand side. On the demand side, the COVID-19 pandemic resulted in a drop in economic activity and a corresponding destruction of global demand for oil, gas and associated products. On the supply side, pricing and production wars between key oil-producing countries led to global oversupply.
The demand destruction and oversupply together caused unprecedented disruption to all sectors of the oil and gas markets. Prices for crude oil fell from over $60/bbl. in January 2020 to nearly $20/bbl. by May 2020, with futures turning negative for a brief period in April 2020. Oil and gas operators announced budget cuts of more than 40%, or $42 billion year-over-year, according to RS Energy Group, and announced shut-ins of more than 1.4 million barrels of production. The North American rig count declined approximately 70% from January 2020 to the end of June 2020, based on the Baker Hughes rig count figures, reflecting disproportionate impact to domestic markets.
Midstream and downstream markets were affected as well, as domestic gasoline demand fell by approximately 45% in April 2020 (almost 5 million barrels per day) and refinery utilization dropped below 70%. The Company expects negative impacts to all facets of the oil and gas markets to continue for an extended period before returning to pre-crash levels. Any further material COVID-19 disruption or significant setback in oil demand arising from a slower economic recovery could present downside risks to this outlook.
Conversely, the COVID-19 pandemic has created increased demand for certain specialty chemicals, and in particular disinfectants and sanitizers. The increased usage globally of personal protection equipment has expanded beyond masks, face shields, and gloves to include both disinfectants and sanitizers. With the outbreak of COVID-19, sales of hand sanitizers and disinfectants has swelled
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across every region in the lower 48 states increased 47.3%world, which led to a global shortage. Consequently, the market has experienced shortages of key raw materials used to make these products, including USP-grade alcohol, woven cellulosics for wipes, and 37.0%various active ingredients. This rapid growth is accompanied by a need for the threesustained higher volumes of sanitizing products as COVID-19 is expected to have a long-term impact on social awareness, personal hygiene habits and nine months ended September 30, 2017, when compared to the same periods of 2016. Sequentially, completions increased 12.2% when compared to the second quarter of 2017.consumer and commercial cleaning protocols.
Company Outlook
The Company’s successCEO, John W. Gibson, Jr., reduced his base salary by 20%, and each of the other executive officers reduced his or her salary by 10%, through December 31, 2020 in promotingexchange for restricted stock, effective as of April 1, 2020.
The board of directors of Flotek approved a 20% reduction in the fees to be paid to the directors, effective as of April 1, 2020.
The Company consolidated office space by moving all employees at its patentedcorporate headquarters into its GRIC facility and proprietary chemistriesbuying out the remaining term of the corporate headquarters lease for a significant discount, with the move completed by the end of June 2020.
The Company reduced headcount by 35% on March 30, 2020.
The Company decreased discretionary spending across all business operations.
These efforts were in addition to the previously-announced restructuring of the Company’s terpene supply agreement in February of 2020, which more closely matched the Company’s ongoing obligations for terpene with expected need, and bringing more legal work in-house to reduce outside legal expenses.
While the full impact of the COVID-19 outbreak is supported through its industry leading researchnot yet known, we are closely monitoring the effects of the pandemic on commodity demands and innovation staff who provide customer responsive product innovation,on our customers, as well as on our operations and employees. Any future development of new products which are expected to expand the Company’s future product lines. During the third quarter of 2016, the Company completed its new Global Research & Innovation Center in Houston. This state-of-the-art facility allows for the development of next-generation innovative energy chemistries, as well as expanded collaboration between clients, leaders from academia, and Company scientists. These collaborative opportunities are an important and distinguishing capability within the industry.
Flotek has also focused on ongoing needs of customers and the market price forto diversify its business and accelerate growth through deployment of capital, with an emphasis on digital transformation in the oil and gas and/or the availability of citrus crops, the market conditions affectingmarkets. On May 18, 2020, the Company could change rapidlyclosed the acquisition of all the ownership interests of JP3, which gives Flotek access to the midstream and materially. Should such adversedownstream markets and diversifies exposure to volatility in the upstream sector. As Flotek’s newly-created Data Analytics segment, JP3 is positioned for growth both domestically and internationally. In addition to increasing market share, the Data Analytics segment is pursuing product enhancements that enable growth opportunities with current and prospective customers.
The Company’s Chemistry Technologies segment has focused on development of competitively-priced product lines that are responsive to current market including wellbore protection and damage mitigation products as the domestic market has shifted to shutting in wells. In response to a forecasted reduction in capital available to customers for drilling with a shift to optimizing existing infrastructure, the Company initiated several efforts to use specialty chemicals to improve enhanced oil recovery (EOR). The Company has also leveraged its international footprint in the Middle East to include unconventional, conventional, and enhanced oil recovery programs.
The Chemistry Technologies segment has also used its expertise in specialty chemistry, existing chemistry infrastructure and facilities, and historical consumer market experience to launch a product line of sanitizers and disinfectants, as discussed above. The Company believes the new sanitizer and disinfectant products slot into the premium market and will be competitive over the long-term.
The Company has also made changes to market conditions occur, management believesits executive team to align with its growth focus. TengBeng Koid, an experienced energy executive with significant upstream, midstream, downstream and digital experience, joined Flotek as President of Global Business in June 2020 and oversees all domestic and international sales and business development efforts for both the Chemistry Technologies and the Data Analytics segments. Additionally, Michael E. Borton joined the Company as Chief Financial Officer in August 2020, bringing 35 years of experience serving in financial and operational leadership roles for high-growth, Software as a Service (SaaS)
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technology companies in a wide range of industries. Finally, Ryan Ezell, Ph.D, has accessbeen promoted to adequate liquidity to withstand the impactrole 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 advantagePresident of significant increases in demand for its products should market conditions improve dramatically in the near term.Chemistry Technologies from Senior Vice President of Operations at Flotek.
Consolidated 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, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Revenue | $ | 8,880 | $ | 34,692 | $ | 28,296 | $ | 77,949 | |||||||
| Operating expenses (excluding depreciation and amortization) | 11,632 | 38,121 | 34,473 | 82,089 | |||||||||||
| Operating expenses % | 131.0 | % | 109.9 | % | 121.8 | % | 105.3 | % | |||||||
| Corporate general and administrative | 5,395 | 6,054 | 9,888 | 13,335 | |||||||||||
| Corporate general and administrative % | 60.8 | % | 17.5 | % | 34.9 | % | 17.1 | % | |||||||
| Depreciation and amortization | 468 | 2,119 | 2,659 | 4,379 | |||||||||||
| Research and development costs | 1,638 | 2,076 | 4,193 | 4,360 | |||||||||||
| (Gain) loss on disposal of long-lived assets | (22 | ) | (4 | ) | (55 | ) | 1,093 | ||||||||
| Impairment of fixed assets and long-lived assets | — | — | 57,454 | — | |||||||||||
| Loss from operations | (10,231 | ) | (13,674 | ) | (80,316 | ) | (27,307 | ) | |||||||
| Operating margin % | (115.2 | )% | (39.4 | )% | (283.8 | )% | (35.0 | )% | |||||||
| Gain on lease termination | 576 | — | 576 | — | |||||||||||
| Interest and other income (expense), net | 62 | 677 | 11 | (1,213 | ) | ||||||||||
| Loss before income taxes | (9,593 | ) | (12,997 | ) | (79,729 | ) | (28,520 | ) | |||||||
| Income tax benefit | 32 | 192 | 6,201 | 503 | |||||||||||
| Loss from continuing operations | (9,561 | ) | (12,805 | ) | (73,528 | ) | (28,017 | ) | |||||||
| (Loss) income from discontinued operations, net of tax | — | (1,608 | ) | — | 44,466 | ||||||||||
| Net (loss) income | $ | (9,561 | ) | $ | (14,413 | ) | $ | (73,528 | ) | $ | 16,449 | ||||
| Net (loss) income % | (107.7 | )% | (36.9 | )% | (259.9 | )% | (35.9 | )% | |||||||
Consolidated Results of Operations: Three and NineSix Months Ended SeptemberJune 30, 20172020, Compared to the Three and NineSix Months Ended SeptemberJune 30, 20162019
Consolidated revenue for the three and ninesix months ended SeptemberJune 30, 2017, increased $15.12020, decreased $25.8 million, or 23.5%74.4%, and $52.4$49.7 million or 27.2%63.7%, respectively, and versus the same periods of 2019. The decrease in revenue was largely a result of the continued volatile macro-environment for U.S. onshore drilling and completion activity, impacted by political and economic events in foreign markets. In addition, concerns related to the COVID-19 virus impacted productivity and customers demand for products.
Consolidated operating expenses (excluding depreciation and amortization) for the three and six months ended June 30, 2020, decreased $26.5 million, or 69.5%, and $48 million or 58.0%, respectively, versus the same periods of 2016. These increases in2019, and, as a percentage of revenue, were drivenincreased by increased sales within the Energy Chemistry Technologies segment due to the increased oilfield activity beginning in the latter half of 2016.
Corporate general and administrative (“CG&A”) expenses are not directly attributable to products sold or services provided. CG&A costs remained relatively flat for the three and six months ended SeptemberJune 30, 2017,2020, decreased $0.7 million, or 10.9%, and increased $3.4 million or 11.1%25.8%, for the nine months ended September 30, 2017,respectively, versus the same periodsperiod of 2016.2019. As a percentage of revenue, CG&A decreased 3.0%increased 43.3% and 2.0%17.8% for the three and ninesix months ended SeptemberJune 30, 2017, respectively.2020. The increasedecrease in CG&A costs waswere primarily due to lower personnel costs, associated with executive retirement,lower software licensing fees, lower stock based compensation and lower professional fees.
Depreciation and amortization expense decreased $1.7 million, or 77.9%, and information technology costs, partially offset by decreased legal expenses.
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Research and Consumer and Industrial Chemistry Technologies sales and support staff for expansion and growth in new business and related higher sales and marketing expenses.
Gain on disposal of long-lived assets had no change and equipping of the Global Research & Innovation Center in August 2016, along with other improvements to manufacturing facilities.
Impairment of fixed asset and long-lived assets was $57.5 million due to a write-down of fixed assets, operating right-of-use (“ROU”) assets and intangible assets to estimated fair market value and recorded in the first quarter of 2020.
Loss from operations decreased $3.4 million, or 25.2%, and increased $53.0 million, or 194.1% and for the three and six months ended June 30, 2020, respectively, and versus the same period in 2019. The change in loss is primarily the result of the impairment charges, lower margins, lower sales volumes and lower plant utilization.
Interest and other income (expense), net increased $0.6 million, or 90.8%, and decreased $1.2 million, or 100.9% for the three and six months ended June 30, 2020, respectively, and versus the same period of 2019, primarily due to the repaymenttermination of the term loanAmended 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 Company recorded an income tax provisionbenefit of less than $0.1$6.2 million, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act, yielding an effective tax benefit rate of (0.5)%0.3%, and 7.7%, for the three and six months ended June 30, 2020, respectively, compared to an income tax benefit of $0.7$0.5 million, yielding an effective tax benefit rate of 12.4%, for the three1.6% and nine months ended September 30, 2017, respectively, compared to income tax benefits of $0.9 million and $1.3 million, yielding effective tax benefit rates of 33.5% and 40.1%,3.3% for the comparable periods in 2016.2019.
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Results by Segment (in thousands):
Chemistry Technologies
| Energy Chemistry Technologies (“ECT”) | |||||||||||||||
| (dollars in thousands) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Revenue | $ | 61,167 | $ | 45,030 | $ | 187,807 | $ | 133,094 | |||||||
| 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 | |||||||||||
| Operating margin % | 11.2 | % | 13.8 | % | 13.2 | % | 16.4 | % | |||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||
| Revenue | 7,962 | $ | 34,692 | $ | 27,378 | $ | 77,949 | |||||||
| Gross margin | 1,301 | 18,180 | 2,539 | 54,609 | ||||||||||
| Gross margin % | 16.3 | % | 52.4 | % | 9.3 | % | 70.1 | % | ||||||
| Income from operations | (3,596 | ) | (7,651 | ) | (66,257 | ) | (12,984 | ) | ||||||
| Income from operations % | (45.2 | )% | (22.1 | )% | (242.0 | )% | (16.7 | )% | ||||||
Chemistry TechnologiesResults of Operations: Three and NineSix Months Ended SeptemberJune 30, 2017,2020, Compared to the Three and NineSix Months Ended SeptemberJune 30, 20162019
| 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 | % | |||||||
Chemistry Technologies income from operations (excluding depreciation and amortization) for the three and six months ended June 30, 2020, improved $4.1 million, or 53.0%, and decreased $53.3 million or 410.3%, respectively from 21.6%versus the same period of 2019, and 22.4%as a percentage of revenue, decreased 23.1%, and 225.4% for the three and six months ended June 30, 2020. The increase in loss during the six months ended June 20, 2020 is primarily the result of the impairment charges of $57.5 million and lower margins due to sales volumes and plant utilization recorded in the same periodsfirst quarter of 2016. These decreases were a result2020.
Data Analytics
| May 18 - June 30 | |||
| 2020 | |||
| Revenue | $ | 918 | |
| Gross margin | 370 | ||
| Gross margin % | 40.3 | % | |
| Income from operations | (1,151 | ) | |
| Income from operations % | (125.4 | )% | |
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Data Analytics Results of lower margins caused by higher material costs and product mix. Sequentially, gross profits decreased by $0.3 million, and gross margins decreasedOperations: May 18, 2020 to 16.4% from 17.0% inJune 30, 2020
During the second quarter of 2017 due2020, the Company announced the purchase of JP3, an equipment and data company that automates real-time data and analytics to product mix and increased raw material costs.the energy industry to maximize the value of their hydrocarbons.
During the fourthsecond quarter, revenue was hindered by sluggish-to-nonexistent capital spending across the entire oil and gas market. The second quarter came with site lockdowns and extreme caution to prevent the spread of 2016,COVID-19. The segment finished the Company classified the Drilling Technologies and Production Technologies segments as held for sale based on management’s intention to sell these businesses. By the endquarter with $0.9 million 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. The Company’s historical financial statements have been revised to present the operating results of the Drilling Technologies and Production Technologies segments as discontinued operations. The information below is presented for informational purposes only.revenue that came from existing JP3 customers.
| 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 | )% | |||||||
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, 20172020, 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.investors other than the long term terpene agreement discussed in Note 3 in Part I, Item I - Financial Statements of this Quarterly Report.
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 policies and estimates during the ninesix months ended SeptemberJune 30, 2017.2020. However, during the six months ended June 30, 2020, the Company evaluated and recorded remeasurement and impairment charges on right of use assets and fixed assets, respectively. Secondly, during the six months ended June 30, 2020, the Company acquired JP3 and recorded the fair value of net assets acquired as of the closing date of May 18, 2020.
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 fromrelate to the Company’sCompany's need to service debt,to 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 2017,2020, the Company funded capital requirements primarily with cash from operations and cash on hand, and debt financing.including proceeds from the sale of the CICT segment, received on March 1, 2019.
As of SeptemberJune 30, 2017,2020, 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$59.9 million. For the remainder of 2017,2020, the Company plansexpects capital spending of approximately $2.0 million to spend between $2.8$3.0 million for the Company’s Chemistry segment and $1.0 million to $2.0 million for the Company’s Data Analytics segment. The Company expects to fund operations and capital expenditures with internal cash on hand, including the PPP loan funded in April 2020 for $4.8 million to Flotek and $0.9 million to JP3, the tax refund of $6.1 million, and $4.8the release of $6.6 million for committed and planned capital expenditures. The Company may pursue external financingfrom the indemnity escrow established pursuant to increase its liquidity position and/or fund acquisitions when strategic opportunities arise.the sale of FCC to ADM effective February 28, 2019.
Any excess cash generated may be used to pay down the level of debtfor outside growth opportunities or retained for future use.
| 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, | |||||||
| 2017 | 2016 | ||||||
| Net cash provided by (used in) operating activities | $ | 1,178 | $ | (825 | ) | ||
| Net cash provided by (used in) investing activities | 11,839 | (18,754 | ) | ||||
| Net cash (used in) provided by financing activities | (13,039 | ) | 20,805 | ||||
| Net cash flows provided by (used in) discontinued operations | 13 | (8 | ) | ||||
| Effect of changes in exchange rates on cash and cash equivalents | 128 | 48 | |||||
| Net increase in cash and cash equivalents | $ | 119 | $ | 1,266 | |||
| Six months ended June 30, | |||||||
| 2020 | 2019 | ||||||
| Net cash used in operating activities | $ | (29,216 | ) | $ | (6,344 | ) | |
| Net cash (used in) provided by investing activities | (16,424 | ) | 151,363 | ||||
| Net cash provided by (used in) financing activities | 5,023 | (49,911 | ) | ||||
| Net cash provided by discontinued operations | — | 16 | |||||
| Effect of changes in exchange rates on cash and cash equivalents | (31 | ) | 2 | ||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | $ | (40,648 | ) | $ | 95,126 | ||
Operating Activities
Net cash provided by (used in)used in operating activities was $1.2$29.2 million and $(0.8)$6.3 million during the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Consolidated net loss for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, totaled $5.3$73.5 million and $2.0$28.0 million, respectively. The cash used in operating activities is primarily due to two one-time payments, one to FCC to amend the Company’s long-term terpene supply agreement and one to ADM related to the final post-closing working capital adjustment related to the sale of the CICT segment in 2019.
During the ninesix months ended SeptemberJune 30, 2017, net2020, non-cash contributionsadjustments to net income totaled $12.2$62.1 million. Contributory non-cash items consisted primarily of $9.5a $57.5 million impairment charge consisting of $30.2 million impairment on fixed assets, $15.2 million on impairment of intangibles, and$7.4 million impairment on ROU assets. Additional non-cash charges included $2.7 million for depreciation and amortization, $9.7$0.5 million for stock-basedallowance for doubtful accounts, $1.5 million for stock compensation expense, $0.9and $0.5 million for recognized incremental tax benefits related to the Company’s share based awards,provision for excess and $0.4 million for net loss on sale of assets, partially offset by $8.3 million for changes to deferred income taxes.obsolete inventory.
During the ninesix months ended SeptemberJune 30, 2016, net2019, non-cash contributionsadjustments to net income totaled $10.8$27.0 million. Contributory non-cash items consisted primarily of $7.7 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 $6.3$17.9 million for changes to deferred income taxes.taxes driven by the valuation allowance recorded against deferred tax assets, $4.4 million for depreciation and amortization, $1.1 million on loss of disposal of assets,$0.5 million non-cash lease expense, and $1.7 million for stock compensation expense.
During the ninesix months ended SeptemberJune 30, 2017,2020, changes in working capital used $5.7$17.8 million in cash, primarily resulting from increasinga decrease in accrued liabilities and accounts payable of $27.3 million, increase in accounts receivable, and inventory by $20.9 million and decreasing accounts payable by $8.3 million, partially offset by decreasing income taxes receivableinventories and other current assets of $25.2 million, offset by $21.9an increase in income tax payable of $0.1 million and increasing accrued liabilities and interest payablereducing income tax receivable by $1.6$6.3 million.
During the ninesix months ended SeptemberJune 30, 2016,2019, changes in working capital used $9.6$5.3 million in cash, primarily resulting from increasinga decrease in accrued liabilities and accounts payable of $14.4 million, increase in accounts receivable inventory, income taxes receivable, and other current assets by $24.3 million and decreasing income taxes payable by $1.8inventories of $7.2 million partially offset by increasing accountsan increase in income tax payable accrued liabilities,of $1.2 million, and interest payablereducing income tax receivable , other current assets and restricted cash by $16.4$17.2 million.
Investing Activities
Net cash used in investing activities was $16.4 million for the six months ended June 30, 2020. The cash used in investing activities is primarily due to the acquisition of JP3 during the second quarter 2020.
Net cash provided by investing activities was $11.8$151.4 million for the ninesix months ended SeptemberJune 30, 2017.2019. Cash provided by investing activities primarily included $18.5$152.2 million of proceeds from sale of business and $0.1 million of proceeds received from the sale of the Drilling Technologies and Production Technologies segments and $0.3 million of proceeds received from the sale of fixed assets, partially offset by $6.2$0.8 million for capital expenditures and $0.8$0.2 million for the purchase of various patents and other intangible assets.patents.
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Financing Activities
Net cash used in investinggenerated through financing activities was $18.8$5.0 million for the ninesix months ended SeptemberJune 30, 2016.2020. Cash used in investinggenerated through financing activities primarily included $10.6$4.8 million for capital expendituresproceeds from borrowings under the PPP, and $8.2$0.4 million forproceeds from the sale of common stock partially offset by $0.1 million cash used in the purchase of IPI and various patents.
Net cash used in financing activities was $13.0$49.9 million for the ninesix months ended SeptemberJune 30, 2017,2019, primarily due to using $7.8$92.7 million for repayments of debt, net of borrowings, purchases of treasury stock for tax withholding purposes related to 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 saleborrowings on revolving credit facility of common stock.
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, 2017,2020, 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 | $ | 213 | $ | 70 | $ | 101 | $ | 42 | $ | — | ||||||||||||||||||||||||||||
| Operating lease obligations | 22,415 | 2,679 | 4,762 | 3,966 | 11,008 | 13,969 | 1,371 | 2,593 | 2,684 | 7,321 | ||||||||||||||||||||||||||||
| Supply commitments for raw materials | 17,724 | 1,974 | 15,750 | — | — | |||||||||||||||||||||||||||||||||
| Total | $ | 63,004 | $ | 43,268 | $ | 4,762 | $ | 3,966 | $ | 11,008 | $ | 32,390 | $ | 3,899 | $ | 18,444 | $ | 2,726 | $ | 7,321 | ||||||||||||||||||
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 disclosureCompany previously identified material weaknesses in its internal control over financial reporting relating to the ineffective design and operating effectiveness of internal controls over the elimination of intercompany profits in inventory, the recording of certain intangible assets and procedures are designedthe operating effectiveness of controls relating to provide such reasonable assurance.impairment analyses of fixed and long-lived assets.
In addition to the material weaknesses mentioned above, during the preparation of the financial statements for the quarter ended June 30, 2020 the Company identified an error relating to the classification of cash flows from the Florida Chemical Company sale in 2019. Specifically, errors were identified relating to the classification of proceeds from the sale and treatment of funds released from escrow subsequent to the sale. Based on these evaluations, the Company has identified the material weaknesses in internal control of financial reporting relating to ineffective design and operation of controls over nonrecurring transactions, including derecognition of items and cash flow presentation relating to disposal transactions, ineffective design and operation of
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controls over the elimination of intercompany profits in inventory, and operating ineffectiveness of controls relating to impairment evaluations.
The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in this Form 10-Q and its previously issued financial statements, present fairly in all material respects, the consolidated financial positions, results of operations and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.
The Company’s management, with the participation of theincluding its principal executive officer and principal financial officers,officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as of September 30, 2017, as required by Rule 13a-15(e) and 15d-15(c) of the Exchange Act. Based upon that evaluation, the principal executiveAct as of June 30, 2020 and principal financial officers havehas concluded that the Company’s disclosure controls and procedures were not effective as of SeptemberJune 30, 2017.2020 due to the material weaknesses in internal control over financial reporting described above.
Remediation Plan
As of June 30, 2020, the material weaknesses discussed above have not been remediated. The Company implemented certain remediation action and continues to test and evaluate the elements of the remediation plan.
These elements include:
Implementing monitoring controls over the review and validation of intangible assets
Expanding monthly close and consolidation procedures
Modifying the chart of accounts
Expanded monthly management review controls
Expanding controls over impairments of long-lived assets
Changes in Internal Control Over Financial Reporting
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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
The following risk factor supplements the risk factors set forth“Risk Factors” section in Part I,1, Item 1A of the Company’s Annual Report.Report on Form 10-K for the fiscal year ended December 31, 2019 filed on March 16, 2020:
The COVID-19 pandemic has significantly reduced demand for our services and may have a material adverse impact on our financial condition, results of operations and cash flows.
The effects of the COVID-19 (coronavirus) pandemic, including actions taken by businesses and governments, have resulted in a significant and swift reduction in international and U.S. economic activity. These effects have materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas, as well as for our services and products. The decline in our customers’ demand for our services and products is likely to have a material adverse impact on our financial condition, results of operations and cash flows. In addition, we have adopted social distancing and work-from-home procedures, which have had and may continue to have an impact on the ability of employees and management of the Company to communicate and work efficiently.
While the full impact of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. Any future development and effects will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic; further adverse revenue, accounts receivable aging and collections, and net income effects; disruptions to our operations; third party providers’ ability to support our operations; customer shutdowns of oil and gas exploration and production; the effectiveness of our work from home arrangements; employee impacts from illness, school closures and other community response measures; any actions taken by governmental authorities and other third parties in response to the pandemic; and temporary closures of our facilities or the facilities of our customers and suppliers. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock.
On June 9, 2020, the board of directors of the Company rescinded the authorization to repurchase the Company’s stock that had been previously approved in June 2015.
Repurchases of the Company’s equity securities during the three months ended SeptemberJune 30, 2017,2020 that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:
| 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 | ||||
| April 1, 2020 to April 30, 2020 | 562 | $ | 0.81 | |||
| May 1, 2020 to May 31, 2020 | 40,040 | $ | 0.99 | |||
| June 1, 2020 to June 30, 2020 | 1,779 | $ | 1.02 | |||
| Total | 42,381 | |||||
| (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. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit Number | Description of Exhibit | |
| 2.1 | ||
| 2.2 | ||
| 3.1 | ||
| 3.2 | ||
| 3.3 | ||
| 3.4 | ||
| 4.1 | ||
| 10.1 | ||
| 10.2 | ||
| 10.3 | ||
| 10.4 | * | |
| 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. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
| * | Filed herewith. | |
| ** | This certification is deemed not | |
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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.
| FLOTEK INDUSTRIES, INC. | ||
| By: | /s/ JOHN W. | |
| John W. | ||
President, Chief Executive Officer and | ||
| Chairman of the Board | ||
| Date: | ||
| FLOTEK INDUSTRIES, INC. | ||
| By: | /s/ | |
| Date: | ||
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