|
| | | | | | | | | | | | | | | |
| 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 areUsing 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 the asset group exceeded its fair value as follows (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Raw materials | $ | 37,961 |
| | $ | 28,626 |
|
Work-in-process | 3,042 |
| | 2,918 |
|
Finished goods | 29,713 |
| | 26,739 |
|
Inventories | $ | 70,716 |
| | $ | 58,283 |
|
Note 9 — Propertyof March 31, 2020, and Equipment
Propertyan impairment loss of $57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and equipment are as follows (in thousands): |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Land | $ | 6,748 |
| | $ | 5,837 |
|
Buildings and leasehold improvements | 43,431 |
| | 42,986 |
|
Machinery and equipment | 38,862 |
| | 36,187 |
|
Equipment in progress | 5,475 |
| | 3,235 |
|
Furniture and fixtures | 2,029 |
| | 1,969 |
|
Transportation equipment | 2,307 |
| | 3,059 |
|
Computer equipment and software | 12,168 |
| | 11,844 |
|
Property and equipment | 111,020 |
| | 105,117 |
|
Less accumulated depreciation | (37,309 | ) | | (30,426 | ) |
Property and equipment, net | $ | 73,711 |
| | $ | 74,691 |
|
Depreciationthe related negative impact on oil and natural gas prices on projections of future cash flows. Prior to the impairment, the Company recognized amortization expense including expense recorded in costfor finite-lived intangible assets acquired of revenue, totaled $2.4 million and $2.1$0.5 million for the three months ended September 30, 2017March 31, 2020.
The Company concluded no triggering events during the first and 2016, respectively, and $7.0 million and $5.3 million for the nine months ended September 30, 2017 and 2016, respectively.second quarters of 2021.
During the three and nine months ended September 30, 2017 and 2016, no impairments were recognized related to property and equipment.
Note 109 — GoodwillAccrued Liabilities
Changes in the carrying value of goodwill for each reporting unitCurrent accrued liabilities are as follows (in thousands): | | | | | | | | | | | |
| |
| June 30, 2021 | | December 31, 2020 |
Loss on purchase commitments (Note 13) | $ | 9,383 | | | $ | 9,402 | |
Severance costs | 3,419 | | | 3,558 | |
Payroll and benefits | 994 | | | 1,789 | |
Contingent liability for earn-out provision | 1,115 | | | 1,416 | |
Taxes other than income taxes | 633 | | | 544 | |
Due to third parties | 504 | | | 434 | |
Legal costs | 721 | | | 333 | |
Deferred revenue, current | 152 | | | 146 | |
| | | |
Other | 300 | | | 653 | |
| | | |
| | | |
Total current accrued liabilities | $ | 17,221 | | | $ | 18,275 | |
Note 10 — Debt
|
| | | | | | | | | | | |
| 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 |
|
In April 2020, the Company received a $4.8 million loan under the Payroll Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 in April 2020. The PPP loans have a fixed interest rate of 1% and have a two-year term, maturing in 2022. No payments of principal or interest were required during the year ended December 31, 2020, or the six months ended June 30, 2021.
A portion of the loans may be eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least 60% of the eligible costs incurred 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 required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. During the threesecond quarter, the Company applied for forgiveness on the PPP loans. The receipt of these funds, and nine months ended Septemberthe forgiveness of the loans attendant to these funds, is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our past and future adherence to the forgiveness criteria. The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.
In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest was fully forgiven. During the second quarter, the Company recorded $0.9 million in other income on the consolidated statement of operations. The Company has submitted to the SBA for partial forgiveness on the Flotek PPP loan but as of the date of this filing, no conclusion has been reached. The Flotek PPP loan is classified as current portion of long term debt as of June 30, 2017 and 2016, no impairments of goodwill were recognized.2021 on the consolidated balance sheet.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Cost | | Accumulated Amortization | | Cost | | Accumulated Amortization |
Finite-lived intangible assets: | | | | | | | |
Patents and technology | $ | 17,236 |
| | $ | 5,323 |
| | $ | 16,815 |
| | $ | 4,537 |
|
Customer lists | 30,877 |
| | 7,745 |
| | 30,877 |
| | 6,518 |
|
Trademarks and brand names | 1,544 |
| | 1,105 |
| | 1,467 |
| | 1,069 |
|
Total finite-lived intangible assets acquired | 49,657 |
| | 14,173 |
| | 49,159 |
| | 12,124 |
|
Deferred financing costs | 2,230 |
| | 493 |
| | 1,804 |
| | 117 |
|
Total amortizable intangible assets | 51,887 |
| | $ | 14,666 |
| | 50,963 |
| | $ | 12,241 |
|
Indefinite-lived intangible assets: | | | | | | | |
Trademarks and brand names | 11,630 |
| | | | 11,630 |
| | |
Total other intangible assets | $ | 63,517 |
| | | | $ | 62,593 |
| | |
| | | | | | | |
Carrying value: | | | | | | | |
Other intangible assets, net | $ | 48,851 |
| | | | $ | 50,352 |
| | |
Finite-lived intangible assets acquired are amortized on a straight-line basis over two to 20 years. Amortization of finite-lived intangible assets acquired totaled $0.7 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and $2.0 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively.
Amortization of deferred financing costs was $0.1 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.4 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively.
Note 12 — Long-Term Debt and Credit Facility
Long-term debt, including current portion, is as follows (in thousands):
|
| | | | | | | |
| 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 |
|
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Long-term debt | | | |
Flotek PPP loan | $ | 0 | | | $ | 4,788 | |
JP3 PPP loan | 0 | | | 877 | |
Total | 0 | | | 5,665 | |
| | | |
Less current maturities | 0 | | | (4,048) | |
| | | |
Total long-term debt, net of current portion | $ | 0 | | | $ | 1,617 | |
| | | |
| | | |
Credit Facility
On May 10, 2013, the Company and certain of its subsidiaries (the “Borrowers”) entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC Bank”). The Company may borrow under the Credit Facility for working capital, permitted acquisitions, capital expenditures and other corporate purposes. The Credit Facility, as amended, continues in effect until May 10, 2022. Under terms of the Credit Facility, as amended, the Company has total borrowing availability under a revolving credit facility of $75 million.
The Credit Facility is secured by substantially all of the Company’s domestic real and personal property, including accounts receivable, inventory, land, buildings, equipment and other intangible assets. The Credit Facility contains customary representations, warranties, and both affirmative and negative covenants. The Company was in compliance with all debt covenants at September 30, 2017. In the event of default, PNC Bank may accelerate the maturity date of any outstanding amounts borrowed under the Credit Facility.
The Credit Facility contains financial covenants to maintain a fixed charge coverage ratio and a leverage ratio, as well as establishes an annual limit on capital expenditures. The fixed charge coverage ratio is the ratio of (a) earnings before interest, taxes, depreciation, and amortization (“EBITDA”), adjusted for non-cash stock-based compensation and the loss from discontinued operations, less
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
cash paid for taxes during the period to (b) all debt payments during the period. The fixed charge coverage ratio requirement began for the quarter ended March 31, 2017 at 1.00 to 1.00 and increases to 1.10 to 1.00 for the year ending December 31, 2017, and for each fiscal quarter thereafter. The leverage ratio (funded debt to adjusted EBITDA) requirement began for the six months ended June 30, 2017, at not greater than 5.50 to 1.10 and reduces to not greater than 3.00 to 1.00 as of September 30, 2018, and for each fiscal quarter thereafter. The annual limit on capital expenditures for 2017 is $20 million. The annual limit on capital expenditures for 2018 and each fiscal year thereafter is $26 million. The annual limit on capital expenditures is reduced if the undrawn availability under the revolving credit facility falls below $15 million at any month-end.
The Credit Facility restricts the payment of cash dividends on common stock and limits the amount that may be used to repurchase common stock and preferred stock.
Beginning with fiscal year 2017, the Credit Facility includes a provision that 25% of EBITDA minus cash paid for taxes, dividends, debt payments, and unfunded capital expenditures, not to exceed $3.0 million for any year, be paid on the outstanding balance within 60 days of the fiscal year end.
Each of the Company’s domestic subsidiaries is fully obligated for Credit Facility indebtedness as a borrower or as a guarantor.
(a) Revolving Credit Facility
Under the revolving credit facility, the Company may borrow up to $75 million through May 10, 2022. This includes a sublimit of $10 million that may be used for letters of credit. The revolving credit facility is secured by substantially all of the Company’s domestic accounts receivable and inventory.
At September 30, 2017, eligible accounts receivable and inventory securing the revolving credit facility provided total borrowing capacity of $74.9 million under the revolving credit facility. Available borrowing capacity, net of outstanding borrowings, was $34.3 million at September 30, 2017.
The interest rate on advances under the revolving credit facility varies based on the fixed charge coverage ratio. Rates range (a) between PNC Bank’s base lending rate plus 1.5% to 2.0% or (b) between the London Interbank Offered Rate (LIBOR) plus 2.5% to 3.0%. PNC Bank’s base lending rate was 4.25% at September 30, 2017. The Company is required to pay a monthly facility fee of 0.25% per annum, on any unused amount under the commitment based on daily averages. At September 30, 2017, $40.6 million was outstanding under the revolving credit facility, with $2.6 million borrowed as base rate loans at an interest rate of 5.75% and $38.0 million borrowed as LIBOR loans at an interest rate of 3.74%.
Borrowing under the revolving credit agreement is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause.
(b) Term Loan
The amount borrowed under the term loan was reset to $10 million effective as of September 30, 2016. Monthly principal payments of $0.2 million were required. On May 22, 2017, the Company repaid the outstanding balance of the term loan.
Note 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 nine months ended September 30, 2017 and 2016, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.3 million restricted stock units for the three and nine months ended September 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.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted earnings (loss) per common share are as follows (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Loss from continuing operations | $ | (3,421 | ) | | $ | (1,870 | ) | | $ | (5,285 | ) | | $ | (2,011 | ) |
Income (loss) from discontinued operations, net of tax | 319 |
| | (876 | ) | | (13,621 | ) | | (33,200 | ) |
Net loss - Basic and Diluted | $ | (3,102 | ) | | $ | (2,746 | ) | | $ | (18,906 | ) | | $ | (35,211 | ) |
| | | | | | | |
Weighted average common shares outstanding - Basic | 57,602 |
| | 56,899 |
| | 57,709 |
| | 55,523 |
|
Assumed conversions: | | | | | | | |
Incremental common shares from stock options | — |
| | — |
| | — |
| | — |
|
Incremental common shares from restricted stock units | — |
| | — |
| | — |
| | — |
|
Weighted average common shares outstanding - Diluted | 57,602 |
| | 56,899 |
| | 57,709 |
| | 55,523 |
|
| | | | | | | |
Basic earnings (loss) per common share: | | | | | | | |
Continuing operations | $ | (0.06 | ) | | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.04 | ) |
Discontinued operations, net of tax | 0.01 |
| | (0.02 | ) | | (0.24 | ) | | (0.60 | ) |
Basic earnings (loss) per common share | $ | (0.05 | ) | | $ | (0.05 | ) | | $ | (0.33 | ) | | $ | (0.64 | ) |
Diluted earnings (loss) per common share: | | | | | | | |
Continuing operations | $ | (0.06 | ) | | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.04 | ) |
Discontinued operations, net of tax | 0.01 |
| | (0.02 | ) | | (0.24 | ) | | (0.60 | ) |
Diluted earnings (loss) per common share | $ | (0.05 | ) | | $ | (0.05 | ) | | $ | (0.33 | ) | | $ | (0.64 | ) |
Note 1411 — 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, and accounts payable and accrued expenses, approximate fair value due to the short-term nature of these accounts. The Company had no cash equivalentsPPP loan for Flotek approximate fair value due to maturity in less than fifteen months.
Liabilities Measured at SeptemberFair Value on a Recurring Basis
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Balance at June 30, | | | | | | | | Balance at December 31, |
| Level 1 | | Level 2 | | Level 3 | 2021 | | Level 1 | | Level 2 | | Level 3 | | 2020 |
Contingent consideration | $ | 0 | | | $ | 0 | | | $ | 1,115 | | $ | 1,115 | | | $ | 0 | | | $ | 0 | | | $ | 1,416 | | | $ | 1,416 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
At June 30, 2017 or2021, and December 31, 2016.
The carrying value and2020, the estimated fair value of the Company’s long-term debt areremaining stock performance earn-out provision, with respect to the JP3 transaction, was recorded as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Term loan | $ | — |
| | $ | — |
| | $ | 9,833 |
| | $ | 9,833 |
|
Borrowings under revolving credit facility | 40,589 |
| �� | 40,589 |
| | 38,566 |
| | 38,566 |
|
a contingent liability. The carryingestimated fair value of the term loanearn-out provision at the end of each period was valued using the Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and borrowings under the revolving credit facility approximate theirvolatility. There were no transfers in or out of either Level 1, Level 2, or Level 3 fair value becausemeasurements during the interest rates are variable.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
periods ending June 30, 2021 and December 31, 2020.
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 impairments of any of these assets were recognized duringDuring the three and nine months ended SeptemberMarch 31, 2020, the Company recorded an impairment of $57.5 million for impairment of long-lived assets. Management inputs used in fair value measurements were classified as Level 3.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During 2020, the first stock performance target for the contingent consideration was achieved and settled. The Company estimated the fair value of the remaining stock performance earn-out provision at June 30, 20172021, and 2016.decreased the estimated fair value of the contingent liability to $1.1 million. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in operating expenses.
The following table presents the changes in contingent consideration balances classified as Level 3 balances for the three months ended June 30, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Balance - beginning of period | $ | 1,081 | | | $ | 0 | | | $ | 1,416 | | | $ | 0 | |
Additions / issuances | 0 | | | 1,200 | | | 0 | | | 1,200 | |
Change in fair value | 34 | | | 0 | | | (301) | | | 0 | |
| | | | | | | |
Transfer out of Level 3 | 0 | | | 0 | | | 0 | | | 0 | |
Balance - end of period | $ | 1,115 | | | $ | 1,200 | | | $ | 1,115 | | | $ | 1,200 | |
Note 1512 — 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, |
| 2021 | | 2020 | | 2021 | | 2020 |
U.S. federal statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of federal benefit | (0.3) | | | 0.4 | | | (0.2) | | | 0 | |
Non-U.S. income taxed at different rates | (0.1) | | | 0.9 | | | 0.3 | | | 0.2 | |
| | | | | | | |
| | | | | | | |
Increase (reduction) in tax benefit related to stock-based awards | 2.2 | | | 0.9 | | | 1.2 | | | (0.1) | |
Non-deductible expenses | 3.6 | | | 0.7 | | | 1.1 | | | 0 | |
Research and development credit | 0 | | | 0.1 | | | 0 | | | 0 | |
Increase in valuation allowance | (26.5) | | | (23.7) | | | (23.6) | | | (16.0) | |
Effect of tax rate differences of NOL carryback | 0 | | | 0 | | | 0 | | | 2.6 | |
| | | | | | | |
| | | | | | | |
Effective income tax rate | (0.1) | % | | 0.3 | % | | (0.2) | % | | 7.7 | % |
|
| | | | | | | | | | | |
| Three months ended September 30, |
| Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
U.S. federal statutory tax rate | (35.0 | )% | | (35.0 | )% | | (35.0 | )% | | (35.0 | )% |
State income taxes, net of federal benefit | 14.3 |
| | 12.0 |
| | 6.7 |
| | 9.2 |
|
Non-U.S. income taxed at different rates | 8.9 |
| | 16.4 |
| | 5.4 |
| | 7.7 |
|
Reduction in tax benefit related to stock-based awards | 15.8 |
| | — |
| | 14.1 |
| | — |
|
Other | (3.5 | ) | | (26.9 | ) | | (3.6 | ) | | (22.0 | ) |
Effective income tax rate | 0.5 | % | | (33.5 | )% | | (12.4 | )% | | (40.1 | )% |
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in 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 income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. GAAP provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance, the Company considers all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income.
The Company continues to have a full valuation allowance against net deferred tax assets as it is not more-likely-than-not they will be utilized.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — Commitments and Contingencies
Litigation
On March 26, 2021, the Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and Joshua A. Snively in state court in Harris County, Texas. The lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty by Mr. Snively. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.
Subsequent to the lawsuit described above, on April 5, 2021, ADM and FCC filed a lawsuit in the effective tax rate duringDelaware Court of Chancery seeking to enjoin the threelawsuit filed in Texas and nine months ended September 30, 2017, includedclaiming damages under the terpene supply agreement and other matters.
The Company implementing ASU No. 2016-09 which requires accounting for excess tax benefitsis subject to other routine litigation and tax deficiencies related to stock-based awards as discrete itemsother claims that arise in the period in which they occur.
In January 2017, the Internal Revenue Service notified the Companynormal course of business. Except as disclosed above, management is not aware of any pending or threatened lawsuits or proceedings that it will examine the Company’s federal tax returns for the year ended December 31, 2014. No adjustments have been asserted, and management believes that sustained adjustments, if any, would notare expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Other Commitments and Contingencies
Terpene Supply Agreement
At December 31, 2020, the Company’s balance sheet included an accrued liability of $9.4 million associated with the terpene supply agreement with FCC. The Company calculated the liability based on the Company’s expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased and expected selling prices of the excess terpene as such loss was not considered recoverable.
The Company’s balance sheet at June 30, 2021 included an accrued liability of $9.4 million as it did not make any payments for, or purchases of, terpene during the first and second quarters of 2021. The Company expects that settlement of the accrued liability, if any, will be determined through the litigation disclosed in the “Litigation” section of this Note.
Indemnification
The Company agreed to provide indemnification to National Oilwell DHT, L.P. for certain intellectual property-related claims in connection with sale of its Teledrift business unit in 2017. The total expenses in this matter are estimated at a range of $0.2 million to $0.5 million as of June 30, 2021.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the surface cleaner and disinfectant industry. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. Customers within the surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment. The concentration in the oil and gas industry increases credit and business risk. See Note 18, “Business Segment, Geographic and Major Customer Information,” for concentration of segment revenue from major customers.
The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.
Note 1614 — Common StockStockholders’ Equity
TheOn 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 commonDuring the first quarter 2021, the Company identified 0.6 million shares issued during the nine months ended September 30, 2017 is as follows:
|
| | |
Shares issued at December 31, 2016 | 59,684,669 |
|
Issued as restricted stock award grants | 273,829 |
|
Issued upon exercise of stock options | 663,288 |
|
Shares issued at September 30, 2017 | 60,621,786 |
|
Stock Repurchase Program
In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common stock. Repurchases may be madethat were improperly included in the open market or through privately negotiated transactions. During the three months ended September 30, 2017,December 31, 2020 issued share count, and the Company repurchased 630,000 shares of its outstanding common stockadjusted the issued share count presented on the open market at a coststatement of $3.7 million, inclusive of transaction costs,stockholders’ equity. This adjustment was not material to the December 31, 2020 consolidated financial statements or an average price of $5.85basic and diluted earnings per share. During the nine months ended September 30, 2017, the Company repurchased 680,000 shares of its outstanding common stock on the open market at a cost of $4.2 million, inclusive of transaction costs, or an average price of $6.14 per share. During the three and nine months ended September 30, 2016, the Company did not repurchase any shares of its outstanding common stock.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through September 30, 2017, the Company has not repurchased any of its common stock under this authorization.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Earnings (Loss) Per Share
AsBasic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of Septembercommon 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 six months ended June 30, 2017,2021 and 2020, since including them would have an anti-dilutive effect on loss per share due to the Company has $50.7 million remaining under its share repurchase programs. A covenant undernet loss incurred during the Company’s Credit Facility limits the amount that may be used to repurchase the Company’s common stock. As of September 30, 2017, this covenant limits additional share repurchases to $10.7 million.periods.
Note 16 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
| | | | | | | | | | | |
| Six months ended June 30, |
| 2021 | | 2020 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Supplemental cash payment information: | | | |
Interest paid | $ | 11 | | | $ | 20 | |
Income taxes (received, net of payments) paid | (351) | | | 149 | |
| | | |
Supplemental non-cash activities: | | | |
Employee retention credit | $ | 1,164 | | | $ | 0 | |
JP3 PPP loan forgiveness | 881 | | | 0 | |
| | | |
Supplemental non-cash investing and financing activities: | | | |
Equity issued - acquisition of JP3 | $ | 0 | | | $ | 8,538 | |
| | | |
| | | |
Note 17 — 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 executed a personal guaranty in favor of the Company, supporting this indemnification.
In October 2019, an amendment to the employment agreement of Mr. Chisholm was executed, giving the Company the contractual right of offset for any amounts owed 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. At December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $1.8 million for potential liability to the IRS. On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company. In September 2020, the Company informed Mr. Chisholm it would cease payment of future severance.
During first quarter of 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of June 30, 2021 and December 31, 2020, the receivable from Mr. Chisholm was $1.4 million, which equaled the payable to the IRS and netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-makersdecision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into twothe following reportable segments: Energy Chemistry TechnologiesCT and Consumer and Industrial DA.
Chemistry Technologies.
Energy Chemistry TechnologiesThe CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals.The Company designs, develops, manufactures, packages, distributes, delivers and markets optimized fluid systems, including specialty and conventional chemistries, usedfor use in oil and natural gas well drilling, cementing, completion, remediation and stimulation. In addition,stimulation activities designed to maximize recovery in both new and mature fields, as well as to reduce health and environmental risk by utilization of greener chemicals. Customers of the Company’s chemistries are used in specialized enhancedCT segment include major integrated oil and improved oil recovery markets. Activities in this segment also include construction and management of automated material handling facilities and management of loading facilities and blending operations forgas companies, oilfield services companies.companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.
Consumer
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and Industrial Chemistry Technologies designs, develops,resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and manufacturessolvents for industrial, commercial and consumer use. The Company produces Food and Drug Administration and Environmental Protection Agency compliant products that are soldits ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to companiesaddress the long-term challenges in the flavorjanitorial and fragrance industrysanitization (JanSan), food service and adjacent markets.
Data Analytics. The DA segment, created in the specialty chemical industry. These technologies are usedsecond quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The real-time information on hydrocarbon composition and properties helps customers generate additional profits by beverageenhancing their operations including crude/condensates stabilization, blending, optimization of transmix, increasing efficiencies of gas processing plants, ensuring product quality while enabling automation of fluid handling and food companies, fragrance companies,reducing losses through give-aways (i.e., that portion of a product of higher value than what is specified). The customers of the DA segment span across the entire oil and companies providing householdgas market, from upstream production to midstream facilities to refineries and industrial cleaning products.distribution networks.
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.
Summarized financial information of the reportable segments is as follows (in thousands):segment.
|
| | | | | | | | | | | | | | | |
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 three months ended June 30, | Chemistry Technologies | | | | Data Analytics (1) | | Corporate and Other | | Total |
2021 | | | | | | | | | |
Net revenue from external customers | $ | 7,688 | | | | | $ | 1,477 | | | $ | 0 | | | $ | 9,165 | |
Loss from operations, including impairment | (3,819) | | | | | (773) | | | (2,869) | | | (7,461) | |
Depreciation and amortization | 233 | | | | | 20 | | | 0 | | | 253 | |
Additions to long-lived assets | 13 | | | | | 0 | | | 0 | | | 13 | |
| | | | | | | | | |
2020 | | | | | | | | | |
Net revenue from external customers | $ | 7,962 | | | | | $ | 918 | | | $ | 0 | | | $ | 8,880 | |
Loss from operations, including impairment | (3,596) | | | | | (1,151) | | | (5,484) | | | (10,231) | |
Depreciation and amortization | 246 | | | | | 131 | | | 91 | | | 468 | |
Additions to long-lived assets | 0 | | | | | 0 | | | 0 | | | 0 | |
(1) The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3. |
| | | | | | | | | | | | | | | |
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 six months ended June 30, | Chemistry Technologies | | | | Data Analytics (1) | | Corporate and Other | | Total |
2021 | | | | | | | | | |
Net revenue from external customers | $ | 17,990 | | | | | $ | 2,945 | | | $ | 0 | | | $ | 20,935 | |
Loss from operations, including impairment | (7,407) | | | | | (1,067) | | | (7,230) | | | $ | (15,704) | |
Depreciation and amortization | 524 | | | | | 35 | | | 1 | | | $ | 560 | |
Additions to long-lived assets | 31 | | | | | 0 | | | 0 | | | $ | 31 | |
| | | | | | | | | |
2020 | | | | | | | | | |
Net revenue from external customers | $ | 27,378 | | | | | $ | 918 | | | $ | 0 | | | $ | 28,296 | |
Loss from operations, including impairment | (66,257) | | | | | (1,151) | | | (12,908) | | | (80,316) | |
Depreciation and amortization | 2,056 | | | | | 131 | | | 472 | | | 2,659 | |
Additions to long-lived assets | 42 | | | | | 0 | | | 0 | | | 42 | |
(1) The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3.
Assets of the Company by reportable segments are as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Chemistry Technologies | $ | 41,950 | | | $ | 43,346 | |
Data Analytics | 5,154 | | | 13,201 | |
Corporate and Other | 24,314 | | | 29,663 | |
Total assets | $ | 71,418 | | | $ | 86,210 | |
| | | |
| | | |
|
| | | | | | | |
| 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 |
|
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Geographic Information
Revenue by country is based on the location where services are provided and products are used. No individual countrycountries other than the U.S. and the United StatesArab Emirates (“U.S.”UAE”) 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, | | Three months ended June 30, | | Six months ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2021 | | 2020 | | 2021 | | 2020 |
U.S. | $ | 66,638 |
| | $ | 52,545 |
| | $ | 203,123 |
| | $ | 154,532 |
| U.S. | $ | 6,869 | | | $ | 6,936 | | | $ | 16,530 | | | $ | 22,711 | |
UAE | | UAE | 1,319 | | | 847 | | | 2,422 | | | 2,308 | |
Other countries | 12,820 |
| | 11,792 |
| | 41,466 |
| | 37,695 |
| Other countries | 977 | | | 1,097 | | | 1,983 | | | 3,277 | |
Total | $ | 79,458 |
| | $ | 64,337 |
| | $ | 244,589 |
| | $ | 192,227 |
| |
Total revenue | | Total revenue | $ | 9,165 | | | $ | 8,880 | | | $ | 20,935 | | | $ | 28,296 | |
Long-lived assets held in countries other than the U.S. areU.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:follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended June 30, | | Chemistry Technologies | | % of Total Revenue | | Data Analytics | | % of Total Revenue |
2021 | | | | | | | | |
Customer C | | $ | 1,038 | | | 11.3 | % | | * | | * |
Customer D | | 1,810 | | | 19.8 | % | | * | | * |
| | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | |
2020 | | 2020 | | | | | | | |
Customer A | 13.3 | % | | 12.5 | % | | 12.9 | % | | 17.9 | % | Customer A | | $ | 2,004 | | | 22.6 | % | | * (1) | | * (1) |
Customer B | 8.8 | % | | 14.8 | % | | 9.6 | % | | 13.5 | % | Customer B | | 1,246 | | | 14.0 | % | | * (1) | | * (1) |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking StatementsExecutive Summary
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, 2016 (“Annual Report”) and periodically in subsequent reports filed with the Securities and Exchange Commission (“SEC”). The Company has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto of this Quarterly Report, as well as the Annual Report. Phrases such as “Company,” “we,” “our,” and “us” refer to Flotek Industries, Inc. and its subsidiaries.
Basis
Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of Presentationenergy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial, commercial, and consumer markets improve their Environmental, Social, and Governance (ESG) performance. The Company serves specialty chemistry needs that span from downstream, midstream and upstream, both domestic and international, energy markets to applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.
The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that help their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and supplying professional chemistries that cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. These real-time data and analytics prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, thereby improving ESG performance. During the fourthsecond quarter of 2016,2020, the Company classifiedacquired 100% ownership of JP3 in a cash-and-stock transaction. JP3’s real-time data platforms combine the Drillingenergy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.
The Company was impacted as a result of the outbreak of COVID-19 that spread throughout the U.S. and the world during 2020, with effects continuing into 2021. For a discussion of the impacts of COVID-19, see “COVID-19 Effects and Actions” and “Outlook” in this Quarterly Report.
Company Overview
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research & Innovation (“R&I”) advanced laboratory capabilities.
Chemistry Technologies and Production Technologies segments as held for sale based on management’s intention to sell these businesses.
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 results of operations of Drilling Technologies and Production Technologies are presented as “Loss from discontinued operations” in the statement of operations and the related cash flows of these segments has been reclassified to discontinued operations for all periods presented. The assets and liabilities of the Drilling Technologies and Production Technologies segments have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheets for all periods presented.
By the end of August 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.
Executive Summary
Flotek is a global, diversified, technology-driven company that develops and supplies chemistriesCT segment includes energy-focused products and services comprised of proprietary green chemistries, specialty chemistries, logistics and technology services, which enable its customers to thepursue improved efficiencies and performance throughout life cycle their wells, helping customers improve their ESG and operational goals. The Company designs, develops, manufactures, packages, distributes, delivers and markets optimized 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,mature fields, as well as to reduce health and other products that are sold in consumer and industrial markets. Flotek operates in over 20 domestic and international markets.environmental risk by using greener chemicals.
The Company’s oilfield business includes specialty chemistries and logistics. Flotek’s technologies enable its customers in pursuing improved efficiencies in
Customers of the drilling and completion of their wells. CustomersCT segment include major integrated oil and gas (“O&G”) companies, oilfield services companies, independent O&G companies, pressure-pumping serviceoil and gas companies, national and state-owned oil companies and international supply chain management companies.
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and solvents for both commercial and personal use. The Company also produces non-energy-related citrusFDA and EPA compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today, the Company has a portfolio of specialty green chemical products designed to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets. The Company has made a commitment of being in this market for the long-term.
Data Analytics
The DA segment, created in conjunction with the acquisition of JP3 in May 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable real time information on the
composition and properties for customers' oil, natural gas and refined products. The DA segment is transitioning to a recurring revenue subscription model of selling its application packages while continuing to sell its line of Verax analyzers, deployed in the field across the oil and related products including (1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous industries around the world, including the O&G industry. gas sector.
The Company sources citrus oil domestically and internationally and is onecustomers of the largest processors of citrus oil inDA segment diversify the world. Additionally, the Company also provides automated bulk material handling, loading facilities, and blending capabilities.
Continuing Operations
The operationsrevenues of the Company are categorized into two reportable segments: Energy Chemistry Technologies (“ECT”) and Consumerspan across the entire oil and Industrial Chemistry Technologies (“CICT”).
Energy Chemistry Technologies designs, develops, manufactures, packages,gas market, including upstream, midstream, refineries and markets specialty chemistries used in O&G well drilling, cementing, completion,distribution networks. The segment helps its customers generate additional profit by enhancing their operations including crude/condensates stabilization, blending, optimization of transmix, increasing efficiencies of gas plants, and stimulation. These technologies developed by Flotek’s Researchensuring product quality while enabling automation of fluid handling and Innovation team enable customers to pursue improved efficienciesreducing losses through give-aways (i.e., that portion of a product of higher value than what is specified) . While the DA segment was focused entirely on North American markets in the drilling and completion of wells.
Consumer and Industrial Chemistry Technologies designs, develops, and manufactures products that are sold to companiespast, business development activities started in late third quarter 2020 in the flavorinternational markets. This segment began preparing the Verax analyzers for international deployment including product design modifications, certifications and fragrance industries andexport controls.
Research & Innovation
R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical industry. These technologies are used by beverageformulations, FDA and food companies, fragrance companies,EPA regulatory guidance, technical support, basin and companies providing householdreservoir studies, data analytics and industrial cleaning products.
Discontinued Operations
new technology projects. The Drilling Technologies and Production Technologiespurpose of R&I is to supply the Company’s segments are classified as discontinued operations.
Drilling Technologies assembles, rents, sells, inspects, and markets downhole drilling equipment used in energy, mining, and industrial drilling activities.
Production Technologies assembles and markets production-related equipment, including pumping system components, electric submersible pumps (“ESP”), gas separators, valves,with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support natural gasadvances in chemistry performance, detection, optimization and oil production activities.manufacturing.
Market ConditionsCOVID-19 Effects and Actions
In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic that spread throughout the U.S. and the world. In late 2020, major pharmaceutical companies developed vaccines and received approval for wide-scale distribution in the U.S. and other countries. The vaccination effort is proceeding in the U.S. and the world. However, variant strains of the virus have emerged, which create additional uncertainty on the extent and the duration of the pandemic.
The Company’s success is sensitive to a number of factors, which include, but are not limited to, drillingpandemic negatively impacted the U.S. and well completion activity, customer demand for its advanced technology products, market prices for raw materials, and governmental actions.
Drilling and well completion activity levels are influenced by a number of factors, including the number of rigs in operationglobal economy, disrupted global supply chains and the geographical areas of rig activity. Additional factors that influence the level of drillingdomestic and well completion activity include:
Historical, current,international oil and anticipated future O&G prices,
Federal, state,gas markets, and local governmental actions thatincreased volatility in financial markets in 2020. These effects materially and adversely affected, and may encourage or discourage drilling activity,
Customers’ strategies relative to capital funds allocations,
Weather conditions, and
Technological changes to drilling and completion methods and economics.
Historical North American drilling activity is reflected in “TABLE A” on the following page.
Customers’ demand for advanced technology products and services provided by the Company are dependent on their recognition of the value of:
Chemistries that improve the economics of their O&G operations,
Chemistries that meet the need of consumer product markets, and
Chemistries that are economically viable, socially responsible, and ecologically sound.
Market prices for commodities, including citrus oils and guar, can be influenced by:
Historical, current, and anticipated future production levels of the global citrus (primarily orange) and guar crops,
Weather related risks,
Health and condition of citrus trees and guar plants (e.g., disease and pests), and
International competition and pricing pressures resulting from natural and artificial pricing influences.
Governmental actions may restrict the future use of hazardous chemicals, including, but not limited to, the following industrial applications:
O&G drilling and completion operations,
O&G production operations, and
Non-O&G industrial solvents.
|
| | | | | | | | | | | | | | | | | |
TABLE A | Three months ended September 30, | | Nine months ended September 30, |
| 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 | % |
Source: Rig counts are per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are the averages of the weekly rig count activity.
Completions are per the U.S. Energy Information Administration (https://www.eia.gov/petroleum/drilling/) as of October 16, 2017.
Average U.S. rig activity increased by 97.5% and 78.6% for the three and nine months ended September 30, 2017, respectively, when compared to the same periods of 2016, and sequentially, increased by 5.7% when compared to the second quarter of 2017.
According to data collected by the U.S. Energy Information Administration (“EIA”) as reported on October 16, 2017, completions in the seven most prolific areas in the lower 48 states increased 47.3% and 37.0% for the three 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.
Company Outlook
After a continuous decline in U.S. drilling rig activity beginning in mid-2014, the market began to gradually recover in the second quarter of 2016. Although a continuing recovery appears to be underway, the level of drilling and completion activity is still depressed compared to historical levels. Assuming the price for crude oil remains relatively stable and regulatory impediments are reduced, the Company expects U.S. oilfield activity to remain dependent on commodity prices.
During the third quarter of 2017, the Company continued to promote the efficacy of its Complex nano-Fluid® (“CnF®”) chemistries resulting in a 23.1% increase in CnF® sales volumes compared to the third quarter of 2016. Third quarter 2017 CnF® volumes decreased 12.9% compared to the second quarter of 2017. Although quarter to quarter performance may vary, the Company expects its Energy Chemistry Technologies sales to outperform market activity metrics over time by continuing to demonstrate the efficacy of its CnF® chemistries through comparative analysis of wells with and without CnF® chemistries, field validation results conducted by E&P companies, and the continuation of its direct-to-operator sales program known as the Flotek Store®. Whether operators purchase directly from Flotek or continue to purchase from oilfield distributionmaterially and service companies, E&P operators are benefiting from increased transparency in pricing and a more direct relationship with Flotek’s technical expertise and supply chain.
The Company’s success in promoting its patented and proprietary chemistries is supported through its industry leading research and innovation staff who provide customer responsive product innovation, as well as 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.
The outlook for the Company’s consumer and industrial chemistries will be driven by the availability and demand for citrus oils, industrial solvents, and flavor and fragrance ingredients. Although current inventory and crop expectations are sufficient to meet the Company’s needs to supply its flavor and fragrance business, as well as both internal and external industrial markets, the market supply of citrus oils has declined in recent years due to the reduction in citrus crops caused by the citrus greening disease. This reduced supply has resulted in higher citrus oil prices and increased price volatility. However, the Company expects its strong market position to enable it to maintain a stable supply of citrus oils for internal use and external sales. The Company expects to manage the impact of volatile terpene costs through the development of new product formulations and pricing strategies.
During the fourth quarter 2016, the Company implemented a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry and initiated a process to identify potential buyers for its Drilling Technologies and Production Technologies segments. By the end of August 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments.
Capital expenditures for continuing operations totaled $6.2 million and $10.6 million for the nine months ended September 30, 2017 and 2016, respectively. The Company expects capital spending to be between $9 million and $11 million in 2017, but anticipates to be towards the lower end of the range. The Company will remain nimble in its core capital expenditure plans, adjusting as market conditions warrant.
Changes to geopolitical, global economic, and industry trends could have an impact, either positive or negative, on the Company’s business. In the event of significant adverse changes toadversely affect, the demand for oil and natural gas production,as well as for the market price forCompany’s services and products.
The Company’s CT segment is energy-focused with product lines comprised of specialty chemistries, logistics and technology services. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent exploration and production companies, national and state-owned oil companies, and international supply chain management companies. Due to customer activity levels in this industry, the Company experienced materially reduced revenues and cash flows during 2020, which continued for the first half of 2021.
Outside the oil and gas sector, the COVID-19 pandemic increased demand for certain specialty chemicals, particularly surface cleaners and disinfectants. In 2020, the Company launched a diversified line of FDA and EPA-compliant disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and 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 experience. The continued impact of COVID-19 and subsequent modification of social behavior in regard to the heightened attention to hygiene and sanitation provide a sustainable yet challenging market to expand the Company’s portfolio.
The DA segment’s largest customer base, the oil and gas midstream market, reduced gathering and infrastructure capital spending in 2020. In addition, the pandemic impacted the DA segment due to reduced access to facilities to complete new installations for a portion of the year. As a result, spending for the DA segment’s products and services has also been impacted by lower consumer demand. As a result, sales and cash flows were below target for the DA segment.
The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level. Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the Company and could result in additional impairments in the future. Future developments of the COVID-19 crisis are uncertain and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.
While the full impact of the COVID-19 pandemic continues to evolve and the full extent of the impact is not yet known, the Company continues to closely monitor the effects of the pandemic on commodity demands, and on its customers, operations and employees. Any future developments and effects are highly uncertain and cannot be predicted, including:
•the scope and duration of the pandemic;
•effectiveness of vaccines;
•emergence of new coronavirus variants;
•further adverse revenue and net income effects; impairments;
•disruptions to the Company’s operations;
•third-party providers’ ability to support the Company’s operations;
•limitations on domestic and international travel for sales, system installations, and support;
•customer shutdowns of oil and gas exploration and production;
•the effectiveness of work from home arrangements;
•modifications to work schedules, including manufacturing shifts;
•impacts on employees from illness, school closures and other community response measures;
•any actions taken by governmental authorities and other third parties in response to the pandemic; and
•temporary closures of the Company’s facilities or the availabilityfacilities of citrus crops, the market conditions affectingits customers and suppliers.
The pandemic caused the Company could change rapidlyto alter its business working practices, including work schedules, manufacturing shifts, employee travel, work locations, meetings and materially. Should such adverse changesparticipation in events and conferences. In addition, the Company and most of its customers continued the practice of social distancing and work-from-home procedures, which have had, and may continue to have, an impact on the ability of employees and management of the Company to communicate and work efficiently. These practices are gradually changing with increased vaccination levels in the U.S. and the world. There is no certainty that these actions will mitigate risks posed by the virus to the Company’s workforce.
In response to market conditions occur, management believesand the anticipating ongoing volatility, the Company has accessreduced its cost structure in 2020 to adequate liquiditymeet anticipated market activity and reduce the Company’s break-even level. In the second half of 2020 the Company recorded additional impairment charges of goodwill and intangible assets as well as an increase to withstandthe provision of excess and obsolete inventory.
Outlook
The COVID-19 pandemic negatively impacted the U.S. and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets. While market prices for West Texas Intermediate and Brent crude oil rebounded from lows during the initial months of the pandemic in 2020 to exceed $50 per barrel during the first quarter of 2021 and $70 per barrel during the second quarter of 2021, many major integrated oil and gas companies and independent oil and gas companies have kept their 2021 budgets generally unchanged, though such budgets may change if crude oil prices increase. Uncertainty exists about the extent and the duration of the resulting industry contraction and consolidation. In addition, the oilfield services industry remains over supplied and the timing of returns to pre-pandemic pricing levels remains uncertain. While uncertainty remains around the extent and duration of the pandemic, there are positive indicators that the U.S. economy is recovering, including improvements in oil and gas demand, rising COVID-19 vaccination levels, and resumption of travel and business activities.
ESG solutions continue to be a focus for the Company as the energy industry is seeking to accelerate their focus on cleaner energy and sustainability. The impact of the actions of the new presidential administration and Congress on the economy and financial markets is uncertain in the current year and longer term. During his first months in office, the President signed many executive orders, including ones with implications for stakeholders in the energy industry, such as canceling the Keystone XL Pipeline and another for the U.S. to rejoin the Paris Agreement on climate change. The U.S. Department of Interior (“DOI”) issued an order in January, placing a 60-day freeze on agency permit approvals and pausing federal oil and gas leasing for a review of all existing leasing and permitting practices related to fossil fuel development on public lands and waters. In March 2021, the DOI allowed the suspension to expire. In addition, the President announced proposed plans to raise the corporate tax rate to help finance his proposed infrastructure plan. These and other potential actions by the new administration could have negative and/or positive impacts on the Company’s business and customers.
Amid the current environment with increased business commitments related to ESG, the Company’s products and services offer a significant benefit to businesses seeking to improve their ESG performance, including improving the safety, reliability and
efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.
The Company believes that an increase in the adoption of green specialty chemicals could benefit our business and reduce the impact of such changes while continuing to make strategic capital investmentsthe slow recovery from the 2020 lows in drilling and acquisitions, if opportunities arise. In addition, management believescompletions activity. The key sales focus of the Company is well-positionedgrowing market share by improving returns for current customers, rebuilding relationships with past customers and identifying new customers that could benefit from collaborative and innovative chemistry solutions. Additionally, the Company is focused on optimizing total cost of recovery per barrel of oil, reducing both financial cost and environmental risk associated with operations.
The disinfectants and surface cleaners industry is expanding, associated with the continued impact of the COVID-19 pandemic and the need for individuals, businesses, schools and governments to take advantageminimize the spread of significant increasesthe coronavirus, as well preparing for emerging variants. Industry growth is also anticipated due to the modification of social behaviors in demandregard to the heightened attention to hygiene and sanitation. In 2020, the Company launched a diversified line of EPA and FDA-compliant disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and consumer use. The Company believes this market provides an opportunity to expand the Company’s portfolio of chemistry products to meet the growing demand. The use of data and analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as predictive maintenance, advanced safety measures and reduced environmental impact of operations. The Company believes that data and analytics is an area for growth. Hence, in 2020, the Company acquired JP3 and formed the DA segment. Prior to and throughout the majority of 2020, the DA segment focused sales solely on North American markets; however, the segment is preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands of overseas installations.
The Company continues to develop technologies to ensure its ability to provide differentiated products should market conditions improve dramaticallyand services to its customers. The Company remains focused on partnering closely with its customers to create and implement specialty chemical products and compositional analyzers. Differentiated products and services are the result of the deployment of the organization’s technical capabilities and expertise in alignment with customer success. The Company believes the near term.
pursuit of new solutions to help make its customers successful will continue to position Flotek as a leader in advanced chemicals and technology.
The Company’s emphasis in 2021 is executing the plan established by the executive team to recover from the varied impacts of COVID-19 and grow the Company’s businesses. The CT segment is focused on marketing our products and services to new and existing customers, while expanding the disinfectants, surface cleaners, degreasers and solvents product line. The DA segment is enhancing its product offerings and customer service while accelerating the business development and sales effort in both the domestic and international markets. The Company does not anticipate a material increase in our maintenance capital spending year-over-year. In 2021, the Company is enhancing its focus on ESG and the responsible management of products and services through our Quality Assurance and Quality Control Program and Chemical Spill Prevention Program, adhering to ISO 9001:2015 standards.
Consolidated Results of 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 | ) |
ConsolidatedResults of Operations: Three and NineSix Months Ended SeptemberJune 30, 2017,2021, Compared to the Three and NineSix Months Ended SeptemberJune 30, 20162020
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2021 | | 2020 | | | | | 2021 | | 2020 |
Revenue | $9,165 | | $ | 8,880 | | | | | | $ | 20,935 | | | $ | 28,296 | |
Operating expenses (excluding depreciation and amortization) | 12,110 | | | 11,632 | | | | | | 25,911 | | | 34,473 | |
Operating expenses % | 132.1 | % | | 131.0 | % | | | | | 123.8 | % | | 121.8 | % |
Corporate general and administrative costs | 2,868 | | | 5,395 | | | | | | 7,229 | | | 9,888 | |
Corporate general and administrative % | 31.3 | % | | 60.8 | % | | | | | 34.5 | % | | 34.9 | % |
| | | | | | | | | | |
| | | | | | | | | | |
Depreciation and amortization | 253 | | | 468 | | | | | | 560 | | | 2,659 | |
Research and development | 1,466 | | | 1,638 | | | | | | 3,008 | | | 4,193 | |
Gain on disposal of long-lived assets | (71) | | | (22) | | | | | | (69) | | | (55) | |
| | | | | | | | | | |
Impairment of fixed assets and long-lived assets | — | | | — | | | | | | — | | | 57,454 | |
| | | | | | | | | | |
Loss from operations | (7,461) | | | (10,231) | | | | | | (15,704) | | | (80,316) | |
Operating margin % | (81.4) | % | | (115.2) | % | | | | | (75.0) | % | | (283.8) | % |
PPP forgiveness | 881 | | | — | | | | | | 881 | | | — | |
Gain on lease termination | — | | | 576 | | | | | | — | | | 576 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Interest and other income (expense), net | 55 | | | 62 | | | | | | 4 | | | 11 | |
Loss before income taxes | (6,525) | | | (9,593) | | | | | | (14,819) | | | (79,729) | |
Income tax (expense) benefit | (21) | | | 32 | | | | | | (27) | | | 6,201 | |
Net loss | $ | (6,546) | | | $ | (9,561) | | | | | | $ | (14,846) | | | $ | (73,528) | |
| | | | | | | | | | |
| | | | | | | | | | |
Net loss % for continuing operations | (71.4) | % | | (107.7) | % | | | | | (70.9) | % | | (259.9) | % |
| | | | | | | | | | |
| | | | | | | | | | |
Consolidated revenue for the three and nine months ended SeptemberJune 30, 2017,2021, increased $15.1$0.3 million, or 23.5%3.2%, and $52.4primarily due to the acquisition of JP3 in mid-May of the second quarter of 2020, which was partially offset by the loss of two major energy customers that were purchased by non-customers during the second quarter of 2021. Consolidated revenue for the six months ended, June 30, 2021, decreased $7.4 million, or 27.2%26.0%, respectively, versus the same periodsperiod of 2016. These increases in2020. First half 2020 revenues experienced less COVID-19 impact than first half 2021 results. Second quarter 2021 experienced a loss of revenue were driven by increased sales within the Energy Chemistry Technologies segment due to the increased oilfield activity beginning in the latter half of 2016.CT segment associated with two major customers changing ownership during the quarter, partially offset by full-quarter revenue in the second quarter 2021 for JP3.
Consolidated gross profitoperating expenses (excluding depreciation and amortization) for the three and nine months ended SeptemberJune 30, 2017, decreased $0.62021, increased $0.5 million, or 2.7%4.1%, and increased $7.7 million, or 11.4%, respectively, compared toversus the same periodsperiod of 2016. Gross margin decreased to 27.4%2020, and 30.9% for the three and nine months ended September 30, 2017, respectively, from 34.7% and 35.3% in the same periodsas a percentage of 2016,revenue, remained flat. The increase was primarily due to increased volumesan unfavorable product mix in the second quarter of 2021 versus second quarter of 2020. Consolidated operating expenses (excluding depreciation and amortization) for the six months ended June 30, 2021 decreased $8.6 million, or 24.8% versus the same period of 2020, and 2.0% as a percentage of revenue. The decrease in operating expenses for the first half of 2021 resulted from reduced cost of sales due to lower margin product sales activity during 2021 compared to 2020 associated with COVID-19 impacts and related declines in all segments.activity. The Company’s operating expenses benefited from actions taken in 2020. Actions taken to reduce operating expenses include reducing the Company’s facility footprint and improving operational efficiencies. These reduced costs were partially offset by new operating expenses for the DA segment acquired in the second quarter of 2020.
Corporate general and administrative (“CG&A”) expenses are those expenses not directly attributable to products sold or services provided. CG&A costs remained relatively flatfor the three and six months ended June 30, 2021, decreased $2.5 million, or 46.8%, and $2.7 million, or 26.9% versus the same period of 2020.CG&A costs declined as a result of lower compensation costs following a reduction in force, a one-time employee retention credit related to the CARES Act and a reduction in professional fees.
Depreciation and amortization expense decreased $0.2 million, or 45.9% and $2.1 million, or 78.9% for the three and six months ended June 30, 2021, versus the same period of 2020, primarily due to impairments of fixed and long-lived assets recorded in the first quarter of 2020.
Research and development costs decreased $0.2 million, or 10.5% and $1.1 million, or 28.3% for the three and six months ended June 30, 2021, versus the same period of 2020 due to lower personnel costs as a result of our reduction in workforce during the first quarter 2020.
Impairment of fixed and long-lived assets decreased due to the first quarter 2020 write-down of $54.7 million in the CT segment and a corporate-level write-down of $2.8 million. See Note 8, “Impairment of Fixed and Long-lived Assets, in Item 1, Financial Statements, of this Quarterly Report.” No impairments of fixed and long-lived assets occurred in the first half of 2021.
Loss from operations decreased $2.8 million, or 27.1%, for the three months ended SeptemberJune 30, 2017,2021 and increased $3.4$64.6 million, or 11.1%,80.4% for the ninesix months ended SeptemberJune 30, 2017,2021, versus the same periodsperiod in 2020. The loss from operations improvement is primarily a result of 2016. As a percentagethe $57.5 million impairment of revenue, CG&A decreased 3.0%fixed and 2.0% for the three and nine months ended September 30, 2017, respectively. The increase in CG&A costs was primarily due to costs associated with executive retirement, stock compensation expense, and information technology costs, partially offset by decreased legal expenses.
Segment selling and administrative (“SS&A”) expenses are not directly attributable to products sold or services provided. SS&A costs remained relatively flat for the three months ended September 30, 2017, and increased $2.1 million, or 7.8%, for the nine months ended September 30, 2017, versus the same periods of 2016. As a percentage of revenue, SS&A decreased 3.5% and 2.2% for the three and nine months ended September 30, 2017, respectively. The increase in SS&A costs was primarily due to increased headcountlong-lived assets in the Energy Chemistry Technologiesfirst quarter of 2020 and Consumer and Industrial Chemistry Technologies sales and support staff for expansion and growthno impairments in new business and related higher sales and marketing expenses.
Depreciation and amortization expense increased $0.3 million, or 14.6%, and $1.4 million, or 23.9%, for the three and nine months ended September 30, 2017, respectively, versusfirst half of 2021. Additionally, the same periods of 2016, primarilydecrease in loss from operations is attributable to the completion and equippingforgiveness of the Global Research & Innovation CenterJP3 PPP loan for $0.8 million and a one-time employee retention credit to the CARES Act of $1.9 million, both recorded in August 2016, along with other improvements to manufacturing facilities.the second quarter of 2021.
Research and Innovation (“R&I”)The Company’s income tax expense increased $0.4 million, or 15.6%, and $3.6 million, or 57.2%, for the threesecond quarter of 2021 and nine months ended September 30, 2017, respectively, compared to the same periods of 2016. These increases in R&I are primarily attributable to increased personnel for new product development and Flotek’s commitment to remaining responsive to customer needs, increased demand, continued growth and refining of existing product lines, and the development of new chemistries which are expected to expand the Company’s intellectual property portfolio.
Interest and other expense decreased $0.3 million, or 46.2%, and $0.6 million, or 35.3%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016, primarily due to the repayment of the term loan in May 2017.
2020 was minimal. The Company recorded an income tax provision of less than $0.1 million, yielding an effective tax rate of (0.5)%, and an income tax benefit of $0.7 million, yielding an effective tax benefit rate of 12.4%, for the three 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%, for the comparable periods in 2016.
As part of the Company’s strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry, 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 through August 2017. The Company recorded a net gain from discontinued operations of $0.3$6.2 million for the three months ended September 30, 2017, andfirst quarter of 2020, primarily as a result of the extended net operating loss from discontinued operations of $13.6 million forcarryback provisions included in the nine months ended September 30, 2017.CARES Act initially recorded in the first quarter 2020.
Results by Segment (in thousands):
|
| | | | | | | | | | | | | | | |
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 | % |
ECTChemistry Technologies Results of Operations: Three and NineSix Months Ended SeptemberJune 30, 2017,2021, Compared to the Three and NineSix Months Ended SeptemberJune 30, 20162020
ECT | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | | Six months ended June 30, |
| 2021 | | 2020 | | | | | 2021 | | 2020 |
| | | | | | | | | | |
| | | | | | | | | | |
Revenue | $ | 7,688 | | | $ | 7,962 | | | | | | $ | 17,990 | | | $ | 27,378 | |
| | | | | | | | | | |
| | | | | | | | | | |
Loss from operations | (3,819) | | | (3,596) | | | | | | (7,407) | | | (66,257) | |
| | | | | | | | | | |
CT revenue for the three and ninesix months ended SeptemberJune 30, 2017, increased $16.12021, decreased $0.3 million, or 35.8%,3.4% and $54.7$9.4 million, or 41.1%34.3%, respectively, versus the same periods of 2016. CnF® sales revenues increased 28.7% (volumes increased 23.1%),2020. The decrease in revenue during the second quarter of 2021 compared to the three months ended September 30, 2016. Increased well completionsecond quarter of 2020 was driven by impacts from both the supply and the demand side. The COVID-19 pandemic negatively impacted economic activity byand reduced global demand for oil and gas, a key sector of our customer base. The Company’s domestic and international revenue for the first half of 2021 decreased as demand from major customers leadand smaller operators has not returned to the increased CnF® chemistry sales during the thirdpre-pandemic levels of first quarter of 2017. Quarterly non-CnF revenues rose approximately 49.8%, compared to the three months ended September 30, 2016, due to increased customer demand2020. In addition, revenue from two major customers was lost as a result of oilfield market conditions.consolidation in the Permian basin. CT also granted price concessions due to maintain and obtain market share.
Sequentially, revenues decreased $4.7 million, or 7.1%, versusLoss from operations for the second quarter of 2017. CnF® sales revenues decreased 11.2% (volumes decreased 12.9%) on a sequential basis. Impacts related to Hurricane Harvey and certain customer delays affected the quarter.
ECT gross profit increased $0.6 million, or 3.0%, and $9.2 million, or 16.9%,CT segment for the three and ninesix months ended SeptemberJune 30, 2017,2021, increased $0.2 million, or 6.2%, and decreased $58.9 million, or 88.8%, respectively versus the same periodsperiod of 2016. Gross margin decreased2020. The increase in loss from operations is due to 30.6%lower revenue and 34.0% forsignificantly lower expenses, primarily the threeresult of no impairments in the first half of 2021 versus impairment charges of fixed and nine months ended September 30, 2017, respectively, from 40.4% and 41.0%long-lived assets of $57.5 million in the same periodsperiod of 2016. The gross margin decreases over2020. Additionally, unfavorable product mix contributed to the periods were primarilyincreased loss from operations as compared to 2021. Secondly, expenses decreased due to product mix and higher raw material costs. Sequentially, gross profit decreased $4.1 million, or 17.9%, versus the secondfirst quarter of 2017.2020 including a $2.3 million terpene purchase commitment loss with no comparable activity in 2021. Personnel costs declined period over period by $1.0 million, which included first quarter 2020 severance costs of $0.6 million for reduction in force actions. Office costs and equipment and facilities costs decreased a combined $0.6 million period over period from the consolidation of the Company’s physical facilities and equipment rentals to align with activity.
Income from operations for the ECT segment increased $0.7 million, or 10.8%, and $2.9 million, or 13.4%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. These increases were primarily attributable to the increase in CnF® sales.
|
| | | | | | | | | | | | | | | |
Consumer and Industrial Chemistry Technologies (“CICT”) | | | | | | |
(dollars in thousands) | Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue | $ | 18,291 |
| | $ | 19,307 |
| | $ | 56,782 |
| | $ | 59,133 |
|
Gross profit | 3,007 |
| | 4,174 |
| | 11,733 |
| | 13,256 |
|
Gross margin % | 16.4 | % | | 21.6 | % | | 20.7 | % | | 22.4 | % |
Income from operations | 985 |
| | 2,433 |
| | 5,906 |
| | 8,508 |
|
Operating margin % | 5.4 | % | | 12.6 | % | | 10.4 | % | | 14.4 | % |
CICT Data Analytics Results of Operations: Three and NineSix Months Ended Septemberended June 30, 2017, Compared to2021 and May 18 -June 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Period May 18- June 30, | | | | | | Six months ended June 30, | | Period May 18- June 30, | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 2021 | 2020 | | | | | | 2021 | | 2020 | | | |
Revenue | 1,477 | | 918 | | | | | | | $ | 2,945 | | | $ | 918 | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Loss from operations | (773) | | (1,151) | | | | | | | (1,067) | | | (1,151) | | | | |
| | | | | | | | | | | | | |
On May 18, 2020, the ThreeCompany purchased JP3 and Nine Months Ended September 30, 2016
CICTformed the DA segment. Segment revenue decreased $1.0 million, or 5.3%, and $2.4 million, or 4.0%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. These decreases were due to reduced volumes, partially offset by higher prices. Sequentially, quarterly revenues decreased $1.0 million, or 5.2%, versus the second quarter of 2017 due to reduced volumes.
CICT gross profit for the three and nine months ended September 30, 2017, decreased $1.2 million, or 28.0%, and2021 was $1.5 million or 11.5%, respectively, versuswhich remained flat from the same periods of 2016. Gross margin decreased to 16.4% and 20.7% for the three and nine months ended September 30, 2017, respectively, from 21.6% and 22.4% in the same periods of 2016. These decreases were a result of lower margins caused by higher material costs and product mix. Sequentially, gross profits decreased by $0.3 million, and gross margins decreased to 16.4% from 17.0% in the secondfirst quarter of 2017 due to product mix and increased raw material costs.2021.
Income from operations for the CICT segment decreased $1.4 million, or 59.5%, and $2.6 million, or 30.6%, for the three and nine months ended September 30, 2017, respectively, versus the same periods of 2016. Sequentially, quarterly operating profits decreased by $0.2 million. These decreases are primarily attributable to product mix and increased raw material and indirect costs.
Discontinued Operations
During the fourth quarter of 2016, 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 end of August 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Drilling Technologies and Production Technologies segments. 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.
|
| | | | | | | | | | | | | | | |
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 September 30, 2017, the Company was not involved in any unconsolidated SPEs.
The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors.
Critical Accounting Policies and Estimates
The Company’s Financial Statementsfinancial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).America. 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 estimatespolicies, including goodwill and assumptions are based on historical experience and expected changes in the business environment; however, actual results may materially differ from the estimates.other intangible assets. There have been no significant changes in the Company’s critical accounting policies and estimates during the ninesix months ended SeptemberJune 30, 2017.2021.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2, — “Recent Accounting Pronouncements”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’s need to service debt, acquire and maintain equipment and fund working capital requirements, and when the opportunities arise, to make strategic acquisitions and repurchase Company stock.requirements. During the first ninesix months of 2017,2021, the Company funded capital requirements primarily with cash on hand and debt financing.hand.
The Company’s primary source of debt financing is its Credit Facility with PNC Bank. This Credit Facility contains provisions for a revolving credit facility secured by substantially all of the Company’s domestic real and personal property, including accounts receivable, inventory, land, buildings, equipment, and other intangible assets. As of SeptemberJune 30, 2017, the Company had $40.6 million in outstanding borrowings under the revolving debt portion of the Credit Facility. At September 30, 2017, the Company
was in compliance with all debt covenants. Significant terms of the Credit Facility are discussed in Note 12 — “Long-Term Debt and Credit Facility” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.
The Company believes it has access to adequate liquidity to fund its ongoing operations and capital expenditures. As of September 30, 2017,2021, the Company had available borrowing capacity under its revolving line of credit of $34.3 million and available cash of $4.9 million, resulting in total liquidity of $39.2 million. For the remainder of 2017, the Company plans to spend between $2.8 million and $4.8 million for committed and planned capital expenditures. The Company may pursue external financing to increase its liquidity position and/or fund acquisitions when strategic opportunities arise.
Any excess cash generated may be used to pay down the level of debt or retained for future use.
Net Debt
Net debt represents total debt less cash and cash equivalents of $27.8 million, as compared to $38.7 million at December 31, 2020. The Company recorded an operating loss for the six months ended June 30, 2021 and combinesrecorded $11.2 million of net cash used for operating activities and $0.3 million of net cash used for financing activities. Cash used in investing activities was minimal.
Liquidity
The effects of the COVID-19 pandemic and the volatility in oil prices during 2020 and the first half of 2021 materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. While the full impact and duration of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. See “COVID-19 Effects and Actions” for developments and possible effects.
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s indebtednesscash flows and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet its capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.
Accordingly, while the Company believes that its existing cash equivalentswill enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that could be usedthe Company’s existing cash on hand is not sufficient to repay that debt. Componentsfund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:
•Sale of net debt are as follows (in thousands):non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sale of excess inventory and/or raw materials;
|
| | | | | | | |
| 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 | ) |
•Entry into a borrowing facility with one or more lenders;•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash;
•Reducing professional advisory fees and headcount; and
•Raising equity either in the public markets or via a private placement offering.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms. For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in the Company’s Annual Report.
The Company expects capital spending to be less than $1.0 million in 2021.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
|
| | | | | | | |
| 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, |
| 2021 | | 2020 |
Net cash used in operating activities | $ | (11,242) | | | $ | (29,216) | |
Net cash provided (used in) by investing activities | 43 | | | (16,424) | |
Net cash (used in) provided by financing activities | (273) | | | 5,023 | |
| | | |
| | | |
Effect of changes in exchange rates on cash and cash equivalents | (31) | | | (31) | |
Net change in cash, cash equivalents and restricted cash | $ | (11,503) | | | $ | (40,648) | |
Operating Activities
Net cash provided by (used in)used in operating activities was $1.2$11.2 million and $(0.8)$29.2 million during the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. Consolidated net loss for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, totaled $5.3$6.5 million and $2.0$73.5 million, respectively.
During the ninesix months ended SeptemberJune 30, 2017, net2021, non-cash contributionsadjustments to net income totaled $12.2$1.8 million as compared to $62.1 million for the same period of 2020.
•For the six months ended June 30,2021, non-cash charges included $0.6 million for depreciation, which was lower than the six months ended June 30, 2020 due to asset impairments taken in 2020, and a $0.3 million charge related to the fair value of contingent consideration, stock based compensation of $1.8 million and JP3 PPP loan forgiveness of $0.9 million. Contributory
•For the six months ended June 30, 2020, contributory non-cash itemsadjustments consisted primarily of $9.5$57.5 million of impairment charges, which included a $30.2 million impairment of fixed assets, $19.9 million impairment of intangible assets and $7.4 million of impairment of right-of-use assets. In addition, non-cash charges included $2.7 million for depreciation and amortization, $9.7 million for stock-based compensation expense, $0.9 million for recognized incremental tax benefits related to the Company’s share based awards, and $0.4 million for net loss on sale of assets, partially offset by $8.3 million for changes to deferred income taxes.amortization.
During the ninesix months ended SeptemberJune 30, 2016, net non-cash contributions to net income totaled $10.8 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 million for changes to deferred income taxes.
During the nine months ended September 30, 2017,2021, changes in working capital used $5.7provided $1.8 million inof cash as compared to using $17.8 million for the same period of 2020.
•For the six months ended June 2021, the cash provided by working capital primarily resultingresulted from increasingroutine operations, including a reduction in accounts receivable and inventory by $20.9 million and decreasing accounts payable by $8.3of $2.0 million, partially offset by decreasing income taxesa decrease in accrued liabilities of $1.0 million.
•For the six months ended June 30, 2020, the use of cash in working capital primarily resulted from a reduction in accrued liabilities and accounts payable of $26.9 million, which included two one-time payments made: one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final post-closing working capital adjustment related to the 2019 sale of the Company’s Consumer and Industrial Chemistry Technologies segment. Decreases in accounts receivable, inventories and other current assets by $21.9 million and increasing accrued liabilities and interest payable by $1.6provided cash of $15.4 million.
During the nine months ended September 30, 2016, changes in working capital used $9.6 million in cash, primarily resulting from increasing accounts receivable, inventory, income taxes receivable, and other current assets by $24.3 million and decreasing income taxes payable by $1.8 million, partially offset by increasing accounts payable, accrued liabilities, and interest payable by $16.4 million.
Investing Activities
Net cash provided by investing activities was $11.8 million for the ninesix months ended SeptemberJune 30, 2017. Cash provided by investing activities primarily included $18.5 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 million for capital expenditures and $0.8 million for the purchase of various patents and other intangible assets.
2021 was not material. Net cash used in investing activities was $18.8$16.4 million for the ninesix months ended SeptemberJune 30, 2016.2020. Cash used in investing activities primarily included $10.6$26.3 million for capital expenditures and $8.2 million for thefrom purchase of IPI and various patents.JP3 offset by cash provided of $9.8 million due to the release of escrow amounts from the sales of Florida Chemical Company.
Financing Activities
Net cash used in financing activities was $13.0$0.3 million for the ninesix months ended SeptemberJune 30, 2017,2021, primarily due to using $7.8 million for repayments of debt, net of borrowings, purchases of treasurycommon stock forrelated to tax withholding purposes related to vesting of restricted stock awards of $1.5 million, and $4.2requirements. Net cash provided by financing activities was $5.0 million for the repurchase of common stock. Cash used in financing activities was partially offset by $0.5 million in proceedssix months ended June 30, 2020, primarily from the sale of common stock.proceeds received from the Paycheck Protection Program.
Net cash generated through financing activities was $20.8 millionOff-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 nine months ended Septemberpurpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2016, primarily due to receiving $30.6 million in proceeds from the sale of common stock, inclusive of $29.9 million, net of issuance costs, from the private placement of 2.5 million common shares on July 27, 2016. Cash generated through financing activities was partially offset by using $8.0 million for repayments of debt, net of borrowings, reductions in tax benefit related to stock-based compensation of $0.9 million, and purchases of treasury stock for tax withholding purposes related to vesting of restricted stock awards and the exercise of non-qualified stock options of $0.9 million.
On August 1, 2017,2021, the Company filed a registration statement on Form S-3 (the “Universal Shelf”) with the SECwas not involved in any unconsolidated SPEs.
The Company has not made any guarantees to register for sale from time to time up to $350 million of common stock, preferred stock, senior and subordinated debt securities, warrants, units and guarantees. The Universal Shelf was declared effective by the SEC on October 11, 2017 and will remain effective for three years. Althoughcustomers or vendors nor does the Company has nohave any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current plans to issue any securities under the Universal Shelf, it will remain available for use by the Company, subject to market conditions, to quickly access the capital markets should the need arise.
Contractual Obligations
Cash flows from operations are dependent on a variety of factors, including fluctuations in operating results, accounts receivable collections, inventory management, and the timing of payments for goods and services. Correspondingly, the impact of contractual obligationsor future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, andcapital expenditures, or capital resources that would be material to investors other than the long term terpene agreement discussed in future periods is analyzedNote 13 in conjunction with such factors.Part I, Item I – Financial Statements of this Quarterly Report.
Material contractual obligations consist of repayment of amounts borrowed on the Company’s Credit Facility with PNC Bank and payment of operating lease obligations. Contractual obligations at September 30, 2017, are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| 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 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Operating lease obligations | 22,415 |
| | 2,679 |
| | 4,762 |
| | 3,966 |
| | 11,008 |
|
Total | $ | 63,004 |
| | $ | 43,268 |
| | $ | 4,762 |
| | $ | 3,966 |
| | $ | 11,008 |
|
(1) The borrowing is classified as current debt. The weighted-average interest rate is 3.86% at September 30, 2017.
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 “Quantitative and Qualitative Disclosures About Market Risk” 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 identified deficiencies in its internal control over financial reporting that represented material weaknesses as of December 31, 2020. Specifically, the Company’s disclosuremanagement determined that the Company did not, as of December 31, 2020, design and maintain effective internal controls over financial reporting. The material weaknesses relate to: (1) ineffective design and procedures are designedoperation of controls over nonrecurring transactions, including recognition of items and cash flow presentation relating to provide such reasonable assurance.disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations; (2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations; and (3) the ineffective design and operating effectiveness of the assessment of going concern.
The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in this Quarterly Report present fairly, in all material respects, the consolidated financial position, results of operations, comprehensive loss, stockholders’ equity, 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 requireddefined by Rule 13a-15(e) and 15d-15(e) of the
Exchange Act. Based upon that evaluation, the principal executiveAct as of June 30, 2021, and principal financial officers havehas concluded that the Company’s disclosure controls and procedures were not effective as of SeptemberJune 30, 2017.2021, due to the material weaknesses in internal control over financial reporting described above.
Remediation Plan and Status
The Company has implemented a remediation plan to address the material weaknesses identified at December 31, 2020. Key elements of this ongoing plan include:
•Implementing monitoring controls over the review and validation of both tangible and intangible assets;
•Expanding controls over impairments of goodwill and long-lived assets;
•Enhancing specificity in the design and implementation of controls around nonrecurring, complex accounting activities, with the assistance of technical subject-matter experts;
•Implementing controls for forecasting and budgeting, to include additional process documentation and precision;
•Expanding monthly management review controls; and
•Enhancing existing control procedures around the quarterly going concern analysis process.
In 2021, the Company made a strategic decision to bring internal audit in-house and hired a director of internal audit to manage internal controls and the remediation plan. Through a structured process of testing and monitoring elements of the remediation plan, we expect the identified material weaknesses to be fully remediated by the end of 2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s system of internal control over financial reporting (identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) under the Exchange Act) during the three months ended SeptemberJune 30, 2017,2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern District of Texas granted the Company’s motion to dismiss the four consolidated putative securities class action lawsuits that were filed in November 2015, against26, 2021, the Company and certain of its officers. The lawsuits were previously consolidated intoFlotek Chemistry, LLC (“Flotek Chemistry”), a single case, and a consolidated amended complaint had been filed. The consolidated amended complaint asserted that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint sought an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between October 23, 2014 and November 9, 2015, inclusive. The lead plaintiff appealed the District Court’s decision granting the motion to dismiss.
In January 2016, three derivative lawsuits were filed, two in the District Court of Harris County, Texas (which have since been consolidated into one case) and one in the United States District Court for the Southern District of Texas, on behalfwholly-owned subsidiary of the Company, filed a lawsuit against certain of its officersArcher-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and its current directors.Joshua A. Snively in state court in Harris County, Texas. The lawsuits allege violations of law,lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty by Mr. Snively. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.
Subsequent to the lawsuit described above, on April 5, 2021, ADM and unjust enrichment againstFCC filed a lawsuit in the defendants.Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters. The Company views this lawsuit as a strategic response to the March 26, 2021 lawsuit filed by Flotek Chemistry and the Company in Texas.
The Company believes that, notwithstanding the lawsuits are without merit and intends to vigorously defend against all claims asserted. Discovery has not yet commenced. At this time, the Company is unable to reasonably estimate the outcome of this litigation.
In addition, as previously disclosed, the U.S. Securities and Exchange Commission had opened an inquiry related to similar issues to those raised in the above-described litigation. On August 21, 2017, the Company received a letter from the stafftermination of the SEC stating thatsupply agreement, it has sufficient terpene inventory and alternate terpene supply sources to meet its requirements for the inquiry has been concluded and that the staffforeseeable future. The Company does not intendexpect that termination of the terpene supply agreement will have a material effect on its operations or ability to recommend an enforcement action against the Company.
Other Litigationmeet customer needs.
The Company is subject to other routine litigation and other claims that arise in the normal course of business. ManagementExcept as disclosed above, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth in Part I, Item 1A of the Company’s Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
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. Repurchases of the Company’s equity securities during the three months ended SeptemberJune 30, 2017,2021, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:
| | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | | | |
April 1, 2021 to April 30, 2021 | 56,219 | | | $ | 1.75 | | | | | |
May 1, 2021 to May 31, 2021 | — | | | — | | | | | |
June 1, 2021 to June 30, 2021 | — | | | — | | | | | |
Total | 56,219 | | | | | | | |
(1) The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting of restricted shares and exercise of non-qualified stock options and (b) to satisfy payments required for common stock upon the exercise of stock options.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
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.