UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM | 10-QUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 |
| FORM 10-Q | | | | |
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021
or
| For the quarterly period ended June 30, 2022
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| | | or |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
| For the transition period from to |
| Commission File Number 1-13270 |
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FLOTEK INDUSTRIES, INC.
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| (Exact name of registrant as specified in its charter) |
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| Delaware | | 90-0023731 |
(State of other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
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| 8846 N. Sam Houston Parkway W. Houston,TX | | 77064 |
| | | | |
Houston, TX | | | | 77064 |
| (Address of principal executive offices) | | | | (Zip Code) |
| |
(713) 849-9911
(Registrant’s telephone number, including area code)
| | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.0001 par value | FTK | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer☐Accelerated filer ☐Non-accelerated filer ☒ Smaller reporting company ☒Emerging growth company ☐ | | ☐ | | Accelerated Filer | | ☒ |
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Non-accelerated filer | | ☐ | | Smaller reporting company | | ☒ |
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| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 8, 2021,At August 10, 2022, there were 79,617,74376,597,249 outstanding shares of Flotek Industries, Inc.the registrant’s common stock, $0.0001 par value.
TABLE OF CONTENTS
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| Forward-Looking Statements | |
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| 2021 | |
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| Unaudited Condensed Consolidated Statements of Comprehensive LossIncome (Loss) for the three and ninesix months ended SeptemberJune 30, 20212022 and 20202021 | |
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| Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and ninesix months ended SeptemberJune 30, 20212022 and 20202021 | |
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| SIGNATURES | 3641 |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly(this “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, as amended.1995. Forward-looking statements are not historical facts, but instead represent the current assumptions and beliefs regarding future events of Flotek Industries, Inc. (“Flotek” or the “Company”), many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to the Company’s business plan, objectives, expected operating results, and assumptions upon which those statements are based. The forward-looking statements contained in this 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, financial condition, future operating results and liquidity, including but not limited to the impact of the COVID-19 pandemic, pending litigation, commodity prices and other circumstances.liquidity. These forward-looking statements generally are identified by words including but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,” “potential,” “schedule,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could,”“could” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or revenue thereafter. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 20202021 (“Annual Report” or “2020“2021 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 16, 2021,31, 2022, and periodically in subsequent reports filed with the SEC. The Company has no obligation, and we disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
PART I —- FINANCIAL INFORMATION
Item 1. Financial Statements
FLOTEK INDUSTRIES INC.
INC, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in (in thousands, except share data) | | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 20,527 | | | $ | 38,660 | | Cash and cash equivalents | $ | 33,084 | | | $ | 11,534 | |
| Restricted cash | Restricted cash | 40 | | | 664 | | Restricted cash | 40 | | | 1,790 | |
| Accounts receivable, net of allowance for doubtful accounts of $743 and $1,316 at September 30, 2021 and December 31, 2020, respectively | 11,560 | | | 11,764 | | |
| Accounts receivable, net of allowance for doubtful accounts of $514 and $659 at June 30, 2022 and December 31, 2021, respectively | | Accounts receivable, net of allowance for doubtful accounts of $514 and $659 at June 30, 2022 and December 31, 2021, respectively | 11,747 | | | 13,297 | |
| Accounts receivable, related party | | Accounts receivable, related party | 11,603 | | | — | |
| Inventories, net | Inventories, net | 8,818 | | | 11,837 | | Inventories, net | 13,249 | | | 9,454 | |
| | Income taxes receivable | 55 | | | 403 | | |
| | Other current assets | Other current assets | 4,811 | | | 3,127 | | Other current assets | 4,000 | | | 3,762 | |
| Current contract assets | | Current contract assets | 6,260 | | | — | |
| Assets held for sale | Assets held for sale | 545 | | | — | | Assets held for sale | 535 | | | 2,762 | |
| Total current assets | Total current assets | 46,356 | | | 66,455 | | Total current assets | 80,518 | | | 42,599 | |
| Property and equipment, net | Property and equipment, net | 7,769 | | | 9,087 | | Property and equipment, net | 4,819 | | | 5,296 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 2,099 | | | 2,320 | | Operating lease right-of-use assets | 1,771 | | | 2,041 | |
| Goodwill | 8,092 | | | 8,092 | | |
| | Deferred tax assets, net | Deferred tax assets, net | 209 | | | 223 | | Deferred tax assets, net | 283 | | | 279 | |
| | Other long-term assets | Other long-term assets | 29 | | | 33 | | Other long-term assets | 17 | | | 29 | |
| | Long term contract assets | | Long term contract assets | 76,063 | | | — | |
| TOTAL ASSETS | TOTAL ASSETS | $ | 64,554 | | | $ | 86,210 | | TOTAL ASSETS | $ | 163,471 | | | $ | 50,244 | |
| | LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | $ | 5,224 | | | $ | 5,787 | | Accounts payable | $ | 19,771 | | | $ | 7,616 | |
| Accrued liabilities | Accrued liabilities | 10,465 | | | 18,275 | | Accrued liabilities | 7,115 | | | 8,996 | |
| Income taxes payable | Income taxes payable | 38 | | | 21 | | Income taxes payable | 103 | | | 4 | |
| Interest payable | Interest payable | 70 | | | 34 | | Interest payable | 106 | | | 82 | |
| | Current portion of operating lease liabilities | Current portion of operating lease liabilities | 586 | | | 636 | | Current portion of operating lease liabilities | 636 | | | 602 | |
| Current portion of finance lease liabilities | Current portion of finance lease liabilities | 48 | | | 60 | | Current portion of finance lease liabilities | 34 | | | 41 | |
| Current portion of long-term debt | Current portion of long-term debt | 1,336 | | | 4,048 | | Current portion of long-term debt | 1,690 | | | 1,436 | |
| | Convertible notes payable | | Convertible notes payable | 18,323 | | | — | |
| Contract consideration convertible notes payable | | Contract consideration convertible notes payable | 67,220 | | | — | |
| Total current liabilities | Total current liabilities | 17,767 | | | 28,861 | | Total current liabilities | 114,998 | | | 18,777 | |
| Deferred revenue, long-term | Deferred revenue, long-term | 100 | | | 117 | | Deferred revenue, long-term | 84 | | | 91 | |
| Long-term operating lease liabilities | Long-term operating lease liabilities | 7,888 | | | 8,348 | | Long-term operating lease liabilities | 6,695 | | | 7,779 | |
| Long-term finance lease liabilities | Long-term finance lease liabilities | 64 | | | 96 | | Long-term finance lease liabilities | 38 | | | 53 | |
| Long-term debt | Long-term debt | 3,452 | | | 1,617 | | Long-term debt | 3,098 | | | 3,352 | |
| | TOTAL LIABILITIES | TOTAL LIABILITIES | 29,271 | | | 39,039 | | TOTAL LIABILITIES | 124,913 | | | 30,052 | |
| Commitments and contingencies (See Note 11) | 0 | | 0 | |
| Commitments and contingencies (See Note 12) | | Commitments and contingencies (See Note 12) | 0 | | 0 |
| Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
| Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | — | | | — | | Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | — | | | — | |
| Common stock, $0.0001 par value, 140,000,000 shares authorized; 79,610,243 shares issued and 69,316,933 shares outstanding at September 30, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020 | 8 | | | 8 | | |
| Common stock, $0.0001 par value, 140,000,000 shares authorized; 82,884,690 shares issued and 76,773,333 shares outstanding at June 30, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021 | | Common stock, $0.0001 par value, 140,000,000 shares authorized; 82,884,690 shares issued and 76,773,333 shares outstanding at June 30, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021 | 8 | | | 8 | |
| Additional paid-in capital | Additional paid-in capital | 362,174 | | | 359,721 | | Additional paid-in capital | 386,310 | | | 363,417 | |
| Accumulated other comprehensive income (loss) | 51 | | | (19) | | |
| Accumulated other comprehensive income | | Accumulated other comprehensive income | 176 | | | 81 | |
| Accumulated deficit | Accumulated deficit | (293,025) | | | (278,688) | | Accumulated deficit | (313,698) | | | (309,214) | |
| Treasury stock, at cost; 5,648,721 and 5,580,920 shares at September 30, 2021 and December 31, 2020, respectively | (33,925) | | | (33,851) | | |
| | Treasury stock, at cost; 6,111,357 and 6,022,634 shares at June 30, 2022 and December 31, 2021 , respectively | | Treasury stock, at cost; 6,111,357 and 6,022,634 shares at June 30, 2022 and December 31, 2021 , respectively | (34,238) | | | (34,100) | |
| Total stockholders’ equity | Total stockholders’ equity | 35,283 | | | 47,171 | | Total stockholders’ equity | 38,558 | | | 20,192 | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 64,554 | | | $ | 86,210 | | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 163,471 | | | $ | 50,244 | |
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
4
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
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| | Three months ended September 30, | | Nine months ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Revenue | | | | | | | |
| Revenue from external customers | $ | 8,847 | | | $ | 12,739 | | | $ | 29,782 | | | $ | 41,035 | |
| Revenue from related party | 1,332 | | | — | | | 1,332 | | | — | |
| Total revenues | 10,179 | | | 12,739 | | | 31,114 | | | 41,035 | |
| Costs and expenses: | | | | | | | |
| Operating expenses (excluding depreciation and amortization) | 5,418 | | | 29,466 | | | 31,330 | | | 63,939 | |
| Corporate general and administrative | 2,696 | | | 2,679 | | | 9,925 | | | 12,568 | |
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| Depreciation and amortization | 233 | | | 518 | | | 793 | | | 3,177 | |
| Research and development | 1,186 | | | 1,480 | | | 4,194 | | | 5,673 | |
| Loss (Gain) on disposal of long-lived assets | 14 | | | (37) | | | (55) | | | (92) | |
| Impairment of goodwill | — | | | 11,706 | | | — | | | 11,706 | |
| Impairment of fixed, long-lived and intangible assets | — | | | 12,521 | | | — | | | 69,975 | |
| Total costs and expenses | 9,547 | | | 58,333 | | | 46,187 | | | 166,946 | |
| Income (loss) from operations | 632 | | | (45,594) | | | (15,073) | | | (125,911) | |
| Other (expense) income: | | | | | | | |
| Paycheck protection plan loan forgiveness | — | | | — | | | 881 | | | — | |
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| Gain on lease termination | — | | | — | | | — | | | 576 | |
| Interest expense | (18) | | | (19) | | | (53) | | | (40) | |
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| Other (expense) income, net | (102) | | | 291 | | | (62) | | | 322 | |
| Total other (expense) income, net | (120) | | | 272 | | | 766 | | | 858 | |
| Income (loss) before income taxes | 512 | | | (45,322) | | | (14,307) | | | (125,053) | |
| Income tax (expense) benefit | (3) | | | 81 | | | (30) | | | 6,282 | |
| Net income (loss) | $ | 509 | | | $ | (45,241) | | | $ | (14,337) | | | $ | (118,771) | |
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| Income (loss) per common share: | | | | | | |
| Basic | $ | 0.01 | | | $ | (0.66) | | | $ | (0.21) | | | $ | (1.75) | |
| Diluted | $ | 0.01 | | | $ | (0.66) | | | $ | (0.21) | | | $ | (1.75) | |
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| Weighted average common shares: | | | | | | | |
| Weighted average common shares used in computing basic income (loss) per common share | 69,324 | | | 68,217 | | | 68,665 | | | 68,063 | |
| Weighted average common shares used in computing diluted income (loss) per common share | 70,176 | | | 68,217 | | | 68,665 | | | 68,063 | |
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| | Three months ended June 30, | | Six months ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue: | | | | | | | |
| Revenue from external customers | $ | 12,824 | | | $ | 9,165 | | | $ | 23,206 | | | $ | 20,935 | |
| Revenue from related party | 16,549 | | | — | | | 19,046 | | | — | |
| Total revenues | 29,373 | | | 9,165 | | | 42,252 | | | 20,935 | |
| Cost of goods sold | 31,678 | | | 10,775 | | | 45,036 | | | 22,853 | |
| Gross loss | (2,305) | | | (1,610) | | | (2,784) | | | (1,918) | |
| Operating costs and expenses: | | | | | | | |
| Selling, general, and administrative | 7,431 | | | 4,203 | | | 12,310 | | | 10,287 | |
| Depreciation of property and equipment | 182 | | | 253 | | | 377 | | | 560 | |
| Research and development | 1,115 | | | 1,466 | | | 2,530 | | | 3,008 | |
| Gain on sale of property and equipment | (1,914) | | | (71) | | | (1,906) | | | (69) | |
| Gain on lease termination | — | | | — | | | (584) | | | — | |
Change in fair value of contract consideration
convertible notes payable | (17,158) | | | — | | | (13,266) | | | — | |
| Total operating costs and expenses | (10,344) | | | 5,851 | | | (539) | | | 13,786 | |
| Income (loss) from operations | 8,039 | | | (7,461) | | | (2,245) | | | (15,704) | |
| Other income (expense): | | | | | | | |
| Paycheck protection plan loan forgiveness | — | | | 881 | | | — | | | 881 | |
| Interest expense | (1,597) | | | (17) | | | (2,265) | | | (35) | |
| Other income (expense) | (104) | | | 72 | | | 120 | | | 39 | |
| Total other income (expense) | (1,701) | | | 936 | | | (2,145) | | | 885 | |
| Income (loss) before income taxes | 6,338 | | | (6,525) | | | (4,390) | | | (14,819) | |
| Income tax expense | (98) | | | (21) | | | (94) | | | (27) | |
| Net income (loss) | $ | 6,240 | | | $ | (6,546) | | | $ | (4,484) | | | $ | (14,846) | |
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| Income (loss) per common share: | | | | | | |
| Basic | $ | 0.08 | | | $ | (0.09) | | | $ | (0.06) | | | $ | (0.22) | |
| Diluted | $ | (0.05) | | | $ | (0.09) | | | $ | (0.12) | | | $ | (0.22) | |
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| Weighted average common shares: | | | | | | | |
| Weighted average common shares used in computing basic loss per common share | 74,861 | | | 69,531 | | | 73,476 | | | 69,001 | |
| Weighted average common shares used in computing diluted loss per common share | 124,335 | | | 69,531 | | | 107,086 | | | 69,001 | |
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
5
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Net income (loss) | Net income (loss) | $ | 509 | | | $ | (45,241) | | | $ | (14,337) | | | $ | (118,771) | | Net income (loss) | $ | 6,240 | | | $ | (6,546) | | | $ | (4,484) | | | $ | (14,846) | |
| | Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | 38 | | | (40) | | | 70 | | | (168) | | Foreign currency translation adjustment | 87 | | | (17) | | | 95 | | | 32 | |
| | Comprehensive Income (loss) | $ | 547 | | | $ | (45,281) | | | $ | (14,267) | | | $ | (118,939) | | |
| Comprehensive income (loss) | | Comprehensive income (loss) | $ | 6,327 | | | $ | (6,563) | | | $ | (4,389) | | | $ | (14,814) | |
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The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
6
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) | | | | Nine months ended September 30, | | Six months ended June 30, |
| | | 2021 | | 2020 | | 2022 | | 2021 |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
| | Net loss | Net loss | $ | (14,337) | | | $ | (118,771) | | Net loss | $ | (4,484) | | | $ | (14,846) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | (701) | | | 3,200 | | Change in fair value of contingent consideration | (134) | | | (302) | |
| Change in fair value of contract consideration convertible notes payable | | Change in fair value of contract consideration convertible notes payable | (13,266) | | | — | |
| Amortization of convertible note issuance cost | | Amortization of convertible note issuance cost | 414 | | | — | |
| Paid-in-kind interest expense | | Paid-in-kind interest expense | 1,819 | | | — | |
| Amortization of contract assets | | Amortization of contract assets | 737 | | | — | |
| Depreciation and amortization | Depreciation and amortization | 793 | | | 3,177 | | Depreciation and amortization | 377 | | | 560 | |
| | Provision for doubtful accounts | (42) | | | 494 | | |
| Inventory purchase commitment settlement | (7,633) | | | 0 | |
| Provision for doubtful accounts, net of recoveries | | Provision for doubtful accounts, net of recoveries | 87 | | | (1) | |
| Provision for excess and obsolete inventory | Provision for excess and obsolete inventory | 687 | | | 10,465 | | Provision for excess and obsolete inventory | 769 | | | 580 | |
| Impairment of goodwill | — | | | 11,706 | | |
| Impairment of right-of-use assets | — | | | 7,434 | | |
| Impairment of fixed assets | — | | | 30,178 | | |
| Impairment of intangible assets | — | | | 32,363 | | |
| Gain on sale of assets | (55) | | | (668) | | |
| | Gain on sale of property and equipment | | Gain on sale of property and equipment | (1,906) | | | (69) | |
| Gain on lease termination | | Gain on lease termination | (584) | | | — | |
| Non-cash lease expense | Non-cash lease expense | 221 | | | 299 | | Non-cash lease expense | 112 | | | 163 | |
| Stock compensation expense | Stock compensation expense | 2,710 | | | 2,208 | | Stock compensation expense | 1,591 | | | 1,750 | |
| Deferred income tax provision (benefit) | 13 | | | (199) | | |
| Deferred income tax (benefit) expense | | Deferred income tax (benefit) expense | (5) | | | 10 | |
| Paycheck protection plan loan forgiveness | Paycheck protection plan loan forgiveness | (881) | | | — | | Paycheck protection plan loan forgiveness | — | | | (881) | |
| Changes in current assets and liabilities: | Changes in current assets and liabilities: | | Changes in current assets and liabilities: | |
| | Accounts receivable, net | 111 | | | 4,714 | | |
| Inventories, net | 2,330 | | | 3,186 | | |
| Accounts receivable | | Accounts receivable | (10,141) | | | 1,995 | |
| Inventories | | Inventories | (4,521) | | | (222) | |
| Income taxes receivable | Income taxes receivable | 405 | | | (140) | | Income taxes receivable | 7 | | | 207 | |
| Other current assets | Other current assets | (2,237) | | | 823 | | Other current assets | (244) | | | (672) | |
| Contract asset, net | | Contract asset, net | (3,600) | | | — | |
| Other long-term assets | Other long-term assets | 541 | | | (16) | | Other long-term assets | 12 | | | 541 | |
| Accounts payable | Accounts payable | (604) | | | (11,906) | | Accounts payable | 12,154 | | | 801 | |
| Accrued liabilities | Accrued liabilities | 414 | | | (17,689) | | Accrued liabilities | (2,924) | | | (1,048) | |
| Operating lease liabilities | | Operating lease liabilities | (308) | | | — | |
| Income taxes payable | Income taxes payable | (53) | | | 25 | | Income taxes payable | 99 | | | 168 | |
| Interest payable | Interest payable | 36 | | | 22 | | Interest payable | 24 | | | 24 | |
| | Net cash used in operating activities | Net cash used in operating activities | (18,282) | | | (39,095) | | Net cash used in operating activities | (23,915) | | | (11,242) | |
| Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
| Capital expenditures | Capital expenditures | (31) | | | (836) | | Capital expenditures | (5) | | | (31) | |
| Proceeds from sale of business | — | | | 9,907 | | |
| Proceeds from sale of assets | Proceeds from sale of assets | 74 | | | 86 | | Proceeds from sale of assets | 4,194 | | | 74 | |
| Purchase of JP3, net of cash acquired | — | | | (26,284) | | |
| | Abandonment of patents and other intangible assets | — | | | (8) | | |
| Net cash provided by (used in) investing activities | 43 | | | (17,135) | | |
| | Net cash provided by investing activities | | Net cash provided by investing activities | 4,189 | | | 43 | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
| | Proceeds from paycheck protection plan loan | — | | | 4,788 | | |
| | Proceeds from issuance of convertible notes | | Proceeds from issuance of convertible notes | 21,150 | | | — | |
| Payment of issuance costs of convertible notes | | Payment of issuance costs of convertible notes | (1,084) | | | — | |
| Proceeds from issuance of warrants | | Proceeds from issuance of warrants | 19,500 | | | — | |
| Payments to tax authorities for shares withheld from employees | Payments to tax authorities for shares withheld from employees | (161) | | | (123) | | Payments to tax authorities for shares withheld from employees | (138) | | | (78) | |
| (Payments) proceeds from issuance of stock | (246) | | | 416 | | |
| Proceeds from issuance of stock | | Proceeds from issuance of stock | 24 | | | — | |
| | Purchase from sale of common stock | | Purchase from sale of common stock | — | | | (166) | |
| Payments for finance leases | Payments for finance leases | (44) | | | (152) | | Payments for finance leases | (21) | | | (29) | |
| | Net cash (used in) provided by financing activities | (451) | | | 4,929 | | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 39,431 | | | (273) | |
| | Effect of changes in exchange rates on cash and cash equivalents | Effect of changes in exchange rates on cash and cash equivalents | (67) | | | (80) | | Effect of changes in exchange rates on cash and cash equivalents | 95 | | | (31) | |
| Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | (18,757) | | | (51,381) | | Net change in cash, cash equivalents and restricted cash | 19,800 | | | (11,503) | |
| Cash and cash equivalents at the beginning of period | Cash and cash equivalents at the beginning of period | 38,660 | | | 100,575 | | Cash and cash equivalents at the beginning of period | 11,534 | | | 38,660 | |
| Restricted cash at the beginning of period | Restricted cash at the beginning of period | 664 | | | 663 | | Restricted cash at the beginning of period | 1,790 | | | 664 | |
| Cash and cash equivalents and restricted cash at beginning of period | Cash and cash equivalents and restricted cash at beginning of period | 39,324 | | | 101,238 | | Cash and cash equivalents and restricted cash at beginning of period | 13,324 | | | 39,324 | |
| Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | 20,527 | | | 49,193 | | Cash and cash equivalents at end of period | 33,084 | | | 27,781 | |
| Restricted cash at the end of period | Restricted cash at the end of period | 40 | | | 664 | | Restricted cash at the end of period | 40 | | | 40 | |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 20,567 | | | $ | 49,857 | | Cash, cash equivalents and restricted cash at end of period | $ | 33,124 | | | $ | 27,821 | |
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
7
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Three and Six Months Ended SeptemberJune 30, 20212022 and 20202021
(In thousands of U.S. dollars and shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, June 30, 2021 | 79,607 | | | $ | 8 | | | 5,628 | | | $ | (34,017) | | | $ | 361,424 | | | $ | 13 | | | $ | (293,534) | | | | | $ | 33,894 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 509 | | | | | 509 | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 38 | | | — | | | | | 38 | |
| | | | | | | | | | | | | | | | | |
| Stock issued under employee stock purchase plan | — | | | — | | | (28) | | | 20 | | | (89) | | | — | | | — | | | | | (69) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Restricted stock granted | 9 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Restricted stock forfeited | (6) | | | | | 4 | | | 8 | | | 3 | | | — | | | — | | | | | 11 | |
| | | | | | | | | | | | | | | | | |
| Stock compensation expense | — | | | — | | | — | | | — | | | 961 | | | — | | | — | | | | | 961 | |
| Shares withheld to cover taxes | — | | | — | | | 45 | | | 64 | | | (125) | | | — | | | — | | | | | (61) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, September 30, 2021 | 79,610 | | | $ | 8 | | | 5,649 | | | $ | (33,925) | | | $ | 362,174 | | | $ | 51 | | | $ | (293,025) | | | | | $ | 35,283 | |
(1) See Note 12, “Stockholders’ Equity” for further discussion. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2022 |
| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income | | Accumulated
Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| Balance, March 31, 2022 | 82,564 | | | $ | 8 | | | 6,073 | | | $ | (34,159) | | | $ | 367,104 | | | $ | 89 | | | $ | (319,938) | | | | | $ | 13,104 | |
| | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 6,240 | | | | | 6,240 | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 87 | | | — | | | | | 87 | |
| | | | | | | | | | | | | | | | | |
| Stock issued under employee stock purchase plan | — | | | — | | | (19) | | | — | | | 24 | | | — | | | — | | | | | 24 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Restricted stock granted | 339 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | |
| Restricted stock forfeited | (3) | | | — | | | 12 | | | — | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | |
| Stock compensation expense | — | | | — | | | — | | | — | | | 852 | | | — | | | — | | | | | 852 | |
| Shares withheld to cover taxes | (15) | | | — | | | 45 | | | (79) | | | — | | | — | | | — | | | | | (79) | |
| Issuance of stock warrants, net of transaction fee | — | | | — | | | — | | | — | | | 9,930 | | | — | | | — | | | | | 9,930 | |
| Equity contribution | — | | | — | | | — | | | — | | | 8,400 | | | — | | | — | | | | | 8,400 | |
| | | | | | | | | | | | | | | | | |
| Balance, June 30, 2022 | 82,885 | | | $ | 8 | | | 6,111 | | | $ | (34,238) | | | $ | 386,310 | | | $ | 176 | | | $ | (313,698) | | | | | $ | 38,558 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, June 30, 2020 | 77,626 | | | $ | 7 | | | 4,459 | | | $ | (33,566) | | | $ | 357,981 | | | $ | 51 | | | $ | (215,767) | | | | | $ | 108,706 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (45,241) | | | | | (45,241) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (40) | | | — | | | | | (40) | |
| | | | | | | | | | | | | | | | | |
| Stock issued under employee stock purchase plan | — | | | — | | | (25) | | | — | | | 58 | | | — | | | — | | | | | 58 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Restricted stock granted | 346 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Restricted stock forfeited | — | | | — | | | 179 | | | — | | | — | | | — | | | — | | | | | — | |
| Treasury stock purchased | — | | | — | | | 36 | | | (41) | | | — | | | — | | | — | | | | | (41) | |
| Stock compensation expense | — | | | — | | | — | | | — | | | 687 | | | — | | | — | | | | | 687 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, September 30, 2020 | 77,972 | | | $ | 7 | | | 4,649 | | | $ | (33,607) | | | $ | 358,726 | | | $ | 11 | | | $ | (261,008) | | | | | $ | 64,129 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2022 |
| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income | | Accumulated Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| Balance, December 31, 2021 | 79,484 | | | $ | 8 | | | 6,022 | | | $ | (34,100) | | | $ | 363,417 | | | $ | 81 | | | $ | (309,214) | | | | | $ | 20,192 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (4,484) | | | | | (4,484) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 95 | | | — | | | | | 95 | |
| | | | | | | | | | | | | | | | | |
| Stock issued under employee stock purchase plan | — | | | — | | | (19) | | | — | | | 24 | | | — | | | — | | | | | 24 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Restricted stock granted | 626 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Restricted stock forfeited | (3) | | | — | | | 20 | | | — | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | |
| Stock compensation expense | — | | | — | | | — | | | — | | | 1,591 | | | — | | | — | | | | | 1,591 | |
| Shares withheld to cover taxes | (15) | | | — | | | 88 | | | (138) | | | — | | | — | | | — | | | | | (138) | |
| Issuance of stock warrants, net of transaction fee | — | | | — | | | — | | | — | | | 9,930 | | | — | | | — | | | | | 9,930 | |
| Equity contribution | | | | | | | | | 8,400 | | | | | | | | | 8,400 | |
| Conversion of notes to common stock | 2,793 | | | — | | | — | | | — | | | 2,948 | | | — | | | — | | | | | 2,948 | |
| | | | | | | | | | | | | | | | | |
| Balance, June 30, 2022 | 82,885 | | | $ | 8 | | | 6,111 | | — | | $ | (34,238) | | — | | $ | 386,310 | | — | | $ | 176 | | — | | $ | (313,698) | | — | | | | $ | 38,558 | |
FLOTEK INDUSTRIES, INC.
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
8
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Nine Months Ended September 30, 2021 and 2020
(In thousands of U.S. dollars and shares) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2021 |
| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income | | Accumulated Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| Balance, March 31, 2021 | 78,276 | | | $ | 8 | | | 5,573 | | | $ | (33,956) | | | $ | 360,537 | | | $ | 30 | | | $ | (286,988) | | | | | $ | 39,631 | |
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (6,546) | | | | | (6,546) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (17) | | | — | | | | | (17) | |
| | | | | | | | | | | | | | | | | |
| Stock issued under employee stock purchase plan | — | | | — | | | (26) | | | (38) | | | (2) | | | — | | | — | | | | | (40) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Restricted stock granted | 1,465 | | | — | | | — | | | — | | | (7) | | | — | | | — | | | | | (7) | |
| | | | | | | | | | | | | | | | | |
| Restricted stock forfeited | (134) | | | — | | | 25 | | | 54 | | | (54) | | | — | | | — | | | | | — | |
| Stock compensation expense | — | | | — | | | — | | | — | | | 969 | | | — | | | — | | | | | 969 | |
| Shares withheld to cover taxes | — | | | — | | | 56 | | | (77) | | | (19) | | | — | | | — | | | | | (96) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, June 30, 2021 | 79,607 | | | $ | 8 | | | 5,628 | | | $ | (34,017) | | | $ | 361,424 | | | $ | 13 | | | $ | (293,534) | | | | | $ | 33,894 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| Balance, December 31, 2020 | 78,669 | | | $ | 8 | | | 5,581 | | | $ | (33,851) | | | $ | 359,721 | | | $ | (19) | | | $ | (278,688) | | | | | $ | 47,171 | |
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| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (14,337) | | | | | (14,337) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 70 | | | — | | | | | 70 | |
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| Stock issued under employee stock purchase plan | — | | | — | | | (112) | | | (110) | | | (136) | | | — | | | — | | | | | (246) | |
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| Restricted stock granted | 1,694 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Restricted stock forfeited | (140) | | | | | 34 | | | 72 | | | 4 | | | — | | | — | | | | | 76 | |
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| Stock compensation expense | — | | | — | | | — | | | — | | | 2,710 | | | — | | | — | | | | | 2,710 | |
| Shares withheld to cover taxes | — | | | — | | | 146 | | | (36) | | | (125) | | | — | | | — | | | | | (161) | |
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Other (1) | (613) | | | — | | | — | | | | | | | — | | | — | | | | | — | |
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| Balance, September 30, 2021 | 79,610 | | | $ | 8 | | | 5,649 | | | $ | (33,925) | | | $ | 362,174 | | | $ | 51 | | | $ | (293,025) | | | | | $ | 35,283 | |
(1) See Note 12, “Stockholders’ Equity” for further discussion. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2021 |
| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| Balance, December 31, 2020 | 78,669 | | | $ | 8 | | | 5,581 | | | $ | (33,851) | | | $ | 359,721 | | | $ | (19) | | | $ | (278,688) | | | | | $ | 47,171 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (14,846) | | | | | (14,846) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 32 | | | — | | | | | 32 | |
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| Stock issued under employee stock purchase plan | — | | | — | | | (84) | | | (130) | | | (47) | | | — | | | — | | | | | (177) | |
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| Restricted stock granted | 1,684 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Restricted stock forfeited | (133) | | | — | | | 30 | | | 64 | | | — | | | — | | | — | | | | | 64 | |
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| Stock compensation expense | — | | | — | | | — | | | — | | | 1,750 | | | — | | | — | | | | | 1,750 | |
| Shares withheld to cover taxes | — | | | — | | | 101 | | | (100) | | | — | | | — | | | — | | | | | (100) | |
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| Other (see Note 13, “Stockholders’ Equity”) | (613) | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Balance, June 30, 2021 | 79,607 | | | $ | 8 | | | 5,628 | | | $ | (34,017) | | | $ | 361,424 | | | $ | 13 | | | $ | (293,534) | | | | | $ | 33,894 | |
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| | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated Deficit | | | | Total Stockholders’ Equity |
| | Shares
Issued | | Par
Value | | Shares | | Cost | |
| Balance, December 31, 2019 | 63,657 | | | $ | 6 | | | 4,145 | | | $ | (33,484) | | | $ | 347,565 | | | $ | 179 | | | $ | (142,237) | | | | | $ | 172,029 | |
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| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (118,771) | | | | | (118,771) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (168) | | | — | | | | | (168) | |
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| Stock issued under employee stock purchase plan | — | | | — | | | (50) | | | — | | | 78 | | | — | | | — | | | | | 78 | |
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| Restricted stock granted | 2,815 | | | — | | | — | | | — | | | 338 | | | — | | | — | | | | | 338 | |
| Restricted stock forfeited | — | | | — | | | 457 | | | — | | | — | | | — | | | — | | | | | — | |
| Treasury stock purchased | — | | | — | | | 97 | | | (123) | | | — | | | — | | | — | | | | | (123) | |
| Stock compensation expense | — | | | — | | | — | | | — | | | 2,208 | | | — | | | — | | | | | 2,208 | |
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| Stock issued in JP3 acquisition | 11,500 | | | 1 | | | — | | | — | | | 8,537 | | | — | | | — | | | | | 8,538 | |
| Balance, September 30, 2020 | 77,972 | | | $ | 7 | | | 4,649 | | | $ | (33,607) | | | $ | 358,726 | | | $ | 11 | | | $ | (261,008) | | | | | $ | 64,129 | |
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
9
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Significant Accounting Policies
Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy 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.environmental performance.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to enhance the profitability of hydrocarbon producers and cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s Data Analytics (“DA”) segment enablesaims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics associated with thetheir hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, reducing their carbon footprint, energy consumption and emissions.profitability.
The Company formed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”). The Company’s 2 operating segments, CT and DA, are both supported by its continuing Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 16,17, “Business Segment, Geographic and Major Customer Information.” For further discussion
Sources and Uses of the JP3 acquisition, see Note 3, “Business Acquisition.”Liquidity
The Company was initially incorporated under the lawscurrently funds its operations and growth primarily from cash on hand. The ability of the ProvinceCompany to grow and be competitive in the marketplace is dependent on the availability of British Columbiaadequate capital. The availability of adequate capital is dependent on the Company’s operating cash flow, 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 1985. In October 2001,the twelve months subsequent to the date of filing the consolidated financial statements. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months, uncertainty surrounding the stability and strength of the oil and gas markets or reduced spending by our customers could have a further negative impact on our liquidity.
On February 2, 2022, the Company changed its corporate domicilecompleted a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $19.5 million (see Note 9, “Debt and Convertible Notes Payable”).
Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the Stategreater of Delaware.(a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022. These Contract Consideration Convertible Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.
On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”). The ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 21, 2022, the “Company issued prefunded warrants (the “Prefunded Warrants”) to ProFrac Holdings II, LLC in exchange for $19.5 million in cash (see Note 13, “Stockholders’ Equity”). The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $0.0001 per share.
On April 18, 2022, the Company sold its Waller facility for $4.3 million of gross proceeds.
Based on our cash and liquid assets, including the transactions during the six months ended June 30, 2022 we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months. However, the Company cannot guarantee a sufficient level of cash flows in the future. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements reflect all adjustments, in the opinion of management, necessary for fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the SEC regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2021 Annual Report. A copy of the 20202021 Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. The information contained on the Company’s website does not form a part of this Quarterly Report.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
Restricted Cash
The consolidated financial statements have been prepared assumingCompany’s restricted cash is $40 thousand and $1.8 million as of June 30, 2022 and December 31, 2021, respectively.The Company’s restricted cash as of June 30, 2022 consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution. The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $1.75 million for amounts due under the terms of the legal settlement discussed in Note 12, “Commitments and Contingencies”.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will continuenot be collected and records the appropriate allowance for doubtful accounts as a going concern.charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for doubtful accounts charged to operating expense.
Sources and Uses of Liquidity
The Company currently funds its operations and growth primarily from cash on hand. The abilitymajority of the Company to grow and be competitiveCompany’s customers are engaged in the marketplace is dependent onenergy industry. The cyclical nature of the availability of adequate capital. Access to capital is dependent, in large part, onenergy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s operating cash flows,ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the monetizationcollectability of non-core assets, and the availability of and access to debt and equity financing. The Company has a history of losses and negative operating cash flows from operations and expects to utilize a significant amount of cash as we wrap up 2021 and begin 2022. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a slower than expected recovery of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.receivables.
Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet the Company’s 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:
•Raising equity either in the public markets or via a private placement offering;
•Seeking Paycheck Protection Program (“PPP”) loan (“PPP loan”) forgiveness from the Small Business Administration;Contract Assets
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s contract assets represent consideration issued in the form of convertible notes to a related party customer in connection with the ProFrac Agreement and the Amended ProFrac Agreement discussed in Note 9, “Debt and Convertible Notes Payable” and other incremental costs related to obtaining the ProFrac Agreements. The contract assets are amortized over the term of the ProFrac Agreements based on forecasted revenues as goods are transferred to the customer and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations. The contract assets will be tested for recoverability and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the transfer of goods under the ProFrac Agreements less the direct costs that relate to providing those goods in the future.
Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of goods sold.
Property and equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including right-of-use assets (“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows:
| | | | | |
| Buildings and leasehold improvements | 2-30 years |
| Machinery and equipment | 7-10 years |
| Furniture and fixtures | 3 years |
| Land improvements | 20 years |
| Transportation equipment | 2-5 years |
| Computer equipment and software | 3-7 years |
Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.
Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell and depreciation is ceased. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.
Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable
The Company accounts for the Convertible Notes Payable issued to the PIPE investors for cash proceeds, which is discussed in Note 1, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.
The Company accounts for the Contract Consideration Convertible Notes Payable issued as consideration for the ProFrac Agreement, which are discussed in Note 1, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.
Fair Value Measurements
The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 10, “Fair Value Measurements.”
Revenue Recognition
The Company recognizes revenue to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.
The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.
The Company applies several practical expedients including:
•Entry into a borrowing facility withSales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or more lenders;less.
•SaleThe majority of excess inventory and/the Company’s services are short-term in nature with a contract term of one year or raw materials;less. As a result the Company does not disclose the transaction price allocated to remaining performance obligations.
•Operating lease transactionThe Company’s payment terms are short-term in nature with settlements of facilities;one year or less. As a result the Company does not adjust the promised amount of consideration for the effects of a significant financing component.
•SaleIn most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of non-core real estate properties;the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.
•Sale-leaseback transactionsThe Company excludes from the measurement of facilities;the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.
•Sub-leasing certain facilities;
•Renegotiating current lease facility termsShipping and conditions;handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold on our consolidated statement of operations.
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes consolidated net income (loss) and foreign currency translation adjustments.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Income Taxes
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash; and
•Reducing professional advisory feesFLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and headcount.liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.
A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
However, there canThe Company’s policy is to record interest and penalties related to uncertain tax positions as income tax expense.
Stock-Based Compensation
Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.
Stock Warrants
The Company evaluated the Pre-funded Warrants in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to be no assurance that such matters can be implemented on acceptable terms or at all.classified within stockholders’ equity, and recorded the proceeds received for the Pre-funded Warrants within additional paid in capital in the consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates.
Reclassifications
Certain prior periodyear amounts in the unaudited condensed consolidated statement of operations have been reclassified to conform to the current periodyear presentation. In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross loss and eliminated the reporting of operating expenses (excluding depreciation and amortization) on the consolidated statements of operations to conform to customary industry reporting practices. In connection with this change in presentation, the Company reclassified selling costs of $1.3 million and $3.1 million to selling, general and administrative expenses which were previously reported in operating expenses for the three and six months ended June 30, 2021 respectively. The reclassifications and change in presentation of the statements of operations did not impact previously reportedrecorded income (loss) from operations, net loss andincome (loss) or stockholders’ equity.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”).FASB. We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.
New Accounting Standards Issued But Notand Adopted as of September 30, 2021January 1, 2022
The FASB issued ASU No. 2019-12,2020-06, “Income Taxes (Topic 740): Simplifying the Accounting for Income TaxesConvertible Instruments and Contracts in an Entity’s Own Equity..” This standard removes specific exceptionschanges the accounting for convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to be classified in equity and amends diluted earnings per share calculations for certain convertible debt instruments. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, with early adoption allowed for fiscal years beginning after December 15, 2020. The Company has adopted this standard as of January 1, 2022, and the general principlesadoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures as of January 1, 2022 as there were no convertible debt instruments outstanding as of that date but will have an impact on the future issuances of convertible instruments and contracts in the Company’s equity.
Topic 740.
The FASB issued ASU No. 2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The pronouncement is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued. The2021.The Company has evaluated the impact ofadopted this standard as of January 1, 2022 and determined that there is nothe adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
New Accounting Standards Issued But Not Adopted as of June 30, 2022
The FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.
Note 3 — Business Acquisition
During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. The 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 transaction was valued at approximately $36.6 million as of the transaction closing date, comprised of $25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $8.5 million, net of a discount for marketability due to a lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million. Additionally, the Company was
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
subject to contingent consideration with an estimated fair value of $1.2 million at acquisition date for 2 potential earn-out provisions totaling up to $5.0 million based on certain stock performance targets. The first and second earn-out provisions occur if the ten-day volume-weighted average share price equals or exceeds $2 per share and $3 per share, respectively, before May 18, 2025. See Note 9, “Fair Value Measurements,” for additional information on the current estimated fair value of the contingent consideration.
The following table summarizes the fair value of JP3’s assets acquired as of the closing date of May 18, 2020 (in thousands):
| | | | | | | | |
Tradenames and trademarks | | $ | 1,100 | |
Technology and know-how | | 5,000 | |
Customer lists | | 6,800 | |
Inventories | | 7,100 | |
Cash | | 604 | |
Net working capital, net of cash and inventories | | (1,063) | |
Fixed assets | | 426 | |
Long-term debt assumed and other assets (liabilities) | | (893) | |
Goodwill | | 17,522 | |
Net assets acquired | | $ | 36,596 | |
Note 4 — Revenue from Contracts with Customers
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an ongoing basisreceive and discounts offered to reflect updated variable consideration information.customers for prompt payment.
The majority of the products from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized on an over time.time basis. The Company bills sales on a monthly basis with payment terms customarily 30-60 days for domestic and 9090-120 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.
Disaggregation of Revenue
The Company differentiates revenue based on whether the source of revenue is attributable to product sales (point-in-time revenue recognition) or service revenue (over-time revenue recognition). Product sales accounted for over
90%
of total revenue for the three and nine months ended September 30, 2021 and 2020.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue disaggregated by revenue source 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, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue: | Revenue: | | | | | | | | Revenue: | | | | | | | |
Products | Products | $ | 9,494 | | | $ | 12,076 | | | $ | 29,017 | | | $ | 39,053 | | Products | $ | 28,588 | | | $ | 8,444 | | | $ | 40,787 | | | $ | 19,524 | |
| | Services | Services | 685 | | | 663 | | | 2,097 | | | 1,982 | | Services | 785 | | | 721 | | | 1,465 | | | 1,411 | |
| | $ | 10,179 | | | $ | 12,739 | | | $ | 31,114 | | | $ | 41,035 | | | $ | 29,373 | | | $ | 9,165 | | | $ | 42,252 | | | $ | 20,935 | |
| |
(1) Product revenues for 2022 include sales to a related party as described in Note 16, “Related Party Transactions.”
Arrangements with Multiple Performance Obligations
The CT and DA segmentsCompany primarily sellsells chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, both segments offerthe Company offers various services associated to products sold which includes field services, installation, maintenance, and other functions. Service revenue is recognized on an over time basis for CT as services are performed as the customer is simultaneously benefiting as the Company performs. For DA, servicesServices are recognized upon completion of commissioning and installation due to the short-term nature of the performance
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
obligation. DA hasThere may be additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, DAthe Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements and revenue not yet recognizable is reported under current and long term contract liabilities on the balance sheet. Subscription-type arrangements were not a material revenue stream in the three and nine months September 30, 2021 and 2020.
During the third quarter 2021, we entered into a bill-and-hold contract, where we invoice the customer for products even though we retain possession of the products until a point in time in the future when the products are shipped to the customer. In these contracts, the primary performance obligation is satisfied at a point in time when the product is segregated from our general inventory, it is ready for shipment to customer, and we do not have the ability to use the product or direct it to another customer. Additionally, we have a secondary performance obligation related to custodial costs, including storage and freight, which is satisfied over time once the product has been delivered to the customer. During the three and ninesix months ended SeptemberJune 30, 2021, we recognized $1.3 million of revenue related to a bill-and-hold arrangement with a related party.
Contract Balances2022 and 2021.
Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract liabilitiesassets associated with incomplete performance obligations are not material.
Note 4 - Contract Assets
Contract assets are as follows (in thousands):
| | | | | | | | | | | |
| |
| June 30, 2022 | | December 31, 2021 |
| Contract assets | 83,060 | | | — | |
| Less accumulated amortization | (737) | | | — | |
| Contract assets, (net) | $ | 82,323 | | | $ | — | |
In connection with entering into the ProFrac Agreements on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable”, we recognized contract assets of $10 million and $69.5 million, respectively, and associated fees of $3.6 million, representing the excess consideration to be given over the three and ten year terms of the contracts over the fair value of the convertible notes we issued. The value to be assigned to the contract asset was estimated based on forecasted volumes and contractual pricing in the agreements. As of June 30, 2022, $76.1 million of the contract assets is classified as long term based upon our estimate of the forecasted revenues from the ProFrac agreements which will not be realized within the first twelve months of the ProFrac Agreements. The Company’s estimate of the timing of the future contract revenues is evaluated on a quarterly basis throughout the contract term.
During the three and six months ended June 30, 2022. the Company recognized $0.7 million of contract assets amortization which is presented as a reduction of the transaction price included in the related party revenue in the consolidated statement of operations. The below table reflects our estimated amortization per year (in thousands) based on our current forecasted revenues from the ProFrac Agreements.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | |
| Years ending December 31, | | Amortization | | |
| 2022 (excluding the six months ended June 30, 2022) | $ | 2,655 | | | |
| 2023 | | 7,922 | | | |
| 2024 | | 8,696 | | | |
| 2025 | | 8,696 | | | |
| 2026 | | 8,696 | | | |
| Thereafter through May 2032 | | 45,658 | | | |
| Total contract assets | | $ | 82,323 | | | |
Note 5 — Inventories
Inventories are as follows (in thousands):
| | | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Raw materials | Raw materials | $ | 6,025 | | | $ | 7,190 | | Raw materials | $ | 7,807 | | | $ | 5,610 | |
| | Finished goods | Finished goods | 13,451 | | | 15,705 | | Finished goods | 15,124 | | | 13,985 | |
| Inventories | Inventories | 19,476 | | | 22,895 | | Inventories | 22,931 | | | 19,595 | |
| Less reserve for excess and obsolete inventory | Less reserve for excess and obsolete inventory | (10,658) | | | (11,058) | | Less reserve for excess and obsolete inventory | (9,682) | | | (10,141) | |
| Inventories, net | Inventories, net | $ | 8,818 | | | $ | 11,837 | | Inventories, net | $ | 13,249 | | | $ | 9,454 | |
The provision recorded in the three and nine months ended SeptemberJune 30, 2022 and 2021 werewas $0.4 million and $0.1 million for the CT segment and nil for the DA segment$49 thousand and $0.5$0.1 million for the CT segment and $0.2 million of the DA segment, respectively. The provision recorded in the three and ninesix months ended SeptemberJune 30, 2020 were $5.92022 and 2021 was $0.7 million and $0.4 million for the CT segment and $3.9$49 thousand and $0.1 million for the DA segment, and $2.0 million for the CT segment and $3.9 million for the DA segment, respectively. The decrease in excess and obsolescence during the nine months ended September 30, 2020 is attributable to the Company’s sales of excess and obsolescence inventory.respectively.
Note 6 — Property and Equipment
Property and equipment are as follows (in thousands): | | | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Land | Land | $ | 1,986 | | | $ | 2,415 | | Land | $ | 886 | | | $ | 886 | |
| Land improvements | Land improvements | 861 | | | 867 | | Land improvements | 520 | | | 520 | |
| Buildings and leasehold improvements | Buildings and leasehold improvements | 6,364 | | | 6,364 | | Buildings and leasehold improvements | 5,356 | | | 5,473 | |
| Machinery and equipment | Machinery and equipment | 7,753 | | | 7,760 | | Machinery and equipment | 6,686 | | | 6,843 | |
| | Furniture and fixtures | Furniture and fixtures | 649 | | | 649 | | Furniture and fixtures | 545 | | | 620 | |
| Transportation equipment | Transportation equipment | 1,043 | | | 1,190 | | Transportation equipment | 878 | | | 878 | |
| Computer equipment and software | Computer equipment and software | 1,222 | | | 1,296 | | Computer equipment and software | 1,175 | | | 1,176 | |
| Property and equipment | Property and equipment | 19,878 | | | 20,541 | | Property and equipment | 16,046 | | | 16,396 | |
| Less accumulated depreciation | Less accumulated depreciation | (12,109) | | | (11,454) | | Less accumulated depreciation | (11,227) | | | (11,100) | |
| Property and equipment, net | Property and equipment, net | $ | 7,769 | | | $ | 9,087 | | Property and equipment, net | $ | 4,819 | | | $ | 5,296 | |
Depreciation expense totaled $0.2 million and $0.5$0.3 million for the three months ended SeptemberJune 30, 2022 and 2021, and 2020,$0.4 million and $0.8$0.6 million for the six months ended June 30, 2022 and 2021, respectively.
In the first quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas in its current condition and as a result the associated assets in the amount of $0.5 million are classified as held for sale as of June 30, 2022 and December 31, 2021. The company also classified $2.3 million for the nine months ended September 30,Waller facility as held for sale as of December 2021, which was sold on April 18, 2022 (See Note 1, “Organization and 2020, respectively.Nature of Operations”.
Note 7 — Leases
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the first quarter of 2021, the Company classified its warehouse facility in Monahans, Texas, as held for sale based on the criteria outlined inAccounting Standard Codification (“ASC”) 360, Property, Plant and Equipment. During the first quarter, the Company committed to a plan to sell the asset in its present condition. The Company engaged with a commercial real estate agent and is actively looking for a buyer. As such, the Company reclassified the related property, plant and equipment of $0.5 million as held for sale in the current assets of the consolidated balance sheet, as the Company expects to complete the asset sale within one year.
Note 7 — Leases
In August 2021, the company entered into a five year triple net operating lease agreement to lease a warehouse facility in Monahans, TX. The tenant occupied the Company’s warehouse facility in Monahans, TX in September 2021. The company will recognize other rental income, including rent, taxes and insurance over the lease period.
In July 2021, the Company entered into a long-term rental agreement with Resolute Oil to leverage capabilities and facilities to drive growth in adjacent green chemistry markets. The agreement includes options to renew until 2036.
Through the agreement, Resolute Oil will fully utilize the Company’s entire 15-acre campus, including the 38,000 square foot chemical blendinglease its manufacturing facility based in Waller, TX, to manufacture United States Pharmacopeia-National Formulary (USP-NF)-grade white mineral oil distributed globally to customers in the agricultural, energy, food & beverage, cosmetic, and personal care markets.
During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the Global Research and Innovation Center (“GRIC”) during the second quarter of 2020. In addition, the lease liability and corresponding right-of-use (“ROU”) assetsTexas, for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC. The remeasurement resulted in adjustments to lease liabilities and ROU assets totaling of $6.2 million each as of March 31, 2020. During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office and moved all employees to the GRIC facility effective June 29, 2020.
In addition,$40 thousand per month for sixty-four months. Rental income recognized during the three and six months ended March 31, 2020,June 30, 2022 was nil and $121 thousand, respectively, and was included in other income in the consolidated statement of operations. As discussed in Note 1, “Organization and Nature of Operations” this facility was sold on April 18, 2022 and the lease agreement between the tenant and the Company recorded an impairment ofterminated.
In August 2021, the ROU assets totaling $7.4 million. No impairment wasCompany entered into a five-year triple net operating lease agreement to lease its warehouse facility in Monahans, Texas, for $20 thousand per month, and the tenant occupied the warehouse facility in September 2021. Rental income recognized forduring the three and ninesix months ended SeptemberJune 30, 2021.2022 was $66 thousand, and $131 thousand, respectively and was included in other income in the consolidated statement of operations.
The components of lease expense and supplemental cash flow information are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating lease expense | $ | 220 | | | $ | 250 | | | $ | 448 | | | $ | 488 | |
| Finance lease expense: | | | | | | | |
| Amortization of right-of-use assets | 4 | | | 4 | | | 8 | | 7 | |
| Interest on lease liabilities | 3 | | | 3 | | | 6 | | 6 | |
| Total finance lease expense | 7 | | | 7 | | | 14 | | | 13 | |
| Short-term lease expense | 79 | | | 61 | | | 203 | | | 134 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total lease expense | $ | 306 | | | $ | 318 | | | $ | 665 | | | $ | 635 | |
| | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows used in operating leases | $ | 350 | | | $ | 394 | | | $ | 726 | | | $ | 727 | |
| Operating cash flows from finance leases | 10 | | | 43 | | | 20 | | | 53 | |
| Financing cash flows from finance leases | 3 | | | 3 | | | 6 | | | 29 | |
Maturities of lease liabilities as of June 30, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | |
| Years ending December 31, | | Operating Leases | | Finance Leases |
| 2022 (excluding the six months ended June 30, 2022) | $ | 519 | | | $ | 19 | |
| 2023 | | 1,221 | | | 39 | |
| 2024 | | 1,247 | | | 21 | |
| 2025 | | 1,274 | | | — | |
| 2026 | | 1,302 | | | — | |
| Thereafter | | 4,782 | | | — | |
| Total lease payments | | $ | 10,345 | | | $ | 79 | |
| Less: Interest | | (3,014) | | | (7) | |
| Present value of lease liabilities | | $ | 7,331 | | | $ | 72 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Operating lease expense | $ | 247 | | | $ | 258 | | | $ | 735 | | | $ | 1,112 | |
| Finance lease expense: | | | | | | | |
| Amortization of right-of-use assets | 4 | | | 4 | | | 11 | | | 13 | |
| Interest on lease liabilities | 2 | | | 5 | | | 9 | | | 14 | |
| Total finance lease expense | 6 | | | 9 | | | 20 | | | 27 | |
| Short-term lease expense | 15 | | | 57 | | | 44 | | | 145 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total lease expense | $ | 268 | | | $ | 324 | | | $ | 799 | | | $ | 1,284 | |
| | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows from operating leases | $ | 380 | | | $ | 317 | | | $ | 1,107 | | | $ | 2,312 | |
| Operating cash flows from finance leases | 10 | | | 5 | | | 62 | | | 13 | |
| Financing cash flows from finance leases | 2 | | | 51 | | | 8 | | | 152 | |
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease liabilities are as follows (in thousands):
| | | | | | | | | | | | | | |
| Years ending December 31, | | Operating Leases | | Finance Leases |
| 2021 (excluding the nine months ended September 30, 2021) | $ | 285 | | | $ | 14 | |
| 2022 | | 1,254 | | | 47 | |
| 2023 | | 1,318 | | | 39 | |
| 2024 | | 1,348 | | | 23 | |
| 2025 | | 1,375 | | | — | |
| Thereafter | | 6,870 | | | — | |
| Total lease payments | | $ | 12,450 | | | $ | 123 | |
| Less: Interest | | (3,976) | | | (11) | |
| Present value of lease liabilities | | $ | 8,474 | | | $ | 112 | |
Supplemental balance sheet information related to leases is as follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | | June 30, 2022 | | December 31, 2021 | |
| Operating Leases | Operating Leases | | | | | Operating Leases | | | | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 2,099 | | | $ | 2,320 | | | Operating lease right-of-use assets | $ | 1,771 | | | $ | 2,041 | | |
| | Current portion of operating lease liabilities | Current portion of operating lease liabilities | $ | 586 | | | $ | 636 | | | Current portion of operating lease liabilities | 636 | | | 602 | | |
| Long-term operating lease liabilities | Long-term operating lease liabilities | 7,888 | | | 8,348 | | | Long-term operating lease liabilities | 6,695 | | | 7,779 | | |
| Total operating lease liabilities | Total operating lease liabilities | $ | 8,474 | | | $ | 8,984 | | | Total operating lease liabilities | $ | 7,331 | | | $ | 8,381 | | |
| | Finance Leases | Finance Leases | | | Finance Leases | | |
| Property and equipment | Property and equipment | $ | 147 | | | $ | 147 | | | Property and equipment | $ | 147 | | | $ | 147 | | |
| Accumulated depreciation | Accumulated depreciation | (33) | | | (26) | | | Accumulated depreciation | (40) | | | (33) | | |
| Property and equipment, net | Property and equipment, net | $ | 114 | | | $ | 121 | | | Property and equipment, net | $ | 107 | | | $ | 114 | | |
| | Current portion of finance lease liabilities | Current portion of finance lease liabilities | $ | 48 | | | $ | 60 | | | Current portion of finance lease liabilities | $ | 34 | | | $ | 41 | | |
| Long-term finance lease liabilities | Long-term finance lease liabilities | 64 | | | 96 | | | Long-term finance lease liabilities | 38 | | | 53 | | |
| Total finance lease liabilities | Total finance lease liabilities | $ | 112 | | | $ | 156 | | | Total finance lease liabilities | $ | 72 | | | $ | 94 | | |
| | Weighted Average Remaining Lease Term | Weighted Average Remaining Lease Term | | | Weighted Average Remaining Lease Term | | |
| Operating leases | Operating leases | 9.1 years | | 9.9 years | | Operating leases | 9.4 years | | 9.1 years | |
| Finance leases | Finance leases | 2.9 years | | 3.1 years | | Finance leases | 3.1 years | | 2.9 years | |
| | Weighted Average Discount Rate | Weighted Average Discount Rate | | | Weighted Average Discount Rate | | |
| Operating leases | Operating leases | 8.9 | % | | 8.9 | % | | Operating leases | 8.9 | % | | 8.9 | % | |
| Finance leases | Finance leases | 8.5 | % | | 9.0 | % | | Finance leases | 8.9 | % | | 8.9 | % | |
Note 8 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):
| | | | | | | | | | | |
| |
| | June 30, 2022 | | December 31, 2021 |
| Severance costs | $ | 2,595 | | | $ | 2,581 | |
| Loss on purchase commitments | — | | | 1,750 | |
| Payroll and benefits | 998 | | | 1,054 | |
| Legal costs | 1,108 | | | 1,013 | |
| Contingent liability for earn-out provision | 474 | | | 608 | |
| Deferred revenue, current | 368 | | | 528 | |
| Taxes other than income taxes | 852 | | | 241 | |
| Other | 720 | | | 1,221 | |
| Total current accrued liabilities | $ | 7,115 | | | $ | 8,996 | |
Note 9 — Debt and Convertible Notes Payable
Long Term Debt
In April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the PPP,Paycheck 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
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020.2020 prior to its acquisition by Flotek. The PPP loans havehad a fixed interest rate of 1% and haveoriginally a two-year term, maturing in 2022. April and May 2022, respectively. No payments of principal or interest were required during the year ended December 31, 2020,three or the three and ninesix months ended SeptemberJune 30, 2022 and 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
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
reductions and compensation limits and provided that at least 60% of the eligible costs incurred arewere used for payroll. Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company. This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that iswas not significantly detrimental to the business.During the second quarter of 2021, the Company applied for forgiveness on the PPP loans. The receipt of these funds, and the forgiveness of the loans attendant to these funds, is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our 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.
During the second quarter of 2021, the Company applied for forgiveness of the JP3 PPP loan with the SBA. In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest waswere fully forgiven. Accordingly, during the second quarter of 2021, the Company recorded $0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other income on the consolidated statement of operations.
In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025.
The Company has submitted to the SBASBA for partial forgiveness onof substantially all of the Flotek PPP loan but as of the date of this filing, no conclusion from the SBA have been reached.
In October 2021, the Company has not received a forgiveness notice. If the loan is not forgiven, monthly payments will be due over the remaining term of the loan upon notice that a request to extendit will not be forgiven. Denial of the forgiveness of the Flotek PPP loan maturity date from April 15, 2022 to April 15, 2025 was confirmed. Prior towill negatively impact the extension approval, the $4.8 million Flotek PPP loan balance was classifiedCompany’s liquidity as a current liability. The maturity date extension amendment occurred before the third quarter 2021 balance sheet was issued, therefore, $3.5 million was reclassified to long-term debt, reducing the current portiondiscussed in Note 1, “Organization and Nature of long-term debt from $4.8 million to $1.3 million as of September 30, 2021.Operations”.
Long-term debt, including current portion, assuming forgiveness is not obtained, is as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Flotek paycheck protection plan loan | $ | 4,788 | | | $ | 4,788 | |
| JP3 paycheck protection plan loan | — | | | 877 | |
| Total | 4,788 | | | 5,665 | |
| | | |
| Less current maturities | (1,336) | | | (4,048) | |
| | | |
| Total long-term debt, net of current portion | $ | 3,452 | | | $ | 1,617 | |
| | | |
| | | |
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Flotek PPP loan | $ | 4,788 | | | $ | 4,788 | |
| Less current maturities | (1,690) | | | (1,436) | |
| Total long-term debt, net of current portion | $ | 3,098 | | | $ | 3,352 | |
Convertible Notes Payable
On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE transaction, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $19.5 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum, have a maturity of one year, and are converted into common stock of Flotek (a) at the holder's option at any time prior to maturity, at a price of $1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $2.50 for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $0.8705. On March 21, 2022, $3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately 2.8 million shares of common stock.
As of June 30, 2022, the remaining Convertible Notes Payable are recorded at carrying value of $18.3 million, including accrued paid-in-kind interest of $0.8 million, and net of unamortized issuance costs of $0.6 million The estimated fair value of the Convertible Notes Payable at June 30, 2022 was $21.1 million.
ProFrac Agreement Contract Consideration Convertible Notes Payable
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE transaction.
The ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $10.0 million on the issuance date and remeasured to fair value of $11.7 million as of June 30, 2022 which includes payment-in-kind interest of $0.4 million. The fair value adjustment was a $2.4 million decrease and a $1.7 million increase in the three and six months ended June 30, 2022, respectively. See Note 10, “Fair Value Measurements”.
Amended ProFrac Agreement Contract Consideration Convertible Notes Payable
On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”). The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable may be converted at any time prior to the maturity date, which will be one year from the date of issuance under the same stock conversion terms as the Convertible Notes Payable issued in the PIPE transaction.
The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $69.5 million on the issuance date and remeasured to fair value of $55.6 million as of June 30, 2022 which includes payment-in-kind interest of $0.6 million. The fair value adjustment was a $13.9 million decrease in the three and six months ended June 30, 2022. See Note 10, “Fair Value Measurements”.
Note 910 — Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.
•Level 1 — Quoted prices in active markets for identical assets or liabilities;
•Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts. The carrying amount of the Flotek PPP loan for Flotek approximates its fair value as of SeptemberJune 30, 2021. Subsequent to the third quarter balance sheet date, the Company received notice that a request to extend the Flotek PPP loan maturity date from April 15, 2022 to April 15, 2025 was confirmed. Additionally, upon receipt of the SBA’s final decision on the Company’s reimbursement request to forgive the FTK PPP loan, any remaining balances not forgiven by the SBA will be measured on a recurring basis.and December 31, 2021.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Balance at September 30, | | | | | | | | Balance at December 31, |
| Level 1 | | Level 2 | | Level 3 | 2021 | | Level 1 | | Level 2 | | Level 3 | | 2020 |
| Contingent consideration | $ | — | | | $ | — | | | $ | 715 | | $ | 715 | | | $ | — | | | $ | — | | | $ | 1,416 | | | $ | 1,416 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | June 30, | | | | | | | | December 31, |
| Level 1 | | Level 2 | | Level 3 | 2022 | | Level 1 | | Level 2 | | Level 3 | | 2021 |
| Contingent earnout consideration | $ | — | | | $ | — | | | $ | 474 | | $ | 474 | | | $ | — | | | $ | — | | | $ | 608 | | | $ | 608 | |
| ProFrac Agreement contract consideration convertible notes | $ | — | | | $ | — | | | 11,670 | $ | 11,670 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Amended ProFrac Agreement contract consideration convertible notes | $ | — | | | $ | — | | | 55,550 | $ | 55,550 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Total | $ | — | | | $ | — | | | $ | 67,694 | | $ | 67,694 | | | $ | — | | | $ | — | | | $ | 608 | | | $ | 608 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
On September 30, 2021, and December 31, 2020, theContingent Earnout Consideration Key Inputs
The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, was recordedis included in accrued liabilities as a contingent liability.of June 30, 2022 and December 31, 2021. The estimated fair value of the earn-out provision at the end of each period was valued using thea Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.There
The key inputs into the Monte Carlo simulation used to estimate the fair value the earn-out provision were no transfers in or outas follows:
| | | | | | | | |
| June 30, 2022 | December 31, 2021 |
| Risk-free interest rate | 2.99% | 1.02% |
| Expected volatility | 90.0% | 90.0% |
| Term until liquidation (years) | 2.88 | 3.38 |
| Stock price | $0.99 | $1.13 |
| Discount rate | 10.77% | 6.71% |
ProFrac Agreement Contract Consideration Notes Payable Key Inputs
The ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of either Level 1,$10.0 million on February 2, 2022. The ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 orat the initial measurement due to the use of a quoted price for a similar liability, and classified as Level 3 as of June 30, 2022 due to the use of unobservable inputs. The estimated value of the ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.
The key inputs into the Monte Carlo simulation used to estimate the fair value measurements during the periods ending SeptemberProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of June 30, 20212022 were as follows:
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| June 30, 2022 |
| Risk-free interest rate | 2.51% |
| Expected volatility | 90.0% |
| Term until liquidation (years) | 0.60 |
| Stock price | $0.99 |
| Discount rate | 10.92% |
The valuation of the ProFrac Agreement Contract Consideration Convertible Notes Payable was $11.7 million as of June 30, 2022
Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs
On May 17, 2022, the Company measured the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a Monte Carlo simulation at an estimated fair value of $69.5 million. The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and December 31, 2020.the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.
The key inputs into the Monte Carlo simulation used to estimate the fair value the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, on the issuance date of May 17, 2022, and as of as of June 30, 2022 were as follows:
| | | | | | | | |
| May 17, 2022 | June 30, 2022 |
| Risk-free interest rate | 2.16% | 2.80% |
| Expected volatility | 90.0% | 90.0% |
| Term until liquidation (years) | 1.00 | 0.88 |
| Stock price | $1.29 | $0.99 |
| Discount rate | 8.40% | 10.97% |
The value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was $55.6 million.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment goodwill and other intangibleoperating lease right-of-use assets, are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. During the three months ended March 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. During the three months ended September 30, 2020, the Company recorded additional impairment expenses of $12.5 million. Total impairment expenses recorded during the nine months ended September 30, 2020 was $70.0 million of long-lived and intangible assets.
Management inputs used in fair value measurements were classified as Level 3.
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 Septemberas of June 30, 2022 and 2021 and decreasedadjusted the estimated fair value of the contingent liability to $0.7 million.$0.5 million and $1.1 million, respectively. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in operating expenses.cost of goods sold.
The Company estimated the initial fair value of $10.0 million of the ProFrac Agreement Contract Consideration Convertible Notes Payable on February 2, 2022, by reference to the cash purchase price paid by third party investors for equivalent notes issued simultaneously by the Company. The Company estimated the fair value of the additional $69.5 million of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on the issuance date of May 17, 2022 using a Monte Carlo simulation. The Company adjusted the estimated fair value of the Contract Consideration Convertible Notes Payable to $55.6 million as of June 30, 2022.
The following table presents the changes in contingent consideration balancesthe assets and liabilities measured at fair value on a recurring basis classified as Level 3 balances for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Balance - beginning of period | $ | 1,115 | | | $ | 1,200 | | | $ | 1,416 | | | $ | — | |
| Additions / issuances | — | | | — | | | — | | | 1,200 | |
| Change in fair value | (400) | | | 3,200 | | | (701) | | | 3,200 | |
| | | | | | | |
| Transfer out of Level 3 | — | | | (2,500) | | | — | | | (2,500) | |
| Balance - end of period | $ | 715 | | | $ | 1,900 | | | $ | 715 | | | $ | 1,900 | |
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Balance - beginning of period | $ | 14,752 | | | $ | 1,081 | | | $ | 608 | | | $ | 1,416 | |
| Transfer of ProFrac Agreement contract consideration convertible notes payable from Level 2 | — | | | — | | | 10,000 | | | — | |
| Issuance of Amended ProFrac Agreement contract consideration convertible notes payable | 69,460 | | | — | | | 69,460 | | | — | |
| Increase in principle of ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest | 257 | | | — | | | 415 | | | — | |
| Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest | 611 | | | — | | | 611 | | | — | |
| Change in fair value of contingent earnout consideration | (228) | | | 34 | | | (134) | | | (301) | |
| Change in fair value of ProFrac Agreement contract consideration convertible notes payable | (2,637) | | | — | | | 1,255 | | | — | |
| Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable | (14,521) | | | — | | | (14,521) | | | — | |
| | | | | | | |
| | | | | | | |
| Balance - end of period | $ | 67,694 | | | $ | 1,115 | | | $ | 67,694 | | | $ | 1,115 | |
Note 1011 — 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 September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| U.S. federal statutory tax rate | U.S. federal statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | 21.0 | % | U.S. federal statutory tax rate | 21 | % | | 21 | % | | 21 | % | | 21 | % |
| State income taxes, net of federal benefit | State income taxes, net of federal benefit | — | | | 0.2 | | | (0.2) | | | 0.1 | | State income taxes, net of federal benefit | — | | | (0.3) | | | 0.1 | | | (0.2) | |
| Non-U.S. income taxed at different rates | Non-U.S. income taxed at different rates | 0.8 | | | (0.2) | | | 0.3 | | | — | | Non-U.S. income taxed at different rates | 3.8 | | | (0.1) | | | (1.9) | | | 0.3 | |
| | Increase (reduction) in tax benefit related to stock-based awards | Increase (reduction) in tax benefit related to stock-based awards | (0.3) | | | 0.1 | | | 1.2 | | | — | | Increase (reduction) in tax benefit related to stock-based awards | 3.1 | | | 2.2 | | | (2.0) | | | 1.2 | |
| Non-deductible expenses | Non-deductible expenses | 5.8 | | | (0.1) | | | 1.1 | | | — | | Non-deductible expenses | (0.4) | | | 3.6 | | | 0.1 | | | 1.1 | |
| Research and development credit | — | | | — | | | — | | | 0.1 | | |
| Increase in valuation allowance | Increase in valuation allowance | (27.3) | | | (20.8) | | | (23.6) | | | (17.9) | | Increase in valuation allowance | (27.5) | | | (26.5) | | | (17.0) | | | (23.6) | |
| Effect of tax rate differences of NOL carryback | — | | | — | | | — | | | 1.7 | | |
| | Tax settlement | | Tax settlement | 3.8 | | | — | | | (2.2) | | | — | |
| Effective income tax rate | Effective income tax rate | — | % | | 0.2 | % | | (0.2) | % | | 5.0 | % | Effective income tax rate | 3.8 | % | | (0.1) | % | | (1.9) | % | | (0.2) | % |
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates, except forrates.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Commitments and Contingencies
Litigation
The Company is subject to routine litigation and other claims that arise in the NOL carryback claim.
Deferred income taxes reflect the tax effectnormal course of temporary differences between the carrying amountbusiness. Except as disclosed below, management is not aware of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax ratesany pending or threatened lawsuits or proceedings that are expected to be inhave a material effect whenon the differences reverse. GAAP provides for the recognitionCompany’s financial position, results 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.
Note 11 — Commitments and Contingencies
Litigationoperations or liquidity.
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 and 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 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.
On March 26, 2021, the CompanyFlotek Industries, Inc. 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 other parties in state court in Harris County, Texas. The lawsuit claimsclaimed damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.
Subsequent to the lawsuit described above, onOn April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters.
On October 29, 2021, the Company and Flotek Chemistry reached agreement with all parties resolving all claims between the parties.(“parties (“the ADM Settlement”) On or before January 3, 2022, Flotek will pay to ADMthat resulted in the termination of the terpene supply agreement and a settlement payment of $1.75 million due from Flotek. The one-time payment of $1.75 million from Flotek to ADM was paid on January 3, 2022 and was included as restricted cash on the terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5 million poundsconsolidated balance sheet as of terpene through 2023.
As a result of the third quarter 2021 recognition of the ADM Settlement, operating expenses (excluding depreciation and amortization) for the three and nine months ended SeptemberDecember 31, 2021 benefited by $7.6 million, excluding legal fees.2021.
FLOTEK INDUSTRIES, INC.During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste. Flotek’s board engaged a third party to review the findings of the investigation. After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company is subjectBeginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other routine litigationlegal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and other claims that ariseMoss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the normal course of business. Except as disclosed above, management is not awarearbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any 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.
Other Commitments and Contingencies
The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1213 — Stockholders’ Equity
On June 21, 2022, the Company issued the Prefunded Warrants to ProFrac Holdings II, LLC in exchange for $11.1 million in cash (see Note 1, “Organization and Nature of Operations”) and a cash equity contribution of $8.4 million, for a total cash infusion of $19.5 million.The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $0.0001 per share, representing a 20% premium to the 30-day volume average price of the Company’s common stock at the close of business on the day prior to the date of the issuance of the Prefunded Warrants. The Prefunded Warrants, net of transaction fees of $1.1 million, and the equity contribution from ProFrac are included in additional paid-in capital as of June 30, 2022.
ProFrac Holdings and its affiliates may not receive any voting or consent rights in respect of the Prefunded Warrants or the underlying shares unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings and its affiliates and (ii) ProFrac Holdings has paid an additional $4.5 million to the Company. The additional $4.5 million will be accounted for as equity contribution when received.
On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $3.0 million plus $39 thousand of accrued interest, were converted into 2,793,030 shares of the Company’s common stock.
During the first quarter 2021, the Company identified 0.6 million shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the December 31, 2020June 30, 2021 consolidated financial statements or basic and diluted earnings per share.
Note 13 14 — 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 the adjusted 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 common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and convertible notes payable and settlement of restricted stock units. The dilutive effect of non-vested stock issued under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the prefunded stock warrants are computed using the treasury stock method. The dilutive effect of the Convertible Notes is computed using the if‑converted method in accordance with ASU 2020-06, which was adopted by the Company on January 1, 2022 (see Note 2, “Summary of Significant Accounting Policies”).
The calculation of the basic and diluted EPS is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2022 | | | | 2022 | | |
| Numerator: | | | | | | | |
| Net income (loss) for basic earnings per share | $ | 6,240 | | | | | $ | (4,484) | | | |
| Paid-in-Kind interest expense on convertible notes payable, net of tax | 1,028 | | | | | 1,402 | | | |
| Change in fair value of contract consideration convertible notes payable , net of tax | (13,229) | | | | | (10,228) | | | |
| Adjusted net (loss) for dilutive earnings per share | $ | (5,961) | | | | | $ | (13,310) | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Basic weighted average shares outstanding | 74,861 | | | | | 73,476 | | | |
| Dilutive effect of convertible notes payable | 49,474 | | | | | 33,610 | | | |
| Diluted weighted average shares outstanding | 124,335 | | | | | 107,086 | | | |
| | | | | | | |
| Basic earnings (loss) per share | 0.08 | | | | | (0.06) | | | |
| Diluted loss per share | (0.05) | | | | | (0.12) | | | |
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The adjustments to net income (loss) in the numerator are net of estimated tax at 22.9%. For the three and six months ended SeptemberJune 30, 2022 weighted average shares for employee stock awards of 692,494 and 662,230, respectively, and weighted average shares for the prefunded stock warrants of 976,177 and 490,785, respectively, were not included in the dilution calculation since including them would have an anti-dilutive effect.
For the three and six months ended June 30, 2021 diluted earnings per common shareweighted average shares for employee stock awards of 1,127,080 and 1,344,233, respectively. were not included 851,702 common share equivalents.
Potentially dilutive securities were excluded fromin the calculation of diluted loss per share for the nine months ended September 30, 2021 and for the three and nine months ended September 30, 2020, since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.
Note 1415 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
| | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2021 | | 2020 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Supplemental cash payment information: | | | |
| Interest paid | $ | 17 | | | $ | 20 | |
| Income taxes (received) paid | (351) | | | 5,927 | |
| | | |
| Supplemental non-cash activities: | | | |
| Employee retention credit | $ | 2,851 | | | $ | — | |
| | | |
| | | |
| Supplemental non-cash investing and financing activities: | | | |
| Equity issued - acquisition of JP3 | $ | — | | | $ | 8,538 | |
| | | |
| | | |
Under the provisions of the CARES Act, the Company is eligible for a refundable employee retention credit subject to certain criteria. In connection with the CARES Act, the Company adopted a policy to recognize the employee retention credit when earned and to offset the credit against the related payroll tax liability. Accordingly, the Company recorded a $1.9 million employee retention credit during the three months ended June 30, 2021 in other current assets with the offset recorded in accrued liabilities. In the second quarter of 2021, the Company used $0.8 million of the total employee retention credit leaving a $1.1 million credit to be applied against payroll tax liabilities. In the third quarter of 2021, the Company used $0.9 million of the total employee retention credit leaving a $1.9 million credit to be applied against payroll tax liabilities. | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2022 | | 2021 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Supplemental cash flow information: | | | |
| Interest paid | $ | 7 | | | $ | 11 | |
| Income taxes received | — | | | (351) | |
| Supplemental non-cash activities: | | | |
| Employee retention credit | — | | | 1,164 | |
| JP3 PPP loan forgiveness | — | | | 881 | |
| Non cash financing and investing activities: | | | |
| Issuance of convertible notes payable as consideration for ProFrac Agreements | 79,460 | | | — | |
| Conversion of convertible notes payable to common stock | 2,949 | | | — | |
| Issuance cost of stock warrants included in accrued accounts payable | 1,170 | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Note 15 16— 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
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 by Mr. Chisholm to the Company for the IRS matter, and giving the Company the right to withhold payments to Mr. Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter from any amounts owed under the employment agreement. 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 SeptemberJune 30, 20212022 and December 31, 2020,2021, 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.
Mr. Ted D. Brown has beenwas a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“Customer”Confluence”), a private oil and gas exploration and production company formed in 2016. The Company entered intoAs of April 15, 2022 Ted D. Brown stepped down from being a $1.3 million bill-and-hold agreement with the Customer during the third quarterDirector of 2021. The agreement between the Company and Customer isConfluence will no longer be considered a related party transaction. The Company’s board was informed prior to the transaction and subsequently ratified the transaction as being in the best interests of the Company.party.. For the three and ninesix months ended SeptemberJune, 30, 2021,2022, the Company’s revenues for chemical sales to Confluence Resources LP was $1.3 million.zero and $1.4 million respectively.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) under which ProFrac Services, LLC is obligated to order chemicals as per the terms of the Agreement discussed in Note 1, “Organization and Nature of Operations”. On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement, (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) to increase the purchase obligation and term of the ProFrac Agreement, as discussed in Note 1, “Organization and Nature of Operations”. On June 21, 2022, the Company issued prefunded warrants (the “PreFunded Warrants”) to ProFrac Holdings II, LLC, in exchange for $19.5 million in cash as discussed in Note 13, “Stockholders’ Equity”.
During the three and six months ended June 30, 2022, the Company’s revenues from chemical sales to ProFrac Services LLC, were $16.5 million and $18.9 million respectively. These revenues were net of amortization of contract assets of $0.7 million for the three and six months ended June 30, 2022. As of SeptemberJune 30, 2022 and December 31, 2021, the customer owes $1.3ProFrac Services, LLC owed $11.6 million to the Company and transactionzero, respectively which is recorded in account receivables on the consolidated balance sheet.
On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $3.0 million plus $39 thousand of accrued interest, were converted into 2,793,030 shares of the Company’s common stock.
Note 1617 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: CT and DA.
Chemistry Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESGenvironmental, social and governance (“ESG) and operational goals. This segment also includes a portfolio of specialty chemical products to address the long-term challenges of in the janitorial, sanitization, food services, and adjacent markets. The Company designs, develops, manufactures, packages, distributes, delivers and markets optimized fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields, as well as to reduce health and environmental risk by utilization of greener chemicals. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.
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 industrial, commercial and consumer use. The Company produces Food and Drug Administration and Environmental Protection Agency compliant products its ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets.
Data Analytics. The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The real-time information oncompany markets products and services that support in-line data analysis of hydrocarbon compositioncomponents and properties helps customers generate additional profits by enhancing 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 reducing losses through giveaways (i.e., that portion of a product of higher value than what is specified). The customersproperties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks.networks
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates performancePerformance based upon a variety of criteria. The primary financial measure is segment operating income.income (loss). Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of the reportable segments is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| For the three months ended September 30, | Chemistry Technologies | | | | Data Analytics (1) | | Corporate and Other | | Total |
| 2021 | | | | | | | | | |
| Revenue from external customers | $ | 8,044 | | | | | $ | 803 | | | $ | — | | | $ | 8,847 | |
| Revenue from related party | 1,332 | | | | | — | | | — | | | 1,332 | |
| Income (loss) from operations, including impairment | 4,399 | | | | | (1,071) | | | (2,696) | | | 632 | |
| Depreciation and amortization | 215 | | | | | 17 | | | 1 | | | 233 | |
| Additions to long-lived assets | — | | | | | — | | | — | | | — | |
| | | | | | | | | |
| 2020 | | | | | | | | | |
| Revenue from external customers | $ | 12,083 | | | | | $ | 656 | | | $ | — | | | $ | 12,739 | |
| Revenue from related party | — | | | | | — | | | — | | | — | |
| Loss from operations, including impairment | (8,880) | | | | | (34,035) | | | (2,679) | | | (45,594) | |
| Depreciation and amortization | 244 | | | | | 274 | | | — | | | 518 | |
| Additions to long-lived assets | 906 | | | | | — | | | — | | | 906 | |
(1) The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3. | | For the nine months ended September 30, | Chemistry Technologies | | | Data Analytics (1) | | Corporate and Other | | Total | |
| As of and for the three months ended June 30, | | As of and for the three months ended June 30, | Chemistry Technologies | | Data Analytics (1) | | Corporate and Other | | Total |
| 2022 | | 2022 | | | | | | | |
| Revenue from external customers | | Revenue from external customers | $ | 12,111 | | | $ | 713 | | | $ | — | | | $ | 12,824 | |
| Revenue from related party | | Revenue from related party | 16,549 | | | — | | | — | | | 16,549 | |
| Change in fair value of contract consideration convertible notes | | Change in fair value of contract consideration convertible notes | (17,158) | | | — | | | — | | | (17,158) | |
| Income (loss) from operations | | Income (loss) from operations | 14,944 | | | (1,198) | | | (5,707) | | | 8,039 | |
| Depreciation and amortization | | Depreciation and amortization | 166 | | | 15 | | | 1 | | | 182 | |
| Additions to long-lived assets | | Additions to long-lived assets | 5 | | | — | | | — | | | 5 | |
| | 2021 | 2021 | | | | | | | | | 2021 | |
| Revenue from external customers | Revenue from external customers | $ | 26,033 | | | | $ | 3,749 | | | $ | — | | | $ | 29,782 | | Revenue from external customers | $ | 7,688 | | | $ | 1,477 | | | $ | — | | | $ | 9,165 | |
| Revenue from related party | Revenue from related party | 1,332 | | | | — | | | — | | | 1,332 | | Revenue from related party | — | | | — | | | — | | | — | |
| Loss from operations, including impairment | (3,009) | | | | (2,138) | | | (9,926) | | | $ | (15,073) | | |
| Income (loss) from operations | | Income (loss) from operations | (3,819) | | | (773) | | | (2,869) | | | (7,461) | |
| Depreciation and amortization | Depreciation and amortization | 739 | | | | 52 | | | 2 | | | 793 | | Depreciation and amortization | 233 | | | 20 | | | — | | | 253 | |
| Additions to long-lived assets | Additions to long-lived assets | 31 | | | | — | | | — | | | 31 | | Additions to long-lived assets | 13 | | | — | | | — | | | 13 | |
| | 2020 | | | | |
| Revenue from external customers | $ | 39,462 | | | | $ | 1,573 | | | $ | — | | | $ | 41,035 | | |
| Revenue from related party | — | | | | — | | | — | | | — | | |
| Loss from operations, including impairment | (75,137) | | | | (35,185) | | | (15,589) | | | (125,911) | | |
| Depreciation and amortization | 2,300 | | | | 405 | | | 472 | | | 3,177 | | |
| Additions to long-lived assets | 906 | | | | — | | | — | | | 906 | | |
(1) The Company formed the DA segment in the second quarter of 2020 upon acquiring JP3.
| | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the six months ended June 30, | Chemistry Technologies | | Data Analytics (1) | | Corporate and Other | | Total |
| 2022 | | | | | | | |
| Revenue from external customers | $ | 21,422 | | | $ | 1,784 | | | $ | — | | | $ | 23,206 | |
| Revenue from related party | 19,046 | | | — | | | — | | | 19,046 | |
| Change in fair value of contract consideration convertible notes | (13,266) | | | — | | | — | | | (13,266) | |
| Income (loss) from operations | 8,887 | | | (2,006) | | | (9,126) | | | (2,245) | |
| Depreciation and amortization | 345 | | | 31 | | | 1 | | | 377 | |
| Additions to long-lived assets | 5 | | | — | | | — | | | 5 | |
| | | | | | | |
| 2021 | | | | | | | |
| Revenue from external customers | $ | 17,990 | | | $ | 2,945 | | | $ | — | | | $ | 20,935 | |
| Revenue from related party | — | | | — | | | — | | | — | |
| Income (loss) from operations | (7,407) | | | (1,067) | | | (7,230) | | | (15,704) | |
| Depreciation and amortization | 524 | | | 35 | | | 1 | | | 560 | |
| Additions to long-lived assets | 31 | | | — | | | — | | | 31 | |
Assets of the Company by reportable segments are as follows (in thousands):
| | | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Chemistry Technologies | Chemistry Technologies | $ | 47,625 | | | $ | 43,346 | | Chemistry Technologies | $ | 127,398 | | | $ | 34,387 | |
| Data Analytics | Data Analytics | 15,960 | | | 13,201 | | Data Analytics | 4,787 | | | 7,329 | |
| Corporate and Other | Corporate and Other | 969 | | | 29,663 | | Corporate and Other | 31,286 | | | 8,528 | |
| Total assets | Total assets | $ | 64,554 | | | $ | 86,210 | | Total assets | $ | 163,471 | | | $ | 50,244 | |
|
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The increase in Chemistry Technologies assets is primarily due to contact assets of $83.3 million.
Geographic Information
Revenue by country is based on the location where services are provided and products are used.sold. No individual countries other than the U.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| U.S. | U.S. | $ | 8,094 | | | $ | 9,928 | | | $ | 24,624 | | | $ | 32,639 | | U.S. | $ | 25,955 | | | $ | 6,869 | | | $ | 36,289 | | | $ | 16,530 | |
| UAE | UAE | 1,319 | | | 1,473 | | | 3,741 | | | 3,781 | | UAE | 3,139 | | | 1,319 | | | 4,450 | | | 2,422 | |
| Other countries | Other countries | 766 | | | 1,338 | | | 2,749 | | | 4,615 | | Other countries | 279 | | | 977 | | | 1,513 | | | 1,983 | |
| Total revenue | Total revenue | $ | 10,179 | | | $ | 12,739 | | | $ | 31,114 | | | $ | 41,035 | | Total revenue | $ | 29,373 | | | $ | 9,165 | | | $ | 42,252 | | | $ | 20,935 | |
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
Major Customers*Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands):
| | For the three months ended September 30, | | Chemistry Technologies | | % of Total Revenue | | |
| Three months ended June 30, | | Three months ended June 30, | | Revenue | | % of Total Revenue | |
| 2022 | | 2022 | | | | | |
| Customer A (Related Party) | | Customer A (Related Party) | | $ | 16,549 | | | 52.2 | % | |
| Customer B | | Customer B | | 5,611 | | | 19.1 | % | |
| | 2021 | 2021 | | | | | | 2021 | | |
| Customer C | | Customer C | | $ | 1,038 | | | 11.3 | % | |
| Customer D | Customer D | | $ | 3,041 | | | 29.9 | % | | Customer D | | 1,810 | | | 19.8 | % | |
| Customer E - Related party | | 1,332 | | | 13.1 | % | | |
|
| | | | | | | | | | | | | | | | | | |
| 2020 | | | | | | | | |
| Customer D | | $ | 4,632 | | | 36.2 | % | | | | |
| Customer C | | 2,088 | | | 16.4 | % | | | | |
| | | | | | | | |
| | For the nine months ended September 30, | | Chemistry Technologies | | % of Total Revenue | | |
| Six months ended June 30, | | Six months ended June 30, | | Revenue | | % of Total Revenue | |
| 2022 | | 2022 | | | | | |
| Customer A (Related Party) | | Customer A (Related Party) | | $ | 17,657 | | | 38.9 | % | |
| Customer B | | Customer B | | 8,218 | | | 19.5 | % | |
| | 2021 | 2021 | | | | | | 2021 | | |
| Customer C | | Customer C | | $ | 4,067 | | | 19.4 | % | |
| Customer D | Customer D | | $ | 7,701 | | | 24.8 | % | | Customer D | | 4,660 | | | 22.3 | % | |
| Customer C | | 4,067 | | | 13.1 | % | | |
| | | | | | | | | | | | | | | | | | |
| 2020 | | | | | | | | |
| Customer C | | $ | 10,412 | | | 25.4 | % | | | | |
| Customer D | | 8,117 | | | 19.8 | % | | | | |
| Customer A | | 3,631 | | | 8.9 | % | | | | |
* DA customer did not account for more than 10% of revenue during this period.
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 ProFrac and other 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 with ProFrac and in the oil and gas industry increases credit and business risk. See Note 16, “Business Segment, Geographic and Major Customer Information,” for concentration of segment revenue from major customers.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1718 — Subsequent Events
We have evaluated the effects of events that have occurred subsequent to SeptemberJune 30, 2021,2022, and there have been no material events that would require recognition in our third quarter 2021 consolidatedthe 2022 interim financial statements or disclosure in the Notesnotes to the consolidated financial statements, except that on October 28, 2021, the Company also received a confirmation approving a request to extend the maturity date of Flotek’s PPP loan maturity date from April 15, 2022 to April 15, 2025. Additionally onstatements.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 29, 2021, the Company and Flotek Chemistry reached an agreement with all parties resolving all claims between the parties.
The ADM settlement agreement and the Flotek PPP loan maturity date extension approval were considered to be recognizable subsequent events under U.S. GAAP and required adjustment to our third quarter 2021 consolidated financial statements. See Note 11 - Commitments and Contingencies and Note 8 - Debt for additional information.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
This Management’s Discussion and Analysis of Financial Condition, Results of Operations (“MD&A”) and risks associated with the outbreak of COVID-19The following discussion should be read in conjunction with the unaudited condensedAnnual Report on Form 10-K for year-end December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) and the consolidated financial statements and the relatedaccompanying 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.included herein.
Executive Summary
Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial, commercial, and consumer markets improve their ESG performance. The Company serves specialty chemistry needs that span from downstream, midstream and upstream,for both domestic and international energy markets toas well as applications of U.S. manufactured 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 clean surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. 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 second quarter of 2020, the Company acquired 100% ownership of JP3 in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.
Company Overview
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research &and Innovation (“R&I”) advanced laboratory capabilities.
Company Overview
Chemistry Technologies
The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.
Customers of the CT segment include those of energy related markets as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and solvents for both commercial and personal use. The Company produces FDA and EPA compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today, the Company has a portfolio of specialty 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
Data Analytics
The DA segment provides game-changing technology that delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, NGLs,natural gas liquids (NGLs), natural gas, crude oil, and condensates. This valuable information includes compositions and physical properties, delivered simultaneously and in real time, transforming customers’ business and helping them optimize their operations while reducing their carbon footprint and emissions. Real-time data is acquiredcondensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with
advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.
Customers who utilizeusing this highly differentiated technology have obtained significant benefits including generating additional profits by enhancing their operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. Many customersMore efficient operations have enjoyed the added benefitsbenefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We began business development activities in the international markets in late third quarter 2020. We have developed a new line of Verax analyzers for deployment internationally which was recently certified for compliance in hazardous locations and harsh weather conditions.
Research & Innovation
R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, FDA and EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.
Outlook
Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry and weather volatility. We have based our outlook on the market and weather conditions we perceive today. Changes often occur.
Energy
We expect North American and International onshore activity to continue to improve throughout 2022 from thirdsecond quarter 2021 levels for the next twelvenine months provided that commodity prices remain at or above current levels. The strongest potential growth in the fourth quarter and throughout 2022 will likely comes from private, rather than publicly traded exploration and production companies. Private exploration and production companies operate the majority of U.S. land rigs and react quickly to changing commodity prices. In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead. Additionally, we have reestablished our ability to sell product through other service companies and believe sales through indirect channels should accelerate in the fourth quarter.2022.
Industrial
In 2020, the
The Company launchedhas a diversified line of EPA and FDA compliant products that target industrial, agricultural and consumer markets with particular focus on customers that are seeking to accelerate their focus on sustainability and minimized impact on the environment. The company’sCompany’s product line includes adjuvants, disinfectants, surface cleaners, degreasers, solvents and a multitude of proprietary chemistries for industrial, commercial and consumer use. The Company believes these adjacent markets provide an opportunity to diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand. We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states. We will be training and educating their representatives during the next two quarters. The leverage sales effort is anticipated to accelerate sales in the second half of 2022.
Digital Analytics
The use of data and digital analytics is a growing trend in all industries where technology is usedleveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. The DA segmentVerax has historically focused sales solely ongained a foothold in North American markets. Our recent press release dated October 27, announcedmarkets for critical applications where compositional information is needed in real-time. The technology delivers real-time insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We continue to work with our customers to identify further facilities and applications where our technology has the release of ahighest value. We expect to open and establish our international customer base with our new generation of internationalinternationally certified online analyzers. The new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments. The technology delivers real-time insight on valuable composition and physical properties data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We anticipate international sales to increase over the next twelve months because of the newly certified equipment. To further enhancedrive recurring revenue, we continue to build on the valuemodular nature of the sensors, we announced the release of aour sensor and analysis packages with new patent pending application todata processing techniques that enhance the value of our line of near infrared real-time analyzers.installations. AIDA (Automated Interface Detection
Algorithm) provides real-time detection of interfaces in a liquids pipeline. AIDA can be utilized immediately on our installed analyzerspipeline without the need for additional sampling or chemometric modeling. The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces within 60 seconds. This allows operators to cut batches quickly and accurately, reduce the inadvertent mixing of two separate products (known as “transmix”)transmix and minimize off-spec product that requires downgrades. We anticipate additional sales resulting from the detection capabilities of our new patent pending application.
ESG
ESG focused
ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s products and services
offer a significant benefit to businesses seeking to improve their ESG performance, including improving 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. Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil. Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.
The Company believes the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of our greener practices and chemistries. We believe the performance drivenperformance-driven ESG focus of the Company assists in reducing environmental liabilities and improving returns for our customers.
Supply Chain
During 2020 and 2021 challenging supply chain issues emerged that “will continue into 2022”are continuing throughout 2022 according to Secretary of Transportation Peter Buttigieg. The anticipated activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:
▪•Rising Freight Costsfreight costs;
▪•Delays due to Port Congestionport congestion;
▪•Labor Shortagesshortages and
▪•Demand Forecastingforecasting.
All bidding will require the risk of shipping costs and delays to be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could also result in supply disruption.
Weather
While Hurricane Ida occurred during
During the third quarter, on October 31, 2021,first six months of 2022 there were no tropical cyclones inmajor weather events that had a material impact on the Atlantic. Water temperatures need to exceed 79 degrees Fahrenheit or either hurricanes will not form or will weaken rapidly. Water temperature two meters below the surface at Station 42002, 207 nautical miles east of Brownsville, Texas was 81.3 degrees Fahrenheit on October 30, 2021,first and temperatures decreased moving to the north. Consequently, disruption of business due to a severe cyclone in fourth quarter is unlikely. The National Weather Service temperature outlook for November-December-January 2021-2022 indicates “elevated odds for above-normal seasonal mean temperatures along the southern half of the U.S.”
We currently do not anticipate inclement weather in the Middle East or the Onshore U.S. to impact fourthsecond quarter results.
COVID-19
The impactsimpacts of COVID-19 continue to affect the U.S. and global economy. TheWe believe our protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge. The resumption of travel while often onerous has begun to accelerate and in person customer visits that began in earnest during the thirdfirst quarter of 2022, continued through-out the second quarter of 2022, will likely continue to accelerate.
Consolidated Results of Operations (in thousands):
Consolidated Results of Operations: Three and Nine Months Ended September 30, 2021, Compared to the Three and Nine Months Ended September 30, 2020
| | | Three months ended September 30, | | | Nine months ended September 30, | | Three months ended June 30, | | | Six months ended June 30, |
| | | 2021 | | 2020 | | | 2021 | | 2020 | | 2022 | | 2021 | | | 2022 | | 2021 |
| Revenue | Revenue | | | | | | | | | Revenue | | | | | | | | |
| Revenue from external customers | Revenue from external customers | $ | 8,847 | | | $ | 12,739 | | | | $ | 29,782 | | | $ | 41,035 | | Revenue from external customers | $ | 12,824 | | | $ | 9,165 | | | | $ | 23,206 | | | $ | 20,935 | |
| Revenue from related party | Revenue from related party | 1,332 | | | — | | | | 1,332 | | | — | | Revenue from related party | 16,549 | | | — | | | | 19,046 | | | — | |
| Total revenues | Total revenues | 10,179 | | | 12,739 | | | | 31,114 | | | 41,035 | | Total revenues | 29,373 | | | 9,165 | | | | 42,252 | | | 20,935 | |
| Operating expenses (excluding depreciation and amortization) | 5,418 | | | 29,466 | | | | 31,330 | | | 63,939 | | |
| Operating expenses % | 53.2 | % | | 231.3 | % | | | 100.7 | % | | 155.8 | % | |
| Corporate general and administrative costs | 2,696 | | | 2,679 | | | | 9,925 | | | 12,568 | | |
| Corporate general and administrative % | 26.5 | % | | 21.0 | % | | | 31.9 | % | | 30.6 | % | |
| Cost of goods sold | | Cost of goods sold | 31,678 | | | 10,775 | | | | 45,036 | | | 22,853 | |
| Cost of goods sold % | | Cost of goods sold % | 107.8 | % | | 117.6 | % | | | 106.6 | % | | 109.2 | % |
| Gross profit (loss) | | Gross profit (loss) | (2,305) | | | (1,610) | | | | (2,784) | | | (1,918) | |
| Gross profit (loss) % | | Gross profit (loss) % | (7.85) | % | | (17.6) | % | | | (6.6) | % | | (9.2) | % |
| Selling general and administrative | | Selling general and administrative | 7,431 | | | 4,203 | | | | 12,310 | | | 10,287 | |
| Selling general and administrative % | | Selling general and administrative % | 25.3 | % | | 45.9 | % | | | 29.1 | % | | 49.1 | % |
| | Depreciation and amortization | Depreciation and amortization | 233 | | | 518 | | | | 793 | | | 3,177 | | Depreciation and amortization | 182 | | | 253 | | | | 377 | | | 560 | |
| Research and development | Research and development | 1,186 | | | 1,480 | | | | 4,194 | | | 5,673 | | Research and development | 1,115 | | | 1,466 | | | | 2,530 | | | 3,008 | |
| Loss (Gain) on disposal of long-lived assets | 14 | | | (37) | | | | (55) | | | (92) | | |
| Impairment of goodwill | — | | | 11,706 | | | | — | | | 11,706 | | |
| Impairment of fixed assets and long-lived assets | — | | | 12,521 | | | | — | | | 69,975 | | |
| Gain on sale of property and equipment | | Gain on sale of property and equipment | (1,914) | | | (71) | | | | (1,906) | | | (69) | |
| | Gain on lease termination | | Gain on lease termination | — | | | — | | | | (584) | | | — | |
Change in fair value of contract consideration
convertible notes payable | | Change in fair value of contract consideration
convertible notes payable | (17,158) | | | — | | | | (13,266) | | | — | |
| Income (loss) from operations | Income (loss) from operations | 632 | | | (45,594) | | | | (15,073) | | | (125,911) | | Income (loss) from operations | 8,039 | | | (7,461) | | | | (2,245) | | | (15,704) | |
| Operating margin % | Operating margin % | 6.2 | % | | (357.9) | % | | | (48.4) | % | | (306.8) | % | Operating margin % | 27.4 | % | | (81.4) | % | | | (5.3) | % | | (75.0) | % |
| PPP loan forgiveness | — | | | — | | | | 881 | | | — | | |
| Gain on lease termination | — | | | — | | | | — | | | 576 | | |
| Interest and other income, net | | Interest and other income, net | (1,701) | | | 936 | | | | (2,145) | | | 885 | |
| Income (loss) before income taxes | | Income (loss) before income taxes | 6,338 | | | (6,525) | | | | (4,390) | | | (14,819) | |
| Income tax expense | | Income tax expense | (98) | | | (21) | | | | (94) | | | (27) | |
| Net income (loss) | | Net income (loss) | $ | 6,240 | | | $ | (6,546) | | | | $ | (4,484) | | | $ | (14,846) | |
| | Interest and other (expense) income, net | (120) | | | 272 | | | | (115) | | | 282 | | |
| Income (loss) before income taxes | 512 | | | (45,322) | | | | (14,307) | | | (125,053) | | |
| Income tax (expense) benefit | (3) | | | 81 | | | | (30) | | | 6,282 | | |
| Net income (loss) | $ | 509 | | | $ | (45,241) | | | | $ | (14,337) | | | $ | (118,771) | | |
| | Net loss % for continuing operations | 5.0 | % | | (355.1) | % | | | (46.1) | % | | (289.4) | % | |
|
Consolidated revenue for the three and six months ended SeptemberJune 30, 2021, decreased $2.62022 increased $20.2 million, or 20.1%220.5%, and $21.3 million or 101.8%, respectively, versus the same period of 2020. The decrease was primarily due to the loss of two major energy customers that were purchased2021 driven by non-customers during the second quarter of 2021, and nominal decreases in international sales, offset by certain CT customer revenue increases during the current quarter that did not have prior year comparable activities. Consolidated revenue for the nine months ended, September 30, 2021, decreased $9.9 million, or 24.2%, versus the same period of 2020. Revenue during the nine months ended September 31, 2021 reflected a loss of revenue in the CT segment associatedactivity with two major customers changing ownership during 2021, losses related to the normalization and decline of market demand for sanitizers and non-recurring citrus terpenes sales. Current year revenue decreases were partially offset by the incremental post acquisition JP3 revenues generatedProFrac starting in the second and third quarter of 2021.
Consolidated operating expenses (excluding depreciation and amortization) for the three months ended September 30, 2021, decreased $24.0 million, or 81.6%, versus the same period of 2020. The decrease was primarily due to an unfavorable product mix in the third quarter of 2021 versus third quarter of 2020 and the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event. Consolidated operating expenses (excluding depreciation and amortization) for the nine months ended September 30, 2021 decreased $32.6 million, or 51.0% versus the same period of 2020. The year to date decrease in operating expenses was primarily due to reduced cost of sales due to lower sales during 2021 and the net reduction of $7.6 million of operating expense accruals related to recognizing the ADM settlement subsequent event. The Company’s 2021 operating expenses benefited from the decision to reduce operating expenses, including 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 May of 2020.quarter.
CorporateConsolidated cost of goods sold for the three and six months ended June 30, 2022, increased $20.9 million or 194.0%, and $22.2 million or 97.1%, respectively, versus the same periods of 2021, primarily attributable to the increase in revenues. Cost of goods sold were also impacted by one- time expenses incurred due to the ramp up of ProFrac activity.
Selling general and administrative (“CGSG&A”) expenses are expenses not directly attributable to products sold or services provided. CGSG&A expenses for the three and six months ended June 30, 2022, increased $3.2 million or 76.8%, and $2.0 million or 19.7%, respectively, versus the same period of 2021. SG&A expenses increased as a result of higher professional fees relating to the ProFrac and PIPE transactions, higher employee costs due to an ERC credit reported in 2021 and decreased legal fees due to large expense incurred on two significant matters in 2021.
Depreciation of property and equipment decreased $0.1 million or 28.2%, for the three months ended SeptemberJune 30, 2021 was consistent with the same comparable period last
year. CG&A for the nine months ended September 30, 2021, CG&A $2.6 million, or 21.0%2022, versus the same period of 2020.CG&A costs declined as a result2021. Depreciation of lower compensation costs following a reduction in force, a one-time employee retention credit related to the CARES Actproperty and a reduction in professional fees.
Depreciation and amortization expenseequipment decreased $0.3$0.2 million or 55.0%32.7% for the six months ended June 30, 2022.
Research and $2.4 million, or 75.0%development (“R&D”) costs for the three and ninesix months ended SeptemberJune 30, 2021,2022 decreased $0.4 million or 23.9% and $0.5 million or 15.9%, respectively, 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 $0.3 million, or 19.9% and $1.5 million, or 26.1% for the three and nine months ended September 30, 2021 versus the same period of 2020 due to lower personnel costs as a result of oura reduction in workforce during the first quarter 2020.and lower non-labor cost.
Income from operations increased $46.2by $15.5 million or 101.4%,207.7% for the three months ended SeptemberJune 30, 2021, while the year to date loss from operations improved by $110.8 million, or 88.0% for the nine months ended September 30, 2021,2022, versus the same periodsperiod in 2020.2021. The income from operations improvementincrease is primarily a result of no impairment during 2021 compared to the $24.2 millionrevaluation of the contract consideration convertible notes payable and $81.7 million in the threegain on sale of property and nineequipment partially offset by higher SG&A expenses. For the six months ended SeptemberJune 30, 2020. Additionally, the decrease in2022, loss from operations isdecreased by $13.5 million or 85.7% attributable mainly to the net reductionrevaluation of $7.6the
contract consideration convertible notes payable and gain on sale of property and equipment and partially offset by increased SG&A expenses.
Income before income taxes for the three months ended June 30, 2022, was impacted by interest charges of $1.6 million of operating expense accruals related to recognizingversus $17 thousand for the ADM settlement subsequent event,same period in 2021. For the forgiveness of the JP3 PPP loan for $0.8six months ended June 30, 2022 and 2021 interest charges were $2.3 million and a one-time employee retention credit$35 thousand respectively. The increased interest costs relate to payment in kind interest expense on the CARES Act of $2.9 million recorded during 2021.Contract Consideration Convertible Notes Payable.
The Company’s income tax expense for the secondthree and third quarter ofsix months ended June 30, 2022 and 2021 and 2020 was minimal. The Company recorded an income tax benefit of $6.2 million for the first quarter of 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act initially recorded in the first quarter 2020.
Results by Segment (in thousands):
Chemistry Technologies Results of Operations: Three and Nine Months Ended September 30, 2021, Compared to the Three and Nine Months Ended September 30, 2020
| | | Three months ended September 30, | | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | Revenue | $ | 9,376 | | | $ | 12,083 | | | | $ | 27,365 | | | $ | 39,462 | | Revenue | $ | 28,660 | | | $ | 7,688 | | | $ | 40,468 | | | $ | 17,990 | |
| | Income (loss) from operations | Income (loss) from operations | 4,399 | | | (8,880) | | | | (3,009) | | | (75,137) | | Income (loss) from operations | 14,944 | | | (3,819) | | | 8,887 | | | (7,407) | |
|
CT revenue for the three and ninesix months ended SeptemberJune 30, 2021, decreased $2.72022 increased $21.0 million, or 22.4% and $12.1$22.5 million, or 30.7%, respectively, versuscompared to the same periods of 2020.2021. The decreaseincreased revenue in 2022 is driven mainly by the ProFrac contract commencing in the second quarter, of which $16.5 million relates to the ProFrac Agreements along with a significant increase in revenue during the third quarter of 2021 compared to the third quarter of 2020 was driven by impacts from both the supply and the demand side. The COVID-19 pandemic negatively impacted economic activity and reduced global demand for oil and gas during 2020, a key sector of our customer base. The Company’s domestic and international revenue for the nine months ended September 30, 2021 decreased as demand from the company’swith two other major customers and smaller operators has not returned to the pre-pandemic levels. In addition, revenue from two major customers was lost temporarily as a result of market consolidation in the Permian basin. CT also granted price concessions in our effort to maintain and obtain market share.customers.
Income (loss) from operations for the CT segment for the three and nine months ended SeptemberJune 30, 2021, decreased $13.32022 improved by $18.8 million or 149.5%, and decreased $72.1 million, or 96.0%, respectively versus491% compared to the same period of 2020.2021. The decreaseimprovement is primarily as a result of the favourable revaluation of the Contract Consideration Convertible Notes Payable of $17.2 million. Excluding the revaluation there was an overall improvement in income from operations of $1.6 million for the three months ended June 30, 2022, attributable mainly to the gain on sale of property and equipment. Income from operations for the six months ended June 30, 2022 improved by $16.3 million or $220% compared to the same period of 2021. The improvement relates mainly to the revaluation of the Contract Consideration Convertible Notes Payable of $13.3 million and the gain on sale of property and equipment and lease termination.
Data Analytics Results of Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | $ | 713 | | | $ | 1,477 | | | $ | 1,784 | | | $ | 2,945 | |
| | | | | | | |
| | | | | | | |
| Loss from operations | (1,198) | | | (773) | | | (2,006) | | | (1,067) | |
| | | | | | | |
DA revenue for the three and six months ended June 30, 2022 decreased $0.8 million, and $1.2 million, respectively, compared to the same periods of 2021 due to less orders in 2022 and some projects being delayed to later in the year.
Loss from operations for the DA segment for the three and six months ended June 30, 2022 worsened by $0.4 million or 55%, and $0.9 million or 88%, respectively, compared to the same period of 2021. The worsening loss from operations is due to lower revenue and significantly lower expenses, primarily theas a result of no impairments in 2021 versus impairment charges of fixed and long-lived assets of $70.0 million in the same period of 2020. Secondly, expenses decreased versus the first quarter of 2020 including a $2.3 million terpene purchase commitment loss with no comparable activity in 2021. Certain cost reduction initiatives to right size our cost structure contributed to the current decrease in operating losses by reducing personnel, office costs, equipment and facilities costs as the Company continues to consolidate its physical facilities and equipment rentals to align with activity.
Data Analytics Results of Operations: Three and Nine Months ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | | | | Nine months ended September 30, | | | Period May 18- September 30, | | | |
| 2021 | | 2020 | | | | | | | 2021 | | | 2020 | | | |
Revenue (1) | $ | 803 | | | $ | 656 | | | | | | | | $ | 3,749 | | | | $ | 1,573 | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Loss from operations (1) | (1,071) | | | (34,035) | | | | | | | | (2,138) | | | | (35,190) | | | | |
| | | | | | | | | | | | | | | | |
(1)On May 18, 2020, the Company purchased JP3 and formed the DA segment. The year to date JP3 revenues represents the post-acquisition partial period revenues between May 18, 2020 to September 30, 2021. Segment revenue for the third quarter of 2021 was $0.8 million, which remained flat from the same quarter in 2020. Also note that the DA segment losses include the impact related to the estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction.
Critical Accounting Policies and Estimates
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 Condition 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, including goodwill, other intangibles and valuation of fixed long-lived assets. There have been no significant changes in the Company’s critical accounting policies and estimates during the nine months ended September 30, 2021.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2, “Recent Accounting Pronouncements,” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.revenues.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and fundfunding working capital requirements. During the first ninesix months of 2021,ended June 30, 2022, the Company funded working capital requirements primarily with proceeds from warrants issued for $19.5 million and cash on hand.
As of SeptemberJune 30, 2021,2022, the Company had available cash and cash equivalents of $20.5$33.1 million, as compared to $38.7$11.5 million at December 31, 2020. The2021. During the six months ended June 30, 2022, the Company recordedhad an operating loss for the nine months ended September 30, 2021 and recorded $18.3of $2.2 million, $23.9 million of net cash used forin operating activities, $4.2 million cash provided by investing activities and $0.5$39.4 million of net cash used forprovided by financing activities. Cash used in investing activities was minimal.
Liquidity
The Company currently funds its operations and growth primarily from cash on hand.hand which includes the proceeds from the convertible notes and warrants received in the second quarter. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to 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. WhileUncertainty surrounding the stability and strength of the oil and gas markets, or reduced spending by our customers could have a further negative impact on our liquidity
On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $19.5 million (see Note 9, “Debt and Convertible Notes Payable”).
Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022. These Contract Consideration Convertible Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.
On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”). The ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.
On June 21, 2022, the “Company issued prefunded warrants (the “Prefunded Warrants”) to ProFrac Holdings II, LLC in exchange for $19.5 million in cash, net of issuance costs, (see Note 13, “Stockholders’ Equity”). The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $0.0001 per share.
The Company also sold its manufacturing facility in Waller, Texas. The sale closed on April 18,2022 with $4.3 million of gross proceeds.
Based on our cash and liquid assets, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet the Company’sour capital requirements and anticipated obligations as they become due uncertainty surroundingin the long term stability, strength and duration of the 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 will enable it to fund its operations and growth,next 12 months. However the Company cannot guarantee thea sufficient level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:
•Raising equity either in the public markets or via a private placement offering;
•Seeking PPP loan forgiveness from the Small Business Administration;
•Entry into a borrowing facility with one or more lenders;
•Sale of excess inventory and/or raw materials;
•Operating lease transaction of facilities;
•Sale of non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sub-leasing certain facilities;
•Renegotiating current lease facility terms and conditions;
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash; and
•Reducing professional advisory fees and headcount.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms. For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in 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, | | Six months ended June 30, |
| | | 2021 | | 2020 | | 2022 | | 2021 |
| Net cash used in operating activities | Net cash used in operating activities | $ | (18,282) | | | $ | (39,095) | | Net cash used in operating activities | $ | (23,915) | | | $ | (11,242) | |
| Net cash provided by (used in) investing activities | 43 | | | (17,135) | | |
| Net cash (used in) provided by financing activities | (451) | | | 4,929 | | |
| | Net cash provided by investing activities | | Net cash provided by investing activities | 4,189 | | | 43 | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 39,431 | | | (273) | |
| Effect of changes in exchange rates on cash and cash equivalents | Effect of changes in exchange rates on cash and cash equivalents | (67) | | | (80) | | Effect of changes in exchange rates on cash and cash equivalents | 95 | | | (31) | |
| Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | $ | (18,757) | | | $ | (51,381) | | Net change in cash, cash equivalents and restricted cash | $ | 19,800 | | | $ | (11,503) | |
Operating Activities
Net cash used in operating activities was $18.3$23.9 million and $39.1$11.2 million during the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. Consolidated net loss for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, totaled $14.3were $4.5 million and $118.8$14.8 million, respectively.
During the ninesix months ended SeptemberJune 30, 2021,2022, non-cash adjustments to net income (loss) totaled $4.9$10.0 million as compared to $100.7$1.8 million for the same period of 2020.2021.
•For the nine months ended September 30,2021, non-cash adjustments included $7.6 million benefit related to the ADM settlement, $0.8 million for depreciation, which was lower than the nine months ended September 30, 2020 due to asset impairments taken in 2020, stock based compensation of $2.7 million, JP3 PPP loan forgiveness of $0.9 million and a $0.7 million charge related to the fair value of contingent consideration.
•For the nine months ended September 30, 2020, contributory non-cash adjustments consisted primarily of $70.0 million of impairment charges and $3.2 million for depreciation and amortization.
During the ninesix months ended SeptemberJune 30, 2021,2022, changes in working capital provided $0.9used $9.4 million of cash as compared to using $21.0providing $1.8 million for the same period of 2020.2021.
•For the ninesix months ended SeptemberJune 30, 2022, changes in working capital resulted primarily from an increase in accounts receivable and inventories of $10.1 million and $4.5 million, respectively, due to increased revenue, change in contract asset of $3.6 million attributable to fees associated with the Contract Consideration Convertible Notes Payable and decreased accrued liabilities due mainly to payment of the ADM Settlement (Note 12, “Commitments and Contingencies”). This is partially offset by an increase in accounts payable of $12.2 million relating mainly to purchases made to support our contract with ProFrac.
•For the six months ended June 30, 2021 the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable and inventory of $2.4$2.0 million, partially offset by an increase of current assets of $2.8 million.
•For the nine months ended September 30, 2020, working capital used $21.0 million in cash, primarily resulting from a decrease in accrued liabilities and accounts payable of $29.6 million, which included two one-time payments made in 2020: one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final$1.0 million.
post-closing working capital adjustment related to the 2019 sale of the CICT segment. Accounts receivable, inventories and other current assets decreased $8.7 million.
Investing Activities
Net cash provided byfrom investing activities for the ninesix months ended SeptemberJune 30, 2022 was $4.2 million from the sale of the manufacturing facility in Waller, Texas which closed on April 18, 2022.
Net cash from investing activities for the six months ended June 30, 2021 was not material. negligible.
Financing Activities
Net cash used in investingprovided by financing activities was $17.1$39.4 million for the ninesix months ended SeptemberJune 30, 2020. Cash used in investing activities included $26.3 million2022, primarily from purchasethe proceeds of JP3the issuance of convertible notes and warrants partially offset by cash provided of $9.8 million dueissuance costs relating to the release of escrow amounts from the sales of Florida Chemical Company.
Financing Activitiesconvertible notes.
Net cash used in financing activities was $0.5$0.3 million for the ninesix months ended SeptemberJune 30, 2021, primarily for purchases of common stock related to tax withholding requirements. Net cash provided by financing activities was $4.9 million for the nine months ended September 30, 2020, primarily from the proceeds received from the PPP.
Off-Balance Sheet Arrangements
There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2021, 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 other thaninvestors.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the long term terpene agreement discussed inCompany’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported. Note 132, “Summary of Significant Accounting Policies” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item I –1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Quarterly Report.the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures Aboutabout 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 management 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 operation of controls over nonrecurring transactions, including recognition of items and cash flow presentation relating to disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations; (2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations; and (3) the ineffective design and operating effectiveness of the 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, including itsBased upon this evaluation, our principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined by Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of September 30, 2021, and has concluded that the Company’sour disclosure controls and procedures were not effective as of SeptemberJune 30, 2021, due to the material weaknesses in internal control over financial reporting described above
Remediation Plan and Status
The Company has implemented remediations plan to address the material weaknesses identified at December 31, 2020. Key elements of this ongoing plan include:2022.
•
Implemented monitoring controls over the review and validation of both tangible and intangible assets;
•Expanded controls over impairments of goodwill and long-lived assets;
•Enhanced specificity in the design and implementation of controls around nonrecurring, complex accounting activities, with the assistance of technical subject-matter experts;
•Implemented controls for forecasting and budgeting, to include additional process documentation and precision;
•Expanded monthly management review controls; and
•Enhanced 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 OverControls 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, 2021,2022 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
Litigation
On March 26, 2021,There are no material changes since the Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the
Company,Company’s Annual Report on Form 10-K filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and other parties 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. 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,SEC on April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters On October 29, 2021, the Company and Flotek Chemistry reached agreement with all parties resolving all claims between the parties. On or before January 3, 2022, Flotek will pay to ADM a one-time payment of $1.75 million and the terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5 million pounds of terpene through 2023. See Note 17 subsequent events for additional information.
The Company is subject to other routine litigation and other claims that arise in the normal course of business. Except as disclosed above, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.March 31, 2022.
Item 1A. Risk Factors
ThereIn addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors contained in “Item 1A.-Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), which could materially affect our business, financial condition and/or future results. As of June 30, 2022, there have been no material changes to thein our risk factors from those set forth in Part I, Item 1A of the Company’s Annual Report. The risks described in the Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.Disclosures in Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’Equity”, of the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 are incorporated by reference hereto.
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, 2021,2022, 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:
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| Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| April 1, 2022 to April 30, 2022 | 43,280 | | | 1.36 | | | | |
| May 1, 2022 to May 31, 2022 | 16,344 | | | 1.19 | | | | |
| June 1, 2022 to June 30, 2022 | 989 | | | 1.06 | | | | |
| Total | 60,613 | | | | | | | |
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| Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| July 1, 2021 to July 31, 2021 | — | | | — | | | | |
| August 1, 2021 to August 31, 2021 | 40,385 | | | $1.63 | | | | |
| September 1, 2021 to September 30, 2021 | 24,279 | | | $1.30 | | | | |
| Total | 64,664 | | | | | | | |
(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
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
None.
Item 6. Exhibits
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Exhibit
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101101.INS | * | *Inline XBRL Instance Document - The following financial information from Flotek Industries, Inc.’s Quarterly Report on Form 10-Q forinstance document does not appear in the period ended September 30, 2021, formatted in interactive data file because its XBRL tags are embedded within the inline XBRL document | |
| 101.SCH | * | Inline Extensible Business Reporting Language (iXBRL): (i) the Unaudited Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020, (ii) the Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021 and 2020, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2021 and 2020, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (v) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2021 and 2020, and (vi) Notes to Condensed Consolidated Financial Statements.XBRL Schema Document | |
| 101.CAL | * | Inline XBRL Calculation Linkbase Document | |
| 101.LAB | * | Inline XBRL Label Linkbase Document | |
| 101.PRE | * | Inline XBRL Presentation Linkbase Document | |
| 101.DEF | * | Inline XBRL Definition Linkbase Document | |
| 104 | * | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
| * | | Filed herewith.with this Form 10-Q. | |
| ** | | This certification is deemedFurnished with this Form 10-Q, not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
filed. | |
1*** | | Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC.U.S. Securities and Exchange Commission or its staff. | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 10, 2022
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| FLOTEK INDUSTRIES, INC. |
| |
| By: | | /s/ JOHN /s/ John W. GIBSON, JR.Gibson, Jr. |
| | John W. Gibson, Jr. |
| | President, Chief Executive Officer and |
| | Chairman of the Board |
| | |
Date: | November 9, 2021 |
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FLOTEK INDUSTRIES, INC. |
| |
| By: | | /s/ MICHAEL E. BORTON |
| | Michael E. Borton |
| | Chief Financial OfficerSeham Carson |
| | Seham Carson |
Date: | | November 9, 2021Interim Chief Financial Officer (Principal Financial and Accounting Officer |